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

Saturday, May 26, 2012

week ending May 26


Fed's Balance Sheet Expands To $2.862 Trillion - The Fed's asset holdings in the week ended May 23 were $2.862 trillion, up from $2.853 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities were $1.657 trillion, just slightly up from where it was last week. The central bank's holdings of mortgage-backed securities rose to $864.99 billion, up from $858.23 billion. Thursday's report showed total borrowing from the Fed's discount lending window was $5.83 billion on Wednesday, down from $6.39 billion a week earlier.Commercial bank borrowed $22 million from the discount window, up from $16 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.510 trillion, up from $ 3.493 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.789 trillion, compared with $2.785 trillion a week earlier.Holdings of federal agency securities rose to $721.40 billion, compared with $708.43 billion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- May 24, 2012

The relative expansion of central banks’ balance sheets - Atlanta Fed's macroblog - Dave Altig's recent macroblog post on policy actions that affected the Fed's balance sheet made me wonder about how changes to the Fed's balance sheet since the financial crisis compared with other central banks.  Relative to before the financial crisis, the Federal Reserve's asset holdings are currently about 3.3 times larger. Initially, the source of that increase was the collateral associated with various temporary lending facilities that the Fed used to address the financial panic. Those assets were then replaced on net by purchases under the first large-scale asset purchase program in 2009. Then in late 2010, asset holdings increased further as a result of a second large-scale asset purchase program.  Of course, size isn't everything... Increasing the size of the balance sheet is not the only thing a central bank can do to ease monetary policy when short-term interest rates are very low. For example, in late 2011 the Fed began a maturity extension program that changed the composition of the assets on the balance sheet, but this program did not materially alter the size of the balance sheet.  With this caveat in mind, the following chart compares the proportionate changes in the size of asset holdings of five central banks over the period from the first quarter of 2007 through the first quarter of 2012: the Federal Reserve (FR), the Bank of England (BE), the European Central Bank (ECB), the Bank of Canada (BC), and the Bank of Japan (BJ).

Do the FOMC Meeting Minutes or the New Fed Appointments Change the Expected Path for Monetary Policy? -Information in the minutes from the April 24-25 meeting of the Federal Reserve's policymaking committee released last week led many observers to conclude that monetary easing was more likely than we thought. The confirmation of Jeremy Stein and Jerome Powell as Federal Reserve governors on Thursday did little to alter that view since most believed these appointments would do little to change the balance of power in monetary policy meetings. However, the real news from these two events isn't about potential changes in the policy outlook, it's that current policy is now even more entrenched than before. The key reason that many analysts changed their policy outlook was language in the minutes from the last meeting of the Federal Open Market Committee, in particular this phrase: "Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough." However, the fact that "several members" of the committee favored more easing if the economy deteriorates "enough" was well known before the minutes were released. The speeches given by presidents of the regional Fed banks, members of the Board of Governors, and most importantly Chairman Bernanke himself, made this clear. Thus, the minutes confirm the commitment to existing policy -- stay the course for now unless conditions change dramatically in either direction -- rather than signaling a deviation from it.

Ten of 12 Regional Fed Banks Vote for Flat Discount Rate - Federal Reserve officials noted “further improvement in economic activity” and expected growth would continue at a “moderate pace,” but expressed concern over global financial risks and uncertainty over the U.S. budget policy, according to minutes of discount-rate meetings held last month and released Tuesday. Ten of the Fed’s 12 district banks recommended keeping the discount rate unchanged at 0.75%, according to the minutes of April meetings held on the rate charged to banks on short-term emergency loans.

Fed Watch: Is QE3 Just Around the Corner? - From the Wall Street Journal today: As measured by Treasury bonds, inflation expectations are falling amid heightened concerns that the discord in Europe will threaten U.S. growth. Some observers say that the lowered outlook for inflation gives the Federal Reserve more leeway to stimulate the economy, possibly through another round of quantitative easing.  Financial market participants are anticipating Fed action. Are monetary policymakers on the same page? St. Louis Federal Reserve President James Bullard yesterday:Bullard said he believes the risks to the U.S. economy are smaller than some analysts perceive.Indeed, Bullard added he expects the U.S. economy to perform better than many forecasters anticipate ... Minneapolis Federal Reserve President Narayana Kocherlakota yesterday: “I see these changes as a signal that our country’s current labor-market performance is much closer to ‘maximum employment,’ given the tools available to the Fed,”..  Arguably, neither Bullard not Kocherlakota are critical voices in the FOMC. More interesting are today's comments from New York Federal Reserve President Wiliam Dudley. From the Wall Street Journal: Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said. “My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley is considered part of the inner circle; if he doesn't think the Fed needs to do something more, the baseline scenario should be that QE3 is not on the table.

Fed’s Dudley Doesn’t See Need for More Easing - Expectations for U.S. economic growth, while “pretty disappointing” at around 2.4%, is sufficient to keep the central bank from easing monetary policy, Federal Reserve Bank of New York President William Dudley said. “My view is that, if we continue to see improvement in the economy, in terms of using up the slack in available resources, then I think it’s hard to argue that we absolutely must do something more in terms of the monetary policy front,” Dudley said in an interview with CNBC, aired Thursday. Dudley, a voting member of the Federal Open Market Committee, said the U.S. economy is slowly healing, and that compared with his previous views, he is “a little bit more confident that the economy’s going to keep growing.” Asked his view of the Fed’s so-called Operation Twist, Dudley said the “best outcome would be the economy looks good, downside risks diminish, inflation is stable. “You know, if that were the case, I would presume that we would keep policy on hold.”

Fed's Dudley: There Is An Argument For Easing Further Given Our Economic Forecast - Given his current forecast for the U.S. economy, there is an argument for further monetary easing, the president of the Federal Reserve Bank of New York said Thursday, stressing that today's policy makers should not rely solely on the Taylor Rule formula to calculate where the policy rate should be.  Speaking about the rules and parameters of setting monetary policy at an event in New York, William Dudley said his team's outlook for stable prices and a slow path back to full employment still presents a case for further easing. But that gauging the costs versus benefits of providing more stimulus is key.  "As long as the U.S. economy continues to grow sufficiently fast to cut into the nation's unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs," Dudley said in his prepared remarks. "But if the economy were to slow so that we were no longer making material progress toward full employment ... then the benefits of further accommodation would increase in my estimate and this could tilt the balance toward additional easing." Should growth in the U.S. decelerate, Dudley said the central bank can choose between extending the duration of its balance sheet, or add to it by buying more bonds. But at the same time, if the economy shows sufficient strength, Dudley said he will consider moving up the current rate-increase timeline of late 2014.

Conducting Monetary Policy: Rules, Learning and Risk Management - New York Fed - speech by William C. Dudley, President

Fed’s Lockhart Sees Continued Accommodative Policy but No QE3 - Given the modest economic progress in the U.S., the Federal Reserve should continue with its policy of monetary accommodation, said a top central banker on Monday. “Circumstances today in the United States call for continued measured efforts to quicken the pace of recovery and shrink unemployment, while keeping inflation controlled and close to the [Federal Open Market Committee's] official target of 2%,” said Federal Reserve Bank of Atlanta President Dennis Lockhart. Lockhart’s comments came from the text of an address prepared for delivery before the Institute of Regulation and Risk, North Asia, in Tokyo. Lockhart is a voting member of the Fed’s monetary policy-setting FOMC, which kept the current course of monetary policy unchanged at its latest meeting.

Fed’s Lockhart Won’t Rule Out More QE - A Federal Reserve policy maker on Tuesday wouldn’t rule out further quantitative easing by the U.S. central bank, citing a sharp rise in jobless or a big shock in confidence as potential triggers. Bank of Atlanta President Dennis Lockhart added that the U.S. unemployment rate is likely to fall slightly below 8% by the end of 2012. The rate stood at 8.1% in April. Lockhart, a voting member of the policy-setting Federal Open Market Committee, spoke at events sponsored by the Institute of Regulation & Risk, North Asia in Tokyo on Monday and Hong Kong on Tuesday.

Fed’s Lockhart: No Need to Extend Operation Twist - It isn’t necessary to extend the Federal Reserve‘s Operation Twist beyond its scheduled expiration in June and a severe drop-off in the U.S. economy would be needed for it to implement further quantitative easing, said the head of the Federal Reserve Bank of Atlanta Monday. “My own view is that it’s not necessary to extend it,” Atlanta Fed President Dennis Lockhart said when asked if Operation Twist should continue beyond its scheduled end next month. He was speaking to reporters after a Tokyo financial seminar.

Monetary Policy Transparency: Changes and Challenges -  Minneapolis Fed President Narayana Kocherlakota Speech - May 23, 2012

Fed Watch: The Fed and the Fiscal Cliff - Ryan Avent has an ambitious post, in which he claims the Federal Reserve will resist proclaiming it has the tools to offset the fiscal cliff, should it even occur: The Fed could explain in great detail what specific steps it would be willing to take to achieve this goal, so as to boost its credibility. And if demand expectations as reflected in equity or bond prices showed signs of weakening ahead of the cliff, the Fed could preemptively swing into the action to establish the credibility of its purpose. The Fed will almost certainly not do this. Why? Because the Fed is thinking about moral hazard, specifically, that if it promises to protect the economy against reckless fiscal policy Congress will have no incentive to avoid reckless fiscal policy... I understand where Avent is going with this. The Fed should be concerned that Congress will never get its act together if the Fed is always there to bail them out. But reading the comments by Minneapolis Federal Reserve President Narayana Kocherlakota today makes me think his concerns are at least for the moment misplaced. From the Chicago Tribune:The U.S. Federal Reserve, which has kept short-term rates near zero since December 2008, may need to ease monetary policy further if U.S. unemployment rises or inflation falls, a top Fed official said on Wednesday. Those are possible outcomes if U.S. lawmakers allow a raft of tax breaks to expire on schedule at the end of the year, pushing the nation over a "fiscal cliff" in 2013, That sounds to me like a pretty explicit promise to step up if Congress falls down on the job. Likewise, St. Louis Federal Reserve President James Bullard, via Reuters: "If there was a sharp slowdown in the U.S. I do think we'd have further scope to take action, we'd be taking on more risk, but we could do it if the situation called for it," he said.

What the Fed fears -- SCOTT SUMNER and TIM DUY offer responses to yesterday's post on monetary policy and the fiscal cliff that are worth a read. To summarise very briefly, Mr Sumner asks why the Fed wouldn't be happy to fully accommodate a plunge over the fiscal cliff given the resulting improvement in the government's budget position, and Mr Duy argues that members of the Federal Open Market Committee are already signalling that a dive off the fiscal cliff would be one of the events that might cause the Fed to take additional expansionary action. They both make reasonable points, so let me see if I can't rephrase and clarify my argument. First, if Congress fails to avert the fiscal cliff scenario, I am confident that the Fed will intervene and ease policy in order to dampen the blow to the economy. Second, the Fed's response will probably fail to offset entirely the impact of the cliff, because it will probably behave as it has in the recent past, reacting primarily to dangers of substantial disinflation. That will allow the cliff to have a serious impact on real output; the fiscal multiplier will be much higher than it ought to be. Third, the Fed could behave differently by focusing on expectations. Essentially, it could begin arguing now that nothing Congress might do on fiscal policy poses a meaningful risk to the demand side of the economy. That's not what it's doing.

Why can’t the Fed just prevent the ‘fiscal cliff’? - Say at the end of 2012, Congress can’t strike a budget deal and we reach the dread “fiscal cliff.” Taxes go up, spending gets slashed. Would the U.S. economy fall into recession? The Congressional Budget Office sure thinks so. But Ryan Avent wonders why the Federal Reserve couldn’t just step in.  After all, he argues, the central bank’s whole job is to maintain demand in the economy even if there’s a large external shock — like a sharp rise in taxes and drop in spending. Propping up the economy would be tricky, he notes, since the Fed can’t really lower interest rates further. But what the Fed could do is influence expectations ahead of time, by announcing that the bank will take whatever steps necessary to maintain demand and avoid deflation. “[M]arkets know that it’s fruitless to bet against a determined central bank with a printing press,” Avent notes. And those expectations could prove self-sustaining. Here’s how Avent thinks this should work in practice: “The Fed could therefore proclaim to the world that will maintain aggregate demand growth … at all costs, and that it would by no means allow the fiscal cliff to knock the economy off its preferred path. It could explain in great detail what specific steps it would be willing to take to achieve this goal, so as to boost its credibility.”  But will the Fed actually take these steps? Avent argues that it probably won’t — because the Fed doesn’t want to give Congress incentives to pursue “reckless fiscal policy.” Over at Fed Watch, however, Tim Duy thinks that the Fed is already starting to hint that it will offset the fiscal cliff. Duy rounds up a few recent statements from members of the Federal Reserve Board saying that the central bank will try to boost the economy if it starts weakening again.

The Fed Faces the End Game -- And Blinks? - If you’ve ever been involved in a legal contention, like a business or personal dispute or a contested divorce, you know that the whole game pivots, ultimately, on the potential end game: what would happen if the thing went to court — even if (even because) everyone involved knows that it never will. The fact that it could, and the expected results if push did come to shove, determine the terrain of the playing field and the positions of the players, and all the ploys and counterploys played out on that field. Ryan Avent brings that principle to bear in one of the nicest pieces I’ve seen laying out the game theory of monetary policy over the next couple of years. For my purposes, starting with the end game (my bold): At one extreme, we can imagine a situation in which America’s government has entirely lost market confidence and is unable to sell its debt. In that case, the central bank, as lender of last resort, would be unable to avoid stepping in to buy that debt, in the process transferring control over inflation to the fiscal authorities. Voilá: MMT World, where Treasury is simply spending newly-created money into existence, at the behest of the legislative and executive branches, by depositing it in recipients’ bank accounts. Bond/debt issuance is immaterial, because the Fed has no choice but to buy all the new bonds for “cash.” (Yes, the Fed is actually “printing” the money, but effectively the Treasury is doing so.) There is no Fed “independence.”

Fed Asset Buying and Private Borrowing Rates –SF Fed - With the federal funds rate, the traditional policy tool of the Federal Reserve, effectively reaching zero in late 2008, policymakers have turned to unconventional policy tools to further ease the stance of monetary policy. These tools are aimed at lowering longer-term interest rates to stimulate economic activity and reduce unemployment. The Fed’s unconventional balance sheet policies began in 2009 with a program of large-scale asset purchases (LSAPs) of Treasury and mortgage-backed securities, followed by further purchase programs. These purchases have been designed to put downward pressure on longer-term interest rates. Unconventional monetary policy actions can only be successful in stimulating the economy if they lower the interest rates that matter most for businesses and households, that is, the private borrowing rates that determine the cost of funds for the private sector. This Economic Letter reviews the Fed’s balance sheet programs, providing evidence about their impact on private borrowing rates, such as corporate bond yields and mortgage rates. To help understand the financial-market effects of these programs, the Letter examines the channels through which they likely have affected longer-term interest rates. It also looks at mortgage spreads, which capture the difference between the return to investors on mortgage bonds and mortgage costs to homeowners, focusing on factors that may limit pass-through to primary mortgage rates.

San Francisco Fed Paper May Shed Light on QE View - The limited resources that U.S. banks apply to residential lending could keep them from matching lower rates in the mortgage bond market for “some time,” according to a Federal Reserve Bank of San Francisco study of central bank asset-purchase programs. That conclusion from a May 21 report by San Francisco Fed economist Michael Bauer may offer a clue on Federal Reserve policy on asset-purchase programs that have been beacons for the $5 trillion mortgage-backed securities market, Nomura Securities said in a research note on Tuesday. MBS yields have dropped significantly based on past Fed purchases to lower borrowing costs and boost growth, known as quantitative easing, or QE. Bauer said limited competition and banks’ reallocation of workers away from lending have given the firms more pricing power. Banks can thus resist passing along the lower yields on agency MBS to rates they charge consumers, he said. MBS, a key beneficiary of past quantitative easing, support the housing market by providing banks with a buyer for their originations. “Originators are not under as great pressure to pass on decreases in secondary rates to homeowners,” Bauer said. “This suggests that the weaker link between MBS yields and primary mortgages may persist for some time.”

Fed's Plosser Says Economists Should Design Crisis Lending Rules - Philadelphia Federal Reserve Bank President Charles Plosser said central bankers should consider how to design rules guiding their emergency lending during crises. “Monetary theory has given a great deal of thought to rules and credibility in the design of monetary policy, but the recent crisis suggests that we need to think more about the design of lender-of-last-resort policy,” Plosser said in prepared remarks for a speech today in Eltville, Germany. Plosser has advocated that the Fed and other central banks make interest rate decisions based on a rule, increase transparency and demonstrate to markets how policy would respond to changes in the economy. Plosser didn’t provide today his outlook for the economy or monetary policy. Instead, he outlined topics for economic research, such as incorporating the institutional design of central banks and moral hazard into macroeconomic models.

The Growing Fed - One part of the economy that’s growing rapidly is the Federal Reserve. These are boom times for the central bank, which persuaded Congress to expand its responsibilities significantly in the wake of the financial crisis. And with greater responsibility comes a larger budget. If not in every case, then at least in the case of the Fed, which as it happens sets its own budget. The Annual Report: Budget Review published Tuesday shows that the Fed plans to spend $4.7 billion this year, a 35 percent increase over 2006 after adjusting for inflation. Moreover, the Fed’s fee-based income from check processing and other services has been in steep decline, with the result that the net cost of operating the Fed actually has increased by 105 percent.The bill, in other words, has more than doubled since the financial crisis. And according to the Fed, the crisis is the cause. The central bank says that more effective regulation requires more regulators and better tools.

Move Bankers off Regional Fed Board - The opening reads like the introductory paragraph to an academic essay. “Periodically, the Federal Reserve’s structure is debated in Congress, the public or the media. Recently, the question of whether it is appropriate for bankers to serve on the boards of the Federal Reserve’s regional Reserve Banks has once again been raised.”  So wrote Esther George, who has been for eight months the president of the Federal Reserve Bank of Kansas City, on Thursday in an unusual communication, a news release with the headline, “Should Bankers Serve on Federal Reserve Bank Boards of Directors?” Usually regional Fed presidents and Federal Reserve governors communicate through speeches, not news releases. George doesn’t mention in the release why the question of bankers serving on regional Reserve Bank boards has recently arisen. A spokesman for the Kansas City Fed wouldn’t comment beyond the release. She does answer the question posed atop her release. Yes, George believes bankers should serve on the regional boards. They bring with them a lot of good information, she says by way of justification, about what’s going on in local economies. She also said bankers should resign if they can’t meet the “high standards” demanded of Reserve Bank directors.

Getting to a better Fed is about more than just Jamie Dimon - Does J.P. Morgan Chairman and Chief Executive Jamie Dimon belong on the board of the New York Federal Reserve? Of course not. And there’s actually a petition demanding his resignation or removal, being pushed by former IMF Chief Economist Simon Johnson.But it’s also important to note that he didn’t belong on the board two months ago either—before the large trading loss J.P. Morgan suffered made news. And it’s not just Dimon, it’s the whole structure of Federal Reserve banks that needs reform. The problem is that the boards of directors for regional Federal Reserve banks are composed of financial-sector executives—and these boards then get to choose five of the 12 voting members of the Federal Reserve’s Open Market Committee (FOMC), the body that makes monetary policy decisions. So, essentially 42 percent of the committee that controls the single most important lever of macroeconomic policy for the country is picked by banking executives.  This is all made more ironic by the fact that any attempt by outsiders to criticize the Fed often leads to distressed hand-wringing by the Beltway elite about the sanctity of Fed “independence.” But of course, they are not talking about “independence” in any normal sense of the word, but rather independence from having to consider the views of those in the economy who might have different interests from finance.

Structural Unemployment Would Affect Both Sides of Fed Mandate - Over the past few months, Federal Reserve Chairman Ben Bernanke and other Fed officials have wondered how many of the millions who lost their jobs during the Great Recession are morphing into structural unemployed. The discussion has policy implications — and potential headaches. Structural unemployment is the result of permanent dislocations within labor markets, such as a mismatch between the skills a growing company needs and the experience job seekers have. Cyclical unemployment, on the other hand, results from not enough demand in the economy. The prospect of high structural unemployment will challenge the Fed to fulfill its dual mandates of supporting full employment and price stability. Monetary policy is designed to boost aggregate demand, but can do little to change structural forces. The threat to the Fed’s duty to promote full employment is obvious. “A pessimistic view is that a large share of the unemployment we are seeing, particularly the longer-term unemployment, is structural in nature,” Bernanke said in a speech in March. “If this view is correct, then high levels of long-term unemployment could persist for quite a while, even after the economy has more fully recovered.”

Fed’s Kocherlakota: Economy Closer to Maximum Employment Than Data Suggest - A top Federal Reserve official said Wednesday that elevated inflation readings in the past two years suggest that the economy is closer to maximum employment than labor-market reports alone might suggest. In prepared remarks for a forum in Rapid City, S.D., about the central bank’s latest transparency initiatives, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said “maximum employment” in the U.S. is especially difficult to pinpoint right now as the economy has evolved since the financial crisis. But using the behavior of inflation as a signal, the “distinctly higher” rise in prices in 2010 and 2011 suggests perhaps the unemployment rate doesn’t have too much more room to fall with the help of monetary policy.

Whats Driving Up Money Growth? - New York Fed - Two key monetary aggregates, M1 and M2, have grown quickly recently—especially M1, the narrow aggregate. In this post, we show that we can attribute most, but not all, of the recent high money growth rate of M1 to low current interest rates as well as the growth in bank reserves that has resulted from the Fed’s asset purchase programs. It’s unlikely that the current high growth rate will continue in the long term, however, as both low interest rates and the Fed’s expansion of bank reserves will likely be reversed as economic growth accelerates. The chart below shows that the annual M1 growth rate is around 20 percent, which is very high by recent historical standards. M1 includes currency in circulation, demand deposits, and other checkable deposits. M2 growth has also increased significantly since 2010, but is still within its recent historical range. M2 includes M1 plus savings deposits, retail time deposits, retail money funds, and some other categories. Notice that M1 and M2 growth increased during the periods in which the Federal Reserve expanded its balance sheet through large-scale purchases of Treasuries and other securities, the so-called Quantitative Easing—“QE1” from 2009 to early 2010 and “QE2” from late 2010 to mid-2011—although M1 responded more rapidly in percentage terms during these periods.

Leveraging expectations through monetary policy - In my previous post I talked about the need for a credible nominal anchor for a central bank to target, even if policy making bodies such as the ECB, Fed and BoE were to adopt an alternative mantra to the current pure inflation or flexible inflation targeting regimes. The reasons why this is necessary are different across the three central banks named above. With the Fed and BoE currently pursuing flexible inflation targeting with long-run inflation targets of 2%, both are in a position to potentially avoid tightening policy in the face of negative supply shocks or simply accommodate their respective economies more even when inflation remains on target, yet still maintain policy that is consistent with their long-run policy objectives. On the other hand the ECB’s pure inflation targeting mandate means the bank is not in a position to do either, as most clearly represented by the disastrous rate rise last summer in the face of higher oil prices. If a pure New-Classical view of the world was totally accurate so that markets cleared and theories such as the policy ineffectiveness proposition held, strict inflation targeting would not be a problem as we would always be at full employment, and problems of “unemployment” would be voluntary or at least have a structural element to them. This is of course not the view of the world that many of us hold.

Chicago Fed: Economic growth near historical trend in April - The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic activity increased in April - Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.11 in April from –0.44 in March. ... The index’s three-month moving average, CFNAI-MA3, ticked down to –0.06 in April from +0.02 in March, falling below zero for the first time since November 2011. April’s CFNAI-MA3 suggests that growth in national economic activity was near its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests growth was near trend in April. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Chicago Fed National Activity Index Rose In April - A broad reading on economic activity turned higher last month. “Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.11 in April from –0.44 in March,” the Chicago Fed reports. Meanwhile, the index’s three-month moving average slipped a bit to -0.06 from March’s +0.02. But that’s still far above the -0.70 value that the Chicago Fed advises is an early warning sign of a new recession. By that standard, we’ll need to see a dramatic deterioration in economic reports in the weeks ahead to argue convincingly that a new recession is fate. Some analysts already say the jig is up. Perhaps, but for the moment a dismal outlook from dismal scientists is still more of a forecast that a recognition of current conditions. Based on the numbers in hand, it doesn’t appear that the economy is poised to fall off the cyclical cliff. Nonetheless, there's room for doubt about what comes next. “Of the four broad categories of indicators that make up the index, only the production and income category and sales, orders, and inventories category improved from March and made a positive contribution in April,” the Chicago Fed noted in a press release.

Fiscal cliffs, multipliers, and the myth of central bank independence - THE cryptic phrase "fiscal cliff" is creeping into news reports and economic analyses (including our own). Alongside "grexit" and "hard landing" it lurks as a mysterious and malevolent force waiting to wreak havoc on the global economy. The fiscal cliff is an American afflication. At the end of this year several major budget items are scheduled to expire, including an extension of the Bush tax cuts, an extension of the stimulus payroll tax cut, and an extension of emergency unemployment benefits. At the same time, the "sequester" cuts to defence and health spending negotiated as part of last year's debt-ceiling compromise are also due to take effect. If all of these provisions are allowed to hit, the impact on the economy will be substantial. According to a new Congressional Budget Office analysis: The bottom line is quite simple, says CBO. If all of the fiscal blow is deflected, the economy should grow at an annual pace of 5.3% in the first half of the 2013 fiscal year. If Congress is unable to find a way to defer some of the impact, the economy will instead shrink by 1.3%.

Remembering when the future kept getting bigger - HOW big can the American economy grow? This week’s Free exchange column tackles the critical question of America’s potential: the maximum output it can sustain given its endowments of capital, labour and technology. The article notes that economic growth since the recession ended three years ago has averaged 2.5% a year. That is roughly the trend rate of an economy already at full employment. Given that America is still in a deep post-recession hole, such a rate should not be enough to reduce unemployment, and should have left so much spare capacity that inflation ought to have fallen sharply. Instead, unemployment has dropped nearly two percentage points in that time and underlying inflation, after dipping below 1%, is above 2%. While various idiosyncratic factors can explain this behaviour, it could also be a sign that the crisis has significantly eroded potential GDP, and the output gap is much smaller than generally realised. (This is a topic on which I’ve blogged before, here, here and here.) Since 2005 the Congressional Budget Office has revised down its estimate of potential GDP in the year 2012 by 5%.

Humbler horizons - WHEN the American economy emerged from recession three years ago, forecasters fell into two broad camps. Optimists reckoned brisk growth would quickly return the economy to its long-term potential level of output, the maximum sustainable GDP that could be achieved with the capital and labour on hand. That would pull down unemployment and prop up inflation. Pessimists, however, predicted sluggish growth, persistently high unemployment and inflation that would slip ever lower as a result of unused capacity in the economy. What has actually happened since then has been a mixture of the two.  Optimists say that GDP may be revised up later. But there is another, more troubling possibility: the crisis may have permanently dented America’s productive capacity. If so, the “output gap” between the economy’s current level of production and its potential level is much smaller than expected. Unemployment has fallen because there are fewer people available to work. Inflation is stable because there is less idle capacity to restrain prices. This would be bad news all round. America would be permanently poorer than would otherwise have been the case. The Federal Reserve would have less room to ease policy before inflation revives. More of the budget deficit would be structural, rather than the temporary result of a depressed economy.

Slouching Towards Third World Status - The United States has been in decline relative to other countries for the last 30 years. On key metrics, we've fallen behind our peer group of industrialized countries, such as the UK, France, Germany, and Japan. Am I exaggerating? Well, according to the Corruption Perception Index, we rank 24th in the world (only slightly better than Qatar) for public sector corruption. We rank 25th (way behind our peer group) in the OECD for math scores among 15-year-olds. Over the past 30 years, our national debt has grown from about 30 percent of GDP to over 100 percent, and will become much worse based on current trends. In a recent survey of 10,000 Harvard Business School Alumni, "66 percent of respondents see the U.S. falling behind emerging economies." It is difficult to find many encouraging metrics.  If the above statistics don't convince you, visit the New Delhi International Airport, then compare it with our JFK or Newark International Airports. In many areas, our infrastructure is an embarrassment, already inferior to that of many third world countries.  These facts (and many others) have escaped Romney, Santorum and our current group of Republican leaders. Obama and the Democrats aren't doing significantly better at confronting these challenges.

Which way America? - THIS week, we review two books with differing takes on the status of the American economy. Dan Gross' new book "Better, Stronger, Faster" makes the case that America's economy is well-poised for a period of surprisingly strong and innovative growth. Ed Luce, by contrast, argues that if America doesn't soon get its act together a long and steady decline looms. Do read the review, but I think it's worth discussing the broader debate in a bit more detail here. As both authors note, Americans have been fearing for their imminent decline for as long as they've been around. There is always plenty to complain about, and now is no exception. It is important to maintain a perspective about this, however, in two different ways. First, while it is important to try and address flaws in the American economy, one shouldn't overreact to them. It is very easy to tell stories about broken government, sclerotic bureaucracy, and corrupt politicians, and Mr Luce does so quite effectively. It is harder to illustrate that things are dramatically different than they used to be.

Could the Eurozone Crisis Cause Another Lehman Moment? - The Lehman Brothers bankruptcy is perceived of as the 9/11 of the financial crisis, the moment where liquidity problems that had been bubbling since late 2006 turned into a full-fledged panic and then economic collapse. The question American elites are pondering is, will a Eurozone break-up, or even Greece leaving the Euro, cause another such moment? Ben Bernanke has argued that Greece leaving wouldn’t, since domestic banks have reduced their exposure to problem countries. Paul Krugman agrees, and in a recent interview on Bloomberg, laid out his case. Question: How interdependent right now, how linked is Europe to the United States?

Paul Krugman: The sheer, the trade linkage, the thing people think well we export to Europe, that’s a lot smaller than people imagine. We only sell 2% of our GDP to Europe, so even a serious European recession, it hurts, obviously, it’s not a good thing, but it’s not that big a deal. The real concern for this side of the Atlantic is financial. Do we see a blowup in European financial markets that spreads worldwide the way ours did? And you know it’s, maybe I ate the wrong thing for breakfast or something, but I’m fairly optimistic that that won’t happen…. Between Mario Draghi and Ben Bernanke, that they can throw enough money at the banking system to keep this thing from being a financial meltdown. I can believe that and believe at the same time that Greece is going to be out of the Euro fairly soon and that there’s a risk that the whole Euro will break up. I don’t think we’re looking at a Lehman style event, which means the impact on the US economy will be fairly limited. Famous last words, knock on wood.

Yet, a key dynamic in the Lehman situation was ignorance – no one quite knew how bad the problem really was.  Similarly, no one knows how bad this Eurozone problem will get, or what the linkages are to American banks. It’s possible the linkages are very very significant.

U.S. Said to Let China Buy Direct From Treasury (Reuters) - China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government, according to documents viewed by Reuters. The relationship means the People's Bank of China buys U.S. debt using a different method than any other central bank in the world. The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions. China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn't been necessary. The documents viewed by Reuters show the U.S. Treasury Department has given the People's Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011. China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market. The change was not announced publicly or in any message to primary dealers.

China Can Now Monetize US Debt Directly - The Treasury, apparently dissatisfied with the speed of indirect bank and/or Fed-inspired monetization of its exponentially rising debt-load at ever-cheaper costs of funds, decided in June 2011 to allow the Chinese, with their equally large bucket of USDs to bid directly for US Treasuries. As Reuters reports, China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government. The documents, viewed by Reuters, indicate that the US Treasury has given the PBOC a direct computer link to its auction system - which was first used in the 2Y auction of June 2011. Perhaps this helps explain the massive spikes in direct bidders July and August 10Y auctions (around the US downgrade). Interestingly, Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees; instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price.

Is China Really Liquidating Treasuries? The news that China has become the first sovereign to establish a direct sales relationship with the U.S. Treasury (therefore cutting out the middleman and bypassing Wall Street ) raises a few interesting questions. From Reuters:China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters. Which begs the question for some analysts — was China really selling? Or was China stealthily buying direct from the U.S. Treasury (unrecorded) and selling back into Wall Street (recorded)? Well, according to the Treasury, the Treasury International Capital data seeks to record foreign holdings of U.S. securities, not just the flows, and given that the Treasury was the seller in these direct transactions (and so obviously was aware of them) there’s no reason to believe that they wouldn’t include any such direct outflows in the data. That suggests very strongly that yes, China really was selling.

Playing Monopolis Monopoly: An inquiry into why we are making ourselves so miserable - - Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we really too poor to put America back to work making and building the things we need to maintain a prosperous nation? Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens! If this seems to defy logic, stay with me for just a few minutes. I’m going to propose a simple exercise that will help you “see” this reality for yourself. The exercise is simply that everyone join me in a familiar game of Monopoly. By the end of the game, I hope to convince you that MMT is correct and that we could be doing better, much better – for ourselves and future generations—if we just understood and took ad vantage of our modern monetary system.

Expansionary Fiscal Contraction in Action (or Not) - The recession in the UK is even worse than first reported. Figure 1: UK annualized q/q GDP growth (chained 2008), calculated as log differences. Dashed line at 2010Q2 (new coalition government). Source: UK ONS.  2012Q1 growth is revised down from -0.1% (quarterly rate) to -0.3%. As I noted earlier [1], this should put (yet another) nail in the JEC-Republican proposition that cutting spending will necessarily result in an output boom. If it doesn't happen in a relatively open, small economy, what would happen in a large, less open economy, stuck at the zero interest bound? [2]

World Gives Uncle Sam A Five Year Loan At Record Low Yield - It may not be quite the 0% coupon which Germany got yesterday for its 2 year bonds (soon realistically going negative if the demand is there), but lending $35 billion to Uncle Sam at a cash interest of 0.625% and a record low yield of 0.748% is still quite remarkable. Because with this auction, total US debt/GDP is now almost 103% (rounded up). But who cares: when one needs to parks cash in a hurry, one will do just what the herd is doing, consequences of groupthink be damned. The internals: 2.99 Bid To Cover, higher than the TTM average of 2.924%, but of note was the slide in Indirect Bidders which bought "only" 42.6% of the auction, and Directs, who only purchased 6.5% of the total. This means that for the first since June 2011, Primary Dealers, who promptly take the proceeds and flip it for cash into the limbo that is the custodial repo market, amounted to over half of the total takedown, or 50.9%: hardly a ringing endorsement when one strips away the ponzi apparatus that is the PD bid. That said: Uncle Sam will take it, and will certainly take another $29 billion in 7 year bonds tomorrow, which will also likely price at an all time low yield.

Uncle Sam Borrows $29 Billion Due In 2019, At Another All-Time Record Low Yield | ZeroHedge: Yesterday it was a record low 5 Year yield, today it is the 7 Year. Tim Geithner just issued a fresh $29 billion in 7 Year bonds at a new all time low yield of 1.203%, on top of the When Issued 1.200%,and paying a cash interest of 1.125%. Those concerned that the belly of the curve may not enjoy the benefits of Twist can put those fears at rest. The internals were non-eventful, with a 2.80 B/C, just shy of the 12 TTM average of 2.81, Directs taking down 15.70%, Indirects 42.73% and Dealers left with 41.57% of the auction, an improvement from yesterday when they were stuck with over 50% of the takedown. And so, with this final weekly auction, total US debt rises to $15.75 trillion.

How National Belt-Tightening Goes Awry - Robert Shiller -WHY is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?  Maybe it’s because we have the wrong metaphor stuck in our minds, and it’s framing policy choices in a misleading way.  Clearly, metaphors and other symbols carry real weight in our thinking,  “Our ordinary conceptual system, in terms of which we both think and act, is fundamentally metaphorical in nature.”  Our metaphors are like the icons on our computer screen, little pictures by which we condense complexities into manageable packets to refer to in our decision-making. Our brains may be hard-wired for them.  Consider our current thinking about taxes and government spending. We seem caught up in a “family belt-tightening” metaphor, in which the nation is a family that has outspent its income and is trying to get back in control. The family must cut profligate spending, save and pay down debts. It’s a powerful thought, of course, because we know that mismanagement of household finances can lead to a family’s ruin.  But perhaps the most important lesson conveyed by the great economist John Maynard Keynes is that this metaphor, when applied to the national economy, is fundamentally misleading: what is smart for the family is not smart for society as a whole. This idea, sometimes known as the paradox of thrift, is that when we all tighten our belts at once, the economy is so weakened that we end up failing to save more, and instead are all worse off. When that happens, some collective action — government stimulus — is needed.

What happens if you tighten your belt … but don’t lose any weight? You get unsightly bulges elsewhere and can’t breathe well enough to exercise. That’s essentially the House Republican solution to the long-term budget challenge of escalating health care costs: Shift costs to individuals, and do it in a way that impedes measures that could actually help control costs in the long run. Nevertheless, belt-tightening is the latest weight-loss fad to hit Washington, prompting Robert J. Shiller to ask in yesterday’s New York Times, “Why is there such strong political support for fiscal austerity, for government cuts and layoffs, at a time of widespread unemployment?” Shiller thinks the reason austerity has caught on (at least inside the Beltway) is that the other side has better metaphors, like belt-tightening. His proposed alternative—”winter on the family farm“—may not resonate in a non-agrarian economy, but his point is a good one: When there’s no planting, fertilizing or harvesting being done, it’s time for infrastructure projects to make productive use of idle labor. It’s not even necessary to increase the deficit, though this would be the quickest way back to full employment. Raising taxes to pay for infrastructure and education would still create jobs, because all the money would be spent, whereas some of the income that was taxed would have been saved. This is especially true if the taxes fall on higher-income households. These investments would also pay off in the form of a more productive economy in the long run.

Metaphorically Speaking - Robert Schiller opens his New York Times column today on a promising note, pointing out the power that metaphors have over our thinking about economics.  A particularly nefarious motif is “belt-tightening”, conjuring up the idea that running an economy is like managing the finances of a family.  When family income falls, under normal circumstances a proper response is to cut spending too: live within your means.  It’s a  misleading guide to macroeconomics, however, since it takes the outside world, the place where our money comes from, as given and looks only at how we can respond to it. Unfortunately, Schiller’s alternative, while fine for some purposes, also misses the point.  He suggests “a winter on the family farm”, where, while when the land is covered in snow, it makes sense to invest time in repairing old equipment, investing in new methods, and so on.  He’s right of course, except that his metaphor also sidesteps macro.  It too takes “winter” as an exogenous force and fails to illuminate how economic winters are created by the behavior of the farmers themselves.

Sensible Nonsense - Krugman - OK, I see that Raghuram Rajan is now saying that “sensible” Keynesians see no easy solution to our depression, because A general increase in government spending may be too blunt – greater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). Do people making arguments like this take even a moment to look at the actual data? Reading Rajan here, you’d imagine that New York was close to full employment, that the unemployment problem was mainly in places like Nevada that had the worst housing bubbles. And it’s true that Nevada, with an unemployment rate of 11.7 percent, leads the nation. But New York has an unemployment rate of 8.5 percent! Not exactly full employment. More than half the US population lives in states with more than 8 percent unemployment. Almost three-quarters lives in states with more than 7 percent unemployment. Less than a tenth of the population lives in states with less than 6 percent unemployment. We are not a nation with pockets of high unemployment. We are a vast expanse of very high unemployment with a few pockets of not-so-high unemployment — exactly the kind of scene where broad-based expansionary policy is exactly the right thing to do.

NBC’s Meet the Press Features Phony “Debate” Between Two Deficit Hysterics - For reasons only he and his producers can fathom, NBC’s Meet the Press host, David Gregory, thought it would be edifying to feature a debate about the economy and budget issues between two men who don’t have a clue about how to help the economy and who differ only in degree about how much Congress should pass measures that will hurt growth, put more people out of work, leave more people uninsured, and reduce more people’s wages and retirement incomes. The so-called “debate” featured the GOP’s ultimate flim-flam con artist, Representative Paul Ryan.  In a first segment, Ryan claims illogically that unless we extend the Bush Tax Cuts, we face a debt crisis, which would be Obama’s fault.  So, if taxes go up, we have a debt crisis? Huh? But it went right over Gregory’s head. So to have a decent debate with this kind of nonsense, one need only oppose Mr. Ryan with any decent human being, someone who actually cares about the effects of government policies on ordinary Americans and who can follow the news from Europe’s austerity catastrophe and draw logical conclusions.  But instead, Mr. Gregory chose Democratic Senator Dick Durbin, just another representative afflicted with the same hysteria who can’t follow simple logic.  Durbin left the principles of the Democratic Party years ago but neglected to tell anyone, and Gregory apparently doesn’t know the difference.

One more time: Public debt incurred when the economy is depressed does not damage the economy - I was on PBS’ NewsHour last night, talking austerity. I’m against it. Ken Rogoff from Harvard was also on, and he’s actually against it too. One point of disagreement came up, though, when I made the argument that public debt incurred when the economy is depressed causes no economic damage (in fact, it acts instead as a useful palliative). Rogoff disagreed in principle and then said something kind of startling—that increases in deficits and debt could lead to incomes in the near-ish future (i.e., less than 30 years from now) that are “20 percent lower.” I’m assuming this claim has some relation to a Congressional Budget Office estimate of the effect of one particular fiscal scenario (the “alternative fiscal scenario,” or AFS) that projects the effects of large increases in budget deficits in coming decades on economic growth (see table below from the CBO report (p. 28)). The mechanism is that rising deficits increase interest rates which lead to lower private investment and a stronger dollar, which leads in turn to higher trade deficits and rising foreign debt. Set aside for a second whether or not there are some problems with these calculations. The more salient point is simply that there is nothing in the CBO analysis that rebuts my larger point: Potential damage from increased public debt does not materialize when this debt is taken on when the economy is depressed

The Long and Short of Fiscal Policy - Alan Blinder - Can we talk about the federal budget deficit? Better yet, can we think about it? For there has been a lot more talking than thinking. One persistent point of confusion arises from the radically different macroeconomic effects of larger budget deficits in the short and long runs. In the short run—let's say within a year or so—a larger deficit, whether achieved by spending more or taxing less, boosts economic growth by increasing aggregate demand. It's pretty simple. If the government spends more money without raising anyone's taxes to pay the bills, that adds to total demand directly.  Similarly, cutting somebody's taxes without also cutting spending raises spending indirectly—again, whether you like the tax cut or not.  A second layer of subtlety recognizes that some types of spending and some types of tax cuts have larger effects on spending than others, and similarly, that some types are more sharply targeted on job creation than others.  But for present purposes, let's keep it simple: Higher spending or lower taxes speed up growth by adding to demand. So, as long as the government can borrow on reasonable terms, the crucial short-run question is: Does the economy need more or less demand? For the last several years, the answer has been clear: more. Bolstering demand was the rationale for fiscal stimulus under President Bush in 2008 and under President Obama in 2009. It remains a persuasive rationale for further stimulus today.

Fiscal stimulus - My colleague UCSD Professor Valerie Ramey has an interesting new paper looking at the effects of higher government spending on GDP. Ramey (2012) approaches the question from a forecasting perspective. Suppose a certain event (examples of which are detailed below) causes you to revise your forecast of how high government spending is going to be over the next few years. How would this news cause you to change your forecast of how high private GDP (that is, all the components of GDP other than government spending) is going to be? If your prediction of private GDP goes up, that is evidence consistent with a fiscal multiplier greater than one-- added government spending not only contributes directly to GDP from the accounting identity, but also helps boost private spending as well. If private GDP goes down, that suggests a multiplier less than one.

No More Fiscal Policy Bank Shots - A little while back the Wall Street Journal observed that if there were as many people employed by government today as there were in the last month of George W. Bush’s tenure, the unemployment rate would be around 7.1 percent.  Job creation policy, in other words, can sometimes be quite simple.  Step One:  stop firing so many people. Reuters’ Edward Hadas picks up Pavlina Tcherneva’s research on the reorientation of fiscal policy and points us in the direction of a Step Two:  offer a job to anyone who wants to work but can’t find paid employment.  Tcherneva’s research reveals that the standard way of doing fiscal stimulus,  trying to boost economic growth with traditional pump-priming and hoping that the jobs follow, has it backwards.  Instead of the traditional “trickle-down Keynesian” approach, Tcherneva suggests that targeting the unemployed with direct job creation policies that run throughout the business cycle would be far more efficient. Tcherneva envisions a direct job creation program that would function as a more effective automatic stabilizer, expanding in recessions and contracting in booms.She argues that this “bottom up” approach is not only closer to what Keynes actually advocated, but that it is also more likely to bring us back to full employment—while being less inflationary and more equitable.  Although expanding government payrolls for projects fulfilling various public purposes would be one way of accomplishing this, Tcherneva advocates using social enterpreneurs and the nonprofit sector to offer jobs to all those willing and able to work (with funding provided by government).

Obama spending binge never happened - — Of all the falsehoods told about President Barack Obama, the biggest whopper is the one about his reckless spending spree. As would-be president Mitt Romney tells it: “I will lead us out of this debt and spending inferno.” Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true. But it didn’t happen. Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.  Here are the facts, according to the official government statistics:

  • In the 2009 fiscal year — the last of George W. Bush’s presidency — federal spending rose by 17.9% from $2.98 trillion to $3.52 trillion. Check the official numbers at the Office of Management and Budget.
  • In fiscal 2010 — the first budget under Obama — spending fell 1.8% to $3.46 trillion.
  • In fiscal 2011, spending rose 4.3% to $3.60 trillion.
  • In fiscal 2012, spending is set to rise 0.7% to $3.63 trillion, according to the Congressional Budget Office’s estimate of the budget that was agreed to last August.
  • Finally in fiscal 2013 — the final budget of Obama’s term — spending is scheduled to fall 1.3% to $3.58 trillion. Read the CBO’s latest budget outlook.

Budget Battles & Reality Checks - Earlier this week, MarketWatch's Rex Nutting wrote that the "Obama spending binge never happened" and that federal government outlays have recently been rising at the "slowest pace since 1950s." The claim was quickly attacked by some commentators of the Republican persuasion as a left-wing conspiracy. The motivation for trying to discredit the report is understandable, at least from a raw political perspective. The notion that federal spending hasn't exploded under Obama doesn't jibe with the political playbook these days for the loyal opposition. But facts are still facts and so the frenzy of efforts to dismiss Nutter's column don't stand up based on the numbers.  A simple review of the federal budget data confirms that the rate of spending growth has slowed recently relative to the Bush years. We can debate why that's so, and whether Obama deserves credit or not. But for now, let's just look at the numbers, as published by the Congressional Budget Office here. (In particular, note the historical data in tables F-1 and F-3 in "The Budget and Economic Outlook: Fiscal Years 2012 to 2022".) The first chart below shows the annual percentage change in federal outlays by fiscal year. The chart speaks for itself.

The Insane Idea Hidden in the Debate Over Obama's Spending -There's a recent debate about whether or not a federal government spending boom has happened under President Obama's watch. This was kicked off two days ago by Rex Nutting's post at Marketwatch, Obama spending binge never happened. Nutting notes that "federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s." He argues that the 2009 fiscal year, outside the stimulus spending, belongs to President Bush, as it was four months into that budget when Obama entered the Presidency. He draws on OMB's numbers, which you can access here. As you can imagine, the right-wing has gone into action. Here's Actually, the Obama spending binge really did happen by AEI's James Pethokoukis, which argues that you must look at the government spending as a percentage of GDP to see the increase. Now there's a technical debate about how to approach the numbers in the 2009 fiscal year. And there's a fair debate on how to understand the increase in automatic stabilizers, such as unemployment insurance. Do they "belong" to Obama, given that they were already starting up due to a recession that started in December 2007? But underneath it is an insane debate about an insane idea - that the government should keep a consistent ratio of government spending to GDP in a recession. The attack on Obama is focused on this number, without acknowledging the crazy part of what this number actually does in a recession. Let's do a quick example to show why I think this is insane.

Federal Spending As A Share Of The Economy - In a previous post, I reviewed Rex Nutting’s report that the “Obama spending binge never happened” by reviewing annual percentage changes in federal spending. The numbers support Nutting's conclusion, but there are several ways of analyzing the federal budget and the results leave plenty of room for debate when it comes to summarizing the government’s fiscal rectitude, or the lack thereof. For example, another method of evaluating federal outlays is by looking at dollar amounts as a percentage of the economy (GDP). By this standard, the Obama administration is open to more criticism vs. comparisons based on the rate of change in spending. Consider how federal spending compares on an annual basis as a share of nominal GDP over the past four decades. Total outlays as a percentage of the economy have recently been at heights unseen in recent history—roughly 23% to 25%. Discretionary spending levels, by contrast, are a bit lower, running at roughly 9% in the last three years. That’s up slightly from the pre-recessions levels of 6% to 7%, but still under the 10% mark reached for a time in the 1980s. If you're a fiscal hawk, however, the recent trend is still cause for alarm.

History Shows U.S. Can Stimulate Now, Cut Later - Peter Orszag - From 2017 to 2022, Social Security’s normal retirement age is scheduled to gradually increase to 67. And I’ll bet that not only happens as planned, but does so with little fanfare -- which is pretty much what happened several years ago when the age rose from 65 to 66.  Therein lies an important point: When policy makers put in place measures carefully designed to reduce the federal deficit in the future, most of them happen. This is a good thing, since enacting more stimulus today and more deficit reduction to take effect later is exactly what the U.S. needs.  It’s also what makes the ongoing jobs-versus-austerity debate so frustrating. What we really need is to be bolder on both jobs and austerity, by pursuing a combination policy.  Additional stimulus is required because the labor market remains extremely weak. Delayed deficit reduction is also needed to reduce uncertainty over how the federal government will navigate its perilous fiscal path -- and to boost the chances of enacting more stimulus despite the looming debt limit.

Why Have Politicians Neglected the Unemployed? - There was a time when Republicans believed that both monetary and fiscal policy had a role to play in recessions, monetary policy in particular. Milton Friedman, for example, believed the Fed should intervene to stabilize the economy during a financial crisis. Today, however, Republicans do not believe that the Fed and Treasury should bail out banks even in a severe crisis. Saving banks, no matter how big, creates the incentive to take on too much risk and delays the necessary cleansing that needs to occur before we can return to economic health. Thus, no banks should be saved even if it means tolerating high levels of unemployment.  When it comes to interest rate policy from the Federal Reserve, Republicans argue that unemployment should not matter either. Many Republicans would like to see the Fed eliminated altogether, but if that’s not possible then monetary policymakers should worry about one thing and one thing only, inflation. Even if unemployment is very high, any threat of inflation whatsoever must be met with interest rate increases. Inflation transfers money from those who lend money – the wealthy supporters of policymakers in particular – to borrowers. That could help the economy in a deep recession, but since the wealthy have to give something up the GOP will oppose it no matter how much it might help struggling households.

MMP Blog 49: Should Growth Drive Jobs, or Jobs Drive Growth? - In an article yesterday in Reuters, Edward Hadas discussed an excellent piece by Pavlina Tcherneva. And, by Jove, he got it. It is much better to create the jobs and then let growth follow, rather than to try to pump up growth in the hope that some jobs might trickle down. That is all the more true when you’ve got 25 million people who need a full-time job. Let me quote the first part of his article; go here for the rest. “Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour. Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

The Irresponsibility Of John Boehner - Like most federal budget watchers, I assumed that the extremely negative political reaction to the federal government shutdowns in 1995 and 1996 meant that tactic wasn’t likely to be threatened again, let alone actually used. That changed last year when a shutdown became the favored approach for many on Capitol Hill. Although the timetable obviously was much more compressed, I thought much the same thing last summer after the extreme negative reaction to the fight over raising the federal debt ceiling also made that look less likely to happen again in the future. Despite the statements made by Senate Minority Leader Mitch McConnell (Ky.) and other Republicans that using the increase in the federal government’s borrowing limit as leverage to win policy changes was now the new standard operating procedure, the downside was so great that the threat seemed to be mere words. The approval rating for Congress and the White House fell during and immediately after the battle. But the negative reaction was also material because it resulted in the downgrading of U.S. debt by one of the three major rating agencies. The downgrade occurred not just because of a concern about the government’s capacity to pay the debt, which wasn’t really questioned but because of what Standard & Poor’s said was the growing inability of the U.S. political system to deal with its fiscal problems. The result was a significant hit to the government’s financial reputation. Most analysts I’ve spoken with are convinced that, were it not for the economic woes in Europe, U.S. interest rates would be much higher as a result.

Does just arguing over the debt ceiling damage recovery? Maybe - Given that Speaker of the House John Boehner (R-Ohio) essentially promised last week to engineer a replay of last summer’s debt ceiling fight at the first opportunity, people have been wondering if that previous fight could be tied directly to subsequent economic damage in the form of lost output or jobs. The short answer: maybe. Before going into this question, however, it is worth noting that there is absolutely zero economic reason to believe that current levels (and expansions in recent years) of public debt are damaging to the economy. But while economic fundamentals regarding public debt pose no threat to the U.S. economy, political brinksmanship might. As the nation approached the (arbitrary, unuseful, and dangerous) statutory debt ceiling last summer, what had been historically a pro forma vote to keep the federal government from defaulting on its obligations became this time a chance for GOP members of Congress to extort passage of some of their own pet policies in exchange for not causing an economic crisis. Eventually, the debt ceiling was raised in a deal to cut more than $1 trillion in spending over the next decade. Circumstantial piece of evidence exhibit A is that economic growth decelerated markedly in the middle of the year (see figure below on year-over-year GDP growth), roughly as the debt ceiling debate came to a head.

Obama has to Explain Why Fairness is Essential to Growth (and Why Some Democrats Have to Stop Believing Otherwise) Robert Reich -The Cory Booker imbroglio has ignited a silly but potentially pernicious debate in the Democratic Party between so-called “pro-growth centrists” who want the President to focus on how well he’s done getting the economy back on its feet, and “pro-fairness populists” who want him to focus on the nation’s widening inequality and Wall Street’s (and Romney’s) continuing role in generating profits for a few at the expense of almost everyone else. According to the National Journal, for example: Conversations with liberal activists and labor officials reveal an unmistakable hostility toward the pro-business, free-trade, free-market philosophy that was in vogue during the second half of the Clinton administration…..Fairness isn’t inconsistent with growth; it’s essential to it. The only way the economy can grow and create more jobs is if prosperity is more widely shared. The key reason why the recovery is so anemic is so much income and wealth are now concentrated at the top is America’s the vast middle class no longer has the purchasing power necessary to boost the economy.

CBO: Fiscal Cliff Likely To Cause Recession -- Trillions of dollars in looming tax hikes and spending cuts set to take effect next year would likely cause a recession, the Congressional Budget Office said Tuesday. At issue is the so-called fiscal cliff -- a series of measures set to begin in January that would take more than $500 billion out of the economy in 2013 alone. Those measures include the expiration of the Bush tax cuts and protection of the middle class from the Alternative Minimum Tax, the onset of $1 trillion in blunt spending cuts, and a reduction in Medicare doctors' pay. If Congress lets all those policies take effect, inflation-adjusted growth for 2013 would be just 0.5% -- with the economy projected to contract by 1.3% in the first half of the year and to grow by 2.3% in the second half. "Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession," the CBO said.

CBO Says Coming Fiscal Cliff Will Devastate The Economy - A giant austerity bomb is timed to go off at the beginning of next year, and the threat of significantly higher taxes and lower spending has Republicans running around the Capitol sounding more like John Maynard Keynes than John Boehner.  Automatic, across-the-board reductions to domestic and defense spending, combined with the looming expiration of the Bush tax cuts, will dramatically consolidate the budget in the next calendar year, if Congress does nothing. And despite bemoaning deficits throughout the Obama years, the GOP’s suddenly come around to the view that cutting government spending is a job killer.  Just listen to Sen. John Cornyn (R-TX). “Just when you thought the economic news could not get much worse with slow economic growth, we have an entirely predictable and preventable jobs crisis approaching in January, where because of the sequestration [automatic spending cuts], my state alone will lose 91,000 private sector jobs — and there are about a million private sector jobs at risk if the sequestration goes into effect on January 2. This marks the return of the Defense Keynesians — Republicans who admit that government spending supports job growth in a weak economy, if and only if that spending is directed toward the military. As luck would have it, a new Congressional Budget Office concludes Republicans are right about the economic consequences of defense cuts — but that their other fiscal priorities are just as perilous for economic growth.

Fiscal Analysis Shows Risks of Austerity Program - The chart above is from a Goldman Sachs analysis, and it shows the effect of fiscal policy on growth from 2009 to the present, as well as projections for growth in a variety of scenarios surrounding the fiscal cliff, the combination of expiring tax cuts and imminent spending cuts all set for the end of the year. I think there are a number of things notable about this. First, you have the fact, contrary to popular belief, that America never really experienced a fiscal stimulus. The stimulus had an impact on growth in the first two quarters it was operative, in Q2 and Q3 of 2009. After that, state budget cuts basically canceled out whatever the stimulus provided. Every quarter since Q4 of 2009 has shown a negative contribution to growth from federal, state and local fiscal policy. And since Q3 of 2010 – when Democrats still controlled Congress – federal fiscal policy has either been flat or negative for growth. If we pull forward to this year, we see that state and local spending has stopped hindering growth. Only federal policies drag on growth at this point, with the stimulus expired and cutbacks in fiscal accommodation from the government. Now, I know if I were the President, I would not be bragging about this. But it goes a long way to explaining the slow or non-existent recovery we have had since the Great Recession.

