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

Saturday, May 19, 2012

week ending May 19

US Fed's balance sheet shrinks in latest week - (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week with reduced holdings of Treasuries and agency debt, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.834 trillion on May 16, down from $2.847 trillion the previous week. The Fed's holdings of Treasuries totaled $1.657 trillion as of Wednesday, versus $1.666 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $10 million a day during the week from an average of $14 million a day in the prior week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $858.23 billion versus $847.83 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $94.17 billion on Wednesday from $94.57 billion last week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 17, 2012...

FOMC Minutes: "Several members indicated that additional monetary policy accommodation could be necessary" if economy slows - The Fed's program to "extend the average maturity of its holdings of securities" (aka Operation Twist) is schedule to end in June. Now analysts are looking for clues about the possibility of QE3. Although there was no discussion of easing alternatives, several members indicated they'd support additional monetary policy accommodation if the economy slows. This was an increase from a "couple" members in the previous meeting. From the Fed: Minutes of the Federal Open Market Committee, April 24-25, 2012 . Excerpt:  Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.

Fed’s Idea of ‘Exceptionally Low’ Still Under Debate - Sometimes the Federal Reserve likes to be a little vague. For months, the central bank has said it expects to keep short-term interest rates at “exceptionally low levels” at least through late 2014. But what exactly that level is continues to be debated by those watching the Fed, even after Chairman Ben Bernanke spelled out what he considers the phrase to mean last month. Minutes of the central bank’s most recent policy meeting, released this week, reignited questions over how low, exactly, “exceptionally low” means. The Fed has kept its benchmark interest rate near zero since December 2008 in an effort to make borrowing cheaper and spur investment.

Federal Reserve worried about impact of US spending cuts - The Federal Reserve is worried about the impact on the US economy if government spending is cut sharply."The possibility of a sharp fiscal tightening in the United States was also considered a sizable risk," the US central bank said in the minutes of its April meeting.Automatic budget cuts that will slash $1.2tn (£754bn) will happen at the end of this year if a budget deal is not reached.The Fed held rates at a record low."If agreement is not reached on a plan for the federal budget, a sharp fiscal tightening could occur at the start of 2013," the minutes said. "Uncertainty about the trajectory of future fiscal policy could lead businesses to defer hiring and investment."After a fierce political debate that saw budget talks go to the wire, Republican and Democratic leaders reached an agreement in August 2011 on raising the US debt limit and avoiding a first default.Under the agreement, the US deficit will be reduced by at least $2.1tn over 10 years.

Federal Reserve wary of eurozone risks - Significant downside risks from the eurozone and US fiscal policy contributed to a Federal Reserve decision to stick with forecasts of low interest rates “at least through late 2014”, the minutes of its April meeting say. The focus on risks to the economy among members of the rate-setting Federal Open Market Committee helps to explain a clash between its forecast of late 2014 and members’ individual predictions that rates will need to rise earlier. “Strains in global financial markets stemming from the sovereign debt and banking situation in Europe continued to pose significant downside risks to economic activity both here and abroad,” note the minutes, which say the risks weighed on the policy judgment of some members. That explanation may reassure markets that the Fed is likely to follow through on its late 2014 forecast and help to keep interest rates down across the yield curve. Some FOMC members are ready to consider more easing if economic conditions get worse. According to the minutes: “Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” The FOMC saw few big changes in the economy, saying it continues to expand moderately and noting that labour markets continue to improve. Most participants expect a gradual decline in unemployment and inflation to fall back to, or below, their 2 per cent goal.

Fed Debates Falling Labor Force Participation - Federal Reserve officials, at their April 24-25 policy meeting, agreed that understanding the reasons behind the decline in the labor force participation rate is “important for understanding unemployment dynamics going forwards,” according to minutes of the meeting released Wednesday after the usual lag.  The big question is how much of the unusually sharp recent decline in the participation rate — which measures the share of the population working or looking for work — will be reversed when the pace of the economy quickens and people come back into the job market and how much is a lasting change. (Read related Capital column.) “The decline in labor force participation, which has been sharpest for younger workers, has been a factor in the nearly 1 percentage point decline in the unemployment rate since last August, a drop that was larger than would have been predicted from the historical relationship between real GDP growth and changes in the unemployment rate,” the minutes noted. The labor force participation rate in April was 63.6%, well below the pre-recession peak of 66.4% reported for early 2007 by the Bureau of Labor Statistics.Several regional Fed banks have been studying the issue. One participant in the Federal Open Market Committee meeting cited research “suggesting that about half of the decline in labor force participation had reflected cyclical factors, and thus, as participation picks up, unemployment may decline more slowly in coming quarters compared with the recent pace.”

FRB: Minutes of the Federal Open Market Committee, April 24-25, 2012 -- May 16, 2012

NY Fed: Median Dealer Forecast First Fed Hike in Q3 2014 - Surveyed ahead of the late April Federal Open Market Committee meeting, Wall Street’s biggest banks largely expected the central bank to follow through on its projected path for monetary policy. In a survey released Thursday by the Federal Reserve Bank of New York, the median view of primary dealer respondents projected the Fed would first raise interest rates in the third quarter of 2014. The FOMC policy statement at that meeting reiterated that rates would be kept very low until late 2014, essentially matching what dealers had expected. Primary dealers are banks that do business directly with the Fed. The New York Fed has been releasing the surveys it does of dealers to find out what they are thinking ahead of FOMC meetings since earlier this year.

Bank of America/Merrill Strategists Still Puts 50/50 Odds on QE3 - You may not hear Federal Reserve officials talking that much about it anymore, but Bank of America/Merrill bond strategists still think QE3′s got a shot. Based on the relationship between a number of different market spreads, they say there’s still an even chance the Fed will expand its balance sheet with bond buying, although they note that’s down from a 70% chance in February.

Bullard: Fed on Hold Because Existing Policy Already Ultra-Easy - In a presentation entitled “The Fed On Pause,” a top Federal Reserve official said Wednesday the U.S. economic recovery is outperforming expectations and that current monetary policy is already very accommodative and risks igniting inflation. Federal Reserve Bank of St. Louis President James Bullard said the ultra-easy policy currently in place is appropriate so far. But “overcommitting” to this stance runs the risk of sparking a 1970s-type of inflation in an era that included four economic recessions in 13 years, the official said.

Potential Middle Path for Further Fed Stimulus - If Federal Reserve officials decide they need to provide additional stimulus to the economy, there is a strategy that would allow them to act without resorting to what markets called QE3. QE3, or a third round of quantitative easing, refers to bond buying by the Fed that would expand what is now a $2.9 trillion central-bank balance sheet. Expectations the Fed would go down this road have waxed and waned over recent months in sync with the flow of economic data. In recent weeks, even those central bankers who had been open to the strategy have suggested it’s pretty unlikely given the outlook. Even so, Fed Chairman Ben Bernanke kept the options alive in his press conference following the late April Federal Open Market Committee.There is, however, a half step that appeals to some key central bankers as well as some market participants, and that would be a replay of the soon-to-end program referred to by most as Operation Twist. This $400 billion effort, started last fall and scheduled to end next month, has been selling short-dated Fed-owned bonds to buy longer-dated securities. The Fed said it would sell Treasurys dated three years or less to buy a like amount of Treasurys maturing between six and 30 years. The aim of the program was to lower long-term borrowing rates, bolster overall financial conditions, and spur better levels of growth and hiring. Many key Fed officials deem Operation Twist a notable success, pointing to historically low long-term rates and to gains in economic activity.

Q&A: Lessons on Central Banking from Adam Posen - Adam Posen spent much of his career analyzing the decisions of central bankers in advanced economies. In 2009, he became one. He spent the past three years as a voting member on the Bank of England’s Monetary Policy Committee. Over that period, he’s gone from warning fellow central bankers about the risks of inaction, to making strong moves through bond purchases to boost the British economy and – now – wondering whether he had fallen into the trap he had warned about so vocally. Posen was named Friday as the next president of the Peterson Institute for International Economics, a prominent Washington think tank. He’ll take that post next January after he concludes his Bank of England term in August. He spoke with The Wall Street Journal’s Sudeep Reddy on Friday. Here are some excerpts:

The Zero Lower Bound and Output Gap Uncertainty - There is currently a great deal of uncertainty about the size of the output gap in the US, UK and elsewhere. Given the significant lags between fiscal policy decisions and their impact, does that mean we should be especially cautious in setting policy? This might seem like a rather academic question at present, because policymakers are not even trying to use fiscal policy to close the output gap... However, uncertainty about the output gap is often used as a justification for maintaining current policies, so it is a relevant question in that sense. I believe that there is a strong argument that goes in exactly the opposite direction. Uncertainty about the output gap should make us less cautious. This argument rests on two very reasonable assumptions: that monetary policy can impact on the economy more rapidly than fiscal policy, and that the Zero Lower Bound (ZLB) for nominal interest rates means that there is an asymmetry in what monetary policy can do. Let me try and illustrate the point with some stylised numbers.

Monetary policy: Tightening (try overshooting for once) - SELFISHLY, my main worry about the ongoing euro-zone crisis is that it might derail America's kinda-sorta strengthening recovery. Trade, once again, is not the main concern. Previously, financial contagion seemed a big problem, but the European Central Bank has helped insulate America against that, for now at least. Instead, the problem appears to be that euro crisis is generating a passive tightening of monetary policy. This shows up most clearly in the form of falling inflation expectations and a rising dollar. We can also read something about growth expectations in the yields on long-term Treasury debt, which are touching 6-month lows. What we're observing is rising money demand, and that is a contractionary force. This shouldn't matter; it's well within the central bank's power to offset this dynamic. But this is where the Fed's apparent recovery strategy is so troublesome. There is complete confidence that the Fed will prevent deflation—the question is when. The Fed's unwillingness to overshoot on inflation means that a preemptive intervention to buoy up demand is unacceptable; if . The Fed will therefore stay its hand while disinflation occurs, until there is sufficient breathing room to step in and cut off the possibility of deflation without generating a meaningful probability of 3% wage and price growth.

John Kay on Central Bank Credibility -In his column today (“The dogma of ‘credibility’ now endangers stability”), Kay brilliantly demolishes the modern obsession with central-bank credibility, the notion that failing to meet an arbitrary inflation target will cause inflation expectations to become “unanchored,” thereby setting us on the road to hyper-inflation of Zimbabwean dimensions.  Here’s Kay: The elevation of credibility into a central economic has turned a sensible point — that policy stability is good for both business and households — into a dogma that endangers economic stability.  The credibility the models describe is impossible in a democracy.  Worse, the attempt to achieve it threatens democracy.  We got into this mess in 2008, because the FOMC, focused almost exclusively on rising oil and food prices that were driving up the CPI in the spring and summer of 2008, ignored signs of a badly weakening economy, fearing that rises in the CPI would cause inflation expectations to become “unanchored.”  The result was an effective tightening of monetary policy DURING a recession, which led to an unanchoring of inflation expectations all right, but in precisely the other direction!

The Death of Inflation Targeting - Frankel- It is with regret that we announce the death of inflation targeting. The monetary-policy regime, known as IT to friends, evidently passed away in September 2008. The lack of an official announcement until now attests to the esteem in which it was held, its usefulness as an ornament of credibility for central banks, and fears that there might be no good candidates to succeed it as the preferred anchor for monetary policy. ...Regardless of the form it took, IT began to receive some heavy blows a few years ago... Perhaps the biggest setback hit in September 2008, when it became clear that central banks that had been relying on IT had not paid enough attention to asset-price bubbles. ... [A]nother major setback was inappropriate responses to supply shocks and terms-of-trade shocks. ... CPI targeting tells the central bank to tighten policy in response to an increase in the world price of imported commodities – exactly the opposite of accommodating the adverse shift in the terms of trade. ... One candidate to succeed IT as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980’s, since it did not share the latter’s vulnerability to so-called velocity shocks.

Is inflation targeting really dead? - Atlanta Fed's macroblog - Harvard's Jeffrey Frankel is the latest econ-blogger to cast an admiring gaze in the direction of nominal gross domestic product (GDP) targeting. Frankel's post is titled "The Death of Inflation Targeting," and the demise apparently includes the notion of "flexible targeting." The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting. Frankel, nonetheless, makes a case for nominal GDP targeting:  "The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980's, since it did not share the latter's vulnerability to so-called velocity shocks. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand—the most that can be asked of monetary policy."  That's certainly true, but a nominal GDP target is consistent with a stable inflation or price-level objective only if potential GDP growth is itself stable.  At least for me, uncertainty about where GDP is relative to its potential remains the key to whether policy should be more or less aggressive.  In another recent blog item, Simon Wren-Lewis offers the opinion that acknowledging uncertainty about size of the output gap actually argues in favor of being "less cautious" about taking an aggressive policy course. The basic idea is familiar. It is a simple matter to raise rates should the Fed overestimate the magnitude of the output gap. But with the short-term policy rates already at zero, it is not so easy to go in the opposite direction should we underestimate the gap.

Inflation: The central banker's bogeyman | The Economist - I ENJOY reading the Atlanta Fed's macroblog. Most of the time what draws me is the analysis—of labour markets, macro conditions generally, that sort of thing. Lately, however, it has become useful as a source of insight into the mindset of the inflation-averse central banker, thanks to a some recent writing by the Atlanta Fed's executive vice president and research director, David Altig. Two weeks ago, Mark Thoma wrote a piece questioning whether the Fed's approach to its 2% inflation target is actually symmetric (such that downside misses generate as aggressive a response as upside misses). In recent years it has certainly seemed that while the Fed is interested in avoiding deflation, it is much more comfortable with an inflation rate just below 2% than one at or above 2%. Mr Altig took to his blog to defend the central bank, using this image:

What Rule Should the Fed Follow? - On May 8, Representative Ron Paul of Texas took a break from campaigning for the Republican presidential nomination to preside over a hearing of the House Financial Services Committee’s Subcommittee on Domestic Monetary Policy and Technology. Its primary focus was on the Federal Reserve System’s so-called dual mandate – to maintain both price stability and low unemployment, a policy that many conservatives view as inherently in conflict. They prefer that the Fed concentrate on one thing and one thing only – price stability, regardless of how high unemployment is. To his credit, Representative Paul (for whom I worked in the 1970s) noted that the Fed actually has three mandates. These are spelled out in Section 2a of the Federal Reserve Act, which says, The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates. Interestingly, while most conservatives aim their fire at the idea of “maximum employment,” Mr. Paul took issue with the idea of “stable prices.” As he explained in his opening statement: Some reformers have called for the full employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices. But these critics ignore the fact that stable prices are not a desirable goal. After all, with increasing productivity and technological innovation, the natural trend for most goods is for prices to decrease.

A Dereliction of Duty - Market Monetarists have long made the case that a nominal GDP (NGDP) level target would firmly anchor the expected growth path of nominal income.  Doing so, in turn, would stabilize current nominal spending since households and firms are forward looking in their decision making.  For example, holding wealth constant, households generally will put off purchasing a new car or renovating their homes if they expect their nominal incomes to fall and vice versa.  This is why Scott Sumner likes to say monetary policy works with long and variable leads. This understanding implies, therefore, that the reason for nominal spending remaining below is its pre-crisis trend is that the Fed has failed to restore expected nominal income to its pre-crisis path. This failure amounts to a passive tightening of  monetary policy.  In the past I provided some supporting evidence for this view using data from the Survey of Professional Forecasters.  Thanks to Evan Soltas, we now know of an another measure of expected nominal income growth that provides further evidence for the Market Monetarist view. The data comes from a question on the Thompson Reuters/University of Michigan Surveys of Consumer where households are asked how mcuh their nominal family income is expected to change over the next 12 months.  The figure below shows this measure up through October, 2011. 

Senate Democrats to Bring Fed Nominees to Floor for Votes - Senate Democrats, confident they have the 60 votes needed to confirm President Barack Obama’s two nominees for the Federal Reserve Board, plan to bring them to a vote soon, a top Senate aide said. Senate leaders believe they have at least the minimum of 60 votes needed to confirm both nominees. Several Republican senators on Tuesday declined to commit their support, but Senate Minority Leader Mitch McConnell (R., Ky.) said that “my impression is that there is bipartisan support” for the nominations. The process could take several days, depending on whether Republicans insist on the maximum debate time that Senate rules allow. Mr. Obama nominated the two men — Jerome Powell, a former private-equity executive, and Jeremy Stein, a Harvard University economics professor — to fill two empty seats on the seven-member Fed board late last year. But their confirmation has been held up by Sen. David Vitter (R., La.), a Republican member of the Senate Banking Committee.

Two Confirmed to Open Federal Reserve Slots - The Senate has confirmed Jerome Powell and Jeremy Stein as members of the Federal Reserve Board of Governors, marking the first time ever in the Obama Administration’s tenure that there are a full slate of seven governors serving. The vote resulted from compromise. Stein, a Harvard professor and Democrat, was confirmed 70-24, and Powell, a former Treasury undersecretary for George H.W. Bush and a Republican, was confirmed 74-21. David Vitter led opposition to confirming these two on the grounds that they would be rubber stamps for Ben Bernanke, but that fizzled out. In actuality we don’t know a lot about how Powell and Stein will choose to govern, and we don’t really know much about their views on monetary policy. That blank slate turned out to be a benefit in the modern Senate. Previous candidates that actually professed their views on monetary policy, or anything else conservatives decided not to like, people like Nobel Prize winner Peter Diamond, were rejected for the position and blocked through filibuster. So only this kinder, gentler set of nominees could make it. Harry Reid overcame the filibuster by allowing two hours of debate on the nominees. Lamar Alexander patted the President on the head for his wise, bipartisan approach.

Lawmaker Calls for Jamie Dimon to Leave NY Fed Board - J.P. Morgan Chase & Co.’s chief executive should step down from his position on the Federal Reserve Bank of New York‘s Board of Directors, an Independent senator said Monday. J.P. Morgan CEO James Dimon‘s presence as one of nine directors on the New York Fed’s board of directors points to “blatant conflicts of interest,” Sen. Bernie Sanders (I., Vt.) said in a statement Monday, echoing similar comments Sunday from Elizabeth Warren, the Massachusetts Democrat running for a U.S. Senate seat.

Inflation, Credibility, and Expectations: Again Some More - Paul Krugman rightly attacked the confidence fairy again yesterday — claiming that the unemployment of the 80s following Volcker’s tightening proves that Fed credibility doesn’t help — but I think he misfires this time. Here’s what I sed over there, with some tweaks: To be fair, Paul, isn’t the point here that in 1980 the Fed was decidedly lacking in inflation-fighting credibility? Volcker changed that — as you say, at great cost — and reluctance to lose the resulting credibility has been grounds for not sufficiently addressing the employment side of the Fed’s mandate ever since. More to the point, though: I am utterly mystified why the Fed thinks that saying it will allow slightly higher inflation (3 or 4 percent), doing so, then presumably bringing it back down, would hurt its inflation-fighting credibility. Given our (their) inability to predict economic futures, and their at-least-perceived decades-long ability to control inflation without big Volcker-style employment hits, this seems like a ridiculous concern. The more likely explanation in my view: each extra point of inflation would transfer hundreds of billions of dollars of buying power every year from creditors to debtors. Permanently. This isn’t just Econ 101; it’s simple arithmetic.  And the Fed is run by creditors.

Key Measures of Inflation in April - Earlier today the BLS reported: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in April on a seasonally adjusted basis ... The gasoline index fell 2.6 percent in April and accounted for most of the decline in energy, though the indexes for natural gas and fuel oil decreased as well. ... The index for all items less food and energy rose 0.2 percent in April, the same increase as in March. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.3% annualized rate) in April. The 16% trimmed-mean Consumer Price Index increased 0.2% (1.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Note: The Cleveland Fed has the median CPI details for April here.This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.4%, the trimmed-mean CPI rose 2.3%, and core CPI rose 2.3%. Core PCE is for March and increased 2.0% year-over-year.

News Flash: Cleveland Fed Reports that Inflation Expectations Fell in April - From a news release issued by the Federal Reserve Bank of Cleveland after the BLS reported that the CPI was unchanged in April. The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.38 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. The Cleveland Fed’s estimate of inflation expectations is based on a model that combines information from a number of sources to address the shortcomings of other, commonly used measures, such as the “break-even” rate derived from Treasury inflation protected securities (TIPS) or survey-based estimates. The Cleveland Fed model can produce estimates for many time horizons, and it isolates not only inflation expectations, but several other interesting variables, such as the real interest rate and the inflation risk premium. The Cleveland Fed’s estimate of expected inflation was 1.47 percent, so expected inflation dropped by .09 basis point in April.  It undoubtedly has continued falling in May.  The lowest monthly estimate of expected inflation over a 10-year time horizon ever made by the Cleveland Fed was 1.34% in February of this year, so we may now already be stuck with the lowest inflation expectations ever.  Is anyone at the FOMC paying attention?

Two Measures of Inflation: New Update - The BLS's Consumer Price Index for April, released today, shows core inflation above the Federal Reserve's 2% target at 2.31%. Core PCE, at the end of last month, is fractionally below the target at 1.96%. The Fed, of course, is on record as using Core PCE as its inflation gauge:  The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.93% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September.  This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice.  The Bureau of Labor Statistic's Consumer Price Index and The Bureau of Economic Analysis's monthly Personal Income and Outlays report are the main indicators for price trends in the U.S. The chart below is an overlay of core CPI and core PCE since 2000.  Here is a long-term perspective from the actual beginnings of the two series.

The housing market and the case for higher inflation targets in the US and the Eurozone - Might more inflation be good for the US and Europe? This column looks at the housing market in the US and argues that, with houses dropping in price, buyers are playing a waiting game. And as buyers keep delaying, the price drops further. Given the importance of property in many economies, the knock-on effects are severe. Yet one way to break this vicious cycle is with inflation.

Inflation Expectations Are Falling; Run for Cover - The S&P 500 fell today by more than 1 percent, continuing the downward trend began last month when the euro crisis, thought by some commentators to have been surmounted last November thanks to the consummate statesmanship of Mrs. Merkel, resurfaced once again, even more acute than in previous episodes. The S&P 500, having reached a post-crisis high of 1419.04 on April 2, a 10% increase since the end of 2011, closed today at 1338.35, almost 8% below its April 2nd peak. What accounts for the drop in the stock market since April 2? Well, as I have explained previously on this blog (here, here, here) and in my paper “The Fisher Effect under Deflationary Expectations,” when expected yield on holding cash is greater or even close to the expected yield on real capital, there is insufficient incentive for business to invest in real capital and for households to purchase consumer durables. Real interest rates have been consistently negative since early 2008, except in periods of acute financial distress (e.g., October 2008 to March 2009) when real interest rates, reflecting not the yield on capital, but a dearth of liquidity, were abnormally high. Thus, unless expected inflation is high enough to discourage hoarding, holding money becomes more attractive than investing in real capital. That is why ever since 2008, movements in stock prices have been positively correlated with expected inflation, a correlation neither implied by conventional models of stock-market valuation nor evident in the data under normal conditions.

It Is Never Too Late: Global Economic Collapse Edition- The global economy appears to be headed over cliff this year.  The emerging world is experiencing a significant economic slow down, the  the Eurozone will probably break apart in the next few months, and the United States faces sharp austerity measures at the end of the year.  There are enough bearish developments here to make the original Mayan calendar look prescient after all.  So should we despair?  Is the global economy fated to collapse in 2012? No, says Willem Buiter and Ebrahim Rahbari of Citigroup.  Though the outlook is dire, they argue there is much more that the Fed, the ECB, the Bank of  Japan, and the Bank of England could do not only to prevent another global economic collapse this year, but also to spur global aggregate demand above its anemic levels as seen below: Source: OECD Statistics So what does Buiter and Rahbari recommend?  Via FT Alphaville, here are their recommendations:

    • (i) reducing rates, first by lowering them all the way to zero (UK and euro area), then by eliminating the effective lower bound on nominal interest rates (all four currency areas) 
    • (ii) carrying out more imaginative forms of quantitative easing (QE) & credit easing (CE), in all four currency areas, by focusing on outright purchases of and/or loans secured against less liquid and higher credit risk securities,
    • (iii) engaging in helicopter money drops (all four currency areas): a combined fiscal monetary stimulus

China's Economic Slowdown Foreshadows Trouble for the U.S. - Industrial activity is down. Retail spending and investment are down. Trade is weaker than expected. We're talking about China -- the world's once seemingly unstoppable economy. According to official government data released by China last Friday, the turbocharged engine of Asia is starting to sputter and slow down. Like it or not, the U.S. is inextricably linked to China's success, failure, or stagnation. It's an uneasy relationship, at best. An Uneasy Alliance During the Cold War, we used to hear a lot about "mutual assured destruction." This was the idea that both sides knew neither would survive an all-out nuclear confrontation. For that reason, neither would risk launching an attack. So an uneasy status quo, with the U.S. and the Soviet Union perched on the edge of the abyss, held for four decades. This current, uneasy status quo between the U.S. and China also deserves use of the once-popular acronym for mutual assured destruction: MAD. There's no other way to describe the complicated relationship between the two countries.

Is That A Recession Or Just More Slow-Growth Turbulence? - The Economic Cycle Research Institute last week repeated its forecast that the U.S. is headed for a new recession, a prediction that the consultancy has been emphasizing since last September. There is some damning evidence to consider, starting with the slumping rate of growth in personal income, a danger sign that’s been with us for months.  Last December, for instance, I wrote that the deceleration in the pace of disposable personal income growth was "troubling… if it continues." And it has, as ECRI notes in its May 9 commentary: For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession. Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.  There’s a fine line between declaring that a new recession is a done deal, a certainty, and arguing that a trend will continue and unleash a fresh round of contraction in the future. If ECRI’s recession forecast is correct, and it may be, then we will soon see clear evidence that all but confirms the prediction.

Vital Signs: Leading Indicators Slip - Recent economic reports point to a sluggish recovery. The Conference Board’s index of Leading Economic Indicators — designed to show where the economy is headed in coming months — slipped 0.1% in April, after rising 0.3% in March. The board attributed the decline to a slump in housing permits, rising jobless claims that month and subdued consumer confidence.

More Evidence on What Is Holding the Economy Back - Here are two charts which show why both increased regulation and policy uncertainty are very significant. The first chart uses data from research by Susan Dudley and Melinda Warren. It takes their series on the number of “full time equivalent” federal employees in regulatory activities and subtracts out the number of Transportation Safety Administration (TSA) workers. (I interpolated the years 2002 and 2003 when TSA was expanding and moving from DOT to DHS). There has been a 25 percent increase just since 2007. And these data barely reflect the increased regulations from the health care and financial reform legislation.

Housing and GDP - Charted below is the relationship between housing permits and the contribution of Residential Investment to GDP up through the end of last year. The relationship is perfect, in part because there are more things than new construction in Residential Investment – the Realty industry, home improvements, renovations, etc – but the relationship is nonetheless pronounced. If permits continue on their current trajectory of roughly 30% Y-o-Y growth it would not be unrealistic to expect a direct contribution to GDP growth of in excess of 1 percentage point. We’ve just spent a little over a year or so with residential construction making no contribution so as a baseline you could think of it as the GDP over the last 18 months plus 1 point.

Q1 GDP Likely to Be Revised Up; Q2 GDP Seeing Major Tailwinds -Current official estimates of GDP growth over the last year look like this My baseline assumption is that this will be edged up both on stronger residential construction and stronger business investment than originally estimated. A revised figure of 3.0% is not out of the question. This would put Q1 GDP at a more rapid pace that Q4, and create a nice stair step coming out of 2011. Q2 has just begun but there are major tailwinds moving in. The biggest of course, is utility consumption. Housing and utility consumption faced major declines over the last two quarters, subtracting just under one percentage point from GDP, as heating consumption collapsed over the winter. That is likely to bounce back strongly in Q2 if utility use simply returns to normal. This means that we could be starting out with a point or so base on which to build.

"End This Depression Now": Paul Krugman Urges Public Spending, Not Deficit Hysteria, to Save Economy: (video) Public spending is under assault from the United States to Europe in the name of fighting deficits. Nobel Prize-winning economist Paul Krugman argues in his new book, "End This Depression Now!", that the hysteria over the deficit will constrain an economic recovery in a time of high unemployment and stagnating wages. "The economics is really easy," says Krugman, "If we were to spend more money at the government level and ... rehire the schoolteachers, firefighters, police officers who have been laid off in the last several years because of cutbacks at the state and local level, we would be a long way back towards full employment. ... Right now, there just is not enough spending, and we need the government, which can do it, to step in and provide the demand we need. ... We’ve had austerity in the face of a recession, in a way that we have never had before since the 1930s. ... And the results are clear: it’s disastrous."  [includes rush transcript]

Nobel laureate economist Paul Krugman on ending the Great Recession - The United States economy isn't recovering from The Great Recession quickly enough for Nobel laureate economist PAUL KRUGMAN. The U.S. unemployment rate is hovering just over 8 percent, when in 2007, the beginning of the financial crisis, according to Krugman, it didn’t spike above 5 percent. The New York Times columnist, blogger and Princeton professor of economics believes we need a governmental jump-start to offset the country’s high inflation and growing deficit. He walks us through the financial crisis that triggered the steepest economic downturn since the Great Depression, and the flaws he sees in the decisions made by President Obama, former Federal Reserve Chairman Alan Greenspan, current Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Robert Rubin, among others. Krugman has recently been responding to the $3 billion-and-growing loss by the nation’s largest bank, JP Morgan Chase, calling for restoring the federal safeguards that, he says, kept the 20th century relatively financially stable. He’s also been looking at what the past few years of austerity measures and a depressed economy in Greece mean for the rest of us. Paul Krugman’s new book is “End this Depression Now!” Listen to the mp3

End This Depression, But How? - Paul Krugman is stepping up to play the kind of role that John Maynard Keynes performed in the 1930s—arguing in clear accessible language for the government to spend to get us out of the slump. End This Depression Now! is his just-published polemic against the austerians—the powerful tribe found on both sides of the Atlantic that insists on balanced budgets. The book frequently hits the mark, but there is a crucial weakness that undermines the power of Krugman’s case. He is so exasperated with the lack of serious arguments by the advocates of austerity that he oversimplifies his own argument. Krugman insists that getting the U.S. economy out of the ditch is just a question of adding enough government spending to make up for the shortfall in private demand. He knows, however, that sooner or later, high rates of private investment will have to kick in if a real recovery is to be sustained.But when will this happen? One of the key elements of private investment—construction of single-family homes—has dropped precipitously and might never return to pre-downturn levels. In 2006 new single-family homes represented more than 18 percent of private fixed investment, but by 2011 had fallen to 5.7 percent. And since further suburban and exurban growth raises deep environmental problems, it is not clear that a full recovery of this sector is desirable. But what types of private investment will rise to fill in that gap? Krugman doesn’t even entertain this question.

Fed's Bullard Says Labor Policy Is Key to Cut Joblessness - Federal Reserve Bank of St. Louis President James Bullard said fiscal policies are needed to reduce the 8.1 percent U.S. unemployment rate and additional asset purchases by the Fed, or quantitative easing, would risk a surge in inflation.  “It may be better to focus on labor market policies to directly address unemployment instead of taking further risks with monetary policy,” Bullard said in Louisville, Kentucky. “If anything, the committee may be trying to do too much with monetary policy, risking monetary instability for the U.S. and the global economy.”  The policy-making Federal Open Market Committee on April 25 reiterated its expectation that subdued inflation and economic slack will probably warrant “exceptionally low levels for the federal funds rate at least through late 2014.” Bullard has said he is opposed to such a pledge because policy should be made in response to economic data and not rely on a public timetable.  “The U.S. macroeconomic data have been stronger than expected as of last autumn,” Bullard said. “The main risk is that the committee will, as it has in the past, overcommit to the ultra-easy policy. The policy has been appropriate so far, but could reignite a 1970s-type experience globally if pursued too aggressively.”

Fiscal credibility vs democracy - John Kay’s latest FT column looks at the problem of credibility, although more in a fiscal than a monetary context. As he points out, we frequently hear now that credibility is the problem besetting heavily-indebted governments. Credibility is seen as a kind of panacea but Kay points out it’s only a very recent concept in economics: not in Keynes, not in Smith, not in Marshall. It dates back to a 1979 article by Finn Kydland and Edward Prescott, he says, who won a Nobel economics award for their work on the subject. Kay says it’s a sensible idea: households and businesses want price stability, and therefore a strong and independent central bank is needed to curb the tendencies of politicians to over-promise. But he says its mantra-like ubiquitousness goes too far:

Foreign holdings of US debt hit record high - Foreign demand for U.S. Treasury securities rose to a record high in March. China, the largest buyer of Treasury debt, increased its holdings for a third straight month. Total foreign holdings rose 0.3 percent to a $5.12 trillion, marking the eighth consecutive monthly increase, the Treasury Department reported Tuesday. U.S. government debt is considered one of the safest investments. Demand has increased as investors worry about the uncertainty surrounding Europe's debt crisis. China boosted its holdings 1.3 percent to $1.17 trillion, its third straight increase. China had trimmed its holdings for five straight months before the January increase. Japan, the second-largest buyer of Treasury debt, trimmed its holdings slightly, cutting them 0.2 percent to $1.08 trillion. Brazil, the third-largest foreign buyer of Treasury debt, increased its holdings in March to $237 billion. Britain reduced its holdings to $112 billion.

Treasury Demand Shows Deficits Irrelevant With Record Yields -  The inability of the U.S. government to reduce record debt and deficits is being rewarded in the bond market.  For all the concern in Washington that the nation is piling on too much borrowing as the deficit exceeds $1 trillion for a fourth straight year, investors are showing insatiable demand for its bonds. They snapped up the 10-year notes sold by the Treasury Department at an auction last week at a yield of 1.855 percent, a record low for that maturity. Trading has slowed to levels last seen before the global financial crisis began in 2007 as money managers sock away the securities.  “Are we likely to get out of this unusually low yield environment anytime soon? I don’t think so,” While deficits will matter someday, investors’ desire to preserve the value of their capital is capping yields, he said.  “Right now there seems to be more than enough demand for safe haven assets on the part of fiduciaries who need fixed- income,” While the amount of Treasuries outstanding has more than doubled to $10.4 trillion since 2007, a decline in securities globally deemed safe enough to meet tougher bank regulations has made the debt seem scarce. Citigroup Inc. says the pool of “high-quality” debt from the U.S., U.K., Germany and nine other European countries is 72 percent of what it was in 2007.

The Private Premium in Public Bonds? - NY Fed - In a 2012 New York Fed study, Chenyang Wei and I find that interest rate spreads on publicly traded bonds issued by companies with privately traded equity are about 31 basis points higher on average than spreads on bonds issued by companies with publicly traded equity, even after controlling for risk and other factors. These differences are economically and statistically significant and they persist in the secondary market. We control for many factors associated with bond pricing, including risk, liquidity, and covenants. Although these controls account for some of the absolute pricing difference, the price wedge between public and private companies remains. Despite these pricing differences, private companies with public bonds are no more likely to go bankrupt or to be downgraded than are similar public companies. In this post, we briefly summarize the findings of our study.

This Is Why No One In Washington Wants To Talk About Fiscal Policy - Even though it actually was relatively big news, it's not at all surprising that last week's announcement from the Treasury that there was a $59 billion surplus in April wasn't hyped in any way. As I posted about last week, the better-than-expected $59 billion surplus was an almost $100 billion change from the $40 billion deficit recorded in April 2011. That's an astounding reversal. What makes it even more astounding is that, although April always used to be a surplus month (that is, after all, when most Americans file and pay their individual income taxes) this was the first April surplus in four years. Although one month doesn't make a trend and shouldn't automatically be assumed to be a sign of what's ahead, the April surplus is noteworthy and definitely is worth watching. So why didn't the April surplus generate more news? Even if the 2012 deficit was half of what it was in 2011, and even if that reduction were applauded by Wall Street and the economic community, it would still be a painfully difficult political issue.

Employment and Deficits: A Tale of Two Administrations - Stan Collender notes that, for the first time in four years, the U.S. Treasury reported a surplus in the month of April.  It isn’t just that there was a surplus in April of 2008, though.  If you look back through Aprils (data here), the last time that month showed a deficit is 1983—the April less than six months after the last official “double-dip” of recessions. Stan offers three reasons that the White House doesn’t want to point out this good news.  I consider the first two somewhat silly—the GOP never hesitates to take about the deficit, except to deny its responsibility, and no politically-alert Democrat will see the April surplus as representative of “the wrong fiscal policy” so much as an indication that employment last year was better than it has been.It’s his third reason that is most interesting: While that's likely to be $200 billion or more less than what was recorded for 2011, the deficit will still be close to $1 trillion and that would be hard to defend. I’m assuming the phrase “close to $1 trillion” means that Stan assumes the actual FY2012 deficit will be lower than $1T.  The original projection was just under $1.3T. Getting that down to $1T would be 23% better than the original projection, not to mention the psychological gain of being back down below thirteen digits again. Even $1.1T would be just about a 15% improvement over the original projections.  If a 15%+ improvement in the deficit over your projections isn’t worth saluting, then what is?

Why We Have A Deficit »  Deficit theater is coming to DC tomorrow, with a well-funded "fiscal summit." The plot summary is that we have Deficit Trouble - Right Here In River City! so to fix it we need to cut Social Security and Medicare and the things democracy does for We, the People -- while cutting taxes on the rich and their corporations to make us more "business-friendly." (This musical is sometimes billed as "Simpson-Bowles" but it's the same old song.) All of this deficit hysteria today - when just over ten years ago we had such a large a budget surplus that we were projected to pay off our entire debt in ... ten years! That's right, Ten Years Ago We Were Paying Off The Nation's Debt. But Then We Elected Obama., Just ten years ago this country was running huge surpluses and paying off its debt. But then we elected Obama and all hell broke loose. Oh, wait... Between the time ten years ago when we had big surpluses and were paying off the debt and now when we are told the "Obama spending and deficit" mean we have to cut back on the things We, the People do for each other, something happened. Something changed. The things that happened, the things that changed, are being ignored in the current DC discussion about what we need to do to fix things. Something happened. We had a surplus, and it was replaced by massive deficits. The last Bush budget year had a deficit of $1.4 trillion!  What happened under Bush? We cut taxes on the rich and doubled military spending. (And started wars.) And don't forget collapsing the economy, forcing people onto unemployment and food stamps. That is why we have a deficit. We have a deficit because of tax cuts for the rich, huge military budget increases and the consequences of deregulating corporations.

The Case for Overreacting - Paul Krugman - Via Mark Thoma, Simon Wren-Lewis argues that if we’re up against the zero lower bound but are uncertain about the size of the output gap — how far the economy is operating below potential — we should deliberately overreach on fiscal policy. Why? Because monetary policy can correct any excess stimulus, but not an inadequate stimulus. Actually, I made exactly the same argument in November 2008, part of my pleading with the incoming Obama team to go big on stimulus. Unfortunately, the memo actually sent to the president said just the opposite, arguing that it would be easier to beef up an inadequate stimulus than to pare back an overlarge one. Alas.

Michael Hudson: Paul Krugman’s Economic Blinders - Yves here. Even though I agree with a good bit of Hudson’s post, I take exception to part of his argument, both in general and with Krugman. Hudson fails to distinguish between private sector debt (particularly consumer debt, whose overall level is negatively correlated with economic growth) and debt issued by a government that also issues its own currency. As we have stressed, unless a country runs a trade surplus (and if some countries run surpluses, other countries must run deficits), when the private sector delevers, the government sector needs to run deficits to accommodate the private sector deleveraging (otherwise GDP and wages contract, which is the austerian result Hudson wants to avoid). And that includes debt writeoffs. Although Krugman argues for deficit spending largely from a Keynesian perspective, he sometimes invokes the sectoral balances approach we described above. Richard Koo, who coined the expression “balance sheet recession” stresses how financial-crisis-hangover high private sector debt loads are crippling. Consumers and businesses prioritize paying down debt over investing.

Noah Smith on the Cyclical-Structural Divide - Key points: Krugman and some of the cyclicalists have focused the vast majority of their attention on cyclical issues. But this reinforces the (mistaken, misleading) claim of the structuralists that there is a tradeoff between the short term and the long term. One more Krugman blog post is not going to convince anyone to support stimulus, QE, etc. But one more Krugman blog post dedicated to discussing long-term issues will do a lot to convince readers that there is no policy trade-off. In other words, the marginal value of Krugman devoting more time to cyclical issues is negative. I am sympathetic to this view and used to more or less hold it, but now I think it is mistaken. While you don’t want to get trapped into people thinking that cyclical concerns are liberal concerns – hence my constant reminder that tax cuts are fiscal policy – I don’t think it actually helps to offer middle ground. The problem is that too much of the debate is manufactured. That is, it is debate for debate’s sake. There is no underlying reasoning going on. So, if you move the debate towards a compromise the parameters will simply change because people want to continue having some form of a debate. In short, the way the political narrative is set up makes it sound as if their ought to be “sides” and “viewpoints” and so even if there aren’t really sides to be had on an issue sides will be manufactured so that they can fit this narrative.

The Need for Countervailing Power - Like Brad DeLong, before the recession started I could not have imagined that policymakers would fail to put the unemployed first and foremost in all policy decisions. I was sure the unemployed would come before inflation, before banks, before debt reduction and contrived fights over the debt ceiling. How could we possibly turn our backs on millions of struggling households, especially when doing so creates so many additional long-run problems for individual households and for the economy as a whole? Nothing else would be more important than putting people back to work, and we would, of course, come together and mobilize in a national war against high unemployment. But I forgot something. With the decline in unions in recent decades, the working class has lost both economic and political power. And at the same time, those at the top end of the income scale have gained power both relatively and absolutely. So why would I have ever thought that the unemployed would come first when they have so little organized political power? Is it any surprise that policy has paid most attention to the issues that just happen to be the things those with the most political power care the most about? What was I thinking?

Are You Feeling Lucky? -- Give all the uncertainties about Europe, and additional worries about other things such as oil prices, if we could buy insurance against future economic problems, now would be a good time to do it. Oh wait, we can. That insurance is called monetary and fiscal policy. Like all insurance it does come with some cost, and yes -- again like all insurance -- there's a chance we won't need it. Keep in mind, too, that some forms of insurance don't have to be very costly. In fact, in some cases the benefits could outweigh the costs even if Europe, oil prices, etc. do not turn out to be problems. What I have in mind is infrastructure spending. Infrastructure spending gives us the extra demand we need to provide insurance against a shock to demand from Europe, etc. And we could use the extra demand in any case given the high level of unemployment right now, so there are benefits even if the insurance is not needed. Thus, there are benefits on the demand side no mater what happens. But infrastructure spending also has important supply side effects. Improved infrastructure would enhance future growth (and the additional jobs the spending would generate would help to prevent permanent losses to the economy associated with long-term unemployment). The higher growth alone yields benefits to the economy that exceed the cost of the investment (costs that are extraordinarily low due to rock bottom interest rates), and when the deamnd side/insurance benefits are added in, it seems to be a no-brainer.

The Fiscal Cliff Will Drive the U.S. Into Recession - Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts were set to expire. The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.” How bad will the damage be? The folks over at Goldman Sachs (GS) have crunched the numbers, running the equivalent of an economic crash test, and it looks grim. If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.As if that’s not depressing enough, Phillips places the odds of this happening—that is, Congress doing nothing (at least temporarily)—at 35 percent.

Boehner: Watch out for that fiscal cliff - Today at the Peter G. Peterson Foundation’s 2012 Fiscal Summit, Boehner is delivering another warning, this time on the end-of-year “fiscal cliff”: For all the focus on Election Day, another date looms large for every household and every business, and that’s January 1, 2013.  On that day, without action by Congress, a sudden and massive tax increase will be imposed on every American — by an average of $3,000 per household. Rates go up, the child tax credit is cut in half, the [alternative minimum tax] patches end, the estate tax returns . . . Now, it gets a little more complicated than that. What will expire on January 1 is cause for concern — as is what will take effect. That includes: Indiscriminate spending cuts of $1.2 trillion — half of which would devastate our men and women in uniform and send a signal of weakness;  Several tax increases from the health care law that is making it harder to hire new workers;  As well as a slate of energy and banking rules and regulations that will also increase the strain on the private sector.

Boehner: Spending cuts must offset debt limit hike - House Speaker John Boehner said Tuesday that when Congress raises the nation's borrowing cap he will again insist on spending cuts and budget reforms to offset the increase. In remarks prepared for a budget address Tuesday afternoon, the Ohio Republican said he welcomes another wrenching debate on increasing the so-called debt limit because it forces a Congress and White House plagued by gridlock to make difficult decisions. Boehner also said that the GOP-controlled House will vote to extend Bush-era tax cuts due to expire at the end of the year and that the House will act next year on "broad-based tax reform that lowers rates for individuals and businesses while closing deductions, credits and special carveouts." According to Treasury Secretary Tim Geithner, the government will hit its borrowing cap late this year but Treasury can use accounting maneuvers to buy time for the newly elected Congress to deal with the issue early next year.

Boehner lays down markers on year-end 'fiscal cliff' - House Speaker John Boehner (R-OH) presaged another developing moment of brinksmanship on taxes and spending, vowing that House Republicans would vote to extend expiring tax cuts before the election, and insist on further cuts in spending to accompany another increase in the debt limit. Boehner said that the House would vote this fall "before the election" to extend the Bush-era tax cuts, which are set to expire at the end of this calendar year. Income taxes would spike upward on Jan. 1 barring action to either extend the tax cuts or reform taxes on a permanent basis. The Republican speaker said the extension on which the House will vote, which comes on top of the two-year extension approved by Congress and President Obama in late 2010, would give lawmakers a chance to work on broad-based tax reform next year.

Republicans Pledge New Standoff on Debt Limit - Speaker John A. Boehner on Tuesday set the stage for a bruising election-year showdown on fiscal policy, vowing to hold up another increase in the federal debt ceiling unless it was offset by larger spending cuts. His combative comments came on the same day the Republicans’ presumptive nominee, Mitt Romney, hit President Obama hard on his fiscal stewardship in a speech in Des Moines, suggesting that Mr. Romney and Congressional Republicans see an opening to attack the president on the mounting federal debt and the size of the government.  Mr. Boehner’s stance threatened to throw Congress back into the debt-limit stalemate that consumed Washington in 2011, but this time at the height of a campaign that Republicans are trying to make a referendum on Mr. Obama’s handling of the economy.

House Speaker John Boehner Teed Up A Debt Limit Fight For The Winter - Treasury Secretary Timothy Geithner wants Congress to raise the debt limit again later this year “without drama, pain and damage.” House Speaker John Boehner has other ideas. In remarks at the 2012 Peter G. Peterson Foundation, Boehner will erect the same requirements for raising the debt limit this coming winter that nearly led the country to default on its debt last August. “We shouldn’t dread the debt limit. We should welcome it. It’s an action-forcing event in a town that has become infamous for inaction,” Boehner will say according to excerpts of prepared remarks provided by his office. “That night in New York City, I put forth the principle that we should not raise the debt ceiling without real spending cuts and reforms that exceed the amount of the debt limit increase…. When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase. This is the only avenue I see right now to force the elected leadership of this country to solve our structural fiscal imbalance. If that means we have to do a series of stop-gap measures, so be it - but that’s not the ideal. Let’s start solving the problem. We can make the bold cuts and reforms necessary to meet this principle, and we must.”

White House slams Boehner debt warning - -- The White House Tuesday blasted a warning by U.S. House Speaker John Boehner that he intends to hang tough on raising the national debt ceiling. Boehner says he won't allow another hike in the national debt ceiling without larger spending cuts and reforms to entitlement programs. Treasury Secretary Tim Geithner said Tuesday at a fiscal summit he estimates the government will hit its $16.394 trillion borrowing limit before the end of year, CNNMoney reported, but the U.S. Treasury can take extraordinary measures -- including suspending contributions to federal pension plans -- to delay the crisis until early in 2013. In prepared remarks set to be delivered before the fiscal summit sponsored by the Peter G. Peterson Foundation, Boehner says: "When the time comes, I will again insist on my simple principle of cuts and reforms greater than the debt limit increase. This is the only avenue I see ... to force the elected leadership of this country to solve our structural fiscal imbalance."

Geithner Comes Clean: "I Don't Understand It" - Tim Geithner outdoes himself this evening with three hypocritical, self-defecating-deceiving, and typically ignominious clips courtesy of his interview with Jeffrey Brown of PBS NewsHour. While we knew TurboTax was beyond him, the Treasury debacle-in-chief admits he doesn't understand how the debt limit has bubbled back up (seeing it as part of a partisan political agenda); admits that perhaps the NY Fed has a 'perception problem' with Jamie Dimon on the board; and his piece-de-resistance his cognitive dissonance erupts as he touts Obama's economic and jobs record: "look how well we are doing relative to any other major country". It seems the election cycle is well and truly upon us and revisionism and populism will once again trump sensibility and forthrightness

Obama and Republicans Clash on Debt Ceiling - President Obama and Congressional Republicans staged a preview of a looming end-of-year battle on Wednesday, as the president warned Republicans that he would not allow Congress to hold the economy “hostage” to another fight over whether to raise the country’s debt ceiling without accompanying cuts in spending.During a lunch of hoagie sandwiches at the White House that was supposed to be about urging Congress to act on proposals to spur the economy, Mr. Obama and the House speaker, John A. Boehner, clashed again over the debt ceiling. Mr. Boehner initiated the hostilities on Tuesday, when he appeared to signal that he wanted to start scrapping over the debt ceiling this summer, in the middle of the election campaign, instead of at year’s end, when the country will again need to raise the borrowing limit. Mr. Boehner stood by his position at the White House, an aide said, telling the president that “as long as I’m around here, I’m not going to allow a debt ceiling increase without doing something serious about the debt.” The president and his Democratic allies on Capitol Hill were talking tough, too. “The president made clear that we’re not going to recreate the debt ceiling debacle of last August,” said Jay Carney, the White House press secretary. He added, “It is simply not acceptable to hold the American and global economy hostage to one party’s political ideology.”

Boehner’s debt ceiling crisis would be so much worse than you think - As Treasury Secretary Timothy Geithner said Tuesday, “we’re likely to hit the debt limit sometime before the end of the year, but Congress has given the executive branch a set of tools that buy them some time. And those tools will probably take us into the early part of 2013, thus separating somewhat the timing of the expiry of the tax cuts and the sequester with the ultimate need for Congress to act on the debt limit.” In other words, the Bush tax cuts expire on Dec. 31. The automatic spending cuts begin on Dec. 31. The debt ceiling likely won’t come due till February, or perhaps even March. So the scenario in which we reach a debt ceiling showdown is a scenario in which the two parties have already failed to come to an agreement on spending and taxes. That is to say, it’s a scenario in which we’ve already reached the fiscal cliff and fallen over the edge. It’s a scenario in which the Bush tax cuts have probably expired, and the spending cuts have probably begun. It’s a scenario in which the markets are already in some amount of turmoil, and the forecasters are already sharply warning that Congress is dragging the country into a double-dip recession. It’s a scenario in which the two parties are already under tremendous pressure, in which Washington has been in some sort of semi-crisis for months, and in which all the possible deals have already been tried and failed. (It’s also a scenario, incidentally, in which our projected deficits are much lower, because our expected tax revenues are so much higher.)

What Happens If All The Bush Tax Cuts Expire? - Based on this from Brad Plumer, and the chart he got from Jonathan Bernstein, it wouldn’t be pretty: What will the economy look like in 2013? A great deal depends on what Congress decides to do at the end of this year. Remember, the Bush tax cuts are expiring, the payroll tax holiday will sunset, and a bunch of new spending cuts under the debt-deal “sequester” are scheduled to kick in. Coming all at once, that’s a potentially big drag on growth.(…) To put this in perspective, the Federal Reserve expects the economy to grow at a roughly 2.9 percent pace in 2013. If Congress does nothing at the end of this year, much of that growth could be wiped out, and there’s a strong possibility that the United States could lurch back into recession. (Granted, a lot could depend on how the Fed reacts in this situation.)On the flip side, as Ezra discussed in Thursday’s Wonkbook, letting all of the tax cuts expire and spending cuts kick in would also cut the U.S. deficit considerably: “Public debt falls from 75.8 percent in 2013 to 61.3 percent in 2022.” Given the fact that we’ve already seen evidence that the 2.5% growth forecast for this year may turn out to be overly optimistic, we probably put to much stock in the 2.9% forecast for 2013. If growth (not factoring in the impact of the changes coming on December 31) is less that 2.9%, then the impact of what Plumer calls “Taxmageddon” will be even worse.

Mr. Boehner and the Debt – NYT editorial - It clearly does not bother Speaker John Boehner that he pushed the United States to the brink of default last year. It does not matter that the deep spending cuts in the resolution he demanded to end that crisis will hurt economic growth. It does not even matter that the House he leads is determined now to break that agreement with even deeper cuts in vital programs. No, Mr. Boehner wants to do it all over again: he announced on Tuesday that the House will not agree to raise the debt ceiling when it is reached later this year or early next, unless the increase is matched by equal spending cuts. “We shouldn’t dread the debt limit,” he said, instantly forcing the country to do just that. “As a matter of fact, I think we should welcome it. It’s an action-forcing event in a town that has become infamous for inaction.” An official who actually wanted to help the country rather than appeasing the Tea Party might have remembered what happened a year ago, after Mr. Boehner first made that extortionate demand. The bond rating agencies said the country’s credit and reputation had been seriously damaged, and the government lost its AAA credit rating. (Mr. Boehner shamelessly blamed Mr. Obama for that on Tuesday.) The Federal Reserve warned of “catastrophic” and “calamitous” effects if Republicans carried through on their threat to default.  Because the House threat was so serious — and because so many Republicans seemed irresponsible enough to actually carry it out — President Obama and the Democrats were forced to agree to cut $2 trillion from the budget over a decade, a huge Tea Party victory.

Boehner Debt Ceiling Statement Wasn’t Surprising; Might Have Been A Huge Miscalculation - No one should have been surprised that House Speaker John Boehner yesterday said that he was going to go to war this fall with the White House over the debt ceiling. Boehner simply doesn’t have the freedom from the House Republican caucus to move away from that extreme/take-no-prisoners position at this point in the year. Had he in any way indicated five+ months before the election and 7 months before not raising the debt ceiling will become a critical problem that he was willing to avoid a fight (let alone use the word “compromise’), Boehner would have been immediately slapped down by other House and Senate Republicans and had one or more GOP members announce that they were going to oppose him for Speaker. Boehner had no choice and his statement on the debt ceiling was totally predictable. However valuable Boehner’s hard line was with the base, it’s hard to imagine that his position will help the GOP in any way with the independent voters they will need to be successful in November. His statement and hard line position will remind independents of what they felt last August when, in the wake of the cliffhanger ending, the approval rating for Congress fell to single digits.

The Boehner/Obama Fiscal Brawl - Listening to Barack Obama and John Boehner over the past few days put me in mind of two testosterone-addled 22-year olds preparing for a bar fight, rather than the President of the United States and the Speaker of the House discussing fiscal policy. First, Boehner kicked off this high-level “whose your mama” conversation by demanding that Democrats agree to massive spending cuts as the price for allowing the U.S. to continue to borrow from the bond markets. No tax increases allowed. At one point in his May 15 speech to a room full of budget wonks, Boehner began a sentence with the phrase, “Yes, allowing America to default would be irresponsible…” The very fact that the Speaker of the House would follow that phrase with a… but… was itself remarkable. And sad. But Boehner is absolutely right. Cutting off access to the bond markets (we wouldn’t really default, but that’s another story) would be irresponsible. Yet Boehner sounds like he can’t wait to replay the fiscal slugfest of last summer. “We shouldn’t dread the debt limit,” he said, “We should welcome it.” Obama responded by inviting the congressional leadership to a White House lunch, where he unhelpfully warned that a rerun of last year’s fiscal debacle is “unacceptable.” The context for all of this, of course, is the coming fiscal train wreck. Sometime in late 2012 or early 2013, the U.S. will reach its legal borrowing limit, just as the 2001/2003/2010 tax cuts will all expire, and deep automatic cuts will be made to some government programs, including defense.

No, Greg, It’s That The Entire Republican Party has Decided to Lie - Greg Sargent should resign from the Washington Post  before it finishes destroying his brain. Give Sargent credit: he knows Mitt Romney is lying, and he calls him out on it, which—especially for the denizens of “Fox on 15th”—is as close to truth as you get outside of Sarah Kliff’s Wonkblog pieces.*  But he always tries to find the bright side, assuming that it’s not deliberating lying so much as hoping there is a “memory hole” in the electorate. RNC Chair Reince Preibus this evening went out of his way to prove that this is a far too generous.  In an email entitled “Stop Obama's Debt and Deficits,” he declares: Obama's [sic] racked up the three highest deficits in history and is scheduled to rack up the fourth this year.  In less than four years, President Obama has run up more than $5 trillion in debt, which is the most rapid increase in the debt under any U.S. President. That is elephant shit.** As I noted a couple of days ago, the “three highest deficits in history” (on an absolutely dollar basis, of course; no Republican currently in the party would admit that the largest percentage increase was under Ronald Wilson Reagan) include the fiscal year ending in September of 2009—the result of the Previous Administration’s final budget (which still holds the record in dollars, let alone inflation-adjusted terms, by at least $113B).  That’s not just hoping for a “memory hole,” it’s outright prevarication. Lying, not to put too fine a point on it.

Because They Can - It seems as if the Republicans, meaning both John Boehner and Mitt Romney, are trying to turn the national debt back into a major political issue. Now, a visitor from Mars might wonder how this is possible. How could a party that (a) passed the massive tax cuts that were the single largest legislative contributor to today’s record deficits, (b) increased spending rapidly the last time it controlled the federal government, and (c) cannot talk in detail about anything except deficit-increasing tax cuts possibly think that calling attention to deficits could be a political winner? Well, despite the Republican Party’s abysmal record when it comes to fiscal responsibility, it could still turn out to be smart politics, for a few reasons. One is that many Americans reflexively associate large deficits with excessive spending, even though reductions in tax revenues have played just as big a role since George W. Bush became president. (Compare, for example, receipts and outlays in 2000 and 2011 as a percentage of GDP.) Then they associate excessive spending with Democrats, although the only president to reduce spending significantly in the past forty years was Bill Clinton. It turns out that if you repeat the same tired attack lines year after year—Democrats are all tax and spend liberals, for example—people believe them.

50 Years Of Government Spending, In 1 Graph - Of each dollar the federal government spends, how much goes to defense? How much goes to Social Security? How much goes to interest on the debt? And how has this sort of thing changed over time? The graphic below answers these questions. It shows the major components of federal spending 50 years ago, 25 years ago, and last year.

A Pro-Austerity Chart, and Why the President Is Touting It - This chart, put together by Michael Linden at the Center for American Progress, shows the Obama Administration’s performance on fiscal policy over his term in office. It shows that spending, taxes and the deficit are all lower, relative to the CBO projections from when the President took office in January 2009. If you’re an economist, you look at this chart, and given the fact that the United States still suffers from elevated unemployment and needs more fiscal stimulus to increase aggregate demand, you shake your head in frustration. If you’re the President of the United States, you tweet out this chart to your millions of followers on Twitter, proud of the fact that you’ve been a President who has cut taxes, cut spending and cut the deficit.

What do Republicans mean when they say 'spending-driven debt'? - I got a weird e-mail from John Boehner’s office yesterday. “No Reason to Wait,” it said. “Let’s Address Spending-Driven Debt Now.” So what’s “spending-driven debt”? I’m not exactly sure. But there are a whole lot of references to it in my inbox. Later that same day, I got another e-mail from Boehner’s office about “the spending-driven debt that threatens job creation and economic growth.” And on May 4, I got an e-mail from Boehner’s office saying “those looking for work can’t find it because ObamaCare, our spending-driven debt, and the threat of tax hikes are making it harder for small businesses to hire.” I tend to think I’m pretty up on the budget lingo. But “spending-driven debt” is a new term for me. In fact, it seems to be a new term period. The first mention I can find on Lexis-Nexis is from Rep. Jeb Hensarling (R-TX) who, on Feb. 14, 2011, told CNN’s Gloria Borger that “we have a spending-driven debt crisis that is harming job growth in America and frankly, threatens the American dream for our children.” I can’t find an actual definition of “spending-driven debt.” But I assume it means debt driven entirely by new spending. And we can actually calculate what percentage of our debt is driven by new spending.

Define 'Welfare State,' Please - Even those who denounce our “unsustainable welfare state” don’t agree on what it is or how its spending should be measured. Brandishing the phrase in his recent call for a structural revolution, David Brooks of The New York Times didn’t get specific. The Heritage Foundation sometimes offers a narrow definition of the “unsustainable welfare state,” based on means-tested programs – benefits directed to those with income below a poverty threshold, like Temporary Assistance to Needy Families, food stamps and Medicaid. Like many conservative Republicans, however, the Heritage Foundation often includes bigger entitlement programs that are not means-tested, like Social Security and Medicare, within its unsustainable category. The ball seems to get bigger as it rolls downhill. Some critics consider the entire government payroll part of the unsustainable welfare state. Others use government spending as a share of gross domestic product as a warning sign. By these measures, military expenditures also count.

Do not cut the American Community Survey - The House Republicans recently voted to remove funded from the US Census. According to news reports, this action was motivated by a mix of Tea-Party symbolism and the legacy of a long-standing fight with the Census. Let’s remember why the long form was invented. Every ten years the entire population needs to be counted. That is an expensive and arduous undertaking. Why not learn about more than merely name, address and age? The United States contains a vast array of different people, and we are not all alike. Over the years it has been useful, not to mention fascinating, to learn about the variety of ways people live – the size of their households, whether they live with an extended family, how much they commute, and whether they enjoy modern conveniences such as indoor plumbing. It is understandable if you do not remember the long form. Many households never got it. It took about a half hour to fill out. Because it was a burden, it arrived to a random set of households during the decennial census, as a way to collect deep information about the US population, but not to burden anybody too much. The long form was replaced by the ACS, which is more periodic. Same idea. Only a small fraction of randomly chosen households get it, with the intent of trying to get deep information about the US population. And it leads to more timely information, since it is not done every ten years. Most of the news reports framed the complaints about the ACS as a standard bit of Tea-Party symbolism about government intrusiveness.

