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

Saturday, May 12, 2012

week ending May 12

Federal Reserve Balance Sheet Unchanged In Latest Week - The Fed's asset holdings in the week ended May 9 were $2.867 trillion, effectively unchanged from a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities were $1.666 trillion, compared to $1.668 trillion last week. The central bank's holdings of mortgage-backed securities rose to $847.83 billion from $847.82 billion. Thursday's report showed total borrowing from the Fed's discount lending window was $6.46 billion on Wednesday, down from $6.80 billion a week earlier. Commercial banks borrowed $6 million from the discount window, down from $300 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.490 trillion, down from $ 3.497 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.776 trillion, compared with $2.782 trillion a week earlier. Holdings of federal agency securities fell to $714.55 billion, compared with $715.06 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- May 10, 2012

Fed’s Dudley Reiterates Central Bank Makes Policy for U.S. - The globalized nature of the world economy calls for broader coordination between economic policy makers and other regulators, a top Federal Reserve official said Tuesday, in remarks that reiterated the U.S. central bank only pursues its actions in line with domestic considerations. The official, Federal Reserve Bank of New York President William Dudley, used part of a speech to remind observers about the ultimate goal of U.S. monetary policy, even as he made no forward-looking comments about the U.S. economy or central bank rate policy. Dudley was responding to critics who argue the very strong stimulus provided by the Fed isn’t just in place to deal with moribund growth and job creation levels. His comments came from the text of a speech to be delivered before a conference held by the Swiss National Bank and the International Monetary Fund, in Zurich. “Actions such as our purchase of U.S. government securities are driven exclusively by our monetary policy goals,” Dudley said. He added “these policy actions will not continue beyond the moment they become inconsistent with our dual mandate objectives.”

Gross Says QE3 Getting Closer as Goldman Sees Easing - Pacific Investment Management Co.’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc. (GS) say investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing U.S. economy. A decision to buy more debt is “getting closer,” Gross, who runs Pimco's Total Return Fund, the world’s largest mutual fund, wrote on Twitter yesterday. Hatzius, the chief economist at New York-based Goldman Sachs, predicted in a report the same day that the Fed will announce additional monetary easing when it meets in June. Prospects for a third round of central bank asset purchases, known as quantitative easing, or QE, increased after a Labor Department report May 4 showed U.S. employers added 115,000 jobs in April, the smallest gain in six months. Europe’s debt crisis is threatening to slow global growth. Ten-year Treasury yields fell to 1.81 percent yesterday, approaching the record low of 1.67 percent set Sept. 23.

Kocherlakota Says Fed May Need to Tighten in Nine Months- Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank may need to begin withdrawing its record monetary stimulus in six to nine months.  “It’s an appropriate time to start thinking about when to begin the process of reversing the level of accommodation,” Kocherlakota said today in response to audience questions after a speech in Minneapolis. “Six to nine months down the road, we should be thinking about initiating our exit strategy.”  Kocherlakota’s view contrasts with the plans of the Federal Open Market Committee, which reiterated on April 25 that the Fed will probably need to keep its main interest rate near zero through at least late 2014. Unemployment is declining and inflation has picked up, two conditions that call for less monetary stimulus, the Minneapolis Fed chief said.

Paul Krugman vs. Ben Bernanke - It’s being called the “battle of the beards” — Paul Krugman vs. Ben Bernanke. Both are eminent (and bearded) economists: Bernanke, chairman of the Federal Reserve Board; Krugman, a Nobel Prize winner and a prominent New York Times columnist. Krugman accuses Bernanke of being too timid in fighting high unemployment and slow economic growth. Bernanke calls Krugman’s policy proposals “reckless.” What’s going on? Beyond the rhetoric, there’s a serious debate about the Federal Reserve.  Almost everyone thinks unemployment (8.1 percent in April) is declining too slowly. By year-end 2013, it will still be somewhere between 7 and 8.1 percent, according to top Fed officials’ latest estimates.  The Fed hasn’t been passive. Since late 2008, it has kept overnight interest rates just above zero. During the 2008-09 financial crisis, its emergency loans to banks and money market funds averted a broader collapse. The Fed also bought more than $2.5 trillion of Treasury bonds and mortgage-related securities in an effort to lower long-term interest rates.  But these heroic exertions haven’t yet ignited a robust recovery.  What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years.

Krugman Finally Wins the Argument - Today’s world can be summarized in two sentences: Unless continuously fed with new credit, the global financial system will implode. And when confronted with this possibility, governments will always respond with new credit.This has been true at least since the Long Term Capital Management collapse in 1998, and in the ensuing 14 years the global financial markets and the world’s governments have been partners in a dance in which crisis elicits monetary ease, which ignites an asset bubble, which bursts and elicits a new flood of credit. After each sequence the total amount of debt — and the system’s fragility — is even higher than before. Through it all a few brave souls like Ron Paul have tried to stop the music and liquidate the debt, while other — far more numerous — authorities like New York Times columnist Paul Krugman have called for even more debt to produce higher inflation in order to liquidate the old debt. These worldviews — sound money to which the world must adapt versus flexible money that adapts to the needs of the economy — are mutually exclusive. Only one can win. With all due respect to sound money advocates, there was never any doubt about the outcome. When voters suffer, governments armed with a printing press will always respond with easy money.

Central banks should do much more - The US recovery has stalled, the UK has fallen back into recession and most of Europe is mired in a debt quagmire to which there appears to be no quick exit. It is against this background that Charles Evans, president of the Federal Reserve Bank of Chicago, has come out aggressively in favor of additional Fed actions. But what can the Fed do to alleviate the unemployment problem? In a series a recent research paper1(here), I have shown that there is  stable connection between the stock market and the unemployment rate and I have argued2(here) that this connection is causal. The stock market crash of 2008 caused the Great Recession. If this relation is truly causal, then central banks can do a great deal to alleviate persistent unemployment. The nearby chart, based upon a recent NBER paper (here),3 shows that in normal times the Fed balance sheet consists mainly of treasury securities. But after the collapse of Lehman Brothers in September of 2008, the Fed charged to the rescue by creating an array of new lending programs. At this point the stock market was in free fall and, in response, the Fed embarked on a policy of quantitative easing known as QE1. The Fed’s balance sheet went from $800bn to over $2,000bn in the space of a month.

Fed’s Kocherlakota: Economy Closer to Max Employment Than Data Suggest - A top Federal Reserve official said Thursday he is paying close attention to inflation and that recent elevated readings signal that the economy is closer to maximum employment than labor-market reports alone might suggest. Speaking before the Economic Club of Minnesota about the central bank’s latest transparency initiatives, Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said the term “maximum employment” is particularly difficult to gauge right now as the economy has evolved since the financial crisis. But using the behavior in inflation as a signal, the “distinctly higher” rise in prices in the past two years suggests perhaps the unemployment rate doesn’t have too much more room to fall. “I see these changes as a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest,” Kocherlakota said. “As I’ve argued in the past, appropriate policy should be responsive to such signals.” The official said the goal of reaching maximum employment is being confronted with an “unusually wide range” of interpretations. Amid efforts to increase transparency, the Fed provided an explicit 2% target on inflation in January, but not one for its other mandate of achieving maximum employment.

Central Bankers under Siege - Raghuram Rajan - Poor Ben Bernanke! As Chairman of the United States Federal Reserve Board, he has gone further than any other central banker in recent times in attempting to stimulate the economy through monetary policy. He has cut short-term interest rates to the bone. He has adopted innovative new methods of monetary easing. Again and again, he has repeated that, so long as inflationary pressure remains contained, his main concern is the high level of US unemployment. Yet progressive economists chastise him for not doing enough. What more could they possibly want? Raise the inflation target, they say, and all will be well. Of course, this would be a radical departure for the Fed, which has worked hard to convince the public that it will keep inflation around 2%.  So why do these economists want the Fed to sacrifice its hard-won gains?  The answer lies in their view of the root cause of continued high unemployment: excessively high real interest rates. Their logic is simple. Before the financial crisis erupted in 2008, consumers buoyed US demand by borrowing heavily against their rising house prices. Now these heavily indebted households cannot borrow and spend any more.  As consumers stopped buying, real (inflation-adjusted) interest rates should have fallen to encourage thrifty households to spend. But real interest rates did not fall enough, because nominal interest rates cannot go below zero. By increasing inflation, the Fed would turn real interest rates seriously negative, thereby coercing thrifty households into spending instead of saving. With rising demand, firms would hire, and all would be well.

Monetary Policy Response Op-Ed - Mike Konczal - The Fed uses monetary policy to balance unemployment and inflation. It has typically done this with an inflation “target”. But the target metaphor is inaccurate; it functions far more like a “ceiling.” People aim for targets but can go over them. Yet what we’ve seen over the last five years is that rather than a balance between its two goals, the Federal Reserve supports the economy up until the point where it is near the inflation target, and thereafter backs down from monetary stimulus. The market understands this and output remains equivalently depressed. The Fed is fighting the last war: against 1970s stagflation. It is of course essential that the Fed maintains its hard-won credibility against runaway inflation. But the best way to do so isn’t to keep the economy in a perpetual state of high unemployment. It is to be explicit in what it wants to see accomplished and what it is willing to tolerate in order to get it. As Charles Evans, President of the Chicago Federal Reserve, recently pointed out, the Fed could “make a simple conditional statement of policy accommodation relative to our dual mandate responsibilities.” An “Evans Rule” would mean the Fed would agree to keep interest rates at zero and tolerate 3 per cent average inflation until unemployment went down to 7 per cent, setting market expectations in such a way that would allow aggregate demand to surge.

Monetary Policy Change James Hamilton Can Believe In - What more can the Federal Reserve do at this point in the business cycle?  Can it really help spur a more robust recovery?  James Hamilton is not so sure and is concerned that calls for more monetary stimulus may come at a high cost.  He believes that further large scale asset purchases (LSAPs) would have at best a modest effect on economic activity and worries that they would make the United States more susceptible to a fiscal crisis.  Given how the Fed has done LSAPs so far, his concerns about the effectiveness of additional LSAPs are understandable.  But advocates of more monetary stimulus, like myself, are not asking the Fed to do business as usual.  We are asking for something different, an approach that would better combine the threat (or, if need be, the action) of LSAP with an explicit target.  If this approach to monetary policy were adopted, his concerns about a  fiscal crisis would also become moot.   So what is this alternative approach?  It is simple: the Fed announces it plans to return the level of NGDP to some pre-crisis growth path and commits to buying up as many treasuries, GSEs, and foreign exchange as needed to accomplish that goal.  Note that this is a conditional LSAP tied to an explicit level target.  It sets a destination for monetary policy and thus firmly manages the expected path of nominal spending.  Previous LSAPs did not set an explicit destination and were very ad-hoc in nature.    It was the monetary policy version of throwing something against the wall and hoping it would stick. 

Does History Support NGDP Targeting Now? - The debate about targeting a higher rate of growth for nominal gross domestic product (NGDP) keeps the blogosphere humming, but the discussion doesn’t mean much if Fed Chairman Ben Bernanke doesn't embrace the idea. Don't hold your breath. Last month he said the idea is "reckless." That's monetary-speak for: Don't even think about it. But if NGDP targeting is considered a radical notion by some, including those at the pinnacle of monetary power, the empirical record suggests otherwise.Consider how nominal and real GDP compare through the decades when measured in terms of their rolling one-year percentage changes. As the chart below shows, there's a relationship here that isn't terribly surprising. Higher levels of NGDP tend to be associated with higher levels of real GDP (RGDP). This relationship is clearer in a scatterplot graph of the two sets of GDP changes. The next chart illustrates how one-year percentage changes for NGDP fare against RGDP. It's not a perfect fit, but you'd be hard pressed to dismiss the connection as random.

The Ticking of the Monetary Clock -- Tyler Cowen argues that monetary policy matters less with each passing day because

    • 1. Resource misallocation and unemployment get “baked in” to some extent, due to hysteresis. 
    • 2. Many nominal values end up reset, more and more as time passes and as new projects replace the old.
    • 3. As banking and finance heal, debt overhang is less of an AD problem.  The debt repayments get rechanneled into investment, rather than falling into a black hole.
    • 4. The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. 
    • 5. The Fed already has failed to act, for whatever reasons.  That makes it all the harder to achieve the credible commitment now.  The market expectation has become “the Fed can/will only do so much.”  . . .

So first lets address these points

Missing Federal Reserve Board Members, Hawks and Weak Leadership - The Atlantic has a story with the title “The Most Important Economic Story Nobody Is Talking About”, on how Obama´s failure to fill all the Board of Governors of the Federal Reserve seats has been damaging: I wholeheartedly agree that Obama´s failure to make good board appointments has made life harder for Bernanke. But there´s another reason for what many view as Fed ‘passivity’ and that is Bernanke´s weak leadership qualities. After all, during Greenspan´s years at the Fed´s helm, the FOMC had its usual assortment of “hawks”.... Maybe Greenspan, not being an academic, was pragmatic. He didn´t appear to have “obsessions”, saying phrases such as: “with the ‘appropriate monetary policy’ we will keep risks to inflation and growth balanced”. What the heck does ‘appropriate monetary policy’ mean? That was for the ‘Fed Watchers’ to figure out! But Bernanke is obsessed with inflation – in particular with its negative manifestation deflation. He´s not a natural leader, so he could not bring the hawks to see things his way – as he had long ago figured out for Japan – especially during critical junctures.

Vitters and Shelby Blocking of Federal Reserve Nominees and Previous Conservative Candidates - Chris Hayes, guest-hosting for Rachel Maddow, had a great segment on the hold Senator David Vitters placed on President Obama's Federal Reserve nominees where he talks with economist Betsey Stevenson.  The nominees, Jay Powell and Jeremy Stein, were nominated as a bi-partisan move after Peter Diamond was blocked by the Senate (records have Powell donating to the Romney and Hunstman campaigns in 2011). Vitters' reasoning? "I refuse to provide Chairman Bernanke with two more rubber stamps who approve of the Fed's activist policies."  This is consistent with Richard Shelby, who blocked Nobel Prize award winning economist Peter Diamond for the Federal Reserve because of “Dr. Diamond’s policy preferences…He supports QE2…He supported bailing out big banks during the financial crisis.”  Republican Senators are giving themselves a de facto seat on the FOMC, and they are casting multiple votes against further monetary easing, without being held accountable for their logic or the subsequent results. Here's an important point on how far to the right conservatives have moved on monetary policy.  The natural way reporters cover this is to note that the back-and-forth blocking of Federal Reserve nominees have been escalating for several years, especially since Democrats blocked  conservative, free-market Randy Kroszner's nomination to the Federal Reserve, and so the Republicans are going to block those who support QE2.

Banks Back Obama's Fed Nominees - President Barack Obama's two nominees to the Federal Reserve Board have received support from the financial-services industry, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. Sen. David Vitter (R., La.) has effectively blocked Senate confirmation of the nominees, Harvard University economics professor Jeremy Stein and former private-equity executive Jerome Powell. Wall Street firms have been quietly pressing Mr. Vitter to drop his objections, an aide to the senator said.

Occupy the Philly Fed! - Charles Plosser sucks. He is the President of the Philly Fed, and he has used this position to stop the Federal Reserve from taking more action to get the economy back to full employment.  The good news is that Plosser’s 5-year term is up at the end of 2012, so there’s *some* chance his replacement will care more about full employment. The bad news is this chance is very small, since the new President will be appointed by a Board whose members are mostly selected by the banks in the district. So supposedly a lot of the people on the Board are supposed to be representing the public. Hard to see how they think they’re succeeding at that, with 8% unemployment and under 2% inflation, but that’s the job description anyway.

A Diverse and Wide Open Hearing on Fed Reforms – Taylor - The House Domestic Monetary Policy subcommittee, with Ron Paul in the chair, is holding hearings tomorrow (May 8) on six proposed bills to reform the Fed. The bills are remarkably diverse ranging from Ron Paul’s Federal Reserve Board Abolition Act to Barney Frank’s bill to remove the Fed district bank presidents as voting members on the FOMC and replace them with appointees of the president of the United States. Two of the bills (Kevin Brady’s and Mike Pence’s) would refrom the Fed’s dual mandate, which in my view would help the Fed get back to more a rules-based policy with fewer of the recent discretionary interventions which have proved so harmful. The Brady bill would go further and restrict the degree to which the Fed can purchase large quantities of mortgages and other non-Treasury securities. Kevin Brady and Barney Frank will be there to defend their own bills, and Ron Paul will be able to do so as the chair. The witnesses for this hearing also have very diverse views: two economists from the Austrian school: Jeffrey Herbener and Peter Klein, as well as Jamie Galbraith, Alice Rivlin and me. All the written testimonies are posted on the House Financial Services Committee website.

Federal Reserve draws legislative fire from both sides of the aisle - What do Reps. Kevin Brady (R-Texas), Barney Frank (D-Mass.), Dennis Kucinich (D-Ohio) and Ron Paul (R-Texas) have in common? All are not happy with the current state of the Federal Reserve. In the 112th Congress, areas of bipartisan interest have been hard to come by. But overhauling the nation’s central bank looks to be a subject where politicians of all different stripes have developed an interest — if not necessarily an agreement on how it should be done. Criticism of the Fed has struck a rare bipartisan tone since the financial crisis, as it has become a target of both Tea Party groups and the Occupy Wall Street movement. Along with Paul’s bill to eliminate the Fed, two other Republican measures to be discussed are being offered by Reps. Brady and Mike Pence (Ind.). Pence’s bill, which he also introduced in the last Congress, would cut the Fed’s mission in half. Since 1977, Congress has handed the Fed a dual mandate of maximizing employment while controlling inflation. Recent steps taken by the Fed in pursuit of the former goal, like near-zero interest rates and two rounds of “quantitative easing,” have earned recriminations from Republicans, who worry the moves could be encouraging inflation.

House Republicans Blame Fed for Congress’s Lack of Action - House Republican lawmakers launched an unusual criticism at the Federal Reserve on Tuesday, scolding the central bank for allowing Congress to shirk its job creating sound fiscal policy. The Fed’s easy-money policy and actions taken to boost economic growth have prevented lawmakers from taking responsibility for shoring up the economic recovery and reducing the deep federal budget deficit, some Republicans said Tuesday at a hearing of a panel of the House Financial Services Committee.“As the Fed does more, Congress is doing less and in the long term that slows our recovery,” said Rep. Kevin Brady (R., Texas), who earlier this year introduced a bill that would narrow the Fed’s mandate to focus solely on inflation. Currently the central bank has a dual mandate charging it to pursue both stable prices and maximum employment. The Fed’s unprecedented actions during the financial crisis and its aftermath have led the White House and Congress to take less responsibility drafting sound fiscal policy and sensible regulations and overhauling the tax code and federal safety-net programs, Brady said.

Galbraith Appears Before Ron Paul Hearing on the Federal Reserve - Congressman Ron Paul held a subcommittee hearing on reform of the Federal Reserve system a couple days ago that featured testimony from Senior Scholar James Galbraith, Alice Rivlin, John Taylor, Jeffrey Herbener, and Peter Klein.  There were a wide variety of topics addressed, including the size of the Fed’s balance sheet, proposals to make the Fed an arm of the Treasury, and changes to FOMC governance. Also raised was the question of whether to (formally) drop the employment side of the Fed’s dual mandate (because with unemployment at the dangerously low level of 8 percent and inflation sky high around 2 percent, clearly we’d be better off if the Fed were more like the ECB …).  As Galbraith recounts, he himself was part of the team that drafted the Humphrey-Hawkins Act (“at a time of acute theoretical conflict in economics,” he points out), and he offers his defense of the dual mandate here:

Fed Foe Ron Paul Breakfasts With Bernanke at Central Bank - Republican presidential hopeful Rep. Ron Paul certainly wants to end the Federal Reserve. But he also has to eat breakfast. One day after chairing a hearing on proposals to abolish or overhaul the central bank, the Texan congressman sat down for the first meal of the day Wednesday with Federal Reserve Chairman Ben Bernanke, the lawmaker confirmed in a brief interview at the Capitol. The decision to meet for breakfast at the Fed was “mutual,” said Mr. Paul, who last year introduced a bill to eliminate the central bank. The Fed chief and lawmaker had “sort of an open discussion,” Mr. Paul said, while declining to provide any details of the conversation. “It was off the record,” he said. The Fed declined to comment on the meeting.

Quelle Surprise! Fed Defends Incompetent Bank Management Against Investors - Yves Smith  - Reader Hecht pointed out a new piece by Steven Davidoff at the New York Times’ Dealbook, illustrating the lengths to which the Fed will go to defend incumbent bank managements. The story recounts the sorry conduct of the bank regulator with regard to two small banks, one the $1.1 billion in assets savings & loan First Financial Northwest, the second Cardinal Bankshares, which has a mere $250 million in assets. Both are under supervision of the Fed, neither bank is doing well (First Financial is under “special supervision” as a result of having lost over $90 million in recent years), yet in both cases, true to an apparent long-standing practice, the Fed is siding with the management that is responsible for the banks being in bad shape over activist investors who look to be urging sound measures. The fact that the Fed so reflexively defends banks against any outside influence, even positive ones, is proof of how the Fed is badly in need of reform. One idea that has been set forth by the Alternative Banking Group of Occupy Wall Street is ending the private ownership of the Fed by banks and barring members of management and boards that the Fed regulates from serving as Fed directors. There are plenty of recently retired financial firm executives who know tradecraft, and the Fed through its supervisory powers can get lots of information about what is happening in markets, rather than relying on the spin of people like Jamie Dimon). The Fed is already a popular target for Congressmen on the right and left ends of the spectrum. If it does not relent from its profoundly pro-bank posture, it may find more changes foisted upon it.

The chicanery between the Fed and ECB - The Fed and ECB (European Central Bank) have taken notes from the exact playbook in dealing with the global financial crisis.  People tend to believe that these are somehow fully set government agencies but in reality, they are designed to protect their number one constituency group.  The Fed and ECB have the primary mission of protecting select financial institutions.  At their core they are where the bankers bank.  I was examining the balance sheets of both the Fed and ECB and from 2008 onward their reactions to the financial crisis have been nearly mirror images.  But ask most Americans and Europeans if their trillion dollars of asset maneuvers have worked out.  To the contrary, many of the European nations are back in recessions while in the US the unemployment rate only falls because people are dropping out of the workforce or being shadowed out in colleges with massive student debt.  The central banks have succeeded in allowing the financial system to essentially transfer the waste onto the backs of the public.

Yes, the Fed could produce a higher inflation rate - From the responses to my remarks last week on monetary policy, I see that my words were interpreted by some readers differently than I'd intended, for which I apologize. Let me try again. Let me begin by summarizing the two main points I was trying to make. First, I pointed out that, in the current environment, large-scale asset purchases by the Fed are essentially a swap of short-term for long-term government debt. I asked whether those who criticize the Fed for being too timid would also criticize the Treasury for likewise being too timid in keeping so much of its borrowing long term. I answered for them (and on this I did not see any of the Fed's critics dispute my proposed answer) that there were clear fiscal management dangers if the Treasury were to aggressively move the federal debt into extremely short-term securities. I therefore suggested that if we would see some potential danger associated with such a strategy if adopted by the Treasury, then we should also see some danger about such a strategy if adopted by the Fed. Second, I pointed out that the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Conditional Inflation Now! - Back in January, Jeffry Frieden and I argued for higher inflation, conditioned on macro conditions, in a Foreign Policy article. The roster of economists in favor expands: Nobel laureates Rob Engle and Paul Krugman join Chicago Fed President Charles Evans, for the US. Regarding the eurozone, the Economist has argued that Germany must reflate. Simon Wren Lewis provides another argument for a looser monetary policy based on (what I take is) a credit-based model of income determination (undergraduate level algebra here). From Whip Up Inflation Now: We need inflation -- just enough to reduce the debt burden to more manageable levels, which probably means in the 4 to 6 percent range for several years. The Fed could accomplish this by adopting a flexible inflation target, one pegged to the rate of unemployment. Chicago Fed President Charles Evans has proposed something very similar, a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it. We believe that now is the time to act, as the US recovery sputters along, and the austerity-based approach in the Eurozone shows a need for revision. Higher inflation would serve to erode real debt, both private and public; it would also ease the adjustment of relative prices and wages, as an alternative to internal devaluation via nominal price/wage changes. Both US and eurozone inflation rates are relatively low right now.

Monetary policy: Try overshooting for once, cont. - What we have here is a chart of 10-year breakevens over time. It's derived by subtracting the yield on the 10-year inflation-protected Treasury from the nominal 10-year yield, and it gives up an implied inflation rate. And what I've done here is illustrate the Fed's reactions to big downward moves in expected inflation; the Fed has been an active deflation fighter. You'll note, however, that in the aftermath of Fed interventions, expected inflation coasts up toward the long-term level, of about 2.3%, then inevitably slides down again. The explanation for this dynamic, as I see it, is that the market thinks the Fed will push inflation up to 2% but no further, and the Fed has not tried to convince the market otherwise. And so what we observe is a cap on the rate of recovery. Will America get QE3? If inflation looks like falling to 2% and below. But it won't get a faster pace of employment growth unless the Fed signals that inflation at 3% or more for a year or two would be acceptable.

How much do expectations matter? - Nick Rowe - It is a cliche (among economists) to say that expectations matter. It is even more of a cliche to say that expectations matter for asset prices. But how much do expectations matter? I'm going to do a quick and dirty back of the envelope calculation to show that expectations matter a lot. And that the lower are interest rates, the more expectations matter. Then I'm going to remind people that money is an asset. Then I'm going to remind people that recessions are always and everywhere a monetary phenomenon, and that recessions are an excess demand for money. So expectations of future monetary policy matter a lot for recessions. Especially when interest rates are low.

Limitations of Raising Expected Inflation to Increase Aggregate Demand - Robert Samuelson is getting a bit of praise for this Battle of the Beards: What we need now — and what the Fed could supply, says Krugman — is a bit more inflation. This would spur growth and job creation, he argues. The Fed now strives to keep inflation around 2 percent annually, a low level that it views as reassuring the public. Krugman wants the Fed to raise its target range to 3 to 4 percent for five years. I’m for anything we can go to get our currently anemic aggregate demand to increase. But note that at current market rates for 10-year government bonds – nominal being just under 2% and real being around a negative quarter percent – we have already passed this 2% inflation target at least for now. OK, telling markets we will tolerate 3% inflation for the next 5 years could further reduce real borrowing costs even as short-term nominal rates hover around zero. I think, however, that James Hamilton has a point here: I pointed out that the direct stimulative effects of a debt maturity swap were decidedly minor. The conclusion I draw from these two observations is that we might have to push on this lever extremely hard to get anything accomplished, and that pushing on the lever is not without its own dangers. My position is therefore that the Fed is correct in viewing this particular tool as one that should be used with caution.

Expectations: a weak lever - My claim that expectations are a weak lever for policy has been questioned. Nick says: Expectations matter a lot for the demand for long-lived assets, and hence for the price of long-lived assets. The lower the rate of interest, the more expectations matter. What happens this year doesn't matter very much at all (unless it affects expectations of future years), and it matters even less as the rate of interest gets lower.This seems reasonable. But it has an implication which doesn't always fit the facts. It implies that as long-term real interest rates fall, the price of "growth" stocks should rise relative to value stocks. . This tells us that the link between longer-lived assets and interest rates isn't as simple as theory tells us. This might be because the stock market is short-termist (pdf) and so longer-term expectations just don't matter much.  This, though, was not the main point I had in mind. I was thinking instead of my second chart, which shows NOP's survey of the public's expectations for inflation in the following 12 months.This chart shows three things:

  • 1. Expectations are not well anchored to the 2% target. Instead, as Adam Posen has said (pdf), they are determined more by the recent data.
  • 2. Inflation expectations have been above 3% since May 2010. This implies that the public has expected sharply negative real interest rates. But this has not led to the rise in consumer spending that theory predicts.
  • 3.Nor have high inflation expectations led to higher wage growth; average earnings have risen 1.4% a year in nominal terms in the last two years.

Commodity Prices and PCE Inflation - SF Fed - Commodity prices have soared several times in recent years, raising concerns that overall inflation could rise substantially. However, crops, oil, and natural gas make up only about 5% of the cost of U.S. consumer goods and services. Thus, about one percentage point of the 10% cumulative inflation since 2007 reflects price rises in these important commodity categories. When the contribution of these commodities is subtracted from overall inflation, the resulting pattern is remarkably similar to that of core inflation, which excludes food and energy prices.

Will Limiting Inflation Mean Limiting Growth? - At some point during the recovery, the Fed may face an important decision. If the inflation rate begins to rise above the Fed’s 2% target and the unemployment rate is still relatively high, will the Fed be willing to leave interest rates low and tolerate a temporary increase in the inflation rate? Probably not. Even though higher inflation can help to stimulate a depressed economy, Ben Bernanke, Chairman of the Federal Reserve, is not in favor of allowing higher inflation because it could undermine the Fed’s “hard-won inflation credibility.” And recent Fed communications seem to be setting the stage for the Fed to abandon its commitment to keep interest rates low through the end of 2014. This adds to the likelihood that the Fed will raise interest rates quickly if inflation begins increasing above the 2% target even if the economy has not yet fully recovered. As I’ll explain in a moment, that’s the wrong thing to do. But first, why does the Fed put so much value on its credibility?

Crowding out, brought to you by the Fed - JUSTIN LAHART has written an interesting post today looking at government job losses over the course of the recession and recovery. He runs some numbers and determines that had American managed to hold government employment constant from December of 2008 then, all else equal, its unemployment rate would now be 7.1%, rather than the current 8.1%. Mr Lahart is careful to note that "ceteris is rarely paribus". Rightly so; I am increasingly convinced that an effort to support government employment would not have led to a meaningful drop in unemployment. To conclude otherwise one would have to accept one of the following conjectures:

  1. That a full percentage point drop in unemployment would not meaningfully change America's inflation dynamics, or,
  2. That the Fed would tolerate a rate of inflation persistently above its 2% target.

Neither looks right to me. And Mr Lahart's exercise gives us a nice framework through which to see how the Fed is principally responsible for the level of unemployment.

Is The Recent Fall In Inflation Expectations A New Warning Sign? - The new abnormal is still with is, and that means that the recent fall in inflation expectations could be signaling trouble ahead… again. Implied inflation, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, remains tightly linked with the ebb and flow of the stock market and, by implication, the broader economy. That’s an unusual relationship in the grand scheme of financial and economic history, but it’s a relationship that rolls on in the wake of the Great Recession. It’s also a relationship that in recent weeks seems to be anticipating a new round of problems for the economy. (For the theory behind this empirical fact, see David Glasner's research paper on the so-called Fisher effect.)Recall that the market’s inflation outlook has been a reliable early warning indicator of macro trouble in recent years. In the new abnormal, a fall in inflation expectations is linked with a falling stock market and a general decline in economic activity. Given that history, the fall in inflation expectations to 2.16% as of yesterday from the previous peak of 2.42% in late-March can’t be dismissed. It may be noise, of course, but the change bears watching until the true trend reveals itself.

The Stall Has Arrived - Robert Reich - The economy has stalled. Friday’s jobs report for April was even more disappointing than March. Employers added only 115,000 new jobs, down from March’s number (the Bureau of Labor Statistics revised the March number upward to 154,000, but that’s still abysmal relative to what’s needed). We need well over 250,000 new jobs per month in order to begin to whittle down the vast number of jobs lost in the Great Recession. At least 125,000 new jobs are necessary each month just to keep up with an expanding population of working-age people. With only 115,000 jobs in April, the hole is getting even deeper.  Most observers pay attention to the official rate of unemployment, which edged down to 8.1 percent in April from 8.2 percent in March. That may sound like progress, but it’s not. The unemployment rate dropped because more people dropped out of the labor force, too discouraged to look for work.  If you stop looking because the job scene looks hopeless for you, you’re no longer counted. Most of the job gains in April were in lower-wage industries – retail stores, restaurants, and temporary-help. That means average wages continue to drop, adjusted for inflation – continuing their long-term decline. Most of the new jobs that have been added to the U.S. economy during this recovery have paid less than the jobs that were lost during the downturn.

Economy Hits a Speed Bump and May Dive Further - Concern the U.S. economy was heading for another summer swoon was mounting even before Friday's disappointing jobs data. Economists are increasingly predicting 2012 will be another year when growth struggles along at about 2 percent. The United States is holding up better than Europe, where several countries have slipped back into recession. And there are signs of resilience in some measures of the economy, especially the manufacturing sector. Still, while American consumers increased their spending in the first quarter, growth in incomes is lagging, suggesting something has to give, and businesses began cutting investment earlier this year. And uncertainty about the outcome of the presidential and congressional elections in November, coupled with the risk of a big hit from tax hikes and spending cuts set to take effect in 2013, may cause shoppers and employers to pull back. Fear hasn't quite gripped the financial markets yet. Stocks fell on Friday, but the benchmark S&P 500 remained up a healthy 9.2 percent this year. Some say that optimism is misplaced. "You've really got to be whistling past the graveyard to think that all is jolly here,"

There are few sparks in a sputtering US recovery - Another spring, another sputtering American recovery. For the third year in a row, what many anticipated to be a return to robust growth is beginning to look like another summer of hibernation. Last Friday’s payroll numbers showed a 115,000 drop in joblessness, barely enough to match population growth. And the ratio of Americans seeking work continues to go in the wrong direction, which flatters the official unemployment number. It fell a decimal point to 8.1 per cent last month. If no one had dropped out of the labour market, the official rate would have risen.  None of this should be much of a surprise. There are plenty of external factors to blame – the crisis in the eurozone, the persistence of relatively high global oil prices and expectations of a slowdown in China and India. To a greater extent than before, the US economy is affected by what happens to demand elsewhere. US domestic spending power is no longer the prime mover in today’s global economy. That era is unlikely to return.  These are structural forces that have been steadily deepening. With each business cycle in the past 20 years, it has taken longer to return to growth and to restore full employment than before. In each case the market clears at a lower price than in the previous expansion. The US is about to enter its fourth year of recovery. The median household income is considerably lower than it was in June 2009, when the recovery began. It is likely to be lower still in November when Barack Obama faces re-election.

Fed's Pianalto Says Economy Recovering at Moderate Pace- Federal Reserve Bank of Cleveland President Sandra Pianalto said the U.S. economy is recovering at a “moderate” pace and that she expects growth of about 2.5 percent this year.  “We need more growth in order for more jobs to be created and for that unemployment rate to come down to the 6 percent rate which I view as maximum employment,” Pianalto, a voting member of the Federal Open Market Committee this year, said today in response to an audience question at Women Leading Kentucky’s Business & Leadership Conference in Lexington.

US trade deficit widens, suggesting lower GDP growth - For all the growth in domestic manufacturing and exports, the ballooning U.S. trade deficit continues to be a thorn in the side of the U.S. economy. The Commerce Department said Thursday that the nation’s trade deficit widened to a larger-than-expected $51.8 billion in March, up from $45.4 billion in February. The U.S. posted record exports of $186.8 billion in March, but imports also hit a new monthly high of $238.6 billion. Unlike in recent months, the jump in the deficit wasn’t mostly because of higher oil imports. Instead, a spike in overseas purchases of capital goods, such as computers and telecommunications equipment, and consumer products (including television sets and cell phones) accounted for the bulk of the fatter trade imbalance. Rising imports aren’t all bad as they reflect growing domestic demand; American consumers have been spending – and borrowing -- more recently. And some of the imports are high-tech goods that were designed in the U.S. and assembled overseas with domestically produced parts. Still, a rising trade deficit indicates more dollars are going overseas rather than returning to support production and jobs in the U.S. Analysts said Thursday’s report means that American economic output, or gross domestic product, was probably smaller in the first quarter than the government’s 2.2% preliminary estimate.

Economists See Growth, Inflation Modest in 2012 - Economists expect modest economic growth and slowly falling unemployment this year and next, according to a survey released Friday by the Federal Reserve bank of Philadelphia. Most economists also expect inflation to remain within the Fed’s target range in the longer run. The quarterly Survey of Professional Forecasters done by the Philly Fed shows real U.S. gross domestic product is forecast to grow 2.3% in 2012 and 2.7% in 2013, no different from the forecasts compiled three months earlier.

Just Released: The New York Fed Staff Forecast May 2012 - We are presenting the New York Fed staff outlook for the U.S. economy to the New York Fed’s Economic Advisory Panel (EAP) at their meeting here today. It is an opportunity we take occasionally to get critical feedback from leading economists in academia and the private sector on the staff forecast; such feedback helps us evaluate the assumptions and reasoning underlying the forecast and the risks to it. Subjecting the staff forecast to such evaluation is important because it is an input assisting New York Fed President William Dudley in his preparation for the monetary policy decisions made at Federal Open Market Committee (FOMC) meetings. In a similar spirit of inviting feedback, we are sharing a short summary of the staff forecast in this post; for more detail, see the material from the EAP meeting on our website. Here we discuss the New York Fed staff forecast for real GDP growth, the unemployment rate, and Consumer Price Index (CPI) inflation in 2012 and 2013.

NY Fed Releases Latest View on Economy - The latest update of the official New York Fed staff economic forecasts predicts trend-like growth, largely stable inflation and a slow grind lower in the unemployment rate. The Federal Reserve Bank of New York released its May forecasts Friday to its Economic Advisory Panel. In a release that laid out the data, bank economists said the predictions help prepare William Dudley, the New York Fed leader, to participate in monetary policy setting Federal Open Market Committee meetings. Bank economists see “moderate” growth of around 2.5% this year, with activity picking up to 3% next year. The forecasters allowed that activity at the end of last year and the start of this year may have been goosed up by warm winter weather and auto inventory adjustments, but they nonetheless reckon “some of the headwinds that have hampered growth in recent years” will subside “gradually.” They said that will allow “improved fundamentals to become more apparent in the second half of the year.” The big challenge for next year is the expected “significant drag” presented by government spending cutbacks, but improved job market and financial conditions will go some way toward offsetting that influence, the bank said. Meanwhile, what is now an 8.1% unemployment rate is seen grinding down to an average of 7.2% in the final quarter of 2013.

ECRI Repeats Recession Call Based on Coincident Indicators, Especially Income - Once again Economic Cycle Research Institute's Lakshman Achuthan repeats his recession call, this time saying within three months. His call is based on coincident indicators, especially income. According to Achuthan, income growth in the last three months is lower than at the start of any of the last 10 recessions. Link if video does not play: Why U.S. Economy is Heading Back Into Recession. Once again I tend to agree with him, yet once again I find some things that sound rather disingenuous. When asked "Can the Federal Reserve do anything about this?", Achuthan responded "no". Specifically Achuthan replied "It's so ironic. We're all free-marketeers. .... the free market has indigenous inherent business cycles which means ups and downs. It's ironic that we think that the Fed or other policies could just stave off a recession".

From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics, by Thomas Palley: Many countries are now debating the causes of the global economic crisis and what should be done. That debate is critical for how we explain the crisis will influence what we do. Broadly speaking, there exist three different perspectives. Perspective # 1 is the hardcore neoliberal position, which can be labeled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics. Perspective # 2 is the softcore neoliberal position, which can be labeled the “market failure hypothesis”. It is identified with the Obama administration, half of the Democratic Party, and the MIT economics departments. In Europe it is identified with Third Way politics. Perspective # 3 is the progressive position which can be labeled the “destruction of shared prosperity hypothesis”. It is identified with the other half of the Democratic Party and the labor movement, but it has no standing within major economics departments owing to their suppression of alternatives to orthodox theory.

How income inequality contributed to the Great Recession -The idea that the Great Recession of 2008 may have been caused not just by careless banking but also social inequality is currently all the rage among macroeconomists. Much of the impetus for the current debate stems from the widely discussed 2010 book Fault Lines, written by Raghuram Rajan, a former chief economist of the International Monetary Fund. Rajan argues that many lower- and middle-class consumers in the United States have reacted to the stagnation of their real incomes since the early 1980s by reducing saving and increasing debt. This has temporarily kept private consumption and thus aggregate demand and employment high, but also contributed to the creation of the credit bubble which eventually burst. In Rajan's view, a large portion of the blame for this falls on misguided government policies, which promoted the expansion of credit to households. But the "Rajan hypothesis" also contradicts the dominant textbook theories of consumption, which see no link between persistent income inequality and aggregate private consumption, and hence no need for government action stimulating consumption demand and jobs in response to higher inequality. These theories, known as the permanent income or life-cycle hypotheses, are based on the assumption that consumers form rational expectations about their long-term income. Short-term fluctuations of income due to, say, unexpected job loss, or lower than average stock market returns, have only a limited impact on current consumption since households expect them to be only temporary.

What is a "financial crisis"? -The conventional wisdom says that recessions that follow financial crises last longer than other recessions. In a recent blog post, John Cochrane challenges the conventional wisdom: Financial crises certainly don't always and inevitably lead to long recessions, as the factoid suggests... In a nice article for the Atlanta Fed, Gerald Dwyer and James Lothian went back to the 1800s, and find no difference between recessions with financial crises and those without. Some, like the Great depression and now, last a long time. The others don't.    Michael Bordo and Joseph Haubrich wrote a somewhat more detailed study of US history, (which I found through John Taylor's blog) concluding recessions associated with financial crises are generally followed by rapid recoveries. We find three exceptions to this pattern: the recovery from the Great Contraction in the 1930s; the recovery after the recession of the early 1990s and the present recovery. ...

US labour market on a knife-edge – stimulus is needed - Last week (May 4, 2012), the US Bureau of Labor Statistics released its latest – Employment Situation Summary – for April 2012. The data revealed that employment growth in the US is now slowing but remains positive (payroll data) although the household survey data (which uses a broader concept of employment) revealed a fall in total employment. More indicative of the state of the US labour market was the decline in the participation rate as workers once again gave up looking for jobs that were not there! While the official unemployment rate fell by 0.1 percentage points to 8.1 per cent in April, the reality is that the labour supply contraction disguises the true picture. If we added the workers who dropped out of the labour force back into the unemployment numbers then the unemployment rate would have risen to 8.4 per cent. The US economy is thus at another turning point. Private spending growth does not appear capable at present of filling the gap left by a declining public spending contribution. Unless the government provides a renewed stimulus it is likely the US economy will head backwards and unemployment will rise.

Larry Summers vs. the long-termers - Ezra Klein -  In this month’s Foreign Affairs, Rajan is back with another warning. “The industrial countries have a choice,” he writes. “They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called ‘animal spirits’ must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.”This time, Rajan’s comments are being received more favorably. Greg Mankiw, the Harvard economist who advises Mitt Romney, called the essay “wise.” Tyler Cowen, the George Mason University economist who runs the popular blog Marginal Revolution, was even more direct: “Rajan nails it,” he wrote. But he is once again on the opposite side of the issue from Summers. This time, however, there has been an unusual role reversal: It is Summers who is trying to rouse an economics profession that has settled into a kind of complacency, and Rajan whose argument is more comfortable to much of the political and economic establishment.

"How to End This Depression" - I have to fight the feeling that it's too late to do much more about the unemployment problem. It's not. Unemployment is still several percentage points above the full employment level and falling slowly -- far too slow to provide any comfort -- and there is every reason to believe that it could be years yet before we reach acceptable employment levels (barring further troubles along the way). We know that unemployment is costly, and that the longer the problem persists the more permanent and damaging it becomes. We also know that we could help to overcome this problem by using idle labor and idle resources to build needed infrastructure. The price of doing so -- the cost of labor, materials, and interest on the borrowing needed to build infrastructure -- is as low as it is likely to get. The cost is low, the need is great, yet we do nothing. Why? Politics. That's what makes me want to throw up my hands and give up. As I've noted in the past, it seems useless to even try since politicians aren't going to act. Political gridlock will not allow it. But I've also been careful to say that "I'll still complain -- there's no reason to let policymakers off the hook."

Paul Krugman: How Bad Things Are:The following is excerpted from "End This Depression Now!" available now from W.W. Norton & Company.

Medieval Medicine - Krugman - My talk with Chrystia Freeland of Reuters:

The Once and Future Dollar - Barry Eichengreen - The week between Christmas and the New Year is normally a quiet time for economic news. On December 25, 2011, however, headlines were ablaze with the news: China and Japan had reached an agreement to use their own currencies in trade and financial transactions. Their governments would establish a market for direct exchange of yuan and yen, avoiding the convoluted process in which a bank or firm in one country must first sell its national currency for dollars and then use them to buy the currency of the other. As part of the same agreement, Japan’s central bank agreed to hold more of its foreign currency reserves, most of which are in dollars, in yuan instead. This historic accord was widely seen as a rebuke to the dominance of the dollar in international transactions. The dollar is involved in 85 percent of global foreign exchange trades. Fully 80 percent of all over-the-counter foreign exchange transactions involving the yuan and the yen are trades of those currencies for dollars. While neither China nor Japan divulges the share of its foreign exchange reserves held in dollars, educated guesses put that figure at more than 60 percent in both cases—even higher than the share of dollars in central bank reserves worldwide.

April Marks First Monthly Budget Surplus of Obamas Presidency - The U.S. government in April saw its first monthly budget surplus since September 2008, with large revenue helping offset below-normal federal spending. The Treasury Department on Thursday said the government saw a surplus of $59.117 billion in April, with the $318.8 billion in taxes and other revenue offsetting $259.7 billion in federal spending. The one-month revenue figure was the highest since April 2008. April tends to mark a flood of revenue into the federal government as many people wait until the deadline to file their tax returns. The surplus was perhaps a bit larger than normal because of the way the calendar was set up. April 1 was on a Sunday, so payments scheduled for that day were pushed into March. Even though the tax revenue was high, it still lagged far behind April 2008, which saw $403.8 billion in receipts. Revenue and spending figures can bounce around, and the government could still see a budget deficit in May (In February, the government notched the largest one-month deficit in U.S. history at $231.7 billion). But the practical implication of the April surplus is that the government might have bought itself some extra time until it hits the $16.394 trillion debt ceiling.

Meanwhile, In The Bond Market – Krugman - The real interest rate on 10-year US bonds is now firmly negative: This is as clear a demonstration as you can ever expect to see that the models some allegedly authoritative figures use to analyze the economy are dead wrong; it’s also an indication that obsessing over the deficit, and actually cutting back sharply on government investment, are crazy.

The Treasury Bubble in One Graph - What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so. Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation). And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies. John Aziz proposes (much to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And that those economists who are calling for even greater inflation are playing with dynamite. See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — we believe that negative side-effects from these policies may cause severe harm. Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). As John wrote recently - "So, does the accumulation of excess reserves lead to inflation? Only so much as the frequentation of brothels leads to chlamydia and syphilis." We’d call that playing dice with the devil.

A Closer Look at Three Sectors’ Financial Balances - Erin’s video is first among several developed by students in Eric Tymgoine’s modern money course.

Sovereign Currency Issuers Are Always Solvent - Another great video developed for Eric Tymgoine’s modern money course.

Fiscal policy: Cliff-diving - The Economist  - AMERICANS have watched austerity sweep Europe with a certain Schadenfreude. But eight months from now they may get a dose of the same medicine. The political compromises that have produced much of America’s deficit of 8% of GDP are programmed to go into reverse at the end of the year, two months after the election. A stimulus package consisting of a payroll-tax cut, investment tax credit and enhanced unemployment insurance expires then, as do George W. Bush’s tax cuts (which have already been extended by two years from their original end-date of 2010). At the same time an automatic, across-the-board cut in domestic and defence spending, called a “sequester”, takes effect, cutting about $100 billion from government spending next year. The economic impact of this fiscal cliff is a matter of some debate. The Congressional Budget Office reckons that the combined effects of the sequester and the expiring tax cuts would add up to 3.6% of GDP in fiscal 2013. But David Greenlaw of Morgan Stanley, which puts the total effect at almost $700 billion at an annual rate, argues that the calendar-year impact is much larger, at around 5%. Others think the effect would be smaller, noting that some people will not experience the full tax hit until they file their returns in 2014.

The Cliff: Coming Soon To A Political Theater Near You -  You know what I mean by the “Fiscal Cliff” — Federal Reserve Chairman Ben Bernanke’s ultimate Fed-speak for the budget apocalypse that could occur between Dec. 31 and Jan. 2. That’s when a series of existing federal-budget-related policies will expire and others will be triggered that could result in an economic calamity. Actually, “could occur” masks the real situation. The truth is that the cliff is already scheduled to happen. It may be a crisis, but it won’t be unexpected: We know what’s ahead, the precise moment when it will occur and how it will happen. The cliff includes substantial tax increases on most Americans and significant military and domestic spending cuts that will affect most individuals and almost every business. It also includes another debt ceiling cliffhanger that, if nothing else, could further convince lenders and rating agencies that, for political reasons, the United States is not as good a credit risk today as it has been in the past. All of this will be happening during the most unstable political environment that could possibly exist — a lame-duck session of Congress — when the work of Representatives and Senators not returning to Washington, D.C., the following year typically is, to be charitable, less reliable. And that’s if they and their staffs, who all have to find new jobs, move or otherwise deal with their soon-to-be-dramatically-changed lives, show up at all.

Congress May Toss the Economy over the Fiscal Cliff - With Congress and the Obama Administration barreling towards the year end “fiscal cliff” Federal Reserve Board Chairman Ben Bernanke has warned about, House Speaker John Boehner, R-Ohio, has begun floating ideas for ways to try to avert a catastrophe. Unless lawmakers and the President can agree on a slew of confounding budget and tax issues before the end of the year, a double whammy of sharp tax increases and deep cuts in domestic and defense spending will jolt the struggling economy beginning in early January. That’s because two Bush era tax cuts and a raft of other tax relief measures are set to expire by the end of the year, and Congress must implement the first installment of $1.2 trillion of long-term deficit reduction that lawmakers and the White House agreed to last summer. While an abrupt surge in tax revenues of about $500 billion, and a steep cut in government spending of about $110 billion early next year would certainly put a big dent in next year’s deficit, many budget experts fear it would also undercut the economic recovery in the short run. Boehner said this week that Congress will be inviting a legislative “train wreck” if it leaves all these big- ticket fiscal issues to a lame duck session of Congress after the November presidential and congressional elections. He revealed plans to schedule a vote on the House floor before the fall election to extend the two Bush-era tax cuts that are very popular with his members.

Harry Reid: No rollback of automatic budget cuts - In his strongest words yet, Senate Majority Leader Harry Reid warned Wednesday that he is not prepared to stop automatic spending cuts in January unless Republicans accept a more “balanced” approach to deficit reduction including revenues. The Nevada Democrat took aim first at his House Republican adversaries but also appeared to lay down a new marker for his own party to hang tough behind the Budget Control Act as the strong medicine needed to jolt the political system toward some budget deal. “Is the sequester the best way to achieve that balance? No,” Reid told the Senate. But he immediately went on to describe the mechanism as “a hard pill to swallow. But it was the right thing to do” “The sequester, which in effect would take $600 billion from domestic programs and $600 billion from defense programs, was designed to be tough enough to force the two sides to reach a balanced deal. It hasn’t happened yet.” Reid stood behind these lines: “As long as Republicans refuse to consider a more reasonable approach—one that asks every American to pay his fair share while making difficult choices to reduce spending—the sequester is the only path forward.” Reid’s stance greatly ups the ante heading toward January and won’t be an easy sell.

Republicans: Cut Programs For The Poor, Not The Military : As Congress returns from recess this week, House Republicans are set to advance legislation to replace automatic defense spending cuts they agreed to last year with cuts to programs for the poor and working class. The controversial measure is expected to pass the House and die in the Senate, making it largely a political exercise that allows the two parties to contrast the values at the heart of the 2012 election: Should the burden for addressing the country’s long-running fiscal challenges fall to struggling people, or to the wealthiest people in the country? The proposal — which is an outgrowth of the budget the House GOP overwhelmingly voted for late March — would cut some $261 billion from health care programs, food stamps, unemployment benefits and child tax credits, among others. It constitutes a violation of the GOP’s end of the debt-limit deal, which included painful sacrifices for both parties if the Congress failed to reach a bipartisan deficit-reduction agreement. The measure would override the $78 billion in defense cuts set take effect January 2013 as a backstop in last August’s debt limit law. Additional cuts are in place for the following nine years. President Obama and Democrats aren’t happy with the so-called “sequestration” cuts either, but they insist they won’t roll them back unless Republicans agree to a balanced deal that combines spending cuts with new revenues taken from wealthy Americans, the latter of which Republicans have blocked for years.

Don't Buy the Spin: How Cutting the Pentagon's Budget Could Boost the Economy - The matter assumed increased urgency in November after the Congressional supercommittee failed to agree on a deficit-reduction plan. This failure set in motion an agenda for automatic cuts—or “sequestration” of funds—from military and nonmilitary budgets beginning in January 2013. According to the sequestration scenario, absent the adoption of a large-scale deficit-cutting plan, military and nonmilitary spending would face $55 billion per year in automatic cuts over a decade, relative to previously established spending levels. If Congress and the White House devise a way to exempt the Pentagon from the automatic cuts—as seems increasingly likely—the cuts will instead be taken from healthcare, education, social spending, infrastructure and the environment. Of course, framing the deficit issue in terms of military versus social spending cuts ignores other options, such as raising taxes on the wealthy. It also erroneously assumes that reducing the federal deficit is necessary now, before the economy has settled onto a sustainable recovery path out of the recession. Even more fundamental, today’s debate largely skirts the question of what the military budget needs to be after Iraq and Afghanistan, and fails to grapple honestly with the impact that major military spending reductions would have on the economy, especially in terms of job opportunities and technology.

Krugman compares Republican economic plan to blood-letting -Nobel Prize-winning economist Paul Krugman said Saturday that Republican-backed austerity measures — such as cutting government spending and reducing public services — were self-defeating  “We are very much like medieval doctors who thought the treatment for illness was to bleed you, then when the patients got sicker they bled them even more,” he said on Reuters TV. “We are doing incredibly destructive stuff that is not working.” Krugman said the real economic problem was mass unemployment. “I would say shelve the deficit discussion,” he said. While Congress has been debating how to cut the federal deficit, “more than 3.9 million Americans have been out of work for more than a year,” Krugman added. “Think about what that means. That should be overwhelmingly our priority. We should be focusing on the clear and present danger, and not wasting a lot of time on what might happen well down the pipe.” The weak job market was causing “continuous damage” to the economy, particularly for recent college graduates, according to Krugman. “The college graduate who five years after graduating has still not found a job that makes use of his or her skills is never going to be used to their full potential later on,” he said. “So, we are basically disinvesting in the future.” Watch video, courtesy of Reuters TV, below:

Don’t Blame Budget Problems on the Safety Net - It's hard to say this enough. The long-run budget problem is a health care cost problem, "which affect costs for private-sector care as much as for Medicaid and other government health care programs": Federal spending on low-income programs has gone up considerably in recent years, a development discussed at a recent House Budget Committee hearing.  A new CBPP analysis examines why and explains that low-income programs outside of health care are not a factor in our serious long-term budget problems. Here’s the opening:  Several conservative analysts and some journalists lately have cited figures showing substantial growth in recent years in the cost of federal programs for low-income Americans. These figures can create the mistaken impression that growth in low-income programs is a major contributor to the nation’s long-term fiscal problems. In reality, virtually all of the recent growth in spending for means-tested programs is due to two factors:  the economic downturn and rising costs throughout the U.S. health care system, which affect costs for private-sector care as much as for Medicaid and other government health care programs. Moreover, Congressional Budget Office (CBO) projections show that federal spending on means-tested programs other than health-care programs will fall substantially as a percent of gross domestic product (GDP) as the economy recovers — and fall below its average level as a percent of GDP over the prior 40 years,

Public overwhelmingly supports large defense spending cuts - While politicians, insiders and experts may be divided over how much the government should spend on the nation’s defense, there’s a surprising consensus among the public about what should be done: They want to cut spending far more deeply than either the Obama administration or the Republicans. That’s according to the results of an innovative, new, nationwide survey by three nonprofit groups, the Center for Public integrity, the Program for Public Consultation and the Stimson Center. Not only does the public want deep cuts, it wants those cuts to encompass spending in virtually every military domain — air power, sea power, ground forces, nuclear weapons, and missile defenses. According to the survey, in which respondents were told about the size of the budget as well as shown expert arguments for and against spending cuts, two-thirds of Republicans and nine in 10 Democrats supported making immediate cuts — a position at odds with the leaderships of both political parties.

It's the Economy, Smartypants - What I'd really like to see is the Obama campaign taking on the whole idea that because you made a lot of money in business, that means you'll be brilliant at setting macroeconomic policy for the country. This idea gets repeated a zillion times every election by candidates saying, "I'm not a politician, I'm a businessman," as though that were a compelling argument for why you'd be successful in politics, not business. This is a pet peeve of mine I've written plenty about; see this article for a rundown of all the reasons it's absurd. But I'm not naive enough to think the Obama campaign is going to spend time arguing against something so many people believe in without thinking. Instead, they're going to comb through Romney's career and figure out what combination of attacks will create a negative association in the public's mind when the words "Romney" and "business" are mentioned together. Maybe the key will be his personal wealth and hilarious habit of saying things that reinforce his distance from the struggles of ordinary people, or maybe it will be stories of layoffs at companies Bain Capital acquired, or maybe it will be some new story we haven't yet heard of. But they'll be attacking him on it, good and hard.

Paul Ryan's Latest Budget Bill Shows He's Still A Coward - As far as we know now (Would anyone be surprised if something else popped up?), the most egregiously silly thing that's going to happen on the budget this week is the House's consideration of what House Budget Committee Chairman Paul Ryan (R-WI) is calling a "reconciliation" bill. This bill would cut $78 billion in spending in fiscal 2013 and cancel the $90 billion spending cut that was triggered when the anything-but-super-committee failed to agree on a deficit reduction plan late last November. The bill also includes an additional $180 billion in spending cuts over the next nine years. Several things need to be noted about this bill. First, it has no chance whatsoever of being enacted.  The time spent debating this bill is a total waste of time and taxpayer dollars. Second, although it's being portrayed as a spending cut, the truth is that the bill would reduce spending LESS than will happen if the January spending cuts are allowed to go into effect as planned.  Third, technically this is not a reconciliation bill. Fourth, this is a huge missed opportunity and yet another example of how, in spite of all of the spin, Ryan is a budget coward rather than a leader. A serious effort to develop a compromise with House Democrats could easily have produced a bill that would have passed with bipartisan support and moved the budget debate forward.

The Ryan Budget May Cut Economic Data - Most U.S. economic data come from three federal agencies: the Census Bureau, the BEA, and the Bureau of Labor Statistics. They have a combined budget of $1.6 billion, less than 0.05 percent of President Barack Obama’s $3.7 trillion proposed budget. These agencies have always had to fight for more funding. Now they may have to fight just to keep their budgets intact. As part of $19 billion in nondefense discretionary cuts in Paul Ryan’s (R-Wis.) budget—recently passed by the House of Representatives—the agencies are likely to get less funding.  The Senate is unlikely to embrace the Ryan budget in its entirety. Yet specific proposals show what the House has in mind. The House Committee on Appropriations recently proposed cutting the Census budget to $878 million, $10 million below its current budget and $91 million less than the bureau’s request for the next fiscal year. Included in the committee number is a $20 million cut in funding for this year’s Economic Census, considered the foundation of U.S. economic statistics.

The War on Data Collection - Ignorance is bliss edition. From BusinessWeek:[The Census Bureau, BEA and BLS] have always had to fight for more funding. Now they may have to fight just to keep their budgets intact. As part of $19 billion in nondefense discretionary cuts in Paul Ryan’s (R-Wis.) budget—recently passed by the House of Representatives—the agencies are likely to get less funding.  The Senate is unlikely to embrace the Ryan budget in its entirety. Yet specific proposals show what the House has in mind. The House Committee on Appropriations recently proposed cutting the Census budget to $878 million, $10 million below its current budget and $91 million less than the bureau’s request for the next fiscal year. Included in the committee number is a $20 million cut in funding for this year’s Economic Census, considered the foundation of U.S. economic statistics. Some people argue that trying to track the economy is a waste of money as the bureaucrats will just manipulate the data to (e.g., Ricardo in his DickF incarnation in 2009). From the article: Some believe the Census Bureau does too much already. “They waste a share of their budget on studies that no one actually uses,” says Chris Edwards, an economist with the Cato Institute, who cites periodic surveys on such items as the total hog count in the U.S. to prove his point. “A lot of that could be done by the private sector.”

Who Pays for Facts? - The Internet has made possible a golden age of commentary. Anyone with a computer and an Internet connection can create a blog and comment to her heart’s content. Yet as one of those commenters with a free blog, I am painfully aware that this hypertrophy of analysis has not been matched by corresponding growth in the stuff that we analyze: facts. There is no way we could have written White House Burning, with its one hundred pages of endnotes, without someone else to do the primary research: either the journalistic kind, calling around to sources in Washington to figure out what’s going on, or the data-gathering kind, visiting grocery stores in Brooklyn to track prices and calculate the inflation rate. So I would just like to second what Menzie Chinn said about the importance of government statistical organizations, which are (along with most of the rest of the government) under attack from Paul Ryan and his troops. Even if you don’t agree with what I say, if you like reading economics blogs, you should realize that they couldn’t really exist without the BEA, BLS, Census Bureau, etc. Of course, if your economic policy prescriptions are based entirely on pure theory, then I guess you can do without data.

President Obama's "To-Do List" for Congress - The White House - President Obama has put together a "to do" list for Congress that, if acted upon quickly, will create jobs and help restore middle class security. These initiatives all have bipartisan support, and the President believes that they will help create an economy built to last that supports secure American jobs and makes things the rest of the world buys - not one built on outsourcing, loopholes, or risky financial deals.  Here are the items on Congress’s To-Do List:

Senate Turns to Partisan Fight over Student Loans - The Senate is the newest arena in the election-year face-off over federal student loans, and both sides are starting out by pounding away at each other. With Congress returning from a weeklong spring recess, the Senate plans to vote Tuesday on whether to start debating a Democratic plan to keep college loan interest rates for 7.4 million students from doubling on July 1. The $6 billion measure would be paid for by collecting more Social Security and Medicare payroll taxes from high-earning owners of some privately held corporations. Republicans want a vote on their own bill, which like the Democrats’ would freeze today’s 3.4 percent interest rates on subsidized Stafford loans for one more year. It would be financed by eliminating a preventive health program established by President Barack Obama‘s health care overhaul. Each side scoffs that the other’s proposal is unacceptable, and neither is expected to garner the votes needed to prevail. Even so, everyone expects a bipartisan deal before July 1 because no one wants students’ interest rates to balloon before November’s presidential and congressional elections.

S Corp payroll tax changes may pay for lower-cost student loans - The White House has endorsed a move by Senate Democrats to tighten up partnership and S Corps payroll tax payments--something long needed anyway--in order to fund the protection for students from paying too high interest rates on their loans. See  Statement of Administration Policy (May 7, 2012); Stop the Student Loan Interest Rate Hike Act of 2012 (S. 2343).  The payroll tax provision would require owners of certain closely held partnerships and S corporations to pay payroll taxes on their income from the entities if they have income in excess of $200,000 (singles)/ $250,000 (joint filers).  The provision would raise almost $6 billion over the next 10 years to pay for a one-year extension of the current 3.4% rate on government-guaranteed loans. A procedural vote will take place on Tuesday, but the routine use of the filibuster by Republican opponents will likely make it hard to enact.  Both parties claim a desire to hold the student loan rate steady, but Republicans can't stand the idea of rich people not being able to use their S corporations to avoid paying payroll taxes on all of their compensation, so the GOP passed a bill in the House that would pay for student loan relief by eliminating funding for a preventive care program!