GDP Gap by End of 2013 if the Fiscal Cliff is Allowed to Occur - The Congressional Budget Office has considered the effect on real GDP growth in 2013 under two alternative fiscal policies:  Under those fiscal conditions, growth in real (inflation-adjusted) gross domestic product (GDP) in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law. Using the CBO estimate of potential GDP, the gap as of 2012QI was 5.4%. CBO also expects GDP to grow by a mere 2% during 2012, which would mean that the gap at year end would still be 5.3%. If policymakers allow the fiscal cliff to occur, this CBO forecast says that the gap will grow to 6.6% by the end of 2013. If policymakers avoided the fiscal cliff in such a way that GDP grew by 4.4%, however, the gap would fall to 3% by the end of 2013. While many economists might prefer some fiscal stimulus so as to close the GDP gap even faster, maybe our best hope given this dysfunctional Congress is that they don’t impose even more austerity.

Three Views of the 'Fiscal Cliff' - Discussion of the so-called fiscal cliff—the combination of tax increases and spending cuts that will come in 2013 if Congress and the president don't act—confuses a number of different issues. The evidence suggests that we should fear the tax hikes, but not necessarily the spending cuts. Anyone who uses the term "fiscal cliff" accepts a Keynesian view of the economy, knowingly or not. Both tax increases and constrained spending are assumed to be bad for the economy. But there are two other views: that of the budget balancer and that of the supply-sider. Rather than term the impending changes that will occur in 2013 a "fiscal cliff," the budget balancer thinks of this as "fiscal consolidation." Tax increases reduce the deficit, as do cuts in government spending. Both are austerity measures that make the government more responsible and, therefore, both are conducive to long-run economic growth.  The supply-sider has a different view from both the Keynesian and the budget balancer. Fundamentally, supply-side advocates focus on the harmful effects of tax increases. Raising tax rates hurts the economy directly because tax hikes reduce incentives to invest and because they punish hard work. As such, tax increases slow growth. But budget cuts work in the right direction by making lower tax revenues sustainable. If spending exceeds revenues, then the government must borrow and this commits future governments to raising taxes in order to service the debt.

None So Blind -Krugman - As those who will not see. Eddie Lazear has an op-ed in the WSJ on the fiscal cliff that, among other things, pooh-poohs any concerns that sudden cuts in spending might hurt the economy. He weasels a bit, but basically conveys the impression that there’s no evidence for Keynesian effects.What this signifies to me is the politicization and corruption overtaking the economics profession. I’ll give Eddie the benefit of the doubt; he is probably just going by what his friends say. But it’s truly awesome: in the midst of a crisis that has both provided overwhelming evidence for Keynesian views of fiscal policy and inspired a great deal of empirical work that also confirms the case for a Keynesian view, the right wing of the profession is just covering its ears and yelling “La, la, la, I can’t hear you.” Just as a reminder:

US fiscal cliff hangs over a pile of recessionary rocks below - The fiscal cliff and “Taxmageddon” are terms for what might happen at the end of this year, when various US tax cuts and benefits expire, and the automatic “sequestration” spending cuts agreed as part of last year’s debt ceiling/Super Committee deal are due to kick in. (Cardiff explained it in more detail back in November if you want a refresher on the scale and messiness of it all.) There have been several estimates of how this might play out — Nomura for example forecast that the expiration of the Bush tax cuts alone would reduce GDP in 2012 by 1.5 percentage points. Now the Congressional Budget Office, a non-partisan agency, has published its own analysis, which paints a picture of all of the fiscal restraint measures and expiring tax cuts shaving a massive 4 percentage points off GDP growth in 2013, making for a recessionary first half: Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

Counterparties: The CBO rates the fiscal cliff - The Congressional Budget Office released its analysis of the economic effects of the so-called fiscal cliff, and it’s not pretty: Growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent … with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half … such a contraction in output in the first half of 2013 would probably be judged to be a recession. These dangers aren’t new, but ever since John Boehner threatened to add another debt-ceiling fight to the mix, they’ve been amplified. Looking at Boehner’s comments, Ezra Klein thinks the US Government is being set up for its very own Lehman moment: “We’re either likely to solve our fiscal problems early in the year in [a] way that defuses Boehner’s debt-ceiling threat or we’re likely to spend 2013 in a state of permanent crisis in which Congress lights the economy on fire”. Monetary policymakers are already attuned to the dangers. The most recent Fed minutes called the impacts of fiscal policy uncertainty a “sizable risk” to the economy. If Congress and the president do get it right, that risk could give way to 4.4% growth.

Staring At The "Fiscal Cliff" - Does the government that governs least also govern best? The famous quote will be put to the test if Congress and the White house don't resolve the "Taxmageddon" train wreck coming our way. What's at stake? Perhaps economic growth, according to a new report from the Congressional Budget Office: "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013." Unless the government acts between now and the end of the year, a combination of expiring tax cuts and broad reductions in spending will kick in automatically. It doesn't take a genius to recognize that this wave of fiscal change, if implemented overnight in one fell swoop, could be toxic for a fragile economic recovery. The CBO report says as much: If current law is allowed to unfold unchanged, the CBO expects that the economy will retreat at an annual real (inflation-adjusted) rate of 1.3% in the first half of 2013—a decline that "would probably be judged to be a recession" by the National Bureau of Economic Research. In that case, overall growth for 2012 is expected to be a shallow 0.5%.The CBO engages in a bit of scenario analysis:What would happen if lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013? In that case, CBO estimates, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, well above the 0.5 percent projected for 2013 under current law.

Turning the Fiscal Cliff Into a Gentler, Climbable Hill - The Congressional Budget Office has just released an excellent analysis prepared by CBO economist Ben Page on the “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013″ (in typically dry CBO-speak).  I prefer to think of it as an economics version of the story “The Little Engine That Could.”  You see, the “engine” is the U.S. economy, and this so-called “fiscal cliff” is, rather than something we are in danger of falling off of, something we are about to ram straight into–like a huge wall just ahead on the tracks, at January 2013.  When economists and policymakers fret about this fiscal cliff, it’s not the usual worrying about the unsustainable deficits we are projected to run over the next several decades; it’s concern that our economy, still in “recovery,” can’t handle the amount of deficit reduction that is scheduled to be forced upon us in just a matter of months. The CBO analysis validates this worry, first defining the scale of the cliff as $607 billion worth of deficit reduction in one year (or $560 billion net of economic feedback, cutting the deficit nearly in half between fiscal years 2012 and 2013), then explaining that letting our economy run head onto this cliff will in fact, slow it down and perhaps even cause the “double-dip recession” economists have been fearing.  From the summary (emphasis added):

CBO warns Obama, GOP about tough tax choices - Regardless of who wins the elections in November, lawmakers already face a series of tough choices in December. They can take action to reduce the federal debt -- but that might also trigger a new recession. A series of tax cuts are due to expire at the end of the year and automatic budget cuts are scheduled to take effect, thereby giving President Obama and Congress their chance to cut budget deficits -- but also threatening a recession if tax bills go up quickly for all Americans. "Under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013 -- a development that some observers have referred to as a 'fiscal cliff' -- and will dampen economic growth in the short term," said a new report from the Congressional Budget Office.

How To Know When Markets Are Freaking Out About The Fiscal Cliff - A good note here from Barclays' Bary Knapp on the "fiscal cliff", the scene at the end of the year when the tax cuts expire and automatic spending cuts kick in. Knapp makes two points. The first is that markets aren't worried yet. The second is that the odds of a problem are much bigger than people think. Here's why he thinks that the market isn't worried yet. One way of detecting whether the equity market is pricing the fiscal cliff is to look to the defense sector and estimate the impact of the impending sequestration. With the fiscal cliff approaching on December 31st (including the expiration of the Bush tax cuts, the Obama payroll tax cut and sequestration, along with some additional annual year end tax extensions due to expire), it would stand to reason that defense stocks’ performance and analyst estimates should reflect the probability of a worse case scenario; that is, there is no deal on sequestration and the draconian defense department (DoD) cuts take effect (10% cuts to DoD spending equal to ~$450bn over 10 years).

CNBC Blows It On Bowles-Simpson - CNBC isn't for everyone. But I've had it on it my office almost since the day it began, have been a frequent guest since it's earliest days, and think highly of a large number of its people in front of and behind the camera. Which is why this story from Jeff Cox on was such a disappointment. Cox made the same mistake that others have made...or he drank the same Kool Aid the B-S Cult wants everyone to drink...when he said in his story that the commission had agreed to a report to reduce the deficit. As regular CG&G readers know, the B-S commission did not issue or agree on a report. The two co-chairs recommended something but that wasn't even voted on let alone actually approved. Eleven of the commission's 18 members informally indicated they supported the co-chairs' recommendation, but there was no vote and the recommendation wasn't approved.

The Economy’s Ailments and the Best Fiscal Policy Prescriptions - The latest economic news and the CBO analysis serve as a reminder that any deficit reduction efforts over the next year need to be designed so as to not stifle personal consumption too much in the short term and yet substantially and credibly increase public saving over the longer term. The President’s budget proposals seem to be appropriately mindful of the short-term fragility of the economy. But in the longer term, their deficit financing becomes the most significant feature in terms of their (adverse) economic effects, causing their costs to outweigh any of the economic benefits associated with the finer structure of the policies. The best way to turn the longer-term numbers around is to keep the basic structure of the policies but change their financing -- i.e., offset their cost without offsetting their good incentive effects.

Entitlement Reform For the Entitled - IF nothing is done about entitlement spending, and if our current tax breaks continue, then by 2025, tax revenue will be able to pay for Medicare, Medicaid, Social Security, interest on the debt and nothing else. The rest — defense, medical research, highways, education, energy — will have to be financed by deficits. Social Security’s funding is predicted to run short in 2033, Medicare’s trust fund in 2024. Like much else in Washington, there is little bipartisan agreement on what to do about it. When it comes to Social Security and Medicare, Republicans emphasize cuts and privatization, while Democrats strongly oppose both approaches. But here is a better bipartisan reform: Graduated eligibility. Instead of having a fixed age at which people can get Social Security and Medicare, we should link the age of eligibility to lifetime wealth. The richer you are, the older you would have to be to be eligible for Social Security and Medicare. Here’s how it would work. People in the bottom half of the lifetime earnings distribution would become eligible for normal retirement benefits at age 65 for Medicare and 66 for Social Security, just as they are today. But people in the next quarter of the lifetime earnings distribution would become eligible for the respective programs at 67 and 68, and those in the top quarter would become eligible at 70 and 71. All eligibility ages would increase over time, as they are scheduled to now.

House Passes Bloated Defense Authorization Bill Despite Veto Threat - The House has passed this year’s defense authorization bill which departs from last year’s debt limit deal by adding $8 billion above spending targets set for the military, and by replacing the defense side of the automatic “trigger” cuts with cuts from elsewhere in the budget. The final vote was 299-120, with 77 Democrats supporting the bill, and all but 16 Republicans joining them. Defense authorization bills are traditionally seen as must-pass, but the White House has already threatened to veto this one from the House because of how it breaks the spending agreement from last year; in this case, by spending MORE than the target limit. Democrats tried to pass an amendment that would roll back the bill by $8 billion to keep it in line with the debt limit deal, but that failed 252-170. Lucky for them, most all the serious people in Washington think that defense spending is magical “un-spending” that doesn’t count toward the federal budget.And the spending issues are not the only reason that the White House threatened a veto.

House approves East Coast missile shield site in $643 billion defense bill - The House on Friday approved a sweeping defense authorization bill for 2013 that calls for the construction of an East Coast missile defense system in the United States by the end of 2015. The bill obligates $100 million next year to plan for the site, but the project would cost billions of dollars in later years that has yet to be funded. The language was derided by a House Democrat as an "East Coast Star Wars fantasy base" but nonetheless escaped further scrutiny during floor debate Wednesday and Thursday on amendments to the National Defense Authorization Act (NDAA). Friday afternoon, members approved the bill in a 299-120 vote after approving dozens of amendments, some after fierce debate that revealed disagreements on issues such as detainee policy, nuclear cooperation with Russia and the speed of the U.S. military withdrawal from Afghanistan. Seventy-seven Democrats support the bill, while 16 Republicans opposed it. The NDAA authorizes $643 billion in spending for the Department of Defense and overseas contingency operations, $8 billion above the spending caps in last year's Budget Control Act (BCA) and $3.7 billion higher than President Obama's request. 

Speaker Boehner pledges to hijack the debt ceiling and jeopardize recovery again - There are only two theoretical ways in which long-term deficit reduction can accelerate economic recovery. First (and actually plausible), a long-term deficit reduction “grand bargain” could include substantial near-term fiscal stimulus and gradually phase-in deficit reduction after some macroeconomic trigger is met (e.g., EPI proposed a “6-for-6” trigger: unemployment at or below 6 percent for six consecutive months). Second, deficit reduction could lower the premium on government borrowing, and thus private interest rates. This second channel actually has no hope of actually working today, as longer-term Treasury yields are already at historically low levels. Making all future increases in the debt ceiling completely uncertain and chaotic, however, will almost certainly impede both channels in the future.

How ‘Taxmageddon’ would affect the U.S. economy  What will the economy look like in 2013? A great deal depends on what Congress decides to do at the end of this year. Remember, the Bush tax cuts are expiring, the payroll tax holiday will sunset, and a bunch of new spending cuts under the debt-deal “sequester” are scheduled to kick in. Coming all at once, that’s a potentially big drag on growth.Jared Bernstein passes along a chart from Goldman Sachs that tries to map out a couple of different scenarios here. The dotted line shows what could happen if Congress can’t reach an agreement and lets all tax cuts expire and spending cuts kick in. If that happened, the U.S. economy would grow at least 3 percentage points less than its potential for each of the first three quarters of 2013: To put this in perspective, the Federal Reserve expects the economy to grow at a roughly 2.9 percent pace in 2013. If Congress does nothing at the end of this year, much of that growth could be wiped out, and there’s a strong possibility that the United States could lurch back into recession. (Granted, a lot could depend on how the Fed reacts in this situation.)

Pelosi wants vote on permanent extension of middle class tax rates - House Minority Leader Nancy Pelosi wants Speaker John Boehner to bring a vote on a permanent extension of the tax rates for the middle class as early as next week. In a letter being released Wednesday, the California Democrat said the revenues for raising tax rates for those earning more than $1 million a year could be used to help pay down the deficit. “It is unacceptable to hold tax cuts for the middle class hostage to extending multi-billion dollar tax breaks for millionaires, Big Oil, special interests, and corporations that ship jobs overseas,” Pelosi wrote to Boehner. Boehner spokesman Michael Steel issued this one-sentence response: "Speaker Boehner has already announced that the House will act to stop the tax hike on every American taxpayer." Pelosi’s rhetoric echoes that of Senate Majority Leader Harry Reid, who said Tuesday that the impending fight over tax cuts could be resolved “tomorrow” if Republicans would extend tax rates for everyone but the wealthy.

Bush Tax Cut Extension: House Republican Leaders Plan Summer Vote: — The House will vote this summer on continuing wide-ranging tax cuts first enacted under President George W. Bush, House Majority Leader Eric Cantor said Friday as the GOP sharpened its plans for confronting Democrats on one of the election's top issues. In a memo to fellow Republican lawmakers, Cantor said the House would vote on extending those tax cuts before leaving Washington for its August recess. Without congressional action, tax rates on wages, dividends, capital gains and other earnings will rise and most Americans will face higher taxes. In one of the defining partisan disputes of recent years, Republicans want to keep those tax cuts – first enacted in 2001 and 2003 – for all taxpayers. President Barack Obama and Democrats oppose renewing the tax cuts for the highest earning Americans, though they haven't agreed among themselves yet where the cutoff should be. The House vote will be symbolic because Democrats running the Senate are sure to block a bill cutting taxes for the rich. Senate Democrats haven't decided yet whether to hold votes this summer or fall on extending the tax cuts, and whether the reductions should be renewed for people earning up to $250,000 or $1 million annually.

How a Delay in the Debt Limit Will Change America’s Fiscal Politics - By now, you know the great taxmageddon story: At the end of the year, a lame duck Congress and a new or newly re-elected president will face the confluence of three extraordinary challenges—the 2001/2003/2010 tax cuts expire, the automatic spending cuts adopted in 2010 begin to bite, and the Treasury loses its ability to borrow new money. But what if that schedule is wrong? What if that third forcing issue—hitting the statutory debt limit—does not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck. Here’s what might happen: Assume President Obama is re-elected. Separating the debt limit from those other fiscal issues strengthens his hand enormously in 2012. It makes it much easier for him to push Congress to extend the 2001/2003 tax cuts for all but those making $200,000 or more.  The more interesting speculation, however, is about what happens if Mitt Romney is elected President. If he wins in November, there will be no living human in America more anxious to have the debt limit resolved in 2012 than Romney. He would, I suspect, give up almost anything to avoid having to face the debt limit shortly after he is sworn in. I can hardly think of a less auspicious start to his presidency than a knock-down drag-out brawl over increasing government borrowing.

Romney Messes Up, Tells the Truth About Austerity - Mitt Romney has periodic breakdowns when asked questions about the economy because he sometimes forgets the need to lie. He forgets that he is supposed to treat austerity as the epitome of economic wisdom. When he responds quickly to questions about austerity he slips into default mode and speaks the truth -- adopting austerity during the recovery from a Great Recession would (as in Europe) throw the nation back into recession or depression. The latest example is his May 23, 2012 interview with Mark Halperin in Time magazine.

  • Halperin: Why not in the first year, if you're elected -- why not in 2013, go all the way and propose the kind of budget with spending restraints, that you'd like to see after four years in office? Why not do it more quickly?
    Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I'm not going to do that, of course.

Romney explains that austerity, during the recovery from a Great Recession, would cause catastrophic damage to our nation. The problem, of course, is that the Republican congressional leadership is committed to imposing austerity on the nation and Speaker Boehner has just threatened that Republicans will block the renewal of the debt ceiling in order to extort Democrats to agree to austerity -- severe cuts to social programs. Romney knows this could "throw us into recession or depression" and says he would never follow such a policy.

Mitt Romney Admits It: Cutting Government Spending Hurts The Economy - One of the under-remarked on things in the Mark Halperin interview of Mitt Romney in Time magazine comes here. Halperin: Why not in the first year, if you're elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you'd like to see after four years in office?  Why not do it more quickly?Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%.  That is by definition throwing us into recession or depression. So I'm not going to do that, of course. It couldn't be clearer: Mitt Romney believes that a large cuts to federal outlays will throw us into a recession or depression.  It is a repudiation of the Tea Party style thinking that you can grow the economy by cutting. Our own Joe Weisenthal has been arguing fiercely that Romney has always understood this and would not fall for the Tea-Party idea that you can cut your way to prosperity, that austerity will unleash growth.

Romney Argues Big Spending Cuts Would Cause ‘Depression,’ Contrary To Tea Party Activists - Republican House Speaker John Boehner and GOP Presidential nominee Mitt Romney have, in the course of the past week, pushed starkly different approaches to fiscal policy and economic recovery, a window into a broader rift within the GOP between the Tea Party and less absolutist conservatives. Boehner, carrying the Tea Party line on spending, recently said that he would insist that the deficit be cut by a dollar for every dollar increase in the debt limit, or else he would refuse to raise it, helping drive the country toward default. "When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase," Boehner said.  Romney, however, said that pushing drastic spending cuts during shaky economic times is a prescription for "recession or depression." Asked by Time's Mark Halperin Wednesday why he wouldn't push major cuts in his first year, Romney responded with reasoning that would be largely uncontroversial if not for the past two years' mainstreaming of an economic philosophy that insists government spending actually costs jobs, rather than creates job. "Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5 percent. That is by definition throwing us into recession or depression. So I'm not going to do that, of course," Romney said in an answer picked up by former bank regulator William Black, a HuffPost blogger.

Romney-Ryan Fiscal Policy – a Return to Reaganomics? - Brian Beutler offers a very good discussion on whether Obama or Romney is offering more austerity with Brian correctly noting the short-term fiscal restraint would be a disaster in terms of getting our economy closer to full employment. He notes the ambiguity of Romney’s proposals (no specifics on tax offsets or spending cuts) noting:  Because we can’t know for sure what will become of the unknowns in Romney’s fiscal plan, it exists simultaneously on both ends of the Keynesian scale. If the offsetting base-broadeners never materialize, and the spending cuts don’t happen as advertised, Romney’s plan amounts to a hugely stimulative tax cut. “A large amount of stimulative tax cuts, and no contractionary spending cuts would suggest the true Keynesian in the race is Romney,” says economist Justin Wolfers. In other words – a return to the spend&spend and borrow&borrow policies during Reagan’s first term. But we also get this from Paul Ryan:  Paul Ryan — the GOP’s official spokesman on fiscal issues — boasted that a Republican victory in November will give his party a mandate to turn his controversial spending-slashing budget into law. “If we make the case effectively and win this November, then we will have the moral authority to enact the kind of fundamental reforms America has not seen since Ronald Reagan’s first year,” Ryan said. Funny thing – spending as a share of GDP never declined under President Reagan.

The idiotic war on the American Community Survey - Catherine Rampell has some excellent coverage of the GOP war on the ACS that does an admirable job of not pulling punches and calling nonsense out as nonsense: It is, more or less, the country’s primary check for determining how well the government is doing — and in fact what the government will be doing. The survey’s findings help determine how over $400 billion in government funds is distributed each year. But last week, the Republican-led House voted to eliminate the survey altogether, on the grounds that the government should not be butting its nose into Americans’ homes. ….A number of questions on the survey have been added because Congress specifically demanded their inclusion. In 2008, for example, Congress passed a law requiring the American Community Survey to add questions about computer and Internet use. Additionally, recent survey data are featured on the Web sites of many representatives who voted to kill the program — including Mr. Webster’s own home page. This stupidity encapsulates perfectly the extremeness that is showing its face in some elements of the GOP today. Between things like this and the debt ceiling insanity it is hard not to agree with those who claim there is an asymmetrical extremeness in politics today. It is a depressing display.

Save the American Community Survey - The Credit Slips blog always has tried to offer perspectives from many different social sciences. That is why many readers may be distressed to learn of the attack on the American Community Survey (ACS). If you do not do a lot of social science work, you may not be familiar with the ACS. It is an arm of the Census Bureau that provides all sorts of information about what is happening in the United States. For example, did you know that people with a college degree live, on average, about two minutes further away from their workplace? At 30 MPH, that would be one mile further away. This small fact from the ACS, which we use as an example in our empirical methods book, might tell us a lot about the structure of cities and social stratification. And, this example is a poor one because it undersells the important data in the ACS on everything from income to drug use. I have used the ACS in my work to get information on consumer financial conditions in various states. There are all sorts of uses for these data in governmental, academic, and business circles. Dollar for dollar, the ACS may be one of the most effective federal programs we have. Now, it is under attack from congressional Republicans. The House has recently passed legislation that would end funding for the ACS. What little thinking has gone into this initiative seems to believe that the ACS is an unwarranted government intrusion in people's lives. The ACS data are confidential and only reported in the aggregate. The ACS is very similar to the Census. In fact, it is run by the Census, but that does not matter to the know-nothings after the ACS because they are also after the constitutionally mandated Census.

Comment: We need more and better data, not less - The Depression led to an effort to enhance and expand data collection on employment, and I was hoping the housing bubble and bust would lead to a similar effort to collect better housing related data. In the early stages of the Depression, policymakers were flying blind. But at least they recognized the need for better data, and took action. All business people know that when there is a problem, a key first step is to measure the problem. That is why I've been a strong supporter of trying to improve data collection on the number of households, vacant housing units, foreclosures and more. But unfortunately some people want to eliminate a key source of data ... From Businessweek: Killing the American Community Survey Blinds Business On May 9 the House voted to kill the American Community Survey, which collects data on some 3 million households each year and is the largest survey next to the decennial census. The ACS—which has a long bipartisan history, including its funding in the mid-1990s and full implementation in 2005—provides data that help determine how more than $400 billion in federal and state funds are spent annually. Businesses also rely heavily on it to do such things as decide where to build new stores, hire new employees, and get valuable insights on consumer spending habits. Check out this video of Target (TGT) executives talking about how much they use ACS data.

The Beginning of the End of the Census? - THE American Community Survey may be the most important government function you’ve never heard of, and it’s in trouble.This survey of American households has been around in some form since 1850, either as a longer version of or a richer supplement to the basic decennial census. It tells Americans how poor we are, how rich we are, who is suffering, who is thriving, where people work, what kind of training people need to get jobs, what languages people speak, who uses food stamps, who has access to health care, and so on. It is, more or less, the country’s primary check for determining how well the government is doing — and in fact what the government will be doing. The survey’s findings help determine how over $400 billion in government funds is distributed each year. But last week, the Republican-led House voted to eliminate the survey altogether, on the grounds that the government should not be butting its nose into Americans’ homes. “This is a program that intrudes on people’s lives, just like the Environmental Protection Agency or the bank regulators,” said Daniel Webster, a first-term Republican congressman from Florida who sponsored the relevant legislation.

Americans Want Smaller Government And Lower Taxes - The reality is that — with the exception of Obama — Americans have again and again opted for a candidate who has paid lip-service to small government. Even Bill Clinton paid lip service to the idea that “the era of big government is over” (yeah, right). And then once in office, they have bucked their promises and massively increased the size and scope of government. Reagan’s administration increased the debt by 190% alone, and successive Presidents — especially George W. Bush and Barack Obama — just went bigger and bigger, in total contradict to voters’ expressed preferences. The choice between the Republicans and Democrats has been one of rhetoric and not policy. Republicans may consistently talk about reducing the size and scope of government, but they don’t follow through.Today Ron Paul, the only Republican candidate who is putting forth a seriously reduced notion of government, has been marginalised and sidelined by the major media and Republican establishment. The establishment candidate — Mitt Romney — as governor of Massachusetts left that state with the biggest per-capita debt of any state. His track record in government and his choice of advisers strongly suggest that he will follow in the George W. Bush school of promising smaller government and delivering massive government and massive debt

Why are some people morally against tax? - Americans are famously hostile to taxes even though they are not heavily taxed in comparison to Canadians and the British. ...Dr Jeff Kidder and Dr Isaac Martin, from Northern Illinois University and the University of California-San Diego, explore how middle class feelings of exploitation lie behind this hostility. "Everyday tax talk among the middle class is not simply part of a wider ideological view about economics or free markets," said Kidder. "Tax talk is morally charged and resonates with how Americans see themselves and their place in society." The researchers conducted 24 semi-structured, open-ended interviews with taxpayers in the Southern states who owned or managed small businesses to discover how they talk about taxes in everyday life.. Respondents saw themselves as morally deserving and hard-working people, sandwiched between an economically more powerful group that manipulates the rules for its own benefit and a subordinate group that benefits from government spending but escapes taxation. "We found that people associate income tax with a violation of the moral principle that hard work should be rewarded," said Kidder. "Our research shows that when Americans lash out at 'takeovers,' 'massive taxes' and 'bailouts,' they are looking at these issues from the perspective of a hard-working middle class besieged on all sides. Tax talk is about dollars, but it is also about a moral sense of what is right."

Union, Liberal Coalition Pushes Obama Tax Plan - A coalition of big unions and left-leaning activist groups has formed to support President Barack Obama’s proposal to raise tax rates on families earning more than $250,000, amid growing signs that Democratic lawmakers want to limit tax increases to people making $1 million or more. Organizers of the new coalition, called Americans for Tax Fairness, worry that Democratic lawmakers are quietly pushing the threshold for tax increases to $1 million, in an effort to hit fewer households and make the plan more politically appealing. That would generate far less federal revenue, limiting what the government will have to spend, and increasing pressure to cut entitlement programs such as Medicare, coalition members fear.“We established Americans for Tax Fairness to help make the economy work for all,” the coalition’s manager, Frank Clemente, said in a statement. “To achieve this goal, we need adequate levels of investment in critical areas like education and rebuilding infrastructure that create and sustain jobs. We also need a balanced and equitable approach to the federal budget challenges we face, which includes protecting critical services for the middle class and the most vulnerable. This requires that we all pay our fair share of taxes, especially big corporations and the richest 2 percent making more than a quarter of a million dollars a year.”

Do Tax Credits Encourage Work? – Mulligan -The earned-income tax credit is often said to encourage work, but it may do just the opposite. This refundable federal income tax credit of a few thousand dollars a year is paid to families with positive but low earned income (that is, wages or salaries) for a calendar year. The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates the mountain-plateau pattern described above: an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero.Along the increasing portion, the credit adds to the reward from working because a few more weeks or hours worked during the year tends to add marginally to the income from work, which adds to the amount of the credit. For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year.

EITC: Mulligan (economic theory) vs. Seto (empirical evidence) -- TaxProf today noted the article in the New York Times about the EITC:  Casey Mulligan, Do Tax Credits Encourage Work? New York Times, Mulligan, an econ prof at the University of Chicago (home, of course, to Milt Friedman's "free" market theories) noted that the EITC "could" discourage work. Now, Mulligan surely knows that this theory about whether the credit encourages or discourages work is just that--a theory.  Much of the assumptions about when people will stop working and substitute leisure don't seem to hold up in practice, partly because there are so many other factors at work besides the rather simplistic assumptions in freshwater economics (such as the joy of working, status of work, self-esteem of work, etc.).  Nonetheless, Mulligan can't help adding another line that makes the overall comment suggest that he thinks the EITC will on the whole discourage work. Ted Seto, a fellow tax prof in sunny California, commented on the Tax Prof item to point out the important empirical evidence that the EITC is mostly working as we want it to.  For a useful summary of recent empirical work, see  Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, "The overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers. There is little evidence, however, that the EITC has reduced the hours worked by those already in the labor force. The empirical literature on married women is somewhat smaller but again consistent in its findings. The studies show that the EITC leads to modest reductions in the employment and hours worked of married women."

Here Is the Full Inequality Speech and Slideshow That Was Too Hot for TED -  Yesterday, National Journal's Jim Tankersley introduced us to Nick Hanauer, a venture capitalist from Seattle, whose speech at the TED University conference was deemed "too politically controversial to post on their web site." Last night, NJ produced the full slideshow to accompany the full text of the speech. Here they are:

Protestors Demand Robin Hood Tax on Financial Transactions -The march is part of the Robin Hood Tax global week of action taking place from May 18 to May 22 in the wake of the G8 Summit at Camp David, which began this Friday. Activists around the world are lobbying for this global financial transactions tax, supported by a range of United Nations (U.N.) human rights experts, including Olivier De Schutter, the U.N. Special Rapporteur on the right to food, .  In the United States, unions, think tanks and groups that focus on the environment, international health, consumer protection and financial reform lobby for "Wall Street to give back to Main Street", as a website in support of the Robin Hood Tax says. The idea of a financial transaction tax has existed since the 1930s, when leading economist John Maynard Keynes was a popular driver of the tax. A financial transactions tax (FTT) would affect the purchase and sale of stocks, bonds, commodities, unit trusts, mutual funds and derivatives such as futures and options. The tax would generate revenues needed to pay for and protect global public goods like education, health and the environment, with a number of variations having been proposed of how high the tax should be.  One of the most prominent ideas is a tax rate of .1 percent on equities and bonds and .01 percent on derivatives.

Nurses Support Financial Transactions Tax - Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate. JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative "bets" on the direction of markets. Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades--regulators may finally quit paying so much attention to the banks' "trust our judgement" lobbies and start making it less possible for banks that get federal support to bet with other people's money in big ways that can cause systemic risk. This seems to be a no-brainer--we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace and place the entire system in jeopardy. That means banks will need to accept more staid profit scenarios--and the compensation for managers and traders should be downsized as well. They made fortunes out of wrecking the economy. They should be content with reasonable compensation when they do good jobs, and salary cuts--or being fired--when they don't.

Sadly Barack Obama, like Mitt Romney, is an apologist for the 1% - Banks such as Goldman Sachs, Bank of America and Morgan Stanley have poured tens of thousands of dollars into Romney's campaign coffers. Key members of his fundraising team include the hedge-fund billionaire Paul Singer and three JP Morgan executives. Is it any wonder, then, that Romney responded to the recent news of JP Morgan Chase's $2bn trading blunder by blaming the "market" and saying he didn't "want to punish companies"? The Republican nominee is a shill for big business and, in particular, big finance. But – and here's where it gets tricky for the Democrats and depressing for the rest of us – so is President Obama. Yes, I know, it's to a lesser extent than Romney, but the fact is that Obama has been a shameless apologist for Wall Street. Take the case of JPMorgan Chase. Official records show that the bank's chief executive, Jamie Dimon, a major Obama donor, has made at least 18 visits to the White House since the start of 2009, meeting the president himself on at least three separate occasions. So should we have been surprised when Obama heaped praise upon the bank and its now-disgraced boss, in an interview with ABC last week? "JP Morgan is one of the best-managed banks there is," he said. "Jamie Dimon, the head of it, is one of the smartest bankers we've got, and they still lost $2bn and counting."

Derivatives need a priest - Imagine two ways of framing a financial trading choice. The first way is in the pseudo scientific language of finance. “An optimal trading strategy will be to go short on Greek and Spanish government bonds to exploit a high likelihood of sell off and debt restructuring which will keep portfolio returns well above inflation going forward.” Or consider the same thing expressed this way: “If we sell off Greek and Spanish government bonds it will push Greek pensioners into poverty, cause deep harm to the social fabric, lead to destabilising political unrest and threaten the stability of the world financial system.” The first way of framing the choice is treating the financial strategy as a way of dealing with a machine; the language has nothing to do with people. The second way of framing it is moral: starting with the effects on people. Of course, the latter way of framing the choice is never used by traders, analysts or economists. The assumption is that the global financial markets are there to serve capital, not people (if it benefits people, fine, but that is after the fact). It is conceived as a giant piece of machinery whose behaviour can be successfully interpreted by those clever enough. Of course, it is an illusion. The machinery is impelled by people trying to interpret the machinery; that is why forecasts and predictions have such a poor track record. Because markets are full of people with minds, predicting what those minds will think and do requires much more than a mechanistic analysis. Nevertheless, the capital markets are seen as a piece of machinery. If one looks at the metaphors, capital “flows”, for instance, is a sort of liquid looking for equilibrium (another popular metaphor).

Why Obama Should Be Attacking Casino Capitalism -- Both Romney's Bain and JPMorgan - Robert Reich - I wish President Obama would draw the obvious connection between Bain Capital and JPMorgan Chase. That way his so-called “attack” on private equity is neither a personal attack on Mitt Romney nor a generalized attack on American business. It’s an attack on a particular kind of capitalism that Romney and JPMorgan both practice: Using other peoples’ money to make big bets which, if they go wrong, can wreak havoc on the economy. It’s the substitution of casino capitalism for real capitalism, the dominance of the betting parlor over the real business of America, financial innovation rather than product innovation. It’s been terrible for the American economy and for our democracy. It’s also why Obama has to come out swinging about JPMorgan. The JPMorgan Chase debacle would have been prevented if the Volcker Rule were sufficiently strict, prohibiting banks from using commercial deposits to make bets except very specific offsetting bets (hedges) on narrow classes of trades. But Jamie Dimon and JPMorgan have been lobbying like mad to loosen the Volcker Rule and widen that exception to include the very kind of reckless bets JPMorgan made. And they’re still at it, as evidenced by Dimon’s current claim that the rule that eventually emerges would allow those bets. 

What Is Private Equity? - The Presidential campaign's focus on Mitt Romney's record at Bain Capital suffers from a confusion about what private equity is. Steven Rattner starts to lay this out in a NYT column, but I think the issue could still benefit from some clarification.  The rubric private equity covers a number of very different investment strategies. It is sometimes used to refer to venture capital--funding of small, young, privately held companies that are looking to grow. Many of these companies fail (think of the vast graveyard of failed Internet startups, including my own), but expansion is the goal.  Alternatively, private equity can refer to investment strategies that involve taking public companies private and restructuring the company with a goal of taking the company public again several years in the future. This is the leveraged buyout or LBO strategy. The acquisition of the target company is done via a tender offer financed by a small (or occasionally no) equity contribution from the LBO sponsor (e.g., Bain) and a lot of bank debt, whic his secured by all the assets of the target company. The sponsor ends up owning the target and puts its own management team in place.

Private Equity Ain’t No Reform Movement - New York Times columnist David Brooks, defending Mitt Romney, describes private equity as a “reform movement”: "Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations. The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient. […] Private equity firms like Bain acquire bad companies and often replace management, compel executives to own more stock in their own company and reform company operations." New York Times columnist Joe Nocera described private equity somewhat differently in a January appearance on the Daily Show: Financial engineering is at the heart of what Wall Street now does, what it has become. And private equity firms, [one] of which Mr. Romney ran for quite a while, are at the heart of that. They buy up companies—that’s the investment—they fiddle around with them, they borrow against them, they lay off workers quite often, they pull out money for their fees, and then they bring them back to public market, and if everything goes well they make a fortune, and if everything doesn’t go well, the company goes bankrupt and they still make a fortune because they’ve taken it all on fees.

Wall Street Should Stop Trying to Gut Financial Reform - Maxine Waters - Recently on Meet the Press, Jamie Dimon, the CEO of JPMorgan Chase, lamented that his company’s then-$2 billion trading loss (which has since swelled to at least $3 billion) would “absolutely” embolden proponents of tighter regulation of Wall Street. I think that Mr. Dimon is most definitely correct; however, unlike Mr. Dimon, I think that emboldening champions of financial reform is actually a good thing.So it’s true that a turn of event like this – particularly when it happens so publicly, at such a critical time, and to such an outspoken critic of financial reform – is the type of scandal that galvanizes public opinion. And it’s that type of pressure that can reignite real momentum for financial reform. Some of us in Congress have been engaged in this fight on a day-to-day level here on Capitol Hill.  After the fanfare that came with passing the historic Dodd-Frank law, the dust settled, and our regulators got to the tough work of actualizing the statute we passed. The job we’ve tasked them with is daunting, leaving many areas of the law open to regulatory interpretation. This, of course, was partially a byproduct of intense lobbying from the financial services industry, who worked tirelessly to complicate the law with exemptions and exceptions, and who wanted a second bite at the apple when it came time for the rules to be written.

What Are the Core Competences of High Finance? » The core competences of high finance are supposed to be (a) assessing risk, and (b) matching people with risks to be carried with people with the risk-bearing capacity to carry them. Robert Waldmann has a different view: Limits to Arbitrage Bites Again: I think their core competencies are (a) finding fools for counterparties and (b) evading regulations/disguising gambling as hedging. Regulatory arbitrage, and persuading those who do not understand risks that they should bear them--those are not socially-valuable activities.

How to Fix Banking - Over the weekend, there was a convergence of very good articles arising from JPMorgan’s illustration that not much has changed in banking. These articles showed that there are better ways to align management with outcomes that balance the needs of national and global economies beyond the current privitised gains and socialised losses approach. The first of these articles was by Sell On News at MacroBusiness. Titled “Derivatives need a Priest” SoN posed the question about markets and what are they for:…we can ask how it was that a system created for people ended being blind to people, especially weaker people in places like Greece? In this anthrosphere we have created, the one thing we seem most averse to is putting human beings at the centre. Much better to see it as a machine, and to spend our time poking it to see how it works. Indeed. In abstracting people from the equation and viewing not only the system but the individual banks and finance institutions as machines we create a distance between ourselves and those machines in a manner that allows some to claim observer status not ownership. At the more complex financial institutions, this abstraction can separate individual departments and traders from their own organisations. Which brings me to a piece by Barry Ritholtz published in the Washington Post on the weekend, about the similarities between AIG and the recent JP Morgan experience.

JPMorgan and the Volcker Rule's Hedging Exemption - In the wake of JPMorgan’s $2 billion trading loss, there’s been lots of talk about whether “portfolio hedging” is allowed under the Volcker Rule, and whether that should be changed. As I wrote in my previous post, the statutory language of the Volcker Rule very clearly allows portfolio hedging, and anyone who claims otherwise is lying to you. That’s just an objective fact, inconvenient though it may be for some people. But the focus on portfolio hedging in the wake of JPMorgan’s trading loss is entirely misplaced. Portfolio hedging is only one of the seven criteria that a bank must meet in order to rely on the hedging exemption in the proposed Volcker Rule, and far from the most important. Commentators and certain politicians seem to believe that if JPMorgan’s trades met the definition of a “portfolio hedge,” then they would necessarily be allowed under the proposed Volcker Rule. That’s simply not true. What are the other criteria that a bank must meet in order to qualify for the proposed Volcker Rule’s hedging exemption? The first two have to do with the “programmatic compliance regime” that banks are required to establish under the Volcker Rule, so we can skip those for now. The third criterion deals with portfolio hedging — the trade has to mitigate specific risks, which can be done on a portfolio basis. The fourth criterion is the most important, and it requires that the hedge “be reasonably correlated, based upon the facts and circumstances of the underlying and hedging positions ... to the risk or risks the transaction is intended to hedge or otherwise mitigate.”

Dimon’s Déjà Vu Debacle, by Paul Krugman - Sometimes it’s hard to explain why we need strong financial regulation — especially in an era saturated with pro-business, pro-market propaganda. So we should always be grateful when someone makes the case for regulation more compelling and easier to understand. And this week, that means offering a special shout-out to two men: Jamie Dimon and Mitt Romney.  Here’s what the presumptive Republican presidential nominee said about JPMorgan’s $2 billion loss (which may actually have been $3 billion, or $5 billion, or more, but who’s counting?): “This was a loss to shareholders and owners of JPMorgan and that’s the way America works. Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain.”  What’s wrong with this statement? Well, suppose that someone runs a bank that takes in deposits and invests the money in various ways. And suppose that one of those investments is a risky bet on some complex financial instrument.    If the bet was big enough, he no longer has enough assets to pay off his depositors. His bank collapses, probably in a chaotic bank run that takes down the whole town’s economy as collateral damage.  The point is that it’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out. And the prospect of such bailouts, of course, only strengthens the case that banks shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money.

Bank of America’s Brian Moynihan Defends Jamie Dimon, Dodd-Frank - Here’s Bank of America CEO Brian Moynihan, defending Jamie Dimon. Asked about JPMorgan’s trading loss and trading risks in the market Moynihan said, “Jamie has the skill to get out of it. The loss concerned the market but did not disrupt it.”Moynihan is the CEO of a major competitor to JP Morgan Chase, but when it comes to regulations and the government, they are as brothers. And then there’s this. This afternoon Moynihan was asked to defend the universal banking model which marries retail banking with investment banking. The CEO of the nation’s second largest bank said the model is the “most important” model there is because it gives consumers access to global information, capital markets, investment advice and basic banking all in one place.Moynihan argued that the dialogue on banking has gone from concerns about “too big to fail to too big to manage.” He noted that regulations brought forth by Dodd-Frank have addressed the former and added that BofA has dramatically narrowed down the scope of its business to address the later. Pretty much everyone, even its proponents, admits that Dodd-Frank has not yet fixed our banking system.  Everyone, that is, except Bank of America CEO Brian Moynihan.  For him, Dodd-Frank is just fine.

Republicans don’t like regulations, except for when they do - Republicans typically don’t like federal regulators to stick their nose into Wall Street’s business. But when something goes dreadfully awry in the markets — and even the CEO can’t account for what’s happened — they tend to change their tune.  At a Senate Banking Committee hearing Tuesday, Republicans grilled top regulators about JPMorgan’s estimated $3 billion loss on derivatives trades, sounding incredulous that the government didn’t have broader oversight of the market. “You didn’t really know what was going on — the problems — until you read the press reports?” Sen. Richard Shelby (R-Ala.) asked Gary Gensler, chair of the Commodity Futures Trading Commission. “That’s what I said,” Gensler replied. Shelby went even further in lamenting the failure of the regulators by bringing up the case of MF Global, the bankrupt derivatives broker where $1.3 billion in customer money went missing last year. CFTC regulators “were on site when the funds went missing,” said Shelby, accusing them of having “failed to protect those customer assets in the first place.”

Thou all-destroying but unconquering whale - A few quick thoughts and suggested readings on Chase's ever expanding losses from the Whale Trade. First, if you have not been reading Lisa Pollack's Alphaville posts on this topic you really must. Next, Krugman makes the obvious but also vital point that "invisible hand" type arguments are really pointless in the specific context of financial institutions, especially giant financial institutions. It's a point I've made before with regard to resolution, and a reason why things like the fabulous Hoover people's Chapter 14 plan is totally unmoored from reality, but it also applies equally well to pre-distress regulation. And finally Economics of Contempt has a good post on the Volcker Rule and the Chase situation. Most importantly, the post points out the nuances in the rule that are too often ignored. That said, let me push back on that post a bit.

Hedging financial risks -- better to be safe than sorry on banking rules -The Dodd-Frank banking rules want to get the federally insured banks that hold our deposits out of the speculative hedging business. As regulators fine tune these rules, banks have cried overregulation foul -- JP Morgan chairman and CEO Jamie Dimon chief among the complainants -- because they worry these rules will block operational hedging and not just speculative hedging. They are right, of course, that it is tricky to draw the line between a good hedge and a bad hedge, but that does not mean we can't try. And we should.The JP Morgan losses of $2 billion and counting seem to have arisen from a speculative hedge. (I say "seem" because I don't want to jump on the bandwagon until all the truth comes out. I have some skepticism because the money-losing hedges were themselves hedges against underlying money-losing hedges, and as soon as things start to get this complicated, I am reminded of the clever mortgage-backed securities of 2008.) The fact that these losses stemmed from, in Dimon's own words, errors in models that didn't accurately predict the exposure of the hedging losses, should give us chilling déjà vu to the 2008 nightmare.Hedges are risky, and while $2 billion or even $3 billion in losses alone is not going to bring down the financial system (or even JP Morgan), they remind us how quickly and dramatically things can turn bad. Getting banks out of this risky area is a good idea, even if it runs the risk of overdeterring some "good" hedges. If 2008 has taught us anything, it is that safe should trump sorry.

BBC Interview with Nassim Taleb on JPMorgan - Rational people keep struggling with the 'why' of all this. I think the struggle is because they start with some wrong assumptions about morally rational behaviour and motives. As Rick Santelli likes to say, traders are not moral when they are trading. I keep coming back to William K. Black's explanation for this enormous attraction to multi-trillion dollar bets at JPM. "Financial institutions such as JPMorgan love to buy derivatives because they are opaque, create fictional income that leads to real bonuses and when (not if) they suffer losses so large that they would cause the bank to fail, they will be bailed out."  The more I look into this and think about it, the more that Barack Obama's 'favorite banker' looks like Enron in their heyday.

Egos and Immorality, by Paul Krugman - In the wake of a devastating financial crisis, President Obama has enacted some modest and obviously needed regulation.. Wall Street has responded — predictably, I suppose — by whining and throwing temper tantrums. And it has, in a way, been funny to see how childish and thin-skinned the Masters of the Universe turn out to be. Remember when Stephen Schwarzman of the Blackstone Group compared a proposal to limit his tax breaks to Hitler’s invasion of Poland? Remember when Jamie Dimon of JPMorgan Chase characterized any discussion of income inequality as an attack on the very notion of success?  But here’s the thing: If Wall Streeters are spoiled brats, they are spoiled brats with immense power and wealth at their disposal. And what they’re trying to do with that power and wealth right now is buy themselves not just policies that serve their interests, but immunity from criticism. Actually, before I get to that, let me take a moment to debunk a fairy tale that we’ve been hearing a lot from Wall Street and its reliable defenders — a tale in which the incredible damage runaway finance inflicted on the U.S. economy gets flushed down the memory hole, and financiers instead become the heroes who saved America.

Counterparties: JPMorgan’s giant search for yield - Andrew Ross Sorkin doesn’t think that Glass-Steagall would have prevented JPMorgan’s botched hedges, losses that the Independent says could hit more than $7 billion. But it’s now clear that JPMorgan needed to be saved from itself. There are two big-picture views of what went wrong in JPMorgan’s infamous CIO office. The first is organizational: The NYT points to a rift between Ina Drew, the CIO head, and her London-based deputy Achilles Macris, whose traders, including Bruno “the London Whale” Iksil, were much more comfortable embracing risk. “No one could sufficiently push back against Achilles, so he and Bruno could do what they wanted,” a former trader said. In this view, Drew, who took an unfortunately timed medical leave because of Lyme disease, simply lost a power struggle with London traders. The second view is that JPMorgan’s CIO office – which was meant to manage the bank’s risk – was chasing returns in a way that its rivals simply weren’t. Bloomberg breaks down JPMorgan’s outsize love for corporate bonds:

The Modest Worth of Big Banks — Jamie Dimon of JPMorgan Chase would have us believe that regulators’ attempts to clip the wings of financial companies are about as misguided as trying to curb spam by shutting down the Internet. To most Americans, a financial crisis that lopped $19.2 trillion off household wealth and produced the deepest recession since the 1930s may be reason enough to limit what financial institutions can do. Andrew G. Haldane, executive director for financial stability at the Bank of England, estimates that the crisis wiped out one to 3.5 years’ worth of the world’s economic output, in present value.  Bankers, however, still hold dear to the argument that financial innovation has driven prosperity over the last 50 years. In their view, new techniques — including the credit-default swaps and mortgage-backed securities at the center of the financial crisis — improved the industry’s ability to understand risk and distribute it among a more diverse group of investors, making credit more widely available. Tying the hands of finance in the name of risk reduction would, they contend, impose incalculable costs on society as a whole.  This view may seem out of place a couple of weeks after JPMorgan admitted it lost $2 billion, maybe $3 billion, on a bad bet on the price of corporate debt. Still, it deserves investigation: how much economic damage would be inflicted by limiting what financial leviathans can do? Put differently, what has our high-tech financial industry really done for the rest of us of late?  It appears that the answer is less than Mr. Dimon would have us believe.

Earth to Dimon: Banks Don’t Have a Right to Profit - Yves Smith - Preventing blow-ups like the JPMorgan “hedge” that bears no resemblance to any known hedge isn’t difficult. What makes preventing it difficult is that banks that exist only by virtue of state-granted charters — and more recently, huge transfers from the public — have persuaded public officials and regulators that they have a God-granted right not just to high levels of profit but also high levels of employee and executive compensation. Banks enjoy state support because they provide essential services, like a payments system and a repository for deposits. One proposal to limit them to these vital services is “narrow banking,” or requiring that deposits be invested in only safe and liquid instruments. This idea was put forward by Irving Fisher and Henry Simons in the 1930s, and has been championed by the right (Milton Friedman), the left (James Tobin) and banking experts (Lowell Bryan of McKinsey). A less radical idea would be to eliminate credit default swaps over time (they are too embedded in current practice to ban them; banks need to be weaned off them). There are no socially valuable uses for the product. Contrary to defenders’ claims, they aren’t a good way to short bonds (not only does it deal with only one attribute of bond risk, it does so badly: payouts in actual credit events on credit default swaps vary considerably, and are generally less than payouts to holders of real bonds). These swaps were the driver of the crisis. They were the mechanism that allowed real economy exposures to risky subprime bonds to be multiplied well beyond the number of actual borrowers and thus cause vastly more damage. Another route would be to implement the Volcker Rule as Paul Volcker envisaged, meaning without the portfolio hedging exemption that JPMorgan relied on. Or officials could enforce Sarbanes Oxley, which has the chief executive officer certify the adequacy of internal controls, which for a major financial firm includes risk controls. Had any chief executives been targeted for Sarbanes Oxley violations for the massive risk management failures during the financial crisis, it’s pretty likely thatJamie Dimon, head of JPMorgan, would have thought twice before giving the chief investment officer both the mandate and the rope to enter into risky trades.

Discord at Key JPMorgan Unit Is Faulted in Loss - Ever since JPMorgan Chase disclosed a multibillion-dollar trading loss this month, the central mystery has been how a bank known for its skill at risk management could err so badly.  As early as 2010, the senior banker who has been blamed for the debacle, Ina Drew, began to lose her grip on the bank’s chief investment office, according to current and former traders. She had guided the bank through some of the most rugged moments of the 2008 financial crisis, earning the trust of Jamie Dimon, JPMorgan’s chief executive, in the process.  But after contracting Lyme disease in 2010, she was frequently out of the office for a critical period, when her unit was making riskier bets, and her absences allowed long-simmering internal divisions and clashing egos to come to the fore, the traders said.  The morning conference calls Ms. Drew had presided over devolved into shouting matches between her deputies in New York and London, the traders said. That discord in 2010 and 2011 contributed to the chief investment office’s losing trades in 2012, the current and former bankers said.  “The strife distracted everyone because no one could push back,” said one current trader in the office who insisted on anonymity because of the nature of the issue. “I think everything spiraled because of the personality issues.” 

Truthiness is Next to Lawlessness: It’s Time to Enforce Sarbanes-Oxley in the JP Morgan CIO Scandal - As more news comes to light about JPMorgan’s inadequate supervision of its CIO desk, the source of its multi-billion-dollar losses, it’s clear an investigation of violations of Sarbanes Oxley (SOX) is warranted.  At a minimum, Congressmen and the public should demand that the SEC and/or the DOJ owe it to us to pursue a SOX-related enforcement action. SOX was passed in the wake of Enron to end the all-too-common “I’m the CEO and I know nothing” defense, and the CIO operation is looking more and more Enron-like with every passing day. By way of background, here’s the certification that’s at the heart of Sarbanes-Oxley. A false certification carries civil penalties against the signators and criminal penalties if the certification is fraudulent. JPMorgan’s SOX Certification for 2011.Management has completed an assessment of the effectiveness of the Firm’s internal control over financial reporting as of December 31, 2011. In making the assessment, management used the framework in “Internal Control — Integrated Framework” promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the “COSO” criteria. Based upon the assessment performed, management concluded that as of December 31, 2011, JPMorgan Chase’s internal control over financial reporting was effective based upon the COSO criteria. Additionally, based upon management’s assessment, the Firm determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2011.

JPMorgan CIO Risk Overseer Said to Have Record of Trading Losses - Irvin Goldman, who oversaw risks in the JPMorgan Chase unit that suffered more than $2 billion in trading losses, was fired by another Wall Street firm in 2007 for money-losing bets that prompted a regulatory sanction at the firm, Cantor Fitzgerald LP, three people with direct knowledge of the matter said. JPMorgan appointed Goldman in February as the top risk official in its chief investment office while the unit was managing trades that later spiraled into what Chief Executive Officer Jamie Dimon called “egregious,” self-inflicted mistakes. The bank knew when it picked Goldman that his earlier work at Cantor led regulators to penalize that company, according to a person briefed on the situation.  JPMorgan’s oversight of risk in its chief investment office has become a focal point as U.S. authorities examine the incident and lawmakers debate how to prevent banks from making wagers that might endanger depositors. Goldman was given the risk-oversight job after his brother-in-law, Barry Zubrow, 59, stepped down in January as JPMorgan’s top risk official to become head of corporate and regulatory affairs, according to a person briefed on the matter.

JP Morgan executive to walk away with millions following trading loss - Ina Drew, the executive who ran the department behind JP Morgan's $2bn (£1.2bn) trading loss, has left the bank and will walk away with about $32m.  The 55-year old chief investment officer oversaw the division that made bets that JP Morgan has warned could rack up a further $1bn in losses. She will be replaced by Matt Zames, head of fixed income at JP Morgan's investment bank and a former proprietary trader.  One of the best paid women on Wall Street, Ms Drew last year received a remuneration package worth $15.5m.  Corporate filings show that following her resignation she is entitled to $400,000 in severance as well as a share award that was worth $16m yesterday. On top of this, she has unexercised options that were valued at the end of last year at $3.44m, a series of retirement benefits worth a further $2.63m, and a $9.87m deferred compensation pot built up over several years.

Did a Tick Bite Really Bring Down JP Morgan?  - Staring back at me from the front page of Sunday’s New York Times was a headline that promised an answer to a puzzle that had endured for more than a month, and which I have explored here and here. The blame for the multi-billion dollar JP Morgan credit default swap fiasco had been discovered. It seems that the bank’s Chief Investment Office was riven by discord and racked by disease, leading me to recall the fate of ancient Athens in the Peloponnesian War. The article portrays the recently-resigned head of the Chief Investment Office, Ina Drew, as a level-headed and competent manager who had successfully guided her operation through the financial crisis, helping to build the reputation of Jamie Dimon and JP Morgan Chase for risk management. But Drew contracted Lyme disease in 2010 and took an extended leave of absence. While she was away, the heads of the New York and London Chief Investment Office operations fell into bickering over the amount of risk being compiled by the London desk, specifically the trades of Bruno Iskil (the so-called “London Whale” or “Voldemort,” depending on the specific tastes of the traders at competing institutions). Even when Drew came back from her sick leave, she was unable to re-assert control.

JPMorgan Gave Risk Oversight to Museum Head - The three directors who oversee risk at JPMorgan Chase & Co. (JPM) include a museum head who sat on American International Group Inc.’s governance committee in 2008, the grandson of a billionaire and the chief executive officer of a company that makes flight controls and work boots.  What the risk committee of the biggest U.S. lender lacks, and what the five next largest competitors have, are directors who worked at a bank or as financial risk managers. The only member with any Wall Street experience, James Crown, hasn’t been employed in the industry for more than 25 years.