Ignorance Is Strength: House of Representatives Edition - The War on Data Collection Continues!From the National Association for Business Economics (NABE): [t]he U.S. House of Representatives was considering an appropriations bill for Commerce, Justice, Science, and Related Agencies (H.R. 5326) that would drastically reduce funding for the Census Bureau and make participation in the American Community Survey voluntary.... Regrettably, the legislation ultimately passed the House along party lines and was much more damaging than originally proposed. In its current form, H.R. 5326 will "devastate" the nation's economic statistics. Specifically, the legislation will:

  • Terminate the American Community Survey;
  • Cancel the 2012 Economic Census; and
  • Halt development of cost-saving measures for the decennial census.

Readers of this blog recognize that almost all the posts rely upon government data in the analysis.

House Votes to Cut Food Stamps to Avoid Defense Reduction - The U.S. House voted to cut food stamps, federal workers’ benefits and other domestic programs to avoid scheduled reductions in defense spending.  The chamber today passed, 218-199, a plan to cut about $310 billion in spending to replace automatic defense-spending reductions that lawmakers in both parties agree shouldn’t be allowed to take effect in January.  “This plan ensures that we maintain our fiscal discipline and commitment to reducing out-of-control government spending, while making sure our top priority is national security,” said House Majority Leader Eric Cantor, a Virginia Republican.  Democrats lined up against the measure, H.R. 5652, saying it would put too much of the deficit burden on the needy. The proposal goes to the Democratic-controlled Senate, where it is doomed to failure.

House Bill Backs Weapons of Mass Delusion  - The Republican-led House is planning this week to approve a Pentagon budget larded with budget-busting missile defense and nuclear weapons modernization programs that top military leaders say they don’t need and whose price tags are likely to explode in the coming decade. The $642.5 billion defense authorization bill, which includes $88.5 billion for Afghanistan and other overseas operations, is at least $4 billion more than requested by President Obama in  February and $8 billion more than the Budget Control Act (BCA) cap, even though public opinion supports larger cuts in defense spending. The BCA called for both domestic and defense spending cuts next year to help bring the nation’s long-term deficit under control.  The plan, which was passed by a 56-5 vote in the House Armed Services committee, calls for deploying an anti-missile defense system along the East Coast of the U.S. by 2015. Though only $100 million is earmarked for the program next year, it will conservatively balloon into a $2 billion program within two years and, according to defense critics, will probably cost far more. “That’s low-balling by a factor of ten at least,”The legislation also contains a down payment on expanding the nuclear bomb-making plutonium complex in Los Alamos, New Mexico. Since the December 2010 strategic arms limitation treaty signed with Russia called for shrinking the number of bombs in each country’s arsenal, updating the facility was not included in the Pentagon’s draft budget. It could cost up to $6 billion by the time it is completed.

Jeff Flake’s plan to politicize the National Science Foundation - On Thursday, on a mostly party-line vote, the House passed an amendment by Rep. Jeff Flake (R-Ariz.) to prohibit the National Science Foundation from funding political science research. And, in doing so, it politicized one of the main ways this country funds scientific research. “My amendment does not reduce funding for the NSF,” he explained. Rather, “this amendment is simply oriented toward ensuring, at the least, that the NSF does not waste taxpayer dollars on a meritless program.” Well, what Flake considers a meritless program, anyway. As Christopher Zorn writes, the NSF runs a widely respected peer-review program that decides what science to fund. If Flake wanted to reduce the funding available to the NSF in total, that would be one thing (and, to be fair to Flake, he has proposed that in the past). But what he’s doing here is telling the NSF what is and isn’t acceptable science to fund. That’s not how scientific decisions are supposed to work. And the effect could be chilling.

House Bill Reinstates 'Global Gag Rule,' Cuts All Funds for United Nations Population Fund - A House panel has approved today a 2013 State Department funding bill that reinstates the Mexico City Policy, also known as the "global gag rule," and eliminates all funding for the United Nations Population Fund (UNFPA). Rep. Nita Lowey (D-N.Y.) had offered an amendment to take out anti-abortion restrictions to the bill to the House Appropriations Committee saying, “These provisions will leave millions of women without access to critical and lifesaving services. If we don't pass this, women will die." Lowey added, "They will die having their 17th child." Peter Yeo, vice president of public policy at the United Nations Foundation, wrote on The Hill's Congress blog that the bill "flies in the face" of voters' wishes. "Americans agree that the UN’s reproductive health programs are critical to the health and safety of women around the world. Ending funding for UNFPA flies in the face of what 79 percent of Americans think the UN should be doing."

Last Week's House "Reconciliation" Bill Was A Hoax - Unless the House decides to consider another makes-no-sense-and-has-no-effect bill such as the “reconciliation” bill it passed last week, the fiscal 2013 budget process essentially is over and done with until after Americans go to the polls in November. Yes, action on appropriations will be needed by the time the fiscal year begins Oct. 1. But even if there is some spending Sturm und Drang, the most likely outcome at that point will be a bipartisan shrug of the shoulders and a short-term continuing resolution that avoids a government shutdown before the election. That will keep federal departments and agencies funded through part or all of the lame-duck session of Congress that now seems 100 percent inevitable. So why did the House last week debate and pass the Sequester Replacement Reconciliation Act? Not only is the name a complete misnomer, but the bill won’t accomplish anything.

Walking and Chewing Gum (Creating Jobs and Reducing the Deficit) In a recovering economy still below “full employment” level, the binding constraint is lack of demand for goods and services. Increasing the supply of productive resources won’t increase GDP if there is already excess supply, or idle capacity, in the economy. It will only increase unemployment. In such an economy, fiscal policy can increase GDP by stimulating consumption — either through the government’s direct purchases of goods and services, or through tax cuts or transfer payments that indirectly increase private spending. Deficit spending can be effective at increasing demand and GDP immediately; how effective it is depends on how well targeted the policies are toward households and businesses most likely to spend additional funds on goods and services, and on how much the industries that produce those goods and services respond by hiring additional workers. Sudden fiscal consolidation or deficit reduction, on the other hand, can jeopardize an economic recovery if it substantially reduces the net incomes of households that spend most of their income. In contrast, in a fully-recovered, full-employment economy, the size of the economy is limited by the level of productive capacity, or the aggregate “supply side” of the economy. Increasing demand without increasing supply only creates inflationary pressures. Under these conditions, higher private and/or public saving will most effectively expand the economy.

Balancing the Budget with Tax Cuts and Defense Spending Increases - PGL at Econospeak points us to Charles Riley of CNNMoney has a must see graph showing how defense spending under Mitt Romney would compare to the current DOD baseline budget over the next decade. His title notes the spending over the next decade will exceed the baseline budget by more than $2 trillion. I like this:  Romney has proposed a slew of tax cuts, and plans to cap federal spending at 20% of GDP. But in both cases, the Romney campaign hasn't fully explained how those provisions will be paid for. The lack of detail means that Romney's claim of moving toward a balanced budget requires a great deal of trust. But no one should trust Mitt Romney on fiscal matters. No one.

When a Spending Cut Can Be Like a Tax Increase - Take, as an example, Medicare, the health-insurance program administered by the federal government primarily for people 65 and older. It is a universal program, rather than an antipoverty program: all citizens can receive benefits from the program when they become old, regardless of how rich or poor they are. To simplify the arithmetic, suppose the medical goods and services provided cost an average of $11,000 a year per beneficiary. The government could provide Medicare free of charge, in which case each beneficiary effectively receives $11,000 in premium assistance from the public treasury in order to pay for the cost of the program. The premium assistance by itself tends to increase the government deficit in proportion to the size of the older population, because the government has to pay for the medical goods and services. One idea, close to some Republican thinking, is to reduce the deficit by cutting government spending by “means-testing”: limiting the assistance to people who cannot afford to pay the premium themselves. For example, the premium assistance might be reduced 10 cents for every dollar of a beneficiary’s income.

Making the Best of the Bush Tax Cuts - Policymakers are headed toward a big fiscal cliff after the election, with the expiration of the Bush tax cuts this time joined by automatic spending cuts known as the sequester. The looming sledgehammerlike spending cuts of about $1 trillion over 10 years have caused a panic. But the expiring tax cuts are worth several times that — more than $2.8 trillion over 10 years, or more than $4.5 trillion including alternative minimum tax relief, even without counting interest costs.1 It’s a good reminder that the most important aspect of the Bush tax cuts (leaving aside the politics) is their cost. Instead of complaining about the size of the Bush tax cuts and not doing anything constructive about it, policymakers ought to commit to using that size in a positive way. The fact that we have a valuable policy lever available to us is fortunate. Everyone loves the Bush tax cuts because they’re tax cuts. They increase after-tax incomes for most of us, so we personally benefit. The problem has been that financing them has kept the true cost out of the awareness of policymakers and the general public. The benefits of the tax cuts have been private goods, but the costs have been public bads.

Geithner: U.S. ‘Can’t Afford’ Bush Tax Cuts for Wealthy - Treasury Secretary Timothy Geithner on Thursday said the U.S. “can’t afford” to extend the Bush-era tax cuts for the upper-income when they expire later this year, as he spelled out the Obama administration’s economic views in a speech to the Greater Baltimore Committee in Maryland. Mr. Geithner’s speech touched on a number of key fiscal and economic issues. Here are some takeaways: President Barack Obama has said he wants to extend the Bush-era tax cuts only for those families earning less than $250,000 and he’s vowed to veto any bill that tries to extend the tax cuts for the upper income as well. Speaker of the House John Boehner (R., Ohio) said Tuesday the House would vote this fall to extend all of the tax cuts. Mr. Geithner made the economic argument Thursday why the White House won’t accept such a proposal. He took another swipe at Republicans in his speech, blasting those who he said pose “serial threats to default on the nation’s credit.” Mr. Boehner on Tuesday also said Republicans would only support an increase in the debt ceiling if it was accompanied by large spending cuts. Here’s Mr. Geithner’s full response:

The Social Security Shortfall and the Cost of the Bush Tax Cuts - graphic [source]

Ten tax tricks (non-rich need not apply) - Back on tax day in April, ran a good story on the tax tricks the rich can use to reduce, defer or avoid altogether federal income taxation.  Jesse Drucker, How to Pay No Taxes: Ten Strategies Used by the Rich, (Apr. 17, 2012). As Drucker notes, the very very wealthy at the top of the income distribution have made out extraordinarily well in the last decade as to amount of taxes paid. For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so. They don't even necessarily have to cheat to do it.  They just use the tried and true tax reduction methods built into the system for their benefit--like "monetizing" their wealth through borrowings that they don't pay back in their lifetimes, but are paid out of the estate (which can sell stocks with the step up in basis resulting in no taxes). That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash.  The article lists ten common ways the rich avoid taxes.

Congress May Vote on Bill Limiting State Taxation of Business Travelers - We've gotten word that the House of Representatives may consider H.R. 1864 this week, the Mobile Workforce State Income Tax Simplification Act. The bill would prohibit states from imposing income taxes on traveling workers unless they spend at least 30 days in the state. Currently, most states require tax payments and even tax withholding for workers in the state for much shorter periods of time, including as little as a day. (In that map below from the Council on State Taxation (PDF link), that's the red states.) Such practices disrupt interstate commerce and falsely suggest that business travelers earn their income in traveling states and not from the home office. In recent hearings, Congress has shown its outrage at these state practices. Because of the tax credit for taxes paid to another state, this just shifts money around the country, toward states with the most aggressive rules. We're hearing more and more stories about state tax departments auditing travel records.

Taxing the London Whale - Now that a once-obscure J.P. Morgan Chase derivatives trader named Bruno Iksil has become infamous as the London Whale, I suppose it is time to ask whether what he does should be subject to new taxes. The question predated Mr. Iksil’s misadventures, of course. Ever since the U.S. financial crash of 2008 and the beginnings of the pending Euro-zone financial collapse, governments have been debating whether financial services should be subject to a new tax. Such a levy could, in theory, accomplish at least three goals: It could raise revenue for countries under great fiscal stress, assure that the financial sector (which often avoids tax) pays a “fair and substantial” share of taxes, and discourage bad behavior and thus stabilize markets. These last two aims are especially important since the cost to governments of bailing out stupid (at least) financial institutions has run into hundreds of billions of dollars over the past four years. Of course, such a tax could also have damaging unintended consequences that would damage financial markets.

Looting the Lives of the Poor - Gordon Gekko, the infamously cutthroat capitalist and lead character in Oliver Stone's Wall Street, captured the heady years of the 1980s with a single, indelible line: Greed is good. Today, it is Edward Conard, a friend and former colleague of Mitt Romney's at the private equity firm Bain Capital, who has offered a new mantra for the 1%, a cri de coeur for the Gekkos of the twenty-first century: Inequality is good. Conard argues that gaping income inequality is an indication of a healthy economy, not a sick one. The more unequal we are, Conard told the New York Times Magazine, the better off we all will be. Why? Because economies grow and thrive when smart people devise solutions to our thorniest problems by inventing or perfecting goods and services. Conard singled out a group of twentysomethings sitting at a Manhattan coffee shop one afternoon, deriding them as lazy "art-history majors." Those people should be out creating businesses and taking risks, he insisted, because that’s how societies prosper. And the way to encourage that risk-taking is the promise of obscene wealth for those who succeed (and, implicitly, dismal poverty for those who don’t). How obscene should that wealth be? In 2008, the top 1% commanded 21% of all income in America. Conard says our society would improve if only that figure were doubled.

Was Nick Hanauer’s TED Talk on Income Inequality Too Rich for Rich People? - Their slogan is “ideas worth spreading.” But the folks at TED – the Technology Entertainment and Design nonprofit behind the TED Talks, beloved by geeks and others interested in novel new ideas – evidently think that some ideas are better left unspread. At least when the ideas in question challenge the conventional wisdom that rich enterpreneurs are the number one job creators. This past March, millionaire tech investor and entrepreneur Nick Hanauer – one of the early backers of – gave a talk at a TED conference in which, among other things, suggested that middle-class consumers, not rich people, are the real job creators – and that because of this rich people should be paying more in taxes. Though the talk drew applause from conference attendees at the time, TED Talk curator Chris Anderson decided it wasn’t worth sharing with the wider world, and refused to post it on TED’s website. His explanation? The talk was “too political” to be posted during an election year, and that “a lot of business managers and entrepreneurs would feel insulted” by some of Hanauer’s arguments. This seems more than a tad disingenuous, since TED generally doesn’t shy away from controversial ideas, and is sometimes so “political” that it invites actual politicians to talk at its conferences.

Steven Rattner Misses the Point (Romney’s and Obama’s) – Beverly Mann - Last February, in the lead-up to the all-important Michigan primary, Romney wrote an op-ed piece in the Detroit News titled “U.S. autos bailout 'was crony capitalism on a grand scale'.”  The dual purpose of the piece was to defend the recommendation he made in a November 18, 2008 op-ed article in the New York Times titled “Let Detroit Go Bankrupt”  In a rebuttal op-ed in the New York Times, Steven Rattner, the Obama administration’s auto taskforce chief advisor and himself a venture capitalist, deconstructed Romney’s claims, especially the statement that private capital was available to fund the reorganization process.  Rattner wrote:  In late 2008 and early 2009, when G.M. and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines. I know this because the administration’s auto task force, for which I was the lead adviser, spoke diligently to all conceivable providers of funds, and not one had the slightest interest in financing those companies on any term. So even though Rattner is a venture capitalist, I was a little surprised to read that he characterized a new Obama ad as unfair for targeting Romney’s work as a venture capitalist for Bain Capital by illustrating what that work actually entailed.   Rattner said that the two candidates should not pretend that the purpose of venture capitalism is to create jobs.  Romney, he said, should not have claimed that he created 100,000 jobs while at Bain.  And Obama should not complain that Bain’s brand of venture capitalism often was to buy ongoing businesses, milk them quickly, and disassemble them in liquidation or for the value of their parts.

Why is Paul Krugman Misrepresenting the Demise of a Wall Street Funded, Right Wing, Entitlement-Bashing Front Group? -- Yves Smith - Paul Krugman’s partisanship has become so shameless that we are giving him the inaugural Eric Schneiderman Decoy Award for his post “Things Fall Apart“. The Schneiderman Decoy Award goes for exceptional achievement in turning one’s good name over to particularly rancid Obama Administration initiatives.  Krugman’s post didn’t merely contain some cringe-making fawning over Obama; it was egregiously incorrect on the development that prompted the post, that of the death of Americans Elect, a shadowy group that had was out to sponsor a Presidential candidate. It’s hard to believe that Krugman does not know the orientation and aims of this failed effort.

US bank CDS hit fresh 2012 highs  - Credit default swaps on major US banks, including JPMorgan Chase, hit fresh highs for the year on Tuesday as problems in Greece intensified. An off-the-run investment grade bond index, where JPMorgan is believed to have built a significant position that contributed to a loss of $2.3bn reported by the bank last week, widened late on Tuesday, reversing declines earlier in the day. The cost of default protection on JPMorgan debt rose 8 basis points to 147, the highest level this year. That means it cost $147,000 a year to insure $10m of JPMorgan bonds for five years. CDS on Goldman Sachs and Morgan Stanley also rose to highs for the year. Goldman rose to 326bp from 314bp and Morgan Stanley to 425bp from 411bp.  While JPMorgan’s shares gained 1.3 per cent on Tuesday, the stock pared much of its earlier rise of 4.1 per cent. The 10-year Markit CDX North American Investment Grade index series 9 was at 150.6bp late on Tuesday, up about 4bp from Monday and sharply higher since JPMorgan announced its trading losses late on Thursday, Markit said.

Accidentally Released – and Incredibly Embarrassing – Documents Show How Goldman et al Engaged in ‘Naked Short Selling’ - Matt Taibbi - It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public. The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks. Last week, in response to an motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.

Senator Asks About ‘Unusual’ Trading Ahead of Jobs Report - A Republican senator Thursday called on the U.S. Department of Labor to examine the “unusual” trading activity that occurred ahead of the May 4 U.S. jobs report, raising concerns about whether some traders received the information prior to its wider release. On May 4, as reported on Dow Jones Newswires and in The Wall Street Journal, unusually large price moves and trading volume surged through the foreign-exchange, bond and stock markets in the one minute before the release of monthly U.S. jobs data. That minute often sees very little trading, as traders try to avoid being on the wrong side of bets just before the world’s most closely watched economic report. “The sudden and negative movement in the currency and futures markets suggests the possibility that some traders may have gained unauthorized access to April’s disappointing report prior to its official release,” Sen. Susan Collins (R., Maine) wrote in a letter to the Labor Department.

The Safe Deposit Box – Creating a Financial Wikileaks - The greatest barriers to financial whistleblowing are social and economic, not legal. Fear of being shunned by colleagues, passed over for promotion, bullied and harrassed, summarily dismissed and even shut out of Wall Street or the City for life plays a big part in dissuading executives who become aware of crimes and misdemeanours inside their organisations from blowing the whistle. Occasionally, as we saw with Greg Smith and his remarkable New York Times op-ed Why I Am Leaving Goldman Sachs, an employee’s conscience gets the better of them. But fear of being ostracised for “spoiling the party”, coupled with an attachment to the high pay that a financial career can bring (you might call it ‘moral cowardice’) is sufficient to persuade the vast majority of putative whistleblowers to keep schtoom. That’s why I believe we need a financial version of the whistleblowing website WikiLeaks. It would protect employees from management retribution and eliminate the social barriers to speaking out. There are already several leak sites available (check out the Leak site directory).

29 Largest Banks May Need $566 Billion More For Basel III: Fitch - The world's 29 largest banks will need an extra $566 billion to comply with Basel III capital rules by the end of 2018, which could hamper their ability to increase dividends and buy back shares, according to Fitch Ratings Inc. Basel III, the most recent iteration of a global regulatory standard on bank adequacy, stress testing and market liquidity risk, requires banks to hold 4.5 percent of common equity, up from 2 percent under Basel II. The higher standard aims to prevent a repeat of the 2008 banking crisis. New York-based Fitch said the $566 billion figure is 23 percent of the aggregate $2.5 trillion in common equity held by the banks, which include JPMorgan Chase, HSBC and Deutsche Bank. They would likely use a mix of strategies to raise cash, including retaining future earnings and selling or winding down riskier assets to comply with Basel III. Without additional efforts, each bank would need a median of three years of retained earnings to comply with the regulations.

Making Banks Small Enough And Simple Enough To Fail - 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, 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; see also these press release materials).  His proposal, while not likely to immediately become law, is garnering support from across the political spectrum – and more support than essentially the same ideas received two years ago.  This week’s debacle at JP Morgan only strengthens the case for this kind of legislative action in the near future.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, parliamentary maneuvers ensured there was little real debate.

Why We Regulate, by Paul Krugman - Jamie Dimon, the chairman and C.E.O. of JPMorgan Chase, has been fond of giving Gatewood-like speeches about how he and his colleagues know what they’re doing, and don’t need the government looking over their shoulders. So there’s a large heap of poetic justice — and a major policy lesson — in JPMorgan’s shock announcement that it somehow managed to lose $2 billion in a failed bit of financial wheeling-dealing. Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on. Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.

Rebuild the pillars of 1930s Wall Street - JPMorgan’s losses have generated renewed interest in tightening the “Volcker rule”, which would attempt to ban speculative trading by banks. Yet the losses also illustrate why the Volcker rule will not work. The synthetic credit trades were not proprietary bets; they were massive, mismatched hedges. The current version of the rule arguably would not have barred these trades. Moreover, wherever the line between speculating and hedging is drawn, Wall Street will easily find a way to step over it. It would be impossible for regulators to police what is a hedge and what is not.  A better way to stop the cycle of financial fiascos would be to emulate 1930s reforms, when Congress erected twin pillars of financial regulation that supported fair, well-functioning markets for five decades. First was a mandate that banks disclose important financial information. In today’s complex terms, that would mean disclosing not just a value-at-risk number but also worst-case scenarios. The law should require JPMorgan to tell investors what would cause a $2bn loss.  The second pillar was a robust anti-fraud regime that punished officials who did not tell the full truth. Unfortunately, this has been eroded by legislation and judicial decisions that make it more difficult for shareholders to allege fraud. Prosecutors are also reluctant to bring criminal cases, leaving the Securities and Exchange Commission to mount largely toothless civil actions. Instead, the law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.

Glass-Steagall or Bank Size? Why Not Both, And More? - In the wake of JPMorgan Chase’s Fail Whale trade, proponents of stiffer regulation on Wall Street than what was ushered in with Dodd-Frank have offered a variety of solutions. In truth all of them could be beneficial in tandem to reduce risk and political influence from the financial system. For instance, Elizabeth Warren, who has been vocal on this issue, just joined with the Progressive Change Campaign Committee to call for a reinstitution of Glass-Steagall: Frankly, I don’t think we should just trust Wall Street banks to regulate themselves. Because as we learned during the 2008 financial crisis, they are not just taking risks with their own money — they are taking risks with the whole economy. That’s why today, with the Progressive Change Campaign Committee, I’m calling on Congress to put Wall Street reform back on the agenda and to begin by passing a new Glass-Steagall Act. This was the law that stopped investment banks from gambling away people’s life savings for decades — until Wall Street successfully lobbied to have it repealed in 1999 [...] A new Glass-Steagall would separate high-risk investment banks from more traditional banking. .Similarly, the Campaign for America’s Future took the opportunity to tout Sherrod Brown’s SAFE Act as a corrective to Wall Street’s unaccountable risk:

JP Morgan and systemic risk - For some time, financial observers have been discussing the large positions in bond-index derivatives amassed by a trader known as the London Whale, now revealed to be Bruno Iksil working for JP Morgan Chase. On Thursday we learned that JP Morgan has lost over $2 billion in the space of two weeks as a result of the trades. On Friday the stock price fell by 9.3%, wiping out $14.4 billion of the company's value. How do you lose so much money so quickly? The short answer is, leverage. Although details are not known, one likely scenario ([1], [2]) involves derivatives constructed from the riskier components of some European corporate bonds. Using derivatives, you can buy or sell securities or pieces of securities that you do not yourself own, involving a potential promise to deliver more money than you even have. If the market moves against you, you'll have to deliver substantial real cash to unload your commitment, and this process appears to be what produced the sudden losses. The Whale's notional exposure in one index was speculated to have been $100 billion in April. The total notional exposure of all of JP Morgan's trades has been estimated to be $79 trillion. That's "trillion", with a "T", from a company with an equity value of $140 billion, and falling quickly. Paul Krugman suggests that in the case of the trades by the London Whale, JP Morgan "was just engaging in financial tricks of little or no social value".

Fed’s Bullard Backs Splitting Up Large Banks - Federal Reserve Bank of St. Louis President James Bullard said Thursday that banks deemed “too big to fail” should be split up. “We do not need these companies to be as big as they are,” Bullard said. His remarks come a week after J.P. Morgan Chase & Co. disclosed a $2 billion trading loss. “We should say we want smaller institutions so that they can safely fail if they need to fail,” he said, although he also called J.P. Morgan “a good player.”

Satyajit Das: Topiary Lessons – JP Morgan’s US $2 Billion Loss -- Having benefitted from risk management failures of others such as investment bank Bear Stearns and hedge fund Amaranth, JP Morgan (“JPM”) appears to have made an “egregious” and “self inflicted” hedging error. The bank would have done well to reflect on John Donne’s meditation: “send not to know for whom the bell tolls it tolls for thee”. The losses indicated are US$2 billion and may be higher. JPM’s share price fell around 9% (a loss of US$14 billion in market value) when the new was announced via a hastily arranged news conference. The bank also lost considerably more in reputation and franchise value.The episode has all the usual trappings of a salacious trading disaster. Competitors had christened Bruno Iksil, one of the traders responsible – Lord Voldemort (after the Harry Potter villain). The position, which has been common knowledge in the market since early 2012 at least, was dubbed “the London whale”. After the losses were announced, the usual journalistic liberties have been taken – the whale has “beached” or “been harpooned”. A sub-editor gleefully coined the headline “Dimon is a Whale of a Hedge Fund Manager”. But the losses raise serious issues. As they do not relate to the usual “rogue trading” incident which is typically dismissed as impossible to detect or control, the episode provides insights into the problems of modern high finance, bank strategies and regulation of markets.

Michael Olenick: WhaleMu – JP Morgan’s Next Surprise? - In an admittedly strange twist of timing JP Morgan, the same JP Morgan that just announced a surprise $2 billion loss caused by the “London Whale,” became the first and only of 26 banks disclosing subprime investor data to flip me the digital bird, refusing access to the public loan-level performance data for their Washington Mutual loans. WaMu, one of the most reckless subprime lenders, was swallowed whole by JPM and they’re having serious indigestion. Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loansUnder Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk. It isn’t hard to figure out why JP Morgan doesn’t want anybody looking into and through their garbage. I have not been able to ascertain whether these reports are required under disclosure requirement Regulation AB (the law itself seems to say yes, but the experts I spoke to gave divergent readings). Whether they are or aren’t, JPM’s refusal — when everybody else cooperated speaks for itself. As those loans sour, and they continue to rot like a dead skunk on a hot July day, the bets needed to offset the losses are increasing. It looks like the bank, peering into that portfolio they refuse to share, is becoming more than a little bit desperate. Like a compulsive gambler after a multi-day bender resulting in crippling losses they decided to double down rather than walk away, leading to their current whale of a surprise and likely a mirror-image follow-up for the WaMu losses this was supposed to offset.

Occupy the SEC to Jamie Dimon: We Told You So - By Occupy the SEC - Jamie Dimon’s plan to enfeeble the Dodd-Frank reforms, specifically the Volcker rule, has blown up spectacularly. Apparently JPM was so confident that their interpretation of the hedging exemption would prevail, that they got ahead of themselves and operated as if this loophople were in effect. But then things went horribly wrong for them. And the losses are even more damaging since the blowup is the result of activity the law was meant to curtail. Double trouble now for JPM, since it’s inconceivable that the hedging exemption they designed will make it into the final rulemaking. If it does survive, then we’ve got bigger issues with our regulators than we imagined. In today’s New York Times, James Wyatt provides an under the radar view of how laws are gutted when the regulators involved in rule-making are heavily lobbied by the regulated. One objective of Occupy the SEC was to inject a non industry perspective in this process as a counterweight to the overwhelming industry influence. By looking for loopholes we intended to shed light on the self-serving interests of the bankers and the vulnerability of the regulators to concerted industry pressure. Wyatt describes the lobbying efforts: Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking. “JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.  Portfolio hedging is at the heart of the London Whale debacle.

Red Flags Said to Go Unheeded by Chase Bosses - In the years leading up to JPMorgan Chase’s $2 billion trading loss, risk managers and some senior investment bankers raised concerns that the bank was making increasingly large investments involving complex trades that were hard to understand. But even as the size of the bets climbed steadily, these former employees say, their concerns about the dangers were ignored or dismissed. An increased appetite for such trades had the approval of the upper echelons of the bank, including Jamie Dimon, the chief executive, current and former employees said. Initially, this led to sharply higher investing profits, but they said it also contributed to the bank’s lowering its guard. “There was a lopsided situation, between really risky positions and relatively weaker risk managers,” said a former trader with the chief investment office, the JPMorgan unit that suffered the recent loss. The trader and other former employees spoke on the condition of anonymity because of the nature of the investigations into the trading losses.

JPMorgan’s Loser Trade Shows Importance of Volcker Rule - JPMorgan CEO Jamie Dimon and an army of lobbying mercenaries have been attacking Dodd-Frank and it’s implementation with campaign contributions and a bunch of false arguments. Until we found out about a huge loss on the Whale Trade, the moneythugs were winning. Maybe now regulators will be able to see through the lies, and actually enforce the law.  Lisa Pollack offers a detailed explanation of the best guess as to what actually happened in a series of posts at FT/Alphaville. Her explanation is lucid and illustrated with charts that make it fairly easy to understand. Here are what I think are the main points

Make Banking Boring - Let’s begin by stipulating the obvious: nobody outside of JPMorgan Chase knows for sure what really happened with those trades that have cost it so much money and done such severe damage to its once stellar reputation.  In his conference call last Thursday, Jamie Dimon, the bank’s chief executive, characterized the trades as “stupid,” but refused to get into any specifics. Even hedge fund managers on the other side of the JPMorgan trades have been able to cobble together only bits and pieces.  Still, we know enough to be able to make some informed judgments. We know that JPMorgan, awash in taxpayer-insured deposits, took some of that money — around $62 billion at last count — and decided to invest it in corporate debt, which had the potential to generate higher returns than, say, old-fashioned loans.  We know that JPMorgan’s chief investment office, which had orchestrated the debt purchases, decided to hedge the entire portfolio by selling credit default swaps against a corporate bond index. You remember our old friends, credit default swaps, don’t you?  We also know that Ina Drew, a JPMorgan veteran who headed the chief investment office — and who departed on Monday — made $14 million last year. Wall Street executives who make $14 million are not risk managers. They are risk takers — big ones. Thus, the final thing we know: At JPMorgan, nothing changed. The incentives, the behavior, even the trades themselves are basically the same as they were in the run-up to the financial crisis.

Will JPMorgan’s $2 Billion Blunder Finally End ‘Too Big to Fail’? - Dimon has been Wall Street’s foremost opponent of the Volcker Rule, a central part of the Dodd-Frank financial package aimed at preventing banks that can collect government-insured deposits from making risky, so-call “proprietary” bets. It’s not hard to see why. The JPMorgan unit that made the trades, the chief investment office, was placing bets using “excess” customer deposits that the bank had not loaned. And it was growing ever-more successful, earnings billions in profit in recent years. Thanks to vigorous lobbying by JPMorgan ($7.6 million last year) and others, the Volcker Rule, which is still being crafted ahead of its scheduled July 21 launch date, includes a loophole that allows the banks to make “hedge” trades, which are supposed to reduce risk elsewhere on their books — not blow up into $2 billion losses. On the conference call, Dimon suggested the trades didn’t violate the Volcker Rule because they were hedges, a view apparently shared by the Comptroller of the Currency Office, the national banks regulator, according to Sen. Bob Corker, the Tennessee Republican who has called for a hearing over JPMorgan’s loss. The Volcker Rule, as currently written, allows “risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings of a banking entity that are designed to reduce the specific risks to the banking entity.” But late Monday, in an odd reversal, The New York Times cited a “JPMorgan official” as saying the bank now believed that the trades “would not have been allowed under the Volcker Rule as it was intended.”

St. Louis Fed President: Break Up the Banks - James Bullard, the President of the St. Louis Federal Reserve, has become the second regional bank President in the last couple months to endorse the concept of breaking up large banks.“We do not need these companies to be as big as they are,” Bullard said. His remarks come a week after J.P. Morgan Chase & Co. disclosed a $2 billion trading loss. “We should say we want smaller institutions so that they can safely fail if they need to fail,” he said, although he also called J.P. Morgan “a good player.” I don’t care who’s a good player or a bad player. You get to a point where a large financial institution cannot properly manage their risk, and they will inevitably benefit from a taxpayer bailout, which gives them no reason to even try to calibrate that risk.I believe in breaking up big banks for a variety of reasons. One, the implicit subsidy of too big to fail gives an enormous competitive advantage to big banks over smaller ones. Two, megabanks garner so much political power and influence as to create terrible policies that cater to them at the expense of ordinary workers and the economy, with the type of sclerotic results we’ve seen, not only in this recovery, but over the last few decades relative to the previous era. In addition, outsized policies benefiting the financial sector often bleed into outsized policies benefiting the rich, and there is ample research that the subsequent inequality created drives financial crises.Three, there is no social good created by giant banks; in fact, the returns diminish after a certain point. The Cleveland Federal Reserve just published a new study on the social costs and benefits of “too big to fail” banks.

In Washington, Mixed Messages Over Tighter Rules for Wall St. - Conflicting signs are emerging in Washington over whether JPMorgan Chase’s surprise trading loss will spur tighter regulation on Wall Street. One of the banking industry’s main regulators appeared to indicate that it would oppose new efforts to rein in risky Wall Street activities, while other regulators emphasized caution. Still, a Congressional committee announced plans on Monday to hold a hearing on the financial regulatory overhaul that will look at the JPMorgan loss. Wall Street’s representatives, fearing that the entire banking industry might pay for JPMorgan’s sins, are trying to contain the fallout in Washington, people close to the matter said. When JPMorgan announced on Thursday that it had a trading loss of $2 billion that was expected to grow, some lawmakers and consumer advocates cast it as a case study on the need for stricter Wall Street oversight. The central policy, known as the Volcker Rule, would ban banks from trading with their own money, an effort to prevent bank blowups that necessitate bailouts with taxpayer money. Yet calls for a crackdown, which come as regulators are putting the finishing touches on the Volcker Rule and other such overhauls, may not find many sympathetic ears in Washington.

Mixed Messages From Capitol Hill on J.P. Morgan Loss - The more than $2 billion trading loss disclosed last week by J.P. Morgan Chase & Co. is playing into the hands of Democrats in Congress such as Sen. Carl Levin (D., Mich.) and Jeff Merkley (D., Ore.) who are calling for stricter regulation of financial firms and a tough Volcker Rule to limit banks’ trading activities. Other lawmakers, meanwhile, have been saying distinctly different things. Some are effectively saying “no big deal,” noting that J.P. Morgan is likely to emerge from the trading loss unscathed. Others are calling for more aggressive scrutiny — both of banks’ trading activities and of regulators’ ability to monitor those activities. These views reflect a fundamental uncertainty about what do to about large banks that are “Too Big To Fail.” Calls to break up the largest banks have been growing of late, with Dallas Federal Reserve President Richard W. Fisher and Federal Reserve Bank of St. Louis President James Bullard saying that banks deemed “too big to fail” should be broken up or downsized. Many analysts, meanwhile, say these calls to break up the nation’s largest financial institutions could well gain currency on Capitol Hill. Here’s a sampling of views from a few key members of the House Financial Services Committee:

Tom Ferguson: Financial Regulation? Don’t Get Your Hopes Up - - Yves Smith - It has come to our attention that an article by Tom Ferguson, the political scientist who is generally recognized as the expert on the role of money in American politics, had an article posted on TPM’s website on April 17, 2008, which appears to have been removed from the site.  You can find it via a wayback machine (hat tip Ed Harrison for tracking it down) but not at TPM or via Google. We are reposting it to make it more accessible. It is rather curious that TPM decided to remove the article now, while a presidential campaign is on, when Ferguson’s piece demonstrates that predictive social science is possible after all. This is the header of the piece: Financial Regulation? Don't Get Your Hopes Up.  And the text, which you’ll see was a good call:

Elizabeth Warren: ‘That’s the strongest argument for a modern Glass-Steagall’ - Ezra Klein - Elizabeth Warren, who is running for Senate in Massachusetts, thinks JP Morgan Chase CEO Jamie Dimon should resign his seat on the New York Federal Reserve. Beating up on Dimon is, of course, a popular position among politicians right now, but Warren has special credibility on this point: She chaired the congressional oversight panel on TARP from 2008 to 2010, and led the Consumer Financial Protection Bureau from 2010 to 2011. We spoke by phone Monday afternoon. A lightly edited transcript follows

Elizabeth Warren Calls for Dimon to Resign From New York Fed - Elizabeth Warren, a Massachusetts candidate for U.S. Senate, called for JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon to resign his position as a director at the Federal Reserve Bank of New York.  Dimon, who disclosed a $2 billion trading loss by his bank last week, shouldn’t stay on the board of the New York Fed because “he advises the Federal Reserve on the oversight of the financial industry,” she said in an e-mail release.  Warren, a Democrat, has served in the Office of the President and as chairwoman of the Congressional Oversight Panel for the Troubled Asset Relief Program. She helped establish the Consumer Financial Protection Bureau.  “After the biggest financial crisis in generations, the American people are frustrated that Wall Street has still not been held accountable and does not appear to consider itself responsible,” she said. “Dimon should resign from his post at the New York Fed to send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability.”

Dimon Doesn’t Know If JPM Broke the Law in Fail Whale Trade - These quotes from Jamie Dimon’s upcoming appearance this weekend on Meet the Press are a bit out of character: David Gregory: Did the bank break any laws? Did it violate any accounting rules or SEC rules? Jamie Dimon: So we’ve had audit, legal, risk, compliance, some of our best people looking at all of that. We know were sloppy. We know we were stupid. We know there was bad judgment. We don’t know if any of that’s true yet. Of course, regulators should look at something like this, that’s their job. We are totally open to regulators, and they will come to their own conclusions. But we intend to fix it, learn from it and be a better company when it’s done. If you can find another CEO answer a point-blank question about whether or not their company broke the law with, essentially, “I don’t know, the regulators should come in and find out,” you win a cookie. That’s an especially interesting angle to take for Jamie Dimon, who has spent the last two years telling the regulators to get off the backs of the financial industry so they can go ahead and master the universe.

Regulator May Have Permitted JPM Trade Under Volcker Rule - Sen. Bob Corker, the first lawmaker to call for a hearing on J.P. Morgan Chase & Co.’s giant trading loss, said a key regulator sees the trade in question as allowable under the so-called Volcker rule. Other lawmakers have said the trade would have violated the Volcker rule, which is a draft regulation meant to prohibit banks from certain trading activities, including making certain bets with their own money. But Mr. Corker said the Comptroller of the Currency Office, regulator of national banks, has told him they disagree with that view. “That’s just absolutely not their perspective,” Mr. Corker, a Republican of Tennessee, said in a CNBC interview Monday. The unit that got involved in the trade was located in J.P. Morgan’s bank and thus under OCC’s jurisdiction. The Federal Reserve has been “less forthcoming” with information about what went awry with the J.P. Morgan trade, he said.

Levin and Merkley Confirm: We Didn’t Intend Fail Whale Trades To Be Legal - Politicians using Jamie Dimon’s Fail Whale trade as a pretext to call for tighter banking regulations are performing exactly the correct public service in their job description. They’re supposed to respond to events as they happen, and create appropriate safeguards to minimize the risk from those events. And Senators Levin and Merkley make the point I’ve been making all day, that the legislation they wrote bears no resemblance to the proposed rule from the bank regulators, which allows for this type of activity. Senators Carl Levin of Michigan and Jeff Merkley of Oregon, both Democrats, said in a conference call with reporters that as currently drafted by the agencies charged with carrying out the new law, the Volcker Rule, governing a bank’s proprietary trading, allows banks to amass a single, large bet as a hedge against possible declines in an entire portfolio of securities. That, Mr. Levin said, “is a big enough loophole that a Mack truck could drive right through it.” And that is what JPMorgan Chase did, the senators contend. Where the law was written to allow hedging of individual investments by banks to protect them from possible losses, it was not meant to allow hedging an entire portfolio or hedging in favor of or against movements in the economy, they said. That is a license pretty much to do anything,” Mr. Levin said.

Barney Frank Weighs In on J.P. Morgan Loss - Regulators apparently still aren’t willing to say whether J.P. Morgan Chase’s whale of a trade would have violated the Volcker rule had the proposed measure been in place. But one of the law’s key architect’s isn’t so shy. “I believe we gave [regulators] enough authority to adopt a rule which would say that what J.P. Morgan did — as I understand what they did — should not happen in a bank, namely they should not be able to hedge against the entire economy, against an entire portfolio,” said Rep. Barney Frank (D., Mass.), who guided through the House the 2010 financial overhaul law that now bears his name. Mr. Frank’s comments came during an interview for C-SPAN “Newsmakers” scheduled to air Sunday, which was posted online Friday.Mr. Frank’s views on the matter are noteworthy because as then-chairman of the House Financial Services Committee he helped lead the House-Senate negotiations on the final language of the law. Regulators, who are still hammering out the final regulation implementing the so-called Volcker rule, must take congressional intent into consideration when they write rules. Mr. Frank’s role in drafting the law gives his comments more weight than that of the Volcker rule’s main Democratic champions Sens. Carl Levin (D., Mich.) and Jeff Merkley (D., Ore.) who have expressed similar views as Mr. Frank.

Why Markets Won’t Fix JPMorgan -  Jonathan Macey, a former professor of mine at Yale Law School,* recently wrote an op-ed for the Wall Street Journal (paywall; excerpts here) arguing that we shouldn’t worry about JPMorgan’s recent trading loss because market forces will ensure that the bank does a better job next time. Macey’s central point is that companies don’t like losing money, so losing $2 billion means that they will do a better job of figuring out how not to lose money in the future. That’s obvious. But it’s also beside the point. Bankers don’t ask, “Do I want to gain or lose money today?” That’s not the relevant point at which incentives apply. Instead, they ask: “Do I want to engage in this specific class of activities that has a certain expected payout structure?” In the JPMorgan case, the question is: “Do I want to engage in trades that are, roughly, portfolio hedges but that also take significant long or short positions on the credit market as a whole, with the conscious intention of making money?” And what we care about is whether the bankers’ decisions are producing the socially optimal level of risk.

Standing up to Jamie Dimon: Is it SAFE? - So, how do we stand up to Jamie Dimon and the other tax payer subsidized bankers that use the privileged position of tax payer underwritten banks to engage in risky activity that harms the real economy and generates massive salaries and bonuses for the bankers (Ina Drew is reportedly in line to make $14 million this year.) First, we must unmask the Republican and Democratic politicians that have actively served to eviscerate the Dodd-Frank rules on proprietary trading, derivatives and swaps regulations and other parts of the Dodd-Frank regulations, in the name of job creation and liquidity enhancement.  The regulators at the Federal Reserve, Securities and Exchange Commission (SEC) and others must be badgered to write and enforce rules that implement strict enforcement of the Dodd-Frank rules against proprietary trading, controls over derivatives, and other key Dodd-Frank provisions. But such provisions will not be enough because banks will eventually find ways around them and continue to act like the world is one big casino and ponzi palace. There is increasing recognition by economists and public officials that the too big to fail banks need to be cut down to size. Senator Sherrod Brown has introduced the SAFE banking act which, like his proposal with Senator Ted Kaufman in 2008, is designed to limit the size of banks and put on hard leverage limits and size restrictions. Sherrod Brown’s SAFE banking act should get much more attention and support than it is getting.

Flawed Dimon - Eliot Spitzer - What to do with Jamie Dimon? The CEO and Chair of JPMorgan Chase has tried so hard in the past several years to seem the “good banker.” He is so charming and gracious, yet all the while lobbying, cajoling, pushing, and wheedling to eviscerate any semblance of real reform on Wall Street. He shrugged off the cataclysm of 2008 as just something that happened, like the weather—no need for any structural reform. Now the chickens have come home to roost—at least 2 billion of them—and it is clear that Chase is like every other big financial institution with distorted incentives.  Thanks to a backstop of a federal guarantee, these gigantic institutions get to keep all the upside of crazy bets while the government gives them all the downside protection they need. Earlier this year, Dimon pooh-poohed concerns about the risks his traders were taking. Did Dimon not understand those risks, not care to know about them, or actually mislead the public about them?    True, in the context of Chase’s balance sheet, a $2 billion loss can be absorbed. But it shows once again the impossibility of trusting the banks in the absence of structural reform and regulation to control their willingness to take almost unmitigated risk. Imagine if the market had been choppy—the losses could have been even more gargantuan—and if several institutions had been in the same position, then the aggregate effect could have become once again cataclysmic.

Jamie Dimon "Invited" To Testify Before Senate -Senator Tim Johnson (D-SD), Chairman of the Senate Banking Committee, released the following statement regarding the Committee’s upcoming oversight hearings. "Earlier this week, I announced the Senate Banking Committee would continue its oversight of the implementation of Wall Street reform by holding additional hearings with key financial regulators. The first of these hearings will be held next Tuesday, May 22 and it will provide Banking Committee members the opportunity to hear from the SEC and CFTC. The second hearing will be held on Wednesday, June 6 with the Federal Reserve, FDIC, CFPB, and OCC as well as the Treasury Department. As part of these hearings, I have asked the appropriate regulators to be prepared to update the Committee on the recently reported trading loss by JPMorgan Chase. “Over the past week, my staff and Ranking Member Shelby’s staff have jointly held briefings with regulators regarding the JPMorgan Chase trading loss, as well a briefing with the company itself. Our due diligence has made it clear that the Banking Committee should hear directly from JPMorgan Chase’s CEO Jamie Dimon, and following our two Wall Street reform oversight hearings I plan to invite him to testify. I encourage all of my colleagues on the Banking Committee to participate in these three critically important and timely hearings, so we can all better understand the facts.”

JPMorgan's Dimon to testify before Senate panel - JPMorgan Chase CEO Jamie Dimon will be heading to Washington to testify before a Senate Committee investigating massive trading losses recently announced by the bank. Senate Banking Committee Chairman Tim Johnson, D-S.D., said the panel hold hearings on Tuesday and June 6 at which federal regulators will provide information on the trading loss, which has been put at $2 billion and growing. Dimon would testify at a third hearing sometime later, Johnson said. "As always, we will continue to be open and transparent with our regulators and Congress," JP Morgan spokesman Kristin Lemkau said in a statement. She said Dimon has agreed to appear before the panel.

Senate Banking Chair Calls Jamie Dimon to Testify -– But JP Morgan Chase is His Biggest Contributor! Holding your breath about the fallout from J. P. Morgan Chase’s derivatives losses? Yesterday, if you believed Politico, you could exhale. Senate Banking Committee Chair Tim Johnson of South Dakota announced his panel would call JP Morgan Chase Chair Jamie Dimon to testify.  It’s good that the watchdog is barking, but we’d all better watch closely to see if it will bite. Here’s what Politico didn’t tell you. Political Money Line’s tabulations of PAC contributions show that securities and financial firms have given more money to Johnson than any other sector in the last three election cycles. In the current cycle, for example, almost two thirds of his $361, 582 in PAC money comes from such firms. In 2008, when he collected over $2 million in PAC contributions, the swag from that quarter amounted to over half a million dollars – and neither figure takes account of numerous individual contributions. Johnson calls his leadership PAC “South Dakota First,” but, not surprisingly, contributions to his campaign committee from New York and other states often run far ahead of receipts from his own state. Alas, it gets worse. Here’s the real punch line. Which firm is Johnson’s single largest contributor? You guessed it: The Center for Responsive Politics’ count shows that in both the current election cycle and the cycles between 2005-2010, it is JP Morgan Chase. Don’t bank on the watchdog.

Are JPMorgan's Losses A Canary in a Coal Mine? - Bill Moyers and Simon Johnson  - That sound of shattered glass you’ve been hearing is the iconic portrait of Jamie Dimon splintering as it hits the floor of JPMorgan Chase. As the Good Book says, “Pride goeth before a fall,” and the sleek silver-haired, too-smart-for-his-own-good CEO of America’s largest bank has been turning every television show within reach into a confessional booth. Barack Obama’s favorite banker faces losses of $2 billion and possibly more – all because of the complex, now-you-see-it-now-you-don’t trading in exotic financial instruments that he has so ardently lobbied Congress not to regulate Once again, doing God’s work — that is, betting huge sums of money with depositor funds knowing that you are too big to fail and can count on taxpayers riding to your rescue if your avarice threatens to take the country down — has lost some of its luster. The jewels in Dimon’s crown sparkle with a little less grandiosity than a few days ago, when he ridiculed Paul Volcker’s ideas for keeping Wall Street honest as “infantile.” To find out more about what this all means, I turned to Simon Johnson, once chief economist of the International Monetary Fund and now a professor at MIT’s Sloan School of Management and senior fellow at the Peterson Institute for International Economics. He and his colleague James Kwak founded the now-indispensable website They co-authored the bestselling book 13 Bankers and the most recent book, White House Burning, an account every citizen should read to understand how the national deficit affects our future.

U.S. Said to Start Probe of $2 Billion JPMorgan Loss - The U.S. Justice Department and the Federal Bureau of Investigation in New York have begun a criminal probe of JPMorgan Chase & Co. (JPM)’s $2 billion trading loss, a person familiar with the matter said.  The U.S. is looking into whether criminal wrongdoing occurred in relation to the losses the bank reported last week, said the person, who declined to be identified because the matter isn’t public. The inquiry is in its most preliminary stage, the person said.  The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulates derivatives trading, also are examining New York-based JPMorgan’s trading activities, according to people familiar with those probes.

F.B.I. Inquiry Adds to JPMorgan’s Woes - Investors and federal investigators turned up the heat on JPMorgan Chase on Tuesday, as shareholders called for pay givebacks from executives responsible for a stunning $2 billion trading loss and the Federal Bureau of Investigation opened a preliminary review of the debacle. The F.B.I. case will examine potential criminal wrongdoing at JPMorgan, according to people briefed on the matter, representing the most serious inquiry to stem from the losses. The inquiry, which is being led by the F.B.I.’s New York office, will in part scrutinize JPMorgan’s accounting practices and public disclosures about the trades that prompted the loss, the people briefed on the matter said. JPMorgan also recently received questions from federal prosecutors in New York, one person said.

Justice launches criminal probe into JPMorgan's $2 billion trading loss - The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday. The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private.  Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bank’s multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades.

Obama has assets in JPMorgan accounts: White House (Reuters) - President Barack Obama has $500,001 to $1 million in a JPMorgan Chase private client asset management checking account, according to financial disclosures released by the White House on Tuesday. Obama said this week that JPMorgan was "one of the best managed banks there is" despite its $2 billion trading loss being investigated by the Securities and Exchange Commission. "This is a checking account used by the president and the first lady," said White House spokeswoman Amy Brundage. "It is the equivalent of an interest-bearing checking account available at many other financial institutions," she said, noting that it generated less than $201 in interest income in 2011. The president's 2011 disclosures also included a regular JPMorgan Chase checking account in the $1,001 to $15,000 range. His other principal assets included $500,001 to $1 million in U.S. Treasury bills and between $1 million and $5 million in U.S. Treasury notes. In a note about the annual financial statements that were posted online, the White House said "neither the president nor the vice president have any conflicts of interest."

Why Obama Must Hold Wall Street Accountable - Late last week, I heard the news about J.P. Morgan’s staggering $2 billion in losses on the same day I read Matt Taibbi’s Rolling Stone article about the death of financial reform and Nick Confessore’s New York Times Magazine piece about President Obama’s fundraising on Wall Street. After reading these two articles in conjunction with the J.P. Morgan news, I could only come to one conclusion: it’s impossible to “reform” Wall Street if the president is dependent on the financial sector to bankroll his re-election campaign. The banks can be Obama’s friend or his enemy, but right now they can’t be both.

The Dog That Didn't Bark: Obama on JPMorgan - Robert Reich - The dog that didn’t bark this week, let alone bite, was the President’s response to JP Morgan Chase’s bombshell admission of losing more than $2 billion in risky derivative trades that should never have been made.“JP Morgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion,” the President said. That was it. Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades. Nor any mention Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.  Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on my experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus

JPM’s Jamie Dimon Talked Volcker Rule In Private Meeting With Timothy Geithner - Embattled JP Morgan CEO Jamie Dimon met with U.S. Treasury Secretary Timothy Geithner at a private meeting in March, according to the Sunlight Foundation. The topic? The Volcker rule. The logs also show that JPMorgan executives attended two other meetings that same month. Volcker was also on the table at another Treasury session the same day, this one a larger meeting with Deputy Assistant Secretary Lance Auer that also included representatives with other groups such as Credit Suisse and Goldman Sachs.

White House Steps Up Push to Toughen Rules on Banks -  In the wake of losses at & Co., the White House is seeking to ensure a tough interpretation of a regulation designed to prevent banks from making bets with their own money, according to people familiar with the matter. White House officials have intensified their talks with the Treasury Department in the days since J.P. Morgan's losses came to light, these people say—representing the first tangible political impact from a trading mess that has cost one of the nation's most prominent banks more than $2 billion.  In this year's election, the president's advisers want to champion tougher Wall Street regulations passed in 2010, and worry the argument could be diminished if elements of the law—including the "Volcker rule" restricting speculative investments by banks—end up looking weak.

Geithner to Dimon: Resign From The Board Of the New York Fed - Simon Johnson - In an interview Thursday on PBS NewsHour, Jeffrey Brown and Treasury Secretary Tim Geithner had the following exchange: BROWN: Do you think Jamie Dimon should be off the board [of the New York Federal Reserve Board]? GEITHNER: Well, that’s a question he’ll have to make and the Fed will have to make. But again, on the basic point, which is it is very important, particularly given the damage caused by the crisis, that our system of oversight and safeguards and the enforcement authorities have not just the resources they need, but they are perceived to be above any political influence and have the independence and the ability to make sure these reforms are tough and effective so we protect the American people, again, from a crisis like this. And we’re going to, we’re going to do that.”In the diplomatic language of Treasury communications, Mr. Geithner just told Jamie Dimon to resign from the New York Fed board (here is the current board composition).  It looks bad – and it is bad – to have him on the board of this key part of the Federal Reserve System at a time when his bank is under investigation with regard to its large trading losses and the apparent failure of its risk management system.  (Update: Mr. Dimon is on the Management and Budget Committee of the NY Fed board; here is the committee’s charter, which includes reviewing and endorsing “the framework for compensation of the Bank’s senior executives (Senior Vice President and above)”.)

The Need For An Independent Investigation Into JP Morgan Chase - Simon Johnson - JPMorgan Chase is too big to fail. As the largest bank-holding company in the United States, with assets approaching $2.5 trillion as reported under standard American accounting principles, it is inconceivable that JPMorgan Chase would be allowed to collapse now or in the near future. The damage to the American economy and to the world would be too great. The company’s recent trading losses therefore call for greater public scrutiny than would be case for most private enterprise – and demand an independent investigation into exactly what happened. (Dennis Kelleher of Better Markets has already called for exactly this.) The investigation begun by the F.B.I. is unlikely to be sufficiently public.  Given the strong political connections between JP Morgan and the Obama administration, it would also be better to have an investigation led by a completely independent counsel.  Hopefully, too-big-to-fail is not forever. The Federal Deposit Insurance Corporation is working on a mechanism that could conceivably allow that agency to handle the “failure” of a bank-holding company while protecting the creditors of operating subsidiaries – limiting the potential contagion effect. But this mechanism is not yet in place, it does not currently apply to cross-border banking (remember that JPMorgan Chase’s losses are in London), and even the F.D.I.C.’s acting chairman, Martin J. Gruenberg, was careful in describing its likely efficacy in a speech last week.

The Dodd-Frank Rules Jamie Dimon Hates Would Have Saved JPMorgan $2 Billion: Somebody throw some water on the irony meter because it's burning up: JPMorgan could have been spared the embarrassment and pain of its $2 billion trading loss by the very Dodd-Frank reforms JPMorgan hates. None of those reforms are currently in place, and most of them are in danger of disappearing forever, thanks to the nightmarish flying-monkey army of lobbyists constantly dive-bombing Washington, with Jamie Dimon guiding it all from his White Tower of Awesome on Park Avenue. "The JPMorgan episode touches on all the major protections of Dodd-Frank, which at the behest of Wall Street lobbying will not go into effect for months if not years and therefore did not apply to the JPMorgan trades in question," University of Maryland law professor Michael Greenberger said in an email. A former director at the Commodity Futures Trading Commission, Greenberger frequently testifies in Congress about financial reform.

What Five Hours From Last Thursday Can Tell Us About Dodd-Frank and JP Morgan -  Let's take a quick look at a time frame lasting less than five hours from last Thursday, May 10th, 2012.
At 12:10 p.m., Martin J. Gruenberg, Acting Chairman of the FDIC, spoke at the Federal Reserve Bank of Chicago. In the long-awaited speech, he outlined the overall vision, as well as the problems and pitfalls, of the FDIC using "resolution authority" to oversee the failure and unwinding of a Too Big To Fail financial firm. These powers were granted to the FDIC in the Dodd-Frank financial reform bill in order to achieve both accountability and stability while avoiding the panic and contagion that occured in the fall of 2008.
At 2:15 p.m., House Republicans passed H.R. 5652, Paul Ryan's Sequester Replacement Reconciliation Act of 2012, by a vote of 218 to 199. This reconciliation act does many things; one is that it takes lots of money from poverty relief programs and gives it to the military, But for our purposes, one specific thing it does is revoke Title II of Dodd-Frank, which is the resolution authority powers Gruenberg was presenting. It replaces them with nothing.
At 5 p.m., the large, systemically risky firm JP Morgan had a surprise conference call where it announced, following what was disclosed on its 10-Q, that it had a giant loss of $2 billion in the last quarter. This suprised the market and sent analysts running to their phones and computers.

Regression to the Mean, JPMorgan Edition - I haven’t been writing about the JPMorgan debacle because, well, everyone else is writing about it. One theme that has stuck out for me, however, has been everyone’s reflexive surprise that this could happen at JPMorgan, supposedly the best and most competent of the big banks. The performance of anyone doing anything will exhibit regression to the mean. If you do well at something, it’s because of some combination of skill and luck. If JPMorgan came through the financial crisis well, it was some combination of skill and luck. Remember, JPMorgan didn’t have as big a portfolio of toxic assets as its competitors because it was late to the party; only in retrospect do we ascribe this good fortune to the supposed skill of Jamie Dimon. JPMorgan was never as good as people (both supporters and critics) made it out to be, so we shouldn’t be so surprised that it just lost $2 billion (and counting). The more disturbing thing isn’t that commentators fell for this statistical red herring. It’s that people inside JPMorgan seem to have fallen for it, too. This was Dimon’s response to a question about whether the Chief Investment Office was becoming more aggressive, as reported by Bloomberg: “I wouldn’t call it ‘more aggressive,’ I would call it ‘better,’” Dimon told analysts yesterday. “We added different types of people, talented people and stuff like that.” People don’t suddenly go from being good to bad overnight. What happens is they go from lucky to unlucky. They are the same people doing the same things.

At JPMorgan, the Ghost of Dinner Parties Past - That round wheel turned on JPMorgan Chase last week, which disclosed that it had suffered a $2 billion trading loss in credit derivatives. That such a hit had befallen the mightiest of banks was perhaps more stunning than the size of the loss.  So where does the karma come in? The loss, and the embarrassment it held for Jamie Dimon, the bank’s imperious chief executive, came just one month after a private dinner party in Dallas at which he assailed two respected public figures who have pushed for policies that would make banks like JPMorgan smaller and less risky.  One was Paul Volcker, the former Federal Reserve chairman, whose remedy for risky trading by too-big-to-fail banks is known as the Volcker Rule. The other was Richard W. Fisher, president of the Federal Reserve Bank of Dallas, who has also argued that large institutions should be slimmed down or limited in their risky trading practices.  During the party, Mr. Dimon took questions from the crowd, according to an attendee who spoke on condition of anonymity for fear of alienating the bank. One guest asked about the problem of too-big-to-fail banks and the arguments made by Mr. Volcker and Mr. Fisher.  Mr. Dimon responded that he had just two words to describe them: “infantile” and “nonfactual.” He went on to lambaste Mr. Fisher further, according to the attendee. Some in the room were taken aback by the comments.

Dancing With Derivatives - Jamie Dimon calls it “a doozy.” And it was. A $2 billion credit derivatives trading bungle that could mushroom to a $4 billion loss. The shining industry agitator against some of the tougher regulations on banks has suddenly become the shining example of why still tougher regulations may be needed. After the economy nearly atomized in a cloud of cupidity, Dimon became known as America’s least-hated banker. But now the blunt 56-year-old Queens native who snowed Democrats in Washington with all his talk about not lumping in “good banks” with “bad banks” has fallen off his pedestal. If Jamie the Great and his “good bank” can make such a gigantic blunder, sending déjà vu shivers down America’s back, what hope is there for lesser bankers? As Noam Scheiber writes in The New Republic, “we now have ironclad proof — as if we really needed it — that everyone is capable of disastrous stupidity.” Dimon doesn’t buy the argument that bosses of big, complex companies can never make mistakes. A smart quarterback still needs great defensive ends, as he puts it, or the guy who runs McDonald’s can’t ensure all the meat is fresh.