Student loan bill fails as Senate gears up for protracted battle - Senate Republicans on Tuesday blocked a bill aimed at extending low interest rates for student loans, signaling the possibility of a protracted congressional battle over a measure lawmakers in both parties agree should ultimately be passed. In a 52-45 vote, Republican Senators blocked further work on the "Stop the Student Loan Interest Rate Hike Act of 2012," a Democrat-sponsored bill that would extend low interest rates on federally subsidized student loans for another year. Barring an extension, the rate on new loans for undergraduates would increase from 3.4 percent to 6.8 percent this July. Sixty votes were needed to advance to debate. The White House called the bill's failure "extremely disappointing" in a statement following the vote.  "It is extremely disappointing that Republicans in the Senate today voted to ask millions of students to pay an average of $1,000 each in order to protect a loophole that allows millionaires to dodge payroll taxes," the statement said. 

GOP blocks Senate debate on student loan bill  - Senate Republicans derailed a Democratic bill on Tuesday aimed at keeping interest rates on federal college loans from doubling July 1 in an election-year battle aimed at the hearts — and votes — of millions of students and their parents.Republicans said they favor preventing the interest rate increase but blocked the Senate from debating the $6 billion measure because they oppose how Democrats would pay for it: Boosting Social Security and Medicare payroll taxes on high-earning stockholders of some privately owned corporations. GOP senators want a vote on their own version heading off the interest rate increases and paid for by eliminating a preventive health fund created by President Obama's 2010 health care overhaul. That financing idea has no chance of passing the Democratic-run Senate and has drawn a veto threat from the White House. Tuesday's vote was 52-45 in favor of starting debate on the Democratic legislation — eight votes shy of the 60 needed. Senate Majority Leader Harry Reid, D-Nev., was the only one to defect his party's position, a procedural move that will allow him to hold the vote again should the two sides work out a deal later.

Obama Brings Back the American Jobs Act From the Mothballs - Perhaps showing concern about the softening economic forecasts of recent months, President Obama has provided a to-do list for Congress that would, in his words, “create jobs and help restore middle class security.” The to-do list includes several ideas from the American Jobs Act and subsequent legislation proposals announced in recent months. I’m not really seeing why there should be a lot of excitement over this to-do list. First, the House GOP isn’t likely to listen. Second, these are a collection of business tax credits and half-measures, without anything on the order of direct job creation. As long as this is posturing, you could actually posture with something that would work. A new study shows that without government cutbacks, the unemployment rate would fall to as low as 7.1%. In the past, the Administration has cited support for fiscal aid to states to restore government jobs. Since this would have the benefit of actually working, I’m baffled as to why it would not be included here.

A Boost in Your Paycheck: How Are U.S. Workers Using the Payroll Tax Cut? - NY Fed -  Over the past several months, there was a flurry of debate in Washington over the extension of the payroll tax cut. Many supporters of the tax cut—worth about $1,000 to a family earning the median income of slightly more than $50,000 a year—have cited its importance to the nation’s economic recovery, while opponents claim that it will only add to the national deficit without boosting the economy. Exactly how such a tax cut affects the aggregate economy relies heavily on how U.S. workers use the extra funds in their paychecks. Unfortunately, we know little about how such tax cuts are used by workers. So we decided to ask them and, in this post, report the answers they gave us. In the first survey, we asked respondents how they intended to spend any extra funds from the payroll tax cut in their paychecks. More precisely, respondents were asked to provide the share (out of 100 percent) of funds that they would spend on: consuming, saving, and paying off debt. The table below shows that 8.8 percent of respondents planned to use most of the tax-cut funds for consumption, 39.8 percent planned to use majority of it on saving, and 50.3 percent planned to use a majority of it to pay off debt. To explore the relationship between the perceived permanence of the tax cuts and the intention to spend the funds, we also asked respondents how likely they thought it was that the tax-cut extensions would continue into future years

How Are U.S. Workers Using the Payroll Tax Cut? - This study from Basit Zafar, Grant Graziani, and Wilbert van der Klaauw of the NY Fed shows that the payroll tax cuts in the stimulus package have been used mostly to pay off debt and add to savings -- around 40% went to consumption. Does the relatively low amount that went to consumption mean the payroll tax cuts didn't work? As I've argued before, the 60% that went to saving and debt reduction represents balance sheet rebuilding, something that has to happen before households can return to more normal expenditure patterns. This may mean "that our estimated MPC [of .405] is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments." And it's not just a reduction in interest, once balance sheets are rebuilt the amount of income that goes to consumption instead of saving and debt reduction ought to go up:

Best Thing About the Bush Tax Cuts? They’re Huge! - My final column with Tax Notes as a regular contributor came out today, available here if you are a subscriber.  If not, you will have to wait until next week when I will reprint the column in full here.  The title is “Making the Best of the Bush Tax Cuts,” and the main point I make is that of all the possible economic effects of the Bush tax cuts, and all the arguments made about the cuts (for or against them), by far the most significant, most noted, most praised or most maligned characteristic has been their size (or revenue loss).  Even supply-side proponents of the Bush tax cuts hardly ever talk about the supply-side effects of the tax cuts in truly supply-side terms; i.e., they don’t try to argue that the incentive effects of lower marginal tax rates on labor supply or private saving have been huge.  They just talk about how the tax cuts have been huge, and so wouldn’t it be bad if they went away?  Liberals have argued that the tax cuts have been costly and have disproportionately benefited the rich, meaning the government has given away a huge amount of money to the rich, so wouldn’t it be good if they went away?  So the bottom line is that for all the talk of all the promising, bipartisan ideas for tax reform that would reduce the deficit, there is still huge disagreement about what to do with the huge thing known as the Bush tax cuts.

Bad Dividend Math - While working on a new Atlantic column, I came across this article by Donald Luskin arguing that “Taxmageddon” (the expiration of the Bush tax cuts at the end of the year) will cause the stock market to fall by 30 percent.* His argument is basically this: if the marginal tax rate on dividends increases from 15 percent to 43.4 percent, the after-tax yield falls by 33.4 percent, so stock prices should fall by about the same amount. Ordinarily I don’t bother with faulty claims like this—there are only so many hours in the day—but it bothered me so much it cost me some sleep last night. The first problem is the only one that Luskin acknowledges: lots of investors don’t pay taxes on dividends. He mentions pension funds; there are also non-profits and anyone with a 401(k) or IRA. According to Luskin, only about one-quarter of dividends are received by people who will pay the top rate. Maybe they are the marginal investors who set prices, he speculates. Well, maybe. But an increase in the tax rate will make dividend-paying stocks more expensive for them but the same price as before for non-taxpaying investors—so as long as we’re going to stick to theory, the former should sell their stocks to the latter for some price between the two. More important, the price of a stock (in theory, again) is the discounted present value of its future dividend stream aggregated over an infinite horizon. So we need to know what the tax rates will be in all future years. That’s clearly unknowable.

Tax Foundation--up to its usual nonsense - Linda Beale - The Tax Foundation claims to be a nonpartisan institute interested merely in researching and informing people about taxes. That's far from the truth, however. Its work is aimed at one purpose--convincing Americans that they pay too much in taxes and that government is too big.  One of its most useful distortions is its self-proclaimed "tax freedom day." It adds up all the state and local and federal income, excise, social security, property, and other taxes on individuals and businesses,including corporations, and then considers how many days of work, at a consistent amount per day, are required to raise that amount of taxes. See Tax Freedom Day 2012, Tax Foundation. But of course the entire enterprise of tax freedom day is baloney. Nothing in that formula actually relates to what an individual earns or what an individual pays in taxes. But because the date is announced as the day that Americans quit working to pay government and start working for themselves, many media outlets and readers interpret the "tax freedom day" as meaning that they themselves must work that long to pay off their share of taxes. There is no such thing as an average American, and it isn't clear at all that many of the excise, corporate and other businesses taxes are borne by ordinary Americans. Moreover, thinking about this on an individual level means averaging in the super-rich like Warren Buffet with ordinary Joes like "Joe the Plumber" and poor folk like those barely scraping by on teacher or janitor salaries results in sheer nonsense.

U.S. Millionaires Told Go Away as Tax Evasion Rule Looms -- Go away, American millionaires. That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business. I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.” The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

Will Rich People Desert the U.S. If Their Taxes Are Raised? - On April 30, the Treasury Department announced that 461 Americans had renounced their citizenship in the first quarter of 2012. A 1996 law requires that every person doing so be named, with their names published in the Federal Register. The idea is to shame those who may be renouncing their citizenship solely to escape taxation. The extreme step of renouncing one’s citizenship is necessary to escape taxation by the United States, because the United States, alone among the major nations of the world, taxes its citizens wherever on earth they live. Other countries tax only those who live and work within their borders; if their citizens live and work in another country, they are liable only for taxes incurred in that country. Americans living abroad, however, must not only pay taxes in the country in which they are living, but United States taxes as well, although there is an exemption of $93,000 that is adjusted for inflation annually. The only legal way for American citizens to avoid American taxes is to renounce their citizenship and live their lives permanently in another country. In recent years, the number of Americans renouncing their citizenship has increased. According to the international tax lawyer, Andrew Mitchel, the sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997.

The Rise and Rise of the Super-Rich - This is what a second Gilded Age looks like.  The above chart compares the inflation-adjusted incomes of the top 0.1 percent with annual inflation-adjusted S&P 500 prices, both indexed to 100 beginning in 1913. (Note: The income numbers for the 0.1 percent come from Picketty and Saez. The real S&P prices come from Robert Shiller).  It tells a three-part history of our economy over the last century. It's a story about the age of the rentiers, their retreat, and subsequent return. By 1913, the robber barons were in relative twilight. The so-called "malefactors of great wealth" had suffered a series of political setbacks over the previous decade -- from Teddy Roosevelt's trust-busting to the creation of the income tax itself. But they were still robber barons. The super-rich of the day still had more than enough wealth to live off. That's what we see in the chart above: the incomes of the top 0.1 percent more or less track the S&P 500.  And then the New Deal happened.  There was a cultural shift too. Executives were embarrassed by high pay. Executives like George Romney, who turned down a bonus, because he didn't think anyone deserved to be paid that much. It's hard to imagine such reluctance nowadays. Consider the following chart, comparing real incomes of the top 0.1 percent, 1 percent and GDP per capita over the past three decades.

Why Are Hospitals Tax Exempt? - TaxProf points us to a very interesting article which makes the case that the origins of our current debate over "Obamacare" and particularly the health care individual mandate stem from 1960s era IRS rulings on the charitable nature of hospitals: "In fact, under ruling 69-545 a tax-exempt hospital did not have to provide any free care to the poor so long as it maintained an emergency room open to all regardless of ability to pay, accepted Medicare and Medicaid patients, and had an independent governing body comprised of community leaders. The IRS had decided that the "promotion of health" was an inherently charitable purpose even if the cost is borne by patients and third party payors. It is important to note, that the change from a relief of poverty standard to a promotion of health/community benefit standard was not the result of a change in the law-rather it resulted solely from a change by the IRS in the regulations interpreting the law. The validity of this change has, however, withstood repeated court challenges.." Accordingly, most hospitals now operate as tax-exempt entities and in return provide free or low cost care.  The removal of market pricing from health care has led to the same sort of problems we might expect if shoes were provided free of charge: over-consumption, out of control costs, poor quality service, and rationing.  The health care individual mandate is meant to address this market distortion by penalizing those who do not buy health insurance.  In this sense the circle is complete: both providers and consumers are subject to government pricing and terms.

The worm in Apple (and the US tax code)--offshoring of US Profits - Linda Beale - Citizens for Tax Justice has focused on Apple's ability to lower its US effective tax rate by offshoring its profits to tax havens.  See, e.g.,  Robert McIntyre, What Apple Pays in Taxes and Doesn't, How to end Apple's offshore shenanigans. Here's the key idea in both the letter and the report. Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore. If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.)  CTJ report. This is a genuine problem for the US in the age of digitized information.  Companies easily "sell" their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious--that no price would actually be sufficient to purchase the company's valuable intellectual property away from it, since the IP is in fact the basis for the company's business.  So companies offshore their profits to post-office boxes in tax haven countries and claim that the US Is no longer the source of their profits, even though the IP was invented in the US, is still used in the US and still results in most of the sales actually in the US.

Incentive Perversity - It’s all about incentives. The richer the reward, the more willing you are to work hard and take risks, and the faster the economy will grow. By this logic – elaborated by Mitt Romney’s former business partner Edward Conard in a recent New York Times profile – income inequality benefits us all. Sloth and fear are singled out as economic sins that could condemn us to stagnation. Only the desire for more, more, more than anybody else can elicit the bold energy that economic growth requires. Only greed can redeem us. Effort is never misdirected. Risk is never carried to excess. You should thank the Higher Power for rewarding talents at the top. Before doing so, consider the empirical evidence that faith in this particular set of incentives is seriously misplaced. Managerial efforts to increase short-term profits sometimes come at the expense of long-term profits and environmental sustainability. Big winnings in a competitive game can be spent on efforts to change the rules of that game: lobbying expenditures often offer a higher payoff than investments in new technology. Research in behavioral economics offers a variety of reasons that economic incentives can backfire, including perverse effects on moral commitments. High-stakes competition in educational testing contributes to increased cheating among both students and teachers. High-stakes competition in many sports contributes to use of performance-enhancing substances.

We Are the 99.5%: The Real Inequality Jump Is in the Top Half-Percentile - Thanks in part to Occupy Wall Street, when people talk about inequality these days, they're typically referring to the extent to which the top 1 percent have pulled away from the bottom 99 percent.  I have previously expressed skepticism not about whether this has happened but about the magnitude of the increase in high-end inequality.  Over time, my skepticism has eroded, though I still believe that interpreting the figures that are commonly cited is complicated.  The first thing to point out is that if marketing were no issue, a case could be made that Occupy Wall Street's slogan should be, "We Are the 99.5%!" The following chart shows that if you are in the top 10 percent of incomes, you command more of the income received in the U.S. today than your counterparts in the past.  But unless you are in the top one-half of one percent, the increase has not been startling.  If you look at the actual income shares that are behind the numbers in the chart, tax returns in the top one percent but not in the top one-half of the top one percent accounted for 3 percent of income in 1960 and 4 percent in 2010.  If you were in the top five percent but not the top one percent, your share increased from 12.5 percent of income to 16 percent.  If you are in the top one-half of one percent, however, your peeps take home over twice the share of income that they would have in 1960--16 percent of all income received instead of 7 percent.  It gets more and more striking as you look at more stratospherically rich groups, but the trends tend to follow a similar pattern once you leave the bottom 99.5 percent behind.

For the Rich, Inequality and Volatility Is a Good Bet - Citigroup bigwig and former Congressional Budget Office/Office of Management and Budget director Peter Orszag has a plea for the one percent: let us decrease income inequality so that it'll tamp down on your income volatility. Conventional wisdom suggests that low-income households experience the greatest changes in response to macroeconomic conditions -- their income falls the most when the economy weakens, and it picks up the most when the economy recovers. The strengthening link between high incomes and macroeconomic activity provides some insight into a stunning set of statistics: In 2010, according to research by Emmanuel Saez, an economist at the University of California, Berkeley, households in the top 1 percent of income distribution accounted for an astonishing 93 percent of aggregate income gains. During the slump from 2007 to 2009, according to the same data set, that group also accounted for a very large share of aggregate income losses -- almost half of the total decline. But: Finally, if anything, high-earning households should be the ones most in favor of aggressively boosting the economy in the short run -- and not just out of benevolence. Yet I suspect, without definitive proof, that support for additional stimulus declines as one moves up the income scale.  I suspect that too! But I also suspect that there are logical, not just ideological, reasons why that's the case. And there's new, specific evidence, gathered right here in Chicago, that goes beyond suspicion.

A web of privilege supports this so-called meritocracy - Shortly after Mitt Romney's failed 2008 campaign for the Republican nomination his son Tagg set up a private equity fund with the campaign's top fundraiser. One of the first donors was his mum, Anne. Next came several of his dad's financial backers. Tagg had no experience in the world of finance, but after two years in the middle of a deep recession the company had netted $244m from just 64 investors. Tagg insists that neither his name nor the fact that his father had made it clear he would run for the presidency again had anything to do with his success. "The reason people invested in us is that they liked our strategies,'' he told the New York Times. Class privilege, and the power it confers, is often conveniently misunderstood by its beneficiaries as the product of their own genius rather than generations of advantage, stoutly defended and faithfully bequeathed. Evidence of such advantages is not freely available. It is not in the powerful's interest for the rest of us to know how their influence is attained or exercised. But every now and then a dam bursts and the facts come flooding forth. The Leveson inquiry has provided one such moment.

Economists, Liquidity Mongers and the Banker Assault on Financial Reform - Yves here. I’m posting a Real News interview with Gerry Epstein on the same theme, that of the dubious arguments and methods bankers are putting forward to stymie reforms, at the end of this post. If you have time, I’d suggest watching that as well as reading this post, since they don’t overlap much. Otherwise, pick your preferred medium! Gerry Epstein: This has been a bad stretch for advocates of financial reform – and therefore for the economy as a whole. One after the other, new financial regulations contained in the Dodd-Frank law are being gutted or delayed by regulators and Congress, while the bankers – escorted by a phalanx of paid economists, lawyers and lobbyists – are squealing “wee, wee, wee” all the way home. Bankers and their lobbyists and economists help grease the skids not just with money – but with terms of “econ-speak” such as “cost-benefit analysis”, and most commonly, “liquidity”. Used and manipulated by the wrong hands, such boring and innocuous sounding concepts can turn dangerous, even fatal in the banker battle against safer financial regulation. The list of delays, loopholes and obstacles is too long to fully recount, but here are a few of the most important.

It’s All About the Fraud: Madoff, MF Global & Antonin Scalia - In this issue of The Institutional Risk Analyst, we return to the Lehman Brothers, Madoff and MF Global bankruptcies to talk about how the largest banks have wired US bankruptcy laws to their own advantage. Specifically, the 2005 changes to the bankruptcy code, combined with the traditional American caution regarding pre-judgement restraint on the parties surrounding a bankruptcy, has provided American banks with a free pass to facilitate fraud with no accountability.  On May 17th, IRA co-founder Christopher Whalen is making a presentation to the economic advisory committee of FINRA entitled "Policy issues regards customer account protection and bankruptcy." This edition of The IRA is meant as a background to that discussion, which unfortunately is closed to the public. In that regard, thanks to Max Keiser for the quotation from his kinsman William Wallace.  You may also read our earlier comment, "Should the Courts Appoint an Equitable Receiver for Bank of America?," where we argue that the degree of obvious fraud present in the operations at BAC and Countrywide justifies the appointment of a federal receiver now to run the bank.

No one went to jail, so why is Wall Street so mad? - In Newsweek, Peter Boyer and Peter Schweizer explore the question of President Obama’s Justice Department’s failure to press any major criminal charges against Wall Street. We learn, distressingly, that “finance-fraud prosecutions by the Department of Justice are at 20-year lows.” Ex-Countrywide whistle-blower Eileen Foster, to name one prominent critic of the Justice Department’s inaction, is still urging the Justice Department to do something about her former colleagues, but to no avail. What’s holding them back? Well, a lot of things. For one, criminal cases for finance-related wrongdoing are hard and complicated to prosecute. The Justice Department is stocked with a lot of people with experience defending financial institutions — including Attorney General Eric Holder, a former partner at Covington & Burling, which represents many of the worst of the mega-banks. Plus, curiously, a lot of Goldman executives and other Wall Street types keep donating lots of money to Obama! (Though less money than they gave him in 2008.) The simple answer is that Holder, and Obama, seem to think that while Wall Street did a lot of stupid, venal things that ruined everyone’s lives, those things were largely … legal. Obama said as much to Rolling Stone: “In some cases, really irresponsible practices that hurt a lot of people might not have been technically against the law.” He might be not entirely wrong! Lots of horrible finance industry practices were and are perfectly legal. But we’ll never quite know whether the line was crossed until we … actually investigate.

Wall Street’s immunity - Of all the ignominious actions of the Obama administration, the steadfast, systematic shielding of Wall Street from criminal liability is probably the most corrupt in the traditional sense of that word. In Newsweek this week, Peter Boyer and Peter Schweizer have an excellent examination of what happened and why, tying together crucial threads. First they lay out the basic facts, including the core deceit of the President’s campaigning for re-election like he’s some sort of populist crusader: With the Occupy protesters resuming battle stations, and Mitt Romney in place as the presumptive Republican nominee, President Obama has begun to fashion his campaign as a crusade for the 99 percent–a fight against, as one Obama ad puts it, “a guy who had a Swiss bank account.” Casting Romney as a plutocrat will be easy enough. But the president’s claim as avenging populist may prove trickier, given his own deeply complicated, even conflicted, relationship with Big Finance.Obama came into office vowing to end business as usual, and, in the gray post-crash dawn of 2009, nowhere did a reckoning with justice seem more due than in the financial sector. . . .  Two months into his presidency, Obama summoned the titans of finance to the White House, where he told them, “My administration is the only thing between you and the pitchforks.” . . .

How Wall Street Killed Financial Reform - Matt Taibbi - Two years ago, when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Barack Obama bragged that he'd dealt a crushing blow to the extravagant financial corruption that had caused the global economic crash in 2008. At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy. There would be no more AIGs, and the world would never again face a financial apocalypse when a bank like Lehman Brothers went bankrupt. Two years later, Dodd-Frank is groaning on its deathbed.  In a furious below-the-radar effort at gutting the law – roundly despised by Washington's Wall Street paymasters – a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes – by a process usually reserved for things like the renaming of post offices.

Frontline Takes Issue With Our Critique of Its “Money, Power & Wall Street” Shows -- Yves Smith - I received this e-mail last week. I will issue my rebuttal Tuesday during the day. Check back in then! Yves: Attached please find our response to your critique of the first two hours of PBS FRONTLINE’s “Money, Power & Wall Street.” We hope you can post this, or if you prefer we can post this as a comment on your blog, though it may be too long for that. Thank you, Martin Smith  Producer / Correspondent  Frontline Response Letter

More on Frontline’s Astonishing Whitewash of the Crisis -- Yves Smith - As readers may know, a recent post, “Frontline’s Astonishing Whitewash of the Crisis,”discussed the first half of the Frontline series, “Money, Power & Wall Street.” Producers Mike Wiser and Martin Smith sent a letter taking issue with this review, and I made an exception to my usual practice and posted their missive. The major dispute is over whether their series lets the financial services industry off too lightly. The producers contend they attempted to provide “an accurate and informative telling of the crisis,” that they were indeed tough on financial firms, and that I “misunderstood” their program. The bulk of the letter then consists of extracts from the program meant to address specific criticisms. I’ll deal with their particular claims in due course. But most important, their letter fails to engage the basic issue raised in the initial post: that of the overall message conveyed by this segment. Their assertion is that I misunderstood, when it it the obligation of Frontline to make sure its message is clear. And as we’ll also see, I am far from alone in “misunderstanding” their show.

Robert Shiller is Wrong - The American academic Robert Shiller has taken another contrarian tack with his latest book Finance and the Good Society. His claim is that Western finance has lost the sense of virtue that it once had. It is interesting to trace where Shiller is wrong, or at least looking in the wrong direction. Because it tells us much about where finance has become post-capitalist and ever more dangerous. Much of what Shiller says is right. For instance his observation that “financial institutions and financial variables are as much a source of direction and an ordering principle in our lives as the rising and setting sun, the seasons and the tides.” This is undoubtedly true. Indeed, finance IS rules, so it sets the rules of money, and therefore the rules of commerce. He then goes on to argue that most bankers and financiers aren’t especially bad people, that greed is something of an aberration. He cites the virtuous stalwarts of the past from Goldman Sachs and ratings agencies to show that recklessness has not always characterised the sector. A return to that sense of virtuous service of commerce, he argues, will re-invigorate the strength of capitalism, surely the best economic and political system.  It is all fine stuff, and there is certainly considerable historical precedent to support what he is saying. Trouble is, it has very little to do with the problems that have emerged over the last decade or two. Here are some objections:

JOBS Act Is Worth the Risks - Are we ready to risk more fraud in order to fund more start-ups? The answer in the U.S. apparently is ‘yes’. The economic malaise demands it. The provocative quid pro quo above is still theoretical on both sides of the equation. But the recently signed federal law, Jumpstart Our Business Startups, has the potential to spark greater company creation and thereby bring into existence some desperately needed jobs. The hopeful acronym for the law, of course, is the JOBS Act. It also puts investors in a less-protected position. Sure, there are safeguards and investment limits in the law, but that didn’t stop investor advocates and some legislators from complaining it was a step backwards. “Crowdfunding” via the Internet is now an approved method for small start-ups to attract investments from individuals. The law gives regulatory leeway to smaller companies that want to launch initial public offerings. That means less information for investors. Of course, more risk allows the possibility of more reward. Still, ‘caveat emptor’ should be the scream heard within every investor poking around online for “crowdfunding” investment opportunities. Some of those opportunities will be real and people will benefit from directing their money in ways that weren’t previously available.

The Fraud And Theft Will Continue Until Morale Improves - Digging into the data on the BEA website to arrive at my own conclusions, not those spoon fed to a willfully ignorant public by CNBC and the rest of the fawning Wall Street worshipping corporate media, is quite revealing. It divulges the extent to which Ben Bernanke and the politicians in Washington DC have gone to paint the U.S. economy with the appearance of recovery while wrecking the lives of senior citizens and judicious savers. Only a banker would bask in the glory of absconding with hundreds of billions from senior citizen savers and handing it over to criminal bankers. Only a government bureaucrat would classify trillions in entitlement transfers siphoned from the paychecks of the 58.4% of working age Americans with a job or borrowed from foreigner countries as personal income to the non-producing recipients. How can taking money from one person or borrowing it from future generations and dispensing it to another person be considered personal income? Only in the Delusional States of America. If you really want to understand what has happened in this country over the last forty years, you need to analyze the data across the decades. This uncovers the trends over time that has led us to this sorry state of affairs. The chart below details the major components of personal income over time as a percentage of total personal income. It tells the story of a nation in decline and on an unsustainable path that will ultimately result in a monetary collapse. 

Why Can't Obama Bring Wall Street to Justice? - Despite his populist posturing, the president has failed to pin a single top finance exec on criminal charges since the economic collapse. Are the banks too big to jail—or is Washington’s revolving door at to blame? Peter J. Boyer and Peter Schweizer investigate:

  • •Obama’s 2009 White House summit with finance titans, in which the president warned that only he was standing "between you and the pitchforks"
    •Why, despite widespread outrage, financial-fraud prosecutions by the Department of Justice are at 20-year lows
  • •Attorney General Eric Holder’s lucrative ties to a top-tier law firm whose marquee clients include some of finance’s worst offenders
  • •How Obama’s trumpeted “task force” for investigating risky mortgage lenders—announced in this year’s State of the Union speech—is badly understaffed and has yet to produce any discernible progress

Former Wall Streeter Explains Why She Joined Occupy Wall Street --  Alexis Goldstein worked for 7 seven years on Wall Street before she got out. In that period, Wall Street made her a "cynical, bitter, depressed, and exhausted “knowledge worker” who felt that everyone was out to screw me over," she wrote in a piece for n+1 magazine.  When Goldstein quit Wall Street in 2010, it well before Occupy Wall Street began. But since the movement caught fire last fall, Goldstein has wholeheartedly thrown herself into the cause and gained quite a bit of publicity for it. She's now a part of Occupy the SEC—a working group in OWS that focuses on financial regulation—and also recently offered her commentary to the Frontline documentary on the financial crisis.  Goldstein, who spent her 7 years on Wall Street in technology developing trading models and as a business analyst, finally shares the story of her personal experience on Wall Street in the n+1 article, and the cycle of greed and envy that the culture of the financial firms nurtured, resulting ultimately in tired and paranoid employees that had completely antagonized their employers.

Commodity Futures Investing: Method to the Madness - Dallas Fed - Commodity futures market participants have traditionally fallen into one of two groups: hedgers and speculators. Hedgers produce or consume a commodity and enter the market to reduce the risk of adverse price movements. Speculators, on the other hand, seek monetary gain by anticipating when and in what direction futures prices will move. Recently, a third group has entered the marketplace. Seeking neither to hedge risk nor to speculate on prices, these individuals invest in commodity futures as a separate asset class, not unlike someone buying stocks or bonds. . Investors in commodity futures often seek to create a portfolio that mimics one of these indexes—thus, they are known as commodity index investors. The amount of money associated with commodity index investing has become nontrivial. For example, the net exposure to West Texas Intermediate (WTI) crude oil was recently estimated at around $36 billion. This compares with about $179 billion for all outstanding futures and options contracts on WTI crude oil.[1] To illustrate the rationale behind some market participants’ determination that commodity futures investment is beneficial, we developed an example based on oil futures. This example shows that the benefits from investing in futures have varied over time and, at least for oil futures, appear to have diminished recently as markets have increasingly moved in sync.

Behind the Burden of Regulation - "Over-regulated America” was the headline in the Feb. 18 issue of The Economist. “The home of laissez-faire is being suffocated by excessive and badly written regulation,” began the accompanying article. Everyone who manages an American business corporation – be it for profit or not – is likely to agree with that headline. Having served in the past on the boards of two hospital companies, one a for-profit hospital chain and the other a nonprofit academic health center, I can sympathize with the headline as well. The question is why this regulatory burden is visited on Americans. Are we just victims of government, an alien force sent hither by some sinister, extraterrestrial creature – perhaps Darth Vader — tasked with suffocating us upright earthlings with mindless rules? Or should we seek the answer in the wisdom of Walt Kelly, the creator of Pogo, who is credited with the phrase, “We have met the enemy and he is us”?

A Rising Tide Against Class-Action Suits - Mr. Wolf was a captain in the Judge Advocate General Corps of the Army Reserves, and he had been called to active duty in Afghanistan. Under a provision of the Servicemembers Civil Relief Act, he was entitled to get back the $400 he’d paid toward future monthly installments.  That didn’t happen, and in 2010, his lawyer filed a lawsuit in Federal District Court in New Jersey on behalf of Mr. Wolf and any other service member with a similar claim against Nissan.  A year later, the lawsuit hit a brick wall. In April 2011, the Supreme Court ruled in AT&T Mobility v. Concepcion that corporations could write consumer contracts that blocked class-action lawsuits. To do so, the corporations need only draft a contract that a.) requires unhappy customers to settle disputes through arbitration, and b.) prohibits unhappy customers from arbitrating as a collective.  When the ruling was issued, Brian T. Fitzpatrick, a law professor at Vanderbilt University, described it to The New York Times as “one of the most important and favorable cases for businesses in a very long time.” He called it “a game changer.”

Wall Street’s Legal Magic Ends an American Right - American business entered its Teflon era on a spring day 25 years ago. Lawyer Madelaine Eppenstein had taken the morning off from work for a parent-teacher event at her 5-year-old’s elementary school on June 8, 1987, when she was summoned to the principal’s office for an urgent call. Her husband and law partner, Theodore Eppenstein, told her they lost the Supreme Court case he had argued two months before on behalf of a couple trying to sue their stockbroker for fraud. The case known as Shearson v. McMahon would wind up locking investors out of U.S. courts any time they tried to sue a broker. A tiny clause in customer agreements turned out to be Wall Street’s magic formula to keep its transgressions out of sight. The agreement that Eugene and Julia McMahon signed said that any dispute between them and their broker at Shearson/American Express Inc. -- a trusted fellow parishioner at their church --“shall be settled by arbitration” in a Wall Street forum. Investors since then have either had to agree to similar terms, or forget about having a securities account. “If you get screwed,” Theodore Eppenstein says, “now you have no place to go.”

Lack of Trust – Caused by Institutional Corruption – Is Killing the Economy - The signs are everywhere: Americans have lost trust in our institutions. The Chicago Booth/Kellogg School Financial Trust Index published yesterday shows that only 22% of Americans trust the nation’s financial system. SmartMoney notes today that more and more Americans are keeping valuables at home because they have lost trust in banks. The National Journal noted last week: Seven in 10 Americans believe that the country is on the wrong track; eight in 10 are dissatisfied with the way the nation is being governed. Only 23 percent have confidence in banks, and just 19 percent have confidence in big business. Less than half the population expresses “a great deal” of confidence in the public-school system or organized religion. “We have lost our gods,”  “We lost [faith] in the media: Remember Walter Cronkite? We lost it in our culture: You can’t point to a movie star who might inspire us, because we know too much about them. We lost it in politics, because we know too much about politicians’ lives. We’ve lost it—that basic sense of trust and confidence—in everything.” Gallup reported last month that – for the second year in a row – Americans said that gold is the safest long-term investment.   This  shows that Americans don’t trust the government.  Specifically, as Time Magazine points out: Traditionally, gold has been a store of value when citizens do not trust their government politically or economically.

Walmart and the Dangers of Corporate Corruption -Until the nineteen-seventies, Western countries paid little attention to corruption overseas, and bribery was seen as an unpleasant but necessary part of doing business there. In some European countries, businesses were even allowed to deduct bribes as an expense. That began to change with a couple of high-profile scandals: the C.E.O. of the fruit giant United Brands killed himself during an investigation revealing that the company had bribed the President of Honduras in order to avoid an export tax; and it emerged that Lockheed Martin had, among many other misdeeds, bribed the Prime Minister of Japan and the President of Italy to win contracts. So, in 1977, Congress passed the Foreign Corrupt Practices Act, which banned the bribery of foreign public officials. Companies complain that these laws make it difficult to do business abroad, pointing out that in many developing countries bribery is a way of life. But that’s exactly the point: these laws are designed to change that, and they do so by acting a bit like economic sanctions. For companies, the fear of potential prosecution effectively raises the cost of doing business in high-corruption countries, making it less likely that they will want to operate there at all. This in turn creates an incentive for developing countries to fight corruption.

High profit margins, debt, money flows, investment - Financial Times takes a look at the question of how high profit margins are obtained in a high unemployment and high debt economy:  The key to the first question is US profit margins, which are still at or around record highs. At some point, logic suggests they will start reverting to the mean. And, aside from events in the eurozone and elsewhere, wringing out more productivity is a finite process. There is only so much juice in the lemon. In the long run, lack of investment must surely take its toll. According to Smithers & Co, official figures show the proportion of US domestic corporate cash flow devoted to capital investment at record lows of about 57 per cent. This compares with an average of 77 per cent over the past 60 years. So where has the cash gone? To shareholders, mainly. In the second half of last year, dividends and buybacks by US corporations came to almost exactly the same as capital investment, at just over $2tn. As recently as the early 1990s, spending on investment was four times the amount handed to shareholders. The ratio has been dropping steadily ever since... is worth noting that even credit analysts these days tend to measure debt in relation to cash flow rather than assets. If corporate margins are indeed under threat, that is self-deluding. ...The money will have come from their own immense cash piles. But US companies still have net debt – after deducting that cash – equal to perhaps 40 per cent of their equity.

Bernanke: Banking Is Stronger, but Lending Still Tight - The banking system has strengthened since the financial crisis, making some loans more available, but mortgage lending will likely be slow to recover, Federal Reserve Chairman Ben Bernanke said in remarks prepared for a speech Thursday morning. Conditions in the financial system have “improved significantly in the past few years” as banks have rebuilt their capital and improved the quality of the assets they hold, Bernanke said Thursday in remarks prepared to be delivered via satellite to a Chicago banking conference hosted by the Federal Reserve Bank of Chicago. He didn’t discuss monetary policy in the speech. While credit conditions have largely improved as financial markets have strengthened, lending is still strained in the U.S. home-mortgage market, Bernanke said. “Many factors suggest that this situation will be difficult to turn around quickly,” Bernanke said. He highlighted the slow economic and housing recovery, continued uncertainty surrounding the future of the government-controlled mortgage giants Fannie Mae and Freddie Mac, the lack of a healthy private market for mortgage-backed securities and “cautious attitudes by lenders.” Financing conditions also are still tight in the commercial real-estate sector, he noted.

Morgan Stanley says may need $7.2B new collateral -- Morgan Stanley may have to put up $7.2 billion in additional collateral or termination payments to counterparties, and may face $2.4 billion collateral requirements at certain exchanges and clearing organizations in the event of a three-notch credit rating downgrade. The potential collateral needs for Morgan Stanley--disclosed in a quarterly report filed with the Securities and Exchange Commission--under that scenario are higher than the projections the securities firm issued in late February. Morgan Stanley is the only major U.S. financial firm facing a possible three-notch downgrade, a move that would lower the firm's long-term credit rating from A2 to Baa2, the second-lowest investment grade.

Morgan Stanley Weighs Derivative Options As It Awaits Moody's Action - As a potential credit-rating downgrade draws closer, Morgan Stanley (MS) Chairman and Chief Executive James Gorman may have a few cards up his sleeve, but Wall Street isn't sure if it's a good hand. The securities firm may need to post $9.6 billion in additional collateral to counterparties and certain exchanges if two ratings firms were to cut its long term credit rating by three levels. Moody's Investors Service is weighing such an action, which would drop Morgan Stanley from A2 to Baa2--a decision that is expected by June.

JPM: $2 billion trading loss on synthetic credit position - At a special conference call, from the WSJ: J.P. Morgan To Host Surprise Conference Call. A few excerpts:  J.P. Morgan is now forecasting an $800 million loss in the corporate segment in the second quarter. Dimon says the strategy was "Flawed complex poorly reviewed poorly executed and poorly monitored." These were egregious mistakes, they were self-inflicted."- Dimon. Other headlines: "Obviously there was sloppiness" "Portofolio still has risk"

JPMorgan Chase Acknowledges $2 Billion Trading Loss - JPMorgan Chase, the largest bank in the United States, said Thursday that it lost $2 billion in a trading portfolio designed to hedge against risks the company takes with its own money. The company’s stock plunged more than 6 percent in late electronic trading after the loss was announced. Other bank stocks, including Citigroup and Bank of America suffered heavy losses as well. “The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought,” CEO Jamie Dimon told reporters. “There were many errors, sloppiness and bad judgment.” Dimon spoke in a hastily scheduled conference call with stock analysts. Reporters were allowed to listen. Partly because of the $2 billion trading loss, JPMorgan said it expects a loss of $800 million this quarter for a segment of its business known as corporate and private equity. It had planned on a profit for the segment of $200 million. The loss is expected to hurt JPMorgan’s overall earnings for the second quarter, which ends June 30. Dimon apologized for the losses, which he said occurred since the first quarter, which ended March 31.

'London Whale' Fail: JP Morgan's $2 Billion Credit Derivates Blunder Tied to Mysterious London Trader - Almost immediately after the stock market closed yesterday, JPMorgan Chase asked Wall Street analysts to attend a highly-unusual, hastily-assembled, post-market conference call. Speculation was rampant: What could be so urgent? A credit-rating downgrade? A government investigation? CEO Jamie Dimon delivered the now-all-too-familiar-sounding bombshell: JP Morgan, the largest bank in the United States, had suffered a $2 billion trading loss over a recent six-week period on a complex derivatives portfolio — initially designed to reduce risk — that spiraled out of control. JP Morgan (JPM) shares dived nearly 7% as Dimon spoke, wiping out almost $10 billion in shareholder equity and dragging down other bank stocks ahead of Friday’s market. With all of Wall Street listening, Dimon tersely explained his version of what happened: JP Morgan’s so-called “chief investment office,” which ostensibly manages risk for the bank, had engineered a “synthetic credit portfolio” as a “hedge” to balance out potential losses elsewhere on its books. Over the last two months, the positions started yielding huge trading losses. Finally, JPMorgan was forced to take a $2 billion trading loss, about $1 billion of which it was able to mitigate by selling other assets. Dimon warned that even now, the bank continues to carry a portion of the huge position, which could cause an additional $1 billion in losses. “The portfolio still has a lot of risk and volatility going forward,” he said.

Jamie Dimon Misrepresented “London Whale” Risks, Admits to $2+ Billion Loss Plus Risk Management Black Eye - Yves Smith - As readers likely know by now, Jamie Dimon hastily arranged an after hours conference call today, in which he admitted to $2 billion in losses in the last six weeks from a trade by the “London Whale”, Bruno Michel Iksil in the bank’s Chief Investment Office, with as much as another potential $1 billion in losses in the offing. The position was a hedge involving credit default swaps, a product in which the firm has touted its expertise (a recent display occurring in a Frontline program we shredded). Bloomberg reported on the story in early April, noting that Iskil’s postions were so large that he was driving prices. This is generally a sign of a basic failure in risk management. You never want to take a bet too large in a market if you might want or need to exit quickly, and highly leveraged firms in general are not in a great position to ride out adverse price moves, even if they believe the trade will work out in the end. This same mistake felled LTCM and Amaranth. Even more telling, Dimon made clear this trade was not a hot idea to begin with, repeatedly calling it poorly conceived, poorly executed, and not sufficiently monitored (update: Felix Salmon says he believe the trade was a cash-basis trade).  So much for JP Morgan’s vaunted risk acumen. As we’ve noted, one of the big reasons it wasn’t as badly hit in the crisis was that it took big CDS losses in 2005 on the Delphi bankruptcy (yes this is a rumor, but it is as pretty widespread rumor, and the sources are credible). The bank got cautious just as the subprime market was entering its toxic phase. So JP Morgan may have dodged the bullet at least in part by getting a wake-up call earlier than its peers.

Whale of a Story: JPMorgan Loses $2 Billion on "Ineffective, Poorly Monitored, Poorly Constructed" Hedging Strategies; Reflections On the Volcker Rule - Mish - In a special conference call this evening Jamie Dimon, CEO of JPMorgan disclosed a "trading loss" of at least $2 billion from a failed hedging strategy. The strategy "morphed over time" and it was "ineffective, poorly monitored, poorly constructed and all of that," said Dimon. Last month, he denied there were any problems, most likely hoping they would go away or he could cover them up. Instead, Dimon went to the confessional. Bloomberg has additional details in JPMorgan has trading loss of at least $2 billion, reputation hit. The April Wall Street Journal report said a trader in JPMorgan's Chief Investment Office, nicknamed the 'London Whale' had amassed an outsized position that had caused hedge funds to bet against his position. In the bank's earnings conference call in April, Dimon called the concern "a complete tempest in a teapot." Interestingly, Dimon says this should not be an excuse to implement the Volcker Rule (a ban on proprietary trading). The problem, he said, was with the execution of the hedging strategy. That's his opinion. Here's mine.  I believe banks should be banks and not hedge funds. I believe "too big to fail" means too big period. And finally I believe this should cost Dimon and the entire board their jobs.

JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR - - Yves Smith - One of the amusing bits of the hastily arranged JP Morgan conference call on its $2 billion and growing “hedge” losses and related first quarter earning release was the way the heretofore loud and proud bank was revealed to have feet of clay on the risk management front. Jamie Dimon said that the bank had determined that its value at risk model was “inadequate” and it would be using an older model. And no wonder. The Financial Times report contained this bombshell:JPMorgan also restated its “value at risk”, a measure of maximum possible daily losses, of the CIO [the unit that executed the trading strategy that blew up] in the first quarter from $67m to $129m “Restating” greatly underplays the significance of what happened. VaR is a prospective risk metric. From ECONNED: …the objective was to come up with a single figure that captured all the risks in a simple statistical fashion: what was the risk that the bank would lose a certain amount of money, specified to a threshold level of probability, in, say, the next 24 hours? The model output would say something like: “We have 95% odds of losing no more than $300 million dollars in the next 24 hours.” It took seven years of refinements to reach that goal, which should have been seen as a warning that it might not be such a good idea. While firms look at VaR over a range of time frames, daily VaR (what is the most I can expect to lose in the next 24 hours) to a 99% threshold is widely used. So get this: VaR’s real use is prospective. The VaR for a big risk taking unit was found to have been nearly double the level reported two weeks ago (hat tip Joe Costello). Remember, this was the risk incurred in the first quarter; this change has nothing to do with the losses incurred in the last six weeks. It means the risk originally reported by the folks in risk management (in real time, for use in management decisions) was grossly off.

How dumb rules can mitigate model risk - We’re still not much the wiser on exactly how the London Whale managed to lose $2 billion this quarter, but I think Matt Levine has the smartest take. The key thing to note here is that while the monster hit to the P&L is what got all the headlines, the real problem here lay with JP Morgan’s risk models. A hint of far out of whack they are is given in the difference between the bank’s earnings release, which showed $67 million of value-at-risk in the Whale’s division in the first quarter, and the new SEC filing, which showed that number as actually being $129 million. Here’s Levine: This was attributed to modeling changes made over the last year, and someone asked on the call “why did you change the VaR model?,” but I’m not convinced that’s exactly the right question. This, I suspect, is not an issue of a thing called a “VaR model” that sits in a central location and spits out numbers for regulators and 10-Qs; rather, this looks like the CIO’s trading desk modelling the actual P&L and risks of the trade wildly wrong. That seems to me like the simplest way to lose a billion dollars without noticing it. I’d put this another way. JP Morgan’s Bruno Iksil, it seems, managed to find an incredibly profitable way of hedging the bank’s positions. Like any other economically rational actor, when he saw a lot of dollar bills lying on the sidewalk, he decided to pick them up. But in Iksil’s highly-complex world, a dollar bill isn’t really a dollar bill. Instead, it’s the output of a model. And if a trader can’t trust his model, he’s flying blind.

Counterparties: Your massive guide to JPMorgan’s failed hedge - It turns out we probably should fear Voldemort. Yesterday Jamie Dimon hastily scheduled a 5 p.m. conference call in which he was forced to explain a sudden $2 billion loss in his Chief Investment Office, a division that was supposed to safely hedge the bank’s risk.  Dimon, who last month called the issue a “tempest in a teapot”, said the hedges implemented by the “London Whale” (aka Bruno Iksil) were a “bad strategy, executed poorly”; he also conceded “many errors”, “sloppiness” and “bad judgement”. The responsibility for mistakes ultimately rests on Dimon’s shoulders. Jonathan Weil noted that yesterday’s disclosures meant that “either Dimon misled the public about the gravity of the festering trades during his company’s first-quarter earnings call last month. Or he didn’t know what was happening inside the bowels of his own company.” Barney Frank didn’t let this opportunity pass him by, either, saying that “JPMorgan Chase, entirely without any help from the government, has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them.” Adding to Dimon’s chagrin was his acknowledgement in yesterday’s conference call that he gave proponents of increased financial regulation, including Barney Frank, yet another proof point. As Felix notes, the strong likelihood that the trades were Volcker-compliant “only goes to show how weak the Volcker Rule” is and affirms the need for “dumb rules” that traders can’t easily game.

JPMorgan's Dimon loses clout as reform critic (Reuters) - Wall Street may have lost its most potent spokesman against Washington reforms. JPMorgan Chase & Co Chief Executive Jamie Dimon has parlayed his bank's reputation as a white knight during the financial crisis into a position as the champion of a beleaguered industry fighting against excessive post-crisis regulation. But the revelation of a shocking trading loss of at least $2 billion from a failed hedging strategy diminishes Dimon's credibility, and is already unleashing calls to get tougher on big banks. "The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least $2 billion harder to make today," said Democratic U.S. Representative Barney Frank, who co-authored the 2010 Dodd-Frank financial reform law. Details are still emerging about the trading loss, the amount of which could still grow, and about the underlying transactions that Dimon said were done to hedge the firm's overall credit exposure. Dimon has been critical of the Volcker rule, a provision in Dodd-Frank that will ban banks from proprietary trading, or trades that are made solely for their own profit. Analysts said it is not yet clear if the trades would have violated the forthcoming Volcker rule reform.

SEC Opens Investigation Into JPMorgan's $2 Billion Loss - Regulators are investigating potential civil violations surrounding the $2 billion loss that JPMorgan Chase disclosed on Thursday, raising further questions about trading activities at the nation’s biggest bank. The Securities and Exchange Commission recently opened a preliminary investigation into JPMorgan’s accounting practices and public disclosures about the trades, according to people briefed on the matter, who spoke on the condition of anonymity because the case is not public. Regulators learned about the activities in April, and formally opened an investigation in recent days, the people said. The inquiry, which is being run out of New York, will probably examine the bank’s past regulatory filings about the internal unit that placed the trades, as well as recent statements from the firm’s top executives. In April, questions surfaced about the group, called the chief investment office, after reports emerged that a London-based trader was taking large bets that distorted the market. At the time, Jamie Dimon, the bank’s chief executive, publicly dismissed the concerns about the trading activities, calling them a “complete tempest in a teapot.” On Thursday, JPMorgan revealed that the group had suffered significant losses, which could cost the firm $2 billion or more. A more humble Mr. Dimon on Thursday said “egregious mistakes” were made.

Ally Said to Receive Treasury Assent on ResCap Bankruptcy -- Ally Financial, the auto lender majority-owned by U.S. taxpayers, received Treasury Department approval for plans to put its Residential Capital unit into bankruptcy, an Obama administration official said.  The Treasury will support directors at Ally and ResCap if they decide that seeking court protection from creditors is the best course, said the official, who asked for anonymity because the arrangements haven’t been made public. The approval is conditioned on a review of final terms, the person said. Chief Executive Officer Michael Carpenter is searching for ways to repay federal bailouts exceeding $17 billion that left the U.S. with a 74 percent stake. Administration officials have concluded that addressing ResCap’s mortgage losses will put taxpayers in a better position to recoup their investment in Ally, the person said today.

Mirable Dictu! Moody’s to Adjust Bank Ratings Downward for Regulatory Arbitrage - Yves Smith - It’s hard to imagine anyone will take tough-sounding stances by ratings agencies seriously, but Moody’s, in a chat with the Financial Times , says it has (finally) taken notice of how banks play games with regulatory capital requirements. Sheila Bair noted in an interview at the Atlantic economy summit in March that in retrospect, one comparison that flushed out banks that were likely to get in trouble was that the were in compliance with risk weighted capital rules but also had very high levels of leverage (simple equity to total assets measures).  The Moody’s step takes place by updating its risk models to adjust for bank phony baloney. I’d also be thrilled if they started adjusting ratings for lack of transparency, but we’ll take what we can get. And this adjustment isn’t mere lip service; a wave of downgrades is coming based on this change.  Notice that the Moody’s rating action and model change will pressure the other ratings agencies to follow suit. I’d really get a kick out of it if Moody’s were to start to issue industry commentary that discussed at length how banks were gaming capital requirements. Heretofore, that sort of discussion relegated to the nether regions of discourse, which these days is the blogosphere, academia, and foreign TV. Remember, when Bill Black said on the Bill Moyers show that the initial stress tests in 2009 were a sham, not a single reporter called him up, even though that charade continued for another month. Even if the revised ratings don’t adequately reflect the level of bank chicanery, this change will make it much more mainstream to talk about regulatory arbitrage, both in general and in detail.

Bank of America’s Protection Detail - To protect Bank of America from inconvenience, Charlotte, North Carolina has directed its police officers to harass and arrest protesters. Unconstitutionally, in my opinion. Charlotte has imposed special rules on a 2 block by 2 block square for 12 hours on Wednesday (May 9) to protect the Bank of America annual shareholder meeting from disruption by protesters. The rules apply to any “Extraordinary Event”, and were adopted nominally for the coming Democratic National Convention and city celebrations such as July 4.  While the rules are poorly drafted and I believe facially unconstitutional regardless, imposing them for the BofA meeting seems overwhelmingly so. Extra restrictions for the July 4th celebration in the name of public safety is one thing; it’s an outdoor, public event hosted by the city for the benefit of its citizenry. The Democratic Convention is similarly easy to rationalize, given that the President and other national security targets will be there. But Bank of America’s shareholder meeting? This annual corporate event is private, indoors, and part of ordinary corporate business. Worse, law enforcement’s targets aren’t potential Presidential assassins or hooligans with a stash of illegal fireworks; they’re peaceful political protesters. Heck, the protesters will include dissident shareholders and their proxies who have every right to be at the meeting. Besides, BofA will have home field advantage: the meeting’s at its corporate headquarters.

Bank Vs. America – Protests Outside, Inside BofA Shareholder Meeting - Occupy and bank accountability activists have staged a major protest at Bank of America’s shareholder meeting today. This is the latest in a series of shareholder activism events that have gone hand in hand with the rebooting of the Occupy movement this spring. Direct challenges to the nation’s biggest corporations and financial institutions have often included legitimate efforts to constrain corporate power through shareholder resolutions, like the one that rejected pay packages for top executives at Citigroup last month. As Zach Carter pointed out this morning, the BofA protests in Charlotte have also been seen as a type of dry run for the activist plans at the Democratic National Convention, to be held in the same city. And activists planned an inside-outside strategy: Inside the Bank of America meeting, disgruntled shareholders — including Trillium Asset Management, the City of New York and the American Federation of State, County and Municipal Employees — will force votes on proposals that would curb the bank’s political spending and force it to review its foreclosure practices. Foreclosure victims are hoping to give testimony during the meeting. Outside the meeting, protesters promise a boisterous slate of events to draw attention to Bank of America’s relationship with the federal government, the coal industry and its long record of foreclosure abuse.  The marches will converge into one big protest.

CNBC Tries to Undermine BofA Protesters - Much of the media coverage of the protests at the Bank of America shareholder meeting yesterday was traditional and solid in the who what where when way. But some “reporting” was really a powers-that-be pushback, trying to undermine the protesters. A great example was CNBC’s interview with Occupy Wall Street’s Max Berger. The opening minute or so fine, with Berger giving lucid, focused answers in response to open ended questions like “What’s your beef with Bank of America?” But then, at 1:49 Maria Bartiromo switches into propaganda mode:“What kind of intelligence, what sort of credibility might you have, or the Occupy groups have, in terms of really knowing and understanding what’s involved in the break up of a bank? Why would what you say matter more, for example, than what the Board says and what management says in terms of understanding the complexities of this company?” Bartiromo’s citing BofA’s Board of Directors and management as a more credible source of analysis than the protesters is not the same kind of contrast that I make when I cite the government’s failure to liquidate BofA. BofA managers’ jobs and obscene compensation depend on believing BofA should not be liquidated.  Berger keeps his cool in the face of Bartiromo’s condescension. He responds first that Occupy has financial industry participants that “know where the bodies are buried, so to speak”, so the protesters do, in fact, know what they’re talking about with some sophistication, but then Berger pivots to the key point: “But more importantly, we’re all taxpayers, we’re all citizens, we all have a stake in the outcome of what happens with this company and the fact that we still have these too big to fail banks

Brown Reintroduces Safe Banking Act - The legislation that’s truly needed, what was missing from the Dodd-Frank financial reform bill, is a measure to bring these behemoth banks down in size, to reduce risk throughout the economy as well as the political influence and power that leads to bad outcomes and toothless regulation. Since the 2008 financial crisis, the risk has only increased. The nation’s six largest banks now control 64% of US GDP in assets. Sen. Sherrod Brown has reintroduced his bill to restrict the size and leverage of the largest financial institutions. In a bill called the Safe, Accountable, Fair & Efficient (SAFE) Banking Act of 2012, Brown, who authored similar legislation with former Sen. Ted Kaufman during the Dodd-Frank debate, would impose a 10% cap on any individual bank’s share of overall US deposits. There would also be limits on the liabilities that any one company can hold (10% of the financial sector), limits on non-depository liabilities of bank holding companies (2% of GDP, under $1.3 trillion) and non-bank financial companies (3% of GDP, and total assets of $436 billion), and limits to leverage to bank and non-bank financial institutions of 10%. The previous legislation got 33 votes in 2010, including the support of Republican ranking member on the Banking Committee, Richard Shelby. There’s also similar though less specific legislation to this effect in the House, from Rep. Brad Sherman (D-CA). Brown released this statement:

Breaking Up Four Big Banks - Simon Johnson - Almost exactly two years ago, at the height of the Senate debate on financial reform, a serious attempt was made to impose a binding size constraint on our largest banks. That effort — sometimes referred to as the Brown-Kaufman amendment — received the support of 33 senators and failed on the floor of the Senate. (Here is some of my Economix coverage from the time.) On Wednesday, Senator Sherrod Brown, Democrat of Ohio, introduced the Safe, Accountable, Fair and Efficient Banking Act, or SAFE Banking Act, which would force the largest four banks in the country to shrink. (Details of this proposal, similar in name to the original Brown-Kaufman plan, are in this briefing memo for a Senate banking subcommittee hearing on Wednesday, available through Politico, and in this news release). His proposal, while not likely to become law immediately, is garnering support from across the political spectrum — and more support than essentially the same ideas received two years ago. The proposition is simple: Too-big-to-fail banks should be made smaller, and preferably small enough to fail without causing global panic. This idea had been gathering momentum since the fall of 2008 and, while the Brown-Kaufman amendment originated on the Democratic side, support was beginning to appear across the aisle. But big banks and the Treasury Department both opposed it, and parliamentary maneuvers ensured there was little real debate. The issue has not gone away. And while the financial sector has pushed back with some success against various components of the Dodd-Frank reform legislation, the idea of breaking up very large banks has gained momentum.

Volcker: Big Banks are too big, but that's OK -- Former Federal Reserve Chairman Paul Volcker told lawmakers at a hearing Wednesday that the big banks are too big, but he stopped short of endorsing measures that force the banks to be broken up. In a Senate Banking hearing about limiting government support for the banking system, Volcker was asked whether he'd prefer a system that was less consolidated in the hands of several giant banks. "If you ask me if I would prefer a banking system that's more decentralized, of course I would," Volcker said. "But I think we can live with what we have." Volcker said he thinks Dodd-Frank puts enough tools in place to make the U.S. system safer than it was. He also pointed out that the U.S. financial reforms were negotiated and passed faster than those in other countries, especially the United Kingdom.

JP Morgan Debacle Reveals Fatal Flaw In Federal Reserve Thinking - Simon Johnson - In the light of JP Morgan’s stunning losses on derivatives, announced yesterday but with the full scope of total potential losses still not yet clear (and not yet determined), Jamie Dimon and his company do not look like any kind of appealing role model.  But the real losers in this turn of events are the Board of Governors of the Federal Reserve System and the New York Fed, whose approach to bank capital is now demonstrated to be deeply flawed. JP Morgan claimed to have great risk management systems – and these are widely regarded as the best on Wall Street.  But what does the “best on Wall Street” mean when bank executives and key employees have an incentive to make and misrepresent big bets – they are compensated based on return on equity, unadjusted for risk?  Bank executives get the upside and the downside falls on everyone else – this is what it means to be “too big to fail” in modern America. The Federal Reserve knows this, of course – it is stuffed full of smart people.   To prevent this from occurring in an egregious manner, the Fed now runs regular “stress tests” to assess how much banks could lose – and therefore how much of a buffer they need in the form of shareholder equity.In the spring, JP Morgan passed the latest Fed stress tests with flying colors.  The Fed agreed to let JP Morgan increase its dividend and buy back shares (both of which reduce the value of shareholder equity on the books of the bank).  Jamie Dimon received an official seal of approval.

Dallas Fed Chief: We Shouldn’t Have Banks That Are ‘Too Big to Fail’ - Dallas Federal Reserve President Richard W. Fisher again lambasted major U.S. banking institutions for being “too big to fail,” repeating his earlier assertions that such institutions should be “significantly downsized.” Mr. Fisher, among the Fed’s more hawkish regional chiefs, spoke Friday morning at the Texas Bankers Association’s annual conference and was asked by an audience member about J.P. Morgan Chase & Co.’s $2 billion trading loss revealed this week. Mr. Fisher noted that he wouldn’t comment directly on J.P. Morgan, but he added that he long has touted that huge banks should be reined in. “We don’t feel that we should have institutions that are ‘too big to fail,’” Mr. Fisher told his audience at the Fort Worth Convention Center. “We don’t think we should allow a system that gives big institutions a subsidy over you of 20 to 100 basis points on their cost of borrowing.” He added, “What I’m very worried about is that you can reach a size of complexity that risk management becomes a mathematical modeling exercise and you lose touch with your customer. What concerns me here, without referencing that bank, is … at what size do you not realize what’s going on underneath you? If you’ve gotten to that point, you’re too big. Period.”

How J.P. Morgan Chase Has Made the Case for Breaking Up The Big Banks and Resurrecting Glass-Steagall  - Robert Reich J.P. Morgan Chase & Co., the nation’s largest bank, whose chief executive, Jamie Dimon, has lead Wall Street’s war against regulation, announced Thursday it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets. Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street. Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets). Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again. And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, and send the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.

2 Billion is not hedging - Remember the "Volcker Rule" that was supposed to stop systemically significant financial institutions from wracking up huge losses on proprietary speculative bets? Well earlier this evening JP Morgan CEO Jamie Dimon announced that his company just lost $2 billion on some of (French-born) "London Whale" Bruno Iksil's bets on credit default swap indexes. Dimon repeatedly insisted that the whole operation is Volcker-compliant, and JP Morgan is describing the operation as an effort at hedging gone wrong. Nobody knows exactly what happened, but in general if you just lost $2 billion that's a good sign that you're not hedging. The idea of hedging is to accept a small cost in order to insure yourself against the risk of a big loss. Two billion dollars is a big loss even for JP Morgan. So why call it hedging? Presumably because the Volcker Rule allows proprietary trading for the purposes of hedging. This turns out to be a big loophole. As it happens in this case JP Morgan has a big enough capital buffer to eat the loss and they only lost $2 billion rather than $20 billion. But nothing was stopping them from screwing up even worse.

Barney Frank Just Applied His Razor Wit To Take A Swipe At JP Morgan - As you know, Massachusetts Representative Barney Frank (D) is one half of Dodd-Frank, the name of the regulatory legislation that came out of the financial crisis. You may also know that the man has a very, very sharp tongue. Here's what he had to say about JP Morgan's scandalous $2 billion trading loss announced yesterday: "This regrettable news from JPMorgan Chase obviously goes counter to the bank’s narrative blaming excessive regulation for the woes of financial institutions," said Rep. Barney Frank... Frank noted a recent estimate by JPMorgan Chase that complying with new regulations would cost the bank $400 million to $600 million. "In other words, JPMorgan Chase, entirely without any help from the government has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them," Frank said.

Jamie Dimon says he can fix it. That's reassuring. - The bets were “poorly executed” and “poorly monitored,” said Dimon, a result of “many errors, “sloppiness,” and “bad judgment.” But not to worry. “We will admit it, we will fix it and move on.” Move on? Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary.Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again. Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule - creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown. And now - only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater,  J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.

Fed Officials Seek More Information on JPMorgan Trade - Federal Reserve officials are gathering more information about the trading position that led to a $2 billion loss at JPMorgan Chase & Co. (JPM), which they have known about for several weeks, according to a person familiar with the matter. Fed officials don’t view it as their role to approve or reject individual trades at banks, the person said. Rather, their job is to ensure the firms have sufficient capital to withstand losses, said the person, who wasn’t authorized to discuss the matter and asked not to be identified. JPMorgan Chief Executive Officer Jamie Dimon announced the “egregious” trading loss yesterday, two months after the biggest U.S. bank by assets passed a Fed stress test

Fitch Cuts JPMorgan Rating as S&P Calls Outlook Negative - JPMorgan Chase & Co. (JPM), the largest and most profitable U.S. bank, had its credit grade lowered one level by Fitch Ratings and Standard & Poor’s said it may follow after the bank revealed a $2 billion trading loss. The lender’s long-term issuer default rating was cut to A+ from AA-, and the short-term grade was lowered to F1 from F1+, Fitch said yesterday in a statement. Fitch placed all parent and subsidiary long-term ratings on rating watch negative. Standard & Poor’s cited the possibility of broader problems with JPMorgan’s hedging strategies, which the credit rater said isn’t “consistent with what we have viewed as the company’s sound risk-management practices.” A downgrade might result if the missteps prove to be wider, or if management “is pursuing a more aggressive investment strategy than we originally believed” and misses financial targets, according to an S&P statement. S&P affirmed JPMorgan’s A rating.