Geithner Sees “Perception Problem” With Jamie Dimon on NY Fed Board of Directors (video, transcript) Simon Johnson writes that Timothy Geithner told Jamie Dimon to resign from the board of the Federal Reserve Bank of New York. I saw the interview to which he’s referring, and I would hardly characterize it as that strong. This is the excerpt he gives from the interview Geithner gave to the PBS News Hour: Johnson says that “In the diplomatic language of Treasury communications, Mr. Geithner just told Jamie Dimon to resign from the New York Fed board.” Perhaps. But Johnson’s leaving a lot out of Geithner’s answer. The interviewer, Jeffrey Brown, mentioned that Elizabeth Warren has called for Dimon’s resignation from the NY Fed board (unfortunately, they didn’t show Geithner’s face when Warren was brought up). Geithner quickly interrupted that “That’s not a new observation, not a new concern,” as if it would help anyone’s position to say “In fact, people have been concerned about this conflict of interest for years!” So Brown asked again if it’s right to have a major Wall Street banker on the board of the key regulatory body for Wall Street banks. Here was the first half of Geithner’s answer:

Jamie Dimon Should Resign From the Board Of The New York Fed - Simon Johnson -The New York Fed is a key part of our regulatory and supervisory apparatus, involved in overseeing the activities of banks and bank holding companies, like JP Morgan Chase (currently the largest bank in the US).  Within the Federal Reserve System, the New York Fed also has some of the deepest expertise on financial markets and complex products, such as derivatives.  Almost of the relevant supervision takes place behind closed doors, with representatives of the industry – including big banks – typically taking the position that they should be allowed to operate in a particular way or use various kinds of risk models.  The staff of the New York Fed often has a decisive voice in determining what kinds of risks are acceptable for systemically important financial institutions.In recent weeks, risk management apparently broke down completely at JP Morgan Chase.  Even the most sympathetic accounts portray Mr. Dimon as out of touch with large parts of his business.  There are also press reports that one or more of Mr. Dimon’s hand-picked executives failed to understand and report on risks that became greatly magnified and quickly got out of control.  Puzzles remain about what exactly Mr. Dimon did not know and when he did not know it, including the question of whether he disclosed all adverse material information in a timely and appropriate manner.  Presumably, the New York Fed will be involved – directly or indirectly – in ongoing and future investigations (including answering questions about what its staff did or did not know).

Kabuki Theater Probably Won't Shake Up NY Fed - Via @MarkThoma, Simon Johnson reports that Treasury Secretary Tim Geithner has called (very diplomatically, of course) for JP Morgan Chase CEO to resign from his position with the New York Federal Reserve Bank in the wake of risk control failures that have already led to $3 billion in losses for the bank.. Johnson comments: Mr. Geithner’s call is a major and perhaps unprecedented development which can go in one of two ways. If Mr. Dimon resigns, that is a major humiliation and recognition – at the highest levels of government – that even the country’s best connected banker has overstepped his limits. This would be a major victory for democracy and a step towards reopening the debate on financial reform, including introducing more restrictions on what global megabanks can do. Alternatively, Johnson says, if Dimon manages to stay on to the end of his term December 31, it will mean a defeat for democracy and a victory for the big banks. Of course, there would be nothing new about this: one of the striking developments since the 2008 financial meltdown is that not a single major bank executive in the United States has gone to jail for their wrecking of the global economy. Moreover, the five largest banks in the country have seen their assets increase from $6.1 trillion in 2008 to $8.5 trillion today. By contrast, in Iceland, 200 bank officials, including the CEOs of the country's three largest banks, are all facing criminal charges for their actions leading up to the crisis.

Dimon and the Fed's Legitimacy - Simon Johnson - There are two diametrically opposed views of how the largest financial companies in our economy operate. On the one hand are views like those of Charles Ferguson, director of the Academy Award-winning documentary “Inside Job” and author of the new book, “Predator Nation.” Mr. Ferguson takes the view that greed and immorality now prevail to an excessive degree at the heart of Wall Street. Academics and other experts have become corrupted, the responsible regulators have been intellectually captured, and law enforcement officials refuse to act – despite the accumulation of evidence before their eyes. “Inside Job” was gripping and emotional; “Predator Nation” contains many more specific details and evidence, as an excerpt dealing with academics (one Republican and one Democrat) makes clear. The second view is that the people in charge of large banks and bank holding companies have done nothing wrong. To see this view in action, look no further than this week’s debate about whether Jamie Dimon, chief executive of JPMorgan Chase, should resign from the board of the Federal Reserve Bank of New York. A balanced account of this debate appeared in American Banker, which kindly agreed to bring the entire article out from behind its paywall.

Fed’s George: Board Members Should Resign if Undermining Confidence - A Federal Reserve regional bank president on Thursday said board members should resign if they undermine public confidence in the central bank system. In the wake of recent criticism of J.P. Morgan Chase & Co. Chief Executive James Dimon‘s role on the New York Fed board, Federal Reserve Bank of Kansas City President Esther George said in a statement that bankers have a “special obligation” to maintain the “integrity, dignity and reputation” of the central bank. George didn’t mention Dimon by name and said that bankers do provide critical information to the regional banks and Fed officials about economic and credit conditions in their communities. She also noted that bankers serving on Fed bank boards do not play a role in supervising or regulating financial institutions. Citing Fed standards, George emphasized that directors have a responsibility to avoid actions that cut into public confidence in the integrity of the system or use their position to influence regulations or supervision. “There are high standards that apply to Reserve Bank directors, and when an individual no longer meets these standards, the director resigns voluntarily to allow someone who does meet the criteria to serve,” she said in the statement. “No individual is more important than the institution and the public’s trust.”

Poll on Jamie Dimon and follow up - The poll results are in on whether Jamie Dimon will resign from the board of the New York Federal Reserve Bank. By a 53%-40% majority, with 7% unsure, readers thought that Dimon would not step down in the wake of the huge supervision failure at JP Morgan, which led to its $3 billion and counting loss.  Meanwhile, the pressure is building for him to resign. Simon Johnson, whose article I first cited on this issue, has written new articles calling for an investigation into JP Morgan, calling for Dimon's resignation, and taking on arguments defending Dimon. Johnson has also started an online petition calling for Dimon's resignation or ouster. Johnson is hardly alone, however. In recent days, others who have called for Dimon's resignation include former Wall Street prosecutor and New York Governor Eliot Spitzer, Nobel Prize-winning economist Paul Krugman, Massachusetts Senatorial candidate Elizabeth Warren, and today, Kansas City Fed President Esther George said that Fed directors who don't meet high standards should resign, which Johnson tweeted was "huge."  I was one who voted "no" on the poll, but the recent activity makes me think the odds must be increasing. And yes, I signed Johnson's petition.

J.P. Morgan Struggles to Unwind Huge Bets - J.P. Morgan Chase is struggling to extricate itself from disastrous wagers by traders such as the "London whale," in a sign that the size of its bets could bog down the bank's unwinding of the trades and deepen its losses by billions of dollars. The nation's largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion. But the losses could be even bigger if the company sells its positions into a market that has turned against its positions, some traders say.  J.P. Morgan's decision to move slowly in unwinding the positions highlights a painful dilemma for the company and Chief Executive James Dimon: The bank can move slowly and risk being bled by small but regular losses over time, or it can attempt to close out the trades sooner but face potentially larger losses. Moving slowly also holds risks if the market turns sharply against the bank in the near term. The company is holding derivative wagers with a face value of roughly $100 billion in a derivative index tracking the health of corporate debt, according to a person familiar with the bank's trading. These wagers include long and short positions, or bets that index will either rise or fall, from various parts of the firm.  J.P. Morgan's chief investment office, which racked up the trading losses, is believed by traders to be mostly long this index. Thus, if nervousness increases about the credit-worthiness of the investment-grade- rated companies making up the index, the bank's overall losses would likely grow, say people familiar with the matter.

JPMorgan Counterparty Platt Says Bank's Trading Loss May Widen - JPMorgan Chase & Co. may face even bigger losses on faulty bets in credit markets if Europe's debt crisis worsens, according to one of the hedge funds that took the other side of the trades. "They're not out of those positions," Michael Platt, co- founder and chief executive officer of BlueCrest Capital Management LLP, said today in an interview on Bloomberg Television's "Inside Track." "If we end up with a catastrophe in Europe in the short run, they're probably not positions that anyone would want to have." BlueCrest, based in Geneva, manages $32 billion. Platt said a credit fund run by his firm took a "small" position against JPMorgan after finding "anomalies" in the pricing of certain credit derivatives. BlueCrest would make money as the prices corrected, he said. JPMorgan, the biggest U.S. bank by assets, is seeking to staunch losses as other hedge funds exploit its money-losing positions by trading in indexes tied to credit-default swaps.

J.P. Morgan Suspends Share Buyback - J.P. Morgan Chase & Co. suspended share repurchases just two months after announcing a giant buyback program, in the latest fallout from the trading blunder that has cost the company at least $2 billion in losses, hammered its stock price and tarnished its reputation as the best-managed big U.S. bank. Chief Executive James Dimon told investors and analysts at a conference Monday that the New York company stopped the buybacks out of an abundance of caution and compliance with a new set of international capital guidelines, saying in reference to money-losing trades that "we want to box this thing first."

Double trouble at JP Morgan: trader’s losses could exceed $7bn - The crisis at JP Morgan escalated yesterday as it emerged its trading losses in London could rise to as much as $7bn (£4.5bn) and the US bank cancelled a share buyback. Fears were growing that the losses could spiral from an initial $2bn, which was declared on 10 May, as JP Morgan struggles to unwind the massive bets made by the so-called "London Whale" trader Bruno Iksil. In a further blow, chairman and chief executive Jamie Dimon has suspended plans to use the US bank's own funds to buy back $15bn worth of shares. Buybacks are a popular way for firms to use up cash sitting on the balance sheet and prop up the share price. JP Morgan shares tumbled 82 cents or 2.45 per cent to a new six month-low of $32.67. The bank's value has fallen by a quarter in a year. Mr Dimon insisted that the decision to cancel the buyback was not linked to fears about a possible increase in losses. But as doubts persisted that the crisis has not yet abated, speculation was mounting that Mr Dimon could be forced to give up at least one of his dual boardroom roles. He has previously been regarded as the savviest banker on Wall Street as JP Morgan survived the credit crunch without a bailout. Rival traders reckon that the losses could be as high $7bn. "The markets know pretty much what JP Morgan has and in what sizes," said one trader.

Fed data expose $100 billion JP Morgan position (IFR) - Official data from the US Federal Reserve have laid bare the eye-watering size of trading positions built up by JP Morgan's chief investment office in synthetic credit indices, raising further questions about risk management standards at the bank. According to the figures, which are reported by banks on a quarterly basis and posted on the Fed's website, JP Morgan's position in investment-grade credit default swaps jumped eightfold from a net long of $10 billion notional at the end of 2011 to $84 billion at the end of the first quarter this year. The Fed data support previous reports about the nature of the trading strategy that has led to the losses. In investment-grade CDS with a maturity of one-year or less, JP Morgan's net short position rocketed from $3.6 billion notional at the end of September 2011 to $54 billion at the end of the first quarter. Over the same period, JP Morgan's long position in investment grade CDS with a maturity of more than five years leapt five times from $24 billion to $102 billion (see chart).  The size of the positions lends credence to credit experts' views that it will take JP Morgan a long time to close out the position, particularly given the illiquidity of the off-the-run indices that are thought to be involved. It also illustrates that the CIO will not be able to allow the risk to simply roll of its books due to the substantial portion of it that is long-dated.

JPMorgan Boosted Derivatives Bets Eightfold in First Quarter - JPMorgan Chase increased bets on credit derivatives on investment-grade debt eightfold in the first quarter, the period when the bank says it built trading positions that have produced at least $2 billion of losses. JPMorgan had sold $83.6 billion more of the derivatives than it bought as of March 31, according to a Federal Reserve report dated May 17. That compares with a $10.7 billion difference as of Dec. 31, according to an earlier report. The reports don’t provide details on specific trades or bank units that contributed to the positions. The latest report provides a glimpse of New York-based JPMorgan’s total derivatives-trading at the end of March, more than a month before the bank disclosed the trading loss. Reuters reported on the Fed data earlier today. While the bank had a $101.3 billion position on derivatives expiring more than five years from now, it had a negative $53.8 billion position on derivatives maturing within one year, according to the latest Fed report. JPMorgan had a $35.1 billion position in derivatives maturing between one and five years as of March 31.

JP Morgan’s reputation plunges - From a PR perspective, the way that JP Morgan managed to lose more than $2 billion on a bad trade is easily the worst thing to happen to the bank since before the financial crisis. This chart comes from YouGov BrandIndex, which measures consumer’s brand perceptions, and shows that JP Morgan is now held in lower esteem than Goldman Sachs — quite possibly, for the first time ever. The plunge in JP Morgan’s “buzz score”, of a good 20 points, is huge: the only comparable fall was the release of the Abacus complaint against Goldman in April 2010. And just as in that case, JP Morgan’s reputation will recover, and it will surely return to the “meh” range that it’s been stuck in since the crisis — in the shallow end of negative territory. Still, it’s interesting to note that JP Morgan’s latest score, of -32, is exactly the same level that Goldman fell to in the wake of the Greg Smith op-ed.

JPMorgan shakes up board risk committee - JPMorgan Chase is to shake up its board risk committee, adding Timothy Flynn, the former chairman of KPMG, according to people familiar with the situation. Ellen Futter, president of the American Museum of Natural History, is expected to step down from the committee, these people say. Shareholders had criticised the composition of the committee even before JPMorgan revealed earlier this month it had suffered trading losses of $2bn in a blow to the bank’s reputation as a strong risk manager. CtW Investment Group, an adviser to union-sponsored pension funds with more than $200bn in assets, contacted JPMorgan last year to tell the bank of its “major concern” about Ms Futter’s qualifications. At the end of another week in which his leadership has come under scrutiny, it was also announced that Jamie Dimon, chief executive of JPMorgan, will appear before the Senate banking committee on June 7.  Mr Dimon, a vocal critic of some elements of the Dodd-Frank financial reform, will answer questions from lawmakers as part of their “effort to get to the bottom of the massive trading loss”.

Why JP Morgan’s gamblers need to be spun off - There are two stories often told of hedge fund managers, and they’re pretty much diametrically opposed. In the popular imagination, such managers are risk junkies, putting on massive bets in the hope that they’ll have huge payoffs, making a fortune for their investors and even more so for themselves. But that’s not the story told to — and bought by — big institutional pension funds and insurance companies and endowments, who lap up stories of state-of-the-art risk management, carefully-calibrated hedges, aggressively maximized Sharpe ratios, and returns which not only beat the stock market but do so with significantly lower volatility along the way. So which is true? Read Lawrence Delevingne’s account of how Michael Geismar gambled away his time at the SALT conference in Las Vegas, and it’s pretty clear that the hedge fund manager of popular imagination is a very real creature indeed. He throws $1,000 tips around like confetti, he books a $20,000 private jet home on a whim, he wins and then he loses $70,000 and then he just keeps on playing, and ends the conference up $710,000 or so.

Counterparties: Breaking up, with Sheila Bair - Sheila Bair, never too shy to make modest proposals, thinks that JPMorgan Chase should voluntarily split itself up:[The] bank is worth more in smaller, easier-to-manage pieces. Let’s face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over. Or, as David Merkel puts it in a different context: “complexity has a price; avoid it unless well compensated for it”. And, Felix notes, setting the Volcker Rule aside, if a business requires complexity and opacity to generate profit, it should be spun out of too-big-to-fail institutions. That would be a complex task, but things only grow murkier once a firm has failed.The FDIC continues to clarify its resolution authority and currently thinks the best method to handle the failure of a large, complex financial institution is to place the “parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge holding company”. Stephen Lubben doubts that the hundreds of billions of dollars in private debtor-in-possession financing required for a tidy resolution to work would be available during a financial crisis.

Bill Targets Fed Conflict - On the heels of JPMorgan’s stunning trading losses, two senators on Tuesday unveiled a bill that would ban financial executives from regulating themselves by taking positions at the Federal Reserve. The measure is aimed at barring what Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) call a conflict-of-interest issue that includes JP Morgan Chase CEO Jamie Dimon, who sits on the board of the New York Federal Reserve. “How do you sit on a board, which approves $390 billion of low-interest loans to yourself?” Sanders said at a news conference rolling out the bill. “Who in America thinks that makes sense?” Under the bill sponsored by Boxer and Sanders, two of the most liberal members of the Senate, people who work for or invest in companies that can receive financial aid from the Federal Reserve would be banned from sitting on any of the Fed’s 12 boards of directors. Federal Reserve workers and board members would also be barred from owning stock in firms that the Fed oversees. The bill is also co-sponsored by Sen. Mark Begich (D-Alaska).

Over 99% of Federal Reserve Bank Enforcement Actions Are Resolved Without Admission of Guilt - In a hearing last week titled “Examining the Settlement Practices of U.S. Financial Regulators”, various regulators tried to justify their practice of settling with financial firms and not requiring them to admit wrongdoing. In that hearing, Federal Reserve General Counsel Scott Alvarez, stated that only seven of the roughly one thousand enforcement actions taken in the last decade were resolved without consent. The vast majority of the Federa Reserve’s formal enforcement actions are resolved upon consent, which is fully consistent with the goal of resolving supervisory concerns with bank management quickly and firmly. In crafting enforcement actions that are entered by consent, the Federal Reserve typically sets out summary recitations of the relevant facts in “Whereas” clause provisions; however, like our fellow banking regulators, it has not been our practice to require formal admissions to the misconduct addressed in our enforcement orders given the remedial nature of our enforcement program. Requiring admission of fact and legal conclusions as a condition of entering into a consent action is likely to have a deleterious effect on our supervisory efforts by causing more institutions and individuals to challenge the requested relief in contested administrative proceedings, which typically takes years to reach final resolution, and which could delay implemenattion of necessary corrective action. In other words, the Federal Reserve will only punish banks who break the rules if those banks consent to punishment.  This attitude is pervasive among all regulators.  Here’s the Office of the Comptroller of the Currency, which regulates among other banks JP Morgan Chase. Obtaining an institution’s consent to an immediately effective order helps ensure that its problems are addressed at a stage when rehabilitation is still possible, thus helping the bank avoid failure

Occupy Wall Street Alternative Banking Group Files Amicus Brief on Side of Judge Rakoff in SEC v. Citigroup - 05/22/2012 - Yves Smith -  Below you’ll find the amicus brief filed by the Alternative Banking Group on May 21 in support of Judge Jed Rakoff’s ruling questioning a proposed $285 million settlement in the SEC v. Citigroup Capital Markets (ruing here, summary and discussion here). Judge Rakoff ordered the parties to trial, which resulted in both Citi and the SEC filing appeals. Certain procedural issues led the appeal to be referred to the Second Circuit Court’s motion panel to determine whether the appeal should proceed. The panel took the unusual step of putting a stay on the lower court case at the Southern District of New York (even though the case was still pending), and in the process criticized Judge Rakoff’s position without deciding the merits of the case. The merits panel is now charged with deciding on the substance of the appeal. You can find the SEC’s appeal here, Citi’s here. Better Markets has also filed an amicus brief supporting Judge Rakoff’s position. The lead authors of this brief were Akshat Tewary, MBS Guy, Andrew Dittmer, and yours truly. OWS AB Motion & AmicusBrief  (embedded)

Rakoff Gets Amicus Support from Occupy Wall Street in Citi Appeal - American Lawyer - The group filed what appears to be its first amicus brief, urging the Second Circuit to uphold U.S. District Judge Jed Rakoff's controversial rejection of the SEC's $285 million settlement with Citigroup. If you expected the brief to be stuffed with inflammatory rhetoric, you'd be wrong.

With New Firepower, S.E.C. Tracks Bigger Game - A corporate lawyer, a professional trader and an anonymous middleman carried out a lucrative insider trading scheme for nearly two decades, baffling federal authorities who were trying to unravel the mystery. Like characters in a crime novel, the three men evaded arrest by dumping cellphones, using code names and rendezvousing in Atlantic City to divide their bounty. Then last year, authorities found the culprits. Relying on new tools, investigators at the Securities and Exchange Commission traced the conspiracy to Matthew H. Kluger, Garrett D. Bauer and Kenneth T. Robinson. In April, the three men, who have all pleaded guilty to criminal charges, agreed to pay the S.E.C. roughly $32 million. Embarrassed after missing the warning signs of the financial crisis and the Ponzi scheme of Bernard L. Madoff, the agency’s enforcement division has adopted several new — if somewhat unconventional — strategies to restore its credibility. The S.E.C. is taking its cue from criminal authorities, studying statistical formulas to trace connections, creating a powerful unit to cull tips and assign cases and even striking a deal with the Federal Bureau of Investigation to have agents embedded with the regulator.

Waters Challenges Khuzami on Securitization Fraud Task Force, Gets Revealing Answers - I don’t know how House Democrats managed to get a hearing in the Financial Services Committee on the SEC’s tendency to settle with financial firms and allowing the companies to get off without admitting wrongdoing, but I’m glad they did. This put Financial Services Committee chair Spencer Bachus (R-AL) in the unusual position of saying that a federal regulator knows best and Congress shouldn’t challenge them on their decisions. Democrats on the committee – and one Republican, Rep. Bill Posey of Florida – were fairly united in the idea that settlements without the admission of wrongdoing encouraged repeat offenses and perpetuates criminal behavior. But I want to focus on another aspect of the hearing. Rep. Maxine Waters (D-CA), who is in line to take over as the lead Democrat on the Committee, actually referenced the interview I did with Elizabeth Warren yesterday, in questioning of Robert Khuzami, who is both the head of enforcement at the SEC and a co-chair of the RMBS working group, the panel that is supposed to be investigating fraudulent actions in the securitization of mortgages. Waters used the fact that Warren expressed no confidence in the working group or any other measures from the regulatory and law enforcement communities to hold banks accountable to launch into a series of questions about the RMBS working group and its progress. You can watch it here, starting around the 43:30 mark. I can’t embed it, so let’s walk through it.

Morgan Stanley’s $2.4 billion Facebook short - First, it’s worth explaining how the greenshoe option is meant to work. In the IPO, the underwriting banks — there were lots of them, but let’s just call them all “Morgan Stanley”, for simplicity’s sake — sold 484 million shares of Facebook at $38 each. At the same time, they bought 421 million shares of Facebook from the company and its investors, at $37.582 each. The underwriter’s fee of 1.1% is the difference between those two numbers: if you buy at $37.582 and sell at $38, then you end up creaming off 1.1% of the total amount raised. You’ll note that Morgan Stanley sold more shares than it bought. That’s the greenshoe. When you sell more shares than you buy, you’re short that stock, so when a bank exercises its greenshoe option, as Morgan Stanley did in this case, it is going short the stock in question.The greenshoe does, however, raise certain existential questions — not least, how can 484 million shares be sold, if only 421 million shares have been issued? Do those extra 63 million shares exist?

Seeing Bailouts Through Rose-Colored Glasses - THE multibillion-dollar trading loss at JPMorgan Chase has revived the idea of paring down banks that are too big to manage. That’s a good thing, if we ever hope to get off the boom-bust-bailout track. As the battles over financial regulation rage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions. Getting a straight answer on this question can be tough, given the politics now surrounding the bailouts that occurred in 2008. The total cost of those salvage efforts isn’t yet known. The problems at the mortgage giants Fannie Mae and Freddie Mac have not been resolved, and the taxpayers’ current $151 billion bill will undoubtedly shift in size. Nevertheless, an accurate accounting of the 2008 rescues should include the value of the bailout subsidy provided by the taxpayers, as well as a hard-nosed cost-benefit analysis. Unfortunately, neither was included in a recent United States Treasury analysis of the various rescue programs, including TARP. That didn’t stop the Treasury from crowing: “The latest available estimates indicate that the financial stability programs are likely to result in an overall positive financial return to taxpayers in terms of direct fiscal cost.” These returns are expected to exceed the costs at Fannie and Freddie, the Treasury added. It’s enough to make you want to break out the Champagne.

Calculating the Cost of Bailouts - A recent New York Times includes a piece on the Treasury's study of the various bailouts or "rescues" of distressed financial and other institutions, Seeing Bailouts Through Rose-Colored Glasses The Treasury study, The Financial Crisis Response--in charts (April 13, 2012), is  positive about the way that government handled the bailouts.  Collectively, these programs --carried out by both a Republican and a Democratic administration--were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.  Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way.  That ignores the fact that the bank bailouts treated the banksters with kid gloves--letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached.  Meanwhile, ordinary Americans--especially those in the lower half of the income distribution--suffered enormously.  Congress--at the behest of the banksters--refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deteroioration and blight. 

Gretchen Morgenson Makes the Case for an Accurate Accounting of Bailout Costs - The methodology that the Treasury Department is using when claiming that we made money on the TARP would imply that the government could make money by issuing a 30-year mortgage at 1.0 percent interest to every homeowners in the country. The vast majority of these mortgages would of course be paid off with interest, therefore the taxpayers would come out ahead. This is ridiculous accounting, as Gretchen Morgenson points out in her column today. There is an opportunity cost to this money and if that is not taken into account, there is no way to say whether this lending is profitable. In the case of the TARP and related Fed lending programs, financial institutions were able to borrow trillions of dollars at far below market interest rates. These programs may have been justified given the situation in financial markets at the time, however it is ridiculous to say that we made a profit on the lending based on the fact that most of the money was repaid with interest just as it would be ridiculous to claim a profit on 1.0 percent 30-year fixed rate mortgages issued by the government.

BAILOUT: Former Bailout Watchdog Neil Barofsky to Release Tell-All Account Of Bush/Obama Administration Banking Policies - Neil Barofsky, a former official who actually put bankers in jail (imagine that!) is coming out with a tell-all book called “Bailout” about his experience as the Special Inspector General for TARP.  I don’t normally put up press releases, but this book will be upsetting to the administration because this is someone who was involved in the decisions, and Barofsky did not play ball with the Wall Street crowd.  Here’s the announcement.From December 2008 until March 2011, Barofsky was the Special Inspector General charged with oversight of TARP, working to ensure against fraud and abuse in the spending of the $700 billion allocated for the bailouts. From the start he was in constant conflict with the officials at the Treasury Department in charge of the bailouts who were in thrall to the interests of the big banks and steadfastly failed to hold them accountable, even as they disregarded major job losses caused by the auto bailouts and failed to help struggling homeowners. Barofsky recounts how his reports of a wave of criminal mortgage fraud and other abuses being perpetrated against homeowners in connection with programs that the Treasury itself set up were ignored time and again.

The One Chart US Banks Don't Want You To See  - Three years ago, the government in all its glory and sound central-planning decided to provide a fully-FDIC-backed facility to allow banks to raise capital at ultra-cheap cost of funds in the middle of the crisis. The Term-Loan-Guarantee-Program (TLGP) has not been far from our thoughts but the next month or so is going to be increasingly anxiety-inducing for the banks that took advantage of that bailout. By the end of June 2012 (i.e. the next six weeks) there is almost $60 billion of TLGP debt that matures for US banks (and will need to be refinanced we assume). This $60 billion has an average cost of funds of 0.3% (that is yield NOT spread) which when compared to the 3.5% - 4% cost of funds for mid-dated US financial debt currently (average CDS around 230bps) means a more than 10x increase in funding costs for this segment of their debt. Of course there are yield-hungry ETF-buyers to be satisfied (note LQD can soak this up and few retail investors realize just how exposed LQD - the investment-grade ETF - is to US financials) and so we expect them to get this off but it can only pressure spreads wider as supply dominates demand in this risk-averse market environment.

My Speech to the Finance Graduates - Robert J. Shiller - Unless you have been studying at the bottom of the ocean, you know that the financial sector has come under severe criticism – much of it justified – for thrusting the world economy into its worst crisis since the Great Depression. And you need only check in with some of your classmates who have populated the Occupy movements around the world to sense the widespread resentment of financiers and the top 1% of income earners to whom they largely cater (and often belong). While some of this criticism may be over-stated or misplaced, it nonetheless underscores the need to reform financial institutions and practices. Finance has long been central to thriving market democracies, which is why its current problems need to be addressed. With your improved sense of our interconnectedness and diverse needs, you can do that. Indeed, it is the real professional challenge ahead of you, and you should embrace it as an opportunity. Young finance professionals need to familiarize themselves with the history of banking, and recognize that it is at its best when it serves ever-broadening spheres of society. Here, the savings-bank movement in the United Kingdom and Europe in the nineteenth century, and the microfinance movement pioneered by the Grameen Bank in Bangladesh in the twentieth century, comes to mind. Today, the best way forward is to update financial and communications technology to offer a full array of enlightened banking services to the lower middle class and the poor.

Study: Typical CEO Pay Up 6% to $9.6 Million — Profits at big U.S. companies broke records last year, and so did pay for CEOs. The head of a typical public company made $9.6 million in 2011, according to an analysis by The Associated Press using data from Equilar, an executive pay research firm. That was up more than 6 percent from the previous year, and is the second year in a row of increases. The figure is also the highest since the AP began tracking executive compensation in 2006. Companies trimmed cash bonuses but handed out more in stock awards. For shareholder activists who have long decried CEO pay as exorbitant, that was a victory of sorts. That’s because the stock awards are being tied more often to company performance. In those instances, CEOs can’t cash in the shares right away: They have to meet goals first, like boosting profit to a certain level.

The Rise of the New Economy Movement - Just beneath the surface of traditional media attention, something vital has been gathering force and is about to explode into public consciousness. The “New Economy Movement” is a far-ranging coming together of organizations, projects, activists, theorists and ordinary citizens committed to rebuilding the American political-economic system from the ground up. The broad goal is democratized ownership of the economy for the “99 percent” in an ecologically sustainable and participatory community-building fashion. The name of the game is practical work in the here and now—and a hands-on process that is also informed by big picture theory and in-depth knowledge. Thousands of real world projects — from solar-powered businesses to worker-owned cooperatives and state-owned banks — are underway across the country. Many are self-consciously understood as attempts to develop working prototypes in state and local “laboratories of democracy” that may be applied at regional and national scale when the right political moment occurs. The movement includes young and old, “Occupy” people, student activists, and what one older participant describes as thousands of “people in their 60s from the ’60s” rolling up their sleeves to apply some of the lessons of an earlier movement.

Ellen Brown: Is Cooperative Banking the Wave of the Future? - It’s hard to see that change just yet in the events relayed in the major media, but a shift does seem to be happening behind the scenes; and this is particularly true in the once-boring world of banking.In the dark age of Kali Yuga, money rules; and it is through banks that the moneyed interests have gotten their power. Banking in an age of greed is fraught with usury, fraud and gaming the system for private ends. But there is another way to do banking; the neighborly approach of George Bailey in the classic movie It’s a Wonderful Life. Rather than feeding off the community, banking can feed the community and the local economy. Today, the massive too-big-to-fail banks are hardly doing George Bailey-style loans at all. They are not interested in community lending. They are doing their own proprietary trading—trading for their own accounts—which generally means speculating against local interests. They engage in high-frequency program trading that creams profits off the top-of-stock market trades; speculation in commodities that drives up commodity prices; leveraged buyouts with borrowed money that can result in mass layoffs and factory closures; and investment in foreign companies that compete against our local companies. We can’t do much to stop them. They’ve got the power, especially at the federal level. But we can quietly set up an alternative model, and that’s what is happening on various local fronts.

Unofficial Problem Bank list increases to 928 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 18, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  The OCC released its actions through mid-April 2012, which contributed to many changes in the Unofficial Problem Bank List. For the week, there were eight additions and four removals that leave the list with 928 institutions and assets of $361.9 billion. The list is up from 924 institutions last week, which represents the first weekly count increase since February 24th, a period of 11 weeks. A year ago, the list held 988 institutions with assets of $423.8 billion.

Toxic mortgage bonds flourish as other sectors slump - While stock and high-yield bond markets have swooned in recent weeks, one unlikely fixed-income sector has been outperforming -- non-agency residential mortgage-backed securities (RMBS).  The securities -- which helped spark the financial crisis, and are mostly backed by the damaged mortgages that made "sub-prime" a household word -- are enjoying a renaissance this year.  Over the last three weeks of broader-market volatility caused by uncertainty about the eurozone crisis, non-agency RMBS cash bonds have outperformed all other risky-asset sectors, including high-yield bonds, according to John Sim, the head of RMBS research at JP Morgan.  One reason is that mortgage bonds are less correlated to the outside events -- economic, political and otherwise -- that tend to affect competing asset classes.  "A macro 'risk-off' environment will impact high-yield, equities, and synthetics more so than cash RMBS bonds," Sim said.  Seen not too long ago as a symbol for much of what went wrong during the financial crisis, they are now being embraced by insurance companies, money managers and hedge funds.

Modest Proposals for Financial Reform: Abolish Mortgage-Backed Securities - CDOs and credit default swaps don't kill financial systems, mortgages kill financial systems. There has been altogether too much opproprium directed at CDOs, credit default swaps and other structuring techniques that spread financial contagion, and not enough directed at the underlying collateral. The record seems to be, however, that Dick Pratt was correct when he called the mortgage "the neutron bomb of financial products." Don't believe it? Ask the foremost experts in credit derivatives, such as:

  • 1) The inventors of credit default swaps and CDOs at JPMorgan: As Gillian Tett describes in Fool's Gold, while they truly believed in the CDO structure, they did not believe that the credit risk could be accurately measured on underlying mortgages. Other banks felt...differently, and this classic Felix Salmon post is the best synopsis of what happened.
  • 2)  The long-time heads of AIG Financial Products: no that was not a typo. For most of the history of AIG FP, they absolutely refused to enter into any transactions, CDOs included, backed by real estate. It is worth excerpting the following from Roddy Boyd's definitive Fatal Risk, referring to Joe Cassano's predecessor as head of AIG FP:

Dean Baker: Mortgage and Securitization Fraud: Where Is the Task Force?: It was almost four years ago that Federal Reserve Board Chairman Ben Bernanke, Treasury Secretary Henry Paul Paulson, and then New York Fed Bank President Timothy Geithner ran to Congress warning that the end of the world was near. They told members of Congress that the banks were drowning in bad debt and without a massive bailout they would soon be forced into bankruptcy. Congress quickly coughed up the money in the form of $700 billion in TARP loans. The Fed contributed trillions more. Undoubtedly most of the bad debt was due to stupidity, which does not seem to be in short supply on Wall Street despite the high paychecks. But there was more than just stupidity involved here. There was an epidemic of mortgage fraud that was identified by the FBI as early as 2004. The general story was that the big subprime issuers were pushing their agents to issue as many mortgages as possible, because they knew that they could sell almost any mortgage the next day in the secondary market. As a result, many mortgage agents put down information that they knew to be false, often changing information provided by applicants to allow borrowers to get mortgages for which they were not actually qualified.Clearly, much of this sort of fraud took place. There were many accounts of people who received mortgages with payments that would have taken up their entire income. According to the FBI, in most of the cases it was the lenders who put down the false information so that they would be able to issue a loan that could be sold in the secondary market. 

Obama and Schneiderman to Double Size of Non-Existent Task Force - On Sunday, roughly one thousand people from liberal community organizing group National People’s Action showed up at Tim Geithner’s house to ask that he investigate the banks.  ”Are you with the people”, asked these activists.  In response to this exceptionally mild pressure, the administration and New York “Attorney General” Eric Schneiderman have decided that they have no choice but to do a bit more PR around the task force.  They have doubled its size, and they have appointed a coordinator. Senior administration officials and New York Attorney General Eric Schneiderman said they’re busy behind the scenes doubling their team to more than 100 federal and state financial experts and drawing on staff in 10 U.S. attorneys offices around the country.  The unit has also delivered more than 20 civil subpoenas, collected more than a million documents and deposed many witnesses as it digs through the work of bankers, mortgage brokers, appraisers and others who from about 2004 to 2007 helped millions of Americans buy homes they couldn’t afford at prices that didn’t match their property values — all while bundling the mortgages into securities for sale to investors. 20 civil subpoenas on appraisers and brokers?  How… adorable!  And they finally tapped a coordinator, an assistant US Attorney based in eastern California.  That’s a clear tell, appointing someone far from a place where they could easily coordinate among multiple agencies.

RMBS Investigators Announce Website, Coordination Team -The Residential Mortgage-Backed Securities (RMBS) Working Group unveiled a new website on Thursday to enable "whistleblowers" to report mortgage-backed securities (MBS) related misconduct.  The group also announced the creation of a new team to coordinate various securities-related investigations around the country. The Working Group is part of the Financial Fraud Enforcement Task Force (FFETF) created in January to address fraud leading to the financial crisis.  The group is led by five co-chairs representing the civil and criminal divisions of the Department of Justice, the Securities and Exchange Commission, and two attorneys general from New York and Colorado.  According to a press release, the working group and its members are focused on investigating potential false or misleading statements, deception or other misconduct by market participants in the creation, packaging and sale of mortgage-backed securities.  The new website, is designed as a "call to those insiders who know about fraud that occurred in the RMBS market, who know it's time to expose that fraud, and who want to help us hold accountable those individuals and institutions who broke the law in pursuit of bigger paydays, according to Acting Associate Attorney General Tony West.  He said that while the working group has done a tremendous amount of investigative work already and has issued more than 24 civil subpoenas, it is particularly valuable to hear from insiders.

Is Schneiderman Already Starting the Blame Game Over the Mortgage Fraud Task Force Failure? - In an article in the Wall Street Journal titled “Investigators Seek More Firepower”, New York Attorney General Eric Schneiderman is quoted pleading for more resources from the administration. New York Attorney General Eric Schneiderman, one of the five officials in charge of the group, said it is making impressive progress but could accelerate those efforts with more investigators. “Do I want more resources, want things to go faster? Yes,” he said in an interview. “Am I asking for more? Yes. Do I believe we’ll get that? Yes.” A spokesman for the attorney general declined to specify how many extra people are needed. That’s a public quote, so Schneiderman is necessarily being passive aggressive about it.  This anonymous quote from a Politico story a few days ago is more brazen. A government source working on housing issues said the unit is struggling in part because of a lack of commitment from the White House since its roll out in the State of the Union, citing a leadership vacuum since DOJ Associate Attorney General Thomas Perrelli left the Obama administration in February. “It’s not happening at the level that it should be happening,” the source said. “There’s no person with juice at the federal level that is banging heads and making sure things are happening the way they should.”

Billion Dollar Bait & Switch: States Divert Foreclosure Deal Funds - ProPublica: States have diverted $974 million from this year’s landmark mortgage settlement to pay down budget deficits or fund programs unrelated to the foreclosure crisis, according to a ProPublica analysis. That’s nearly forty percent of the $2.5 billion in penalties paid to the states under the agreement. The settlement, between five of the country’s biggest banks and an alliance of almost all states and the federal government, resolved allegations that the banks deceived homeowners and broke laws when pursuing foreclosure. One part of the settlement is the cash coming to states; the deal urged states to use that money on programs related to the crisis, but it didn’t require them to. ProPublica contacted every state that participated in the agreement (and the District of Columbia) to obtain the most comprehensive breakdown yet of how they’ll be spending the funds. You can see the detailed state-by-state results here, along with an interactive map. [1] Many states told us they’ll be finalizing their plans in the coming weeks. We’ll be updating our breakdown as the results come in. What stands out is that even states slammed by the foreclosure crisis are diverting much or all of their money to the general fund. In California, among the hardest hit states, the governor has proposed using all the money to plug his state’s huge budget gap. And Arizona, also among the worst hit, has diverted about half of its funds to general use. Four other states where a high rate of homeowners faced foreclosure during the crisis are spending little if any of their settlement funds on homeowner services: Georgia, South Carolina, Wisconsin, and Maine.

Where Are the Foreclosure Deal Millions Going in Your State? interactive map

Ally Financial: Newly Released Letter Show Scope Of Possible Mortgage Screwups - Trying to count the number of bank screwups during the foreclosure crisis is a little like guessing the amount of change in a huge jar: You can see that the answer is "an awful lot," but without breaking the jar and counting by hand, there's no way to know for sure.  On Thursday, however, just how much homeowner misery Ally Financial may be responsible for came to light after the Federal Reserve released a letter between the bank's mortgage servicing unit, GMAC Mortgage, and its auditing firm detailing exactly how many borrowers' cases may have been mishandled.  In response to the bankruptcy proceedings, which typically require a public disclosure of financial information, the Federal Reserve released a letter between the bank's mortgage servicing unit, GMAC Mortgage, and the accounting firm GMAC hired to audit its loan files as part of a 2011 agreement with federal regulators. Some highlights:

  • GMAC started foreclosure proceedings on 1,270 borrowers who were in some stage of the bankruptcy process, and thus should have been protected from foreclosure.
  • GMAC carried out foreclosure sales on 1,577 borrowers who were awaiting a decision about a loan modification. This is known as "dual tracking" and is one of the biggest complaints of homeowners and their advocates.
  • The mortgage servicer hired a law firm that was subsequently "delisted" to process 30,235 foreclosures. The names of the firms are redacted, but presumably include several of those accused of forging documents as part of the robo-signing scandal.
  • The mortgage servicer denied 50,030 borrowers for a government-run Home Affordable Modification Program, and then offered no alternative modification.

What Theory is Animating Rajan's FT Mortgage-Debt Reduction Policy Recommendation? -Ok, I'm genuinely confused. There's two interesting things about this from Raghuram Rajan's Financial Times editorial, Sensible Keynesians see no easy way out, that we should unpack (my numbering): The key question then is whether more government spending can make a real difference to the most severe employment problems. Here the case for a general stimulus becomes less compelling. [1] In the US, demand is weakest in communities where a boom and bust in house prices has left an overhang of household debt. Lower local demand has hit employment in industries such as retail and restaurants. A general increase in government spending may be too blunt – greater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). [2] Targeted household debt write-offs in Las Vegas could be a better use of stimulus dollars. Targeted government spending, or reduced austerity, along the lines suggested by sensible Keynesians, might be feasible in some countries and helpful in speeding recovery. But we should be particularly wary of populist Keynesians, who parrot “in the long run we are dead” to justify any short-sighted government action. So Rajan is a sensible Keynesian who would push us towards targeted, household mortgage-debt write-offs. Meanwhile others, including presumably Paul Krugman, are a dangerous, populist variety of Keynesian who want fiscal or monetary stimulus.

LPS: Mortgage delinquencies increased slightly in April - LPS released their First Look report for April today. LPS reported that the percent of loans delinquent increased slightly in April from March, and declined year-over-year. The percent of loans in the foreclosure process was unchanged and 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) increased to 7.12% from 7.09% in March. 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 an increase in April after a sharp decline in March. The following table shows the LPS numbers for April 2012, and also for last month (March 2012) and one year ago (April 2011).The number of delinquent loans is down about 16% year-over-year (682,000 fewer mortgages delinquent), and the number of loans in the foreclosure process is down 136,000 year-over-year (the percent in foreclosure is unchanged, but the number of total loans has declined). The percent of loans less than 90 days delinquent is about normal, but the percent (and number) of loans 90+ days delinquent and in the foreclosure process are still very high.

Zillow: One-Third of Homeowners Underwater, 9 Out of 10 Current - About 15.7 million U.S. homeowners were underwater in the first quarter of 2012, according to Zillow’s Negative Equity Report released Thursday. This translates to about one-third, or 31.4 percent, of homeowners with a mortgage, an increase from 31.1 percent in the previous quarter and a decrease from 32.4 percent a year ago. Yet, most underwater homeowners are current on their mortgages, with nine in 10 continuing to make their payments on time. Also, just 10.1 percent of underwater homeowners are more than 90 days delinquent, Zillow reported. “While it was disappointing to see negative equity numbers remain so high, it is important to note that negative equity remains only a paper loss for the vast majority of underwater homeowners,” said Zillow Chief Economist Stan Humphries. “As home values slowly increase and these homeowners continue to pay down their principal, they will surface again.” While negative equity is never beneficial for homeowners, a large percentage of underwater borrowers are at least wading in shallow waters. Nearly 40 percent of underwater homeowners owe between 1 and 20 percent more than their home is worth, and another 21 percent owe between 21 and 40 percent more than their home’s value.

US Housing Crisis - Negative Equity Infographic - Zillow

Strategic default pays off as defaulters repurchase at lower prices » Many borrowers chose not to struggle with onerous house payments early in the housing bust and strategically defaulted. Most of these borrowers recognized their payments were greater than the cost of a comparable rental, and with falling prices, there was no return for this added investment. The wise choice then as now was to strategically default. Many did. Early strategic defaulters are being rewarded with much lower ownership costs due to lower house prices and lower interest rates. By the time prices recover to the peak when many of their cohorts will just be emerging from the depths, the early defaulters will have lower payments and significant equity. Strategic default was the best possible decision, and today’s buyers are making the most of it. Foreclosed Americans find way back to homeownership (Reuters) – When Jennifer Anderson’s family could no longer afford their mortgage and lost their home, she expected many years to pass before they would again become property owners. But less than two years later, in March, they purchased a $297,000 house outside Phoenix, Arizona, after qualifying for a loan backed by the U.S. government.

Housing chief leaves Morgan Stanley to launch buy-to-rent fund - Oliver Chang, head of U.S. housing strategy at Morgan Stanley, who has written more about foreclosed homes as an investment opportunity than any other Wall Street analyst, is leaving his firm to start his own buy-to-rent housing fund. Chang announced his decision on Monday in a resignation letter he submitted to Morgan Stanley obtained by Reuters. "Having followed this market for the past several years, I believe it represents one of the most compelling investment opportunities available across all asset classes today," Chang wrote in a letter to his former Morgan Stanley colleagues.

FDIC-insured institutions’ 1-4 Family Real Estate Owned (REO) decreased in Q1 - The FDIC released the Quarterly Banking Profile today for Q1 2012. Here is the press released from the FDIC: FDIC - Insured Institutions Earned $35.3 Billion in the First Quarter of 2012  On 1-4 family Real Estate Owned (REO), the report showed that REO by FDIC insured institutions declined to $11.08 billion in Q1, from $11.64 billion in Q4 2011. FDIC insured institutions REO peaked at $14.8 billion in Q3 2010. Unfortunately the FDIC does not collect data on the number of properties held by FDIC-insured institutions, instead they aggregate the carrying value of 1-4 family residential REO on FDIC-insured institutions’ balance sheets.Here is a graph of the 1-4 family REO carrying value for FDIC insured institutions since Q1 2003.  Note: FDIC insured institutions have other REO and this is just the 1-4 family residential REO (other REO includes Construction & Development, Multi-family, Commercial, Farm Land).

Lawler: Q1 REO inventory of "the F's", PLS, and FDIC-insured institutions combined down about 20% from a year ago - From economist Tom Lawler:  FDIC released its Quarterly Banking Profile for the first quarter of 2012, and according to the report the carrying value of 1-4 family REO properties at FDIC-insured institutions at the end of March was $11.0819 billion, down from $11.6736 billion at the end of December and $13.2795 billion at the end of March. FDIC does not release institutions’ REO inventory by property count. If FDIC institutions’ average carrying value were 50% higher than the average for Fannie and Freddie, then the number of 1-4 family REO properties at the end of March at FDIC institutions would be about 89,398, down from 93,215 at the end of December and 100,530 at the end of last March. Using this assumption, here is a chart showing SF REO inventory for Fannie, Freddie, FHA, private-label ABS, and FDIC-insured institutions. The estimated total for this group in March was 450,194, down 19.9% from last March. CR note: As Tom Lawler has noted before: "This is NOT an estimate of total residential REO, as it excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other lender categories." However this is the bulk of the 1-4 family REO - probably 90% or more. Rounding up the estimate (using 90%) suggests total REO is just around 500,000 at the end of Q1.

Lawler: Post-Census Study of Census 2010 -- Census yesterday released some of the results from its “Census Coverage Measurement” (CCM) program for Census 2010, which is a post-enumeration exercise to assess the “accuracy” of the decennial Census numbers. While there’s a lot of “stuff” in the two CCM memoranda released yesterday, here are a couple of “highlights.”
1. The CCM (similar to the 2000 A.C.E. Revision II and the 1990 P.E.S) for the US household population (excluding remote Alaska areas) suggests that the 2010 Census had a de minimus net “over-count” of just 36,000, or 0.01%. Studies mentioned above suggested that Census 2000 had a net over-count of 0.49%, and Census 1990 had a net under-count of 1.61%. While net over/under-counts for specific race/ethnic groups or age groups were in many cases “significantly different from zero,” on balance Census 2010 seems to have been the “best” ever. (see
2. The CCM designed to provide estimates of housing unit net coverage suggest that Census 2010 under-counted the number of US housing units by 0.60%, similar to Census 2000’s estimated 0.61% under-count. The 2010 estimated under-count for occupied units was an insignificant 0.03%, below Census 2000’s 0.33%, while the estimated under-count for vacant units was 4.80%, higher than Census 2000’s 3.37%.
Based on the CCM results, Census 2010 understated the gross vacancy rate by about 0.5 percentage points. The CCM’s gross vacancy rate was higher than the Census 2010 GVR in all states save Alaska. The CCM results also suggest that the US homeownership rate on April 1, 2010 was 65.2%, just a tad above the “official” estimate of 65.1%. There’s a lot more in the report, available at

Historic Lows for Fixed Mortgage Rates Hold Steady - Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing the record lows for average fixed mortgage rates holding steady for the week. The 30-year fixed-rate mortgage ticked slightly down to 3.78 percent and 15-year fixed-rate mortgages remained unchanged from last week at 3.04 percent. 30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.

MBA: Mortgage Refinance activity increases, Mortgage Rates at Record Low - From the MBA: Record Low Mortgage Rates Fuel Third Consecutive Increase In Refinance Applications In Latest MBA Weekly Survey The Refinance Index increased 5.6 percent from the previous week. This is the third consecutive weekly increase in the Refinance Index which is at its highest level since February 10, 2012. The seasonally adjusted Purchase Index decreased 3.0 percent from one week earlier to its lowest level since April 20, 2012. "Mortgage rates again dipped to new record lows in the survey, which spurred more borrowers back into the refinance market. As a result, applications for refinance loans have increased for the third straight week and are at the highest level since February of this year.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.93 percent, the lowest rate in the history of the survey, from 3.96 percent,with points increasing to 0.39 from 0.37 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Record Low Mortgage Rates and Refinance Activity - Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA). Freddie Mac reported earlier today that 30 year mortgage rates had fallen to a record 3.78% in the PMMS®. And the MBA reported yesterday that refinance activity has been increasing again.  Earlier from Freddie Mac: Historic Lows for Fixed Mortgage Rates Hold Steady 30-year fixed-rate mortgage (FRM) averaged 3.78 percent with an average 0.8 point for the week ending May 24, 2012, down from last week when it averaged 3.79 percent. Last year at this time, the 30-year FRM averaged 4.60 percent.This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®. The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates are getting close! The 30 year conforming mortgage rates were at 4.23% in October 2010, so a 50 bps drop would be 3.73% - just below the current rate.

Sales of Previously Occupied Homes Increased in April - Americans bought more previously owned homes in April, a hopeful sign that the weak housing market is gradually improving. The National Association of Realtors says home sales rose 3.4 percent last month to a seasonally adjusted annual rate of 4.62 million. That brings home sales back near the pace in January and February — which was the best winter for sales in five years. Still, sales are well below the nearly 6 million per year that economists equate with healthy markets. A mild winter encouraged some people to buy homes earlier. That drove up sales in January and February, while making March weaker. The median price for homes sold in April rose to $177,400, up 10.1 percent from a year ago.

Existing Home Sales Rise 1st Time in 3 Months - Sales of existing U.S. homes rose in April for the first time in three months, indicating the industry is stabilizing.  Purchases of previously owned houses, tabulated when a contract closes, increased 3.4 percent to a 4.62 million annual rate, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a rise to a 4.61 million rate.  Gains in employment, depressed prices and record-low mortgage rates may bring more properties within reach of buyers, eliminating a source of weakness for the world’s largest economy just as risks from Europe’s debt crisis climb. At the same time, efforts to reduce foreclosures and free up financing are just beginning to take root, signaling a sustained housing recovery will take time to develop.

Existing Home Sales in April: 4.62 million SAAR, 6.6 months of supply - The NAR reports: April Existing-Home Sales Up, Prices Rise Again:Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April from a downwardly revised 4.47 million in March, and are 10.0 percent higher than the 4.20 million-unit level in April 2011. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in April 2012 (4.62 million SAAR) were 3.4% higher than last month, and were 10.00% above the April 2011 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory increased to 2.54 million in April from the downwardly revised 2.32 million in March (revised down from 2.40 million). Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Inventory decreased 20.6% year-over-year in April from April 2011. This is the fourteenth consecutive month with a YoY decrease in inventory.

Home Sales Jump as Number of Foreclosures Drops - April housing numbers released by the National Association of Realtors were, wait for it … good. Spring is traditionally a busy season for home sales, but the real estate market has been in such a slump for the past couple of years that “ordinary” good news comes as something of a surprise. In the case of today’s data, existing home sales increased 3.4% from the month before, jumping to a seasonally adjusted annual rate of 4.62 million. It’s even better news when you compare year-on-year numbers: the current pace of sales is a 10% pop from April 2011.Record-low mortgage-interest rates — just when it seems they can’t sink any lower, they do — are probably helping the cause. Rates on 30-year fixed-interest mortgages have been under 4% all spring. And those rates are dropping, which may continue to boost home sales. Fixed mortgages that run for 30 years are now available at 3.79%, the lowest rate since data tracking began in the 1950s, according to the Associated Press.

Vital Signs: Jump in Home Sales - Americans stepped up purchases of previously occupied homes in April. Existing-home sales rose 3.4% from March to a seasonally adjusted annual rate of 4.62 million units, ending two months of declines. While sales are on track to eclipse last year’s dismal figure, they are still far below prerecession levels, as high unemployment and foreclosures continue to plague households.

Breaking Down Existing Home Sales - Robert Brusca, chief economist at Fact & Opinion Economics, talks with Jim Chesko about today’s report showing that existing-home sales increased 3.4% in April.

Existing Home Sales: Inventory and NSA Sales Graph - The NAR reported inventory increased to 2.54 million units in April, up 9.5% from the downwardly revised 2.32 million in March (revised down from 2.40 million). This is down 20.6% from April 2011, and up 2.7% from the inventory level in April 2005 (mid-2005 was when inventory started increasing sharply). Inventory was down slightly compared to April 2004 (see first graph below). This decline in inventory remains a significant story. There is a seasonal pattern for inventory - usually inventory is the lowest in the winter months, and inventory usually peaks mid-summer. However most of the seasonal increase typically happens by April - so we could be close to the peak for this year. The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of April since 2005, and inventory is slightly below the level in April 2004 (not counting contingent sales). The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA (red column) are above the sales for the 2008, 2009 and 2011 (2010 was higher because of the tax credit). Sales are well below the bubble years of 2005 and 2006. Also it appears distressed sales were down in April. From the NAR: Distressed homes – foreclosures and short sales sold at deep discounts – accounted for 28 percent of April sales (17 percent were foreclosures and 11 percent were short sales), down from 29 percent in March and 37 percent in April 2011.

Lawler: Comments on Existing home sales and FHA REO - Some comments from housing economist Tom Lawler: The National Association of Realtors estimated that US existing home sales ran at a seasonally adjusted annual rate of 4.62 million in April, up 3.4% from March’s downwardly revised (to 4.47 million from 4.48 million) pace and up 10.0% from last April’s pace. The NAR’s estimate exceeded my estimate based on regional tracking, though almost all of my “miss” was related to the NAR’s seasonal adjustment factor: while seasonally adjusted sales were up 10.0% YOY, unadjusted sales showed just a 6.7% YOY gain (I guess the timing of Easter was the reason; my bad). The NAR also estimated that the inventory of existing homes for sale at the end of April totaled 2.540 million, up 9.5% from March’s downwardly revised (to 2.32 million from 2.37 million) level and down 20.6% from last April. This was pretty close to my “guess” for a 21% YOY decline, and today’s report continued the trend for the NAR’s inventory estimates to show significantly lower monthly gains (or larger declines) in March and significantly larger monthly gains in April than that suggested by actual listings data. Finally, the NAR estimated that the median existing home sales price in April was $177,400, up a whopping 10.1% from last April.

U.S. Sales of New Homes Rose 3.3 Percent in April - Americans bought more new homes in April, the latest signal that the U.S. housing market is steadily improving. The Commerce Department said Wednesday that sales increased 3.3 percent in April from March to a seasonally adjusted annual rate of 343,000. Sales were up in all regions except the South. The median price rose to $235,700, a slight increase from March. Even with gain, the pace of new-home sales is well below the 700,000 annual rate that economists equate with healthy markets. Still, the broad-based gains across the country contributed to growing evidence that the home market could finally be rebounding nearly five years after the housing bubble burst.

New Home Sales increase in April to 343,000 Annual Rate - The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 343 thousand. This was up from a revised 332 thousand SAAR in March (revised up from 328 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. The second graph shows New Home Months of Supply. Months of supply decreased to 5.1 in April from 5.2 in March. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 340 thousand SAAR over the last 5 months, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too.

Investors Help Lift Home Demand, But Not Prices - Demand for housing continues to show signs of stabilizing, as evidenced by the gain in sales of existing and new homes in April. Cheap mortgage rates, some loosening of credit conditions and better job growth are pulling buyers into the market. But don’t discount the positive impact from investors who are snapping up cheap, often foreclosed properties. According to National Association of Realtors data, investors have accounted for about 20% of existing-home sales over the past few years. Speculators are taking advantage of falling home prices and low borrowing rates, as well as the shift from owning to renting. With demand for rental properties rising, landlord incomes increased 15% in the year ended in the first quarter. Investors represent a double-edged sword for the housing outlook. On the plus side, investor-buying is clearing out some of the overhang of home inventory.