Chasing Chase: The Difference Between Bank Robbers and Bank Bunglers - Why is everyone getting so outraged about JPMorgan Chase losing two billion bucks? It’s a bank. Isn’t losing money what modern banking is all about—you take in deposits from normal folk and then invest those hard earned funds in completely ludicrous schemes: subprime mortgage companies, credit card loans for people who aren’t creditworthy, Greece. In the current fiasco, some clever Chase traders in London figured they would hedge the company’s asset portfolio by pouring massive amounts of bank money into a single instrument. The instrument was a credit default swap derived from the price of an index of corporate bonds. It’s a derivative in other words, a synthetic asset. No, I can’t really explain it—and neither can Chase— but as one trader friend emailed, “synthetic = fake.” The point is, whether we’re talking about a CDS or gold, taking such a large position in a single trade could hardly be called hedging. Chase  might as well have bet on the price of bananas during hurricane season. Still, I certainly can share Chase CEO Jamie Dimon’s pain about losing money. For instance, I lost $80 last week. Well, I didn’t actually lose it, I just left my walking-around money in a pair of pants I had been wearing. The next day, wearing a different pair, I realized I had no dough but was reasonably sure it was somewhere around the house. But if I were a bank, my response would be to hedge against the lost cash by selling the pair of pants I was wearing.  I’d have new cash, but no pants on. This is the way bankers think.

Hot Money Bets Backed By Taxpayers: The Extreme Moral Hazard of 'Too Big To Fail' - Credibilty Trap - The professor makes some excellent points about the real world of finance that bear some serious thought. He certainly left the Bloomberg spokesmodels yammering in search of a sound byte. He misses a key point however. It is not that Jamie Dimon does not know, or even that he cannot know, about the risky speculation in his firm. It is that the system is so designed now that in the long run he is heavily incented not to care, as long as he can maintain a plausible deniability.  There are management controls, policy, and objectives that flow down from the top in any large corporation.  Dimon had a personal hand in recrafting the CIO to do what it was doing in order to sidestep the Volcker Rule.  This was no rogue operation. As long as the profits are rolling in, the band plays on and the players keep dancing.

Jamie Dimon’s Hedge Fund  - Jamie Dimon, John Stumpf, and to a lesser extent, Vikram Pandit and Bryan Moynihan, are running massive hedge funds. They’re placing enormous, incredibly risky bets. “Hot money” investors are giving them the cash to gamble because they all understand that you and me will make good on any losses, since we’ve started guarantying the banks-turned-hedge-funds as “Too big to fail.” The money flowing to these gamblers-in-chief is growing by double digit percentages, and includes so much borrowed money the “leverage” may be six times what Lehman Brothers was doing when it flamed out. As long as this situation continues, a new financial crisis is inevitable, and the risks of it grow faster every day. There’s only one solution: cut these gamblers off from public support. The market will do the rest. We cut them off by reinstating Glass-Steagall, a depression era law that kept the bankers in check for decades, until their Clinton-era lobbying prowess repealed it. Senate Candidate Elizabeth Warren has a petition going to do just that. Please sign it. The information on the bailed out bankers’ hedge funds I just summarized comes from this incredibly important Bloomberg interview of Amar Bhide. (H/T to Yves Smith at Naked Capitalism.) Bhide is a professor at Tufts University who knows a lot about the financial services industry, as the excerpts I discuss below make clear. In a little more than four minutes, Bhide detailed how and why JPM “is a systemically important, structurally defective bank. As are all the other megabanks.”

Bill Black: On JP Morgan's "Hedge", Jamie Dimon's Integrity, and the Epic Conflicts of Interest in the Federal Reserve System - Bill Black is interviewed by Amy Goodman for Democracy Now. Video of the full interview is embedded following these notes.
The story that JP Morgan is telling us: They had about $15 billion in distressed European debt. Europe has been in trouble, so those investments were losing value. Their story, which does not make sense, is that they decided to hedge this position with a derivative of a derivative. In this case, it was an index of credit default swaps, which is the form of derivative that blew up AIG. JP Morgan's story is that instead of offsetting the risk, the hedge increased the losses dramatically. They woke up one morning, and they had a $2 billion loss. 
Why it does not make sense: If you have distressed European debt, you are supposed to have already reserved against the losses in it. So why hedge the position at all? Just sell it. Get rid of these incredibly risky assets before they can suffer any additional losses. If you already have losses, it is not necessary to recognize a loss, because you have already reserved for it. So, you should not have had to hedge, period

Is the Fed to Blame for JPMorgan’s $2 Billion Blow-Up? - The JPMorgan $2-billion-trading-loss story is nearly a week old, and the news has predictably gone through the various spin cycles of the political right and left. Initially, progressives pounced on the loss as reason to strengthen the yet-to-be-fully-implemented Dodd-Frank financial reform law. Conservatives then pushed back on that conclusion arguing that the loss was not a disaster for shareholders given the size and profitability of the bank overall, and that therefore policy makers shouldn’t overreact with more stringent regulation. However, there is another, smaller chorus of voices that is blaming neither government inaction nor banker recklessness, but the policies of the Federal Reserve. These critics are arguing that excessive intervention by the central bank has distorted financial markets and forced big banks resort to risky moves in order to maintain profits.

12 Year Old Explains How Banks Commit Fraud - 12 year old Victoria Grant spells out the fraud the banks are committing against the people and explains why her homeland, Canada, and most of the world, is in debt.

JPMorgan made some $5bn on Friday using accounting magic called DVA - With all the talk about JPMorgan's losses out of the CIO's office, nobody is discussing the money the firm made on Friday due to the accounting magic called DVA. After all, CIO's positions were (at least in principle) meant to act as an offset to this earnings volatility. As an example the chart below shows the price action for JPM's newly minted bond (issued just last month). It's a 4% coupon bond maturing in 20 years.  With roughly $12bn of this bond outstanding, JPMorgan will record a gain of some $350MM based on Friday's price move just for this bond. It's important to note that this bond represents only a fraction of the $2.3 trillion balance sheet funding. Since the firm's long-term debt is some 12% of total liabilities, one can do a quick back of the envelope estimate. A two point drop (which is lower than the bonds above moved on Friday) in JPMorgan's long term bonds results in roughly $5bn in DVA gains. This more than offsets the reported losses on the CIO's portfolio. Welcome to accounting magic.

“What Scares Me Isn’t $2 Billion Loss JP Morgan Made, What Scares Me is the Record $19 Billion in Profits” - video - Yves Smith - Even with all the focus on JP Morgan’s loss bomb in the past few days, some critical elements of the story have not gotten the scrutiny they deserve. By way of background, Amar Bhide, who is currently a professor at Tufts, has run a prop trading operation (admittedly some time ago) and has written extensively both on the financial services industry and entrepreneurship. Bhide takes issue with Dimon’s description of the funds that the Chief Investment Office (part of the bank’s treasury function) as “deposits” but rather as market funds. He also contends that no one can be running a major risk-taking trading operation along with a huge, sprawling international bank. A major trading operation requires that senior management be on top of position risks, and the organizational and operational demands of running a super big bank make that impossible. Finally, he argues that the risks JPM and other banks are taking are much greater than is commonly recognized, and JP Morgan’s profit level in the face of unfavorable conditions for financial firm is proof of unduly high risk levels.

JPMorgan executives set to leave, sources say (Reuters) - Three top executives involved with a failed hedging strategy that cost JPMorgan Chase & Co at least $2 billion and tarnished its reputation are expected to leave the bank this week, sources close to the matter said on Sunday. The bank - the biggest in the United States by assets - is expected to accept the resignation of Ina Drew, its New York-based chief investment officer and one of its highest-paid executives, in the next few days, the sources said. Two of Drew's subordinates who were involved with the trades, London-based Achilles Macris and Javier Martin-Artajo, are expected to be asked to leave, they said. The departures come after the unit Drew runs, known as the Chief Investment Office, mismanaged a large portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives. The portfolio included layers of instruments used in hedging that became too complicated to work and too big to unwind quickly in the esoteric, thinly traded market.

JPMorgan Chase Executive to Resign in Trading Debacle -Stung by a huge trading loss, JPMorgan Chase will replace three top traders starting Monday, including one of the top women on Wall Street, in an effort to stem the ire that the bank faces from regulators and investors.  They are the first departures of leading officials since Jamie Dimon, the chief executive, disclosed the bank’s stunning $2 billion loss on Thursday.  The huge scope of the complex credit bet caught senior bank officials off-guard when it began to sour last month and has set off renewed regulatory scrutiny of the industry. Mr. Dimon has largely sidestepped blame for the loss, although he has offered numerous apologies for the blunder, the biggest of his eight-year tenure at JPMorgan, the nation’s largest bank.  Ina Drew, a 55-year-old banker who has worked at the company for three decades and is the chief investment officer, has offered to resign and will step aside Monday, said several bank executives who would not speak publicly because the resignations had not been completed.  Her exit would be a precipitous fall for a trusted lieutenant of Mr. Dimon. Last year, Ms. Drew earned roughly $14 million, making her the bank’s fourth-highest-paid officer. From her desk in Manhattan, she oversaw the London office that assembled the trade, a growing unit that oversees a portfolio of nearly $400 billion. Two traders who worked for Ms. Drew are also likely to leave shortly. Ms. Drew was not available for comment

Was JP Morgan Chase's CIO Ina Drew Pushed Off the Glass Cliff? - You’ve probably heard about JP Morgan’s gigantic $2 billion loss on risky trades by now. The story continues to evolve as executives are starting to step down in the aftermath. Who was the first to go? Was it the London Whale, so called because he made the massive, market-skewing bets that got JP Morgan into this mess? Was it Jamie Dimon, the CEO who may have ignored the warning signs? Nope. The first head to roll was female. Ina R. Drew, JP Morgan’s Chief Investment Officer who was in charge of the division in which the catastrophic trades were made, was the first resignation. She stepped down yesterday. This means that “one of the top women on Wall Street,” as the New York Times called her, will now disappear. She’s been replaced by two men. She was also one of the top paid officials at JP Morgan, pulling in about $14 million, in a world where women hold 7.5 percent of the top paying executive jobs. Also going with her is her apparent advocacy for getting more women into the “testosterone-laden” world of investment banking and trading specifically.

An Ex-LTCM Trader Will Be Overseeing $70 Trillion In Derivatives - We wish to welcome former LTCM trader, and current TBAC chairman, Matt Zames to his new post as head of the world's biggest, government backstopped prop trading desk, with a hearty and sincere "good luck." Because an ex-LTCMer in charge of ~$70 trillion in derivatives? Why, what can possibly go wrong...

JPMorgan Said to Weigh Bonus Clawbacks After Loss - JPMorgan Chase & Co. (JPM), the biggest U.S. bank, will consider reclaiming incentive pay from employees including former Chief Investment Officer Ina Drew after her unit had a $2 billion trading loss, said two senior executives. The lender can cancel stock awards or demand they be repaid if an employee “engages in conduct that causes material financial or reputational harm,” JPMorgan said in its annual proxy statement. The company will claw back pay if it’s appropriate, said one of the executives, who asked not to be identified because no decisions have been made. The incident, which led to Drew’s retirement yesterday, may test JPMorgan’s clawback policy amid mounting investor criticism over Wall Street pay practices and as regulators investigate the trades. Chief Executive Officer Jamie Dimon said the strategy that led to the loss was “poorly executed and poorly monitored” and that it gave ammunition to proponents of stricter bank regulation. “The political environment is very sensitive right now and this couldn’t have come at a worse time,”

‘London Whale’ Said to Be Leaving JPMorgan - The $2 billion trading loss at JPMorgan Chase has claimed another victim. Bruno Iksil, the so-called London Whale at the center of the trading debacle, is expected to leave the bank, according to current and former colleagues. The timing of the departure is unclear. Mr. Iksil gained notoriety last month after reports that he built up outsize positions that distorted prices in an obscure corner of the credit markets. The holdings proved disastrous for the bank. Last week, JPMorgan disclosed $2 billion in trading losses, and indicated that the final cost could be much higher. Jamie Dimon, the bank’s chief executive, called the wounds “self-inflicted.” His expected departure follows the resignation Monday of Ina Drew, the 55-year-old banker who oversaw the chief investment office, where Mr. Iksil worked. Achilles Macris, a top JPMorgan official in London and a senior London trader, Javier Martin-Artajo, are also expected to leave. Although a spokeswoman for the bank said Mr. Iksil is still employed, he is no longer trading on behalf on the bank and is expected to be gone by the end of the year, according to people with knowledge of the situation.

JPMorgan's Trading Loss Is Said to Rise at Least 50% - The trading losses suffered by JPMorgan Chase have surged in recent days, surpassing the bank’s initial $2 billion estimate by at least $1 billion, according to people with knowledge of the losses. When Jamie Dimon, JPMorgan’s chief executive, announced the losses last Thursday, he indicated they could double within the next few quarters. But that process has been compressed into four trading days as hedge funds and other investors take advantage of JPMorgan’s distress, fueling faster deterioration in the underlying credit market positions held by the bank. A spokeswoman for the bank declined to comment, although Mr. Dimon has said the total paper trading losses will be volatile depending on day-to-day market fluctuations.

JPMorgan’s ‘London Whale’ Loss Rises to $3 Billion as Lawsuits Fly - Days after disclosing a massive derivatives trading loss, JPMorgan Chase was hit with three shareholder lawsuits accusing company executives — and its CEO Jamie Dimon — of misleading investors about the extent of the blunder. The flurry of legal paper came as news emerged that the losses at the nation’s largest bank have grown by 50% to $3 billion — just days after the debacle was disclosed. Now that JPMorgan’s bad position is known, hedge funds have been betting against it, driving up the bank’s losses and raising questions about how it intends to extricate itself. The three lawsuits are the first of what could be a flurry of legal actions against the bank over the botched trade, which has wiped out nearly $20 billion in JPMorgan shareholder equity and renewed calls for more aggressive regulation of Wall Street. One of the complaints, filed in New York federal court on behalf of investment firm Saratoga Advantage Trust, a JPMorgan shareholder, alleges that bank executives misled investors into thinking that its traders were pursuing deals designed to reduce risk, when in fact they were geared to producing profits.

Romney: JPMorgan’s $3 billion loss is ‘the way America works’ - Presumptive Republican presidential candidate Mitt Romney on Wednesday defended a shocking $3 billion loss on derivatives by JPMorgan Chase & Co. by saying it was just “the way America works.” “I would not rush to pass new legislation or new regulation,” Romney said during a Wednesday interview with Hot Air blogger Ed Morrissey. “This is, in the normal course of business, a large loss but certainly not one which is crippling or threatening to the institution.” “This was not a loss to the taxpayers of America; this was a loss to shareholders and owners of JPMorgan and that’s the way America works,” the former Bain Capital executive explained. “The $2 billion JPMorgan lost, someone else gained.”

Win Some, Lose Some - Krugman - Is it possible that I have misjudged Mitt Romney? My take has always been that he’s a smart guy who also happens to be both ambitious and completely amoral; he decided that his career can best be advanced by pandering to the crazies of the right, and will say anything to that end. More and more, however, he has been coming out with statements suggesting that he is, in fact, a dangerous fool. The latest: JPMorgan’s loss was no biggie: This was a loss to shareholders and owners of JPMorgan and that’s the way America works Some people experienced a loss in this case because of a bad decision. By the way, there was someone who made a gain. The $2 billion JPMorgan lost someone else gained. Hey, when Lehman Brothers lost a lot of money, that was money someone else gained. No problem, right? Can Romney really not understand that key financial institutions are different from any old business — that when they fail they can wreak havoc? And can he really not understand that for that reason taxpayers are ultimately on the hook for large losses — and that JPMorgan in particular has government-guaranteed deposits?

More Evidence of Lax Oversight of JP Morgan Chief Investment Office - Yves Smith - As reporters keep digging into the “London Whale” story, the picture that emerges about the caliber of risk controls and management supervision at JP Morgan only look worse and worse.  The latest revelations comes via the Wall Street Journal. First, that there was no treasurer during the period when the CIO entered into the loss-making trades. The idea that a bank of any size, let alone one as big as JP Morgan, would go for months (five in this case) without a treasurer in place is stunning. JP Morgan contends this is not germane, since (allegedly) the CIO did not report to the treasurer. Then pray tell, why was it housed in the treasury at all? And the bank’s efforts to make this all sound normal are undermined by this part of the story: Joseph Bonocore, who left the treasurer’s post last October before the trading losses ballooned, reviewed weekly the positions being taken by the office and had raised general concerns about risks being taken by the London office that placed many of the questionable trades, according to a person familiar with the situation. Mr. Bonocore knew the investment unit well; he previously was its chief financial officer for roughly 11 years. So the former treasurer was looking over the positions, even if he was not part of the reporting line (or was he?).  But worse, the risk manager tasked to the oversight of the unit appears underqualified for the job, and that might not be unrelated to the fact that he is the brother-in-law of a JP Morgan executive.

What Did JPMorgan Execs Know and When Did They Know It? - The Securities and Exchange Commission and the Federal Bureau of Investigation are looking into JPMorgan Chase’s trading debacle — and if you think anything is going to come of that, well, I’m pretty sure that JPMorgan has some derivatives it would love to sell you. A serious investigation is still necessary. The first lesson of the financial crisis is not that the capital markets were poorly regulated or that the banks were too leveraged or that the government needed better processes for taking over failing institutions.The first lesson is that when they are in trouble, banks will mislead the world about their financials. And some will lie. Richard S. Fuld Jr. of Lehman Brothers, E. Stanley O’Neal and Charles O. Prince of Citigroup all played down their banks’ exposures before their institutions took vast losses. Were they deliberately misleading? Because of the failures to investigate the financial crisis adequately, we still don’t know. But we do know that when banks hide their problems, they metastasize and can hurt the economy. So before we move on to other vital discussions — about tightening the Volcker Rule, preventing the rollback of Dodd-Frank’s derivatives provisions, whether these banks are Too Big to Manage and more — we need to go back to the basics: What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it? Were JPMorgan’s first-quarter earnings accurate? Were top JPMorgan officials misleading when they discussed the chief investment office’s investments?

Inside J.P. Morgan’s Blunder - J.P. Morgan Chase & Co. Chairman and Chief Executive Officer James Dimon had just committed the most expensive blunder of his 30-year career, failing to detect the risk of trades that had begun to generate huge losses at the bank. On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses. But there were no details about the trades themselves. "I want to see the positions!" he barked, throwing down the papers, according to attendees. "Now! I want to see everything!" When Mr. Dimon saw the numbers, these people say, he couldn't breathe.  Those trading positions have produced losses that could total as much as $5 billion, tarnishing the record of an executive who had thrived through the global financial crisis and who has long been known for paying close attention to the bank's trading activity, its risk profile and the activities of its senior employees. J.P. Morgan, the nation's largest financial firm by assets, is struggling to contain the damage, which already has shaved off more than $25 billion in shareholder value.  This behind-the-scenes account of the disaster—based on interviews with numerous J.P. Morgan executives and with officials on Wall Street and in Washington—provides new details about the drama inside the bank as executives sought to understand the scope of the losses and decide what to do about them.

How JPM's "Hedge" Blew Up In One Easy Chart - It seems every critical-to-stay-relevant talking head and blogger is trying to make sense of, and gain as much airtime discussing, how JPMorgan's CIO unit could have been so 'stupid'. The answer is - they weren't. As we described first here and here - and has now been accepted by the mainstream media as fact (of course we are flattered by the mimicry) - the reason that the hedge got out of control was the massive amount of delta-hedging that Iksil had to do to manage the position as the Fed and ECB crushed the systemic risk out of the system and blew up the correlation assumptions in his models. This is complex to explain but, by way of example, we show a chart of the implied delta of a proxy for the JPM hedge. The lower the delta, the more and more index protection that needs to be sold to maintain a stable hedge - and as is clear, not only did the delta collapse (almost halving in 4 months) but it reached pre-crisis levels which would have been generally unthinkable in the risk scenarios - given the backdrop of reality. Whether Iksil arrogantly enjoyed ignored the cornering of the IG9 index market and the momentum and P&L he was relishing in is a different matter but to comprehend the forced selling protection pressure he was under, this chart is all you need to understand...

[JPM Whale-Watching Tour] The high yield tranche piece - Coverage of the $2bn $3bn loss emanating from JPMorgan’s Chief Investment Office on its synthetic credit portfolio continues a pace, and FT Alphaville’s tour continues too. The desire to understand what the trade was and the rationale behind it continues to bug us and many others. Interestingly, some of the discussion of late has come full circle. Bloomberg kicked off the London Whale saga on April 6th, and their follow-up on April 9th contained a detail that has now come back into the narrative. This time, though, it’s more than a mere sidenote — more on this in a minute. While these more recent explanations are satisfying, we’re still scratching our heads a bit. The challenge remains: to find trades that have managed to deteriorate with the speed that CEO Jamie Dimon has claimed they have — small in the first quarter, $2bn “all in the second quarter”, and “it kind of grew as the quarter went on”. Now, credit tranches, which are leveraged positions on credit indices that themselves already involve a lot of leverage, could do this if the model used to determine hedge ratios wasn’t up to the task or if the trades were just outright foolish. There’s also this, as Tracy Alloway and Sam Jones in wrote in Thursday’s FT: Even now, the magnitude of JPMorgan’s loss remains something of a mystery to hedge funds. There are rumours that Mr Iksil’s positions may be masking other losses elsewhere within the CIO.

[JPM Whale-Watching Tour] Tracking trades down - The last twenty-four hours have brought us some incredibly interesting insights into the JPMorgan chief investment office’s $2bn loss story. In some impressive feats of investigative journalism, the FT revealed that the CIO has been a huge player in certain structured asset markets. Some surmise that the trading activity from the unit has been so big that if it ceased participation in those markets, it could damage what liquidity there is in them. There was also a story, this one written by the WSJ, about how CEO Jamie Dimon reacted when the stories about the “London Whale” first surfaced (pun intended). The article described how the positions were then investigated (internally) and the decision taken to delay a regulatory filing until the exact positions were better understood. For FT Alphaville’s part, we’ve been keeping up the data monkey end of things, which is what we would like to continue to do now.

So How Are JPM's Prop "Counterparties" Faring? - We already know that JPM has lost billions on its prop trade, and as suggested earlier (and as the FT picked up subsequently), JPM's prop desk (not to mention its actual standalone hedge fund, $29 billion Highbridge, which nobody has oddly enough discussed in the mainstream press yet) is so large that unwinding the full trade, as well as all other positions held by the CIO, would be unwieldy, allowing us to mock "the fun of negative convexity - especially when you ARE the market and there is no-one to unwind the actual tranches to." The FT then phrased it as follows: "I can’t see how they could unwind these positions because no one can replace them in terms of size. It’s a bit of the same problem they face with the derivatives trade," said a credit trader at a rival bank. "They pretty much are the market." Which actually is funny, because if the media were to actually read a paper or two on how the market works, and puts two and two together, it just may figure out that the biggest beneficial counterparty for JPM is none other than the Fed, using the conduits of the Tri-Party repo system. But that is for Long-Term Capital MorganTM and its new CIO head Matt "LTCM" Zames to worry about.

JPMorgan May Lose $5 Billion on Derivatives, WSJ Reports - JPMorgan Chase & Co. (JPM) (JPM)’s loss from derivatives trading may widen to $5 billion, the Wall Street Journal reported. Chief Executive Officer Jamie Dimon personally approved the strategy that led to the trades, without monitoring how they were executed, the newspaper said, citing people familiar with the matter that it didn’t identify. His failure to closely regulate that activity caused resentment among executives whose departments face tighter oversight, according to the Journal. JPMorgan last week announced a $2 billion trading loss on synthetic credit products, or derivatives tied to credit performance. Dimon said the transactions, intended to manage risk, were “egregious” failures by the bank’s chief investment office. JPMorgan has said the amount could increase by $1 billion or more as it winds down the positions. Joseph Evangelisti, a spokesman for New York-based JPMorgan, declined to comment on the $5 billion estimate.

JPMorgan Unit Has $100 Billion of Risky Bonds - The unit at the centre of JPMorgan Chase’s $2 billion trading loss has built up positions totalling more than $100 billion in asset-backed securities and structured products – the complex, risky bonds at the centre of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses and have mired the bank in regulatory investigations and criticism. The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralized loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times. The bank has said its derivative activities were intended primarily to help balance risks on its overall balance sheet, but the revelation that it has built up other large, risky positions is likely to raise further questions about the CIO’s remit.

No Systemic Issues Here - Krugman - No way, no how: The unit at the centre of JPMorgan Chase’s $2bn trading loss has built up positions totalling more than $100bn in asset-backed securities and structured products – the complex, risky bonds at the centre of the financial crisis in 2008. These holdings are in addition to those in credit derivatives which led to the losses and have mired the bank in regulatory investigations and criticism. The unit, the chief investment office (CIO), has been the biggest buyer of European mortgage-backed bonds and other complex debt securities such as collateralised loan obligations in all markets for three years, more than a dozen senior traders and credit experts have told the Financial Times. Among other things, it appears to have taken more than half of the residential mortgage-backed securities issued in Britain over the past three years. But of course, the fact that these risks are being taken by a too-big-to-fail institution, whose failure would cause a global crisis, which would therefore inevitably be bailed out if it got in big trouble, and which benefits from taxpayer-backed deposit insurance, is no cause for concern. None at all.

Investigating JPMorgan Chase - Simon Johnson - JPMorgan Chase is too big to fail. As the largest bank holding company in the United States, with assets approaching $2.5 trillion as reported under standard American accounting principles, it is inconceivable that JPMorgan Chase would be allowed to collapse now or in the near future. The damage to the American economy and to the world would be too great. The company’s recent trading losses therefore call for greater public scrutiny than would be the case for most private enterprise – and demand an independent investigation into exactly what happened. (Dennis Kelleher of Better Markets has already called for exactly this.) The investigation begun by the F.B.I. is unlikely to be sufficiently public. Given the strong political connections between JPMorgan Chase and the Obama administration, it would also be better to have an investigation led by a completely independent counsel. Hopefully, too-big-to-fail is not forever. The Federal Deposit Insurance Corporation is working on a mechanism that could conceivably allow that agency to handle the “failure” of a bank holding company while protecting the creditors of operating subsidiaries – limiting the potential contagion effect. But this mechanism is not yet in place. It does not now apply to cross-border banking (remember that JPMorgan Chase’s losses are in London), and even the F.D.I.C.’s acting chairman, Martin J. Gruenberg, was careful in describing its likely efficacy in a speech last week.

Why the Cops Should be Knocking on Jamie Dimon’s Door Soon - The scandal surrounding JP Morgan’s losses in its Chief Investment Office is not going away, and for good reason. Its trading book continues to lose money at an astounding rate. The most recent report estimates that the losses have increased by at least 50% more than the bank’s original loss estimates. The total damage is anyone’s guess at this point. This fiasco is beginning to look a lot like accounting control fraud. The Justice Department and the FBI have begun criminal probes. The SEC is also investigating. So far, the objectives of these investigations are under wraps, but if I were an SEC or DOJ enforcement official I’d be laser-focused on bringing a Sarbanes-Oxley case against Jamie Dimon. Sarbanes-Oxley emerged out of the Enron frauds. This law requires the CEO to certify that internal controls are operating effectively to give comfort to readers of the financial statements that the disclosures contained in the reporting are reliable. There are civil penalties for filing a false certification and criminal penalties, including jail time, for false filings found to be fraudulent. So far none of the obvious candidates like Dick Fuld at Lehman or Jon Corzine at MF Global have been prosecuted under the law. Jamie Dimon looks like a very attractive candidate to investigate for SOX violations.

Let’s put Jamie Dimon on trial - Let’s put JPMorgan Chase chairman, president and CEO James “Jamie” Dimon on trial. Mr. Dimon has a reputation for being the sagest guy on Wall Street and an expert at managing risk. JPMorgan emerged from the financial crisis not just unscathed but secure enough to step in and rescue Bear Stearns when the government asked it to. (He gets very mad when you say that his bank got bailed out by the government, and he insists that the government made him take all that free money.) Then his bank somehow accidentally lost billions of dollars last week, whoops! And he is really embarrassed, but not embarrassed enough to fire himself. So, let’s put him on trial and force him to explain what good he and his bank are. The SEC is investigating the massive loss, but that will take a lot of time and the eventual report will probably be very difficult for novices to understand and probably they won’t put anyone in jail. Dimon might have to be hauled before Congress to answer questions, but no one watches congressional hearings, and no one likes members of Congress. I think a big televised prime-time tribunal would be best. And then maybe some JPMorgan shareholders, unemployed people, journalists and angry bloggers can just ask him some really simple questions about why he thinks JPMorgan shouldn’t be regulated at all.While I am definitely endorsing a humiliating show trial, we don’t have to send Jamie Dimon to jail afterward, even if a jury of people who had their houses foreclosed on them find him guilty. The point of this is to mainly have him on the record, compelled to answer questions plainly and clearly, to an unfriendly audience of non-Davos people.

LTCM. Amaranth. JP Morgan? - Will Jamie Dimon go down in history as the John Meriwether of this generation? Or perhaps the Nick Maounis of our time? Either metaphor can’t make the current CEO of JP Morgan feel very good about his legacy. And if I understand the trade properly, the end of the story is nowhere near being written.  Banks hedge risks. This is what they are supposed to do. And when they don’t, the results have been disastrous (see: the failure of the S&Ls when their long-dated mortgage books were suddenly funded with short term, de-regulated deposits in the sharply rising rate environment of the 1970s). The best way to hedge is always through the cash markets, e.g., I loan out money for a period of time and assume credit risk, interest rate risk, liquidity risk and timing risk, but match fund the loan and mitigate three of the four risks (with only credit risk remaining, the precise thing that banks should get paid to do). The problem is, with the scale of banks and the increasing range and complexity of both business and retail products, match funding is a thing of the past. This risk gap is generally managed using derivatives. There is nothing inherently wrong with this. However, problems arise when hedging strategies become excessively complex in their attempt to be as close to costless as possible and overly precise.  While a hedge might effectively hedge “delta” but not “gamma,” the best way to address this is to simply take on less gamma, not try to construct a sickeningly complex and illiquid hedge that models out beautifully but is essentially a custom suit on a person whose weight fluctuates wildly. Sometimes the suit fits, sometimes it looks like crap. And in JP Morgan’s case, they are sporting one of the ugliest suits we’ve seen in quite some time.

How JPMorgan Is Like Enron - Last week when JPMorgan Chase & Co. warned investors about a $2 billion trading loss at its chief investment office, it also disclosed it had been using a faulty model to determine the unit's so-called value at risk. For me at least, the story conjured up memories of a similar tale at Enron Corp. more than a decade ago, the details of which I'll get to in a moment. Initially, in its first-quarter earnings press release on April 13, JPMorgan said the average value-at-risk figure for its chief investment office was $67 million during the three months ended March 31. JPMorgan revised that to $129 million when it filed its quarterly report with regulators last week. The figure is an estimate of the maximum "potential loss from adverse market moves in an ordinary market environment" for a single trading day "using a 95 percent confidence level," as the company describes it. JPMorgan Chief Executive Officer Jamie Dimon explained that the company had implemented a new value-at-risk model last quarter that it later realized was "inadequate." It then switched back to an older version that it had been using for several years, which showed the bigger number.

Failing Up With Citigroup’s Dick Parsons - Last month, shareholders finally rebelled against Citigroup, the worst of the Too Big To Fail bailout disasters, by filing a lawsuit against outgoing chairman Dick Parsons and handful of executives for stuffing their pockets while running the bank into the ground. Anyone familiar with Dick Parsons’ past could have told you his term as Citigroup’s chairman would end like this: Shareholder lawsuits, executive pay scandals, and corporate failure on a colossal scale. It’s the Dick Parsons Management Style. In each of the three companies Parsons was appointed to lead, they all failed spectacularly, and somehow Parsons and a handful of top executives always walked away from the yellow-tape crime scenes unscathed. This past April, for his final act as Citigroup’s chairman, Dick Parsons made sure that Citi’s top executives were handsomely rewarded for their failures. He arranged a pay package for CEO Vikram Pandit amounting to $53 million despite the fact that Citi’s stock plummeted 44% last year, and has woefully underperformed other bank stocks even by their low standards. Citigroup, as you might recall, got the largest bailout of any banking institution, larger than BofA’s– $50 billion in direct funds, and over $300 billion more in “stopgap” federal guarantees on the worthless garbage in Citi’s “assets” portfolio. Those are just the most obvious bailouts Citi received—this doesn’t take into account the flood of free cash, the murky mortgage-backed securities buyback programs, the accounting rules changes that allowed banks like Citi to decide how much their assets “should be worth” as opposed to what they’re really worth on their beloved free-market, and so on…

Mirabile Dictu! The SEC Finally Investigates Magnetar -- Yves Smith  - More than four years after Serena Ng and Carrick Mollencamp of the Wall Street Journal first took notice of the highly destructive ways of the Chicago hedge fund Magnetar, which created a series of toxic CDOs, the SEC finally appears to be taking a serious look at some of their deals. More accurately, it seems to be dusting off and perhaps expanding a probe that it started last June (hhm, wonder if this flurry of activity has anything to do with polls showing how independents in swing states are giving Obama thumbs down for his complacency on Big Finance?) The SEC is also reportedly looking at the deceptive role played by collateral managers, something we discussed in ECONNED and that Tom Adams has written about extensively on this blog.  The short version of the story is that Magnetar constructed the perfect trade. It would fund the equity tranche of CDOs, usually 4-5% of their total value. Deal sponsors like Magnetar got significant influence over the deal, at a minimum veto rights over the assets chosen to go into the CDO. Magnetar took a much bigger short bet on these same CDOs (either by buying the CDS that were the majority of the assets in these deals) or by buying CDS on the CDO itself. The equity paid a very high interest rate (15% to 20%) until the deal started to fail. The interest on the equity funded the CDS premiums on the short bet. But these deals paid big money only if they failed, which they did with impressive speed. (For more background, see this post). Key points from the Wall Street Journal article: U.S. securities regulators are investigating hedge-fund firm Magnetar Capital LLC, which bet on several mortgage-bond deals that wound up imploding during the financial crisis, according to people familiar with the matter…. If the SEC were to file civil charges, it would be its first enforcement action against hedge funds related to CDOs.

Ally Financial's mortgage unit nears bankruptcy: sources | Reuters: (Reuters) - Ally Financial Inc's Residential Capital unit is nearing a bankruptcy filing, sources familiar with the situation said on Sunday, in a move that could help the taxpayer-owned auto lender to shed its troubled mortgage business but also spur drawn-out legal fights. The board of ResCap is scheduled to meet later on Sunday and a pre-arranged bankruptcy filing, where Ally has the support of some creditors to its plan but not all, is expected to follow soon after, the sources said. Under the plan, Fortress Investment Group (FIG.N) is expected to make an opening bid of more than $2 billion, including debt, to buy certain ResCap assets, while Ally would buy the rest, in a bid to turn all ResCap assets into cash, a source said.Ally, the former lending arm of General Motors Corp (GM.N), has been besieged in the past few years by losses in its Residential Capital mortgage unit, which was once a major subprime lender and profit engine. A bankruptcy of ResCap would clear the path for Ally, formerly known as GMAC, to focus on its main auto lending business and to put together a plan to pay back U.S. taxpayers. The U.S. Treasury injected $17 billion into the lender during the financial crisis and now owns nearly 74 percent of the company. Ally owes the government about $12 billion, counting dividend payments by the lender and sale of some securities by the Treasury.

So Much for Schneiderman Being Tough on Wall Street  - As regular readers no doubt recall, Eric Schneiderman abandoned the dissident state attorney general effort to get a better mortgage settlement, assuring the Administration a win on this sellout to the banks. The bright shiny prize Schneiderman got in return for his betrayal was serving as one of five co-chairmen on a Federal mortgage task force, which appears to have gotten close to nada in resources beyond the staff in various Federal agencies who were already working on mortgage investigations. And given that were are now close to a full five years past the origination of toxic subprime deals, those existing investigations don’t exactly look to have been pursued with much in the way of vigor. We’ve criticized the Schneiderman sell out, yet the PR push to position him as the True Hero of What Passes for the left continues apace, including some ham-handed efforts like the American Prospect’s “The Man the Banks Fear Most“.  Schneiderman today proved the skeptics to be correct (hat tip reader Peter). From a writeup in the New York Law Journal of a presentation Schneiderman made on white collar crime. It seems Schneiderman is in favor of it:Noting his role as co-chair of President Barack Obama’s mortgage-fraud task force, he said that he was “very pro-Wall Street” and had represented some financial services firms in private practice.He said that the majority of people working in the financial industry are honest, but added that the “ability to tell people that and not have people scoff has been damaged” by ongoing scandals.

Romney: Bank of America protestors too young to understand how banks work  - On Friday, Mitt Romney once again displayed his utter contempt for young voters. Reacting to the massive demonstration against Bank of America in Charlotte last week, Romney told WBTV that the protestors were simply too young to understand the economy or how banks work: Asked what message he had for the protestors, Romney said, “Unfortunately, a lot of young folks haven’t had the opportunity to really understand how the economy works, and what it takes to put people to work in real jobs, and why we have banks, and what banks do. I understand — it’s a very understandable sentiment if you don’t find a job, and you can’t see rising incomes. You’re going to be angry and looking at someone to blame.

Unofficial Problem Bank list declines to 924 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for May 11, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808: Only one change to report this week to the Unofficial Problem Bank List.A reader pointed out an action termination against First Missouri National Bank back in August 2011 that was not captured. First Missouri National Bank underwent a name change to First Missouri Bank and charter flip to state member in December 2011. While the name change and charter flip were properly identified, the action termination prior to the charter conversion was not as the OCC did not include the termination within a press release nor can it be found via the OCC's enforcement action search tool. With the removal, the Unofficial Problem Bank list stands at 924 institutions with assets of $361.1 billion. A year ago, the list held 983 institutions with assets of $425.4 billion. We thought there was an outside chance for the OCC to release its actions through mid-April, but they will keep us waiting until next week. Also, we will be on watch for the FDIC to release the Official Problem Bank List as of March 31, 2012.

Restoring Trust in Mortgage-Backed Securities - The mortgage finance market has leaned heavily on government support over the past few years. More than 90 percent of mortgages originated in 2011 were securitized by government entities using taxpayer funds to guarantee investors against default risk. And over $5.8 trillion in home mortgage debt in the United States is now either owned or guaranteed by a federal entity – be it the Federal Housing Administration (FHA), Ginnie Mae, the Veterans Housing Administration, or one of the two government-sponsored enterprises (GSEs) under "conservatorship" since 2008. This support cannot continue forever. The mother lode of guaranteed mortgage debt constitutes a significant taxpayer liability. In order to avoid another crisis, the government must exit mortgage finance and private capital must shoulder mortgage default risk. However, there are at least four roadblocks preventing this transfer from happening. In a newly released Reason Foundation study, we argue that there are:

  1. High conforming loan limits which perpetuate market share dominance of Fannie Mae and Freddie Mac, and the growing market share of Ginnie Mae and FHA;
  2. Risk retention requirements in the Dodd-Frank Act;
  3. The complex legal framework governing residential mortgage-backed securities (RMBS); and
  4. A profound lack of confidence in the models used by credit rating agencies to assess RMBS and in the rating agencies themselves

Brown Proposes Clever Raid of Foreclosure Fraud Settlement Funds - This was inevitable. California is $7 billion more in the budget hole than they expected at the end of last year, and they need money from any source. The federal government delivered $410 million to California in the foreclosure fraud settlement. That money is supposed to go to homeowners, but many states have raided the funds for their own budgets. So this was an inviting target for Jerry Brown. The Sacramento Bee makes it sound like Brown is prepared to steal the money: The Democratic governor relies on a patchwork of solutions to bridge the gap in a $91.4 billion general fund spending plan, including deeper cuts, his November tax initiative and taking money from a multi-state mortgage abuse settlement with banks. This is a common but fiendishly clever California budget trick. In this case, the state has been funding a series of homeowner assistance and counseling programs. The funds from the foreclosure fraud settlement were supposed to augment those programs. Instead, Brown will zero out those program budgets, so that they will be entirely funded by the settlement dollars. This “saves” $292 million from the General Fund, but it’s really no different than stealing $292 million from the settlement to fill the budget hole. The settlement was not intended as a pretext for zeroing out all assistance and counseling programs. Those programs in California, and most states, were inadequate to meet demand. The settlement money would have partly fixed that; now that money will have to shoulder the entire burden of assistance and counseling on its own.

Needy States Use Housing Aid Cash to Plug Budgets - Hundreds of millions of dollars meant to provide a little relief to the nation’s struggling homeowners is being diverted to plug state budget gaps. In a budget proposed this week, California joined more than a dozen states that want to help close gaping shortfalls using money paid by the nation’s biggest banks and earmarked for foreclosure prevention, investigations of financial fraud and blunting the ill effects of the housing crisis. California was awarded more than $400 million from the banks, and Gov. Jerry Brown has proposed using the bulk of that sum to pay the state’s debts. The money was part of a national settlement valued at $25 billion and negotiated with five big banks over abuses in their mortgage and foreclosure processes. The settlement, reached in February after a year of talks and intervention by the Obama administration, was the second-largest in history involving the states, trailing the tobacco industry settlement, and represented the first large-scale commitment by banks to provide direct aid to borrowers. As part of the settlement, the banks agreed to pay the states $2.5 billion, money intended to help homeowners and mitigate the effects of the foreclosure surge. But critics complained that this was the only cash the banks were required to pay — the rest comes in the form of “credits” for reducing mortgage debt and other activities. Even that relatively small amount has proved too great a temptation for lawmakers.

Bank of America, Rushing to Foreclose So It Can Abandon And Let Homes Rot Away... Bank of America, along with all the other banks are pushing our courts to throw America taxpayers out into the street…why? Part of the reason is they want to collect the easy money they get from the federal government….(that’s you and me the taxpayer by the way) another part of the reason is they want to sit on the homes and leave them dilapidating into states of disrepair. An elderly couple, who worked their entire lives and who operated a small machine shop, were chased out of this perfectly fine home about three years ago. The home has sat vacant and abandoned, with no power on for years. The attorneys handling the foreclosure had no authorization to entertain any purchase price…not any price…and when the home finally went up for foreclosure auction six months ago, Bank of America would only accept the full judgment price….nearly $200,000. Cash buyers were prepared to pay the fair market value for the home, but the bank would not accept any price….instead they let it conclude with a foreclosure sale. I keep watching it, wondering when a realtor might put a sign in the yard, wondering when some family might move in, but six months later and there’s not even a sign. And so the home just sits, untold tens of thousands more, vacant and abandoned, rotting away more and more each day.

KC Man Sues Bank Over Foreclosure Error-- video - A Kansas City man is taking on banking giant JPMorgan Chase, accusing the company of something that he said would have landed anyone else in handcuffs.  Allan Danforth bought a house in a short sale in fall 2010. JPMorgan Chase held the previous owner's mortgage. Danforth said two months later, without notice, the bank changed the locks and hauled away $25,000 worth of furniture, appliances and family heirlooms.  "I had to bust in through the basement window here,"  He said JPMorgan Chase's contractor, Safeguard Properties, ignored "No Trespassing" signs on the garage, changed the locks on his home and cleaned it out two months after he paid cash for the property.  "It was basically stuff that was 150 years of family history," Danforth said. "I feel violated and I felt like the house wasn't even safe to go into for a while."

Will the FHA require a bailout? – 12,000,000 underwater mortgages 3,000,000 are FHA insured loans -  FHA insured loans have been a big booster for the current market.  Historically FHA insured loans made up roughly 8 to 12 percent of all mortgage originations but in 2009 they hit 30 percent.  For first time home buyers it was a stunning 50 percent showing that most people can only purchase a home today with a very small down payment.  Yet small down payments create instant negative equity positions if the market moves sideways or pops lower (aka our current market).  For example, the 3.5 percent standard FHA down payment is wiped away by the 5 to 6 percent selling costs.  What is interesting with this is that the FHA insured loan market is fully backed by the government (i.e., you) so any losses will be completely shouldered by the public.  The move to increase premiums recently was no fluke.  One piece of data that stood out to me was of the number of homes in negative equity, how large the FHA numbers grew.

Fed’s Duke Urges Policymakers to Bring Certainty to Housing Market - Federal Reserve governor Elizabeth Duke on Tuesday urged policymakers to finalize regulations and rules to provide more certainty for the housing market. Establishing regulations and deciding on the future of government-controlled mortgage giants Fannie Mae and Freddie Mac will help reduce the uncertainty contributing to tight mortgage lending, Duke said in remarks prepared for a National Association of Realtors conference on Tuesday. She didn’t discuss monetary policy in her remarks. “The most important solution that I am suggesting today is that policymakers move forward with the difficult decisions that will affect the future of the mortgage market,” Duke said. “If lenders tighten more than is warranted, it will hamper the recovery of the housing market and, in doing so, restrain economic growth.”

Report: Fewer US Homes Foreclosed upon in April — National foreclosure trends took a positive turn in April, as the number of homes seized by banks declined and fewer properties entered into the foreclosure process. But state-level data point to potentially more home repossessions ahead in Florida and many of the 25 other states where courts are required to sign off on foreclosures. All told, the number of U.S. homes taken back by lenders in April declined 7 percent from March, the third consecutive monthly decline, foreclosure listing firm RealtyTrac Inc. said Thursday. Home repossessions fell 26 percent versus April last year. The number of homes that lenders placed on the foreclosure path last month also declined, falling 4 percent from March and 2 percent from April 2011, the firm said. While the figures suggest foreclosure trends are improving nationally, state data tell a different story. “You absolutely have a tale of two different types of foreclosure trends happening across the country,” said Daren Blomquist, a vice president at RealtyTrac. The divide comes down roughly between the 26 states where courts play a role in the foreclosure process and places like California and the other 23 states where the process generally moves quicker because judges are not required to sign off on foreclosures.

RealtyTrac: Foreclosure activity declined in April - This was released earlier this morning by RealtyTrac: U.S. Foreclosure Activity Shifts Eastward in April RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for April 2012, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 188,780 U.S. properties in April, the lowest monthly total since July 2007. April foreclosure activity decreased 5 percent from the previous month and was down 14 percent from April 2011. ... "Rising foreclosure activity in many state and local markets in April was masked at the national level by sizable decreases in hard-hit foreclosure states like California, Arizona and Nevada,” “Those three states, and several other non-judicial foreclosure states like them, more efficiently processed foreclosures last year, resulting in fewer catch-up foreclosures this year."  “In addition, more distressed loans are being diverted into short sales rather than becoming completed foreclosures,” Moore continued. “Our preliminary first quarter sales data shows that pre-foreclosure sales — typically short sales — are on pace to outnumber sales of bank-owned properties during the quarter in California, Arizona and 10 other states.” Here is a repeat of a graph from the MBA showing the percent of loans in the foreclosure process by state. See: Q1 MBA National Delinquency Survey Comments. According to RealtyTrac, foreclosure activity is picking up in the judicial states - and most of those are in the east. Last month, RealtyTrac was saying "The [foreclosure] dam may not burst in the next 30 to 45 days, but it will eventually burst, and everyone downstream should be prepared for that to happen". It is still early, but they seem to be backing off the "dam bursting" a little

The American Foreclosure Process Has Ground To A Halt - Something funny happened in the aftermath of the US fraudclosure settlement, in which millions of backlogged housing units were supposed to enter the foreclosure process and begin the clearing of the nearly 9 million housing units in shadow inventory: nothing. Because as RealtyTrac disclosed overnight, in April the US saw a mere 188,780 foreclosures events of various type (NOD, auction, REO) take place. Why is this number significant? Because it is the lowest in 5 years, despite shadow inventory in the US now being virtually the highest ever. But, but, "this is precisely what the foreclosure settlement was supposed to prevent" one may ask... That would be correct. Next question. In other words, not only did banks get away scott free from being litigated to the 7th circle of hell, but for them the "profitable" business model continues to be one where house lending is largely irrelevant. And why not: with NIMs are record lows, banks couldn't care less if the houses and marked down loans against them in the asset pool go up or down.  In the meantime for everyone else hoping to get a true clearing price on housing and millions in units in shadow inventory being finally absorbed by the market: good luck. Not only has the foreclosure process in America ground to a complete halt but as the second chart below shows, the time to liquidation once a property enters 60 day-delinquent status just hit an all time high: that's right, the average time during which a deadbeat can occupy a home without payment if they so choose is 31 months.

Housing Analysis Biased Toward Removing People From Homes By Any Means Necessary - Foreclosures either show serious signs of decline or no sign of decline, depending on what you read today. If you look at RealtyTrac data you find foreclosures decreasing: “Rising foreclosure activity in many state and local markets in April was masked at the national level by sizable decreases in hard-hit foreclosure states like California, Arizona and Nevada,” said Brandon Moore, CEO of RealtyTrac. “Those three states, and several other non-judicial foreclosure states like them, more efficiently processed foreclosures last year, resulting in fewer catch-up foreclosures this year.” However, Nick Timiraos looks at a separate sheet of data which shows that while delinquencies have dropped as the economy has improved modestly, the share of loans in foreclosure continues to remain high. Foreclosures, however, remain a concern. Some 4.4% of mortgages were in some stage of foreclosure at the end of March, unchanged from the previous quarter and down only slightly from 4.5% a year ago. The numbers mask big variations by state. The national foreclosure rate remains elevated largely because of states that require banks to process foreclosures through the courts. . Banks have encountered fewer hurdles in nonjudicial states. Incidentally, there’s no need to talk about judicial states as if they’re some kind of problem, which both of these accounts at least intimate. The judicial states provide a check on bank behavior, at least relatively speaking. The “fewer hurdles” in nonjudicial states allow banks to steal homes with impunity.

MBA: Mortgage Delinquencies decline in Q1 - The MBA reported that 11.79 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q1 2012 (delinquencies seasonally adjusted). This is down from 11.96 percent in Q4 2011 and is the lowest level since 2008. From the MBA: Delinquencies Decline in Latest MBA Mortgage Delinquency Survey The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the first quarter of 2012, a decrease of 18 basis points from the fourth quarter of 2011, and a decrease of 92 basis points from one year ago. The non-seasonally adjusted delinquency rate decreased 121 basis points to 6.94 percent this quarter from 8.15 percent last quarter.  The percentage of loans on which foreclosure actions were started during the fourth quarter was 0.96 percent, down three basis points from last quarter and down 12 basis points from one year ago. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the first quarter was 4.39 percent, up one basis point from the fourth quarter and 13 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.44 percent, a decrease of 29 basis points from last quarter, and a decrease of 66 basis points from the first quarter of last year.

Q1 MBA National Delinquency Survey Comments - A few comments from Jay Brinkmann, MBA’s Chief Economist and Senior Vice President, and Michael Fratantoni, MBA's Vice President, on the conference call.
• All delinquency categories were down in Q1, both seasonally adjusted (SA) and NSA.
• The 30 day delinquency rate is back to normal (at the long term average). (This means a normal amount of loans are going delinquent each month)
• This was the largest quarter-to-quarter drop in delinquencies in history (there is usually a large seasonal drop in Q1, but this was larger than normal).
• The biggest problem is the number of loans in the foreclosure process. This is primarily a problem in states with a judicial foreclosure process.

This graph is from the MBA and shows the percent of loans in the foreclosure process by state. Posted with permission. The top states are Florida (14.31% in foreclosure), New Jersey (8.37%), Illinois (7.46%), Nevada (the only non-judicial state in the top 10 at 6.47%), and New York (6.17%). The second graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent decreased to 3.13% from 3.22% in Q4. Delinquent loans in the 60 day bucket decreased to 1.21% in Q1, from 1.25% in Q4. This is the lowest level since Q4 2007.

Lawler: Update Table of Short Sales and Foreclosures for Selected Cities - Last week I posted some distressed sales data for Sacramento. Economist Tom Lawler sent me the updated table below for several other distressed areas. For all of these areas, the share of distressed sales is down from April 2011 - and for the areas that break out short sales, the share of short sales has increased and the share of foreclosure sales are down - and down significantly in some areas. In five of the seven cities that break out short sales, there are now more short sales than foreclosure sales!  Economist Tom Lawler also wrote today: Plunge in Foreclosures Pushes Up REO Prices/Down REO Price Discounts  ForeclosureRadar released its April Foreclosure Report, which covers foreclosure activity in Arizona, California, Nevada, Oregon, and Washington. According to the report, foreclosure starts fell sharply in April in all five states, and completed foreclosure sales declined in all five states, with sizable drops from March in all states save for Washington. And in Arizona, California, and Nevada, record high percentages (44.6%, 41,1%, and 50.7%) of completed foreclosure sales were sold to third parties, rather than becoming bank REO. In its write-up, FR lamented that “we are seeing unprecedented government intervention into the foreclosure process leaving underwater homeowners in limbo, while stealing opportunity from investors and first time buyers." In discussing the “stolen opportunities,” FR noted that “In both Arizona and Nevada winning bids on the courthouse steps on average equal the current estimated value of those properties,” and that “(i)n California the discount between market value and winning bid have on average declined to 12.3 percent” – substantially lower than a year ago. According to FR, “(t)his leaves investors who intend to resell their purchases with record low profits after eviction, repairs, and closing costs.”

Gary Shilling: Don't Believe What They Say Home Prices Are High Compared To Rents - Despite growing consensus that it is now cheaper to buy a home than rent one, Gary Shilling, president of A. Gary Shilling & Co. says by previous standards home prices are still high relative to rents. In his latest editorial in The Wall Street Journal, Shilling writes that while home prices have fallen 34 percent since their peak in early 2006, they are not cheap if prices continue to fall: "But even if homeownership was cheaper than renting, as some claim, buying a house now would be a disastrous investment if prices fall another 20% or more." Shilling says homes are going to lose market value in coming years because of excess inventories. He says there are an excess of 2 million inventories and that it will take at least four years to work off this excess and quite some time for those surplus homes to bring down prices: "Additionally, our inventory estimate doesn't even include future foreclosures, some five million of which are waiting in the wings. ...Now that mortgage servicers have reached a $25 billion settlement with Washington and state attorneys general, foreclosures are likely to roar back. That likely will trigger the additional price decline, since the National Association of Realtors says foreclosed houses sell at a 19% discount to other listings, and sizable sales of real estate owned by lenders drag down the entire market. The total peak-to-trough decline in single-family house prices then would be more than 50%. If those foreclosed out of their abodes move to rentals, they're occupying other housing units, so there is no change in overall inventories. But if they double up or move in with their parents—as statistics show they have been doing—even more excess inventory results."

Will America Ever Recover From The Housing Crisis - infographic

U.S. 30-Year Mortgage Rate Falls to Record 3.79% - Average U.S. rates for 30-year and 15-year fixed mortgages fell to record lows for the third straight week. The steady decline has made home-buying and refinancing more affordable than ever for those who can qualify. Mortgage buyer Freddie Mac says the rate on the 30-year loan dipped to 3.79 percent. That’s down from 3.83 percent last week and the lowest since long-term mortgages began in the 1950s. The 15-year mortgage, a popular option for refinancing, declined to 3.04 percent. That’s down from last week’s previous record of 3.05 percent. Rates on the 30-year loan have been below 4 percent since early December. But so far, those cheap rates haven’t been enough to ignite home sales. While sales of previously occupied homes picked up in January and February, they fell again in March and remain well below healthy levels.

Misc: Record Low Mortgage Rates and more - From Freddie Mac: Fixed Mortgage Rates Hit Record Lows Again Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates again hitting new record lows. The 30-year fixed-rate mortgage at 3.79 percent continues to remain well below 4 percent and 15-year fixed-rate mortgages are also slightly down at 3.04 percent. 30-year fixed-rate mortgage (FRM) averaged 3.79 percent with an average 0.7 point for the week ending May 17, 2012, down from last week when it averaged 3.83 percent. Last year at this time, the 30-year FRM averaged 4.61 percent. From the WSJ: Ten-Year Treasury Yield Near Record Low The benchmark note gained 18/32 in price by late-afternoon trading to yield 1.702% after sinking as far as 1.692%. The record low of 1.672% was matched in September and originally set in February 1946. Based on a 3 p.m. EDT finish, 1.702% would be the lowest yield ever to round out a session.

Housing’s Future: Renting and Downsizing - Be it ever so humble, there’s no place like a rented apartment. That may be the mantra of U.S. households for the next three years, according to a new study released Tuesday by the Demand Institute division of the U.S. Conference Board. Most Americans still hope to own a home, the study found — but that home will be smaller than the MacMansions of the housing boom.  Data suggest the sector is bottoming out, but its recovery will be unlike that of past business cycles, according to the Demand Institute’s report, entitled “The Shifting Nature of U.S. Housing Demand.” The first stage of this recovery will be led by rental properties. Past homeowners who lost their houses to foreclosure, young adults who are now living at home or who haven’t saved a down payment, and new immigrants will drive the demand to lease rather than to buy. As a result, new construction will be concentrated in multi-unit projects, a shift already evident in 2012 data. At the same time, speculators hoping to cash in on increasing rents will buy up vacant properties with an eye to leasing them, helping to pare down the huge oversupply of existing homes on the market. Renting households who tend to own fewer cars than home owners (in part because of the expense of parking) will prefer apartments within walking distance to retail, school and work, or towns with good mass-transit systems. That will make certain urban areas more attractive than the suburbs and rural areas, the study said.

Report: Housing Market Recovery Has Officially Begun - It’s been a rough five and a half years for the American homeowner. Since the housing bubble reached its peak in early 2007, Americans have watched helplessly as $7 trillion in housing wealth evaporated. At many points during this ugly plunge, pundits have erroneously called the “bottom” of the housing market – saying things could finally get no worse. And then they got worse. The American public can therefore be forgiven for eyeing the latest round of predictions that the market has turned a corner with skepticism.  Of course, the housing market will heal at some point, so perhaps the boy is crying about an actual wolf this time. The best reason to shed your hard-won dubiousness is a report issued today by the The Demand Institute, a think tank jointly operated by the well-respected and non-partisan research organizations The Conference Board and Nielsen. The fifty-page study is definitively labeling 2012 the year of the housing bottom. It says: “The double-digit increases in U.S. housing prices over the first half of the past decade proved unsustainable. But the freefall is over. The point has been reached where housing prices will start to climb, albeit at single-digit rates in most markets over the next five years.”

US Housing Starts Rose to 717,000 in April - U.S. builders started work on more homes and apartments last month and requested more permits to build single-family homes. The increases suggest the battered housing market is healing. The Commerce Department said Wednesday that builders broke ground in April at a seasonally adjusted annual pace of 717,000 homes. That’s a 2.6 percent increase from an upwardly revised March figure and near January’s three-year high of 720,000. Construction rose for both single-family homes and apartments. Building permits, a gauge of future construction, fell last month from a 3 ½ year high to a seasonally adjusted annual rate of 715,000. But that was because of a 23 percent drop in the volatile apartment category. Permits for single-family homes rose almost 2 percent. Even with the gains, the rate of construction and the level of permits requested remain roughly half the pace considered healthy. But the increase, along with rising builder confidence and stronger job growth, is a hopeful sign that the home market may finally be starting to recover nearly five years after the housing bubble burst.

Housing Starts increase to 717,000 in April -From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in April were at a seasonally adjusted annual rate of 717,000. This is 2.6 percent (±14.8%)* above the revised March estimate of 699,000 and is 29.9 percent (±15.2%) above the revised April 2011 rate of 552,000.  Privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 715,000. This is 7.0 percent (±1.0%) below the revised March rate of 769,000, but is 23.7 percent (±1.9%) above the revised April 2011 estimate of 578,000.  Single-family authorizations in April were at a rate of 475,000; this is 1.9 percent (±1.1%) above the revised March figure of 466,000. Authorizations of units in buildings with five units or more were at a rate of 217,000 in April. Total housing starts were at 717 thousand (SAAR) in April, up 2.6% from the revised March rate of 699 thousand (SAAR). Note that March was revised up sharply from 654 thousand.  Single-family starts increased 2.3% to 492 thousand in April. March was revised up to 481 thousand from 462 thousand. The second graph shows total and single unit starts since 1968. Total starts are up 50% from the bottom, and single family starts are up 39% from the low.

Breaking Down Jump in Home Construction - Mesirow Financial Deputy Chief Economist Adolfo Laurenti talks with Jim Chesko about today’s report showing that home construction rose 2.6% in April, the latest sign that the recovery may be strengthening in the long-suffering housing market.

Housing Starts Beat, Permits Miss; Both Crawl Along Record Bottom Following several months of permits rising even as starts flatlined, today we get the opposite, as forward looking construction came weaker than expected, with permits printing at 715K on expectations of 730K, while starts coming ahead at 717K on expectations of 685K. Completions soared as backlogs caught up with inventory started and under construction. Really, that's all one can say about these two series, who long-term charts can be seen below. What can one say but crawling at the bottom, and increasing modestly courtesy of trillions in fiscal and monetary stimulus, and as of recently full-blown mortgage debt forgiveness courtesy of this country's desperate administration to get some traction in at least one metric of economic improvement.  And Goldman's take:

  1. Housing starts rose by 2.6% (month-over-month) to an annualized rate of 717k units. Although the monthly growth rate was below consensus expectations, the level of starts was higher than expected due to upward revisions to earlier months. Single-family starts rose by 2.3% in April and multi-family starts (apartment buildings and condos) rose by 3.2%.
  2. In contrast to the modest increase in starts, building permits declined by 7.0% (month-over-month) in April. Although discouraging news, we would emphasize that the decline was entirely due to a 21% drop in multi-family permits, which followed a 32% increase in multi-family permits in March. Because multi-family permits can be quite volatile, we think the latest weakness should be partly discounted.