Amid mass unemployment, corporate profits surge - Amid deepening poverty and unemployment for masses of American working people, the largest US corporations once again posted record profits last year. Fortune magazine released its ranking of the 500 biggest US corporations Monday, which showed that they received a record-breaking $824 billion in combined profits in 2011, up 16 percent from 2010. But despite having more money than ever, companies are refusing to invest and hire. Instead, they are paying out record bonuses to executives and hoarding what remains in cash. The average CEO took home $12.14 million in 2011, up from $12.04 million in 2010 and $10.36 million in 2009, according to a report by the Economic Policy Institute published earlier this month. The ratio of CEO pay to workers' wages has also risen steadily, according to the report. The average CEO received 231 times in as much pay as the average worker in 2011, up from 228 times in 2010 and 193 times as much in 2009. It is rapidly making its way back up to the pre-crisis peak of 383.4 times the average worker set in 2000. The money left over after the executives had stuffed their pockets was simply hoarded. Last year, corporations held $1.8 trillion in cash, up from $1.6 trillion in 2010, and nearly double the amount that they held in previous decades.

Cash Cow Liquidity Comparison: Where's the Cash and Where's the Debt? A Look at the Top 50 Companies - In light of  renewed banter about corporations being flush with cash following Apple's stellar earnings, I thought it would be instructive to take a look at the top 50 companies by market cap in the following ways:

  1. Debt and liabilities vs. cash
  2. Debt and liabilities vs. cash plus short-term investments
  3. Debt and liabilities vs. cash plus both short-term and long-term investments 

With thanks to Ross Perez at Tableau Software for compiling the data for my idea, please consider the following interactive graph.

Oil: A Temporary Selloff? - Oil prices may stay under downward pressure in the near term and are particularly vulnerable to euro volatility. Nonetheless, our cyclical bias is still positive.... Moreover, many of the headwinds for oil prices should prove temporary even if a washout in the euro does develop. Generous Fed liquidity reduces the odds of sustained U.S. equity weakness at a time when the U.S. economy is on a stable, albeit slow growth path. In this environment, lower oil and product prices have a self-stabilizing aspect by supporting consumer and business confidence, suggesting that without a major exogenous shock, the downside in oil prices from current levels is lmiited. Bottom line: Our Commodity & Energy Strategy service maintains that oil prices should be higher by year-end.

FDIC's Gruenberg outlines new strategy for failing banks - Regulators plan to employ a strategy for handling big failing banks that would help stabilize the financial system by preserving the banks' healthy operations, the head of the Federal Deposit Insurance Corp. says.FDIC Acting Chairman Martin Gruenberg outlined the agency's strategy in a speech Thursday. Under the 2010 financial overhaul law, the agency has the authority to seize and dismantle big financial firms that could collapse and threaten the broader system. The aim is to avoid another taxpayer bailout of Wall Street banks in another financial crisis. Gruenberg said that under the strategy, the FDIC would take over a failing bank's parent company but allow its healthy subsidiaries to continue operating. He said that would reduce disruption and permit normal financial transactions. Because the subsidiaries would keep operating, their trading and other relationships with other big financial institutions would also continue normally, Gruenberg said. That would "mitigate systemic consequences,". That means it would reduce the chance that big financial firms closely connected to each other would fall like dominoes.

Avoiding the Next Big Bailout -  When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp. The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC's plan. Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system. As part of that effort, acting FDIC Chairman Martin Gruenberg will outline the agency's strategy in a speech in Chicago Thursday, his first public remarks on the dismantlement plans for banks. In recent weeks, FDIC officials discussed the plans with The Wall Street Journal. If several federal agencies and the Treasury Department agree to seize a firm, the FDIC will unwind the parent bank holding company of the faltering firm, placing it in receivership and revoking its charter. The firm's subsidiaries around the world would continue to operate, supported with liquidity the FDIC-held parent company can borrow from the government under the Dodd-Frank financial overhaul.

Unofficial Problem Bank list declines to 925 Institutions - This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for May 4, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Relatively quiet week for the Unofficial Problem Bank List with five removals. The removals lower the institution list count to 925 with assets of $361.1 billion. A year-ago, the list held 983 institutions with assets of $422.2 billion.

Fannie Mae Doesn’t Need Government Aid for First Time Since Takeover — U.S. mortgage giant Fannie Mae made money in the first three months of the year and is not seeking additional federal aid. It’s the first time the company has reported a net income gain since it was taken over by the government during the 2008 financial crisis. Fannie on Wednesday reported that it earned net income attributable to common stockholders of $2.7 billion in the January-March quarter. That compares with a net loss of $6.5 billion in the first quarter of 2011. The income gain was sufficient to pay a dividend of $2.8 billion to the Treasury Department in the first quarter. The improvement was due primarily to slower home price declines, reduced inventory of single-family homes and fewer mortgages in serious delinquency, the company says. The gain also adds to evidence of slow improvement in the home market five years after the housing bubble burst.

Commercial Mortgage Delinquencies Much Worse than Single Family: Trepp Wire reports that CMBS (commercial mortgage backed securities) have rising delinquency rates. Haven’t we been hearing that mortgage delinquency rates were falling? That has been for residential mortgages. The types of numbers that have been reported by CoreLogic for residential mortgages have been down from a year ago and changing very slowly over recent months. Not only are the commercial delinquency numbers increasing, they are approximately 25-30% greater (on a percentage basis) than residential mortgages. The residential rates are close to 7% while commercial delinquencies are well in the 9% range. In February GEI News reported that CoreLogic said the total U.S. loan delinquency rate (loans 30 days or more past due, but not yet in foreclosure) was 7.57% of all mortgages. This was down from February 2011 when the rate was 8.8%. For March Corelogic reported a similar rate of 7.0% for mortgages 90 days or more delinquent, including foreclosures started and those completed and still in REO (real estate owned) status. Trepp Wire has some graphics in their latest news release that reveal the reasons for concern about commercial real estate loans.

House Kills Measure to Fully Fund Mortgage Fraud Task Force - With the financial sector sure to summon massive amounts of money and resources to battle any criminal or civil prosecutions over its role in the 2008 crisis, a key is how much resources authorities will have at their disposal to battle back. When New York attorney general Eric Schneiderman appeared before the Congressional Progressive Caucus in late April, he asked the members to help him obtain funding for the Residential Mortgage-Backed Securities working group, which he co-chairs. “If you want to help me badger everybody, that’s good,” he said. “I’m a good badger by myself but I know there are some experts in this room.” Yesterday, Representative Maxine Waters, a member of the caucus, made the first attempt to get the RMBS group funding—and it didn’t work. She offered an amendment to a large appropriations bill, created by Republicans, that would fund, in part, the Department of Justice. The bill provided only a fraction of the $55 million the DoJ asked for in its budget request for “investigating and prosecuting financial and mortgage fraud.” Unfortunately, when put up for a voice vote, the Waters amendment failed in the Republican-dominated chamber.

Check Off Another Securitization Fraud Task Force Promise - One of the items Eric Schneiderman has been using to push back on claims that the Residential Mortage Backed Securities (RMBS) working group is being slow-walked and made ineffectual is that they have a funding stream earmarked for it that testifies to the seriousness of effort with respect to resources. In an op-ed two weeks ago, Schneiderman wrote that “The President has requested a congressional appropriation of an additional $55 million to ensure that we have the resources to do a thorough job.” My point on this was always that the President’s appropriation request and $6 will get you a very expensive cup of coffee at my local Intelligentsia café. Presidential budget requests are as ignored in Washington as pledges to not accept lobbyist money, or marital vows. The request didn’t mean anything, and the House Republicans currently putting together the budget were highly unlikely to honor it. Sure enough, yesterday, the Justice, Science and Commerce appropriations bill, the proper venue for this additional $55 million request, came up for a vote. Maxine Waters tried to include the appropriation for the RMBS working group. And it failed pretty badly.Yesterday, Representative Maxine Waters, offered an amendment to a large appropriations bill, created by Republicans, that would fund, in part, the Department of Justice. The bill provided only a fraction of the $55 million the DoJ asked for in its budget request for “investigating and prosecuting financial and mortgage fraud.” .Unfortunately, when put up for a voice vote, the Waters amendment failed in the Republican-dominated chamber

Watching Icon of the Left Eric Schneiderman Morph into Administration Water Boy Tom Miller - Yves Smith  - Established readers may recall that Tom Miller, an unknown when he became the lead negotiator in the mortgage settlement on behalf of his fellow state attorney generals, quickly distinguished himself with how often he lied and how badly he did it. He started inauspiciously with promising criminal prosecutions and almost immediately walked that back. He wasn’t terribly convincing in dealing with the revelation that his donations from the FIRE sector increased 88 times in the previous year compared to what they’d given him in the preceding decade. He kept running the administration canard that the group negotiating with the banks had done serious investigations. The point is that Miller was a convenient stooge for the Administration. His job was to maintain the pretense that the effort he was leading was in the public’s interest and moving ahead at a good clip. These weren’t very easy lies to sell and Miller wasn’t very good at pedaling them, but that didn’t matter much. His job was to keep up a certain level of background noise.But nothing was going to happen unless the Administration wanted it to happen, and for some reason, the powers that be decided in late 2011 that a mortgage settlement would be a useful election talking point. So they saddled up and pushed the foundering deal over the line. Now that the Administration has traded up from the unknown Miller to the soi disant “Man the Banks Fear Most” Eric Schneiderman, we have the instructive spectacle of watching Schneiderman look more and more Miller-like with every passing day. Admittedly, Schneiderman is far more skilled at passing off Administration canards than Miller, and is also trusted by many progressives, so he can probably run on brand fumes for quite a while.  It’s also worth noting that Schneiderman seems to be limiting himself to safe media settings. For instance, Chris Hayes tossed him only softballs (the supposedly tough questions had been raised so many times before that Schneiderman had answers ready).

Wells Fargo faces new fines for mortgage ripoffs -- Wells Fargo (WFC) isn't done paying for the mess it made in the mortgage market. The Department of Justice appears to be close to bringing charges against Wells Fargo for violations of fair lending laws by its mortgage division in the run up to the housing bust. On Tuesday, Wells in a financial filing said the DOJ has told the bank that it has enough evidence to impose fines and bring civil charges. Once again, though, it appears no one will be headed to jail. It's not clear what exact practice the DOJ is focusing in on. But in July, Wells Fargo paid $85 million to the Federal Reserve, the largest ever consumer protection fine in the central bank's history, to settle charges that it routinely put people in subprime loans that they either couldn't afford or didn't qualify for. The Fed said that the bank regularly pushed borrowers into high-cost subprime loans even when many of those customers would have qualified for traditional lower cost loans. The Fed also said that loan officers at Wells Fargo Financial, a subprime lending division of the bank that has since been shut down, would often falsify loan documents by inflating the incomes of borrowers to make it appear that the person would be able to afford a loan that they normally would not be able to qualify for. As is normally the practice, Wells settled the Fed's charges without admitting or denying it broke the law.

Bank of America Starts Mortgage Reduction Effort - Bank of America has started sending letters to thousands of homeowners in the United States, offering to forgive a portion of the principal balance on their mortgages by an average of $150,000 each. The reduction for qualifying homeowners could amount to monthly savings of up to 35 percent on mortgage payments, Bank of America said in a news release on Monday evening. The principal reduction offers from Bank of America Home Loans are the result of a $25 billion settlement agreement earlier this year with 49 state attorneys general as well as federal authorities who had been investigating allegations of abuses over the handling of foreclosures. “To the extent principal reduction and other modification tools help us turn mortgages headed for possible foreclosure into long-term performing loans, it will be positive for homeowners, mortgage investors and communities,” Ron Sturzenegger, a legacy asset servicing executive, said in the statement. The bank said it planned to contact more than 200,000 homeowners who could be candidates for the offers, sending letters to a majority of them by the third quarter of this year. To be eligible for the principal reductions, however, homeowners will have to meet certain criteria, including: having a loan owned or serviced by Bank of America; owing more on the mortgage than their property is worth; and being at least 60 days behind on payments as of the end of January.

BofA Initiates Home Loan Modification Offers — Homeowners with a Bank of America mortgage have good reason to check their mailbox. The lender said Tuesday it has begun mailing out letters to customers who may qualify to have their home loans reduced as part of a multistate settlement over alleged foreclosure abuses. The Charlotte, N.C.-based company estimates that more than 200,000 of its customers could potentially be in line for a reduction in the principal balance on their mortgage. Some customers could receive letters from the bank as early as this week that invite them to provide financial information as part of a review process for the program. The bank plans to have mailed out most of the letters by the end of the third quarter. Bank of America estimates that customers who end up receiving the loan modifications will save, on average, 30 percent a month on their mortgage payments. Among the criteria to qualify, borrowers must owe more on their mortgage than the property is worth, and be at least 60 days behind on payments as of Jan. 31.

Principal reductions begin in earnest - This is an important milestone, even if it’s too little, too late: Bank of America Home Loans has begun reaching out to customers who may be eligible for forgiveness of a portion of the principal balance on their mortgage under terms of a recent settlement… The bank estimates average monthly savings of 30 percent on mortgage payments of customers who qualify for this program… On average, the principal reduction being offered is substantial: it’s on the order of $150,000. And this offer is being extended to some 200,000 homeowners, which means we’re talking a lot of mortgage principal here: some $30 billion. In reality, however, the actual amount of principal forgiven by BofA is likely to be much smaller than that. As we’ve seen with HAMP, banks are incredibly good at putting people into three month trials, and then managing to determine that for whatever reason they don’t qualify for conversion to permanent modification. What’s more, ironically, many homeowners might not be able to afford to accept this principal reduction, since after the end of this year, forgiven principal will count as income, for income-tax purposes, and the income tax on $150,000 of windfall income is substantial.Still, principal reduction is exactly what the country needs right now, and I’m glad that it’s finally beginning to happen. I wrote about the subject in The Occupy Handbook, and this seems as good a time as any to put my chapter up online. So here goes.

Bank of America Begins “Pay Settlement With Other People’s Money” Scheme - Bank of America says they have begun mailing notices to their borrowers about principal reduction opportunities under the foreclosure fraud settlement. You may recall that BofA inked a side deal on the settlement that would allow them to extinguish an additional $850 million of the cash penalties by reducing loan balances more deeply than called for in the settlement. At the time it was announced, the thinking was that BofA could avoid that $850 million by reducing balances on loans it didn’t actually own.  So whom did BofA reach out to today? The bank said it planned to contact more than 200,000 homeowners who could be candidates for the offers, sending letters to a majority of them by the third quarter of this year. To be eligible for the principal reductions, however, homeowners will have to meet certain criteria, including: having a loan owned or serviced by Bank of America; owing more on the mortgage than their property is worth; and being at least 60 days behind on payments as of the end of January. Owned OR serviced. In other words, this is exactly as we suspected; BofA will try to extinguish cash penalties by modifying principal on loans they service but don’t own. And they’re trying to load up on the modifications with those loans.

What is a "Responsible" Homeowner? - Many American families bought their homes at or near the peak of the house price boom. "Through no fault of their own" (individually, not collectively), house prices collapsed. Many of these families are now "underwater:" what they owe on their mortgage exceeds the market value of their home. Some have lost their jobs and can no longer afford to make their monthly mortgage payment. Others can afford it, but are walking away from their obligations. Still others seem to be doing the "responsible" thing: they continue to service their debt. Shouldn't we (the rest of society) do something to help "responsible" homeowners? Perhaps so. But first we have to ask what exactly constitutes a "responsible" homeowner? President Obama has someone like Val and Paul Keller, of Reno, Nevada, in mind. Diana Glick talks about their situation here: Obama's "Responsible" Reno Homeowners: Are They? A quick summary. This couple bought their Reno home in June 1988 for $127,000. Their home is currently valued at $100,000. They currently have a mortgage worth $168,000.  In 2007, the Keller's home was assessed at $250,000. Like so many other families, they did a cash-out finance at that time for $178,000. They used $51,000 of this to pay off a debt, allowing Paul to retire. We are not told what happened to the remaining $127,000. Are the Kellers "responsible" homeowners?

Freddie Mac: Lower REO Expense in Q1 due to "stabilizing home prices in certain geographical areas" - Last week Freddie Mac reported results for Q1 2012. Freddie reported that they acquired 23,805 REO in Q1 2012 (Real Estate Owned via foreclosure or deed-in-lieu); this is down from 24,707 in Q1 2011. Freddie disposed of 25,033 REO in Q1 2012, down from 31,627 in Q1 2011. Since Freddie disposed of more REO than they acquired, Freddie's REO inventory fell slightly in Q1 2012 to 59,307.  A few comments from Freddie: REO operations expense declined to $171 million in the first quarter of 2012, as compared to $257 million in the first quarter of 2011, primarily due to stabilizing home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory during the first quarter of 2012. Although our servicers have resumed the foreclosure process in most areas, we believe the volume of our single-family REO acquisitions during the first quarter of 2012 was less than it otherwise would have been due to delays in the foreclosure process, particularly in states that require a judicial foreclosure process. The lower acquisition rate, coupled with high disposition levels, led to a lower REO property inventory level at March 31, 2012, compared to March 31, 2011. We expect that the length of the foreclosure process will continue to remain above historical levels. The following graph shows REO inventory for Freddie. REO inventory for Freddie decreased slightly in Q1, but has mostly been steady over the last year.

Florida foreclosure case could slam banks (Reuters) - The Florida Supreme Court is set to hear oral arguments Thursday in a lawsuit that could undo hundreds of thousands of foreclosures and open up banks to severe financial liabilities in the state where they face the bulk of their foreclosure-fraud litigation. The court is deciding whether banks who used fraudulent documents to file foreclosure lawsuits can dismiss the cases and refile them later with different paperwork. The decision, which may take up to eight months to render, could affect hundreds of thousands of homeowners in Florida, and could also influence judges in the other 26 states that require lawsuits in foreclosures. Of all the foreclosure filings in those states, sixty three percent, a total of 138,288, are concentrated in five states, according to RealtyTrac, an online foreclosure marketplace. Of those, nearly half are in Florida. In Congressional testimony last year, Bank of America, the U.S.'s largest mortgage servicer, said that 70 percent of its foreclosure-related lawsuits were in Florida. "This was a case of an intentionally fraudulent document fabricated to use in a court proceeding," says former U.S. Attorney Kendall Coffey, author of the book Foreclosures in Florida. If the Supreme Court rules against the banks, "a broad universe of mortgages could be rendered unenforceable," Coffey says. "The cost to the financial industry is difficult to estimate, but it could be substantial."

Look Who’s Pushing Homeowners Off the Foreclosure Cliff - One of the more confounding aspects of the U.S. housing crisis has been the reluctance of lenders to do more to assist troubled borrowers. After all, when homes go into foreclosure, banks lose money.  Now it turns out some lenders haven’t merely been unhelpful; their actions have pushed some borrowers over the foreclosure cliff.. Lenders have been imposing exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. The policies, standard homeowner’s insurance or extra coverage for wind damage, say, for Florida residents, typically cost five to 10 times what owners were previously paying, tipping many into foreclosure. The situation has caught the attention of state regulators and the Consumer Financial Protection Bureau, which is considering rules to help homeowners avoid unwarranted “force- placed insurance.” The U.S. ought to go further and limit commissions, fine any company that knowingly overcharges a homeowner and require banks to seek competitive bids for force- placed insurance policies. Because insurance is not regulated at the federal level, states also need to play a stronger role in bringing down rates.

Banks Accused of Racial Bias on Foreclosed Homes - The green bungalow at 136 Chappell Road in northwest Atlanta brings a little bit of the country into the big city – a wooded lot, a big lawn, a wraparound front deck. But come in for a closer look and you’ll notice that the windows are boarded up, the wood siding has started to peel off, and two holes have opened in the front eaves. Old tires lean against one side, and the back door is missing. Inside, debris is strewn around the living room and mold grows on the walls.  A coalition of fair housing groups say those conditions are present in hundreds of foreclosed homes around the country that have been taken over by banks – and they claim that the new owners are not treating all homes equally. The National Fair Housing Alliance (NFHA) and four sister organizations spent a year visiting bank-owned houses (also known as real-estate owned homes, or REOs) in 11 major cities across the country. In April, the groups released a report charging that once banks take possession, they do a far better job of maintaining and marketing homes in white neighborhoods than they do in minority neighborhoods.

Longtime Queens Court Foreclosure Sales Monitor Forced Out For A Ridiculous Reason - We wrote three weeks back about Seabrook's arrest (by nine guards) and how she was banned from the civil courts for assisting a Haitian immigrant family--a group that does not speak English very well--from being evicted. Seabrook confirmed with us today that she has effectively been banned from the Supreme Court for six months too.  "The guard who accused me of attacking him filed an order of protection, issued in criminal court, that restrains me from going within 100 yds of his place of business," she said. "And his place of business just happens to be the Queens Supreme Court." The family Seabrook was trying to help are still in their home, thanks to a court screw up that named the wrong person on the referee's deed (these type of screw ups happen all the time), but Seabrook's nine year streak of attending--and documenting--every Queens foreclosure auction has ended.

Dozens of Police Evict Georgia Family at Gunpoint at 3am -  Four generations of a Georgia family were evicted at gunpoint by dozens of sheriffs and deputies at 3am last week in an Atlanta suburb. The eyebrow-raising eviction, a foreclosure action, might have been another anonymous descent into poverty were it not for Occupy Atlanta activists who tried to help the family stay in Christine Frazer’s home of 18 years.   The eviction came as Frazer, 63, who lost her husband and then job in 2009, had been challenging the foreclosure in county and federal courts by seeking to restructure the terms of a delinquent mortgage. However, the latest holder of her loan, Investors One Corporation—the fourth company that bought her mortgage in an eight-month period—allowed the eviction to proceed even though it was "negotiating" new loan terms with her attorney one day before the police raid.

7 Foreclosure Horror Stories (And One Possible Win) - This week, Christine Frazer and her family were thrown out of the Atlanta home they'd lived in for 18 years, at gunpoint in the dead of night. They were not set upon by robbers, but by the Dekalb County Sheriff's department, which evicted the family at the request of Investors One Corporation. As Steven Rosenfeld reported for AlterNet, it was the fourth company to buy the family's mortgage in eight months. The Frazers' eviction is horrifying, but sadly their story is all too common. Senator Sherrod Brown, who's introduced legislation aiming to curtail the worst practices, called it “a longstanding ugly pattern of homeowner abuse.” "You can basically throw a dart off a building and hit someone with a foreclosure horror story,” said Matt Browner Hamlin of Occupy Our Homes. “This is the whole point -- that the crisis is being driven by fraud and criminality by the banks. Three million people didn't wake up one morning and decide to just stop paying their mortgages." Around the country, families are being tossed out of their homes with astonishing regularity, with local law enforcement enlisted to do the bidding of big banks that own and resell the mortgages, utterly detached from the people whose lives are turned upside-down in the process. It's easy to just look at statistics and forget the human stories behind the numbers, so here are six stories of families who've had to fight all sorts of shady tactics to try and stay in their homes—and one family that might just beat the bank and get to keep their home, with the help of local activists.

Protesters in Miami clean garbage from foreclosed homes and dump it at bank - MSNBC Photo Blog

Lawler: Table of Short Sales and Foreclosures for Selected Cities - Earlier I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). Economist Tom Lawler sent me the following table for several other distressed areas. For all of the areas, the share of distressed sales is down from April 2011, the share of short sales has increased and the share of foreclosure sales are down - and down significantly in some areas. Economist Tom Lawler wrote today: "Note that there are BIG declines in the foreclosure share of resales this April vs. last April, reflecting sharply lower REO inventories."  Tom has been looking at the incoming data from various areas of the country, and wrote today: "There seems little doubt that the NAR’s median existing SF home sales price for April will show a good-sized YOY increase, probably over 5%." In March, the NAR reported median prices were up 2.5% year-over-year. Of course the median price is impacted by the mix, and some of the increase in the median price is probably due to fewer foreclosure sales at the low end. Note: The table is as a percentage of total sales. Note that the percent of short sales has been increasing, and the percent of foreclosure sales has been declining - and the percent of total distressed sales has been declining too (but is still very high).

New Rules May Curtail Some Fees in Mortgage— The Consumer Financial Protection Bureau said it planned to propose tighter mortgage lending regulations that would limit the ability of banks and mortgage brokers to charge certain transaction fees, possibly ending one of the most abusive costs levied on consumers when they buy a house.  Bureau officials said that the rules, which were released Wednesday ahead of formal introduction this summer, would ban mortgage companies from charging origination fees that vary with the amount of the loan.  Those fees are sometimes referred to as origination points and are disclosed in a blizzard of documents and fees that most home buyers face at closing. But they can easily be confused with the upfront discount points that borrowers often pay to secure a lower interest rate.  The consumer bureau also said it would require that lenders offer a reduced interest rate when a consumer opted to pay upfront discount points and would require lenders to offer a loan option without points. During the financial crisis, some lenders charged the points without lowering the interest rate.  Changing that rule, the bureau believes, will make it easier for consumers to weigh offers from multiple lenders.

Housing: Inventory declines 21% year-over-year in early May - I've been using inventory numbers from HousingTracker / DeptofNumbers to track changes in listed inventory. Tom Lawler mentioned this last year. According to the for (54 metro areas), inventory is off 20.7% compared to the same week last year. This graph shows the NAR estimate of existing home inventory through March (left axis) and the HousingTracker data for the 54 metro areas through early May.  Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well.  Seasonally housing inventory usually bottoms in December and January and then starts to increase again through mid to late summer. So seasonally inventory should increase over the next several months. The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker. HousingTracker reported that the early May listings - for the 54 metro areas - declined 20.7% from the same period last year. So far in 2012, there has only been a small seasonal increase in inventory. Also, if there is an increase in foreclosures, this might slow the year-over-year decline - but right now the decline in inventory remains a significant story.

Fannie Mae reports $2.7 billion in income, REO inventory declines in Q1 2012 - This morning Fannie Mae reported results for Q1 2012.  Fannie Mae (FNMA/OTC) today reported net income of $2.7 billion in the first quarter of 2012, compared to a net loss of $6.5 billion in the first quarter of 2011 and a net loss of $2.4 billion in the fourth quarter of 2011. The significant improvement in the company’s financial results in the first quarter of 2012 was due primarily to lower credit-related expenses, resulting from a less significant decline in home prices, a decline in the company’s inventory of single-family realestate owned (“REO”) properties coupled with improved REO sales prices, and lower single-family serious delinquency rates. Fannie reported that they acquired 47,700 REO in Q1 (Real Estate Owned via foreclosure or deed-in-lieu) and disposed of 52,071 REO. Fannie has sold more REO than they acquired for six consecutive quarters (acquisitions slowed because of the process issues, but dispositions picked up sharply in 2011).  The following graph shows Fannie REO inventory, acquisitions and dispositions over the last several years.When the red line is above the blue line, dispositions are higher than acquisitions, and REO inventory declines. REO inventory declined by 25% from Q1 2011, and is down 3.7% from last quarter.

Lawler: REO inventory of "the F's" and PLS - Earlier I posted a graph of REO inventory (lender Real Estate Owned) for the Fs (Fannie, Freddie and the FHA). Economist Tom Lawler has added estimates for PLS (private label securities). Below is a chart showing SF REO inventories of Fannie, Freddie, private-label ABS, and FHA. The March FHA number is estimated, as for some reason FHA has not yet released the March report to the FHA commissioner. FHA’s SF REO inventory as shown in this monthly report declined to 30,005 at the end of February from 32,170 at the end of December. Data in the FHA Outlook report, however, suggested that SF property conveyances, which had been running extremely low (relative to the number of SDQ loans), spiked up sharply in March, and probably significantly exceeded sales, As a result, I’m assuming March’s FHA SF REO inventory is about the same as December’s. When the FDIC's Q1 quaterly banking profile is released in a couple of weeks, I'm sure Tom will add an estimate for REO at FDIC-insured institutions. This is not all REO: In addition to the FDIC-insured institution REO, this excludes non-FHA government REO (VA, USDA, etc.), credit unions, finance companies, non-FDIC-insured banks and thrifts, and a few other categories.

Lawler: Fannie SF REO Inventory: Total vs. “Listed/Available for Sale” - From economist Tom Lawler: In its latest 10-Q filing Fannie Mae showed the distribution of the “status” of its SF REO inventory, including the % it was unable to “market” for various reasons. (Fannie’s SF REO inventory as of 3/31/2012 totaled 114,157 properties, down 25.5% from last March). Of Fannie’s 114,157 SF REO properties, almost half – 54,795 – were characterized as being “unable to market” (meaning can’t be listed for sale). Another 11,416 were not yet “listed” or “available” for sale because the properties were still being appraised (so that a list price can be determined). That left just 47,946 properties that were available for sale (listed), of which 22,831 already had a purchase offer accepted but which had not yet closed escrow. The Fannie table is below. Here is a pie chart showing the distribution of REO. The "blue" categories are "marketable" (and many are in escrow). The "orange, yellow, red" categories are not currently marketable. Some are within the state redemption period, some are rented, some are in the eviction process, some are being repaired ... NOTE: Table below has a sub-total for "unable to market" that includes the categories below it:

CoreLogic: House Price Index increases in March, Down 0.6% Year-over-year - The CoreLogic HPI is a three month weighted average and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® March Home Price Index Shows Slight Year-Over-Year Decrease of Less Than One Percent [CoreLogic March Home Price Index (HPI®) report] shows that nationally home prices, including distressed sales, declined on a year-over-year basis by 0.6 percent in March 2012 compared to March 2011. On a month-over-month basis, home prices, including distressed sales, increased by 0.6 percent in March 2012 compared to February 2012, the first month-over-month increase since July 2011. Excluding distressed sales, month-over-month prices increased for the third month in a row. The CoreLogic HPI also shows that year-over-year prices, excluding distressed sales, rose by 0.9 percent in March 2012 compared to March 2011. Distressed sales include short sales and real estate owned (REO) transactions.  This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index was up 0.6% in March, and is down 0.6% over the last year.  The index is off 34% from the peak - and is just above the post-bubble low set last month. The second graph is from CoreLogic. The year-over-year declines are getting smaller - this is the smallest year-over-year decline since 2010 when prices were impacted by the housing tax credit.

LPS: House Price Index increased 0.2% in February -Note: The timing of different house prices indexes can be a little confusing. LPS uses February closings only (not an average) and this tends to be closer to what other indexes report for March. The LPS index is seasonally adjusted. From LPS: LPS Home Price Index Shows U.S. Home Price Increase of 0.2 Percent in February; Early Data Suggests Further Increase of 0.3 Percent is Likely During MarchThe updated LPS HPI national home price for transactions during February 2012 increased 0.2 percent to a level on par with those seen in June 2003 ..."Our HPI shows an increase in seasonally adjusted prices this month for the first time since March 2010, and for only the third time in five years,” “There have been signs of price declines slowing for a few months now, and our estimates for next month are flat to slightly positive. Without a pickup in sales volumes from their current anemic levels, it’s hard to be more optimistic that the market may be nearing the end of its fall. During the period of most rapid price declines, from April 2007 through April 2009, the LPS HPI national home price fell at an average annual rate of 9.3 percent. ... The slowest declining trend lasted from about April 2009 to April 2010, dates which are marked in Figure 1. ... The expiration of the first-time buyers’ tax incentive in April 2010 marks the start of a steadier decline in house prices. Figure 1 shows the trends for the three different post-bubble intervals.

LPS Home Price Index (HPI) Shows National Home Prices Rose .2%, First Rise Since March 2010; Sales Volume 30% Lower Than Any Point Since 1998; Another Low-Volume Failure? - The latest LPS HPI Release suggests home prices are flattening out if not bottoming. Data is from February. Highlights:

  • Nationally, February seasonally-adjusted prices rose 0.2%, the first such increase since March 2010
  • The average US home price in February was $195K, on par with levels seen back in June of 2003 
  • LPS projects a further 0.3% increase in the national average home price for March 2012 
  • The average discount on a short sale property in March was 23%; for a foreclosed property sale, 29%
  • Of the 26 MSAs tracked by both LPS and the BLS, only Los Angeles, San Diego and San Francisco saw price declines in February
  • Honolulu, Portland, OR., Seattle and Tampa all saw increases of more than 1% over the month

MBA: Mortgage Purchase activity increased, Record Low Mortgage Rates - Form the MBA:Mortgage Applications Increase in Latest MBA Weekly Survey:  Application activity within the Government market decreased for both of these measures from last week. Likewise, the Refinance Index increased 1.3 percent from the previous week, driven by a 1.8 percent increase to the Conventional Refinance Index, while the Government Refinance Index decreased 2.3 percent. The seasonally adjusted Purchase Index increased 3.4 percent from one week earlier, spurred by a 5.4 percent increase in the seasonally adjusted Conventional Purchase Index. ...The refinance share of mortgage activity decreased to 72.1 percent of total applications from 72.6 percent the previous week. This is the lowest refinance share since April 6, 2012. The government purchase share decreased over the week from 37.0 percent to 35.8 percent of all purchase applications. This is the lowest government purchase share since March 27, 2009. ...The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 4.01 percent from 4.05 percent,with points decreasing to 0.41 from 0.44 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This is the lowest 30-year fixed interest rate recorded in the history of the survey

Mortgage Rates Fall to Record Lows This Week - Mortgage rates fell to fresh lows this week, according to data released today by mortgage-buyer Freddie Mac, with the 30-year rate falling to 3.83% (see chart above) and the 15-year rate dropping to 3.05%.  The 30-year (15-year) rates are the lowest since at least 1971 (1991) when Freddie Mac's records start.  

Ben Bernanke says even worthy borrowers can't get mortgages - Banks have become so restrictive in making mortgages that many worthy homebuyers are being frozen out of the U.S. housing market, and lending practices are not likely to loosen any time soon, Federal Reserve Chairman Ben Bernanke said on Thursday. Speaking via satellite to a banking conference in Chicago, Bernanke highlighted ongoing problems in mortgage finance availability, even though banks are much healthier now as the 2007-2009 financial crisis has receded. "To be sure, a return to pre-crisis lending standards wouldn't be appropriate," Bernanke said. "However, current standards may be limiting or preventing lending to many creditworthy borrowers." Lax lending practices, including "liars' loans" handed out to borrowers who provided little or no documentation for jobs and incomes, have been cited as a key contributing factor in precipitating the severe financial crisis. Bernanke implied the backlash by banks against criticism of their lending practices, which now are far tighter, might be overdone and will be extremely hard to reverse.

Unfairness to homeowners blocks recovery — Discrimination against homeowners is blocking economic recovery. Our legal system permits every kind of property owner to reduce their mortgages, with one exception; homeowners are given no way to reduce excess mortgages. As a result, four years after the crash of real estate, homeowners are still buried in debt. This is why consumer demand has not recovered and a big reason why the recovery has been so weak. We have had many prior cycles, in which real estate prices soared, tempting property owners to take on high mortgages, and prices then crashed, leaving owners “underwater” with real estate worth less than the debt against it. When this happens to commercial property owners, our law gives them an escape route. They can file a Chapter 11 reorganization. While Chapter 11 filings are expensive, risky and uncertain, Chapter 11 gives commercial property owners the power of “strip down:” They can reduce the principal of their mortgages to the current fair market value of the property. The rest of the mortgage, the amount by which the mortgage exceeds the value of the property, can be “stripped down” under Bankruptcy Code Section 506, or converted into unsecured debt, which can be discharged. “Strip down” gives underwater commercial property owners a reasonable chance to reduce their debts, and to return to profitability.

The economic impact of stabilizing house prices? - Back in February, when I wrote “The Housing Bottom is Here”, I received a number of positive emails (even from people who disagreed with me), and many more negative emails. One person wrote: “No credible informed analyst would call the housing bottom now. Just to be clear: there are also informed and credible analysts who think house prices will fall further. But if I’m correct about house prices – and the CoreLogic report released this morning is another indicator that prices may be stabilizing - I think we should start asking what the economic impact of stabilizing house prices will be. Prices don’t have to start increasing to have a positive impact on the economy; just stop falling. As an example, Freddie Mac just noted that “stabilizing home prices in certain geographical areas with significant REO activity” led to lower REO expenses in Q1. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand.

Chart of the day: Let’s go buy a house! - Many thanks to Ben Walsh for putting this chart together for me. The source is this data at the Census bureau, inspired by page two of the first-quarter 2012 Census bureau report on rental vacancies and homeownership. The first thing to look at here is the blue line, which shows that the median asking rent for vacant rent units tends to rise pretty steadily. It doesn’t spike during housing bubbles, and it doesn’t plunge when those bubbles burst. Which is one reason why if you can, it’s always a good idea, when you’re buying a home, to take a look at what rents are like in the area. That’ll help you work out whether prices are too high. David Leonhardt performed this exercise two years ago, and came to the conclusion that in some parts of the country, including South Florida, Phoenix and Las Vegas, buy-to-rent ratios were making houses look attractive again. I wasn’t completely convinced, but over the past two years, prices have continued to fall, while rents have continued to rise — sometimes painfully so. In the chart, the red line shows the mortgage payment you’d have to make if you took out a standard 30-year mortgage for the median asking sales price for vacant sale units. In reality, your mortgage payment would be lower, since this doesn’t take into account any downpayment. But in any case, thanks to ludicrously low mortgage rates below 9%, that number is now lower than the median national rental price. This is the first time that’s happened since 1988, and probably for quite some time before that, too.

If it is all about age, what should the homeownership rate be? - Last week's report of a continuing drop in the homeownership rate to its 1997 rate of 65.4 percent made me decide to revisit a question I looked at in a paper some years ago: holding demographics constant, would should the homeownership rate be? I don't think anyone would argue that 1990 was a year in which the homeownership rate, at 64.2 percent, was unnaturally high.  In fact, the rate had been stuck around 64 percent for around 20 years. One of the reasons for this is that the country at the time was moving through a period with lots of young adults.  In 1990, the homeownership rates by age were as follows:At the time time, the age shares of household heads at the time were: Now let us look at age shares in 2010.  They are: If we apply those population shares to the homeownership rate by age in 1990, we get an "age-predicted" homeownership rate of 67.0 percent.  This suggests that the rate has fallen below where it "should be."  Why might this be?  Let's look at the ownership rate among non-hispanic whites and everyone else in 1990. In 1990, 80 percent of household heads were non-hispanic whites; according to the 2009 American Housing Survey, 70 percent of household heads that year were non-hispanic white.  If we hold ownership rates by race constant (as well as age) and allow race/ethnicity of household heads to vary, we would have seen a decline in the ownership rate to 61.9 percent.  Age by itself therefore pushed up the rate by 2.8 percentage points, and race/ethnicity reduced it by 2.3 percentage points, so if the effects of age and race stayed constant (and we ignore interactions of age and race for now), we would expect the ownership rate in 2010 to be about 64.7 percent.

Renting Prosperity - In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom. For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.

"Rents soar" - From the LA Times: Rents soar as foreclosure victims, young workers seek housing: The foreclosure mess has pushed millions of former homeowners with tarnished credit into a competitive apartment market across the U.S. Add fresh demand from young workers, few new units and tight standards for home loans, and the result is rental sticker shock not seen in years. Rents are surging from New York to Los Angeles. The average monthly U.S. rent for apartments hit $1,008 in the first quarter, pushing past the all-time high set in the third quarter of 2008, according to the data firm RealFacts. A big driver of rent increases has been demand from young workers who are striking out on their own after doubling up with family members during the worst of the economic downturn. It makes sense that rental demand has been increasing: Demographics are favorable for rentals right now (see graph below: a large cohort is moving into the 25 to 35 year old age group), people who have lost their homes to foreclosure (or short sales) are turning to renting, and some people have probably stopped "doubling up".  The house price-to-rent ratio is back to normal, and further rent hikes will provide support for house prices. This graphic is from the Census Bureau and shows the number of people by age and sex in the US based on the 2000 and 2010 Census. See: Age and Sex Composition: 2010

Are There Too Many Home Building Regulations In America? - Dan Gross has another article in the spirit of – wow, rental construction is soaring, hoocoodanode! The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%. What’s more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market. Which is why I need to bring this back to context. While the mainstream is increasingly impressed by the rental stats, I have been throwing my coffee cup month after month.  That’s because while the pace of construction of multifamily homes and the conversion of single family homes to rentals is increasing rapidly, it is still missing every mark that I set down for it and in the process throwing off my larger macro-economic projections. What’s worse is the sinking feeling that if the economy doesn’t “kick” soon the Fed will nonetheless take higher rents as reason to prematurely tighten money supply.

NAHB: Builder Confidence in the 55+ Housing Market Increases - This is a quarterly index from the the National Association of Home Builders (NAHB) and is similar to the overall housing market index (HMI). The NAHB started this index in Q4 2008, so all readings are very low. This is expected to be key a demographic over the next couple of decades - if the baby boomers can sell their current homes. From the NAHB: Builder Confidence in the 55+ Housing Market Shows Significant Improvement in the First QuarterBuilder confidence in the 55+ housing market for single-family homes had a significant increase in the first quarter of 2012 compared to the same period a year ago, according to the latest National Association of Home Builders’ (NAHB) 55+ Housing Market Index (HMI) released today. The index increased 10 points to 27, and although 27 is relatively low for an index that lies on a scale of 0 to 100, it is nevertheless the highest reading since the inception of the index in 2008. This graph compares the NAHB 55+ HMI through Q1 2012. All of the readings are very low for this index, but there has been a fairly sharp increase over the last two quarters. The overall HMI has also shown a sharp increase, but this segment has seen a somewhat larger increase in confidence.

Affidavits Are Not a Substitute for Evidence of Debt Ownership - The Tennessee Court of Appeals has issued a decision that highlights the problems facing credit card debt collectors in a post-robosigning world (see here and here). The decision reaffirms what should be a simple principle in a debt-collection lawsuit. The burden is on the debt collector to show it owns the debt and to show the consumer is liable for the amount the debt collector asserts. The debt collector's say-so is not enough. In LVNV Funding, the consumer had opened a Sears Gold Mastercard account in 1985 and was being sued for a balance that was a little more than $15,000. He had not used the account since 2001 and thought it had been settled in 2005.One might first think Sears was the plaintiff. It was not. Sears had sold the account to Citibank, but Citibank was not the plaintiff either as it had sold the account to Sherman Financial Group. The plaintiff was LVNV Funding, a subsidiary of Sherman Financial to which the account had been assigned.  What should have happened is that the account history should have been transferred along with each sale of the account. It is not exactly clear what did happen but nothing more than a bare list of account names and balances was apparently transferred. The custodian of records for LVNV Funding testified that she was familiar with LVNV's business records, and that $15,000 was the amount due based on what was told to LVNV.

Some Americans too broke to file for bankruptcy - This year, hundreds of thousands of Americans are expected to be too broke to file for bankruptcy. The average cost to file for Chapter 7 bankruptcy protection, the most common form of consumer bankruptcy, is more than $1,500, according to recent research submitted to the National Bureau of Economic Research. As a result, anywhere between 200,000 and one million consumers are estimated to be unable to afford that steep cost this year. The research, conducted by a group of professors from Columbia University, the University of Chicago and Washington University in St. Louis, examined how bankruptcy filings spiked after people received their tax rebates in previous years. They estimate that another 200,000 consumers, who would otherwise not have enough money to file, will use their tax refunds to pay for bankruptcy this year. "For lots of people, bankruptcy has been taken off the table as an option because of the severe fees involved," said Jialan Wang, co-author of the report. Among those fees is a charge of about $300 just for filing the paperwork with the federal court, while the rest typically goes to bankruptcy lawyers, said Wang. And there are other expenses on top of that, including fees for mandatory pre-bankruptcy credit counseling and a pre-discharge debtor education course.

US consumers flock to borrow - US consumer credit surged in March by the most in more than a decade as Americans borrowed more to pay for education and autos, suggesting growing confidence in the economy. Credit jumped $21.36bn, or 10.2 per cent, to $2.54tn, the Federal Reserve announced on Monday. That was more than twice the $9.8bn increase forecast by economists and was the biggest rise since November 2001.  Consumers added $16.2bn in non-revolving debt, which includes student and auto loans but excludes mortgages and other real estate debt. Credit card and other revolving debt rose $5.1bn. A “surge” in student loans probably drove the increase, said Paul Edelstein, director of financial economics at IHS Global Insight. “Households sought to lock in student financing as interest rates on these loans are set to jump in July without Congressional action.  The interest on some newly issued government-subsidised loans is set to double on July 1 unless Congress grants a one-year reprieve supported by President Barack Obama. The Fed’s figures show the federal government increased its share of lending – much of which consists of educational loans – by $6.9bn in March. Analysts were also encouraged by the uptick in credit card balances, which suggested that consumers seem to be weathering the sluggish recovery.

Student Loans, Credit Cards Push Up Consumer Debt - U.S. consumer credit expanded in March at the fastest pace since late 2001, boosted by higher student borrowing and a rebound in credit-card use. Consumer credit outstanding surged by $21.36 billion, or 10.2%, to $2.542 trillion, Federal Reserve data showed Monday. That was the biggest jump since November 2001, in both dollar and percentage terms. Economists surveyed by Dow Jones Newswires had forecast an $8.5 billion increase. February’s expansion in consumer credit was revised up, as well, to $9.27 billion from an initial estimate of an $8.73 billion rise. With consumer credit expanding at the fastest rate in the six months ending in February since late 2007–before the credit crunch caused a painful contraction–and commercial banks showing an increasing willingness to lend,  Still, much of the credit expansion has reflected a shift in student loans to direct borrowing from the federal government, with loans held by the Department of Education surging more than four-fold since 2008. Federal student credit outstanding rose to $460.2 billion in March from $453.3 billion the previous month. Overall nonrevolving credit, which includes student credit as well as auto loans, rose $16.17 billion to $1.739 trillion. Revolving credit, which includes credit-card debt, increased in March by $5.18 billion to $803.63 billion. That was the first gain in three months.

Consumer Credit Soars As US Government Encourages Student, Car Loan Bubbles - That US consumer credit soared by $21.4 billion in March on expectations of $9.8 billion rise, or the fastest monthly expansion since March 2001 would have been commendable and memorable if one did not dig through the actual components. Which sadly are atrocious: of the entire surge, a modest $5.1 billion was from real credit, or revolving, credit-card type debt. This brought the total revolving debt to $804 billion or to a level first crossed in January 2005. The balance, or $16.2 billion, was non-revolving debt, or the type of debt used to fund GM car purchases by subprime borrowers and push the student loan bubble well into its $1+ trillion record territory. The total non-revolving debt is now $1.739 trillion: an all time record. As for the source of such debt? why the US government of course, in what is the supreme ponzi scheme, whereby the US government allows US consumers to purchase Government Motors products and to keep the Higher Learning status quo in power. In other words, the US government has become the final enabler of the consumer spending bubble with proceeds used to keep the US auto unions happy (as channel stuffing is already at record high levels), and of course, to fund such ancillary student purchases as iPads.

Vital Signs: Consumer Borrowing Surges - Americans ramped up their borrowing in March. Consumer credit — including debt on credit cards, car loans and student loans but not mortgages — rose at a seasonally adjusted annual rate of 10.2% in March, the biggest jump in more than a decade, the Federal Reserve said. Many people sought loans to attend college amid the weak labor market; also, credit card use also surged.

Good and Bad in Credit-Card Binge - Talk about March Madness: consumers went on a borrowing spree, adding $21.4 billion in borrowing for the month. The surge was the largest–in both dollar and percentage terms–since November 2001. What was unusual was an increase of $5.2 billion in revolving debt. The category–which includes credit cards–had been on a downtrend over the last three years. That lack of credit use had limited consumer spending. The question is how to read the March credit increase. Was the gain an upbeat, “glass-is-half-full” view of consumers? Were consumers confident enough about their finances to haul out the credit card again? Or are consumers feeling half-empty, needing credit cards to cover the higher cost of gasoline? The answer is probably a little of each, and it may take a few more months of credit data to gauge its true signal. It is another example of the split in the household sector. Some consumers have put the recession behind them while others still struggle with the drags of underwater mortgages, joblessness and past debt.

CHART OF THE DAY: Consumer Strength Isn't All It's Cracked Up To Be - Economists have been touting consumer strength as the economic recovery has appeared to gain steam in the last few months. But there's a good reason to believe this development isn't all it's cracked up to be. According to research from Morgan Stanley global strategist Gerard Minack, the U.S. government is actually "paying out as much in benefits as it receives in taxes from households." And analysts already concerned about a fiscal cliff ahead around the start of 2013 when the government dramatically cuts back expenditures, the power of the consumer might be much weaker than the numbers would suggest.

Consumer Sentiment Improves - U.S. consumers started this month feeling more upbeat about the economy, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index for early May increased to 77.8 from 76.4 at the end of April and a preliminary April reading of 75.7, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the preliminary May index to fall to 76.0. The current conditions index rose to 87.3 from 82.9 in late April, while the expectations index slipped to 71.7 from 72.3. The sentiment and current indexes are at their highest levels since January 2008. Consumers may feel better because falling gasoline prices are taking pressure off household budgets. Within the Michigan survey, the one-year inflation expectations reading slowed to 3.1% from 3.2% in late April. The inflation expectations covering the next 5 years to 10 years edged up to 3.0% from 2.9%.

Consumers Feel Better as Vacation Time Rolls Around - U.S. consumers are seeing fewer dark clouds on the economic horizon. The Thomson-Reuters/University of Michigan consumer sentiment index unexpectedly increased in early May to 77.8, the highest reading since January 2008, which was just as the U.S. was slipping into recession. A better assessment of labor markets–despite the slowdown in hiring as measured by the Labor Department–was one catalyst for the optimism. The report noted “Nearly twice as many consumers reported hearing about new job gains than reported hearing about recent job losses.” Sentiment, however, isn’t rising equally among all consumers. The gain was centered in higher-income households, which likely reflects not only better labor conditions but also higher stock prices so far this year. Since high-income consumers account for an outsized share of total consumer purchases, the increased confidence is good for future spending.

The Return Of Economic Pessimism - Americans appear to be becoming more pessimistic about the state of the economy, and that could spell trouble for President Obama: Economic pessimism is on the rise as Americans predict that the unemployment rate will start ticking back upward and expect a deterioration in their household finances over the next year, according to a new survey Friday. Just 22 percent of Americans said that the economy has improved in the past month, down from the 28 percent who said so in February, according to an Associated Press-GfK poll. Meanwhile, 35 percent predict that the unemployment rate, which has been slowly dropping, will start going back up, up from 30 percent who believed that in February. Fewer than one in three Americans believe their household’s economic condition will improve in the next year, down from 37 percent just three months ago, while 18 percent believe their finances will deteriorate, up from 11 percent in February.

PPI declines 0.2% in April, Core PPI increased 0.2% - From the BLS: The Producer Price Index for finished goods falls 0.2% in April; finished core rises 0.2%. The decline in the headline number was mostly due to falling energy prices. The index for crude energy materials fell 6.8 percent in April. From January to April, prices for crude energy materials dropped 15.1 percent subsequent to a 6.6-percent advance for the 3 months ended in January. Almost three-fourths of the April monthly decline can be traced to the index for crude petroleum, which decreased 7.9 percent. However, excluding food and energy, core PPI increased 0.2%. We will probably see a slowdown in April CPI too due to declining oil and gasoline prices in April (to be released next week).

Producer Price Inflation Eases in April to 1.9% -- The BLS reported today on producer prices for April, here are some highlights:
1. Prices for finished goods increased annually by 1.9% through April, the seventh straight month of slowing year-over-year inflation rates following a 7% increase for the 12 months through September 2011.  It was the smallest annual increase in producer price inflation for finished goods since October 2009 (see brown line in chart above). 
2. Intermediate goods increased by only 1.1% on an annual basis through April, the smallest yearly increase since June 2010 (see red line in chart).
3. Prices for crude goods fell by 7.3% from April last year, led by sharp declines in food and energy prices (see blue line). 
Overall, the declining inflation rates for producer prices in April should ease some of the fears of inflationary pressures at the consumer level. Falling raw material costs for producers means that there won't be incentives to raise prices on consumer goods, and we can expect low and stable consumer inflation this year.     

Wholesale Sales Have a Bad Month in March 2012 - It is not often that the difference between the adjusted and unadjusted data is like night and day – but in March 2012, the seasonally adjusted data looks very good and the unadjusted data looks terrible.  The year-over-year unadjusted data crashed from up 14.0% last month to up 3.9% this month.   One month is not a trend but after inflation adjustment there seems little growth in wholesale in March. US Census Headlines:

  • sales up 0.5% month-over-month, up 6.5% year-over-year
  • inventories up 0.3% month-over-month, sales-to-inventory ratios were 1.15 one year ago – and are now 1.17
  • the market expected an inventory increase of 0.6%(versus the headline 0.3%)

Econintersect Analysis:

  • sales down 9.9% month-over-month, and up 3.9% year-over-year
  • sales (inflation adjusted)  up 1.2% year-over-year
  • inventories unchanged 0.0% month-over-month, sales-to-inventory ratio is 1.12 which is low for Marchs (good: inventories are not growing).

Vital Signs: Wholesale Restocking Slows -  Wholesalers restocked in March, but at a slower pace than in earlier months. The value of inventories climbed 0.3% from February and 8.4% from a year ago to $480.4 billion. Companies have been restocking goods such as vehicles and lumber since last summer, thanks to higher sales and increased confidence. But that restocking appears to be easing.

Wholesale Inventory Gains Held Back by Petroleum - U.S. wholesale inventories rose less than expected in March, held back by the biggest drop in petroleum stocks in nearly two years. Inventories rose 0.3% to $480.44 billion, following an unrevised 0.9% jump the previous month, the Commerce Department said Wednesday. A 5.9% drop in petroleum stocks, which retraced the previous month’s gain, was the biggest decline since May 2010. Economists surveyed by Dow Jones Newswires had expected a 0.6% gain in overall inventories. Sales registered by wholesalers rose 0.5%, on the back of a downwardly revised 1.1% increase in February. After aggressive stockpiling going into the end of the year, companies have been easing back on their inventory buildup. Inventories accounted for about a quarter of the 2.2% rise in gross domestic product in the first quarter, after contributing about half of economic growth in the final quarter of last year.

Update: Gasoline Prices down 15 cents year-over-year - Oil and gasoline prices have been falling recently. West Texas Intermediate (WTI) futures are down to $97.80, and Brent is down to $112.84 per barrel. From Bloomberg: U.S. Gasoline Falls to $3.85 a Gallon, Lundberg Survey Shows The average price for regular gasoline at U.S. filling stations fell 6.75 cents to $3.8452 a gallon, according to Lundberg Survey Inc.... The price is 15.49 cents lower than a year earlier, when the average was $3.9998. The highest average this year was $3.9671, during the period ended April 6. “It is crude oil that has delivered this retail gasoline price decline,” Trilby Lundberg, president of Lundberg Survey, said yesterday in a telephone interview. The following graph shows the decline in gasoline prices. Gasoline prices are down from the peak in early April, and are down year-over-year.

Weekly Gasoline Update: The Fourth Week of Price Declines - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, both regular and premium, rounded to the penny, declined another four cents. This is the fourth week of decline, matching last week's 4 cent drop. Regular is up 56 cents and premium 55 cents from their interim weekly lows in the December 19th EIA report.As I write this, shows five states with the average price of gasoline above $4 and 3 states with the price above $3.90. California has the highest mainland prices, averaging around $4.19 a gallon. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer:

3-Month Gasoline and Petroleum Usage Still Declining - The following chart from reader Tim Wallace shows three-month usage for February, March, and April compared to the same three months in prior years.Tim writes....  Next month there may be a slight leveling off between 2011 and 2012 - still well down but less of a slope. Looking further ahead, I expect to see almost a flat line or slight downturn towards the end of the summer as the year-on-year comparisons get easier to beat.  Regardless, as you can see the trend remains, with nothing good to see.

Visualize Gasoline - Next time you find yourself in traffic, try this nifty thought exercise. Ignore the cars within your field of vision and imagine instead the contents of their fuel tanks. Visualize gasoline flowing up and down the highway. Let’s assume the typical American car carries seven gallons of refined petroleum product in its tank at any given moment (a 15-gallon tank half-full). That’s a lot of liquid to be carting around. In fact, gasoline is the second-most-consumed fluid in the US after water. Each American household consumes an average of 350 gallons of water per day and 2.5 gallons of gasoline; milk, coffee, and beer clock in at .15 gallons, .12 gallons, and .1 gallons respectively. If you do this visualization exercise, you might find yourself seeing rivulets, streams, and—in the case of big freeways—rivers of gasoline coursing across the land. For the US as a whole, 400 million gallons of gasoline enter the flow every day. But, since we routinely carry more gasoline with us than we intend to use immediately, the total amount in car gas tanks at any given moment is roughly seven times larger, so that America’s gasoline rivers slosh with 2.8 billion gallons on any given day.

AAR: Rail Traffic "mixed" in April - Once again rail traffic was "mixed". This was because of the sharp decline in coal traffic (mild winter, low natural gas prices), and also for grains. Other commodities were up, such as building related commodities such as lumber and crushed stone, gravel, sand. From the Association of American Railroads (AAR): Reports Mixed Rail Traffic for April The Association of American Railroads (AAR) reported U.S. rail carloads originated in April 2012 totaled 1,113,105, down 64,335 carloads or 5.5 percent, compared with April 2011. Intermodal volume in April 2012 was 946,951 trailers and containers, up 32,505 units or up 3.6 percent, compared with April 2011. Commodities with carload declines in April were led by coal, down 85,719 carloads, or 16.6 percent compared with April 2011. This was coal’s biggest year-over-year percentage decline in rail traffic on record. This graph shows U.S. average weekly rail carloads (NSA).   A warm winter, low natural gas prices that make gas-based electricity generation more competitive vis-à-vis coal-based generation, and environmental pressures are all reducing U.S. coal consumption, and thus rail coal carloads. Meanwhile, U.S. rail grain carloads were down 17.2% (16,402 carloads) in April 2012 from April 2011, their 10th straight significant decline. Grain carloads are hurting largely because U.S. grain exports are down. The second graph is just for coal and shows the sharp decline this year.

US Trade Balance Surges Above Expectations To -$51.8 Billion - Imports to the U.S. continued to outpace the country's exports, as the U.S. trade deficit swelled to $51.8 billion from $45.4 billion a month earlier.  Total exports during the month increased by $5.3 billion to $186.8 billion, as imports rose $11.7 billion to $238.6 billion. Below, total imports to exports over the past few years.  The U.S. ran trade surpluses with Hong Kong, Australia, Singapore, and Egypt, and recorded deficits with China, the E.U., OPEC, Japan, and a number of other countries. The deficit with China accounted for some 42 percent of the overall trade balance.

Trade Deficit increased in March to $51.8 Billion -The Department of Commerce reported: Total March exports of $186.8 billion and imports of $238.6 billion resulted in a goods and services deficit of $51.8 billion, up from $45.4 billion in February, revised. March exports were $5.3 billion more than February exports of $181.5 billion. March imports were $11.7 billion more than February imports of $226.9 billion. The trade deficit was above the consensus forecast of $49.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through March 2012.Exports increased in March, and are at record levels. Imports increased even more. Exports are 13% above the pre-recession peak and up 7% compared to March 2011; imports are 3% above the pre-recession peak, and up about 8% compared to March 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through March. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $107.95 per barrel in March, up from $103.63 in February. Import oil prices were probably a little higher in April too, but will probably decline in May. The increase in imports was a combination of more petroleum imports and more imports from China. Exports to the euro area were $18.1 billion in March, up from $17.6 billion in March 2011, so the euro area recession is still not a huge drag on US exports.

Mitt Romney: 'I'll Take A Lot Of Credit' For Auto Industry Recovery - Despite his 2008 call to "let Detroit go bankrupt," presumptive Republican presidential nominee Mitt Romney said Monday that he would "take a lot of credit" for his impact on the U.S. automobile industry's comeback.  During an interview with WEWS-TV in Cleveland following a campaign stop, Romney said his views helped save the industry.  "I pushed the idea of a managed bankruptcy," Romney said. "And finally, when that was done, and help was given, the companies got back on their feet. So I'll take a lot of credit for the fact that this industry's come back."

Manufacturers to banks: We need money now  -- American manufacturers say business is booming again, but many are complaining that banks aren't lending them money to ramp up production.In a new quarterly survey of small to mid-sized manufacturers, 26% of 268 respondents cited "lack of capital to grow" as their biggest challenge at a time when they need loans to hire more workers, buy new equipment and aggressively market themselves. The survey was conducted in April by, an online directory that pairs businesses with manufacturers that can produce their goods domestically.  Banks, aware of a domestic manufacturing resurgence, say they're willing to lend, according to a range of regional and national financial institutions CNNMoney talked to. But they are proceeding with caution, especially with loans to smaller contract manufacturers or "machine and job shops."

Exploding the myths of manufacturing - MIT - The manufacturing sector, its advocates note, is burdened by negative stereotypes. Outsiders often mistakenly think that manufacturing consists of jobs that are “dumb, dirty and dull,” as MIT President Susan Hockfield said at a conference on the subject this week. Many people also view manufacturing as being in a state of continual decline, a perspective Hockfield has encountered frequently. During discussions about manufacturing around the country over the last 12 to 18 months, “the majority of people I met would assure me without any apparent concern that nothing is made in America,” Hockfield said. “And they would further assert that we should be resigned to the sector’s demise, that it somehow wouldn’t matter.” The facts present a different story, however. The United States added about 50,000 manufacturing jobs this January alone, the largest monthly gain since 1998. Companies such as Ford Motor Co. have moved overseas plants back to the United States. And high energy costs (which make global shipping more expensive), along with rising foreign wages in some industries, have provided reasons for companies to consider relocating their factories in America.

The Benefits of Manufacturing Jobs | Economics and Statistics Administration: The role of the manufacturing sector in the U.S. economy is more prominent than is suggested solely by its output or number of workers. It is a cornerstone of innovation in our economy: manufacturing firms fund most domestic corporate research and development (R&D), and the resulting innovations and productivity growth improve our standard of living. Manufacturing also drives U.S. exports and is crucial for a strong national defense.  The current economic recovery has witnessed a welcome return in manufacturing job growth. Since its January 2010 low to April 2012, manufacturing employment has expanded by 489,000 jobs or 4 percent1— the strongest cyclical rebound since the dual recessions in the early 1980s. From mid-2009 through the end of February 2012, the number of job openings surged by over 200 percent, to 253,000 openings. 2 Coupled with attrition in the coming years from Baby Boomer retirements, this bodes well for continued hiring opportunities in the manufacturing sector.3The rebound in manufacturing is important, not only as a sign of renewed strength, but also because manufacturing jobs are often cited as “good jobs:” they pay well, provide good benefits, and manufacturing workers are less likely to quit than workers in other private sector industries.4 In fact, our analysis finds evidence in support of these claims.

Locating American Manufacturing: Trends in the Geography of Production - Brookings Institution: With the slight resurgence of U.S. manufacturing in the recent years—termed a potential “manufacturing moment” by some—it is important to consider not just the future of manufacturing in America but also its geography. Geographic considerations are, in fact, central to whether the slow growth of U.S. manufacturing jobs during the last two years signals a renaissance of American manufacturing or merely a temporary respite from long-term decline. General Electric CEO Jeffrey Immelt recently stated: "When we are deciding where to manufacture, we ask, ‘Will our people and technology in the U.S. provide us with a competitive advantage?’ Increasingly, the answer is yes.  When firms locate near each other, they gain a number of advantages. The geographic clustering of companies in the same industry or related industries—along with the educational, R&D, business, and labor institutions that support them—promotes high wages and innovation. Such clustering gives manufacturers access to specialized workers, suppliers, and customers and makes it easier for them to share ideas that can improve their performance. Manufacturers can also benefit from their location in a geographic area that has a diverse set of industries, including those not associated solely with manufacturing. In such locations, they can learn from the practices of non-manufacturing industries and gain easier access to such services as engineering, finance, legal services, and management consulting.