New Home Sales Comments - Clearly new home sales have bottomed. Although sales are still historically very weak, sales are up 25% from the low, and up about 15% from the May 2010 through September 2011 average. Some people think housing will recover rapidly to the 1.2+ million rate we saw in 2004 and 2005. I think that is incorrect for two reasons. First, I think the recovery will be sluggish - 2012 will probably be the third worst year ever. Second, the 1.2 million in annual sales was due to an increasing homeownership rate and speculative buying.  And inventory of completed homes is at a new record low. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at a record low 46,000 units in April. The combined total of completed and under construction is at the lowest level since this series started. The second graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In April 2012 (red column), 33 thousand new homes were sold (NSA). Last year only 30 thousand homes were sold in March. This was the fourth weakest April since this data has been tracked. The high for April was 116 thousand in 2005. 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 clearly better than 2011. Below is an update to the "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through April. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Vital Signs: New Home Sales Still Way Below Historical Average - The housing market took a small step forward in April. Sales of newly built, single-family homes rose 3.3% from March to a seasonally adjusted annual rate of 343,000, reversing the prior month’s decline. Sales were 9.9% higher from a year ago. Still, the sales pace is roughly half of the historical average, as a housing recovery struggles to gain traction.

Home Prices Increase in April by 10.1%, The Largest Yearly Gain in More Than Six Years -The National Association of Realtors (NAR) reported today on existing-home sales in April with the following highlights:

  • 1. Total existing-home sales (single-family homes, townhomes, condominiums and co-ops) increased 3.4 percent to a seasonally adjusted annual rate of 4.62 million in April from a downwardly revised 4.47 million in March.
    2. April home sales this year of 4.62 million were 10% higher than the 4.20 million units in April 2011.
    3.  The national median existing-home price jumped 10.1% to $177,400 in April from a year ago; the March price showed an upwardly revised 3.1% gain from a year earlier.
  • 4.  The 10.1% median price increase in April was the biggest year-to-year gain since January 2006 and reflected a seasonal mix in demand toward bigger houses and fewer distressed sales.

FNC: Residential Property Values increase 0.5% in March - In addition to Case-Shiller, CoreLogic, and LPS, I'm also watching the FNC, Zillow and RadarLogic indexes.  FNC released their March index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.5% in March (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased about 0.8% in March. These indices are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales).The year-over-year trends continued to show improvement in March, with the Composite 100 index down only 2.4% compared to March 2011. This is the smallest year-over-year decline in the FNC index since 2007. The year-to-year declines in the largest housing markets, as indicated by the 10- and 30-MSA composites, are now below 3.0%, the slowest year-over-year decline since 2007. This graph is based on the FNC index (four composites) through March 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. The indexes are showing less of a year-over-year decline in March. If house prices have bottomed, the year-over-year decline should turn positive later this year or early in 2013.

FHFA: Quarterly House Price Index shows first year-over-year gain since 2007 - The Federal Housing Finance Agency (FHFA) releases several house prices indexes. The most followed are the Purchase Only repeat sales index, both monthly and quarterly, based on Fannie and Freddie loans only, and the quarterly "expanded data series" that includes data from FHA endorsed mortgages and county recorder data licensed from DataQuick. Here are the key results released today:
1) The quarterly Q1 seasonally adjusted purchase-only house price index showed the first year-over-year (YoY) increase since 2007.
2) The monthly (March) purchase only house price index showed a larger YoY increase of 2.7% in March compared to a 0.3% YoY increase in February. This is the largest YoY increase since 2006.
3) The expanded data series showed a smaller YoY decline of 1.3% in Q1 (smaller than the 3.0% YoY decline in Q4).
From the FHFA: HPI Shows Quarterly Increase and First Annual Increase Since 2007 U.S. house prices rose modestly in the first quarter of 2012 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). The FHFA HPI was up 0.6 percent on a seasonally adjusted basis since the fourth quarter of 2011. The HPI is calculated using home sales price information from Fannie Mae and Freddie Mac mortgages. ... FHFA’s seasonally adjusted monthly index for March was up 1.8 percent from February.

Home Values Continue to Climb in April - Zillow’s April Real Estate Market Report, released today, shows that home values increased 0.7 percent to $147,300 from March to April (Figure 1). Compared to April 2011, home values are still down by 1.8 percent (Figure 2). This strong monthly appreciation follows March’s encouraging data point, which also had home values appreciating at a healthy clip. In conjunction with rising home values, rents also rose significantly in April, appreciating by 1.6 percent from March to April. On an annual basis, rents across the nation are up by 3.2 percent (Figure 3). The Zillow Real Estate Market Report covers 166 metropolitan areas (metros) of which 88 showed monthly home value appreciation. Among the top 30 metros, 18 experienced home value appreciation. The largest monthly decline among the top 30 metros took place in Atlanta, where home values fell by 0.7 percent from March to April. Leading the pack on the appreciation side are once again Miami-Fort Lauderdale and Phoenix, which experienced 1.6 percent and 1.9 percent home value appreciation, respectively. Overall, national home values are down 24 percent since their peak in May 2007.

Zillow's forecast for Case-Shiller House Price index in March, Zillow index shows prices increased in April - Note: The Case-Shiller report is for March (really an average of prices in January, February and March). This data is released with a significant lag, see: House Prices and Lagged Data Zillow Forecast: Zillow Forecast: March Case-Shiller Composite-20 Expected to Show 2.6% Decline from One Year Ago On Tuesday, May 29th, the Case-Shiller Composite Home Price Indices for March will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 2.6 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 2.7 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from February to March will be 0.3 percent for both the 20 and 10-City Composite Home Price Index (SA). ...This will be the second month in a row where both of the Case-Shiller composite indices show monthly appreciation on a seasonally adjusted basis. However prices are still down from year ago levels. Most likely, there will be some see-sawing in home prices along the bottom before we start to see a more sustained recovery. Zillow's forecasts for Case-Shiller have been pretty close, and I expect Case-Shiller will report NSA house prices at a new post-bubble low in March.

Kolko: Dissecting the House Price Indices - Each month, several data releases track house price changes. Case-Shiller, CoreLogic, the Federal Housing Finance Agency (FHFA), the National Association of Realtors (NAR) and others report monthly sales-price trends, and the Trulia Price Monitor reports trends in asking prices, a leading indicator of sales prices. These indices often show different trends even for the same time period. Some of the differences among these indices are well-known, such as the fact that FHFA’s traditional index is based on transactions involving conforming, conventional Fannie Mae & Freddie Mac mortgages, while other indices (including the newer FHFA expanded-data index) cover a broader set of homes. But other, more technical differences help account for why some indices go up while others go down, including how they handle:
• The mix of homes listed and sold.
• Seasonal patterns in home prices.
• Weighting of homes and metros.
How much do these issues really matter for price trends? A lot, it turns out. In constructing the Trulia Price Monitor, we (1) adjust for the mix of homes listed, (2) adjust for seasonality, and (3) “weight” homes equally so that our national trend best represents what’s going on with the typical home in the largest 100 metros. Using this approach, we found that asking prices nationally rose 0.2% year-over-year and 1.9% quarter-over-quarter in April.

The Waltz of the Zombie Banks - It’s the same everywhere. The banks are keeping houses off the market to trick people into believing that prices have hit bottom. But prices haven’t hit bottom, in fact, they still have a long way to go. So, what’s  going on here; what do the banks hope to gain by withholding supply? Here’s a clip from an article in OCHousing News that helps to explain: “Lenders hope they can solve all their problems by making the housing market hit bottom. If prices bottom, people who bought at the bottom gain equity with rising prices, and they in turn reignite the move-up market which will allow the banks to sell their high-end shadow inventory. Further, rising prices makes for fewer short sales and fewer foreclosures and distressed sellers become equity sales. Rising prices would be a panacea for lenders, which is why the full weight of our government and the federal reserve is working to make house prices go back up. …. they hope they can create an artificial bottom and momentum to carry them through the liquidation of their distressed inventory.” (“11.8% of all loans at least 30 days past due or in foreclosure”, OCHousing News) Bingo. The banks want to make it appear as though prices have stabilized, because, once they stabilize, then potential buyers will emerge from their bunkers and go on another spending spree. That, in turn, will allow the banks to offload more of their distressed properties at minimal cost.

The Housing Recovery: An Update - Comparing three key measures of housing activity through April on a year-over-year basis shows that the trend is still up. Housing starts, new one-family houses sold, and newly issued building permits were higher last month by roughly 10% to 30% vs. their year-earlier levels. Even better, the growth rates have been climbing for a year or so. It's not a smooth revival--it never is--but it's hard to miss the general change for the better. In addition, existing home sales rose in April and remain above year-ago levels as home prices continued to rise, the National Association of Realtors reports. No one will confuse the recent numbers with a healthy market or robust growth. Once you consider the deep and prolonged correction that real estate has endured over the last six years, it's clear that the market is still digging itself out of a very deep hole. And the digging will go on for some time, probably for years. But the light at the end of the tunnel, if we can call it that, is the growing recognition that housing is no longer a negative overall for the broader economy.

Quarterly Housing Starts by Intent compared to New Home Sales - We can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The Q1 2012 quarterly report was released this week and showed there were 77,000 single family starts, built for sale, in Q1 2012, and that was below the 83,000 new homes sold for the same quarter (Using Not Seasonally Adjusted data for both starts and sales). This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale. Single family starts built for sale were up about 17% compared to Q1 2011. Usually Q2 is the strongest quarter seasonally, and single family starts, built for sale, will probably be close to 100 thousand in Q2 - the highest level since 2008. Owner built starts were up 30% year-over-year from a record low in Q1 2011. And condos built for sale are still near the record low. The 'units built for rent' has increased significantly and is up about 41% year-over-year. The second graph shows the difference (quarterly) between single family starts, built for sale and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes increased. In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory they had built up in 2005 and 2006.

Historically High Housing Affordability Will Play A Major Role in the Housing Rebound This Year - The chart above shows one measure of housing affordability over time by displaying the monthly mortgage payments (adjusted for inflation) for a median-priced new home (Census data here) financed at the prevailing 30-year mortgage rate in each month back to January 1978, assuming a 20% down payment.  Payments today for a $234,500 median-price new home purchased in March with a 20% down payment and a 3.95% fixed-rate 30-year mortgage would be $890.23.  Average monthly mortgage payments have been below $900 for the last eight months going back to last August, and the March payment is about 33% below the average of $1,334 per month over the last 33 years.     During the decade of the 1980s, average monthly mortgage payments according to this measure were $1,627 (in 2012 dollars), almost double the average payment today of $890.  On an annual basis, the increased housing affordability today translates into more than $9,000 in savings compared to the 1980s, which is the same as a $9,000 average increase in household income.  In the 1990s, the average monthly home payment was $1,224, and that would translate into annual savings today of $4,000 at the $890 monthly payment in March. 

How the Housing Crisis Shafted the Next Generation - In sorting through the debris of the financial and economic crisis, some experts say that one of the most harmful and long-lasting effects is the demise of the “generational compact.”  Plummeting home values is one reason children may not live as well as their parents, thus breaking the long-standing assumption that life will be better for the next generation.  There was a time, for example, when parents and grandparents viewed their homes as an asset to be leveraged to send their children and grandchildren to college, or to help them to buy their own homes after graduation.  At the same time, state and local support for higher education helped to keep publicly supported college costs manageable for most Americans.  But now, the intergenerational connections that long defined the American Dream have been stretched to their limits, pitting seniors against young people, whites against blacks and Hispanics, and the wealthy against the poor, according to experts. “Today, students graduate burdened with debt,  homeowners owe more on their homes than they are worth, and public infrastructure is crumbling,”

Will The Student Debt Burden Depress The US Housing Market For The Foreseeable Future? - There is every reason to believe so.  On the one hand, after years of mortgages being granted without down payments, those have been reimposed along with much stricter standards regarding analysis of credit worthiness of mortgage borrowers in the wake of the collapse of the housing bubble.  However, the student debt burden has now reached a record high in excess of $1 trillion total, with many recent grads unable to get jobs that will allow them to begin dealing with their accumulated burdens in a serious way, and even some of their parents and grandparents burdened with paying these.  These burdens are especially great for the most recent grads, who are very unlikely to be able to buy houses for the foreseeable future. It is worth noting how alone the US is in having this level student debt burden.  It is clearly the result of our having by far the highest levels of tuition of any country in the world, substantially driven in more recent years by major cutbacks in state aid in for public colleges and universities.  In many nations college education remains free, and in most others the tuitions are all but nominal.   So, the US has a uniquely substantial drag around its younger population that will make large portions of its younger population unable to buy homes for a long time to come.  Forget any serious "recovery" of housing prices anywhere in the US anytime soon.

US Inflation Data: Seasonally Adjusted CPI Shows Zero Change for April - The headline number in the latest inflation report from the Bureau of Labor Statistics, the Consumer Price Index for all urban consumers, seasonally adjusted, showed zero change for April 2012. Unrounded data for the month, restated at an annual rate, showed inflation of 0.36 percent, down from 3.54 percent in March. Without seasonal adjustment, the inflation rate for April was 3.7 percent. Motor fuel prices contributed to the difference between the rates with and without seasonal adjustment. Motor fuel prices usually rise in April, but this year, they rose much less than usual. The unadjusted increase was 1.8 percent, but the seasonally adjusted change was -2.6 percent.  Food and energy prices are volatile and usually account for much of the month-to-month change in the CPI. We can remove their effect by taking food and energy out of the CPI. Economists call the result the core inflation rate. The monthly change in core inflation, stated at an annual rate, was 2.92 percent in April, about the same as in March. Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month, whatever they are. The 16 percent trimmed mean CPI increased at an annual rate of 1.94 percent in April, down about half a point from the March rate.

BPP@MIT Annual Inflation Rate Falls Below 2% - The top chart above displays annual inflation rates based on daily online retail price data collected by the Billion Prices Project @ MIT, which just released data through April 30.  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 fell below 2% at the end of April for the first time since early January 2010, more than two years ago.   The bottom chart above shows that since January 2010, MIT's online price index has tracked the Consumer Price Index (NSA) pretty closely.  Despite the fact that the MIT 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, and gives us additional information about the trends in consumer prices and inflation based on real-time online retail prices.

Economic Confidence in U.S. Hits New High: The Gallup Economic Confidence Index broke through a barrier last week, surpassing -17 for the first time in the four-plus years of Gallup Daily tracking in the United States. The index now stands at -16 for the week ending May 20, up from -18 in each of the prior two weeks in May, and from -21 in late April. The Gallup Economic Confidence Index is an average of two components of consumers' psychology: Americans' ratings of current economic conditions and their perceptions of whether the economy is getting better or getting worse. The index has a theoretical maximum of +100, obtained if all Americans say the economy is excellent or good and improving. The index could go as low as -100 if all Americans perceive the economy as poor and getting worse. All of last week's gains occurred because of a slight improvement in Americans' outlook for the economy. Forty-three percent now say the economy is getting better and 52% say it is getting worse, for a -9 net economic outlook score. This is up from -13 the week prior. Americans' net perceptions of current economic conditions are unchanged from the previous week, with 15% describing conditions as "excellent" or "good" and 38% as "poor," for a net economic conditions rating of -23. Notably, Americans' economic outlook is nearly the most positive Gallup has found since January 2008, and the current conditions component is the highest since September 2008. This is despite the Dow Jones Industrial Average's losing more than 900 points in May by the end of last week's polling, including a roughly 450-point decline last week alone.

First Thoughts: Economic pessimism is back - Our new NBC/WSJ poll provides a pretty clear understanding of WHY the two campaigns are pushing the messages we’re seeing on the campaign trail and in their TV ads. For the Romney camp, it wants to channel the public’s economic anxiety and use that as a political weapon against President Obama. And our poll shows that economic pessimism -- after the April jobs report, new worries out of Europe, and stock losses -- is back. Only 33% of respondents believe the economy will get better in the next year, down five points from April and seven points from March. In addition, approval of Obama’s economic handling stands at 43%, down two points from last month, his worst showing on this question since December. And just a third of respondents (33%) think the nation is headed in the right direction, which is consistent with the numbers from our previous NBC/WSJ polls this year.

Consumer Sentiment at Highest Since Late 2007 - U.S. consumers ended May feeling the most upbeat about the economy since late 2007, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index increased to 79.3 in its final-May reading from 77.8 earlier in the month and 76.4 at the end of April, according to an economist who has seen the report. The sentiment index is the highest since October 2007 before the last recession. Economists surveyed by Dow Jones Newswires had expected the final May index to be unchanged at 77.8. The current conditions index was little changed at 87.2 from the preliminary reading of 87.3, while the expectations index increased to 74.3 from 71.7. With gasoline prices slipping, consumers have lowered slightly their price expectations. Within the Michigan survey, the one-year inflation expectations reading slowed to 3.0% in late May from 3.1% in early May and 3.2% in late April. The inflation expectations covering the next five to 10 years fell to 2.7% from 3.0% in early May.

Weekly Gasoline Update: Premium Now Below $4 - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, rounded to the penny, declined over the past week: regular is down four cents and premium is down five. This is the sixth week of declines, with the average price premium finally falling below four dollars a gallon. Regular is up 49 cents and premium 47 cents from their interim weekly lows in the December 19th EIA report. As I write this, still shows five states with the average price of gasoline above $4 and four states with the price above $3.90. California has the highest mainland prices, averaging around $4.31 a gallon. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer:

Gasoline prices add to the holiday cheer - It isn’t time to celebrate relief at the gasoline pump just yet.  So far, the data is encouraging. The average price for a gallon of regular gas has fallen each day since May 16 and stood at $3.676 on Thursday, according to AAA data. That is down 17 cents from a month ago. The latest AAA Daily Fuel Gauge Report. “Oil price increases led to early gas price spikes, and oil price decreases lead to an early drop,” said Jeff Lenard, a spokesman at the National Association of Convenience Stores, a trade group for an industry that sells 80% of the nation’s gas. At the beginning of the year, prospects for record prices above $4 or even $5 were a top concern. But talk of reaching those levels has all but disappeared.

Keystone XL Pipeline Will Raise U.S. Gasoline Prices, Group Says -TransCanada’s proposed pipeline to carry crude from the oil sands of Canada to the U.S. Gulf Coast would increase gasoline prices, according to a report from an environmental group that opposes the project.  The Keystone XL pipeline would divert crude oil from the U.S. Midwest to refineries along the Gulf Coast geared to producing diesel fuel for export, the Natural Resources Defense Council said in a report today. That will decrease the amount of gasoline produced for U.S. consumers and raise production costs, making the fuel more expensive, according to Anthony Swift, author of the report and an attorney with the environmental group.

DOT: Vehicle Miles Driven increased 0.9% in March - The Department of Transportation (DOT) reported: Travel on all roads and streets changed by +0.9% (2.3 billion vehicle miles) for March 2012 as compared with March 2011. Travel for the month is estimated to be 251.4 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven. Even with the year-over-year increase in March, 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 52 months - and still counting. The second graph shows the year-over-year change from the same month in the previous year. This is the fourth consecutive month with a year-over-year increase in miles driven.

Vehicle Miles Driven: The Economic Contraction Continues to Ease - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through March. Travel on all roads and streets increased by 0.9% (2.3 billion vehicle miles) for March 2012 as compared with March 2011. The 12-month moving average increased by 0.14%. This is the fourth month-over-month increase after nine consecutive months of decline (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

ATA Trucking index declined 1.1% in April -- From ATA: ATA Truck Tonnage Fell 1.1% in April - The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.1% in April after increasing 0.6% in March. (March’s gain was more than the preliminary 0.2% increase ATA reported on April 24.) The latest drop put the SA index at 118.7 (2000=100), down from March’s level of 120. Compared with April 2011, the SA index was up 3.5%, better than March’s 3.1% increase. Year-to-date, compared with the same period last year, tonnage was up 3.8%.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 3.5% year-over-year. From ATA: Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010.

What Falling Export Share Says about U.S. Export Competitiveness - NY Fed blog - The U.S. market share of world merchandise exports has declined sharply over the past decade. Throughout the 1980s and 1990s, approximately 12 percent of the value of goods shipped globally originated in the United States; by 2010, this share had dropped to only 8.5 percent. How can we account for the United States’ flagging merchandise export performance? Have U.S. manufacturing firms simply become less competitive than their foreign counterparts?  In a recent article and discussion paper, I investigate possible factors for the fall in the U.S. export share (illustrated below) and, to the extent possible, try to determine the importance that changing productivity of U.S. firms relative to their competitors has played. Productivity, in turn, is a key driver of an exporter’s sales in global markets compared to foreign firms selling similar products. What is at stake if productivity principally explains the evolution of U.S. export share? For one, it may have a bearing on trade policy. For instance, the effectiveness of a policy that opens foreign markets or otherwise promotes U.S. exports depends on the fundamental health and competitiveness of the export sector.

Infrastructure problems hold back U.S. economy – Inland waterways quietly keep the nation's economy flowing as they transport $180 billion of coal, steel, chemicals and other goods each year — a sixth of U.S. freight — across 38 states. Yet, an antiquated system of locks and dams threatens the timely delivery of those goods daily.Locks and dams raise or lower barges from one water level to the next, but breakdowns are frequent. For example, the main chamber at a lock on the Ohio River near Warsaw, Ky., is being fixed. Maneuvering 15-barge tows into a much smaller backup chamber has increased the average delay at the lock from 40 minutes to 20 hours, including waiting time. The outage, which began last July and is expected to end in August, will cost American Electric Power and its customers $5.5 million as the utility ferries coal and other supplies along the river for itself and other businesses, says AEP senior manager Marty Hettel. As the economy picks up, the nation's creaking infrastructure will increasingly struggle to handle the load. That will make products more expensive as businesses pay more for shipping or maneuver around roadblocks, and it will cause the nation to lose exports to other countries — both of which are expected to hamper the recovery.

The 2012 Durable Goods Benchmark Revisions -Tomorrow morning the Census Bureau will release the Advance Report on April Durable Goods, and I'll post my updates shortly thereafter. The new report will be based on the benchmark revisions published in the Census Bureau on May 18th (available here in PDF format). The revisions are substantial, as I'll illustrate below. But first, let's get a sense of the relative size of durable goods new orders as compared to GDP. Here is a chart showing how much of nominal GDP is attributable to durable goods new orders. As we can readily see, durable goods is a rather tiny part of GDP. And particularly interesting is its decline over time. Here is a similar chart showing the relationship between durable goods and Personal Consumption Expenditures (PCE). The series is a bit noisier because it is based on monthly data rather than the quarterly data of the GDP version.  Now let's compare the pre- and post-benchmark revision data from 2000 through March 2012. I've added monthly markers to facilitate the comparison. The table on the chart highlights the magnitude of the revision. The post-revision data gives us a deeper trough, 42% off the 2007 peak, and puts it a month earlier in March 2009. The recovery is markedly stronger in the revised series. The percentage change from the 2009 trough to the present went from a rise of 36.3% to 52%. In fact, if we compare the pre- and post-revision recoveries to their interim highs, which occurred in December 2011, the change is from a 44.6% rise to a post-revision 63%.

April Was Another Weak Month For Durable Goods Orders -  New orders for durable goods suffered another sluggish month in April, the Census Bureau reports. Although orders overall edged up last month by a slim 1.5%, the April report follows a sharp 3.7% fall in March. Nonetheless, last month’s slight gain was enough to boost the annual pace of new orders a bit vs. the previous annual reading. That’s hardly a game changer, but the gain at least leaves room for another month of debate about whether durable goods orders--a key leading indicator--are giving way to the dark side of the business cycle. Looking at the numbers on a monthly basis clearly shows that recent history has roughed up the trend. Is this a smoking gun for the future weakness in the broader economy? Maybe, although some analysts aren’t yet ready to declare that the game is over.

Durable Goods Orders Up 0.2%, But Below Expectations - The May Advance Report on April Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in April increased $0.3 billion or 0.2 percent to $215.5 billion, the U.S. Census Bureau announced today. This increase, up two of the last three months, followed a 3.7 percent March decrease. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders increased 1.2 percent.  Transportation equipment, also up two of the last three months, had the largest increase, $1.3 billion or 2.1 percent to $62.2 billion. This was due to motor vehicles and parts, which increased $2.3 billion. Download full PDF New orders at 0.2 percent came in below the consensus estimate of 0.3 percent. The ex-transportation -0.6 percent was below the consensus forecast of 1.0 percent. If we exclude both transportation and defense, the core durable goods orders rose 0.8 percent in April following a 0.8 percent decline in March, and a 0.8 percent increase in February. In other words, the trend over the past three months has been relatively flat. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

The ''Real'' Goods on the Latest Durable Goods Orders - Earlier this morning I posted an update on the May Advance Report on April 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:

Richmond Fed: May Manufacturing Index Declines - Economic activity among manufacturers in the central Atlantic region is slowing this month, the Federal Reserve Bank of Richmond reported Tuesday. The service sector reported falling revenue this month. Employment improved in both sectors.The bank’s manufacturing general-business index fell to 4 from 14 in April. Numbers above zero indicate expanding activity.Last week, the New York and Philadelphia Feds reported a split decision for area factory activity in May. New York manufacturers are busier than expected this month, but Philly factories report contractionary conditions. The Richmond subindexes generally deteriorated in May. Its shipment index plunged to 0 from 18 in April, and the new orders index fell to 1 from 13 last month. The employment index, however, improved to 16 from 10.

Kansas City Fed Reports Rebound in Region’s Manufacturing - Manufacturing activity in the Federal Reserve Bank of Kansas City‘s district this month recovered all the ground lost in April, according to a report released by the bank Thursday. The Kansas City Fed’s manufacturing composite index–an average of the indexes covering production, new orders, employment, delivery times and raw-materials inventories–rebounded to 9 in May after falling to 3 in April from 9 in March. Readings above zero denote expansion. On a year-over-year comparison, the composite index increased to 27 from 24. Recent readings on manufacturing have been mixed. The Kansas City Fed survey follows results from other regional Fed banks. The New York Fed reported an acceleration in its region’s factory activity, but the Richmond Fed and Philadelphia Fed reported weakness.

Kansas City Fed manufacturing index "Rebounds", "Flash PMI" shows slower expansion - From the Kansas City Fed: Growth in Tenth District Manufacturing Eased Further but Activity Remained Expansionary Growth in Tenth District manufacturing activity rebounded in May, and producers were more optimistic than in previous months. The majority of producers reported stable or increasing capital spending plans in the next six to twelve months, with very few anticipating a decrease. The month-over-month composite index was 9 in May, up from 3 in April and equal to 9 in March ... In contrast, the employment index eased slightly from 12 to 8.  The regional manufacturing surveys have been mixed in May. The NY (Empire State) and Kansas City Fed surveys showed faster expansion, but the Richmond Fed showed slower expansion. And the Philly Fed survey showed contraction.   Also for manufacturing, the new Markit Flash PMI showed slower expansion. From Markit: PMI falls to three-month low, signalling slower rate of manufacturing expansion The May Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated a solid improvement in U.S. manufacturing sector business conditions, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. However, with the seasonally adjusted PMI falling from 56.0 in April to 53.9, the headline PMI nonetheless signalled the weakest expansion in three months.

New Gauge Shows U.S. Factory Growth Slowing - A new gauge covering the U.S factory sector shows activity slowing in May. The flash purchasing managers’ index compiled by data provider Markit dropped to 53.9 in May from 56.0 in April, according to an economist who has seen the numbers. The Markit report said the index is the lowest since February. Markit has been reporting PMIs for other global economies, but it is adding the U.S. to “make the Flash series the first snapshot of global manufacturing operating conditions every month,” according to a company press release announcing the new report. In May, the subindexes covering output, orders and employment slowed although they remain above 50, meaning expansion. While the Markit indexes are followed in other nations, U.S. economy-watchers have paid more attention to the PMIs reported by the Institute for Supply Management.

Factories begin to shift back to US - Two-thirds of big US manufacturers have moved factories in the past two years, with the most popular destination being the US, according to a survey being released on Monday by Accenture, the consultants. The report provides some of the first industry-wide empirical evidence of “reshoring,” the trend of jobs once outsourced to low-cost emerging economies being brought back to the US.  Although the subject has received much attention, with General Electric the most high-profile example, most of the evidence so far has been isolated and anecdotal.  President Barack Obama has proposed tax incentives for companies that move their overseas operations back to the US and tax penalties for those that do not.  “If you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it,” Mr Obama said in this year’s State of the Union address. “No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.” Some 65 per cent of the senior executives questioned by Accenture said they had moved their manufacturing operations in the past 24 months, with two-fifths saying the facilities had been relocated to the US. China was the second destination for relocated factories, with 28 per cent, followed by Mexico with 21 per cent.

U.S. Manufacturing Makes a Comeback - Brookings - Amid continuing mixed signals about the economy, one notable bright spot is the revival of U.S. manufacturing. The surprising strength of this once-battered sector holds promise for reenergizing the U.S. economy overall, and despite troubles in Europe, its new vigor may provide a boost to the global economy. In the latest “How We’re Doing” Index, a team of scholars at the Brookings Institution looked at the past five quarters of economic data to explore how growth in manufacturing is helping to support the nation’s fragile economic recovery — with a particular emphasis on key metropolitan areas in a 21st century dominated by high-tech industries. The latest broad economic reports have been somewhat disappointing. The economy grew at a 3 percent rate in the fourth quarter of 2011, but the advance estimate for the first quarter of 2012, 2.2 percent, was lower than expected. Monthly jobs growth averaged more than 250,000 positions from December through February, but the increase slowed to 154,000 jobs in March and the economy added only 115,000 positions in April. The unemployment rate is still inching downward, but it remains above 8 percent. Stronger payroll growth will be needed for continued improvement.

Structural unemployment: Jobs for the long run - UNEMPLOYMENT is high, and the longer people are unemployed the longer they are likely to stay that way. Eventually, they may become discouraged and drop out of the labour force. So what can be done? The economic infighting about whether unemployment is structural (and there’s a new natural rate) or cyclical (just unemployment brought on by weak demand from the recession) is important; each requires different policy. It’s impossible to know precisely how much unemployment is structural and how much is cyclical, and probably there’s some of both right now. Cyclical unemployment resulting from weak demand is amenable to expansionary government spending or monetary policy. Structural unemployment is harder to fix. Structural joblessness results from things like skills mismatches, and policy to address such mismatches is inherently longer-term in scope, involving education and encouraging innovation. Expansionary policy can't reduce structural unemployment; when that's all that's left, more expansion generates nothing but rising inflation.

High Unemployment: Cyclical or Structural? | Brookings - Unemployment is edging down, but the fraction of the unemployed who have been idle more than a year remains near a record high. In the first three months of the year about 30% of the unemployed – more than 3.9 million people – had been jobless for a year or longer. Before the Great Recession the post-war record for long-term unemployment was set in Ronald Reagan’s first term. Even at the worst stage of that slump, however, only about 14% of the unemployed were out of work for more than a year. The increase in long-term unemployment has raised the specter of a permanent jump in the unemployment rate, one that is linked to a surge in structural unemployment. Most economists distinguish between cyclical unemployment, which rises and falls over the business cycle, and structural unemployment, which persists even when the economy has been expanding for years. Because high unemployment has lasted so long, many observers worry that structural unemployment has now become deeply embedded in the nation’s job market. If true, what would this mean? It would imply that traditional remedies for high joblessness have become less effective. Congress cannot accelerate the pace of the recovery by spending more or taxing less. The Federal Reserve cannot safely push the unemployment rate down to 4½%, using either standard or nonstandard monetary policies.

Unemployed Burn as Fed Fiddles in Debate Over Natural Rate: Jobs - Federal Reserve officials and economic advisers are debating far-reaching differences on whether to accept a jobless rate that doesn’t fall much below 6.5 percent or act more aggressively to reduce it to 5 percent or less.  David Horowitz says he’s “not enough of an economist” to know who’s right. He just wants a full-time job again.  As for the policy makers’ debate on joblessness, “if they’re declaring that it’s a permanent situation, then that does make me angry,” he said. An approach that doesn’t put job creation first “puts a lot of people out of work and makes our educations worthless, and doesn’t give much optimism about working hard and moving up.”  Horowitz and millions of other unemployed and underemployed people are searching for jobs at the same time policy makers, such as San Francisco Fed President John Williams, and economists, including former Obama administration adviser Jared Bernstein, ponder whether the current 8.1 unemployment rate will ever drop to the 5 percent level where it stood when the longest and deepest recession since the Great Depression began.

Weekly U.S. Jobless Aid Applications Dip to 370,000 — The number of people seeking unemployment benefits changed little last week, signaling modest job growth. The Labor Department said Thursday that weekly applications for benefits dipped by 2,000 to a seasonally adjusted 370,000. Applications have leveled off this month after declining from April’s five-month high of 392,000. The four-week average, a less volatile measure, has also dropped — it was 370,000 last week. The lower level indicates hiring could pick up in May from April’s sluggish pace. When applications drop below 375,000 a week, it typically suggests hiring is strong enough to lower the unemployment rate.

Is The Decline In New Jobless Claims Losing Momentum? - For the fourth time in as many weeks, today’s update on initial jobless claims shows that new unemployment filings are hugging the 370,000 neighborhood on a seasonally adjusted basis. The fact that claims aren’t rising is an encouraging sign, of course. But the resistance at the 370,000 level, if it rolls on, will raise more questions about the labor market’s capacity for growth.  For the moment, however, the case for optimism is still stronger. New claims last week remained near the lowest levels since the recession was formally declared null and void as of mid-2009. That’s a sign that suggests job growth continues to forge on. Indeed, one good report and new claims could touch a new post-recession low.

The Current Post-Recession Labor Market in Historical Perspective (3 graphs) In terms of the speed of the unemployment rate decline after the recession unemployment peak, we are not doing that badly: In terms of the speed of the recovery of the labor-force participation rate after the recession unemployment peak, we are doing uniquely badly indeed: And the same holds for the recovery of the employment-to-population ratio:

American Workers: Shackled to Labor Law -- In These Times: Republicans hate the National Labor Relations Board. But they’re not the only ones. In speeches to workers and testimony in Congress in the ’80s and ’90s, then-AFL-CIO President Lane Kirkland repeatedly declared that union members would be better served by “the law of the jungle.” Some union presidents agreed, including Richard Trumka, who now heads the AFL-CIO. In 1987, Trumka called for abolishing both the law’s “provisions that hamstring labor” and “the affirmative protections of labor that it promises but does not deliver.” In other words, it’s not just Mitt Romney who argues the National Labor Relations Board – which interprets and enforces labor law – does more harm than good. That’s in part because the National Labor Relations Act (NLRA), as amended by Congress and interpreted by the courts, bans or restricts labor’s most effective tactics. The occupations of workplaces that fueled momentum for the NLRA, passed by Congress in 1935, are now illegal under it. The aggressive strikes – shutting down workplaces or even entire cities – that forged the modern labor movement have largely been replaced with strikes that are essentially symbolic.

Unhappy Homemakers: Which Moms Are Really Choosing to Stay Home? - Some new research came out late last week on stay-at-home mothers that’s bound to create a new battleground in the so-called mommy wars. Gallup reports that stay-at-home mothers are more likely to experience depression, sadness, and anger than their counterparts who work for pay outside the home. Of the more than 60,000 women it interviewed, “women with young children at home who are employed for pay…report experiencing sadness and anger a lot of the day ‘yesterday,’” it says. Meanwhile, the emotional state of a mother who’s employed is about as strong as that of a working woman who doesn’t have children at home. It would seem, then, that it’s the staying at home part that’s causing the negative mental state. What’s interesting, however, is how this breaks down by income. The traditional image of the stay-at-home mother is the middle- to upper-middle class woman whose family income allows her to choose to stay out of the workforce and be with her children full-time. (Exhibit A: Ann Romney.) But as I wrote previously, the face of stay-at-home mothers is changing. It seems they are increasingly lower-educated, foreign-born Hispanic women who may not have employment options that outweigh the cost of putting their children in childcare. It may be these women who are skewing the numbers on happiness.

Social mobility is about twice as great in Australia and Canada than in the United Kingdom and the United States compared -  I made the opening presentation offering an overview, and here it is as a pdf: Social Mobility and Social Institutions . My analysis is based upon three facts that lead to three broad conclusions. First, the degree of social mobility—as measured by the extent to which a son’s earnings are related to his father’s earnings—varies a good deal across the rich countries, and this variation should be a public policy concern. Second, this variation occurs in a particular way: mobility is higher where inequality is lower.  This relationship between social mobility and inequality may be seductive for policy makers: tax-transfers might be seen as solving two problems at once, lowering inequality in the here and now, and lowering the degree to which it is transmitted across the generations. But inequality is not the sole cause. It is also a signal of a whole set of forces associated with how families, markets, and government policy interact to determine the life chances of children. Third, this said, in an era of growing inequality, the more unequal societies—like the United Kingdom and the United States—will likely not experience more mobility without concerted and effective public policy addressed not just to inequality but also to how families function, how the education system develops the human capital of relative disadvantaged children, and how families interact with a labour market that is increasingly more polarized.

Social mobility and inequality in the UK and the US - Consider this. Among the ten jobs for new graduates that did not exist in the United States ten years ago, as compiled by an intrepid journalist at Forbes, there are a few we would have all guessed: app developer, market data research data miner, and social media manager. But the magazine also listed something called “Educational or Admissions Consultant.” Affluent parents will apparently go to great lengths to get their toddlers into the right pre-school or kindergarten, to say nothing of high school and college. An Admissions Consultant can be paid thousands for help in navigating the testing and interviewing process, particularly if their skills include the right connections with school administrators. Surprising? Not really in a society with ballooning earnings for those at the top. A recent study found that parents are increasingly going the extra mile to give their kids all the extras it takes to get into the Ivy League: so-called “enrichment expenditures” on everything from books, computers, high-quality child-care, to summer camps and private schools have increased in the US from an average of about $3,500 a year in the 1970s to close to $9,000 for those in the top 20% of incomes, amounts that are now almost seven times as great as parents in the bottom 20%.

How Cash Keeps Poor People Poor - Want to help the poor? Start by taking money out of their hands. More specifically, cash—coins and paper bills are the silent enemy of the poor, with costs often out of proportion with their day-to-day convenience. On one level it’s ridiculous to think of cash as problematic; if you have a mountain of paper money you aren’t exactly impoverished. And at times cash feels like exactly what we need. Saying “yes” to cash can feel like saying “no” to overspending and steering clear of big banks, which means also saying “no” to credit card debt, overdraft fees, and Big Brother. The irony of this line of thinking is that most of the people espousing the virtues of cash simultaneously enjoy the safety and cost savings of electronic money. Even those who despise credit cards usually have bank accounts, receive payments via auto-deposit, use stored-value cards for public transit, and more likely than not pay their rent or mortgage, utilities, medical expenses, internet service, hotel bills, and auto insurance by transferring sequences of 1s and 0s between faraway computers. Click. Sure, you may still need a bill or two now and then for Salvation Army Santas, waiters and bellhops. But for the most part, the better off you are the less you need cash, and the easier it is to avoid it.

This Week in Poverty: A Little Help for the Long-Term Unemployed? - There are 12.5 million unemployed people still seeking work in the United States, and over 5 million of them have been looking for work for twenty-seven weeks or longer. These are “the long-term unemployed,” and their prospects for finding employment or getting assistance are rapidly diminishing. The long-term unemployed now make up over 40 percent of all unemployed workers, and 3.3 percent of the labor force. In the past six decades, the previous highs for these figures were 26 percent and 2.6 percent, respectively, in June 1983. Instead of helping these folks weather the storm and find ways to re-enter the workforce, our nation is moving in the opposite direction. In fact, this past Sunday, 230,000 people who have been looking for work for over a year lost their unemployment benefits. More than 400,000 people have now lost unemployment insurance (UI) since the beginning of the year as twenty-five high-unemployment states have ended their Extended Benefits (EB) program. What makes the denial of this lifeline all the more absurd is the reason for it. As Hannah Shaw, research associate at the Center on Budget and Policy Priorities (CBPP), writes, “Benefits have ended not because economic conditions have improved, but because they have not significantly deteriorated in the past three years.” It’s all about an obscure rule called “the three-year lookback.”

How Fast Will States Recover Peak Employment? - A new analysis by the forecasting firm IHS Global Insight shows which states have returned to their peak prerecession employment levels (Alaska, Texas, Louisiana, North Dakota) and offers a forecast of how soon the rest will do so. The optimistic report says that 16 states will regain peak employment by the end of next year, and that all but eight will do so by the end of 2015. Nevada, Michigan and Rhode Island are expected to be the laggards, not achieving peak employment until after 2017. What was the formula for success? “The states in the middle of the country have benefited from not being exposed to the housing boom and bust and also have gotten a kick from strong oil and gas demand,” said Jim Diffley, the chief regional economist at IHS.

Most States Still Years Away From Getting Back Lost Jobs - Most states are still more than two years away from returning to prerecession employment levels, according to a new analysis. Only four states — Alaska, North Dakota, Texas, and Louisiana — have created enough jobs since the recovery to get back to where they were prior to the recession, according to economist Steven Frable of IHS Global Insight. All four of those states have benefited from an energy boom, and Louisiana was starting at a low level of employment after taking a major hit from Hurricane Katrina. Two more states, New York and West Virginia, are expected to return to their prerecession peak later this year, and 10 more should reach the mark next year. But the majority of states still won’t get there until after 2014. Meanwhile, returning to peak employment levels doesn’t necessarily mean jobs markets are healed. In fact, getting back to where a state started doesn’t account for the jobs needed by new entrants to the labor force over the past four years. Eighteen states still are more than 5% below their 2007 employment levels, and the two worst-hit states — Nevada and Michigan — are still more than 10% off their peaks. Frable estimates those two states, as well as Rhode Island which has seen sluggish job growth, won’t return to prerecession peaks until sometime after 2017.

Pennsylvania’s unemployment fund owes feds $3.87 billion - The fund that pays Pennsylvania’s unemployment benefits is running in the red, and lawmakers are grappling with how to remedy that. Compounding matters is that the state owes the federal government $3.87 billion it has borrowed to pay jobless claims because of the recession. There seems to be little disagreement about how to pay back the money: Legislators are likely to pass a bill that will allow the state to float a bond. “This is akin to refinancing your house,” said Pennsylvania Secretary of Labor Julia Hearthway. “It’s the lowest interest rate we’re going to have for years to come.” But there is considerable debate about how to solve the underlying problem: that the fund is paying out more than it takes in. Pennsylvania’s fund “is structurally insolvent,” according to the department’s analysis. In 2011, it paid out $3 billion but collected only $2.7 billion. To fix things, legislators are considering a measure that would reduce the state’s payout by denying benefits to an estimated 48,000 unemployed people a year.

States looking to new tolls to pay for highways (AP) -- Driving onto an Interstate highway? Crossing a bridge on the way into work? Taking a tunnel under a river or bay? Get ready to pay. With Congress unwilling to contemplate an increase in the federal gas tax, motorists are likely to be paying ever more tolls as the government searches for ways to repair and expand the nation's congested highways. Tolling is less efficient and sometimes can seem less fair than the main alternative, gasoline taxes. It can increase traffic on side roads as motorists seek to evade paying. Some tolling authorities - often quasi-governmental agencies operating outside the public eye - have been plagued by mismanagement. And some public-private partnerships to build toll roads have drowned in debt because of too-rosy revenue predictions. Tolls are hardly a perfect solution. But to many states and communities, they're the best option available.

More elderly NYC residents are getting food stamps - The number of New York City residents over the age of 65 receiving benefits through the food stamp program has increased about 30 percent in the weak economy. But advocates say there's still work to be done to make sure the elderly know how to get help. The president of the Queens Interagency Council on Aging, Maria Cuadrado, tells the Daily News ( ) that many people who are eligible are not applying. Advocates say seniors shouldn't let pride stand in the way of getting help.

Financial Armageddon: Wandering the Streets - In "Millions Homeless in US: Report," China Daily details an interesting take on economic conditions in our country: - Millions of homeless people wander around streets in the United States, according to a Chinese report on the US human rights record released on Friday. The Human Rights Record of the United States in 2011, released by the State Council Information Office of the People's Republic of China, said that about 2.3 million to 3.5 million Americans did not have a place that they called home to sleep in the night, and the number of homeless families grew by 20 percent between 2007 and 2010. Over the past five years, the percentage of singles arriving at shelters after living with family or elsewhere in the community has jumped from 39 percent to 66 percent, the report said. There is a simple explanation for this, according to China's largest English language newspaper: The problems concerning human rights were the reflection of the US ideology and political system that ignored people's economic, social and culture rights, and the financial crisis was far from being the sole reason, the report said. Of course, we know this is not true. Right?

Three homeless children under the age of four found in wooden shed in Oregon ...Youngest may be just 8 months old - Three children under the age of four years have been found in living rough with a group of homeless people in a shed in Portland, Oregon. The youngest is estimated to be as young as eight months old, although police are struggling to identify the toddlers. Police officers found the youths in a shed, where the children's voices were heard by a neighbour who alerted the authorities. The officers talked to 'a number of homeless people on the premises' and found the three 'olive-skinned' children, reports CNN. Homeless: Police believe the mother abandoned the kids in the shed the previous night 'While contacting a number of homeless people on the premises, [police] discovered there were three very young children present, all of whom appeared to be under four years of age,' said the authorities.

Our penal system - As we discussed in this blog post, the very high incarceration rates for African-Americans is a uniquely American failure. There are fundamental problems with the US penal system in general, which locks up and puts under parole hundreds of thousands of young men (and women), mostly for non-violent offenses. But the comparison of the incarceration rates of whites and African-Americans, which is shown again in the next figure, is particularly jarring. Almost 5 out of every 100 male African-Americans are in jail, a rate more than five times that of white Americans. Of course, this might all be because African-Americans commit more crime. But history suggests that there is more to it. A recent book by Michelle Alexander, The New Jim Crow: Mass Incarceration in the Age of Colorblindness suggests that the treatment of African-Americans in our penal system is a continuation of Jim Crow politics of the South.

Inmates riot in Mississippi prison, one guard killed - Inmates seized control of a privately owned prison in Mississippi on Sunday after riots broke out, and a guard was killed in the chaos in the low security facility, authorities said. Adams County Coroner James Lee said the 23-year-old guard died of blunt trauma to the head during the riot at the Adams County Correctional Center, a privately owned prison that houses mostly illegal immigrants for the Federal Bureau of Prisons. "This is an ongoing riot that still has not been rectified because the prisoners are in still in charge of the prison," Lee said, speaking at around 9 p.m. local time. The disturbance in the 2,567-bed prison began on Sunday afternoon inside the facility in Natchez, Mississippi, the Corrections Corporation of America, which owns the prison, said in a statement. Photographs of the scene showed white smoke lingering above the prison yard.

Jefferson County Commission votes to skip $15 million bond payment -  The Jefferson County Commission, as expected, voted today to skip a $15 million non-sewer debt payment and use the money for operating expenses. A commission committee last week voted to skip the payment. Today's vote in a regular commission meeting made it official.  County Manager Tony Petelos said the money will allow the cash-strapped county to continue operating through Sept. 30, the end of the fiscal year. The payment, due Oct. 1, will be the second $15 payment on general obligation debt the county has skipped this year. Petelos said the commission will prepare a $180 million fiscal 2013 budget, which is nearly $40 million less than the current fiscal 2012 spending plan and more than $130 million smaller than the fiscal 2011 county budget. The county, which filed for bankruptcy in November, has been forced to slash spending repeatedly and reduce its work force drastically since the Alabama Supreme Court last year threw out its occupational tax because of a technical defect in the way the Alabama Legislature enacted it. The Legislature declined to approve a replacement tax in both its 2011 and 2012 regular sessions.

Half of Detroit’s Streetlights May Go Out as City Shrinks - Detroit, whose 139 square miles contain 60 percent fewer residents than in 1950, will try to nudge them into a smaller living space by eliminating almost half its streetlights. As it is, 40 percent of the 88,000 streetlights are broken and the city, whose finances are to be overseen by an appointed board, can’t afford to fix them. Mayor Dave Bing’s plan would create an authority to borrow $160 million to upgrade and reduce the number of streetlights to 46,000. Maintenance would be contracted out, saving the city $10 million a year. Other U.S. cities have gone partially dark to save money, among them Colorado Springs; Santa Rosa, California; and Rockford, Illinois. Detroit’s plan goes further: It would leave sparsely populated swaths unlit in a community of 713,000 that covers more area than Boston, Buffalo and San Francisco combined. Vacant property and parks account for 37 square miles (96 square kilometers), according to city planners.

The State of Education - Last Monday, May 14th, Governor Jerry Brown of California released the state's revised budget for the 2012-13 fiscal year (FY). The original budget projected a deficit of $9.2 Billion; the revised estimate pushed the gap to $15.7 Billion. The announcement came as something of a shock: a larger deficit was anticipated, but not the magnitude in the revision. In part, the deteriorating fiscal situation reflects the weakness of the California economy. Housing prices remain depressed and job growth anemic. Continued weakness in employment translates into lower personal income and sales tax revenue for the state. The two account for almost 86 percent of California's projected revenues in the coming fiscal year. Relative to FY 2011-12, the budget assumes a better than 6 percent increase in income and sales tax revenues. Any future shortfall obviously will exacerbate the shortfall. If the state's revenue issues are cyclical, then its expenditure issues are structural — and, largely problems of its own doing. Public school funding, in particular, has long been a contentious political issue in California. It is as well a problem which has defied a solution. Until a fix acceptable to all involved is adopted, K-12 financing will continue to consume a disproportionate share of general fund expenditures, squeezing other initiatives (higher education) in the process.

Record number of school districts in state face bankruptcy - Pummeled by relentless budget cuts, a record number of California school districts are facing bankruptcy, state Supt. of Public Instruction Tom Torlakson announced Monday. The Inglewood Unified School District and 11 others -– most in northern California -- are currently not able to pay their bills this school year or next, according to a biannual report on the financial health of the state’s 1,037 school systems compiled by the state Department of Education. An additional 176 school districts may not be able to meet their financial obligations. All told, the financially troubled districts serve 2.6 million children. And the picture could dramatically worsen if initiatives to raise taxes for public schools by Gov. Jerry Brown and others fail to pass in November, officials said. Education officials blame much of the crisis on a double blow by the state: budget cuts amounting to 20% over the last three years and the deferment of millions of dollars owed to schools but not dispersed until months later. 

More than 1500 school layoffs approved despite emotional protests - The San Diego Unified School District Board of Education Tuesday night adopted the decision of an administrative law judge that upheld 1,534 layoff notices sent to employees, despite about two dozen parents, students and staff who spoke out against the cuts. Notices were issued to 1,656 employees in March to help close a $122 million budget gap for the next school year. Some were part-time employees, so the layoff list was comprised of the equivalent of 1,628 full-time positions who would be laid off at the end of this school year. About 1,500 of the workers appealed their inclusion on the list. Administrative Law Judge Roy Hewitt ruled that school districts are given "wide discretion" in budget setting and layoff notices. "We do not have enough money to pay all of our employees next year,"

Coverage of Changing Texas Schools Ignores the Racist Elephant in the Room - Last week, the San Antonio Express-News did a piece on the changing face of Texas schools. It seems the system has gotten noticeably browner and poorer and now we have the undesirable task of figuring out how to get these brown, underperforming people educated.Watching policymakers, journalists and statisticians dance around the obvious reason for underperformance from poor students of color would be funny if it weren’t so infuriating.  First off, let’s look at their home life. As people of color, these kids’ parents are subjected to a higher unemployment rate than their Anglo counterparts. According to the Economic Policy Institute, the unemployment rate for whites in Texas is at roughly 6.5 percent. For Latinos it’s 9 percent and for African-Americans it’s a whopping 15.5percent. Texas Hispanics not only make less money on average than Anglos, they make less money than Hispanics living in other states, according to a report published by the Federal Reserve Bank of Dallas. As this year’s redistricting debacle has taught us, minorities in Texas have been historically discriminated against in the political process and still have to fight just to gain fair representation in government. And people of color also have a higher chance of being targeted by police. Six out of every seven law enforcement agencies in Texas reported searching blacks and Latinos at higher rates than Anglos despite those searches turning up nothing 98 percent of the time.

Ignoring the Crisis: Philadelphia Schools Are Crumbling - Last week, the city of Philadelphia's school system announced that it expects to close 40 public schools next year and 64 schools by 2017. The school district expects to lose 40 percent of its current enrollment and thousands of experienced, qualified teachers. But corporate media in other cities made no mention of these massive school closings - nor of those in Chicago, Atlanta or New York City. Even in the Philadelphia media, the voices of the parents, students and teachers who will suffer were omitted from most accounts. It's all about balancing the budgets of cities that have lost revenues from the economic downturn. Supposedly, there is simply no money for the luxury of providing an education for the people. Where will those children find an education? Where will the teachers find work? Almost certainly in an explosion of private sector "charter schools," where the quality of education - from the curriculum to books to the food served at lunch - will be sacrificed to the lowest bidder, and teachers' salaries and benefits will be sacrificed to the profits of the new private owners, who will also eat up many millions of dollars of taxpayer subsidies.

Flint school district laying off hundreds of teachers - The Flint school board has voted to lay off 237 teachers as part of an effort to eliminate an estimated $20 million deficit for the coming year. The board voted Tuesday to lay off 108 elementary and 129 secondary school teachers. Earlier this month, ( ) says the board voted to close both middle schools, along with Bunche and Summerfield elementary schools. Board documents say the district selected teachers for layoff based on recent evaluations. Statewide teacher tenure legislation last year put an end to seniority-based layoffs.

Metro school districts struggle with budget shortfalls -ATLANTA - As the school year comes to an end, districts all over the metro area are struggling to figure out how to pay next year's bills. DeKalb residents will get their chance to speak out about their district's plan later on Tuesday. The school district is facing major cuts due to more than a $70 million deficit. Residents will be able to voice their concerns or support for a plan that would increase class size by three additional students, raise taxes by 2 mils and cut the district office personnel, budget and overtime. DeKalb isn't the only district having to make hard decisions. Cobb's board balanced its book in part by shortening the school year. Faced with a $62 million shortfall, the district will impose cuts next year including reducing the school year from 180 to 177 days. Class size will increase by an additional two students and 350 teachers will be eliminated. School officials say they don't have much choice. Tax collections continue to be down and the state is giving the district less money. They say the hard decisions had to be made to balance Cobb's books.

Harrisburg School District debates job cuts, curtailing bus service - School administrators said Monday the shortfall for next year’s Harrisburg School District budget is now just shy of $13 million, lower than the previous estimate of $16 million. Administrators say the change is largely attributed to increased federal revenues. Programs such as kindergarten, arts education and busing remain on the chopping block. Last week, school leaders floated the idea of eliminating bus service. At Monday’s board meeting business manager Jeff Bader said the move would save the district about $50,000. The district would still be obligated to bus certain groups of students, including those with special needs and those attending charter schools. Some board members balked at the idea, saying the increased burden on the community was not worth the potential savings.

Scholarship Funds, Meant for Needy, Benefit Private Schools… When the Georgia legislature passed a private school scholarship program in 2008, lawmakers promoted it as a way to give poor children the same education choices as the wealthy. The program would be supported by donations to nonprofit scholarship groups, and Georgians who contributed would receive dollar-for-dollar tax credits, up to $2,500 a couple. The intent was that money otherwise due to the Georgia treasury — about $50 million a year — would be used instead to help needy students escape struggling public schools. That was the idea, at least. But parents meeting at Gwinnett Christian Academy got a completely different story last year. “A very small percentage of that money will be set aside for a needs-based scholarship fund,” Wyatt Bozeman, an administrator at the school near Atlanta, said during an informational session. “The rest of the money will be channeled to the family that raised it.” A handout circulated at the meeting instructed families to donate, qualify for a tax credit and then apply for a scholarship for their own children, many of whom were already attending the school. “If a student has friends, relatives or even corporations that pay Georgia income tax, all of those people can make a donation to that child’s school,” added an official with a scholarship group working with the school.

Students will be tracked via chips in IDs - Northside Independent School District plans to track students next year on two of its campuses using technology implanted in their student identification cards in a trial that could eventually include all 112 of its schools and all of its nearly 100,000 students. District officials said the Radio Frequency Identification System (RFID) tags would improve safety by allowing them to locate students — and count them more accurately at the beginning of the school day to help offset cuts in state funding, which is partly based on attendance. Northside, the largest school district in Bexar County, plans to modify the ID cards next year for all students attending John Jay High School, Anson Jones Middle School and all special education students who ride district buses. That will add up to about 6,290 students.

Obama Campaign Proud of Bashing Teachers’ Unions - It looks like we’re going to have six more months of the Obama campaign trying to prove that their candidate has conservative values and believes in conservative ideas. That’s what we can learn from the latest fact check from Deputy Campaign Manager for Obama 2012 Stephanie Cutter. FACT CHECK: Romney off on Obama’s relationship with teachers’ unions; it’s anything but cozy: The link takes you to a story at the Washington Post with the same name as what Cutter quoted approvingly. And I can’t say that anything in the Post’s fact-check is wrong. It makes the case that President Obama has promoted ideas and instituted policies that teachers’ unions oppose, and that’s true. Obama has promoted initiatives that encourage districts to tie teacher evaluations to student performance and to expand the number of charter schools — actions the teacher unions have long been against, and which Romney himself promoted Wednesday in a speech in Washington outlining his education platform [...]