Housing Less Dilapidated, but Still a Fixer-Upper - Housing starts increased 2.6% in April, to an annual rate of 717,000, a higher-than expected level. Permits fell 7%, but the drop was from a three-and-a-half-year high posted in March. All in all, the report supports the idea that housing is no longer the dilapidated wreck it was in past years. The housing report also contained revisions going back to 2010. While the changes for the past two full years were minor, starts in the first quarter were revised up significantly. Homes under construction were also refigured higher, suggesting residential construction contributed more to real gross domestic product growth in the first quarter than the 0.4 percentage point estimated last month. (The second look at GDP will be reported May 31.) Housing, however, is unlikely to be a growth leader anytime soon. It’s not just because the U.S. is still grappling with an overhang of recently built homes for sale. It’s also because the nature of new housing will probably involve fewer resources and labor, according to a study released this week.

NAHB Builder Confidence increases in May, Highest since May 2007 - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased 5 points in May to 29. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises Five Points in May Builder confidence in the market for newly built, single-family homes gained five points in May from a downwardly revised reading in the previous month to reach a level of 29 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This is the index’s strongest reading since May of 2007.  “Builders in many markets are reporting that buyer traffic and sales have picked back up after a pause this April,” “While home building still has quite a way to go toward a fully healthy market, the fact that the HMI has returned to trend is an excellent sign that firming home values, improving employment and low mortgage rates are drawing consumers back,” This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the May release for the HMI and the March data for starts (April housing starts will be released tomorrow).

Housing markets: Boom ahead? | The Economist - IT'S been a long time coming, but America's housing market finally seems to be normalising. Construction has been so low since the beginning of the bust that many markets are experiencing increasingly tight conditions. That's supporting rent increases, and that, in turn, is putting a floor under home values and leading to an uptick in construction. The question is: how large an uptick? Builder confidence has risen sharply in recent months and, as Calculated Risk points out, that typically presages a surge in construction: A construction-oriented phase of recovery would be most welcome now given the shaky state of export markets. But any rebound in residential investment will be bounded by the Fed's tolerance for inflation. Indeed, as Joshua Aizenman and Menzie Chinn argue, housing might have ended its long swoon earlier had the Fed been willing to generate—or at least tolerate—a bit more inflation.

Still Standing Amid the Wreckage - During the boom of the 90s and aughties, about 99.5 percent of the new real estate development was done by the conventional schlock sprawl-builders and the New Urbanists did much of the remaining .5 - which was enough to get their point across. Some of their projects (e.g. Seaside, Fla.) are now iconic examples of excellence in urban design artistry. Many others were botched by compromises made in the planning board battles, and another bunch were either half-assed from the get-go or plain fakes. These traditional neighborhood developments were almost always built on greenfield sites, provoking controversy that could not be briskly dismissed. At the same time, quite a bit of New Urbanist work was done in re-making existing town centers and in retrofits of sclerotic older suburban parcels, and their influence was later seen in the many big city streetscape redesigns from Times Square to Santa Monica. Their laborious work in reforming the intricate idiocies of zoning law made possible better development outcomes in towns all over the land which adopted so-called Smart Codes.  The housing bubble bust massacred the New Urbanists. Many of the firms had tied their fortunes to the production house builders and the commercial real estate developers doing large projects, often hundreds of acres, and when the market imploded around 2007 their work dried up. Now there is very little new real estate development of any kind going on around the country. Many talents languish while the nation broods over the fate of its obsolete suburban dream and fails to recognize that we have to make drastically new arrangements for inhabiting the landscape.

Some thoughts on Apartments and Rents - Just over two years ago we started discussing how the environment was becoming more favorable for apartment owners. This was based on several factors:
• Favorable demographics: a large cohort was moving into the low 20s to mid-30s age group. (see graph of age groups at "Rents soar")
• There were a record low number of multi-family housing units being started, meaning very few completions in 2010 and 2011.
• A large number of families were losing their homes in foreclosure, or through a short sales, and many of these families were becoming renters. (limited new supply)
• The price-to-rent ratio favored renting.
Sure enough, the vacancy rate for apartments declined sharply over the last two years, and rents have been rising. Looking forward, the environment will be a little less favorable for apartments owners in a year or two. Demographics will still be favorable for several more years, but it appears completions might start catching up to absorption in a year or two. Below is an update to a graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction are also important for employment). The blue line is for multifamily starts and the red line is for multifamily completions.  The rolling 12 month total for starts (blue line) has been increasing since mid-2010. The 12 month total for completions (red line) is now following starts up. This suggests that completions (new supply) will increase sharply in 2013 and 2014, although this will still be below the level for the pre-bust period.

Remodeling activity up 10 percent from 2011 in March - Permits for residential remodeling projects increased 10 percent in March from 2011, but slipped slightly from an unseasonably warm February, according to the latest BuildFax Remodeling Index. "Overall, March 2012 had lower remodeling activity than February, which saw significantly greater-than-expected activity, likely due to the unseasonably warm winter weather," said Joe Emison, Vice President of Research and Development at BuildFax. Permits were issued at a seasonally adjusted annual rate of 2,781,000, compared with 2,811,000 (a drop of about 1 percent) and 2,522,000 in March 2011. On a year-over-year basis remodeling was up in the Midwest (15 percent), West (12 percent) and South (10 percent), while the Northeast dropped 9 percent. The Northeast also experienced the largest February to March drop, with activity there declining 22 percent. Permits were down 7 percent in the West, but actually increased by 3 percent in both the South and Midwest in March.

AIA: Architecture Billings Index indicates contraction in April - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Reverts to Negative Territory After five months of positive readings, the Architecture Billings Index (ABI) has fallen into negative terrain. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the April ABI score was 48.4, following a mark of 50.4 in March. This score reflects a decrease in demand for design services. The new projects inquiry index was 54.4, down from mark of 56.6 the previous month.This graph shows the Architecture Billings Index since 1996. The index was at 48.4 in April. Anything below 50 indicates contraction in demand for architects' services. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.  According to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This is just one month - and as Baker noted, this might be payback for the mild weather earlier in the year - but this suggests CRE investment will stay weak all year (it will be some time before investment in offices and malls increases).

Retail Sales increased 0.1% in April -On a monthly basis, retail sales were up 0.1% from March to April (seasonally adjusted), and sales were up 6.4% from April 2011. From the Census Bureau report:The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $408.0 billion, an increase of 0.1 percent from the previous month and 6.4 percent above April 2011. Ex-autos, retail sales also increased 0.1% in April. Sales for March was revised down to a 0.7% increase from 0.8%, and February was revised down to 1.0% from 1.1%. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 23.1% from the bottom, and now 7.7% above the pre-recession peak (not inflation adjusted) The second graph shows the same data since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 19.4% from the bottom, and now 7.3% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.4% on a YoY basis (6.4% for all retail sales). Retail sales ex-gasoline increased 0.2% in April.

Retail Sales Growth Turns Sluggish In April - Retail sales rose a meager 0.1% last month on a seasonally adjusted basis, the smallest monthly gain since December, the Census Bureau reports. The retreat in the growth rate isn’t terribly surprising, given the relatively strong pace in each month during the first quarter. Nonetheless, today's sales news won't inspire confidence amid all the renewed worries about the potential blowback for the global ecoomy if Greece leaves the euro and the possibility of rising recession risk in the U.S. Some economists say there's still a weather factor at play in the latest retail sales numbers and so it's not obvious that April's data is all that damning.  “The key thing here is to determine to what extent the weather had an effect, and it’s pretty clear if you look at the components there was some weather impact.” Last month's fade in consumption may be a harbinger of things to come, or not, but the trend doesn't look ominous in terms of the year-over-year change. Retail sales jumped 6.4% in April vs. 12 months earlier. That's down moderately from the pace in recent months, but no one will confuse this rate of growth with a recession.

Retail Sales: Up 0.1% in April - The Retail Sales Report released this morning shows that retail sales in April were up 0.1% month-over-month from a downwardly revised 0.7% in March (from 0.8%). Today's number is below the consensus forecast of 0.2%. The year-over-year change is 6.4%. This is the weakest monthly change since the 0.0% reading for December. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes.  We normally evaluate monthly data on a month-over-month or year-over-year basis. As I mentioned earlier, the April gain exceeded consensus forecast, and the 6.4% increase over April 2011 is encouraging. On the other hand, a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy. How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 148.7% since the beginning of this series. Adjust for population growth and the cumulative number drops to 102.4%. And when we adjust for both population growth and inflation, retail sales are up only 22.1% over the past two decades.

Stagnant Wages Limit Consumer Spending – Madigan - You can’t get blood from a stone — unless the stone has a credit card.  Consumers managed a soft 0.1% gain in April retail sales, which suggests consumer spending is contributing only modestly to second-quarter economic growth. (In comparison, household spending accounted for 2.04 percentage points of the 2.2% increase in first-quarter real gross domestic product.) But any increase in household spending is somewhat a surprise since worker buying power is falling far behind the rise in inflation. True, inflation was flat last month thanks to a 2.6% plunge in gasoline prices. But hourly pay and hours worked also flat-lined, meaning real weekly pay was unchanged in April. Since peaking in October 2010, real pay has declined by 1.2%. To be sure, personal income is made up of more than just paychecks, but wages and salaries still account for the bulk of income totals and are more likely to be spent than items like dividends.

Kathleen Madigan on Wages and Consumer Spending - I don’t have anything against Kathleen Madigan and I think her posts do a better job at confronting economic data than the vast majority of what you read from major news outlets. Yet, as much because of that as in spite of it, she often presents idealized examples of garbled economic reasoning. This post on wages and consumer spending is one them.  The first part links low retail sales to stagnant wages. The problems here are several fold.  Obviously there is no particular reason to think that month-to-month changes in wage and retail sales series are going to match but lets set that aside, assuming its just a device to motivate the larger discussion of stagnant incomes and consumer purchases. A larger issue is that the retail sales series is an aggregate nominal series where Madigan appears to be comparing it to average real weekly earnings and then drawing conclusions about real Personal Consumption Expenditures.  Why does this matter? Well, if more workers are hired and if their wages nominal wages are at least steady then we should expect the base for retail expenditures to be expanding even if average real wages are falling. This is because total spending on payrolls is rising even average real wages are falling. Indeed, this is the classic mechanism by which we explain how recessions come to an end.

Vital Signs: Cautious Consumers - Consumers spent cautiously in April. Retail sales barely grew from the previous month and slowed to a year-over-year increase of 6.4%. Consumers cut spending on building materials, clothing and gardening supplies, while paying more for food and online purchases. April sales were hurt by stagnant wage growth along with a warm winter and an early Easter, which may have pulled purchases forward in the year.

Consumer comfort in U.S. declines to an almost 4-month low - Consumer confidence dropped last week to the lowest level since the end of January as slower U.S. job growth contributed to pessimism about personal finances and spending. The Bloomberg Consumer Comfort Index fell in the week ended May 13 to minus 43.6, a level associated with recessions or their aftermaths, from minus 40.4 in the previous period. The monthly expectations measure was little changed as Americans see scant improvement in the world's largest economy. The fourth straight decline in weekly confidence comes even as gasoline prices have retreated from an 11-month high reached in early April. The figures underscore the need for stronger job and wage gains that would help propel household spending, which accounts for about 70 percent of the economy. "The lagged impact of rising food and fuel prices early in 2012 and a slower pace of hiring amid a decelerating economy are the likely culprits behind the near reversal of gains in consumer comfort observed through the first quarter," said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. "The ability of the household to reassert its place as the primary driver of growth during the current business cycle remains limited due to modest job growth and incomes."

Consumer Blinks as "Consumer Comfort" Collapses Most In 4 Years - We have seen three very loud and very clear messages this week on the state of the US consumer's mind. After a few months of extravagance, on the back of what can only be described as depression-fatigue, reality is biting once again. The Bloomberg Consumer Comfort index just missed expectations by its greatest amount in three years and has plunged over the last 5 weeks by the most in four years - dropping back to four-month lows. Do these two messages explain the catastrophe that is JCP's results this quarter? We suspect so as the outlook for the economy (sub-index) has plummeted by the most in 14 months - once again echoing the last two years and the end of the central-bank easing periods exposing the sad reality beneath

Gas Prices Fall, But Consumers Not Spending More - Lower gas prices in April weren’t enough to embolden U.S. consumers to spend more elsewhere. The Commerce Department said retail sales rose only 0.1 percent last month. Even after excluding gasoline station sales, consumers increased their spending on retail goods by just 0.2 percent. That followed two stronger months in February and March. Some economists say a mild winter led consumers to make purchases earlier in the year, effectively stealing sales from April. Gasoline prices have fallen sharply in the past month. The national average dropped to roughly $3.73 per gallon on Monday, roughly 17 cents cheaper than a month ago, according to a survey by AAA. While that could help consumer spending going forward, the drop in prices did little to boost spending on discretionary goods in April. The retail sales report represents the government’s first look at consumer spending for the April-June quarter. Consumer spending is closely watched since it accounts for 70 percent of economic activity.In the January-March quarter, overall economic growth slowed to an annual pace of 2.2 percent. That’s down from the 3 percent increase in the October-December period, but faster than last year’s 1.7 percent pace.

Inflation Watch: Headline and Core are Neck-and-Neck at 2.3% - The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 2.30%, which the BLS rounds to 2.3%, down fractionally from 2.65% last month. Year-over year-Core CPI came in at 2.31%, which the BLS rounds to 2.3%, up fractionally from 2.26% last month. Here are excerpts from the BLS summary:  The energy index, which had risen in each of the three previous months, declined in April on a seasonally adjusted basis and offset increases in the other major indexes. The gasoline index fell 2.6 percent in April and accounted for most of the decline in energy, though the indexes for natural gas and fuel oil decreased as well. The food index rose in April as five of the six major grocery store food group indexes increased. .The 12-month change in the index for all items was 2.3 percent in April, the lowest figure since February 2011. The index for all items less food and energy also increased 2.3 percent over the last 12 months. This is the first time since October 2009 that the 12-month all items change has not exceeded the 12-month change for all items less food and energy. The food index has risen 3.1 percent over the last 12 months, and the energy index has risen 0.9 percent.  More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

Breaking Down Retail Sales and Inflation - Wells Fargo Senior Economist Mark Vitner talks with Jim Chesko about reports showing that U.S. retail sales inched higher by 0.1% in April and consumer prices were flat in the month.

Inflation: A Five-Month X-Ray View: New Update - Here is a table showing the annualized change in Headline and Core CPI for each of the past five months. I've also included each of the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components. Some of us have higher transportation costs, others medical costs, etc. The chart below shows Headline and Core CPI for urban consumers since 2007. Core CPI excludes the two most volatile components, food and energy. Core CPI has been on the rise and has now risen above the Fed's inflation target of 2%. However, the more attention-grabbing headline CPI has moderated in recent months after hitting an interim high in September 2011, a decline that was primarily driven by lower energy costs, especially as reflected in the transportation category. This trend began reversing in mid December, with a steady rise in gasoline prices that lasted about 15 weeks. For the past five weeks, however, gasoline prices have moderated (more on that topic here). For a longer-term perspective, here is a column-style breakdown of the inflation categories showing the change since 2000.

A Long-Term Look at Inflation - The May 2011 Consumer Price Index for Urban Consumers (CPI-U) released today puts the April year-over-year inflation rate at 2.30%, which is well below the 3.95% average since the end of the Second World War.  For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature. For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components. For an even closer look at how the components are behaving, see this X-Ray View of the data for the past five months. The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson's price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller's website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.

Inflation is Quiet, So Why are People Still Feeling its Pain? - This week’s report from the Bureau of Labor Statistics shows no change in the seasonally adjusted U.S. consumer price index for April. Real average hourly earnings were also unchanged. On the face of it, those numbers should take inflation off the list of things people have to worry about, but they don’t. Instead, every time I post numbers that show inflation is low, I get comments like these: “Those who live in ivory towers and pontificate about the ‘real’ economy while being totally removed from it should really experience how the 99 percent live.” “If you believe the BS stats, you are in the minority. Consumers KNOW differently. Core CPI, etc. What a pile of cowdung!” It is tempting to dismiss comments like these as simply ill informed, but that would be a mistake. Instead, we should take them seriously as an indication that when economists and consumers think about inflation, they ask different questions and get different answers. The differences all stem from the fact that consumers look at what affects their pocketbooks–actual changes in prices as they happen. Economists, who instead are looking for what is relevant for policy, adjust the raw data to eliminate statistical noise that obscures underlying trends. Seasonal adjustments are one example. When the BLS reports that the seasonally adjusted CPI for April did not change, it is giving an answer to the question, “Did prices change more or less last month than they usually do in April?” Only changes that differ from the April norm are relevant for policy.  There would be no point in adjusting interest rates or government expenditures just to offset price changes that happen each April as a matter of course.  In contrast, when consumers visit the supermarket or the gas station, they see unadjusted numbers.

Gas Costs Ease, Offering Hope on Economy - Americans are starting to see some relief from higher gasoline prices, a change that could revive the economy in the months ahead. Consumer prices were flat in April, the Labor Department reported on Tuesday, largely because of a decline in gas prices. Cheaper gas may be combining with steady job growth to increase spending on more expensive items.  Sales of autos, furniture and electronics all rose in April. And Americans spent more at restaurants and bars, generally a sign of confidence in the economy.  “Consumer spending looks to have started the second quarter on a solid footing,” Despite the strength in important areas, overall retail sales increased just 0.1 percent last month, the Commerce Department said Tuesday. That modest gain followed stronger increases in February and March.  Less expensive gas offset some of the gains in big purchases. The mild winter was also a factor. In February and March, it propelled sales in areas such as building materials and gardening supplies. Spending in those categories fell sharply in April.  Still, economists were encouraged by the details in the report. Excluding autos, gas station sales and building materials, so-called core retail sales increased 0.4 percent, a modest gain.

Vital Signs: Tumbling Gas Prices - The price of gasoline is tumbling. The average price of a gallon of regular gas stood at $3.754 on Monday, down more than 3 cents from a week ago and more than 20 cents from a year ago, government figures show. The price has fallen for six consecutive weeks as fears about Europe’s fiscal crisis persist and certain oil-producing countries boost oil supplies.

Update on Gasoline Prices: West Coast Refinery Problems - Earlier I noted that gasoline prices will probably follow the price of Brent oil down, but that there were some refinery issues. Here is a story from the Mercury News last Friday: Rising California gas prices expected to increase even more: Prices could rise an additional 20 cents in the next few days, as refinery problems continue to choke supplies for California's special blend of clean burning gas. On Thursday, many Bay Area stations saw jumps of several cents to a dime. "Prepare to get clobbered," said Patrick DeHaan, the senior petroleum analyst with West Coast gas inventories are at their lowest level in 20 years, he said, and the blame is with production on the West Coast. "Refineries have been having a lousy spring with not just one massive facility outage," DeHaan said, "but smaller, more widespread issues." Gasoline prices on the west coast are up about 20 cents this month, and about 10 cents over the last several days.

Gasoline Prices Implied by Futures - Downward, and downwardly revised. Following up on this post several weeks ago, it seems that futures prices are confirming downward movements in gasoline prices. A simple bivariate regression using the lagged log futures price and log gasoline prices (all formulations) yields the following estimates: (1) pgast = 0.514 + 0.719 × fgast-1 + ut Adj-R2 = 0.97; SER = 0.034; DW = 1.90; smpl = 2005M11-2012M03; n = 77  Using this relationship, and the futures prices as of April 19, one can infer the path of future gasoline prices, and for May 13. I show the result in Figure 1:

Gas Prices Around the World: Relative to Income, U.S. Has Some of the Cheapest Gas in the World - The table above is based on this Bloomberg article "Highest & Cheapest Gas Prices by Country": "The cost of a gallon of gasoline ranks with bad weather as one of the most universal complaints. In the U.S., the price of gas is getting even more attention than usual this year as presidential contenders battle over energy policy.  What's lost in the debate is how much the U.S. and other countries actually pay for gas, relative to one another and to their citizens' wages. The ranking above sorts 55 countries by: a) the average retail price at the pump for a gallon of premium gas (from April 2 to 11), and b) by "pain at the pump," which is measured by the percentage of average daily income needed to buy a gallon of fuel."

Vital Signs: Exports Remain Strong -Exports of goods have remained strong, despite fiscal woes in Europe. Economists say U.S. manufacturers are being helped by a weak dollar and low wage growth at home, making their goods cheaper relative to global rivals’ products. More than half the respondents in The Wall Street Journal’s latest economic survey see contagion from Europe as the biggest threat to the U.S. economy.

New York Manufacturing Rebounds - New York manufacturing activity rebounded this month, and shipments jumped, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey released Tuesday. The Empire State’s business conditions index increased to 17.09 this month after toppling nearly 14 points to 6.56 in April. Economists surveyed by Dow Jones Newswires had expected the index to recover, but only to 9.3. May’s higher level suggests “activity for New York state’s manufacturers expanded at a moderate pace,” the report said.

Empire State Manufacturing Improved In May, NY Fed Reports  -Manufacturing activity in New York state improved moderately in May 2012 as shipments rose and employment levels and hours expanded, a report from the New York Federal Reserve Bank said Tuesday. The Empire State Manufacturing Survey index ticked up 11 points to 17.1 in May, largely erasing the surprising losses of the month before, when the index fell to just 6.6. May's numbers substantially beat analyst expectations. Analysts surveyed by MarketWatch had predicted the index to read 9.5 for May. Driving the overall improvement was an 18-point gain in the shipments index, which reached 24.1, its highest level in a year. The employment index remained stable, indicating that hours and employment levels would likely continue to expand. Prices paid and prices received were both positive in May, but lower, indicating that the rate of price increases slowed.

Philadelphia Fed's Manufacturing Survey Shows Pace of Growth Fell Back - Firms responding to the May Business Outlook Survey indicated that manufacturing growth fell back from the pace of recent months. The survey's broad indicators for general activity fell into negative territory for the first time in eight months. Indicators for new orders and employment also suggested slight declines from April. Input price pressures were less in evidence this month, and for the first time in nine months, more firms reported price declines for their products than reported increases. The survey's indicators of future activity remained positive but weakened considerably from April.  The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 8.5 in April to -5.8 in May (see Chart 1). The index for new orders fell four points, from 2.7 to -1.2, its first negative reading in eight months. The shipments index edged 1 point higher and remained just above zero. The indexes for current unfilled orders and delivery times both declined and registered negative readings, suggesting lower levels of unfilled orders and faster deliveries.  The current employment index, which had been positive for eight consecutive months, decreased 19 points, to -1.3. The percentage of firms reporting decreases in employment (16 percent) was slightly higher than the percentage reporting increases (14 percent). Firms also reported a slight decrease in average hours worked compared with April.

Philly Fed: Regional manufacturing activity contracted in May Survey - From the Philly Fed: May 2012 Business Outlook Survey Firms responding to the May Business Outlook Survey indicated that manufacturing growth fell back from the pace of recent months. The survey’s broad indicators for general activity fell into negative territory for the first time in eight months. Indicators for new orders and employment also suggested slight declines from April. ...The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 8.5 in April to -5.8 in May. The index for new orders fell four points, from 2.7 to -1.2, its first negative reading in eight months.  ...The current employment index, which had been positive for eight consecutive months, decreased 19 points, to -1.3. ... Firms also reported a slight decrease in average hours worked compared with April.  Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through May. The ISM and total Fed surveys are through April. The NY and Philly Fed surveys went in opposite directions this month. The NY Fed survey showed stronger expansion; the Philly Fed survey indicated contraction. The average of the Empire State and Philly Fed surveys declined in May, and is at the lowest level this year.

Philly Fed Manufacturing Report Disappoints - Mid-Atlantic manufacturers report business conditions unexpectedly contracted this month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia. Hiring also turned negative. The Philadelphia Fed said its index of general business activity within the factory sector fell to -5.8 in May from 8.5 in April. It was the first negative reading in eight months. Within the Philly Fed survey, the subindexes outside of shipments generally worsened this month. The new orders index dropped to -1.2 from 2.7 in April while the shipments index increased to 3.5 from 2.8. The important hiring index plunged to -1.3 after it jumped to 17.9 in April from 6.8 in March. The workweek index worsened to -5.4 from a contractionary -2.3. Price pressures eased significantly this month. The prices-paid index dropped to 5.0 from 22.5 in April, while the prices-received index fell to -4.5 from 9.4 last month.

Philly Fed Plunges, First Contraction Since September 2011 - Remember the surge in the Empire Fed which was the straw so desperately clutched by all those who still held on to hope the US economy was still kinda sorta growing? Oops. The May Philly Fed just came out and was a disaster, printing at -5.8, down from 8.5 and crashing expectations for an increase to 10.0. This was the first contractionary print since September 2011 and the biggest miss since August 2011, but the worst news is that the Number of Employmees indicator was in absolute freefall, plummeting from 17.9 to -1.3. And now come the downward NFP revisions, and NEW QE (because courtesy of AAPL it is no longer QE [X] anymore) whispers.

US Auto Production - I’ve gone on record saying that there is no way domestic auto producers can deliver 11 Million new cars in 2012 with the workforce they have on hand. It seems, however, that they are going to do their best to try. From Ford Media: Ford Motor Company will produce nearly 40,000 additional vehicles this summer by idling 13 plants, including six assembly plants, for just one week instead of the traditional two.“We are working most of our North America plants at maximum capacity and we are adding production shifts in three of our assembly plants this month alone,” said Jim Tetreault, vice president of North America Manufacturing. “Requiring more capacity from our plants is a good problem to have and having the flexibility to add a week of production in our plants goes a long way toward solving it.” The Ford assembly plants taking just one week of summer shutdown in 2012 include Chicago Assembly, Dearborn Truck, Kentucky Truck, Louisville Assembly, Michigan Assembly and Kansas City Assembly. Other plants taking just one week of shutdown include Dearborn Engine, Chicago Stamping, Cleveland Engine No. 1, Lima Engine, Essex Engine, Sterling and Rawsonville.

Industrial Production Rebounds Sharply In April - If you’re looking for evidence that recession risk is rising, you won’t find it in today’s update on industrial production, which surged 1.1% in April—the biggest monthly rise since December 2010. The cycle may be drag us down in the months ahead, but industrial production is putting up a pretty good imitation of swimming against the tide.  The other big economic news today comes from housing, which suggests that the modest mending rolls on. Housing starts rose a bit last month, although newly issued building permits retreated. Today’s drama, however, is clearly in industrial production, and for all the right reasons. Let’s start by looking at the monthly percentage changes. As you can see, April witnessed a strong revival in this series, which is considered to be on the short list of proxies for the broad economy. The caveat is that the revisions lately have been relatively large and so today’s good news may evaporate next month. But given the numbers in hand, it’s a bit tougher to argue that the economy is headed for trouble.

Industrial Production up in April, Capacity Utilization increases - From the Fed: Industrial production and Capacity Utilization Industrial production increased 1.1 percent in April. Output is now reported to have fallen 0.6 percent in March and to have moved up 0.4 percent in February; previously, industrial production was estimated to have been unchanged in both months. Manufacturing output increased 0.6 percent in April after having decreased 0.5 percent in March. Excluding motor vehicles and parts, which increased nearly 4 percent, manufacturing output moved up 0.3 percent, and output for all but a few major industries increased. Production at mines rose 1.6 percent, and the output of utilities gained 4.5 percent after unseasonably warm weather in the first quarter held down demand for heating. At 97.4 percent of its 2007 average, total industrial production for April was 5.2 percent above its year-earlier level. The rate of capacity utilization for total industry moved up to 79.2 percent, a rate 3.1 percentage points above its level from a year earlier but 1.1 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 12.4 percentage points from the record low set in June 2009 (the series starts in 1967).The second graph shows industrial production since 1967. Industrial production increased in April to 97.4. March was revised down (so the month-to-month increase was greater than expected), and February was revised up.

Industrial Production Rebounds in April; Vehicle Assemblies Were Highest in Almost Five Years - The Federal Reserve released its report today on Industrial Production in April, here are some highlights:

  • 1. Overall industrial output increased by 1.1% in April on a monthly basis, which was the largest monthly gain since a slightly higher 1.13% increase in December 2010.  It was also the 11th monthly gain in the last 12 months. 
  • 2. On an annual basis, industrial production increased by 5.2%, which was the largest annual gain in more than a year.  Annual increases were especially strong for business equipment (12%), motor vehicle and parts (27.1%) and manufacturing (5.8%), especially for durable manufactured goods (10.1%) and oil and gas well drilling (11.9%).
  • 3. The Federal Reserve reported motor vehicle assemblies of 10.67 million units in April (seasonally adjusted, annual rate), which was an increase of 35% over last year, and the highest monthly number of vehicles assembled since August 2007, almost five years ago.

Vital Signs: Strong Industrial Production - U.S. factories stepped up production in April. The Federal Reserve’s Industrial Production Index — which measures the output of factories, mines and utilities — rose 1.1% from March. Manufacturing production climbed 0.6% after falling in March, led by cars, and furniture and business equipment. Factories are operating at a high capacity but unemployment and weak wage growth continue to weigh on the U.S. recovery.

Companies Aim to Start Spending Trillions They're Hoarding - Corporations around the globe are finally planning to spend some of the nearly $8 trillion in emergency cash they’ve amassed. According to the latest American Express/CFO Research Global Business & Spending Monitor, released today, 45% of the world’s chief financial officers and other executives say they’re likely to switch from hoarding cash to spending their reserves in the course of 2012. Only 34% say they’re sticking with a strategy of building rainy-day funds. That’s a notable change from last year, when 62% of respondents said they were preserving cash in case of emergency. North American executives are especially bullish: 56% of those surveyed planned to spend reserves instead of saving compared with 28% who said the opposite. Drilling down, U.S. respondents were more willing to open their wallets than their peers, with nearly two-thirds talking about using cash on mergers and acquisitions. In Latin America, 61% of respondents were pro-spending, while in Europe, 44% were pro-spending, and 35% anti-spending. The Asia-Pacific region was the anomaly: 33% of respondents there talked about spending, while 41% wanted to keep hoarding.

If I Were Looking for Structural Changes......I would not be likely to find them.  But at least I know how to look. Start at the macro level and see if there is a noticeable shift in revenues: I decided that anything that didn't have at least a 0.3% change in its effect on GDP over three years could not be defined as a Structural Change, especially by the people who claim a priori that the change is structural. This may be giving them too much credit, but that's how we roll here in Dataland. There are two basic areas that show effectively neutral shifts. The first is that there is a decline in Construction that is matched by a rise in Manufacturing. If we look at employment in Construction, it peaks (as one might expect) in April of 2006. (Employment in Manufacturing in the United States peaked in June of 1979.)   If we normalize both Construction and Manufacturing to that peak, we might expect that Manufacturing hiring would increase while Construction hiring would decrease. (Indeed, having chosen the maximum point in Construction Employment to be early in the graphic, the general trend in Construction becomes inevitable.)

The Main Point -- Suppose the current recession/depression is mainly structural. Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead. According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits. (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.) If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.  If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock. We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further. But think about it: if we have the wherewithal to resume prosperity, what holds us back? And why should rational people accept any excuses for policies that delay it?  Repeat: we have everything we need, right now, to restart our economies. All the unemployment, the hardship, the lost opportunities are unnecessary. That’s the main point.

The Kobayashi Maru Test and the Job Market - Let's start with some sobering facts. Although what classifies as "essential" is open to interpretation, the secure jobs will likely be the essential ones that maintain the core infrastructures of everyday modern life: water, sewage and electrical systems, the energy complex, public safety and health, agriculture, railways, network security, etc. How many jobs are essential is anyone's guess, but it is certainly less than 100% of the 140 million jobs that currently comprise the job market. In general, supply and demand works like this: when demand exceeds supply, costs/wages rise. Then people respond by entering the lucrative field until supply exceeds demand, and prices/wages decline. A lot of people are assuming the healthcare field will be permanently short of workers, but if enough people reach this conclusion then qualified labor will be in oversupply. The same can be said of MBAs and a number of other degrees that are widely viewed as "meal tickets" to a secure job. Since millions of other people are pursuing the same path, there is now a glut of MBAs and lawyers. The problem is that the job market is not causally aligned with education. If we encourage a million students to get PhDs in physics and biochemistry, that doesn't mean the economy will magically create 1 million jobs in these fields. These fields are small not because there is a shortage of qualified labor, but for other reasons: the limitations of Research and Development funding, the limited market for products in these fields, and so on. 

Occupational Licensing - Timothy Taylor summarizes some recent and not-so-recent research showing the surprising extent of occupational licensing. My own guess is that the politics of passing state-level occupational licensing laws is driven by three factors: 1) lobbying by those who already work in the occupation to limit competition; 2) passing laws in response to wildly unrepresentative anecdotes of terrible or dangerous service; and 3) the tendency when setting standards to feel like more is better. But in a U.S. economy which is hurting for job creation, especially jobs for low-income workers, states should be seriously rethinking many of their occupational licensing rules. Many would be better-replaced with lower standards, certification rather than licenses, or even no licenses at all.  One approach I would like to see is one in which being in licensed in one state means that you are licensed in every state. State-specific licensing requirements strike me as violating the spirit, if not the letter, of the Constitution's provisions protecting interstate commerce.

Postal Service to Consolidate 48 Mail Processing Centers in Summer — The United States Postal Service announced Thursday that it would begin consolidating 48 mail processing centers beginning in July, the first phase of a cost-cutting plan that is intended to save the agency nearly $1.2 billion a year as it tries to adjust to declining mail volume.  The agency said it would consolidate an additional 92 processing centers in February, and 89 more in early 2014.  In all, the Postal Service said it would close 229 processing centers — about half of the total — and it expects to save about $2.1 billion a year after the plan is fully carried out in 2014. About 5,000 workers will be immediately affected by the consolidations, the agency said, though it was unclear if they would be reassigned or given incentives to retire. About 13,000 employees will be affected once the first phase is completed by February. A total of 28,000 positions will be eliminated by 2014.  The service’s latest plan to reduce costs comes as the agency continues to endure financial losses. In the first two quarters of the 2012 fiscal year, which ended March 31, the agency lost more than $6 billion.

Unemployment Benefit Applications Remain Unchanged at 370,000 - The number of people seeking unemployment benefits was unchanged last week, suggesting steady gains in the job market. The Labor Department said Thursday that weekly unemployment aid applications stayed at a seasonally adjusted 370,000, the same level as the previous week. The four-week average, a less volatile measure, fell for the second straight week, to 375,000. Applications for benefits surged in April to a five-month high of 392,000. They have fallen back since then and are near the lowest levels in four years. The decline suggests hiring could pick up in May after slumping in the previous two months. When applications drop below 375,000 a week, it generally suggests hiring is strong enough to lower the unemployment rate.

Jobless Claims Were Unchanged Last Week - No news is still good news for jobless claims. The risk that the labor market’s revival has stalled is still on everyone’s mind, but there’s nothing ominous in today’s update on new filings for unemployment benefits. Claims were flat last week, holding steady at a revised 370,000 on a seasonally adjusted basis. The number du jour is a yawn, and for the time being that’s ok. Treading water has a short shelf life for inspiring confidence, but for the moment a broader review of the numbers continue to suggest that job growth will roll on. One reason for thinking positively is that the four-week moving average of new claims fell for the second straight week and is near its post-recession low. That’s a sign that the downward momentum for this series remains intact. You can't tell much from any one report for this series, but the trend is more reliable and for the time being the trend still appears inclined to be friendly.

Initial Claims Miss, Media Spin: "Unchanged" - While claims were expected to improve from last week's pre-revision print of 367K, we got not only a miss but a deterioration, with the print coming at 370K on expectations of 365K. But all is well, for the media already has its spin: "Unchanged", because you see last week's number was as usual pushed up higher to 370K, hence no change. Of course, next week this week's 370K will be revised to 374K or something, but the algos will be long past caring. What is worse is that the exodus from the cliff continues, as those off EUCs and Extended benefits declined by another 68K (and down by 1.14 million from this time last year): people who no longer get their weekly allowance from Uncle Sam and having been without a job for 99 weeks are pretty much guaranteed to not find a job, thus making them rely exclusively on disability and foodstamps. Initial Claims are stabilizing around 20% higher than pre-crisis levels - not exactly positive.

A Modestly Strong Batch of New Data - The latest batch of economic data has been slightly better than expected, causing Moody’s Analytics to raise its forecast for May job growth to 170,000, up from 165,000 last week. “The best evidence comes from surveys of builders and manufacturers,” Moody’s economists write. The surveys suggest that “April’s slowdown in factory hiring was a temporary phenomenon. One sign of the likely strengthening of the job market since April, when the economy added only 115,000 jobs, came in this morning’s report on new claims for unemployment benefits. Last week, 370,000 people applied for initial benefits, compared with 389,000 a month earlier. Because last week included the 12th day of the month, it is the week on which the May monthly jobs report will be based. The latest data do not change the larger picture, though. Moody’s forecasts average monthly job growth of 183,000 in the six months between now and election day (virtually unchanged from 182,000 a week ago). As I noted last week in the debut of The Times’s new Jobs Tracker: History suggests that this year’s election will probably be very close if the economy adds 100,000 to 175,000 jobs a month in the six months before Election Day. (These benchmarks come from work by Nate Silver,.) Job growth above 175,000 would tend to make President Obama a favorite. Growth below 100,000 would make Mitt Romney, the presumptive Republican nominee, the favorite….

Help Wanted: Our Workforce Needs Americans of All Skill Levels - Slowly — very slowly — America is getting back to work. And when you look at the representation of foreign-born workers across our economy, it is clear America remains a nation of immigrants. Shoulder to shoulder, generations of Americans stand with families of new Americans, their collective prosperity depending on immigrants and immigration to the United States. Increasingly, a skilled home health care aide from Vietnam will be just as important to our elderly as a skilled physician from Colombia. But the U.S. immigration debate focuses on the “high-skilled” worker. This narrowing of the debate undermines the value of work. It does so by creating a double-edged sword that separates the contributions of “high-skilled” and “low-skilled” workers, which deepens social and economic divides across all communities. Evidence is building that this separation is misguided. The Brookings Institution and the Partnership for a New American Economy recently released an eye-opening study showing the importance of immigrant workers across the economic spectrum. Indeed, health care tops the list.

Labor Department Error Overstates Female Job Losses - There are more women working for the postal service than the Labor Department originally thought. That has the potential to alter some much-reported numbers, but isn’t likely to change the underlying trend of the recovery.The Bureau of Labor Statistics reported Monday that it had made a mistake when calculating the ratio of female-to-male employees in the postal service. BLS discovered the error after economist Stephen Bronars noticed that in the original accounting, women made up 96% of Post Office job cuts. BLS says it correctly estimated how many jobs the postal service has cut since November 2009. But the mistaken ratio led the agency to mis-estimate how many of those positions were held by women. The mistake also affects other measures that include the postal service, such as the ratio for government jobs or the total number of jobs. Among the estimates likely to change: The widely reported number touted by Republican candidate Mitt Romney‘s presidential campaign in April that 92.3% of workers who lost jobs since President Barack Obama took office were women. Since that number includes jobs lost in the postal service, it will be revised when the BLS releases the new data.

The Outlook Is Still Grim for Women in the Job Market - This year has so far been much better for women’s unemployment picture than the past three. But it may not be time to get comfortable yet. As Joan Entmacher, vice president of NWLC, told me, because the overall number of jobs added last month was so small, it didn’t take much for them to come out on top. After all, 73 percent of only 115,000 jobs won’t make a huge dent in a high unemployment rate. And it’s no time to get optimistic about public-sector jobs. Last month’s new trend of women’s gaining those jobs “could change when you hit June, July and August, when teachers start getting lay-off notices,” Entmacher pointed out. Women hold the vast majority of those jobs, and they’ve been completely hammered in the recovery period. As of March we had lost 236,500 jobs in local education, a k a public school teachers. Don’t forget that GOP legislatures at the state level have been driving those cuts, and news that Philadelphia, under conservative Governor Corbett, is on the verge of shuttering sixty-four schools should comfort no one. Nor should the fact that thirty states still face budget shortfalls totaling $49 billion. The recovery’s story overall is still pretty disheartening. “When you look over the course of recovery,” , “for every two jobs women gained in the private sector they’ve lost a public sector job.”

Half of college grads can't find full-time jobs - Jihan Forbes got good grades and a degree two years ago. The only thing she didn't get was a full-time job. "They said, 'You get a degree, and you'll get a job. You are going to be a step ahead of everybody,' and that really hasn't been the case," Forbes said. "I've sent out hundreds of resumes, like at least 300 in the past two years," Forbes said. Forbes said there have been many bad moments during the process. "I mean, I have my breakdowns," Forbes said. Forbes majored in English, but a recent study found employers most likely to hire graduates with engineering (69 percent), business (63 percent), accounting (53 percent) or computer science degrees (49 percent). Another study by Rutgers University found more than a quarter of recent grads (27 percent) said their jobs have them working below the level of their education, the same percentage that have moved in with their parents to save money. The median salary for recession-era grads in their first job is $27,000, about $3,000 less than those who graduated before the recession began.

Half of college grads working full time, with less pay, deep debt - For most recent college graduates, these are gloomy times. Only about half are working full-time, with the majority starting with less pay than expected while also dealing with huge student debts. Nearly six in 10 think they'll end up less financially successful than their elders. It's a pessimistic outlook from the subjects of a study from Rutgers University, which this spring surveyed hundreds of people who graduated between 2006 and 2011. About 12 percent are under- or unemployed (many of the rest are volunteers, in the military or still in school). Workers who graduated during the recession - from 2009 through last year - earned a median starting salary of $27,000 - or $3,000 less annually than earlier graduates. Nearly a quarter of all respondents said their current job pays much less than they'd anticipated. Female graduates earned $2,000 less than their male counterparts. Most fresh college grads said their first jobs didn't help them advance along a career path and that the positions didn't even require a four-year degree. Four in 10 said they took the work just to get by.

The Rotten Kid theorem? - According to Adecco, nearly a third of parents are helping their kids find work, and nearly one in ten are taking them to job interviews. …Three percent of recent college grads say their parents have actually sat in with them during interviews, and one percent claim Mom or Dad wrote their thank you notes afterwards. Nearly one in four say they would not take a job they were otherwise interested in if they could not make or receive personal phone calls at work. Twelve percent say they wouldn’t work at a place that wouldn’t let them check in on Twitter or Facebook. Finally, my favorite, five percent — one in 20 recent grads — say they wouldn’t take a job where they couldn’t shop online, and the same amount would say no to employment where they couldn’t check sports scores. The story is here, and for the pointer I thank John Chilton.

North Dakota oil boom: thousands pin their dreams on striking it rich - It's a life measured out in 18-hour shifts and washed down with 5-hour Energy Drinks and Red Bull, a job on the rigs in North Dakota's oil boom: three weeks on, two weeks off, in exchange for $100,000 or more a year and the promise of being set up for life. In an America where 18m are out of work, the chance of finding any job – let alone a well-paid job – exerts an irresistible force that is drawing thousands to North Dakota in a 21st century re-enactment of the Gold Rush. Only this time, it's oil. North Dakota now produces more oil than several members of Opec, and many in the industry are predicting America will soon overtake Saudi Arabia and even Russia as the world's top oil producer. To do that, however, the oil fields need more workers than the thinly populated state of North Dakota can possibly supply. Scores of people arrive every day looking for a new start, a second chance in lives wrecked by personal troubles and the recession. "A new guy can come out here and fall off a turnip truck and make $50,000, $60,000 easy as long as he can pass a piss test and tie his boots up," said Don Beaty, an oil worker from Alaska. But not everyone is lucky, and the oil rush has brought chaos and big city troubles, like bar fights, prostitution and violent crime, to once placid small towns.

More Americans clocking in during their golden years - The labor force participation rate, or the number of Americans who are working or looking for work, has declined in recent years for every age group except those who are 55 and older, according to a report released this week by the Government Accountability Office. Older Americans generally have a lower labor force participation rate than other age groups, and for good reason: That’s the point in life when most people retire. But the percentage of older Americans who are choosing to remain in the labor force, or to get back in it, has steadily been rising over the past 20 years and even continued to increase over the course of the recession and recovery. About 40 percent of workers age 55 and over were working or looking for work in 2011, the GAO analysis found, compared to about 30 percent in 1990. That’s in contrast to young and prime-age Americans, who have seen declines in labor force participate rates in recent years.

Exclusive: Over 55 and jobless, Americans face tough hunt - The number of long-term unemployed workers aged 55 and older has more than doubled since the recession began in late 2007. Getting back to work is increasingly difficult, according to a government report being released on Tuesday.For unemployed seniors, the chances of reentering the workforce are grim. Experts worry that unemployed seniors face a long-term threat as the impact of lost wages compounds. In what should be their prime earning years, these older workers rely on savings, miss out on potential wages and prematurely tap into Social Security - all at a time when Americans live longer and health care and other living costs are rising. About 55 percent of jobless seniors, or 1.1 million, have been unemployed for more than six months, up from 23 percent, or less than 200,000, four years earlier, according to a Government Accountability Office report released on Tuesday. The GAO, a non-partisan investigative arm of Congress, also found that years of lost work significantly reduced retirement income, particularly for those with defined contribution retirement plans.

How Older Workers Weather Layoffs - While the recession and its aftermath have been particularly rough on the youngest workers, the oldest workers may end up suffering the longest. A new Government Accountability Office report on unemployed older workers looks at the difficulties they face finding new jobs if they are laid off, and how their financial security in retirement may be compromised as a result. As has been documented, older workers have not been laid off at the same rate as younger workers, but once they lose their jobs, they tend to spend much longer finding new jobs, if they find them at all. In 2011, 55 percent of workers older than 55 had been out of work for 27 weeks or more, compared to 47 percent of those 25 to 55. Of workers who lost their jobs between 2007 and 2009, just under a third of those 55 to 64 had found full-time jobs by January 2010, compared with 41 percent of those 25 to 54. The report’s authors convened focus groups of unemployed older workers and prospective employers to discuss the barriers to re-employment, finding that older workers believed they suffered from age discrimination but also had trouble adjusting to new technology and online job searches. Employers were hesitant to hire older workers because of perceived higher health-care costs, as well as concerns that older workers would not stay long enough for the employer to reap a good return on investment. Those older workers who do find jobs are much more likely to take a pay cut than younger workers. According to the report, 70 percent of workers 55 or older who were laid off between 2007 and 2009 and found a new job are now earning less than in their previous job, compared to 53 percent of those 25 to 54.

Will You Be More Successful Than Your Parents? - If the American dream is doing better than your parents, only about half of recent college graduates think they will achieve it. They are even more pessimistic about the prospects for their peers, according to a new survey of recent graduates from the Heldrich Center for Workforce Development at Rutgers University. Here’s a chart showing how graduates of the college classes of 2006-11 feel their generation will fare compared to the generation before them, and how the respondents personally will fare compared to their own parents: The bar on the right shows that just shy of half (48 percent) of college grads from the classes of 2006-11 believe they will have more financial success than their parents. A fifth (20 percent) say they will probably have less financial success than their parents, and about 29 percent say they’ll do about as well. If that sounds discouraging, take a look at the bar on the left, which shows responses to a question about whether today’s generation of young people over all will be more successful than their parents. A mere 16 percent said yes. A majority — 58 percent — predicted that their generation will have less success than the generation before.

Productivity Doubled -- And The Middle Class Got Screwed. What Went Wrong? - Corporations did just fine in the immediate postwar decades as the nation’s productivity rose steadily. But so did average Americans, as both workers and consumers. Over the course of the postwar years, Americans shared the wealth that higher productivity created. The nation would experience the greatest epoch of middle class prosperity the world had ever seen. What happened next? That’s the story that Lawrence Mishel, the president of the Washington, D.C.-based Economic Policy Institute, tells in his just-released preview on productivity from the upcoming new edition of EPI’s biannual economic factbook series, The State of Working America. Mishel tells his story with lots of useful numbers. But we can sum up his data in just three quick words. The sharing stopped. Since 1973, average Americans have realized little benefit from rising U.S. economic productivity. Between 1973 and 2011, that productivity most certainly did rise substantially, by 80.4 percent. That increase, EPI's Mishel notes, would have easily been “enough to generate large advances in living standards and wages if productivity gains were broadly shared.”

Equal rights and the U.S. economy, by Chrystia Freeland - Are equal rights good for the economy? Campaigns against discrimination, like the battles for women’s rights and civil rights in the 1960s and the fight for gay marriage equality today, are usually framed as struggles for justice.. But there is actually a powerful economic argument for equal rights. If you believe that talent isn’t determined by gender, race or sexual orientation, but is instead a roll of the genetic dice, then the most productive society will be the perfectly fair one. A society that is blind to gender, race and sexual orientation will choose the best person for the job – not just the best white, straight man.  A draft paper by four U.S. economists makes the strong empirical case that it is. Fairness, they contend, has made the economy more productive... as much as 20 percent of the growth in productivity in the United States over the past 50 years can be attributed to expanded opportunities for women and blacks. “Changes in things that have affected women or blacks specifically have yielded a sizable impact on overall U.S. earnings growth,” Hurst told me. “That is a big effect.” “If we believe in a world where there was discrimination faced by women and blacks, then not having women and blacks as lawyers and doctors, for example, was costly for society, if we think they are born with the same distribution of talent as white men,” Hurst said.

Why a Strong Middle-Class Is Necessary For Growth - On issues ranging from political corruption to a lack of a serious, sustained response to the economic crisis, people are telling sharper and more critical stories about why inequality should be a concern for the country.  One of the issue areas where this has been lacking is long-term economic growth. The research has been substantial, but few have collected and curated it into a set of arguments for why inequality is bad for the health of our economy. This is one of the more important battles. The normal assumption is that inequality helps everyone by allowing the economic pie to grow as big and as quickly as it possibly can. The background thought animating this is that there's a serious tension between efficiency and equality -- to support equality is to necessarily sacrifice economic efficiency. Heather Boushey and Adam S. Hersh from the Center for American Progress have a new paper out, "The American Middle Class, Income Inequality, and the Strength of Our Economy: New Evidence in Economics," that summarizes the case for why inequality can damage the economy. They start by reviewing the literature trying to link income inequality and growth, and find that the link is, if anything, in the other direction. "Roland Benabou of Princeton University surveyed 23 studies analyzing the relationship between inequality and growth. Benabou found that about half (11) of the studies showed inequality has a significant and strongly negative effect on growth; the other half (12) showed either a negative but inconsistently significant relationship or no relationship at all. None of the studies surveyed found a positive relationship between inequality and growth."

Big Idea: To Fight Inequality, Link Worker Pay to Corporate Taxes - Most people in the 1 percent are simply executives at non-financial businesses—CEOs, CFOs, COOs, vice presidents, and whatever other inflated titles they’ve conjured up. Corporate executives make up 31 percent of the top 1 percent, and at the highest tier, among the top .01 percent, corporate executives from non-financial companies make up 40 percent of the total.   An astonishing contributor to inequality, then, is corporate bosses taking a larger share of the company’s revenue for themselves. In 2008, the average CEO earned 300 times the pay of the average worker. That’s way out of line by historic standards: In 1980, the ratio was just 40 to 1. And it’s way out of line by international standards—only in the United Kingdom is executive pay comparable; in Japan, executive compensation relative to the pay of average workers is one-fifth of what it is in the United States. It’s also out of line at companies that demonstrate that you don’t need to pay the CEO like a king in order to excel: At Whole Foods Markets, the CEO’s compensation is capped at 14 times the average employee salary.

The Human Disaster of Unemployment - Baker and Hassett - THE American economy is experiencing a crisis in long-term unemployment that has enormous human and economic costs. In 2007, before the Great Recession, people who were looking for work for more than six months — the definition of long-term unemployment — accounted for just 0.8 percent of the labor force. The recession has radically changed this picture. In 2010, the long-term unemployed accounted for 4.2 percent of the work force. That figure would be 50 percent higher if we added the people who gave up looking for work. Long-term unemployment is experienced disproportionately by the young, the old, the less educated, and African-American and Latino workers. While older workers are less likely to be laid off than younger workers, they are about half as likely to be rehired. One result is that older workers have seen the largest proportionate increase in unemployment in this downturn. The number of unemployed people between ages 50 and 65 has more than doubled. The prospects for the re-employment of older workers deteriorate sharply the longer they are unemployed. A worker between ages 50 and 61 who has been unemployed for 17 months has only about a 9 percent chance of finding a new job in the next three months. A worker who is 62 or older and in the same situation has only about a 6 percent chance. As unemployment increases in duration, these slim chances drop steadily.

On Hysteresis Hysterics - Dean Baker and Kevin Hassett have a great editorial in the weekend's New York Times, "The Human Disaster of Unemployment." They correctly identlfy the many long-term psychological and social problems of periods of mass unemployment for people, families, communities, and ultimately our nation. As is the nature of editorials written by people with cross-ideological committments, the solutions are a bit off, but this weakness is also part of the issue with discussing the urgency of unemployment because of "hysteresis." Imagine having a fever so bad that it permanently raised your body temperature. Now imagine a period of unemployment so bad that it permanently reduces our economy's ability to produce things and employ people. That's hysteresis -- the long-term scarring of our economy from periods of short-term unemployment. I've discussed this before, and I think the evidence is very convincing it is a major issue. Hysteresis is part of the engine in the recent Brad Delong/Larry Summers paper arguing for self-sustaining stimulus. Crucially, hysteresis is an intellectual challenge to the so-called structuralists who would argue that we should ignore the short-term economy and just focus on the long-run health of the economy. Beyond us all being dead in the long run, the long run is just a series of short runs right after each other. And hysteresis shows that short-run problems can perpetuate themselves and become embedded in the long-run economy.

Unemployment Rates Drop in 2/3 of States - Unemployment rates fell in two-thirds of U.S. states last month, evidence that modest economic growth is boosting hiring in most areas of the country. And in many states, unemployment has fallen well below the national average, which was 8.1 percent last month. Rates were lower than 7 percent in 22 states in April. That compares to only 13 states in April 2011. The Labor Department said Friday that unemployment rates dropped in 37 states in April, the most in three months. Unemployment rose in 5 states and was unchanged in eight. Nationally, the unemployment rate has fallen a full percentage point since August. Employers have added a million jobs over the past five months, although the pace of hiring slowed in March and April.

State Unemployment Rates decline in 37 states in April - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in April. Thirty-seven states and the District of Columbia recorded unemployment rate decreases, five states posted rate increases, and eight states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-eight states and the District of Columbia registered unemployment rate decreases from a year earlier, while only one state experienced an increase and one had no change. Nevada continued to record the highest unemployment rate among the states, 11.7 percent in April [down from 12.0 in March]. Rhode Island and California posted the next highest rates, 11.2 and 10.9 percent, respectively. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009. In early 2010, 18 states and D.C. had double digit unemployment rates. The states with the largest decrease in the unemployment rate are Michigan, Alabama, Tennessee, South Carolina, Ohio and Oregon. The states with the smallest improvement are New Jersey and New York.

Payrolls Increase in 32 States, Led by Indiana and Texas - Payrolls increased in 32 states in April, while the unemployment rate dropped in 37, indicating the labor market improved across much of the U.S.  Indiana led the nation with a 17,100 gain in payrolls, followed by Texas with 13,200 more jobs. The jobless rate dropped the most in Arizona and Oklahoma from the prior month.  The U.S. added the fewest number of workers in April, while the jobless rate unexpectedly fell to a three-year low of 8.1 percent as people left the labor force, data showed this month. The world’s largest economy needs faster hiring to spur consumer spending and to help reduce unemployment, which Federal Reserve policy makers have said remains elevated.  Nevada remained the state with the highest jobless rate even after it dropped to 11.7 percent, its lowest level since June 2009, from 12 percent in March. Unemployment in Rhode Island climbed to 11.2 percent from 11.1 percent, putting it in second place, followed by California at 10.9 percent.

Jobless Rates Fall in Swing States - The unemployment rate fell in 37 states and Washington, D.C., last month, most notably in several swing states that will likely prove critical in the November election, the Labor Department reported Friday.The job gains were relatively small in April as the pace of hiring slowed from the winter, indicating a sluggish labor market. Nationally, the unemployment rate ticked down a tenth of a percentage point to 8.1% from March, and part of the decline was due to workers leaving the labor force rather than a large gain in new jobs. Still, a majority of states chipped away at their high jobless rates. Arizona and Oklahoma saw a drop of four-tenths of a point in their unemployment rate. Four states saw a three-tenths-of-a-point drop: Florida, Nevada, New Mexico and North Carolina. Three notched a two-tenths-of-a-point drop: Idaho, Massachusetts and Minnesota.Florida, Nevada and North Carolina are all considered key “swing” states — those that are expected to be particularly close in the November presidential election, given how they voted in the past and their current voter breakdown. Florida’s rate is now at 8.7%, down from 10.6% a year ago. Nevada — still crippled by the housing crash–is at 11.7%, down from 13.6% a year ago but still the highest in the nation. North Carolina’s is at 9.4%, down from 10.4% a year ago.  See the full interactive graphic.

Bye bye, unemployment benefits - More than 200,000 long-term jobless Americans will lose their unemployment checks this week, when eight states roll off the federal extended benefits program. Nearly half of them live in California, and the rest reside in Florida, Illinois, North Carolina, Colorado, Connecticut, Pennsylvania and Texas. The federal extended benefits program has provided the jobless with up to 20 weeks of unemployment checks after they've run through their state and their federal emergency benefits, which together last up to 79 weeks. But the extended benefits program is expiring throughout the country as the economy improves. To be eligible for these benefits, a state must show that its unemployment rate is at least 10% higher than it was in at least one of the past three years. State unemployment rates1 have been falling as the jobless find new positions or exit the workforce2. For instance, Nevada has the highest state unemployment rate at 12%, but it's still below the 14% it logged in October 2010. Best companies to work for in the Fortune 5003 Already, 25 states have rolled off the extended benefits program, with 15 of them exiting last month alone. But more unemployed folks will be affected by this week's cessation than April's, when about 135,000 people saw their payments end.

No More Help: 403,000 Americans Lose Long-Term Unemployment Benefits - More than 230,000 unemployed workers will lose their jobless benefits this weekend as portions of federal programs expire across several states. All told, 409,300 long-term unemployed Americans in 27 states will have lost upward of 20 weeks of federal unemployment benefits by this past Saturday, even as the many state jobless rates remain high…“A growing number of long-term unemployed workers are being left behind,” said Christine Owens, executive director of the NELP. “Job openings are not taking the place of these cuts,” Owens said. A tier of 13 to 20 weeks of federal jobless benefits, used by the long-term unemployed, are expiring because of legislation Congress passed in February that gradually cuts federal benefits to 79 weeks from 99. That figure includes up to 26 weeks of state-level insurance. “These cuts are coming faster than the economy is improving, which means more workers will have to survive without any jobless assistance and families will have less money to put back into the economy,” Owens said.

The Economics of Marginalization and Hopelessness - Krugman - That’s one of the subject headings in this recent survey paper (pdf) on teen births, which are much higher in America than in other advanced countries. The authors find evidence suggesting that inequality and lack of mobility are central, another sign that Wilkinson-type views about the corrosive effects of inequality are going seriously mainstream. Here’s the money graph: I was wondering how this would look if we got down to individual states. Here’s the scatterplot, with inequality from the Census and teen births from KFF: I find this interesting, both for the apparent relationship between inequality and teen births and for the somewhat surprising social health of the Northeast Corridor; how do the states of Acelaland manage to have relatively few teenage births despite high inequality? Is it the nature of the inequality? Is it more liberal contraception policies?

SNAP benefits surpass 10% of all grocery spending  - In 2010, for the first time, SNAP benefits appear to have surpassed 10% of all grocery spending. This seems to me like a significant threshold.  The program formerly known as food stamps is not just an important part of the safety net.  It plays a big role in the U.S. retail economy more generally.  It should be a national priority to seek economic growth of the sort that reaches all the way to the low-wage labor market.  The last time we had that type of poverty-reducing economic growth for a sustained period was the late 1990s. I provide more detail about recent program trends in "The New Normal: The Supplemental Nutrition Assistance Program (SNAP)," published this week in the American Journal of Agricultural Economics (AJAE).  The paper came out of a lively conference session, organized by Benjamin Senauer and including papers by himself and Mark Rosegrant, Mike Boehlje, Brent Gloy, Jason Henderson, and Tim Beatty. This figure compares administrative data on SNAP benefits to USDA's two data series on aggregate food spending.  Depending on the measure of food spending used, SNAP now represents 10% to 17% of the food retail economy.

SNAP faces billions of dollars in cuts -- Melissa Booher is scared. For the last five years this mom has been able to put food on the table for her family because of food stamps. "I honestly don't know what I'd do without them," said Booher. But she may soon have to figure it out. In an effort to reduce the deficit and replace what would have been a 10 percent cut to the military budget, the House of Representatives voted last week to cut the federal Supplemental Nutrition Assistance Program (SNAP) by $36 billion. "That's just going to be catastrophic for working families across all of the 17 counties of North Florida that we serve," said Bruce Ganger. Ganger is the head of the local food bank Second Harvest North Florida. This year, Congress has already forced him to cut two million pounds of food from their distribution. Now faced with this, he's unsure how he'll continue. "There's going to be less food in the system to feed them and more demand from people who are going to need the food," he said. "Without the SNAP benefits and without food pantries supplementing those programs, I know a lot of families would be without. It's not just myself," said Booher. According to the Department of Children and Families, more than one in four households in Duval County rely on SNAP. Breaking that down further, that's 203,000 local children.