Where Manufacturing Is Gaining - After hemorrhaging jobs during the recession – and over the last decade, for that matter – manufacturing has been one of the few bright spots of the recovery, restoring 489,000 jobs since the beginning of 2010. But there have been some significant geographic distinctions in that recovery, as well as some toppled assumptions, one of which is that factory jobs have steadily shifted from the Midwest to the South. A new report from the Brookings Metropolitan Policy Program shows that since the beginning of 2010, manufacturing employment has increased by 5.2 percent in the Midwest, while it has gone up by only 2.2 percent in the South. The study also analyzes which metropolitan areas have the highest concentration of manufacturing workers, both as a proportion of jobs in the area and as a multiple of the proportion of manufacturing jobs to all jobs nationally. Of the 20 metropolitan areas that rank as “most manufacturing-specialized,” half are in the Midwest. Southern regions remain relatively strong in manufacturing, with eight metropolitan areas on that list. But the usual narrative of an inexorably declining Rust Belt seems not quite accurate – or at least for now.

Subsidies Aid Rebirth in U.S. Manufacturing - Brian O’Shaughnessy comes across as a staunch advocate of manufacturing in America. But he invariably adds: “There is nothing made in the United States that has to be made here — that can’t be shipped in from some other country.”  As chairman and principal owner of Revere Copper Products, Mr. O’Shaughnessy runs one of America’s oldest manufacturing companies, started by Paul Revere himself, a fact that exerts considerable pressure. As he put it: “What kind of a message are you sending to the people of the country if you abandon America?”  But spend a day with him, and a more complex picture emerges. He wonders sometimes about the less patriotic alternative of relocating production to Asia or closing the factory entirely on the ground that Revere’s profit margin here is too thin — less than $1 million on $450 million in annual revenue.  “I could sell the inventory and the machinery, which could be moved elsewhere in the world, and pay off our debts and walk away with $35 million to $40 million.”  What staves off those alternatives are labor concessions and a substantial government subsidy, something he and others in the United States say is increasingly important to fuel a nascent recovery in manufacturing.  The subsidy comes from New York State, which supplies, at cost, the electric power that Revere uses to produce copper sheets and slabs. Mr. O’Shaughnessy says it accounts for half of Revere’s profit.

The case for industrial policy (a paper and a rant) - A new paper, where some very good economists look at data from Chinese medium and large firms: …sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly. …if subsidies are allocated to competitive sectors… and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant. “You can’t pick winners” is the knee-jerk retort to the mention of anything that even rhymes with industrial policy. I would call it the triumph of ideology over evidence, except that even “ideology” feels like a generous term. Lazy thinking might be a more accurate description. Some have given the question a great deal of thought, but most have not. I’m not suggesting that ... governments can pick winners (probably they can’t). Nor am I forgetting that industrial policy is easily politicized and distorted (as surely it is). I’ll make two claims. The first: industrialization is the most important and essential process of development. ... The problem? We have little to no idea how to do that. And many of the tools in the current policy tool box are deeply flawed. This brings us to the second part of my argument, The fact that we know so little, and the tools are so poor, suggests (to me) that the marginal gains from more research are huge. there is no more important place for scholars to spend their time.

NFIB: Small Business Optimism Index increases in April - From the National Federation of Independent Business (NFIB): Small-Business Optimism Gains Two Points in AprilAfter taking a dip in March, the Index of Small Business Optimism gained 2 points in April, settling at 94.5. The reading is the highest since December 2007, however, April’s gain only returns the Index to its February 2011 level, indicating that in a year, the net gain has been zero. While March did not post strong job creation numbers, labor market indicators did improve, suggesting better job growth in the next few months. ... “While the Index remains historically weak, there was good news in the details of April’s report. Job creation plans, job openings and capital spending plans all increased. The percent of owners reporting positive sales trends quarter on quarter reached the highest level seen since April 2006. This graph shows the small business optimism index since 1986. The index increased to 94.5 in April from 92.5 in March. This ties February 2011 as the highest level since December 2007. Another positive sign is that the "single most important problem" was not "poor sales" in April - for the first time in years. In the best of times, small business owners complain about taxes and regulations, and that is starting to happen again

Small Business Owners More Optimistic in April — Small business owners recovered some of their optimism during April, but they’re still wary about the economy. The National Federation of Independent Business said Tuesday that its index of small business optimism rose 2 points last month, bringing it to 94.5. That makes up for the 2 points lost in March, but only returns the index to its February 2011 level. William Dunkelberg, the NFIB’s chief economist, still classifies the reading as weak. Dunkelberg said owners’ plans to hire rose during April. And he said a greater number of small companies reported higher sales and profits. But he noted that news about the U.S. economy is bad — the government reported that gross domestic product growth slowed to an annual rate of 2.2 percent in the first quarter, from 3 percent in the final three months of 2011. And Europe’s debt crisis still shows no signs of easing. Also, inflation could become more of a worry because more NFIB members say they’ve raised their prices in the last three months.

Purchasing Managers See More Revenue, Hiring in 2012 - Purchasing managers in both the factory and nonmanufacturing sectors expect revenues and jobs to increase for rest of 2012, according to surveys released Tuesday by the Institute for Supply Management. “Expectations for the remainder of 2012 continue to be positive in both the manufacturing and nonmanufacturing sectors,” the ISM semiannual survey said. Recent data have shown an economy running out of steam. In particular, job growth ratcheted down sharply in March and April. The two ISM surveys suggest the slowdown is temporary and business activity will pick up in coming months. Purchasers project revenues to continue to increase this year, but expectations were mixed when compared to 2011 growth. Manufacturing purchasers expect revenues to rise 4.5%, less than the 7.0% gain reported for all of 2011, says the ISM. Nonmanufacturing purchasers say their revenues will increase 4.8%, much faster than the 1.5% in 2011. For manufacturing, higher revenues will lead to better hiring and investment. Factory employment is projected to increase 1.4% for the rest of the year, on top of good hiring in the first four months of 2012. Manufacturers also plan to spend more on equipment. Capital expenditures are expected to increase 6.2% this year, up sharply from the 1.9% planned increase reported in the December survey.

Labor Indicators Point to Moderate Hiring - A compilation of U.S. labor indicators in April showed only moderate gains in hiring, according to a report released Monday by the Conference Board. The board said that its April employment trends index increased 0.8% to 108.04 from a revised 107.18 in March, first reported as 107.28. The April index is up 7.1% from a year ago. “The growth in the Employment Trends Index in recent months is signaling moderate improvements in employment,” said Gad Levanon, director of macroeconomic research at the board. Last Friday, the Labor Department reported U.S. nonfarm payrolls grew by only 115,000 last month. Levanon said that disappointing gain is “probably below the current trend and should pick up to about 150,000-175,000 jobs a month through the summer.”

Postal Service: Will Keep Rural Post Offices Open - The financially struggling U.S. Postal Service sought Wednesday to tamp down concern over wide-scale cuts, revealing it will seek to keep thousands of rural post offices open with shorter hours. At a news briefing, Postmaster General Patrick Donahoe said the mail agency was backing off its plan to close up to 3,700 low-revenue post offices sometime after May 15. Citing strong community opposition, Donahoe said the agency will now whittle down full-time staff but maintain a part-time post office presence in rural areas, with access to retail lobbies and post office boxes. Under the emerging strategy, no post office would be closed. But more than 13,000 rural mail facilities could see reduced operations of between two and six hours. The Postal Service intends to seek regulatory approval and get community input, a process that could take several months. The new strategy would then be implemented over two years and completed in September 2014, saving an estimated half billion dollars annually. “We’ve listened to our customers in rural America and we’ve heard them loud and clear — they want to keep their post office open,” Donahoe said. “We believe today’s announcement will serve our customers’ needs and allow us to achieve real savings to help the Postal Service return to long-term financial stability.”

Postal Service Holds Back On Closings — The United States Postal Service said Wednesday that it would keep hundreds of small post offices open by reducing business hours or offering stamps and packaging in grocery stores, whittling down its ambitious plan to streamline its services and balance its books by closing thousands of post offices.  Giving Congress more time to pass legislation to overhaul the financially struggling agency, the service held back from the wholesale closings of mostly rural post offices that it had proposed last year. The Postal Service’s hope is that Congress, given more time, will come up with a plan to overhaul the agency. But Wednesday’s action signals that the Postal Service needs to move forward with staffing cuts.  Patrick R. Donahoe, the postmaster general, said the latest plan would take two years to put into effect and would save about $500 million a year. That would not be nearly enough to fill its multibillion-dollar shortfalls, but it addresses objections from dozens of small communities where post offices were targeted for closing. “The plan today will ensure rural communities will be served by the Postal Service,” Mr. Donahoe said. “It balances reducing cost with the need to serve rural America.”

April Jobs Report Shows Growth Slowing, With 115,000 New Positions - The nation’s employers are creating jobs at less than half the pace they were when this year began, according to a government report released Friday.  The addition of just 115,000 jobs in April was disappointing, but economists urged no panic just yet. Maybe the unusually warm winter had encouraged companies to do their spring hiring a little early, they offered in one of several theories. Maybe high gas prices, now falling, temporarily discouraged job growth. Better yet, maybe this latest report understates how many jobs were added, since the initial estimates for earlier months have been revised upward. But no matter which hopeful explanation you choose, America’s 13.7 million jobless workers still look pretty discouraged. Many economists had been predicting that strong job growth early this year would persuade many people sitting on the sidelines to re-enter the job market. Instead, for reasons that are unclear, workers continue to peel off the labor force. An estimated 342,000 Americans dropped out of the job market altogether in April. That is why the unemployment rate fell to 8.1 percent from 8.2 percent — not because more workers found jobs, but because so many people left the work force. It’s just one month of data, and the survey numbers are not precise. Still, the figures fit into a longer-term trend.

Jobs Fade in April 2012 - After stalling out in March 2012, the employment situation for April 2012 in the U.S. faded across the board.  We see that for all the age groups we routinely cover. The number of teens (Age 16-19) recorded as having jobs fell by 14,000 from the level recorded in March 2012 to 4,321,000 in April 2012. Likewise, young adults between the ages of 20 and 24 saw their numbers fall by 42,000 to 13,329,000 in April 2012, while those Age 25 or older saw their numbers in the U.S. civilian workforce decline for the first time since October 2011, falling by 113,000 to 124,215,000.  Compared to November 2007, when the total employment level in the United States peaked just before the peak in economic expansion marking the beginning of recession in the following month, there are 4,730,000 fewer individuals being counted with jobs as of April 2012. There were 141,865,000 people counted as being employed in April 2012.  Of the decline in jobs since November 2007, just over 1 out of 3 of the jobs that have disappeared from the U.S. economy in the time since may be accounted for by individuals between the ages of 16 and 19. Today, these individuals represent 3.0% of the entire U.S. workforce, down from a percentage share of 4.0% in November 2007.  Another 1 out of 7 of the decline in jobs since November 2007 may be accounted for by young adults (Age 20-24). These individuals represent 9.4% of the total U.S. workforce today, which is almost identical to their percentage share of 9.5% in November 2007.

Stop the Obamapologists Before They Kill the Data - Dean Baker - Peter Coy is ordinarily a pretty good reporter, but he really misses the boat with this chart, with the comment, "this jobs recovery is weak, all right, but right in line with the past two recoveries." When you evaluate the strength of a recovery, you also have to consider the depth of the downturn that preceded it. In the 1990-91 recession we lost 1.5 million jobs, in the 2001 recession we lost 1.6 million jobs. In the 2007-2009 recession we lost 7.5 million jobs. The job loss in the downturn provides the room for job growth in the upturn. That is why the economy was able to generate 10.4 million jobs from June of 1975 to June of 1978 and 9.8 million jobs from December of 1982 to December of 1985. (Remember the labor force was less than 2/3rds the size of the current labor force.) In both cases, severe recessions left enormous room for job growth in the expansion. This is also true with the current downturn. Several Obama supporters have picked up Coy's graph and tried to make a political statement with it. They have. They don't believe that Obama can make a serious economic case to support his re-election.

Mitt Romney Promises to Create Eleventeen Million Jobs - Krugman - OK, not exactly. But he did say that we should be creating 500,000 jobs a month — which almost never happens — and that we should have 4 percent unemployment, which is way below almost anyone’s estimate of the lowest rate we can have without accelerating inflation. But he understands the economy, right? Incidentally, since Romney is proposing a complete return to Bush economic policies, it might be interesting to note the average rate of job creation during Bush’s first 7 years in the White House — that is, his record even if you ignore the catastrophe at the end. And that average monthly rate, from the BLS, was … drum roll … 66,000.

Why Unemployment Remains So High —Posner - The current depression (calling it a mere “recession” that ended in June 2009 when GDP stopped falling strikes me as ridiculous) began almost four years ago. That employment has not recovered is not surprising. When the financial crisis struck in September 2008 the personal savings rate of Americans was only 1 percent, the reason being that the housing bubble had inflated the apparent savings of homeowners by increasing their home equity relative to their debt. The rapid plunge in the market value of people’s personal savings caused them to reduce their consumption spending in an effort to rebuild their savings. At the same time, the uncertainty of the economic environment and the weakness of bank balance sheets caused banks to restrict lending (other than to the federal government and a handful of other reliable borrowers), so credit for consumer purchases became harder to get, and this further reduced consumption spending. The Federal Reserve flooded the banks with money, but the banks hoarded the money. With credit scarce and consumer spending down, companies reduced production and so laid off workers, which further reduced consumer spending, both directly by reducing incomes and indirectly by increasing uncertainty about the economic future. When the downward spiral stopped, and consumer spending revived, companies were reluctant to hire back the laid-off workers because of continued uncertainty about economic conditions arising in part from the deepending economic crisis in Europe and slowing economic growth in countries like China, India, and Brazil.

Why has the Recovery in Employment in the US been so Slow? - Becker - The jobs report from The Bureau of Labor Statistics this past Friday is not good reading. The economy added about 115,000 workers, the slowest increase in 6 months. To make matters worse, over 40% of the unemployed have remained out of work for at least six months. The unemployment rate did drop a notch, but this was because many discouraged workers left the labor force. In fact, the recovery is the slowest in the post World War II period. No single factor explains this slowness, but a combination of several explains most of the slow recovery. Recoveries after major financial crises are notoriously slow. This is well documented in the book This Time is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff. The authors study many financial crises, and the recoveries from these crises. Recoveries are slow partly because the dire nature of a financial situation is not recognized quickly, and policies that try to end a crisis are usually implemented slowly. While slow recoveries from major financial crises are common, employment would have increased considerably more rapidly, and unemployment would have fallen much faster, were it not for several factors special to this recovery.

Fed’s Lacker: Skills Mismatch Part of Unemployment Problem - The long-run U.S. unemployment rate may end up higher than current estimates because of the time it takes workers to find new skills and fill available jobs, a Federal Reserve official said Tuesday. “People talk about the natural rate of unemployment–if part of the unemployment is people finding skills and moving to other jobs then the natural rate is higher than you think it might be,” Federal Reserve Bank of Richmond President Jeffrey Lacker told reporters. Lacker’s comments followed a meeting with students and administrators at Guilford Technical Community College. “Doubling the demand for welders isn’t going to make it any easier for them to learn welding,” Lacker said. “To me it’s powerful evidence about the time it takes to resolve the mismatch problems.” The natural unemployment rate is the rate for a healthy economy without undue inflation. The Fed last month projected longer-term unemployment in the U.S. between 5.2% and 6%. The rate last month was 8.1% Earlier Tuesday, the Labor Department said employers advertised 3.74 million job openings in March, the most since July 2008. Still, an average of 3.4 people are competing for each open job. Lacker said broad shifts in the economy are making it more difficult to fill existing openings.

Fed’s Kocherlakota: Economy Closer to Max Employment Than Data Suggest - A top Federal Reserve official said Thursday he is paying close attention to inflation and that recent elevated readings signal that the economy is closer to maximum employment than labor-market reports alone might suggest. Speaking before the Economic Club of Minnesota about the central bank’s latest transparency initiatives, Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said the term “maximum employment” is particularly difficult to gauge right now as the economy has evolved since the financial crisis. But using the behavior in inflation as a signal, the “distinctly higher” rise in prices in the past two years suggests perhaps the unemployment rate doesn’t have too much more room to fall. “I see these changes as a signal that our country’s current labor market performance is much closer to ‘maximum employment’ than the post-World War II U.S. data alone would suggest,” Kocherlakota said. “As I’ve argued in the past, appropriate policy should be responsive to such signals.”

The Structural Signature - Krugman - How do you assess stories about what’s going on in the economy? You can go with your prejudices, of course. You can turn to detailed econometric evidence — although my experience is that essentially nobody, including the econometricians, is convinced by that sort of thing. But the way I usually try to do it is to ask whether the available facts fit the “signature” the story seems to imply — that is, do we see the general pattern that the argument would suggest we’d see? Now consider the argument that our problems are mainly structural. The way this story is usually told is that we had too many workers in the wrong industries, that we have to expect a depressed level of overall employment as workers are moved out of these “bloated” sectors. OK, so what should be the signature of that story? Surely it is that job losses should be concentrated in the bloated sectors, that employment should if anything be rising elsewhere — and wages should be rising in the unbloated sectors more rapidly than in the bloated ones. So, let’s take a quick look at BLS data on employment and wages. Here’s what we get on a first pass: Kind of looks like job losses everywhere, doesn’t it? And on wages, Who’s bidding for workers?

Structural Unemployment Talk Is Nonsense - Remember that unemployment problem we used to have? The one that politicians, pundits and policymakers used to talk about on a regular basis, debating how we might fix it? Well, forget about all that, because the problem is structural, meaning nothing can be done. So sayeth a loud slice of the econo-pundit class.Rather than traditional cyclical unemployment, which reflects a weakness in demand for goods and services and can be goosed with additional government spending, structural unemployment is impervious to traditional economic solutions. In what passes for the national conversation, the essential meaning of "structural unemployment" is that people with money need not bother fretting over those who are out of work and are struggling to pay their bills, because fate and globalization and forces larger than any institution have rendered so many jobs obsolete. No point making the wealthy pay more in taxes to support government spending, because this will not deliver jobs.  Structural unemployment is functionally a euphemism that allows its adherents to claim the imprimatur of professorial authority while condemning millions of people to long-term joblessness -- all this, without having to feel mean or heartless. People are out of work, but nothing can be done. What a pity! Please pass the paté.

Structural Flashbacks - Paul Krugman - A few notes, largely to myself, regarding the renewed push by conservatives to declare our problems “structural”, not solvable just by increasing demand.

1. That’s what Very Serious People said in the 1930s too. Then the approach of war finally delivered the stimulus we needed, and all those structural difficulties turned out to be imaginary.
2. Ireland was praised for its wonderful flexibility; it was a shining example of the art of the possible, declared George Osborne. Then, when things went wrong, it was told that it must fix its deep structural rigidities.
3. Anyone who says something like “If deficit spending were the route to prosperity, Greece would be in great shape” should be immediately considered not worth listening to. People in my camp have repeated until we’re blue in the face that the case for fiscal expansion is very specific to circumstance — it’s desirable when you’re in a liquidity trap, and only when you’re in a liquidity trap. I know that some people like to project their own crudity onto others, but what they’re actually demonstrating is their own ignorance.
4. Anything along the lines of “we need long-run solutions, not short-run fixes” may sound sophisticated, but it’s actually just the opposite.

Assessing Yet Another Round of the Structural Unemployment Arguments - David Brooks has the 2012 version of the structural unemployment argument in his editorial today, "The Structural Revolution." Here's rooting for this one, as the previous arguments haven't held up all that well.The 2010 version of the argument had to do with an increase in JOLTS "job opening" data, data that turned out to be incorrectly estimated by the BLS (as we learned in 2011). The 2011 version focused either on the idea that the unemployed has bifuricated into a normal unemployment market and a long-term, zero-marginal productivity market (it hadn't) or that the "regulatory uncertainty" of the Obama administration was holding back the economy (which, as Larry Mishel found, wasn't backed by the data). I want to address three specific points in Brooks' essay which I think are wrong in a very useful way. First, Brooks argues that "Running up huge deficits without fixing the underlying structure will not restore growth." The argument here is that a larger deficit will not help with short-term growth. I'll outsource this to Josh Bivens, addressing a similar argument from Adam Davidson:This is the reverse of the truth – there is wide agreement that debt-financed fiscal support in a depressed economy will lower unemployment. Now, it’s true that there are holdouts from this position. And others who think the benefits of lower unemployment are swamped by the downsides of higher public debt (they’re wrong, by the way). But, the agreement is much more widespread – ask literally any economic forecaster, in the public or private sector, that a casual reader of the Financial Times has heard of if, say, the Recovery Act boosted economic growth. They will all tell you “yes.”

Occupational Hazards - Paul Krugman -- More on the structural unemployment thing. As Mike Konczal points out, there’s something clearly obsessive about the desire to tell a structural story. It’s not just that people keep coming up with new arguments after each successive argument is shot down by the data; it’s the fact that it’s the same people who keep coming up with new arguments, strongly suggesting that they really want to believe it’s structural, and won’t take no for an answer. Anyway, some readers responded to this post by asking what it looks like if you consider occupations rather than industries . Mike has one version: Before I saw his post, I did a slightly different version, looking at the percentage change in unemployment rates from 2007-2010 by a more detailed list of occupations; loooong chart after the jump: Source. So, which are the occupations in which unemployment has fallen, the skills in high demand? There aren’t any. This looks like a general fall in demand.

Cyclicalists should start talking about structural issues too - Krugman has convinced a huge chunk of the populace that there is something seriously wrong with macroeconomics. That is good. But he seems not to have made much headway in garnering intellectual support for more active countercyclical policy. As an illustration of this, consider the recent push for "structural" explanations of our current high unemployment rate. Raghuram Rajan, David Brooks, and Tyler Cowen are all confidently asserting that our problems are structural, not cyclical. This point of view is seconded by Greg Mankiw and John Cochrane and echoes recent comments by Jim Bullard. Now, it is true that these "structuralists" (to use Brooks' term) are in some sense just the usual suspects. For these people to support, say, quantitative easing would be to go against their political instincts. But in 2009 you did not hear these people arguing nearly as strongly or loudly that everything was structural, because in 2009 this point of view was far less credible. The fact that no one now feels ashamed of making structuralist claims shows that the winds of public opinion are starting to shift against Krugman and the "cyclicalists". In response, Krugman has rebutted the structuralist argument with data (see here, here, and here). He is joined by Scott Sumner, Karl Smith, Mike Konczal, Ezra Klein, and other cyclicalists. On the merits, their case is very strong. It is much stronger than the case of the structuralists, which seems mostly based on assertion and repetition, and includes a fair bit of confusion. If economic policy arguments were settled on the basis of logic, the cyclicalists would be winning.

Easy Useless Economics, by Paul Krugman -A few days ago, I read an authoritative-sounding paper in The American Economic Review, one of the leading journals in the field, arguing at length that the nation’s high unemployment rate had deep structural roots and wasn’t amenable to any quick solution. The author’s diagnosis was that the U.S. economy just wasn’t flexible enough to cope with rapid technological change. The paper was especially critical of programs like unemployment insurance, which it argued actually hurt workers because they reduced the incentive to adjust. O.K., there’s something I didn’t tell you: The paper in question was published in June 1939. Just a few months later, World War II broke out, and the United States began a large military buildup, finally providing fiscal stimulus commensurate with the depth of the slump. And, in the two years after that article was published, nonfarm employment rose 20 percent — the equivalent of creating 26 million jobs today. So now we’re in another depression, not as bad as the last one, but bad enough. And, once again, authoritative-sounding figures insist that our problems are “structural,” that they can’t be fixed quickly. So what’s with the obsessive push to declare our problems “structural” ... no matter how much contrary evidence is presented[?]The answer, I’d suggest, lies in the way claims that our problems are deep and structural offer an excuse for not acting ... to alleviate the plight of the unemployed.

Unemployment Rate Without Government Cuts: 7.1% - One reason the unemployment rate may have remained persistently high: The sharp cuts in state and local government spending in the wake of the 2008 financial crisis, and the layoffs those cuts wrought. The Labor Department’s establishment survey of employers — the jobs count that it bases its payroll figures on — shows that the government has been steadily shedding workers since the crisis struck, with 586,000 fewer jobs than in December 2008. Friday’s employment report showed the cuts continued in April, with 15,000 government jobs lost. But the survey of households that the unemployment rate is based on suggests the government job cuts have been much, much worse. In April the household survey showed that that there were 442,000 fewer people working in government than in March. The household survey has a much smaller sample size than the establishment survey, and so is prone to volatility, but the magnitude of the drop is striking: It marks the largest decline on both an absolute and a percentage basis on record going back to 1948. Moreover, the household survey has consistently showed bigger drops in government employment than the establishment survey has. The unemployment rate would be far lower if it hadn’t been for those cuts: If there were as many people working in government as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%.

In Defense of U3 - In discussing declining labor force participation Mike Konczal writes At the other end of the spectrum are those who would think that the unemployment rate is capturing all we need to know.  If someone really wants a job, they would look for one, and there’s nothing interesting policy-wise in this information.  At 8.1% unemployment there’s still plenty of slack in the labor market. (There’s an unemployment crisis at 8.1% unemployment!)  The answer of the "true" unemployment rate should be somewhere in the middle. I am certainly one if not the primary member of “those who think the unemployment rate is capturing all we need to know” As will come as a shock to no one I have deep philosophical as well as practical reasons for pushing this stance. The short-short on the philosophical is that there is no “true” unemployment rate. There are data collection and analysis procedures. Indeed, this extends to all of our interaction with “the world.”

The incredible shrinking labor force - If the same percentage of adults were in the workforce today as when Barack Obama took office, the unemployment rate would be 11.1 percent. If the percentage was where it was when George W. Bush took office, the unemployment rate would be 13.1 percent. That helps explain a seeming contradiction in the unemployment numbers — the rate keeps dropping even though job creation has been soft. In April, the U.S. economy added a mere 115,000 jobs, according to Bureau of Labor Statistics data released Friday. In a normal month, that would not even be enough to keep up with new entrants into the labor market. But in this economy, it was enough to drive unemployment from 8.2 percent down to 8.1 percent, the lowest point since January 2009.The explanation is a little-watched measure known as the “labor force participation rate.” That tracks the number of working-age Americans who are holding a job or looking for one. Between March and April, it dropped by 342,000. But because the official unemployment rate counts only those workers who are actively seeking work, that actually made the unemployment rate go down.

Bringing back those missing millions - FRIDAY'S jobs report touched off a round of hand-wringing over the possibility of permanent damage to America's labour force as a result of years of labour-market weakness. Labour-force participation fell in April; there has been virtually no recovery in the employment-population ratio over the past three years, despite steady (though disappointingly slow) employment growth. My colleague captured the nature of the concern in a Friday post: While it has fluctuated considerably, the labour force is only slightly larger now than in December, 2007, when the recession began. Yet in January, 2008, the Congressional Budget Office reckoned it would be some 5m larger by now, or 159.5m (see chart). What happened to those 5m people? Why aren't they showing up as unemployed? Is it early retirement? Disability? Returning to school? Illegal immigrants returning home (or failing to enter the country in the first place)? Whichever it is, it is a troubling sign that our economic potential could be a lot lower than we thought just a few years ago. And that's the real bad news from today’s report. I'm going to disagree. The real bad news in Friday's jobs report is that the conversation has once again focused on the possibility of a decline in potential. The real danger is that policymakers will conclude that this is right and give up on countercyclical policy as a result, when in fact most of the seemingly structural deterioration in the labour market is entirely fixable.

Why Aren’t There More Jobs? - Friday’s jobs report was a disappointment even though it showed unemployment falling to the lowest level since shortly after President Obama took office. The trouble is that job creation is abnormally sluggish and nowhere near enough to keep bringing down the unemployment rate. This is hardly news, of course. For months economists have been talking about a jobless recovery. And they point to certain factors as having contributed to the problem — from the severity of the recent recession to the so-called skills gap, a shortage of workers with the training needed to fill the jobs that are available. These factors do help explain why job losses were so bad in the first place and why the unemployment rate reached 10% in 2009, the highest level since 1983. But they don’t explain why job creation continues to be so weak. Employment usually does lag a little bit behind the rebound in GDP that occurs after every recession. (During bad times, companies operate below capacity and, as a result, don’t have to start hiring again until growth has gone on long enough to leave them short-staffed.) But that doesn’t explain the surprising — even shocking — fact that today’s rate of new job creation remains low almost three years into the recovery.

Occupational Licensing and Low-Income Jobs - Morris Kleiner points out that nearly one-third of the U.S. labor force works in jobs where some form of government license is a requirement. Some of the largest occupations that require licenses include teachers, nurses, engineers, accountants, and lawyers. Occupational licensing poses a potential tradeoff: on one side, requiring licenses offers a promise of a reliably high quality of service; on the other side, requiring licenses is a barrier to entry that tends to reduce the quantity of jobs in that occupation but increase the wage. Kleiner and others investigate this subject by looking at differences in licensing requirements for a certain occupation across states, and searching for evidence of wage and quality differences. A typical finding is that the wage differences are readily perceptible, but the quality differences are not. Licensing is distinguishable from certification: with certification, you are free to hire someone who doesn't possess the certification if you like, but with licensing, hiring someone without the license is illegal. As an example, travel agents and mechanics are often certified, but they are typically not licensed.

BLS: Job Openings increased in March - From the BLS: Job Openings and Labor Turnover Summary - There were 3.7 million job openings on the last business day of March, little changed from February but up significantly from a year earlier, the U.S. Bureau of Labor Statistics reported today. ... The number of total nonfarm job openings has increased by 1.3 million since the end of the recession in June 2009. ... The quits rate can serve as a measure of workers’ willingness or ability to change jobs. In March, the quits rate was unchanged for total nonfarm, total private, and government. The number of quits was 2.1 million in March 2012, up from 1.8 million at the end of the recession in June 2009. The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings increased in March to 3.737 million, up from 3.565 million in February. The number of job openings (yellow) has generally been trending up, and openings are up about 17% year-over-year compared to March 2011. This is the highest level for job openings since July 2008.

U.S. Employers Posted 3.74 Million Jobs in March — U.S. companies in March posted the highest number of job openings in nearly four years, a sign that hiring could strengthen in the coming months after slowing this spring. The Labor Department said Tuesday that employers advertised 3.74 million job openings in March. That’s up from a revised 3.57 million in February. The March figure was the highest since July 2008, just before the financial crisis erupted that fall. The increase in job openings suggests that weaker hiring gains in March and April could be temporary. It usually takes one to three months for employers to fill openings. Even with the increase, roughly 12.7 million people were unemployed in March. That means an average of 3.4 people competed for each open job. While that’s far better than the nearly 7-to-1 ratio when the recession ended. In a healthy job market, the ratio is usually around 2 to 1.

Jobs and Churn - One of the things that can make interpreting the monthly job creation report difficult is that net job creation is influenced by creation, destruction initiated by employers and destruction initiated by employees. In March we had disappointing job net job creation number but total hires were near a cycle high and layoffs were near a cycle low. On the other quits, were surging. What is one supposed to make of this? By my lights the correct answer is – we don’t really know. On the one hand a surge in quits looks like a labor market where employees feel better about their prospects. On the other the fact that hires didn’t surge with quits may show us that employers are still reluctant uncertain about final demand.

Applications for Unemployment Benefits Dip by 1,000 — The number of people applying for U.S. unemployment benefits ticked down last week after dropping sharply the previous week, evidence hiring could pick up this month. Weekly applications dropped 1,000 to a seasonally adjusted 367,000 in the week ending May 5, the Labor Department said Thursday. The previous week’s figure was revised up slightly. The four-week average, a less volatile measure, fell by 5,250 to 379,000. It was the first decline since late March. Applications are a measure of the pace of layoffs. When they stay consistently below 375,000, it suggests job growth is strong enough to lower the unemployment rate.

Jobless Claims Fall (Just Barely) Last Week - There’s good news and bad news in today’s weekly update of initial jobless claims. The good news is that new filings for jobless benefits fell last week, albeit by a slim 1,000 to a seasonally adjusted 367,000. That’s also the bad news. A more convincing drop--ideally to new post-recession lows--is what's needed to boost confidence. Instead, we seem to be stuck in neutral, and so there's no resolution yet for the main question weighing on the economic outlook: Are the last two months of weak growth in private payrolls signs of deeper troubles for the U.S. economy?  It’s surely encouraging that claims have remained relatively low in recent weeks. The outlook for the labor market would be considerably darker if new filings for unemployment had jumped sharply in the wake of the March and April slowdown in jobs creation. Actually, it was easy to think that the economy’s goose had been cooked when new claims surged to nearly 400,000 last month. But the danger quickly passed and claims have since fallen back to near four-year lows.

Weekly Unemployment Claims: Sight Drop From an Upward Revision - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 367,000 new claims is a decrease of 1,000 from an upward revision of 3,000 for the previous week. The less volatile and closely watched four-week moving average came in at 379,000. Here is the official statement from the Department of Labor:  In the week ending May 5, the advance figure for seasonally adjusted initial claims was 367,000, a decrease of 1,000 from the previous week's revised figure of 368,000. The 4-week moving average was 379,000, a decrease of 5,250 from the previous week's revised average of 384,250.  The advance seasonally adjusted insured unemployment rate was 2.5 percent for the week ending April 28, a decrease of 0.1 percentage point from the prior week's unrevised rate of 2.6 percent.  The advance number for seasonally adjusted insured unemployment during the week ending April 28 was 3,229,000, a decrease of 61,000 from the preceding week's revised level of 3,290,000. The 4-week moving average was 3,290,000, a decrease of 10,500 from the preceding week's revised average of 3,300,500.  As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

Vital Signs: Easing Unemployment Claims - The number of Americans applying for unemployment benefits is falling. The four-week moving average of initial jobless claims declined by 5,250 to 379,000 last week. The drop indicates employers are slowing the pace of layoffs and that the labor market may be strengthening. A rise in claims last month stoked fears of a pending slowdown in economic growth.

Out of work but not unemployed – storing up the cost of future US unemployment - There are some worrying underlying trends for people out of work: 42.5% have been unemployed for over 26wks, and once people are out of work for over a year their chances of returning to the labour market are less than 10%. There is considerable data from earlier recessions showing the long-term scarring effect of such unemployment – people’s ability to earn is unlikely to ever recover. Furthermore the Labor Force Participation Rate (LFPR) actually fell between March and April by over 300,000 people – that’s 300,000 people fewer people working and spending their earnings. The unemployment rate fell despite this because it measures people actively seeking work, and significant numbers of people are leaving the US labour market with no immediate plans to attempt to return, they are becoming ‘inactive’. The Federal Bank of Chicago recently published a letter that explains the decline in the Labor Force Participation Rate. In this the authors make the case that just under half of the LFPR decline from a peak of 67.3% in the early 2000s to 64% in December 2011 was for reasons of demography – primarily baby boomers nearing retirement age. Indeed Betsey Stevenson, Economics professor at Princeton and former Chief Economist at the US Department of Labor, tweeted a similar explanation:

In the Words of Christina Romer: "We Are So Scr*&@d": Labor-Force Participation and Structural Unemployment - My bottom line: Since 2007:

  • a likely 0.2%-0.6% point decline in labor-force participation from demographic changes.
  • a likely 1.5% point decline in labor-force participation as a cyclical and reversible consequence of cyclically low employment
  • a likely 0.7%-1.1% point decline in labor-force participation as the length of the economy's depression transforms temporary cyclical unemployment into permanent structural unemployment
  • and this last component is highly likely to grow in the future.

As time passes and the baby-boom generation ages and retires, the "natural" labor force participation rate in the American economy declines. This rate of decline is almost surely an overestimate of how demographic factors are affecting labor-force participation: the high-pressure economy of the late-1990s boom almost surely pulled more people into the labor force and had peak participation higher than the economy's natural rate. The 2007 peak is probably a more reliable estimate of "natural" labor-force participation. Moreover, "natural" labor-force participation depends on the wealth of those near retirement: the poorer they are, the greater the incentives for them to keep working. The demographic decline in natural labor-force participation has surely been partly or fully offset by the collapse of the value in home equity.

The Declining Participation Rate - There has been some discussion about the causes of the decline in the participation rate. Here is a post from Catherine Rampell today at the NY Times economix today: Baby Boomers and the Shrinking Work Force As America ages, its overall labor force participation rate will fall because older people are less likely to work. But even excluding older Americans, labor force participation rates have still fallen sharply over the last few decades, and especially in the last five years. This is an excuse to update some graphs to look at the long term trends. (update: see Brad Plumer's The incredible shrinking labor force ) The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out this year - the rate increased slightly in April to 74.3%. The participation rate for men has decreased from the high 90s a few decades ago, to 88.7% in April. There might be some "bounce back" for both men and women (some of the recent decline is probably cyclical), but the long term trend for men is down.There are other key trends. The next graph shows that participation rates for several key age groups.
• The participation rate for the '16 to 19' age group has been falling for some time (red). This was at 33.8% in April.
• The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical). This was at 40.3% in April.
• The participation rate for the '20 to 24' age group fell recently too (perhaps more people are focusing on eduction before joining the labor force). This appears to have stabilized - although it was down to 70.6% in April.

The third graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA). The participation rate is generally trending up for all older age groups.

Brad Plumer, meet Bill McBride - Plumer writes,while part of the story is clearly that the labor force is shrinking because the bad economy is driving workers out, another significant factor is that baby boomers are beginning to retire early -- a trend that has worrying implications for future growth. This squares with my intuition, which is that the decline in labor force participation has a large secular component, driven by the aging of the population. Unfortunately, this story runs into a little bit of difficulty when confronted by the facts. Thus, McBride wrote,The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical)....The participation rate is generally trending up for all older age groups. The '65 to 69' age group hit a new record high in March! Follow the link to his post, which tells the story in graphs.

A take on labor force participation and the unemployment rate - Atlanta Fed's macroblog - By now, if you've been paying attention to the coverage following the April employment report, you know the following:

•   The March to April decline in the unemployment rate from 8.2 percent to 8.1 percent was arithmetically driven by yet another decline in the labor force participation rate (LFPR).
•   The decline in the LFPR, now at its lowest level since the early 1980s, is itself being influenced by a confounding mix of demographic change and other behavioral changes that nobody seems to understand—a point emphasized by a gaggle of blogs and bloggers such as Brad DeLong, Carpe Diem, Conversable Economist, Free Exchange, and Rortybomb, to name a few.
With respect to the first observation, in a previous post my colleague Julie Hotchkiss described how to use our Jobs Calculator to get a ballpark sense of what the unemployment rate would have been had the LFPR not changed. If you follow those procedures and assume that the LFPR had stayed at the March level of 63.8 percent instead of falling to 63.6 percent, the unemployment rate would have risen to 8.4 percent instead of falling to 8.1 percent.
It is clear that interpreting this sort of counterfactual experiment depends critically on how you think about the decline in the LFPR. The aforementioned post at Rortybomb cites two Federal Reserve studies—from the Chicago Fed and the Kansas City Fed—that attempt to disentangle the change in the LFPR that can be explained by trends in the age and composition of the labor force. These changes are presumably permanent and have little to do with questions of whether the labor market is performing up to snuff. The following chart, which throws our own estimates into the mix, illustrates the evolution of the actual LFPR along with an estimate of the LFPR adjusted for demographic changes:

The Great Recession Is Pushing Women Out of the Workforce -Friday’s jobs report seemed to grab headlines for one aspect in particular: the labor force participation rate, i.e., the number of people either working or looking for a job, fell to 63.8 percent, the lowest level since 1981. That means more and more people are dropping out—retiring, turning to something else like grad school or just giving up on the prospect of a job altogether. But there seems to be a big difference in what’s driving men and women to leave the labor force.  According to the Bureau of Labor Statistics’s Current Population Survey, men’s participation rate—the ratio of men working or looking for work versus those who have dropped out—has fallen 3.1 percentage points since the beginning of the recession, and women’s has fallen 1.8 points. The dip looks more troubling for men than for women.  Yet interestingly, a recent paper from the Federal Reserve Bank of Kansas City  finds that the forces behind those numbers are very different. For men, 60 percent of the drop from 2007 to 2011 has been due to a decline in “trend participation,” meaning things that were on course to happen whether we were in an economic crisis or not. That’s because the rate for men “has been falling steadily for 60 years,” in part due to things like increased access to Social Security benefits and an aging population that make retirement look like a pretty good option. In contrast, the paper “attributes essentially all of [women’s] decline to the cyclical downturn of the labor market”—in other words, the fact that we hit the Great Recession.

Government Job Cuts Threaten Black Middle Class - The planned downsizing of the U.S. Postal Service, which wants to shed thousands of jobs and reduce hours at post offices, struck Baltimore native Eric Easter at his core. For him, it will mark the end of an era in which a post office job has meant stability and a path to a better life, as it did for him and his six siblings living in public housing in the 1960s. "You hate to see that disappear," Rivaled only by the manufacturing industry, postal and other government jobs built the modern black middle class. Blacks are 30 percent more likely than nonblacks to work in the public sector, according to the University of California, Berkeley's Center for Labor Research and Education. And roughly 21 percent of black workers are public employees, compared with 16.3 percent of nonblacks. But government jobs, long considered the most secure form of employment in America, have rapidly disappeared since the start of the last recession in December 2007 — particularly at the state and local levels, where officials have cut budgets to cope with declining tax revenues and the rising costs of unemployment benefits, employee pensions and Medicare.

Decline in Labor Force Participation Reflects Demographics, May Not Be as Bad as Reported - The civilian labor force participation rate (LFPR) is calculated by the BLS as the Civilian Labor Force (employed + unemployed) divided by the Civilian Noninstitutional Population (16 years and over), and not by the working age population as both the WSJ and IBD report.  This can be verified by the current BLS employment report, which calculates the April Labor Force Participation Rate of 63.6% as 154,365 (labor force) DIVIDED BY 242,784,000 (TOTAL POPULATION, not divided by working-age population). . One reason that the LFPR can be going down over time is that the civilian population can be increasing relative to the labor force, and that's exactly what has been happening to the Male Labor Force Participation Rate, since at least 1948 (see third chart above).  From a post-war high of 87.4% in 1949, the male LFPR has been consistently declining and reached a low of 70% in April.  Perhaps the decline accelerated in recent years, and the graph would indicate that's the case, but the decline in male LFPR is part of long-term, secular demographic trend that has been going on since the 1940s, and has been declining even during all economic expansions since WWII. Reason? Increasing life expectancy over time will lead to increases in the adult population relative to men in the labor force.  

Labor force nonparticipants: So what are they doing? -  Atlanta Fed's macroblog -- As Dave Altig, Atlanta Fed research director, pointed out earlier this week in this blog post, there is a great deal of interest these days in the labor force participation rate—particularly its level and the direction it's going. The question that seems to be on everyone's mind is how many of the nonparticipants in the labor force can we expect to return to the market. The answer to this question has immediate implications for the unemployment rate (especially if all these nonparticipants were to return to unemployment rolls), and longer-term implications for economic growth—our economy needs workers to fuel production. . But all of this discussion begs the question that my colleague, Melinda Pitts, and I have been investigating: What are these labor force nonparticipants doing? Perhaps an answer to that question will help us get a better handle on which nonparticipants are likely to return to the labor force in the near future. The Current Population Survey (CPS), administered by the U.S. Bureau of Labor Statistics (BLS), asks labor force nonparticipants about their reason for absence (details of the CPS questionnaire are available from the NBER). The reason given by nonparticipants that gets most of the attention is "discouraged over job prospects." In April 2012, these people accounted for only 1.1 percent of all nonparticipants (41 percent of the marginally attached—those who want a job, are available to work, and searched in the previous year). The vast majority of nonparticipants are absent because of retirement, disability, going to school, caring for household members, or other reasons.

Depressing graph of the day: The long-term unemployed - The Pew Fiscal Analysis Initiative has released an addendum to its 2010 report A Year or More: The High Cost of Long-Term Unemployment, and the update isn’t pretty. Using data from the Bureau of Labor Statistics’ Current Population Survey, Pew’s addendum finds that 29.5 percent of unemployed Americans in the first quarter of 2012 have been jobless for a year or more. That means 3.9 million working-age Americans haven’t been able to find a job in 12-plus months. In 2008, during the first quarter of the Great Recession, 9.5 percent of the unemployed had been jobless for at least a year. While this percentage of the long-term unemployed peaked at 31.8 percent in the third quarter of 2011, it’s still very high and remains more than three times greater than at this point four years ago. Note also that BLS defines long-term unemployment as someone who has been unemployed for more than half a year (27 weeks or more). By this measure, 41.3 percent of the jobless still qualify as long-term unemployed. Some other findings from the Pew analysis:

  • Age: Older workers are less likely to lose their jobs, but much more likely to be jobless for a year or more once they do (see Figure 3 in the addendum).
  • Education: Workers with higher levels of education are less likely to lose their jobs, but they’re no better off once they do as long-term joblessness is fairly even across all education levels (see Figure 5).
  • Industry: No industry or occupation has gone unscathed due to long-term unemployment (see Table 3).

Continued high levels of long-term unemployment have a damaging impact on the economic situations of both individuals and families, and more broadly, on the economy as a whole. As EPI has documented before, the outcome of such long-term joblessness is “scarring,” which carries severe and long-lasting consequences for our economy and society.

Who are the long-term unemployed? - Right now, nearly 30 percent of all unemployed Americans have been out of work for more than a year. All told, that’s 3.9 million workers, slightly more than the number of people who live in Oregon. But who are the long-term unemployed, exactly? The Pew Charitable Trust has a new report (pdf) out about these Americans, and some of the stats are surprising. For one, long-term unemployment is an equal risk for all unemployed workers, regardless of education level. Here’s a chart showing this:The chart’s a bit confusing, but basically, the red bar shows the likelihood of a worker in each education category becoming unemployed in the first place. The blue bar shows how likely it is that a worker stays unemployed for a year or more once he loses his job. And the chart shows something unexpected: A worker with a PhD is less likely to become unemployed in the first place than a worker who never finished high school. But, once those workers lose their jobs, they both have a roughly equal chance of being out of work for more than a year. In fact, an unemployed worker with a PhD is slightly more likely to have trouble finding work again.

For chronically unemployed, more bad news in Calif - A drop in the state's unemployment rate to 11 percent _ its lowest mark in three years _ is triggering the federal cutoff of emergency, long-term unemployment pay to at least 93,000 Californians. But in the state's agricultural heartland, where Callahan-Johnson runs the Merced County Community Action Agency, a jobless rate of more than 20 percent _ two and a half times the nationwide average of 8.2 percent _ makes it difficult for some to believe an economic recovery has begun. The cut-off is another blow to a region with the state's highest percentage of people living below the poverty line, and where the bursting of the housing bubble has led to the highest foreclosure rate in the country. The Golden State has lost its luster for many of the chronically unemployed, and even for those whose job it is to provide anti-poverty services to them. With just two weeks' notice, those 93,000 people will join 670,000 other unemployed Californians whose benefits, averaging $292 a week, already have run out.

The Recovery Squeezes the Middle Class - Ninety-five percent of the net job losses during the recession were in middle-skill occupations such as office workers, bank tellers, and machine operators, according to research by economists Nir Jaimovich of Duke University and Henry Siu of the University of British Columbia. That’s what we all assume happens in recessions: The middle class is hit hardest, then eventually climbs back. Only, that comeback isn’t happening. Job growth since the end of the recession has been clustered in high-skill fields inaccessible to workers without advanced degrees or in low-paying industries, the economists found. In March the U.S. had 2 million more managers and professionals working than five years earlier. Lower-paying service-sector jobs were up 1.5 million. It’s the middle-income jobs that have been slow to return. Over the same period, there were 3.2 million fewer Americans working in sales and office jobs and 1.2 million fewer employed in transportation and production—a broad category that includes factory and assembly-line workers, printers, welders, tailors, and poultry and meat plant workers. Another worrisome measurement: Median annual household income in March was $2,900 lower after inflation than at the start of the recovery in June 2009, according to Sentier Research, an economic consulting firm.

Number of the Week: No Recovery for Single Moms - 15%:

The unemployment rate in 2011 for mothers who are unmarried, divorced or live apart from their spouses. Mother’s Day is a time for us to stop and appreciate the women who care for us and our children, but we also may want to take time to remember the more than two million moms struggling in our recession-battered labor market. In 2011, there were 2.3 million women with children under 18 years old who wanted a job but couldn’t find one, according to a recent report from the Labor Department. That put the unemployment rate for mothers at 9% last year, compared to 8.4% for all women. But the weakness was primarily concentrated among single moms. In 2010 for the first time, married mothers were more likely to be employed than single mothers. That trend became more pronounced in 2011. Last year, 63.4% of mothers living alone had a job, compared to 64.6% of married mothers. That was largely because single moms are having a much harder time finding employment. Their unemployment rate was 15% in 2011, compared to 6% for their married counterparts living with a spouse.

Why the Job Market Will Continue Shrinking - The fundamental dynamic of America's job market is simple: we need relatively few workers to provide the absolute essentials of life even as the cost-basis of the economy inexorably rises. In other words, there are fewer jobs even as the costs of maintaining a "middle class" life rise. Let's start by observing how all the financial data in the world does not necessarily describe the primary dynamics of an economy. There are a number of factors that cause this disconnect between the primary forces at work beneath the surface and the data. One is that economists tend to focus on situations with abundant, easy-to-interpret data. If you're only looking for roses, then you ignore everything that isn't a rose. So economists seek dynamics that can be easily explained by available data, and financial factors that they are paid to examine. Everything else is ignored, especially if the act of examining it casts a skeptical light on a self-serving Status Quo. One key reality that is rarely if ever discussed is that the number of workers needed to provide the bare essentials of life to the 313 million residents of America is modest. Let's stipulate that bare essentials include food, heat in winter, clean water, sewage and waste disposal, public health (innoculations against pandemics, etc.), public safety and enough energy to fuel these essentials. If life were suddenly reduced to these basics, and no energy were available for anything but these essentials, then how many full-time workers would be needed?

Baby Boomers and the Shrinking Work Force - Among the lowlights of the jobs report for April was the news that the share of adults who are either working or looking for work fell. For men, this measure — called the labor force participation rate — was at its lowest level since 1948, when the government first began keeping track. Yes, as America ages, its overall labor force participation rate will fall because older people are less likely to work. But even excluding older Americans, labor force participation rates have still fallen sharply over the last few decades, and especially in the last five years. This chart shows the share of Americans 25 to 54 years old who are involved in the labor force, either by working or actively looking for work: As you can see, this age group is also dropping out of the labor force. The participation rate fell after the 2001 recession, never recovered, and then started another slide that began in the financial crisis. This trend among prime-working-age Americans cannot be explained by baby boomers’ retiring. You may notice that the labor force participation rate had been climbing from the 1940s through about 1990. Women’s labor force participation rate continued rising through the late 1990s, dropped a couple of percentage points, and then more or less flat-lined. The main reason the labor force has been declining in the last couple of decades, then, is that men have been dropping out in droves. Here is a chart of labor force participation for workers 25 to 54, but showing men only:

Vital Signs: Unemployment Rate for College Grads - American adults who hold college degrees are finding it easier to get jobs. The unemployment rate for those 25 years old and over who have at least a bachelor’s degree dropped to 4% in April from 4.2% in the prior month and 4.5% in April 2011. That is roughly half the overall U.S. jobless rate, which declined to 8.1% last month from 8.2% in March.

STEM Across the “Gen(d)erations” - Last year, ESA issued a series of reports on science, technology, engineering, and mathematics (STEM) employment.  Newer data are now available and we updated some key results from these reports. Overall, the new data reaffirm the importance of STEM jobs to the U.S. economy (we are happy to share the details with anyone who is interested). We also extended the analysis in one of the previous reports, Women in STEM: A Gender Gap to Innovation, by examining how trends in STEM degrees and jobs by gender have changed across generations; that is, what differences do we see between people just entering the labor force, those whose careers are well underway, and those are reaching retirement age?  What we find is that younger generations of women are more likely to major in STEM fields than are women in previous generations, but there is still a ways to go in terms of translating this into more women working in STEM jobs.  

  • Looking first at degrees, Figure 1 shows that among younger generations, women account for an increasing share of STEM college graduates (the blue bars.) 
  • In 2010, 40.4 percent of “Millenial” STEM degree holders were women, compared with 34.2 percent of “Generation X” and 26.2 percent of “Baby Boomers.” 
  • However, fully utilizing this potential supply of STEM workers remains a challenge. As shown in Figure 2, among college graduates, Millenial women are more likely to hold STEM jobs than their more mature predecessors, though the increase is relatively small. 
  • In 2010, 29.4 percent of Millennial STEM workers (with a college degree) were women compared to 25.2 percent among Gen Xers and 22.2 percent among Baby Boomers.

The Class of 2012: Labor market for young graduates remains grim - Though the labor market is slowly improving, the Great Recession that began in December 2007 was so long and severe that the crater it left in the labor market continues to be devastating for workers of all ages. Unemployment has been above eight percent for more than three years, and 12.7 million workers remain unemployed today. The weak labor market has been, and continues to be, particularly tough on young workers: At 16.4 percent, the March unemployment rate for workers under age 25 was twice as high as the national average. Though the labor market is now headed in the right direction, the prospects for young high school and college graduates remain grim. This briefing paper examines the labor market that confronts young graduates who are not enrolled in additional schooling—specifically, high school graduates age 17–20 and college graduates age 21–24—and details the following findings:

  • Unemployment and underemployment rates of young graduates have only modestly improved since their peak in 2010.
    • For young high school graduates, the unemployment rate was 32.7 percent in 2010 and 31.1 percent over the last year (April 2011–March 2012), while the underemployment rate was 55.9 percent in 2010 and 54.0 percent over the last year.
    • For young college graduates, the unemployment rate was 10.4 percent in 2010 and 9.4 percent over the last year, while the underemployment rate was 19.8 percent in 2010 and 19.1 percent over the last year.

Jobs Few, Grads Flock to Unpaid Internships - Confronting the worst job market in decades, many college graduates who expected to land paid jobs are turning to unpaid internships to try to get a foot in an employer’s door.  While unpaid postcollege internships have long existed in the film and nonprofit worlds, they have recently spread to fashion houses, book and magazine publishers, marketing companies, public relations firms, art galleries, talent agencies — even to some law firms.   Ms. Reyes soon soured on the experience. She often worked 9 a.m. to 9 p.m., five days a week. “They had me running out to buy them lunch,” she said. “They had me cleaning out the closets, emptying out the past season’s items.” Although many internships provide valuable experience, some unpaid interns complain that they do menial work and learn little, raising questions about whether these positions violate federal rules governing such programs.  Yet interns say they often have no good alternatives. As Friday’s jobs report showed, job growth is weak, and the unemployment rate for 20- to 24-year-olds was 13.2 percent in April. The Labor Department says that if employers do not want to pay their interns, the internships must resemble vocational education, the interns must work under close supervision, their work cannot be used as a substitute for regular employees and their work cannot be of immediate benefit to the employer.

The Uses and Misuses of Unpaid Internships -- Camille Olson, one of the nation’s leading lawyers in advising employers about internship programs, says internships can be an excellent way for employers to get a good sense of a potential hire — to kick the tires, so to speak — and see, for example, how hard-working or creative someone is. If an intern performs well, it seems natural for the employer to offer a regular, permanent job. But if the intern is not up to snuff, it is much less painful to let the person go after three months than to lay off a recently hired regular employee after three months. That latter course not only hurts the worker, but also helps give the employer a reputation as an undesirable place to work. As for the use of unpaid interns — something I wrote about at length in a Sunday article in The New York Times — Ms. Olson generally gives that idea a thumbs-down. Ms. Olson generally advises employers, especially profit-making employers, to pay their interns, noting that it should not be much of a financial strain to pay them minimum wage. She points out that the Labor Department’s guidelines are quite strict about when employers can legally avoid paying interns at least the minimum wage: the internships must resemble vocational education; the internship experience must be for the benefit of the interns; the interns must work under close supervision; their work cannot be used as a substitute for that of regular employees; and their work cannot be of immediate benefit to the employer.

One Quarter Of Millennials Can't Cover Cost Of Basic Needs: Survey - Can't afford basic needs? Odds are you’re a millennial, according to a new survey. One quarter of millennials, or the generation aged 18 to 34, aren’t making enough money to cover basic needs, according to a survey of nearly 2,000 adults of various ages by retail trend research firm WSL Strategic Retail (h/t Chicago Tribune). By comparison, only 17 percent of adults between the ages of 35 to 54, and 13 percent of those 55 and older reported having the same problem. The results are hardly surprising considering the financial challenges young adults now face. At 54 percent, the employment rate for Americans aged 18 to 24 is at its lowest in more than 60 years, according to the Pew Research Center. On top of that, some estimates say the current value of student loan debt is more than $1 trillion, while the Federal Reserve Bank of New York pegs it at about $870 billion. The New York Fed estimates that two-thirds of that debt is held by people under 30. As a result of such financial strain, many millennials are being forced to make lifestyle changes. When it comes to retail, 60 percent said they now choose a cheaper brand over their preferred one. Likewise, most millennials now go online to check for the lowest price before making a purchase. In addition to shopping choices, millenials have also had to make changes when it comes to their living standards. Last year, 5.9 million people aged 18 to 34 lived with their parents, according to U.S. Census Bureau data cited by the Wall Street Journal.

How to bankrupt a generation of young Americans in four steps - young Americans living at home surges by 50 percent from 2005. The viable pathway for success for many young Americans seems to have gotten very narrow in the last decade.  The opportunities for many young workers have become mired with an economy that is largely in a deep recession with limited quality positions.  Many are saddled with debt and taking on employment positions that may not even utilize the very expensive college education some have taken on.  Education is important but doing it intelligently has become tougher since we are living in a student loan bubble.  Many young Americans have been forced to move back home to live with mom and dad because of the shoddy economy even if they have a job.  Each point of data suggests that we will have a less affluent generation coming forward yet this is the generation that is largely going to shoulder the burden of unsupportable government debt?  The bill is largely coming due but many younger Americans are already starting with a negative net worth.

The Bankruptcy “Reforms” of 2005: Creation of a New Debtor’s Prison? - Yves Smith - An article by law professor Linda Coco, “Debtor’s Prison in the Neoliberal State: ‘Debtfare’ and the Cultural Logics of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” (hat tip Michael Hudson) is a an informative, if disheartening, overview of the significance of the bankruptcy law reforms implemented in 2005. Debtor’s Prison in the Neoliberal State (embedded) One might cynically observe that after 25 years of making it easier for consumers to borrow and encouraging them to load up, banks realized that they might have too much of a good thing and realized they needed to improve their ability to extract payments from the credit junkies they had created. But the passage of the 2005 law had been a prize the financial services industry had chased for over a decade. Credit card company MBNA (later bought by Bank of America) was one of the most aggressive backers of the bill. MBNA had penciled out that the new law would increase its profits $85 million a year, by extracting an extra $100 a month on average from consumers in bankruptcy. As Coco points out, bankruptcy expert Elizabeth Warren said the new law would destroy the consumer bankruptcy system. It greatly restricted access to Chapter 7 bankruptcies (which apply all consumer funds, ex retirement accounts, to existing debts and wipes out the balance) and also made certain types of debt non-dischargeable, most important, student loans (note the change applied to private student loans). It also created hurdles to filing bankruptcy by making the process more costly: higher court charges and attorney fees, as well as requiring useless but borrower-paid credit counseling. As Jialan Wang noted in VoxEU, these changes increased the cost of filing for bankruptcy by 60%. She and her co-authors of a NBER paper found that this had the intended effect of inhibiting families from filing for bankruptcy, and getting an extra chunk of cash (they looked at tax rebates) led to an uptick in bankruptcy filings.

Are Baby Boomers Stealing Jobs from the Young? (Part 1): Walter Russell Mead writes on the disappearance of jobs for non-Baby Boomers:  An analysis of recent jobs figures at reveals a disturbing development: the biggest beneficiaries from the economic recovery are Boomers, while everyone else is getting the shaft.  Since the Obama administration took office, there has been an epochal shift. Young workers have continued to lose jobs and incomes, while older workers have actually gained ground.  In fact, the Obama administration has seen a boom in the prospects of the 55+ crowd; their (I should say ‘our’) employment stands at a 42 year high. Net, there are 3.9 new jobs for people over 55 since the recession began in December 2007, but there are 8.1 million fewer jobs for the young folks since that time.  Jed Graham's IBD article features a chart that shows the employment-to-population ratio that applies for the following age groupings: Age 16-24, Age 25-55 and Age 55 and up:

Are Baby Boomers Stealing Jobs from the Young? (Part 2) -Today, we're going to start by looking directly at the evidence that would seem to support the case that Baby Boomers are making out much better than younger Americans in the Great Recession in the second part of our three-part series.  Here, we'll start by showing the number of individuals counted within each approximately five-year long age grouping recorded by the BLS as being employed in November 2006 and November 2011. Only the data for the very youngest, Age 16-19, and oldest, Age 75 and older, cover different age ranges. The data shown in our first chart applies to the BLS' non-seasonally adjusted figures for each of the indicated age groups: Comparing the recorded values for the same age groupings in November 2006 with those for November 2011, we find that there would indeed appear to be a significant shift favoring Americans over the age of 50. We can see that move clearly if we focus in the differences recorded in the values from November 2006 to November 2011, as shown in our second chart: We observe that the age distribution of the U.S. workforce would appear to have shifted strongly in favor of those Age 50 and older. Surprisingly though, we see that teens would appear to only be the fourth most negatively-affected age grouping, with the top three most-negatively affected being those Age 35 to 39, Age 40-44 and Age 45 to 50.

Are Baby Boomers Stealing Jobs from the Young? (Part 3) What's the real story with the changing age distribution of working Americans over the previous five years? We've previously shown that large declines in the working population of the U.S. has taken place across all age groups, but how much of that might be considered to be normal, such as in the case of retirement, and how much might due to other factors? Which age groups have been hurt the most during the Great Recession, and are there any that have made out the best?  To find out, we need to go back to the Employment to Population ratio that Jed Graham used to make his original point, only we'll calculate it for each of the age groupings for which the BLS collects data for both November 2006 and November 2011. We're doing a direct comparison of each of the five-year age cohorts we have been considering, so we'll capture the shift in the age distribution of the U.S. civilian labor force, with respect to the non-institutionalized population for each over that time.  Doing this will allow us to take factors like retirement into account for older Americans. Since the data for November 2006 is well outside the period covered by the so-called "Great Recession", being just over a year before that recession would rear its ugly head, comparing the more recent U.S. workforce data for November 2011 to it will allow us to see what percentage of people in each age range might have been pushed out from participating in the U.S. labor force by other factors, at least with respect to what we'll call a "normal", non-recessionary year like 2006.

US inequality is getting worse - The Congressional REsearch Service released a report in March showing that US inequality is getting worse. Linda Levine, US income distribution and mobility: trends and international comparisons, Here's an excerpt from the summary provided in the report itself. Approaching three years into the recovery from the 2007-2009 recession, the unemployment rate remains over 8%. The persistent difficulty of many of the workers who lost jobs to find reemployment has meant reduced incomes for them and their families. A historically slow rebound in the labor market appears to be partly responsible for some groups’ focus on the distribution of the benefits of economic growth and for some policymakers’ interest in redistributing income through the tax code, for example. Varying perceptions about a trade-off between economic growth and income equality appear to underlie longstanding congressional deliberations about such policy issues as the progressivity of income tax rates, the tax treatment of capital gains, and the adjustment of the federal minimum wage. If income were equally divided across households, each quintile (fifth) would account for 20% of total income. The Congressional Budget Office and others have documented that the bottom fifth has long accounted for much less than 20% of total income. The bottom quintile’s share of income has remained little changed for the past few decades at less than 4%, according to U.S. Census Bureau data. In contrast, the income shares of the top fifth and the top 5% of households appear to have trended upward. The top fifth’s share of total household income rose from 42.6% in 1968 to 50.2% in 2010; the top 5%’s share, from 16.3% to 21.3%.