Romney proposes steps to overhaul public education  -- Mitt Romney proposed a series of steps to overhaul the public education system, reigniting the debate over school choice as his campaign intensifies its effort to introduce the presumptive Republican presidential nominee to a general-election audience.The education plan, detailed in a speech today in Washington, would create a voucher-like system to give low- income and disabled students federal funds to attend charter schools, private institutions and public schools outside their district.

The Bomb Hidden in Mitt Romney's Education Plan - If the federal government offered you some free money to buy supplemental education services for your kid, you'd take the money right? After all, why not? That's common sense, but it also adds up to a huge bomb lurking inside the education policy white paper released by the Romney campaign yesterday (PDF).  The basic idea of Romney's thinking on K-12 education is to walk away from the standards-and-accountability approach that's dominated in both the Bush and Obama administrations and double down on the choice thread of reform. Romney's white paper also doesn't say anything about levels of federal education spending, but given his overall budget commitments this is likely a big difference between his approach and Obama's. But in structural terms, most of Romney's choice proposals are only incrementally different from trends over the past decade. But then there's this: "Eligible students remaining in public schools will also have the option to use federal funds to purchase supplemental tutoring or digital courses from state-approved private providers rather than receiving Title I services from their district."

Chart of the day, college-dropout edition - In March 2010, the unemployment rate for high-school graduates 25 years or older peaked at 11.9%. Since then, it has dropped 4.2 percentage points — a pretty impressive showing, in just two years — and now stands at 7.7%. In the same period, the unemployment rate for college dropouts 25 years or older also fell, from 9.5% to 8.0%. But that drop, of 1.5 percentage points, is much smaller. And now college dropouts have a higher unemployment rate than their friends who never went to college at all. And these two series are very comparable: both sets include about 34 million people. Now these numbers aren’t seasonally adjusted, and you can see that the unemployment rate for high-school graduates is pretty bumpy. As a result, it might well rise again soon. But the big picture is clear: unemployment among college dropouts is proving much more stubborn than it is among most of the rest of the population.

College Graduates, Dropouts Now Account For A Majority Of Jobless 25+, First Time Ever - For the first time in history, the number of jobless workers age 25 and up who have attended some college now exceeds the ranks of those who settled for a high school diploma or less. Out of 9 million unemployed in April, 4.7 million had gone to college or graduated and 4.3 million had not, seasonally adjusted Labor Department data show. That's a swing of more than 2 million since the start of 1992, early in another jobless recovery, when 4.1 million who hadn't gone to college were jobless vs. 2.3 million jobless who had gone. Mostly, this dramatic shift reflects broad demographic forces. A greater share of the population has attended college, at least for a time. Meanwhile, older Americans who were less likely to pursue higher education are exiting the work force. In 2011, 57% of those 25 and up had attended some college vs. 43% in 1992. Those without a high school diploma fell from 21% to 12% over that span. But along with the increasing prevalence of college attendance has come a growing number of dropouts, who have left school burdened by student loan debt but without much to kick-start their careers.

Young, Educated and Seeking Financial Security - Above all other major life goals, today’s college students and recent graduates are looking for financial security. That’s one finding from a report released today from the Heldrich Center for Workforce Development at Rutgers University. In February the center surveyed juniors, seniors and graduate students at four-year colleges — as well as working college graduates of earlier generations — about life and career. Among the more interesting questions was one about the importance of various life goals. While young people, and particularly today’s generation of young people, are generally thought to be more interested in pursuing their ideals and passions than money, 91 percent of college students and 95 percent of millennials (here referring to college graduates between ages of 21 and 32) said that being financially secure was either essential or very important to them. Perhaps shaken by the terrible economy they are graduating into, these young Americans are about as concerned with lifetime financial security as boomers and Gen Xers are, as you can see in the chart above.

The Good News and the Bad News About Public Colleges - If anyone could be described as the poster child for public colleges, it would have to be me. I'm a graduate of SUNY-Binghamton and CUNY-Graduate Center. My brother has a BA from the University of Virginia. My sister attended SUNY-Binghamton. My husband has degrees from Miami University, Cleveland State University, and CUNY-Graduate Center. His father also attended Miami University.  My husband and I collectively taught at four different public colleges.  My parents were the first in their families to attend college and both attended public universities.  The affordable tuition and excellent education at these state schools were critical for the success of my family, as well as millions of working class and middle class Americans.  So, what's the state of state colleges today? Are public colleges still taking care of their core constituency?  Last week's New York Times article on student loan debt showed that students from state colleges had lower debt burdens than private college students. Tuition was half the price of private schools. (Please play with the Times' interactive graph.) The Times also reports that all public colleges have been getting more selective, as students are priced out of private schools.

The Commencement Address That Won't Be Given - Robert Reich - Members of the Class of 2012, As a former secretary of labor and current professor, I feel I owe it to you to tell you the truth about the pieces of parchment you're picking up today. You're f*cked. Well, not exactly. But you won't have it easy. First, you're going to have a hell of a hard time finding a job. The job market you're heading into is still bad. Fewer than half of the graduates from last year's class have as yet found full-time jobs. Most are still looking. That's been the pattern over the last three graduating classes: It's been taking them more than a year to land the first job. And those who still haven't found a job will be competing with you, making your job search even harder. Contrast this with the class of 2008, whose members were lucky enough to get out of here and into the job market before the Great Recession really hit. Almost three-quarters of them found jobs within the year. You're still better off than your friends who didn't graduate. Overall, the unemployment rate among young people (21 to 24 years old) with four-year college degrees is now 6.4 percent. With just a high school degree, the rate is double that. But even when you get a job, it's likely to pay peanuts. Last year's young college graduates lucky enough to land jobs had an average hourly wage of only $16.81, according to a new study by the Economic Policy Institute. That's about $35,000 a year -- lower than the yearly earnings of young college graduates in 2007, before the Great Recession. The typical wage of young college graduates dropped 4.6 percent between 2007 and 2011, adjusted for inflation.

College Presidents vs. College Football Coaches:

Peter Thiel on 60 Minutes: $1 Trillion in Student Debt is $1 Trillion in Lies About Higher Education - "A billionaire's program to pay students with promising ideas to drop out of college and develop those concepts for the good of all is attracting students and critics. Internet business pioneer Peter Thiel thinks his program is a viable alternative to what he sees as a largely ineffective university system where costs far outweigh benefits.  Morley Safer takes a look at the controversial program and the increasingly expensive university system that helped spawn it on 60 Minutes, this Sunday May 20 at 7:00 p.m. ET (watch preview above) "We have a bubble in education, like we had a bubble in housing...everybody believed you had to have a house, they'd pay whatever it took," says Thiel. "Today, everybody believes that we need to go to college, and people will pay-- whatever it takes." And that's way too much these days says Thiel, when people without a degree can make as much as those with an advanced one.  "There are all sorts of vocational careers that pay extremely well today, so the average plumber makes as much as the average doctor," Thiel tells Safer. At a time when only half of recent college grads are employed full-time and tuition has quadrupled over the past 30 years, Thiel believes the system is broken and its promises are hollow. "I did not realize how screwed up the education system is. We now have $1 trillion in student debt in the U.S. Cynically, you can say it's paid for $1 trillion of lies about how good education is," Thiel says. 

The Higher Education Bubble vs. Housing Bubble - The chart above shows the historical relationship between: a) college enrollment rates for high school graduates (blue line, left scale) which have gone from 30% to almost 50% between the early 1970s and 2009, b) college enrollment rates for all 18-24 year olds (data here), which have gone from 25% to over 40%, and c) an index for college tuition adjusted for inflation (red line, right scale, only available starting in 1978), which increased more than three times between 1978 and 2009. The positive historical relationship between college enrollment rates and inflation-adjusted college tuition is similar to the positive, historical relationship between: a) homeownership rates and b) inflation-adjusted home prices, see chart below:  In the case of both college degrees and homeownership, the government decided the private market wasn't providing "enough" of either, and then created various government financing schemes to lend money to borrowers, often with questionable credit, at below market rates, along with providing other taxpayer subsidies and incentives to induce more people to go to college and more renters to become homeowners. In both cases, government policies created unsustainable bubbles, one for higher education and one for homeownership. 

Full Disclosure for Student Borrowers - NYTimes editorial - For too many students, a college education that is supposed to create opportunities can also mean years of struggle to pay off tens of thousands of dollars in debt. Schools must be required to do more to educate students about the real cost of their education and about a complex borrowing process that even the most sophisticated people have trouble understanding. According to an analysis by the Federal Reserve Bank of New York, the average debt for student borrowers last year was about $23,300, while 10 percent owed more than $54,000 and 3 percent owed more than $100,000. An article in The Times last week described the experience of 23-year-old Kelsey Griffith. She currently earns a meager wage as a restaurant worker and owes $120,000 in student loans for an undergraduate degree from Ohio Northern University, a college whose recent graduates are among the most indebted in the country.  Ms. Griffith’s debt was worsened by the fact that she changed majors and took five years to graduate. And because federal loans did not cover her total costs, she had to take out more expensive private loans that offer fewer protections than federal loans — like deferments and income-based repayment plans. Ms. Griffith voiced an increasingly common sentiment when she told The Times: “I knew a private school would cost a lot of money. But, when I graduate, I’m going to owe like $900 a month. No one told me that.”

Future pension benefits of Pa. public workers eyed - Pennsylvania's approach to a looming spike in pension obligations for state and public school employees should include a discussion of reducing the cost of current workers' future benefits, even if it means challenging state constitutional law that has traditionally protected such benefits, a top state lawmaker said Monday. The $1.1 billion the state is paying for pensions this year is scheduled to rise to $4.3 billion in five years. The obligation will triple for school districts over the same period. Senate Appropriations Committee Chairman Jake Corman said that pension changes "absolutely, positively" have to happen and that he hopes a plan will be in place with the annual state budget that is to be assembled one year from now. "There's no tax increase that is palatable, there's no spending cuts that are palatable to make room for the contributions of where this pension obligation would go for the state," Corman said. "The school districts would all begin to go in the red."

Alan Simpson isn’t ‘saving Social Security’ - Alan Simpson is at it again. Launching another off-color attack on people who oppose the Bowles-Simpson plan to bomb Social Security in order to save it, Simpson claims he is saving it for young people who would otherwise be “gutted.” In fact, Simpson’s overarching desire to protect rich Americans from paying their fair share of Social Security taxes (if wealthy earners paid FICA taxes on all of their income, most of Social Security’s solvency problems would be solved) leads him to propose cuts in Social Security almost as large as the automatic benefit reductions that will occur in 2033 under current assumptions. According to an analysis of the Bowles-Simpson plan by Social Security’s chief actuary, middle-class workers with average earnings over the course of their careers (around $43,084 in 2010) would see a 22 percent cut in benefits by 2080, not significantly different from the 23.5 percent cut in benefits these workers would face if nothing were done to shore up Social Security’s finances. Our children and grandchildren will lose critical benefits under Simpson’s plan, while seniors like him are mostly protected.

Hiding it Does Not Help: Social Security is Already Broke - I recently noticed an article by Pulitzer Prize winning journalist David Cay Johnston in which he claims the following: "Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty? Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus." This is highly misleading, and more than a little dangerous considering the European sovereign debt crisis.  According to the most recent data from the social security administration, last year social security paid out $596 billion in benefits and took in $504 billion in taxes, for a deficit of $92 billion.  However, to get to a $95 billion current year surplus David Cay Johnston must be counting "general fund reimbursements", which is to say money moved from the rest of the federal budget to cover social security deficits.  That is clearly illegitimate, and conflicts with any sensible notion of social security as a contained retirement system funded by its own revenue sources.

Number of the Week: Half of U.S. Lives in Household Getting Benefits - 49.1%: Percent of the population that lives in a household where at least one member received some type of government benefit in the first quarter of 2011. Cutting government spending is no easy task, and it’s made more complicated by recent Census Bureau data showing that nearly half of the people in the U.S. live in a household that receives at least one government benefit, and many likely received more than one. The 49.1% of the population in a household that gets benefits is up from 30% in the early 1980s and 44.4% as recently as the third quarter of 2008. The increase in recent years is likely due in large part to the lingering effects of the recession. As of early 2011, 15% of people lived in a household that received food stamps, 26% had someone enrolled in Medicaid and 2% had a member receiving unemployment benefits. Families doubling up to save money or pool expenses also is likely leading to more multigenerational households. But even without the effects of the recession, there would be a larger reliance on government. The Census data show that 16% of the population lives in a household where at least one member receives Social Security and 15% receive or live with someone who gets Medicare. There is likely a lot of overlap, since Social Security and Medicare tend to go hand in hand, but those percentages also are likely to increase as the Baby Boom generation ages.

Ill. Medicaid bill makes nearly $1.4B in cuts - Illinois moved closer to drastic Medicaid cuts Monday with proposed legislation that could excise nearly $1.4 billion from the state's program by shrinking benefits, such as regular adult dental care, and cutting payments to most hospitals and nursing homes. The measure, backed by Gov. Pat Quinn, falls short of the $2.7 billion in cuts that Quinn originally said would be needed to prevent the health care program for the poor and disabled from collapsing. Legislative sponsors said revenues, including Quinn's proposed $1 cigarette tax increase, will be dealt with separately, and are needed to make the plan work. "I honestly believe it is just not doable" without the cigarette tax, said Sen. Heather Steans, a Democrat who served on a four-member bipartisan Medicaid committee. The measure, filed as a House amendment to a Senate bill, includes $240 million in payment rate cuts to hospitals and nursing homes. But it spares doctors from rate cuts, along with 51 rural community hospitals and about 20 urban hospitals that care for poor patients.

Romney's Plan For Health Care: Undo Decades Of Progress By Undermining Medicare, Medicaid, The Affordable Care Act, And Employer-based Insurance - After looking at the economic platform of Mitt Romney’s presidential campaign, this installment of our series on his policy plans examines the details of his health care agenda.

  • The gist: Repeal the Affordable Care Act; end Medicare and Medicaid as we know it, by turning the former into a voucher program and the latter into a block grant scheme; unravel private insurance, by changing the tax treatment of benefits and undermining state regulation.
  • The good. Not much. Once in a while he talks up worthwhile reforms designed to improve the quality of care. He also endorses malpractice reform, which is a worthy idea, although his approach would do in a way that reduced damage awards without improving compensation for actual medical errors.
  • The bad: Changing the tax treatment of health insurance makes sense if you do it alongside other reforms. But if you do it without those reforms, it undermines employer-sponsored coverage without providing adequate alternatives.
  • The ugly: Tens of millions of people would likely end up without health insurance, relative to what will happen if current law stays in place; in fact, the number could reach 58 million, according to one credible estimate drawn from the (admittedly vague) things he's said so far.

For the Uninsured, the Wait for Health Care - This Op-Doc video, adapted from my feature-length documentary “The Waiting Room,” presents a composite day in the life of patients at Highland Hospital in Oakland, Calif. — edited from five months of filming in 2010.  “The Waiting Room” developed from stories my wife, a speech pathologist at Highland Hospital, told me about the struggles and resilience of her patient population. And a few years ago, as the contentious vote for health care reform got louder, it occurred to me that the people who were not participating in the debate were the very people we were fighting over: those stuck in waiting rooms at underfunded public hospitals all over the country. By following the caregivers and patients as they passed through the waiting room, we felt we could shed some light on the challenges of delivering primary health care in an environment designed for emergency medicine. What we found was that the uninsured were more likely to be hospitalized for avoidable conditions because there is virtually no continuity of care; no regular doctor to get a detailed medical history and then a follow-up visit to make sure the prescribed treatment is working. And because the wait times are so long — both in the emergency department and to see a doctor in the clinics — simple conditions like high blood pressure and diabetes can escalate to severe life-threatening emergencies like strokes or kidney failure. These true emergencies end up back in the emergency department but at a much higher personal and financial cost.

Health care costs rose faster than inflation despite weak economy - Higher prices charged by hospitals, outpatient centers and other providers drove up health care spending at double the rate of inflation amid the weak economy -- even as patients consumed less medical care overall, according to a new study. Prices rose at least five times faster than overall inflation for emergency room visits, outpatient surgery and facility-based mental health and substance abuse care from 2009 to 2010, says the report by the Health Care Cost Institute, a nonpartisan research group funded by insurers.  Prices declined in only one category: Nursing home care, which saw a 3.2 percent drop in the cost per admission.One of the areas with the fastest growing spending, meanwhile, was children's medical care.

The Fork in the Road for Health Care - Milliman, the global actuarial and employee benefit consulting firm, released its annual Milliman Medical Index for 2012 on May 15. Based on a large, nationwide sample of families with employment-based health insurance, the index tracks the total cost of spending on health for a typical family of four under age 65 that is covered by an employment-based, preferred-provider health insurance plan. The virtue of this index lies in its inclusion of out-of-pocket spending in total health spending. Just tracking premiums for employment-based health can be misleading, if employers shift more and more of the cost of health care out of their benefit package into deductibles or coinsurance paid by employees, exclude certain benefits altogether or otherwise limit coverage. For 2012, the nationwide average of the total health spending for a typical family of four was estimated by Milliman to be $20,728. On a regional basis, that average varies from a low of $18,365 in Phoenix to $24,965 in Miami. A just-released study by the Health Care Cost Institute shows that much of these spending increases are the result of rising prices and not of rising use. Reporting on the study, Julie Appleby of Kaiser Health News notes, Higher prices charged by hospitals, outpatient centers and other providers drove up health-care spending at double the rate of inflation during the economic downturn – even as patients consumed less medical care over all. The chart below shows the path of the Milliman Medical Index since the year 2000.

Is That the Sound of a Bending Cost Curve? - I’ve been working on a health care presentation that I’ll post tomorrow, but first I wanted to note this piece in today’s Wapo on recent trends in health care spending for persons under 65 with employer-sponsored insurance (ESI).  The numbers are notable because they’re derived from a very large database provided by the insurers who carry the private policies for the employers—such data have historically been hard to come by.  One finding that caught my eye was the slowing of health care spending in 2010.  After growing about 6% per year in 2008 and 2009, health spending per insured person on ESI rose 3.3% in 2010 (see table 1 here). Readers may recall this recent post wherein I wondered if a report on this slowing health spending phenomenon was cyclical or structural.  That is, are people spending less because their incomes are down in the recession, implying growth rates will eventually bounce back?  Or is some more fundamental change underway “bending the cost curve” in ways that will generate lasting savings?I hypothesized mostly the former.  I don’t yet see the kinds of structural changes in place that would alter incentives of patients, providers, and insurers, though let’s hope such changes are forthcoming through the Affordable Care Act (more on that tomorrow).  And, in fact, utilization is down, not price.

Health Care Thoughts: Notes from the Conference World - So in the past 10 days I have spoken to and with health care executives from 40 + states about their current view of the health care world. A few observations: Accountable Care Organizations (ACOs), a keystone of Obamacare, are being viewed with great skepticism and are generally being avoided, especially by physician groups. Hospitals and physicians are talking more, within Stark limits, about cooperative ventures without going all the way to an ACO format. Private insurers feel empowered by the feds to ratchet down rates. Older physicians are watching retirement funding very closely (shock fact: 1/3 of Michigan physicians are 60 years or older). The complexity of managing any sort of health care facility is going from severe to insane. Regulatory overload and revenue cycle problems are prominently mentioned. It is a happy time for lawyers specializing in health care transactions and regulations. The words "under siege" are used frequently.

How The Zero Weeks Of Paid Maternity Leave In The U.S. Compare Globally - Out of 178 nations, the U.S. is one of three that does not offer paid maternity leave benefits, let alone paid leave for fathers, which more than 50 of these nations offer. Here’s how the U.S. stacks up to 14 other countries:

Data, Drugs, and Deception - Last week The Lancet published a meta-analysis of 27 statin trials, an attempt to determine whether patients with no history of heart problems benefit from the drugs—true story. The topic is controversial, and no less than six conflicting meta-analyses have been performed—also a true story. But last week’s study claims to show, once and for all, that for these very low risk patients, statins save lives—true story.Actual true story: the conclusions of this study are neither novel nor valid.The Lancet meta-analysis, authored by the Cholesterol Treatment Trialists group, examines individual patient data from 27 statin studies. Their findings disagree with an analysis published in 2010 in the Archives of Internal Medicine, and with analyses from two equally respected publications, the Therapeutics Letter and the Cochrane Collaboration.* Despite this history of dueling data the authors of last week’s meta-analysis, in a remarkable break from scientific decorum, conclude their report with a directive for the writers of statin guidelines: the drugs should be broadly recommended based on the new analysis.

Scientists start explaining Fat Bastard's vicious cycle - Fat Bastard's revelation "I eat because I'm depressed and I'm depressed because I eat" in the Austin Powers film series may be explained by sophisticated neuroscience research being undertaken by scientists affiliated with the University of Montreal Hospital Research Centre (CR-CHUM) and the university's Faculty of Medicine. "In addition to causing obesity, rich foods can actually cause chemical reactions in the brain in a similar way to illicit drugs, ultimately leading to depression as the 'come-downs' take their toll," explain lead researcher, Dr. Stephanie Fulton. As is the case with drug addicts, a vicious cycle sets in where "food-highs" are used as a way to combat depression. "Data shows that obesity is associated with increased risk of developing depression, but we have very little understanding of the neural mechanisms and brain reward patterns that link the two," Fulton said. "We are demonstrating for the first time that the chronic consumption of palatable, high-fat diets has pro-depressive effects."

Harvard team cracks the code for new drug resistant superbugs - Antibiotic-resistant superbugs, including methicillin resistant Staph. aureus (MRSA), have become household words. Antibiotic resistance threatens health and lives. Schools have been closed, athletic facilities have been scrubbed, and assisted living and day care centers have been examined for transmission of these bacteria. Since 2005, MRSA have killed over 18,000 people a year in the United States alone. To make matters worse, in 2002 a new MRSA with resistance to even the last-line drug vancomycin (VRSA) appeared. Since the first case in Michigan, there have been at least 11 other well-documented cases in New York, Pennsylvania, Delaware and more in Michigan. Each of these infections is believed to have had multiple bacteria, an MRSA plus a vancomycin resistant bacterium called Enterococcus (or VRE). VRE has caused vancomycin resistant hospital-acquired infections since the 1980s. But there is hope on the horizon. Scientists have now determined the genome sequence for all available VRSA strains. The Harvard-wide Antibiotic Resistance Program is using this information to develop new ways to prevent and treat infection by MRSA, VRSA and VRE. The team identified several new compounds that stop MRSA by hitting new targets, and is currently subjecting these to further tests.

U.S. Advisers Say 'No' to Routine PSA Tests for Prostate Cancer - In a highly anticipated move sure to unleash heated debate, a prominent U.S. government advisory panel is recommending that men of all ages no longer be screened for prostate cancer by undergoing the prostate-specific antigen (PSA) blood test. The U.S. Preventive Services Task Force, an independent group of medical experts in prevention and evidence-based medicine, said PSA screening results in overdiagnosis of prostate cancer and unnecessary treatment that can leave men impotent and incontinent. This final recommendation comes seven months after the task force drafted a report giving a "D" rating for the PSA blood test. Previous guidelines had stated that most men should undergo screening beginning at age 50.

The Global Diabetes Tsunami... And Why America Actually Has It Good - Lately there has been a flurry of media reports focusing on America's obesity epidemic, and how costs associated with America's gradual shift to a fat society will inundate the already strapped budget in the form of shadow taxation and other direct and indirect costs, which are, to put it simply, unsustainable. As the first chart below shows, the primary cost center associated with the obese conditions - diabetes - has certainly gripped a substantial portion of the US population, at last count affecting at least 10% of the population. Yet as chart #2 shows, America, with its $23.7 million diabetes cases, actually has it good. Because when compared to countries without a social safety net, such as China and India, the US diabetes problem is child's play. With 90 million diabetes cases in China, and 61.3 million in India, or nearly half of the total 346 million worldwide diabetes cases, perhaps it is time for the developing world to worry how they plan on funding the billions of associated costs, as they assimilate more and more of the worst American habits. Because as the International Diabetes Foundation says, "In developing countries, the looming costs in human lives, healthcare expenditure and lost productivity threatens to undo recent economic gains." However since all of this is in "the future" what's the point of worrying about it now...

The government spends billions on research. Should we have to pay $20,000 more to see the results? - Taxpayers fund a ton of government research — and the results can get stuck behind a paywall that tops $20,000. Should they be able to see them without paying a second time around? That’s a question Congress could take up, thanks to Rep. Mike Doyle (D-Pa.), who has introduced bipartisan legislation that requires free, online access to the results of federally funded research six months after it’s been published. “The public has a right to see the results,” he declared from a podium at the Brookings Institute on Wednesday. But opponents of Doyle’s bill say that’s not fair to the journals that actually select the work that’s fit to publish and depend on subscriptions to stay in business. Doyle and his supporters point out that the best research often ends up being published in prestigious journals with pricey paywalls: Subscription fees can range from a few hundred dollars to more than $20,000 per year. Individual articles can be $50 a pop. As a result, the published work is walled off from the vast majority of Americans — whether they’re a researcher at a cash-strapped lab or an Iowa farmer who wants the latest on a new strain of pest-resistant corn. It’s not just a question of fairness, but of economic, social and scientific value, the open-access camp argues. “The more people look at a problem, the more ways there are of solving a problem,” ”

Not so organic – USDA accused of conspiracy with agribusiness insiders - A watchdog group that handles issues dealing with the American agriculture industry is lashing out at the federal government for allegedly corrupting the advisory board that oversees organic food stuffs in the United States. The Cornucopia Institute from the state of Wisconsin is calling out the US Department of Agriculture (USDA) in their latest report by saying that the governmental panel that determines what is and isn’t considered “organic” is stacked with federal insiders with an alternative agenda.  According to the findings in The Organic Watergate paper released this week, the USDA’s National Organic Standards Board (NOSB) has taken a turn for the worse in recent years, hiring staffers in bed with corporate entities that aren’t as concerned with protecting consumers as they are with making a buck. "This is the proverbial fox watching the organic chicken coop,”

Demand Strong for Government Program Paying Farmers Not to Plant Crops - More farmers than expected applied to put their land in a government program that pays the farmers not to plant crops and not all of the acres could be accommodated, the U.S. Department of Agriculture said Friday. The USDA accepted 3.9 million new acres into the Conservation Reserve Program, or CRP, in the latest sign-up period and turned away 600,000 acres. Interest in the program was so high, a USDA spokesman said, the agency extended the time period to allow farmers to get their applications filed. A guaranteed return on land is appealing to farmers, especially if the land isn’t well suited for planting crops, said Todd Davis, a senior economist with the American Farm Bureau Federation. The USDA is anxious to enroll new acres in the program that is aimed at protecting environmentally sensitive land because on Sept. 30 the contracts that keep about 6.5 million acres of potential farm land idle will expire. Contracts take land out of production, thus conserving soil, for either 10 or 15 years.

Big Risks for Uninsured Farmers - The farm bill, that cyclical flashpoint, is up for reauthorization in Congress this year, and reforms are needed to help small and organic farms obtain crop insurance, the Union of Concerned Scientists argues in a new report. Crop insurance policies, which are regulated and subsidized by the Department of Agriculture, provide coverage almost exclusively on a per-crop basis, which suits industrial farms growing single crops on vast acreage. But for farmers who grow a diverse array of crops, as many small and organic farms do, enrollment can be an onerous and complicated task requiring them to apply for a dozen or more separate policies. “The insurance burden that’s put on these types of farmers is completely out of balance,” said Jeffrey O’Hara, an agricultural economist for the scientists’ group and the report’s author. As a result, few small farms take out insurance plans, leaving them vulnerable to risks like extreme weather and hard-pressed to secure credit and loans. Such administrative burdens are in tension with grass-roots and federal policy initiatives designed to support small-farm economies, the report notes. Environmental groups are also putting more of an emphasis on buying local, both for the sake of freshness and to reduce the fossil fuel emissions associated with transporting food from faraway places. “This needs to be a priority if we want to expand the local foods farm system,” Dr. O’Hara said.

Commodity index funds and agricultural prices - I've just completed a new research paper with University of Chicago Professor Cynthia Wu on the Effects of Index-Fund Investing on Commodity Futures Prices. Here was our motivation for writing the paper: The last decade has seen a phenomenal increased participation by financial investors in commodity futures markets. A typical strategy is to take a long position in a near futures contract, and as the contract nears maturity, sell the position and assume a new long position in the next contract, with the goal being to create an artificial asset that tracks price changes in the underlying commodity. Barclays Capital estimated that exchange traded financial products following such strategies grew from negligible amounts in 2003 to a quarter trillion dollars by 2008 (Irwin and Sanders (2011)). Stoll and Whaley (2010) found that in recent years up to half of the open interest in outstanding agricultural commodity futures contracts was held by institutions characterized by the Commodity Futures Trading Commission (CFTC) as commodity index traders.  Hedge fund manager Michael Masters argued in testimony before the U.S. Senate in 2008 that purchases of commodity futures contracts by index funds must have influenced prices: Index Speculator demand is distinctly different from Traditional Speculator demand; They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been "put to work." Their insensitivity to price multiplies their impact on commodity markets.

Revenge of the Weeds - It’s a story suited for a Hollywood horror film, yet it’s also a tenet of evolutionary biology. Introduce a toxin to a system, and you inevitably select for resistant survivors. These few individuals gain a reproductive advantage and multiply; sometimes they can’t be stopped with even the most potent chemicals. Weeds around the world are developing resistance to glyphosate—one of the most common herbicides on the market—and like bacteria and tumor cells, many plants can also withstand multiple other toxins, each with unique molecular targets. In January, a hair-raising infestation of the kochia shrub was confirmed in Alberta, Canada. Originally introduced to desert climates as forage for cattle, the tenacious weed can now survive glyphosate, which targets an enzyme involved in the biosynthesis of aromatic compounds. It can also withstand chemicals that inhibit the ALS enzyme, involved in the production of amino acids. At least 2,000 acres are now impacted, and “we expect more cases will be confirmed after a field survey this fall,” The United States are also being taken by storm. Palmer amaranth recently developed resistance to the same two classes of chemicals in Tennessee. Since 2009, the tall, spindly weed has swept across 1 million acres of cropland, causing some farmers to abandon their fields. And in California, a plant named hairy fleabane recently crept into vineyards. It is now able to withstand both glyphosate and Paraquat—a chemical that hijacks photons from proteins involved in photosynthesis.

Russian dryness major concern, says Black Earth: The dryness in southern Russia are a "major concern" for the country's grain production prospects, Black Earth Farming said, stoking fears for a disappointing world wheat harvest which drove prices higher again. "Lack of rain in the south remains a major concern," Black Earth Farming, one of Russia's biggest farm operators, said.There were "downside risks" to early estimates of a Russian grains harvest of 90m-95m tonnes "if the dry and hot weather in May persists".The comments fuelled concerns over the world wheat harvest also stoked by an official estimate that German winter wheat area making it to harvest will fall 9.5% this year to 2.87m hectares, thanks to frost damage."The strongest decreases were observed for winter wheat cultivation in Hessen, -42%, and Lower Saxony, -21%," Germany's federal statistics office said.

My Nature Piece On Dust-Bowlification And the Grave Threat It Poses to Food Security -  Joe Romm - Which impact of anthropogenic global warming will harm the most people in the coming decades? I believe that the answer is extended or permanent drought over large parts of currently habitable or arable land — a drastic change in climate that will threaten food security and may be irreversible over centuries. A basic prediction of climate science is that many parts of the world will experience longer and deeper droughts, thanks to the synergistic effects of drying, warming and the melting of snow and ice. Precipitation patterns are expected to shift, expanding the dry subtropics. What precipitation there is will probably come in extreme deluges, resulting in runoff rather than drought alleviation. Warming causes greater evaporation and, once the ground is dry, the Sun’s energy goes into baking the soil, leading to a further increase in air temp- erature. That is why, for instance, so many temperature records were set for the United States in the 1930s Dust Bowl; and why, in 2011, drought-stricken Texas saw the hottest summer ever recorded for a US state. Finally, many regions are expected to see earlier snowmelt, so less water will be stored on mountain tops for the summer dry season. Added to natural climatic variation, such as the El Niño–La Niña cycle, these factors will intensify seasonal or decade-long droughts.

Yemen Suffering 'Catastrophic' Food Crisis as US Escalates Its Drone War - As the U.S. continues its covert drone war on Yemen, the country is on the brink of a hunger crisis of catastrophic proportions, aid agencies report today.The aid groups, including Oxfam, Save the Children and CARE, report that 10 million people, 44 percent of the population, don't have enough to eat and say that the malnutrition rates are "alarming." While the Guardian reports that the U.S. has spent "hundreds of millions of dollars" on Yemen's fight against al-Qaida and has escalated its drone war on the country, Oxfam notes today that "the UN humanitarian appeal for the country is just 43 percent funded – a $262 million shortfall." Penny Lawrence, Oxfam’s International Director, points to the focus of aid on "security" as fatal to the Yemeni people:

Dispute Over Labeling of Genetically Modified Food - For more than a decade, almost all processed foods in the United States — cereals, snack foods, salad dressings — have contained ingredients from plants whose DNA was manipulated in a laboratory. Regulators and many scientists say these pose no danger. But as Americans ask more pointed questions about what they are eating, popular suspicions about the health and environmental effects of biotechnology are fueling a movement to require that food from genetically modified crops be labeled, if not eliminated.  Labeling bills have been proposed in more than a dozen states over the last year, and an appeal to the Food and Drug Administration last fall to mandate labels nationally drew more than a million signatures. There is an iPhone app: ShopNoGMO.  The most closely watched labeling effort is a proposed ballot initiative in California that cleared a crucial hurdle this month, setting the stage for a probable November vote that could influence not just food packaging but the future of American agriculture.  It pits consumer groups and the organic food industry, both of which support mandatory labeling, against more conventional farmers, agricultural biotechnology companies like Monsanto and many of the nation’s best-known food brands like Kellogg’s and Kraft.  The heightened stakes have added fuel to a long-simmering debate over the merits of genetically engineered crops, which many scientists and farmers believe could be useful in meeting the world’s rapidly expanding food needs.

UK GM Wheat War: Not Really About Science - In the UK there is a battle brewing over a scientific trial involving genetically modified wheat. Last weekend a protester attempted to vandalize the trial, and a larger civil action is expected on May 27. The ongoing battle, and its close cousin in the climate wars, tell us something about what can happen to science when it becomes the central battleground over politics and technology. Unfortunately, the scientific community itself has contributed to such tactics. A Nature editorial explains what is going on: Plant scientists at Rothamsted Research, a complex of buildings and fields in Hertfordshire, UK, that prides itself on being the longest-running agricultural research station in the world, have spent years preparing for their latest experiment — which will attempt to prove the usefulness of a genetically modified (GM) wheat that emits an aphid alarm pheromone, potentially reducing aphid infestation. Yet instead of looking forward to watching their crop grow, the Rothamsted scientists are nervously counting the days until 27 May, when protesters against GM crops have promised to turn up in force and destroy the experimental plots.

90 Percent of Corn Seeds Are Coated With Bayer's Bee-Decimating Pesticide -- As I prepared for the conference, a few interesting news items on the industry crossed my desk.

  • • As I've written before, Bayer's neonicotinoid pesticides, which now coat upwards of 90 percent of US corn seeds and seeds of increasing portions of other major crops like soy, have emerged as a likely trigger for colony collapse disorder. Watch this NBC News report from last week linking bee kills in Minnesota to Bayer's highly profitable product. Meanwhile, the Columbus Dispatch reports similar bee die-offs in Ohio farm country, with beekeepers there, too, pointing the finger at Bayer.
  • • One of my biggest complaints about the agrichemical industry it its market dominance. As I say above, more than 90 percent of corn seeds planted today are treated with Bayer's pesticide. What if a farmer wants to opt out, to plant seeds free of neonicotinoids? Good luck.
  • • Speaking of market dominance, Monsanto essentially owns the market in genetically modified seed traits—a highly lucrative position, given the way GMOs have taken over massive crops like corn, soy, and cotton. And like any well-run company out to maximize earnings for its shareholders, Monsanto invests some of its profit hoard in protecting its market from pesky regulators who might place the public interest over Monsanto's.

Government tyranny: Illinois Department of Agriculture secretly destroys beekeeper's bees and 15 years of research proving Monsanto's Roundup kills bees = An Illinois beekeeper with more than a decade's worth of expertise about how to successfully raise organic, chemical-free bees is the latest victim of flagrant government tyranny. It began last summer when Ingram, who teaches children about natural beekeeping, gave a sample of his honeycomb to IDofA inspector Susan Kivikko ( at a beekeeper's picnic. Ingram explained that his bees would not touch the comb, and asked Kivikko if it could be tested for chemical contamination. Kivikko told him that IDofA does not test for chemicals, presumably because its policy is to actively promote them, and instead took the comb and had it tested for "foulbrood," a disease that Ingram says is greatly overblown. When the test allegedly came back positive, Kivikko proceeded to get the ball rolling on a witch hunt that would eventually lead to the illegal seizure and destruction of Ingram's personal property. Not only did Kivikko, as well as her colleague Eleanor Balson and superior Steven D. Chard, break the law by trespassing Ingram's property on numerous occasions without a warrant, but they also committed numerous crimes by stealing his hives and equipment and destroying pertinent evidence before a hearing, which Ingram believes may have ultimately been rooted in a deliberate conspiracy by the state to hide the truth about Roundup, and subsequently steal his most vibrant bees.

Anti-GM protestors likened to ‘Nazi book burners’ - The leader of the UK's farmers' union has likened to "Nazi book burners" the anti-biotech protester who vandalised trails of genetically-modified wheat, the latest in a series of attacks on the technology in Europe. A break-in at Rothamsted Research, the world's longest-running farm research centre, at the weekend which, allegedly, saw plants attacked and seed scattered around plots was "worse than" criminal, Peter Kendall, the president of the NFU said. "It is the wilful imposition of ignorance, directly comparable to Nazi book-burning in the 1930s," he said, in comments prepared for evidence to UK politicians, terming the attack "scandalous". "If the [world's] aim is to feed 9bn people by 2050 there is a sense of urgency to start dealing with this issue now. "To achieve this we will need every single tool in our toolbox - and that includes GM crops that have been adapted to cope in dry conditions, need fewer pesticides or offer nutritional benefits."

Asian Carp: The Invasive Species Thriving in America's Rivers (video) Although it's unclear how they were first introduced into North American ecosystems, Asian carp have been thriving at the expense of native species for the past few decades. Various efforts have been made to keep them out of the Great Lakes, but for some fishermen, the invaders are good for business. The Perennial Plate, a series about sustainable food, heads to Illinois to talk to the fishermen who haul in thousands of pounds of bighead carp a day. The Perennial Plate is produced by Daniel Klein and Mirra Fine. At least these carp are edible; Klein notes that "despite being heavy on bones, they are quite tasty."

EPA: Development of Pebble Mine project could be devastating for the 37 million fish in Bristol Bay. The 37 million or so sockeye salmon that spawn in Alaska’s Bristol Bay watershed are back in the news this week, after the U.S. Environmental Protection Agency released a draft scientific study Friday that concluded development of a large-scale mine could be devastating for the world’s largest wild sockeye salmon fishery. That conclusion is followed immediately by a clarifier that the EPA study is being released for public comment and that it “in no way prejudges future consideration of proposed mining activities.”  The EPA’s first significant federal (draft) study of the project details some potential impacts that will keep plenty of environmentalists up at night:

  • • Significant impact on fish populations, including loss of spawning and rearing habitat for several salmon species, other fish, birds and mammals, like bears, that rely on a sound ecosystem;
  • • Blocked streams and reduced water flow that could result in the direct loss of up to 87 miles of streams and wetlands, and would directly impact salmon passage;
  • • Heavy water usage by the mine that would even further diminish streams and habitat.

The end of fish, in one chart - Want to see how severely we humans are scouring the oceans for fish? Check out this striking map from the World Wildlife Fund’s 2012 “Living Planet Report.” The red areas are the most intensively fished (and, in many cases, overfished) parts of the ocean — and they’ve expanded dramatically since 1950: Between 1950 and 2006, the WWF report notes, the world’s annual fishing haul more than quadrupled, from 19 million tons to 87 million tons. New technology — from deep-sea trawling to long-lining — has helped the fishing industry harvest areas that were once inaccessible. But the growth of intensive fishing also means that larger and larger swaths of the ocean are in danger of being depleted. Daniel Pauly, a professor of fisheries at the University of British Columbia, has dubbed this situation “The End of Fish.” He points out that in the past 50 years, the populations of many large commercial fish such as bluefin tuna and cod have utterly collapsed, in some cases shrinking more than 90 percent (see the chart to the right).

'40 tons' of tsunami debris litters Alaska island -- Cleanup workers will on Friday attack a jumble of debris from Japan's 2011 tsunami that litters an Alaskan island, as residents in the state gear up to scour their shores for everything from buoys to building material that has floated across the Pacific. The cleansing project slated to start on Montague Island is expected to last a couple weeks, and organizers say it marks the first major project in Alaska to collect and dispose of debris from the tsunami. A U.S. senator has sought to obtain $45 million to tackle the problem, and officials have cited fears about invasive species and toxic substances thought to be among the floating mess of objects. While debris from Japan is also floating toward other U.S. states along the West Coast, Alaska has a more extensive shoreline, much of it difficult to reach.

Draining of world's aquifers feeds rising sea levels - Humanity's unquenchable thirst for fresh water is driving up sea levels even faster than melting glaciers, according to new research. The massive impact of the global population's growing need for water on rising sea levels is revealed in a comprehensive assessment of all the ways in which people use water. Trillions of tonnes of water have been pumped up from deep underground reservoirs in every part of the world and then channelled into fields and pipes to keep communities fed and watered. The water then flows into the oceans, but far more quickly than the ancient aquifers are replenished by rains. The global tide would be rising even more quickly but for the fact that manmade reservoirs have, until now, held back the flow by storing huge amounts of water on land. "The water being taken from deep wells is geologically old – there is no replenishment and so it is a one way transfer into the ocean," said sea level expert Prof Robert Nicholls, at the University of Southampton. "In the long run, I would still be more concerned about the impact of climate change, but this work shows that even if we stabilise the climate, we might still get sea level rise due to how we use water." He said the sea level would rise 10 metres or more if all the world's groundwater was pumped out, though he said removing every drop was unlikely because some aquifers contain salt water. The sea level is predicted to rise by 30-100 cm by 2100, putting many coasts at risk, by increasing the number of storm surges that swamp cities.

All The Water On Planet Earth - How much of planet Earth is made of water? Very little, actually. Although oceans of water cover about 70 percent of Earth's surface, these oceans are shallow compared to the Earth's radius. The above illustration shows what would happen if all of the water on or near the surface of the Earth were bunched up into a ball. The radius of this ball would be only about 700 kilometers, less than half the radius of the Earth's Moon, but slightly larger than Saturn's moon Rhea which, like many moons in our outer Solar System, is mostly water ice. How even this much water came to be on the Earth and whether any significant amount is trapped far beneath Earth's surface remain topics of research.

April 2012: Earth’s 5th Warmest On Record And La Niña Officially Ends, So The Heat Is On. - Figure 1. Departure of temperature from average for April 2012.  April 2012 was the globe’s 5th warmest April on record, according to the National Oceanic and Atmospheric Administration’s National Climatic Data Center (NCDC). NASA rated April 2012 as the 4th warmest April on record. April 2012 global land temperatures were the 2nd warmest on record, and the Northern Hemisphere land surface temperature was 1.74°C (3.13°F) above the 20th century average, marking the warmest April since records began in 1880. Global ocean temperatures were the 11th warmest on record, and April 2012 was the 427th consecutive month with ocean temperatures warmer than the 20th century average. The last time the ocean temperatures were below average was September 1976. The increase in global temperatures relative to average compared to March 2012 (16th warmest March on record) was due, in part, to warming waters in the Eastern Pacific, due to the La Niña event that ended in April. Global satellite-measured temperatures for the lowest 8 km of the atmosphere were 6th or 4th warmest in the 34-year record, according to Remote Sensing Systems and the University of Alabama Huntsville (UAH). April temperatures in the stratosphere were the 1st to 4th coldest on record. We expect cold temperatures there due to the greenhouse effect and to destruction of ozone due to CFC pollution. Northern Hemisphere snow cover during April was 4th smallest in the 46-year record.

Early Season Heat Wave for Memorial Day Weekend - Memorial Day weekend marks the unofficial start of summer, but a large swath of the U.S. will skip right to mid-summer heat this weekend, likely breaking records and leading to one of the hottest Indy 500 races on record. Forecasts for Sunday's Indianapolis 500 call for a high of 93°F. According to the National Weather Service (NWS), only five Indy 500 race days had highs in the 90s, and the all-time record high for the month of May is 96°F. That means that Sunday's forecast would rank as one of the warmest race days in history, and one of the warmest days in May on record.Indianapolis won't be alone. The heat will stretch from the southern Plains to the Mid-Atlantic, affecting cities ranging from Kansas City to Washington, D.C. The weather system responsible for the heat is an area of high pressure that will establish itself over the Southeastern U.S., pumping hot and humid air northward around the backside of its clockwise circulation. Thunderstorms will flare up around this high, dumping heavy rains with the threat of damaging winds across the Upper Midwest, in particular.

Warming could exceed 3.5 C, say climate scientists: The UN's target is a 2 C (3.6 degree Fahrenheit) limit on warming from pre-industrial levels for manageable climate change. In a report issued on the penultimate day of new UN talks in Bonn, scientists said Earth's average global temperature rise could exceed the dangerous 3.5 C (6.3 F) warming they had flagged only six months ago.Marion Vieweg, a policy researcher with German firm Climate Analytics, told AFP the 3.5 C (6.3 F) estimate had been based on the assumption that all countries will meet their pledges, in themselves inadequate, to reduce greenhouse-gas emissions. New research has found this is not "a realistic assumption," she said, adding that right now "we can't quantify yet how much above" 3.5 C (6.3 F) Earth will warm.

IEA: Global CO2 Emissions Hit New Record In 2011, Keeping World On Track For ‘Devastating’ 11°F Warming -  First the bad news from the International Energy Agency (IEA). Thanks to a huge jump in Chinese emissions, “global carbon-dioxide (CO2) emissions from fossil-fuel combustion reached a record high of 31.6 gigatonnes (Gt) in 2011.” The worse news is that, “The new data provide further evidence that the door to a 2°C trajectory is about to close,” according to IEA Chief Economist Fatih Birol. Why does that matter? As Reuters reported: Scientists say ensuring global average temperatures this century do not rise more than 2 degrees Celsius above pre-industrial levels is needed to limit devastating climate effects like crop failure and melting glaciers. Darn you truth-telling scientists, always ruining the party (see “James Hansen Is Correct About Catastrophic Projections For U.S. Drought If We Don’t Act Now“). And the worst news, as Birol told Reuters, is that: “When I look at this data, the trend is perfectly in line with a temperature increase of 6 degrees Celsius [11°F], which would have devastating consequences for the planet.”

150,000 more US heat deaths projected by 2100 - Killer heat fueled by climate change could cause an additional 150,000 deaths this century in the biggest U.S. cities if no steps are taken to curb carbon emissions and improve emergency services, according to a new report. The three cities with the highest projected heat death tolls are Louisville, with an estimated 19,000 heat-related fatalities by 2099; Detroit, with 17,900, and Cleveland, with 16,600, the Natural Resources Defense Council found in its analysis of peer-reviewed data, released on Wednesday.Concentrated populations of poor people without access to air conditioning are expected to contribute to the rising death tolls. Thousands of additional heat deaths were also projected by century's end for Baltimore, Boston, Chicago, Columbus, Denver, Los Angeles, Minneapolis, Pittsburgh, Providence, St. Louis and Washington, D.C., the report said. June, July and August are expected to see above-normal temperatures over most of the contiguous United States, from inland California to New Jersey, and from as far north as Idaho and Wyoming to Texas, Florida and the desert Southwest, the National Oceanic and Atmospheric Administration said in a May 17 forecast.

Better tech to boost weather manipulation - Rainmaking technology will be better deployed and there will be more of it, a leading meteorologist promised.  The country plans to increase artificial precipitation by 3 to 5 percentage points in the next five years, Zheng Guoguang, administrator of the China Meteorological Administration, said.  Rainmaking technology in China lags behind the leading countries in the field by between 15 and 45 percent, depending on the region, he said. The arsenal targeting the weather includes more than 7,000 rocket launchers, at least 50 planes and nearly 7,000 guns.  Management capability will also be enhanced, Zheng said during the National Weather Modification Conference in Beijing on Tuesday. According to Zheng, about 70 percent of natural disasters in China are caused by the weather and the climate is getting more unpredictable.

Evaluating a 1981 temperature projection - Sometimes it helps to take a step back from the everyday pressures of research (falling ill helps). It was in this way we stumbled across Hansen et al (1981) (pdf). In 1981 the first author of this post was in his first year at university and the other just entered the KNMI after finishing his masters. Global warming was not yet an issue at the KNMI where the focus was much more on climate variability, which explains why the article of Hansen et al. was unnoticed at that time by the second author. It turns out to be a very interesting read. They got 10 pages in Science, which is a lot, but in it they cover radiation balance, 1D and 3D modelling, climate sensitivity, the main feedbacks (water vapour, lapse rate, clouds, ice- and vegetation albedo); solar and volcanic forcing; the uncertainties of aerosol forcings; and ocean heat uptake. Obviously climate science was a mature field even then: the concepts and conclusions have not changed all that much. Hansen et al clearly indicate what was well known (all of which still stands today) and what was uncertain.

NPR: Link Between Extreme Weather And Climate Change  - 2011 brought exceptionally mild winters in most of the U.S., deadly tornadoes in the Midwest and extended drought in the West and Southwest. Kevin Trenberth, distinguished senior scientist at the National Center for Atmospheric Research, discusses the correlation between climate change and extreme weather.Listen to the Story Talk of the Nation [16 min 50 sec] -

60% reduction in 40 years in the volume of Antarctic Bottom Water, the cold dense water that drives global ocean currents - Comparing detailed measurements taken during the Australian Antarctic program's 2012 Southern Ocean marine science voyage to historical data dating back to 1970, scientists estimate there has been as much as a 60% reduction in the volume of Antarctic Bottom Water, the cold dense water that drives global ocean currents. In an intensive and arduous 25-day observing program, temperature and salinity samples were collected at 77 sites between Antarctica and Fremantle. Such ship transects provide the only means to detect changes in the deep ocean. The new measurements, which have not yet been published, suggest the densest waters in the world ocean are gradually disappearing and being replaced by less dense waters. "The amount of dense Antarctic Bottom Water has contracted each time we've measured it since the 1970s," said Dr Steve Rintoul, of CSIRO and the Antarctic Climate and Ecosystems CRC. "There is now only about 40% as much dense water present as observed in 1970."

Arctic melt releasing ancient methane: Scientists have identified thousands of sites in the Arctic where methane that has been stored for many millennia is bubbling into the atmosphere. The methane has been trapped by ice, but is able to escape as the ice melts. Writing in the journal Nature Geoscience, the researchers say this ancient gas could have a significant impact on climate change. Methane is the second most important greenhouse gas after CO2 and levels are rising after a few years of stability. There are many sources of the gas around the world, some natural and some man-made, such as landfill waste disposal sites and farm animals. Tracking methane to these various sources is not easy. But the researchers on the new Arctic project, led by Katey Walter Anthony from the University of Alaska at Fairbanks (UAF), were able to identify long-stored gas by the ratio of different isotopes of carbon in the methane molecules. Using aerial and ground-based surveys, the team identified about 150,000 methane seeps in Alaska and Greenland in lakes along the margins of ice cover.

Ancient methane unleashed from 150k 'seeps' in Alaska and Greenland could impact on greenhouse effect | Mail Online: Retreating glaciers and thawing permafrost are unleashing 'seeps' of methane which could have a massive impact on global warming.Using ground-based measurements and aerial surveys, researchers found 150,000 'methane seeps' - mostly along boundaries where glaciers and permafrost are melting. Methane is a potent greenhouse gas - and this effect makes the climate puzzle even more complex, says the report in Nature Geoscience.As more glaciers and permafrost melt, the effect could become even MORE severe. 'Perennially-frozen ground and glaciers of the Arctic trap methane leaking from hydrocarbon reservoirs, restricting the flow to the atmosphere,' say the researchers.  

Popping the Cap on Arctic Methane - Methane held underground by caps of Arctic ice is bubbling out as a warming climate causes those caps to melt, researchers report in the journal Nature Geoscience. The paper offers some of the strongest field evidence yet that a melt-back of land ice can release methane. The new mechanism may sound similar to one that I described last year in an article focusing on other work by Dr. Walter Anthony on the frozen lakes of central Alaska. But the two methane sources are not the same. As that article explained, old organic material is locked up across much of the Arctic in frozen ground called permafrost, much of which dates back to the last ice age. As these shallow deposits thaw in today’s warmer climate, bacteria are converting the carbon into methane and carbon dioxide, both of which are escaping into the atmosphere. The new paper describes a different type of deposit known as a geologic reservoir, in which methane gas has been trapped underground for a long time, thousands or even millions of years. Atop those deposits, land ice – in the form of permafrost, glaciers or ice caps, which are collectively known as the earth’s cryosphere – has helped to keep the methane sealed underground. But now that the ice is melting, the gas can escape.

G8: Leaders open up vital new front in the battle to control global warming – It seems to have gone virtually unnoticed, but the world leaders at the weekend's G8 summit look as if they have taken the biggest step in years in tackling climate change. And it's quite apart from anything to do with carbon dioxide. The summit's final communiqué, the Camp David Declaration, supports “comprehensive actions” to reduce “short-lived climate pollutants”. These substances – including black carbon (soot), methane, ground-level ozone, and hydrofluorocarbons – are responsible for about half of global warming. Straightforward measures to address them, a report by the United Nations Environment Programme concluded last year, would delay dangerous climate change by more than three decades, buying crucial time for the much more difficult process of slashing carbon dioxide emissions. More important still, the measures would save some 2.4 million lives a year, mainly by cutting the inhalation of soot, chiefly emitted by vehicle diesel engines and by the inefficient wood and dung burning cookstoves used by most of the world's poorest people – and increase grain harvests, at present hit by pollution, by 52 million tons a year.

International climate change treaty talks end in discord and disappointment - The latest round of international climate change talks finished on Friday in discord and disappointment, with some participants concerned that important progress made last year was being unpicked. At the talks, countries were supposed to set out a workplan on negotiations that should result in a new global climate treaty, to be drafted by the end of 2015 and to come into force in 2020. But participants told the Guardian they were downbeat, disappointed and frustrated that the decision to work on a new treaty – reached after marathon late-running talks last December in Durban – was being questioned. China and India, both rapidly growing economies with an increasing share of global emissions, have tried to delay talks on such a treaty. Instead of a workplan for the next three years to achieve the objective of a new pact, governments have only managed to draw up a partial agenda. “It’s incredibly frustrating to have achieved so little,” said one developed country participant. “We’re stepping backwards, not forwards.”

Majority of Americans Agree: Protecting the Environment Creates Jobs - The majority of Americans (58 percent) think that protecting the environment improves economic growth and creates new jobs. The results are from a recently released poll by Yale University and George Mason University's climate change communication program. Only 17 percent of the poll's respondents think that environmental protection hurts the economy and job growth, and 25 percent think there is no effect. When there is a conflict between protecting the environment and improving the economy, 62 percent think it is more important to protect the environment, and only 38 percent thought economic growth is more important.

Greenhouse Gas Gap Grows as Climate Pledges Fall Short - The gap between the emissions cuts needed to contain global warming and actual reductions by 2020 is at risk of widening as countries including the U.S., Brazil and Mexico fail to meet pledges, Climate Action Tracker said. At best, commitments would lead to emissions 9 gigatons (9 billion tons) higher than the 44 gigatons needed in 2020 to stop the planet warming more than 2 degrees Celsius (3.6 Fahrenheit) since industrialization, the project said in Bonn, where two weeks of United Nations talks end tomorrow. A temperature increase of at least 3.5 degrees Celsius on the current greenhouse-gas trajectory may accelerate because nations are indicating they will miss 2020 pledges, Climate Action Tracker said after analyzing presentations made by countries at the meeting. “Many governments are nowhere near putting in place the policies they have committed to, policies that are not enough to keep temperature rises to below 2 degrees Celsius,” said Bill Hare, director of Climate Analytics, one of three groups that set up the project. “We’ve already identified a major emissions gap. The action being taken is highly unlikely to shrink that gap. It seems that the opposite is happening.”

SciAm: Climate Armageddon: How the World's Weather Could Quickly Run Amok [Excerpt] - The eminent British scientist James Lovelock, back in the 1970s, formulated his theory of Gaia, which held that the Earth was a kind of super organism. It had a self-regulating quality that would keep everything within that narrow band that made life possible. This was a comforting notion. It was also wrong, as Lovelock himself later wrote in the Independent in 2006. The world has warmed since those heady days of Gaia, and scientists have grown gloomier in their assessment of the state of the world's climate. NASA climate scientist James Hanson has warned of a "Venus effect," in which runaway warming turns Earth into an uninhabitable desert, with a surface temperature high enough to melt lead, sometime in the next few centuries. Even Hanson, though, is beginning to look downright optimistic compared to a new crop of climate scientists, who fret that things could head south as quickly as a handful of years, or even months, if we're particularly unlucky. Ironically, some of them are intellectual offspring of Lovelock, the original optimist gone sour. The true gloomsters are scientists who look at climate through the lens of "dynamical systems," a mathematics that describes things that tend to change suddenly and are difficult to predict. It is the mathematics of the tipping point—the moment at which a "system" that has been changing slowly and predictably will suddenly "flip." The colloquial example is the straw that breaks that camel's back. Or you can also think of it as a ship that is stable until it tips too far in one direction and then capsizes. In this view, Earth's climate is, or could soon be, ready to capsize, causing sudden, perhaps catastrophic, changes. And once it capsizes, it could be next to impossible to right it again.