Preying on the Poor - The trick is to rob them in ways that are systematic, impersonal, and almost impossible to trace to individual perpetrators. Employers, for example, can simply program their computers to shave a few dollars off each paycheck, or they can require workers to show up 30 minutes or more before the time clock starts ticking. Lenders, including major credit companies as well as payday lenders, have taken over the traditional role of the street-corner loan shark, charging the poor insanely high rates of interest. When supplemented with late fees (themselves subject to interest), the resulting effective interest rate can be as high as 600% a year, which is perfectly legal in many states. It’s not just the private sector that’s preying on the poor. Local governments are discovering that they can partially make up for declining tax revenues through fines, fees, and other costs imposed on indigent defendants, often for crimes no more dastardly than driving with a suspended license. And if that seems like an inefficient way to make money, given the high cost of locking people up, a growing number of jurisdictions have taken to charging defendants for their court costs and even the price of occupying a jail cell. The poster case for government persecution of the down-and-out would have to be Edwina Nowlin, a homeless Michigan woman who was jailed in 2009 for failing to pay $104 a month to cover the room-and-board charges for her 16-year-old son’s incarceration. When she received a back paycheck, she thought it would allow her to pay for her son’s jail stay. Instead, it was confiscated and applied to the cost of her own incarceration.

For Whom the Austerity Bell Tolls - In conversations and debates around the recent deceleration in job growth, when I’ve pointed out that we here in the US have our own austerity programs going, I’m often met with disbelief.  After all, we’ve got these huge federal budget deficits, right?! Right, but what matters in terms of foot-on-the-accelerator is the change in the budget deficit, and the fact is we’ve been letting up right as the economy appears to have a slowed a bit.  Add state fiscal drag and the growing unemployment insurance cuts and you get the picture. On the first point, the figure compares the budget deficit so far this fiscal year with the one from the same months of last FY.  Last year’s was $150 billion more negative.  Annualized, that’s enough to drive the unemployment rate a half-point higher than it would otherwise be. Then there are all the state job losses, which are also keeping the unemployment rate elevated, as I show here. Finally, as my CBPP colleague and UI expert Hannah Shaw points out, over 400,000 long-term unemployed persons in 25 high-unemployment states have lost UI benefits so far this year as the extended benefits program is ending in states across the land.

Austerity Budgets Still A Problem - State austerity budgets are driven both by conservative ideology and fiscal necessity even though the poor recovery in public sector jobs hurts our national recovery.  The latest employment report from the Department of Labor Statistics (DOLS) was disappointing mostly because public (government) employment is not even keeping pace with the slow improvements in private sector jobs. Austerity, as a solution to the recession, has proven to be a harmful economic prescription, yet it still remains a popular conservative choice. Instead of leading us out of recovery, state austerity budgets are prolonging the recession. Using the latest DOLS statistics for total government employment from February 2008 to February 2012, the follow charts depict just how well each state has handled the economic crisis.  States in which the trend line is rising are doing their part to restart the economy.  State where the trend line is pointing downward are implementing harmful austerity budgets.  States with currently Republican or Democratic governors are labeled in red or blue.   States where the political affiliation of the governor changed in 2010 have a red or blue line to indicate the party to which the preceding governor was affiliated.  In the period from February 2012 March 2012 (not shown), of 15 states still implementing austerity budges 12 of the 15 have Republican governors.  This data only reflects state government employment.  It doesn't include the very poor record on local government employment, which including teachers, firemen and police.

The Great Gatsby Curve, for the States - Earlier this year, Alan Krueger, the chairman of President Obama’s Council of Economic Advisers and a former Economix contributor, presented what he called the Great Gatsby Curve: that is, a chart showing a positive relationship between intergenerational mobility and income inequality in rich countries. It suggested that a greater concentration of wealth might make it harder for people at the bottom to move up the income ladder. Since then, Pew’s Economic Mobility Project has released American state-level mobility data. I thought it might be interesting to look at whether states in which wealth is distributed more evenly also appear to provide poorer residents with opportunities for more upward mobility.It’s an exceedingly difficult question to answer (and Pew’s report did not seek to do so), especially given the limited data available. But here’s a rough, back-of-the-envelope first go.The chart above shows inequality on the horizontal axis and relative income mobility on the vertical axis. Here are the exact metrics I used: Pew produced several different measures for economic mobility (none of which was directly comparable to that used in the original Gatsby Curve chart, unfortunately). I focused on its metric for relative upward mobility.

Whites Now Account for Under Half of Births in U.S - After years of speculation, estimates and projections, the Census Bureau has made it official: White births are no longer a majority in the United States. Non-Hispanic whites accounted for 49.6 percent of all births in the 12-month period that ended last July, according to Census Bureau data made public on Thursday, while minorities — including Hispanics, blacks, Asians and those of mixed race — reached 50.4 percent, representing a majority for the first time in the country’s history. Such a turn has been long expected, but no one was certain when the moment would arrive — signaling a milestone for a nation whose government was founded by white Europeans and has wrestled mightily with issues of race, from the days of slavery, through a civil war, bitter civil rights battles and, most recently, highly charged debates over efforts to restrict immigration. While over all, whites will remain a majority for some time, the fact that a younger generation is being born in which minorities are the majority has broad implications for the country’s economy, its political life and its identity. “This is an important tipping point,” said William H. Frey, the senior demographer at the Brookings Institution, describing the shift as a “transformation from a mostly white baby boomer culture to the more globalized multiethnic country that we are becoming.”

Big Generation Gaps in U.S. Racial Composition - The U.S. has hit a racial tipping point where less than half of newborns are whites of European descent. But since the older population still has a strong majority of non-Hispanic whites, these racial changes have big generational divides. Below is a chart of counties where the overall majority is non-Hispanic white, but where whites are a minority among the population under 5. The biggest divides are in rural counties, many of which have seen out-and-out declines in their white population, leading to big percentage gains. Still, many larger counties have huge white/minority divides that are a great illustration of how different generations view issues of race and immigration. Take, for instance, Maricopa County, Ariz., which surrounds Phoenix and is a hotbed for the nation’s continuing debate over illegal immigration. Maricopa had an 18.4 percentage point gap between the share of the overall population that is non-Hispanic white and the share of kids under 5. In other words, while non-Hispanic whites are still a strong majority of Maricopa’s overall population, white children are a clear minority. Some other big counties with a big race/generation gap are King County, Washington, which includes Seattle, Tarrant County, Texas (Fort Worth), Palm Beach County, Florida and Cuyahoga County, Ohio (Cleveland).

This Column Is Not Sponsored by Anyone - I had no idea that in 2001 an elementary school in New Jersey became America’s first public school “to sell naming rights to a corporate sponsor,” Sandel writes. “In exchange for a $100,000 donation from a local supermarket, it renamed its gym ‘ShopRite of Brooklawn Center.’ ... A high school in Newburyport, Mass., offered naming rights to the principal’s office for $10,000. ... By 2011, seven states had approved advertising on the sides of school buses.” Seen in isolation, these commercial encroachments seem innocuous enough. But Sandel sees them as signs of a bad trend: “Over the last three decades,” he states, “we have drifted from having a market economy to becoming a market society. A market economy is a tool — a valuable and effective tool — for organizing productive activity. But a ‘market society’ is a place where everything is up for sale. It is a way of life where market values govern every sphere of life.”  Why worry about this trend? Because, Sandel argues, market values are crowding out civic practices. When public schools are plastered with commercial advertising, they teach students to be consumers rather than citizens. When we outsource war to private military contractors, and when we have separate, shorter lines for airport security for those who can afford them, the result is that the affluent and those of modest means live increasingly separate lives, and the class-mixing institutions and public spaces that forge a sense of common experience and shared citizenship get eroded.

Metals Thefts Spike 400 Percent In One County - Baltimore County Police have set up a special team to investigate the spike in thefts of metals. Chief Jim Johnson has created a Metals Theft Team. He tells WBAL Radio that since 2009, there has been a more than 450 percent increase in metal thefts in the county. Johnson says aluminum bleachers, poles and products are also been stolen, dismantled and scrapped. "What we have experienced in the past is a lone individual perhaps stealing a few pounds of copper. Today, we are seeing a more sophisticated network of copper thieves and middle men holding the copper and watching for an increased copper commodity price on the global market and they then move the products," says Johnson. The police department has teamed up with BGE to try and create more awareness around the theft of metals. Chief Johnson says BGE is now going to paint their copper wires lime green color to make it more identifiable when it is moved through a scrap processor.

Department of Correction cuts could free thousands of prisoners - Budget cuts to the Alabama Department of Corrections could result in thousands of inmates being turned loose. Lawmakers will have the rest of the regular session to work out the budget issues. The House approved over $300 million dollars for the state's prison system, but the Senate only approved $184 million dollars, which would cut the DOC's budget by $180 million dollars. If lawmakers pass the senate budget, DOC commissioner Kim Thomas said roughly 18-thousand of the 25,500 prisoners in state facilities would be set free. Thomas said under the senate version of the general fund, most of the state's corrections facilities would have to close. The inmates selected to be released would be non-violent and violent inmates. Thomas said, "Those 18,000 creates almost immediate risk to the public and leaves us a rather stagnant 9,000 inmates which is basically taking your death-row, your life without parole." While lawmakers deal with budget cuts, Governor Bentley has already passed a bill allowing inmates to earn money inside the wires. He is hoping the prison work program will generate money for the state. Lawmakers said it will save the budget millions of dollars.

Failure of tax hike forces sheriff and DA to hand out pink slips in Oregon ...A failed levy vote in an Oregon county is taking a toll: government workers facing dismissal, a pending prisoner release, and crimes such as misdemeanor domestic assault and shoplifting likely to go unprosecuted. A day after Josephine County voters resoundingly turned thumbs down on a levy to plug a $12 million budget gap, the sheriff and district attorney began handing out pink slips Wednesday, cutting staff to levels probably not seen since the region was settled during the 1850s Gold Rush. “We’re going to wreck the train here and see how we can put it back in the future,” Stephen Campbell, district attorney for the Southern Oregon county, told The Associated Press. The sizeable budget gap was left by the expiration of a federal safety net for timber-reliant counties such as Josephine. As a result of the cutbacks, the routine areas of law enforcement — drunken drivers, domestic abuse, shoplifting and car wrecks — will likely be where people see the loss of sheriff’s patrols and prosecutors first.

Scott Walker’s Numbers - So there has been a lot of chuckling over Scott Walker’s suggestion that his office is going to produce its own statistics. This is important to me because it highlights a couple of things.First off what does it mean to “create 250K jobs.”  I am going to tell you that it means that the latest revision to the BLS payroll series shows that your state has 250K more jobs than it did when you made the announcement and that there simply is no reality beyond that. I know that this weirds a lot of people out and if that is too much to handle then perhaps its better to think in terms of how we define “jobs”  We could say there is a BLS definition of jobs, a Unemployment Insurance definition of “jobs”, a household survey definition of “jobs” and then reality. Since we can’t measure reality directly we have to agree to be talking about one of these other measures or we are going to wind up just talking past each other.

Them that's got shall get -THIS week in the paper I'm writing about welfare for and hostage-taking by billionaires, or as it's more commonly known, American football. On Monday, Minnesota's governor, Mark Dayton, signed into law a remarkable deal authorising a new stadium for the hapless Vikings. The stadium is projected to cost $975m, of which the Vikings will pay less than half. The rest ($498m) will come from the state, through an expansion of gambling revenue, and from a Minneapolis hospitality tax. The Falcons want a new stadium to replace the admittedly dreary Georgia Dome; it is projected to cost nearly $1 billion, $300m of which will come from taxpayers. The Rams want a $700m upgrade to their 17-year-old, publicly-funded field; St Louis wants to cap public contributions at $60m (the Rams' owner, by the way, is worth $3.2 billion; he also owns a basketball team, a hockey team and a Premier-league football team; he recently fell just short of completing the set, losing his bid for baseball's Los Angeles Dodgers).  Teams in Oakland and San Diego have complained that their facilities are also outdated, and an outdated facility will never get the holy grail of American sport: the Super Bowl (sometimes even new facilities don't quite cut it; I understand the renovations of Lambeau Field and Ralph Wilson are lovely, but I do not see hordes of football fans flocking to Green Bay or Buffalo in January). Estimates of a Super Bowl's impact vary, both by site, and, of course, by who is doing the estimating. The National Football League (NFL) tends to estimate the economic impact of a Super Bowl at the high end: $300m to $400m. This paper by Victor Mathesen and Robert Baade argues that the true economic impact is around one-quarter of that amount.

California Deficit Swells to $16 Billion, Governor Says - California’s budget deficit has swelled to $16 billion after tax collections trailed projections amid the tepid economic recovery, Governor Jerry Brown said in a comment on his Twitter post.  The shortfall has widened from the $9.2 billion Brown estimated in January, after lawmakers resisted the Democrat’s call for cost cuts, the federal government blocked other reductions and April income-tax revenue missed budget forecasts by $2 billion. On May 14, he’s set to unveil a revised spending plan and to say how he would erase the gap.  Brown, 74, set out an initial budget in January with $92.6 billion in spending for fiscal 2013, which begins in July. That plan stripped more than $4 billion from health and welfare programs while relying on higher income and sales taxes. The levy increases will go before voters in November. If rejected, schools will lose $4.8 billion midway through the year.

California deficit has soared to $16 billion, Gov. Jerry Brown says - Gov. Jerry Brown announced on Saturday that the state's deficit has ballooned to $16 billion, a huge increase over his $9.2-billion estimate in January. The bigger deficit is a significant setback for California, which has struggled to turn the page on a devastating budget crisis. Brown, who announced the deficit on YouTube, is expected to outline his full budget proposal on Monday in Sacramento. "This means we will have to go much further, and make cuts far greater, than I asked for at the beginning of the year," Brown said in the video. Lawmakers and others were hoping that a rebounding economy would help the state avoid steep cuts to social services. But revenue in April, the most important month of the year for income taxes, fell far short of expectations, leading to a shortfall of at least $3 billion in the current fiscal year. The state has also spent $2.1 billion more than expected, according to the controller, further worsening California's financial health. Advocates involved in budget discussions say they expect deeper cuts to social services than Brown originally proposed in January. Union officials are also in negotiations with administration officials about ways to reduce state payroll costs, an issue that wasn't on the table earlier this year.

Jerry Brown releases revised budget to close $16-billion gap - Gov. Jerry Brown today released a $91-billion budget proposal that sharply cuts health and welfare spending, reduces state payrolls by 5% and freezes construction of new courthouses. Brown's revised budget reflects a steadily worsening fiscal picture for California. On Saturday, he announced via YouTube that the state's deficit had grown to $16 billion, nearly twice what he projected when he released his initial budget proposal in January. The gap grew, the budget revision states, because Brown over-estimated tax revenues by $4.3 billion and the federal government and courts blocked $1.7 billion in cuts the state wanted to make. The remainder of the difference reflects an increase in the amount of money the state is mandated to spend on education under a complex voter-approved formula. To close the wider gap, Brown has heightened the cuts he wants to make to Medi-Cal, to $1.2 billion, and maintained another $1.2 billion in welfare and child-care savings he proposed in January. He also wants to slash payments to people who care for the disabled by 7% and reduce the state payroll through a shorter workweek or wage concessions. He proposed $500 million in cuts to the state's struggling court system, including a one-year freeze on all new construction projects.

Brown Tax Increase Gains Urgency as Deficit Rises to $16 Billion - California Governor Jerry Brown bet that a nascent financial recovery would lift the world’s ninth- largest economy enough to whittle down a $9.2 billion deficit. Instead, the gap has widened to $16 billion. Today the 74-year-old Democrat will unveil his revised budget and explain what additional spending must be cut. Tax collections have run $3.5 billion below what he calculated four months ago. Spending has grown $2 billion above projections. The federal government and court ruling blocked some savings he expected, while his fellow Democrats in the Legislature balked at others. California, with an economy bigger than Russia’s, lost more than a million jobs in the recession that struck in 2007, costing the most populous U.S. state 24 percent of its revenue. The new deficit estimate increases the urgency of the governor’s plans to increase income taxes on some earners to the highest in the nation, and boost sales levies that are now more than any other state. “We are still recovering from the worst recession since the 1930s,” Brown said May 12 in a YouTube video. “Tax receipts are coming in lower than expected and the federal government and the courts have blocked us from making billions of necessary budget reductions.”

California governor calls for higher taxes, 4-day state workweek to fill $16 billion gap - California Gov. Jerry Brown on Monday asked state employees to work a four-day, 38-hour week as part of a package of massive spending cuts needed to help the state close an unexpected $15.7 billion budget deficit. In addition to the unusual four-day workweek — part of a mandated reduction in salaries and benefits to state workers of 5 percent — Brown's proposed budget, which would take effect July 1, also would slash $1.2 billion from the state's Medi-Cal program and more than $2 billion from education. Brown also urged voters to pass an initiative to raise taxes that he is supporting on the November ballot."I am a buoyant optimist," Brown said at a news conference, "but this is the best I can do" about the deficit, which is about $7 billion greater than Brown predicted when he proposed his initial budget in January.

Jerry Brown's plea to voters: 'Please increase taxes temporarily' — Gov. Jerry Brown released a plan to close California's rapidly growing deficit by switching state offices to a four-day week, slashing welfare benefits and healthcare for the poor and relying on a variety of short-term fixes — all in the hopes that voters will give the state some breathing room by raising taxes in November. The governor, who unveiled his revised budget proposal in the Capitol on Monday, is facing a nearly $16-billion budget gap, far larger than the $9.2 billion he predicted in January. He warned that the deficit could grow significantly if voters reject his proposed ballot measure to raise the state sales tax and income levies on the wealthy. That would trigger additional cuts, including reductions in public education equivalent to lopping three weeks off the school year, he said. "I'm linking these serious budget reductions … with a plea to the voters: Please increase taxes temporarily," Brown said at a morning news conference.

Banana Republic of California - And while all eyes are fixed on Greece, a tiny economy on the worldwide scale, a much larger economy is heading deeper into fiscal disaster: California. California has everything: stunning mountains and deserts, a breath-taking coast, delicious seasonal fruit and veggies, gourmet cheeses, a large variety of seafood, and grass-fed beef—well, and a mad cow, too. Nevertheless, expenditures are down for the first ten months of fiscal 2012 through April, just not as much as hoped for: State Operations outlays dropped by 8% to $20.8 billion and Local Assistance outlays inched down by a fraction to $59.5 billion. Combined, expenditures so far this fiscal year dropped 6.5% to $80.2 billion. Under Governor Brown, the state workforce has shrunk by 30,000 positions, though pay raises saw to it that salary expenditures rose.  Disappointing as the less than hoped-for expense reductions are, they’re the good news. The bad news is the steep drop-off in revenues, a sign of the shaky California economy, despite all the rhetoric to the contrary: For the first ten months of the current fiscal year, General Fund revenues dropped a chilling 10.7% to $65.6 billion, while Special Funds revenue was up 5.3%, for a combined decline of 6.5%—a deficit that was filled with $10.9 billion in “Temporary Loans.” To heck with the balanced-budget requirement.

S&P issues warning on California finances - The ratings agency Standard & Poor’s warned on Tuesday that it could downgrade California’s financial outlook if lawmakers don’t pass a credible budget plan this year. A final budget is due June 15, and lawmakers’ task has become increasingly difficult as the state’s deficit has swelled to nearly $16 billion. "We could change the outlook to negative or lower the rating if we believe the state's credit quality weakens through the budget process," said a report from Standard & Poor's. The ratings agency had upgraded California's financial outlook from "stable" to "positive" in February. That means California's credit rating of A-, the lowest of any state, is poised for improvement.

Stockton Weighs Bankruptcy Option in Confronting Deficit - Stockton, the central California city on the brink of insolvency, weighed filing for bankruptcy as it faces a $26 million budget gap in the next fiscal year. A Chapter 9 bankruptcy filing, massive cuts to city departments or concessions that may emerge from negotiations with creditors are among the options for balancing the spending plan, City Manager Bob Deis told the City Council at a meeting on the fiscal 2013 budget. Bankruptcy is an option only if the talks fail, Deis said yesterday. “The city needs to tighten the belt and start crawling our way out of this hole,” Deis said. The farming center about 80 miles (130 kilometers) east of San Francisco is negotiating with creditors under the provisions of a new state law aimed at helping municipalities avoid bankruptcy. Unsustainable retiree health-care costs and labor contracts, large borrowings, the weight of the recession, state raids on its finances and poor fiscal management brought the city to this point, Deis said.

Sacramento County courts expect 'catastrophic' cuts, layoffs - The Sacramento County court system looks like it's about to lay off at least 9 percent of its employees – and maybe twice that figure – as a result of the latest state budget revision. "We're going to have to have layoffs," Sacramento Superior Court Presiding Judge Laurie M. Earl said in an interview Wednesday, after digesting word of the $544 million reduction in state trial court funding announced Monday by Gov. Jerry Brown. Court officials have already begun to mail out layoff advisory notices. Earl said the local system needed to cut its staffing by 62 employees even before the governor laid out the need for the additional cuts. The new reductions could double that layoff figure, Earl said.

Harrisburg School District's $16 million deficit drives city school buses onto chopping block - As the Harrisburg School District stares down a nearly $16 million budget deficit, officials are exploring every avenue to try a plug the hole. One idea being considered is to stop providing transportation. “It’s going to be pretty tough. I don’t have a lot of family here to help out transporting her,” Angol said. “I wouldn’t let her walk to school. It’s too far to our house.” Transportation is not mandated by the state. Eliminating school buses could save the district $2.9 million. The district also is considering slashing athletics for an additional $378,000 in savings. However, school board member Brendan Murray said that even with cuts to transportation and other programs, such as the $1.6 million kindergarten program, a deficit of more than $5 million would remain. “We’re talking raises in taxes, cuts to all activities. No sports, no band, raising class sizes to 30 in the elementary schools and 35 in the high school. This is absolutely the worst-case scenario that I was afraid of,” he said.

Clark County School District seeks to lay off 1,015 employees - Under a final budget to be presented to the Clark County School District Board of Trustees this evening the district plans to lay off 1,015 licensed personnel. The layoffs are coming after an arbitrator sided with the teachers union, rebuffing the district’s attempt to maintain a pay freeze in order to fill a deficit. In the several weeks since the ruling, district officials have been fine-tuning their final budget, which has been obtained by News 3. The district, now mandated to offer raises for certain teachers, will face a deficit of $59.1 million dollars. In order to balance its budget, the district says 1,015 jobs would be lost: 840 positions would be trimmed in schools; another 175 literacy specialists would be let go. Layoff notices will go out the second week of June.

Shock Doctrine Comes to Philly Schools - Philadelphia teachers and parents—and educators throughout the country—were horrified a few weeks ago when Thomas Knudsen, the School District of Philadelphia’s chief recovery officer, unveiled a five-year plan to close 64 schools (25 percent of the system), move 40 percent of students into charters, slash the central office to 20 percent of its former capacity, and divide the rest of the district into “achievement networks” run by third-party operators. Mayor Michael Nutter said the district faced near “collapse” and that the plan was something Philadelphians needed to “grow up and deal with.” Can you believe that city officials later admitted that the charters and achievement networks wouldn’t actually save the district any money?

San Diego Unified School District Faces $120 Million Budget Deficit - San Diego Unified School District officials presented a report to the Board of Education Tuesday night stating the district can meet its financial obligations for the 2012-13 academic year due to potential budget cuts that could mean layoffs for about 1,155 employees, but financial uncertainties could make a balanced budget difficult for the 2013-14 academic year. District officials expected to face a budget deficit of around $120 million in the 2012-13 academic year and up to $97 million the following year, according to G. Wayne Oetken, the district's interim chief financial officer. "If this board had the power to vote away $122 million budget shortfall, we would instantly and unanimously have a vote to do away with that," said board President John Lee Evans. "But as a school district, we can't print money and we are not going to go into debt to the state. We're going to be responsible and we're all going to work together on this."

UC, CSU systems may each face additional $50 million cut under revised budget proposal - California’s higher education systems may be forced to take on greater cuts to help cover a $15.7 billion gap in state revenues, according to the governor’s revised budget proposal for the upcoming fiscal year. The new budget proposal, released Monday, reflects changes in California’s economic climate since January. The budget deficit has increased by almost $7 billion, according to the state finance department. “The fact is California has been living beyond its means. … There has to be a balance and a day of reckoning,” said Gov. Jerry Brown in a press conference Monday. “We have to take the medicine.” To cover the gap, Brown has proposed deeper cuts to the state’s health and welfare programs, as well as higher education. Under the revised budget proposal, both the University of California and the California State University systems would each need to absorb $250 million, which is $50 million more than what was proposed earlier this year.

Colleges, health care face cuts in La. budget - A state-run psychiatric hospital in central Louisiana shuttered. A program that aids families with children who have hearing, speech and motor control problems eliminated. College campuses pushed to financial emergency. Medical training programs threatened with loss of accreditation. Higher education and health care leaders outlined dire consequences to senators Monday of the $25 billion budget proposal passed by the House for next year. The plan contains $268 million less in state funding than what was sought by Gov. Bobby Jindal. "Cuts of this magnitude, in my opinion, cause me to question whether we really do value postsecondary education in this state," said University of Louisiana System President Randy Moffett. Health and Hospitals Secretary Bruce Greenstein said he'd have to shut down programs that treat the poor, uninsured and most vulnerable state residents, and he said the cuts could force people into more expensive care that will cost the state more money in later years.

Power to the professors: A bold, new way to fund research begins at U-Michigan - A first-of-its-kind, real-time research funding initiative at the University of Michigan puts $15 million into the hands of professors to jumpstart new projects they believe in. To qualify, three researchers from different disciplines just need to come up with an idea and agree to work together. A modern alternative to the traditional year-long government grant review process, the new MCubed program puts university professors in charge of divvying research dollars in a pure form of peer review. MCubed is designed to encourage bold research at the interfaces of academic fields, where big breakthroughs tend to happen, according to the designers of the grassroots program.

The College Degree Gap for Blacks is Huge: 2:1 - The table above is based on data from the Department of Education on college degrees by sex and race/ethnicity, and compares black college graduates by gender for the Classes of 1977 and 2009 (most recent year available). The chart displays the number of degrees earned by black females for every 100 degrees earned by black males. There is huge gender "degree gap" for the general population but that gap is much, much wider for black college graduates compared to the degree gap for all racial/ethnic groups.  For example, there were more than 250 master's degrees awarded in 2009 to black females for every 100 degrees earned by black men, and that degree gap is the widest, followed by the degree gap for Associate's degrees (217.5 black females per 100 males) and Doctor's (Ph.D. and Ed.D.) degrees (198.5 black women per 100).    Consider also that in 1976-1977, black men outnumbered black women for doctor's degrees and professional degrees (MDs and JDs) and there were 100 doctor's degrees earned by black men for every 63.6 degrees awarded to black females, and 100 professional degrees for black men for every 44.1 degrees earned by black women (more than a 2:1 ratio in favor of black men). By 2009, the gender imbalance had completely reversed and black women outnumbered black men by almost 2-to-1 for doctor's degrees and by 1.63-to-1 for professional degrees.

Quebec Plans to Suspend Classes Over Student Strike -  Quebec’s government said Wednesday night that it would introduce emergency legislation that would suspend the academic year at many of the province’s French-speaking universities and colleges in an attempt to end a 14-week student strike over a plan to increase tuition. Jean Charest, the province’s premier, said the semester would resume on a modified schedule in August in academic departments and schools that have been shut down by strikers, so that students would be able to complete the current school year. Mr. Charest declined to comment on reports from many news media outlets in Quebec that the legislation would also impose significant fines on anyone who tried to block access to classrooms.

Massive Student Protest Fills Streets of Montreal after Proposed 'Emergency' Law - Thousands of student protesters flooded the streets in Montreal last night after Quebec Premier Jean Charest announced a proposal for a new 'emergency law' in a bid to end the ongoing 14 week old student uprising and strike.The proposed legislation would halt the spring semester, push up the summer holidays, and restart classes in August. The move would maneuver around the current student strike and walkouts, moving classes to later in the year, in an effort to 'restore calm'. The government also hinted at severe penalties for anyone who tries to picket or prevent students from entering classrooms; further details about the extent of the law and its penalties will be released today.

A Generation Hobbled by the Soaring Cost of College - With more than $1 trillion in student loans outstanding in this country, crippling debt is no longer confined to dropouts from for-profit colleges or graduate students who owe on many years of education, some of the overextended debtors in years past. Now nearly everyone pursuing a bachelor’s degree is borrowing. As prices soar, a college degree statistically remains a good lifetime investment, but it often comes with an unprecedented financial burden. Ninety-four percent of students who earn a bachelor’s degree borrow to pay for higher education — up from 45 percent in 1993, according to an analysis by The New York Times of the latest data from the Department of Education. This includes loans from the federal government, private lenders and relatives. For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000, the Federal Reserve Bank of New York reports. Average debt for bachelor degree graduates who took out loans ranges from under $10,000 at elite schools like Princeton and Williams College, which have plenty of wealthy students and enormous endowments, to nearly $50,000 at some private colleges with less affluent students and less financial aid.

The Rotten Kid theorem? - According to Adecco, nearly a third of parents are helping their kids find work, and nearly one in ten are taking them to job interviews. …Three percent of recent college grads say their parents have actually sat in with them during interviews, and one percent claim Mom or Dad wrote their thank you notes afterwards. Nearly one in four say they would not take a job they were otherwise interested in if they could not make or receive personal phone calls at work. Twelve percent say they wouldn’t work at a place that wouldn’t let them check in on Twitter or Facebook. Finally, my favorite, five percent — one in 20 recent grads — say they wouldn’t take a job where they couldn’t shop online, and the same amount would say no to employment where they couldn’t check sports scores. The story is here, and for the pointer I thank John Chilton.

Slowly, as Student Debt Rises, Colleges Confront Costs - In a wood-paneled office lined with books, sports memorabilia and framed posters E. Gordon Gee, the president of Ohio State University, keeps a framed quotation that reads, “If you don’t like change, you’re going to like irrelevance even less.”Mr. Gee, who is often identified with a big salary and spendthrift ways, says he has taken the quotation to heart, and he is now trying to persuade Ohio State’s vast bureaucracy, and the broader world of academia, to do the same. At a time of diminished state funding for higher education and uncertain federal dollars, Mr. Gee says that public colleges and universities need to devise a new business model to pay for the costs of education, beyond sticking students with higher tuition and greater debt. “The notion that universities can do business the very same way has to stop,” said Mr. Gee, who is also the chairman of a commission studying college attainment, including the impact of student debt. College presidents across the country are confronting the same realization, trying to manage their institutions with fewer state dollars without sacrificing quality or all-important academic rankings. Tuition increases had been a relatively easy fix but now — with the balance of student debt topping $1 trillion and an increasing number of borrowers struggling to pay — some administrators acknowledge that they cannot keep putting the financial onus on students and their families.

Colleges as Merchants of Debt - Yves Smith - Student loan debt slavery is even worse than you probably thought. The Grey Lady tonight has a long, informative story, “A Generation Hobbled by the Soaring Cost of College“, that early on presents the stunning tidbit that 94% of the recipients of bachelor’s degrees borrowed in order to pay for it. The Times doesn’t report what average debt levels are in this cohort, but the average across all borrowers, per the New York Fed, is $23,000. Remember, this total includes graduates who have have been paying down debt, meaning they’ve amortized principal and almost certainly had borrowed less on average to complete school.  Contrast this “certain to be higher on average than $23,000″ for new graduates with their earning power, or more accurately, lack thereof. The Times article also mentions a Rutgers survey which seems to have some sample bias or underreporting of borrowing (of 2006-2011 graduates, only 55% of the respondents said they had borrowed to help fund college, and the median reported debt level was $20,000). The 2009-2011 graduates’ income averaged $27,000. In addition, only half said that their job required a college degree.  This juxtaposition confirms that colleges, like the financial services industry, have become increasingly extractive: whatever financial benefits accrue to getting an undergraduate education, they are more and more captured by the schools, though their ability to persuade students to go into hock to get a degree. And like late housing bubble borrowers, more are defaulting early on, meaning the loans were badly underwritten (ie, many should probably have never been made because it the odds of default were high):Nearly one in 10 borrowers who started repayment in 2009 defaulted within two years, the latest data available — about double the rate in 2005.

America’s trillion-dollar student debt burden - Over the weekend, the NYT had a great, in-depth look at soaring student debt figures, and the picture is not pretty: over the last decade, tuition and fees at state schools have increased 72%, and public funding per pupil has dropped 24%. Student loans are now a generational rite of passage – 94% of students borrow to earn a bachelor’s degree, up from 43% in 1993. The total value of student loan debt has passed $1 trillion, up from $852 billion halfway through 2011. As the Federal Reserve shows, it’s not just the young who bear the burden: a third of the value of outstanding student loans is owed by those older than 40. Congress, for its part, is currently wrangling over a bill that would prevent federally subsidized student loan rates from doubling to 6.8% beginning July 1. Looking at that debate, Will Wilkinson makes the point that interest rate subsidies are just another form of spending that could be better directed at scholarships for students of modest means. And Conor Friedersdorf takes that argument one step further, calling indebted college graduates a “privileged class” on whom spending money “in a country with impoverished immigrants and struggling high school dropouts and hard-pressed single mothers” is pandering at its worst.

The Student Debt Bomb - Whatever else they possess, the class of 2012 possesses an enormous amount of debt. Heavy borrowing’s not only for graduate students or drop outs from for-profit colleges any more. It’s also for Barnard alums. Forty eight per cent of those graduating this year from Barnard (where the price tag of an education stands at $58,078 ) have taken out loans to pay for their bachelor’s degree. As the New York Times recently pointed out, “Nationally, ninety-four percent of students who earn a bachelor’s degree borrow to pay for higher education — up from 45 percent in 1993.”  For these students things aren’t getting better, they’re getting worse.  Their will has nothing to do with it. Standing at $1 trillion and rising fast, outstanding student debt is a bubble set to burst. The New York Times report compiled shocking numbers: “For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.”  Not just the students but also their parents are borrowing. Loans to parents for the college education of children have jumped 75 percent since the 2005-2006, according to the Times.  “If the trends continue through 2016, the average cost of a public college will have more than doubled in just 15 years,” even as this year, “state and local spending per college student, adjusted for inflation, reached a 25-year low.”

Number of the Week: Student Loan Bubble - 368%: The jump since 2007 in the measure of consumer credit held by the government comprised primarily of student loans. If a student loan bubble were to pop, the government, not private banks, would be the one standing around with gum in its hair. Issuance of student loans has soared in recent years, hitting $867 billion at the end of 2011, according to an analysis from the Federal Reserve Bank of New York, more than credit cards or auto loans. The jump has led some to classify the student-lending market as a bubble, comparing it with the housing mess that nearly brought down the banking system in 2008. But there are some big differences between student loans and housing. For starters, mortgage credit absolutely dwarfs lending for higher education — by nearly a 10-to-1 ratio. Troubles in an $8 trillion market pose a much higher systemic risk.   Despite some recent signals of banks getting back into the student-loan business, private lending has been pretty much stagnant since the recession hit. Since December 2007 nonrevolving consumer lending by commercial banks is up less than 11%. Over the same period, total consumer loans owned by the federal government — a measure that includes loans originated by the Department of Education under the Federal Direct Loan Program — has more than quadrupled.

The Unsustainable Higher Education Bubble; It's Showing Signs of Stress, Has the Deflation Started? - It's been widely reported now that the U.S. has a serious and unsustainable "higher education bubble," not unlike the unsustainable housing bubble in the U.S. that eventually crashed and resulted in a housing meltdown, mortgage tsunami, a wave of foreclosures, and a global financial crisis.  The chart above illustrates that the ever-inflating higher education bubble with ever-increasing costs for college tuition and education supplies is starting to make the housing bubble look almost inconsequential by comparison.The CPI for college tuition has increased almost 12 times since 1978, compared to the 3.5 time increase in overall consumer prices, and the 4.4 time increase in home prices at their "bubble peak." What the two bubbles have in common is that they have both been fueled by political obsessions: one with homeownership and another with college education.  A Los Angeles Times article yesterday pointed out some of the grim facts that suggest that the higher education bubble is showing signs of real trouble:
1. Newly minted college graduates lucky enough to find a job after leaving school are in for a shock: They’ll likely be earning less money, adjusted for inflation, than they would have a decade ago.
2. Meanwhile, college debt is soaring. Last year, students took out $117 billion in new federal loans, pushing the total outstanding to above $1 trillion.
3. The average student graduating from college today has $25,250 in student loan debt.
4. Unlike other forms of debt, student loans are virtually impossible to discharge through bankruptcy. Uncle Sam frequently garnishes paychecks, tax refunds, even Social Security payments from people who haven't paid their government-backed loans.

Taxpayers Fund $454,000 Pay for Collector Chasing Student Loans -Joshua Mandelman made $454,000 in a single year as a student-loan debt collector -- more than twice the pay of the U.S. secretary of education. His boss, Richard Boyle, chief executive officer of Educational Credit Management Corp., received $1.1 million in 2010, including commuting expenses from his ranch in New Mexico. Five other managers each took home more than $400,000. ECMC, a Minnesota nonprofit group, owes its success to an 18-year-old agreement with the U.S. government. The company charges fees to borrowers and earns commissions from taxpayers -- totaling as much as 31 percent -- when it collects on defaulted student loans. Those rich rewards, which are approved by Congress, are sparking criticism that ECMC and similar collection agencies are reaping a bonanza from former students’ pain. The loan program “is enriching collection agencies and undermining a goal we all want for society -- to encourage people to go to college,” Robert Shireman, a former deputy undersecretary of education under President Barack Obama, said in a telephone interview.

Why So Many Ph.D.s Are On Food Stamps - With the economic troubles of the past few years, it's no surprise that the number of people using food stamps is soaring. The U.S. Department of Agriculture reports that an average of 44 million people were on food assistance last year; that's up from 17 million in 2000. What might be surprising, though, is one subgroup that's taken a particularly hard hit. The number of people with graduate degrees — master's degrees and doctorates — who have had to apply for food stamps, unemployment or other assistance more than tripled between 2007 and 2010, according to a report in The Chronicle of Higher Education. In 2010, the report says, 360,000 of the 22 million Americans with graduate degrees received some kind of public assistance. Chronicle reporter Stacey Patton spoke with Tell Me More host Michel Martin about why so many highly educated Americans have to rely on this type of aid. One thing that is happening at universities, Patton says, is the overlap between graduate students and adjunct professors — "contingent" faculty who are working on contracts. In an effort to cut costs, she says, universities increasingly rely on these instructors because unlike tenured faculty, they work part time, they don't have health benefits, and they can be fired or not have their contracts renewed.

Regrets About College - I still get a lot of e-mail from readers asking whether college is really worth it, given the huge debt burden it produces (as my colleagues have been documenting) and the large number of unemployed recent graduates. But while those recent graduates regret many things, having gone to college generally isn’t one, according to new survey data from the Heldrich Center for Workforce Development at Rutgers. Iin online interviews conducted by Knowledge Networks in April and May of this year, two of three graduates of the college classes of 2006-11 said they would do something differently if they could do it all over again. As you can see, only a measly 3 percent said they regretted having gone to college in the first place:

Elderly Poor? - There will be elderly poor.  Look at page 26 of this PDF.  I interpret those that don’t know or declined as being well below $50K in assets.  That means 60% of those reaching “retirement age” will have less than two years income stored up.That said I feel more sorry for younger workers who have to pay high amounts into Social Security/Medicare, and they will not get out of program what they put in.  There’s a longish article here, excerpting from a recently released book on the topic.  In general, the older you are, the sweeter the deal was for those who received payments from Social Security, at least until 2026 when benefits will be cut by 25%, or taxes raised. What this means is that in aggregate, Americans don’t save enough, particularly the Baby Boomers, of which I am one, but not a negligent one. We are heading for elderly poverty/work for a large portion of Americans.  I suspect that many older people will continue to work, solving their problem but taking jobs from those who are younger.

Light at the End of the Tunnel for State and Local Pensions? - The news for the last several years about underfunded pension programs for teachers, nurses, and other state and local workers has been bad.  But that may be changing. The stock market’s rebound from its depths in the recession has lifted pension assets substantially over the past two and half years, Federal Reserve data show.  The most recent data show assets at the end of 2011 were $680 billion more than in early 2009 (see Table L.119 here).The effects of the recovering market haven’t yet shown up in most state pension funds’ financial reports, but they will over the next few years.  When most funds estimate their available assets, they phase in the impact of investment gains and losses over several years in order to minimize year-to-year changes in the amount of money that the state must deposit in the fund. Also, states have taken a number of steps since 2009 to improve their pension systems’ fiscal health.  Forty-three states have made changes in the last three years, according to the National Conference of State Legislatures:  30 states have upped employee contributions, for example, and more than 30 states have reduced benefits.  These changes and other factors have slowed the growth in pension costs.

Social Security advocates go on the offensive - In March, the AFL-CIO issued a call-to-arms on Social Security, saying, “We have to stop playing defense, because we have nothing to be defensive about.”Advocates have taken up the challenge, coalescing around a strategy centered on eliminating the cap on taxable earnings, raising the cost-of-living adjustment (COLA) to reflect the higher out-of-pocket medical expenses faced by seniors, and increasing benefits across the board in ways that provide larger percentage increases for low-income beneficiaries. Building on a bill introduced in 2010 by Congressman Ted Deutch (D-Fla.) that included the first two of these measures, Senator Tom Harkin (D-Iowa) made them the centerpiece of the retirement provisions in his Rebuild America Act. The three measures were also among the recommendations of a blueprint released last Friday by the Institute for Women’s Policy Research, the National Committee to Preserve Social Security and Medicare Foundation and the NOW Foundation that focused on women; and two of these measures (minus the COLA increase) were among the recommendations of the 2011 Commission to Modernize Social Security that focused on people of color. The Center for Community Change and the Task Force on Older Women’s Economic Security, who are expected to issue their own set of recommendations in the near future, will also include some of these measures.

Dental Abuse Seen Driven by Private Equity Investments -  Isaac Gagnon stepped off the school bus sobbing last October and opened his mouth to show his mother where it hurt.  She saw steel crowns on two of the 4-year-old’s back teeth. A dentist’s statement in his backpack showed he had received two pulpotomies, or baby root canals, along with the crowns and 10 X-rays -- all while he was at school. Isaac, who suffers from seizures from a brain injury in infancy, didn’t need the work, according to his mother, Stacey Gagnon.  “I was absolutely horrified,” said Gagnon, of Camp Verde, Arizona. “I never gave them permission to drill into my son’s mouth. They did it for profit.”  Isaac’s case and others like it are under scrutiny by federal lawmakers and state regulators trying to determine whether a popular business model fueled by Wall Street money is soaking taxpayers and having a malign influence on dentistry.  Isaac’s dentist was dispatched to his school by ReachOut Healthcare America, a dental management services company that’s in the portfolio of Morgan Stanley Private Equity, operates in 22 states and has dealt with 1.5 million patients. Management companies are at the center of a U.S. Senate inquiry, and audits, investigations and civil actions in six states over allegations of unnecessary procedures, low-quality treatment and the unlicensed practice of dentistry.

Cutbacks Hurt a State’s Response to Whooping CoughWhooping cough, or pertussis, a highly infectious respiratory disease once considered doomed by science, has struck Washington State this spring with a severity that health officials say could surpass the toll of any year since the 1940s, before a vaccine went into wide use.  Although no deaths have been reported so far this year, the state has declared an epidemic and public health officials say the numbers are staggering: 1,284 cases through early May, the most in at least three decades and 10 times last year’s total at this time, 128.  The response to the epidemic has been hampered by the recession, which has left state and local health departments on the front lines of defense weakened by years of sustained budget cuts.

Slippery-Slope Logic, Applied to Health Care - There are lots of important things to worry about these days, so it is important that we limit our worries to real as opposed to imaginary risks. One pernicious category of imaginary risks involves those created by users of the dreaded “slippery slope” arguments. Such arguments are dangerous because they are popular, versatile and often convincing, yet completely fallacious. Worse, they are creeping into an arena that should be above this sort of thing: the Supreme Court, in its deliberations on health care reform.  idea is that while Policy X may be acceptable, it will inevitably lead to the terrible Outcome Y, so it is vital that we prevent Policy X from ever being enacted. The problem is that such arguments are often made without any evidence that doing X makes Y more likely, much less inevitable.  Given how flimsy slippery-slope arguments can be, it is downright scary that they might play an important role in the Supreme Court decision on the new health care law. The case before the court is whether it is constitutional for the federal government to penalize people who fail to buy health insurance.

Republicans May Opt to Reinstate Parts of Obamacare if Invalidated by Supreme Court - Republicans think they’ve figured out a way to clean up after the ruling on the Affordable Care Act from the Supreme Court. They have articulated a series of options after the fact to retain some elements of the law, the parts they view as the most popular.If the law is upheld, Republicans will take to the floor to tear out its most controversial pieces, such as the individual mandate and requirements that employers provide insurance or face fines. If the law is partially or fully overturned they’ll draw up bills to keep the popular, consumer-friendly portions in place — like allowing adult children to remain on parents’ health care plans until age 26, and forcing insurance companies to provide coverage for people with pre-existing conditions. Ripping these provisions from law is too politically risky, Republicans say. If you continue to provide coverage for people with pre-existing conditions without a mandate, you create a problem for insurance companies that I assume they will solve by jacking up prices as much as humanly possible to stay profitable. That’s a recipe to break the market entirely.

Health Care Costs are the Problem - Another reminder that the long-run budget problem is a health care cost problem, a problem that exists in both the private sector and in government. This is Nancy Folbre: ...Spending on Social Security, often treated as the greatest bugaboo of our aging society, has remained at 4.5 to 5 percent of G.D.P. since 1985. The already carried out transition to a higher retirement age is contributing to cost containment. The scary increases in government spending have come in Medicaid and Medicare. These two programs, which consumed 1.2 percent of G.D.P. in 1975, reached 4.1 percent of G.D.P. in 2008. These increases have less to do with government spending than with the increased costs of health care, regardless of who is paying the bill. ... All government programs deserve critical scrutiny, and there is plenty of room for meaningful debate over the relative efficiency of public versus private provision. But there is no evidence that social spending in the United States is approaching some upper limit of feasibility. What is unsustainable (or should be) is the current level of confusion, misinformation and paranoia about the future of the so-called welfare state.

The Massachusetts Senate passes a health care cost control bill - Rachel Zimmerman has the story, the end of which includes many of the details. Here’s the bottom line:The approved bill, for the first time in the nation, establishes a statewide health care cost growth goal for the health care industry equal to the projected growth of the state’s gross state product (GSP) plus .5 percent from 2012 to 2015 and equal to the state’s GSP beginning in 2016. This change will result in an estimated $150 billion in savings over the next 15 years which will be passed on to businesses, municipalities and residents of the Commonwealth who are struggling with increasing premiums and other health care costs. Some comments:

  • The savings estimate is likely optimistic, as I’ve already explained.
  • The House bill’s growth cap is based on per capita potential GSP (PGSP, adjusting for economic conditions) and the Senate bill uses something similar, “the long-term average projected percentage change in the per capita state’s gross state product, excluding business cycles.”
  • The theory behind the spending growth cap is very different from the House’s, which increases the cap from growth in per capita potential GSP minus 0.5 to per capita PGSP plus one as of 2027.

Milliman: Healthcare costs for American family exceed $20,000 in 2012 - Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its 2012 Milliman Medical Index (MMI), which measures the average healthcare costs for a typical American family of four receiving healthcare through an employer-sponsored preferred provider organization (PPO) plan. The average cost of care for this typical family in 2012 is $20,728. While the 6.9% increase over 2011 is the lowest rate of increase in the ten years of this study, the $1,335 increase surpasses last year's record of $1,319. "The average rate of increase this year dips below 7% for the first time since we began analyzing these costs, but the total dollar increase is still the highest we have seen," said Lorraine Mayne, principal and consulting actuary with the Salt Lake City office of Milliman. "This helps illustrate the challenge of controlling healthcare costs. When the total cost is already so high, even a slower rate of growth has a serious impact on family budgets." The MMI's release date falls during an uncertain time for American healthcare, with the nation awaiting the outcome of the U.S. Supreme Court's decision on the future of the Patient Protection and Affordable Care Act (PPACA). To date, PPACA has had only a limited effect on healthcare costs for families covered by an employer-sponsored PPO plan; longer term, the implications may be more pronounced, and will depend on a number of dynamic and interrelated factors.

Healthcare costs are scary --The 2012 Milliman Medical Index is out:The annual Milliman Medical Index (MMI) measures the total cost of healthcare for a typical family of four covered by a preferred provider plan (PPO). The 2012 MMI cost is $20,728, an increase of$1335 or 6.9% over 2011. The rate of increase is not as high as in the past, but the total dollar increase was still a record. this is the first year the average cost of healthcare for the typical American family of four has surpassed $20.000.If that number seems high, it’s because many of the costs are hidden from view. For instance, your employer is footing about $12,144. But that’s still money that would likely have gone to you otherwise. Then, employees kick in another $5114 in contributions. But those might come out of your paycheck before you get it, so again, the cost is hidden. On the spending side, that family’s spending goes mostly to physicians ($6647) and inpatient care ($6531). The rest goes to outpatient care ($3699) and pharmacy costs ($3056), leaving $795 for “other”. The amount spent in each category has gone up every year for the last five years.

Why Does the U.S. Spend More on Health Care? - Everyone knows that the U.S. spends far more on health care than other countries, but do you know how much more? In 2009, the U.S. spent 17.4% of GDP on health care (using OECD data). The closest contenders are Netherlands (12% of GDP), France (11.8%), Germany (11.6%), Denmark (11.5%), and Canada (11.4%). The U.S. has higher per capita GDP than these countries, so the gap in absolute spending is even higher. In 2009, the U.S. spent $7,960 per person on health care, and the closest contenders were Switzerland ($5,144 per person) and Netherlands ($4,914). What accounts for these differences in health care spending across countries? David Squires assembles some of the evidence in "Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices and Quality," a May 2012 "issue brief" written for the Commonwealth Fund. I ran across it here at Larry Willmore's Thought du Jour blog.   I'll also contrast and compare it with a paper by David M. Cutler and Dan P. Ly, "The (Paper)Work of Medicine: Understanding International Medical Costs," which appeared in the Spring 2011 issue of my own Journal of Economic Perspectives. For readability, footnotes and references to exhibits are omitted from the quotations below

The Secret Source of Antibiotics in Your Food - It All Starts With Corn. To create crop-based ethanol, an increasingly common component of U.S. gasoline, producers use yeast to break down its sugars and ferment corn. The distillation process takes place in large vats of warm water, creating the perfect breeding ground for bacteria that could hamper ethanol yields. To counteract this, the report says that ethanol producers have routinely added antibiotics like penicillin and erythromycin to the fermentation tanks. "These antibiotics, distributed by animal drug manufacturers and chemical suppliers, are readily available without a prescription," according to the report. In fact, they're completely unregulated by the Food and Drug Administration, the same agency under fire for failing to curtail overuse of antibiotics in farming.  So what does creating ethanol have to do with farm animals? The corn mash and liquid slurry by-products created during ethanol production are sold as animal feed. The beef and dairy industry are the biggest consumers of the ethanol by-product–based feed. "Residues of antibiotics in [ethanol-based feed]—the predictable result of adding antibiotics to ethanol fermentation vats—have the potential to cause increased antibiotic resistance, impacting the human population," the author of the report writes.

New evidence that many genes of small effect influence economic decisions and political attitudes -  Genetic factors explain some of the variation in a wide range of people's political attitudes and economic decisions – such as preferences toward environmental policy and financial risk taking – but most associations with specific genetic variants are likely to be very small, according to a new study led by Cornell University economics professor Daniel Benjamin. The research team arrived at the conclusion after studying a sample of about 3,000 subjects with comprehensive genetic data and information on economic and political preferences. The study showed that unrelated people who happen to be more similar genetically also have more similar attitudes and preferences. This finding suggests that genetic data - taken as a whole – could eventually be moderately predictive of economic and political preferences. The study also found evidence that the effects of individual genetic variants are tiny, and these variants are scattered across the genome. Given what is currently known, the molecular genetic data has essentially no predictive power for the 10 traits studied, which included preferences toward environmental policy, foreign affairs, financial risk and economic fairness.

Least Polluted Cities In The U.S. Ranked In State Of The Air 2012 - slide show - Are you and your neighbors breathing healthy air?  American Lung Association has released their State Of The Air 2012 report, detailing cities with the least and most air pollution in America. Each city is ranked by ozone pollution, short-term particle pollution, and year-long particle pollution. Below are the report's "Top 25 Least Polluted Cities By Year-Round Particle Pollution." Although many problem regions still exist, the report shows that all but three of the most ozone-polluted cities improved air quality, and over 50% of the worst smog-makers were having their best year thus far.  However, America’s air is far from perfect. You can view some of the country's most polluted cities by clicking here. Click here to read more about the 2012 report, or visit the SOTA website.

To Boost Test Scores, Chinese Students Hooked to IV Drips -  Earlier this week, within hours a photo taken at Xiaogan City High School in Hubei Province China was circulated all over China. In the photo some students were in class reviewing their homework.  What is unusual in the picture is that more than half of the 50 or so students had an intravenous infusion bottle above their heads. What they are injecting, collectively and following the advice of the school, are amino acids supposed to “enhance their physical fitness and replenish their energy,” so as to boost their performance in the upcoming entrance examinations for colleges. The picture is inconceivable. In order to help pigs grow, Chinese breeders feed them with Paylean, a beta-adrenoceptor agonist drug linked to cancer and heart disease. Now to help them compete in highly competitive exams, schools and parents do not hesitate to subject their children to amino acid injections. Where is this going to end? Anybody with a little bit of common sense knows that it is stupid to inject amino acids into humans. Not only can it cause an excessive intake of protein and over-burden one’s liver and kidneys, the intravenous injection can also potentially bring side-effects like chills or fever, accompanied by symptoms such as nausea and vomiting.

A Tour of Drought as it Unfolds Across the U.S. - In addition to the West, drought conditions are also prevalent in the Southeast, Mid-Atlantic, and parts of the Northeast as well, along with a small pocket in the Upper Midwest. In all, 56 percent of the Lower 48 states were experiencing drought conditions as of May 8, almost twice the area compared to last year at this time, according to data from the U.S. Drought Monitor.   Fortunately, much of the West had such bountiful winter precipitation last year that the risk of water supply disruptions are rather low in most areas, but that could change if the current weather pattern lasts much longer. Water officials in Colorado, for example, have begun urging residents to start conserving water in case the dry spell continues. Take a look at the streamflow forecast for the West this summer compared to last year at this time. The orange and red hues this year indicate well below average streamflow conditions are likely, as unusually thin and dry snow cover yields less water than usual. Last year at this time, the same map showed above average streamflow conditions for most of the West.

'Last Call at the Oasis': Why Time Is Running Out to Save Our Drinking Water - The first voice you hear in the new documentary Last Call at the Oasis is Erin Brockovich's -- the famed water justice advocate whom Julia Roberts portrayed on the big screen. "Water is everything. The single most necessary element for any of us to sustain and live and thrive is water," says Brockovich as her voice plays over clips of water abundance -- gushing rivers and streams. "I grew up in the midwest and I have a father who actually worked for industry ... he promised me in my lifetime that we would see water become more valuable than oil because there will be so little of it. I think that time is here." The film then cuts to images of water-scarce populations in the world: crowds of people at water tankers, stricken children, news reports of drought in the Middle East, Brazil, China, Spain. The images are heart-wrenching and alarming ... and so are the ones that come next, which are all in the U.S. Water parks, golf courses, car washes, triple shower heads, outside misters -- all point to our folly when it comes to water.

Extreme rain doubled in US Midwest - climate study (Reuters) - The number of extreme rainstorms - deluges that dump 3 inches or more in a day - doubled in the U.S. Midwest over the last half-century, causing billions of dollars in flood damage in a trend climate advocates link to a rise in greenhouse gas emissions. Across the Midwest the biggest storms increased by 103 percent from 1961 through 2011, a study released by the Rocky Mountain Climate Organization and the Natural Resources Defense Council reported on Wednesday. States in the upper Midwest fared worse than those in the south part of the region, the study found, with the number of severe rainstorms rising by 203 percent in Wisconsin, 180 percent in Michigan, 160 percent in Indiana and 104 percent in Minnesota. Illinois saw an 83 percent increase in extreme storms, Missouri had 81 percent, Ohio 40 percent and Iowa 32 percent, according to the study. "The increase in extreme storms, because of the linkage to flooding, probably represents the Midwest's greatest vulnerability to climate change," said study author Stephen Saunders, president of the Rocky Mountain Climate Organization. Overall annual precipitation for the region rose 23 percent between 1961 and 2011, the study found, using data from weather stations.

Super weeds no easy fix for US agriculture-experts (Reuters) - A fast-spreading plague of "super weeds" taking over U.S. farmland will not be stopped easily, and farmers and government officials need to change existing practices if food production is to be protected, industry experts said on Thursday. "This is a complex problem," said weed scientist David Shaw in remarks to a national "summit" of weed experts in Washington to come up with a plan to battle weeds that have developed resistance to herbicides. Weed resistance has spread to more than 12 million U.S. acres and primarily afflicts key agricultural areas in the U.S. Southeast and the corn and soybean growing areas of the Midwest. Many of the worst weeds, some of which grow more than six feet and can sharply reduce crop yields, have become resistant to the popular glyphosate-based weed-killer Roundup, as well as other common herbicides. Monsanto Co's Roundup worked well for many years. It became prevalent with the commercialization of "Roundup Ready" crops Monsanto developed to tolerate the weedkiller, making it easy for farmers to treat their fields. But now super weeds have developed a resistance to Roundup, and farmers are scrambling to figure out how to combat their weeds. "We don't have that next technology. We have to get back to the fundamentals,"

U.S. experiences warmest 12-month period on record - 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.

WMO: 2001-2010 warmest decade since records began in 1850  - Climate change has accelerated in the past decade, the UN weather agency said Friday, releasing data showing that 2001 to 2010 was the warmest decade on record. The 10-year period was also marked by extreme levels of rain or snowfall, leading to significant flooding on all continents, while droughts affected parts of East Africa and North America. "The decade 2001-2010 was the warmest since records began in 1850, with global land and sea surface temperatures estimated at 0.46 degrees Celsius above the long term average of 14.0 degrees Celsius (57.2 degrees Fahrenheit)," said the World Meteorological Organisation. Nine of the 10 years also counted among the 10 warmest on record, it added, noting that "climate change accelerated" during the first decade of the 21st century. The trend continued in 2011, which was the warmest year on record despite La Nina -- a weather pattern which has a cooling effect. The average temperature in 2011 was 0.40 degrees Celsius above the long term average, said the WMO.

Arctic methane at Barrow, Alaska, hits 2500 ppbv

2,000 year water temperature high underlines Arctic threat - The water flowing from the Atlantic Ocean into the Arctic through the Fram Strait is warmer today than any time in the past 2,000 years. That’s what microscopic seabed deposits have told Robert Spielhagen of the Academy of Sciences, Humanities, and Literature in Mainz, Germany, and his colleagues. The scientists have shown that the average temperature of water flowing into the Arctic since 1890 is 2ºC higher than it has been on average in the previous two millennia. This sends a stark message about the prospects for the Northern polar region. “I am afraid that my children – now 14 and 17 years old – will be able to see a summer ice-free Arctic Ocean,” Spielhagen told Simple Climate. On August 4, 2007 Spielhagen and his co-workers extracted the key deposits when they drilled a 46 cm long cylinder of rock from the sea bed. Such “sediment cores” had previously been used to look at temperature changes as far as 12,000 years into the past, but could only provide measurements for periods of a few hundred years at a time. That’s down to how much sediment settles to the sea bed, with too little deposition for high-resolution temperature measurements occurring where cores have been taken before. By contrast, Spielhagen’s team was able to give temperatures on a scale of 2-3 decades at a time. “We took our core in a place where a lot of fine-grained particles settle, due to diminished bottom currents,” he explained.

Arctic Death Spiral: More Bad News about Sea Ice - The sea ice that blankets the Arctic Ocean each winter peaked in early March this year, as usual, and is now in retreat, en route to its annual minimum extent in September. How low it will go is something scientists worry: ice reflects lots of sunlight back into space, and when the darker ocean underneath is exposed, more sunlight is absorbed to add to global warming. That’s the simple version of the story, but things look even worse when you dig into the details. For one thing, all that open water does re-freeze each winter, but it freezes into a relatively thin layer known as seasonal, or first-year ice. Because it’s so thin, first-year ice tends to melt back quickly the following season, giving the ocean a chance to warm things up even more in what National Snow and Ice Data Center director Mark Serreze has called a “death spiral” that could lead to ice-free Arctic summers by 2030.  But it’s worse than that, says a new analysis by scientists at the U.S. Army’s Cold Regions Research Laboratory in Hanover, N.H. “First-year ice is not just thinner, “ said Donald Perovich, lead author of a report in Geophysical Research Letters, in an interview. “We’re also beginning to realize it has other properties.” The most important: new ice is less reflective than old ice, for most of the year, anyway. It absorbs more heat from the Sun, which means it doesn’t just melt faster: it actually speeds up its own melting.

Study: Many mammals won't be able to outrun climate change - Hundreds of species of mammals in the Western Hemisphere may not be able to migrate with the projected speed of climate change, according to a new study released Monday. "As they have in response to past climatic changes, many species will shift their distributions in response to modern climate change," the authors write in the study. "However, due to the unprecedented rapidity of projected climatic changes, some species may not be able to move their ranges fast enough to track shifts in suitable climates and associated habitats." The study appeared in the journal Proceedings of the National Academy of Sciences and was led by Carrie Schloss, an ecologist at the University of Washington. The study looked at the dispersal speeds of 493 mammals, and found that in some places, as many as 39% may not be able to keep pace with climate change.Dispersal is the movement of an animal away from its home range, without anticipated return, according to Schloss.

Earth 'going downhill' as consumption rises - From high above the earth, an astronaut launched the latest report card on the health of the planet which once again paints an alarming image of over-consumption and exploitation. In a recorded message, Andre Kuipers, an astronaut with the European Space Agency on his second mission to the International Space Station, said he had a unique view of the earth which he orbits 16 times a day. "From space, you see the forest fires, you see the air pollution, you see erosion," he said, launching the World Wildlife Fund's Living Planet Report for 2012. The biennial survey shows the world is still consuming far more than the Earth can replenish, along with a widening and "potentially catastrophic" gap between the ecological footprints of rich and poor nations."The report is clear that we're still going downhill, that our ecological footprint, the pressure we put on the earth's resources, continues to rise so we're now using 50% more resources that the earth can replenish and biodiversity continues to decline," said Jim Leape, Director General of WWF International.