This is the graph that scares me: This is the increase that 50% of workers are getting more than, and 50% are getting less than, on a year-over-year basis. It has been running at under 2% at all times since the financial collapse of 2008. So, even if inflation runs at the very modest rate of only 2% (and for most of the time since the bottom of the recession in 2009, it has been higher than that), more than half of all workers fail to keep up. You simply cannot have a durable economic expansion where most workers are consistently falling behind. In the past 30 years,as shown in this graph of mortgage rates, which highlights those periods where interest rates are higher than they were 3 years prior in red, once households have been able to refinance, it took at least 3 years without new lows being established, before the economy fell back into recession. We just set new lows. It's difficult to imagine any further round of refinancing once this one is done.  Can rates really go much lower? If median wage growth doesn't improve soon,  there will be no escaping another recession once the effect of refinancing has run its course, and in the meantime, it's hard to imagine broad-based economic growth.

How government red tape keeps poor people out of jobs - One way to help improve the lives of low income people is to focus on how the government can give them more. Sometimes this can be very effective, and even desirable. But a far less common way is to look at how the government can stop doing stuff that is making them worse off. Occupational licensing is a great example of this. In the 1950s, around 1 out of 20 jobs required a license. Now the number is around 1 in 3. This red tape keeps a lot of low income people out of better jobs with better income. This issue receives the discussion it deserves in an excellent new report from Angela Erickson and John Ross at the Institute for Justice. They looked at 102 occupations that are licensed in at least one state and where incomes are below the national average. As an important improvement on past research, they document the difficulty in getting licensed by looking at the five main costs of licensing: fees, education and training, exams, minimum age and minimum grade completed. This allows them to measure not only how widespread licensing is, but how much of a cost it imposes. The following are a couple of facts worth noting from the report, but you should read the whole thing.

U.N. Wraps Up Contentious Study of Native American Communities - IPS James Anaya, the United Nations Special Rapporteur on the Rights of Indigenous Peoples, warned that historical wrongs, particularly the loss of land, continue to have an overriding impact on the wellbeing of Native American communities. Anaya has just finished a 12-day research mission probing the current status and experience of the U.S.'s roughly 5.2 million-strong Native American population. The trip marked the first time that the U.N. has waded into the contentious issue of U.S. treatment of its indigenous communities, one of the poorest and most marginalised populations in the United States. The unemployment rate for American Indians has typically been double that of the white population. On reservations Anaya reported a 70 percent unemployment rate. Native Americans have also long suffered from disproportionately low statistics in health and education, as well. "It is evident that there have still not been adequate measures of reconciliation to overcome the persistent legacies of the history of oppression, and that there is still much healing that needs to be done."

A Battle With the Brewers - The human toll is evident here in Whiteclay: men and women staggering on the street, or passed out, whispers of girls traded for alcohol. The town has a population of about 10 people, but it sells more than four million cans of beer and malt liquor annually — because it is the main channel through which alcohol illegally enters the Pine Ridge Indian Reservation a few steps away.  Pine Ridge, one of America’s largest Indian reservations, bans alcohol. The Oglala Sioux who live there struggle to keep alcohol out, going so far as to arrest people for possession of a can of beer. But the tribe has no jurisdiction over Whiteclay because it is just outside the reservation boundary.  So Anheuser-Busch and other brewers pour hundreds of thousands of gallons of alcohol into the liquor stores of Whiteclay, knowing that it ends up consumed illicitly by Pine Ridge residents and fuels alcoholism, crime and misery there. In short, a giant corporation’s business model here is based on violating tribal rules and destroying the Indians’ way of living.  It’s as if Mexico legally sold methamphetamine and crack cocaine to Americans in Tijuana and Ciudad Juárez.

Poverty’s Poster Child - This sprawling Pine Ridge Indian Reservation is a Connecticut-sized zone of prairie and poverty, where the have-nots are defined less by the money they lack than by suffocating hopelessness.  In the national number line of inequality, people here represent the “other 1 percent,” the bottom of the national heap.  Pine Ridge is a poster child of American poverty and of the failures of the reservation system for American Indians in the West. The latest Census Bureau data show that Shannon County here had the lowest per capita income in the entire United States in 2010. Not far behind in that Census Bureau list of poorest counties are several found largely inside other Sioux reservations in South Dakota: Rosebud, Cheyenne River and Crow Creek.  Poverty in the United States, including in the reservations, is so entrenched because it is often part of a toxic brew of alcohol or drug dependencies, dysfunctional families and educational failures. It self-replicates generation after generation.  “What’s a man or woman to do?” asked Ben, a young man here who said he started drinking at age 12. “I felt helpless. I felt worthless, and I wanted a drink to get rid of my pain. But then you get more pain.”

Disabled Americans Shrink Size of U.S. Labor Force - The number of workers receiving Social Security Disability Insurance (SSDI) jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.  The participation rate -- the share of working-age people holding a job or seeking one -- was 63.8 percent in March after falling to a three-decade low of 63.7 percent in January. Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year. “How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” . “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.” 

TrimTabs on Debt and Disability Claims: How Much Debt Does it Take to Generate $1 in GDP? Disability Fraud vs. Expiring Unemployment Benefits Revisited - In response to 2.2 Million Go On Disability Since Mid-2010; Fraud Explains Falling Unemployment Rate I received a nice email from Madeline Schnapp, Director, Macroeconomic Research at TrimTabs Investment Research. Madeline Writes ...  I loved your disability graph so decided to expand on that theme some more and took a look at the relationship between the trend in disability recipients and the roll off of recipients of emergency and extended unemployment insurance programs. Should we dare say there is a stunning relationship! First consider a few snips from my previous post, then we will take a look at what TrimTabs has to say.

Long Term Unemployed Californians' Benefits Will End -  California's Employment Development Department is warning long term unemployed people that their benefits will be cut off next week. The state was recently notified that it no longer qualifies for the federal funds because its unemployment picture is looking better. The cut-off of federal funds affects 93,000 people who have been drawing unemployment beyond 79 weeks. Those individuals will no longer get unemployment checks from the so-called "Cal-Ed" program, even if they are in the middle of the 20 week cycle.  "When the economy starts to improve, the extensions are designed to go away when the jobs are easier to come by," said Loree Levy, EDD Deputy Director. But those who are unemployed don't like the idea.  "They need to reevaluate things because we need that money,"

200,000 about to lose unemployment benefits - Unemployment benefits are scheduled to end in many states Saturday, and about 200,000 people will lose their benefits, nearly half of them in California. Under the terms of a benefit extension agreement in Congress last year, benefits would be cut off if unemployment rates fell below certain thresholds, and despite the weak job market, rates have been falling. With unemployment rates as high as they are, is cutting benefits a good idea? Will a cut in unemployment benefits motivate workers who have become dependent on the program to go out and find jobs? Unemployment compensation creates both costs and benefits for the economy. On the benefit side, it promotes better matching of jobs with individuals, and it helps households avoid the difficult economic problems that come with unemployment. For example, we don't want an unemployed electrical engineer to be forced to take a job at McDonald's out of economic necessity. It is much better for the individual and for society to match the individual with what he or she does best, engineering. If that takes several weeks, we will still be better off in the long-run since the person will add much more to the economy working as an engineer than flipping burgers. In addition, the extra income that households receive (in benefits), which is mostly spent, creates more demand in the economy.

Unemployment insurance vanishing, even as jobs scarce - The job market in the United States is still in rough shape, yet states are already starting to pare back unemployment insurance. On Saturday, eight states — including California and Florida — will cut benefits for more than 200,000 workers. Here’s the backstory: Since the recession began, many states have been using federal aid to offer up to 99 weeks of unemployment insurance. In February, Congress agreed to reauthorize this program for one more year, but with less aid. States have since been cutting back the number of weeks they provide benefits. The National Law Employment Project has been tracking all the state cutbacks in this chart. All told, some 409,000 workers have lost benefits in 2012 — and most of them have been unemployed for longer than 70 weeks. These days, fewer and fewer jobless workers are receiving government aid. According to NELP, two-thirds of all jobless workers qualified for state or federal unemployment insurance in 2010. Last year, that number shrunk to 54 percent. This year, it will go below 50 percent. If Congress lets all of its extended-unemployment programs lapse at the end of this year, says NELP, then “only a quarter of jobless Americans will be receiving unemployment insurance.”

Food Stamps and Unemployment Insurance - The Department of Agriculture’s food-stamp program, now known as the Supplemental Nutrition Assistance Program, or SNAP, was originally intended as a program for the poor. But it has transformed itself into an important source of support for the unemployed. Traditionally, food-stamp program participants were subject to an asset test – households with a total of more than a few thousand dollars of assets in their bank accounts, automobiles and other assets were not eligible even if income was zero. In this way, food stamps had a lot in common with Medicaid and other antipoverty programs. The welfare reform of the 1990s also required able-bodied adult food-stamp recipients, without children, to be working or enrolled in a job-training program, or their eligibility would be limited to a few months. For these two reasons, the food-stamp program had little in common with unemployment insurance, which offers weekly cash benefits to people who have lost their jobs and have been unable to find and start a new job.  But the food-stamp eligibility rules have changed markedly in the last several years, bringing the program closer to unemployment insurance. Food stamps effectively no longer have an asset test. States have also received waivers from work requirements during the recession (for a while, the requirements were waived nationwide by the 2009 stimulus law).

Two Charts Exposing America's Record Shadow Welfare State - There was a little mentioned tangent to last Friday's very disappointing NFP print of +115,000 (driven by a surge in temp jobs offsetting a collapse in full time positions): as David Rosenberg notes, the jobs number was about half of another far more important number - that of Americans applying for disability, which in April was +225,000. He continues: "this is the new stealth stimulus program - so far in 2011, nearly one million Americans have applied for disability and year-to-date, 333k have actually enrolled (covering 539k family members). In total, more than five million people have been added to disability coverage since President Obama took over three years ago." The punchline will make all those who adore (insolvent) welfare states shake with giddy delight: "So look - either safety standards at work have eroded dramatically or the "99%" have found a creative way to milk the system and turn the economy into a quasi welfare state".... Yup. What he said. Because remember: the BLS assumes that any amount up to the total 53 million people, is not in the labor force as they have other "wefare" based forms of government handouts and see no need at all to look for a job. Is there any wonder why US unemployment is realistically 20% if not much higher? As for the other chart, food stamps, we know that story all too well.

The Real Hunger Games - Astoundingly, the House is voting this week on billions in cuts that would slash food stamps, school lunches and other programs putting food on the table for about 45 million people, mostly children, seniors, working poor and the disabled. A new video and petition asks you to tell them not to.

Teen Pregnancy: What Causes What? - Here is a classic problem of cause and effect. Teenagers who give birth are more likely to be from households with lower income levels. Also, teenagers who give tend to end up later in life in households with lower income levels. But does the lower income level cause teens to be more likely to give birth? Or does giving birth cause as a teen cause that woman to be more likely to end up in a lower-income household? How can one untangle cause and effect? Melissa S. Kearney and Phillip B. Levine tackle these questions in "Why is the Teen Birth Rate in the United States So High and Why Does It Matter?" which appears in the Spring 2012 issue of my own Journal of Economic Perspectives. They have lots of interesting comments to make about variation in teen birthrates across states and countries. Here, I'll focus on their analysis of the cause and effect question, which surprised me and offers a nice example of  how economist try to disentangle these sorts of issues. 

"Breathing While Latino" Laws Boom for Private Prison Profits - For the past two weeks, I have written two columns on the biggest private prison companies, Corrections Corporation of America (CCA) and the Geo Group (GEO), to expose their efforts to elevate their profits by working to keep laws on the books that will maximize the number of prisoners in this country (one in 100 people, the highest in the world). They were successful by making certain that they had well-placed lobbyists and former employees to keep their product (the number of prisoners) high to keep beds filled in public prisons that they managed and private prisons that they owned. It was even part of the business plan that they filed with the Securities and Exchange Commission

Throwaway People: Will Teens Sent to Die in Prison Get a Second Chance? -  When she was 11, Trina was sent by her grandmother to Allentown State Hospital for mental treatment; she was discharged at 13 against the advice of her doctor and stopped taking her medication. Following the fire, prison officials requested she be given a psychiatric evaluation, after which she was deemed unfit for trial and hospitalized. A second evaluation yielded a diagnosis of schizophrenia. But a third assessment, just a few weeks later, deemed her competent to stand trial. Her lawyer did not challenge the decision. Nor did he challenge the prosecutor’s successful push to try Trina as an adult. (He would later be jailed and disbarred.) Trina was tried in March 1977. Trial transcripts have been lost, but it’s clear that she took the stand as the sole witness for the defense. Frances Newsome was the key witness for the prosecution, telling the jury Trina had set the fire as revenge on Sylvia Harvey for forbidding her sons to play with her. Trina was found guilty of arson, two counts of second-degree murder and “causing a catastrophe.”

Which States Have the Most Economic Mobility? - Americans love economic mobility. It’s kind of a founding myth for us: We see ourselves as having broken free from rigid, aristocratic Europe to form a meritocracy that guaranteed a chance to move up in the world. Though there has been much talk lately about rising income inequality in the United States, what has worried pundits on both the left and the right has been recent reports that Americans aren’t as economically mobile as citizens other Western nations. The Pew Economic Mobility Project has been studying this phenomenon, and is out with a new report studying which regions in America are the most and least mobile. Researchers looked at Americans ages 35 to 39 and then examined their incomes ten years later. The study covered the time period between 1978 and 2007, and tackled three different measures of income mobility: absolute mobility (as measured by inflation-adjusted income growth over time), and relative upward and downward mobility — i.e. movement up or down the socio-economic ladder. In other words, are Americans born poor becoming rich and vice-versa? So which states come out on top? The Mid-Atlantic and New England are the most economically mobile regions in America, with Maryland, New Jersey, and New York having better-than-average mobility in all three measures studied.

Northeast and Mid-Atlantic States Most Upwardly Mobile - Reaching for the American dream? Your best chances are probably in New York, New Jersey or Maryland. Those states are best at helping Americans move up the income ladder, both in absolute terms and relative to their peers, according to a groundbreaking new study from the Economic Mobility Project at the Pew Center on the States. Generally speaking, states in New England and the mid-Atlantic had the most upwardly mobile residents, whereas states in the South had the least mobile populations. The study, which appears to be the first to try to measure economic mobility at the state level, looked at the incomes of Americans in each state over a 10-year period using data from the Census Bureau and the Social Security Administration. Researchers tracked a group of nationally representative Americans who were age 35 to 39 at any point from 1978 to 1997. They then examined how each individual’s earnings had changed exactly one decade after the initial income number was collected.

Number of the Week: Nice Place to Do Business, but Wouldn’t Want to Live There - The latest issue of Chief Executive magazine ranks the best and worst states to do business based on a survey of 650 CEOs (scroll down for the full list). Respondents were asked to grade states in which they do business in a number of ways, including tax and regulation, quality of work force and living environment. Texas and Florida ranked first and second, respectively. Texas and Florida also rank highly — third and fourth, respectively — as homes for billionaires, according to Forbes’ list of the 400 richest people. But just because a state is good for business, doesn’t mean business leaders are making their homes there. California and New York — in last and second-to-last place in the rankings for business — are the first and second most popular places for billionaires to live. Being good for business also doesn’t necessarily mean good for residents. Gallup produces a Well-Being Index for states, which tracks life evaluation, emotional health, physical health, healthy behaviors, work environment and basic access. Among Chief Executive’s top ten states for doing business, just one — Utah — is also in the top 10 for well being. Texas ranks 27th and Florida is 41st. Meanwhile, the top ranked state for well being — Hawaii — is in the bottom 10 for states to do business.

Monday Map: State Income and Sales Tax Deductions - Today's Monday Map shows which states benefit from the federal income tax deduction for state taxes. Taxpayers can elect to deduct either state income or sales taxes, but not both; in most states, the income tax deduction is worth more. New Yorkers deducted state taxes worth 6.16% of their income, to take the top spot. Alaska, where state income and sales tax deductions amounted to only 0.26% of the state's income, comes in last. (Alaska has no income tax, no state sales tax, and small local sales taxes.)

Infographic: America's Not-So-Proud Tradition of Government Corruption - Government corruption doesn't only affect developing nations with long histories of dysfunction; it happens in nearly every American state (and, famously, the District of Columbia). From perjury and tax evasion to outright bribery, corruption has taken down thousands of elected officials over the past 35 years. Which states are home to the most convictions for government corruption?

California’s Revenue $2.44 Billion Below Projection – California’s State Controller has released his monthly financial report and the state continues to fall behind in revenue. State Controller John Chiang’s report shows California’s cash balance for April came in $2.44 billion below the Governor’s projection. “The task of crafting a credibly-balanced budget has been made more difficult by a nine-month revenue shortfall of $3.5 billion,” said Chiang. “Without a timely, financeable budget plan, the State will be unable to access the working capital needed to pay its bills later this year.” Chiang says most of the April shortfall was due to lower than projected personal income tax receipts. Sales taxes were also down by $445.8 million Currently, the state’s cash deficit stands at $19.2 billion which is being covered with both internal and external borrowing.

Governor warns state workers of 8 to 10 percent pay cut in revised budget plan - State workers face pay cuts of up to 10 percent in a revised budget due out next Monday. Sources at state worker unions say Governor Brown warned them about the pay cuts a week ago. But the depth of the cuts – anywhere from eight to ten percent of their paycheck – was news. In a written statement, David Miller with the California Association of Professional Scientists says the 3,000-member union agreed to several concessions last year to help the state cope with deep deficits. But, Miller writes, “further cuts, after years of unpaid furloughs and benefit concessions, seem unreasonable.” The state worker pay cuts will be detailed in Governor Brown revised budget next Monday. Brown’s got to plug a deficit that’s grown larger than the $9 billion shortfall he projected in January.

The Mordant Litmus of Texas? - Noni Mausa - The other day I was listening to a fascinating interview on US executions. "So far this year, 5 convicted criminals felt the executioner's needle. Michael Graczyk watched as they took their last breath. The reporter from the Associated Press has witnessed more than 300 executions. It's believed he's seen more men and women put to death than anyone else in the United States." (Link is here. Audio  is here) But what caught my ear was the moment in the interview when Graczyk remarked that in 1982, Texas resumed executions. I thought, there's another entry for my file "It all started in 1980." From 1964 to 1982, eighteen years, Texas executed nobodyHowever, this post has nothing to do with capital punishment, but with the economy. And I noticed something interesting. See, all this led me to look at the number of Texas executions over time. In this very rough (don't laugh) graph, there were three peaks in Texas executions -- in the late 1800s, in the 30s, and today's. Each peak has outdone the previous, and the 2000-2010 numbers were the highest ever. For those who don't notice it, these eras equate to the Long Depression, the Great Depression, and our current depression.

Six Months Into Alabama County Bankruptcy, Services Fray - In Alabama’s most populous county, twisted tree limbs are strewn on the ground months after a tornado ripped them down. Potholes pockmark roads and parking lots, including one the size of a pizza that swallowed the county manager’s front tire. Government credit cards were rejected when maintenance workers tried to buy supplies. These are symptoms of the financial collapse of Jefferson County, population 660,000, which six months months ago filed a record $4.2 billion municipal bankruptcy. The county’s inability to provide services once taken for granted is becoming increasingly noticeable as hundreds of workers leave. “The county is just falling apart,” said Judy Hall Collins, a Jefferson County real-estate agent. She said she struggles to persuade buyers to look at houses in Jefferson. “There’s a stigma now. It seems like you hear about something else every day.”

Jefferson County Makes Alabamians Suffer Cost Boost - Cities and towns in Alabama are paying a penalty six months after Jefferson County filed the nation’s biggest municipal bankruptcy. Investors demanding extra yield to buy the region’s debt blame elected officials, especially lawmakers in the Legislature who have failed to help the county come up with new revenue to maintain services for its 660,000 residents. Jefferson officials have fired hundreds of workers and consolidated offices, lengthening lines for chores such as renewing drivers’ licenses. Issuers in or near Jefferson County may pay an extra 0.10 percentage point to borrow, said Mike Dunn, managing director in Montgomery, Alabama, at Merchant Capital LLC, which underwrites the most Alabama debt, data compiled by Bloomberg show. Tom Barnett, finance director of Birmingham, the county seat, said the premium may be 0.25 percentage point across the state. “I’m reluctant to buy bonds in Alabama if the Legislature can’t craft a meaningful tax that’s constitutional,” said Tom Dalpiaz, who oversees $300 million in municipal bonds at Monument, Colorado-based Advisors Asset Management Inc. “There are 49 other states to find bonds.”

Local street repair budgets being cut - Many local cities are putting road repair and maintenance on the backburner in the face of revenue cuts, resulting in aggravated drivers, damaged cars and ultimately more costly repairs down the line.  Safety and road repairs are the two areas that taxpayers, when surveyed by cities, say they want their tax money spent on. But, an extensive examination of road work spending by the Hamilton JournalNews shows most local cities have slashed the amount spent. In 2012, Middletown cut money budgeted for road repairs by more than $2 million. Hamilton cut its road repair budget by $3 million, a reduction by more than half of its 2011 expenditures. City officials said cuts come because of a loss of revenue for the cities, particularly the state's elimination of its local government fund and the estate tax.

N.J. municipalities guaranteeing more debt of private developers, other towns, Moody's says - New Jersey municipalities increasingly have guaranteed the debt of private developers and other entities since the financial crisis, a strategy that puts their balance sheets, credit quality and taxpayers at risk in the event of someone else's default, according to a recent report by Moody's Investors Service. The percentage of another entity's debt that's backed by a local government's general obligation pledge has tripled since 2008, from 7.9 percent to 23.7 percent last year, analysts for the rating agency wrote last week.

Chicago’s Parking Meter Debacle: The Check Is Not in the Mail - Sounding a bit like an angry motorist who’s just gotten what he considers an unfair parking ticket, Chicago mayor Rahm Emanuel announced last week that he wasn’t going to pay a $14 million bill sent to the city by the company that runs the city’s parking meters. The bill in question, from the unimaginatively named Chicago Parking Meters LLC, is for what the company says it’s owed for revenues lost when the city closed streets for repairs, street fairs, and the like. The company recently sent the city a similar sized bill to compensate for the lost revenues from Chicago drivers using “disabled” placards. That’s currently in arbitration. There’s no question that Chicago will have to shell out some money; these sorts of obligations are spelled out in the 521-page contract the city signed. The Emanuel administration insists that the company is overcharging the city; the company says its bills are accurate. So how did Chicago get itself into this situation? In 2008, Chicago’s then-mayor Richard M. Daley pushed through a $1 billion deal to lease Chicago’s parking meters to a private company for 75 years. A group of investors, led by Morgan Stanley, took over Chicago parking, ripping out old meters and replacing them with high-tech pay boxes. As Chicagoans adjusted themselves to the new technology, they also had to adjust themselves to new, much higher parking rates. Street parking in Chicago’s Loop now costs $5.75 an hour. Next year it will be $6.50.

The New Wall Street Racket Looting Your City, One Block at a Time - When Mayor Rahm Emanuel introduced a “new and innovative” financing tool last month to help Chicago renovate failing infrastructure without precipitating another budget crisis, many in the city were understandably critical.  Chicagoans have already endured the notorious 75-year lease of their parking meters to a consortium headed by Morgan Stanley. That sale promulgated a system wherein the public is held hostage by private finance, due largely to the inclusion of arcane legal stipulations like “non-compete clauses” and “compensation events” in the language of the contract. Ellen Danin, writing in the Northwestern Journal of Law and Social Policy relates that: “Chicagoans learned about compensation events when CBS reported that the city’s parking meter contract required reimbursement for events like repairing streets. Public records showed that in the first quarter of 2009, the city was liable to the parking meter contractor for more than $106,000 in lost income during the slow months for street repair and street closings for festivals, parades, and holidays, as well as repairs and maintenance. At that rate, it is not unreasonable to predict that Chicago will owe roughly $500,000 a year to the private contractor.”

Rogue Democrats Loot Detroit As Nation Sleeps - Few readers will be surprised to learn that decades of incompetence and entrenched corruption in Detroit’s government have not only helped wreck the city; firms linked to former Democratic mayor Kwame Kilpatrick also looted the pension fund. The latest scandal, which leaves even hardened observers of the abysmal Democratic machine that has run the city into the ground bemused, involves a real estate firm which gave the felonious mayor massages, golf outings, trips in chartered jets and other perks as this enemy of the people went about his hypocritical business of pretending to care about the poor while robbing them blind. The firm, apparently run by a sleazy low class crook named by the reprehensible Kilpatrick to be the Treasurer of what was left of Detroit’s finances, used Detroit pension funds to buy a couple of California strip malls. Title to the properties was never transferred to the pension funds, and they seem to be out $3.1 million. Overall, a Detroit Free Press investigation estimates that corrupt and incompetent trustees appointed by Democratic officials over many years in Detroit are responsible for almost half a billion dollars in investments gone wrong. . . .

Demolitions leave an urban prairie (video) Buffalo's East Side is in demolition overdrive. On Goodyear Avenue alone, 99 houses and other buildings have been demolished since 2000. On Fillmore, it's 96 houses; on Sycamore, 81; and on Bailey, 79. And they're hardly alone: On 27 other East Side streets, 40 or more demolitions occurred during the same period. "I used to live here," "It's a ghost town. They just move the crane right down the street." Mayor Byron W. Brown's administration has been on a demolition spree, with a goal of knocking down 5,000 buildings in five years, including those owned by private individuals and city redevelopment agencies. Coming on the heels of the Masiello administration, which demolished thousands more, a lot of buildings have come tumbling down.

Hundreds of 5-year-old municipal vehicles found in Miami that were never used: Have you ever bought a brand new cars only to forget where you put it? How about 300 of them? Probably not – unless you're Miami-Dade County, which was recently reunited with 298 vehicles it bought brand new between 2006 and 2007. The county "discovered" this fleet of no-mileage vehicles after reading about them in a Spanish-language newspaper there (see the source for more images). Most of the misplaced motorcade is made up of Toyota Prius hybrids whose warranties either expired with very few miles on the odo or will very soon. Looking to save some face, the county has rushed at least 123 of the hybrids into service. The Toyota warranty covered the hybrid bits for eight years or 100,000 miles, but we're not sure if that covers cars parked for five of those eight. We're also not sure what that much time in Miami heat and humidity does to an unused hybrid powertrain, but it can't be good.

Miami-Dade County seeks to unload Head Start program, salaries - For more than four decades, Miami-Dade County officials have managed Head Start, the storied preschool program for children from low-income families. But the county now wants out — and “generous” salaries are partly to blame. On average, Miami-Dade paid its Head Start teachers $76,860 in salary and fringe benefits in 2011, county records show. That’s about 90 percent higher than the second highest-paying Head Start provider in the county, Catholic Charities, which paid its teachers an average of $40,418 in salary and benefits. On the administrative side, 17 county Head Start staffers made more than $100,000 in salary and benefits. Last week, the county submitted paperwork to offload much of the Head Start program to three local agencies: the Miami-Dade school system, Easter Seals of South Florida and the YWCA of Greater Miami-Dade. But the plan has been met with resistance from some parents and politicians, who say the shake-up would hurt the current Head Start staffers.  About 400 county employees would face the prospect of either losing their jobs or accepting substantial pay cuts if the new agencies hire them.

Move to collect school lunch debt stirs controversy — For some kids in our region the meals they eat at school are the only nutritious food they get all day. That is especially true in parts of the state where people are suffering from layoffs and a tough job climate. But some parents in Boone County say their kids are being punished for something that isn't their fault. Michael Kirk said he couldn't believe his ears when he asked his daughter how her day went at school Friday. "She said at lunch time some kids had to collect money for the other kids to eat," Kirk said. Several kids went home that day saying they or their friends had been singled out and embarrassed in the cafeteria because their parents were delinquent on their lunch bills.

Philadelphia Schools Say $94M More From Property Taxes Next Year Won’t Be Enough (CBS) — The Philadelphia School Reform Commission, facing a huge deficit, presented its budget to City Council today with a strong pitch for more money. The School District of Philadelphia says that without an additional $94 million from the mayor’s “Actual Value Initiative” property tax overhaul (see related story), schools may not have enough personnel to open in the fall. Will City Council approve AVI, or will aid to the school district take some other form? Those were the questions hanging in the room in City Council chambers today. The school district faces a $218-million deficit next year, even assuming that the district gets that extra $94 million from the city.

Report: California's public schools face crushing stress levels - California's public schools may be facing unprecedented levels of pressure as they try to teach an increasing number of children in poverty with fewer employees and a continual threat of cutbacks, a report by the Mountain View-based research group EdSource found. Through publicly available data and surveys of the state's 30 largest districts -- including San Francisco, Oakland, Mt. Diablo, Fremont, San Jose and San Francisco -- policy analysts compiled information on a number of "stress factors," from local unemployment rates to smaller budgets as a result of the state's budget deficit. In 2010-11, California's public schools spent $2,856 less on each student than the national average, according to the California Budget Project. The report showed the percentage of Oakland children living below the poverty level rose by 8 percentage points between 2007 and 2010, to 33 percent. Even in the more economically stable city of Fremont, the child poverty rate more than doubled during that time, to 9 percent, based on estimates from the U.S. Census Bureau's American Community Survey. "All of this puts enormous stress on children and has an impact on how they do in school,"

Cali.'s 4th year of teacher layoffs spur concerns — Los Angeles Unified teacher Mike Newman sighed when he saw the now familiar certified letter in his mailbox last month — a pink slip, for the fourth year in a row. "Here we go again," said Newman, a 14-year classroom veteran who's had his previous three layoffs rescinded and hopes for the same this year. A new term is being bandied about in California schools these days — "the RIFing season," which refers to the "reduction in force" letters notifying teachers they may be laid off at the end of the school year. Some want the annual practice, which gives teachers advance notice that their jobs are in jeopardy depending on the outcome of the state budget debate, changed because it unnecessarily saps morale and incurs administrative expenses since most of those employees will not be laid off. School districts sent out 20,000 warning notices in March — the fourth consecutive year of mass cuts due to continued state funding shortfalls, but if the past three years are anything to go by, roughly a quarter of those teachers will actually lose their jobs.

SF teachers set for strike vote amid budget woes - San Francisco teachers are set for a strike vote this week over the district's demands to cut $30 million from teachers' salaries and benefits over the next two years. The union wants a 2 percent raise for teachers instead. The 6,000 members of United Educators of San Francisco will take the first of two required strike votes Thursday, less than a week after the district declared an impasse in contract talks. If a majority agrees, the union leadership would have the ability to call a strike if negotiations stall completely. There are only three weeks left in the school year, but that's enough time to call a strike, said union President Dennis Kelly. The breakdown in bargaining follows years of frequent, congenial cooperation between the two sides. Together, they have challenged the Legislature to boost school spending. Combined, they passed the Proposition A parcel tax in 2008 to raise $28 million per year, mostly to boost teacher salaries. Now, after five straight years of budget cuts, the two sides have turned on each other, the cumulative effects of layoffs, furlough days, a move to larger class sizes, elimination of summer school and more in an era of budget shortfalls.

Studying school quality, to fight inequality - MIT - Education has long been perceived as a great leveler in the United States, providing opportunities throughout society. But at a time of economic struggle, millions of people are wondering if the country’s schools can still provide a platform for success. “School quality and human capital are major issues on the American policy agenda,” says Josh Angrist, the Ford Professor of Economics at MIT, noting the emphasis President Barack Obama placed on the issue during his most recent State of the Union address. Yet it is hard for parents to make confident decisions about the subject. “A very difficult question is finding out what is a good school for your child,” says Parag Pathak, a professor in MIT’s Department of Economics. Moreover, state and local civic leaders must continually evaluate schools as well. That is one reason Angrist, Pathak and economist David Autor have founded the School Effectiveness & Inequality Initiative (SEII), a new center at MIT giving a home to diverse studies of education and its effects on Americans throughout their working lives. Some of those studies have already made headlines: Angrist and Pathak, working with other scholars, have found that while some Boston charter schools outperform the city’s other public schools, charter schools elsewhere in Massachusetts fail to generate gains in student achievement. They have also found that some highly regarded public schools — which use competitive test-based admissions — may not improve the trajectory of the already-thriving students who are accepted into them.

Quality public schools need well-compensated teachers - From the editorial page of this paper to public meetings and casual conversations, there have been calls to offset the Summit School District’s $2.5 million loss in state aid by freezing or reducing teachers’ compensation. I think this is the wrong direction.  We look to teachers to prepare our children for academic and career success, and to impart the fundamentals of good citizenship. On a national level, we are told that public school teachers must do more to prepare future engineers, scientist, and creative thinkers, lest the United States lose its edge in the global economy. Our children’s futures and the future of our communities, state, and country rest, in large part, in our teachers’ hands.  To fill this tall order, teachers are expected and, indeed, required to be bright, hardworking, and dedicated. To attract and retain the best and the brightest, the Summit Board of Education must provide teachers with adequate and consistent salary and benefits. Otherwise, it is only a matter of time before smart, capable people forgo teaching for professions that garner better compensation and more respect.

Louisiana colleges will seek a $25-per-credit 'sustainability fee' -- Faced with more budget cuts, Louisiana's state colleges and universities are seeking a new fee to cover part of the loss. The plan, said Commissioner of Higher Education Jim Purcell, is to ask the state Legislature to approve imposing a "Sustainability Fee" of up to $25 per credit hour to supply funding that could offset loss of state funding. The fee could be imposed for up to three years "or until the economy improves." Purcell said Monday that colleges and universities have been cut $360 million since 2008, the last time Louisiana schools were fully funded. Counting a $50 million midyear cut last year and reductions in the current year's budget, state general funding is down $138 million since last July. And with a gap of more than $200 million found in the current year's budget that ends June 30, more cuts are likely. "We've replaced some of that with self-generated revenues" by increasing tuition, he said, "but it doesn't fully fill the gap."

The campus tsunami - Online education is not new. The University of Phoenix started its online degree program in 1989. Four million college students took at least one online class during the fall of 2007.  But, over the past few months, something has changed. The elite, pace-setting universities have embraced the Internet. Not long ago, online courses were interesting experiments. Now online activity is at the core of how these schools envision their futures.  This week, Harvard and the Massachusetts Institute of Technology committed $60 million to offer free online courses from both universities. Two Stanford professors, Andrew Ng and Daphne Koller, have formed a company, Coursera, which offers interactive courses in the humanities, social sciences, mathematics and engineering. Their partners include Stanford, Michigan, Penn and Princeton. Many other elite universities, including Yale and Carnegie Mellon, are moving aggressively online. President John Hennessy of Stanford summed up the emerging view in an article by Ken Auletta in The New Yorker, “There’s a tsunami coming.”  What happened to the newspaper and magazine business is about to happen to higher education: a rescrambling around the Web.

What Should Colleges Do? - I had several reactions to this column in the New York Times on the purpose of a college education. My perspective is that of someone who works in higher education both as a faculty member and as the director of a public policy center that offers many programs to students, both in and out of the classroom. First, there are the usual laments in the article about the need for colleges to provide a liberal arts education as the basis of an engaged citizenry.  I wholeheartedly agree that a liberal arts education can achieve that end.  I do not necessarily agree that we are best served by having that happen in college.  More specifically, why should we use years 13-16 of a student's education to do that?  The confusion about what should happen in college is in part derived from a confusion or a failure of execution in earlier years.  Why not set a goal for an engaged citizenry by the time citizens are 18?   Second, the article references recent policy proposals about making the college decision more transparent or financially remunerative, particularly with an eye toward a first job after college.  I understand that federal and state governments should be looking to get their money's worth, given how much of higher education they subsidize or provide.  But I view the efforts as largely inconsequential.  Third, the most interesting part of the article is the discussion of what some schools are doing to create more interesting learning experiences through multidisciplinary courses or sequences of courses on a given topic.

Economics professor in London: 'They aren't here to learn, they're here to pass' - We are currently offering one course in ethics, taken by 10-20% of students. What would happen if we offered an entire semester with only ethical courses? I suspect many of our students would have serious problems passing those. If they had to engage with complex ethical issues in debates … many would fail. These are people with a strong mathematical bent, the future 'quants', many with mild Asperger-like qualities. I'd say the disconnect between quants and the rest of the world is an important key to understanding the financial sector today. If you allow me to generalise: Quants are extremely good at recognising patterns and structures, and at working in very detailed and systematic ways. Quants feel a strong psychological need for those structures, too, and they tend to presume the existence of such structures and patterns for the world to behave predictably, in ways that can be modelled. Quants don't have very good social skills. If you react to a quant in a way that requires empathy, this is difficult for them. Say two students are chatting over at the coffee machine. The quant professor recognises his student and stops to say 'look, I really didn't think your latest paper was good enough'. Then he walks on.

Turning Student IDs Into Prepaid Cards Is Making Colleges Rich  - It looks like banks are getting a partner to promote prepaid cards: American universities.  In a recent article in Time, Martha White covered the rise of prepaid offerings on college campuses and the benefits some of these schools may receive from marketing them to students. White's article highlights the new Wolfpack One card at North Carolina State University, which combines a student ID with a prepaid debit card from U.S. Bank.Seems like a good way to simplify the load of cards in students' wallets, right? Well, it's also an easy way for the college to earn some additional money. According to the article, the college receives 75 cents per month from each active deluxe prepaid account. With around 34,000 students, you can see how those earnings could add up throughout the year.

Colleges hold transcripts hostage for graduates behind on their college loans - Students traditionally have a soft spot for their alma maters. But as growing numbers of students run up debt in the high five and even six figures to pay for college, that may change. Especially when they discover their old school is actively blocking them from getting a job or going on to a higher degree.  That's what increasing numbers of students are finding when they try to obtain an official transcript to send to potential employers or graduate admissions offices.  It turns out many colleges and universities refuse to issue these critical documents if students are in default on student loans, or in many cases, even if they just fall one or two months behind.  It's no accident that colleges are using the withholding of official transcripts to punish students behind in their loan payments. It turns out the federal government encourages the practice. Schools are not required by law to withhold transcripts, but a spokeswoman at the Department of Education confirmed that the department "encourages" them to use the draconian tactic, saying that the policy "has resulted in numerous loan repayments."

Higher education tuition increases fueled by? - Salon points us to a primary reason public higher education tuition inflation has occurred that is left out of election rhetoric, more so than the suggested availability of Pell grants. And of course the selling of the need for one by us all.  The problem: The word “public” doesn’t mean as much as it used to. Direct state support for public colleges has cratered over the past 10 years, and really fell off the cliff after the financial crisis. Yes, tuitions have risen, but not by as much as state and local appropriations for higher education have fallen. Just between 2008 and 2009, for example, average tuition revenue at public research institutions increased by $369 per student, but the loss in state and local appropriations per student was $751. Similarly, at public community colleges, tuition revenue rose by $113 per student, while appropriations fell by $488. Since the recession of 2001, tuition hikes, as exorbitant as they have been, still haven’t kept pace with the fall in government support.  The bottom line: For the large majority of college students, rising tuitions have nothing to do with the availability of student loans or Pell Grants. What’s happening, instead, is that the burden of paying for college that was previously provided directly by government has now been shifted onto the backs of students...

Price of a diploma: Class of 2012 faces tough job market, rising costs, and increasing debt - There was a great article in Monday’s Wall Street Journal that discussed the tough job market the Class of 2012 is facing. Many of these new graduates will be competing with the graduating classes of 2011 and 2010 just to get on the bottom rungs of the career ladder. While it’s well-documented that graduating into a depressed labor market lowers lifetime earnings potential on average, today’s young  graduates have additional hurdles to worry about: rising higher education costs and crippling student debt.At EPI, we, with economist Heidi Shierholz, recently released an analysis of the labor market for recent high school and college graduates. The results are predictably grim, with unemployment rates for both sets of graduates spiking at the beginning of the Great Recession and falling very slowly in the recovery. The report also highlighted the rising cost of obtaining a college degree. The figure below shows that the cost of higher education has been rising faster than family incomes for decades, making it harder for families to pay for college. From the 1981–82 enrollment year to the 2010–11 enrollment year, the cost of a four-year education increased 145 percent for private school and 137 percent for public school. Median family income only increased 17.3 percent from 1981–2010, far below the increases in the cost of education, leaving families and students unable to pay for most colleges and universities in full.

Today’s Student Loan Recipients are Tomorrow’s Economic Elite - President Obama recently took to college universities and late night talk shows to tout his plan to keep student loan interest rates fixed at 3.4%. As e21 has noted previously, since 2008 the Federal Government has effectively socialized the student loan market by enacting laws to eliminate private lender participation in administering Federal loans. As a consequence, student loans owned by the Federal Government have grown from $111 billion at the end of 2008 to $425 billion (L. 106) as of December 31, 2011, a compound annualized growth rate of 56%. With a 9% default rate among borrowers and no collateral to cushion default severities (there are added protections in bankruptcy), the program’s interest rate would be insufficient to cover expected credit losses at today’s default rates. Yet there is no appetite among elected officials for scaling back government involvement. Despite the widespread agreement on extension of current policy, President Obama has focused on the issue to highlight tax policy and his own biography. By so doing, however, the President has revealed the incoherence of his broader approach to economic policy. On the one hand, President Obama wishes to present himself as one of the fortunate few who should have to pay more in taxes so the government can provide greater, or ongoing, loan subsidies to prospective college students. At the same time, the President references his own experience as a one-time recipient of student loans to argue for lessening the financial burden on prospective recipients. But, the President can’t have it both ways. The President is financially successful precisely because he is well-educated. If he can personally pay more in income taxes to defray the cost of the government’s student loans, he most certainly could pay the interest and principal balance on the loans he took out to finance his education.

This Is The Flawed Thinking Behind The College Bubble -… Here in Montreal, students have been striking for 13 weeks and protesting in huge numbers about a government tuition hike. The protest is laughable to the rest of the continent because fees will be raised to just $3600/year.  The protest has divided the city but it’s given me ample opportunity to hear about the cost and value of education. My mind keeps coming back to this chart from the Carpe Diem blog.  The hallmark of a bubble is that it’s based on conventional wisdom; “house prices will never fall” The conventional wisdom of higher education is that people with degrees will earn significantly more money over a lifetime. I’m not sure that’s true:

  1. Studies may have proven this but those studies looked at people in their 50s and 60s compared to their cohorts. At the time, a university degree meant something and a far lower percentage of workers had one compared to today.
  2. These studies don’t adjust for work ethic and intelligence. Some people who don’t go to university just don’t like working or they’re stupid so naturally they will make less money.
  3. Anecdotally, I don’t think it’s true. Workers in the skilled trades or low-level government jobs are much better-off than the average grad.

GOP Blocks Bill To Extend Low-Interest Student Loans - While not exactly surprising, today's Senate failure to extend a bill extending the currently low interest on student loans, after a blocking vote by the GOP may bring even more attention to what Zero Hedge has dubbed one of the biggest bubbles of 2012.  That there will be politics involved in this touchy subject is not a secret. What, however, will hit the American (young) consumer class (and recidivist iGadget buyer) like a wall of bricks is if on July 1 there is still no deal, and the student protests seen in the recent past in London and Montreal spread to US campuses, where students demand the dignity to file for bankruptcy in peace... and full debt discharge. The counter of course will be whether anyone had put a gun to their head when they were taking out a loan. The counter to that counter will be that no students expected there would be zero jobs available upon graduation. And so on, in a tit for tat repeat of the housing bubble and the massive unexpected consequences as yet another $1 trillion bubble pops, which just like last time, will result in yet another broad taxpayer funded bailout, in which the all end up paying for the the few.

To Pay Off Loans, Grads Put Off Marriage, Children -  Jodi Romine took out $74,000 in student loans to help finance her business-management degree at Kent State University in Ohio. Ms. Romine's $900-a-month loan payments eat up 60% of the paycheck she earns as a bank teller in Beaufort, S.C., the best job she could get after graduating in 2008. Her fiancé Dean Hawkins, 31, spends 40% of his paycheck on student loans. They each work more than 60 hours a week. They can't buy a house, visit their families in Ohio as often as they would like or spend money on dates. Plans to marry or have children are on hold, says Ms. Romine. "I'm just looking for some way to manage my finances." Total U.S. student-loan debt outstanding topped $1 trillion last year, according to the federal Consumer Financial Protection Bureau, and it continues to rise as current students borrow more and past students fall behind on payments. Moody's Investors Service says borrowers with private student loans are defaulting or falling behind on payments at twice prerecession rates. Most students get little help from colleges in choosing loans or calculating payments. Most pre-loan counseling for government loans is done online, and many students pay only fleeting attention to documents from private lenders. Many borrowers "are very confused, and don't have a good sense of what they've taken on," says Deanne Loonin, an attorney for the National Consumer Law Center in Boston and head of its Student Loan Borrower Assistance Project.

From Graduate School to Welfare - "I am not a welfare queen," says Melissa Bruninga-Matteau. That's how she feels compelled to start a conversation about how she, a white woman with a Ph.D. in medieval history and an adjunct professor, came to rely on food stamps and Medicaid. Ms. Bruninga-Matteau, a 43-year-old single mother who teaches two humanities courses at Yavapai College, in Prescott, Ariz., says the stereotype of the people receiving such aid does not reflect reality. Recipients include growing numbers of people like her, the highly educated, whose advanced degrees have not insulated them from financial hardship."I find it horrifying that someone who stands in front of college classes and teaches is on welfare," she says. Ms. Bruninga-Matteau grew up in an upper-middle class family in Montana that valued hard work and saw educational achievement as the pathway to a successful career and a prosperous life. She entered graduate school at the University of California at Irvine in 2002, idealistic about landing a tenure-track job in her field. She never imagined that she'd end up trying to eke out a living, teaching college for poverty wages, with no benefits or job security.

Seniors’ Social Security Garnished for Student Debts - It seems that Congress has removed nearly every consumer protection from student loans, including not only standard bankruptcy protections, statutes of limitations and truth in lending requirements, but protection from usury (excessive interest). Lenders can vary the interest rates and some borrowers are reporting rates as high as 18-20 percent. At 20 percent, debt doubles in just three and a half years; and in seven years, it quadruples. Congress has also given lenders draconian collection powers to extort not just the original principal and interest on student loans, but huge sums in penalties, fees and collection costs. The majority of these debts are being imposed on young people, who have a potential 40 years of gainful employment ahead of them to pay the debt off. But a sizeable chunk of US student loan debt is held by senior citizens, many of whom are not only unemployed but unemployable. According to the New York Federal Reserve, two million US seniors age 60 and over have student loan debt, on which they owe a collective $36.5 billion; and 11.2 percent of this debt is in default. Almost a third of all student loan debt is held by people aged 40 and over and 4.2 percent is held by people over the age of 60. The total student debt is now over $1 trillion, more even than credit card debt. The sum is unsustainable and threatens to be the next debt tsunami.

States Borrow to Cover Pension Fund Shortfalls - Debt-burdened U.S. states and municipalities were grappling with about $900 billion in long-term unfunded pension liabilities as of 2011, according to a Boston College analysis of 126 plans. The solution for some local governments from California to Florida: Take on more debt. State financial authorities are betting the pension assets they now manage will get better returns as the U.S. economy recovers and stock and bond markets improve. If so, states can take advantage of today’s ultralow borrowing costs to strengthen their retirement plans now—and pay off the debt later when pension funds generate returns robust enough to more than cover their annual payouts. Local governments sold $4.96 billion of pension bonds in 2011, the most since 2008, according to data compiled by Bloomberg. In California, Pasadena issued pension bonds in March. Oakland, Calif., and Fort Lauderdale are among issuers considering a bond sale later this year. Illinois, which has one of the country’s most poorly funded public pension funds, borrowed a total of $7.2 billion in 2010 and 2011. This strategy could backfire if state retirement fund returns don’t rebound. Recent history isn’t encouraging: In the decade through June 2010, the nation’s biggest state retirement systems earned less than half of what they needed to keep up with pension obligations, according to a Bloomberg survey.

States scaling back worker pensions to save money - Neil Carpenter took a pay cut when he accepted a job as a Louisiana state accountant more than 12 years ago, but he figured he would make up for the loss with a retirement check that would guarantee long-term financial security for him and his family. Now the 41-year-old finds his life plan teetering as Republican Gov. Bobby Jindal seeks to restructure the pension system for rank-and-file workers, potentially requiring higher employee contributions and delaying the retirement plans of employees like Carpenter. "Do you really want to breach a contract with the employees who have committed a long part of their lives to the state of Louisiana?" Carpenter asked state lawmakers recently. For years, state governments lured workers with the promise of lucrative pensions that provide nearly the pay that employees earned on the job. But after years of budget crunches, nearly every state has revamped public retirement benefits in an effort to shrink the long-term obligations that are billions of dollars short of what is needed to cover benefits. The moves have triggered a legal and political battle over whether states are reneging on their promises to millions of public-sector workers.

Calpers Actuary Recommends 5.7% Boost in California Funding - The California Public Employees’ Retirement System’s chief actuary says state taxpayers should increase contributions 5.7 percent, or $213 million, next year to cover the cost of pensions after record losses. California would pay $3.7 billion, or about 4 percent of the state’s budget, for retiree benefits in the fiscal year beginning July 1, actuary Alan Milligan recommended in a report today. School districts would pay $1.2 billion. The fund’s governing board will consider the increase at a meeting May 16. Calpers, as the fund is known, is the largest pension in the U.S., with $232.5 billion in assets. It’s still recovering from the recession which caused it to lose 23 percent in fiscal 2009, its worst one-year decline on record.

Mayor Emanuel Pushes Pension Reform In Springfield — Mayor Rahm Emanuel went to Springfield on Tuesday to speak to state lawmakers about the need for pension reform at the city and state levels. The mayor said if the General Assembly does not take action on pension reform soon, public safety and education in Chicago would be at risk – since they eat up the biggest portion of government spending and would be hardest hit by any budget cuts needed to deal with the pension crisis. CBS 2 Chief Correspondent Jay Levine reports it was the first time a Chicago mayor has been to the Illinois State Capitol in five years. (video)

Social Security Matters - Catherine Rampell wrote a post last week about how Americans expect to retire later and how more elderly Americans are working. Her last chart also showed that a growing proportion of nonretirees expect Social Security to be a major source of their income in retirement. That shows that Americans are becoming more realistic. But still, just 33 percent?Just how important is Social Security, anyway? Let’s look at some numbers. Around 2003, Barbara Butrica, Howard Iams, and Karen Smith analyzed the composition of household income for people at age 67. They projected that median-income early baby boomers, when they reached 67, would have mean per capita family income of $33,000 (Table 3), of which Social Security made up $13,000, or 40 percent. Does 40 percent qualify as a “major source” of income? I would say so. Imagine losing 40 percent of your income. Another way to look at Social Security is to compare it to the things that, in some people’s eyes, were supposed to make it unnecessary: 401(k) plans. In the projection, for early baby boomers (people retiring now), about half were expected to have defined benefit pensions and the other half were expected to have individual retirement accounts like 410(k)s and IRAs. The latter group are getting about $4,000 from those retirement accounts.

Fixable Error, New Insight, and Social Security - When errors are honest, and people keep talking in good faith, they are usually fixable. One of the errors I will talk about here is mine. The new insight is entirely the result of the good faith and honesty of Eric Laursen who has written a book about Social Security called The People's Pension. In the transcript ( ) of Mark Miller's interview with Laursen about his book appears this statement regarding possible fixes for Social Security: "A fallback would be to raise payroll taxes for everyone, but so slowly that it would have little impact – say, by 0.01 percent a year"  I knew this was wrong, and I thought I knew why: Lots of people get confused between 0.01 which is one percent of one, and 0.01 percent, which is one ten thousandth of whatever you are talking about. A tax increase of 0.01% on a 40,000 dollar per year income would be 4 dollars a year. This would not help Social Security. But it is marvelous that a tax increase of 0.05%, which is one half of one tenth of one percent, per year would solve the Social Security problem entirely. Laursen told me he had gotten the number from Monique Morrissey ( ). So I read Morrissey's paper to see where she had gotten the number. Morrissey is primarily arguing against increasing the retirement age, and she wishes to show that increases in life expectancy are not the drivers of the projected shortfall in SS:

Op-ed on social security and regressive taxes - The people who say Social Security is a regressive tax are suffering from brain damage caused by parrot fever. Having been taught to say "regressive tax, regressive tax" when they were young and impressionable, they can't stop themselves. They don't mean anything by it, but they think they do. They don't know what a regressive tax is. They don't know what a tax is. They don't know what regressive means. And above all they have no sense of proportion. The "tax" increase needed by Social Security is forty cents per week. This is the cost to the average worker of saving a program that will give them about twenty thousand dollars a year when they retire. But the "liberals" call that forty cents a "regressive tax, regressive tax" and would see the poor loose that twenty thousand dollars in order to save forty cents worth of "regressive tax, regressive tax." A regressive tax is a tax that falls more heavily on the poor than on the rich as a percent of income. But Social Security does not pay for government expenses. It pays for the retirement of the person paying the tax. So it is not a tax in the usual sense in which a tax is a payment to the government for government expenses. And Social Security is designed so that people who end up poor after a lifetime of work get a much higher return on their "investment" than those who end up "well off." So the poor are paying LESS for what they get than the rich. The poor are getting MORE for what they pay than the rich. This is called "progressive." It is the opposite of "regressive."

Your retirement health-care tab will run $240,000 — Retirement health-care costs are enough to cause a severe anxiety attack. Even with Medicare benefits, a 65-year-old couple retiring in 2012 will spend at least $240,000 in retirement, according to the latest estimate from Fidelity Investments. That doesn’t include long-term-care costs, over-the-counter medications and most dental costs. Plus, that $240,000 estimate is based on average life expectancy for a 65-year-old—the husband living until age 82 and the wife until 85—but “average” means half of people live longer than that. In other words, that 65-year-old couple may well need much more than $240,000. No wonder almost half of wealthy Americans close to retirement said they are extremely worried about the effect health-care costs will have on their plans, according to a recent survey, by Harris Interactive for Nationwide Financial, of people with more than $250,000 in household assets.

Disability rolls may be holding economy back - Following multiple surgeries that confined her to bed, Soltes was diagnosed with a hormonal disease that is weakening her bones. She also ran out of money, signed up for disability benefits and has been unable to work again. The 47-year-old from Michigan is among the 8.7 million American workers on the U.S. disability rolls, an important part of the social safety net. Since the recession began in 2007, she has been joined by a record number of people seeking disability benefits, raising questions about the program's solvency and casting a pall over future prospects for U.S. economic growth. Applicants soared to a record high of 2.94 million in 2010, and have held above 18 per 1,000 workers in the past three years — a far higher rate than in previous recessions. "There are serious concerns that this increase in disability benefits is a type of 'hidden unemployment,'"  Even though only 35 percent of applicants are awarded disability, those receiving disability benefits now account for 5.6 percent of the working age population, up from about 4.5 percent in 2007. At this rate of growth, Burkhauser estimates that total would reach over 7 percent by 2018.

Lawmakers hear update on Medicaid spending -- Texas lawmakers will get a briefing on the current status of Medicaid, the health insurance program for the poor and disabled. Experts on Monday will update a House Appropriation Subcommittee on the program that represents one of the largest segments of the state budget. Last year lawmakers shorted the program by roughly $4.8 billion, hoping that Texas will get special waivers from the federal government. But that hasn't happened. Officials with the Texas Department of Health and Human Services have predicted that lawmakers will need to come up with more than $10 billion to cover the current deficit and increases in the next budget. That could create another crisis when lawmakers meet next year to draft the next two-year budget. Last year the Legislature cut $27 billion in state services.

Pennsylvania hospitals face $5B Medicaid shortfall – The Hospital and Healthsystem Association of Pennsylvania (HAP) released new data last week showing Medicaid payments falling short of costs by $5.28 billion between 2011 and 2015. Pennsylvania hospitals are also facing reduced Medicaid payments and increased uncompensated care totaling at least $146 million as a result of the 2012–2013 proposed state budget. “Medicaid, like in most states, is an important component of care, so this kind of shortfall is pretty significant,” said HAP President and CEO Carolyn Scanlan. “With state revenue continuing to improve, hospital payments should be restored in the final state budget.” Scanlan said that the Medicaid program has always paid hospitals less than the cost of care, but that budget and payment policy changes in Harrisburg will cause the shortfall to more than double in the coming year.

Postal Service loses $3.2 billion, will skip health payment — The U.S. Postal Service said Thursday it lost $3.2 billion in the quarter ended March 31 and won’t have the cash to make a required payment for future retirees’ health benefits. The loss widened from $2.2 billion a year earlier as mail volume declined further, the service said today in a statement. The service must by law pay $11.1 billion for future health benefits by the Sept. 30 end of its fiscal year. The 10th consecutive quarter of losses may spur the House to consider its version of legislation intended to overhaul the service, which is supposed to be self-sufficient, and return it to profitability. The Senate has passed a bill that didn’t give the service all the changes it requested, including permission to end Saturday mail delivery. “The Postal Service can’t afford to continue hemorrhaging money like this,” Sen. Tom Carper, the Delaware Democrat who co-sponsored the Senate bill, said in an emailed statement. “Congress can’t stand idly by and allow it to continue to creep towards collapse. The Postal Service supports a trillion-dollar mailing industry and over 8 million jobs.”

The Fight over Medicare Double Counting - Budget experts are waging a spirited battle over the Medicare changes that helped pay for 2010’s health reform. In April, Chuck Blahous, one of two public trustees of the program, released a study arguing that the Affordable Care Act (ACA) would increase the deficit by at least $340 billion by 2021, a sharp contrast from the $210 billion in deficit reduction estimated by the Congressional Budget Office (CBO). Chuck bases his estimates on several factors, but the item that has garnered the most attention is his charge that the ACA’s spending cuts and revenue increases in Medicare Part A are being double counted: once to help pay for the ACA’s coverage expansion and a second time to improve the finances of the Part A trust fund, whose predicted exhaustion was delayed by several years. Chuck notes that those resources can be used only once: They can either offset some costs of health reform or strengthen Medicare, but not both. He believes those resources will ultimately finance additional Medicare spending and thus can’t offset any health reform costs. For that reason, he concludes that the ACA would increase deficits, rather than reduce them. That argument inspired a host of commentary from leading budget experts, ranging from denunciation to affirmation. See, for example, Jeffrey Brown, Howard Gleckman, Peter Orszag, Robert Reischauer (as quoted by Jonathan Chait), and Paul Van de Water, and a follow up by Chuck and Jim Capretta. Why does this dispute exist? It can’t just be politics. If it were, we’d have double-counting disputes about every program. But we don’t. We thus need an explanation for why this debate has erupted around Medicare Part A, which provides hospital insurance, but not around other programs.

Senate Inquiry Into Painkiller Makers’ Ties - Two senior senators said on Tuesday that they had opened an investigation into financial ties between producers of prescription painkillers and pain experts, patient advocacy groups and organizations that set guidelines on how doctors use the drugs. In a letter, the Senate Finance Committee said that it was undertaking the inquiry to make sure that doctors and patients were getting accurate information about the medications’ risks and benefits, uncolored by the financial interests of producers. The letter was signed by Max Baucus, and by Charles E. Grassley. “Overdoses on narcotic painkillers have become epidemic and it’s becoming clear that patients aren’t getting a full and clear picture of the risks posed by their medications,” Senator Baucus said in a statement. Senator Grassley, in a statement, added: “The problem of opioid abuse is bad and getting worse.” The committee also sent letters Tuesday to several academic experts seeking information about their ties to producers. Narcotic painkillers, called opioids, are the most widely prescribed class of drugs in the United States. In the last decade, the number of prescriptions doctors write annually for drugs like OxyContin, Vicodin, fentanyl and methadone has jumped fourfold. In some states, more people die in a year from overdoses involving such drugs than are killed in highway accidents. Concerns are growing that patients face significant risks from these drugs when they are used at high doses or over long periods.

Stealth Plan to Shift Costs of Certain Widely-Used Drugs to Consumers -- Yves Smith - The US healthcare system is wildly overpriced and delivers mediocre outcomes. And while the many of the problems are well known, such as bad incentives for doctors, patients trained to equate over-testing and over-treatment with high quality care, high administration costs, and unrestricted drug pricing (despite lavish public funding of drug research), Obamacare has sided with industry incumbents, namely Big Pharma and health care insurers, at the expense of everyone else. We predicted that one outcome would be overpriced insurance that didn’t cover much (note for middle class and affluent consumers, it would probably be better to have only catastrophic coverage and self insure for the rest; the worst is pricey insurance that leaves you carrying meaningful costs, particularly for major medical procedures). We seem to be moving in that direction already. Reader bob alerted me to a news item that also seems to have gone below the radar of most finance and economics bloggers: that of an FDA proposal to have more drugs available on an over-the-counter basis, including ones for diabetes (insulin), high cholesterol, allergies, and migraines. On the surface, this seems like a great cost saving move. You could get meds with no doctor visit. But most people I know who are treated for these conditions don’t get prescribed them via a separate office visit; they get a scrip in the course of getting an annual checkup.   But the stealth part of this is by making drugs for certain widespread chronic conditions and frequent ailments OTC, the result will be to move the cost onto the consumer. And this is a feature, not a bug. Per the Washington Times:

Amish Farm Kids Remarkably Immune to Allergies -Amish children raised on rural farms in northern Indiana suffer from asthma and allergies less often even than Swiss farm kids, a group known to be relatively free from allergies, according to a new study.“The rates are very, very low,” said Dr. Mark Holbreich, the study’s lead author. “So there’s something that we feel is even more protective in the Amish” than in European farming communities. What it is about growing up on farms — and Amish farms in particular — that seems to prevent allergies remains unclear.Researchers have long observed the so-called “farm effect” — the low allergy and asthma rates found among kids raised on farms — in central Europe, but less is known about the influence of growing up on North American farms. Holbreich, an allergist in Indianapolis, has been treating Amish communities in Indiana for two decades, but he noticed that very few Amish actually had any allergies.

New study: Amish prove raw milk promotes health in children - An international team of researchers recently confirmed that children who drink fresh milk – unprocessed and unpasteurized – have a better immune response to allergens and are far less likely to develop asthma. Researchers from Indiana, Switzerland, and Germany ran surveys and tests on Swiss and US children aged 6-12 years and submitted their results to the Journal of Allergy and Clinical Immunology last month. [1] Because the Amish emigrated from Switzerland, and are thus genetically similar, the team compared Northern Indiana Amish farm children with today’s Swiss kids. Though rural kids are known to be healthier than city kids, the team found that the Amish have a superior immune response to allergens and asthma than even Swiss farm kids have

More Than 40% of U.S. May Be Obese by 2030, Study Says-- The obesity rate may rise to 42 percent from about a third of the U.S. population by 2030 if nothing changes, according to a report.Preventing that increase may save about $550 billion in medical costs over the next 20 years, Eric Finkelstein, the study author and an associate research professor at Duke University, said during a press briefing. The findings, presented today at the Centers for Disease Control and Prevention's Weight of the Nation obesity conference, also suggest the surge in obesity may be slowing. Two-thirds of U.S. adults are overweight and one-third are obese, according to the Atlanta-based CDC. The findings predict that the number of people who are severely obese, or about 100 pounds overweight, will double to 11 percent. Those people are at the highest risk for health conditions caused by excess weight, including diabetes and heart disease. "Obesity rates have been skyrocketing," Finkelstein said. "If we can keep obesity rates flat, we save about $550 billion."

UK doc survey: Deny treatment to smokers, obese - A majority of doctors in a United Kingdom survey supported measures to deny non-emergency medical services to smokers and the obese, The Observer newspaper reported Sunday. Although the survey by the networking website was a self-selecting poll, the site's chief executive called the response "a tectonic shift" for the profession. The results feed into a British debate about "lifestyle rationing" by the National Health Service, the Observer reported. The survey by, which claims nearly 192,000 members, found that 593, or 54 percent, of the 1,096 doctors who participated answered yes to this question: "Should the NHS be allowed to refuse non-emergency treatments to patients unless they lose weight or stop smoking?"