'Faster Than We Thought': An Epitaph for Planet Earth - Sometime later this Century, a writer will sit down and attempt to document how his or her grandparents’ generation could have all but ignored the greatest disaster humanity has ever faced.It won’t be a pleasant world she lives in. Cities and countries will be locked in an expensive battle with rapidly rising seas; but after spending trillions of dollars, most of the world’s ports will have been abandoned anyway. Up to seventy percent of the planet’s species will be wiped out. Gone. Vanished. Kaput. Songbirds will no longer serenade us. Butterflies will no longer dazzle us. The boreal forests – the largest belt of green in the world – will be gone. Brutal heat waves will be the norm. Off-the-chart hurricanes and storms will be the rule. Deserts will have expanded. Haboobs, giant black blizzards of dust will sweep across vast portions of the US’s high plains and the southwest. The Amazon rainforest will be a shrunken, wizened remnant of a once vast source of life. The once bountiful seas will be acidic crypts in which jellyfish and other primitive forms spread in vast sheets across the surface, covering the rotting hulks of the fish we used to eat. Agricultural productivity will collapse, famine will be widespread. Money for anything other than preventing catastrophe will be scarce.  By 2050, as many as a billion climate refugees will roam the Earth, spreading unrest, poverty, disease and misery. By the century’s end?  Who knows? 

END CIV Resist Or Die (Full) - YouTube - END:CIV examines our culture's addiction to systematic violence and environmental exploitation, and probes the resulting epidemic of poisoned landscapes and shell-shocked nations.  Based in part on Endgame, the best-selling book by Derrick Jensen, END:CIV asks: "If your homeland was invaded by aliens who cut down the forests, poisoned the water and air, and contaminated the food supply, would you resist?"

The Environment Is Dead: Long Live Mother Nature - “Environmentalism has failed” is a statement that deserves attention. It comes from famed environmentalist David Suzuki marking 50 years since Rachel Carson’s book, Silent Spring, helped spark the modern environmental movement.  Suzuki’s recent essay, Environmentalism Has Failed: On Adopting a Biocentric Viewpoint, on the fundamental failure of environmentalism is ominous. The world faces not only environmental calamities such as deforestation, coral reef depletion, and freshwater shortages, it is also mired in economic crises and harsh political realities. Despite the promise of “Arab Springs” and the global Occupy movement, we are increasingly in planetary peril. Throughout his life, David Suzuki has been a leading educator on planetary health; his conclusion about the environmental movement’s failure must be agonizing. Perhaps that’s why his blog offered no new way forward. What now? If decades of environmental campaigns produced significant gains but have lost the overall struggle to protect planetary life, that raises key questions: What caused the failure? What is to be learned? What do environmental organizations, supporters and concerned citizens do now? What do we say to children, and to young advocates? Where’s the new strategic road ahead?

Blinded by the (solar) light -The Obama Administration’s preliminary decision to impose a 31 per cent tariff on solar panels imported from China is short sighted. The move could cause a trade war, hurt the US economy, jeopardize US security interests, and put the world further off course in terms of meeting its global climate change goals. The decision opens the US up to a trade war in renewable energy, of all things. The US currently has a trade surplus with China in solar energy because of large US exports of poly-silicon to China. Not surprisingly, Li Junfeng, a senior Chinese government official, has already proposed imposing retaliatory tariffs on US polysilicon—and a trade war might not stop there. The measure could also hurt one of the few bright spots in the US economy. Jobs in the solar sector grew by 7 per cent last year thanks to the combination of higher demand for solar PV (due to lower prices for the modules) and state and national incentives for renewable energy. Most of the new jobs are in the solar installation business. If the Obama Administration makes solar modules one-third more expensive by imposing these tariffs, US demand for solar PV will certainly fall, and new jobs in this sector will vanish. Chinese solar firms can shift their production to other countries to avoid the tariffs, and will still be more competitive than SolarWorld—the German company whose US subsidiary is behind the complaint.

EU appeals to China to help reach global emissions agreement to end airline dispute - A European envoy held out a possible compromise in a fight with China over carbon emissions charges on airlines, saying Wednesday that Europe might alter its system if Beijing helps negotiate global regulations. China, India, the United States and Russia oppose the European Union charges that took effect Jan. 1. Beijing has barred its carriers from cooperating and has suspended purchases of European aircraft. Talks on a global system have begun in the International Civil Aviation Organization, a U.N. body, said Matthew Baldwin, director of aviation for the 27-nation EU. He said Europe might alter its Emissions Trading System if an agreement is reached.

Government announces biggest energy reforms in 20 years - The biggest reforms to the UK energy sector in two decades were set out on Tuesday, prompting warnings from consumer groups and green campaigners that they would raise bills and penalise renewable energy while boosting nuclear power. The sweeping reforms, detailed in the draft energy bill, grant the government powers to intervene in the market on a scale not seen since the industry was privatised. Under the changes, low-carbon generators including nuclear companies will receive a fixed price for their energy that should be higher than they can sell it for on the open market, and ministers will create a "capacity market" to ensure a reliable supply of power and prevent blackouts. There will be a minimum price for carbon dioxide emissions, and an emissions performance standard that will in effect stop any coal-fired power stations being built without technology to capture carbon. The reforms will mean major changes to the way the market is regulated, and the way utilities and their smaller rivals operate.

Germany aims for stronger grip on switchover from nuclear to renewable energy - The German government will more closely oversee the country’s move from nuclear power to renewable energy, Chancellor Angela Merkel said Wednesday — a mammoth 10-year project for Europe’s biggest economy that has been going slowly so far. Merkel said she will be meeting with all of Germany’s 16 state governors twice a year to take stock of the transformation’s progress and shortcomings, stressing that everything must be done to avoid blackouts and ensure affordable energy. Critics, including Germany’s main industry lobby group, have faulted the government for a lack of coordination and demanded better, permanent oversight for one of Merkel’s most challenging projects.

Goldman Sachs To Invest $40 Billion In Clean Energy: ‘The Underlying Thesis Still Holds True’ - In a major sign of confidence during a period of “rolling uncertainty” in the global renewable energy market, Goldman Sachs says it will invest $40 billion in the sector over the next decade. The investment bank is already a major financier of renewable energy and energy efficiency around the world, putting $4.8 billion into projects last year alone. Taken across the next decade, the new $40 billion plan would mean that Goldman is investing $800 million less per year than in 2011. However, it would still roughly equal the rate of investment during its first major foray into the sector between 2005 and 2011, according to Reuters: In 2005, Goldman pledged to invest and finance $1 billion of environmentally friendly projects. By the end of 2011, the company had exceeded its goal, arranging $24 billion worth of financing and investing $4 billion into such projects, said Kyung-Ah Park, head of environmental markets at Goldman.

New Directions for North American Energy Infrastructure - On Thursday, May 17th the Financial Times reported that Royal Dutch Shell CEO Peter Voser has said he expects US natural gas prices to double by 2015, but remain under pressure in the short term. Voser made these comments based on the fact that he sees more and more transportation options stemming from NatGas. Voser is correct in his assumption that more and more transportation options will rely on NatGas as we move forward. The largest annual trucking show in North America, the Mid-America Trucking Show, was held in Louisville Kentucky in March and featured a panel discussion on NatGas in trucking featuring famed petroleum investor T. Boone Pickens. The Conference Board of Canada reported in an April research paper that making the switch to NatGas from diesel would be a fixed cost of roughly $80,000 CDN per vehicle, but would save about $15,000 CDN per year over a 10-year period. Although North American NatGas refuelling infrastructure is not as mature as it needs to be to trigger a large-scale shift, change is coming.

Beyond oil, can Alaska be tapped as a source for renewable energy? - Alaska has massive hydro, wind, geothermal and other renewable resources, but the state's rural villages are chained to diesel and suffer oppressive energy costs they say threaten their existence. Lawmakers, energy experts and Native leaders said Thursday it's a dire problem with elusive solutions. "People are suffering, people are leaving. It is crushing opportunities, it is crushing innovation," said Ethan Schutt, senior vice president for land and energy development at Cook Inlet Region Inc., an Alaska Native corporation. The Center for American Progress, a liberal-leaning think tank chaired by John Podesta, a former chief of staff under President Bill Clinton, held a forum Thursday to explore rural Alaska renewable energy issues. Podesta said the Lower 48 thinks of Alaska as all about oil, when it has an estimated 40 percent of the U.S. potential to generate electricity from rivers and 90 percent of the nation's potential to produce power from tidal resources.

Supervolcano Drilling Plan Gets Go-Ahead - A project to drill deep into the heart of a “supervolcano” in southern Italy has finally received the green light, despite claims that the drilling would put the population of Naples at risk of small earthquakes or an explosion. Yesterday, Italian news agency ANSA quoted project coordinator Giuseppe De Natale of Italy’s National Institute of Geophysics and Volcanology as saying that the office of Naples mayor Luigi de Magistris has approved the drilling of a pilot hole 500 meters deep. The Campi Flegrei Deep Drilling Project was set up by an international collaboration of scientists to assess the risks posed by the Campi Flegrei caldera, a geological formation just a few kilometers to the west of Naples that formed over thousands of years following the collapse of several volcanoes. Researchers believe that if it erupted, Campi Flegrei could have global repercussions, potentially killing millions of people and having a major effect on the climate, but that such massive eruptions are extremely rare.

Extremes: Climate Change - Last year, America suffered historic weather calamities: disastrous tornadoes, severe floods, extended drought, record-breaking snowfall, raging wildfires, etc. Federal agencies say $52 billion in property loss was inflicted, and more than 1,000 Americans died in weather ravages…. Scientists say the violent weather is solid evidence that fossil fuel fumes are girdling Planet Earth with greenhouse gases that produce global warming and climate change. Warmer air holds more moisture, producing more extreme storms. This topic has special resonance in West Virginia, a fossil fuel treasure trove. And what happens here has a special impact on the future of the planet. Pollution controls seeking to reduce global warming are sure to impose tighter restrictions on coal and natural gas. West Virginia’s energy should not be squandered on a shortsighted attempt to protect the status quo, or to discredit science in the public’s eyes, or to vilify the Obama administration’s very reasonable proposal that new coal-fired power plants be required to limit their greenhouse gas emissions. West Virginia should put its energy into getting people ready to work in a world after coal.

Low Natural Gas Prices Threaten Carbon Capture Projects - A federal proposal to ban the construction of coal-fired power plants that release all of their carbon dioxide into the atmosphere would seem to smooth the way for carbon capture, a budding technology that traps the greenhouse gas for storage or other uses. But even as the Environmental Protection Agency prepares to open hearings on the proposed rule, unveiled in March, industry experts say the persistently low price of natural gas is threatening the viability of the nation’s carbon capture projects.  Natural gas is so cheap and plentiful that utilities have little incentive to build coal-fired plants with the capture technology. And the proposed rule exempts existing coal- and gas-fired plants.

There Is a Way! Beyond the Big, Bad Corporation - In September 2011, two Appalachian women traveled to Delaware to deliver a petition to the state’s Attorney General Beau Biden. Betty Harrah and Lorelei Scarbro represented thousands who believed that the business charter for coal-mining company Massey Energy should be repealed. The company, mostly operating in Appalachia but incorporated in Delaware, has violated the Clean Water Act 60,000 times. An investigation commissioned by the governor of West Virginia found Massey could have prevented the explosion that claimed the lives of 29 miners, among them Harrah’s brother, at the Upper Big Branch Mine in 2010. Massey, they contended, was simply too dangerous to be in business. But their pleas fell on deaf ears. The company plugs along, despite its shoddy environmental and safety records, churning out profits for its parent company, Alpha Natural Resources. To many, Massey is not simply one bad apple, but part of an economic system heavy with rotten fruit. Companies like Lehman Brothers, Bank of America, Countrywide, BP, and Walmart epitomize the relentless drive of corporations to maximize profit above everything else, including safety, fair working conditions, clean air and water, healthy communities, and common decency. In doing so, the very word “corporation” has become a dirty word. Forget bad apples, perhaps we should just raze the entire orchard, right?

Coal Country Jobs At Two-Decade High, But Industry Campaigns Against ‘Job Killing’ Regulations - The coal industry and their Republican allies are looking to bury Obama under coal issues, Politico reports. American Coalition for Clean Coal Electricity unveiled video attacks on his coal record the past week, as coal donors flock to Romney, who’s taken $187,750 in campaign cash through March 31. We’ve already debunked the myth that EPA regulations threaten jobs, and the facts do not back the industry’s case for a “war on coal”: While the Obama administration and the EPA may be taking a harder look at mountain top removal mining permits, a quick look at coal mining employment in West Virginia reveals that since Obama took office in the winter of 2009 coal mining employment has grown by over 1,500 jobs or by 7.4%. If we measure from the end of the national recession in June 2009 (or the 2nd Quarter of 2009) to the third-quarter of 2011 (the latest available data), employment in the coal mining industry has grown by 3,100. For comparison, total employment in West Virginia has only grown by 2.9% over this period.

Burning Less Coal? Let's Export Global Warming Instead - An increasingly large part of the "rosy" exports picture centers around our energy exports, which means coal exports. I was pleased to see Worse Than Keystone by Alyssa Battistoni, which appeared in Salon last Friday. Alyssa actually did some research, and provided some useful links, which always makes me happy. Environmentalists are focused oil and gas, but a bigger carbon disaster may be brewing in the Pacific Northwest Coal is without question our dirtiest fuel source: When burned, it dumps toxins like mercury and nitrogen oxides into the air and packs an outsize punch when it comes to carbon emissions. Since America has a lot of it, though, we’ve tended to use a lot: Historically, around half our electricity has been generated by coal combustion plants. But as a result of sustained anti-coal activism, low prices for natural gas, and new EPA regulations on power plant emissions, Americans are using a lot less coal than we used to, and the future of the sooty stuff in this country is looking dim. So the U.S. coal industry is pinning its hopes on China. The United States is indeed burning a lot less coal than it used to, mostly due to very cheap natural gas, which is the crack cocaine of the power generation industry. Let's look at some data before we move on.

Coal Industry To Northwest: ‘Back Away From Your Future. Resistance Is Futile.’ - Seattle woke up yesterday to a litany of coal export insults, front page in the Seattle Times:  “…an explosion of diesel exhaust”; “… long, traffic-snarling trains”; “…more accidents and marine vessel groundings”; “…poison aquatic food webs.” ….and that’s before the story turns to “the most far-reaching issue:  the potential effect new markets for coal could have on greenhouse gas emissions.” Oregon, Washington, and many local governments insist that the federal government take a comprehensive look at the issue, including the climate impacts.  One way or the other, decisions about coal export amount to fateful climate policy decisions.  Oregon Governor John Kitzhaber said, in his strongly worded letter to the feds: “In the absence of a clear federal policy on this point, we will simply be deciding by not deciding.”  “Deciding by not deciding” is, of course, exactly what the coal industry proposes.  The last thing they can afford is a conscious decision, on the merits, in full view of all the facts. 

Worse than Keystone - Coal is without question our dirtiest fuel source: When burned, it dumps toxins like mercury and nitrogen oxides into the air and packs an outsize punch when it comes to carbon emissions. Since America has a lot of it, though, we’ve tended to use a lot: Historically, around half our electricity has been generated by coal combustion plants. But as a result of sustained anti-coal activism, low prices for natural gas, and new EPA regulations on power plant emissions, Americans are using a lot less coal than we used to, and the future of the sooty stuff in this country is looking dim. So the U.S. coal industry is pinning its hopes on China. While historically most of our exported coal has gone to Europe, U.S. exports to China increased 176 percent between 2009 and 2010, and that number is likely to keep rising as the Asian market for coal continues to expand. The prospect of shipping coal across the Pacific is even more appealing considering that Western states like Wyoming and Montana have vast coal reserves in the Powder River Basin, one of the largest coal deposits in the world. But while the incentives to drastically scale up Western-mined, Asia-bound coal exports exist, the infrastructure to do so does not — at least, not yet. Coal mining companies are hoping to change that by building up to six coal export terminals in the Pacific Northwest — three apiece in Washington and Oregon — with the combined capacity to ship around 150 million short tons of coal to Asia each year. These new plans would more than double 107 million short tons of coal the U.S. exported in 2011

Why Coal Leasing Should Be The Center Of The Climate Fight - The most important thing you can read this week is Joe Smyth’s post on federal coal leasing. I realize “federal coal leasing” is not a phrase to quicken the pulse, but it’s a Very Big Deal. A couple of weeks ago, I explained the situation the U.S. coal industry is in: Domestic electricity use has leveled off, utilities are switching to cheap natural gas and wind, and the EPA is finally cracking down on dirty old coal plants. All that leaves U.S. coal in a pinch. Their main hope for the future is to increase coal exports. That’s why the fight over coal export terminals matters. Arguably, though, the coal-export fight is secondary. From a climate-hawk point of view, it would be better just to leave the damn coal in the ground. Is that even within our power as concerned U.S. citizens? As it happens, yes, it is, because we own much of the coal! The coal that companies like Peabody are itching to export comes from the Powder River Basin in Wyoming and Montana. And most of the land in the Powder River Basin is owned by the federal government — that is to say, it’s owned by you and me. The federal Bureau of Land Management leases the land to coal companies at bargain-basement prices, so they can strip-mine it and export the coal at a profit. Does that sound like good public policy to you?

Map Shows Probability Of Contamination From Severe Nuclear Reactor Accidents Is Higher Than Expected - Western Europe has the worldwide highest risk of radioactive contamination caused by major reactor accidents Catastrophic nuclear accidents such as the core meltdowns in Chernobyl and Fukushima are more likely to happen than previously assumed. Based on the operating hours of all civil nuclear reactors and the number of nuclear meltdowns that have occurred, scientists at the Max Planck Institute for Chemistry in Mainz have calculated that such events may occur once every 10 to 20 years (based on the current number of reactors) — some 200 times more often than estimated in the past. The researchers also determined that, in the event of such a major accident, half of the radioactive caesium-137 would be spread over an area of more than 1,000 kilometres away from the nuclear reactor. Their results show that Western Europe is likely to be contaminated about once in 50 years by more than 40 kilobecquerel of caesium-137 per square meter. According to the International Atomic Energy Agency, an area is defined as being contaminated with radiation from this amount onwards. In view of their findings, the researchers call for an in-depth analysis and reassessment of the risks associated with nuclear power plants. Global risk of radioactive contamination. The map shows the annual probability in percent of radioactive contamination by more than 40 kilobecquerels per square meter. In Western Europe the risk is around two percent per year.

Fukushima radiation higher than first estimated - The radiation released in the first days of the Fukushima nuclear disaster was almost 2-1/2 times the amount first estimated by Japanese safety regulators, the operator of the crippled plant said in a report released on Thursday. Tokyo Electric Power said its own analysis conducted over the past year put the amount of radiation released in the first three weeks of the accident at about one-sixth the radiation released during the 1986 Chernobyl disaster. "If this information had been available at the time, we could have used it in planning evacuations," Tepco spokesman Junichi Matsumoto told a news conference. Because radiation sensors closest to the plant were knocked out by the March 11, 2011 quake and the tsunami, the utility based its estimate on other monitoring posts and data collected by Japanese government agencies.

Radioactive Release at Fukushima Plant Was Underestimated… (Reuters) — The amount of radioactive materials released in the first days of the Fukushima nuclear disaster was almost two and a half times the initial estimate by Japanese safety regulators, the operator of the crippled plant said in a report released on Thursday. The operator, the Tokyo Electric Power Company, said the meltdowns it believes took place at three reactors at the Fukushima Daiichi plant released about 900,000 terabecquerels of radioactive substances into the air during March 2011. The accident, which followed an earthquake and a tsunami, occurred on March 11. The latest estimate was based on measurements suggesting the amount of iodine-131 released by the nuclear accident was much larger than previous estimates, the utility said in the report. Iodine-131 is a fast-decaying radioactive substance produced by fission that takes place inside a nuclear reactor. It has a half-life of eight days and can cause thyroid cancer. It is difficult to judge the health effects of the larger-than-reported release, since even the latest number is an estimate, and it does not clarify how much exposure people received or continue to receive from contaminated soil and food.

Radioactive steam still coming out of Fukushima reactors — “On the order of trillions of becquerels per day” (AUDIO)

Vital Signs: Natural Gas Prices Rebounding - Natural-gas prices are rising. Rising production and falling demand because of an unusually warm winter pushed the price of natural gas to a 10-year low earlier this year. But prices have rebounded in recent weeks as drillers increasingly turn their attention to more profitable oil. Prices are up 37% since their April low, to $2.609 per million British thermal units.

Shale gas boom helps slash US emissions - The shale gas boom has led to a big drop in US carbon emissions, as generators switch from coal to cheap gas.  According to the International Energy Agency, US energy-related emissions of carbon dioxide, the main greenhouse gas, have fallen 450m tonnes over the past five years – the largest drop among all countries surveyed. Fatih Birol, IEA chief economist, attributed the fall to improvements in fuel efficiency in the transport sector and a “major shift” from coal to gas in the power sector. “This is a success story based on a combination of policy and technology – policy driving greater efficiency and technology making shale gas production viable,” Mr Birol told the Financial Times. Shale gas has transformed the US energy landscape, with surging production pushing gas prices down to 10-year lows and heralding an industrial renaissance. But it is also the subject of a heated environmental debate, with critics alleging that the production process can pollute groundwater.  Gas is fast becoming the new fuel of choice for the US power sector: in the past 12 months, coal generation has slumped by 19 per cent while gas generation has increased by 38 per cent, according to US Department of Energy figures. A gas-fired plant produces half the CO2 emissions of a coal-fired one.

Gazprom Hopes to Build Second Baltic Sea Pipeline - The Nabucco pipeline is intended to transport gas from the Caspian Sea region, along a 3,900-kilometer southern route to Baumgarten in Austria, bypassing Russia in the process. But not a single meter of the pipeline has yet been laid, and that will likely remain the case. The Nabucco project will not be implemented as planned.  Three weeks ago, Hungary's MOL Group voiced significant doubts about the project, and now another consortium member is thinking of pulling out.  One reason is that the estimated total cost of over €15 billion ($19 billion) is more than twice as high as the original projection. Another is that potential suppliers Azerbaijan and Turkmenistan have not yet provided definitive commitments to supply natural gas to the pipeline. Indeed, it is beginning to look as though the erstwhile competition between the two pipelines has been overwhelmingly won by Nord Stream. Schröder's team has just decided to expand the Baltic Sea pipeline's capacity. The owners, Gazprom, E.on-Ruhrgas, Wintershall, Gaz de France and the Dutch firm Gasunie, are investigating the construction of a second pipeline through the Baltic Sea, which is likely to be built close to the existing line. The end result would be a dual pipeline that could begin transporting additional billions of cubic meters of gas from Siberia directly to northern Europe in seven to eight years.

Oil starts flowing from Cushing to Houston on Seaway - The Seaway pipeline began pumping crude from Cushing, Oklahoma, oil tanks to the heart of the U.S. refining industry in Houston, Texas, on Saturday, marking a historic shift in the way oil flows across the United States.

Methane Reported In 2 Northern Pennsylvania Water Wells: — State environmental regulators say methane had to be vented from a pair of private drinking wells near a northern Pennsylvania natural gas drilling well. The Department of Environmental Protection says gas bubbling has also been reported in wetlands near the homes in LeRoy Township, Bradford County. The DEP says the source of the methane hasn't been determined but driller Chesapeake Energy Corp. is screening all private wells within 2,500 feet of its Morse drilling pad. The complaint was first made to DEP on Saturday.

How rural America got fracked - If the world can be seen in a grain of sand, watch out. As Wisconsinites are learning, there’s money (and misery) in sand -- and if you’ve got the right kind, an oil company may soon be at your doorstep. Yet this peaceful rural landscape is swiftly becoming part of a vast assembly line in the corporate race for the last fossil fuels on the planet. The target: the sand in the land of the cranes.That sandstone contains a particularly pure form of crystalline silica. Its grains, perfectly rounded, are strong enough to resist the extreme pressures of the technology called hydraulic fracturing, which pumps vast quantities of that sand, as well as water and chemicals, into ancient shale formations to force out methane and other forms of “natural gas.” That sand, which props open fractures in the shale, has to come from somewhere. Without it, the fracking industry would grind to a halt. So big multinational corporations are descending on this bucolic region to cart off its prehistoric sand, which will later be forcefully injected into the earth elsewhere across the country to produce more natural gas. Geology that has taken millions of years to form is now being transformed into part of a system, a machine, helping to drive global climate change.

Insight: Peak, pause or plummet? Shale oil costs at crossroads - - Occidental Petroleum was among the first major U.S. oil drillers to make a big bet on the resurgence of domestic production, spending billions to grab oil patches from Texas to North Dakota. Now, as it bemoans steep costs and moves its rigs out of the Bakken shale oil fields, some analysts wonder if the company has lost its clairvoyance. After two years of unyielding gains, costs are bound to fall, they say.The California-based energy giant is beset by escalating labor costs in North Dakota, which has the lowest unemployment rate in the country. Other material costs have surged and new environmental regulations could add to the burden. The cost of bringing one Bakken well into production has grown from an average $6.5 million in 2010 to $8.5 million in the first quarter this year, data from company reports and the state regulator show. "We got a lot better places to put money right now than the Bakken," Occidental CEO Stephen Chazen said on a conference call with analysts late last month. "That's why I'm slowing it down."

Oil And Gas Link To Texas Earthquakes Studied - Scientists from two Texas universities are looking into a pair of recent earthquakes near the Texas-Louisiana border for clues to whether they were related to underground injection of oil and gas drilling waste produced in the course of hydraulic fracturing or fracking. One of the scientists studying the two recent Texas quakes was on a team that concluded a swarm of earthquakes near Dallas in 2008 and 2009 were related to the disposal of drilling wastes, according to E&E’s Energy Wire. Cliff Frohlich, a research scientist at the University of Texas who studied those Dallas area quakes, did not rule out a similar conclusion in the recent east Texas quakes.“It’s possible they were natural,” he said. “It’s possible they were man-made.” The two quakes, a 3.9 magnitude event on May 10 and a 4.3 magnitude one on May 17, took place northeast of Nacogdoches, Texas. That area is part of the Haynesville shale formation and is home to injection wells.The two recent events come about a month after the US. Geological Survey reported that a big increase in earthquakes across a large part of the nation’s midsection since 2001 is “almost certainly manmade.”  Though the agency did not tie the increase directly to a big increase in drilling for gas and oil from shale formations, it did say the surge in seismic activity “corresponds” to that development and the huge jump in fracking and the underground disposal of liquid wastes that flow back to the surface after fracking jobs are completed.

Hidden oil sands growth bodes ill for crude - Those expectations of meteoric growth in the oil sands? Too modest, according to a new analysis by CIBC World Markets Inc., which says the official industry projections may be conservative by 500,000 to a million barrels a day. In other words, where the Canadian Association of Petroleum Producers suggests oil sands output could surge by 1.4-million a day between 2011 and 2020, CIBC’s read of the numbers suggests it could be more like two-million to 2.5-million – an analysis that portends financial difficulties for an oil patch that sees prices nosedive when there’s too much oil and not enough pipe. It’s a bold call because history has shown that industry forecasts are routinely too optimistic – by a lot. An analysis by Raymond James pointed out that in recent years CAPP’s numbers have proven too high by roughly a third. Numerous problems, from engineering and planning errors to price overruns, have conspired to deflate some corporate growth ambitions.

The age of extreme oil: ‘This Used To Be A Forest? -  One grey Thursday at the end of April, a plane touched down in Fort McMurray, Alta., carrying four Achuar Indians from the Peruvian Amazon. They had flown 8,000 kilometres from the rain forest to beseech Talisman Energy Inc., the Calgary-based oil and gas conglomerate, to stop drilling in their territory. Talisman's annual general meeting was coming up, and the Achuar were invited to state their case to chief executive officer John Manzoni in front of the company's shareholders.  But first, they wanted to see a Canadian oil patch for themselves, and meet the aboriginal people who lived there.

Aerial Photo Tour Of The Alberta Oil Sands - Since the companies mining the oil from the sands of Alberta wouldn't provide access to their operations to a reporter, he rented a plane and took a bunch of photos.

Just how dirty are Canada’s oil sands, anyway? - Once again, Congress is debating whether to approve the Keystone XL pipeline, which would bring oil from Alberta’s tar sands down to the Gulf Coast. Republicans want to fold it into the transportation bill. And scientists like James Hansen warn that harvesting tar sands would be “game over” for the climate.So let’s get some numbers: What would the actual impact be? The Congressional Research Service just put out a new report that takes stock of various academic studies on the subject. Crude from Alberta’s oil sands is heavier, more viscous, and contains more impurities than other types of oil. So it takes more energy to extract and process. When you consider the entire life cycle — from digging the stuff out of the ground to burning it in your tank — oil from tar sands produces 14 to 20 percent more carbon emissions than other oil the U.S. imports.Overall, the CRS report estimates, approving the Keystone XL pipeline would be the equivalent of boosting U.S. global-warming emissions by between 0.06 percent and 0.3 percent per year. (That assumes the pipeline spurs additional production in Candada.) At the high end, that’s like putting 4 million extra passenger cars on the road.

Rep. Kucinich: Keystone approval will cause gas prices to rise - Outgoing Rep. Dennis Kucinich (D-Ohio) said Tuesday that the Keystone XL pipeline approval mandate that is currently being debated by a conference committee on a proposed multi-year surface transportation bill will lead to higher prices if it becomes law. Kucinich, who was ousted in a primary in March by Rep. Marcy Kaptur (D-Ohio), said a study released by the Natural Resources Defense Council showed the Keystone approval would increase the amount the U.S. has to spend on gasoline by $4 billion by "limiting the supply of Canadian crude to Midwest refineries and rerouting it to Gulf Coast refineries. "A foreign-owned oil company is playing us for fools," Kucinich said in a statement released by his office. "In order to convince Americans to accept a pipeline that will result in higher gas prices, we have been bombarded with a public relations campaign to convince us that the pipeline is a good idea. It may be a good idea to foreign investors, but the Keystone XL pipeline is a bad idea for American consumers, a bad idea for America’s fledgling economy, a bad idea for our health and a bad idea for our environment."

How the Keystone XL could bring higher gas prices to Texas - The 1,700-mile pipeline has been at the center of the debate between Republicans and Democrats over job creation, but according to a NPR StateImpact story, the pipeline might have a negative impact on gasoline prices in some areas including Texas. The reason is based on the premise that access to crude oil is uneven. In the current crude oil pipeline system, the Midwest has more access to crude oil from North Dakota, Montana and Canada, and a glut of oil is sitting idle in Cushing, Okla., unable to reach refineries in the Gulf Coast. As a result, the crude oil is selling cheaper because it can’t get the refineries easily. The Keystone XL pipeline and another project by Enbridge would alleviate that bottleneck by bringing the glut of oil to refineries in the Gulf Coast, and analysts say that could lead to the end of discounted crude.

Republicans try to force the military to use dirty energy it doesn’t want - The U.S. military recognizes that dependence on fossil fuels is a threat to U.S. strategic influence and its own operational effectiveness. With that in mind, it’s trying to make itself lighter and leaner, reducing energy consumption at bases and on the battlefield while working to develop fuel alternatives for its ship and plane fleets. Last week, the Republican-led House Armed Services Committee proposed a new Pentagon budget. Tucked away inside it was a provision that would prohibit the Department of Defense from buying any alternative fuels that cost more than conventional fossil fuels. TPM has the story. Slate’s Fred Kaplan laments that this provision would kill the $12 million “Green Strike Group” program the Navy is running, which would field a strike group running entirely on biofuels (and a nuclear-powered carrier) for a naval exercise in June. The Navy hopes to have an entire “Great Green Fleet” in the water by 2016. But the language is far broader than that. It would effectively prohibit military field-testing of any non-fossil fuel. After all, if alternatives were already cheaper than fossil fuels, they wouldn’t be alternatives. The Air Force couldn’t experiment with fuel blends for its jets. The Army couldn’t fuel its “Green Warrior Convoy.” This provision would explicitly ban the military from being an instrument of energy innovation.

Oil boom strikes Kansas - Hundreds of workers seeking high-paying jobs are flocking to places like Harper County, which had resorted to paying people to live there because of its declining population. Businesses are coming back from the dead and a housing shortage has caused rents to triple.  Oil companies began exploring Southern Kansas over a year ago, seeing enormous potential in the area now that new technologies like horizontal drilling and fracking have made it possible to tap into the oil-rich Mississippian Lime formation (see map above). SandRidge Energy, which holds the most horizontal drilling permits in Kansas, estimates there are about 15 billion barrels of recoverable oil in this part of Kansas. The company plans to drill 130 wells in the state by the end of the year -- up from 10 last year. And its wells are hitting oil 100% of the time.

Shell Arctic Ocean Drilling Stands to Open New Oil Frontier - The president’s preoccupation with the Arctic proposal, even as the nation was still reeling from the BP spill, was the first hint that Shell’s audacious plan to drill in waters previously considered untouchable had gone from improbable to inevitable. Barring a successful last-minute legal challenge by environmental groups, Shell will begin drilling test wells off the coast of northern Alaska in July, opening a new frontier in domestic oil exploration and accelerating a global rush to tap the untold resources beneath the frozen ocean. It is a moment of major promise and considerable danger. Industry experts and national security officials view the Alaskan Arctic as the last great domestic oil prospect, one that over time could bring the country a giant step closer to cutting its dependence on foreign oil. But many Alaska Natives and environmental advocates say drilling threatens wildlife and pristine shorelines, and perpetuates the nation’s reliance on dirty fossil fuels. In blessing Shell’s move into the Arctic, Mr. Obama continues his efforts to balance business and environmental interests, seemingly project by project. He pleased environmentalists by delaying the Keystone XL pipeline from Canada and by adopting tough air standards for power plants, yet he has also delighted business concerns by rejecting an ozone standard deemed too costly to the economy.

When 'Drill Baby Drill' means 'Export Baby Export'- Americans are frequently promised that more oil and gas drilling will translate into lower energy prices. "More domestic production is critical to putting downward pressure on gasoline prices – supply matters." And so it does. But what happens when we start exporting those extra barrels? You don't need to be an economist to know the answer. When supplies are tight, prices stay propped up. A fresh infusion of supplies may send prices down, but when they're exported to consumers overseas willing to pay more for their energy, Americans never get to see the savings. A boom in natural gas drilling in the U.S. has, indeed, led to dramatically lower prices across the board as supplies hold near historic highs. Yet the most aggressive oil drilling in the country in nearly a decade has not produced the same result, even as crude oil inventories hit a 21-year high. The reason is simple, although our nation's politicians and business leaders have been coy about it. It comes down to our ability to export. Right now, the U.S. does not have sufficient exporting facilities to keep pace with the flood of natural gas. On the other hand, we have long had the ability to export record amounts of petroleum products, such as gasoline, jet fuel and heating oil – and that's exactly what we've been doing.

Crude and Condensate Reached New Highs  - The EIA helpfully produces a breakdown of the global liquid fuel supply into components.  This allows us to distinguish change in the supply of "oil" - narrowly defined as crude oil plus condensates (hydrocarbons which come out of the ground as liquid) - from changes in other things (natural gas "liquids", most of which are actually gases like ethane, propane, and butane, ethanol, and refinery volume changes. The above graph shows these four substreams - the crude and condensate (C&C) is on the right scale and the others on the left scale.  This approach is designed to make it easiest to compare changes.  The interesting news is that crude+ condensate, which has been pretty much plateaued since late 2004, has now made new highs.  So clearly "peak monthly oil" is not behind us. At the same time, the data still seem to me to be consistent with the overall "peak oil moderate" worldview - that in 2005 we entered into a situation in which it became very difficult to raise oil production and that placed significant constraints on the global economy and made recessions more likely, but that the decline in global production will be slow and fears that this would lead to an abrupt collapse of the global economy were overblown (the "doomer" view). At the moment, the plateau in C&C has a slight upward tilt and it's not possible to say declines in global oil production have begun:

Petrobras Says It Holds Billions Of Barrels Of Offshore Oil - Brazilian state-owned oil company Petrobras (SAO: BR:PETR4) announced Tuesday it holds tens of billions of barrels of oil reserves to be developed from offshore oil fields. Speaking to investors, Petrobras Chief Financial Officer Almir Barbassa said the company and its partners hold between 15 and 20 billion barrels of oil. Most of the oil is located in the country's Santos Basin, where some of the largest oil discoveries of the past several decades have been made, reported Dow Jones Newswires. The Santos Basin, comprised of 20 oil fields, the majority of them operated by Petrobras, is said to hold as much as 43 billion barrels of oil. Brazil in general could have as much as 100 billion barrels of oil locked up in offshore deposits, according to the U.S. Geological Survey.

Qatar Producing Crude Oil At Full Capacity -Energy Minister - Qatar is currently producing crude oil at full capacity and is sticking with its OPEC quota, Minister of Energy and Industry Mohammed Bin Saleh Al-Sada said Friday. Qatar currently has a combined output for oil and condensate of around 1.45 million to 1.5 million barrels a day, Al-Sada told reporters on the sidelines of a meeting in Seoul. While he didn't break down the figures for oil and condensate production, he said Qatar's condensate output has been gradually increasing and is "almost now equivalent to crude oil." Qatar plans to boost its condensate output in the coming years, during which it expects condensate output to exceed that of crude oil. "We regard condensate as a crude oil," Al-Sada said.

Sharp Uptick in Iraqi Oil Production - The graph above shows the latest available data for Iraqi production.  As you can see, there was a sharp increase in March and April.  The April number is entirely dependent on one source - OPEC (secondary sources) - but post-invasion Iraq seems much more transparent than other middle eastern countries and the data sources don't vary that much.  So I would expect this to be mostly confirmed. According to Bloomberg, more is on the way: The country is targeting production of 3.4 million a day this year and more than 4 million barrels in 2013, according to Asim Jihad, a spokesman for the Oil Ministry in Baghdad. and Iraq, seeking to more than double oil output by 2015, is poised to overtake Iran as OPEC’s second- largest producer by the end of the year as sanctions hobble crude production in its Persian Gulf neighbor. My past coverage on prospects for Iraqi oil coverage can be found here.

OPEC's View of the World Oil Market - It is interesting to read the viewpoint of OPEC each month, as it relates to global oil supply, and the numbers that they rely on to estimate how much production that will be required.  For 2012, for example, they now see no need to increase production above 30 mbd, (though it averaged 31.62 mbd in April, when NGL and non-conventional sources are included) with adequate production growth to meet demand (some 0.6 mbd) coming from non-OPEC sources that are anticipated to average 53 mbd this year. At present supply is seen as exceeding demand, hence there has been an increase in global stocks which OPEC has noted.  The forecast by region is broken down, as follows:  However, while there appears to be relative stability in the market, this conceals the changes in internal consumption within the Middle East, that collectively effectively reduce the quantity of fuel that is available to the rest of the world, if their production overall remains flat.

OPEC Has Lost the Power to Lower the Price of Oil - There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply. What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat.   While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time. And there is more to this story than meets the eye.

Saudi Oil Output Surpasses Russia - Oil production in Saudi Arabia, the world's largest crude exporter, rose to 9.923 million barrels a day in March, from 9.853 million barrels a day in February, overtaking Russia as the world's largest producer for the first time in six years, official data showed Sunday according to Zawya Dow Jones. Russia's output in March dropped to 9.920 million barrels a day, from 9.943 million barrels a day in February, according to figures posted on the Joint Organization Data Initiative, or JODI, website. JODI is supervised by the Riyadh-based International Energy Forum and shows data supplied directly by governments dating back to 2002. The Arab world's largest economy exported 7.704 million barrels a day in March, up from 7.485 million barrels in the month earlier, JODI said. No comparative figures were given on Russia's exports for the same period.

Is Russian Oil Production Plummeting? - According to  a recent Bloomberg story Saudi Arabia displaced Russia as the world’s largest oil producer, producing just about three thousand barrels a day more in March of 2012: Saudi Arabia boosted crude production close to a 31-year high in March, overtaking Russia as the world’s largest oil producer for the first time in six years, according to the Joint Organization Data Initiative (JODI). Saudi crude exports rose 3 percent in March, reaching the highest level in five years as Iran cut shipments, according to government statistics posted today on the initiative’s website. Saudi Arabia, OPEC’s largest producer, increased daily output to 9.923 million barrels in March, up 0.7 percent to the second-highest level since at least 1980, according to the initiative. That topped output from Russia, which pumped 9.920 million barrels a day, for the first time since February 2006, according to the data.  But what was really interesting was not that the Saudis successfully boosted production, it’s long been known that they have significant excess capacity and can, if needed, rapidly put more oil on the market, but that Russian oil production through the first few months of 2012 was apparently sharply lower than it was at the end of 2011. This would be a truly shocking development, as the Russians have reported that their production has been holding steady near a post-Soviet high.

Iran's oil exports halt decline in May (Reuters) - Iranian oil exports have not dropped further in May after falling sharply since March, industry sources said on Tuesday, because core customers in Europe and Asia continue to buy ahead of European sanctions aimed at slowing Tehran's nuclear programme. Crude exports from Iran appear to be holding steady at around 1.5 million barrels per day (bpd), according to a firm that tracks oil shipments. A source at a leading European oil company and another industry source also said shipments were little changed so far this month. Last year, Iranian crude exports were running at about 2-2.2 million bpd with total production, including domestic consumption, at 3.5-3.6 million. The lack of a significant drop in shipments in May contrasts with declines in March and April and indicates that while many countries have said they will buy less Iranian oil in response to tightening Western sanctions, they have yet to do so. 

U.S. Won't Ease Oil Sanctions at Iran Nuclear Talks - Negotiators headed to Baghdad for a second round of talks on Iran’s nuclear program won’t be giving Iran the relief it is seeking from oil and financial sanctions hobbling its economy, according to Obama administration officials and Western diplomats. Instead, the U.S. and the five other major powers that will hold talks tomorrow with Iran in the Iraqi capital have agreed on confidence-building measures they may offer in response to Iranian concessions, said several U.S. officials and Western diplomats who spoke on condition of anonymity because of the sensitivity of the issue. The five other countries represented at the table are the U.K., France, Germany, China and Russia.

No One Can Afford Another Round of Iran Sanctions - As Iran and the P5+1 prepare to meet in Baghdad on 23 May for the next round of nuclear talks, Europe should be seriously considering the implications of its planned sanctions on Iranian oil scheduled to be implemented on 1 July. Obama certainly is considering this. Greece is collapsing and the entire Euro zone is in trouble. A newly elected French President Francois Hollande is a very important confidante for US President Barack Obama, and together they have plans to save Europe – particularly Greece and the Eurozone – with or without Germany’s cooperation. These ambitious plans, which must see some results before US elections in November, will be thwarted if Europe goes through with its 1 July sanctions on Iranian oil. Though Washington cannot at this point start publicly expressing the desire that Europe back down on the sanctions plans, the Obama administration knows the result of those European sanctions with be higher oil prices and could spell his doom, along with the Eurozone’s.

China Buyers Defer Raw Material Cargos - Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and — in some cases — defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets. The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices. “We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment.” A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore. China’s economy grew 8.1 percent in the first quarter from the same period of 2011, the weakest rise in nearly three years but still pointing to a so-called soft landing. Other key economic indicators followed by Chinese policy makers, including electricity consumption, rail cargo volumes and disbursement of bank loans, point to a sharper slowdown, suggesting the risk of a hard landing. Soft commodities such as soybeans and cotton have also seen Chinese customers default in the past two weeks, a trader at a third global trading house said.

Chinese buyers default on coal, iron ore shipments-trade (Reuters) - Chinese buyers are deferring or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world's second-largest economy is hitting its appetite for commodities. China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. Coal and iron ore prices could fall further before recovering towards the tail end of the second quarter, traders say, sparking more defaults or deferred deliveries. "There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren't buying because they have a lot of coal and traders are also afraid of getting burnt. It's very bearish now," said a trader. The defaults come on the heels of a slump in global thermal coal benchmark prices to two-year lows and increases the prospect of an even steeper fall unless China revives buying to absorb the global coal surplus as exporters ramp up production.

Chinese Buyers Defaulting On Commodity Shipments As Prices Plunge - One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.  More from Reuters:"Chinese buyers are deferring delivery or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world's second-largest economy is hitting its appetite for commodities. China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade. At least six defaulted thermal coal cargoes were being re-offered at a discount, traders said, including contracts for shipments from the United States, Colombia and South Africa. "Many of them signed for the spot cargoes in early April and prices have fallen around $10 a tonne since then. Say if the Chinese traders were buying a cape-sized shipment, they'd be suffering a loss of nearly $1.5 million alone,"

Wen changes his tune - After China’s disastrous macroeconomic data in April, the People’s Bank of China has cut the reserve requirement ratio by 50 basis points. Unfortunately, with debt deflation and a worsening capital flow situation, cutting RRR is going to be totally useless in stimulating credit. So here comes Wen Jiabao. He has recently been quoted as saying that stabilising economic growth is now becoming more important.  According to Xinhua, Wen Jiabao has been travelling to various places and, while he thinks that economic growth is currently within the target range, with challenges both inside and outside of the country it is important to continue proactive fiscal policy and prudent monetary policy to achieve the right balance between stable and rapid economic growth, economic rebalancing and price stability. So, stabilising growth is of greater importance than we’ve see recently, and the government would like to “fine-tune policies in order to expand domestic demand and stabilise external demand”.

The Chinese Stimulus Bull Trap - Yesterday I noted that the Chinese government is considering bringing forward investment projects in the hope of offsetting the negative effect of slowing fixed asset investments.  We have heard this kind of thing before.  Essentially, that was partly what the stimulus after the Lehman bust was about, albeit on a much grander scale. I will not be surprised to see some big fiscal packages if the economy deteriorates further.  I will leave the analysis of the impact of that later, although I am currently leaning towards the opinion that perhaps the consensus has been too optimistic about the effectiveness on stimulating growth, not to mention the very high possibility that the stimulus will be geared towards fixed asset investment anyway (you can’t force people into eating more can you?), which will not be helpful at all as far as adjusting economic structure is concerned. But don’t take my word for it. Nomura’s metal and mining team, which recently called the commodities super-cycle over, is back with another piece of research which is unenthusiastic on the prospects of the benefits of any forthcoming stimulus.

Bear In A China Shop - Time and again, China has defied the skeptics who claimed its unique mixed model -- an ever-more market-driven economy dominated by an authoritarian Communist Party and behemoth state-owned enterprises -- could not possibly endure. Today, those voices are louder than ever. Michael Pettis, a professor at Peking University's Guanghua School of Management and one of the most persistent and well-regarded skeptics, predicted in March that China's economic growth rate "will average not much more than 3% annually over the rest of the decade." Barry Eichengreen, an economist at the University of California, Berkeley, warned last year that China is nearing a wall hit by many high-speed economies when growth slows or stops altogether -- the so-called "middle-income trap."  No question, China has many problems. Years of one-sided investment-driven growth have created obvious excesses and overcapacity. A weaker global economy since the 2008 financial crisis and rapidly rising labor cost at home have slowed China's vaunted export machine. Meanwhile, a massive housing bubble is slowly deflating, and the latest economic data is discouraging. Real growth in GDP slowed to an annualized rate of less than 7 percent in the first quarter of 2012, and April saw a sharp slowdown in industrial output, electricity production, bank lending, and property transactions. Is China's legendary economy in serious trouble?

World Bank warns of China slowdown -- The World Bank said a slowdown in China will drag on growth in the entire East Asia-Pacific region. The bank, an international organization that helps to fund projects in the developing world, said in a report released Wednesday that growth in the East Asia-Pacific region should slow to 7.6% this year from 8.2% in 2011 and 10% as recently as 2010. The slowing regional growth is due to China, which has seen its exports fall due to economic weakness across the developed nations that are its primary customers. Chinese growth is projected to fall to 8.2% this year from 9.2% last year, according to the World Bank's forecast. The bank said China and other developing economies in the region need to do more to break their reliance on exports, such as encouraging domestic purchases.

The risks of a Chinese hard landing - With the Chinese economy seemingly in the midst of a fairly soft landing, global investors have not been paying much attention to China in recent months. However, all that will change as a result of the extremely weak Chinese activity data for April which were published last week. Asian equities and commodity prices have already fallen this quarter, and that will turn into a global problem if the April activity data are a harbinger of things to come. The April data have not only shaken investors out of their earlier complacency, they have clearly affected policy makers too. The cut of 50 basis points in the banks’ reserve requirement ratio announced on Saturday suggests that the urgent need for a policy injection is at last being recognised. The question now is whether Chinese policy makers, in sharp contrast to their normally sure-footed behaviour,  have left it too late to stem the downward momentum in the economy, and especially in the property sector.  Chinese economic data are, of course, notoriously unreliable and difficult to read. Most data are released in the form of 12-month percentage changes, which tend to obscure short-term variations in economic momentum. Seasonal adjustment is another severe problem, especially around the turn of the calendar year, when annual holidays massively distort the reports. Although the economics teams in several investment banks now publish their own estimates of monthly and quarterly changes in the most important series, these can differ markedly from each other, and are subject to huge revisions. Nevertheless,  investors have no option but to attempt to peer through the fog.The first graph shows my latest effort to make sense of recent data:

China Manufacturing PMI Softens Again, In Contraction For 6 Months; Defaults and Deferrals on Commodity Contracts; As Long As Pigs Have Wings - China shows modest deterioration in operating conditions during May according to HSBC Flash China Manufacturing PMI.  Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: “Manufacturing activities softened again in May, reflecting the deteriorating export situation. This calls for more aggressive policy easing, as inflation continues to slow. Beijing policy makers have been and will step up easing efforts to stabilize growth, as indicated by a slew of measures to boost liquidity, public housing and infrastructure investment and consumption. As long as the easing measures filter through, China will secure a soft landing in the coming quarters.”

Chinese Manufacturing Activity Slows Further, Survey Shows — A closely watched survey showed that manufacturing activity in mainland China had sagged in May, confirming that the Chinese economy was struggling to regain momentum and cementing expectations that Beijing would increase efforts to prop up growth. A preliminary reading of the survey, which is published by HSBC and the financial information provider Markit and offers one of the earliest glimpses of the Chinese economy’s performance each month, fell to 48.7 in May from 49.3 in April, HSBC said Thursday. Readings below 50 indicate contraction, and the HSBC manufacturing index has now been below that level for seven months. Moreover, a subindex that tracks new export orders fell to 47.8 in May, from 50.2 in April. That highlighted the way the economic turmoil in the euro zone — where a purchasing managers index, also released Thursday, likewise fell — has taken its toll on demand for goods from China and elsewhere.

Economists React: Flash Manufacturing Gauge Declines Again - An initial gauge of China’s manufacturing activity fell in May, marking its seventh straight month in contractionary territory and stoking concerns the economy could slow sharply. The preliminary HSBC China Manufacturing Purchasing Managers Index fell to 48.7 in May from a final reading of 49.3 in April.The PMI, a key indicator of manufacturing activity, follows weak performance by the world’s second-largest economy in April in many areas, including industrial production, trade, fixed-asset investment, money supply and the property market. A reading below 50 in the PMI indicates contraction from the previous month, while anything above that indicates growth. The preliminary PMI figure, also called the HSBC/Markit Flash China PMI, is based on 85% to 90% of total responses to HSBC’s PMI survey each month, and is issued about one week before the final PMI reading. The final PMI reading for May is due June 1 when China issues its own official index on manufacturing activity. Here are some of the comments from economists on HSBC’s preliminary data:

No house of cards, but in need of change - THIS week, the print edition has a special report on China's economy written by Simon Cox. I highly recommend it. While you're looking that over, however, don't neglect the accompanying multimedia fare, including today's Daily chart, this conversation with Mr Cox, and the video below: The video helps provide a sense of the extent of inequality in China. Nice Beijing neighbourhoods look very much like nice neighbourhoods in American or European cities. Meanwhile, over 100m Chinese citizens live on less than $1 a day (roughly the official poverty line).

Why China Won’t Rule - Is China poised to become the world’s next superpower? This question is increasingly asked as China’s economic growth surges ahead at more than 8% a year, while the developed world remains mired in recession or near-recession. China is already the world’s second largest economy, and will be the largest in 2017. And its military spending is racing ahead of its GDP growth. The question is reasonable enough if we don’t give it an American twist. To the American mind, there can be only one superpower, so China’s rise will automatically be at the expense of the United States. Indeed, for many in the US, China represents an existential challenge.  This is way over the top. In fact, the existence of a single superpower is highly abnormal, and was brought about only by the unexpected collapse of the Soviet Union in 1991. The normal situation is one of coexistence, sometimes peaceful sometimes warlike, between several great powers.   The sensible question, then, is not whether China will replace the US, but whether it will start to acquire some of the attributes of a world power, particularly a sense of responsibility for global order.

Made in China, but Assembled in Bulgaria - Looking like a child’s fantasy of a life-size toy car, each had a big white sign on the side: “Made in Lovech.” These were the first Chinese cars built in Bulgaria. Late in 2009, Great Wall Motor started talks with a potential Bulgarian partner for construction of an assembly plant, its first in Europe, on abandoned farmland outside Bahovitsa, a quiet village near Lovech in northern Bulgaria. The plant opened officially in February, turning out three models — the Voleex C10, a small five-door hatchback powered by a 1.5-liter engine; a pickup truck; and a sport utility vehicle. Prices start at 16,000 Bulgarian lev, or about $10,400. The plant can produce as many as 50,000 cars a year. For now, the Bahovitsa facility assembles cars from kits manufactured and painted in China. But plans call for welding and painting shops to be added over the next few years, to accommodate the entire production cycle. The idea behind the investment is simple: Bulgaria, the poorest member of the European Union, offers low production costs, cheap labor and a flat tax rate of 10 percent, the lowest in the Union. Assembled in an E.U. member state, Chinese cars can enter the European market without paying customs levies.

Tri-lateral trade pact an Asian game-changer: As global economic power shifts away from the West, the leaders of East Asia's most important economies are busy laying the groundwork for the continued growth of their region based on mutually beneficial trade and investment.  Last week, Chinese Premier Wen Jiabao hosted Japanese Prime Minister Yoshihiko Noda and Republic of Korea President Lee Myung-bak in Beijing. The three leaders agreed to launch formal talks later this year to set up a trilateral free-trade agreement (FTA). This move will have significant and long-lasting effects on both the global economy and the strategic environment in Asia.  Trade between the three nations was valued at over US$690 billion last year, up from $130 billion in 1999. [1] The People's Republic of China (PRC) is already the largest trading partner of both Japan

India and China Should Go Their Own Ways  - In the aftermath of the financial crisis, emerging market economies, led by China and India, kept world growth from collapsing. As Europe again teeters on the brink of disaster and the tepid US recovery lurches along, the growth slowdowns in China and India augur rough times ahead for the world economy.  To keep these two engines of world growth on track, fiscal policy intervention must be a priority. What is needed in each country is a mirror image of the other. China needs more, well-targeted fiscal stimulus while India needs fiscal discipline. While these actions are diametrically opposed due to different circumstances in each country, they will have similar, positive effects. Fiscal policy, if executed well, could help stimulate private demand, boost business and consumer confidence and improve the effectiveness of monetary policy. With both domestic and external demand slowing, the Chinese government faces a choice of policies to hit this year’s growth target. As in 2009-10, looser monetary policy and a rapid burst of credit expansion by state-owned banks could do the trick of boosting investment and output. But this would come at a heavy cost – a retreat from the goal of a consumption-driven economy, more wasteful investment spending and additional bad loans in the banking system.

India’s Slowdown May Have a Silver Lining - iMFdirect - The extent of the recent slowdown in India’s growth rate has surprised most India watchers even in the face of ongoing international financial market volatility, high and volatile oil prices, and the uneven global recovery. GDP growth fell throughout 2011, from a high of 7.8 percent at the beginning of the year to 6.1 percent in the quarter ending in December. The slowdown in the economy has affected the industrial sector particularly hard and has extended to 2012 as shown by the 3.5 percent contraction (y/y) in March industrial production. For 2012/13, we at the IMF project that GDP growth is likely to be about 7 percent. While India has been affected by the worldwide slowdown, many observers have started to question the inner strength of the Indian growth story. By international standards 7 percent growth is still very robust, but it sometimes feels like underachievement for a country that was growing at more than 9 percent just a few years ago.