Report: Global biodiversity down 30 percent in 40 years - The world's biodiversity is down 30 percent since the 1970s, according to a new report, with tropical species taking the biggest hit. And if humanity continues as it has been, the picture could get bleaker.  Humanity is outstripping the Earth's resources by 50 percent — essentially using the resources of one and a half Earths every year, according to the 2012 Living Planet Report, produced by conservation agency the World Wildlife Fund (WWF).  Colby Loucks, the director of conservation sciences at WWF, compared humanity to bad houseguests.  "We're emptying the fridge, we're not really taking care of the lawn, we're not weeding the flower beds and we're certainly not taking out the garbage,"

An Effort to Bury a Throwaway Culture One Repair at a Time - At Amsterdam’s first Repair Cafe, an event originally held in a theater’s foyer, then in a rented room in a former hotel and now in a community center a couple of times a month, people can bring in whatever they want to have repaired, at no cost, by volunteers who just like to fix things.  Conceived of as a way to help people reduce waste, the Repair Cafe concept has taken off since its debut two and a half years ago. The Repair Cafe Foundation has raised about $525,000 through a grant from the Dutch government, support from foundations and small donations, all of which pay for staffing, marketing and even a Repair Cafe bus.  Thirty groups have started Repair Cafes across the Netherlands, where neighbors pool their skills and labor for a few hours a month to mend holey clothing and revivify old coffee makers, broken lamps, vacuum cleaners and toasters, as well as at least one electric organ, a washing machine and an orange juice press.

Debris Possibly From Japanese Tsunami Floating Up Strait Of Juan De Fuca — Debris apparently from the March 2011 Japanese tsunami is now riding the tides up the Strait of Juan de Fuca. The biggest collection of fishing floats — many bearing Asian writing and logos — has been found on Dungeness Spit, which juts into the Strait north of Sequim, said Dave Falzetti, refuge officer for the U.S. Fish and Wildlife Service, which oversees the lengthy spit. “We’ve never seen anything like these before,” he said. Falzetti said visitors to the Dungeness National Wildlife Refuge had been finding floats sporadically since January. During the first official beach cleanup of the year May 5, volunteers recovered more than two dozen small floats, he said

Plastic-eating fungi found in Amazon may solve landfill problems - In a report by NZ Herald it was stated that a group of students from Yale University found a species which appears to be happy eating plastic in airless landfills.  The group of students are part of Yale's annual Rainforest Expedition and Laboratory. Travelling with professor Scott Strobel of the molecular biochemistry lab into the jungles of Ecuador, the mission was to allow "students to experience the scientific inquiry process in a comprehensive and creative way."  Plastic garbage could last indefinitely, meaning that landfills of garbage will continue on possibly for centuries. But now there may just be the perfect solution.  The group brought back a new fungus with a voracious appetite for polyurethane, which is a common plastic used for many modern purposes, including shoes, garden hoses and other non-degenerating items. 

Trends in Carbon Dioxide - The graph, updated weekly, shows as individual points daily mean CO2 up to and including the week (Sunday through Saturday) previous to today. The daily means are based on hours during which CO2 was likely representative of “background” conditions, defined as times when the measurement is representative of air at mid-altitudes over the Pacific Ocean. That air has had several days time or more to mix, smoothing out most of the CO2 variability encountered elsewhere, making the measurements representative of CO2 over hundreds of km or more. The selection process is designed to filter out any influence of nearby emissions, or removals, of CO2 such as caused by the vegetation on the island of Hawaii, and likewise emissions from the volcanic crater of Mauna Loa. For details, see ”How we measure background CO2 levels at Mauna Loa”. The same measurement principles also apply elsewhere. The weekly mean (red bar) is simply the average of all days in the week for which a background value could be defined. The average standard deviation of day to day variability, calculated as the difference from the appropriate weekly mean, equals 0.38 ppm for the entire record. As a visual aid, the blue lines present monthly means of background data as they are presented under Recent Monthly CO2 at Mauna Loa.

Australia Hottest in 1,000 Years - A massive new climate study in Australia concluded that the past 60 years have been the hottest in the past thousand for the Australasia region, and that the extreme temperatures cannot be explained by natural causes. The study used data from 27 climate indicators, including tree rings, corals and ice cores, to map the temperature over the past millennium. The climate map was done 3,000 different ways, and concluded with 95 percent accuracy that post-1950 warming was “unprecedented” and exceeded the possibility of an explanation by natural, random variations in climate. Read it at The Guardian

Humanmade Pollutants May Be Driving Earth's Tropical Belt Expansion: May Impact Large-Scale Atmospheric Circulation — Black carbon aerosols and tropospheric ozone, both humanmade pollutants emitted predominantly in the Northern Hemisphere's low- to mid-latitudes, are most likely pushing the boundary of the tropics further poleward in that hemisphere, new research by a team of scientists shows. While stratospheric ozone depletion has already been shown to be the primary driver of the expansion of the tropics in the Southern Hemisphere, the researchers are the first to report that black carbon and tropospheric ozone are the most likely primary drivers of the tropical expansion observed in the Northern Hemisphere. Led by climatologist Robert J. Allen, an assistant professor of Earth sciences at the University of California, Riverside, the research team notes that an unabated tropical belt expansion would impact large-scale atmospheric circulation, especially in the subtropics and mid-latitudes. "If the tropics are moving poleward, then the subtropics will become even drier," Allen said. "If a poleward displacement of the mid-latitude storm tracks also occurs, this will shift mid-latitude precipitation poleward, impacting regional agriculture, economy, and society."

The Climate Misinformation Nation - Scientists are more confident than ever that climate change is happening and is largely caused by human activities.  Yet, according to a recent poll, the American public is less likely to believe that climate change is caused by humans than they were even last year. When it comes to climate science, are we a misinformation nation?  A new report from the Yale Project on Climate Change Communication and the George Mason University Center for Climate Change Communication finds that since November 2011, public belief that global warming is happening increased by 3 percentage points, to 66 percent overall.  However, public belief that global warming is caused mostly by human activities decreased four percentage points, to 46 percent. Even more striking:  Since November, there has been a 6 point decrease (to 35%) in the proportion of Americans who believe that most scientists think global warming is happening, with a 2 point increase (to 41%) in those who believe there is substantial disagreement among scientists.

What's Really Scary - Krugman - I don’t write very often about climate change, basically because I doubt that we can get action until the immediate economic crisis is resolved. But I may be part of the problem, because this issue is all too likely to trump, well, everything — yet those who know this have been reluctant to say it for fear of seeming, well, shrill. Joe Romm has a great post with a great illustrative figure (is it his own? He doesn’t say): All too true, from everything I’ve read. And horrifying.

Q. and A.: How to Save Bangladesh? -In just over a month, policy makers from around the world will meet in Rio de Janeiro for the United Nations Conference on Sustainable Development. The meeting has been called Rio+20, reflecting the two decades that have passed since a landmark conference on the environment and development was held in Rio in 1992. This time the main themes are energy, sustainable cities, food security, water shortages, the health of oceans, disaster readiness and assuring people a livelihood. Bangladesh is a prime example of a vulnerable developing nation that faces formidable challenges in all these areas, and it will be directly affected by the decisions that are made — or not made — at the conference. Firm commitments have often been elusive on the international level. We asked Thomas Rath, the country program manager for the United Nations International Fund for Agricultural Development project in Bangladesh, about the development obstacles the country faces, some of which are linked to climate change and environmental degradation. Following are excerpts, edited for brevity and clarity.

'Nobody is exempt from climate responsibility' - interview - New Scientist: Could Christiana Figueres have the world's toughest job: getting all nations to agree how to tackle climate change? We talk to the UN's climate chief

The Face of Genocidal Eco-Fascism - This is Finnish writer Pentti Linkola — a man who demands that the human population reduce its size to around 500 million and abandon modern technology and the pursuit of economic growth — in his own words. He likens Earth today to an overflowing lifeboat: What to do, when a ship carrying a hundred passengers suddenly capsizes and there is only one lifeboat? When the lifeboat is full, those who hate life will try to load it with more people and sink the lot. Those who love and respect life will take the ship’s axe and sever the extra hands that cling to the sides. He sees America as the root of the problem: The United States symbolises the worst ideologies in the world: growth and freedom. He unapologetically advocates bloodthirsty dictatorship: Any dictatorship would be better than modern democracy. There cannot be so incompetent a dictator that he would show more stupidity than a majority of the people. The best dictatorship would be one where lots of heads would roll and where government would prevent any economical growth.

Copenhagen Consensus 2012: Climate Change - Bjorn Lomborg: If you had $75 billion to spend over the next four years and your goal was to advance human welfare, especially in the developing world, how could you get the most value for your money? That is the question that I posed to a panel of five top economists, including four Nobel laureates, in the Copenhagen Consensus 2012 project. The panel members were chosen for their expertise in prioritization and their ability to use economic principles to compare policy choices. ...When it comes to climate change, the experts recommend spending a small amount – roughly $1 billion – to investigate the feasibility of cooling the planet through geo-engineering options. This would allow us to understand better the technology’s risks, costs, and benefits. Moreover, the research could potentially give us low-cost, effective insurance against global warming. via . One reason that climate change ranks low in the Copenhagen Consensus exercise is that the benefit-cost analyses conducted for the Copenhagen Consensus were required to use 3% and 5% discount rates. Since the benefits of climate policy may happen 50+ years down the road, these benefits are discounted away. Really, conventional benefit-cost analysis has some serious limitations when informing climate policy. Also, the absence of a carbon tax (or cap-and-trade) in the recommended policies makes it appear that the expert panel rejected incentive-based policy on merit, in favor of geoengineering.

Chinese Government to Close 1,200 Companies to Help Clear Beijing Smog - Beijing is one of the most polluted cities in the world, and as China follows its desires to become a leader in clean, renewable energies, it must also look to clean up the air quality of its capital city. Many complain about the heavy smog often found within the city. Smog so thick that sometimes planes can be grounded and trains going to and from the city be delayed due to poor visibility. Obviously the local residents also complain of health concerns, with many being forced to wear face masks to prevent inhalation of the dirty air. Zheng Zaihong of the city's municipal environmental protection bureau said that 22 percent of the fine particulate emissions within the city originated from around 1200 local industrial fabicas such as, foundries, chemical plants and furniture factories. In an effort to eliminate these highly polluting industries, and reduce the overall carbon emissions in the city, environmental protection approval and inspecting systems are planned to be introduced to reduce the fine particles.

Apple commits to renewable power for US data centres - Apple plans to power its main data centre entirely with renewable energy by the end of this year, taking steps to address longstanding environmental concerns about the rapid expansion of high-consuming computer server farms. The maker of the iPhone and iPad said on Thursday it was buying equipment from SunPower Corp and startup Bloom Energy to build two solar array installations in North Carolina, near its core data center. Once up, the solar farm will supply 84m kWh of energy annually. The sites will employ high-efficiency solar cells and an advanced solar tracking system. The two solar farms will cover 250 acres, among the largest in the industry, the Apple CFO, Peter Oppenheimer, told Reuters. Apple plans on using coal-free electricity in all three of its data centres, with the Maiden facility coal-free by the end of 2012. "I'm not aware of any other company producing energy onsite at this scale," Oppenheimer said

Google's offshore wind cable moves forward - A proposed $5bn transmission line connecting wind farms off the East coast of the US to the mainland is on track to come online by 2017, after the Google-backed project cleared another regulatory hurdle. The Department of the Interior said on Monday there was "no overlapping competitive interest" in the areas earmarked for building the line (see map), which clears the way for an environmental review. However, the review of impacts on fishing, marine life and other factors could take up to two years to complete - a scenario familiar to offshore wind farm developers who have been dogged by slow progress securing planning permissions. The $1bn Cape Wind project off the Nantucket Sound, the first major offshore wind project in the US, has suffered almost a decade of delays mainly brought about by legal challenges from local residents. The Atlantic Wind Connection line is intended to transmit up to 6GW of electricity from yet to be constructed offshore wind farms along two, 250 mile long parallel lines, strengthening the ageing electricity network along the East Coast in the process. Interior officials said the government hopes to start selling leases to wind farm developers in the coming months, although they could not say when offshore wind farms would start producing power for the region.

Half Of U.S. Nonresidential Construction To Be ‘Green’ By 2015: Firms Must Embrace Sector ‘To Stay Competitive’ - The green building sector is expanding rapidly post-recession. Will there be enough workers to fill demand? This may come as a big surprise: The U.S. commercial construction sector is facing a shortage of skilled workers. After a period of steep decline in commercial construction stemming from the 2008 financial crisis — forcing mass layoffs throughout the industry — that seems like an absurd notion. But activity is picking back up. By 2015, non-residential construction is projected to grow 73 percent compared to 2011, increasing demand for skilled workers. With nearly half of all nonresidential activity by 2015 set to be “green,” workers with experience in energy efficiency, water efficiency, responsible site management, air quality, and green building certification will be the highest in demand. That’s according to a survey of industry companies conducted by McGraw-Hill Construction. The McGraw-Hill survey shows that companies fear a shortage of potential employees with in-demand skills over the coming years. The shortage will be caused by three main factors: A wave of retiring baby boomers; a decline in workers with experience due to mass layoffs after the recession; and a thinning pipeline of students.

Conservative thinktanks step up attacks against Obama's clean energy strategy - A network of ultra-conservative groups is ramping up an offensive on multiple fronts to turn the American public against wind farms and Barack Obama's energy agenda. A number of rightwing organisations, including Americans for Prosperity, which is funded by the billionaire Koch brothers, are attacking Obama for his support for solar and wind power. The American Legislative Exchange Council (Alec), which also has financial links to the Kochs, has drafted bills to overturn state laws promoting wind energy. Now a confidential strategy memo seen by the Guardian advises using "subversion" to build a national movement of wind farm protesters. The strategy proposal was prepared by a fellow of the American Tradition Institute (ATI) – although the thinktank has formally disavowed the project. The proposal was discussed at a meeting of self-styled 'wind warriors' from across the country in Washington DC last February. 

Solar Panels From China May Get New U.S. Tariffs - The Obama administration is moving to impose stiff new tariffs on solar panels made in China, finding that Chinese companies are improperly flooding the U.S. market with government-subsidized ones. The Commerce Department said Thursday that Chinese producers had dumped solar panels in the United States at margins ranging from 31 percent to nearly 250 percent. If the preliminary ruling is upheld, tariffs averaging 31 percent could be imposed on Chinese solar-panel imports. The tariffs would be in addition to fees ranging from 2.9 percent to 4.73 percent imposed in March after the department found that China is improperly subsidizing its solar manufacturers. The tariffs announced Thursday were higher than expected and could ratchet up trade tensions between the two countries.

China Rejects US Ruling in Solar Dumping CaseChina‘s government on Friday rejected a U.S. antidumping ruling against its makers of solar power equipment and Chinese manufacturers warned possible higher tariffs might hurt efforts to promote clean energy. The conflict has worsened U.S.-Chinese trade tensions. The two governments have pledged to cooperate in developing renewable energy but accuse each other of violating free-trade pledges by subsidizing their own manufacturers. “The U.S. ruling is unfair, and the Chinese side expresses its extreme dissatisfaction,” said a Commerce Ministry spokesman, Shen Danyang, in a statement. Shen warned the ruling might harm clean energy cooperation but gave no indication how Beijing might respond. Some American companies that oppose the trade probe have warned China might retaliate against U.S. suppliers.

The Environmental Costs of Anti-Dumping Policy -  The NY Times reports that the U.S is imposing a large tariff punishment on these imports. This will hurt Chinese exporters and U.S importers and help U.S producers of panels but it will also impose a global pollution externality.  A side benefit of the U.S being able to import cheap solar panels is that this increases their adoption and this reduces global GHG emissions.  In the presence of such a consumption positive externality, does this affect how we think about the economics of dumping?   The irony here is that environmentalists should support Chinese dumping (i.e. China selling their green products in the U.S for a really low price).  As I understand the economics of dumping,  regulators are concerned that exporter prices low now to kill off domestic competition and once the U.S firms are dead will sharply raise prices to monopoly levels and gouge the silly Americans.    Most Chicago economists do not believe this logic.  If China did achieve market power and tried to take advantage of it, this would trigger entry by some other developing nation who could cheaply mass produce that solar panel technology.  The "pro-dumpers" implicitly assume that there is some future barrier to entry that prohibits entry into the industry.  That sounds silly to me.  To repeat this blog post's key point.   In the case of products that offer positive externality benefits,  environmentalists should be bigger fans of free trade and oppose tariffs on such products! 

Big Oil's Big in Biofuels - BP has invested $7 billion in alternative energy since 2005. ExxonMobil is spending $600 million on a 10-year effort to turn algae into oil. And Royal Dutch Shell has invested billions of dollars in a Brazilian biofuels venture, buying up sugar cane mills, plantations, and refineries to make ethanol. In the U.S., Shell produces small lots of so-called drop-in biofuels—engine-ready products that can replace gasoline—from a pilot plant in Houston that uses sugar beets and crop waste. On the way to a renewable energy future, a funny thing has happened: Big Oil has become the biggest investor in the race to create green fuels. In the last decade, the industry says, it has put $71 billion into zero- and low-emission and renewable energy technologies. The U.S. government, by contrast, has spent about $43 billion on similar efforts during the same period, according to the American Petroleum Institute (API), a trade group. “We are making huge bets” on biofuels and also investing in wind and low carbon technologies, says Katrina Landis, chief executive officer of BP Alternative Energy, noting that her division has grown from a handful of employees in 2005 to 5,000 today.

Peabody Coal pays U.S. taxpayers $1.11 per ton of coal, sells it to China for $123 - Yesterday, I wrote about the issue of public land in the Powder River Basin being leased to coal companies for cheap, so they can strip-mine it and sell the coal abroad at an enormous profit. Also yesterday, the feds held a “competitive lease sale” for the South Porcupine Tract, which contains almost 402 million tons of mineable coal. Guess how many companies bid in this “competitive auction”? One: Peabody Coal, the company that filed the original application [PDF] for the lease. This was actually the second auction for the tract. The first ended with no sale because BLM rejected Peabody’s lowball offer of $0.90 a ton. The winning price in Thursday’s sale? $1.11 per ton. Again: $1.11 per ton. The price of a ton of Powder River Basin coal on U.S. spot markets? $9.15 per ton, as of May 11. The price of a ton of coal exported to China? It averaged $97.28 per ton [PDF] in 2011. It’s now up to $123 per ton.

A Higher Price Tag for a Nuclear Project - The flagship project of a hoped-for but not-yet-realized “nuclear renaissance,” the Vogtle 3 and 4 reactors under construction near Augusta, Ga., may cost about $900 million more than had been estimated, the Southern Company said in a filing this week with the Securities and Exchange Commission. The company, which is building the reactors with a consortium of utilities, said the problem arose from delays in the Nuclear Regulatory Commission’s approval of a design certification document from the manufacturer, Westinghouse, and of a combined construction and operating license. “Issues have arisen that may impact the project budget and schedule,” Southern said. Cost and schedule are very tightly related because interest costs accumulate on the money already spent. Southern said that the consortium building the plants, which includes its subsidiary Georgia Power (45.7 percent) as well as Oglethorpe Power (30 percent), the Municipal Electric Authority of Georgia (22.7 percent) and Dalton Utilities (1.6 percent), is in negotiations to determine the extent of the cost overrun and how it will be shared. A total cost is hard to arrive at because each partner is likely to have different borrowing costs, but it is in the range of $14 billion.

San Onofre: Bad Vibrations - About this video - Arnie Gundersen, Chief Engineer of Fairewinds, demonstrates what has happened inside the replacement steam generators at the site of the San Onofre nuclear generating station in San Diego, California. Arnie shows that steam generator tube vibrations have caused extensive damage due to design changes between the original and replacement generator tubes.

Japanese Diplomat: Deploy military to Fukushima Daiichi? If not “it may be too late” - The highly radioactive spent fuel assemblies at the Fukushima-Daiichi power plants present a clear threat to the people of Japan and the world. [...] Another magnitude 7.0 earthquake would jar them from their pool or stop the cooling water, which would lead to a nuclear fire and meltdown. The nuclear disaster that would result is beyond anything science has ever seen. Calling it a global catastrophe is no exaggeration. If political leaders understand the situation and the potential catastrophe, I find it difficult to understand why they remain silent. [...] Many scientists believe that it will be impossible to remove the 1,535 fuel assemblies in the pool of Reactor 4 within two or three years.Japanese scientists give a greater than 90 percent probability that an earthquake of at least 7.0 magnitude will occur in the next three years in the close vicinity of Fukushima-Daiichi. [...] Are there any means to shorten the period for the completion of removal spent fuel from all of the pools, in particular of Reactor 4, within two years or so? Are we able to trust such extraordinary tasks to TEPCO and the private sector?

ENENews: Physicist: Unit 2 completely liquified, 100% liquification of uranium core — “We’ve never seen this before in the history of nuclear power” (VIDEO)

German Government to Oppose Fracking - Germany has put the brakes on plans to use hydraulic fracturing, commonly known as fracking, to extract natural gas in places where it is difficult to access, such as shale or coal beds. Environment Minister Norbert Röttgen and Economy Minister Philipp Rösler have agreed to oppose the controversial process for the time being, SPIEGEL has learned. Sources in the German government said that the ministers were "very skeptical" about fracking, which injects chemicals as well as sand and water into the ground to release natural gas. "There are many open questions which we will first have to carefully examine," Rösler told close associates.  With their stance, the two ministers are opposing plans by energy companies to use the fracking process to tap into deposits of natural gas in shale, especially in northern and eastern Germany. In order to access the gas, the shale needs to be fractured using a mixture of hot water, sand and chemical additives, some of which are poisonous. Environmental groups reject the use of the technology, saying that the chemicals used can contaminate drinking water.

To Make Fracturing Safer - There is little doubt that natural gas, which is plentiful and cleaner than coal, could help with the country’s energy and climate problems. But as Interior Secretary Ken Salazar once warned, the drilling technique known as hydraulic fracturing could be natural gas’s Achilles’ heel unless the public can be sure it will not pollute water supplies or the air. Hydraulic fracturing, combined with deep horizontal drilling, has been largely responsible for a huge surge in the production of natural gas. It has also been blamed for poisoned wells and dirty air. Last Friday, Mr. Salazar proposed new rules governing drilling on more than 700 million acres of federal and Indian lands that his department oversees. They cover safety issues now regulated with varying degrees of strictness by the states: the casing, or lining, of wells to prevent contamination of aquifers and groundwater; the safe disposal of contaminated water that emerges from every well; and disclosure of the chemicals used the drilling process. While most new production has occurred on private lands in places like North Dakota and Pennsylvania, about 3,400 wells are drilled every year on federal and Indian lands. The hope is that a strong set of federal rules will provide a standard governing drilling everywhere.

Shale Boom Sets Off a Midwest Sand Boom - From the WSJ article "Midwest Sees a Sand Rush" (with video above): "Sand is in high demand among U.S. oil and natural-gas producers, setting off a sand rush in Wisconsin, Minnesota and other Midwestern states. Sand mined in the Midwest is used in places such as North Dakota and Pennsylvania to tap oil and gas reserves.  Sand mined in the Midwest is used in places such as North Dakota and Pennsylvania to tap oil and gas reserves. The U.S. producers' demand for sand reached 28.7 million tons in 2011, up from six million tons in 2007 (see chart above).   The surging demand is making sand the Midwest slice of a national energy boom. Oil and gas producers in recent years have greatly boosted the use of horizontal drilling and hydraulic fracturing to tap reserves once out of reach. Sand, injected deep underground to prop open fractures in shale formations and allow oil and gas to flow out, is important in "fracking." Wisconsin and Minnesota have abundant supplies of the type of sand that oil and gas producers need. Geological conditions were right hundreds of millions of years ago to form sand hard enough to withstand the pressure thousands of feet underground, while also having round grains that leave space so the oil and gas can escape. Fracking sand can fetch around $50 a ton, depending on quality."

‘Fracking’ Titan Chesapeake Energy in Stock Swoon Amid Cash Crunch - Over the last year, Chesapeake shares have fallen more than 50% — and nearly 6% on Tuesday — mirroring the precipitous decline in natural gas prices, which has been driven by a glut of gas on the market. Ironically, the over-supply of natural gas has been fueled, in part, by Chesapeake’s relentless, multi-year campaign to buy up and drill vast tracts of land using a controversial practice called hydraulic fracturing, or “fracking.” Today, the company has built up a staggering land portfolio of over 15 million acres. Chesapeake, along with other energy companies that employ fracking, have been so successful at bringing new natural gas onto the market that the price of the commodity has fallen to the lowest level in a decade. As the price of natural gas has slumped, Chesapeake has faced a growing cash crunch, estimated to be over $10 billion this year. In response, McClendon has said the company intends to move away from natural gas drilling to more lucrative oil drilling, becoming what he calls a “more balanced liquids-focused producer.” Still, it needs to raise cash. Last Friday, Chesapeake announced plans to take out a $3 billion loan from investment banks Goldman Sachs and Jeffries & Co. On Tuesday, Chesapeake upped the amount to $4 billion. The company said the purpose of the loan is to “repay borrowings under the company’s existing corporate revolving credit facility and for general corporate purposes.” In other words, Chesapeake is taking a loan — on which it must pay a steep 8.5% interest rate — to pay off another loan. The energy giant said it plans to repay the new debt by selling large chunks of its land portfolio, including one of its crown jewels, a massive, 1.5 million-acre oil-rich holding in the Permian Basin in West Texas, which could fetch $5 billion or more.

Natural Gas Stocks Are In Trouble -I recently predicted a massive loss in market valuation for some of North America's largest energy producers. I'll share some specific names with you in a moment...but before we cover them, it's important that you know the dynamics that will drive them lower. The first dynamic is called "reserve write-downs." As you probably know, the price of natural gas has collapsed more than 60% over the past 12 months. Energy firms that carry billions of dollars of reserves on their books based on the "old" prices (around $4 per MMBtu) will have to write down the value of those reserves to reflect the new prices (below $2 per MMBtu). Natural gas reserves that were "economically recoverable" -- and thus, extremely valuable -- when natural gas traded for more than $4 per MMBtu back in 2010 are going to be worth much, much less now that natural gas is below $2 per MMBtu. The second dynamic involves "hedging." Hedging is when one party agrees to sell a commodity to another party at a particular price in the future. This strategy helps commodity producers and consumers know in advance what their price of a given commodity will be. It gives both parties a greater ability to plan for the future.

Total gas leak operation begins at Elgin North Sea platform - The oil company Total started pumping heavy mud down its leaking well in the North Sea on Tuesday in an attempt to stop an escape of gas that has lasted nearly eight weeks and could deprive Britain of nearly 6% of its supply this summer. "The well intervention operation got underway at 8:20am with the pumping of heavy mud into the well from the main support vessel," the oil and gas major said in a statement. The work, at the Elgin platform, 240 km off the coast of Scotland, is expected to last several days before engineers can determine whether the leak has been stopped, Total said. The leak is costing the company around £1.8m a day in relief operations and lost net income.

Total Finally Stop Gas Leak at North Sea Well - Total S.A. has announced that the gas leak at their Elgin well in the North Sea, 150 miles of the coast of Aberdeen, Scotland, has been successfully halted. The leak was first detected back in March when all 238 staff were evacuated from the rig. Last month the engineers drilled a relief well which helped to reduce by two-thirds the 200,000 cubic metres of gas leaking every day. A Total spokesperson said that, “Total is today able to announce that a well-intervention operation has stopped the G4 well leak on the Elgin complex, 240km from Aberdeen in the UK North Sea.”

Methane hydrate technology fuels a new energy regime - In a joint announcement two weeks ago, the United States and Japan (along with ConocoPhillips, the U.S.-based multinational oil company) announced the world’s first successful field trial (in Alaska) of a technology that uses carbon dioxide to free natural gas from methane hydrates – the globally abundant hunks of porous ice that trap huge amounts of natural gas in deposits, onshore and offshore, around the world. It’s a neat feat. You use CO2, which isn’t wanted, to produce natural gas, which is. But it’s more than neat – much more.  Methane hydrates constitute the world’s No. 1 reservoir of fossil fuel. Ubiquitous along vast stretches of Earth’s continental shelves, they hold enough natural gas to fuel the world for a thousand years – and beyond. Who says so? Using the most conservative of assumptions, the U.S. Geological and Geophysical Service says so. The U.S. now produces 21 trillion cubic feet (tcf) of natural gas a year. But it possesses 330,000 tcf of natural gas in its methane hydrate resource – theoretically enough to supply the country for 3,000 years (give or take). Using less conservative numbers (for example, a methane hydrate resource of 670,000 tcf), the U.S. is good to go for 6,000 years (give or take).

Horrific Injuries Linked to BP Dispersant Corexit - Exposure to chemical dispersants BP used in the Gulf of Mexico oil spill left a commercial diver with seizures, unable to walk and going blind - and two members of his dive team committed suicide, the man claims in Harris County Court. "Between June 1, 2010 and the end of November, 2010, David Hogan performed commercial diving work from boats and vessels that were owned, leased, chartered, contracted for, and/or under the direction and control of Specialty Offshore, ConocoPhillips, Xplore Oil, and the Stuyvesant defendants in the navigable water of the Gulf of Mexico. On every one of those dives during that period of time, David Hogan dove into waters that were contaminated with both the crude oil and the Corexit® dispersants," the complaint states. Hogan says that on his first dive, in June 2010, "he immediately noticed that something was different from his prior diving experiences," and that "the oil seemed to have sunk considerably deeper into the depths of the Gulf waters than he had ever seen or experienced before. He immediately terminated his dive and returned to the surface, only to find that his wetsuit looked entirely different than it had ever looked before when he had dived into waters with an oil spill." Hogan says neither ConocoPhillips nor Specialty Offshore provided him or his team with any information about NALCO's Corexit dispersants."

Canadian oil sands flyover slide show -  When reaching out to Alberta oil sands companies before a trip to Canada last month, I thought all of them mined oil the same way — they don't.  The open mining most people think of when they picture the oil sands is just one way of extracting crude from the ground, but it is without a doubt the most dramatic. And we had to see it. Check out the pictures > More pictures of our oil sands trip can be found here on Flickr.

Experts deliver another round of Eagle Ford bullishness - The development of the Eagle Ford shale continues to prompt dazzling assessments and predictions from experts, who said at an energy symposium Wednesday that in four years, the oil-rich formation could become the nation's second-most productive shale play. Production in the Eagle Ford could reach 1 million barrels a day by 2016, said Trevor Sloan, director of energy research at ITG Investment Research in Calgary, Alberta. "So the growth rate out of there would be pretty spectacular," he said. But before production can reach that level, some problems have to be solved. About 1,400 Eagle Ford wells are waiting to be completed or to be tied into pipelines, ITG research shows. There are also shortages of crews and water and too few pipelines. Once the problems of getting the oil and natural gas to market are gone, production from the Eagle Ford could double, and "the Eagle Ford would be the second-largest producing area if you could bring all those to market," Sloan said. The Bakken shale in the western U.S. is No. 1.

Enbridge Kicks Off Huge Canada, U.S. Pipeline Expansion - Enbridge Inc. kicked off one of the most sweeping expansions in its history on Wednesday, a $3.2 billion series of projects across its pipeline system aimed at moving western Canada and North Dakota oil to Eastern refineries and eliminating costly bottlenecks in the U.S. Midwest. Enbridge, the largest transporter of Canadian oil exports, said C$2.6 billion worth of the new work would support a reversal in flow direction of a pipeline between Sarnia, Ontario, and Montreal to move Alberta oil sands and North Dakota Bakken shale oil to refineries that are now captive to foreign suppliers. It would also spend about C$600 million expanding its mainline in Canada and the United States, which now moves more than 2 million barrels a day, to get more crude into the Chicago area for shipment South and East. Pending approval, the expansions could be in service in 2014, the company said. These are the latest in a raft of proposals to open up new markets for oil sands-derived crude with production slated to nearly double this decade. Other initiatives involve moving large volumes to Texas via TransCanada Corp's controversial Keystone XL pipeline, and to Asia via Canada's West Coast on Enbridge's equally contentious Northern Gateway proposal. TransCanada has also proposed moving Canadian crude to refineries in Ontario, Quebec and the Maritime provinces by switching one of its natural gas pipelines to oil service.

Do we know enough to ensure safe Arctic drilling? - FOR the oil and gas industry, the Arctic Ocean is the final frontier. Beneath the ocean floor lies an estimated 90 billion barrels of recoverable oil - about 13 per cent of the global total. As the sea ice retreats and traditional sources of hydrocarbons dwindle, the pressure to drill is becoming irresistible. It now seems inevitable that this harsh environment will be opened up to oil and gas production, which poses a big question: how much scientific research is "enough" to ensure safe drilling in the Arctic Ocean? It is true that hundreds of millions of dollars have been spent on marine science in US Arctic waters. But that doesn't mean the right questions have been asked, or that we have the results necessary to inform responsible management. Unfortunately it turns out that we simply don't know enough about Arctic Ocean ecosystems to ensure our actions won't inadvertently stress species to the point of affecting animal populations and the indigenous peoples who depend on them.

North Dakota Tops Alaska in Oil Production - North Dakota has passed Alaska to become the No. 2 oil-producing state in the country, reflecting how the embrace of new drilling technology is redrawing the U.S. energy map. North Dakota's daily production of oil rose 3.1% to 575,490 barrels in March, according to preliminary state data, 1.4% more than Alaska's daily production of 567,480 barrels for the month. Texas, which pumped 1.7 million barrels a day in February, holds a firm grip on first place. In four years, oil output has quadrupled in North Dakota. In March 2008, the state was the No. 8 oil-producing state at 144,000 barrels a day. But since then, new technology called hydraulic fracturing, or fracking, has allowed companies to access the roughly 4.3 billion barrels of crude believed to lie in the Bakken shale beneath parts of North Dakota, Montana and Canada.North Dakota is likely to hold onto the No. 2 spot, as Alaska's output has steadily declined over the past decade. Six years ago, Alaska produced about eight times more oil than North Dakota.

200 Year Supply of Oil in Green River Formation - The Green River Formation, the world's largest oil shale deposit, is located in a largely vacant region of mostly federal land on the western edge of the Rocky Mountains that includes portions of Wyoming, Utah, and Colorado (see map above).  Here's an excerpt from testimony about the Green River Formation that was provided on Thursday by Anu K. Mittal, Government Accountability Office (GAO) Director of Natural Resources and Environment, to the House Subcommittee on Energy and Environment, Committee on Science, Space, and Technology titled "Unconventional Oil and Gas Production: Opportunities and Challenges of Oil Shale Development": "The Green River Formation—an assemblage of over 1,000 feet of sedimentary rocks that lie beneath parts of Colorado, Utah, and Wyoming—contains the world’s largest deposits of oil shale. USGS estimates that the Green River Formation contains about 3 trillion barrels of oil, and about half of this may be recoverable, depending on available technology and economic conditions. The Rand Corporation, a nonprofit research organization, estimates that 30 to 60 percent of the oil shale in the Green River Formation can be recovered. At the midpoint of this estimate, almost half of the 3 trillion barrels of oil would be recoverable. This is an amount about equal to the entire world’s proven oil reserves."

GAO: Recoverable Oil in Colorado, Utah, Wyoming 'About Equal to Entire World’s Proven Oil Reserves' (video) The Green River Formation, a largely vacant area of mostly federal land that covers the territory where Colorado, Utah and Wyoming come together, contains about as much recoverable oil as all the rest the world’s proven reserves combined, an auditor from the Government Accountability Office told Congress on Thursday. The GAO testimony said that the federal government was in “a unique position to influence the development of oil shale” because the Green River deposits were mostly beneath federal land. It also noted that developing the oil would have an environmental impact and pose “socioeconomic challenges,” that included bringing “a sizable influx of workers who along with their families put additional stress on local infrastructure” and “making planning for growth difficult for local governments.” “The Green River Formation--an assemblage of over 1,000 feet of sedimentary rocks that lie beneath parts of Colorado, Utah, and Wyoming--contains the world's largest deposits of oil shale,”Anu K. Mittal, the GAO’s director of natural resources and environment said in written testimony submitted to the House Science Subcommittee on Energy and Environment. “USGS estimates that the Green River Formation contains about 3 trillion barrels of oil, and about half of this may be recoverable, depending on available technology and economic conditions,” Mittal testified.

Canadian oil production may hit six million bpd by 2020: CIBC - Canadian oil production may rise by as much as 2.5 million barrels per day by 2020, blowing past previous forecasts, according to a CIBC report published Wednesday. This implies Canadian crude output could cross 6 million bpd by the end of the decade. Current production levels have averaged 3.6 million bpd this year, according to the International Energy Agency. The Canadian Association of Petroleum Producers 2011 estimates show total Canadian output’s expected to reach 4.2 million by 2020 and 4.7 million by 2025, but CIBC analyst Andrew Potter says that figure may be too conservative. Data gleaned from oil companies suggests an even more bullish growth by another 3.5 million bpd to cross 7 million by the end of decade, CIB data shows.

Oil and gasoline prices - There is no oil shortage in the central United States, and has not been for some time, thanks to increased production from Canadian oil sands, North Dakota, and the Midwest United States: At the same time, demand in the U.S. is down, as Americans are driving fewer miles than in 2008 with more fuel-efficient cars: The result has been that oil is piling up in the central U.S. With inadequate pipeline capacity to transport that crude so that it could replace more expensive oil imported by refineries on the U.S. coasts, a dramatic divergence developed between the price of oil in the central U.S. (as represented by West Texas Intermediate) and that paid by refiners on the U.S. coasts (which is close to the European benchmark Brent).However, as U.C. Berkeley Professor Severin Borenstein and University of Michigan Professor Ryan Kellogg note in a new research paper, that discrepancy in cost of crude did not translate into differences Americans pay for gasoline in different parts of the country. The main reason is, unlike crude oil transportation capacity, our pipelines for moving refined products were adequate to enforce the law of one price for the wholesale gasoline market.

U.S. says most oil, gas acreage is idle -- More than two-thirds of the onshore and offshore acreage leased for oil and natural gas exploration remains idle, the U.S. Department of Interior said. The Department of Interior found of the 36 million acres leased offshore, only 10 million acres are under active development. Onshore, about 56 percent of the leased areas, or roughly 20.8 million acres, is idled. "These lands and waters belong to the American people, and they expect those energy supplies to be developed in a timely and responsible manner and with a fair return to taxpayers," Interior Secretary Ken Salazar said in a statement. "We will continue to encourage companies to diligently bring production online quickly and safely on public lands already under lease." Critics of President Barack Obama's energy policies say he's throwing up roadblocks to domestic energy production. American Petroleum Institute President Jack Gerard said Salazar's assertions are absurd. U.S. Reps. Ed Markey, D-Mass, and Rush Holt, D-N.J., both House energy leaders, said they are introducing legislation that would impose a fee on the oil and natural gas industry for sitting on drilling licenses.

Dept. Of Interior Finds ‘Nearly Two-Thirds Of Acreage’ Leased By The Oil Industry ‘Lies Idle’  - The Department of Interior released an updated analysis of fossil fuel leases today, finding that more than two thirds of offshore leases and half of onshore leases are sitting idle“neither producing nor under active exploration.” The report, “Oil and Gas Lease Utilization, Onshore and Offshore Updated Report to the President,” explained that oil and gas companies hold thousands of undeveloped leases. Despite holding these inactive leases, the oil industry continues to demand the opening of new, previously protected federal lands and waters areas to drilling. The report found that: More than 70 percent of the tens of millions of offshore acres currently under lease are inactive, neither producing nor currently subject to approved or pending exploration or development plans. Out of nearly 36 million acres leased offshore, only about 10 million acres are active – leaving nearly 72 percent of the offshore leased area idle. In the lower 48 states, an additional 20.8 million acres, or 56 percent of onshore leased acres, remain idle. Furthermore, there are approximately 7,000 approved permits for drilling on federal and Indian lands that have not yet been drilled by companies. According to independent analysis, the total number of active rigs operating on the U.S. outer continental shelf was higher in January 2012 than any time since May 2010.

The Future of Oil: Geology versus Technology - pdf - 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.

A pro-fossil industrial policy? - Two items of news caught my eye today. The first is that Republicans in Congress are trying to stop the U.S. military from using biofuels: In its report on next year’s Pentagon budget, the House Armed Services Committee banned the Defense Department from making or buying an alternative fuel that costs more than a “traditional fossil fuel.”...if the measure becomes law, it would make it all-but-impossible for the Pentagon to buy the renewable fuels. It would likely scuttle one of the top priorities of Navy Secretary Ray Mabus. And it might very well suffocate the gasping biofuel industry, which was looking to the Pentagon to help it survive.Now, this sounds like a fairly straightforward narrative: cost-conscious Republicans versus free-spending Democrats who want to push a "green" agenda and protect favored industries. But a moment's thought will reveal that it's not so simple. The "cost" of a fuel source is not entirely reflected in its spot price. The other news story that caught my eye may provide some insight into that question. It's about a new campaign by conservative think tanks to block the adoption of solar and wind power: A number of rightwing organisations, including Americans for Prosperity, which is funded by the billionaire Koch brothers, are attacking Obama for his support for solar and wind power. The American Legislative Exchange Council (Alec), which also has financial links to the Kochs, has drafted bills to overturn state laws promoting wind energy.  

Chart of the Day: Peak What? - World oil production surpassed 75 million barrels per day for the first time ever in December 2011, at 75.45 million barrels, and went even higher in January of this year at 75.58 million barrels, setting a new monthly production record, according to data recently released by the EIA.  The red line in the graph shows the upward linear trend in world oil production from 1973 onward, with daily production increasing by almost 600,000 barrels per day on average every year since 1973.

Can we please just declare the end of 'peak oil' and start worrying about something important? – Apparently something terrible happens when we get to peak oil. I've never really quite understood the argument myself, but when we've used half of all the oil then civilization collapses or something. I'm not sure why this should happen: we don't start starving when there's only half a loaf of bread left. But I am assured that something awful does happen. That oil fields do get pumped out is obviously true – and also that you can have a good guess at when the ones we're currently pumping will run out. The part I don't get is the catastrophe. Some people seem to think that "peak oil" is when we can't actually pump out a higher amount: that if we've got 70 million barrels a day, then that's the most we can ever have, 70 million a day. Which is also called a disaster. Apparently this means that demand will move ahead of supply, which is simple sheer ignorance of the price system. There is no such thing as "supply" or "demand". There is only either of them at a price. So, if there really is a limit on how fast we can pump the stuff up, the price will rise. It's true that if we really do reach some production plateau, then it's likely that the price will rise. But I still don't even see the catastrophe there. Even if we accept the geological conventional wisdom, then there's still no cause for panic. Prices will rise, yes, so people will go off and do other things. Either use something else instead of oil (that ever cheaper shale gas for example) or simply doing things that require less energy. That's what a price system is for, after all, providing the signals that a certain resource is in scarce supply.

Forget Peak Oil, Time To Worry About Peak Oil Labor -In a recent working paper, researchers at the the IMF (International Monetary Fund) attempt to reconcile the Peak Oil debate that whether resource constraints will dictate the future of oil output and prices, or advance in technology motivated by high oil price would eventually provide a solution to more production, as well as higher oil prices. An economic model was developed incorporating both views, and identified two biggest factors contributing to the recent run-up in oil prices:

  1. Relative price insensitivity on the supply side - We have to point out that this IMF observation is partly due to oil production increase/decrease typically significantly lags the oil price movement.  
  2. "Shocks to excess demand for goods and to demand for oil" due to the recent phenomenal growth from countries like China and India.

The paper also gives out this dire warning:"....our prediction of small further increases in world oil production comes at the expense of anear doubling, permanently, of real oil prices over the coming decade. This is uncharted territory for the world economy...."

Updating world deepwater oil & gas discovery - Defining deepwater oil as the offshore resource found in water depths over 500 m, the data available as of October of 2010 was pointing to an ultimate around 150 Gb. This is the result of an extrapolation made last year: Figure 1: world deepwater (>500 m) creaming curve 1971-Oct 2010. The previous ultimate estimate in 2008 was 100 Gb, missing the third cycle in subsalt plays. Figure 2: world deepwater (>500 m) creaming curve 1971-2007 The cumulative discovery versus time with the data up to October of 2010 implied that most discoveries would be made before 2025. Figure 3: world deepwater (>500 m) cumulative discovery versus time 1971-2009. Applying the Hubbert linearisation method to oil discovery confirmed an ulitmate of about 150 Gb. Figure 4: world deepwater (>500 m) oil discovery Hubbert linearisation. The average oil field size has been around 100 Mb the last 20 years and a little less for gas in Mboe. At the same time there is a sharp change in the number of fields since 1995: it was less than 10 before that date and has been over 50 since!

Oil Drops to Lowest Level in 6 Months - The price of oil dropped to a six-month low Tuesday on concern that economic uncertainty in Europe could hurt demand for crude. Benchmark West Texas Intermediate crude fell 80 cents to end the day at $93.98 per barrel in New York. Oil hasn’t finished this low since Dec. 19. Oil has fallen 11 percent so far in May. Recent signs of global economic weakness in Europe and elsewhere have raised questions about the strength of energy demand.

Oil prices could double by 2022, IMF warned - The International Monetary Fund (IMF) has been warned by its internal research team that there could be a permanent doubling of oil prices in the coming decade with profound implications for global trade. "This is uncharted territory for the world economy, which has never experienced such prices for more than a few months," the report warns. The new IMF "working paper" come as the value of crude on world markets remains at the historically high level of $113 a barrel and just after the International Energy Agency reported that consumption would accelerate for the rest of this year in line with a wider economic recovery. Undertaken amid mounting concerns about "peak oil", the IMF study does not presume that there is a constraint on how much oil can be taken out of the ground. It prefers to believe that extraction rates will depend on the price that will be able to be charged for the final product."While our model is not as pessimistic as the pure geological view that typically holds that binding resource constraints will lead world oil production on to an inexorable downward trend in the very near future, our prediction of small further increases in world oil production comes at the expense of a near doubling, permanently, of real oil prices over the coming decade," argues the report, entitled The Future of Oil: Geology v Technology.

The “other reportables” oil mystery - From John Kemp at Reuters: Hedge funds and other money managers reduced their long position in U.S. crude by the equivalent of nearly 54 million barrels of oil, the largest one-week decline since at least June 2006, according to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday. The long liquidation was three times greater than in the “flash crash”, almost exactly a year ago on May 5, 2011, when speculative longs were cut by a little under 19 million barrels.—– The ratio of hedge fund long to short positions halved from 6.2:1 to just 3.2:1, the lowest since October 2011, and far below the recent peak of 11.8, back at the height of the oil price spike in February (Chart 1). While the 54m barrel reduction in hedge fund/managed money longs is interesting in its own right, Kemp observes that just as curious are the changes on the short side. The massive net short position which was being run by banks and other swap dealers fell by 27m barrels, while commercial users dropped their net short position by 15m barrels. But the most interesting thing of all was perhaps the transfer of 27m barrels to the net long position of the mysterious “other reportables” category of the Commitment of Traders report, which now stands at a record 171m barrels. As he notes: Other reportables now have larger gross long and short positions, and a larger net position, in the market than hedge funds, CTAs and other classified as money managers.

Greasing the wheel: Oil’s role in the global crisis - Between January 2002 and August 2008, the nominal oil price rose from $19.7 to $133.4 a barrel. This column gathers evidence on the role of this rise in prices in the global crisis. It suggests that oil prices had a direct impact on household expenditure on gasoline and increased mortgage delinquency rates. It adds that it also had many indirect impacts, notably though interest rate increases due to monetary policy.

Kuwait risks exhausting oil savings by 2017 - IMF - Kuwait will have exhausted all its oil savings by 2017 if it keeps on spending money at the current rate, the International Monetary Fund said in a report published on Tuesday. The IMF, which held a regular consultation with the OPEC member state in the last two weeks of April, said Kuwait would not be able to save oil receipts into its future generations fund. It needed to diversify its economy and improve its infrastructure and climate for investment if it was to remain in good financial health. It said the Gulf state would have to cut the fiscal deficit excluding oil and debt servicing by at least 7 billion dinars ($25 billion) by 2017 to ensure long-term fiscal sustainability.

India to Cut Iranian Oil Imports by 11 Percent -- India says it has decided to cut imports of Iranian crude oil by 11 percent, following pressure from the United States to isolate the Islamic Republic over its nuclear program. India's minister of state for petroleum, R.P.N. Singh, said Tuesday that Indian refiners now plan to import 15.5 million metric tons of crude oil from Iran this fiscal year, down from 17.44 million tons the year before. Singh said India was "consciously trying to diversify its sources of crude oil imports to strengthen the country's energy security." He said refiners base their imports on "technical, commercial and other considerations." Tuesday's announcement came after U.S. Secretary of State Hillary Clinton urged India to reduce Iranian oil imports during her visit to the South Asian country last week.

Part 9: Inter-Regional Trade Movements of Petroleum to and from China  - Over the last decade, all four net petroleum exporting regions (ME, FS, AF, SA) have stepped up their exports to CH, often the expense of less exports to one or more of EU, NA or Japan (JP). For instance, Part 7 and Part 8 illustrated how petroleum exports from the Middle East (ME) and the former Soviet Union (FS) was increasingly flowing to China (CH). Part 5 showed a similar trend of increasing exports from Africa (AF) to CH with declining exports to the European Region (EU). Part 4 showed the analogous trend of decreasing export to North America (NA) from South America (SA) and increasing exports from SA to CH. Here in Part 9, I show these trends all together, from the perspective of China, and, further explores the trade movements of petroleum between China and the other two Asian regions: JP and the remaining Asia-Pacific countries (rAP).

Risks loom as China orders Big 4 auditors to go local - China and the world's largest audit firms face credibility risks under an order Beijing issued saying the firms must hire more Chinese citizens to manage operations there, analysts said. Thursday's order follows a string of accounting scandals at Chinese companies listed on U.S. stock markets and amid broader questions about China's willingness and ability to conform with international business standards and rules.As the world's second largest economy, China has enterprises with global ambitions, but markets often question the accountability and transparency of these businesses. The new government order will do little to alleviate that skepticism. China's Ministry of Finance announced the audit industry's so-called Big Four - PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte - must begin to hand over the reins of their Chinese practices to its citizens and accountants. The China operations of the four firms are now led largely by expatriates. The Chinese order caps at 40 percent the number of foreign-qualified partners a Chinese Big 4 affiliate may have as of August, and at 20 percent by 2017. The rules also say each of the Big Four's senior partners eventually must be Chinese citizens. All now are foreigners.

Data Signal Economic Trouble in China - China announced Thursday that growth in imports had unexpectedly come to a screeching halt in April — rising just 0.3 percent from the same period a year earlier, compared with expectations for an 11 percent increase. Businesses across the country appeared to lose much of their appetite for products as varied as iron ore and computer chips. Growth in other sectors appears to be slowing, too, particularly in real estate. Soufun Holdings, a Chinese real estate data provider, released figures Monday showing that residential land sales in the country’s 20 largest cities had fallen 92 percent last week from the week before, as declining prices for apartments have left developers short of cash and reluctant to start further projects. In a series of interviews over the past week, bankers and senior executives from provinces all over China, in a range of light and heavy industries, cited a broad deterioration in business conditions. Two of them said that some tax agencies in smaller cities had been telling companies to inflate their sales and profits to make local economic growth look less weak than it really was, while reassuring the companies that their actual tax bills would be left unchanged. There are early signs of a credit crunch, at least among private sector companies. Many seem to be asking their suppliers for more time to pay debts and complaining of cash flow problems.

China Real Estate Unravels - As a prelude to a broader analysis of China’s GDP, and the accuracy of its official GDP figures, I want to start by examining the national real estate statistics for the first four months of 2012.  This discussion feeds into the broader GDP picture, but the property story that has been unfolding is important and interesting enough to be worth taking a close look at on its own. Getting an accurate view of the property sector is complicated by the fact that neither the official price index, nor the Soufun price index, nor the average price/square meter that can be calculated from the investment numbers seem to track very well with each other or with point-of-sale impressions of steep developer discounts over the past eight months.  Developers and local governments also enjoy a great deal of discretion in deciding what to count as a “start” or a “completion.”  Monthly data releases are never revised, which often gives rise to huge corrections that are simply lumped into the end-year December data release, giving a distorted impression of how trends are unfolding. All that being said, I’m seeing some rather striking patterns in the data that tell us two main things:

  1. The market is not poised to recover, but will continue to see greater downward pressure on prices; and
  2. Real estate investment is likely to flatten out or start falling, erasing several percentage points of GDP growth.

China’s new housing starts turn negative - The chart below shows that new housing starts (residential) year-to-date in terms of floor area is below what it was in the same period of last year.  This points to a negative impact on the GDP growth figure and not only because real estate investments contributes roughly 10% of GDP, its impact on other related industries such as steel and cement will be, although not easily quantifiable, very negative:

As The Chinese Car "Channel Stuffing" Bubble Pops, "Debilitating Price Cuts" Arrive - The fact that GM's "stunning" car sales have been in no small part driven exclusively by its eagerness to stuff dealers with unsold inventory, aka channel stuffing, is well known to Zero Hedge readers - we have been covering the subject for over a year now. What we did not know, yet what in retrospect is so glaringly obvious, is that the GM ploy of fooling the dumbest sellside analysts and investors all the time has now gone global. And while channel stuffing may have worked for a while, it is now starting to bite back. Bloomberg reports: "Chinese dealers are struggling with the rising number of unsold cars that’s threatening to deepen price cuts, according to the nation’s biggest automobile dealers’ association. Dealerships for Honda Motor Co., Chery Automobile Co., BYD Co. and Geely Automobile Holdings Ltd. carried more than 45 days of inventory as of the end of April, exceeding the threshold that foreshadows debilitating price cuts, Unsold cars are crowding dealer lots in cities from Guangzhou in the south to Xi’an to the west,” Su said in a phone interview yesterday from Beijing. “It’s like a contagious disease that will spread." Wait, so Channel Stuffing is... bad? And if 45 days of inventory "foreshadows debilitating price cuts", then what should GM with its 86 days of full vehicle days supply in the US say?

China’s ugly April - It’s official, the Chinese economy did not bottom out in the first quarter, and the latest data confirms just how badly the economy is doing (or just how optimistic the market has been). While I am bearish on China and did not think the worst was over for the Chinese economy, I did think that the slowdown had stabilised a bit in the late first quarter, and will probably enjoy another leg down later this year. The latest data suggests, however, that even China bears like myself could be wrong for not being bearish enough. The short-term stabilisation I was looking for has stayed much shorter than I thought it would, and the data from April has been uniformly bad. The only good news appears to be that inflation is trending down, so inflation pressure is much less of a concern when the government is trying to implement pro-growth measures, and that’s what people have been hoping for. Here’s a round-up of just how ugly some of these April macro data look.

Is China entering a debt deflation? - Yes, I am talking about the dreaded debt deflation (in Irving Fisher’s sense) in China. It works like this, more or less: Banks create money by extending credit; when banks lend you money, your deposit account balance increases.  That money created by bank’s extending credit is included in the money supply calculation.  Increasing debts in the economy means increasing money supply, more or less, and that funds economic growth and, of course, asset prices. It all goes well when asset prices keep rising because the debt level looks lower.  It is when things go into reverse that what looked like a comfortable debt level suddenly appears to be problematic. With the economy slowing and companies not profitable, demand for credit is slowing.  Not surprisingly, with the real estate bubble bursting, demand for mortgages is also slowing.  With demand for credit lower, the banking system is creating money at a slower pace.  And with asset prices falling, it is be possible (in the future, if it is not already happening) that loan repayments and defaults overtake new loan creation. In that event, the banking system is destroying money, all else being equal (i.e. if the central bank isn’t doing anything).

Wenzou’s debt deflation - In a debt deflation, debt liquidation leads to falling asset prices. As the process continues, the repayments of debt (and default) outpace extension of new credits, meaning that the banking system is destroying money through credit contraction.  That means deposits fall, and so does money supply. That leads to sharper falls in asset prices, more repayment and default, contracting money supply, deflation, rinse and repeat. I speculated yesterday that China is slipping into some version of these dynamics based upon what is happening right now in the monetary statistics, as loan demand appears very weak and both deposits and money supply are falling. Today, I have an anecdote that suggests that the it could well be happening.  First Financial Daily is reporting a scene happening in banks in Wenzhou that suggests.  Even at a normally non-peak hours in the afternoon, it says, banks are full of people queuing up, not for borrowing money, but repaying debts. This is a curious scene that suggests the debt deflation process has started in Wenzou, if not nation-wide. According to the report, informal lending in Wenzhou has fallen by 30% compared to last August, and Wenzhou banking sector profits have fallen 53.5% in the first quarter compared to a year ago.  In fact, some banks are losing money, which is, according to the report, rare in Wenzhou.  The report also mentions that non-performing loans, perhaps not surprisingly, have been on the rise.

World edges closer to deflationary slump as money contracts in China - All key indicators of China's money supply are flashing warning signs. The broader measures have slumped to stagnation levels not seen since the late 1990s. Narrow M1 data for April is the weakest since modern records began. Real M1 deposits – a leading indicator of economic growth six months or so ahead – have contracted since November. They are shrinking faster that at any time during the 2008-2009 crisis, and faster than in Spain right now, according to Simon Ward at Henderson Global Investors. If China were a normal country, it would be hurtling into a brick wall. A "hard-landing" later this year would already be baked into the pie. Whether this hybrid system of market Leninism – with banks run by Party bosses – conforms to Western monetary theory is a hotly contested point. The issue will be settled one way or the other soon. What seems clear is that China's economy did not bottom out as expected in the first quarter. It is flirting with real trouble. Yao Wei from Societe Generale says a blizzard of awful data "screams out for easing".

Money is fleeing China - The detailed statistics from China’s April monetary statistics show that the change in the position of forex purchases has turned negative again in April. With a relatively large trade surplus in April, this indicates that capital flow turned hugely negative. I estimate that excluding the trade surplus, capital outflow would be RMB177 billion (I don’t distinguish the type of flow). As explained in the past, under the current arrangements, a capital outflow will contribute to a tightening of monetary conditions within China. Thus we now know, more or less, the reason for last weekend’s decision to reduce Reserve Requirement Ratio. Indeed, while the 50bps cut of RRR would have made RMB421.14 billion available for banks to lend, almost half of that would have been offset by the April’s capital outflow:

China faces pressure to reverse economic slump - Now, with China's economy cooling abruptly again, Gao sees another wave of bankruptcies about to hit his industry. "I can see about one-fifth to one-third of the factories are about to close, and owners are preparing to sell off their equipment," said Gao, general manager of Taiyuan Fanhe Engineering Co. China's economic growth has decelerated from overheated to slower than Beijing wanted in just half a year as export demand and consumer spending at home weaken, raising the threat of job losses and possible unrest.  Chinese leaders are gradually reversing course after spending the past two years trying to cool growth and inflation. They are easing lending curbs and are expected to take other steps to shore up growth that fell to a nearly three-year low of 8.1 percent in the first quarter and is slowing further.

Economists Expect China to Broaden Stimulus - A decision by China’s central bank to loosen monetary policy is not an antidote by itself for emerging weakness in the Chinese economy and is likely to be just the start of a broader program of economic stimulus by the government, economists said on Sunday. “We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing,” Qu Hongbin, the co-head of Asian economic research at HSBC, said in a report. The People’s Bank of China, the central bank, said on its Web site late Saturday that effective this Friday, it would reduce the share of deposits that banks must set aside as reserves by a half percentage point. The reduction in the so-called reserve ratio means that banks will have more cash available to lend. But economists were skeptical about the effectiveness of allowing banks to lend more money at a time when many businesses do not necessarily see a lot of attractive opportunities that would prompt them to borrow and invest. At the same time, a steep decline in land prices and apartment prices, engineered by the government to improve the affordability of housing, has left many companies without enough collateral to post in order to qualify for loans.

Why China's RMB exodus IS the story - There is a huge developing story in China’s currency, the renminbi. After years of structural under-valuation, things are changing. China faces what we have described before as a “dollar shortage” problem, a situation it last faced on a major level in 2008. This might seem counterintutive given China’s large stock of US Treasuries, but we promise, this is a real and growing problem. As it stands, China sits on a huge pile of Treasuries it can’t openly liquidate for fear of sending the wrong signal to the Treasury market, as well as fear of moving the underlying. But at the same time it is finding it ever harder to absorb dollars from the system, because fewer surplus greenbacks are making their way into China via trade. Ordinarily, China offers traders the chance to exchange dollars — received through their business practices — for renminbi at the standing PBoC renminbi rate. Since this creates an excess renminbi liquidity issue, the government simultaneously offers yuan-denominated bills to the market so as to absorb the huge amounts of yuan-denominated cash that it creates. But, whilst this creates big yuan-denominated liabilities for the government, the process also creates large dollar-denominated assets, which are usually reinvested into dollar-denominated “safe” securities like Treasuries (or GSE paper before 2008).

Economists: Chinese Currency Significantly Undervalued - Last week, a Chinese central bank official said the yuan’s exchange rate with the dollar “isn’t clearly undervalued.” Economists in the latest Wall Street Journal forecasting survey beg to differ. Twenty-eight of 41 economists who responded to the question said that yuan was undervalued, and 23 of them said it was undervalued by more than 5%. Nine economists said the level was about balanced, and just four said the yuan was overvalued. Stephen Stanley of Pierpont Securities was among those who said the Chinese currency was at about the right level. “The trade balance is getting less lopsided,” he said. Meanwhile, Ram Bhagavatula of Combinatorics Capital thinks that while the yuan is undervalued, it’s not a large number. “Other countries in the region are proving more attractive,” he said. But most of the respondents disagreed. Allen Sinai of Decision Economics estimates the currency is undervalued by up to 30%. And Julia Coronado of BNP Paribas say that if the exchange rate is balanced, China’s currency policy makes no sense. “If it weren’t [undervalued by more than 5%] then what would be the harm in letting it float?,” she said.