‘One in six cancers worldwide are caused by infection’ - One in six cancers - two million a year globally - are caused by largely treatable or preventable infections, new estimates suggest. The Lancet Oncology review, which looked at incidence rates for 27 cancers in 184 countries, found four main infections are responsible. These four - human papillomaviruses, Helicobacter pylori and hepatitis B and C viruses - account for 1.9m cases of cervical, gut and liver cancers. Most cases are in the developing world. The team from the International Agency for Research on Cancer in France says more efforts are needed to tackle these avoidable cases and recognise cancer as a communicable disease. 'Preventable' The proportion of cancers related to infection is about three times higher in parts of the developing world, such as east Asia, than in developed countries like the UK - 22.9% versus 7.4%, respectively. Nearly a third of cases occur in people younger than 50 years. Among women, cancer of the cervix accounted for about half of the infection-related cancers. In men, more than 80% were liver and gastric cancers.

Drug-Defying Germs From India Speed Post-Antibiotic Era - Skaret was relieved to be home. Then her doctor gave her upsetting news. Mutant germs that most antibiotics can’t kill had entered her bladder, probably from a contaminated hospital catheter in India. She risked a life-threatening infection if the bacteria invaded her bloodstream -- a waiting game over which she had limited control,  Eventually, her body rid itself of the bacteria, and she escaped harm from a new type of superbug that scientists warn is spreading faster, further and in more alarming ways than any they’ve encountered. Researchers say the epicenter is India, where drugs created to fight disease have taken a perverse turn by making many ailments harder to treat.  India’s $12.4 billion pharmaceutical industry manufactures almost a third of the world’s antibiotics, and people use them so liberally that relatively benign and beneficial bacteria are becoming drug immune in a pool of resistance that thwarts even high-powered antibiotics, the so-called remedies of last resort.  Poor hygiene has spread resistant germs into India’s drains, sewers and drinking water, putting millions at risk of drug-defying infections. Antibiotic residues from drug manufacturing, livestock treatment and medical waste have entered water and sanitation systems, exacerbating the problem.  As the superbacteria take up residence in hospitals, they’re compromising patient care and tarnishing India’s image as a medical tourism destination.

Price of Rice Is Going Up - That cheap bowl of rice you were counting on to stretch your paycheck may soon get pricey. It’s happening because Western Hemisphere farmers are cultivating less rice while inventories are set to plummet. “Stocks are running low now, and rice prices do not go down when acreage goes down,” . “Never [has that happened] in any year that we have traded rice, which is for over 30 years.” In short, prices are going higher. U.S. land dedicated to rice planting will hit the lowest level since 1987, about 2.6 million acres, according to the U.S. Department of Agriculture. That’s down 30% from 3.6 million acres in 2010. That’s not the only reason Firstgrain’s Hamilton sees higher prices. Production is projected to see double-digit percentage declines in the major Western Hemisphere producers—Brazil, Argentina, Uruguay, Peru, and Ecuador—according to recent USDA projections. In addition, Hamilton says, for 2012-2013 (next season), U.S. stockpiles relative to the amount of rice consumed will be about half the normal level of about 15%. So, there’s not much cushion.

Soy-Crop Bust Spurs China to Drain U.S. Bins: Commodities - U.S. soybean stockpiles are poised to drop to the lowest relative to consumption since at least 1965 after the worst drought in five decades decimated crops across South America, driving China to buy more from Midwest farmers.  Inventories will decline 20 percent to 172 million bushels (4.68 million metric tons) before next year’s harvest in the U.S., the largest grower, according to the average of 31 analyst estimates compiled by Bloomberg. This year’s 22 percent rally may extend another 9 percent by the end of June to $16 a bushel, according to Linn Group, a brokerage and researcher based in Chicago. Prices reached a record $16.3675 in 2008.  The U.S. Department of Agriculture cut its forecasts for the South American crop four times in as many months after predicting record supplies as recently as December. The estimates are scheduled to be updated May 10. Imports by China, where demand doubled since 2004, will advance to a record 55 million tons this year as farmers feed a hog herd expanding 4.4 percent to a record 690 million animals, USDA data show.

Beef prices way up and likely to remain high - Smaller U.S. cattle herds and increasing feed and fuel costs have pushed some cattle producers out of the business over the last half-decade. And because of last year's extreme drought in the cattle cradle of the Southwest, many ranchers liquidated herds they couldn't afford to feed. Meanwhile, the export market for U.S. beef remains strong. In response, prices have risen significantly since 2010, with some beef cuts jumping more than 30 percent. The average retail price in March for USDA Choice-grade round steak was $4.81, up 13 percent from two years ago, according to the U.S. Agriculture Department's Economic Research Service. Choice-grade boneless sirloin was $6.53, up 16 percent. And ground beef was at a record $3.02 a pound in March, 11 percent higher than last year and 35 percent more than in 2010.

EIA Chart of U.S. Biodiesel Production from 2009 through 2011 - U.S. production of biodiesel was a record 109 million gallons in December 2011, according to new data released by the U.S. Energy Information Administration (EIA). Production came from 113 active biodiesel plants.

  • Biodiesel production for all of 2011 was 967 million gallons, which was the highest level recorded since EIA began tracking this data. Biodiesel fuel is mainly used for transportation, similar to diesel fuel.
  • Monthly biodiesel production had both sharp increases and decreases in 2009 and 2010 due in part to the expiration and reinstatement of Federal tax credits and renewable fuels standards affecting biodiesel.
  • Annual biodiesel production was 516 million gallons in 2009. Production fell to 343 million gallons in 2010 but then rebounded to 967 million gallons in 2011.
  • Soybean oil was the largest biodiesel feedstock in 2011, at 4,136 million pounds consumed. The next three largest biodiesel feedstocks during 2011 were canola oil (847 million pounds), yellow grease and other recycled feedstocks (665 million pounds), and white grease (533 million pounds).

South Africa: U.S. Agriculture Hosts Food Security Seminar: By 2100 the world's population will exceed ten billion and more than 80% of that population will be resident in Africa and Asia, according to the United Nations. Right now, world population growth coupled with the economic crisis and its resultant higher food prices and falling consumption mean that the world, and Africa in particular, is facing a food security crisis. The pressing issue of food security, or the availability of food and a population's access to it, will be dealt with extensively at the USA Food Security Seminar in Sandton, Johannesburg on Tuesday, 22 May, hosted by the US Department of Agriculture (USDA).In this one-day seminar, American and South African industry leaders will provide insights on food security, nutrition, world food trends and practical solutions for cost-effective feeding of the people of Southern Africa, including the region's most at-risk demographic, children aged five and under. "We invite stakeholders and buyers from the Southern African food industry to join us, to listen and exchange views on the issues that will be put on the table, as well as be introduced to a range of quality, cost-effective food products from the USA,"

The Intensifying Debate Over Food Security -- Yves Smith - One of the troubling ideas that seems to have gained traction is that nations should not care overmuch about the needs of their citizens and should accept market outcomes. This position is ultimately contradictory, since its proponents argue for the Reaganite “get government out of the way” position, when commerce depends on rights defined by and enforced by the state (would US companies have built factories in China, a Communist country which could expropriate assets, if the US were not a military superpower?) This advocacy of “free trade” (when we in fact live in world of managed trade) runs two parallel arguments: the “free trade increases wealth and therefore we should all go along” and and the “more open trade is inevitable, you better be on this bus or you will be under the bus.” Too often, these arguments rest on the assumption that coming close to the economists’ fantasy of frictionless free trade is better. But that was debunked in 1953, in the Lipsey-Lancaster theorem, which demonstrated that trying to move to closer to an unattainable state was not only not assured to produce better outcomes, it could very well produce worse ones. You actually need to do the work of evaluating various “second best” alternatives, rather than assuming more is better.  And there are non-economic tradeoffs to consider as well. We’ve often cited this observatio by development economist Dani Rodrik: I have an “impossibility theorem” for the global economy that is like that. It says that democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. Here is what the theorem looks like in a picture:

Breakthroughs in Health in the Millennium Villages - Jeffrey Sachs - In Africa's Millennium Villages (MVs), local communities are taking many actions in health care, agriculture, education, and other challenges to achieve the Millennium Development Goals. Their hard work is paying off. In just three years, the mortality rate among children under five dropped by 22 percent. This pace is three times faster than national trends in the rural areas, and is fast enough to achieve the Millennium Development Goal for child mortality (MDG 4). These results, detailed in a Lancet study published today, reinforce the global effort to build effective, low-cost, community-led health care systems that can end millions of deaths of young children and pregnant women each year.  The Millennium Villages are representative of the most impoverished settings across sub-Saharan Africa, where the rate of child mortality is fifteen times higher than in developed economies. High child mortality is caused mainly by diarrhea, pneumonia, malaria and HIV infection, all made more severe by under-nutrition, and from unsafe childbirths taking place at home without skilled personnel. These conditions go unsolved because of weak and under-financed health systems. The Millennium Villages strategy is to build a highly effective, low-cost health system to address the range of infectious diseases, nutritional deficiencies, and risks related to childbirth.

What Does Geography Explain? - The view that geographic factors such as climate, natural resources, disease burden or soil quality directly explain why some countries are poor still has many proponents. But these diehard geographic determinists notwithstanding, most people recognize that such geographic factors cannot explain world inequality today. That being said, the dominant explanation about world inequality at the start of the early modern period (around 1500) is all about geography. This explanation, developed and popularized in Jared Diamond’s Guns, Germs and Steel, links inter-continental inequality circa 1500 to the historical distribution of domesticable animal and crop species. Where there were a lot of these the Neolithic Revolution — the transition from hunting and gathering to herding and farming — happened earlier and was more productive. In these places population density took off, and this spurred both technological progress and the emergence of complex societies. A fascinating argument.  But it is not an explanation for modern world inequality.

Big Rise In North Pacific Plastic Waste - The quantity of small plastic fragments floating in the north-east Pacific Ocean has increased a hundred fold over the past 40 years. Scientists from the Scripps Institution of Oceanography documented the big rise when they trawled the waters off California. They were able to compare their plastic "catch" with previous data for the region. The group reports its findings in the journal Biology Letters. "We did not expect to find this," says Scripps researcher Miriam Goldstein.  "When you go out into the North Pacific, what you find can be highly variable. So, to find such a clear pattern and such a large increase was very surprising," she told BBC News.  All the plastic discarded into the ocean that does not sink will eventually break down. Sunlight and the action of the waves will degrade and shred the material over time into pieces the size of a fingernail, or smaller. An obvious concern is that this micro-material could be ingested by marine organisms, but the Scripps team has noted another, perhaps unexpected, consequence. The fragments make it easier for the marine insect Halobates sericeus to lay its eggs out over the ocean.These "sea skaters" or "water striders" - relatives of pond water skaters - need a platform for the task.

Pollution: the great leveller - A harried parent called a few weeks ago. She wanted to know if the pollution levels in Delhi were bad and if so how bad. The answer was simple and obvious. But why do you need to know? Her daughter’s prestigious school (which I will leave unnamed) had sent a circular to parents, saying they are planning to shift to air-conditioned buses because they were worried about air pollution. She wanted to know if this was the right decision.  My answer changed. The fact is that pollution levels are high and we do need to find ways to bring them under control. But the solution is not to think that the rich can find ways to avoid breathing the air, and so keep pollution at bay. I asked her if the school was also planning to build an air-conditioned funnel for walkways and an air-conditioned gymnasium so that children would not be exposed to this foul air.  What an irony that instead of fighting pollution and demanding change, the city’s rich and famous —many drive big cars and run them on subsidised diesel—think they can escape this noxious air. They can opt out of the whole “dirty” system and even generate their own air to breathe.

Chemical manufacturers rely on fear to push flame retardant furniture standards - Dr. David Heimbach knows how to tell a story. Before California lawmakers last year, the noted burn surgeon drew gasps from the crowd as he described a 7-week-old baby girl who was burned in a fire started by a candle while she lay on a pillow that lacked flame retardant chemicals. "Half of her body was severely burned. She ultimately died after about three weeks of pain and misery in the hospital." But there was a problem with his testimony: It wasn't true. Records show there was no dangerous pillow or candle fire. The baby he described didn't exist. Neither did the 9-week-old patient who Heimbach told California legislators died in a candle fire in 2009. Nor did the 6-week-old patient who he told Alaska lawmakers was fatally burned in her crib in 2010. Heimbach is not just a prominent burn doctor. He is a star witness for the manufacturers of flame retardants. His testimony, the Tribune found, is part of a decades-long campaign of deception that has loaded the furniture and electronics in American homes with pounds of toxic chemicals linked to cancer, neurological deficits, developmental problems and impaired fertility.

I, for one, Welcome our New Blood Sucking, Disease bearing OverLords. Tick Population Explodes after Winter MIA - Although the growing season hasn’t even started, there’s already a bumper crop — of a critter that really ticks people off. Ticks make even confirmed nature-lovers skeevy, since they do more than suck your blood. They can also transmit diseases, including Lyme Disease. Schuylkill Center land and facilities director, Sean Duffy, says the mild winter and warm, early spring have given ticks a leg-up. “We’re going to have a lot. Last year was actually a pretty active year for ticks on our property, and because we didn’t have the die-off from a harsh winter, I think that this is really going to be a big year for ticks,” which aren’t very big, especially deer ticks. And, Duffy says you don’t need deer strolling through your yard to have them. “Mice are actually one of their big host species.” In fact, that’s where the Lyme bacteria come from. Wearing long sleeves and pants can help you keep ticks from making a meal of you. But, make sure you check for them when you go inside.

NOAA: US Experienced Warmest 12-Month Period in 117 Years - The U.S. has experienced the warmest 12-month period since recordkeeping began in 1895, according to the newest monthly "State of the Climate" report from the National Oceanic and Atmospheric Administration (NOAA). The NOAA reports that in the period from May 2011 to April 2012 the nationally-averaged temperature 2.8°F above the 1901-2000 long-term average. The first four months of the year were 5.4°F above the long-term average, also the warmest such period since recordkeeping began.

U.S. Experiences Warmest 12-Month Period On Record And Most Extreme January to AprilFigure 1. The ten warmest 12-month periods in the contiguous U.S. since record keeping began in 1895. Image credit: NOAA/NCDC. by Jeff Masters, via WunderBlog The past twelve months were the warmest twelve months in U.S. history, said NOAA’s National Climatic Data Center (NCDC) on Tuesday, in their monthly “State of the Climate” report. Temperatures in the contiguous U.S. during May 2011 – April 2012 broke the previous record for warmest 12-month period, set November 1999 – October 2000, by 0.1°F. The past twelve months have featured America’s 2nd warmest summer, 4th warmest winter, and warmest March on record. Twenty-two states were record warm for the 12-month period, and an additional nineteen states were top ten warm. NOAA said that the January – April 2012 period was also the warmest January – April period since record keeping began in 1895. The average temperature of 45.4°F during January – April 2012 was 5.4°F above the 20th century average for the period, and smashed the previous record set in 2006 by an unusually large margin–1.6°F.

House slashes funding increase for NOAA climate website - Of a possible $1.4 billion dollars in proposed spending cuts in the Departments of Commerce and Justice for 2013, the U.S. House Representatives voted to approve none of them. None of them except a piddly $542,000 for a NOAA climate website. The amendment was approved 219-189 Tuesday evening reported. The NOAA “climate website” is - a portal to NOAA’s climate information.  The website - currently in a prototype stage - provides a rich set of climate information, tools, and data resources. With a little investment, it has the potential to provide tremendous benefits to decision makers. One wonders, then, why the 56 percent funding increase for this website proposed by the President was the low-hanging fruit snipped off the vine. Congressman Andy Harris (R-MD), serving eastern Maryland, who offered the amendment, justified it as an effort to save taxpayers money. But couldn’t the website provide a substantial return on the relatively trivial investment? In 2011, the U.S. experienced 14 separate billion dollar weather disasters with more than $60 billion in damages.

Report: U.S. Environmental Satellite System ‘Is At Risk Of Collapse’ And Could Decline 75% By 2020 - The Nation’s leading scientists have issued a stark warning: America’s ability to monitor the environment is rapidly diminishing. And if we don’t properly fund our satellite capabilities, the country could lose three quarters of its Earth observation systems by 2020.That alarming conclusion comes from the National Research Council in a new report assessing the progress of the nation’s Earth observation programs. In short: our leading scientific institutions aren’t actually making much progress. Rather, a lack of funding and infrastructure will result in “a rapid decline” in our ability to monitor extreme weather and changes to the climate. The committee found that the number of NASA and NOAA Earth observing instruments in space is likely to decline to as little as 25 percent of the current number by 2020….  The U.S. system of environmental satellites is at risk of collapse. The projected loss of observing capability could have significant adverse consequences for science and society. The loss of observations of key Earth system components and processes will weaken the ability to understand and forecast changes arising from interactions and feedbacks within the Earth system and limit the data and information available to users and decision makers.

Club Of Rome Climate Change Report Predicts 2 Degree Celsius Warming By 2052: - Rising carbon dioxide emissions will cause a global average temperature rise of 2 degrees Celsius by 2052 and a 2.8 degree rise by 2080, as governments and markets are unlikely to do enough against climate change, the Club of Rome think tank said. Failing to tackle climate change in the first half of this century will put the world on a dangerous track to warming in the second half, even though global population should peak in 2042 at 8.1 billion and economic growth will be much slower than expected in mature economies, the Switzerland-based body said in a report on Tuesday. "It is unlikely that governments will pass necessary regulation to force the markets to allocate more money into climate-friendly solutions, and (we) must not assume that markets will work for the benefit of humankind," said Jorgen Randers, author of the report. "We are emitting twice as much greenhouse gases every year as are absorbed by the world's forests and oceans. This overshoot will worsen and will peak in 2030."

Global Temperatures Could Rise by More than 2°C by Mid-Century: Report - Rising carbon dioxide CO2 concentrations in the atmosphere will continue to grow and cause an increase of 2°C in global temperatures by 2052 and could rise as much as 2.8°C by 2080, according to a new report sponsored by the international think tank Club of Rome. Such drastic temperature shifts are faster than other studies have predicted and would be high enough to trigger self-reinforcing climate change much sooner than previously thought. "Humankind might not survive on the planet if it continues on its path of over-consumption and short-termism," the report suggests. The main cause of global warming and climate change -- and a panoply of future problems facing mankind -- is the dominance of excessively short-term political and economic models, suggests the report's author, Jorgen Randers. “We already live in a manner that cannot be continued for generations without major change," . "Humanity has overshot the earth’s resources, and in some cases we will see local collapse before 2052 – we are emitting twice as much greenhouse gas every year as can be absorbed by the world’s forests and oceans.” He continued: “We need a system of governance that takes a more long-term view. It is unlikely that governments will pass necessary regulation to force the markets to allocate more money into climate friendly solutions, and must not assume that markets will work for the benefit of humankind”.

ArcticNews: Temperature rise projections The Climate Emergency Institute recently produced the image below. Also see the institute's warning on Food Security.

NASA Study Finds Surprising New Methane Emission Source And Possible Amplifying Feedback: The Arctic Ocean -- NASA scientist: “It’s possible that as large areas of sea ice melt and expose more ocean water, methane production may increase, leading to larger methane emissions…. So our finding could represent a noticeable new global source of methane.” The fragile and rapidly changing Arctic is home to large reservoirs of methane, a potent greenhouse gas. As Earth’s climate warms, that methane is vulnerable to possible release into the atmosphere, where it can add to global warming. Researchers have known for years that large amounts of methane are frozen in Arctic tundra soils and in marine sediments (including gas hydrates). But now a multi-institutional study led by Eric Kort of NASA’s Jet Propulsion Laboratory has uncovered a surprising and potentially important new source of methane: the Arctic Ocean itself. The photograph above was taken by Kort, and it shows leads and cracks in the ice cover of the Arctic Ocean north of Alaska. During five research flights in 2009–10, Kort and colleagues measured increased methane levels while flying at low altitudes north of the Chukchi and Beaufort Seas in a National Science Foundation/National Center for Atmospheric Research (NCAR) Gulfstream V aircraft as part of the HIAPER Pole-to-Pole Observations (HIPPO) airborne campaign.

Destabilization: Scientists discover new unstable region the size of New Jersey under Antarctica Ice Sheet - Using ice-penetrating radar instruments flown on aircraft, a team of scientists from the U.S. and U.K. have uncovered a previously unknown sub-glacial basin nearly the size of New Jersey beneath the West Antarctic Ice Sheet (WAIS) near the Weddell Sea. The location, shape and texture of the mile-deep basin suggest that this region of the ice sheet is at a greater risk of collapse than previously thought. Team members at The University of Texas at Austin compared data about the newly discovered basin to data they previously collected from other parts of the WAIS that also appear highly vulnerable, including Pine Island Glacier and Thwaites Glacier. Although the amount of ice stored in the new basin is less than the ice stored in previously studied areas, it might be closer to a tipping point. “If we were to invent a set of conditions conducive to retreat of the West Antarctic Ice Sheet, this would be it,” said Don Blankenship, senior research scientist at The University of Texas at Austin’s Institute for Geophysics and co-author on the new paper. “With its smooth bed that slopes steeply toward the interior, we could find no other region in West Antarctica more poised for change than this newly discovered basin at the head of the Filchner-Ronne Ice Shelf. The only saving grace is that losing the ice over this new basin would only raise sea level by a small percentage of the several meters that would result if the entire West Antarctic Ice Sheet destabilized.”

The Bad News Continues to Flow About Antarctica’s Ice - It’s just two weeks since a paper in Nature flagged an ominous thinning of ice shelves along parts of the Antarctic coast lying due south of the Pacific Ocean.  Now there’s something new to worry about. A pair of brand-new studies published today, one in Nature and one in its sister publication Nature Geoscience, are pointing to yet another danger zone, this one on Antarctica’s Weddell Sea coast, nestled in the armpit of the Antarctic Peninsula. The first study asserts that warm ocean currents are likely to eat significantly into the huge Filchner-Ronne Ice Shelf by 2100; the second argues that the lay of the land underneath the shelf makes the ice even more unstable than it would otherwise be. “We don’t necessarily have any evidence for a dramatic change right now,” , “but it’s on the threshold.”The reason, say Seagirt and his colleagues, is that airborne radar shows that the ice shelf sits atop a depressed basin of bedrock about 60 miles wide by 160 miles long by up to a mile and half below sea level at its deepest. Right now, the so-called grounding line — the place where a shelf makes the transition from grinding along the rock to floating freely in the sea — lies at the outer rim of that basin. As warmer water melts the ice back, it can flow into the basin and cause the ice within to detach from the bedrock relatively quickly. “Its very nearly afloat already,” Seagirt said. “It needs some push and we don’t believe the push needs to be very hard.”

Game Over for the Climate, by James Hansen -  Global warming isn’t a prediction. It is happening. That is why I was so troubled to read a recent interview with President Obama in which he said that Canada would exploit the oil in its vast tar sands reserves “regardless of what we do.” If Canada proceeds, and we do nothing, it will be game over for the climate.  Canada’s tar sands, deposits of sand saturated with bitumen, contain twice the amount of carbon dioxide emitted by global oil use in our entire history. If we were to fully exploit this new oil source, and continue to burn our conventional oil, gas and coal supplies, concentrations of carbon dioxide in the atmosphere eventually would reach levels higher than in the Pliocene era, more than 2.5 million years ago, when sea level was at least 50 feet higher than it is now. That level of heat-trapping gases would assure that the disintegration of the ice sheets would accelerate out of control. Sea levels would rise and destroy coastal cities. Global temperatures would become intolerable. Twenty to 50 percent of the planet’s species would be driven to extinction. Civilization would be at risk.  That is the long-term outlook. But near-term, things will be bad enough. Over the next several decades, the Western United States and the semi-arid region from North Dakota to Texas will develop semi-permanent drought, with rain, when it does come, occurring in extreme events with heavy flooding. Economic losses would be incalculable. More and more of the Midwest would be a dust bowl. California’s Central Valley could no longer be irrigated. Food prices would rise to unprecedented levels.

Global Warming: An Exclusive Look at James Hansen’s Scary New Math - How can NASA physicist and climatologist James E. Hansen, writing in the New York Times today, “say with high confidence” that recent heat waves in Texas and  Russia “were not natural events” but actually “caused by human-induced climate change”? It wasn’t all that long ago that respected MIT atmospheric scientist Kerry Emanuel flatly refuted the notion that you can pinpoint global warming as the cause of an extreme weather event. “It’s statistical nonsense,” he told PBS. But Hansen’s shot across the bow this morning indicates that the unwillingness to point fingers may be changing. According to a peer-reviewed paper Hansen has submitted to a leading scientific journal and made available to prior to publication, scientists can now state “with a high degree of confidence” that some extremely high temperatures are in fact caused by global warming, simply because they occur much more frequently than they used to. (A preliminary draft of the article is available here.) Hansen’s reasoning has to do with math. Statisticians employ standard deviation to measure variability; it’s the calculation pollsters use to determine margin of error, and it’s especially valuable when looking at the weather. Perfect distribution of standard deviation is graphed as the familiar bell curve; about two-thirds of the time, data points fall in the middle of the bell — or within one standard deviation of the mean.

Asia group urges action on climate change - -- The Asian Development Bank urged countries in the Asia-Pacific region to take immediate action to reduce the negative impact of climate change. A new ADB study, unveiled during the bank's 45th annual meeting in Manila, calls for governments in the region to create a carbon market, phase out pervasive fossil fuel subsidies and to establish an Asian free-trade zone for high-impact, low-carbon technologies and services. Noting that Asian-Pacific countries have been the world's largest resource users since the mid-1990s, ADB warned that if current trends continue, by 2050, the carbon dioxide emissions of these countries are likely to more than triple, putting an "unbearable strain" on the Earth's ecosystems. Developing Asia is now responsible for 35 percent of worldwide energy-related carbon dioxide emissions, compared with 17 percent in 1990, ADB says.

Pakistan's climate change challenge - Siachen, in fact, serves as a microcosm of Pakistan's environmental troubles. The nation experiences record-breaking temperatures, torrential rains (nearly 60 percent of Pakistan's annual rainfall comes from monsoons), drought, and glacial melt (Pakistan's United Nations representative, Hussain Haroon, contends that glacial recession on Pakistani mountains has increased by 23 percent over the past decade). Experts estimate that about a quarter of Pakistan's land area and half of its population are vulnerable to climate change-related disasters, and several weeks ago Sindh's environment minister said that millions of people across the province face "acute environmental threats."  . According to climatologists, the devastating floods of 2010-which submerged a fifth of the country and displaced millions-constituted "the worst natural disaster to date attributable to climate change" (a judgment rendered in 2010). The floods' destructiveness was exacerbated by Pakistan's rampant deforestation.  UN data and Pakistani media reports paint an alarming picture of this emissions-releasing scourge: Pakistan suffers from the highest annual rate of deforestation in Asia (the nation lost 33 percent of its forest cover between 1990 and 2010), with barely 2 percent of the country's total area remaining forested today.    The next year brought another climate-related disaster: record-setting monsoon rains. Though they produced less destruction and garnered less media attention than the preceding year's floods, nearly nine million people were affected and more than a million homes damaged or destroyed. September 2011 witnessed the most rain ever recorded in southern Pakistan, with monsoon amounts 1,170 percent above normal. Deforestation once again made matters worse.

Public support slips for steps to curb climate change – From gas-mileage standards to tax breaks for windmills, public support for "green" energy measures to tackle global warming has dropped significantly in the past two years, particularly among Republicans, a new poll suggests. Majorities still favor most such tax breaks or restrictions on industry, finds the Stanford University poll to be released today. It shows 65% support gas-mileage standards and 73% support tax breaks for wind and solar power. But just 43% support tax breaks for nuclear power, 26% support increasing gasoline taxes and 18% support hiking taxes on home electricity.  Overall, support for various steps to cut greenhouse gas emissions has dropped an average of 10 percentage points since 2010, from 72% to 62%, lead researcher Jon Krosnick says. "Most Americans (62%) still support industry taking steps aimed at cutting greenhouse gas emissions," Krosnick says, "but they hate the idea of consumer taxes to do it." His group's nationwide polls compared responses from 1,001 people in 2010 to 1,428 people this year.

Can the courts force climate change legislation? - "At issue is whether a small group of individuals and environmental organizations can dictate through private tort litigation the economic, energy, and environmental policies of the entire nation," wrote National Association of Manufacturers spokesman Jeff Ostermeyer in an email. Granting the plaintiffs' demands, he added, "would carry serious and immediate consequences for industrial and economic productivity -- increasing manufacturing and transportation costs and decreasing global competitiveness." The manufacturers' legal brief says the restrictions being sought "could substantially eliminate the use of conventional energy in this country." It also argues that the plaintiffs haven't proved they have a legal right to sue.  The plaintiffs contend that they have standing to sue under the "public trust doctrine," a legal theory that in past years has helped protect waterways and wildlife. It's the reason, for example, that some state government agencies issue licenses to catch fish or shoot deer, particularly when populations are declining. The doctrine has never before been applied to the atmosphere, and it's a trickier prospect, not least because the sources of atmospheric pollution are so diffuse and wide-ranging, extending to other countries whose actions the United States may not be able to influence. via www.theatlantic.comInteresting.

EU nations get cold feet over climate change fund - - EU nations have yet to come up with a plan on how to fill a multi-billion euro fund to help tackle climate change, even as the region's executive body hosts talks with countries likely to bear the brunt of extreme weather. The European Union recommitted to providing 7.2 billion euros ($9.4 billion) for the fund over 2010-12, according to draft conclusions seen by Reuters ahead of a meeting of EU finance ministers next week.But after that, how much cash will flow is unclear as the text, drafted against the backdrop of acute economic crisis in the euro zone, states the need to "scale up climate finance from 2013 to 2020", but does not specify how. The Green Climate Fund aims to channel up to $100 billion globally per year by 2020 to help developing countries deal with the impact of climate change. Its design was agreed at international climate talks in Durban last year.

Can Geoengineering Solve Global Warming? - There is only one reason to consider deploying a scheme with even a tiny chance of causing such a catastrophe: if the risks of not deploying it were clearly higher. No one is yet prepared to make such a calculation, but researchers are moving in that direction.  “The odd thing here is that this is a democratizing technology,’’ Nathan Myhrvold told me. “Rich, powerful countries might have invented much of it, but it will be there for anyone to use. People get themselves all balled up into knots over whether this can be done unilaterally or by one group or one nation. Well, guess what. We decide to do much worse than this every day, and we decide unilaterally. We are polluting the earth unilaterally. Whether it’s life-taking decisions, like wars, or something like a trade embargo, the world is about people taking action, not agreeing to take action. And, frankly, the Maldives could say, ‘Fuck you all—we want to stay alive.’ Would you blame them? Wouldn’t any reasonable country do the same?”

'Cornucopians in Space' Deliver a Dangerously Misguided Message - Once a year the very chic and exclusive TED conference takes place in Southern California, bringing together entrepreneurs, inventors, and thought leaders from every corner of the world. There, gathered around a stage, a kind of hive mind begins to unfold in which the most cutting edge ideas in healthcare, energy, social development, and behavioral psychology are shared from a very plugged-in, big-screen podium. It’s extremely well done. And despite the reflexive criticism from outside the conference -- that the gathering is inward-looking and elitist -- TED usually does manage to disturb the zeitgeist, a little, with its unveilings in technology and innovation. It is plainly good that next-step advances in solar technology, data collection, and developing world health initiatives are explained and broadcasted from TED. Especially given that policy makers, or those who have the ear of policy makers, are also often in attendance.  A better charge to level against the TED conference, however, is that it’s routinely, if not unfailingly, optimistic.

What Is The Limiting Factor? - In yesteryear’s empty world capital was the limiting factor in economic growth. But we now live in a full world. Consider: What limits the annual fish catch — fishing boats (capital) or remaining fish in the sea (natural resources)? Clearly the latter. What limits barrels of crude oil extracted — drilling rigs and pumps (capital), or remaining accessible deposits of petroleum — or capacity of the atmosphere to absorb the CO2 from burning petroleum (both natural resources)? What limits production of cut timber — number of chain saws and lumber mills, or standing forests and their rate of growth? What limits irrigated agriculture — pumps and sprinklers, or aquifer recharge rates and river flow volumes? That should be enough to at least suggest that we live in a natural resource-constrained world, not a capital-constrained world. Economic logic says to invest in and economize on the limiting factor.Economic logic has not changed; what has changed is the limiting factor.   Nobel Laureate in chemistry and underground economist, Frederick Soddy, predicted the shift eighty years ago. He argued that mankind ultimately lives on current sunshine, captured with the aid of plants, soil, and water. This fundamental permanent basis for life is temporarily supplemented by the release of trapped sunshine of Paleozoic summers that is being rapidly depleted to fuel what he called “the flamboyant age.” So addicted are we to this short-run subsidy that our technocrats advocate shutting out some of the incoming solar energy to make more thermal room for burning fossil fuels!

The Environmental Benefits of China's One Child Policy - I've read in the news that the blind Chinese activist is eager for China to get rid of its one child policy.  Will environmentalists oppose his agenda?  After all, Paul Ehrlich's ideas remain influential.  It has been claimed that China would have an extra 300 million people right now had it not introduced this policy.  Such population growth would scale up greenhouse gas emissions and resource consumption. Siqi Zheng and I have worked on a different environmental benefit of "4-2-1" (4 grandparents, 2 parents, 1 kid).  As Chinese urbanites have only 1 kid, they have very strong incentives to seek out "green cities"  to guarantee this precious child's health and happiness.  Pollution injures both.   Dora Costa and I have argued that the willingness to pay to avoid risk rises faster than national per-capita income.  As China grows richer, this logic implies that China's willingness to pay for safety and environmental regulation will increase and this will help to supply "green cities".  Zheng and I have a Journal of Economic Literature submission that fleshes out these ideas.

Big Idea: A Green Energy Offensive From the Department of Defense - Over the past decades, the U.S. military has been a central driver of commercial innovation. When our armed forces needed to enhance their speed of communication in the face of a nuclear assault, we got the internet. When they needed to increase their ability to process information, we got the microprocessor. Today, our military is facing an energy crisis that requires new breakthroughs in technology. How much does it cost the U.S. government to protect our oil supplies? In fiscal terms, between 1976 and 2007 it cost our military $7.3 trillion to patrol the Persian Gulf with aircraft carriers. Between 2001 and 2006, while thousands of troops lost their lives in Afghanistan and Iraq, the military—much like average Americans—saw its budget squeezed as oil prices climbed to record highs. The U.S. economy’s growth has frequently been thwarted by shocks stemming from rising oil prices. The Department of Defense has reacted to this challenge by investing in renewable energy innovation.  In the face of growing costs in terms of lives and fuel, our military has developed a new approach to energy innovation that fundamentally changes the way we think about energy security. In order to compete economically and preserve our military dominance in the 21st century, the U.S. military is developing technologies that promote energy ownership: energy supplies that can be controlled by the user from production to consumption.

Saudi Arabia Unveils $100 Billion Plan To Make Solar ‘A Driver For Domestic Energy For Years To Come’ - Even the world’s largest producer of oil understands the value of developing renewable energy. A few months after Saudi Arabia’s oil minister called global warming “among humanity’s most pressing concerns,” the country is rolling out an ambitious plan to source 41,000 megawatts of solar projects over the next two decades — scaling up a domestic solar industry to support one third of electricity production by 2032. Solar electricity and petroleum serve completely different markets. However, in this case, solar will be directly replacing the oil that Saudi Arabia uses for desalination plants. Officials are currently rolling out a competitive bidding process for 1,100 megawatts of solar photovoltaics and 900 megawatts of concentrating solar power in the first quarter of 2013. The plan is part of a larger strategy to scale up various sources of renewable energy, build a new domestic industry, and reduce oil consumption. Officials estimate that the solar plan will reduce domestic consumption of oil by 520,000 barrels per day. PV Magazine reported on the news from a solar conference in Saudi Arabia: The oil-rich country is planning to place more focus on renewable energy generation. In addition to more solar power, it intends to add wind, geothermal, waste-to-energy and nuclear plants to its energy mix in the future. The program, said to be worth tens of millions of dollars, aims to “catapult Saudi Arabia into the group of global leaders in renewable-energy development.”

The Thing That Couldn’t Die: Yucca Battle Continues in Congress and in the Courts - As noted here last month, the life and death of the Yucca project was at the center of a public face off between President Obama and Senate Majority Leader Harry Reid, who just happens to hail from–and represent–the Silver State. Although the administration has sided with Reid on cancelling work on Yucca Mountain, Obama’s move to re-appoint Kristine Svinicki to another term on the Nuclear Regulatory Commission–over the vocal objections of the Majority Leader–registered with Yucca watchers like stirrings from the grave. Svinicki, after all, has been a staunch proponent of the Yucca project since she worked at the Department of Energy. . . writing the support documents for the Yucca nuclear waste repository. This week’s official re-nomination of Svinicki by the White House seems to say that rumors of Yucca’s demise are somewhat exaggerated. Or at least that is what the nuclear industry and its army of lobbyists, captured regulators, and purchased politicians would have you believe.

UK nuclear build requires taxpayer rescue -Citi - Britain's aim to expand its fleet of nuclear plants by 2025 will take place only if the taxpayer absorbs the burden of spiralling construction costs, allowing private companies to invest in the sector, a senior analyst said. Nuclear energy policy in Britain faces major setbacks following reports that the cost of replacing ageing reactors increased dramatically in the past year, making power produced from new plants not affordable without government help. A report from the Times newspaper on Monday said French nuclear developer EDF had raised the cost of building a nuclear power plant to 7 billion pounds from 4.5 billion pounds last year. "If the latest cost figures are true, new nuclear power plants in the UK are not commercially viable," Citi analyst Peter Atherton told Reuters. Based on the new figures, nuclear would be the most expensive form of electricity generation, exceeding even offshore wind, he said. "The only way they could be built is if the construction risk was transferred to the taxpayer," Atherton said, equating to a multi-billion pound government insurance policy. EDF's Flamanville reactor, which is under construction in France, is running four years late and at least double its original budget.

Over 1,300 Tubes Damaged at Calif. Nuclear Plant - More than 1,300 tubes that carry radioactive water inside the San Onofre nuclear plant in Southern California are so damaged that they will be taken out of service, the utility that runs the plant said Tuesday. The figures released by Southern California Edison are the latest disclosure in a probe of equipment problems that have kept the coastal plant sidelined for more than three months. At issue has been the integrity of tubing that snakes through the plant's four steam generators, which were installed in a multimillion-dollar makeover in 2009 and 2010. A company statement said that as of Monday, 510 tubes had been plugged, or retired from use, in the Unit 2 reactor, and 807 tubes in its sister, Unit 3. Each of the generators has nearly 10,000 tubes, and the number retired is well within the limit allowed to continue operation. The statement comes just days after an Edison executive said the company hopes to restart at least one of the twin reactors next month. The company is drafting a plan under which the reactors would run at reduced power, at least for several months, because engineers believe that will solve a problem with vibration that the company believes has been causing unusual wear in the alloy tubing.

N.R.C. Skimps on Financial Oversight, Audit Says - The government does a poor job of estimating what it will cost to tear down a nuclear reactor, Congressional auditors say, and it may not be overseeing plant owners well enough to assure that they set aside enough money to do the job. For a study it plans to issue on Monday, the Government Accountability Office scrutinized 12 of the nation’s 104 power reactors and found that for 5 of them, the decommissioning cost calculated by the Nuclear Regulatory Commission was 76 percent or less of what the reactor’s owner thought would be needed. The most striking example was Indian Point 3 in Buchanan, N.Y., which could be forced to close by 2015 because of a licensing dispute. The Nuclear Regulatory Commission estimated the cost of decommissioning the reactor at $474.2 million, just 57 percent of the “site-specific” estimate made by Entergy, the owner, which put the figure at $836.45 million. After reactors are retired, they must eventually be torn down and their radioactive components hauled away for burial, an expensive task. The process is full of uncertainties, including figuring out just when the plant will retire. So far reactors have generally shut down when the market for electricity softened or they ran into unexpected technical problems.

Last Reactor of 50 in Japan Is Shut Down - Japan’s last operating reactor was taken offline Saturday, as public distrust created by last year’s nuclear disaster forced the nation to at least temporarily do without atomic power for the first time in 42 years. The reactor, at the Tomari plant on the northern island of Hokkaido, was shut down for legally mandated maintenance, said its operator, Hokkaido Electric. As Japan’s 50 functional commercial reactors have been shut down one by one for maintenance, none have been restarted because of safety concerns since last year’s Fukushima disaster. Desperate to avert possible power shortages this summer, the government has tried to convince the public to allow some of the reactors to be restarted. It has conducted simulated stress tests to show whether reactors can withstand the sort of immense earthquake and tsunami that knocked out the Fukushima Daiichi plant. However, the public has not accepted the tests, which were conducted largely behind closed doors.  Cozy ties between officials in the Trade Ministry, which both regulates and promotes nuclear power, and plant operators are widely seen as having left the Fukushima plant without adequate defenses against natural disaster. This distrust fed criticism that the authorities failed to protect the public after the accident, and instead tried to cover up the full dangers.

Japan nuke-free for first time since ’70 - Japan was running without nuclear power for the first time in 42 years Saturday, as the final commercial reactor in operation was shut down for routine maintenance. Hokkaido Electric Power Co. gradually started taking reactor 3 at its Tomari nuclear plant offline around 5 p.m., and operations completely halted by 11 p.m. No reactors shut for regular scheduled checks have gone back online since the triple-meltdown crisis at the Fukushima No. 1 power station in March 2011. All 50 of the nation's viable reactors must now undergo mandatory two-stage stress tests to determine if they can resume operations, a measure introduced amid the nuclear crisis. But the government and power companies also have to win approval in the court of public opinion, which has soured against atomic energy after the massive radioactive fallout emitted by the Fukushima facility's crippled reactors, and the mass evacuations that ensued. The government hopes to restart two idled reactors at Kansai Electric Power Co.'s Oi nuclear plant in Fukui Prefecture to prevent an electricity shortage this summer in western Japan, but the public remains wary, stung by one of the world's worst nuclear crises.

Japan to take control of Tepco in return for bailout -The Japanese government will take a controlling stake in Tokyo Electric Power (Tepco) in return for a one trillion yen ($12.5bn; £7.8bn) taxpayer bailout. Trade Minister Yukio Edano approved the business plan on Wednesday. Tepco faces huge clean-up and compensation costs from a disaster at one of its power plants after the earthquake and tsunami last year. The nationalisation is to avoid a collapse of the company. Tepco provides power to millions of people in and around Tokyo. Reactors at its Fukushima power plant melted down in March last year, spreading radiation over a wide area. Tens of thousands were forced to evacuate and the farming and fishing industries were impacted.

Senator: Fukushima Fuel Pool Is a National Security Issue for AMERICA - After visiting Fukushima, Senator Ron Wyden warned that the situation was worse than reported … and urged Japan to accept international help to stabilize dangerous spent fuel pools. An international coalition of nuclear scientists and non-profit groups are calling on the U.N. to coordinate a multi-national effort to stabilize the fuel pools. And see this. Fuel pool number 4 is, indeed, the top short-term threat facing humanity. Anti-nuclear physician Dr. Helen Caldicott says that if fuel pool 4 collapses, she will evacuate her family from Boston and move them to the Southern Hemisphere. This is an especially dramatic statement given that the West Coast is much more directly in the path of Fukushima radiation than the East Coast.And nuclear expert Arnie Gundersen recently said (at 25:00): There’s more cesium in that [Unit 4] fuel pool than in all 800 nuclear bombs exploded above groundIt would certainly destroy Japan as a functioning country

Bernie Sanders, Keith Ellison Unveil Bill To End Fossil Fuel Subsidies -- Progressive lawmakers Sen. Bernie Sanders (I-Vt.) and Rep. Keith Ellison (D-Minn.) teamed up on Thursday to introduce legislation designed to stop subsidies to the oil, coal and natural gas industries, preserving an estimated $110 billion over the next ten years.The measure, End Polluter Welfare Act, would do away with tax breaks, financial assistance, royalty relief, direct federal research and development and many loopholes that benefit the fossil fuel industry -- coal, oil, and natural gas -- according to the bill's authors. It has the backing of numerous groups, including Friends of the Earth, Taxpayers for Common Sense and, which has vowed to campaign on Capitol Hill in support of the legislation. "If we confine this effort to Capitol Hill, the fossil fuel industry will just drown us in dollars -- they could spend $100 billion fighting this thing and still come out on top," said Executive Director May Boeve in a Thursday statement. "So we're going to take this fight to districts around the country and find other currencies to work in: our creativity, energy and grassroots organizing power." The Yale Project on Climate Change has reported that as of November 2011, 70 percent of Americans opposed federal subsidies for the fossil fuel industry, including majorities of both Republicans and Independents.

Shale Gas Hype: Subprime 2.0? -- Yves Smith - If my RSS reader is any guide, most of the press about shale gas has focused on two issues. First, shale gas is in considerable supply, cheap to produce, and burns far cleaner than other fossil fuels. Second, shale gas does not look so hot environmentally, all in. Fracking can pollute ground water (and potable water is our most scarce resource) and releases enough methane to make shale gas as detrimental as coal. Still, it has been treated as the Great Hope for America’s energy woes, a way to turn the US into an exporter, and maybe it will cure cancer too. The problem is that the good part of this story is largely wrong. Shale gas supplies are overestimated, and it is not as cheap as it has been touted to be. The big reason is that shale gas wells, unlike oil wells, peter out really quickly. The result is that the viability of shale gas as a solution to America’s high energy consumption level is only on an interim basis. As with the housing bubble, analysts and journalists who understand the economics are giving clear warnings, but they don’t seem to be getting much of an audience.In February, no doubt annoyed by Obama’s State of the Union claim of 100 years of shale gas, aeberman of The Oil Drum wrote a detailed post explaining in some detail what the supply side looks like. One key fact: the US is already at the point where it is drilling less productive wells. But why the comparison to subprime? The biggest producers are more land/lease speculators than energy companies, in terms of how they seek to make money. And they’ve been speculating in a highly leveraged manner.

Chesapeake Deals Carry $1.4 Billion in Undisclosed Liability - Embattled Chesapeake Energy Corp. has saddled itself with about $1.4 billion of previously unreported liabilities over the next decade through off-balance-sheet financial deals.  Most of these costs will hit this year and next, at a time when the company needs to raise substantial cash to cover operating expenses and its move into the more lucrative oil business. Chesapeake, the second-largest natural-gas producer in the U.S., has made a number of long-term commitments to Wall Street banks that require it to deliver specific amounts of oil and natural gas each month through 2022, in exchange for upfront cash.

Natural gas: Difference Engine: Awash in the stuff - EVEN as it tries to slow production down, America is still pumping three billion more cubic feet (85m cubic metres) of natural gas a day out of the ground than it can consume. The country has become so awash in the stuff since “fracking” (hydraulic fracturing of gas-bearing shale deposits) began barely five years ago that the price has plummeted from $8 per thousand cubic feet to $2. (A thousand cubic feet of natural gas contains roughly a million BTUs of energy.) Not that long ago, natural gas was a tenth of the price of oil in energy terms; now it is a 50th. If the natural-gas companies go on producing at the current rate, all the storage reservoirs in America will be full by autumn. With nowhere left to put the stuff, its marginal price will fall to zero. Such a situation is unsustainable.At today’s spot prices for natural gas, producers are losing money hand over fist. Many could cease to exist as the industry is forced to contract. And consolidate it will. There are so many firms that the top ten producers account for less than half the market between them. The trouble is that fracking is almost too productive for its own good, and there is just too much shale gas out there. Only big companies with deep pockets will survive.

It's dangerous to depend on natural gas - The United States needs an "all of the above" energy strategy that focuses on low-carbon electricity sources that will lower energy costs, reduce dependency on foreign fuel sources and promote clean electricity. This is a prudent strategy to help drive American manufacturing and transportation networks of the future. Most importantly, this approach can put the country on a sustainable path toward long-term economic growth. While today's rock-bottom natural gas prices are attractive, an unbalanced dependence on natural gas in the electricity sector would put Americans at risk, both economically and in terms of longer term energy security. While many look at energy prices from today's lens, successful energy policy requires a long view that promotes fuel diversity but doesn't pick technology winners; it preserves our air, land and water and is affordable for consumers. We need only look at the volatile history of natural gas prices. Consider the shift from the low, stable prices of the 1990s to the record-high rates and wild supply fluctuations of the mid-2000s. We should take advantage of our domestic energy resources, recognizing that today's natural gas market is still vulnerable. The present oversupply of natural gas opens opportunities for exports into foreign markets at prices two-to-three times higher. If demand from other countries increases as they meet growing energy demand, it will cause our prices to align with higher world prices.

A Fracking Tax? - Linda Beale - Ed Dolan has an interesting post on Fracking and The Environment: an economic perspective - He suggests that the controversy over fracking would be better handled by some serious development of national energy policy.  My take on what he says is that at least the following is needed:

  • 1. an in-depth assessment of the carbon emissons costs of each type of fuel (not just the cost of burning that fuel, but the cost of finding, extracting, processing and transporting it as well);
  • 2.  an in-depth assessment of the locality costs of each type of fuel (the local environmental effects of fuel extraction and usage, including harm to places of natural beauty, harm to ecologically unique or sensitive areas (thinking here about National Wildlife Refuge), harm to drinking water (thinking here about potential of pollution of underground aquifers and wells from fracking done poorly), harm from toxic chemical dispersion (fracking, again), flaming faucets, etc.);
  • 3, some kind of pricing mechanism to make the types of fuel that do the most harm on either the first or the second level above also the most costly and therefore economically disfavored (a fuel tax that varied according to the score on each of the two category levels would make sense;
  • 4. something not mentioned by Dolan but necessary if we are ever to develop a decent national energy policy--removal of the current subsidies for natural resource extraction and replacement with incentive subsidies for those forms that are scored as least harmful to the environment.

Silencing Communities: How the Fracking Industry Keeps Its Secrets - The "Rogers" family signed a surface-use agreement with a fracking company in 2009 to close their 300-acre dairy farm in rural Pennsylvania. That's not the end of the Rogers' story, but the public, including the Rogers' own neighbors, may never learn what happened to the family and their land as drilling operations sprouted up in their area. The Rogers did not realize they had signed a nondisclosure agreement with the gas company making the entire deal invalid if members of the family discussed the terms of the agreement, water or land disturbances resulting from fracking and other information with anyone other than the gas company and other signatories. "Rogers" is not the family's real name, it's a pseudonym offered by Simona Perry, an applied anthropologist who cannot reveal the family's identity. Perry has been working with rural families living amid Pennsylvania's gas boom since 2009. Mrs. Rogers initially agreed to participate in a study Perry was conducting on rural families living near fracking operations. She later called Perry in tears, explaining that her family could no longer participate in the study because of the nondisclosure clause in the surface-use agreement. She told Perry she felt stupid for signing the agreement and has realized she had a good life without the money the fracking company paid them to use their land.

Keystone XL pipeline takes second shot at U.S. (Reuters) - TransCanada Corp is taking its second shot at asking Washington to approve the contentious Keystone XL oil pipeline, betting that a new route through Nebraska and post-U.S. election time frame for a decision will push the project forward. The reapplication to the U.S. State Department on Friday comes after Canada's largest pipeline company carved the proposal into two parts in hopes of kickstarting the project. U.S. President Barack Obama rejected the full $7.6 billion project early in this election year as concerns spread about the proposed northern portion of the route near an aquifer in Nebraska. Obama has expressed support for the southern portion. TransCanada has been negotiating with Nebraska state officials over a new route and hopes to have U.S. State Department approval for the northern part of the line early next year with the aim of putting it in service by the end of 2014 or early 2015. That portion would cost $5.3 billion. The company pointed out that 10,000 pages of study from the first review concluded Keystone XL would have minimal impact on the environment, so the application need not be bogged down again.

Keystone XL company plans oil terminal - The company behind the planned Keystone XL oil pipeline said it received enough support from the industry to move ahead with an oil terminal in Alberta, Canada. Pipeline company TransCanada said it has received binding commitments for more than 500,000 barrels per day "leading to the opportunity to expand the proposed 2 million barrels of crude oil batch accumulation tankage and pipeline infrastructure to a 2.6 million barrel terminal" in Hardisty, Alberta.  The terminal could become operational by 2014, a year before TransCanada aims to deliver oil through the planned Keystone XL pipeline.The existing Keystone oil pipeline ties so-called tar sands oil from Alberta to oil refineries in Illinois and the key storage hub in Cushing, Okla. Keystone XL would extend the route to the southern U.S. coast.

More On Hydraulic Fracturing - There is a real, practical limit to the amount of oil that can be recovered from a reservoir. Depending on the availability and economic viability of different technical approaches, that limit might be less than 25% of the total volume of oil originally in place, or it can be more than 50%, as has been achieved in some of the fields in the Kingdom of Saudi Arabia (KSA). KSA is now reaching the point where the easy production of oil, as in sink vertical wells at kilometer intervals and watching an average of 10 kbd merrily bubble to the surface, is now largely over. The oilfields are moving increasingly into the more advanced and costly procedures to help sustain a production that would, under earlier production regimes, have long faded into memory. Ghawar, for example, is moving into CO2 injection and some steam assist (likely with the areas with heavier, tar-ier deposits) seeking to maintain an overall 5 mbd production.  But today I want to talk a little about KSA's increasing use of hydraulic fracturing of their horizontal wells, and offer a little more technical detail about growing cracks through rocks. Consider the problem that high production fields have when a horizontal well runs through a high permeability or densely fractured zone. The impact of this on premature water breakthrough is well documented. The relative preferential movement of water along faults, for example, can be seen in this model from Ghawar.

The Oil Industry's Deceitful Promise of American Energy Independence - The oil and gas industry would like you to believe that American energy independence is just around the corner. The question is, why do they want you to believe it now? After all, if energy independence were that easy to deliver, the industry would have done it a long time ago. Why has the industry chosen now, in particular, to begin a campaign of deceit to push the false promise of American energy independence?  Both the large international oil companies and the smaller independents are finding themselves increasingly locked out of those areas richest in hydrocarbons. State-owned firms now dominate the oil and gas industry worldwide and hold 80 percent of the world's oil reserves. And, these firms typically have exclusive rights to exploit oil in their own countries which are located in the world's most prolific oil regions such as the Persian Gulf.Even in countries where the international oil companies and their smaller counterparts are still allowed to exploit oil and gas resources, these operators are finding that regulations are getting tougher, environmental accountability is rising, and taxes are increasing. In some cases, the fear of expropriation is preventing expansion of or participation in projects in many formerly docile countries.  And so, the industry is turning back to the United States where private development of resources is still possible and legally well-protected.  What is the logic behind the industry's campaign to spread the false promise of American energy independence?

CBO study examines policy options to reduce oil price volatility - Policies that reduce the US transportation system’s heavy reliance on petroleum products would more effectively shield consumers from volatile prices and supply interruptions in the long term than simply increasing US production, a new Congressional Budget Office study concluded. Higher vehicle fuel efficiency requirements and increased motor fuel taxes might be easier to implement than developing alternative fuels and their necessary distribution systems, it suggested.... Increasing US production would put downward pressure on global oil prices once projects were operating, but several overseas producers, particularly members of the Organization of Petroleum Exporting Countries, likely would respond by trying to reduce their exports, the study said. More US production also would take pressure off consumers to move away from petroleum products for motor fuels, it added. A study by the Energy Security Leadership Council at Securing America’s Future Energy, which was released on May 8, reached a similar conclusion.

CBO Report: Boosting Oil Production Won’t Protect Americans From Gasoline Price Shocks -More domestic drilling does not make America less susceptible to global supply disruptions or protect consumers from gasoline price volatility, according to a new analysis from the Congressional Budget Office. The CBO report reviewed different policies intended to make the country more energy secure, concluding that the only effective tool for shielding businesses and consumers from price spikes is to use less oil. Because oil is sold on the global market, CBO concludes that increasing domestic oil production would do little to influence rising gas prices in the U.S.  According to an analysis of 36 years of gasoline prices and domestic oil production conducted by the Associated Press, there is zero statistical correlation between increased drilling and lower prices at the gas pump. Even if increased drilling did substantially lower gas prices — which it has not –  the agency says those lower prices would actually make the country less secure from price shocks: In fact, such lower prices would encourage greater use of oil, thus making consumers more vulnerable to increases in oil prices. Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world. In contrast, policies that reduced the use of oil and its products would create an incentive for consumers to use less oil or make decisions that reduced their exposure to higher oil prices in the future, such as purchasing more fuel-efficient vehicles or living closer to work.

Energy Security, the Infographic - The Congressional Budget Office is out with another fine infographic, this time on energy security. The entire infographic is too big to post here, but here’s how Andrew Stocking and Maureen Costantino portray America’s energy sources and uses: One of the most notable features is the absence of any link from natural gas to transportation (some natural gas is used in transportation, of course, but not enough to make the cut for this image). Given the ever-growing divergence between oil and natural gas prices, I wonder whether that will still be true a decade from now? Or will someone finally crack the natural gas to transportation fuel market in a big way?

Vital Signs: Price of Oil Tumbling - The price of oil has been falling in May. The cost of a barrel of crude oil fell 93 cents to $97.01 on Tuesday. The price is down more than $9 this month and is far below the year’s peak of nearly $110, reached in late February. Fears of slowing economies in the U.S. and Europe, along with apparently easing tensions in the Middle East, are among factors behind the decline.

Oil Prices Are Falling, Do Speculators Get Credit? - The top chart above displays the daily CME July futures contract prices for light crude oil back to late January, and shows the price increase in February from $98 to $111 per barrel, and the subsequent decrease to below $97 in recent trading, including the 9% decrease just during the month of May, from $106.50 to $96.50 per barrel.  The bottom chart displays the spot price of crude oil over the same period, which follows the exact same pattern as prices for crude oil futures contracts.  Since oil speculators got the blame for rising prices in February, do they now get the credit for falling oil prices in May?  How exactly does the "speculators cause high oil prices"crowd now explain the falling oil prices?  Do speculators somehow contribute to only rising prices, but not to falling prices?  Do speculators only trade when prices are rising, but somehow exit the market suddenly when prices are falling?  To be fair to speculators, it seems like the popular press should be giving them credit now for the falling oil and gas prices.

New IMF Working Paper Models Impact of Oil Limits on the Economy - The International Monetary Fund (IMF) recently issued a new working paper called “The Future of Oil: Geology versus Technology” (free PDF), which should be of interest to people who are following “peak oil” issues. This is a research paper that is being published to elicit comments and debate; it does not necessarily represent IMF views or policy. The paper considers two different approaches for modeling future oil supply:

  1. The economic/technological approach, used by the US Energy Information Administration (EIA) and others, and
  2. The geological view, used in peak oil forecasts, such as forecasts made by Colin Campbell and forecasts made using Hubbert Linearization.

The analysis in the IMF Working Paper shows that neither approach has worked perfectly, but in recent years, forecasts of oil supply using the geological view have tended to be closer than those using the economic/technological approach. Since neither model works perfectly, the new paper takes a middle ground: it sets up a model of oil supply where the amount of oil produced is influenced by a combination of (1) geological depletion and (2) price levels.

Norwegian Crude Oil Reserves and Production as of 12/31/2011  - The chart above shows a forecast for crude oil production from the 21 discoveries presently sanctioned for development on the Norwegian Continental Shelf (NCS) and which are scheduled to start flowing from 2012 to 2016. After oil prices moved upwards and settled at a higher level starting around 2005, a new wave of exploration resulted in sanctions for developments of several new and known discoveries that previously had been on hold due to lack of profitability. These new developments are expected to add up to 350 kb/d of additional oil production, reaching a peak in 2016. This is by itself impressive given the location of the discoveries (offshore, water depth), their size and the total efforts required to bring these to fruition. These 21 developments have been estimated to hold total recoverable reserves of 1 Gb crude oil, 140 Gcm (Gcm = Bcm: Billion cubic meters) of natural gas, around 23 Mb condensates and around 164 Mb NGLs. These 21 new developments are "small fields". What characterize “small fields” are rapid buildup and a short plateau followed by aggressive (high) decline rates. Total investments for these 21 developments are now estimated to be around 225 billion NOK (2011) or US$40 billion. Most of the developments shown in Figure 1 have been estimated to be profitable for crude oil prices ranging from US$40 - US$90/bbl.

Chris Martenson: Peak Oil Will Change Life As You Know It & So Will the Coming Collapse - Here’s my new interview with researcher and author of ‘The Crash Course’ Chris Martenson. Buckle up, Chris has the data that he believes proves that ‘peak oil’ is a fact – and that any way you cut it, our lives are about to change forever as the days of cheap liquid fuel are nearly over. Chris also covers the coming collapse and the need to continue stacking physical.

OPEC Says Supply Ample, Speculation Driving Price - Oil supply will be more than sufficient to meet demand this year and beyond, OPEC's Secretary General said on Thursday, but added the price of fuel is being driven higher by speculation. "There has been no shortage of oil in the market. Producers have been able to meet consumer needs," Abdullah al-Badri told an energy conference. "We also see this as being the case for the rest of 2012 and the foreseeable future." Oil prices surged in March to $128 a barrel, the highest level since 2008, because of concern about possible supply shortages. Prices have since fallen back and brent crude was trading around $118 on Thursday. "Today the price continues to be driven by excessive speculation," Badri said. OPEC at a meeting in December set a target to produce 30 million barrels per day, settling an argument which broke out in 2011 after Iran and other members opposed a Saudi-led plan to raise OPEC's production ceiling. Output has remained above the target all year as Libyan supply recovered after being virtually shut down during the 2011 uprising against Muammar Gaddafi's rule.

Saudi's Naimi says kingdom pumping 10 million bpd (Reuters) - Top oil exporter Saudi Arabia is pumping around 10 million barrels per day (bpd) and is storing 80 million barrels to meet any sudden disruption in supplies, Oil Minister Ali al-Naimi said on Tuesday. Worries of a supply disruption from the Middle East due to escalating tensions between the West and Iran over Tehran's disputed nuclear program have pushed Brent prices 20 percent higher since the start of the year to a record of over $128 in March. Prices have since eased but the more expensive crude has threatened to derail the fragile global economic recovery and strained the budgets of emerging economies. This has prompted influential Saudi Arabia, a key ally of the United States, to repeatedly stress that oil markets are well supplied. Despite the recent declines, Naimi told reporters during a trip to Japan that oil prices were still high. Asked if producer group OPEC needed to raise output quotas in a policy meeting on June 14, he said: "You have to wait for the meeting. We have to discuss that." At 10 million bpd, Saudi Arabia's output is the same as last month, which was the most since November when it produced more than it had done for decades. The kingdom stood ready to tap into its spare capacity of 2.5 million barrels per day if more crude was needed, he added.

Saudi crude stockpiles grow - Analysis of the Saudi Arabian oil sector finds stockpiles are up because of domestic demand, though a minister said Riyadh was responding to the global market. A report from Goldman Sachs Group, cited by Bloomberg News, finds Saudi Arabia boosted its oil inventories by 35.4 million barrels from December to February. In an April report, the bank said Riyadh was building crude stockpiles to address domestic demands. Members of the Organization of Petroleum Exporting Countries are addressing pricing concerns on the global market. Bloomberg notes that while crude oil prices have retreated somewhat, they're still up nearly 5 percent from the beginning of the year. Saudi Oil Minister Ali al-Naimi said from Tokyo oil prices on the global market were "still a little bit high," Bloomberg reported. He said Riyadh has around 2.5 million barrels per day worth of spare production capacity and was storing crude oil "because of the situation in the world."