Vietnam Economic Slowdown Seen in Cobweb-Covered Crates - Nguyen Thi Ha sighs as she looks at the dust and cobwebs covering crates full of colorful, enameled tiles in her factory by Hanoi’s Red River. “We’re struggling to keep our business alive,” said Ha, who laid off more than half of her 60 employees this year as luxury hotels in the beach resort of Danang halted orders. Ha’s factory is among thousands in Vietnam that cut production or closed this year after policy makers curbed a lending spree and bad debts mounted. As demand also slows from Europe to China, the shakeout of businesses that mushroomed during the 2002-2007 boom is slowing economic growth and may temper a stocks rally that made Vietnam the world’s third-best performer this year. “There’s no way we can meet the economic growth target of 6 percent this year when so many companies are in serious trouble,” said Le Dang Doanh, an economist who has advised Prime Minister Nguyen Tan Dung and who estimates 2012 expansion may slow to as low as 5 percent, the least since 1999. “Many businesses are on their last breath.”

The Trade Agreement You Never Heard About – TPP - Did you know, beyond closed doors, there is a massive trade agreement being crafted? It's called TPP or Trans Pacific Partnership and this one makes NAFTA look like the stepping stone that it is. This is one bad mother. This is a trade agreement between Chile, Australia, Brunei, New Zealand, Peru, Singapore, Malaysia and Vietnam and the United States. Japan as well as China may also join. The countries involved isn't the problem. What's being negotiated is. For those who think they won the SOPA/PIPA battle, think again. The below video clip does a good job explaining how SOPA/PIPA are being reintroduced via TPP negotiations.

Democrats revolt against Obama over TPP — RT: A leading Senate Democrat has called out US President Barack Obama over his alleged unwillingness to keep Congress updated on negotiations over a treaty that might be potentially disastrous for America. Senator Ron Wyden (D-Oregon) introduced legislation on Wednesday that specifically targets the Obama administration by demanding that the White House open up on details about the proposed Trans-Pacific Partnership, a massive, international trade agreement that, if passed, would greatly affect consumers from coast-to-coast. The lawmaker isn’t alone in his opposition against the administration, either — more than 60 House Democrats and at least one Republican have objected to provisions of the TPP, and more are expected to line up as details are made public.According to the senator, President Obama and his cabinet have gone out of their way to keep Congress uninformed on the details surrounding the TPP, including even members of his own political party, such as Sen. Wyden. What’s more, argues the senator, is that if anyone should be kept update on the issue, it’s him — as chair of the United States Senate Finance Subcommittee on International Trade, Customs, and Global Competitiveness, it is his job to be up to snuff on proposals such as this.On the contrary, Sen. Wyden and his office have been largely kept out of the picture. The massive corporations with personal stock in the TPP, however, have been all too informed though, he says.

Japan utilities to hike peak rates sharply: report Japanese utilities are planning to increase fees for peak-hour electricity usage in an effort to head off possible power shortages this summer following the closure of the nation's nuclear power plants, the Nikkei business daily reported Tuesday. Under plans beginning for Tokyo Electric Power Co. on June 1 and for Kansai Electric Power Co. (JP:9503) on July 1, rates during the peak hours of 1 p.m. to 4 p.m. will be more than four to six times higher than those for nighttime hours, the report said. Other utilities are likely to follow suit, except for Hokkaido Electric Power Co. and Tohoku Electric Power Co. (JP:9506), which see less of a difference in power usage between peak and night hours.

Japanese Exports to US Surge 42.9 Percent - Japan’s exports to the United States rose for the sixth consecutive month in April on a year-on-year basis, jumping 42.9 percent to $11.99 billion, according to preliminary figures released by the Finance Ministry on Wednesday. Japan’s imports from the U.S. also increased in April, albeit at a much slower pace of 4.4 percent, totaling $6.66 billion. It was the fourth successive monthly growth on a year-on-year basis. As a result, Japan’s trade surplus with the U.S. expanded for three months in a row in April on a year-on-year basis, widening 165.9 percent to $5.32 billion. The robust growth in U.S.-bound shipments in April was led by autos, which soared a whopping 317.1 percent in terms of value. It reflects a sharp drop a year earlier. In April last year, Japan’s exports to the U.S. slumped 23.3 percent on a year-on-year basis, as the devastating earthquake and tsunami that hit northeastern Japan in the preceding month caused serious disruptions to supply chains for Japanese automakers and other manufacturers.

Fitch downgrades Japan to A+, outlook negative - Fitch Ratings on Tuesday downgraded Japan to A+ and issued a negative outlook on the country's credit rating, citing rising public debt levels. Japan's long-term foreign rating had stood at AA and its local currency issuer default rating was previously at AA-. "The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," said Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, in a news release "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk," he said

Japan's fiscal death is a warning to the West - Fitch Ratings has downgraded Japan two notches to A+, citing a surge in public debt since the Lehman crisis and the lack of any plan to restore fiscal probity. Key indicators are deteriorating on almost every front, raising concerns that the world's third largest economy is running aground after two "Lost Decades". Japan's debt has jumped by 61 percentage points of GDP since 2008, compared to eight points for the AAA bloc. Public debt is expected to reach 239pc of GDP this year, uncharted levels for a major economy in peace-time. `Net debt' – subtracting Japan's vast holdings of foreign bonds – is nearer 137pc but this is rising at an even steeper trajectory. "Japan's addiction to public sector spending is way beyond the boundaries or remedial `austerity'," said Dylan Grice from Societe Generale. "Political pressure on the Bank of Japan to crank the printing presses into top gear will become irresistible. We see no alternative."

Australia Approves Migrant Workers for Mining Projects - Australia will allow mining companies to use foreign workers to help address chronic labor shortages, with mining magnate Gina Rinehart's A$9.5 billion ($9.2 billion) Roy Hill iron ore project winning approval on Friday to bring in 1,715 workers. Immigration Minister Chris Bowen said the government had approved Rinehart's plan to bring in the workers to help develop the iron ore mine in the booming and remote Pilbara region of northwestern Australia. The approval is a major shift in immigration policy and clears the way for the resources sector to use more foreign labor to help develop major projects at a time when Australian companies are struggling to find skilled workers. "There is no doubt that the Roy Hill Project is one of national significance," Bowen told the National Press Club as he announced the first Enterprise Migration Agreement with Rinehart's company Hancock Prospecting. Australia's economy avoided recession following the global financial crisis, with strong labor market growth and an unemployment rate currently at 4.9 percent, well below unemployment rates in the United states and Europe. But the resources sector, supported by continued demand from China and India, has long complained that the tight labor market and worker shortages are a constraint on expansion plans. Rinehart, Australia's richest woman, has long called for easier access to foreign temporary workers to help fill shortages.

Rio Issues Land Titles To Slum Residents - The home Jose Nazare Braga built in the Rocinha shantytown is his life's work, an investment that grew from a shack to a three-story building over 30 years. A restaurant and a paper-goods store on the ground floor provide income, and his children, grandchildren and great-grandchildren live above. The red-brick building is Braga's nest egg, his retirement home and an inheritance for his large family. But for decades, the property wasn't formally his, and he lived in fear of losing it all. Now local officials and human rights groups are working to give legal title to tens of thousands of people like Braga, a process that increases their wealth and gives them greater access to credit, as well as peace of mind.

Europe's slump deepens; US, China lose momentum (Reuters) - The shadows over the global economy darkened on Thursday as the euro zone's private sector contracted, U.S. manufacturing growth slowed and China's once-booming factories faltered. In Europe, a downturn that started in smaller states on the euro zone's periphery is now taking root in the core countries of Germany and France, where tepid growth had been the main ballast of support for the euro area economy. "We are very much in a period of weakening global growth. It doesn't quite feel like 2008 yet, but the danger is we could get there quicker than we think," said Peter Dixon at Commerzbank. The euro zone composite PMI, comprising the services and manufacturing sectors, fell to 45.9 from April's 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction. The data sent German Bund futures to a record high as investors sought a safe haven, while the euro neared a two-year low against the dollar. Europe's woes were felt across the Atlantic. Financial information firm Markit's "flash" U.S. manufacturing Purchasing Managers Index slipped to 53.9 in May from 56.0, with slower export sales sapping momentum."The cause seems to lie largely with weak export sales, which likely reflects the deteriorating economic situation in Europe as well as slower growth in China,"

IMF's Lagarde, OECD Call For More Euro Debt Sharing - International Monetary Fund head Christine Lagarde Tuesday called on euro-zone governments to accept more common liability for each other's debts, saying that the region urgently needs to take further steps to contain the crisis. "We consider that more needs to be done, particularly by way of fiscal liability-sharing, and there are multiple ways to do that," Lagarde told a press conference in London to mark the completion of a regular review of U.K. finances. Her comments came an hour after the Organization for Economic Cooperation and Development had, for the first time, endorsed joint bond issuance in its latest Economic Outlook

State Dependence and Fiscal Multipliers - Or, are there nonlinearities in the real (macro) world? Following up on Jim's Sunday post on multipliers, I found this graph from the April IMF Fiscal Monitor of interest: The authors describe the results underpinning this graph thus: The model finds significant evidence that the impact of fiscal policy on economic activity varies with the business cycle and that the effect of fiscal policy on output is nonlinear. Average fiscal multipliers in G-7 countries are significantly larger in times of negative output gaps than when the output gap is positive (Figure A1.2). Results from a simple linear model are very much in line with averages identified in the previous literature, as shown in Table A1.1. Assuming, in line with recent fiscal adjustment packages in advanced economies, that two-thirds of the adjustment comes from spending measures, a weighted average of spending and revenue multipliers in downturns yields an overall fiscal multiplier of about 1.0.

Rising US recession risk poses the real threat to Europe - The US economy has slowed to stall speed. A few lonely forecasters fear that America has already fallen back into recession, replicating the terrible double-dip of 1937. The Philly Fed’s manufacturing index dropped suddenly to minus 5.8 in May. The US Conference Board’s index of leading indicators fell in April. Job creation has slipped from 250,000 a month to nearer 130,000 in March and April. The Economic Cycle Research Institute (ECRI) says post-War personal income growth in the US has never been this weak for three months in a row without triggering a recession. It has happened ten out of ten times. It is this fresh menace - combined with China’s failure to calibrate its heralded soft-landing - that poses the real danger to southern Europe’s arc of depression over the next year. Greece is just a poignant detail.

Dancing Shoes - So many shoes are dropping out there that reality is starting to look and sound like the tap-line in a Busby Berkeley production number. The meme-scape, too, is humming with viral transmissions of dire doings. Is JP Morgan unwinding like a 1911 knitted woolen Yale varsity sweater? Did it booby-trap the credit default swap universe in the process, and is that getting ready to blow? The whole world is hanging by its fingernails, refusing to be dragged into the future.  That future is all about contraction. We could navigate our way into it but we don't want to. We want to stay right where we are with all our stuff and no need to make new arrangements and we are trying every last trick to do that. Can you not sense a terrible tidal surge of implacable forces under the headlines' placid surface?    Does anybody really believe that the European money problem has any other ending except massive repudiation of obligations and epic political realignment? Or that the USA isn't caught in the undertow. The only real question now is how the civilized world might remain civilized while it rebuilds its money system. Money, after all, is a representative of reality and the representations by nations and person and institutions have been so false for so long that, for practical purposes, there is no consensual reality anymore.     Reality's theme going forward is changing from liquidity to liquidation. The European LTRO was a nice fairy tail, and the mild buzz lasted a few months, but its flimsy spell is broken.

Should Greece Exit the Euro Zone? Becker - Countries run balance of payments deficits when their tradable goods are expensive on world markets because their producers are not sufficiently cost effective. These deficits cannot continue unless other countries are willing to help finance these deficits indefinitely by lending money to deficit-running countries. This is unlikely, unless either the deficits are small or a country has an excellent record on debt servicing. Otherwise,countries with balance of payments deficits must reduce their deficits. One option is to devalue their currency if they control its value. Devaluation makes exports cheaper to other countries and imports more expensive to domestic consumers and companies. These effects both tend to cut the trade deficit. Another way to improve international competitiveness is to have sufficient reductions in wages and prices that make the cost of goods more competitive internationally. Still another way is to lower production costs through improved efficiency.

Should Greece Abandon the Euro? Posner - I agree with Becker that it would make sense for Greece (from the standpoint of Greek self-interest) to replace the euro with its own currency, but my reason is slightly different; it is that it is the politically more practicable solution to Greece’s economic woes. I also suggest a caveat based on the costs to Greece of transitioning from the euro to a homegrown currency: Greece would be better off in the long run with its own currency, but it may not be able to avoid or tolerate the short-run costs.  From a narrowly economic standpoint, disregarding politics, abandoning the euro would have consequences for the Greek economy comparable to the consequences of adopting a further set of “austerity” measures, as urged by the Germans. Such measures might include laying off a large number of public sector workers, cutting public pensions, curtailing the powers of unions, cracking down on tax evasion and corruption more generally, and eliminating restrictions on competition, such as licensing requirements for new businesses and for professionals such as lawyers and accountants. The problem with enacting such austerity measures is that they are politically infeasible in the circumstances in which Greece finds itself. This is partly due to Greeks’ hatred of Germans but more to distrust by the Greek people of the Greek government and to the understandable resistance of the beneficiaries of Greece’s economically unsound policies to give up any of their benefits.

Bailout terms will push Greece to exit, party says - The head of Greece's far left Syriza party said Monday there can be no negotiations based on the latest memorandum for a Greek bailout because following those terms would lead to disaster and an exit from the euro zone. Alexis Tsipras, the leader of the Coalition of the Radical Left, or Syriza, was speaking at a press conference at the French national assembly alongside France's far left leader Jean-Luc Melenchon, who took around 11% of the first round vote in recent French presidential elections. Syriza, who came second in Greece's May general elections, is refusing to continue with the austerity terms of the country's international bailout, but demands Greece should continue accepting aid.

Is a Greek Exit from the Euro Inevitable? - For two-and-a-half years, the world has been watching and waiting to see if debt-laden Greece could remain in the euro zone. Many have been doubtful since the beginning of the debt crisis. Greece’s government debt is simply too burdensome, the fiscal adjustment imposed on Athens too severe, the Greeks themselves unwilling to submit to the tough reforms necessary, and the rest of Europe too bullheaded to change their approach to suit reality. But for two-and-a-half years, Greece has nevertheless managed to scrape by and remain in the monetary union, thanks to two European Union/IMF bailouts (totaling $300 billion) that have kept Greece on life support, and repeated promises to reform by Greece’s major political parties. Now, however, the Greek debt crisis may finally be reaching the endgame. The chances of a Greek exit from the euro zone have been on the rise, and that has scary consequences for not just the rest of Europe, but for the entire global economy.

Are concerns over a Greek Euro exit overdone ? - The press and the market continues to speculate about the negative impact of an exit of Greece from the Euro (expectations seems to be over 50%) and both the financial consequences of such an exit on the EZ (indeed everyone else) and, in particular, on the adverse contagion issues in respect of the other PIIGS and core EZ countries, for that matter. Yes it is true that the Greek party Syriza (comprising leftist anti bail out elements) came a surprising second in the last elections and, until recently, has lead in the polls. However, the most recent polls suggest that the Greeks may well be rethinking. New Democracy (23.1%) is narrowly back in the lead (with indications that its support is increasing), followed by Syriza and then Pasok some 10 points behind. If the next elections (due on 17th June) reflect recent polls, a coalition comprising New Democracy and Pasok will be able to form a working majority in Parliament, something which I believe the market has not picked up on as yet Early days, but I for one believe that the trend away from Syriza will continue. Greeks, by an overwhelming majority (between 75% to 80%) want to remain in the Euro, as they realise that the reintroduction of the Drachma will result in an effective devaluation of at least 50%, by all accounts. The resultant hardship (the need to close the current account deficit to zero immediately) will make the current austerity plans seems like a mild dose of influenza, compared with the pneumonia that will follow an Euro exit.

Can This Really Be Europe We Are Talking About? - In recent days I have been think a lot, and reading a lot, about the implications of Greece’s recent election results.  At the end of the day the only difference this whole process makes to the ultimate outcome may turn out to be one of timing. If  Alexis Tsipras of the anti bailout, anti Troika, party Syriza won and started to form a government then the second bailout money would undoubtedly be immediately stopped. On the other hand if the centre right New Democracy wins and is able to form a government, as the latest polls tend to suggest, then the country would quite possibly try to conform to the bailout conditions, but in trying it would almost certainly fail, and then the money would be stopped. Before the last election results, it will be remembered, this was the main scenario prevailing.  Indeed reports coming out of Greece suggest that the end point may be reached more quickly than even previously thought, since the main impact of recent events is that the reform process in the country has been put on hold, meaning that slippage on implementation by the time we get to June will be even greater than it otherwise would have been.

Greece slides on bailout targets in political paralysis (Reuters) - Prolonged electoral uncertainty has put Greece into a state of deep freeze, meaning whoever finally emerges as the new leader will take over a country already falling behind on its promises to lenders. The European Union and International Monetary Fund demanded extensive cuts and reforms as part of a 130 billion euro bailout package agreed in March. But Greece has had no elected government since an inconclusive election on May 6, and paralysis will continue for at least another month, even as funds dry up in the treasury. Senior judge Panagiotis Pikrammenos was sworn in as interim prime minister on Wednesday, but he will not be empowered to take any political decisions - only to steer the country to a new vote on June 17. "The only thing we are doing is waiting," said a government official who declined to be named. Another Greek official close to bailout negotiations said ministers in the outgoing cabinet have not been authorised to negotiate with Greece's lenders since the May 6 election. A senior party official said the caretaker government would not publish any decrees and all tender procedures were suspended. Leftists now favoured to win the next election have alarmed Europe by threatening to tear up the bailout altogether. But even if the next Greek government wants to keep to the agreement, it will have catching up to do from day one.

What Happens if Greece Leaves the Euro? - The BBC have this infographic about what happens if Greece leaves the Euro. Source: BBC. But, when I look at this. Everything has already happened.

  • Greece is already in recession. It has been in recession for past 5 years.
  • Greece already has bank runs. Multinationals are not keeping money in Greek banks
  • Due to unemployment of 23% and youth unemployment of 53%, there already is a political backlash, with growth of extremism on both left and right of political spectrum
  • The Markets are already in turmoil with bond yields very high, and stock markets falling.
  • Greece has already partially defaulted. It already has a sovereign debt crisis.

What Would be Different if Greece did leave the Euro?

No one wins this game of chicken - AS WE have all read repeatedly since it became clear that Greeks would be voting again in June, Greece and the euro zone are engaged in a game of chicken. Greece's left-wing Syriza has been intimating that Greece has nothing to lose from exit and can therefore force the euro-zone core into accommodating its demands. Core euro-area leaders, by contrast, argue that they aren't about to give ground to Greece and that if Greek voters want to push themselves out of the single currency that is fine by them. Perhaps some members of the two sides believe their rhetoric, but most observers think both are nuts—a Greek exit would be extraordinarily costly for all involved. And so some are taking encouragement from signs that maybe, just maybe, Greek voters are being frightened back into support for the parties responsible for the country's bail-out agreement. Kate Mackenzie quotes a Reuters piece on new Greece polling results:The poll, the first conducted since talks to form a government collapsed and a new election was called for June 17, showed the conservative New Democracy party in first place, several points ahead of the radical leftist SYRIZA which has pledged to tear up the bailout...Crucially, it showed that along with the Socialist PASOK party, New Democracy would have enough seats to form a pro-bailout government, which it failed to win in an election on May 6, forcing a new vote and prompting a political crisis that has put the future of the euro in doubt.

In Greek Humanitarian Crisis, It Will Be Leftists Or Neo-Nazis - Austerity doesn’t just lead to unemployment and misery.  If it goes on long enough, it will inevitably lead to the emergence of “swamp thing” extremists into positions of power.  Take the situation in Greece, a country which until recently was a wealthy Western democracy with a relatively stable political system.  After five years of depression, voters in Greece just fired their equivalent of the Democrats and Republicans, and replaced them with anti-bailout groups, mostly on the left (Syriza and Communists), but also with the neo-Nazi group Golden Dawn on the right. This should be a wake-up call to political elites globally, because Greece could simply be the start of a trend of collapsing centrist politics and the rise of dangerous political actors.  7% of Greeks, including a substantial number of the police, voted for a fascist anti-immigrant party whose platform is a mixture of economic populism and xenophobic racist lunacy.  21 Golden Dawn members were elected to Parliament.  Golden Dawn political machine includes roving gangs of thugs that routinely beat up immigrants, and its political platform includes placing mines on the border between Greece and Turkey to prevent immigrants from coming into the country. This is what austerity produces – extremism.   Greeks don’t want neo-Nazi groups running the country, they just don’t want corrupt bankers running it either.  The man who garnered the most power from the election, leftist Alexis Tsipras of Syriza, has called the situation in Greece a “humanitarian crisis”.  That’s just reality. 

The anatomy of the eurozone bank run  - A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.  The risk of bank runs is an inevitable feature of any banking system which takes short term deposits from lenders, and then makes longer term loans to borrowers. This “maturity transformation” is arguably the key function of a bank, but it brings with it the risk that depositors will ask for their money in large numbers at a time when the bank does not have the liquid resources to meet these demands. In some ways, the withdrawal of deposits from banks in the periphery of the eurozone is simply a slow motion version of a rational bank run in the Diamond/Dybvig tradition. For example, deposits in Greek banks have fallen by about a third since the beginning of 2010. Deposits in Irish and more recently Spanish banks have also been falling. Depositors have been shifting their money to “safer” banking systems, notably those in Germany. The extent of these declines and other financing difficulties for the banks is illustrated by the rise of Target 2 imbalances contained within the ECB’s balance sheet, which reflect the mechanism through which these cross-border flows have been financed:

Merkel Resists G-8 Spending Pressure  - German Chancellor Angela Merkel agreed to shift the euro area’s debt-crisis response toward economic growth, avoiding a showdown with her partners as the U.S. prods Europe to stem more than two years of market turmoil. With French President Francois Hollande newly at the table of Group of Eight leaders who met at Camp David outside Washington, Merkel faced the broadest opposition yet to her austerity-led policy for debt reduction and saving the euro. As the G-8 agreed that Greece shouldn’t exit the currency union, some German allies said even that challenge may pale if governments across the continent don’t press ahead on quick- acting programs that offer voters jobs and growth. “Whatever is achieved on Greece in this very difficult situation will not really allow Europe and the euro zone to breathe unless a more substantive agenda of growth is decided upon in Europe to accompany fiscal consolidation,” Italian Prime Minister Mario Monti said in a CNN interview on May 20.

Germany resists sense - Those who have been following my blog for a while will understand I consider Europe’s “fiscal compact” to be both dangerous and counter-productive because there has been a large and significant miscalculation in what implementing fiscal austerity means in already depressed economies. As I stated back in December last year: So while there is no credible counter-balance for the effects of supra-European austerity any attempt to implement the new “fiscal compact” will make Europe’s economic issues worse. The continent is already on the way to recession and unless we see some additional action from the ECB, or a huge swing against this new framework, the push to implement the outcomes of the summit will simply accelerate that outcome. My assumption is that, if Europe does ratify this framework (there are a few stragglers), after 12-24 months of trying the effect will be so disastrous that they will eventually give up. But until then my base case for Europe is a significantly worse economic outcome. And that is pretty much what we have seen.

The Pirate Party fits the political gap - It's a fairytale success: two years ago, hardly anyone knew that the Pirate Party even existed; now, all of a sudden, it has won seats in state parliaments in four successive elections, and a new poll puts them at 11% of Germany's national vote. And that's despite still not having any clear stand on important issues such as Afghanistan or the euro crisis. The German press is bewildered and horrified by turns. The Pirates are a chaotic bunch, they say, a protest party without a real political agenda. A group of internet addicts, nerds who primarily want to download music and films for free.

Mighty Merkel may be the odd woman out (Reuters) - There are weeks in the political life of Angela Merkel that were surely more pleasant than the last one. Last Sunday, the German chancellor's party suffered a big loss in the regional election of North Rhine-Westphalia. On Wednesday, she sacked one of her cabinet ministers, a rare move for her, after he led the party to the election defeat. On Saturday, she looked isolated with her insistence on fiscal austerity - also known as "consolidation" -for the ailing euro zone at the G8 summit hosted by President Barack Obama at Camp David in Maryland. And she might have been upstaged by the new man at the top table, French President Francois Hollande, who defeated her close ally, Nicholas Sarkozy, just weeks ago and ended the so-called "Merkozy" era in Europe. To top off an already long list of unpleasant events, the German football club Bayern Munich lost the Champions League final against Chelsea from London on penalties, a match Merkel watched on the G8 summit sidelines. Pundits may view this week as the first chapter of decline not only for the mightiest woman in Europe, but also for the German way of managing Europe's debt crisis in recent years.

Today Germany is the Big Loser, Not Greece - Given the German electorate’s long standing aversion to “fiscal profligacy” and soft currency economics (said to lead inexorably to Weimar style hyperinflation), one wonders why on earth Germany actually acceded to a “big and broad” European Monetary Union which included countries such as Greece, Portugal, Spain and Italy.Clearly, this can be better understood by viewing the country through the prism of the Three Germanys, which we’ve discussed before:  Germany 1 is the Germany of the Bundesbank: the segment of the country which to this day retains huge phobias about the recurrence of Weimar-style inflation, and an almost theological belief in sound money and a corresponding hatred of inflation. Germany 2 is the internationalist wing of the country, led by Helmut Kohl. Kohl and his successors are probably the foremost exponents of the idea that Europe can rid itself of the “German problem” once and for all if Germany firmly binds itself to a “United States of Europe” and continues to construct institutions that broadly move the EU in this direction.  Which brings us to the key third variable in German politics: Germany 3, Industrial Germany, the Germany of Siemens, Daimler, Volkswagen, the great steel and chemical companies, the capital goods manufacturers. Clearly, these companies benefited substantially from the economic stewardship provided by institutions such as the Bundsebank, along with the broad adherence to Erhard’s social market economy. But they also recognized the benefits entailed by a completely open and integrated European market (still the largest component of their sales).

Just Released: The Euro-zone Growth Outlook Calm Before theStorm? - NY Fed blog - The European Central Bank (ECB) released the results of its 2012:Q2 Survey of Professional Forecasters (SPF) on May 3. As noted in our recent post, the previous survey conducted in January was worrisome because it not only reflected a marked slowdown and increased downside risks to the growth outlook, but also displayed many parallels to the 2008:Q4 survey, when Europe was in a deep recession. The current survey (collected April 17-19) indicates stabilization rather than a further deterioration in the growth outlook. As shown in the chart below, the mean forecasts at both the one-year-ahead (2011:Q4-2012:Q4) and one-year/one-year-forward (2012:Q4-2013:Q4) horizons indicate little change from the previous survey.

Vital Signs: Concerns Weigh on Euro - The euro has been losing ground against the dollar. The currency settled at $1.278 Friday, a slight gain for the day. But that was down more than 3.5% over the past three weeks and nearly 10% during the past year. Concerns about Europe’s fiscal crisis and the prospect of Greece’s exit from the currency bloc have been behind the decline.

Spain's de Guindos: Economy to contract again -- Spanish Economy Minister Luis de Guindos on Monday said the country's economy will contract again in the second quarter, according to media reports. The country's economy, at the heart of deep worries for financial markets, contracted 0.3% in the first quarter, its second straight quarter of economic decline. Late Friday, the government revised up its budget deficit to 8.9% from 8.5% for 2011, after four regions reported higher debt. Speaking to reporters, de Guindos reportedly also said the country's banks do not need bailout help, after French President Francois Hollande said at the Group of Eight Summit over the weekend.that Spanish institutions should be recapitalized by Europe's bailout funds. Spanish stocks stayed under pressure after earlier attempts at gains, off 1.1% to 6,495.70, while yields on 10-year government bonds rose 5 basis points to 6.32%.

Spain says Bankia needs more capital - Spain's economy minister said Monday that the nationalized Bankia needs to strengthen its capital defenses by as much as €7.5 billion ($9.56 billion), but downplayed the need for bailout from European funds.  The minister, Luis de Guindos, said Bankia needed billions more to meet the Spanish government's new requirements to guard its banking industry against further economic shocks. If Bankia cannot raise the money itself, it will have to tap the state bank rescue fund. Bankia and others have until June 11 to tell the government how they plan to come up with the money. : De Guindos dismissed comments from the new French President Francois Hollande that Spain's banks might need money from European recapitalization funds to stay in business.

Cracks are appearing in Europe's state-backed lenders - European taxpayers face having to bankroll a new wave of bailouts amid growing funding problems at state-backed borrowers across the region, according to senior bankers. Financiers are becoming increasingly concerned that many taxpayer-backed borrowers are losing their ability to access private funding markets. The development raises the prospect of already heavily indebted eurozone national governments being forced to take on hundreds of billions of euros of additional debts. “Cracks are appearing in the funding markets for these institutions. If you don’t like the sovereign risk, why would you take the risk of buying the debt of the institutions they support,” said one credit banker. In France, the authorities are racing to avoid having to rescue Caisse Centrale du Credit Immobilier (3CIF) after Moody’s downgraded the mortgage lender last week, warning it could become totally reliant on taxpayer support within months. The lender is one of France’s largest mortgage providers and is owned by a collection of local authorities and mutuals, giving it implicit government support.

Run On Banks In Spain Is Very Real -  As Spain's banking sector continues to deteriorate, rumors are beginning to spread of a possible run on banks with depositors withdrawing some billion euros from a single bank. The Telegraph:The man's voice was scarcely a whisper, but the urgency in his tone was unmistakable. "Will my money be safe here?" asked the customer, leaning over the counter in a central Madrid office of troubled bank Bankia. The weary-looking cashier nodded. "Things are better now," he said quietly. As Spain reels from a week of plunging stock markets and euro-zone nightmares, everyone in the country – and beyond – will be hoping that the cashier was right. On May 9 the government took over Bankia, the country's fourth-largest lender, in an attempt to dispel concerns over the bank's ability to deal with losses related to the 2008 property crash. Bankia is itself a clumsy conglomeration of banks with serious exposure to bad property debt. Don't worry sir, your money is perfectly safe at Bankia. Because "things are better now" that the Spanish government has taken the bank over. And there is no liquidity problem with the nation's banking system because Mr. Fernandez de Mesa said so.

Europe's Banks Fear Flight of Deposits -—The specter of funding problems is once again haunting Europe's banks. Even after the European Central Bank pumped more than €1 trillion ($1.278 trillion) of cheap three-year loans into hundreds of banks, the Continent's financial system remains vulnerable to the prospect that stampedes of customers could yank their deposits from institutions perceived as shaky. That threat was shoved into the spotlight last week when customers withdrew more than €700 million from Greek banks in a single day. The deposit flight, in response to the rising odds that Greece will leave the euro zone, represented a dramatic escalation of two years of a slow but steady flow of deposits fleeing the country's crippled banking system. Now the concern among a growing number of policy makers, investors and analysts is that banking systems elsewhere in Europe's periphery are susceptible to similar crises. If that happens, policy makers and central bankers would likely again have to rush to the rescue.

Europe’s Worst Fear: Spain and Greece Spiral Down Together - In a season of nightmare projections for Europe, this one could be the scariest: Greek leaves the euro currency union at the same time Spain’s banking system is collapsing. In many ways, the market convulsion last week was a test run for those crises, as political deadlock in Greece and mounting fears over the health of Bankia, one of the largest consumer banks in Spain, converged. The credit ratings agency Moody’s Investors Service downgraded the entire Spanish banking sector Thursday. As investors gird for another challenging week, they will be hoping European leaders in Brussels, if not Frankfurt where the European Central Bank is based, can finally start to map out an action plan. It is not clear that policy makers have many good options. The money available to Europe within its main bailout fund, about €780 billion, or $997 billion, would not be enough to handle the twin calamities of a Greek euro exit and a Spanish banking implosion.

Euro Crisis: Why A Greek Exit Could Be Much Worse Than Expected - Greece is likely to abandon the common euro currency now used by 17 European countries. And when it does, perhaps within a matter of months, there will be a damaging domino effect throughout much of Europe. Not all domino effects are created equal, however. And there are two possible consequences if Greece leaves the euro zone that few observers seem to have considered. The scenario everyone recognizes is based on Greece reviving its traditional drachma currency. What this means is that salaries and prices within Greece would be converted from euros to drachmas, and then the drachma currency would be allowed to depreciate to make the Greek economy more competitive. The problem comes with debts that are denominated in euros, especially if the lenders are outside of Greece. These lenders would naturally resist being repaid with less valuable drachmas. However, if Greek borrowers have to repay the loans with euros, the debt would become more expensive for them to pay off after the drachma is devalued. The most likely domino effect, therefore – and the one most widely expected – is that debts to non-Greek creditors are compromised after Greece switches to the drachma.

Greek Voters Need to Look Beyond the Lies of Bloomberg, Merkel, ECB, IMF, Ekathimerini; Greece Nightmare Coming or Already at Hand? - A half-baked editorial on Bloomberg, full of one-sided distortion, warns Greek Voters Need to Look Beyond Syriza’s Dangerous Lies. Tsipras and his Syriza party are selling the Greek people a falsehood: namely, that Greece can renounce the terms of its bailout agreements with the euro-area governments and still receive their money. If voters believe him, and he attracts enough votes in elections on June 17 to follow through with his threats, then his country, Europe and the global economy will live for years with the consequences. Tsipras hardly has a mandate -- he won 16.8 percent of the vote on May 6, and may increase that to 20 percent or more in June. But polls suggest Syriza is now fighting for first place with the center-right New Democracy party. In Greece, that matters, because the top party gets an extra 50 seats in the 300-seat parliament.  Europe’s politicians, across the political spectrum, need to make clear the distinction between Syriza and other parties that disagree with Europe’s austerity strategy. They need to say, repeatedly, that they want to help Greece, but they cannot, and it cannot remain in the euro, if its leaders simply abandon the commitments the country signed. I am not a fan of lies (and I have pointed out lies by Tsipras). However, I am not a fan of snakeoil, thievery, and one-sided analysis either...

Greek House Prices - I found the above data for the Greek house prices at the Bank of Greece.  It's an index for all urban areas with 1997 set to 100.  I don't believe it's inflation adjusted.  The data are annual through 2011 but I also put in the estimate for Q1 2012. There seem to be several interesting points:

  • Greek house prices tripled in only 15 years.
  • They have so far fallen about 20% (nominal) from the peak - closer to 30% in real terms.
  • The decline accelerated in 2012.  Given that the country shows no sign of political and economic stabilization, it's likely they'll fall quite a bit more.
Greece seems like an interesting case study of how much your house can lose value if your country really goes to hell.  So far, it's not worse than what US homeowners lost:

Will the New York Times’ Reporters ever admit that European Austerity is the Problem? - By William K. Black The New York Times’ reporters covering Europe’s financial, social, and political crises continue to channel Berlin and demonstrate an ignorance of economics so profound that it rivals the Wall Street Journal’s editorial writers and columnists.  On May 18, 2012 the NYT published “Rising Greek Political Star, Foe of Austerity, Puts Europe on Edge.”  The problem begins with the title.  It is austerity that has put Europe over the edge.  The Greek leader the article discusses is one of the best hopes from pulling Europe back from self-inflicted disaster.  Most of the euro zone has been thrown into a gratuitous recession and the periphery has been cast into Great Depression levels of unemployment.  The title reverses the analytics and implies that if only the peoples of the periphery would silently embrace economic catastrophe all would be well with Europe.  Economists have known for roughly 75 years that adopting austerity in response to recession or depression will make the economic crisis grow and last far longer.  Austerity is to economics as bleeding was to medicine. Germany, however, has insisted that the European Union (EU) adopt increased austerity in response to the Great Recession.  It is a measure of Germany’s dominance of the EU and the collapse of democracy within the EU that Germany’s self-destructive policy demands that European leaders recently agreed to the Berlin Consensus – adopting more severe austerity even as it became indisputable that austerity was causing economic, social, and political disasters in the euro zone.  The citizens of Europe, however, are increasingly rejecting austerity and the Berlin Consensus.

Spanish Banks Could Need Up to $76 Billion More: IIF - Spanish banking stocks saw some relief early on Tuesday after heavy continued losses on Monday on concern about the banks' property losses. Late on Monday, the Institute of International Finance (IIF) warned that under a worst-case scenario, Spain´s bank losses could hit 260 billion euros ($331.7 billion), with the majority of the losses stemming from commercial real estate loans. In its report, the IIF highlighted that Spanish house prices have further to fall, since they haven´t declined as much as in Ireland and in the U.S. The unemployment rate of 24 percent, which is the euro zone´s highest, only adds to an acceleration of loan defaults, the IIF says. Given that Spanish banks´ provisions for loan losses are only estimated at around 190 billion euros, the shortfall in provisions could be up 50—60 billion euros ($63.7 billion—$76.5 billion), requiring government support for the smaller institutions which don´t have sufficient own resources. The IIF says: ”The three largest banks should meet any shortfalls from own resources, thus residual capital requirements in an adverse scenario may be limited to 50—60 billion euros, around 5 percent of GDP.”

Spanish banks caught in a turf war -  Spain is being pressured to take funds from the EU as fears continue to mount that Greece could withdraw from the euro zone. Spain has been experiencing worsening economic performance on top of its troubled financial system and a staggering unemployment rate has all added to the pressure on its banking system, and the source of the EU's concern that Spain is the most vulnerable to the financial turbulence in Greece. Adding to the pressure and concern, last week credit rating agency Moody's downgraded 16 Spanish banks that are struggling with bad loans from broke construction companies - and the 24.4% unemployment rate. Spain's central bank then announced on Friday that it has bad loans on its books from Spanish banks in the form of uncollectible loans worth €148 billion ($189.2 billion) from last year, a 33% jump. This has now pushed the Spanish government to take measure to protect its banks. The measures being announced by Deputy Prime Minister Soraya Saenz de Santamaria and Economy Minister Luis de Guindos will now require Spanish banks to secure an extra €30 billion ($39 billion) to protect them against additional bad loans. The banks are being left to scrabble and find the additional capital on their own on top of the €54 billion ($70.2 billion) mandated by the government earlier this year. If they cannot find the capital this will cause the banks to take loans from the Spanish government at a 10% interest rate.

Teachers strike across Spain, protesting cuts (Reuters) - Spanish teachers went on strike on Tuesday to protest against cuts in education spending that labour unions say will put 100,000 substitute teachers out of work but that the government says are needed to tackle the euro zone debt crisis. The central government has ordered Spain's 17 autonomous regions to cut 3 billion euros (2 billion pounds) from education spending this year as part of a tough programme to trim the public deficit to an EU-agreed level of 5.3 percent of gross domestic product. Spain's economy is contracting for the second time since late 2009 and four years of stagnation and recession have pushed unemployment above 24 percent, the highest rate in the European Union. Tuesday's strike affected all levels of public education, from kindergarten to university. Teachers at some private schools that receive state subsidies were also on strike.

Millions in the streets: Spain protests cuts to education - The majority of Spain's educational institutions have closed as teachers and students take to the streets to defend their rights. The government has cut billions of euros from educational sector expenses.  ­The strike is taking place on all levels, from elementary schools to universities in all but three of Spain's 17 regions. As many as a million teachers and seven million students are expected to take part in Tuesday's demonstrations. If the austerity package goes through, it will reduce government subsidies on education by more than 20 per cent. The measure, unions say, will result in worsening educational conditions, mass teacher layoffs and higher tuition costs.

How Overvalued Is Southern Europe? - Krugman - OK, for a bit of relief, here’s a dispute among reasonable people. I think I’m right (but then I would, wouldn’t I?), but it’s worth serious discussion.Wolfgang Munchau, in the course of an article I otherwise agree with, argues, contra what I and others have been saying, that there isn’t a need for a large real devaluation — internal or otherwise — on the part of Spain and other peripheral economies:The distortions in competitiveness between eurozone member states are important, but in the short run, I would ignore them for three reasons.First, the competitiveness gap is not as big as some of the estimates suggest. I am especially wary of analysis that shows a divergence of unit labour costs, or other national price indices, since 1999 when the euro was introduced. Germany entered the eurozone with an overvalued exchange rate, which has exaggerated the extent of the subsequent adjustment made by Germany compared with others. I know that Richard Portes, another analyst I very much respect, shares that view. So where’s the difference? The data, whether using unit labor costs or some other measure like GDP deflators, look like this:

Bundesbank warns of Greek risk exposure - --Bundesbank President Jens Weidmann has warned Europe's central banks not to increase their exposure to Greece because of the high level of political uncertainty there ahead of next month's elections. In an interview with German Sunday newspaper Frankfurter Allgemeine Sonntagszeitung he said that “Greek people and their elected lawmakers” will have to decide if they want to abandon the euro currency. Pending those political decisions, central banks “must ensure that the risk on our balance sheets remains manageable,” Weidmann was quoted as saying. If Greece were to abandon the euro, the European Central Bank, national central banks and taxpayers would face high losses that analysts say could add up to some 200 billion euros (US$255 billion). “Indeed, I would not consider it to be right for the euro system to further increase its level of risk for Greece,” Weidmann said.

Why the Germans Probably Won’t Allow Greece to Exit the Euro - Yesterday, Gavyn Davies over at the Financial Times blog ran an excellent piece on the silent bank run that has been taking place across Europe since the sovereign debt crisis began. It would seem that the bank run has sped up somewhat, as many will likely be dimly aware of from recent articles about bank deposits moving out of Greece. The extent to which it has accelerated, however, is quite interesting and can be seen in the following chart which tracks the Target2 interbank lending system in the Eurozone:  Why? Because this is not, as Davies points out, a typical bank run. The reason that people are moving their deposits from peripheral banks to core banks is not because they are concerned about the peripheral banks’ ability to repay. Instead they are concerned that their government might exit the euro and reissue its own currency. In that case there is a good chance that if their deposits were sitting in a bank in their own country they would be converted into the new currency and, hence, automatically devalued vis-a-vis the euro (or neo-Deutschmark if the whole thing fell apart). If the depositor moves their money to a German bank, however, this shouldn’t be a problem — and given that there are no capital controls in Free Europa, moving your money is pretty easy. The real problem — for the Germans, that is — is that, as Davies points out, in preventing a bank run the ECB is loading up on some pretty serious risk:

Secret Central Bank Aid Props Up Greek Banks - There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug. Extensive use of “emergency liquidity assistance” (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis. Separate from normal supplies of liquidity and meant originally as a temporary facility for national authorities to use when banks hit problems, ELA proved a lifesaver for the financial system Ireland and is now even more so in Greece. As such, it has given the ECB — which has ultimate control over the facility — considerable power to determine countries’ fates. Whether that power would ever be exercised is unclear. ELA is a subject on which the ECB is deeply reluctant to provide information — even on where or when it is provided. The ECB’s guard slipped a little late last month. Its weekly financial statement published on April 24, showed an unexpected €121 billion increase in the innocently titled heading “other claims on euro area credit institutions,” the result of putting all ELA under the same item. By definition, €121 billion was the minimum amount of ELA being provided by the “eurosystem” — the network of eurozone central banks. By scouring ECB and national central bank statements analysts, have since pieced together more details. Analysts at Barclays, for instance, reckon Greece is now using €96 billion in ELA, with Ireland accounting for another €41 billion and Cyprus €4 billion. If correct, total ELA in use has exceeded €140 billion — more than 10 per cent of the amount lent to eurozone banks in standard monetary policy operations.

Squeezing Greece's Cash Flow - Greece’s political impasse and the risk of contagion to euro deposits in Spain pushed markets down last week. We think those developments are serious but not necessarily fatal to the euro-zone. The downward pressure from the Facebook IPO and the disclosure of big, vulnerable JP Morgan long positions on corporate credit should fade, leaving U.S. and Chinese growth as key variables along with Greece and euro developments. We don’t think the June 30 wind down of the Fed’s operation twist (which was ineffective) or the fiscal cliff (open to compromise) are as important. We expect the Greek government’s cash to be squeezed hard in coming days. The question is how that plays politically in Greece. Running short before the June 17 election might be helpful to reformers. Greece’s government has been sustaining itself (meeting payroll) by hollowing out the Greek banking sector (as discussed in previous pieces), but the government is at the limit of this resource. The banks are nearly drained and the withdrawal of bank deposits hastens this endpoint (because it uses up any remaining assets). The ECB is reducing Greece’s access to the discount window. It could restrain currency transfers or stop the “emergency lending” that the Bank of Greece has been allowed to make even as its capitalization goes more deeply into the red

The Crisis of European Democracy - IF proof were needed of the maxim that the road to hell is paved with good intentions, the economic crisis in Europe provides it. The worthy but narrow intentions of the European Union’s policy makers have been inadequate for a sound European economy and have produced instead a world of misery, chaos and confusion.  Certainly, some European countries have long needed better economic accountability and more responsible economic management. However, timing is crucial; reform on a well-thought-out timetable must be distinguished from reform done in extreme haste. Greece, for all of its accountability problems, was not in an economic crisis before the global recession in 2008. (In fact, its economy grew by 4.6 percent in 2006 and 3 percent in 2007 before beginning its continuing shrinkage.)  The cause of reform, no matter how urgent, is not well served by the unilateral imposition of sudden and savage cuts in public services. Such indiscriminate cutting slashes demand — a counterproductive strategy, given huge unemployment and idle productive enterprises that have been decimated by the lack of market demand. In Greece, one of the countries left behind by productivity increases elsewhere, economic stimulation through monetary policy (currency devaluation) has been precluded by the existence of the European monetary union, while the fiscal package demanded by the Continent’s leaders is severely anti-growth. Economic output in the euro zone continued to decline in the fourth quarter of last year, and the outlook has been so grim that a recent report finding zero growth in the first quarter of this year was widely greeted as good news.

On the Relevance of Democracy - - In the run-up to new elections in Greece, the German elite is discussing various scenarios involving the use of force to ensure control over Athens, including the establishment of a protectorate or the deployment of "protection forces" in that southern European country. The German austerity dictate, pushing Greece into destitution, is provoking growing popular resistance, which, apparently, can no longer be suppressed with democratic means. Berlin has failed in its efforts to force Athens into subordination by threatening to withdraw the Euro, as much as with its demand that Greece combines its parliamentary elections with a referendum on the question of remaining in the Euro zone. Berlin categorically rejects the option of retracting the austerity dictate and replacing it with stimulus programs, as is being demanded by leading economists world wide, even though the exclusion of Greece form the Euro zone threatens to push the currency, itself, into an abyss.

The crisis through the eyes of middle-school students - “If I were to paint a picture of how I feel, it would be black and show a homeless person begging and crying,” said Dimitris. “The biggest problem is that our politicians are bad and instead of making things better, they are making them worse,” said Constantinos. Dimitris and Constantinos are both middle-school students in Kalamaria, a suburb of Thessaloniki, who participated in a program designed by the parent-teacher association (PTA) to gauge how the children were experiencing the economic crisis and what they thought about fixing it. “The children recorded their thoughts, either in a literary or descriptive way, or in a more technical manner, and I must say they were very interesting,” said Dimitris Madras, head of the PTA and an economics professor at the Aristotle University of Thessaloniki. Eva wrote in her essay: “Once upon a time there was a country that had all that was good. The people were brave, ambitious, kind and hardworking. Slowly, though, they began to steal, not to work as hard; they became greedy. The politicians used tricks to make the people vote for them. Other countries, seeing the mess, began to take advantage of them. Many people lost their jobs and no longer had the basics; no longer had a home.”

Greeks pay full price for medicines -Millions of Greeks are being forced to pay full price for essential medicines because the state health system has run out of cash to pay pharmacies for supplying prescriptions, health officials said on Wednesday. Pharmacy owners staged a 24-hour nationwide strike to press the government to start paying arrears of €250m for prescriptions issued in March and April after last-minute talks on Tuesday between Panagiotis Pikrammenos, the prime minister, and union officials broke down. The dispute highlights Greece’s mounting cash flow problems amid recent political turmoil. While the finance ministry achieved spending targets agreed with international lenders, social insurance funds used up half their annual budget allocations in the first four months, according to official figures. “There is a cash crunch. … The state has stopped funding [the National Organisation for Health Care Provision] EOPPY, and they have stopped paying us,” said an official from the PanHellenic Pharmaceutical Association. ‘We cannot continue to subsidise the health service out of our pockets.” The move to make patients pay the full cost of prescription medicines started last month when state payments were suspended as Greece headed for elections. Pharmacies are owed a total of €520m by EOPPY and other social insurance funds for prescriptions supplied in the past year, the same official said.

Calm Before the Storm?, by Tim Duy: A relatively calm start to the week. Can it last? Almost certainly not. It will get worse before it gets better. A few themes popped since last Friday that are worth considering. First is that some calmer voices have come to the forefront, arguing that a Greek exit is not really all that likely. See Brad Plummer at Ezra Klein's blog or Kate MacKenzie at FT Alphaville. The general point: Breaking up is hard to do. No argument here - a Greek exit would be ugly for Greece, and the rest of Europe as well. And, by all accounts, the Greek people don't want that outcome. The problem, however, is that the alternative, unending austerity to induce a substantial internal devaluation, is not really a solution either. Indeed, it seems to me that on the current path, the cost of austerity will soon outweigh the cost of exit. And we are running out of time to change that trajectory. As I noted in my last post, it looks like the Greece fiscal situation is quickly deteriorating. And it looks like a collapsing tourism industry will only worsen the economy, thereby putting additional pressure on deficit to GDP targets. From FT Alphaville: But it looks like German tourists won’t be propping up the Greek economy so much this summer... The last bailout is quickly being overtaken taken overtaken by events. What will be the demands of any new bailout? If history is any guide, more austerity - and with it a higher probability of exit.

Forget The "Bazookas": Here Come The "Tomahawks" And "Howitzers" - An R-Rated Walk Thru The Greek Endgame - So lets "run" through the mechanics of a Greek bank run. As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account. Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!

OECD joins call for eurozone bonds --- The Organisation for Economic Co-operation and Development has joined French and EU officials in calling for a move towards jointly-guaranteed eurobonds at a time it sees as perilous for the global economy. In its twice-yearly economic outlook, the Paris-based international organisation which specialises in economic policy for advanced economies, warned of a vicious circle in the eurozone, "involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth". It said that the "global economy is, once again, trying to return to growth" with the US, Japan and emerging economies showing steady recoveries, but the progress is threatened by the new crisis in the eurozone. So long as the eurozone crisis does not escalate, the OECD is forecasting a modest contraction of 0.1 per cent in the eurozone economy this year, compared with growth of 2.4 per cent in the US and 2 per cent in Japan.

Germany rules out common euro bonds - Germany refused to share the debt burden of stressed eurozone peers on Tuesday, ignoring two of the most influential international economic bodies which offered support for proposals championed by Paris, Rome and Brussels ahead of a summit. Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms. The calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development came on the eve of Wednesday’s EU summit. François Hollande, France’s new president, has strongly backed common eurozone bonds – which would ease funding constraints for the eurozone’s stressed periphery but potentially raise German borrowing costs by diluting its creditworthiness across the currency union. German officials made clear the idea was a non-starter in Berlin.“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”

Germany, France draw battle lines over eurozone bonds (Reuters) - Germany dismissed a French-led call for euro zone governments to issue common bonds, a day before a European Union summit which investors are looking to for new measures to counter the bloc's debt crisis. After a torrid week, stock markets rallied on optimism that the Wednesday summit would produce measures to foster growth and ward off the threat of contagion should Greece exit the euro. The FTSEurofirst 300 index of top European shares closed up 1.9 percent and Spanish and Italian borrowing costs fell, leaving scope for disappointment if the EU leaders underwhelm. New French President Francois Hollande will push a proposal for mutualising European debt at the informal summit, a scheme which many economists and policymakers say could be one of the most effective ways of restoring market confidence. Hollande has also called for a focus on growth rather than austerity. But there is no sign that Germany, the EU's paymaster, led by Chancellor Angela Merkel, is ready to soften its opposition. Berlin says more progress is needed first on coordinating fiscal policies, a stance in which it has the backing of the Netherlands, Finland and Austria among others.

Austria Joins Germany In Opposing Euro Bonds - While the euro bond song and dance is all too familiar, being a carbon copy replay of last year, we feel obliged to remind who the key actors are, but more importantly who the key decision makers are. In short: while last year, at least in the first half, it was everyone against Merkozy, demanding that the two AAA rated countries backstop Europe at their own expense, following the French downgrade, France no longer cared if there are Eurobonds and joined the peripheral push to convince Merkel to shoulder the cost of preserving the Eurozone on its own. Germany politely declined. Fast forward to this year, when we get the same, only Hollande is now more vocal than ever knowing full well that he alone will be unable to deliver the "growth", read incremental leverage, needed to back up his campaign promises. This is, or rather was, the whole point of today's and tomorrow's latest European summit which, just like this weekend's useless G-8 photosession for the world's leaders to express their support for either Chelsea or Arsenal, will achieve absolutely nothing. Importantly, we now can add at least one more country to the list of those opposed to a AAA-backstopped rescue of the rest of the Eurozone.

Merkel Pressed to Share German States’ Debt Costs - Chancellor Angela Merkel is being pushed by German states to ease their budget squeeze by sharing borrowing costs, a policy she has opposed in confronting the financial crisis in the rest of the euro region.  The opposition Social Democrats plan to press Merkel on so- called Deutschland bonds at a meeting on May 24, Norbert Walter- Borjans, finance chief of North Rhine-Westphalia, the nation’s biggest state, said in an interview. She needs their support to win parliamentary backing for the tougher European fiscal rules she championed.  “The parallel between efforts to push euro bonds and Deutschland bonds is remarkable: the motivation for the push, the timing and the risks,” . “We know her position on euro bonds. If states open a new offensive for Deutschland bonds, then she faces the same pressure from a different angle.”

Ex-ECB Head Proposes Giving Greece the Benton Harbor, Michigan Treatment - Berlin is enraged that the Greeks have voted in favor of candidates opposed to the austerity deal Berlin coerced the disgraced and fallen Greek government to sign.  The austerians have decided that since democracy is the problem, imperialism is the answer.  Jean-Claude Trichet, former head of the European Central Bank (ECB), and a fiercer austerian than Chancellor Merkel, has proposed a plan to cripple Greek democracy.  Naturally, the business press reacted with praise.  Reuters’ headline gushed:  Ex-ECB head unveils bold plan to save the euro. Note that the “bold” plan is not designed to “save” Greece or the Greeks – it is supposed to save the “currency.”  When the Titanic sank the general order was “women and children to the lifeboats.”  Trichet gives priority to saving our currency.  Reuters’ doesn’t even see that bizarre priority as worthy of discussion. But what is “bold” about Trichet’s plan?  Reuters’ answer is: Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.

David McWilliams: Eurozone Policy that Rewards the Reckless at the Expense of Taxpayers, and Crushes the Periphery, must be Resisted - Economist David McWilliams describes what led to the crisis, who is being bailed out, the terrible policy decisions being made, and the negotiating position of peripheral countries in the Eurozone. McWilliams' whiteboard animations are embedded following these select notes:

  • The bill for individual and institutional debt that led to the crisis has been passed on to people who had nothing to do with creating that debt.
  • Europe has been turned from a democracy to a bankocracy.
  • There are 2 ways out of a debt crisis: squeeze the debtor, or forgive the debt. If you squeeze the debtor - a.k.a. austerity - you make it less likely that the debtor will be able to pay back the debt.
  • The more austerity, the less growth. The less growth, the less tax revenue. It is like putting someone in debtor's prison for being in debt; no one in prison has any way to make money to pay off debt.
  • A fiscal union is supposed to help regions when they get into trouble - that's what happens in the American fiscal union. In Europe, it is working the opposite way. 
  • The German solution will cause more recessions in the periphery. 
  • The ECB solution is "cash for trash", where bust European banks give the ECB trash as collateral. In return, the ECB gives the banks cash. The ECB is lending one trillion Euros to the banks in this fashion.

Time to pull the plug? - GIDEON RACHMAN has a thought-provoking piece in today's Financial Times. It reads in part: Late last year I found myself discussing this very question with a senior European politician. He had noticed that I had written repeatedly that the eurozone was a flawed construction that was likely to collapse. If that was the case, I was asked, would it not be better to break the whole thing up now?... [T]o answer the question that I dodged back in December – yes, I do think that it would ultimately be better if the eurozone broke up... As a (very) German proverb puts it – “Better an end with horror, than a horror without end.” I am generally inclined to say that it's always a good time to put off a disaster. There is a meaningful chance that disaster will occur anyway, but there's also a chance it won't. Given the unpredictability of the knock-on effects from disaster, its better not to accept a 100% chance of disaster in the present.

Competitiveness and the European Crisis - Wolfgang Munchau in the Financial Times argues that competitiveness is not the real problem of Southern Europe and that internal devaluation is not the solution. Paul Krugman disagrees with him and argues that the evidence is clear:
1. Prior to the crisis, inflation was higher in Southern Europe.

2. These countries displayed large current account deficits, a sign of an overvalued real exchange rate.
I have presented arguments before that support Wolfgang Munchau’s conclusions. Let me repeat some of the arguments and show additional evidence. Unit labor costs grew faster in Spain or Greece or Italy than in Germany. But Germany was the outlier here. The behavior of unit labor costs in some of the countries in Southern Europe was not too different from that of France or the Netherlands. Here is a chart from an earlier post.

Can the Eurozone Be Saved without Treaty Changes or New Institutions? - Yanis Varoufakis and Stuart Holland have updated their “Modest Proposal” for overcoming the eurozone crisis (they call it version 3.0).  They took on the challenge of coming up with proposals for addressing the eurozone’s tripartite crisis (sovereign debt, banking, and underinvestment) in a way that avoids any treaty changes or the creation of new EU institutions.  So although turning the eurozone into a “United States of Europe,” with an empowered federal (which is to say EU)-level fiscal authority and a central bank willing and ready to act as a buyer of last resort for government debt might be an ideal solution, there are serious institutional and political obstacles that stand in the way.