Carr: China concerned by Australia-US military ties - China has raised concerns over growing military ties between Australia and the US, Australian Foreign Minister Bob Carr said as he visited Beijing. Chinese officials had told him that "the time for Cold War alliances has long since passed", he told reporters. The US has recently started rotating troops through bases in Australia. On Monday Mr Carr met counterpart Yang Jiechi. He is also due to meet Vice Premier Li Keqiang to discuss a China-Australia free trade deal. China is a major trading partner for Australia and about a quarter of all Australian exports now go to China. But Australia's key security partnership is with the US. Last month the first contingent of some US marines to be stationed in Darwin arrived; the US will eventually deploy a 2,500-strong force in northern Australia by 2017.

Why the Selloff in Emerging Market Currencies Could Worsen - The selloff in emerging market currencies over recent months looks set to worsen, according to analysts, who point out India’s rupee, Indonesia’s rupiah, and to some extent, South Korea’s won could face the brunt of the pressure. Investors have been selling so-called ‘risk assets’ in recent weeks on fears that Greece may have to leave the 17-nation euro bloc after talks to form a new government broke down. After several days of selling, risk assets stabilized on Thursday. The Indian rupee - one of the worst affected currencies this year - strengthened against the U.S. dollar. But David Rocheemerging market currencies weakening further as these economies post disappointing growth, putting pressure on their central banks not to raise rates in the face of higher inflation. Higher inflation and lower real interest rates could make these countries less attractive to foreign investors. Since many emerging markets depend on inflows of capital to fund their current account deficits, Roche foresees a “funding gap” developing. On Wednesday, for example, the Indian rupee dropped to a fresh all-time low of 54.44 against the U.S. dollar. The country runs a current account deficit of 4 percent of GDP, making it especially vulnerable.

WA government delays $1.8b in projects - MORE than 30 projects have been deferred as part of a restructure of the State Government's capital works program in order to reduce runaway debt that will blow out to $18.5 billion next financial year. The government today said it would spend $26.4 billion over the next four years on infrastructure, including a record $7.6 billion in 2012-13. However, Treasurer Christian Porter said the government was not prepared to take on more debt that it could handle to fund the infrastructure projects, blaming the position on WA’s declining share of GST revenue. The government has estimated a $662 million black hole from the GST revenue fall for 2012-13. Thirty three projects worth $1.8 billion will be delayed due to the State Government’s restructure of its infrastructure spend.

UNCTAD as the Battleground for Role of the State, Trade Policy - We’ve featured past Real News Network segments on the United Nations Conference on Trade and Development. UNCTAD has increasingly become a forum for struggles between advanced economies and developing economies over what the rules of the road should be in trade. UNCTAD was early to call the benefits of financialization into question, and has also been taking issue with the comparatively small take countries in the “south” get from extended supply chain production. This, needless to say, is a vision that is a direct challenge to how multinational like to conduct their affairs, so it should be no surprise that the big, rich countries are trying to bring UNCTAD to heel. From the Real News Network (video):

Working in Africa: Expatriates in little danger of seeing the money run out - Expatriates are certainly in little danger of running out of money, but the degree to which they are “looked after” rather than paid in hard cash depends where in Africa they operate. It is also likely to depend on the industry sector in which they work, with opportunities in most sectors now appearing to be very slowly diminishing. Multinational companies are drawn to Africa today because of its natural resources; its economic growth – the International Monetary Fund expects economies in the sub-Saharan region to post average economic growth in 2012 of almost 6 per cent; its fast-emerging middle class, now numbering more than 300m people; its possession of 60 per cent of the world’s total uncultivated arable land; and, increasingly, its tourist destinations. “There is a very real sense that Africa seems to have grown tired of going to war,” says Derick Boshard, partner in Johannesburg with Heidrick & Struggles, the global search firm. Countries such as Kenya and Tanzania are now among the world’s favoured tourist destinations, and the United Nations World Tourism Organisation expects tourist arrivals in Africa to exceed 50m in 2012. “We are seeing a groundswell of activity this year with American interest as well around Francophone, Anglophone and Lusophone (Portuguese-speaking) Africa,” he says. But when it comes to executive pay, there are large regional variations across the continent: “In terms of how the pay is structured, if you look at West Africa and southern Africa, the pay scales will be very different,”

Graphic: Products of Slavery - Statistics from a U.S. government study are helping trace common consumer products back to slave-labour origins. Findings released in the 2011 report from the U.S. Department of Labour outline 71 countries involved in exploitative labour practices, spanning 130 product types. The National Post graphics department takes a look at this data and charts out what it means:

Spending and Growth - Krugman - First-quarter growth results are now in for the major advanced economies; they look like this: Wait, what? Japan as star performer? What’s that about? Actually, no mystery. From Bloomberg: Japan’s economy expanded faster than estimated in the first quarter, boosted by reconstruction spending that’s poised to fade just as a worsening in Europe’s crisis threatens to curtail export demand. So Japan, which is spending heavily for post-tsunami reconstruction, is growing quite fast, while Italy, which is imposing austerity measures, is shrinking almost equally fast. There seems to be some kind of lesson here about macroeconomics, but I can’t quite put my finger on it …

McWages Around the World - "There is a reason that McDonald’s products are similar.  These restaurants operate with a standardized protocol for employee work. Food ingredients are delivered to the restaurants and stored in coolers and freezers. The ingredients and food preparation system are specifically designed to differ very little from place to place. Although the skills necessary to handle contracts with suppliers or to manage and select employees may differ among restaurants, the basic food preparation work in each restaurant is highly standardized. Operations are monitored using the 600-page Operations and Training Manual, which covers every aspect of food preparation and includes precise time tables as well as color photographs. ... As a result of the standardization of both the product and the workers’ tasks, international comparisons of wages of McDonald’s crew members are free of interpretation problems stemming from differences in skill content or compensating wage differentials." Ashenfelter has built up McWages data from about 60 countries. Here is a table of comparisons. The first column shows the hourly wage of a crew member at McDonald's, expressed in U.S. dollars (using the then-current exchange rate). The second column is the wage relative to the U.S. wage level, where the U.S. wage is 1.00. The third column is the price of a Big Mac in that country, again converted to U.S. dollars. And the fourth column is the McWage divided by the price of a Big Mac--as a rough-and-ready way of measuring the buying power of the wage.

Escaping the Resource Curse « iMFdirect – The IMF Blog -- High commodity prices and the discovery of new reserves offer the potential for much needed revenue in many developing countriesrevenues that should help promote economic and social development, build human capital, and reduce infrastructure gaps in resource-rich countries. In a new study, my co-authors and I look at how to manage fiscal policy to achieve those goals while avoiding previous pitfalls. The design of fiscal policy frameworks for resource-rich developing countries is beset by trade-offs and tensions. In fact, the volatility, uncertainty, and exhaustibility of revenues earned from resources have to be taken into account when formulating a scaling up of public spending.

  • How to ensure short-term macroeconomic and fiscal stability?
  • How to achieve long-term fiscal sustainability and adequate savings for future generations while allocating sufficient resources to meet development needs?
  • How to address absorption capacity constraints that could limit the quality and effectiveness of scaled-up spending?

The new World Input-Output Database - Global value chains and the international fragmentation of production challenge well-established trade policy models and raise new issues. Yet research has been hindered by the limited availability of proper statistics. This column introduces the World Input-Output Database (WIOD), a new public data source that offers unique opportunities to study the effects of fragmentation on a range of socioeconomic and environmental issues.

StandardAndPoors: The Credit Overhang: Is A $46 Trillion Perfect Storm Brewing? -  Uncertainty continues to plague global corporate credit markets. Through a series of reports titled "The Credit Overhang," Standard & Poor's Ratings Services will comment on the competing forces that can potentially influence corporate credit quality and alter the fragile equilibrium that currently exists in the global corporate credit landscape. This is the initial article of the series.) The global "wall" of nonfinancial corporate debt maturities coming due from 2012 to 2016 is not new to market observers. Less discussed is the incremental financing that corporate debt issuers will need over this period to fund capital expenditure and working capital growth. Standard & Poor's Ratings Services estimates the total amount of refinancing and new money requirements over the next five years at between $43 trillion and $46 trillion. This demand for funds will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk-return thresholds. These factors, amid the current eurozone crisis, a soft U.S. economic recovery following the Great Recession, and the prospect of slowing Chinese growth, raise the downside risk of a perfect storm for credit markets, in our view.

Sweden - Sweden!!! - as Conservative Icon - Krugman - I learn from Ezra Klein’s interview with Tom Coburn that Sweden, of all places, has become the new right-wing icon. I thought Europe’s woes were all about collapsing welfare states? But anyway, the story now is that Sweden has slashed spending and cut taxes, and is doing great; supply-side economics vindicated! Ezra points out, rightly, that Sweden has actually benefited a lot from very aggressive monetary policy — one of the original Princeton zero-lower-bound Group of Four, Lars Svensson, is now deputy governor of the Riksbank. (The others were Mike Woodford, yours truly, and a fellow by the name of Ben Bernanke). But Ezra didn’t challenge Coburn on the claim about spending cuts; why don’t we look at what Sweden has actually done, as opposed to the official right-wing line? Look, in particular, at actual government consumption — purchases of stuff. Here’s Sweden versus the United States, from Eurostat: Somebody has been practicing harsh spending-side austerity — and it’s not Sweden.

U.S. Versus Europe: Who’s Winning Now? - Now that the OECD has updated their GDP data for 2010, I thought I should revisit the question I asked a few years ago: Who’s growing faster? The U.S. or Europe? The answer’s the same as it was then: it’s a dead heat. As I pointed out in that previous post, people love to cherry-pick periods and show how the US has grown so much faster than Europe. (Funny how liberals don’t seem to play this particular game, while conservatives do, quite constantly — usually while going all gooey about people named Reagan and Thatcher.) The problem is, what they’re saying isn’t true. Being a curiously curious cat, with an apparently blithe disregard for my own mortality, I went out and looked at the changes in real (inflation-adjusted) GDP per capita over the last forty years. Which I share with you here. Feel free to cherry-pick at will.

Is Europe on a Cross of Gold?  - Barry Eichengreen -  Increasingly, one hears predictions that the euro will go the way of the gold standard in the 1930’s. And, increasingly, the reasoning behind such forecasts seems persuasive. But does that mean that the euro doomsayers are right? Following the 1929 stock market crash, governments opted to move unilaterally. One after another, they abandoned the gold standard, depreciating their currencies. By loosening credit in this way, they recovered, one after another, from the Great Depression. Today, Europe has been hit again by a massive deflationary shock. This time, the constraint on reflationary action is the euro. Governments lack a national currency to depreciate, and lack the power to relax credit, having delegated monetary policy to the European Central Bank. As unemployment again rises to catastrophic heights, they will have no alternative, it is said, but to abandon the euro unilaterally. I wrote the book on Europe and the gold standard. Literally. In Golden Fetters: The Gold Standard and the Great Depression, published in 1992, I argued that the deflationary engine that was the gold standard was a key cause of the 1930’s depression, and that abandoning it opened the door to recovery. Yet I am reluctant to believe that things will turn out the same way this time. Four differences lead me to believe that maybe – just maybe – the euro will survive.

Greek Unity Talks Hit Impasse - Talks between Greece’s president and the leaders of the country’s three largest political parties on forming a coalition government reached an impasse on Sunday, increasing the chances that the country will hold fresh national elections in June. Antonis Samaras, the conservative leader, said the radical left coalition Syriza had blocked a last-ditch effort to break the deadlock. “Syriza doesn’t accept the formation of a viable government, or agree to support a government that would seek to renegotiate the terms of the bailout,” Mr Samaras said after the 90-minute meeting chaired by Karolos Papoulias at the presidential mansion.  Alexis Tsipras, the Syriza leader, said after the meeting: ”They wanted Syriza to collude in a crime … to ignore the voice of the people”, referring to the fact that 70 per cent of Greeks voting last Sunday backed anti-austerity parties.

Syriza Says It Won’t Join Greek National Unity Government - Greece’s biggest anti-bailout party, Syriza, said for the second time in as many days that it won’t join a unity government, pushing the country closer to new elections that have sparked concerns about a euro-area exit. “Syriza won’t betray the Greek people,” leader Alexis Tsipras said in statements televised on state-run NET TV after a meeting brokered by President Karolos Papoulias between the party and the leaders of the New Democracy and Pasok parties. “We are being asked to agree to the destruction of Greek society.” Papoulias began a final bid to coax the three biggest parties into a coalition today after a week of talks which failed to deliver on mandates to form governments. He will meet later today the leaders of the four other parties to probe the likelihood of forming a national-unity government. If Papoulias’s efforts fail, new elections will need to be called. Greece’s political impasse since inconclusive general elections May 6 has raised the possibility another vote will have to be held as early as next month, with polls showing that could boost anti-bailout Syriza to the top spot. The standoff has reignited concern the country will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since May 2010, and, ultimately, leave the euro area.

Greek coalition talks break down in acrimony - Greece appeared to be heading for fresh national elections after last-ditch coalition talks chaired by the country’s president ended in mutual mud-slinging by the conservative, socialist and leftwing leaders. Antonis Samaras, leader of the centre-right New Democracy party, said the radical left coalition Syriza had blocked efforts to break the deadlock, even after a letter from premier Lucas Papademos was circulated at the meeting outlining Greece’s deteriorating fiscal position. Tax collection slowed markedly during the election campaign, putting budget deficit targets at risk, according to a finance ministry official. Prolonged political instability would also delay the implantation of a €40bn recapitalisation scheme for Greek banks included in the country’s second bailout by international lenders, the official said. Mr Samaras criticised Syriza’s 37-year-old leader for refusing to help form a coalition or support a government that would try to re-negotiate the terms of the bailout. Evangelos Venizelos, leader of the PanHellenic Socialist Movement (Pasok), accused the Syriza leader of “showing arrogance” by opposing a coalition deal.

Greek exit would convert over half a trillion of external euro liabilities into drachma - As discussed earlier, Greek exit from the Eurozone may be the only way the nation could gain some control over its monetary system. Given the complete "credit isolation" of Greece's banks and the private sector from the rest of the Eurozone, the ECB is powerless to improve liquidity conditions in that nation. Some of the ECB's policymakers are beginning to agree.  Reuters: - A Greek exit from the euro zone would damage confidence in the single currency bloc but not necessarily be fatal, Irish central bank chief and European Central Bank policymaker Patrick Honohan said on Saturday. Intrade probability of at least one nation exiting the Eurozone (basically Greece) before the end of next year has spiked in the past few days, approaching 60%. This agrees quite well with numerous other forecasts by a number of Wall Street firms.  But the exit will cost the Eurozone more than just "damage of confidence" that Patrick Honohan alluded to in his comments. There would be some serious financial damage to the Eurozone/EU and the IMF. The exit will be far more painful than simply converting to drachma (as many believe), even though some preparations for this eventuality are already under way. The problem with this conversion is that all of Greece's external liabilities would need to be converted to drachma as well. Let's take a quick look at some of these external liabilities:

Greek Communist Head Calls For Annulment Of Greek Loan Deal - The head of Greece's Communist KKE party Sunday called for the annulment of the country's loan deal, ruling out her party's participation in a coalition government, even as Greece scrambles to resolve a weeklong political deadlock following inconclusive polls last week. "We will introduce legislation in the Greek parliament, which is going to set out very specifically the elimination and annulment of the [loan agreement], Aleka Papariga said after a meeting with Greece's president Karolos Papoulias.

Europe Update: Next Greek Election, Euro-area GDP expected to show recession - Greece: It is very unlikely that a coalition government will be formed. This means there will be another election on June 17th. The Europeans have said they will fund Greece through the next election, but it is not clear what will happen next. An exit from the euro is very possible. From the Financial Times: Greek exit from eurozone ‘possible’ Greece’s exit from the eurozone “would be possible,” even if not in Europe’s interest, and countries should have a democratic right to quit, according to ... Luc Coene, the central bank governor of Belgium, Mr Coene’s remarks – echoing similar comments by other eurozone central bankers – hinted at swirling debate within the ECB’s 23-strong council and suggested the ECB now realises such an outcome has become distinctly possible.  And it is appears data this week will confirm the European recession. From Nomura:  An important state election in Germany and a Eurogroup meeting will take center stage amid heightened political uncertainty and GDP data likely to confirm the euro area is in recession. ... Euro-area Q1 GDP first release (Tuesday & Wednesday): The euro area seems to have entered into a technical recession in Q1, albeit with a shallower contraction than in Q4. We expect GDP growth to come in at -0.2% q-o-q in Q1 from -0.3% previously. By country, we think the core should hold up well, while the rest see a less sharp decline in economic output. In Germany and France, we forecast GDP growth of +0.1% q-o-q (vs Q4‟s -0.2%) and 0% q-o-q (vs Q4‟s +0.2%) respectively. ... In Italy, we think GDP growth is likely to print at -0.5% q-o-q in Q4 (vs -0.7% in Q4).

No Deal: Greek Moderate Left Party says "No Government Possible"; Chart Explains Why Deal Is Now Impossible - The talks still continue but good news is on the horizon as yet another political party, the Democratic Left, has backed out of the Unity coalition. Please consider Greece's moderate left says no government possible The moderate Democratic Left party in Greece says it will not join pro-bailout parties in a coalition without the more radical far-left Syriza. Syriza is refusing to attend coalition talks because it will not back any government which supports austerity measures demanded by the EU and IMF. The Greek president has summoned the four main parties for last-ditch talks in an effort to avoid new elections. "No unity government can emerge," Fotis Kouvelis, head of the Democratic Left party, told Greek television. "A government without Syriza would not have the necessary popular and parliamentary backing."  Here is a nice chart from the article that highlights the situation.

Greek outgoing PM warns of cash squeeze - Greece's outgoing Prime Minister Lucas Papademos has warned the country's political leaders the government may have difficulty in meeting its cash obligations as of the start of June, a Greek newspaper reported Monday. In a note Papademos sent to Greek President Karolos Papoulias and discussed in Sunday's meetings between the president and party leaders on forming a coalition government, the prime minister said it is likely Greece will have significant difficulties in covering its cash payments in June, according to newspaper Ta Nea, citing unnamed sources from Papoulias' office This is due to last week's decision by euro-zone governments to hold back part of a scheduled loan payment towards Greece and the country's election period weighing on revenue collections, the paper said.

Greek Elections Loom as Key Bailout Opponent Defies Unity - Greece’s political deadlock went into a second week as President Karolos Papoulias failed to secure agreement on a unity government and avert new elections with the country heading toward a possible exit from the euro area. Greece’s biggest anti-bailout party, Syriza, defied overtures to join the government yesterday, deepening the impasse. Leader Alexis Tsipras won’t attend a meeting called by Papoulias today at 7:30 p.m. Athens time, the party said in an e-mailed statement.  “Syriza won’t betray the Greek people,” Tsipras said in statements televised on NET TV after meeting with Papoulias and the leaders of the New Democracy and Pasok parties. “We are being asked to agree to the destruction of Greek society.”  Papoulias spent yesterday trying to coax the country’s three biggest parties into a coalition after a week of talks failed to deliver a government. If Papoulias’s efforts fail, new elections will need to be called. Today’s meeting will be with the leaders of two of the three biggest parties, and the head of the smaller Democratic Left party, state-run NET TV said.

Holdouts get paid, the rest can pray  - At the time when the Greek-forced writedown of private sector bonds was being imposed less than two months ago, there were open threats of a complete cessation of payments to any “holdouts”, or bondholders who refused to take the new “PSI” (private sector involvement) bonds, with their forced reductions in principal and stretchouts of maturity.  Can’t pay, won’t pay, to use a slogan of Seventies Italian radicals. Guess what. Last Tuesday, the Greek Debt Management Office announced that it had paid a coupon that came due on Japanese yen-denominated floating rate notes (FRN), whose holders had held out. My own view is that this was not a bad idea, given that Japan still has the largest capital market in Asia. The Japanese holders had not threatened court action, or retaliation. They just expected their money, and got it.

EU central bankers ponder Greece euro exit - European central bankers have been openly expressing views on the possibility of Greece leaving the eurozone as its leaders struggle to form a government. Germany's top banker said it was up to the Greeks to decide, but if they did not keep to their bailout commitments, they would receive no new aid. His counterpart in the Irish Republic said a Greek exit would be damaging but not necessarily fatal to the euro. Greece is to make a final attempt at forming a government on Sunday. President Karolos Papoulias is to meet party leaders after they failed to deliver a coalition through their own negotiations. Greek voters punished mainstream parties which backed the bailout at last Sunday's parliamentary election. If no new government is formed, a new election will have to be held, and opinion polls suggest Syriza - a leftist, anti-bailout party - will benefit most. Syriza firmly rejects the terms of the most recent EU-IMF bailout, which requires tough austerity measures in return for loans worth 130bn euros ($170bn; £105bn).

Eurozone: If Greece goes ... Greece’s European partners say Athens cannot have it both ways. But the siren call from the radical left coalition Syriza, that Greece is safe in the eurozone with its creditors poised to ease the harsh bailout, is music to the ears of hard-pressed citizens. Popular anger is running high at the prospect of three more years of austerity while Athens implements the rest of the reform programme agreed with the EU and International Monetary Fund. “We desperately need a break ... If my pension is cut again, I might as well commit suicide,” says Angelos Syrigos, 85, whose modest income has been slashed by 30 per cent in the two years since the bailout began.  Alexis Tsipras, Syriza’s charismatic 37-year-old leader, who emerged as a kingmaker following his party’s surge to second place at last Sunday’s inconclusive general election, is gaining in support. Opinion polls published at the weekend showed Syriza would win first place in a second election, with 20-25 per cent of the vote.  Mr Tsipras insists Brussels and Berlin will not force Greece out of the euro because of the contagion effect this would have on Portugal, Ireland and Spain. He has demanded a reversal of salary and pension cuts imposed by the bailout, as well as the hiring of 100,000 new public sector workers to reduce the impact of a
21 per cent unemployment rate.

EU leaders set for showdown on fate of euro as crisis deepens  - Europe is braced for a crucial 48 hours of high-stakes summitry likely to decide whether Germany and France can strike a grand bargain aimed at dispelling growing pessimism over the chances of the single currency surviving in its current form. While eurozone finance ministers are to meet on Monday in Brussels, apparently at a loss over how to respond to political paralysis in Greece and a worsening crisis in Spain, all eyes are on François Hollande, the new French leader, who is to go to Berlin for his first face-to-face meeting with the German chancellor, Angela Merkel, as soon as he is sworn in as president on Tuesday. Hollande, Europe's new champion of growth policies, lines up against Merkel, the dominant cheerleader of austerity as the solution to the crisis. The German leader, increasingly isolated if inherently strong in the European contest, suffered a big setback on Sunday night, with her Christian Democrats slumping to a crushing defeat in an election in the big German state of North-Rhine Westphalia, according to German TV exit polls. Against a background of intense volatility, Europe was pulled in opposing directions by voters, protests, and political paralysis at the weekend, deepening uncertainty over its future shape and gnawing away at the prospects for the euro's survival as a 17-country union.

The Great Debate©: How to Resolve the Euro Crisis - This is a three sided debate on the Euro crisis. Prof. Amar Bhidé, Thomas Schmidheiny Professor of International Business, Fletcher School of Business, Tufts University, represents the position that the current course of action simply needs to be followed through to be successful. Elliott Morss, former IMF economist, argues that the logical solution is to break up the eurozone and reestablish sovereign currencies. John Lounsbury, Managing Editor of Global Economic Intersection, says there is a third solution, the United States of Europe.

Brussels raises alert over French deficit - Brussels has raised a red flag on France’s budget deficit next year, in a warning over a €24bn fiscal shortfall that threatens to develop into a confrontation with Paris over austerity. François Hollande, the French Socialist president-elect who has warned against over-reliance on austerity, said he had “anticipated” the deterioration in public finances and blamed “hidden taxes” left behind by the outgoing president Nicolas Sarkozy. European Commission forecasts unveiled on Friday suggest France is expected to meet its deficit target of 4.5 per cent of gross domestic product in 2012, but its shortfall next year will be 4.2 per cent – well short of the 3 per cent EU target. Closing the 1.2 per cent gap would require savings or new taxes amounting to about €24bn. France was one of 13 countries in the 17-strong eurozone that Brussels said it expected to miss their deficit targets for 2013, with the total deficit for the single currency bloc slipping by 1 per cent of overall output. Spain fell badly short, nursing an expected 6.3 per cent deficit next year – some 3.3 per cent wide of its target. Olli Rehn, the EU commissioner responsible for economic affairs, said he was “waiting for the French authorities to decide which measures will be introduced for 2013”.

Tax Collection Violence in Italy: Mail Bombs in Rome, Police Clashes in Naples, Molotov Cocktails in Livorno - Violent protests against the hated Equitalia, the Italian tax collection agency, are making headlines in several cities in the past few days. In Rome mail bombings have been ongoing since December. Via Google Translate, this time in Italian, please consider a trio of articles. Equitalia, six months of mail bombs MILAN - Equitalia once again in the crosshairs. After the envelope with gunpowder delivered Friday to the see of Rome, in Via Giuseppe Grezar, last night, two Molotov cocktails were thrown against the door of the agency's headquarters in Livorno. This is the latest in a long series of parcel bombs and suspicious envelopes arrived in recent months in various offices of the Italian society of recovery.  The first package bomb delivered to Equitalia comes in via Millevoi, in Rome, December 9 last year. The bomb explodes in the hands of the director general, Mark Cockaigne, that is wounded in the hand and eye. On 12 December a large firecracker exploded outside the headquarters of the agency Equitalia in Naples. The explosion causes damage of the lower part of the gate valve iron input current Southern.

Italy: Debt rises to record, Bank of Italy says - Italy's public debt rose to a record 1,946 trillion euros in March as the country's emergency government implements initiatives to lower the amount of money it owes and balance its budget, the Bank of Italy said on Monday. The previous high was about 1,935 trillion euros in January. Italy has the world's fourth-biggest debt load, which late last year prompted investors to speculate it could default on interest payments, leading to the resignation of Silvio Berlusconi's government. Italy is suffering its fourth recession since 2001 with almost 10 percent unemployment. Critics of austerity measures in Italy, Greece, Spain and other European countries say the spending cuts have exacerbated an already weak economic situation.

Spanish and Italian Bond Yields Increase - From the WSJ: Global Stocks Hit by Greece Worries Worries about what a Greek exit would mean for other euro-zone nations with hefty deficits pushed yields on 10-year Spanish government bonds above 6% to the highest levels seen since December. Here are the Spanish and Italian 10-year yields from Bloomberg. The Spanish yields are at 6.3%, the highest level since last November. Compared to the German yield, Spanish borrowing costs at euro-era highSpreads on Spanish 10-year bonds over German Bunds hit a euro-era high of 486 basis points, surpassing the record hit last November. Yields on Spanish benchmark debt reached 6.30 per cent while German 10-year Bunds were at an all-time low of 1.44 per cent. The Italian yields are at 5.74%, the highest level since January.

In Spain, a Debt Crisis Built on Corporate Borrowing - In a country with one of the highest levels of company debt in the world, few businesses in Spain shoulder as big a burden as Grupo A.C.S., the global construction giant whose debt woes have become a mirror image of Spain’s own increasingly severe financial struggle. Saddled with a 9 billion euro ($11.7 billion) debt pile that is twice the size of the company’s shrinking market value, A.C.S. is in the midst of a frantic campaign to sell off assets, pay down debt and further distance itself from a Spanish economy caught in a spiral of austerity and deflation. The Spanish government’s harsh budget cuts and their depressive effect on the economy have prompted foreign investors to sell Spanish stocks and bonds in droves. On Tuesday, Spanish stocks plunged 2.8 percent and the government’s 10-year bond yields spiked to 6 percent as Spain moved to bail out its ailing banks, and uncertainty over Greece loomed. But economists now say that one of the greatest threats to Spain could well be the snarl of debt choking off the growth prospects of A.C.S. and other highly indebted Spanish corporations. And they warn that as these companies cut back on investments and shed assets as well as jobs, the result could be a Japan-style lost decade of stagnation.

Spanish protest against austerity, grim economy - Spaniards angered by increasingly grim economic prospects and unemployment hitting one out of every four citizens protested in droves Saturday in the nation's largest cities, marking the one-year anniversary of a spontaneous movement that inspired similar anti-authority demonstrations across the planet. The country's Interior Ministry said 72,000 people marched against the government's tough austerity measures in Madrid, Barcelona and six other large cities — but protesters claimed the turnout was much higher. The epicenter of the protest was in the capital of Madrid, where at least 30,000 people flooded into the central Puerta del Sol plaza in the evening, vowing to stay put for three days. Authorities warned they wouldn't allow anyone to camp out overnight as protesters did last year but the demonstrators stayed put after a midnight deadline to leave and more than 2,000 riot police on duty made no immediate effort to force them out.

At Least 100,000 March in Spain Over Austerity — At least 100,000 Spaniards angered by grim economic prospects and the political handling of the international financial crisis turned out for street demonstrations in the country's cities Saturday, marking the one-year anniversary of a movement that inspired similar pressure groups in other countries. Tens of thousands of protesters in Madrid flooded into the central Puerta del Sol plaza in the evening and aimed to stay for three days. But authorities warned they wouldn't allow anyone to camp out overnight, and up to 2,000 riot police were expected to be on duty. "I'm here to defend the rights that we're losing and for the young people who have it so tough," 57-year-old middle school teacher Roberto Alonso said. "They're better educated than ever. But they don't have work. They don't have anything. They're behind and they'll stay that way." At least 20,000 people demonstrated in Barcelona. Marches were also held in Bilbao, Malaga and Seville. Sympathizers held protests in other European cities. The protests began May 15 last year and drew hundreds of thousands of people calling themselves the Indignant Movement. The demonstrations spread across Spain and Europe as anti-austerity sentiment grew.

Sovereign Debt Risk Rises as Spain Bank Woes Heighten Euro Alarm - The cost of insuring against a sovereign default in Europe surged as Greece’s political deadlock and Spain’s bank capital crisis heightened speculation the euro region may start to crumble. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments jumped 7.5 basis points to 293.5 at 3:15 p.m. in London, signaling deterioration in perceptions of credit quality. Contracts on Spain soared as much as 26 basis points to a record 543, according to Bloomberg data. European officials are starting to consider a Greek abandonment of the euro as authorities in Athens struggle to form a government that agrees to the austerity terms of the nation’s bailout. Spain’s plan to force banks to increase provisions by 30 billion euros ($39 billion) and inject less than 15 billion euros of cash will worsen its debt burden and may not be enough, Moody’s Investors Service said.

Spanish Banks’ April ECB Borrowing Jumped 16% to $339 Billion - European Central Bank borrowing by Spanish banks jumped 16 percent to a record 263.5 billion euros ($339 billion) in April after lenders tapped emergency loans. Net average ECB borrowing climbed from 227.6 billion euros in March this year and 42.2 billion euros in April 2011, the Bank of Spain said on its website today. Gross borrowing was 316.9 billion euros, little changed from March, and accounted for about 28 percent of ECB borrowing by all euro-region lenders in the month. Spanish banks have used three-year emergency loans from the ECB to cover funding needs and buy the nation’s bonds as doubts about hidden losses on the their balance sheets drove up their financing costs and kept them locked out of wholesale debt markets. The government on May 11 ordered banks to make a further 30 billion euros of provisions to cover real estate losses in its latest bid to bolster confidence in the financial industry. “The fact that the gross number was broadly flat reflects the fact that they’ve already flooded themselves with so much additional liquidity,”

Moody’s: Spain banks vulnerable after new rules - An effort by Spain to restore confidence in its financial system with measures including additional loss provisioning at banks will boost the country’s debt burden and undermine its credit standing, Moody’s Investors Service said Monday. “The government acknowledges that additional public fund injections will be required to provide a credible solution to the banking sector’s woes. This will likely further increase Spain’s already elevated public debt burden, a credit negative for the sovereign,” Moody’s said in a weekly credit report. Moody’s said that until now the government expected the banking industry to shoulder the cost of the clean-up as the industry-funded Deposit Insurance Fund provided asset protection schemes to the buyers of nonviable banks. But it said this is now changing with the public vehicle Fondo de Reestructuracion Ordenada Bancaria providing additional capital for those banks that will be unable to achieve the new provisioning requirements on their own.

Moody’s Said to Delay Bank Downgrades Amid Crisis, JPMorgan Loss - Moody’s Investors Service is delaying ratings downgrades on more than 100 banks as it assesses the effect of JPMorgan (JPM) Chase & Co.’s trading losses and a greater possibility of a euro breakup, a Moody’s official said. The Moody’s official declined to be identified as he wasn’t authorized to comment publicly. Moody’s said on April 13 that it would begin downgrading banks, including BNP Paribas SA (BNP), France’s biggest lender, Germany’s Deutsche Bank AG (DBK) and New York-based JPMorgan and Morgan Stanley (MS), by early May. It’s the second time Moody’s has delayed publishing details of the downgrades in a month. Any ratings cuts could push up bank funding costs, heaping further misery on the industry as the boost that followed the European Central Bank’s cash injections in December and February wears off and policy makers struggle to extinguish the sovereign-debt crisis.

Moody's Downgrades 26 Italian Banks - Moody's Investors Service kicked off its long-awaited downgrades of European and global banks by docking the credit ratings of 26 Italian lenders, a move that could ratchet up the continent's banking woes at a critical time for the currency union. The downgrades, which cite the banks' vulnerability to mounting loan defaults and potential funding problems, were expected, but they nonetheless add to concerns by making it more expensive for the banks to finance themselves via the capital markets. The ratings for Italian banks are now among the lowest within advanced European countries, reflecting these banks' susceptibility to the adverse operating environments in Italy and Europe, Moody's said in a statement. Two of the country's largest institutions, UniCredit SpA (UCG.MI, UNCFF) and Intesa Sanpaolo SpA (ISP.MI, ISNPY), were included. Moody's move came hours after the firm raised an alarm on Spain, arguing the country's banks remain vulnerable even after Madrid moved to increase the banks' cushions against potential losses from real-estate loans. Earlier on Monday, investors demanded higher risk premiums for Italian and Spanish government bonds on fears that Greece was edging closer to an exit from the euro zone. The rating firm cited Italy's double-dip recession as being a driving factor in its decision to lower the banks' credit score.

Bankers call Moody's mass downgrade attack on Italy - Italy's banking and business community responded angrily on Tuesday to Moody's mass downgrade of Italian banks, calling the move irresponsible and an assault on the austerity-hit country as it struggles with an economic crisis. Italian banks, already battling with shrinking demand and soaring bad loans, suffered a further blow as the U.S. agency slashed the credit ratings on 26 local lenders, adding to their difficulties in raising funds.

Italy's GDP shed 0.8% in first quarter -- The Italian economy lost 0.8% in the first quarter, compared to the prior quarter, the nation's national statistics body, Istat, said on Tuesday. The dip in gross domestic product was larger than expected, with the average forecast calling for a contraction of 0.6%, according to a Dow Jones Newswires poll. Italy's economy has shrunk for three consecutive quarters. On an annual basis, Italy's GDP contracted by 1.3% against the year-ago period.

Euro-zone output decline lifts recession concern -- Industrial production in the 17 countries that use the euro fell unexpectedly in March, leaving little doubt the region contracted for a second straight quarter in the first three months of the year and returned to recession, data by Eurostat showed Monday. The European Union's statistical agency will publish the first estimate of first-quarter gross domestic product Tuesday when economists are forecasting a 0.2% quarterly decline, according to a Dow Jones Newswires poll. Industrial production fell 0.3% on the month in March and by 2.2% on the year. The latter was the steepest drop since a 3.7% fall in December 2009, while the monthly decline was due to a sharp 8.5% fall in energy production as the weather in March was warmer than usual for the time of year, a Eurostat statistician said. "March's fall in euro zone industrial production is a timely reminder that first-quarter GDP, due out tomorrow, will likely show a contraction,"

Merkel’s party gets only 26% in regional German election - Chancellor Angela Merkel’s party suffered a severe defeat Sunday in a pivotal German state vote likely to award her main rivals a major boost in their bid to soften her austerity drive in Europe. Around 16 months before national elections, the snap poll in the state of North Rhine-Westphalia, Germany’s most populous with 18 million people, is closely watched as a taste of things to come at federal level. While Germans nationally back Merkel and her tough stance on European belt tightening and debt reduction, voters in NRW handed her conservatives their worst ever result in the western state.Her Christian Democatic Union (CDU) won just over 26 percent, according to preliminary results, while the main opposition Social Democrats (SPD) took 39 percent in NRW, home to the Ruhr industrial heartland. 

New election blow for Germany's Merkel - Chancellor Angela Merkel's conservatives have suffered heavy losses in an election in Germany's most populous state, exit polls suggest. Support for the Christian Democrats dropped from 35% to 26% in North Rhine-Westphalia, with the Social Democrats set to return to power with the Greens. It is the Christian Democrats' worst result in the state. Analysts say many voters rejected Mrs Merkel's tough line on fiscal discipline as a cure for state debt. In another development, the exit polls suggested Germany's Pirate Party had won seats in North Rhine-Westphalia, making it their fourth state parliament. The Pirate Party has grown in strength recently with its calls for transparency and internet freedom. According to two exit polls, the Social Democrats (SPD) won around 38%, the Christian Democrats (CDU) 25.5%, the Greens 12%, the Free Democrats (FDP) 8.5%, the Pirates 7.5% and the Left, 2.5%.

Europe’s Black Cygnets Grow - And so the black cygnets scuttle from the shadows again. Over the weekend, Angela Merkel’s Christian Democrats suffered an 8.3% swing in North Rhine-Westphalia as the Social democrats (SDP) and the Greens garnered a majority. Although this is only a state election, called after the previous SDP led minority government was unable to get approval for its budget, North Rhine-Westphalia is the country’s most popular state and seen the bellwether for national government. Of note is the fact that the SDP-Greens coalition governed Germany under Chancellor Gerhard Schröder from 1998 to 2005. Although this is as much about state politics and personalities, especially the SDP leader Hannelore Kraft, the flow-on effects at a national level from such a large turn around are very obvious:Appearing on stage in Düsseldorf on Sunday night, Röttgen said: “I led the CDU, I was its leading candidate. This is, above all, my own personal defeat — and it really hurts.” Röttgen stepped down from his post as head of the state chapter of the CDU on Sunday. Ultimately, the election had pitted the SPD’s Kraft, who is considered to be a down to earth politician who has no trouble connecting with the people of her state, with Röttgen, a national politician who proved to be too distant from state voters.  The worst came when Röttgen said he wanted to make the vote a state referendum in support of Chancellor Merkel’s policies for saving the euro. Merkel’s positions have been popular with German voters, but the chancellor wanted no part of Röttgen’s pending election defeat. Angry, CDU politicians at the national level distanced themselves from Röttgen, saying any loss in North Rhine-Westphalia would be his alone. It nevertheless represents a setback for Merkel and the CDU because the vote in the state, with its 13.2 million people, often influences the outcome of federal elections.

The Merkel Myths that are Devastating EuropeWilliam K. Black - German Chancellor Merkel wishes to stamp out any belief that there is a “magic bullet” to deal with the renewed euro zone crisis.  Merkel’s response to the crisis, however, is the fundamental cause of the second-stage of the crisis and it is the product of magical (un)realism – a series of economic myths that she asserts as if they were facts. Angela Merkel warns there is no ‘magic bullet’ to beat debt crisis Merkel’s rhetoric is intended to ridicule opponents of the Berlin Consensus – the austerity dogma that has thrown the euro zone back into recession and the periphery into depressions.  Tens of millions of Europe’s citizens, however, hate the Berlin Consensus’ austerity dogma as recent elections have shown.  My colleagues and I have explained many times why pro-cyclical policies (e.g., austerity in response to a Great Recession) make recessions more common and severe.  Counter-cyclical fiscal policies are not “magic” – automatic fiscal stabilizers work, they make recessions less common and less severe for reasons that are understood.  As we have also explained, it is proponents of austerity as a response to a Great Recession who rely on magic.  Paul Krugman’s withering phrase is that austerity proponents are perpetually waiting for the arrival of “the confidence fairy.”

German voters must break the Merkel mindset - Robin Wells - Sometimes, just sometimes, economics and politics are like physics – one can recognize immutable forces. One of those times is now, as Greece is inexorably pushed out of the euro. It took no particular talent to have seen this coming, just the recognition that it has always been a fantasy to believe that the Greeks would democratically choose to destroy their economy for the better part of a decade in order to pay foreign creditors.  The fact is that Greece never was a suitable member of the eurozone. That the Greek economy was extremely inefficient, that corruption was rife, that the government budgets were perpetually out of control, and that the official statistics were not to be believed were widely known. But, as in many marriages, Greece's entry into the euro was a triumph of sentimentality and wilful blindness over realism. The pity – in addition to the actual damage already inflicted on millions of Greeks – of this debacle is that it was never clear, and still isn't clear, that other countries, like Spain, will also be inexorably forced out. For the adjustment that Spain needs to make in order to stay in the euro was never as drastic as it was for Greece. While undoubtedly painful, it is probably still do-able.  But what has become unavoidably clear is that Germany, the linchpin of the eurozone, has been hopelessly stuck in an attitude that makes the break-up of the eurozone almost unavoidable. If Germany cannot pull itself together to keep Spain in the euro, then the markets can no longer ignore the fact that the lack of leadership and governance is a fatal flaw in the system.

Germany Does Heavy Lifting; Eurozone Avoids Recession - Europe dodged a bullet Tuesday after the economy of the 17 countries that use the euro narrowly avoided a recession in the first quarter of the year despite a raging debt crisis that’s raising the specter of the breakup of the currency union.There was one reason why the eurozone avoided an overall recession — officially defined as two consecutive quarters of negative growth. Germany, Europe’s biggest economy, was behind the better-than-expected performance as strong export figures helped it grow by 0.5 percent — equal to the U.S.’s economic performance.“The euro area might have dodged recession, but it is firing on only one cylinder,” Huge economic disparities exist across the single currency bloc. Of the euro’s 17 members, seven are in recession: Ireland, Greece, Spain, Italy, Cyprus, the Netherlands, Portugal and Slovenia. Though Eurostat, the EU’s statistics office, revealed that the eurozone posted flat output in the first quarter — against expectations that it might actually slip into recession with a 0.2 percent decline — there are growing concerns that the months ahead will be as difficult as any the currency union has faced since its creation in 1999.

EU Pledges Campaign Against 1 Trillion Euros in Tax Evasion - The European Commission today pledged to step up its fight against an estimated 1 trillion euros ($1.28 trillion) in tax evasion. European Tax Commissioner Algirdas Semeta later this year will offer new proposals to combat tax havens and “aggressive tax planning,” so that nations don’t lose revenue to unfair investment strategies, the EU said in a document distributed to reporters in Brussels today. The commission, the European Union’s regulatory arm, will also seek to limit opportunities to exploit loopholes among national tax rules. EU finance ministers are meeting in Brussels today and will discuss whether to give the commission room to negotiate tax agreements with Switzerland, San Marino, Liechtenstein, Monaco and Andorra. In 2010, EU nations collected about 330 million euros in savings tax withholdings from Switzerland, according to the commission document.

Eurodämmerung - Krugman - Some of us have been talking it over, and here’s what we think the end game looks like:

  • 1. Greek euro exit, very possibly next month.
  • 2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
  • 3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
  • 3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
  • 4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
  • 4b. End of the euro.
  • And we’re talking about months, not years, for this to play out.

Dooming the Euro - Krugman - At this point an argument that was once considered way out there — that euro area adjustment won’t be possible unless the inflation target is raised — now has widespread support, albeit not from the crucial players. Inflation significantly above 2 percent is almost surely a necessary (though not sufficient) condition for the euro to survive. So what’s happening to euro inflation expectations? We can look at the German breakeven — the difference in yields between German bonds, presumably viewed as safe, and yields on German bonds indexed to euro area inflation. This currently points to an expected inflation rate over the next 5 years of 1.3 percent — way too low to make euro survival feasible. So how has that breakeven evolved over time? It was possibly getting into feasible territory in early 2011, then fell to levels that arguably doom the euro. And what happened in April 2011? The ECB hiked rates, even though it was obvious that the rise in inflation was a temporary blip driven by commodity prices. This was a clear signal that the price stability obsession was as strong as ever. And it has meant, in the end, a loss of hope. Credibility!

How Europe can force Greece to exit the euro - The word on everybody’s lips these days is Grexit — Paul Krugman, for one, reckons it could be here as early as June. But how would such a thing happen? The FT, in its otherwise excellent Grexit explainer, fudges that bit: Exit would occur because, without disbursements of additional loans, the government would run out of money to pay social security and public sector wages. In addition, the ECB could withhold needed funds from Greek banks, bringing them down. At this point Athens would need to pass a new currency law, redenominate all domestic contracts in a new drachma, impose exchange controls, secure the borders to limit capital flight and take steps to introduce a paper currency. It’s true that Greece is currently running a substantial fiscal deficit, which is being funded by the EU. If the EU stopped disbursing loans, Greece by definition could not meet all of its obligations. But the thing that happens when you can’t meet your obligations is known as a default — and as we’ve already seen, Greece is more than capable of defaulting on its obligations without exiting the euro. So the question is: given that leaving the euro would be political suicide for any Greek politician, why would any such politician go ahead and do it anyway?

Mr. "Lie When It's Serious" Juncker Tells Another Whopper: "I Don’t Envisage, Not Even for One Second, Greece Leaving the Euro Area"; Two More Days of Hopefully Futile Coalition Talks on a "Government of Personalities" - Those looking for a bit of humor in the European debacle can find it in statements from Jean-Claude Juncker, head of the eurozone finance ministers. Juncker says "I don’t envisage, not even for one second, Greece leaving the euro area. This is nonsense. This is propaganda. We have to respect Greek democracy." Bear in mind this statement comes from the same man who said "When it becomes serious, you have to lie."  Also bear in mind Juncker's support for a Troika installed puppet government in Greece, after Greek Prime Minister George Papandreou proposed putting bailout measures to a vote. Notice that bailout measures went to a vote anyway. Two More Days of Hopefully Futile Greek Negotiations; the Financial Times reports Greece set for further coalition talks Greece’s president is set to resume coalition talks on Tuesday with the country’s political leaders in another attempt to avoid a fresh general election after a meeting on Monday evening ended without agreement.  President Karolos Papoulias has another 48 hours to persuade politicians to join a national unity government according to the constitution or face having to call another election.

Must See: Greece Explained In One Picture (Click on the bottom pic to see the video...the pic that they refer to is at a little over 5 minutes into the video) What is it? It is a picture taken at the Athens ministry of finance. It is part of a full documentary (go to 24 minutes in for the lack of money shot) released a few days ago by German TV station ZDF called The Greek Lie. It is self-explanatory, and shows where 2 years of bailout funds went, or rather didn't, and why 2 years to the day after the first bailout, not only is Greece not fixed, but is days away from leaving the Eurozone, but at a cost to taxpayers of nearly half a trillion.  We urge anyone, even non-German speakers, to set aside 45 minutes and view the clip below. It is unsettling at best.

Counterparties: The ‘hunt for a government’ in Greece - At a time when it’s facing an ultimatum from Europe, Greece has given up its “nine-day hunt for a government.” New elections are on the way in June, and Greece’s anti-austerity left is expected to win. For now, Greece’s lame-duck transition government can’t respond to Germany’s open threats to accept crippling budget cuts or leave the euro zone. This is happening as Greece’s deputy prime minister is warning that his country could run out money in six weeks, the Greek stock market fell 4.5% in seconds – and have we mentioned a Greek leader is now warning about civil war? Quite suddenly, we’re back to last summer: pondering the implications of (another) Greek default and dealing with (another) potential debt-ceiling standoff in America. This time, in Europe at least, is actually a bit different. After days of speculation about euro officials pondering a Grexit, IMF chief Christine Lagarde admitted that an “orderly” Greek exit from the euro zone is a possibility. “It is something that would be extremely expensive and would pose great risks but it is part of options that we must technically consider,”  There are also some very specific ideas of the costs involved if Greece exits the euro. Losses for French banks could reach $25 billion; German banks could see a $6 billion loss, according to one estimate. JPMorgan estimates the immediate costs for Europe could be $513 billion. UBS figures that leaving the euro zone could cost a country like Greece $12,000 to $14,000 per citizen and lead to a 50% drop in its volume of trade.

Greek deadlock heightens fears of full European economic crisis -- Political deadlock in Greece rattled world markets Monday, reviving fears that the fractious Mediterranean country could spurn an international bailout, abandon the common European currency and risk a fresh round of world economic turmoil. European stock indexes fell, with Greece’s market now at a 20-year low, while the euro currency continued a recent decline against the dollar.  Coming only days before the leaders of the world’s Group of Eight industrialized nations meet at Camp David, the standoff in Greece over its political direction has thrust Europe’s troubles to the top of the agenda. A downturn in Europe could stagger a fragile recovery in the United States and undermine growth around the world. Fighting a new downturn would be a challenge for the major economies, many of which have not fully stabilized since the last big economic crisis.

Greece heads for fresh elections after coalition talks fail - Greek politicians have failed to form a coalition government and fresh elections will be held next month, plunging into chaos the country's future in the euro. The talks turned on implementation of a very tough EU-IMF debt bail-out accord. Greek socialist leader Evangelos Venizelos said: "We are going again towards elections, in a few days, under very bad conditions," he said, while a statement from the president's office noted simply that efforts to form a government had failed. Panos Kammenos, leader of a conservative party that opposes Greece's international bailout deal, emerged from the presidential mansion where the talks had been held and said that no deal had been reached. Left-wing leader Fotis Kouvelis added: "I did everything I could to avoid new elections. From the very first moment some parties had chosen to go for new elections."

Will the Greek exit be voluntary or involuntary? - Ever more voices are talking about the possibility of Greece leaving the euro zone despite the fact that there is no formal mechanism for a euro are member country to exit the single currency and the fact that most European voters want the euro zone to stay intact. This talk of a Greek exit, however, makes sense because Greece’s situation is untenable economically and politically. I wrote a trio of posts on the likelihood of a unilateral Greek exit in February: Running through unilateral Greek exit scenarios, How and why Greece will leave the euro zone, The political economy of a Greek default (and euro zone exit). I plan on updating my thinking here with a member post later today or tomorrow. However, I just want to outline some of the critical points here first, The political economy surrounding the Greek issue has deteriorated as expected. There is no political will in Greece itself or in the euro area for the kinds of repeated haircuts and bailouts it will take to see Greece through the current crisis.

On ABC Radio National, PM program: ‘Stupendously idiotic’ policies for Greece can’t work. For the audio of the interview click here. For the transcript (courtesy of ABC), continue reading…  EU finance ministers are due to meet in Brussels later tonight to discuss the Greek crisis. But they don’t have much room to manoeuvre, because Greece has no effective government and no prospect of getting one. The Greek president has called on the four main parties, including the centre-right New Democracy and the socialist Pasok, to try to form an emergency government to avoid new elections. But that call seems doomed after repeated coalition attempts foundered on the rock of economic reform. The second biggest party, the left wing, Syriza, says it couldn’t back any coalition which supported austerity. It’s now near inevitable there’ll be fresh elections in June. Yanis Varoufakis is professor of economic theory at the University of Athens. He’s currently in Seattle and he spoke to me on Skype from there.

Greece Faces Big Debt Payment Tuesday: Now What? As if the Greek situation wasn’t messy enough, a missing paragraph from a key legal document is throwing a wrench into a debt deadline. Greece has a 436 million euro principal repayment due Tuesday. So far, the country has not decided what to do. Under normal Greek-debt contracts, if Greece doesn’t pay, it would have only a seven-day grace period. But experts who have pored over all of this have found that one of the key paragraphs from the normally boiler-point language is missing. As a result, Greece will have a 30-day grace period, leading to the possibility of an extended, “Will they?” or “won’t they?” drama.  Here’s what happened. In debt contracts there is a section titled: Events of Default. In a typical Greek bond it says “If the Republic defaults in the payment of principal…and such default is not cured by payment within 7 days from the due date for such payment.” However, that paragraph is missing from tomorrow’s debt payment. Instead, if Greece chooses not to pay, it will likely fall under a different paragraph: “the Republic is in default in the performance of any other covenant, condition or provision set out in the Notes and continues in default for 30 days after written notice thereof.” If Greece doesn’t pay, it will mean the country officially enters into default.

Risk of Greek Euro Exit Rattles Markets, but Hints of More Talks Emerge - As gridlock among Greece’s political parties made new elections and another month of uncertainty there all but inevitable, European markets dropped significantly on Monday amid concerns that Greece’s departure from the euro was near, and right behind it a new round of financial instability for Europe and the outside world. Yet there were also indications emerging on Monday that the latest turmoil could as easily signify the beginning of a new phase of bargaining between Greece and its European lenders as it could a sudden Greek exit from the euro zone.  Despite their hard line in public, German policy makers, including Chancellor Angela Merkel, have begun to hint at some flexibility on the deep and painful budget cuts European officials have demanded. In Greece, despite outrage at the cost of carrying out European demands for austerity, few seem prepared to argue that the costs of leaving the euro — and perhaps severing political ties to Europe — are really bearable. “Leaving the euro is like a huge earthquake or a nuclear bomb,” . “There will be no life. Life will start from scratch.” Asked if Greece had any contingency plans for leaving the euro, Mr. Stournaras said simply, “No.”

Greece Gets Hint of Leeway From Euro Officials - European governments hinted at giving Greece extra time to meet budget-cut targets, as long as the financially stricken country’s feuding politicians put together a ruling coalition committed to austerity. Calling talk of a Greek pullout from the euro “nonsense” and “propaganda,” Luxembourg Prime Minister Jean-Claude Juncker said only a “fully functioning” Greek government would be entitled to tinker with the conditions attached to 240 billion euros ($308 billion) of rescue aid. “The government would have to stand by the program,” Juncker told reporters after chairing a meeting of euro-area finance ministers in Brussels late yesterday. “If there are dramatic changes in circumstances, we wouldn’t close ourselves off to a debate over extending the deadlines.”

Merkel tells Greece to back cuts or face euro exit - Raising the spectre of a Greek exit, the German chancellor said “solidarity for the euro” was threatened by the ongoing political crisis in Athens. Stock markets around the world fell sharply with fears mounting that a euro break-up could lead to renewed financial turmoil. The FTSE-100 index of Britain’s major companies fell by two per cent to 5465, with bank shares hit particularly hard. The cost of Spanish government borrowing also hit a record high since the single currency was introduced because of concerns that the crisis will spread. Today, François Hollande, the new French president, will be sworn in and, in an indication of the concern gripping Europe, will almost immediately travel to Berlin to hold talks with Mrs Merkel that will be dominated by Greece’s plight.

European leaders and financial markets braced for Greece exit from euro -  Financial markets are hastily making preparations for a Greek exit from the euro after a day of political and economic turmoil ended with Europe's policy elite admitting for the first time that it may prove impossible to keep the single currency intact. With attempts in Athens to form a government after last week's election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.

If Greece has to leave the euro, it will be because of the reckless decision to bail it out in the first place -  If Greece had defaulted in late 2009 or early 2010, it would not have needed to leave the euro. It could have defaulted on its private sector bondholders, borrowed a bit short on private markets at 11-12 per cent, and borrowed from Germany, France, Finland and so on to cover the rest. That needn't have entailed euro exit. Of course, if that had happened, then Greek banks would have been bankrupt, as they held large amounts of Greek sovereign debt, and since that sovereign debt would have had low creditworthiness, the ECB might not have accepted it as collateral. So Greek banks would have had to be resolved, properly, by falling into the hands of creditors (i.e. there would have been defaults on Greek bank bonds as well as the government). The combination of Greek sovereign default and Greek banking sector default might have created spillover problems for the French and German banking sectors. But it would not have meant Greek exit from the euro. The reason Greece is likely to leave the euro is precisely because it was (or, more specifically, those that had lent money to it were) bailed out in 2010. Under the scenario above, official creditors (the IMF, the Germans, etc) would have lent money to Greece only after it had defaulted, much as a classic IMF package involves the IMF lending money to countries after they devalue. But what actually happened was that the official creditors lent money to Greece to try to stop it from defaulting.

James Galbraith on the Euro Crisis - Here's the third part (German version) of an interview of Jamie Galbraith conducted a few weeks ago by Roger Strassburg and Jens Berger of the German blog NachDenkSeiten (first part, second part). This is on the Euro crisis:

Weisbrot and Krugman are Wrong: Greece cannot pull off an Argentina -- Mark Weisbrot has been arguing, for some time now, that Greece must try to emulate Argentina; that is, to default on its debts not as a bargaining strategy that yields a New Deal within the Eurozone but, rather, in the context of exiting the Eurozone altogether and going it alone. Recently, Paul Krugman has endorsed this position (see here and here). I think they are profoundly wrong. There are two arguments against the recommendation that Greece and Argentina are similar enough to warrant an Argentinian road for Greece. There are those, like the Cato Institute and IMF diehards, who never forgave Argentina for having successfully escaped the clutches of the poisonous austerity (and internal devaluation) that the IMF had imposed upon the country so as to sacrifice a whole people’s prosperity in the interest of creditors, rentiers and assorted speculators who had flooded the country with dollars (during the era of the currency board). Believe me when I say that I am not one of them. Indeed, I salute the Argentinian people for having toppled a regime, and more than one government, that tried so desperately to sacrifice a proud people on the altar of IMF-led austerity. No, my criticism of the idea that Greece can ‘do’ an Argentina today stems from the view that the circumstances Greece is facing today are genuinely different to those of Argentina a decade ago.

Leaving the Euro May Be Better Than the Alternative - Some two decades ago, when Europe’s leaders worked out the details of their grand vision to connect the European Union with a single currency, virtually every economist on this side of the Atlantic — and most of those on the other — figured out that the euro would be fatally flawed.   “The European Commission did invite economists to present their views. It was a Darwinian process,” said Paul De Grauwe, professor of European political economy at the London School of Economics. “I was invited, but when I expressed my doubts I wasn’t invited anymore. In the end only the enthusiasts were left.”  A little over a decade since the first euro bills hit the shops in Madrid and Berlin, the euro’s design flaws have pushed much of the European Union into a deep economic pit. And political imperative is again being deployed as a major reason to stick to the common currency. “This enormously important motivation is often underestimated by outsiders,” argued the Financial Times columnist Martin Wolf, the most sober analyst of Europe’s economic maelstrom.  Yet for a project intended to draw Europe together, the euro did surprisingly little to build solidarity. German voters endured a recession two decades ago after bringing in their brethren from the Soviet bloc. They now appear unwilling to spend a pfennig to help the Greeks, Spaniards, Portuguese, Irish or Italians.  Conceived as a tool for integration, the euro could, instead, tear Europe apart.

Merkel and Hollande spell out Greek fear - The leaders of France and Germany on Tuesday joined forces to urge Greece to reaffirm its commitment to membership of the eurozone, after François Hollande flew to Berlin for talks with Angela Merkel, German chancellor, within hours of being installed as French president. Both spelt out their concern that Greece should remain a full member of the common European currency [EUR=X 1.2723 -0.0007 (-0.05%) ], while promising to consider new measures to revive economic growth in the country. But they also agreed that Athens must carry out the austerity programme it has agreed with the European Union and the International Monetary Fund . The Greek crisis emerged as the most urgent item on the Franco-German agenda, although both leaders insisted their meeting was primarily intended as a chance to get to know each other. “We want Greece to stay in the euro,” Merkel said. “We know that the majority of people in Greece see that.” The Greek government had also agreed on a rescue programme with the IMF and the EU after lengthy negotiations, she said. “I believe that memorandum must be respected.”

Greece is Running Out of Time, by Tim Duy: I have repeatedly described myself as a Euroskeptic. The current combination of politics and economics looks likely to at worst doom the Euro to failure, at best to commit the Continent to a deep and long-lasting recession. Moreover, the pace of deterioration in Greece, combined with an economic structure that seems completely at odds with much of the rest of Europe, seems to make a Grexit all but impossible. That said, I am horrified at the ongoing willingness of European policymakers to still be playing chicken at this point. I assumed that my skepticism would ultimately be proved wrong as the European Central Bank would ultimately cave and effectively monetize national debt across the Eurozone, and that Germany would come to this conclusion as necessary to save the single currency that they have long-championed. That ultimately, the Eurozone would step up and take greater responsibility for this mess, understanding that while the Greeks have mismanaged their economy, they should never have been admitted to the Eurozone in the first place. Instead, Europe situation is now akin to two or three trains running full-speed at one another, and by the time someone finally pulls on the brakes, it will be too late. By the time key actors step into action, irreparable damage will have been done.

Guest Post: The New European Serfdom - So let’s assume Greece is going to leave the Eurozone and suffer the consequences of default, exit, capital controls, a deposit freeze, the drachmatization of euro claims, and depreciation. It’s going to be a painful time for the Greek people. But what about for Greece’s highly-leveraged creditors, who must now bite the bullet of a disorderly default? Surely the ramifications of a Greek exit will be worse for the international financial system? J.P. Morgan — fresh from putting an LTCM alumnus in charge of a $70 trillion derivatives book (good luck with that) — is upping the fear about Europe and its impact on global finance: The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. These immediate losses add up to €400bn. This is a big amount but let’s assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest? The wildcard is obviously contagion to Spain or Italy? Could a Greek exit create a capital and deposit flight from Spain and Italy which becomes difficult to contain? It is admittedly true that European policymakers have tried over the past year to convince markets that Greece is a special case and its problems are rather unique. We see little evidence that their efforts have paid off.