Iran Oil Exports Fall as Sanctions Tighten - Iranian crude oil exports fell sharply again in April and could be down by as much as one million barrels a day this quarter as many countries reduce imports ahead of sanctions that come into effect on July 1, the International Energy Agency said Friday. Iran's oil production remained steady at 3.3 million barrels a day in April, but 15% to 25% of that oil wasn't sold and had to be pumped into floating tanker storage, the IEA said, a process the country could continue for a couple of months before filling its storage and having to shut down fields, according to David Fyfe, head of the IEA's oil markets division. This fresh data from the IEA, which represents the interests of major energy-consuming rich countries, shows how the economic pressure of Western sanctions is ratcheting up ahead of crucial talks on Iran's nuclear program in Baghdad later this month. It also shows how, due to oil production increases from other members of the Organization of Petroleum Exporting Countries, sanctions should be able to proceed without hurting oil consumers.

OPEC oil production climbs to 31.71 million barrels per day in April - The latest Platts’ monthly survey of OPEC production shows two highly significant trends: sanctions are starting to pinch Iranian output, and other OPEC countries are stepping in to fill the gap. Crude oil output from the Organization of the Petroleum Exporting Countries (OPEC) climbed 320,000 barrels per day (b/d) to 31.71 million b/d in April from 31.39 million b/d in March, a just-released Platts survey of OPEC and oil industry officials and analysts showed. “This is one of the more significant month-on-month changes Platts has reported in quite some time,” said John Kingston, Platts global director of news. “First, it shows that sanctions clearly are taking a bite out of Iranian output. Also, this enormous one-month jump in production shows that, for now, OPEC has output capacity to cover the missing Iranian oil barrels. In the next few months Iranian output and overall OPEC production will be the key numbers to watch.” Production increases totalling 510,000 b/d from Angola, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia and the United Arab Emirates (UAE) were partly offset by decreases totalling 190,000 b/d from Algeria, Iran and Qatar.

OPEC Says ‘Plentiful’ Global Oil Supplies Outpace Demand - The Organization of Petroleum Exporting Countries said that global oil supplies are outpacing demand levels, keeping its forecast for world consumption this year unchanged.  OPEC, scheduled to meet next month, is producing 8.3 percent more crude than it considers necessary this quarter, data released today by the Vienna-based group show. This has helped inventories in developed nations to reach “comfortable levels,” equivalent to about 59 days worth of consumption, according to an e-mailed report.  “Higher OPEC crude oil production underscores the current trend of plentiful supply in excess of market requirements,” OPEC’s secretariat said in its Monthly Oil Market Report.

Crude Oil is in oversupply: OPEC - Contrary to market fears, crude oil is plentiful and prices have been spiking purely because of geopolitical reasons, the Organization of Petroleum Exporting Nations (OPEC) stated in its latest report. OPEC reports that its members produced 31.62 million barrels per day (mbpd) of oil in April 2012. This is above the OPEC target limit of 30mbpd decided during the group's previous meeting. The excess production was largely due to a jump in Iraqi oil production and the recovery in Libyan production. "Higher OPEC crude oil production underscores the current trend of plentiful supply in excess of market requirements”, states the report. The excess oversupply is reportedly being used to plug the gap in oil inventories. Oil outages and geopolitical unrests had caused a dent in oil stockpiles for most of the past year and as such the current excess production could be used to refurbish the oil stockpiles. The organization has also raised its outlook for oil demand growth in 2012 by 40,000 barrels per day (bpd) to 900,000bpd. "Given the stabilisation of the US economy and the shutdown of the Japanese nuclear power plants, world demand has - at least, for the short term - stopped its decline and has begun to show growth", the report states.

Japan to seek stable oil supply from Saudi Arabia - Japan's Trade Minister Yukio Edano said on Tuesday he would ask for Saudi Arabia's continued support to help Japan secure a stable oil supply when he meets with Saudi Oil Minister Ali al-Naimi later in the day. "In general, Saudi Arabia has provided the greatest cooperation over many years in regards to a stable crude oil supply. I want to thank him for that and ask for continued cooperation," Edano told a news conference.Japan has cut its crude imports from Iran amid tighter Western sanctions aimed at limiting Tehran's nuclear programme. Edano also said that Japan is in touch with the European Union on insurance coverage for Iranian oil shipments. The EU's restrictions on Iran are due to take effect in July. The Trade Minister, who holds the energy portfolio, also said that power supply outlook for this summer in Japan's western region of Kansai looks tough but repeated that he hoped to avoid issuing a mandatory power restriction order.

OPEC: Global Fuel Supply Flat in April (plus Europe) - The trend the last few months in global liquid production has been flat. The graph above, from OPEC's monthly oil market report, shows this continuing in April. This is of course bullish for oil prices - the global economy is still growing and thus will have a natural tendency to require more oil - something that can only be thwarted by higher prices. On the other hand we have the ongoing debacle in Europe continuing to press downward on oil prices. The Greek elections have failed to produce a viable government and it looks like there might need to be further elections - which themselves may or may not produce a government.  It now appears that Greece is in a dangerous downward spiral - one is reminded of Argentina in the early 2000s were the average lifetime of a new prime minister became about a week.  When a country has no good options, one of the symptoms is the inability to form a stable government.

Iran Accepts Renminbi for Crude Oil - Iran is accepting renminbi for some of the crude oil it supplies to China, industry executives in Beijing and Kuwait and Dubai-based bankers said, partly as a consequence of U.S. sanctions aimed at limiting Tehran’s nuclear program. Tehran is spending the currency, which is not freely convertible, on goods and services imported from China. Most of the oil that goes from Iran to China is handled by the Unipec trading arm of Sinopec, China’s second-largest oil company, and through another trading company called Zhuhai Zhenrong, the oil industry executives said. The trade is worth as much as $20 billion-$30 billion annually according to industry estimates, but a share of it is in barter form. Zhuhai Zhenrong, for example, pays Iran for its oil by providing services such as drilling, these people add. “The global financial crisis accelerated the shift from the west to the east,” said the chief executive of one bank in Dubai. “Such measures [as the U.S. sanctions against Iran] will now enhance the acceptability of the renminbi as a transaction currency.”

China to begin deep water drilling in disputed sea -- China's first deep water oil drill is ready to start production in the South China Sea amid an ongoing standoff with the Philippines in another section of the contested waters. The official Xinhua News Agency says China National Offshore Oil Corp's rig will start operations Wednesday in an area 320 kilometers (200 miles) southeast of Hong Kong. It will drill at a depth of 1,500 meters (almost 5,000 feet), Xinhua said in a report Tuesday. The area where the platform will be stationed does not appear to be under dispute, but southeast of it, ships from China and the Philippines continue a standoff over Scarborough Shoal. That dispute has been going on since April 10 when the Philippine navy accused Chinese boats of fishing illegally. Both countries claim the shoal. China's Foreign Ministry on Tuesday said it had summoned a top Philippine diplomat in Beijing to complain over the standoff for the third time in recent weeks.

Analysis: Petro-dollar windfall could help China's rebalancing (Reuters) - A $1 trillion oil-fired trade windfall couldn't be better timed to help Chinese companies climb the value chain and rebalance the economy of the world's biggest exporter. Fast growing countries producing oil and other commodities, are taking advantage of the windfall from the recent surge in prices and buying roughly half of the $2 trillion worth of goods sold by China overseas. But, more importantly for the economy, they are buying the value-added products that Beijing wants its export-oriented factories to focus on - construction equipment, heavy infrastructure goods and telecom network equipment, for instance. "Commodity exporting countries have had a windfall after commodity price rises and they are now recycling this back into the global trade system," Yao Wei, China economist at Societe Generale in Hong Kong, told Reuters. "The silver lining to China's exports is really the other emerging economies," she said. China's export-led expansion of the last decade has been largely a function of processing trade - importing materials and components for assembling products that are then shipped overseas. And now the source of value in Chinese exports is shifting. New orders are increasingly coming from developing economies buying industrial goods to build out infrastructure, products with a large element of domestic added value, using locally-made components that China once imported.

China's restrictive rare earth mineral policy draws global ire - A recent report from the Congressional Research Office (PDF) suggests that China's restrictive policy on rare earth mineral exports isn't going to change anytime soon. The report comes on the heels of a renewed call for a rare earth production boost in Europe and a dispute settlement filed in March by the United States, Japan, and the European Union with the World Trade Organization over alleged unfair trading practices concerning rare earth minerals."From 2002 to 2011, the value of US rare earth imports from China rose by 1,376 percent," the CRS report states. "From 2010 to 2011, the value of US rare earth imports from China increased by 305 percent." For a few years now, there has been a lot of talk about rare earth minerals. You know, the ones that aren’t particularly rare, but are nevertheless crucial for many products. Demand for them has shot up. They’re needed in the production of hybrid cars, missiles, and smartphones. And it doesn’t help that China, the world’s largest producer, announced in 2010 that it was cutting export of its domestic supply. This has since led to newfound attention on mines and processing in California, Estonia, Malaysia, and Australia. Not surprisingly, the rest of the world isn't very happy at China. The country produces 97 percent of the world's rare earth minerals—according to the United States Geological Survey, that translated to $3.4 billion of the stuff in 2011.

Chinese Architect Comments on "Dark Apartments", Vacancies, Residential Malinvestment - I have a friend that is an architect in Shanghai. I sent him an article that talked about counting dark apartments at night to determine vacancy rates." My architect friend says...Once you get out of the city and into the second tier cities these 50% vacancy figures ring true. I've been to so many smaller cities and they are full of residential high rises going up everywhere. Most have a significant vacancy rate from what I see just from driving by.The idea of "build it they will come" mentality has been fueling this. However, the government has since put down some hard rules to slow all of this down but so many buildings were either just completed or in the middle of construction before these measures were put into effect. What's sad is that these buildings are built very poorly and I'm not confident that they will survive long enough for the migration from rural to urban to occur. The developers here are severely handicapped when it comes to what and how to build. they are usually farmers who sold their land for big money and know absolutely nothing about developing profitable projects. They don't do any valid market research from what I can tell. It's usually left up to us (the architecture firm) to figure things out for them.

China economy shows unexpected signs of weakness (Reuters) - China's economy stuttered unexpectedly in April with lower than expected output data, softening retail sales and easing prices suggesting economic headwinds might be stiffer than thought, requiring more robust policy responses to counter them. Industrial output expanded at its slowest annual pace in April in nearly three years, while fixed asset investment growth dipped to its lowest in almost a decade. The weak growth in fixed asset investment signaled that the impact of a prolonged credit crunch in China's real estate sector, and of flagging demand from export markets, was more severe than first thought. In fact, new loans in April were well below what most market observers had expected, helping to explain continued tight conditions for businesses and developers despite the gentle easing espoused by Beijing. "The data suggests further deceleration of the economy at the start of Q2, with all segments of private demand weak,"

Timing of China's Slowdown - China bears frequently argue that in the massive onrush of investment in the country, capital will inevitably be misallocated resulting in unsustainable debt levels and eventual disaster.  For example, here's Michael Pettis the other day:Debt is rising at an unsustainable pace and debt levels will become unsustainable well before the end of the decade. This follows from the above point – if investment is debt funded and if it is being wasted, then by definition debt must be increasing at an unsustainable pace – i.e. faster than debt-servicing abilities.  There is still some disagreement on the sustainability of debt, with some analysts, like Arthur Kroeber of Dragonomics and the guys at The Economist, saying that China doesn’t have a serious debt or over-investment problem.  I suspect nonetheless that in another year or two no one will doubt that the Chinese growth model tends towards unsustainable debt and that we are rapidly reaching the limit. As so often in life, it's one thing to be right on the general direction of things, but another altogether to get the timing right.  I don't dispute that Pettis will eventually be right, but I do continue to wonder about the timing.  If we regard the entire country as a black box (perhaps appropriate for a system with as much central command-and-control as China's economy-formerly-known-as-communist), then the current account balance represents the degree to which the entire system is more then paying for itself.

More on tepid Chinese inflation - China’s consumer price inflation continued with the downward trend in April. Consumer price inflation increased by 3.4% on an year-on-year basis, falling from 3.6% yoy of the previous month, in-line with market estimates.  On a month-on-month basis, consumer price fall by 0.1% in April. Food remains to be the category with high rate of inflation on an year-on-year basis.  Food prices increased by 7.0% yoy, while non-food prices increased by 1.7% yoy.  On a month-on-month basis, food prices were down by 0.9%, contributed by negative prints from meat and vegetables, while non-food prices increased by 0.3%. On another note, the producer price index is down 0.7% yoy, below market estimates of –0.5%.

Grasping at Chinese straws - The Commerce Department released another depressing report on the U.S. trade deficit this morning, our monthly reminder of the huge gap between globalization’s economic reality and American economic policymaking. In March, we bought about $52 billion (28 percent) more from the rest of the world than we sold. From first quarter 2011 to first quarter 2012, the deficit on goods and services rose almost 8 percent, with China representing almost two-thirds of our non-oil deficit with the rest of the world. Yet, over the past year or so, a drumbeat of analysis in the establishment business press has been telling us to stop worrying; our chronic trade imbalance with China will soon disappear. New York Times columnist Eduardo Porter last week summed up the happy scenario: Chinese wages and transpacific transportation costs are rising and the Chinese are allowing their currency to appreciate. The implication is that rather than exerting unpleasant political pressure on China, we should trust in the natural workings of the market and the good common sense of the Chinese leaders who “appear to understand the need for change.” Don’t hold your breath.

Maybe the Renminbi Won't Rule the World After All - Here's a neat riposte from Eswar Prasad and Lei Ye to the idea that the RMB will surpass the dollar as the world's most important currency over the next decade or two. That point of view has been famously espoused by Arvind Subramanian of the Peterson Institute of International Economics and, for you trivia buffs out there, occasional co-author of Dr. Prasad.  First, let's begin with their recounting of the standard criteria (store of value, medium of exchange, unit of account) by which the functions of money are evaluated to see whether the RMB is indeed catching up with the US dollar:The answer to that question depends on three related but distinct concepts about the currency:

  • •Internationalization: its use in denominating and settling cross-border trade and financial transactions—that is, as an international medium of exchange;
    •Capital account convertibility: how much a country restricts inflows and outflows of financial capital—a fully open capital account has no restrictions; and
    •Reserve currency: whether it is held by foreign central banks as protection against balance of payments crises.

The rest of their short contribution is well worth reading, but here's the concluding portion where they give the store away: Is the renminbi on a trajectory to usurp the U.S. dollar’s role as the dominant global reserve currency? Perhaps, but the day is a long way off. It is more likely that, over the next decade, the renminbi will evolve into a reserve currency that erodes but doesn’t end the dollar’s dominance. About two-thirds of global foreign exchange reserves are now held in U.S. dollar–denominated financial instruments. Other indicators, such as the dollar’s shares of foreign exchange market turnover and cross-border foreign currency liabilities of non-U.S. banks, confirm the currency’s dominance in global finance...

Where does all of that iron ore go? - ANZ has produced a useful note on the outlook for iron ore. Regular readers will recognise plenty of conventional wisdom at work here, with the basic argument being that ongoing modest growth in Chinese demand and the cost curve for supply will support prices in the $120 to $160 range. That’s fair enough if more bullish than I’d be, but what caught my eye was the above chart on the sectoral breakup of iron usage in China – including 39% of consumption being real estate – as well as some interesting anecdotes on iron ore hoarding. Neither of these made me terribly comfortable but see for yourself. China Iron Ore May12 (2)

A soy Taiping point? - Like a pensioner on his birthday, the Australian financial media yesterday enjoyed an annual spasm of exuberance with the release of the 2012-2012 Federal Budget. Yet amid the dense pages of analysis over every minutiae of detail,  few dared ask whether the prospects for the Chinese economy are a realistic backdrop for Treasury’s estimate of 3.25% GDP growth which will return Australia’s public finances back to a wafer-thin surplus.As many will know, China spent much of 2011 fighting a combined overheating in its fixed asset investment and inflation levels. Together these two were a part of a larger commodities driven inflation that seized the globe in part as well because of the oil shocks of the Arab Spring and the effects of La Nina on crop production. The consensus in more recent times is that China has licked its inflation problem, which was especially centred on food prices.  And this is what keeps me up at night. There is one foodstuff that has not fallen at all in China. Indeed, it has tracked the opposite way. That may not matter much except that that foodstuff is soy, which is a key ingredient in the Chinese food production chain, the vast majority consumed in animal feed, and is one of the most important imported components of China’s food CPI basket:

Bank of Japan buys record amount of stock ETFs - The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date, though the move failed to prevent a sharp fall for the Tokyo equity market. The Japanese central bank said it spent 39.7 billion yen (about $500 million) buying up stock ETFs as part of its ongoing asset-purchase program, breaking a previous record of ¥28.5 billion, set on April 16. In addition to the ETF buys, the Bank of Japan also acquired ¥2.3 billion in real-estate investment trusts Monday. Since the 2008 collapse of Lehman Brothers and ensuing global crisis, central banks around the world have embarked on a spree of asset-buying meant to avoid deflation and, to a certain extent, support the markets. But Japan’s monetary authority is almost unique among its peers in the major developed economies in its high-profile purchases of ETFs, which it began in December 2010 as part of aggressive easing measures. Since then, the Bank of Japan has bought almost ¥1 trillion worth of ETFs — along with another ¥78.9 billion in REITs — and has an additional ¥642 billion to spend on the stock funds after raising the program’s size at it last policy meeting in April.

Is Australia turning Japanese? - Last week the RBA finally lowered its growth forecasts for the year ahead but it did so largely with a grain salt, still forecasting a pretty aggressive range of between 2.5 and 3.5%. Tomorrow night, the Federal government will release its Budget for the year ahead and, as Ross Gittins suggests today, will no doubt also assume a trend rate of growth. The real question both should be asking is why the Australian economy has so underperformed since 2008, with below trend growth the norm since the GFC. The fear among many is that we are another US in waiting. A massively over-leveraged and de-industrialsed service economy just waiting for the penny to drop. The key vulnerability is asset markets and especially house prices, as well as the potential for a China shock. The thesis goes that once past a “Minsky moment” the bust will accelerate on household deleveraging. Richard Koo calls these balance sheet recessions because they as much about repairing wealth as they are about repairing cash flows.

Increasing American Jobs Through Greater Exports to Africa - Brookings - The bipartisan “Increasing American Jobs Through Greater Exports to Africa Act of 2012,” introduced in the U.S. House and the Senate, calls on the Obama administration to develop a U.S. trade and investment strategy for Africa and to triple American exports to the African region in order to create new U.S. jobs. The most significant U.S. legislation on Africa since the African Growth and Opportunity Act, the bill would establish a much-needed trade and investment agenda in a continent increasingly dominated by China and other trading partners. Mutually beneficial to both the United States and Africa, the legislation marks an important turning point for U.S. engagement with African markets.

Amid Brazil’s Rush to Develop, Workers Resist - The revolt here on the banks of the Madeira River2, the Amazon’s largest tributary, flared after sunset. At the simmering end of a 26-day strike by 17,000 workers last month, a faction of laborers who were furious over wages and living conditions began setting fire to the construction site at the Jirau Dam.  Throughout the night, they burned more than 30 structures to the ground and looted company stores, capturing the mayhem3 on their own cellphone cameras, before firefighters extinguished the blazes. The authorities in Brasília flew in hundreds of troops from an elite force to quell the unrest4.  Men in camouflage fatigues still patrol the sprawling work site, reflecting a dilemma for Brazil’s leaders. Even as they move to tap one of the world’s last great reserves of hydroelectric5 power, the Amazon basin, strikes and worker uprisings at the biggest projects are producing delays and cost overruns.  Brazil is leading a rush among South American nations to build an array of dozens of dams6 in the Amazon. The authorities expect at least 20 important hydroelectric projects, including the Jirau and Santo Antônio Dams here in Rondônia State, to be built in Brazil over the next decade. Elsewhere in the Amazon, work has begun on Brazil’s biggest dam project7, Belo Monte, an effort to divert the Xingu River requiring more than $12 billion.

Who Wants To Buy Honduras? - Octavio Rubén Sánchez Barrientos had no idea how to undo the entrenched power networks. Honduras’s economy is dominated by a handful of wealthy families; two American conglomerates, Dole and Chiquita, have controlled its agricultural exports; and desperately poor farmers barely eke out subsistence wages. Then a friend showed him a video lecture of the economist Paul Romer, which got Sánchez thinking of a ridiculously big idea: What if Honduras just started all over again?  Romer, in a series of papers in the 1980s, fundamentally changed the way economists think about the role of technology in economic growth. Since then, he has studied why some countries stay poor even when they have access to the same technology as wealthier ones. He eventually realized something that seems obvious to any nonacademic, that poor countries are saddled with laws and, crucially, customs that prevent new ideas from taking shape. He concluded that if they want to be rich, poor countries need to somehow undo their invidious systems (corruption, oppression of minorities, bureaucracy) and create an environment more conducive to business. Or they could just start from scratch.

What Does Interconnectedness Imply for Macroeconomic and Financial Cooperation? - Federal Reserve Bank of New York; William C. Dudley, President and Chief Executive Officer - Remarks at the Swiss National Bank-International Monetary Fund Conference, Zurich, Switzerland

Fiscal Consolidation: Striking the Right Balance - iMFdirect - There is no getting around the need to reduce debt levels. High debt leaves countries exposed to interest rate shocks, limits their capacity to respond to future shocks, and reduces long-term growth potential. At the same time, we all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can and usually does stifle growth. With more than 200 million people out of work worldwide, and with growth in advanced countries forecast at a mere 1½ percent for 2012, getting the pace of consolidation right is therefore of paramount importance. So how do policymakers strike the right balance? As IMF Managing Director Christine Lagarde pointed out the other day, the growth vs. austerity debate is essentially a false one. There can be no lasting growth without sustainable policies, and right now that sustainability requires fiscal consolidation. But equally there can be no sustainable adjustment without growth.So the critical challenge is to devise a strategy that is good for stability and good for growth. This is possible. But there is no denying that, in the short term, consolidation involves real costs and requires tough choices, the more so given that growth is already below potential and there is little scope for additional lift from monetary policy or external demand

Never Mind Europe. Worry About India., by Tyler Cowen - The economic slowdown in India is one of the world’s biggest economic stories, but it is commanding only a modicum of attention in the United States. It may not even look like a slowdown because by developed standards, India’s growth — estimated by the International Monetary Fund at 6.9 percent for 2012 — is still strong. But a slowdown it is: the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline.The government reported year-over-year growth in the October-through-December quarter of only 6.1 percent.  What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison.  China commands more attention, but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will continue to grow, so under even modestly optimistic projections the Indian economy will be No. 1 in terms of total size.

Dismal Numbers from China and India Indicate Further Weakening of Global Economy — Dismal data from China and India on Friday may signal a further weakening of the global recovery, undermining hopes the dynamic emerging economies of Asia can help prop up growth. China reported its industrial production rose 9.3 percent from a year earlier in April, below expectations and down from nearly 12 percent in March. Investment and retail sales also slowed, though easing inflation offers leeway for fresh moves to boost growth. India’s industrial output fell 3.5 percent in March from a year earlier on weak manufacturing and investment. Output for the fiscal year ending in March rose 2.8 percent, down from 8.2 percent the year before. The anemic indicators suggest Asia’s ability to counter slowing growth in Europe may be limited. It also shows that the brief burst of vitality partly fueled by European stimulus late last year is likely wearing off.

This week, China released data that showed its economy was continuing to weaken. Meanwhile India’s economy shows signs of slowing, as do Brazil’s and Russia’s. As our attention focuses on Europe’s troubled economy, are we in danger of ignoring a slowdown in the BRIC nations — Brazil, Russia, India and China — that could have a huge impact on the global economy? What happens if one or all of the BRIC countries come to a halt?

Global Reality: Surplus of Labor, Scarcity of Paid Work: The global economy is facing a structural surplus of labor and a scarcity of paid work. Here is the critical backdrop for the global recession that is unfolding and the stated desire of central banks and states everywhere for "economic growth": most of the so-called "growth" since the 2008 global financial meltdown was funded by sovereign debt and "free money" spun by central banks, not organic growth based on rising earned incomes. Take away the speculation dependent on "free money" and the global stimulus dependent on massive quantities of fresh debt, and how much "growth" would be left?  What policy makers and pundits dare not admit is that the global economy is entering the "end of paid work" foreseen by Jeremy Rifkin. The industries that are rapidly increasing productivity and profits are doing so by eliminating jobs and the need for labor. The Web is chewing up industry after industry, wiping out entire sectors that once supported hundreds of thousands of jobs while creating a few thousand new jobs that require high-level skills and mobility.  Robotics are replacing factory labor throughout the world--yes, even in "low-wage" China. When I first toured a variety of factories in China in 2000, many were little more than simple warehouses filled with long tables where workers assembled and packaged cheap light fixtures, etc. by hand. Others had robotic machines stamping out circuit boards that were then hand-assembled into monitors, etc.

Angry Greeks reject bailout, risk euro exit - The latest official results, with over 61 percent of the vote counted, showed the only two major parties supporting an EU/IMF program that keeps Greece from bankruptcy would be hard pressed to form a lasting coalition. New Democracy was polling just under 20 percent and PASOK a humiliating 13.6 percent with the Left Coalition on 16.2. In the last election in 2009, PASOK won a landslide victory with 44 percent and the Left Coalition had just 5 percent. Left Coalition leader Alexis Tsipras, at 37 Greece's youngest political leader, hailed a peaceful revolution and said German Chancellor Angela Merkel should understand that austerity policies had been defeated. In another indication of the extent of public anger, the extreme right Golden Dawn party was poised to take nearly 7 percent of the vote. This would allow such a party to enter parliament for the first time since the fall of a military dictatorship in 1974. Several analysts said the unprecedented fragmentation of the vote could bode weeks of instability and force another election. But a New Democracy source said the party would not ask for repeat elections if it finished up as the largest party. Samaras is likely to be invited to try to form a government on Monday.

Dangers of National Unity - Krugman - A thought on the Greek election results: what we’re seeing there is the danger of getting all the Very Serious People together in a national unity government when the Very Serious People are, in fact, all wrong about what needs to be done. Backing up a minute: I don’t think you want to read European elections in terms of any particular ideological tide. This is very much a Larry Bartels world in which voters toss out incumbents and reward insurgents if the economy is bad, never mind the specifics of their platforms. Hollande’s victory in France is no more a harbinger of a general leftward shift than Rajoy’s victory in Spain a little while ago heralded a general rightward shift; these are just the “outs” benefiting from the fact that they aren’t in, and the economy stinks. But now consider Greece, which had a government of national unity — an alliance between the center-right and the center-left, dedicated to following what the VSPs consider responsible policies. Think of it as Michael Bloomberg with retsina. Sounds great, doesn’t it? (Not to me, but I’m not a Serious Person). The trouble is that the responsible policies aren’t — the austerity program that has defined being Serious in Europe is an abject (and predictable) failure. So voters take their anger out by voting against the insiders. And since all the respectable people are inside the political tent, backing and being identified with failed policies, that means a big vote for extremists right and left.

Ballot Box Breakdown: How Europe’s Elections Will Heat Up the Debt Crisis - There have been many flaws in Europe’s strategy to resolve its ongoing debt crisis: The unreasonable obsession with austerity. The persistent reluctance to commit sufficient financial resources. The stubborn rejection of important tools like eurobonds. But perhaps the most misguided notion of all was the apparent assumption among European leaders that voters would meekly accept that strategy, despite the economic suffering and social upheaval it has been creating. That delusion was shattered on Sunday. In France, Socialist candidate François Hollande beat out Nicolas Sarkozy, one of the key architects of the euro zone’s economic policies, to become the country’s new President. Even more telling, in Greece, the two main political parties, which have supported the biting austerity program mandated by the euro zone in return for two massive bailouts, got trounced. About 60% of the vote went to smaller parties, most of which campaigned against the pledges of austerity and reform made by Athens. Most notably, support for one such party, the Coalition of the Radical Left, known as Syriza, more than tripled from the last election, making it the second largest party in parliament with one-sixth of the 300 seats.

The Greece question - THE outcome of the weekend's French election may have gotten more headlines, but the results in Greece are the more surprising, and impactful. Charlemagne writes: Enraged voters punished Greece's once-dominant parties, the socialist Pasok and the conservative New Democracy, which had formed a unity government and accepted the unpopular terms of the second EU-IMF bail-out. With the count still taking place, the two parties secured less than 35% of the vote, which means they will struggle to form a majority. Anti-austerity Greek parties, of the left and the right, have done well. Syriza, a radical left-wing party, pushed Pasok far into third place. The far-Right Golden Dawn was poised to enter parliament for the first time. Antonis Samaras, leader of New Democracy, which won the biggest number of voters, said he was prepared to forge a government of national unity based on two points: that Greece remains within the euro, and that the bail-out terms are renegotiated. The fragmentation in Greece will inevitably raise the question of whether the country will leave, or be pushed out of, the euro zone. Until now European officials have been adamant that any breach of Greece's second austerity and reform plan would lead to the halting of its rescue funds. Greece will try to piece together a government this week. There are more interesting elections to come. France will elect its National Assembly in June. Ireland will weigh in on the fiscal compact later this month.

Greek threat to scrap EU bailout - The leader of Greece's left-wing Syriza bloc has said he will try to form a coalition based on tearing up the terms of the EU/IMF bailout deal. Alexis Tsipras, whose bloc came second in Sunday's vote, said Greek voters had "clearly nullified the loan agreement". He has three days to reach a coalition deal and has told the two major parties to end their support for the austerity terms if they want to take part. The European Commission and Germany say countries must stick to budget cuts. European Commission President Jose Manuel Barroso said on Tuesday: "What member states have to do is be consistent, implementing the policies that they have agreed." But, after French voters chose a new president on Sunday in Francois Hollande who has advocated greater focus on growth, EU leaders are to gather on 23 May for an informal meeting at which his proposals will be discussed. The financial chaos has sparked huge social unrest in Greece and led to a deep mistrust of the parties considered to be the architects of austerity. On Monday the leader of the centre-right New Democracy (ND) party, Antonis Samaras, abandoned attempts to form a coalition.

Deadlock pushes Greece closer to euro exit - Greece failed in its efforts to forge a "pro-European" government last night after a watershed election in which nearly two-thirds of voters rejected the reform programme which has underwritten the country's international bailout. The prospect of stalemate in Athens, fresh elections next month and a possible exit from the euro sent markets plunging, while Angela Merkel, the German Chancellor, warned that Europe's most embattled economy must stick to its commitments to international lenders or face default. Greece's two main parties were locked in talks over a government of national unity but a collapse in their support left them with only one-third of the vote, no parliamentary majority and no obvious coalition partner. Antonis Samaras, leader of first-placed party New Democracy, announced in a televised address last night that he had done "everything possible" but had failed to build a coalition, handing the mandate back to the President. "We directed our proposal to all the parties that could have participated," he said, "but they either directly rejected their participation, or they set as a condition the participation of others who, however, did not accept." While new forces like the radical left Syriza party, who came second on Sunday, celebrated the overthrow of the two-party system, analysts warned that Greece may be left without a government and forced to return to the polls next month. Should the country fail to secure its next tranche of loans in June then it would be forced into bankruptcy and out of the euro, a prospect that rattled global stock markets.

Greece ‘worst-case’ outcome sparks new turmoil —Investors woke up Monday to a “worst-case” scenario in Greece after voters punished mainstream, pro-bailout parties in parliamentary elections, potentially creating a political vacuum that could fan doubts over the country’s ability to meet the terms of its latest bailout and remain in the euro, strategists said. With 99% of the vote counted, the center-right party New Democracy was on track to hold 108 seats in the 300-seat lower house of parliament, while the center-left Socialists, known as Pasok, were seen at 41, according to Greek newspaper Kathimerini. Pasok came in third behind the left-wing and anti-bailout Syriza party, which has won 52 seats, the report said. That leaves a combination of New Democracy and Pasok — the country’s long-dominant parties and architects of the recent bailout — two seats short of a 151-seat majority. “This is the crisis we have all feared,”

No Deal: SYRIZA and Greece's Democratic Left Party Refuse to Join Bailout Alliance; Icing on the Cake: PASOK Will Not Join a Slim Majority; Solidarity is One-Way Street - Odds of a lasting coalition are slim given the massive vote against the austerity coalition. Fotis Kouvelis, SYRIZA party leader and second place finisher in the elections repeated his position that cooperation with New Democracy and PASOK was not in his intentions. Moreover, Greece's Democratic Left party refuses to join any pro-bailout coalition. The moderate leftist party, which picked up 6.1 percent of the vote in Sunday's election, had been seen as the two traditional ruling parties' best hope for a coalition partner among the five anti-bailout parties that entered parliament. "We rule out participating in a PASOK-New Democracy government," Kouvelis told Reuters after a party meeting to decide the group's strategy. "We would participate in a coalition government with other progressive forces," he said, referring to other leftist parties which together do not have enough parliamentary seats to obtain a majority.

Creepy Video of Greek Neo-Nazi Party Leader - I don't know what's more unsettling--the demagogic rant delivered here by Golden Dawn Party leader Nikolaos Nichaloliakos, or the part before the rant, when his advance team intimidates journalists into standing as he enters the room. In any event, the Greeks had better get used to this kind of spectacle, because Golden Dawn will, after yesterday's election, have a presence in parliament. I have a couple of thoughts below the video player.

A Defiant, Yet Desperate Leap Into the Dark - It is now 100% clear to everyone that the European people, and specifically the Greek people, are almost unified in their resistance to further austerity.  The message of "no more austerity for the people and welfare for the banks" has reached an unquestionable level of pitch perfection. The fate of Greece, its political economy and its people, though, still remains as uncertain as ever. There are still many issues the Greeks must hammer out for themselves WITHOUT the interference of the Troika. While the people have clearly expressed their unwillingness to entertain any more pro-austerity policies crafted by the "moderate" coalition government of PASOK and ND, they have not made clear whether they will ultimately embrace the policies of the far left or the far right, or a combination of both. There are both major advantages to be had and major pitfalls to be encountered with either one. What is clear, though, is that a turn too far to the right, i.e. to the Golden Dawn neo-nazi party and its policy platform, may be a turn into the most bitter parts of European history in the 20th century. It would be tragic for the Greeks to finally escape an oppressive EU regime only to fall under the dictates of an equally oppressive/dangerous reactionary regime, which would also have consequences for the rest of Europe and the world.

The World from Berlin: 'Germans Won't Pay for Greece's Vacation from Reality' -Greece appears to be sinking ever further into a political quagmire after a first push to form a new coalition government failed on Monday, just one day after outraged voters chastened the parties that have supported the country's bailout and austerity measures.  Sunday's election results revealed clear anti-austerity sentiments from voters, who toppled the two main parties that have dominated Greek politics for some four decades, the conservative New Democracy and socialist PASOK. Instead, many Greeks voted for smaller, more extreme, parties that oppose the strict requirements levied by the European Union and International Monetary Fund in exchange for bailouts. Greece's election has brought a political sea change to the country, after bitter voters hammered established parties for supporting austerity measures in exchange for international bailouts. As Athens veers towards political chaos, German editorialists predict hard times ahead.

Those Revolting Europeans, by Paul Krugman - The French are revolting. The Greeks, too. And it’s about time. Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that’s a good thing. Needless to say, that’s not what you heard from the usual suspects in the run-up to the elections. It was actually kind of funny to see the apostles of orthodoxy trying to portray the cautious, mild-mannered François Hollande as a figure of menace. He is “rather dangerous,” declared The Economist, which observed that he “genuinely believes in the need to create a fairer society.” Quelle horreur! What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest. What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

The Answer Isn't Socialism; It's Capitalism that Better Spreads the Benefits of the Productivity Revolution - Robert Reich - Francois Hollande’s victory doesn’t and shouldn’t mean a movement toward socialism in Europe or elsewhere. Socialism isn’t the answer to the basic problem haunting all rich nations.  The answer is to reform capitalism. The world’s productivity revolution is outpacing the political will of rich societies to fairly distribute its benefits. The result is widening inequality coupled with slow growth and stubbornly high unemployment. In the United States, almost all the gains from productivity growth have been going to the top 1 percent, and the percent of the working-age population with jobs is now lower than it’s been in more than thirty years (before the vast majority of women moved into paid work). Inequality is also growing in Europe, along with chronic joblessness. Europe is finding it can no longer afford generous safety nets to catch everyone who has fallen out of the working economy. Consumers in China are gaining ground but consumption continues to shrink as a share of China’s increasingly productive economy, while inequality in China is soaring. China’s wealthy elites are emulating the most conspicuous consumption of the rich in the West.

Hollande Pledges to Fight Austerity After Beating Sarkozy -- Francois Hollande, who defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe's second-biggest economy, pledged to push for less austerity and more growth in the region. "Europe is watching us," he told supporters in Tulle, France, last night after he won about 52 percent of the vote. "Austerity isn't inevitable. My mission now is to give European construction a growth dimension." Hollande inherits an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load that makes France vulnerable to the financial crisis that has rocked the euro region the past two years. Sarkozy became the ninth euro leader to fall in that time and the first French president in more than 30 years to fail to win re-election. Hollande's comments were echoed in Greece, where voters flocked to anti-bailout groups, leaving the two main parties, New Democracy and Pasok, a seat short of a majority if they govern together, an Interior Ministry projection showed. His victory may sharpen tensions with key allies with Hollande advocating a more aggressive European Central Bank role in spurring growth -- a measure opposed by Germany.

Merkel Rejects Stimulus in Challenge to Hollande’s Growth Plans - German Chancellor Angela Merkel rejected government stimulus as the way to spur economic growth in Europe, setting up a clash with French President-elect Francois Hollande before he’s even taken office. In her first response to Hollande’s victory in yesterday’s French election, Merkel rejected a return to the “huge” stimulus programs following the financial crisis in favor of business-friendly economic changes. She and Hollande will talk “very openly” about the form of growth to pursue, a discussion now taking place across Europe and “to which the new French president will bring his own accents.” This discussion is not whether we should pursue consolidation or growth, it’s completely clear that we need both,” Merkel told reporters in Berlin today. “Rather, I think the core of the discussion is whether we again need debt- financed economic programs, or whether we need growth elements that are sustainable and oriented toward the economic strength of certain countries.”

Germany and the Benefits of the Euro -Since the launch of the Euro, there has always been a question about the benefits that Germany could enjoy of sharing a currency with other countries. While for the other countries (the "periphery") the benefits in terms of credibility and stability of a strong currency were obvious, for Germany the benefits were simply the additional trade integration that the Euro would produce. Some believed that this benefit was too small to compensate for the potential risk of being part of a club with riskier countries. The current crisis has provided arguments for those who believed that Germany should have never been part of the Euro. There is, however, a different perspective of the first 12 years of the Euro when looking at the performance of the German economy. During those years Germany managed to engineer a reduction to its relative labor costs that paid off in terms of increasing exports, a large surplus in the current account and faster GDP growth. A model that some see today as an example for others to follow. As Paul Krugman has pointed out several times, this model cannot work for everyone, not all countries can run current account surpluses!

German Adjustment - Krugman - It has become clear that one of the main forces behind the insistence on austerity as the answer to Europe’s problems is the belief among many German opinion leaders that their own experience in the last decade shows the way. Here’s Josef Joffe: Why [should France emulate] the former German chancellor? Because he dared tell his own electorate what neither Mr Hollande nor Nicolas Sarkozy would have uttered even on the rack. Nine years ago, Mr Schröder warned his country: reduce social benefits, loosen up labour markets and accept individual responsibility – or else. Then he carried through with his “Agenda 2010”. And lo, Germany went from zero to 3 per cent growth in the two years before the crash – and back to 3 per cent thereafter. So, how useful a role model is German adjustment in the 2000s? It certainly did happen: But how did it happen? I As I pointed out a couple of days ago, Germany got out of its turn-of-the-millennium doldrums by moving into a huge trade surplus, which is not possible for everyone now. . That trade surplus was possible because Germany had a large fall in its costs and prices relative to other euro countries. Here’s the German real exchange rate using unit labor costs relative to the same measure for the euro zone as a whole, using OECD data:

Bill Black: New York Times Reporters Need to Read Krugman’s Columns - The New York Times has a very good economist, a Nobel laureate, working for it as a regular columnist. His name is Paul Krugman and among his areas of primary study is how to recover from a severe recession. Regular readers of the paper will know that recovery is the most common subject Krugman’s columns discuss. Sunday’s elections in France, Greece, Germany, and the UK have spawned a spate of articles in the New York Times that have focused on finance and recovery from the Great Recession in Europe. The reporters’ collective take on the elections demonstrates that they are in the grip of dogmas that are so powerful that they have come to believe in anti-facts and to rely on “economic” theories that are rarely believed by economists and have been continuously falsified by reality. It is now apparent that the paper’s journalists that cover the EU do not read or do not understand Krugman. Here is how they began a story on the French election and the import of Hollande’s victory.Mr. Hollande’s campaign promised a kinder, gentler, more inclusive France, but his victory over President Nicolas Sarkozy will also be seen as a challenge to the German-dominated policy of economic austerity in the euro zone, which is suffering from recession and record unemployment. Notice the logical disconnect? There is “austerity” and there is “suffering from recession and record unemployment.” The two are presented as if they are not connected. Austerity during a weak recovery from a Great Recession will cause intense “suffering from recession and record unemployment.” That is a fact as we have taught it in economics for over a half-century. It has strong theoretical and empirical support.. When and how austerity turns around and eventually aids a recovery has neither theoretical nor empirical support (hence Krugman’s derisive allusion to the stealth “confidence fairy”). Note also that the interrelationship of the German-imposed austerity and the resultant return to recession in France is precisely why Hollande won the election and is therefore critical to the article.

How savage has European austerity been? - To be sure, there are particular small countries which have made serious spending cuts, in the Baltics most of all.  But sometimes one hears it said that an anti-austerity strategy must be EU-wide as a whole, or that austerity is “a failed strategy for the eurozone,” or something similar.  So perhaps it is worth looking at some numbers for the larger picture.  Here is a graph which puts the matter in some perspective:  Veronique de Rugy, who compiled this data, writes:First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. Third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn’t available) it would possibly show a slight decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.

After Austerity, by Joseph Stiglitz - This year’s annual meeting of the International Monetary Fund made clear that Europe and the international community remain rudderless when it comes to economic policy. Financial leaders, from finance ministers to leaders of private financial institutions, reiterated the current mantra: the crisis countries have to bring down their national debts, undertake structural reforms, and promote growth. Confidence, it was repeatedly said, needs to be restored. It is a little precious to hear such pontifications from those who, at the helm of central banks, finance ministries, and private banks,... created the ongoing mess. Worse, seldom is it explained how to square the circle. How can confidence be restored when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower? The consequences of Europe’s rush to austerity will be long-lasting and possibly severe. If the euro survives, it will come at the price of high unemployment and enormous suffering, especially in the crisis countries.

Pain Without Gain - Krugman - Joe Wiesenthal says something that can’t be said enough:The fact of the matter is that there’s no example in Europe, yet, where the bond market has rewarded austerity. Actually, that may be a bit too strong — Latvia, which never had much debt to begin with, is back in the graces of the bond market, although still deeply depressed. But consider Ireland, which has been proclaimed an austerity success story not once but twice — in 2010 and again last fall. Strange to say, markets have remained firmly unconvinced. Here, for example, is the CDS spread from Bloomberg (which moves closely with the bond spread): Ireland is still nowhere near regaining market access. So where is the supposed payoff from austerity?

Austerity now dirty word in Europe, but what next?  - The day after Francois Hollande rode to power in France on a slogan of "change now," the conversation in Europe was already different Monday: Austerity had become a dirty word. What replaces it, though, was anything but clear. The newly powerful in France and Greece want to roll back the spending cuts and tax increases that have defined Europe's response to its 3-year-old debt crisis. But campaign rhetoric is likely to prove more extreme than any real-world reversal of the budget tightening. World financial markets took Europe's latest round of political upheaval in stride, convulsing early and then recovering. The continent's uncertain future — including the possibility of Greece leaving the euro — was causing anxiety but not panic about the threat to the global economy. But there is hardly unity in Europe. Sunday night, Socialist president-elect Hollande celebrated his victory over Nicolas Sarkozy by vowing, "Austerity can no longer be inevitable!" On Monday, German Chancellor Angela Merkel gently pushed back. She rejected Hollande's call to renegotiate a treaty signed last month on tougher action to control government deficits. "We in Germany, and I personally," she said, "believe the fiscal pact is not up for negotiation."

Francois Hollande has ten weeks to avert a French bond crisis - There will be no speculative attack against French bonds on Monday morning because François Hollande has been elected president, the first socialist to take the Élysée since the Mitterrand debacle of 1981.  The phantom army waiting to pounce is the cynical invention of the Sarkozy campaign. Any fears of a Leftist lurch have been in the price for weeks.  What is true is that the CAC-40 index of French stocks has underperformed Germany’s DAX by 20pc since last August, an ominous divergence for two countries yoked so tightly together. The yield spread of German 10-year Bunds over French OAT bonds has jumped 90 basis points.  This parting of the ways pre-dates the "Hollande scare". It goes beyond downgrade jitters, or fears of contagion from $710bn of French bank exposure to Italy, Spain, Greece, Ireland, and Portugal (IMF data). It reflects a gut feeling in global markets that France is sliding into deep trouble, clinging to a ruinously expensive social model in a Teutonic monetary union and a Chinese trading world.  French economists say the moment of danger will come later this summer - whoever is elected - as the full force of Europe’s contraction crisis hits France.

The Euro Area Economy Is Deteriorating At A Disastrous Pace - In case you forgot how quickly the euro area economy was deteriorating, here's a look at the latest reading of composite PMI for the 17-country region. That index fell to 46.7 this month, even worse than an earlier flash reading of 47.4. Perhaps most concerning is that the effects of the European Central Bank's two three-year long-term refinancing operations appears to already be fading, as business activity rebounded slightly at the start of 2012 before declining sharply later in the year. The idea that economic momentum driven by the LTROs has faded already stands in contrast to statements by ECB president Mario Draghi yesterday, who told reporters that the effects of the LTRO had not yet been felt  in the markets.

The only solution to the eurozone crisis - It is easy to solve the eurozone crisis on a piece of paper. I have done it many times. It is also easy to invent new institutions: a fiscal union, a treasury secretary, a common sovereign bond and a banking union. I would welcome most of these. But we must subject these discussions to a reality check. While these institutions will emerge from this crisis, none of them can solve it. That will have to be the job of the existing institutions. This applies particularly to the idea of a common bank resolution fund. It is a great idea, but political resistance to it will be so big that it will not be implemented in full and in time. It will not solve the crisis. The solution can come only from a combination of two instruments – debt monetisation through the European Central Bank and default into the European Stability Mechanism, the €500bn rescue fund that becomes operational in July.  In practice, any resolution of the crisis will involve more of the latter than the former. We have reached the limits of what the ECB will do. I agree with Paul de Grauwe, of the London School of Economics, that direct purchases of government bonds would have been more effective than the indirect route of long-term refinancing operations. But the ECB is unlikely to go that far.

Spain to Present New Bank Clean-up Measures - Spain’s prime minister said Monday the government will likely present this week new measures to help banks, a key source of worry over whether the country might need a financial bailout. Mariano Rajoy gave no details but said he would not rule out lending or injecting government money into the sector if necessary. “The last thing I would do would be to inject or lend public money but if it is necessary I would not hesitate to do it, just as other European countries have done,” Rajoy told Onda Cero radio in an interview. He said the measures would almost certainly be presented after Friday’s weekly Cabinet meeting.

Spain to spend billions on bank rescue - Spain is planning a state bail-out of Bankia, the country’s third biggest bank by assets, in a move likely to involve the injection of billions of euros of public money into the troubled lender. In an abrupt reversal of policy, the Spanish government, which had previously insisted that no additional state money would be needed to clean up the country’s banking sector, confirmed that an intervention was being prepared.  Some bankers and analysts have argued that BFA, Bankia’s parent company which controls the listed entity and houses the combined group’s worst quality assets, needs significantly more capital. BFA said last week it had renegotiated €9.9bn of assets last year to avoid them being classified as bad loans, equivalent to 5 per cent of the bank’s €188bn loan book. One adviser to Spanish banks and government agencies said that if the amount Madrid injected into Bankia was not sufficient, and did not involve a much improved management of its bad assets, then the plan risked achieving little. “Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic,” the person said. “I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is.”

Saving the Euro Will Require Banking Sector Reform - It was one of those puzzling sentences that central bankers like to leave hanging in the air. The temporary European Financial Stability Facility (EFSF), the rescue fund for cash-strapped euro-zone countries, has not been very successful, admitted European Central Bank (ECB) President Mario Draghi at a press conference in Barcelona last Thursday. "Its functioning fell short of both expectations and needs," he said. Draghi left it up to the journalists in the audience to interpret what is wrong with the fund and what needs to be changed. Furthermore, the Italian banker failed to mention that his organization has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM), to give the bailout mechanism more firepower.  Euro Group chief Jean-Claude Juncker had asked Draghi for his advice in the matter two weeks earlier. Originally, the ESM, which will be launched in July 2012, was only intended to help out debt-ridden governments, which would have to meet strict requirements in return. But recently, there have been serious closed-door discussions about direct aid for banks. In Brussels, a working group is also looking at this delicate subject. Time is running out. With the financial crisis now in its fifth year, the banks' problems remain unresolved, and in some countries they are even jeopardizing the stability of the state -- and the future of the European common currency.

France simmers, Greece boils -  Back in early February I wrote a post about 2 key things that I was watching out for in Europe that I thought the economic world was underestimating the impact of. I called these things “black cygnets”. One was Spain, the other was elections. My concerns about Spain came to pass and now it seems elections are doing the same. As I have mentioned a few times in my European coverage, one of my greatest concerns about the failings of Europe’s economic policy response to the crisis was a dangerous political fallout. As I stated previously: Obviously this is an economic disaster and I have been at the front of the queue screaming about misguided economic ideologies in Europe that have led, and continue to lead, to this situation. However, it doesn’t take much of an imagination to realise that this has the potential to become something much more sinister than just ugly looking charts and that is my real concern. It was obvious from round one result of the French presidential campaign that the Right was gaining strength in Europe. Marine Le Pen played a critical role in ousting Sarkozy, and given the failing of Sarkozy to re-claim the presidency she is now expected to extend her base into the national parliament in June elections:

The Greek crisis will fast expose Mr Hollande  - In rural France on Sunday night, the newly-elected French president took to the stage and announced that he would lead the battle in Europe against austerity. On the other side of the continent, Greek voters were calling his bluff. By overwhelmingly opting for parties that want to either repudiate or renegotiate Greece’s bailout deal, they have handed François Hollande a painful dilemma. Will he stand with the Greek people against austerity? Or will he stand with the German government and the International Monetary Fund, in insisting that the Greek bailout cannot be renegotiated? The choice Mr Hollande makes will be fateful, for France and Europe. Potentially, France’s new president could position himself as the head of Europe’s southern rebels. There is no doubt that the Spanish and Italian governments – even if nominally from different political families – have been cheering on the French socialist. They, like the Greeks, desperately want to see a challenge to German austerity orthodoxy.  Yet any French effort to isolate Germany within the EU would be a historic shift in postwar French foreign policy – which has been built around the idea that the “Franco-German couple” should run the EU together. Allying France with the European south would also damage France’s self-image, as one of the stronger economies in Europe. The perception of France in financial markets could also worsen. Most damaging of all, an open split between France and Germany would cause Europe-wide problems, opening up a seismic fault in the foundations of the EU and its single currency. As a result, most analysts assume Mr Hollande will settle for a few face-saving gestures from Berlin, allowing him to say that he has changed the direction of the EU debate in favour of “growth”. Even before he was elected, experts in Berlin and Paris were sketching out the likely contours of an agreement.

A Message from Argentina for Euro-Zone Countries - Persistent euro-zone turmoil has kept the world economy on edge. Doubts about the ability of many countries in the single-currency region to service their sovereign debt are rising along with the interest rates the affected nations must pay to roll over maturing obligations. The once unthinkable scenario of a large-scale sovereign debt crisis in the region is prompting a heated debate concerning the costs and benefits of different ways to reduce unsustainable levels of government indebtedness. Euro-zone member Greece recently implemented a restructuring of its sovereign obligations, perhaps because its citizens decided that the benefits of that painful decision outweighed the costs. Still, many observers (including eventually some Greek citizens) might come to expect such a result after reviewing the often-cited experience of Argentina, a country whose output growth rates soared for many years after its 2001 debt default, one of the largest in the history of emerging markets.Such a benevolent assessment is not borne out by a closer inspection of the economic performance of Argentina after 2001 and its prior default in 1983. If anything, Argentina’s experience suggests that default will be accompanied by costs that may be missed by looking only at output growth.

The euro alternative to Greek default and the drachma - Dean Baker - Austerity was the big loser in the Greek elections on Sunday. The two main Greek parties, who endorsed the austerity pact signed last year, together got just over one-third of the vote. This is an extraordinary rebuke given that, between them, these parties have governed Greece since the end of the dictatorship in 1976. On the anti-austerity side, a leftwing coalition came in second with around 17% of the vote. More ominously, a far-right anti-immigrant party, which is also anti-austerity, received almost 7% of the vote. It is important for people elsewhere in the world, and especially in Europe, to understand that the Greek voters were not just being cranky kids who refuse to take their medicine. There is no doubt that Greece's government and economy were poorly managed in the years leading up to the crisis. However, the current path of austerity does not offer the country a path to a better future. The current path of austerity is simply a path of pain as an end in itself.  This can be seen from examining the official projections. The IMF now projects that 2012 will be Greece's fifth successive year of economic contraction, with 2013 being a year of stagnation. Even with growth projected to resume again in 2014, Greece's per capita income is still projected to be more than 8% lower than it was a decade earlier. Its unemployment rate, which is currently hovering near 20%, is still projected to be almost 15% in 2017. And its debt to GDP ratio is projected to be 137% in five years – far higher than it was at the onset of the crisis.

European Voters Have Rejected Austerity—So What Happens Next? - So voters in France and Greece sent an inescapable signal to the euro zone: No more austerity. In doing so, they showed that the average guy on the street understands economics better than the people in power. Rather than reducing debt and returning the European economy to health, the all-austerity approach to solving the debt crisis was sending the weaker economies of Europe into a death spiral of recession, unemployment, and ultimately, continued strain on national finances. But there’s a problem. Whatever the verdict of the ballot box, Europe can’t avoid austerity. Its indebted governments can’t simply return to spending and borrowing as they had in the past. Financial markets just wouldn’t stand for it. So the question going forward is not what replaces austerity, but what new mix of policies along with austerity are needed to restore prospects for growth, fix national finances and quell the debt crisis. There are no easy answers. Austerity, by its very nature, is growth-killing. The trick is finding a combination of policies, both at the national and Europe-wide levels, that can balance out that effect. There is no agreement on how that can be achieved. What we are about to see in Europe is a continent-wide debate on what the next steps might be to both end the debt crisis and restore the euro zone to economic health. The outcome of that debate is highly uncertain.

Merkel rejects renegotiating fiscal pact after French votes - German Chancelor Angela Merke on Monday ruled out renegotiating Europe's new fiscal pact on budget control and austerity, saying the "correct" path of combating eurozone debt crisis would not be toppled simply due to country leader changes. Speaking at a press conference in Berlin, Merkel said reopening talks on the fiscal compact agreed during the European summit in March "simply won't happen", dismissing repeated calls from France 's President-elect, Socialist Francois Hollande. The new French leader, who beat Merkel's close ally Nicolas Sarkozy on Sunday's election, criticizes Germany's hardline on belt-tightening and budget cuts, maintaining that it was economic growth, rather than harsh austerity, that could pull Europe out of the mess. Merkel stressed that the hard-earned pact, endorsed by 25 of the European Union's (EU) 27 member states was "correct" as a major way to tackle eurozone's debt crisis and enhance its fiscal management. "I think that we can't simply re-start discussing everything we have already agreed after an election in a small or big country," Merkel said.

Austerity: Wrong policy or hard truth? (+video) - Europeans voted for change over the weekend, and some politicians even promised it. But the reality of today's Europe is that little change is possible.While voters in France and Greece clamored for government stimulus and an end to austerity measures that have cut hundreds of thousands of government jobs, economists come back to a simple fact: Only Germany might have the needed cash, and it has no intention of sending it around the continent. Despite French President-elect Francois Hollande's proclamation that growth, not austerity, is the new path for Europe, there's little chance of that becoming true in the near term. German Chancellor Angela Merkel on Monday invited Hollande to Berlin for economic talks expected next week _ the new president's first international trip _ but she noted that the European fiscal treaty that mandates spending cuts and strict discipline won't be renegotiated. European growth, Merkel said, requires first getting Europe's spending and debt under control.

Greek bailout not up for negotiation: ECB's Asmussen - The European Central Bank will not renegotiate Greece's bailout package and there are no alternatives to sticking with it if Greece wants to stay in the euro zone, ECB Executive Board member Joerg Asmussen was quoted as saying on Tuesday. "Greece needs to be aware that there are no alternatives to the agreed bailout program, if it wants to stay in the euro zone," Asmussen told German financial daily Handelsblatt. Greece plunged into turmoil after a general election boosted far-left and far-right splinter groups, stripping mainstream parties that back a painful EU/IMF bailout of their parliamentary majority. The ECB is part of the so-called troika along with the International Monetary Fund and the EU Commission, which monitors the implementation of the bailout program.

Germany says renegotiating EU pact 'not possible' - The German government on Monday ruled out reworking the European Union's fiscal pact despite calls to do so by French president-elect Francois Hollande. "It is not possible to renegotiate the fiscal pact," government spokesman Steffen Seibert told a regular news conference. He noted that 25 of the 27 EU member states had already signed the accord imposing strict budgetary discipline in March after major wrangling. Hollande has called for a shift in strategy toward more growth-oriented measures including more public spending. But Seibert said Merkel would not accept "deficit spending" to feed economic expansion, and believed in "growth through structural reforms" such as reducing the cost of job creation as pursued by Germany over the last decade. Yet he dismissed suggestions that the apparently conflicting policies would put Merkel on a collision course with Germany's closest ally, insisting she was ready for an open dialogue.

Europe Wasn't Destroyed In A Day - Just like Rome wasn’t built in a day, the Eurozone won’t be destroyed in a day, but it is on a path that leads to eventual dismantling. This week we will see everyone play nice. Conciliatory words will be spoken.  Growth will become the topic de jour.  The markets will fall all over themselves once again on news of bank bailouts.  The headlines we get in the early part of this week will once again be overwhelmingly designed to encourage people and the markets.  Europe will have a new spirit of co-operation and will welcome fresh insights into the process.  Growth, growth pacts, plans to grow, infrastructure growth, etc., will be talked about.  There will be talk, and maybe even action on the bank recapitalization efforts.  Good banks and bad banks will abound.  Governments will promise money to banks at rates so low no sane investor would even consider. Ultimately these plans will fail, and we will see fresh lows on the year for stocks, with the U.S. and Germany hit hardest as justifying further bailouts for the core will be nigh on impossible, growth is not easy to achieve, and the good-bank-bad-bank model is a loser from the start.

If you can't divorce, take a lover - The previous post argued that the euro was a mistake, and that time has come to talk about it. But such a discussion can only happen if it is based on the prospect of a solution. As the Economist points out: one reason the euro holds together is fear of financial and economic chaos on an unprecedented scale. Such a fear may be widely exaggerated. A euro exit will not necessarily trigger chaos, but might instead reduce the risk of chaos. It does not have to be economically painful, and it does not even have to be a real exit, let alone a complete break-up. First, let's look at the political implications of a euro break-up:

  • In theory, members of the Eurozone are not allowed to exit the euro, or they would have to quit the European Union. This is unlikely. After the mandatory screaming and warnings, Brussels will accept whatever it takes to avoid a European implosion.
  • A euro break-up would sanction the failure of the biggest European project so far. Obviously, it won't look good for the European construction. But it was an ill-conceived project from the start, and nothing threatens more the European Union right now than the current crisis. Politically, a euro break-up would be less damaging than further deterioration of the economic situation.

Are there any alternatives to austerity? Six ideas for fixing Europe - Roughly speaking, here’s the euro zone’s current approach to its debt crisis: Individual countries are pursuing austerity measures to shrink their budget deficits. There’s a bailout fund for countries in truly terrible shape, such as Greece and Portgual. And the European Central Bank is propping up the continent’s rickety banks. Basically, muddle through and hope for the best. But muddling through doesn’t seem to be working. Voters are now revolting against austerity, especially as the euro zone slides into yet another recession. Countries like Spain are finding that austerity is hurting growth and making deficits harder, not easier, to control. The bailout fund isn’t big enough to prop up countries like Italy and Spain if they run into serious trouble borrowing money. And many poorer euro zone countries are finding it difficult to grow and reduce their trade imbalances so long as they’re yoked to a single currency and a central bank that can’t cater to everyone’s needs.  So many observers are wondering whether Europe will shift course now that France’s newly elected president, Francois Hollande, has called for a change. But what else could Europe do? Here’s a list of six policies that various experts have suggested that the euro zone might consider instead:

What Hollande must tell Germany  - As Paul de Grauwe, now at the London School of Economics, stresses in a recent note, the current adjustment process is asymmetric: countries in difficulties disinflate; but countries in a good position do not inflate. This is not a monetary union. It is far more like an empire. What, then, might Mr Hollande do? First, he is going to have to forget almost all of his domestic promises, not only because they are not going to help France, but also because German leaders will not take him seriously otherwise. Then the new president must embark on a serious discussion with the latter on how they expect the eurozone to end its crisis. He should give enthusiastic support to the wise recent remarks by Wolfgang Schäuble calling for higher German wages. He should then point out that there seem to be only five ways this can end. The first and best would be symmetrical adjustment of the imbalances that built up before the crisis, along with reform in weaker countries. The second would be a permanent transfer of resources from surplus countries to deficit ones. The third would be a painful shift of the eurozone into external surplus – a Germany writ large, so to speak. The fourth would be semi-permanent depressions in weak countries. The last would be partial or total break-up of the eurozone. The only sensible choice is the first. But that is not the path the eurozone is now on. Austerity has to be matched to the realistic pace of adjustment and structural reform.

Budget Madness in the Netherlands - While all the current focus is on the challenge to austerity thrown up by the French and Greek elections, it may be salutary to look at an equally recent challenge that failed. Towards the end of April the Dutch conservative coalition government collapsed, when the far right party refused to discuss further budget cuts. The Prime Minister resigned. And yet a few days later other parties rallied round to give their support to a similar package of austerity measures, which now have majority support in parliament.   This austerity was not required by the bond markets. The government can borrow at very low interest rates:  2.3% on 10-year bonds. (Predictably a ratings agency made noises about the country losing its triple AAA after the government collapsed, although not the same one that infamously downgraded US debt last year.) It is definitely not required by the state of the Dutch economy: GDP is expected by the IMF to fall by 0.5% this year (that’s a -0.5% growth rate), with unemployment rising from 4.5% to 5.5%. So what could have led a government to try and cut spending and raise taxes at such a time to the extent that it brings the government down? The answer is the ‘Excessive Debt Procedure’ (EDF) of the EU’s Stability and Growth Pact. The budget deficit as a percentage of GDP was 4.7% in 2011, down from 5.6% in 2009. Without these measures it would probably have stabilised at around 4.5% of GDP, and the objective of these additional cuts is to bring it down to 3% by 2013.

Doubling Down - Krugman - I guess we knew this was coming, but in the face of last Sunday’s election results and the broader evidence that Europe’s economic strategy is an utter failure, the usual suspects are, you guessed it, doubling down. Simon Wren-Lewis looks on in horror as the Dutch agree on completely unnecessary austerity measures, as a way of showing their commitment to Europe’s totally misguided fiscal pact. David Cameron vows no going back on his failed austerity strategy. And Jens Weidmann vows to destroy the euro. OK, that’s not what he said in so many words, but it’s the implication of his op-ed. The meat is at the end: Monetary policy in the eurozone is geared towards monetary union as a whole; a very expansionary stance for Germany therefore has to be dealt with by other, national instruments. However, this also implies that concerns about the impact of a less expansionary monetary policy on the periphery must not prevent monetary policy makers taking the necessary action once upside risks for eurozone inflation increase. Let’s parse this. “A very expansionary stance for Germany therefore has to be dealt with ..” I’m pretty sure that this is code for saying that Germany will try to prevent any inflationary impact of low ECB rates with fiscal contraction. Austerity for all! (And no help for peripheral economies in the form of above-normal German inflation). And then, a declaration that the ECB will tighten to prevent any “upside risks for eurozone inflation” — so, tightening even if the southern economies are facing deflation.