Let's All Devalue Against Each Other – Krugman - Jeremy Siegel echoes a lot of what some of us have been saying for years about the infeasibility of internal devaluation, but then argues that the answer is devaluation of the euro as a whole. Um, against whom? I mean, it’s not as if America or Japan are towers of economic strength, easily able to provide the demand Europe lacks. That leaves emerging markets. And while I and others have been pushing for years for an end to Chinese currency manipulation, China is at this point (a) not looking very strong itself (b) just not that big in the world economy — not yet. More generally, Europe as a whole, like America, remains a relatively closed economy. Its salvation must be mainly internal.

EU Bank Buffer Inadequate If Money Pulled, Goldman Sachs Says - The 1.1 trillion-euro ($1.4 trillion) liquidity buffer that Europe’s biggest banks have to guard against a flight of deposits will be insufficient if there’s a systemic loss of confidence, Goldman Sachs Group Inc. analysts said. While the buffer would be ample to protect against the loss of confidence and a run on deposits at a single bank, it would be inadequate if customers withdrew their money across the region, the analysts including Jernej Omahen wrote in a note to clients today. “If deposit loss occurs as a result of a systemic event, individual liquidity buffers would not prove effective,” they wrote. “Fears of a euro breakup, for example, could give rise to loss of depositor confidence on a systemic level. This would call for a regulatory response.” Greece’s banking system lost 9 billion euros of deposits this year and has seen outflows of 73 billion euros since the 2009 peak, the analysts said. Speculation that customers were withdrawing money in Spain caused a 29 percent drop in the shares of Bankia SA (BKIA) on May 17. The Spanish government denied reports of a run on deposits at Bankia last week.

European Banks May Require Third Round of ECB Loans, Fitch Says - The likelihood southern European banks will require a third round of emergency three-year loans from the European Central Bank is increasing as Greece’s debt crisis worsens, Fitch Ratings said. “If a third Longer Term Refinancing Operation is needed, we believe it will be provided,” James Longsdon, a managing director at Fitch’s financial institutions group in London, wrote in a report today. The timing is “unlikely to be imminent without a further significant shock, such as a Greek exit from the euro.” The Frankfurt-based ECB began the LTRO after bank funding markets froze and yields on southern European government debt hit euro-era records last year. Lenders in the region borrowed 489 billion euros ($623 billion) in December and a further 530 billion euros in February, according to the central bank.

Spanish House Prices - Following up on discussion of Greek house prices the other day, I found some data on Spanish house prices from Spanish surveyors Tinsa.  The picture is similar to Greece - if anything a bit worse.  Total losses from the peak have been about one third, and the situation has not stabilized.  In fact as the year-on-year change below show, prices losses have recently accelerated: This obviously is going to worsen the position of Spanish banks (which are already suffering from moderate capital flight).

Spanish Regions Face EUR35.8 Billion Payments Year-End - Spain's regional governments face debt maturities of nearly 35.8 billion euros before the end of 2012, El Pais reported in its Wednesday Internet edition, citing regions" plans submitted to the country's Budget Ministry. Those maturities include short- and long-term debt, credits, loans and securities' issuances, the report added. In addition, if another EUR15 billion for the financing of the expected 2012 regions' deficit of 1.5% of gross domestic product is added, regional governments will need to raise more than EUR45 billion this year, according to El Pais. Debt maturities six years ago amounted to some EUR5 billion, the newspaper added.

Spain struggles to meet regions’ 36 billion-euro debts (Reuters) - Top Spanish officials are at odds over how to help the country's highly indebted regions refinance 36 billion euros of debt this year, government sources told Reuters on Wednesday. The figure, revealed in the budget plans from 17 autonomous communities, compares with previous public data of around 8 billion euros of bonds maturing in 2012. The difference is due to bilateral loans from Spanish banks to the regions worth 28 billion euros that were not made public previously. It could unnerve further investors concerned by the capacity of Spain to curb its public finances and reform its banking sector. Spain's weak banks and overspending regions are at the heart of the euro zone debt crisis. There are fears that expensive bail-outs of ailing lenders, like fourth largest lender Bankia, could force the country to seek international aid. Many of the autonomous regions are virtually blocked from financing themselves on public debt markets due to the high rates they would have to pay. Some have seen the credit rating on their debt cut to junk status. The government sources said the central administration now aimed to put forward a new mechanism to back regions' debt as soon as early June.

Spain 'Discovers' 28 Billion In Debt - Back in late March, we pointed out - much to the chagrin of the LTRO-funded Spanish-sovereign-debt-stuffing banks of the tapas-nation - that, in a similarly misleading manner to Greece's 'leverage' the debt-to-GDP data for Spain was significantly higher than official estimates. Once sovereign guarantees, contingent liabilities and their responsibilities to the EU and the ECB were included things got a whole lot uglier. Now, slowly but surely, as reported by Reuters this evening, some of these bilateral guarantees/loans are coming to light. Instead of the expected EUR8 billion of 'regional refinancing' expected for 2012, it turns out there is EUR36 billion and as Reuters notes "the difference is due to bilateral loans from Spanish banks to the regions worth 28 billion euros that were not made public previously" adding that "It could unnerve further investors concerned by the capacity of Spain to curb its public finances and reform its banking sector." Critically this stunning 'discovery' should be worrisome since the plan, given the regions are virtually blocked from public market financing - due to the high cost of funds, was/is for the sovereign to guarantee (there's that word again) their issuance explicitly. Ironically, as de Guindos and Hollande are chummy borrow-and-spendaholic growth-seekers versus Merkel's safe-and-austere determination, so now the Spanish authorities must lend exuberantly to their regions while at the same time demanding deficit targets are met (or else?) - or as one Reuters' source objects: "You can't tell them on one side that they have to be austere and on the other side give them unlimited liquidity".

Rajoy Urges ECB Action to Reverse Surge in Spanish Bond Yields -- Spanish Prime Minister Mariano Rajoy called on the European Central Bank to act to bring down rising borrowing costs in some of the 17 euro countries. "If public debt isn't sustainable, we have a problem," he said today after a meeting of European Union leaders in Brussels. "I insist it is up to the ECB to take this decision that it has already taken in the past." The ECB helped reverse a surge in Spanish yields in August when it began buying the country's bonds and channeled 1 trillion euros ($1.3 trillion) of three-year loans to the bloc's banks in December and February. "All the measures I have proposed can be taken in 24 hours, the most important one is guaranteeing the sustainability of the public debt of the countries of the EU," Rajoy said. "For the moment, the sustainability of debt is guaranteed, but if it happened that it wasn't anymore, a decision could be taken in 24 hours."

Foreign investors likely to keep dumping Italy, Spain debt: Fitch (Reuters) - Foreign investors are likely to keep cutting their holdings of Italian and Spanish government bonds this year, after slashing their share of each country's public debt to around a third of the total in the first quarter of 2012, Fitch said on Wednesday. The foreign retreat leaves Rome and Madrid ever more reliant on their domestic banks to get through their debt refinancing, tying lenders to their governments and exposing them more directly to the risks stemming from a worsening euro zone sovereign debt crisis. "Fitch sees a high risk of outflows in Spain and Italy continuing in the coming quarters until either a more stable base of foreign investors with higher risk appetite is reached, or economic prospects for Spain and Italy improve," the ratings agency said in a statement. Fitch estimates that foreign investors held 32 percent of Italy's and 34 percent of Spain's debt at the end of the first quarter excluding purchases carried out by the European Central Bank under its bond buying program. Those numbers compare with a share of more than 60 percent for Spain back in 2008 and around 50 percent for Italy. Fitch said it expected the ECB and the euro zone's rescue funds to step in to avert possible liquidity crises if the outflows were to continue.

OECD sees Greece in 6th year of recession -- The Organization for Economic Cooperation and Development forecast Tuesday a bleaker outlook for Greece's economy in 2012 and predicted recession will continue into a six straight year in 2013. In its global economic outlook, the Paris-based organization said the Greek economy is likely to shrink 5.3% in 2012, compared with a November estimate of a 3% contraction. The European Commission forecast in March that Greece's gross domestic product will contract 4.7% this year. "Output is set to decline further until the second half of 2013 when the pace of fiscal consolidation is expected to ease somewhat, wide-ranging structural reforms to boost competitiveness and promote investment start to bear fruit, and international demand strengthens," the OECD said Tuesday. The report did not specify the reasons for the downward revision. After the November estimates were published, Greece reported that in the fourth quarter of last year its economy contracted 7.5%.

Italy to Contract More Than Government Forecasts, Istat Says - Italy’s economy will contract this year more than the government forecasts as falling domestic demand and investments extend the country’s fourth recession since 2001, the national statistics institute said. Gross domestic product will decline 1.5 percent in 2012 before rising 0.5 percent in 2013, Istat Chairman Enrico Giovannini said in Rome today, according to the text of a speech to present the institute’s annual report. Household consumption and corporate investment will both decline this year, 2.1 and 5.7 percent respectively. Istat’s GDP projections compare with forecasts by Prime Minister Mario Monti’s government for a 1.2 contraction this year and 0.5 percent growth in 2013. The Organization for Economic Cooperation and Development said today that Italy’s economy will shrink 1.7 percent this year and expand 0.5 percent next year. Istat said the unemployment rate, currently at a 12- year high of 9.8 percent, won’t start falling until 2014.

Eurozone Warned by OECD: ‘Severe Recession’ Looming — The 17-country euro zone risks falling into a “severe recession,” the Organization for Economic Cooperation and Development warned on Tuesday, as it called on governments and Europe’s central bank to act quickly to keep the slowdown from dragging down the global economy. OECD Chief Economist Pier Carlo Padoan warned the euro-zone economy could contract by as much as 2 percent this year, a figure that the Paris-based think tank had laid out as its worst-case scenario in November. In its twice-yearly global economic outlook, the OECD — which comprises the world’s most developed economies — said its average forecast was for the euro-zone economy to shrink 0.1 percent this year and grow a mere 0.9 percent in 2013. The report forecasts Europe falling further behind other countries, particularly the United States, whose economy is expected to grow 2.4 percent this year and 2.6 percent next. Germany, Europe’s largest economy, will accelerate to 2 percent growth next year after 1.2 percent growth in 2012, while France, the euro zone’s second-largest economy, will expand 1.2 percent next year after 0.6 percent growth this year, the OECD said. Italy’s economy, by contrast, will shrink 1.7 percent this year and 0.4 percent in 2013, the OECD forecast. Spain is also set to remain mired in recession, with contraction of 1.6 percent this year and 0.8 percent next.

Eurozone PMI Disaster - Worst Downturn Since Mid-2009, Manufacturing and Composite at 35-Month Low; Expect Numerous GDP Downgrades, Missed Budget Targets --Markit Reports Eurozone PMI Suffers Worst Downturn Since Mid-2009:

  • Composite Output Index at 45.9 (46.7 in April). 35-month low.
  • Flash Eurozone Services PMI Activity Index at 46.5 (46.9 in April). 7-month low.
  • Flash Eurozone Manufacturing PMI at 45.0 (45.9 in April). 35-month low.
  • Flash Eurozone Manufacturing PMI Output Indexat 44.7 (46.1 in April). 35-month low.
The Markit Eurozone PMI® Composite Output Index fell to a near three-year low in May, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell for the fourth month in a row to 45.9, down from 46.7 in April, to signal the fastest rate of decline of private sector economic activity since June 2009. Output has fallen eight times in the past nine months. Activity fell at the fastest rates for seven months in services (and the second-fastest in 34 months), while manufacturing production dropped at the steepest rate since June 2009. The goods-producing sector posted the stronger overall rate of contraction.

Containment Theory Blows Sky High: German Manufacturing PMI Plunges to 45; French Manufacturing PMI Plunges to 44.4, Sharpest Contraction in 3 Years -The Pollyannas who thought the European recession would be short, shallow, and contained to the periphery have another thing coming. . Markit reports French private sector output falls at sharpest rate for over three years.

  • Flash France Composite Output Index drops to 44.7 (45.9 in April), 37-month low
  • Flash France Services Activity Index unchanged at 45.2
  • Flash France Manufacturing PMI falls to 44.4 (46.9 in April), 36-month low
  • Flash France Manufacturing Output Index declines to 43.6 (47.5 in April), 36-month low
Markit reports German private sector returns to contraction. German private sector returns to contraction. Manufacturing output falls at sharpest pace for nearly three years, offsetting resilient services growth. Key points:
  • Flash Germany Composite Output Index at 49.6 (50.5 in April), 6-month low.
  • Flash Germany Services Activity Index at 52.2 (52.2 in April), unchanged.
  • Flash Germany Manufacturing PMI at 45.0 (46.2 in April), 35-month low.
  • Flash Germany Manufacturing Output Index at 44.6 (47.3 in April), 35-month low.

The weight of the eurozone PMIs - Eurozone flash PMIs for the month of May are out Thursday morning. It’s got us thinking about how the eurozone PMI should be interpreted, but more on that later. First, the highlights:

    • Flash Eurozone PMI Composite Output Index at 45.9 (46.7 in April). 35-month low.
    • Flash Eurozone Services PMI Activity Index at 46.5 (46.9 in April). 7-month low.
    • Flash Eurozone Manufacturing PMI at 45.0 (45.9 in April). 35-month low.
    • Flash Eurozone Manufacturing PMI Output Index (4) at 44.7 (46.1 in April). 35-month low.

Commentary on the above from Markit Economist Chris Williamson:The flash PMI indicated that the Eurozone downturn gathered further momentum in May, with business activity and new orders both falling at the fastest rates for just under three years. The survey is broadly consistent with gross domestic product falling by at least 0.5% across the region in the second quarter, as an increasingly steep downturn in the periphery infects both France and Germany.Companies consequently continued to focus on cutting staff levels. Although slightly weaker than in April, the rate of job losses is still running at the highest levels since early-2010.

Europe is driving full-tilt, foot on the pedal, into a brick wall - I see the G8 has a brilliant solution to the problems of the eurozone. President Obama says it’s time for “growth and jobs”. Jolly good. That’s the stuff. Let me show you how to create employment – the Brussels way.  Come with me through the streets of Athens, not far from Syntagma Square, and your mind will reel with the horrified realisation that history is not a one-way ratchet, that human progress is not guaranteed, and that a proud country can be reduced – by years of torture and bullying – to a state verging on total political, economic and moral collapse.  You will see businesses boarded up and windows smashed because no one has the money or the energy to fix them, and on almost every wall a riot of graffiti full of poisonous hatred for politicians. You will see people sitting on cardboard, heads down, hands out, or pushing trolleys full of scrap metal.  Not far from the town hall, I saw a man using the pavement as an operating theatre to eviscerate a mattress for its springs. In the eyes of every politician there is a glassy humiliation, a sense that the fate of the nation is no longer in their hands. Even worse than the humiliation is the dread that things will deteriorate further still. Thousands are now being fed by soup kitchens.

Tracking the euro-zone economy in real time - THE greatest short-term threat to the world economy continues to be Europe's debt crisis. The progress of the euro-zone crisis will, in turn, depend on the length and depth of the euro-area ecession. If output is shrinking and unemployment rising, then austerity measures are likely to make economic conditions worse while raising very little new revenue. The euro zone may fall ever deeper into a hole. That's an unnerving possibility. After shrinking in the fourth quarter of 2011, the euro-zone economy showed early signs of life in 2012. According to the first estimate of euro-area output, GDP was flat in the first quarter. Things seem to have deteriorated since then. The soothing effect of the European Central Bank's trillion-euro effort to prop up the European banking system is wearing off. Market fears of a Greek exit are rising. And new data on confidence and manufacturing output suggest that the euro-zone economy is contracting once again. An analysis of recent data points by Now-Casting, which publishes "real-time" economic forecasts, points once more toward contraction in the second quarter. Even worse, a steeper decline in the third quarter now looks a real possibility. You can see the information that goes into their forecast in the interactive chart below.

Austerity-only cure for crisis out of fashion, but growth rhetoric covers difficult realities - On paper at least, European leaders agree: They need stronger growth measures to help their economies expand out of their 2½-year-old government debt crisis. Figuring out exactly what those new steps might be will be the hard part. Persistent political divisions — neatly bridged by a Group of Eight summit statement that advocates a mix of austerity and growth promotion — and lack of money stand in the way of a comprehensive European growth strategy. Analysts said markets were likely to look past the verbal deal, with news about Greece’s struggle to stay in the eurozone and an informal European Union summit Thursday in Brussels more likely to set the tone. At Saturday’s G-8 summit, German Chancellor Angela Merkel — under urging from U.S. President Barack Obama and French President Francois Hollande — signed onto a statement that called for mixing painful cutbacks with growth-promoting measures to deal with a crisis that threatens the global economy. The leaders warned that budget deficits have to come down. But they also acknowledged that an approach that’s based mostly on austerity and longer-term reforms can’t help countries out of recessions this year or next. That’s the approach that has dominated the continent’s German-led attack on the crisis since it erupted in late 2009, when Greece admitted its finances were broken.

The Issue Europe Won’t Face - Europe’s leaders emerged far apart at their summit dinner in Brussels Wednesday night. They could not even agree on relatively easy measures to contain the escalating crisis, such as Eurobonds or a greater role for the European Central Bank (ECB). But at the core of the crisis is an issue that Europe’s leaders are even more reluctant to take on—the ease with which hedge funds and other speculators can drive a small economy into the ground. When the socialist government of George Papandreou took office in 2009, the Greek economy was still in relatively decent shape.“Spreads”—the difference between Greek government borrowing costs and those of Germany—widened throughout the spring of 2010, creating a financial crisis and driving Greece into a severe slump. This in turn in reduced the value of Greek bonds to junk, and led to the perverse bail-out deals in which the European Union and the International Monetary Fund (IMF) advanced the Greeks money in exchange for austerity programs that only deepened Greece’s depression. Defenders of financial speculation argue that the banks and hedge funds are only helping markets detect the “true” value of securities such as Greek Government bonds. This argument is self-serving nonsense, for the speculation itself creates a self-fulfilling prophesy.

Hollande set for EU summit showdown with Merkel (Reuters) - European leaders will try to breathe life into their stricken economies at a summit over dinner on Wednesday, but disagreement over the issue of mutual euro-zone bonds and whether they can alleviate two years of debt turmoil will dominate the gathering. For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not held their own mini-summit beforehand to agree positions, marking a significant shift in the traditional Franco-German axis. Instead, new French President Francois Hollande will meet Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit. Despite fears that Greece could exit the currency bloc, Spain, where the economy is in recession and the banking system is in need of wholesale restructuring, is at the frontline of the crisis, with concerns that it could follow Greece, Ireland and Portugal in needing a bailout.

Tsipras Says Berlin Must Back Down on Austerity - Alexis Tsipras, the leftist leader who could hold the whole of Europe to ransom if he wins the Greek election on June 17, breezed into Berlin on Tuesday to tell Germans they don't own the euro zone, and that they will endanger the whole currency block if they insist on stringent austerity for his recession-hit country. The 37-year-old leader of the Radical Left party (Syriza), which came second in the May 6 election and is expected to emerge as the strongest political force in the repeat vote, reiterated his determination to abandon the radical budget cuts that were imposed on Greece in return for international aid -- a move EU leaders and German politicians in particular have warned could force Greece out of the euro. The charismatic leader had visited Paris on Monday as part of a tour to convince a skeptical European public that he is not bent on wrecking the euro. In Berlin, he was hosted by Germany's opposition Left Party, which agreed a six-point program with Syriza calling for an end to austerity, taxes on banks and the rich and economic stimulus measures.

Greek Leftist Reaches Out, to Little Avail - With less than a month before new elections in Greece, it might be expected that Alexis Tsipras would be campaigning in his own country. Instead, Tuesday found Greece’s rising young political star in Berlin, the second stop of what appeared to be a decision to effectively launch his pre-election campaign abroad. Ostensibly, Mr. Tsipras’ aim was to win over the German public to his goal of keeping Greece in the euro zone, though under a radically different deal than the austerity plan agreed to in February. Coming a day after a stop in France, however, the visit was also clearly intended to show that the relatively untested 37-year-old politician could punch above his weight in the larger European arena. Yet Mr. Tsipras found himself shunned in both countries by the leading political players, on whom Greece’s future may well depend, and his trip prompted criticism from his political rivals at home and in much of the Greek media. Both newly elected president of France, François Hollande, and the German chancellor, Angela Merkel, rebuffed Mr. Tsipras’ overtures, and he was forced to be content by appearing alongside more marginal leftist colleagues in both countries.

Cutting Off Your Nose...: spite your face. This should be the new, official slogan of German policymakers. It is pretty clear that financial conditions in Europe are unravelling, now putting the Euro into free-fall. European policymakers simply became far too complacent over the winter, thinking that the ECB's two LTROs had fixed the problem. And, in a sense they did - for the moment. But as it became increasingly evident that the ECB was back out of the game, everything went sour. The economic realities came back into play. Moreover, there has been precious little action taken to resolve those problems - essentially, the lack of an federal fiscal institutional structure - that would make a common currency workable.Moreover, Germany continues to block movement in that direction. From the FT:Germany refused to share the debt burden of stressed eurozone peers on Tuesday, ignoring two of the most influential international economic bodies which offered support for proposals championed by Paris, Rome and Brussels ahead of a summit.Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms. Merkel sees a large stick as the only way to end the crisis. She is unwilling to recognize that she needs to match that stick with a large carrot. At the end of the day, rather than concede on the necessity of internal fiscal transfers to make this work, she would rather doom the entire project to failure.

The Fable of “Moral Arithmetic” - Warren Mosler (visit Warren’s blog) applies simple arithmetic to numerical relations that have a $ sign (or € sign), and explains clearly how a money economy works. “If Timmy brings 100 marbles to school and lends them to his classmates at 5% interest for the day, and the classmates diligently work to trade and earn and win enough marbles to pay their debts, how many marbles will Timmy collect at the end of the day?” Most of the pupils are of the linear thinking neoclassical persuasion steeped from the cradle in “banker arithmetic”, so they sharpen their pencils and calculate that Timmy will receive 105 marbles in total principal + interest. “Profit drives the marble economy”, Teacher correctly explains, “which is why the classmates were all so busily engaged working for marbles.” And the pupils agreed it would be great fun participating in a marble economy where you could exercise your talents to get out more than you put in. But little Warren had failed to cram his head into the neoclassical pencil sharpening box where you learn banker arithmetic and he exclaims, “But there ARE only 100 marbles, so unless Teacher adds marbles into the room, Timmy can only get back as many marbles as he put in. So the correct answer is Timmy will get back 100 marbles and some of his classmates will default on their debts and suffer a life of stupid unemployed poverty because Teacher says “We must live within our means.” and she refuses to add the needed marbles even though she owns the marble factory that produces unlimited marbles at virtually no cost.”Teacher, by virtue of her “solid moral character”, is hired to run the Bundesbank, from whence she engineers a German export juggernaut that trades Mercedes for marbles so that Germans always earn enough marbles as profits to pay their debts.

Why I can still believe the Euro will survive, just... Paul Krugman thinks that Greece will probably leave the Eurozone. It is generally foolish to disagree with PK, and what follows is a huge hostage to fortune, but here goes. It is clear that Greece wants to stay in the Euro. Their people do and so do most political parties, including Syriza. Their banks are losing money fast, but the Greek central bank will fill that gap, as long as the ECB allows them to. So a Greek exit will only occur if the Eurozone in some shape or form decides that Greece must go. (See John Quiggin here, for example.) This is the first reason why I think the Euro may survive. If the Greek people were less committed to the Euro, then in macroeconomic terms the option of Greece themselves deciding to leave would look quite attractive in all but the short term, so they might well take that option. (For a different view, see Jacob Kirkegaard here.)   The spin being encouraged in Europe at the moment (and I broaden the scope here deliberately, because it includes the UK government) is that the next Greek election is in effect a referendum on Greek membership. The implication, given the previous paragraph, is that if Greece tries to renegotiate the terms of its existing loans, the Eurozone will force Greek exit.  The key question is whether this is a credible threat.

European Economic Outlook Dims Amid Leaders’ Impasse - Economic reports Thursday showed Europe’s prospects dimming as the long battle to defend the euro zone continued to undermine confidence and raised the prospect of a renewed cycle of demands for austerity. The relentlessly bleak data, reflecting weakness across the Continent and in Britain, came a day after political leaders again failed to break the deadlock over how to resolve the European debt crisis. A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. In the first quarter, the euro zone economy grew just 0.1 percent. Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April. A separate report from the Ifo Institute, based on surveys of German companies, showed “greater pessimism about their business outlook,” and noted that the “recent surge in uncertainty in the euro zone is impacting the German economy.”

Debt crisis: Germany holds a gun to Greece’s head - Pressure on Greece increased dramatically on Wednesday night after Germany's central bank called for a suspension of financial support to Athens and eurozone finance ministries agreed to draft contingency plans for a Greek exit from the euro. In a blunt warning to Athens, the Bundesbank said a Greek withdrawal from the eurozone would be disruptive but "manageable", undermining claims by Greece's radical anti-austerity leader, Alexis Tsipras, that Europe would not dare pull the plug. "When the Eurosystem provided Greece with large amounts of liquidity, it trusted that the programmes would be implemented and thereby ultimately assumed considerable risks," said the bank. "In the light of the current situation, it should not significantly increase these risks." The German financial daily Handelsblatt said the Bundesbank was "holding a gun to Greece's head", hammering home the message that Germany will not submit to blackmail from populist politicians in Athens. Berlin also leaked news that their member on the European Central Bank board, Jürg Asmussen, is to head an ECB taskforce to handle the Greek crisis. There was confusion in Brussels over leaks that EMU finance ministry officials had agreed in a meeting on Monday – allegedly in the name of Eurogroup executives – that each state should draw up a national plan to cope with a Greek exit.

Bankers at the Gates - FEW Greeks have a good word to say about the European banking system these days. They believe it’s the real reason for their current crisis, having pushed easy money on their politicians and now demanding a pound of financial flesh.  It was the same story 800 years ago. The men of the Fourth Crusade, who had originally set off to fight for Christianity in the Holy Land, found themselves instead ransacking Constantinople, the capital of the Greek-speaking Byzantine Empire, because of enormous debts that had been racked up in the West.  The way Europe has behaved over the current Greek crisis is scarcely less shameful than the way those crusaders behaved all those centuries ago. If nothing else, that dark spot on the West’s historical record should be a warning to the bankers and politicians who would rather watch Greece fall apart than take responsibility for their own profligacy.

Insecurity Touches the Tycoons of Greece - While money pours out of Greek banks and Europe debates whether or not Greece deserves its next handout, the people potentially in the best position to help shore up the nation’s finances are mainly keeping their heads down. They are among the wealthiest Greeks — whether shipping magnates, whose tax-free status is enshrined in the constitution, or the so-called oligarchs who have accumulated vast wealth via their dominance in core areas of the economy like oil, gas, media, banking and even cement. Astute investors, they have been reluctant to lend a hand to the Greek treasury through the risky proposition of buying government bonds. But they have also been slow to dispense funds to philanthropies trying to combat the mounting social ills that their nation’s economic collapse has wrought — drawing a sharp rebuke from the head of a foundation created from Greek shipping wealth that has become Greece’s largest charitable donor in recent years. Mainly, though, they have done what Greeks, from the richest to those of modest means, have traditionally done: pay as little as they can in the way of taxes. Many economists say the oligarchs are a big part of Greece’s economic problem, because they have capitalized on the insular, quasi-monopolistic approach to business that is one reason their nation has long lagged the far more competitive economies of many other euro zone nations.

Chart of the day: The Grexit decision tree - The Financial Times has gone through the very useful exercise of creating a decision tree on what a Greek exit from the euro zone entails. I think the Europeans are now actively preparing for a Grexit because to not do so would be folly. But that doesn’t mean that they want Greece to be forced out. Much of what we hear for public consumption is real. But much of it is also political posturing to improve negotiating positions. This decision tree can be helpful in figuring out what’s real and what’s just bluff.

European Banks Unprepared for Greek Exit From Euro -  Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro. While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.  “A Greek exit would be a Pandora’s box,”  “It’s a disaster that would leave the door open to other disasters. The euro’s credibility will be weakened, and it would set a precedent: Why couldn’t an exit happen for Spain, for Italy, and even for France?”

Bundesbank Suggests Greek Exit From Euro Would Be Manageable -- Germany's Bundesbank said the consequences of Greece reneging on the terms of its bailout program would be manageable for the euro area. "The current situation in Greece is extremely worrying," the Frankfurt-based central bank said in its monthly report today. "Greece is threatening not to implement the reform and consolidation measures it agreed to in return for sizeable rescue programs." Speculation about a Greek exit from the euro region has increased before new elections next month that could give power to parties opposed to austerity measures. Greece is "jeopardizing the continuation of aid payments," the Bundesbank said. "Greece would have to bear the consequences of such a decision. The challenges for the euro area and Germany would be significant but manageable with the help of cautious crisis management." The ECB, in an effort to protect its balance sheet, last week excluded some Greek banks from regular refinancing operations, moving them to an emergency-liquidity program run by the Greek central bank until they are sufficiently recapitalized.

Eurozone tells members to make contingencies for "Grexit"  - Euro zone officials have told members of the currency area to prepare contingency plans in case Greece decides to quit the bloc, an eventuality which Germany's central bank said would be "manageable". Three officials told Reuters that the instruction was agreed on Monday by a teleconference of the Eurogroup Working Group (EWG) - experts who work on behalf of the bloc's finance ministers. "The EWG agreed that each euro zone country should prepare a contingency plan, individually, for the potential consequences of a Greek exit from the euro," said one euro zone official familiar with what was discussed. For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not huddled beforehand to agree positions, marking a significant shift in the Franco-German axis which has traditionally driven European policymaking. Instead, new French President Francois Hollande met Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit.

Europe Plans for Greece Exit -European officials are stepping up contingency planning for a possible Greek exit from the euro zone, even as Europe's leaders struggled to overcome differences on how to resolve the currency bloc's crisis at a summit meeting here. Emerging from Wednesday night's informal European Union summit, Italian Prime Minister Mario Monti said most leaders had backed issuing common debt, or euro-zone bonds, to help support troubled members. But Germany and others opposed them and demanded Greece do more.  "We want Greece to remain in the euro zone," German Chancellor Angela Merkel told reporters after nearly eight hours of talks. "But the precondition is that Greece upholds the commitments it has made." Europe's leaders have warned of turmoil in Greece and beyond if the country leaves. Finance ministers from the 17 countries that use the euro agreed earlier this week on the need to develop national contingency plans in case Greece drops out of the common currency, officials said.  Those plans aim to address what would be an unprecedented event in the modern financial system: how to buffer government bond markets, the banking sector and other financial markets in the event of a Greek exit.

War-Gaming Greek Euro Exit Shows Hazards In 46-Hour Weekend - Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.  That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.  Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.  “Leaving is difficult and messy, so anyone who thinks it’s easy is just wrong,” said Lorenzo Bini Smaghi, who left the European Central Bank’s executive board last year, in a phone interview. “The Greeks must be rational and protect themselves from rash decisions that they will live to regret. Leaving the euro is not the answer to their problems.” He declined to say whether he thought an exit would occur.

Forecasters Flying Blind When Predicting Repercussions of Greek Exit - Economic computer models typically depend on the past to forecast the future. The possibility of Greece leaving the euro zone is an exception to the rule because no nation has exited before. Certainly, the Greek and European economies would take a big hit. But the impact from the unprecedented event on the U.S. economy is harder to quantify. Economists are depending on instinct rather than regressions. U.S. exports would take a hit, say economists. The current recession in Europe hasn’t yet curtailed demand across the pond for U.S.-made goods, but look for declines later in the year. The most immediate impact would be seen in the financial markets. Until the dust settles, investors would be likely to seek safe assets. “A Greek exit from the euro is not priced into the markets,” says Eric Green, chief rate strategist at TD Securities, because no one has a clear handle on what will happen.

More Economists React: What if Greece Exits Euro Zone? - The prospect of Greece leaving the euro is the only thing anyone is talking about in the markets at the moment. It even has its own nickname: Grexit.  While the world holds its breath for the next Greek elections or major policy announcement, speculation of an exit runs rife. It is important to emphasize that nothing is certain here; Greece may or may not leave, and there’s a huge range of potential policy responses. So, making allowances for some guesswork, from U.S. political upheaval to a knock-on effect for Mexican bonds, here’s a rundown of the latest on some economists’ and analysts’ views on what could happen next. (See previous insights here.)

Beware hidden costs as banks eye ‘Grexit’ - Earlier this month, I asked the leaders of a group of US-based companies what – if anything – they were doing to prepare for “Grexit”, or a possible exit of Greece from the eurozone. The responses from the manufacturers were rather vague.The bankers, however, were alarmingly precise: amid all the speculation about Grexit, they told me, banks are increasingly reordering their European exposure along national lines, in terms of asset-liability matching (ALM), just in case the region splits apart. Thus, if a bank has loans to Spanish borrowers, say, it is trying to cover these with funding from Spain, rather than from Germany. Similarly, when it comes to hedging derivatives and foreign exchange deals, or measuring their risk, Italian counterparties are treated differently from Finnish counterparties, say. The halcyon days of banks looking on the eurozone as a single currency bloc are over; cross-border risk matters. To put it another way, while pundits engage in an abstract debate about a possible break-up, fracture has already arrived for many banks’ risk management departments, at least when it comes to ALM in their eurozone books. It is difficult to overstate the significance of this, or the potential hidden costs. As a report from the European Central Bank last month notes*, until 2007 the eurozone seemed to be on a glide path towards steadily rising levels of financial integration, which was delivering big economic benefits, by cutting the cost of capital. But since then, the ECB says, progress has gone into reverse, since “the financial crisis has led to a marked deterioration in European financial integration”; and since late 2011 “the integration of the euro area financial system [has] deteriorated further.” The most visible sign of this, extensively quantified in the ECB report, is that spreads have jumped between sovereign bonds, and the funding costs of different sets of national banks. Cross-border interbank lending has shrunk, too.

Big European funds dump euro assets - Some of Europe's biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the eurozone and single currency turmoil. The euro's sudden fall this month caught many investors by surprise. Europe's single currency has lost 5 per cent in the past three weeks after barely moving against the US dollar for much of the year. On Thursday, the euro hit a fresh 22-month low at $1.2514. US-based Merk Investments, the currency specialists, has cut all of its euro holdings in its flagship fund this month. "We sold our last euro on May 15," "We're concerned about how dysfunctional the process is. No one is there to talk to in Greece." Amundi, which manages money for some of the continent's biggest pension funds and companies, said the risk of the crisis spreading to the bigger economies of Spain and Italy was growing because policy makers had failed to convince investors it had built a sufficient firewall.

ECB’s Nowotny Warns of ‘Massive Shocks’ From Greek Exit - A Greek exit from the euro-zone would have “massive” repercussions that no one fully understands, European Central Bank governing council member Ewald Nowotny warned Thursday. “We mustn’t play frivolously with such things,” Nowotny, who heads Austria’s central bank, said at a press conference. A Greek exit “would create large, massive shocks, and no-one knows the consequences,” he said.

Total Failure, by Tim Duy: With the crisis once again nipping at their heels, European policymakers accomplished exactly what was expected of them. Absolutely nothing. From the FT: European leaders put off any decisions on shoring up the region’s banks at a late-night summit on Wednesday despite rising concerns that instability in Greece was undermining confidence in the eurozone’s financial sector. Instead, the heads of the EU’s main institutions were given the task of drawing up proposals for closer fiscal co-ordination in time for another summit next month, including plans that could include a path towards a Europe-wide deposit guarantee scheme and, in the longer term, commonly-backed eurozone bonds. The trouble is that Europe doesn't have a month to wait for another summit. I am not confident they even have a week. But not to fear - the ECB is expected to step into the breech once again. At least that is the hope. But notice the irony. Germany doesn't want Eurobonds because of the moral hazard risk. They don't want to get stuck paying for Southern Europe's profligacy. At the same time, the ECB does want to act as lender of last resort for fear that will only encourage policymakers to put off hard decisions on fiscal union. Moral hazard to the right, moral hard to the left. The only path left is gridlock - and failure. In the meantime, the Wall Street Journal reports on accelerating plans for a Greek exit.

Greek anti-bailout left has 4-point lead -poll (Reuters) - Greece's anti-bailout leftist SYRIZA party is maintaining its poll lead ahead of a June 17 election that is deemed critical to the country's continued membership of the euro zone, a poll showed on Thursday. Greece was forced to call a repeat election after a May 6 vote left parliament divided evenly between groups of parties that support and oppose austerity conditions attached to a 130 billion euro rescue agreed with lenders in March. The Public Issue/Skai TV poll showed SYRIZA leading with 30 percent of the vote, four points ahead of the conservative New Democracy party, which is backing the bailout. In a previous survey by the same pollster on May 19, SYRIZA was leading with 28 percent to New Democracy's 24 percent. If repeated on June 17, such a result would give SYRIZA a large majority in parliament, although not big enough to rule alone.

Let’s Say Germany Enforces More Austerity on Greece: Then What? - Everyone’s holding their breath until mid-June, when the Greek elections take place.  In the meantime, the Eurozone is heading into a deep recession and Germany is bickering with, well, everyone.  Ambrose Evans-Pritchard gives us the dynamic.Another month of EU stasis is unlikely to prove a winning formula. The eurozone’s manufacturing and service surveys for May were the worst in 35 months. “Truly dismal,” said Howard Archer from IHS Global Insight. “The Greek exit effect is starting to take its toll on an already brittle eurozone economy,” said Nicholas Spiro, from Spiro Sovereign Strategy. The danger is no longer what will happen if Euroland unravels, but “what is happening”. Meanwhile, the new President of France is proving to live up to his nickname, “Marshmallow.” French president Francois Hollande achieved his coup de theatre. The French media gently accused him of staging a choreographed spat with chancellor Angela Merkel over eurobonds, knowing that Germany will not share its credit card with the debtor states until there is a fully-fledged United States of Europe – anathema to France. “While Germany sees eurobonds as the end point, we see them as the starting point,” said Mr Hollande. His eyes are on France’s legislative elections in mid-June. He has already fudged campaign pledges to withdraw troops from Afghanistan. He risks haemorrhaging support to the Left Front of Jean-Luc Melenchon if he yields on calls for eurobonds, a “growth compact”, and an EU “Tobin tax” on financial transactions.

The Threat of German Amnesia - – Europe’s situation is serious – very serious. Who would have thought that British Prime Minister David Cameron would call on eurozone governments to muster the courage to create a fiscal union (with a common budget and tax policy and jointly guaranteed public debt)? And Cameron also argues that deeper political integration is the only way to stop the breakup of the euro. A conservative British prime minister! The European house is ablaze, and Downing Street is calling for a rational and resolute response by the fire brigade. Unfortunately, the fire brigade is being led by Germany, and its chief is Chancellor Angela Merkel. As a result, Europe continues to try to quench the fire with gasoline – German-enforced austerity – with the consequence that, in a mere three years, the eurozone’s financial crisis has become a European existential crisis.  Let’s not delude ourselves: if the euro falls apart, so will the European Union (the world’s largest economy), triggering a global economic crisis on a scale that most people alive today have never experienced. Europe is on the edge of an abyss, and will surely tumble into it unless Germany – and France – alters course.

Yields on German and Dutch Bonds Decline to Record Lows - Yields on haven government bonds fell to record lows Wednesday, as investors piled money into triple-A-rated debt amid mounting worries that Greece may exit the euro zone. The yield on the 10-year German bund came within a whisker of a record low, hitting 1.41%, while the yields on 30-year bonds fell to a record low of 1.995%. Yields on the other members of the haven club also plunged into uncharted territory. Ten-year Dutch bonds fell to a record low yield of 1.89%, while 10-year Finnish bond yields touched a low of 1.73%, according to data from Tradeweb.

Vital Signs: Falling German Bond Yields - German bond yields are falling. As fears among investors mount of a Greek exit from the euro, and concerns grow about the deteriorating financial health of many other European countries, investors are pouring their money into the perceived haven of German government debt. That has pushed the yield on 10-year bonds under 1.4%, down from over 3% a year ago.

Berlin Proposes European Special Economic Zones - With Europe beginning to look for alternatives to its exclusive focus on austerity, the German government has developed a six-point plan to foster economic growth in Europe, SPIEGEL has learned. Included in the proposal is the creation of special economic zones in struggling euro-zone countries. The proposal is part of a six-point plan the German government plans to introduce into the discussion on measures to stimulate economic growth taking place in the European Union. The proposal also calls for the countries to set up trusts similar to the Treuhand trust created in Germany at the time of reunification that then sold old off most of former East Germany's state-owned enterprises in order to divest those countries' numerous government-owned companies. The plan also calls for the countries to adopt Germany's dual education system, which combines a standardized practical education at a vocational school with an apprenticeship in the same field at a company in order to combat high youth unemployment. The plan recommends that countries with high unemployment also adopt reforms undertaken by Germany, including a loosening of provisions that make it difficult to fire permanent employees and to create employment relationships with lower tax burdens and social security contributions.

Merkel's 6-Point Plan to Save Europe; Merkel Backed Into Tight Corner: Social Democrats Threaten to Not Ratify Merkozy Treaty Without Growth Measures; Merkel Coalition at Risk - It would be quite ironic and rather fitting if Germany and France fail to ratify the Merkozy treaty. 25 Nations have ratified the treaty but France and Germany still have not. French president Francois Hollande has already threatened non-ratification unless the treaty is revised. The Leader of the Social Democrat Party (SPD)in Germany, Frank-Walter Steinmeier, is making similar threats for the first time. Effectively chancellor Merkel is painted into a huge corner with no wiggle room. "I guarantee you, there will only be a fiscal pact if it includes complementary growth elements," Steinmeier said. Specifically, Steinmeier wants a financial transaction tax, expansion of loan volume to the European Investment Bank, and a nebulous "strengthening of investment power". Steinmeier also called for the creation of a European debt repayment fund. He said that euro bonds could only be introduced "if they come with strict conditions and we have harmonized European economic and finance policy." Merkel needs those SPD votes because treaty ratification takes a two-thirds majority in the Bundestag, Germany's parliament.

Bankia set to ask Spain for more than $19 billion - Spain's Bankia SA is set to ask the state for a more than 15 billion euros ($19 billion) bailout on Friday, marking another rise in the cost of a drawn-out rescue of the country's fourth-biggest bank. The capital shortfall at Bankia is key to a wider funding gap in Spain's banking system, which some investors believe could drive the euro zone's fourth-largest economy to seek international aid - a move that would create fresh uncertainty around the whole currency union.Spain is nationalizing Bankia, which holds some 10 percent of the country's bank deposits, after it was unable to handle heavy losses from a 2008 property crash. The government insists the bank is a one-off case. One London-based analyst said the government's handling of Bankia had undermined confidence in whether the figure announced would be enough. "Whatever they say, people are going to think it's not enough. The process has been going on for so long already."

Spanish Lender Seeks 19 Billion Euros; Ratings Cut on 5 Banks -  Spain’s banking crisis worsened Friday as the board of Bankia, the country’s biggest mortgage lender, warned that a bailout would cost 23.5 billion euros, far beyond what the government estimated when it seized the bank and its portfolio of delinquent real estate loans.  The government is trying to head off a collapse of the bank, which could threaten the Spanish banking industry and reverberate through the financial centers of Europe and beyond. The fear is that it will not have the money to save its banks, and their 1 trillion euros, or $1.25 trillion, in deposits, and will need a rescue by the rest of Europe — even as Brussels and Frankfurt are struggling to resolve Greece’s debt debacle. Bankia’s announcement came as Standard & Poor’s, the credit ratings agency, downgraded Bankia and two other banks, Banco Popular and Bankinter, to “junk” status and lowered the ratings of two other Spanish banks also staggered by mounting bad loans. A junk rating could make it even harder for Bankia to borrow its way out of trouble. The rising fear now is that the recent steady trickle of deposits from Spain’s banks, which are suffering from the bursting of Spain’s real estate bubble, to institutions outside the country could eventually turn into the sort of bank run that almost brought the financial world to its knees after the collapse of Lehman Brothers in 2008.

Madrid suspends Bankia trade, reported to need $32b - Spain's stock market suspended trade in Bankia's plunging shares on Friday as media reports said the struggling lender may seek up to 20 billion euros (S$32 billion) from the state to stay afloat. Bankia requested the suspension ahead of a board meeting to decide on a recapitalisation plan, 'in view of the lack of precision on the figures' ahead of its decision, the bank said in a statement. Bankia's shares plummeted 7.43 per cent on Thursday to close at 1.57 euros, taking total losses to more than 58 per cent since their listing in July 2011 when Bankia was formed by the merger of seven savings banks. Spain's fourth-biggest bank, Bankia was partially nationalised in May as the state tried to save it from its vast exposure to the troubled property sector.

Spain Plans to Merge All Nationalized Banks Into Gigantic Bad Bank; Merging Small Cesspools Creates Bigger, Deeper, Smellier Cesspools - After repeated denials of the creation of a combined "bad bank", Spain's economy minister Luis de Guindos is discussing creation a public body merging all the smaller bad banks into one gigantic bad bank, equivalent to 20% of the entire Spanish banking sector. Courtesy of Google Translate from Libre Mercado, please consider large public bank under state controlThe Government is considering the possibility of creating a public bank that brings together institutions nationalized by the state, which include BFA-Bankia, Caixa Catalunya and Novacaixagalicia, Europa Press reported financial sources. The Ministry of Economy examines delaying the auction and Caixa Catalunya Novacaixagalicia, waiting to know the binding offers to be submitted to the process of awarding the Catalan and that, if adopted, will be very tight. The department headed by Luis de Guindos is aware that the latest sanitation requirements established by the Government through new provisions on healthy property portfolio have cooled the already low interest of potential buyers. Bear in mind that Bankia, one of the banks in this cesspool merger was formed on December 3, 2010 as a result of the union of seven failed Spanish financial institutions. In 2012, Bankia was the third largest lender in Spain and the largest holder of real estate assets at 38 billion euros. Bankia is once again in trouble, along with Caixa Catalunya and Novacaixagalicia.

Eurozone strains intensify as ‘massive shock’ looms - Eurozone tensions have intensified after grim news on the economic outlook and as investors sought safety in Germany on growing doubts over Greece’s future in the currency union. Shortly after an EU summit failed to produce a remedy, a May survey of eurozone business confidence on Thursday showed the sharpest monthly fall for nearly three years while the data for Germany was the worst for six months and a survey in France, the poorest for 37 months. European Central Bank President Mario Draghi said the EU was at “a crucial moment in its history” and that the debt crisis has demonstrated the EU’s weaknesses. “The process of European integration needs a courageous jump in political imagination to survive,” he said, adding that while growth was a priority, “there is no sustainable growth without ordered public accounts.” ECB governing council member Ewald Nowotny warned of a “massive shock” of unknown consequences if Greece should stumble back to the drachma and cautioned against taking the possibility too lightly.

Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros -The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the group’s managing director said. The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”  The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector. “The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”

Fresh Fears as EU Finalises Reform Plans - Sweeping reforms to shift the burden of rescuing failing banks from taxpayers to bondholders are to be unveiled by the European Commission, despite fears it will further rattle nervous bank investors. When a bank is deemed to be failing, regulators will win extensive powers to write down non-guaranteed deposits and senior unsecured bondholders, according to draft proposals obtained by the Financial Times. While the broad thrust of EU bank resolution reforms are well known, its publication has been delayed for more than a year over fears the so-called “bail-in” tools would make it even harder and more expensive for banks to raise money. There remain extreme sensitivities over the details. The FT has seen three recent drafts that show fundamental elements of the scheme are still being rewritten, with just a few weeks before the expected publication date. The latest version includes one big political concession. Rather than forcing banks to raise an EU minimum of debt that can be “bailed in”, national authorities will have discretion to tailor requirements. If approved in the final version, the increased flexibility could leave a patchwork of different regimes and requirements across Europe. However, it would placate some countries opposed to the original commission measure, which forced big banks to raise bail-in debt covering 10 percent of their liabilities. To meet this, Barclays Capital estimated listed banks would need to issue 600 billion-1 trillion euros of debt that can be bailed-in, which is more risky for investors.

Euro Crisis: Is the Currency (Finally) Doomed? - Europe has all but admitted that Greece will exit the euro zone. It seems impossible to me that the second round of elections in Greece on June 17 will produce a government that will strictly adhere to the austerity measures agreed to by the previous government in return for European Union bailout funds. Yet German Chancellor Angela Merkel has made it clear she has no intention of renegotiating. “We want Greece to remain in the euro zone,” she said after Wednesday’s summit of E.U. leaders in Brussels. “But the precondition is that Greece upholds the commitments it has made.” With that attitude, the leaders of Europe might as well boot Athens out of the union right now. Unless someone is willing to bend here, Greece won’t get its rescue money, and will likely run out of funds by early July, which could force the country to reissue its own currency. No wonder European finance ministers earlier this week talked of the need for contingency plans to combat a Greek exit.

Rumors and Threats, by Tim Duy: From the Wall Street Journal's MarketBeat blog this morning: One of the only things holding the euro up, she said, is the so-called “announcement risk,” the fear that the eurocrats will actually pull together some kind of solution. From Bloomberg this afternoon: Italian Prime Minister Mario Monti said a majority of leaders at a European Union summit backed joint European bonds. Timing is important on this one. From the Financial Times: But summit leaders agreed such measures were months – and, in the case of eurozone bonds, years – away, and some officials have in recent days begun to express concern that the EU has not properly prepared itself for the whirlwind that could strike if a new Greek government defaults on its bailout loans and is forced out of the euro. Most of Europe might support Eurobonds, but it isn't going to happen in the near-term. Interestingly, Monti also laid down his own gauntlet to Germany. From Bloomberg: Italian Prime Minister Mario Monti said Germany has an interest in ensuring that no country leaves the euro. Monti said that, in a hypothetical case, Germany would be harmed should Italy “one day leave the euro.” A weak “new lira” would put German exports at a disadvantage, though an exit from the currency region would also harm Italy, Monti said in an interview today on Italian television La7.While “anything can happen in Greece,” the nation is likely to remain in the 17-nation currency, Monti said. A clear escalation of the doctrine of mutually assured financial destruction - now Italy has its hand on the button. The more hands on the button, the greater the chance that someone pushes it. Meanwhile, while European politicians fiddle, Europe burns.

Euro Zone Crisis Boils as Leaders Fail to Signal New Steps - — With Greece’s membership in the euro zone teetering, fears of bank insolvency rising and Europe’s leaders bickering about what to do, the euro crisis is once again intensifying and threatening to undermine fragile growth globally.At a summit meeting in Brussels on Wednesday, regional leaders failed to signal any significant new steps to stimulate the sputtering regional economy or resolve the competing agendas of President François Hollande of France, who favors stronger action to spur growth, and his German counterpart, Chancellor Angela Merkel, who has opposed aggressive moves to ease the pressure on Europe’s weakest economies. Yet, the urgency for a solution to the region’s debt crisis, now in its third year, may never have been greater. With international economic monitors warning that the Continent could slide back into recession, Spain has watched its borrowing costs climb to unsustainable levels, as concerns rise about the country’s weakened banking sector. Fears continue to grow that it will be difficult to avoid a messy divorce between Greece and the euro zone, with still unpredictable consequences for markets and other struggling European economies, including Spain and Italy.

Crafting a Global Rescue for Europe - Gordon Brown - Another international summit has come and gone without any of the coordinated action that is vital if an ailing European economy is to be revived. Confronted by a crisis whose resolution demands intervention on a par with the crash of 2008, last weekend’s G-8 communiqué was long on words and short on action. There were no concrete measures, least of all a plan to back up public pleas for growth. And, while next month’s G-20 meeting in Mexico could offer a second chance for coordinated action, there is no evidence of any pre-planning for such an initiative. This failure of yet another international gathering has its origins in a fatal misdiagnosis. From the start, Europe’s leaders have insisted that we face a public debt crisis, that its solution is austerity, and that if that solution is not working it is because we have not had enough austerity. But Europe’s problem is not simply the one-dimensional problem they describe. Europe also faces a crisis in the fundamentals of its banking sector, and another crisis in the failure of economic growth and competitiveness that affects every country on the Continent with the sole exception of Germany.

Posen: Undercapitalized Banks, Not Greece, Cause of Europe Crisis - Bank of England policymaker Adam Posen on Monday placed the blame for the euro-zone debt crisis on “insufficiently capitalized” banks, calling for more efforts to evaluate their risk profiles and temporary nationalization of the weakest financial institutions. “The source of our current problem is not Greece,” said Posen, a member of the BOE’s Monetary Policy Committee. “The sources of our current problem in the euro area are the various financial exposures that we all have in the interbank market that have not yet been resolved because…institutions remain insufficiently capitalized and insufficiently disciplined.”

With or Without the Euro - UK GDP contracted faster than previously announced in the first quarter of 2012. What would the evolution of GDP have looked like during this crisis if the UK had been part of the Euro area? Impossible to tell as we cannot do a proper counterfactual exercise. But here is a potentially interesting comparison: the evolution of the UK and Spanish economies since the beginning of the crisis. Spain and the UK are both large (by European standards) economies. Both of them started the crisis with current account deficits and suffered a real estate bubble prior to the crisis. There are, of course, differences: the UK financial sector is larger than that of Spain; the real estate bubble was larger in Spain,... But the difference that tends to be highlighted more by economic commentary is the Euro membership. Spain could not depreciate its currency as the UK did, Spain cannot resolve its government debt problems by relying on its central bank, and Spain could not lower the interest rate to zero as the UK did. Are these factors visible in the evolution of GDP from the beginning of the crisis to today?

British Recession Is Worse Than Thought, Data Says— When the British economy fell back into a recession at the beginning of the year, the government put part of the blame on the turmoil in the euro zone. That claim lost some credibility Thursday, with the release of official statistics showing that the country’s downturn in the first quarter was worse than had been estimated, while the euro zone escaped recession altogether. The data put added pressure on the coalition government led by Prime Minister David Cameron to soften its emphasis on austerity measures to reduce the deficit and instead consider ways to spur economic growth. The Office for National Statistics revised the decline in gross domestic product in the first three months of this year to 0.3 percent, from the 0.2 percent it estimated last month, because of a deeper slump in the construction industry. Construction output dropped 4.8 percent from a year earlier, the agency said, not 3 percent, as it had estimated earlier. The revised figures were “bad news for U.K. policy makers as it shows the economy faring even more badly than initially thought,” said “Indeed, the latest data show the U.K. economy performing worse than the euro zone economy, which saw zero growth at the start of the year — meaning the U.K.’s woes cannot even be fully attributable to the debt crisis embroiling the Continent.”

IMF calls on UK to do more to boost economy - The International Monetary Fund has issued a tough assessment of U.K. economic policy, urging the coalition government and Bank of England to do more to boost demand in the economy. The IMF's report of its latest consultation with British authorities released Tuesday called for more stimulus, either through further rounds of quantitative easing or by a further cut in the all-time low base lending rate of 0.5 percent. Since coming to power in 2010, the U.K.'s coalition government has introduced an extensive austerity program of state spending cuts and reforms aimed at bringing down the country's deficit. However, as the IMF report states, that while the U.K. has "made substantial progress toward achieving a more sustainable budgetary position", the country has fallen back into recession and "the hand-off from public to private demand-led growth has not fully materialized." The Bank of England, meanwhile, has been working to keep inflation — which halts income growth and squeezes household spending — down to a target 2 per cent. The BoE has also paused in its program of quantitative easing — buying high-quality assets to free up the flow of money in the economy — after spending 325 billion pounds ($513 billion) to support the economy.

The IMF calls for a more expansionary UK policy - The preliminary findings of an IMF Article IV mission are always a highly political document, as Paul Krugman points out. That is why you can spin today’s report on the UK as support for the current government line, or implicit criticism of it. And a lot of the reporting focuses on just this political angle. This is a shame, because it misses the clear message of the report, which is that UK macroeconomic policy is too restrictive.      On monetary policy the report is absolutely clear. A bold heading reads “Further monetary easing is required”. The detail calls for more QE, and perhaps a further interest rate cut. One reason why the economists at the Fund are prepared to make such a clear criticism of the current MPC stance may be outlined in my recent post. On fiscal policy, the Fund continues to call for balanced budget fiscal expansion. The heading here is a little more opaque:  “There is scope within the current overall fiscal stance to improve the quality of fiscal adjustment to support growth.” However this from the text below is pretty clear: “Fiscal space for further growth-enhancing measures could be generated by property tax reform, restraint of public employee compensation growth, and better targeting of transfers to those in need. This fiscal space could be used to fund higher infrastructure spending, which has a high multiplier and raises potential output. It will also be important to shield the poorest from the impact of consolidation.”

Britain's Blunder - Krugman - In the nature of things, the IMF can’t go to a country not in need of a financing program and say bluntly, “Ur doing it wrong”. Nor can it easily climb down from its original endorsement of the Cameron-Osborne austerity program. But the latest consultation comes about as close as the Fund can to saying that a huge error is underway, in particular mentioning “hysteresis”, the risk that the economy’s austerity-induced weakness will inflict long-run damage. So I guess we can add the IMF to those “dangerous voices” Cameron wants to shut up. Also, for all those who went on and on about British inflation: I have a hard time working with the ONS data, but here’s what I get from the latest report: The inflationistas, wrong again.