Kunstler: 1, 2, 3, Puke - Europe may soon be choking on that plat du jour of government a la Hollandaise with the side of chopped Greek salad. The whole world, in fact, has got something like a giant hairball stuck in its craw. The hairball is composed of filaments of lies wound over a core of supernatural indebtedness. The lies are promises that the debt will be paid back. The illusion of remaining airborne may dissolve now with the Hollandaise denunciation of Franco-German team spirit while a centripetal vortex of unpaid obligations sucks notional wealth through the event horizon of massive deflation. Things are heating up, in other words. Wake up, sleepyheads! Welcome to the rest of the year 2012. Paul Krugman, the Nobel Prize winning Professor of Economics and op-ed columnist for The New York Times, is so amusing this morning. I, too, almost upchucked my "Paleo" diet breakfast of salmon hash with four eggs (pas de Hollandaise). Krugman writes in his column: What's wrong with the prescription of spending cuts as the remedy for Europe's ills? One answer is that the confidence fairy doesn't exist -- that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper. What an excellent misrepresentation of reality by one of the official molders of public opinion and policy in this exceptional land. I would attempt to debate his statement above that spending less government money is proposed to encourage consumers, blah blah. It is proposed because government doesn't have the money to spend and has run out of the ability to borrow more money due to the bad odor now wafting off the world's compost heap of sovereign bond paper. Everyone is going broke simultaneously, including putative lenders, i.e. buyers of bonds, who are the same ones selling them. I like the way Krugman avers offhandedly to the concept of "depression."  Heretofore his halftime act between two presidential terms has been sheer cheerleading, but I guess he forgot to bring his pompoms to the office yesterday.

The Politics of Austerity - Europe is undergoing a massive political upheaval. You may have noticed. Caught in the wake of deep recession, painfully high unemployment, bank failures, and growing demands for fiscal austerity by the bond markets, governments across the continent are collapsing. In November, voters in Spain dumped a Socialist government for the conservatives. Last weekend in France, voters replaced conservative President Nicolas Sarkozy with a Socialist. In the past year, governments have fallen in Portugal, Italy, and Denmark, just to name a few. In Greece, voters tossed out just about everyone and at the moment the nation has no government at all. In Britain, PM David Cameron’s ruling conservatives are polling at about 32 percent It is easy to look at all this and see a massive rejection of fiscal austerity. Certainly, many Democrats in the U.S. take that message even as they fret over a multinational “throw the bums out” tidal wave But is the left in the U.S. right, er, correct? Is the lesson from Europe that deficit reduction is a loser and the key to political success is short-term economic growth? I suspect, however, that the story is more complicated than that. In Europe, economy is in worse shape than here, spending cuts are deeper, and tax increases steeper. We are not Europe, at least not yet.

Yes, there is austerity - The Economist - A FIERCE debate is raging within Europe over the question of austerity. Some argue that countries within the euro zone, and on the periphery especially, have no choice but to embrace savage budget cuts. Others point out that the crisis is about more than just budget deficits, that some countries have room to cut less, and that austerity across the euro-zone as a whole should be pursued at a slower pace.And some, I'm somewhat stunned to find out, allege that there is no austerity. Veronique de Rugy posts a chart showing what appears to be just a tiny drop in spending across some euro-zone countries and no drop at all among others (Britain is thrown in, for good measure). Austerity is mostly a myth, she claims, and what austerity there has been has come from tax increases, which don't count. No less an authority than Tyler Cowen quickly gloms on to the argument.This is nonsense, as a quick check of the data reveals. The supposed absence of austerity in Ms de Rugy's figures is mostly a product of poor graph scaling and a reliance on nominal, absolute figures. If we instead turn to data from the International Monetary Fund's WEO database we see, first and foremost, that budget balances are in the process of improving dramatically:

Italian Banks’ ECB Borrowings Increase to Record High in April - Italian banks’ borrowings from the European Central Bank reached a record high in April, as the country’s lenders took up almost one-fourth of the funds offered to lenders amid revived concerns about Europe’s debt crisis. Total borrowing by Italian banks rose to 271 billion euros ($353 billion) from 270 billion euros in March, the Bank of Italy said on its website today. Most of the funding, about 268.4 billion euros, was from longer-term refinancing operations, while 2.6 billion euros came from the main refinancing operations, the data show. Lenders in the entire euro area borrowed about 1.13 trillion euros from the ECB, according to the central bank. Italian banks are struggling to fund themselves as the debt crisis has pushed up the cost of borrowing and made it harder for banks to access the interbank market and reach wholesale investors. Lenders in the country took on more than 255 billion euros from the ECB in two auctions of three-year loans in December and February.

Italy: 'Three-thousand' businesses file for bankruptcy in 1Q, report says - About 3,000 Italian businesses filed for bankruptcy during the first three months of the year as the eurozone's third-biggest economy falters under the weight of recession and a debt crisis, according to a new report. The bankruptcy rate during the first quarter rose more than 4 percent from 2011 and has been steadily increasing since 2008, according to the report by the Milan-based Cerved business consulting company. Italy's economy is in a recession that isn't expected to end this year. Almost 12,000 businesses closed their doors in 2011, the most in four years, The economy contracted during the final two quarters of last year, meaning the economy was in recession. The International Monetary Fund forecasts the economy will shrink 2.2 percent this year. Prime minister Mario Monti is leading an emergency government of unelected so-called technocrats who have passed a 20 billion-euro austerity plan to reduced the 1.9 trillion-euro debt and balance the budget. The economic situation has been blamed for 34 suicides since the beginning of this year.

In debt or jobless, many Italians choose suicide -Armenante had been fired more than a year ago, and had been struggling to find another job ever since. Next to his body he left a letter: “I decided to end it because I am a failure. I can’t live without work.” Unfortunately, he is not alone. Tens of other Italians have also chosen to take their own lives in response to the strain of the economic crisis and the consequent austerity measures. On Tuesday, two other people committed suicide, apparently due to financial hardship. A 60-year-old businessman in Milan hanged himself from a tree after failing to repay his debts. And a 64-year-old bricklayer in Salerno, who lost his job around Christmas, shot himself in the chest. He left a similar message: “I can’t live without a job.” The three men are casualties of the debt crisis that has pushed Italy’s economy to the brink over the past year and put considerable strain on most Italians, especially those who own or work for small businesses. At least 34 people have killed themselves citing economic reasons since the start of the year, according to the Italian Association of Small Businesses.

Italy: Industrial output falls almost 6% amid recession - Italian industrial output in March plunged 5.8 percent from a year earlier as weak economies in Europe and the United States sap demand for products, according to a new report. In an effort to lower its 1.9 trillion euros in debt, Italy's unelected government has implemented tax hikes and changed pension rules making workers stay on the job longer before retirement. Industrial output in the eurozone's third-biggest economy rose 0.5 percent from February. The Italian economy contracted during the final two quarters of last year, meaning the country is in recession. The International Monetary Fund forecasts the economy will shrink 2.2 percent this year.

Italy facing uphill battle to ratify EU's fiscal compact - Mario Monti, the Italian prime minister faces an uphill battle to ratify the EU's fiscal compact following local elections results which saw a swing to the centre left as voters gave the thumbs down to his government's tough austerity measures. Mr Monti took over as head of a technical government last November, after ruling centre right Prime Minister Silvio Berlusconi stepped down. His first measures were the introduction of tax hikes and spending cuts in a bid to tackle the country's enormous public debt. Initially Mr Berlusconi and his People of Freedom Party as well as the centre left opposition gave him a hesitant backing but now there is growing unease from many about whether Mr Monti can continue to steer the country until next year's scheduled general election. The former premier also stressed that "we won't commit ourselves to voting for measures we don't agree with" which could make it tough for Mr Monti's government to press ahead with its programme of structural economic reforms designed to revive the recession-hit Italian economy, including unpopular labour-market measures.

Greece, Again, by Tim Duy: It is shaping up to be another long, hot summer, and not just because of global warning. As has been widely noted, the austerity backlash in Europe began in earnest this past weekend. And Greece is once again the epicenter, at least for now. The Greek political system appears rudderless, which is calling into question the nation's resolve to complete the conditions of the last bailout package. Moreover, there are open calls for Greece to renege on the deal: Greece’s Syriza party leader Alexis Tsipras, charged with forming a government, told his pro-bailout counterparts they must renounce support for the European Union- led rescue if there is to be any chance of forging a coalition. Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their pledges to implement austerity measures by the time he meets with them tomorrow to discuss forming a coalition. Samaras said he would not do so, and would support a minority government if necessary. The Troika can't be particularly optimistic about Greek resolve whatever government finally holds together. Also note that in the coming days, Greece is faced with some real debt management decisions. From Bloomberg:The government taking office after this weekend’s election has 30 days to decide whether to make today’s interest payment on 20 billion yen ($250 million) of 4.5 percent notes maturing in 2016, or default. Then, by May 15, officials must decide if they’re going to repay the 436 million euros ($555 million) due on a floating-rate note issued a decade ago.

How A Radical Greek Rescue Plan Fell Short - Two years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency. After Greece's May 6 elections left pro-bailout parties too weakened to govern the country, more elections are likely in June, with no guarantee a stable government will emerge. By next month, Athens must identify €11.5 billion, or $15 billion, in fresh spending cuts or face suspension of the international loans it needs to pay pensions and run schools. If it doesn't get the money, it would eventually have to print its own. Greece's growing turmoil is the culmination of a radical austerity experiment and botched economic overhaul that have pushed the nation to the brink of social and political breakdown. The story of the ill-fated bailout suggests that forcing deep austerity on individual member states won't save the euro and may worsen its crisis. oo Late Markets React: Bonds | Stocks | Euro Above all, Greece's example illustrates the conflict between Germany's tough terms for aiding other euro members and the amount of pain other societies can bear. Greece's fate shows that what it takes to sell bailouts to a skeptical German public can be politically calamitous in Europe's indebted south. "The program is suicidal, not only for Greece but for the euro," says Louka Katseli, a former Greek economy minister. "In Spain, Portugal, Italy—everywhere, the same mistake is being made," she says, referring to the European Union's insistence on slashing spending in a recession.

Greek Elections Force Germany to Weigh Austerity Endgame - Greece’s elections have confirmed its role as the worst pupil in the euro-area class. But with all respect to Paul Krugman and others, austerity isn’t dead: It’s now up to Germany to decide whether to ease up, or hold firm and watch Greece leave the euro. The May 6 vote showed clearly that Greeks aren’t willing to accept further cuts. Almost 70 percent of voters backed political parties -- from anti-Europeans to neo-fascists -- that oppose sticking to the terms of the two bailouts since May 2010. There’s now a high likelihood the country will miss its next deadlines under the 130 billion euro ($169 billion) program it agreed to in February. That means the European Union and other exasperated international creditors may soon have to decide whether to pull the plug, leaving Greece to default and exit the euro. Economists at Citigroup Inc. say the odds of that happening in the next 18 months are now as high as 75 percent. The mild reaction of currency and equity markets -- outside Greece -- after Sunday’s election shouldn’t fool anyone. Letting Greece go would be a reckless gamble with the future of the single currency, risking political turmoil and unknown consequences for the European project as a whole.

Greek left attacks ‘barbarous’ austerity -- Greece is heading for a clash with international lenders as the radical leftwing party that came second in the weekend's election called for the ripping up of a "barbarous" austerity programme underpinning its bailout and questions mounted about the country's future inside the euro. Alexis Tsipras, the 38-year-old leader of the Syriza party that surged in popularity in Sunday's poll, outlined a five-point plan to be put to conservative and socialist leaders on Wednesday as he attempts to build a coalition, demanding the reversal of fiscal and structural measures that have enabled Greece to slash its budget deficit.However, in an unusually blunt intervention, Jörg Asmussen, a European Central Bank executive board member, for the first time raised the possibility of a Greek exit from the euro -- an option the ECB had previously refused to acknowledge in public. "Greece needs to be aware that there is no alternative to the agreed reform programme if it wants to remain a member of the eurozone," Mr Asmussen told Handelsblatt, the German business newspaper.

Greek Default Risk Returns as Bond Maturity Nears - Two months after forcing through the biggest-ever sovereign bond restructuring, Greece once again faces the prospect of becoming the first developed nation to default on its debt. The government taking office after this weekend’s election has 30 days to decide whether to make today’s interest payment on 20 billion yen ($250 million) of 4.5 percent notes maturing in 2016, or default. Then, by May 15, officials must decide if they’re going to repay the 436 million euros ($555 million) due on a floating-rate note issued a decade ago. These are among about 7 billion euros of bonds whose holders took advantage of being governed by foreign rather than Greek law to sidestep losses suffered under the private-sector involvement rescheduling, or PSI. Paying the holdouts in full would arouse the ire of Greek taxpayers, as well as investors who cooperated with PSI. A failure to pay would signal Europe’s debt crisis is worsening.

Greece pays increased rate to raise 1.3 bn euros - Greece paid higher rates to raise 1.3 billion euros (USD$1.7 billion) in a sale of 6-month treasury bills on Tuesday, two days after a shock anti-austerity vote, the debt management agency said. "Total bids reached 2.6 billion euros (USD$3.4 billion) and the amount finally accepted was 1.30 billion euros," the agency said in a statement, with the interest paid to investors at 4.69 percent, up from 4.55 percent at the last equivalent sale on April 10. The auction came as Greek voters on Sunday dealt a stinging rebuke to political parties that spearheaded austerity cuts over the past two years. Conservative New Democracy and socialist Pasok, which have alternated in power since 1974, saw their share of the vote collapse to 32.1 percent on Sunday from 77.4 percent at the last election as voters supported instead a raft of anti-austerity parties. This left the two parties, which favour sticking to the bailout but with easier terms, with 149 MPs in the 300-seat parliament, insufficient for a re-run of the outgoing coalition led by technocrat Lucas Papademos

 Attempt to form Greece government fails after shock poll (Reuters) - Greece's Left Coalition party will get an historic chance on Tuesday to form a government opposed to the country's EU/IMF bailout, after the mainstream conservatives failed to cobble together a coalition following a shock inconclusive election. Alexis Tsipras, whose party was catapulted into second place by voters angry with austerity, will take on the tough task of wooing small groups into forming the first leftist government in Greece's modern history. Greeks plunged their country into political limbo in Sunday's election, angry with the harsh cuts dictated by the bailout deal which is keeping Greece afloat but has also brought the worst unemployment and recession in decades. By spurning the two main parties, voters shrugged off the risk of bankruptcy and the threat to Greece's future in the euro as officials warned that cash was running out fast. On Monday, President Karolos Papoulias gave a three-day mandate to form a coalition to Antonis Samaras, whose conservative New Democracy party won the biggest share of the vote. But Samaras admitted defeat within the day after rejections from several party leaders. Tsipras, who believes the bailout is leading Greece to bankruptcy rather than averting it, is next in line and will receive the presidential mandate on Tuesday to try to rally the fragmented groups of the left.

SYRIZA's Tsipras to make bailout rejection key bargaining point - The SYRIZA leader is expected to meet the head of the Democratic Left, Fotis Kouvelis, at 3.30 p.m., Ecologist Greens representative Ioanna Kontouli at 5.30 p.m. and the Social Pact president Louka Katseli at 7 p.m. Tsipras has indicated that he will use the full three days at his disposal to talk with all the party leaders, including those of New Democracy and PASOK, but barring Chrysi Avgi (Golden Dawn).  Because of the 50-seat bonus received by the first party, in this case New Democracy, there is no way SYRIZA can form a government without ND if it does not secure the support of PASOK and the Communist Party (KKE). KKE leader Aleka Papariga has already rejected any idea of cooperation with SYRIZA, although Tsipras will meet with her to discuss the matter. The only other option open to SYRIZA is to receive the backing of ND and PASOK, which seems unlikely. Sources have suggested that Tsipras will present a three-point proposal to his counterparts, which will include the rejection of the bailout terms.

New Election in Greece Looks Likely - Greece's political turmoil showed no signs of abating Tuesday as hopes faded that leading political parties can form a coalition government after Sunday's splintered election result, increasing the possibility that Greeks will be called back to the polls as early as next month. The inconclusive vote and ensuing coalition talks, combined with concerns about the emergence of a Socialist president in France who opposes German-led austerity measures for the euro zone, has revived speculation that Greece would leave the euro, stoking new worries about the fragility of Europe's monetary union.  At stake is Greece's ability to implement next month agreed budget cuts and overhauls it must take in order to secure continued financing from its European partners and the International Monetary Fund. Failure to do so could delay—and potentially imperil—further aid promised to Greece as part of a €130 billion ($170 billion) bailout agreed only in March, rendering the country unable to meet its obligations.

Greek Leftists Rule Out Coalition With Incumbents  - Resisting mounting pressure from Europe to quickly resolve Greece’s political crisis, the leader of a left-wing party that placed second at the polls on Sunday effectively ruled out forming a coalition with the two dominant parties, raising the prospect of new elections and increasing chances the country could default on its heavy debt load and potentially exit the euro zone.  Alexis Tsipras, the leader of the Coalition of the Radical Left, known as Syriza, was given a mandate from President Karolos Papoulias to try to form a government on Tuesday, after the front-runner, Antonis Samaras, the leader of New Democracy, failed to do so on Monday.  Yet, to the consternation of European leaders and financial markets, Mr. Tsipras held true to his party’s platform of opposing the loan agreement that Greece made with its so-called troika of foreign lenders: the European Commission, the European Central Bank and the International Monetary Fund. He called on the two dominant parties that backed the bailout, the Socialists, led by Evangelos Venizelos, and New Democracy, to revoke the deal.  He said ominously, for European leaders hoping for a quick resolution, “The popular verdict clearly renders the bailout deal null.” The announcement raised further doubts about the country’s future in the euro zone, as well as fears about the stability of the common currency itself.

Left-wing Leader Rejects Greek Austerity Pledge — The smoldering debate over European austerity flared hotter Tuesday as the left-wing politician trying to form a new Greek government declared that his country is no longer bound by its pledges to impose crippling cutbacks in return for rescue loans. The comments by Alexis Tsipras flew in the face of EU leaders’ insistence on fiscal discipline and sent the Greek stock market tumbling just two days after Greek voters rejected mainstream pro-austerity politicians. Instead, the people backed a hodgepodge of parties from the Stalinist left to the neo-Nazi right but produced no clear winner in parliament. Tsipras also demanded an examination of Greece’s still-massive debt and a moratorium on repayment of the part of it that is “onerous,” statements that rattled investors and drove Greek shares down another 3.6 percent on top of Monday’s nearly 7-percent loss. Markets in France, Italy, Germany and the U.S. also fell.“The pro-bailout parties no longer have a majority in parliament to vote in destructive measures for the Greek people,” said the 38-year-old Tsipras, whose anti-austerity Radical Left Coalition party came second in Sunday’s vote. “The popular mandate clearly renders the bailout agreement invalid.”

Greek Leaders Given Bailout Ultimatum - Alexis Tsipras of Greece’s Syriza party squared off with political leaders before talks on forming a coalition, handing them an ultimatum to renounce support for the European Union-led rescue if they want to enter government. Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their written pledges to implement austerity measures by the time he meets them today to discuss a government alliance. Samaras and Venizelos rejected the request. Samaras said he was being asked “to put my signature to the destruction of Greece.”  “The bailout parties no longer have a majority in parliament to vote for measures that plunder the country,” Tsipras told reporters. “There will be no 11 billion euros ($14 billion) of additional austerity measures; 150,000 jobs will not be cut.” Tsipras said he aimed to link up with parties in a government that would nationalize banks, place a moratorium on debt payments and cancel the bailout and measures such as labor reforms and pension cuts. 

Greek Syriza leader hands rivals ultimatum to renounce austerity - Alexis Tsipras of Greece's Syriza party squared off with political leaders before talks on forming a coalition, handing them an ultimatum to renounce support for the European Union-led rescue if they want to enter government. Mr Tsipras said he expected Antonis Samaras of New Democracy and Evangelos Venizelos, the former finance minister who leads the Pasok party, to send a letter to the EU revoking their written pledges to implement austerity measures by the time he meets them today to discuss a government alliance. Both men rejected the request. Mr Samaras said he was being asked "to put my signature to the destruction of Greece." "He interprets, with unbelievable arrogance, the election result as a mandate to drag the country into chaos," Mr Samaras said. "I hope Mr Tsipras will have come to his senses by the time we meet."

Eurozone can survive without Greece - Voters' rejection of pro-bailout political parties in Sunday's election has raised the chances of Greece leaving the euro, but this unprecedented step is seen as manageable rather than catastrophic for the currency bloc. Some banks have raised estimates of the likelihood of Greece quitting the euro. But after a year of investors shedding bonds issued by highly indebted euro zone countries and big injections of central bank cash, they said the damage could be contained. Spanish and Italian government bonds initially sold off, the euro fell and European shares slid on Monday, the first trading after the elections. However, all these assets recovered somewhat by the end of the day despite the deep uncertainty. "This makes you wonder whether Greece is still a systemic threat or whether Greece is more of a Greek problem and a political problem for the rest of Europe," said Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management.

The Greek Solution - The Greeks appear to have come up with an interesting way to deal with the fact that any Greek government will face intense pressure from Germany and some other European countries to accept more and more austerity that will be rejected by most Greeks. Don’t have a government. The elections held Sunday seem likely to result in an impasse over the formation of a government. The two traditional parties got fewer than a third of the votes between them, which may seem fitting considering that they got Greece into the mess. Nearly all the rest went to parties that oppose the austerity deal but also despise each other. If no coalition government can be formed, a caretaker administration would be formed — with no mandate to do anything — and new elections called. Would Europe pull the plug on such government? If not, the stalemate could go on for a while, with no assurance that a second or third Greek election would settle anything. The German position, repeated by Chancellor Angela Merkel after the Greek vote, has been that the European austerity agreement is sacred and must be respected. Her position would be stronger if that deal had actually been ratified. If one or more countries refuse to do so, there is no agreement.

Defiant Greeks have no regret for anti-austerity vote (Reuters) - Greeks who plunged their country into turmoil by voting overwhelmingly on Sunday to reject parties behind an EU/IMF bailout say they are ready to do it all over again if, as seems all but certain, the election is rerun next month. The two parties that dominated Greece for decades and negotiated its 130 billion euro bailout were reduced to just 32 percent of the vote in Sunday's election, with the rest of Greeks picking fringe parties that all oppose the bailout. Politicians show virtually no sign of being able to cobble together a government, which means a new election is likely to be held in 3-4 weeks. The political disarray has fuelled speculation Greece could be ejected from Europe's single currency, even though polls show most Greeks want to keep the euro. "I have no regrets. I feel vindicated because the two pro-bailout parties have been unfair with us for so many years," said 70-year old Petros Chiotopoulos, who owns a small bus rental company and cast his ballot for the conservative splinter party Independent Greeks. The comments were echoed by dozens of Greeks on the streets of Athens, who said they were unrepentant about punishing a ruling establishment that presided over five years of recession, surging unemployment, falling wages and rampant corruption.

Europe’s Problems Multiply - Overnight, Greek Leftist leader, Alexis Tsipras, gave up on his attempts, or at least pretence of them, to form government. The gauntlet has now been handed to PASOK leader, Evangelos Venizelos, who again has 3 days to attempt the same. Given that New Democracy, Venizelos’s potential coalition partner, has already failed to create a workable coalition it is doubtful PASOK will succeed. Neither Tsipras or Samaras used their fully allocated time suggesting there is little point dragging out talks as no comprises could be reached. Greece appears to be heading back towards an interim technocrat government and new elections unless the Greek President is able to muster a workable coalition in the coming days. New elections may bring new alliances, but it is yet to be seen what the new political strategies will appear after the demolition of the centrist parties. Overnight the EFSF board agreed to make an additional payment to Greece in order to keep it technically solvent for a few more weeks: After a conference call, the board of the European Financial Stability Facility, the 700 billion euro bailout fund administered by the 17 countries that use the euro, agreed to make the scheduled payment, which will allow Greece to meet near-term bond redemptions and other obligations. An initial 4.2 billion euros will be paid on Thursday, while the remaining 1 billion will be paid out later, “depending on the financing needs of Greece,” a statement said.

Will the elections in Europe change economic policy? - The elections of this week-end are widely interpreted as a strong signal by voters that they are unhappy with austerity or what they perceive to be austerity. Will the elections change the speed of budget consolidations? Will France even reverse policies? Or will the elections not lead to any change?  In Greece, it appears highly unlikely that elections will change the current policies. De facto, even if there was to be a new election due to the inability to form a government and at the next elections the anti-austerity Syriza party would come to dominate the political scene, there is still little it could change. The Greek adjustment path is largely set by the Troika, i.e. the European Commission, the IMF and the ECB. The Troika will not be willing to renegotiate the agreement. If they were, they would give an election recommendation to all other countries under financial assistance programmes and conditionality would lose its meaning. The Greek election shows the impotence of democracy in a state that has lost sovereignty.    Also in France, the new president will have limited room to completely reverse fiscal policy. Francois Hollande cannot and will not enter on a large scale public spending programme. Looking at the French economy, it is also clear that France needs ambitious reforms to become more competitive and more innovative. Already now, it has one of the largest government sectors and its fiscal performance is poor. In fact, France did not balance its budget since 1974.

Germany's Roadmap For A Greek Return To The Drachma -  There has been much speculation about how the Greek endgame will play out, but precious little from the perspective of Germany. Until today. Courtesy of a three part series from Handeslblatt (here, here and here) we now know precisely what the next steps are as visualized by Europe's piggybank, which now is telegraphing it is set to cut Europe's most wayward child loose. Step-by-step summary:

1.Greece cannot stand by the spending cuts expected by the Troika. €11.5 Bn until June
2.The creditors refuse the payment of the next tranche. Greece must pay €30 Bn until the end of June, to pay pensions, civil servants salaries, and support its ailing banking sector.
3.Greece cannot service its debt anymore. Which means essentially service its debt to debtors like banks, bringing its banking sector to a likely bankruptcy (remember Greek banks were already hardly met by the €80 Bn PSI in March, 2 big Greek banks already have negative equity).
4.Greece must save its banks to avoid a bank run. There will be no other way than reintroducing the Drachma since no one will lend them money, IMF or EU.

Those naughty Greeks - What is Europe going to do with Greece? They vote "against austerity" and stock markets around the world fell sharply. Personally, I am not totally sure what voting against austerity means. I think it might be a bit like voting to be rich. But lets leave that unresolved issue for the moment....  Still, the Greeks managed to get the attention Europe's leaders. There is going to be another emergency summit. Now when was the last time we had one of those? It doesn't seem that long ago.  However, talking about Greece quickly gets boring. Our leaders don't want to be associated with failure. They want photo ops and sound bites. They want to build a new Europe of prosperity and stability. The Greek vote for extremism and confusion doesn't quite fit. The language has moved since Sunday's vote. The mantra now is that Europe needs Growth, not austerity. Therefore, Europe is about to shift direction. This Emergency Summit will call time on the debt fixation..

Greek unemployment up at 21.7 percent in February - Greece's unemployment rate rose to 21.7 percent in February, after 336,500 people lost their jobs in the past year in the crisis-hit country. The Greek Statistical Authority said Thursday that nearly 1.171 million people were out of work during the month. The jobless rate a year ago was 15.2 percent. Greece is suffering a fifth year of recession, largely due to harsh austerity measures demanded in return for international bailout loans required to avoid default.

Greece's Jobless Soar By 42% As Unemployment Rises To Record, Industrial Collapse Accelerates - As noted earlier this week, while the theater of Greek elections serves as a convenient distraction from the epic depression the country of 10 million is undergoing, the reality is that very soon it won't matter at all who is left to govern this ruined country. Because if previously we demonstrated the collapse in two primary drivers of government tax revenue, namely tourism and commerce, today we show the logical follow through to economic flatlining: jobs and industries. Sadly, both are getting trounced. As Reuters reports, "Greece's jobless rate hit a new record in February, underscoring the pain austerity policies required by the EU and IMF have inflicted on the debt-laden country which is struggling to form a government. More than one in five Greeks and one in two youths are out of a job, statistics service ELSTAT data showed on Thursday. The unemployment rate hit 21.7 percent from a revised 21.3 percent in January. In the 15-24 age group, joblessness stood at a record 54 percent."  "Nearly 1.1 million people were without a job, 42 percent more than in the same month last year, the data showed. The number of those in work declined by 8 percent over the same period to a record low 3.87 million." In other words, less than 4 million people are working to pay off the country's bailout package and debt which at last check was about 200% of GDP? At least of all indicators, the GDP is collapsing the fastest. Very soon Greece will be treated to a merciful #Div/0 when attempting to calculate its debt to GDP ratio. We can't wait to see the IMF's face then.

Greece sinks in deeper crisis amid rescue deal doubts - Greece could be forced to leave the eurozone if it fails to abide by EU and IMF loan commitments, a government economic advisor warned Wednesday as Athens raised prospects of renegotiating a bailout deal. “If we say no to everything, we leave the eurozone,” said Gikas Hardouvelis, economic advisor to outgoing Prime Minister Lucas Papademos. Voters roundly rejected austerity measures in Sunday’s elections, booting out a coalition by the two mainstream parties and leaving the radical left-wing Syriza party charged with forming agovernment. Its leader Alexis Tsipras was planning to write Wednesday to the highly indebted nation’s international lenders telling them that the country would renege on its austerity commitments. Hardouvelis said on Skai Radio that Greece “has room for renegotiation” of austerity measures that it had agreed to take by 2015 under the bailout deal, “but we should not oversell it and think that suddenly something has changed in Europe because the people here have shouted no”.

REPORT: Eurozone Countries Debate Delaying Aid Payments to Greece - The WSJ reports that eurozone countries are debating delaying aid payments to Greece in the wake of elections that ousted pro-bailout parties. This follows the cancellation of a trip by troika inspectors to Greece that was planned for later this month. Popular support for anti-bailout parties surged in the elections in Greece this weekend. With the centrist PASOK and New Democracy winning less than 35 percent of the vote combined, more and more Greek politicians see the renegotiation of bailout terms as inevitable. At the same time, Europeans have threatened to withhold any future aid so long as Greece does not live up to the terms of the plan. Analysts worry that a full-scale default by Greece—mostly on loans from the EU public sector—would ultimately result in the country's exit from the European Monetary Union.

Crisis-hit Portugal axes holidays - Portugal has taken austerity measures to a new level with the decision to scrap four of its 14 public holidays. Two religious festivals and two other public holidays will be suspended for five years from 2013. The decision over which Catholic festivals to cut was negotiated with the Vatican. Portugal has already cut public sector wages and raised taxes to reduce its budget deficit and deal with its economic crisis. The country agreed a 78bn euro bailout deal with the European Union, European Central Bank and International Monetary Fund last year and recently passed the latest review of its spending cuts. It is hoped the suspension of the public holidays will improve competitiveness and boost economic activity. The four days affected are All Saints Day on 1 November; Corpus Christi, which falls 60 days after Easter; 5 October, which commemorates the formation of the Portuguese Republic in 1910; and 1 December, which marks Portuguese independence from Spanish rule in 1640.

Moody's Bank-Downgrade Threat Risks Choking Europe Recovery (Bloomberg) -- Moody's Investors Service will this month start cutting the credit ratings of more than 100 banks, a move that risks pushing up their funding costs and forcing them to curb lending in a threat to economic growth. BNP Paribas SA, France's biggest lender, Deutsche Bank AG, Germany's largest, and New York-based Morgan Stanley are among firms that face having their short- and long-term debt downgraded to their lowest-ever levels by Moody's, the ratings company said in February. The cuts, which would follow downgrades by Standard & Poor's and Fitch Ratings last year, could erode profits, trigger margin calls and leave some firms unable to borrow from money- market funds that have strict rules on who they can lend to. Without access to funding from private sources, banks have had to sell assets and reduce lending.

Doubts spread to Spain’s big banks - Just before Bankia and Banca Cívica, its smaller, now defunct rival, listed on the Madrid stock market last summer, Elena Salgado, Spain’s then finance minister, was bold enough to declare that the country’s banking reforms would “provide lessons for Europe and the rest of the world”. The lessons learnt are unlikely to be the ones Ms Salgado had in mind. Less than a year down the line, Cívica has had to be rescued by rival Caixabank for 27 per cent less than its flotation price, while Bankia – whose shares are already trading at about 40 per cent below their issue price – is slated for a highly dilutive €7bn-€10bn bailout, though dilution may be delayed by structuring the injection as convertible debt. In both cases, seemingly needless losses have been inflicted on thousands of investors, most of them individual bank customers, who bought shares in the banks. Crucially, the manoeuvres did nothing to resolve the underlying problems: the sector’s combined €340bn of exposure to real estate developers when the property market is in free fall; and a conviction among investors that Spain cannot afford a bailout. Those doubts now weigh on the perception even of Spain’s big banks – Santander and BBVA – despite the fact that the bulk of their earnings comes from high-growth economies in Latin America and they are better insulated from Spanish property losses than local rivals, particularly the regionally-minded cajas, or savings banks, that have found themselves in the most trouble.

Spain to demand banks recognise more losses - Spain stepped up efforts to save its troubled banks on Thursday with a plan to make them recognise huge losses from a property crash, but uncertainty over the final cost of a rescue hit the euro, Spanish debt and global stock markets. The centre-right government will demand that banks set aside 35 billion euros ($45 billion) against loans to the moribund building sector, on top of 54 billion euros the banks are already provisioning, financial sources said late on Tuesday. This would mark the latest in a string of reform plans in the past week which include moving toxic assets out of some banks and staging an estimated 10 billion euro state rescue of Spain's most exposed bank, Bankia. "On Friday we will deepen the process of cleaning up the banks," Prime Minister Mariano Rajoy told a news conference in Portugal, adding that other decisions could come sooner, although he did not say what they were.

Spain Says Treasury Is Only Entity Left Able to Get Funding - Prime Minister Mariano Rajoy said the debt agency is the only borrower left in Spain that can finance itself on markets as banks, companies and regional administrations have been shut out. “Today, the Treasury is practically the only one that finances itself on the markets,” he said in the Senate in Madrid today. Being locked out of debt markets isn’t “theoretical” as it’s “happening to the immense majority of regions, our whole financial sector and most big companies.” Rajoy once again raised the threat of an international bailout as he seeks to convince Spaniards to accept spending cuts even as unemployment approaches 25 percent. His comments also underline the challenge the government faces as it tries to overhaul the banking industry without overburdening public finances. Rajoy, in power since December, declined to answer a question from reporters as he left the Senate on how much public money may be needed to shore up Bankia, the lender with the biggest Spanish asset base and 38 billion euros ($49 billion) of real-estate assets.

Spain nationalises Bankia as euro crisis escalates - Spain has nationalised crippled lender Bankia in a dramatic move to contain the escalating crisis and restore faith in the country's management.  The forced rescue was ordered by premier Mariano Rajoy after auditors Deloitte refused to sign off the bank's books, amid allegations of €3.5bn (£2.8bn) of inflated assets. Half of the bank's €37bn of property exposure is deemed "problematic" by regulators.  The lender has asked for €4.5bn in loans, converting the cash into ordinary shares. The Spanish government holding 45pc of the bank in return. Bank of Spain has also demanded Bankia dispose of assets as part of the rescue.  "The Spanish have denied until now that there was any need for fresh capital so it comes as a surprise. It wasn't intended, and that is a worry," said Guy Mandy, credit strategist at Nomura.  Yields on Spanish 10-year bonds jumped above 6pc on Wednesday, pushing spreads over German Bunds to the danger line above 450 points. Spain's IBEX stock index fell 2.8pc, hitting its lowest level since 2003.

Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears "Bottomless Pit" - The implosion in Spanish banks continues. On Wednesday, Spain nationalized BFA, the 8th nationalization since the start of the crisis. After sinking 3 billion into CatalunyaCaixa, Spain tried to privatize the mess but there were no offers at zero euros. Clearly CatalunyaCaixa bank is worth less than zero. Meanwhile Der Spiegel reports "Bundesbank has no idea of what is happening in Spanish banks". Mish readers do. The Spanish banking system is without a doubt bankrupt. Let's take a look at half a dozen articles courtesy of Google Translate.

The Pain In Spain Is Mainly, Well, Everywhere - The reality is Greece is largely noise. Greece will eventually leave the Eurozone, but not this month. The hardliners inside Greece will realize they need some time to organize. The markets will have spooked the hardliners outside of Greece that they should play nice for a little bit, because forcing Greece out now won’t do them any good whatsoever. With Greece largely a sideshow at this stage, the attention is really focused on Spain and Italy. The fact that Greece might lead the way out of the Euro is having a big impact on these countries. That realization combined with the already obvious problems at the sovereign and bank level caused markets to sell off. The Spanish 10 year bond is back above 6%, dropping 20 bps today, which is a significant move. As we wrote about last Friday, there are no natural buyers, so this move occurred in an illiquid market. There is more room to run, but moves in Spanish and Italian bonds are already starting to have a less direct impact on stocks than they did earlier in the morning. I don’t think we will see a serious rebound in Spanish and Italian yields until the ECB intervenes. They will need to step up and draw a proverbial line in the sand.

Spain 10-year bond yield rises above 6% - Spanish government bonds came under renewed pressure Wednesday, sending the 10-year yield back above the 6% threshold. The yield on 10-year bonds rose 0.20 percentage point to 6.04%, according to electronic trading platform Tradeweb, while yields on safe-haven German bunds continued to set record lows. The yield premium demanded by investors to hold 10-year Spanish bonds over German debt widened 0.23 percentage point to 4.49 percentage points, according to Tradeweb. A political impasse in Greece and concerns about Spain's banking sector continue to weigh on Spanish bonds, strategists said.

Spain Underplaying Bank Losses Faces Fate Ireland Couldn't Avoid -- Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system. The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That's enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn't be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain's public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

Desperately seeking a bailout for Spain and its banks - Roubini & Greene - No one can pretend to know whether Spain is illiquid or insolvent without gauging the size of the black hole that is the country’s banking sector. The Spanish government is finally starting to do this: Bankia and other banks are reportedly set to receive a capital injection from Madrid. With the Spanish economy contracting sharply and with unemployment soaring, it was inevitable that the government had to bail out the banks. But this only deals with one piece of the puzzle. Without growth, the Spanish sovereign will need a bailout as well. Spain’s credit boom peaked in 2008 when the supply of cheap, external finance began to fall sharply. Four years later, Spanish banks’ asset quality continues to plummet. The sector will require €100bn-€250bn in recapitalisation later this year to maintain a 9 per cent core tier one capital ratio, the minimum stipulated by the European Banking Authority. In the meantime, there are concerns about the capacity and appetite of Spanish banks to support the sovereign, particularly amid rating downgrades and deposit withdrawals. Ideally, a bailout for Spanish banks should come immediately and in the form of direct capital injections from the EU bailout funds. Germany remains staunchly opposed to this, as it would mean giving up the stick of conditionality and feeding Spain the funding carrot. Such an option is also resisted by the Spanish authorities as the EU taxpayer will in effect take over their banks. Instead it looks like a bailout for Spanish banks has been postponed until the very last minute. The cost of a bank bailout would then be foisted on to the Spanish sovereign’s balance sheet. Bank bailouts on this scale may well bring the Spanish state to its knees. If they don’t, Spain’s public and external debt positions will.

EU hints at further deficit flexibility for Spain - The European Commission hinted Monday that it could give Spain further leeway to meet budgetary deficit objectives given a deteriorating economy and troubled banking system. "Spain has made commitments to its European partners on objectives in terms of budgetary consolidation" and "these are parameters that Spain must respect," EU economy commissioner Olli Rehn's spokesman told a news conference. "That said, an economic analysis must be done by the Commission... which takes into account the economic environment within which the country is evolving," he underlined. The European Union Stability and Growth Pact, which sets limits for public deficits, contains a clause obliging such an assessment. "The pact has to be applied intelligently," said a senior EU official speaking on anonymity, days after Rehn said the pact is not "stupid."

Spain set to miss deficit target - Spain will badly miss its budget deficit target for this year and next year, according to European Union forecasts released on Friday that mean Madrid will have to adopt even deeper austerity measures if it is to avoid big fines from Brussels. The forecasts, unveiled by the European Commission, showed France was facing emerging budget problems that could lead to a direct confrontation between Brussels, which is likely to call for more austerity from Paris, and the newly-elected French president, Francois Hollande, who ran on an anti-austerity platform. According to the figures, Spain is expected to run a budget deficit of 6.4 per cent of economic output in 2012, which misses the EU imposed target of 5.3 per cent. This shortfall is barely reduced in 2013, standing at 6.3 per cent – some 3.3 percentage points wide of its 3 per cent budget target. The data fall well short of market expectations. Commission officials are expected to give Spain more time to hit the budget deficit targets it agreed with the EU but only if Madrid meets new conditions, including an independent audit of the restructuring plan for its troubled banks.

Lights Go Out in Spain as Cuts Plunge Highways Into Dark - Cars went barreling along the highway in darkness, ferrying families from Madrid to the beaches of Catalonia during the Easter holiday season, the black stalks of unlit streetlamps flicking past their windows. Truck drivers honked angrily as motorists switched on their full beams to pick out curves in the road, momentarily dazzling oncoming traffic. Motorists traveling along the main highway linking the Spanish capital to Seville and the rest of the south face similar challenges.  The most draconian spending cuts on record are plunging Spain’s cities and highways into darkness as ministries and mayors struggle to pay for basic services, “In some stretches it looks like they’ve been switching off the lights, in others they are missing the bulbs or the cables,” says Pascual Cabello, 32, who runs a fleet of eight trucks. “It’s only going to get worse,” he adds.

Bill Black: New York Times Reporters Embrace the Berlin Consensus and Ignore Krugman and Economics -The New York Times’ coverage of the euro zone crisis continues to exhibit two related flaws. First, it is overwhelmingly written from the German perspective – the Berlin Consensus that is driving the crisis. Second, it continues to ignore economics. Paul Krugman, the NYT’s Nobel Laureate in economics, has been explaining the economics of the crisis for years in his weekly NYT column. We know that Berlin either doesn’t read or comprehend what Krugman has been trying to explain, but it is remarkable that so many of the NYT reporters covering the euro zone crisis share their failure to read or comprehend. A recent example of this pattern is the May 8, 2012 article “German Patience with Greece on the Euro Wears Thin.” The introductory paragraph establishes that the frame for the article is Berlin’s destructive and warped view of the euro zone crisis. BERLIN — Just weeks ago, the idea that Greece would leave the euro zone was almost unthinkable. Now, with Greece’s newly empowered political parties refusing to abide by the terms of the country’s international loan agreement and Europe’s leaders talking tough, that outcome is looking increasingly likely. We should begin with the title of the article. Germany has insisted that Greece follow austerity policies (the Berlin Consensus) that were certain to force Greece into depression. The Berlin Consensus has forced Greece into a depression. The German reaction to the economic catastrophe that it has forced on the Greek people is to be enraged that the Greek people in the recent election rebelled against their leaders who had given in to the German demands that the Greeks be forced into a depression. Greek patience with Germany’s destructive policies, its assaults on Greek sovereignty, and its constant, vitriolic insults of the Greek people has more than worn “thin.”

If Greece goes...AS WE argue in our briefing this week, a Greek exit from the euro zone would not just be chaotic for Greece itself but would also invite questions about the status of Portugal, Ireland and others. So what would policymakers have to do at the moment of a Greek exit to persuade investors and depositors that Greece really was the exception proving the rule of euro unity?. A credible commitment to mutualise the debts of remaining euro-zone countries would probably do the trick, but it is hard to see how such a pledge could be made credible enough in the near future. There is no consensus among Europe’s elites that this is the way to go; and the political journey to that destination would rightly require parliamentary votes and refererendums. The lesson to others would be move first, ask questions later. The onus on policymakers would be to offer concrete reassurance about other countries, effective immediately. For Portugal and Ireland, which do not have to worry about the response of the markets, a strong signal of commitment to their membership would be an extension of their current programmes and/or a reduction in interest rates charged by their official creditors. But it would also come at the same time that an ostracised Greece would be about to repudiate its official debts. Euro-zone politicians would be handing over more money to peripheral economies at the very moment they were being handed losses on loans to a peripheral economy.

Greeks May Hold $510 Billion Trump Card in Renegotiation - Greece’s next government may hold a trump card worth more than $510 billion if it heeds voters’ demands to renegotiate its bailout with the European Union.  The nation owes about 400 billion euros ($517 billion) to private bondholders, public bodies such as the International Monetary Fund and European Central Bank, and other creditors, according to data compiled by Bloomberg. About 252 billion euros of that’s due to official organizations that used their status to avoid the losses suffered by ordinary bondholders when Greece restructured its debt two months ago.Greek voters are demanding their leaders renegotiate the terms of rescue packages that have imposed unprecedented austerity on the country since 2010. One potential prime minister, Syriza party leader Alexis Tsipras, has pledged to tear up the EU-led bailout agreement. With Greece owing a sum roughly equal to Switzerland’s economy, the fallout for taxpayers could be calamitous if the country walks away.

Banks prepare for the return of the drachma (Reuters) - Banks are quietly readying themselves to start trading a new Greek currency. Some banks never erased the drachma from their systems after Greece adopted the euro more than a decade ago and would be ready at the flick of a switch if its debt problems forced it to bring back national banknotes and coins. From the end of the Soviet Union - which spawned currencies such as the Estonian Kroon and the Kazakh Tenge - to the introduction of the euro, they have had plenty of practice in preparing their systems to cope with change. Planning behind the scenes has been underway since Europe's debt crisis erupted in Greece in 2009, said U.S.-based Hartmut Grossman of ICS Risk Advisors who works with Wall Street banks. "A lot of the firms, particularly in Europe and also here, have been looking at that for a long time," said Grossman, who added that the latest Greek political crisis had brought matters "to a little bit of a head".

Will Greece Snatch Defeat From the Jaws of Victory? -- Inquiring minds scoff at the preposterous Financial Times headline a ‘Glimmer of hope’ for Greek coalition. The "Glimmer of Hope" that  Financial Times writer Kerin Hope speaks of is the possibility of a coalition that last until 2014 before new elections. I strongly disagree.  I believe another coalition whose sole purpose is to keep Greece in the eurozone will result in more years of useless torture. Here are a few snips from the Financial Times. Greek conservative leader Antonis Samaras said on Friday there were still hopes a government could be formed after Sunday’s inconclusive election to avoid a repeat poll. “We are fighting to form a government and there are still hopes this can done,” Mr Samaras told his parliamentary group, adding that he welcomed the proposal of a small, moderate leftist party for a national unity government. Earlier, he met Socialist leader Evangelos Venizelos, who has been given a three-day mandate to try to form a government. Mr Venizelos on Thursday launched a last-ditch attempt to form a coalition government and avert a fresh general election next month that could push the country closer to exiting the euro.

Not as easy as you might think (leaving the eurozone) Controls on the movement of capital could be a nightmare for banks with loans in Greece, potentially making it illegal for companies to repay debt in euros. Here is more, but that is the key point.  One option is that the Greek government would prevent importers of food and fuel from paying in euros, but I would recommend against such a policy for obvious reasons.  Another option is that the importers will be allowed to pay with euros, but then that is one easy way of getting money out of the country.  I would expect that Greece’s “measured food imports” would rise rather suddenly, as invoices get reclassified, whether food actually is being imported or not.  (If Greece cannot do a good job collecting its taxes, how well can it patrol its exports and invoices?)  Then capital flight returns. Under one scenario, Greece will experience both hyperinflation and hyperdeflation at the same time, depending on which medium of account one is measuring prices in. 

Greece shouldn’t quit euro, just austerity measures - A Greek euro exit would damage both the country and Europe as a whole, the head of the Radical Left Coalition head said Thursday, but insisted the austerity measures imposed as part of Greece’s international bailout are too harsh and must be changed. Alexis Tsipras came a surprise second in weekend elections in which voters furious at two years of harsh spending cuts hammered the two formerly dominant parties of New Democracy and PASOK. No party won enough seats in Parliament to form a government. The three have been negotiating so far unsuccessfully since Monday to form a coalition government. If no agreement can be reached, Greeks will go to the polls again next month. The prospect promises more political uncertainty in the crisis-hit country, which is dependent on funds from international bailout loans to continue functioning. Tsipras’ insistence that a new government denounce the bailout deal with the International Monetary Fund and other European countries provoked a backlash from the other two main parties, who argued the move would see Greece leave the common European currency and endure years of poverty and isolation. But Tsipras said it was a position he couldn’t change. “The Greek people gave a clear mandate to cancel these harsh austerity measures that for the past two-and-a-half years have led us to catastrophe. If this basic condition that we are setting in this negotiation isn’t accepted, it is clear that we at least can’t participate in a government.”

France's Hollande: Sarkozy underplayed budget woes - French President-elect Francois Hollande suggested Friday that the government of outgoing leader Nicolas Sarkozy underestimated the country's budget problems and wants a new audit of France's books. But Hollande, a Socialist elected Sunday to lead the world's fifth-biggest economy, said that wouldn't hurt his ability to fulfill campaign pledges. Those include higher taxes on the rich, thousands of new teaching jobs and freezes on some government spending. And Hollande stuck to his own deficit reduction goals despite new European Union figures released Friday that paint a bleak picture for France and the whole eurozone. "I have known for several weeks that there was a greater degradation than the outgoing government said there was. We conclude that this is a confirmation," Hollande told reporters in the central city of Tulle. He said the new figures do not necessarily mean he has less room to maneuver after he takes office Tuesday. "No, we had already expected this," he said in remarks shown on French television.

Recession in Europe: EU Predicts Negative Growth in 2012 — The European Union estimates that the economy of the 17 countries that use the euro is in recession in the wake of a debt crisis that has prompted savage spending cuts and a jump in unemployment to record highs. The European Commission, the executive arm of the EU, forecasts that the eurozone economy will contract by 0.3 percent in 2012 and grow by 1 percent next year. Its prediction for 2012 is far weaker than the one it gave last November, when it predicted growth of 0.5 percent. A year ago it was predicting growth of 1.8 percent. Friday’s forecasts provide clear evidence of the impact of Europe’s debt crisis on the eurozone economy over the past year as governments have struggled to introduce deficit-reduction measures and business and consumer confidence has taken a dive. Olli Rehn, the EU’s monetary affairs chief, said the recession is likely to be “mild” and “short-lived”.

EU Commission Forecasts Pain Almost Over - The European Commission just came out with a spring 2012 forecast for the EU economy.  You can see the main point above in the chart for GDP and forecast.  The good news is that Q2 will be the last quarter of contraction: recovery will begin forthwith next quarter. Or not:The forecast mild recovery is predicated on a return of confidence, and thus on the assumption that the challenges faced by the euro area, notably the still on-going sovereign-debt crisis and the fragile state of the EU banking system, will be successfully and sustainably overcome. That's a pretty big assumption... In particular the main mechanism identified to initiate recovery is that a falling Euro will help European competitiveness and drive greater demand for European exports. Overall, domestic demand is unlikely to support GDP growth in 2012, as the process of deleveraging continues across the sectors of the economy. Banks need to further strengthen their balance sheets and tight credit conditions are expected to weigh on consumption and investment. Private investment is currently still contracting and is expected to be a drag on GDP in 2012.

Bundesbank signals softening on inflation - The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis. A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday. It followed comments at the weekend by Wolfgang Schäuble, German finance minister, backing stronger wage increases, which would boost domestic demand – benefiting other European countries exporting goods and services to Germany – but could drive German inflation rates higher. Despite the Bundesbank’s conciliatory stance on inflation, German policy makers have been among the toughest in insisting that Greece sticks to its agreed reform programme underpinning its bailout in the aftermath of Sunday’s Greek election in which most voters rejected the plan. Speaking in Brussels, Mr Schäuble said that changing the bailout terms would unleash ‘’catastrophic uncertainty’’ in financial markets.

Bundesbank Prepared to Accept Higher Inflation - Inflation is a political hot button issue in Germany, where the hyperinflation of the early 1920s has not been forgotten and many people still have a deep-rooted fear of their money losing value. Now Germany's central bank, the Bundesbank, has made waves with signals that it is willing to tolerate higher inflation.  On Wednesday, Jens Ulbrich, head of the Bundesbank's economics department, told the finance committee of the German parliament that Germany is likely to have inflation rates "somewhat above the average within the European monetary union" in the future and that the country might have to tolerate higher inflation for the sake of rebalancing within the euro zone. Inflation would, however, only rise from a very low to a moderate level, Ulbrich said.  The comments have attracted great interest in the financial world. Britain's Financial Times interpreted it as a signal that the Bundesbank was "softening (its) deep-seated opposition" to inflation. "The willingness to contemplate higher domestic inflation in public comments points to a new-found flexibility in German thinking," the newspaper wrote in a front-page article in its Thursday edition.

Hopeful Signs From Europe?, by Tim Duy: While I suspect this is a case of too little, too late, it is increasingly evident that European policymakers on some level realize the errors of their ways. From the Wall Street Journal: Euro-zone governments are expected to give Spain more leeway to meet its budget-deficit target next year, according to officials involved in the discussions, in a sign they intend to shift away from rigid enforcement of the currency bloc's budget rules. Austerity will still be the guiding principle of European fiscal policies. But the likely Spanish move suggests the rules will be adjusted in some cases to account for the fact that when economies go into recession, their budget deficits usually rise. Officials said the flexibility is unlikely to stop with Spain's politically sensitive deficit target. Among other countries that may take advantage of the rules in the future is France, which would have to pass large cuts to achieve its current deficit target for next year—a task likely to clash with the pledges of Socialist President-elect François Hollande to spur economic growth. It is not clear that this shift gives struggling nations enough room, but it is a step in the right direction that policymakers now recognize that austerity programs have been self-defeating. Likewise, perhaps even the Bundesbank is coming around to the realities of European adjustment. From the FT: The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.

A one-word explanation on why the eurozone cannot inflate its way out of trouble: Spain! - So, Germany seems to have pushed the inflation-phobia monkey off its back. Its finance minister has condoned real wage rises for German industrial workers and the head of the Bundesbank has acknowledged a readiness to allow German inflation to outpace that of the rest of the eurozone. After fifteen years of violating the Maastricht agreement on the need to target the same rate of inflation (at around 2% – see here), Germany is now prepared to compensate the rest of the eurozone for the damage its deflationary strategy has caused. This is, surely, a good thing, is it not? Yes and no. Yes, it shows that there is some hope that German policy makers will, at last, ‘get it’ that competitiveness is a relative (as opposed to an absolute) concept. And, No, allowing for above average inflation in Germany is too little and desperately too late to do anything about the Crisis we find ourselves in. Ironically, the head of the Bundesbank, Mr Weideman, has just published an article in the FT whose title gives the answer away: Monetary Policy is No Panacea for Europe. Indeed it is not. And the reason is… Spain. Or, to be more precise, Spain is an excellent case in point as to why a further easing of monetary policy, even if German wages are allowed to increase above inflationary expectations, will simply not do. Of why the rot has dug so deeply into the fabric of the eurozone that Eco101 macroeconomic remedies are neither here nor there.

Spain: EU estimates for contraction now considerably deeper - This is not a good day for Spain. The day began with the EU Commission revising its estimates for the Spanish economy. The contraction is now expected to be considerably deeper. Rather than contract 1% as the EU previously projected, now it is expected to shrink by 1.8%. The deficit this year, which was originally supposed to be 4.4% and PM Rajoy said would be 5.8%, before accepting a 5.3% target, is now likely to be 6.4%, according to the EU. The government is denial and even today is claiming the 5.3% goal is achievable this year and 3% next year. Spain unveiled its new efforts to address the banking problems. It is the fourth one since the crisis began and the second one since Rajoy became PM. It is not likely to be the last either, as it seems largely to have failed to get ahead of the market expectations. In fact, today could mark the first time that the (generic) 10-year bond yield finishes the week above the 6% threshold in six months. The key weakness of the earlier plans has not be addressed. Like them, the new plan appears to under-estimate the potential bank losses. Ironically, no major Spanish bank has reported an annual loss since the crisis began. If the news is too good to be true, it probably isn’t.

Spain Struggles to Control Escalating Bank Crisis - Der Spiegel - Spain's banks are now amongst the greatest problem children in the euro zone. Developments on Wednesday night underscored just how dire the situation has become. The Spanish government announced that Bankia, the country's fourth-largest financial institution, would be largely nationalized. The announcement, made with little notice, suggests a hectic situation. The cabinet of Prime Minister Mariano Rajoy had actually been planning to announce a new bailout program on Friday. So what led the situation in the Spanish banking market to escalate so quickly? The problem was that the Spanish regulators recognized the threat abroad, but not the one that was brewing at home. Just like in the United States, a real estate bubble had also grown in Spain. The only difference between the two was that Spain's wasn't hidden in the form of complicated financial products. Spain's cajas, or savings banks, speculated badly with normal loans.

S&P warns of $46tn refinancing challenge  - European companies could face serious challenges refinancing a wall of maturing debt over the next few years as the region’s banks deal with the impact of regulation and fallout from the eurozone debt crisis, according to a new report from Standard & Poor’s. The rating agency predicted that companies round the world would need new funding or to refinance existing debt totalling as much as $46tn over the next five years. And while global banks and debt capital markets should largely be able to provide the majority of funding for companies, S&P raised concerns about the ability of European lenders in particular to meet all corporate funding needs as they deal with the impact of sluggish economic growth and tough regulatory requirements.  “While most of the economic and regulatory challenges facing the banks are similar in both the US and Europe, we believe that most of them will have a more severe impact on lending capacity in Europe. Specifically, European banks have to adapt to a weaker economy and uncertainties relating to sovereign debt sustainability while managing more highly levered balance sheets,” the report said. S&P warned of the risk of a “perfect storm” forming as non-financial companies looked to refinance debt raised at the peak of the credit boom or find new funds just as banks were deleveraging and restructuring.

ECB talks money (and the lack thereof) - The May monthly bulletin from the ECB came out last night covering March data. As usual its a big document but in the context of Europe there really isn’t anything important that wasn’t already covered in the April banking survey. The chart on page 27 pretty much tells you the story of what is happening across the Eurozone, showing clearly that the rate of credit growth in the private sector continues its downwards trend. Given the structure of many of the European countries, this fall in the rate of credit combined with government austerity is leading to rapid deceleration in economic growth, national income and asset values. Please see here for more on this particular topic. That table, however, isn’t what caught my eye while reading the document. The most interesting part was a section titled “The relationship between base money, broad money and the risks to price stability”. I’ve stated previously that one of my concerns about modern economics is that many economists view the world through the abstraction of models, some of which are based on outdated theory.

Bond King Says Budget Pain Isn’t Enough in Europe - The struggling countries of Europe have cut spending for two years in hopes of averting financial catastrophe and persuading bond investors to buy their debt. But the world’s most influential bond investor thinks it won’t work. Bill Gross, manager of Pimco’s $252 billion Total Return Fund, the largest mutual fund, says that countries can’t simply cut their way out of the debt crisis. That’s bound to backfire, he says. The countries that use the euro reduced their budget deficits last year, but their economies shrank, too. As a result, their debt increased as a share of their annual economic output. Eight of the 17 euro countries are in recession. Meanwhile, unemployment in the so-called eurozone is almost 11 percent and rising. Outrage over spending cuts led voters last weekend to oust leaders in Greece and France who had promoted cuts as a way out of the crisis.  Some questions and answers with the man sometimes called the bond king:

It’s too late for Germany to save the euro - Despite belated gestures from Berlin, the single currency cannot survive if and when Greece leaves it. Greece’s motorcycling Marxist, Alexis Tsipras, makes an unlikely champion, with his commuter leathers and largely unrealistic Left-wing views, but he seems to be about the best of a bad bunch right now. As far as I can see, he’s the only member of the Greek political class who makes any kind of sense, albeit only marginally so and with one rather important deficiency. Rightly, he’s rejected Berlin’s austerity programme as “barbaric” and counter-productive (though, incongruously, he rides to parliament on a German-made BMW), but he’s not yet managed to reconcile himself to the logical corollary of this analysis – that Greece must take back control of its own destiny by leaving the euro. As it is, the economy is condemned only to permanent depression. Youth unemployment in Greece was yesterday revealed to have overtaken even that of Spain, at an almost unbelievable 53.8 per cent. This for an economy which, if it sticks to the programme, has a further 150,000 public sector jobs still to shed. Those who think that, with the requisite degree of structural reform, the private sector will automatically move in and fill the gap can forget it.

The euro crisis: No way out | The Economist - THE conventional wisdom that emerged immediately after Europe's weekend elections—that voters may have forced Europe into a new crisis reckoning—seems to have been correct. Greece is struggling to put together a government and whatever government eventually emerges will probably press for a renegotiation of its bail-out deal. Euro-zone officials are saying that this is out of the question. Odds of a Greek departure from the euro zone appear to be rising sharply; Intrade now puts the chance of exit in 2012 at close to 40%, up from 22% a week ago. Markets are shuddering at the possibility; European equities are dropping like stones, yields around the periphery are jumping—Spain's 10-year yield is back above 6%—and German yields are sinking to record lows. Big trouble is brewing. The talk is increasingly turning to how Greece might fare upon leaving the euro-zone. Some are speculating that with Greece in the midst of a deepening depression and suffering from full-on capital flight, there is little risk to calling it quits. Indeed, if one is going to have an economic disaster, one might as well get a depreciation out of the bargain.

CIC Stops Buying Europe Government Debt on Crisis Concern - Gao Xiqing, president of China Investment Corp., said the nation’s sovereign wealth fund has stopped buying European government debt on concerns about the region’s financial turmoil.  CIC will continue to look for new investments in Europe as part of its strategy to boost allocations to infrastructure, private-equity assets as well as emerging markets to help boost returns, Gao said. CIC, with an estimated $440 billion in assets, is the world’s fifth-largest country fund, according to Sovereign Wealth Fund Institute. “What is happening in Europe right now is of course of concern,” Gao said in an interview in Addis Ababa, Ethiopia, during the World Economic Forum on Africa. “We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds.”  Europe’s turmoil is reigniting on the second anniversary of policy makers’ first attempt to prevent Greece’s woes from spreading. That raises fresh doubt over the strategy just as Greece’s election spurs concern that the country may not meet the terms of its international rescues and will seek a solution outside the euro.

Queen's Speech: Plans to withdraw UK from EU bailouts - The UK will be exempt from a new European bailout agreement between eurozone countries under plans confirmed in the Queen's Speech. EU countries have signed up to protect the stability of the single currency. But the UK wants to ensure it is not liable if eurozone states default. The Queen also announced legislation to confirm Croatia's accession the EU - but an expected bill to commit the UK to give 0.7% of national income in overseas aid was not included. The government expects to meet this foreign aid target by next year, but has opted not to mandate itself to do it every year in law.

A million more households sink into debt - The number of ‘stable’ households – those with some money left over after bills are paid – is also at its lowest level since the coalition came to power in May 2010, according to a survey by insurer Legal & General (L&G). In April 2012 16% of households were struggling to pay the bills, compared with 11% in September 2011. Last month 42% said they were surviving – just covering bills and debt – compared with 44% in September. The number of people who described their financial situation as ‘stable’ has fallen from 45% last year to 39% this year. In further bad news, the survey shows 3.3 million households are spending more than their income on paying bills and debts – over a million households more than in September last year, when the figure was 2.1 million households. The average monthly shortfall nationwide is £73.94 per month, which is a slight improvement on three months ago, when the average shortfall was £96 per month.

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