ECB’s dilemma on the euro rescue - Outside the smaller peripheral economies of Greece, Ireland and Portugal, neither eurozone creditor governments nor indeed the International Monetary Fund wants to open the Pandora’s box of loans to the larger periphery economies of Spain and Italy. To do so would expose the folly of a tiny eurozone firewall and the unfathomable possibility that sovereignty is transferred from two of the bloc’s largest economies to Brussels.  Complacency stems from a belief, thus far confirmed by events, that the ECB will act as a lender of last resort to sovereigns, at least indirectly via the banks. Investors and policy makers alike assume the ECB will simply repeat its late 2011 actions. The key point is that the eurozone’s current firewall relies, at its core, on collateralised lending to stressed periphery banks. The lack of good collateral is the Achilles heel of this rescue strategy. As periphery banks’ balance sheets shrink, so, naturally, do the asset bases with which they can borrow from anyone on a securitised basis. These banks will be inclined to run out of eligible collateral again and again as they are forced to finance foreigners exiting the periphery. Accordingly, another massive liquidity injection will only be possible if the ECB accepts ever riskier collateral or assumes smaller haircuts on its existing collateral. But there is evidence, from the commentary of several national central bank governors since the LTROs, that they are extremely averse to doing so. Their comments echo those of their respective governments, underscoring that risk-sharing through the back door is becoming just as difficult as debt mutualisation, in the form of common eurobonds, through the front door.

In about-face, Greece pays bond swap holdouts - Greece made a last-minute about-face on Tuesday and paid bondholders who rejected an earlier debt exchange, a move likely to upset creditors who accepted just cents on the euro in a historic bond swap. Greece opted to pay 435 million euros ($552 million) of a May 15 bond to holders who had refused to exchange their debt, despite insisting at the time of the offer in March that anyone who rejected it would get nothing.The decision averts litigation by the holdout bondholders at a time when Greece is in deep political disarray after an inconclusive election. But it will infuriate the 96.9 percent of creditors, mainly European banks, who agreed to take the deal. It also means hefty profits for hedge funds, who snapped up distressed Greek debt at steep discounts and will now be paid in full. Some Greeks may be angry at such a use for precious cash at a time of severe cuts.

Has The Greek Bank Run Started? - While the long-term decline in bank deposits over the past 3 years has been well documented both on Zero Hedge and elsewhere, it is the most recent, acute post-election phase that has not gotten much coverage. Minutes ago Bloomberg sent out a notice that things in Greece may be on the verge of the final collapse. From Bloomberg: "Anxious Greeks have withdrawn as much as 700 million euros ($893 million) from the nation’s banks since the inconclusive May 6 election, President Karolos Papoulias told party leaders yesterday, according to a transcript of the meeting posted on the presidency’s website today. Papoulias said he got the information from the head of the Bank of Greece, the central bank, George Provopoulos, according to the transcript." While this was likely a negotiation talking point to facilitate the formation of the government, the reality as we now know is that there has been NO government formed, which now means that the bank run will only get worse. Needless to say, a Greek banking system which is now virtually shut out of any extrenal funding except for the ELA, where it has a few billions euros in access left, will be unable to deal with hundreds of millions in deposit outflows.  This may be the beginning of the end for Greece, just as Buiter and later JPM warned over the weekend.

Greek President Told Banks Anxious as Deposits Pulled - Greek President Karolos Papoulias was told by the nation’s central bank chief that financial institutions are worried about their survival as Greeks pull out euros amid a deepening political crisis. Central bank head George Provopoulos told Papoulias that Greeks have withdrawn as much as 700 million euros ($891 million) and the situation could worsen, according to the transcript of the president’s meeting with party leaders on May 14 that was published yesterday. “Provopoulos told me that of course there’s no panic but there’s great fear which can evolve into panic,” the president said. Greece’s future in the euro has been thrown into doubt by the political standoff following inconclusive May 6 elections. The president was forced to call for new elections yesterday. German Finance Minister Wolfgang Schaeuble said the next vote will be a referendum on whether Greece exits the euro, a move that would leave lenders to its government, businesses and households unsure of recouping their money. The risk of a run on Greek banks is “a very serious problem,” Yannis Ioannides, professor of economics at Tufts University in Massachusetts, told Bloomberg Television. He said the European Central Bank needs to guarantee deposits held by the region’s lenders to guard against contagion. “That’s the only way to kill a bank run: not words but deeds.”

Greek banks see steady deposits outflow - Greek banks have seen a steady outflow of deposits this month, reflecting savers’ concerns over the failure of political leaders to form a coalition government and the prospect of another inconclusive election, which will be on June 17. Athens-based bankers said withdrawals exceeded €1.2bn on Monday and Tuesday – 0.75 per cent of deposits – as President Karolos Papoulias failed in two final meetings with conservative, socialist and leftwing leaders to form a national unity government. A senior Greek banker said the experience of the past few days “gives rise to concern that withdrawals may accelerate”. Another banker said: “We are seeing something very unusual, customers breaking their time deposits in order to withdraw funds.” “The situation with the banks is extremely difficult ... there is no panic but there is great fear which could turn into panic and the resistance of the banks is very limited just now,” Mr Papoulias told the political leaders on Sunday, according to a transcript of the meeting released by his office. The president cited a briefing by George Provopoulos, the central bank governor, who told him that withdrawals last week reached €700m, excluding funds used to buy German bonds and other foreign securities.

Jogging for the Exit - Krugman - FT Alphaville has a good writeup of what’s happening, and — implicitly — how Greek euro exit may be approaching. What’s happening now is a “bank jog” — Greeks are pulling euro deposits out of banks fairly rapidly, but not quite fast enough to be called a bank run. But where are the euros coming from? Basically, banks are borrowing them from the Greek central bank, which in turn must borrow them from the European Central Bank. The question then becomes how far the ECB is willing to go here; is it willing, in effect, to lend enough money to buy up the entire balance sheet of the Greek banking sector, given the likelihood that this sector will be left insolvent by Greek default? Yet if the ECB says no more, Greek banks stop operating — and it’s hard to see how they can be restored to operation except by ditching the euro and using something else. And if that happens, surely depositors in other European countries will start their own bank jogs …

Going, going, gone? - SO MUCH of modern finance is a confidence game. Banks borrow short and lend long. A perfectly solvent bank can therefore go bust if depositors panic and rush to pull money out.  European leaders have been playing their game with Greece like confidence doesn't matter. They have behaved as if an adjustment is necessary, and the only question at issue is which side will bear its costs. But confidence matters. As time has gone on, markets have become less sure of the talk that Greece would never be allowed to leave the euro area. The euro zone's chief leaders have been more concerned about moral hazard than this confidence dynamic. We know what happens in such cases; the lack of confidence destroys the system. The slow hiss of capital leakage has been a problem for Greece since relatively early on in the crisis. That problem seems to have intensified significantly in the wake of the recent election. From May 6th to May 15th, for instance, Greeks were yanking deposits from their banks at a clip of approximately €700m per day. Why wouldn't they? If everything turns out all right, they can simply put their money back in the bank later. If Greece tumbles out of the euro area, well, they have protected their savings from huge losses. A bank run is the logical development.

ECB cuts back on support for Greek banks: report (Dow Jones)--The European Central Bank is increasingly refusing requests for liquidity from Greek banks, making them dependent on support from the Greek central bank, Dutch financial daily Financieele Dagblad reports Wednesday, citing “sources in Brussels.” At the end of January, Greek banks had received EUR73 billion in liquidity support from the ECB, but this amount has dropped by more than 50% now, according to the newspaper. The ECB is cutting back support because Greece has been holding off on recapitalizing its banking system, despite receiving EUR25 billion in funds for that purpose, the paper says. The ECB wasn’t immediately available for comment

IMF head says Greece could leave euro - The head of the International Monetary Fund today raised the possibility that Greece could leave the euro zone in an orderly fashion."If the country's budgetary commitments are not honoured, there are appropriate revisions to do, which means either supplementary financing and additional time or mechanisms for an exit, which in this case must be an orderly exit," Christine Lagarde said in an interview with France 24. Meanwhile, debt-stricken Greece must hold fresh elections after talks on forming a new government broke up today without agreement. The new polls, expected on June 17, follow inconclusive elections on May 6 when a majority of Greeks voted against the austerity measures which Athens agreed to in return for a massive EU-IMF bailout late last year. "We are going again towards elections, in a few days, under very bad conditions," socialist Pasok party leader Evangelos Venizelos said, regretting the fact that there was no accord. "The Greek people must now make the right decisions for the good of the country," said Mr Venizelos, who supported the EU-IMF deal in a technocrat government formed last November.

Euro area official sector exposures to Greece in excess of EUR 290bn Total; EUR 84bn Germany, EUR 63bn France, EUR 55bn Italy, EUR 37bn Spain - Via email I received an interesting set of facts from Barclays regarding banking exposures to Greece. Greece: Euro area official sector exposures in excess of EUR290bn According to the French Finance Minister, F. Baroin, Greece's exit from the euro area "would cost France EUR50bn net, in addition to the securities held by banks and insurers in their portfolios." In the German press, it is reported that a Greek exit would cost approximately EUR80bn (EUR16bn from bilateral KfW loans, EUR20bn from the EFSF, EUR12bn from the SMP and EUR30bn from Target 2, based on December 2012 data, source: FAZ). Here, we estimate the euro area's official sector exposure to Greece (bilateral loans, EFSF guarantees and Eurosystem) and show that the cost estimations mentioned in the press match the exposure if you consider a 20% recovery rate on Greek holdings. 20% is rather low, but not unrealistic given the outcome of the PSI and devaluation of the new Greek currency in the event of an exit. However, because of the accounting treatment of the different exposures and the presence of some financial buffers within the Eurosystem, the one-off, year-end shock on public accounts will be much smaller, probably around EUR100bn (1% of GDP).

Cost of Greek exit from eurozone put at $1tn - UK government making urgent preparations to cope with the fallout of a possible Greek exit from the single currency. The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was "tearing itself apart". Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output. Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a "headwind" that could threaten the fragile American recovery. In a speech in Manchester before flying to the United States for a summit of G8 leaders, the British prime minister, David Cameron, will say the eurozone "either has to make up or it is looking at a potential breakup", adding that the choice for Europe's leaders cannot be long delayed.

‘If We Leave the Euro, Everything Will Be Worse’ - Just imagine: A country finds itself mired in an existential crisis and diametrically opposed political parties are tasked with putting together a government. This is exactly the challenge Greece currently faces. The conservative Nea Dimokratia (New Democracy) and the socialist PASOK parties have tried in vain to convince the radical left-wing Syriza to join in forming a viable government. Every attempt at negotiation with the country's second-strongest party has failed, and Greece now faces a new election in June. The biggest issue in the vote will be the question of whether the people of Greece want their country to continue implementing the strict austerity measures they agreed to in exchange for European Union and International Monetary Fund bailout money, or if they want to simply leave the euro zone. SPIEGEL ONLINE invited representatives from two political camps in Greece that are the polar opposite of each other to debate the issue. Stefanos Manos, who leads the pro-business Drasi (Action) party, and Despoina Charalambidou, a member of parliament with the radical left-wing Syriza party, met over Skype to express their views.

ECB Stops Loans to Some Greek Banks as Draghi Talks Exit - The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area. The Frankfurt-based ECB said yesterday it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement. The move comes after Draghi acknowledged for the first time that Greece could leave the monetary union. While the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet,” he said in a speech in Frankfurt yesterday.

Debt crisis: Greek euro exit looms closer as banks crumble - A tsunami of capital flight from Greece threatens to overwhelm the authorities, forcing the country out of the euro before fresh elections in June. Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support. President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma. He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6. Steen Jakobsen from Saxo Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal. "This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said.

Greece will run out of money soon, warns deputy prime minister - Greece's deputy prime minister has said the country will run out of money in six weeks unless it honours its bitterly-disputed EU bailout deal. Speaking exclusively to The Sunday Telegraph, Theodoros Pangalos said he was "very much afraid of what is going to happen" after Greek voters rejected the deal in elections last Sunday. "The majority of the people voted for a very strange mental construction," he said. "We want to be in the EU and the euro, but we don't want to pay anything for the past." The main beneficiary of the election, the hard-Left Syriza coalition, came a startling second on a promise to tear up the deal, which promises EU loans to keep massively-indebted Greece afloat, but demands crippling spending cuts in return. Germany, the principal lender, has said it will stop payments if Greece breaks its promises on spending.

Greeks urged to run poll as euro vote - Senior European leaders are attempting to turn Greece’s repeat national election next month into a referendum on the country’s membership of the euro, a high-stakes political gamble that officials believe can win back voters disillusioned by the tough bailout conditions but eager to stay in the single currency. José Manuel Barroso, president of the European Commission, made the choice clear on Wednesday, telling Greek voters the €174bn rescue programme would not be changed and that remaining in the eurozone was now in their hands.  “We want Greece to remain part of our family, of the European Union, and of the euro,” Mr Barroso said at a hastily convened news conference. “This being said, the ultimate resolve to stay in the euro area must come from Greece itself.” The stark message echoed points made by Angela Merkel, the German chancellor, and François Hollande, the new French president, after their first meeting in Berlin on Tuesday night. Both leaders said Greece’s election next month would be a referendum on euro membership. Senior European officials said the position was agreed after meetings this week, including a lunch on Monday between Mr Barroso and other heads of EU institutions, including Mario Draghi, president of the European Central Bank, Herman Van Rompuy, president of the European Council, and Jean-Claude Juncker, head of the group of eurozone finance ministers. It was also discussed at Monday night’s meeting of Mr Juncker’s eurogroup.

Greece Can No Longer Delay Eurozone Exit - Tsipras is the new political star in Athens. While the country's washed-up mainstream parties struggled for days to form a new government, the clever young politician has been dominating the headlines with his coalition movement of Trotskyites, anarchists and leftist socialists.  In the recent elections, Tsipras' Syriza party advanced to become the second-largest political force in the country, and Tsipras is making sure his gray-faced opponents from the Greek political establishment know it. Surrounded by cameras and microphones, he stood in the Athens government district last Tuesday, put on his winner's smile and called upon the two traditional parties, the center-left Socialists (PASOK) and the conservative New Democracy, to send a letter "to the EU leadership" and cancel the bailout deal that Athens made with the EU and the International Monetary Fund (IMF). Tsipras knows what many Greeks are thinking. At the end of last week, his poll numbers rose to a new record level of almost 28 percent. It's time to admit that the EU/IMF rescue plan has failed. Greece's best hopes now lie in a return to the drachma.

The Problem with the Eurozone’s Throw-Greece-from-the-Train Plan Is that its Timing Can’t Be Controlled - There is no democratic deficit in Greece: its people have clearly indicated they want to do two things, clean the slate by defaulting on their debts and staying within the Eurozone.  This is seen as unacceptable in Brussels and Frankfurt, and Greeks are supposed to understand that if they choose the first they will lose the second. Alas, there is no legal procedure by which Greece can be expelled from the EZ; therefore the strategy has to be one of making retention of the euro so ruinous for Greeks that they will exit on their own volition.  The mechanism is the Target system through which euros are transferred from one national central bank to another. The idea is this: when funding from the troika is cut off after a default, the Greek government will lack the resources to backstop its banking system.  Moreover, euro transfers via Target will be cut off.  Greek depositors who try to withdraw their funds will be told, sorry, but the cupboard is quite bare.  This will ignite a banking meltdown, and the only way out for Athens will be to redenominate financial liabilities in a new currency they can supply.  Whether they call it a drachma is up to them. Clever, huh?  The only hitch is that, now that the game plan is becoming clear, rational Greeks are not choosing to wait for an EZ attack before withdrawing their funds from Greek banks and transferring them somewhere, anywhere, else.

Get Ready: We’re About To Have Another 2008-Style Crisis - cmartenson - Well, my hat is off to the global central planners for averting the next stage of the unfolding financial crisis for as long as they have. I guess there’s some solace in having had a nice break between the events of 2008/09 and today, which afforded us all the opportunity to attend to our various preparations and enjoy our lives. Alas, all good things come to an end, and a crisis rooted in ‘too much debt’ with a nice undercurrent of ‘persistently high and rising energy costs’ was never going to be solved by providing cheap liquidity to the largest and most reckless financial institutions. And it has not. The same sorts of signals that we had in 2008 are once again traipsing across my market monitors. Not precisely the same, of course, but with enough similarities that they rhyme loudly. Whereas in 2008 we saw breakdowns in the credit spreads of major financial institutions, this time we are seeing the same dynamic in the sovereign debt of the weaker European nation states. Greece, as expected and predicted here, is a right proper mess and will have to leave the euro monetary system if it is to have any chance at recovery going forward. Yes, all those endless meetings and rumors and final agreements painfully hammered out by eurocrats over the past year are almost certainly going to be tossed, and additional losses are going to be foisted upon the hapless holders of Greek debt. My prediction is that within a year Greece will be back on the drachma, perhaps by the end of this year (2012).

Europe Overnight, by Tim Duy: European policymakers are trying to sway the vote in Greece. From the Financial Times: Senior European leaders are attempting to turn Greece’s repeat national election next month into a referendum on the country’s membership of the euro, a high-stakes political gamble that officials believe can win back voters disillusioned by the tough bailout conditions but eager to stay in the single currency.José Manuel Barroso, president of the European Commission, made the choice clear on Wednesday, telling Greek voters the €174bn rescue programme would not be changed and that remaining in the eurozone was now in their hands.. I thought the last election was supposed to be a referendum on Greece's commitment to the Euro. European policymakers fail to understand that they have provided the Greek people no way out - they are damned if they do, damned if they don't. Even if the Greeks overwhelming want to remain in the Euro, the austerity program guarantees ongoing recession, and the Greek people are being asked to commit to a program that is effectively already overtaken by events. The deteriorating fiscal situation seems to guarantee a new program will be necessary in the months if not weeks ahead.  If the rest of Europe really wants Greece to stay in the Euro, I think it can only work with a program of bilateral transfers to Greece in exchange for radical, rapid restructuring of the economy. Carrot, meet stick.

Not a Greek Problem - Krugman -  Tim Duy has some harsh words for the European Central Bank among others, with which I agree completely. What strikes me is that even now there seems to be no willingness to accept the fact that this isn’t a Greek problem, or even a Spain/Italy problem; it’s a European problem. The morality play the Germans like to tell about how the crisis countries got into trouble isn’t true, but even aside from that, the question is what you do NOW. And the key point is that there is no way out for the troubled countries if Europe as a whole is marked by low growth and low inflation. Given that reality, lecturing Greek voters on responsibility, while hinting that maybe we’ll ease the terms a bit — oh, and it’s almost time for summer vacation! — just won’t cut it. We need a conversion experience here, not in Athens, but in Berlin and Frankfurt. Otherwise, the game is almost over.

Europe’s growth gulf -European Q1 GDP data came out overnight. Germany was better than expected with a rise of 0.5% in the quarter and to 1.2% over the previous 12 months. France stagnated and the periphery continued to contract. The German data was obviously a highlight, but as I spent much of last year explaining, good German data is a double edged sword. Although it is good for Germany, it is a big negative for the rest of Europe because one of the major issues that brought on the crisis in the first place was the competitiveness imbalance of nations under the single currency. As you can see from the chart below, countries that that are the major source of European risk continue to suffer economic contraction which, given the renewed strength of Germany, makes this imbalance worse: This is something I would expect to see in the macro-economic environment that peripheral Europe finds itself. Austerity has a tendency to bring about rises in unemployment and falls in industrial production. Another look at Germany compared to “at risk” countries clearly shows that peripheral Europe has rolled back over in terms of growth while Germany accelerates away:

Recession hits "pretty grim" EU states in the east (Reuters) - The Czech Republic's economy shrank for the third quarter in a row and Romania fell back into recession from January to March, as the euro crisis and government austerity hammered domestic demand and squeezed exports across central and eastern Europe. Flash gross domestic product estimates for the European Union's emerging states also showed Hungary had contracted in annual terms for the first time since the height of the global economic crisis in 2009. The data in all three countries was worse than forecast by economists in Reuters polls, prompting many to say it could intensify debates in those countries' central banks over whether to cut interest rates despite a need to keep investors interested with high risk premiums. They also warned that the figures had come before early indications of a decline in manufacturing across the region at the start of the second quarter. "It's pretty grim. The worst part is that it shows output in large swathes of the region was contracting even before the most recent escalation of the euro crisis,"

Italy Economy Contracts Most in Three Years on Recession - Italy’s economy contracted for a third quarter in the three months through March as the nation’s recession deepened amid an intensifying euro-area debt crisis. Gross domestic product declined 0.8 percent, the most in three years, Rome-based national statistics institute Istat said in a preliminary report today. The contraction was more than the median forecast of 0.7 percent in a survey of 14 economists by Bloomberg News. GDP fell 1.3 percent from a year earlier. Prime Minister Mario Monti’s government is implementing 20 billion euros ($26 billion) in austerity measures that helped push Italy into its fourth recession since 2001 in the fourth quarter of last year. Monti is now lobbying European leaders to craft policies to boost economic growth without widening budget deficits as spending cuts and the debt crisis cloud prospects for euro-region expansion.

Brian Drain: Businesses and Brightest Minds Flee Italy; Credit Crunch Italian Style - Courtesy of Google Translate, this time from Italy, please consider From the North-East and abroad, fleeing already 720 companies Farewell, ungrateful Italy. In addition to brain drain, we'll get used to the migration of entrepreneurs. The news coming from the North-East lab are not at all encouraging. Until 2010 no employer has had the courage to leave Italian soil. A sort of waiting anxiety that charge went through the last part of 2008 and the two following years. Explains Daniele Marini, a sociologist at the University of Padua and the Director of the North East: "Entrepreneurs have felt a great loneliness. And 720 of them already internationalized and holding sizes above the threshold of 10 employees, in 2011 the companies have decided to move abroad. It remains to be seen how many entrepreneurs make the same choice in 2012.

Italy’s banks shaken as economic slump deepens - As Greece erupts, Italy is moving into the eye of the storm. Its economy is contracting at speeds not seen since the depths of the slump in 2009 as draconian austerity bites, greatly increasing the risk of social revolt and a banking crisis. With the world's third largest debt after the US and Japan at €1.9 trillion (£1.18 trillion), it is big enough to bring the global financial system to its knees. It is also in the front line of contagion as the Greek crisis metastasizes. Yields on 10-year Italian debt jumped 16 points to 5.86pc on Tuesday after Italy's data agency said the country is sliding even into deeper recession, with GDP shrinking 0.8pc in the first quarter. Output is now 6pc below its peak in 2008. Italy has been trapped in perma-slump for a decade, the only major state to suffer a fall in real per capita income since 2000. Rising anger has led to a spate of violent attacks by terrorist groups over recent weeks, all too like the traumatic 'years of lead' in the late 1970s. The government is mulling use of troops to protect targets after anarchists shot the head of Ansaldo Nucleare last week and hurled petrol bombs at tax offices. The unelected government of Mario Monti is carrying out net fiscal tightening of 3.5pc of GDP this year even though Italy's budget is near primary surplus. This is three times the International Monetary Fund's "therapeutic" pace. All key measures of Italy's money supply have been contracting at 1930s rates over the last six months.

Italy Tax Agents on Frontline of Anti-Austerity Backlash - For 10 years, Daniela Ballico has been knocking on Romans’ doors seeking back taxes. Now with Italy’s tax-collectors on the front line of an anti-austerity backlash, she no longer has the courage to ring their bells. Equitalia, the state tax-collection agency, has been targeted in a wave of attacks as Italians chafe under stepped-up efforts to recover an estimated 120 billion euros ($153 billion) in lost revenue from evasion. On May 12, a Molotov cocktail exploded outside Equitalia’s Livorno office, one day after a parcel bomb was delivered to the Rome headquarters, site of a December explosion that tore off part of the general manager’s hand. “I have never seen such a tense atmosphere” said Ballico, who has been employed by Equitalia since 1998 and is now on temporary leave to work for the UGL labor union. “They call us loan sharks, bloodsuckers; my colleagues have to deal with anxiety and stomach aches every day and they are scared.” The crackdown is part of Prime Minister Mario Monti’s 20 billion-euro austerity plan that also brought higher taxes, cuts in public spending and record gasoline prices. While the measures may have helped bring down bond yields from euro-era records, they helped push the economy into its fourth recession since 2001, making it harder even for law-abiding Italians to keep up with tax payments.

How Europe’s banking crises threaten the eurozone - The size of the run on Greek banks is not at all clear: while it seems that something on the order of €1 billion has left the banks of late, it’s less obvious whether that was over the course of one day, three days, or two weeks. The big picture, though, is unambiguous: What you’re seeing here is Greece down to its last €165 billion or so in deposits, and at the margin the rate of decrease is probably accelerating, despite the fact that most sensible Greeks will have already stashed their hard-earned euros safely outside the country a long time ago. I don’t know what the minimum amount is that Greeks need on deposit just to serve their near-term liquidity requirements, but we’re not there yet: Greece’s total population is only 11 million. So there’s a long way further this number can fall — especially since the Greek banking system isn’t receiving the support it needs from the ECB.

European Debt-Insurance Costs At Highest Since January - The cost of insuring European sovereign and corporate debt against default rose Wednesday to its highest since January as fears escalate about a Greek exit from the euro zone. A last-ditch attempt by politicians in Athens to form a new government failed. It follows an inconclusive May 6 vote and sets a path for a second poll in June that will be widely seen as a referendum on the country's euro-zone membership. Market volatility was sparked across the region. The political uncertainty could derail Greek commitments under its financial rescue package from the European Union and the International Monetary Fund. That aid, needed to keep Greece's fragile economy afloat, may then be withdrawn. Banks with exposure to Greece saw their debt insurance costs surge, with five-year credit default swaps on Credit Agricole at a new record, jumping 17 basis points to 389/406 basis points. Societe Generale's five-year CDS moved out 19 basis points to 388/405 basis points, its widest level since December, according to data-provider Markit.

Hungary’s Stimulus Crashing Corners Orban Before IMF Talks - Hungarian Premier Viktor Orban’s negotiating hand going into bailout talks with the International Monetary Fund has been weakened after the economy slumped the most in three years, said economists from London to Budapest. Hungary is headed toward joining the Czech Republic and Romania among eastern European countries in recession as the euro region’s debt crisis saps demand for their exports. That adds to pressure on Orban to obtain aid from the IMF and limits his ability to protect the flat personal income tax, a cornerstone of his economic policy, “As long as the economy isn’t growing, the government’s room to maneuver in IMF negotiations is limited,” . “One of the red lines the government has drawn is that it’s not willing to debate the flat income tax, while the IMF has been fairly critical. Keeping the tax risks becoming self-defeating, creating a vicious cycle that’s difficult to break out of.”

Europe's Car Industry: If Plants Close, Then What? - Under the lights of the Geneva motor show in March, Europe's top auto executives boasted about the new features of their latest models and tried to out-hype their rivals. The next morning, in a hotel conference room just across the way from Geneva's convention center, the same executives all sat down to work out how to fix their huge overcapacity problem. At a board meeting of the European automaker's lobby group ACEA, the bosses of Volkswagen, Daimler, BMW, Peugeot, Renault, Fiat and Opel decided it was time to discuss the elephant in the room: plant closures. "Their fear was of an all-out price war," said a source who was briefed about the meeting but declined to be named. "The negative fallout from that would be terrible." The hard truth is that after more than four years of falling demand and profits, Europe's carmakers have yet to restructure or consolidate. Many factories are running at partial capacity – analysts estimate automakers have cut some 3 million cars, or 20 percent, from their production lines – and still producers struggle to sell their wares.

Spaniards Go Underground to Fight Slump - More than six months ago, a 37-year-old worker here named Juan was laid off from his job delivering and assembling furniture for customers of Ikea, joining the legions of unemployed in Spain. Or so it would seem. Since then, Juan has continued doing more or less the same work. But instead of doing it on the payroll of Pantoja, a transport subcontractor to Ikea, he hovers around the parking lot of the megastore, luring customers of his own by offering not only to deliver their furniture but also to do “general work,” like painting and repairs, all for the bargain price of €40, or $51, a day. “I will do anything except electricity and plumbing, where I really don’t have enough expertise to guarantee a safe and decent job,” said Juan, who did not want his full name used because he does not declare his income and did not want to run afoul of the tax authorities. As Spain’s recession deepens, more workers like Juan are being shunted into an underground economy that amounts to as much as a fifth of Spain’s gross domestic product, according to some estimates, with broad implications as the country tries to revive itself, reform its labor market and keep at bay the kind of wrenching crisis that now threatens to push Greece out of the euro zone.

Spain’s Prime Minister Warns Country Is in Danger of Being Shut Out of Markets - Spain‘s prime minister warned Wednesday that the country faced the danger of being locked out of international markets as investors continued to fret about the future of the euro and Greece’s place in the 17-country eurozone. “Right now there is a serious risk that (investors) will not lend us money or they will do so at an astronomical rate,” Mariano Rajoy told Spanish lawmakers. Investors are getting increasingly concerned about the survival of the single currency and whether the Spanish government can push through its deficit-reduction plan at a time of recession and mass unemployment. Interest rates, or yields on 10-year Spanish bonds traded on the secondary market hit 6.32 percent in afternoon trading — taking them closer to the unmanageable levels that prompted bailouts for Greece, Portugal and Ireland.

Finance Minister Says "Nothing to Hide" Asks for ECB Audit of Banks, Denies Need for Rescue Fund - The Economy Minister Luis de Guindos, said Tuesday it has asked the European Central Bank (ECB) to assist in the independent audit of the Spanish banks' balance sheets and is committed to full throttle work as has asked the Eurogroup, in order to have results within two months. In addition Guindos assured that no minister of economy of the eurozone has said that Spain should come to the rescue fund EU to recapitalize their banks. "There is nothing to hide, believe that the reform we are doing is a reform that clarifies and introduces transparency and clarity in balance sheets and the Spanish government has a will very clear about it," stressed the Minister of Economy. "Nobody has spoken at all to go to the bailout fund, is a matter of speed independent valuations," has settled the finance minister when asked about whether Spain would seek assistance from the EU to help banks unable to meet the requirements of provisions providing for the reform.

Spanish debt risk premium smashes record high - The extra return demanded by investors on Spanish bonds over safer German debt hit 507 basis points -- the highest since the euro's launch in 1999 on a wave of optimism about the riches it could deliver. The yield on Spain's benchmark 10-year government bonds soared to a peak of 6.51 percent, a danger level widely considered too high for the state to afford over the longer term. Prime Minister Mariano Rajoy warned that the rise of the risk premium made it harder for Spain to finance itself. "The situation is very complicated, the risk premium has gone up a lot, and that means it is very difficult to get financing," Rajoy told reporters in parliament. He called for a strong message in defence of the euro, but said he was not asking the European Union to step in and help Spain.

Moody's to downgrade 21 Spanish banks: report - Moody's is set to 'significantly' downgrade 21 Spanish banks within a week, following a cut of credit ratings on Italian banks, the Spanish economic daily Expansion said on Wednesday. "Sources in the Spanish financial sector are convinced that the agency will lower in a significant manner the ratings of numerous institutions," said the daily. "The announcement can come within a week according to market sources," it said, adding that 21 banks would be affected. The downgrade would deal a further blow to battered Spanish banks, which find it hard to borrow money from other banks because many in Spain are heavily exposed to a real-estate sector that has been in a slump since 2008. In April, Spanish banks borrowed a record 263.5 billion euros ($339 billion) from the European Central Bank, the lender of last resort to eurozone commercial banks. On Monday, Moody's slashed its credit ratings by up to four notches for 26 Italian banks, citing their vulnerability to Italy's recession and further trouble in the 17-nation eurozone.

Spain's GDP contracts as austerity hits spending - Spain's government, households and companies reined in spending in the first three months of the year, leading the euro zone's fourth-biggest economy to contract 0.3% from the fourth quarter. Exports softened after several quarters of strong growth, reflecting the wider slowdown in Europe. Exports had been a bright spot throughout the country's drawn-out economic crisis. The conservative government of Prime Minister Mariano Rajoy has slashed spending and raised taxes in a drive to bring Spain's budget gap in line with European Union targets. With salaries falling and unemployment on the rise, households are feeling the pinch. On an annual basis, gross domestic product shrank 0.4%, final data from the National Statistics Institute showed Thursday. In the fourth quarter, GDP fell 0.3% on a quarterly basis, but grew 0.3% on an annual basis. The data, in line with a preliminary reading on April 30, confirm that Spain's austerity measures are weighing on the economy. They provide a stark measure of the challenge of cutting the deficit in the midst of a deep economic downturn.

Spain clears bond sale, but borrowing costs up-- Spain’s borrowing costs lurched again higher at a bond auction Thursday as mounting doubts over Greece’s future in the euro zone have spurred investor fears that other fiscally frail nations could be the next weak links in the currency bloc. Spain comfortably sold EUR2.494 billion in shorter-dated bonds, practically the maximum targeted amount, but had to pay up. While total demand of EUR7.366 billion was almost three-fold of the amount sold, the sharp rise in borrowing costs from the previous auction will likely cast further doubt over the country’s ability to get its finances on a more sustainable footing. The current deterioration in risk sentiment comes when European and US economic activity data have been either in line or above expectations, “demonstrating the market’s concern about political risks in Greece,” said Barclays Capital in a note.

Spain’s Supplier Payment Fund Signs 30 Billion-Euro Loan - Spain’s state fund set up to pay overdue bills to suppliers of city halls and regional administrations signed a 30 billion-euro ($38 billion) syndicated loan with 26 banks, the government said. The financing, which can be increased to as much as 35 billion euros, will allow town halls and regional governments to refinance debt and for suppliers to recover payments owed, the economy and budget ministries said today in a statement. “A solution is being sought for a problem of grand dimensions during a great credit crisis,” said Rafael Minguez, a lawyer at Cuatrecasas, Goncalves Pereira who with colleague Fernando Navarro will head the legal team advising the banks.

The Government is preparing a surprise rise in VAT for up to three points by 2013 - Mariano Rajoy's government is determined to adhere strictly and without delay the requirements of Brussels to get the unequivocal support of the European Union to reform measures taken and to try to appease the markets. This is the VAT in the rest of Europe: average at 20.9%. So, on Monday, the minister Luis de Guindos, acceded to the wishes of Merkel and European Commission to be the European Central Bank (ECB) who audit the Spanish banks. And now, the chief of government has already committed to some partners of his confidence that the government might have to climb two or three points in the VAT, by surprise, without waiting for 2013, as planned. Specifically, Rajoy met last weekend privately with the president of the CEOE, Juan Rosell. A meeting that was held at the Moncloa Palace and that was unveiled yesterday at the meeting of the Board of the Spanish employers that some attendees described as "a funeral" to the bleak picture of the business leaders to draw on our economy.

The Spanish bank debt with the ECB increased by 15.7% in April - The debt of Spanish banks with the ECB shot up to 263.535 billion euros in April, that is 15.7% compared to 227.6 billion recorded in March, a new record, according to the Bank of Spain. This amount is outstanding entities resident in Spain still have yet to return to the European Central Bank as a result of the funding the agency has been granted previously. The net financing granted in April by the Eurosystem to Spanish banks accounted for 68.8% of total Eurozone, which amounted to 382.712 billion euros. However, the gross amount of appeal does not collect the money that Spanish banks have borrowed from the ECB and have been redeposited in the body to receive a return of 0.25% a day. The increasing difficulties of Spanish institutions to borrow from the interbank appreciate finding that the credit requested by Spanish banks headed by Mario Draghi school increased sixfold compared to that recorded in April 2011 (42.227 billion).

Nationalized Spanish Bank Plummets On News Of Bank Run - The problem with bank runs is that once they start, they don't stop. And while the world was conveniently distracted by events in Greece, debating whether or not people were withdrawing money in droves (they were), the real bank run happened elsewhere, namely in Spain, where just nationalized bank Bankia moments ago plunged 30% and was halted following an El Mundo report that "customers had withdrawn €1 billion over the past week." In other words -  a bank run (but whatever you do, don't call it that - it's not the politically correct and accepted nomenclature) which has sent shockwaves through Europe, pushed the EURUSD under 1.27, and bond yields in their traditional "Europe is open" direction - wider. From FT: Shares in Bankia, the Spanish bank which was part-nationalised last week, plunged by over a quarter on Thursday morning, after a report that customers had withdrawn €1bn from the bank over the past week. Shares fell 27 per cent to €1.21 after El Mundo, a national Spanish newspaper, reported customers had withdrawn €1bn from the bank over the past week, citing information from a recent board meeting. The self-styled “the leader of the new banks” was formed from seven cajas last year and has now shed nearly 70 per cent of its market capitalisation since its shares were listed in July of last year.

Spanish Banks' Bad Loans Worsen as Recession Bites: Economy -- More Spanish loans soured in March, fueling concern that the government's focus on making banks clean up real estate was too narrow as the country's economy entered a recession. Bad loans as a proportion of total lending jumped to 8.37 percent in March, the highest since August 1994, from a restated 8.30 percent in February, according to data published today by the Bank of Spain. As much as 8.21 billion euros of loans soured in the first quarter, 90 percent more than in the same period of last year. The regulator said a further 4.15 billion euros ($5.3 billion) of loans went bad, in addition to its original 143.82 billion-euro total for February before the number was restated

Spanish Bad-Loans Ratio Hits 17-Year High - Bad debts held by Spanish banks rose to a 17-year high in March and the cost of insuring the debt of two major Spanish banks against default hit a record Friday a day after the sector was hit by a downgrade, underscoring the continuing challenges posed by the country's five-year property slump. The central bank said that 8.37% of the loans held by banks, or €147.97 billion ($188 billion), were more than three months overdue for repayment in March, up from 8.3% in February and the highest since September 1994. The total number of non-performing loans is now almost 10 times higher than the level reported in 2007, just as Spain's decade-high property boom peaked. The rapid deterioration of the loan books was one of four reasons cited by Moody's Investors Service for its downgrade of the credit ratings of Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and 14 other banks in the country late Thursday. "Moody's announcement will increase speculation that the Iberian state will be forced to ask for external support in order to effectively tackle its banking crisis,"

Bankia bought own shares before bailout -- Bankia, the part-nationalised Spanish savings bank, bought 4.3 per cent of its own shares in the months before being taken over by Madrid, in transactions that analysts said would have propped up its share price amid concerns over its future. Bankia had surprised analysts by suffering less severe falls in its shares than other larger rivals since it was listed last summer . It largely shrugged off a 26 per cent dilution forced on investors in February when it converted preference shares and subordinated debt into equity. Filings with Spain’s stock market regulator show that Bankia raised its holding of its own shares from about 1 per cent at the end of last year to 3.2 per cent in April and 4.3 per cent at the time Madrid intervened by converting €4.5bn of loans made by the government bank rescue fund, the Frob, into common equity. "It’s a big amount – they were clearly propping up their own share price,” said one banking analyst, who did not want to be named. “What they did was completely within the law, but there is no doubt that this would have pushed up Bankia’s share price.”

Spanish Debt Insurance Costs Hit Another Record High At 562 BPs --The cost of insuring Spanish sovereign debt against default hit yet another record high Friday, rising 12 basis points from Thursday's close to 562 basis points as its banking system is under severe stress, undermining investors' confidence and threatening to once again push the country's borrowing cost to unsustainable levels.

Euro austerity example Ireland 'may need second bailout' - Ireland, seen as the eurozone’s "poster child" for implementing austerity, could require a second bailout, economists warned. As households struggle to pay their mortgages, the country’s rescued banks may need €4bn (£3.2bn) more to cover losses on loans than was assumed in stress tests last year, said analysts at Deutsche Bank. That would hit the finances of the Irish government, which has already pumped about €63bn into its banking sector in the last three years. “A new, even modest, increase in [banks’] capital requirements could deter sovereign investor participation and tip the balance in favour of the sovereign requiring a second loan program,” said the Deutsche team. Ireland has been viewed as an example of how a country can stick to an austerity programme of tax rises and spending cuts. Fears that it will none the less need another rescue reinforce the challenges around a resolution of the eurozone debt crisis.

Ireland And Portugal Resume Their Places Among Europe's Teetering Dominos - While all eyes are focused on Greece (and contagiously Spain), they have forgotten that two far weaker countries still exits - and combined have the power to do as much (if not more) damage than Spain. Portugal and Ireland have moved back into the Red-Zone of risk in Europe's credit markets. Ireland back over 700bps and Portugal back over 1200bps reflects both their idiosyncratic issues (that we have discussed at length) or the systemic issues (which we discussed most recently this morning here). In the case of Portugal, it appears the Dan Loeb trade (we said to fade it) is now being unwound en masse as the reality of the fundamental risks we discussed here seem to be realized. In the case of Ireland, not only is there a rising chance of a 'no' vote at the forthcoming referendum (discussed here) but as Deutsche Bank notes today, via Bloomberg, that Irish banks may face a further $5.1 billion capital call to cover loan losses as "A new, even modest, increase in capital requirements could deter sovereign investor participation and tip the balance in favor of the sovereign requiring a second loan program." Of course the CDS reflect not just the chance of these nations restructuring but also the probability of a EUR devaluation (since the instruments are denominated in USD) but still - we thought Ireland was the template for the success of austerity?

Temporary Cabinet Named in Greece as Agency Lowers Nation’s Debt Rating  Political and economic tremors rolled out of Greece and across Europe again on Thursday as the caretaker prime minister, Panagiotis Pikrammenos, appointed a temporary cabinet to manage the country’s affairs until June 17, when the second general election in a little more than a month is held.  An increasingly urgent question is whether Europe can afford to wait until that election, which is expected to determine the future of the troubled country in the euro zone and the broader stability of the bloc. Events may force European officials’ hand much earlier.  On Thursday, the rating agency Fitch lowered its rating on Greek debt from B- to a lowly CCC, saying in a statement that the downgrade “reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union” after the strong showing of anti-austerity parties in the May 6 elections.

Greece: Election is June 17th - The election is a month away and Europe will support Greece financially through the next election, but no one knows what will happen at the end of June. Until the election, the campaign rhetoric will be global front page news. Syriza leader Alexis Tsipras seems to think that Greece can stay in the euro and also break the bailout agreement. His opponents say a vote for Syriza is a vote to exit the euro.From the AthensNews: Judge to lead Greece to critical eurozone vote A senior judge was put in charge of an emergency government on Wednesday to lead Greece to new elections on June 17 and bankers sought to calm public fears after the president said political chaos risked causing panic and a run on deposits.European leaders who once denied vociferously that they were fretting over Greece leaving their currency union have given up pretence. Asked if he was concerned about a Greek exit, European Central Bank chief Mario Draghi said simply: "No comment".Citizens have been withdrawing hundreds of millions of euros from Greek banks in recent days, as the prospect of the country being forced out of the European Union's common currency zone seems ever more real ...The "run" on Greek deposits started in 2010, and deposits were already down about one-third before the recent run started. There won't be much left on June 17th.

Greek poll shows pro-bailout conservatives leading - Greece's conservative New Democracy party, which backs the country's international bailout, has retaken the lead from the anti-bailout radical leftist SYRIZA, a poll showed on Thursday, the first published since a new election was called for June 17. If elections were held now, New Democracy would win 26.1 percent of the vote compared with SYRIZA's 23.7 percent, according to the MARC/Alpha survey conducted on May 15-17. Based on this result, New Democracy would win 123 seats, the pollsters said. Combined with the 41 seats projected to be won by the Socialist PASOK, Greece's two major pro-bailout parties would command a 14-seat majority in the country's 300-strong parliament.Support for SYRIZA appears to have declined after the party refused to join a national unity government with all the other major parties, the MARC poll showed. In the previous survey by the same agency before the coalition talks collapsed, SYRIZA led with 27.7 percent, up seven points on New Democracy.

Merkel Asks For Greece Referendum on Euro - Germany’s chancellor reportedly proposed on Friday that Greece hold a referendum on its membership in the euro currency area, increasing pressure on the nation just as Group of Eight leaders are set to discuss the region’s debt crisis this weekend. In a phone call with the Greek president on Friday, German leader Angela Merkel suggested that Greece could have a referendum on the euro when it holds national elections in June, according to media reports, citing a Greek government spokesman. Whether she actually did make the proposal is in doubt — her spokesman denied it, but the Greek official then reiterated that Merkel made such a request.

Greece Must Exit - Nouriel Roubini - The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the eurozone. Postponing the exit after the June election with a new government committed to a variant of the same failed policies (recessionary austerity and structural reforms) will not restore growth and competitiveness. Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression. The only way to stop it is to begin an orderly default and exit, coordinated and financed by the European Central Bank, the European Commission, and the International Monetary Fund (the “Troika”), that minimizes collateral damage to Greece and the rest of the eurozone. Greece’s recent financing package, overseen by the Troika, gave the country much less debt relief than it needed. But, even with significantly more public-debt relief, Greece could not return to growth without rapidly restoring competitiveness. And, without a return to growth, its debt burden will remain unsustainable. But all of the options that might restore competitiveness require real currency depreciation.

The Eurozone Crisis: An End to Austerity? - The announcement Wednesday by Germany’s chancellor, Angela Merkel, that her nation is ready to discuss economic stimulus to keep Greece in the eurozone is—if serious—a hugely important development. But the critical test will be what policies emerge from this announcement. After more than three years of unsuccessful efforts to tackle the problems in Greece and other countries through imposed austerity measures in return for bailout funds, observers might be forgiven for thinking there are no solutions to the continuing eurozone crisis. Yet the eurozone is not stuck between a rock and a hard place. The tragedy is that effective solutions are available, but the stronger European nations, led by Germany and the European Central Bank, seem incapable of adopting them, or perhaps even thinking clearly about them. The crisis is not purely a consequence of Greek intransigence, by any means.  As Greeks withdraw hundreds of millions of euros from their own banks, there may be little time to head off crisis. But the leaders of the eurozone have to begin with a clear-cut objective that is more than lip-service. Even fervent advocates of austerity economics—cutting government spending and increasing taxes to reduce government budget deficits—agree with those who advocate stimulus on one crucial point: that the threat of economic collapse in the eurozone—and of the end of the euro—can only be eliminated by renewed economic growth in the struggling countries.

Softening, Merkel Says She Is Open to Stimulus for Greece - Chancellor Angela Merkel of Germany said Wednesday that she was ready to discuss stimulus programs to get the Greek economy growing again and that she was committed to keeping Greece in the euro zone, signaling a softer approach toward the struggling country. The fierce rhetorical salvos out of Germany in the past week gave way to conciliatory gestures by Ms. Merkel, who throughout the crisis has shown a propensity for managing through brinkmanship. “I have the will, the determination to keep Greece in the euro zone,” she said in an interview on CNBC on Wednesday, in what appeared to be an attempt to relax an increasingly tense situation. If Greek officials are looking for “stimulus to be pursued for growth in the euro zone, which we could pursue in the interest of Greece, we’re open for this,” Ms. Merkel said. “Germany is open for this.” Europe was shaken anew this week by the chaos in Greece, where a bank run threatened to hasten the country’s exit from the euro and jeopardize the Continent’s financial stability. While the impact of a country’s leaving the euro is hard to predict, economists fear the crisis could spread to much larger countries like Spain and Italy if financial markets bid up borrowing rates to unsustainable levels.

What is the potential for German fiscal stimulus? - This idea has been overpromoted for a long time: Even if Germany manages to increase domestic demand, there is no guarantee that the additional spending will find its way into the peripheral euro-zone economies. A simple macroeconomic simulation suggests that a permanent increase in German government consumption equivalent to one percentage point of GDP would raise output in Ireland and Greece by 0.1% at most, and in larger countries, such as Spain and Italy, by much less than that. That should come as no surprise. After all, exports to Germany account for just 2.5% of the combined GDP of Italy, Ireland, Portugal, Spain and Greece. In order to make a difference, Germany would therefore have to embark on a fiscal expansion that is too big even for the largest economy in Europe. What about households and companies? German household saving is relatively high at 11%, in theory providing some scope for additional private spending. Here, too, however, there are difficulties. Designing a fiscally neutral set of measures that encouraged spending would be challenging because German households have, on average, less net wealth than their counterparts in France or Italy.

Europe's woes and policy hedging - With the eurozone now reaching what is evidently a tipping point, many suggestions are being put forward for what should be done next, and increasingly there is talk of life after a Greek exit from the single currency (the term “Grexit” has annoyingly been constructed to describe such a scenario, because saying “Greek exit” is far too time consuming). Wolfgang Münchau suggests that “The only solution to the eurozone crisis” is a dual implementation of debt monetisation through the ECB i.e. the ECB essentially becoming a lender of last resort for eurozone governments, and the use of the single currency’s rescue fund. As Wolfgang states; “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. Instead, the most obvious solution will come through a default by a troubled eurozone country into the ESM and the other rescue funds.”

Closer to Colliding, by Tim Duy: Each passing day brings the runaways trains closer to collision.   The European strategy to scare the Greek people into voting for pro-austerity parties was always risky. My tendency is to think it will drive voters in the other direction, this is especially the case if voters come to believe they hold the real leverage. And that is exactly the strategy that is emerging. From the Wall Street Journal:The head of Greece's radical left party says there is little chance Europe will cut off funding to the country and if it does, Greece will repudiate its debts, throwing down a gauntlet that could increase tensions between Greece's recalcitrant politicians and frustrated European creditors......"Our first choice is to convince our European partners that, in their own interest, financing must not be stopped," Mr. Tsipras said in an interview with The Wall Street Journal. "If we can't convince them—because we don't have the intention to take unilateral action—but if they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors." Europe and the Greece are locked in a battle of mutually assured financial destruction. Nor can European leaders afford to take Tsipras' threats lightly: According to recent opinion polls, Mr. Tsipras' party is poised to win the most votes in repeat elections next month, bettering its surprise second-place finish in an inconclusive May 6 vote.

Apocalypse Fairly Soon, by Paul Krugman - Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.  This doesn’t have to happen; the euro (or at least most of it) could still be saved. But this will require that European leaders, especially in Germany and at the European Central Bank, start acting very differently from the way they’ve acted these past few years. They need to stop moralizing and deal with reality; they need to stop temporizing and, for once, get ahead of the curve. Greece is, for the moment, the focal point. Voters who are understandably angry at policies that have produced 22 percent unemployment — more than 50 percent among the young — turned on the parties enforcing those policies. And because the entire Greek political establishment was, in effect, bullied into endorsing a doomed economic orthodoxy, the result of voter revulsion has been rising power for extremists. Even if the polls are wrong and the governing coalition somehow ekes out a majority in the next round of voting, this game is basically up: Greece won’t, can’t pursue the policies that Germany and the European Central Bank are demanding.

Europe is Falling Apart - It feels as if Europe has rolled the clocks back to 2011 as the effects of the ECB’s LTRO have now well and truly warn off and the markets appear to have reconnected with idea that the fundamental issues of the Eurozone have never been addressed. Spain is 55% through its debt schedule for the year but, as the shadow of emergency operations passes over, yields are rising quickly: Spain sold 372 million euros of a bond maturing January 31, 2015 at an average yield of 4.375 percent, after paying 2.89 percent April 4, with a bid-to-cover ratio of 4.45 after 2.4 in April. The bond maturing July 30, 2015 sold 1.0 billion euros, had a yield of 4.876 percent compared to 4.037 percent May 3 and was 3 times subscribed following a bid-to-cover ratio of 2.9 percent at the last auction. The bond maturing April 30, 2016 sold 1.1 billion euros with an average yield of 5.106 percent, higher than 3.374 percent March 15. Demand was lower than previously, with the bond 2.4 times subscribed after 4.1 times at the March auction. But that wasn’t Spain’s only problem overnight: The Spanish government moved Thursday to quell fears of massive deposit withdrawals in Bankia SA (BKIA.MC) as its shares were pummeled by an unconfirmed local media report that depositors were withdrawing savings after the government rescued the ailing lender last week. “It is not true that there’s a deposit flight,” Deputy Finance Minister Fernando Jimenez Latorre told a news conference to discuss the country’s economic outlook. “Depositors are safer now than they were a couple of weeks ago.” He also dismissed the notion that Spanish banking sector could face massive deposit withdrawals.

Paul Krugman on Eurozone: “The Whole Thing Could Fall Apart in a Matter of Months” - The European economic crisis is expected to top the agenda at the G8 meeting tomorrow at Camp David. In Greece, voters will soon head to the polls for another round of elections which will be viewed by many as a referendum on the euro. Our guest today, Nobel Prize-winning economist Paul Krugman, warns the current bank run in Greece could spiral into the end of the eurozone. "It’s really quite shocking," Krugman says. "I hate to sound apocalyptic." Meanwhile, France’s new finance minister has reiterated that the country’s new Socialist government will not ratify the European Union’s fiscal pact calling for greater austerity. [includes rush transcript]

SocGen: If Greece Leaves The Euro, Get Ready For A Whoosh Out Of Spanish And Italian Banks - One of the effects of a Grexit: A major whooshing sound, as cash rushes out of Spanish and Italian banks, as nervous nationals fear a return to pre-euro currencies in their countries. Says SocGen: A Greek exit could lead to a 20-30% deposit outflow We believe that unless a credible deposit insurance scheme is set up or other credible mitigation measures are taken, savers in Spain and Italy (as well as Portugal) will fear a return of their historical currencies. This could prompt them to withdraw their deposits from the local banks and try to turn them into either resilient assets or move them outside the country. This is unlikely to take place in the form of a “bank run” but will more likely materialise as a continuing drain over 12 to 18 months. ... Absent a major intervention by the ECB, the Italian and Spanish banks will then have to (i) de-lever their balance sheet to offset the reduced deposit availability, (ii) de-lever further to a 110% loan/deposit ratio to mitigate the continued drought in the wholesale funding market and (iii) offer materially higher rates on the remaining available deposits in the market. We assume for the purposes of this analysis that the Italian and Spanish banks will not repay the LTRO early and that the ECB will prolong the LTRO from 3 years to 5 years. All that being said, it's not unreasonable to think that if Greece were to leave that the ECB would in fact be very proactive, opening up all kinds of new firewalls (including deposit insurance) to make sure that something like this doesn't happen.

World Bank on Greece crisis: Spain and Italy could be next -Spain and Italy will be the next victims of the European financial crisis if Greece crashes out of the euro currency zone, the head of the World Bank has warned. Fears that Athens may be forced to issue registered warrants or return to its former currency, the drachma, have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at the G8 summit in Camp David later this week."The core question will be not Greece, but Spain and Italy," World Bank President Robert Zoellick said on Wednesday. Reuters reported that a Greek exit from the eurozone would have effects reminiscent of the collapse of the Lehman Brothers investment bank collapsed in 2008, which spread panic on global financial markets, and said that it could expose other European nations to hundreds of billions of euros in losses

Europe’s depressing prospects - Michael Pettis - Normally I don’t like to write about European prospects in the midst of a very rough patch in the market because in that case there isn’t much I can say that isn’t already being said. Still, given the conjunction of political uncertainty in Beijing, low Chinese growth numbers, and another round of deteriorating circumstances in Europe, I will spend most of this issue of the newsletter trying to outline the possible paths countries like Spain must face. For several years I have been saying that Spain would leave the euro and restructure its external debt.  I should say that I specify Spain because it is the country in which I was born and grew up, and so it is also the country I know best.  When I say Spain, however, I really mean all the peripheral European countries that, like Spain, are uncompetitive, have high debt levels, and suffer from low savings rates that had been forced down in the past decade to dangerous levels. Spain had a stronger fiscal position and healthier bank balance sheets than many of its peers when the crisis began, so any argument that applies to Spain is likely to apply more forcefully to its peers.   There are two reasons why I was and am fairly sure that Spain cannot stay in the euro (or, which amounts to the same thing, that Germany will leave the euro instead of Spain).  The first has to do with the logic of Spain’s balance of payments position, and the second has to do with the internal dynamics that drive the process of financial crisis.

Europe thinks the unthinkable on Greece (Reuters) - European officials are working on contingency plans in case Greece bombs out of the euro zone, the EU's trade commissioner said on Friday, while Berlin said it was prepared for all eventualities. European shares were on course for their steepest weekly decline since November and are now in the red for the year, spooked by the prospect of a Greek euro exit sparking a wave of contagion in the currency bloc which could engulf much larger economies such as Spain's. Policymakers insist they want Greece to remain in the euro zone but European Union trade commissioner Karel De Gucht said the European Commission and the European Central Bank were working on scenarios in case it has to leave.

Bini Smaghi: A Greek Exit Will Be Much More Damaging Than You Expect - Former ECB member Lorenzo Bini Smaghi has a sharply worded op-ed in the FT that basically says: Greece's demand to renegotiate its bailout while staying in the Eurozone is ridiculous, but that if Greece is forced out, the devastation will be bigger than anyone appreciates.  ...there is no doubt that if Greece leaves the eurozone the contagion will be devastating. Those who suggest that markets are now well prepared for such an event and that most of the costs would be borne by the Greek economy seriously underestimate the channels of transmission of systemic crises following a sovereign debt crisis and a bank run. As we saw after the fall of Lehman Brothers, quick decisions would have to be taken to set up credible firewalls and stop market panic.  The most interesting part is where he takes a swipe at... France: The only way for Europe to protect itself against the irrational behaviour of Greece is to strengthen its own institutions and rules. So far, the main opposition in the eurozone has come from France, which has systematically striven to preserve the inter-governmental nature of the eurozone decision making and to contain the powers and legitimacy of the European Commission and European Parliament. Several countries, including Germany, have made different proposals, with a view to increasing the federal nature of European institutions.

Mysterious Arrogance - Krugman - Kevin O’Rourke takes on Lorenzo Bini Smaghi, who argues that Greek voters are being “irrational” in rejecting austerity. As O’Rourke says, that’s an odd position to take given that the policy in question has been an abject failure. I’d just add that as someone who follows this stuff fairly closely, Bini Smaghi of all people should be the last to lecture the Greeks on sense and sensibility. Few people have been as consistently wrong in insisting that the initial Greek plan was feasible, that no debt restructuring was necessary or desirable, and that all skeptics about the various plans were just misinformed. In a way, LBS exemplifies the European elite in this crisis: moralizing, sententious, always wrong yet always convinced that the other side of the argument is ignorant and unwashed. It’s an amazing thing to watch.

The Plan for Greece - Krugman - As we contemplate the Greek debacle, it’s worth looking at what was supposed to happen even if voters went along with the program. Here, from the IMF World Economic Outlook database, are projections for debt and unemployment under the program that’s now collapsing; and since unemployment has already spiked well above the forecast, we know that this was way overoptimistic. Anyway, this is what “responsible” policy is supposed to deliver: Pain without end, amen.

EU Official: Greek Exit Plans Discussed —Europe has begun to prepare for Greece's exit from euro zone ahead elections next month that are fast becoming a referendum on the country's membership in the common currency.  A senior European Commission official said Friday that staff are working on studies about how a Greek exit from the euro would impact other member states and the euro zone's crisis-fighting rescue fund, commonly known as the firewall, as well as the region's banks.  The official said that similar studies are underway at the European Central Bank and several euro-zone country capitals. "They are looking at the fallout for the firewall, which would have to be boosted, as well as the European financial sector generally," the official added.

Europe, US and the world brace for messy impact from Greece - As Greece teeters on the edge of financial collapse, European officials have a new task before them: preventing the financial turmoil from spreading across the continent, across the Atlantic and around the rest of the world. The fear is that Greece’s financial turmoil could spread beyond its borders despite European efforts to create a “financial firewall” to contain it. “The spillover effects, the chain of consequences are very difficult to assess,” said International Monetary Fund President Christine Lagarde on Wednesday. “We can certainly assume that it would be quite messy.” Lagarde, whose agency has been among those providing financial support for Greece, said the IMF has begun making “technical” preparations for Greece’s possible departure from Europe’s common currency, the euro.

G8 Leaders Look To Head Off Euro Zone Crisis (Reuters) - Leaders of major industrial economies meet this weekend to try to tackle a full-blown crisis in Europe where fears are growing that Greece could leave the euro zone bloc, threatening the future of the common currency. President Barack Obama, the G8 host, has urged European leaders repeatedly to do more to stimulate growth, fearing contagion from the euro crisis that could hurt the U.S. economy and his chances of re-election in November. British Prime Minister David Cameron, who has been increasingly vocal in urging Europe to do more to resolve the debt crisis, will tell leaders they must work together to stop it from spreading worldwide, an aide said. No major economic policy decisions are expected from the talks but officials said Obama hoped to promote a discussion on a comprehensive approach to resolving the crisis. He will seek to cement a bond with France's new leader at the White House later on Friday before heading to Camp David for the talks. Francois Hollande, sworn in this week as French president, has already made waves by challenging Europe's austerity focus and saying he will pull French combat troops from Afghanistan by the end of this year.

EU, ECB working on Greece exit contingency: trade commissioner (Reuters) - The European Commission and the European Central Bank are working on scenarios in case Greece has to leave the euro zone, EU trade commissioner Karel De Gucht has said. Speculation about such planning has been rife, but the comments in a newspaper interview, confirmed by a person close to De Gucht, appear to be the first time an EU official has acknowledged the existence of contingency plans being drawn up in case Greece has to drop out of the currency bloc. "A year and a half ago there maybe was a risk of a domino effect," De Gucht told Belgium's Dutch-language newspaper De Standaard, referring to the threat of Greece leaving the euro. "But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn't make it." He added: "A Greek exit does not mean the end of the euro, as some claim." The source close to De Gucht said the commissioner was explaining that EU institutions had not been sitting on their hands for the past two years, and that they were now better prepared than they had been.

Schäuble calls for closer EU integration - Wolfgang Schäuble, Germany’s finance minister, called on Thursday for the EU to move decisively towards a political union in the face of the eurozone crisis, with a directly elected president in Brussels. In a passionately pro-European speech delivered in Aachen, where he was awarded the annual Charlemagne prize, Mr Schäuble said the economic and financial crisis made it clear that closer European integration was needed. “We must create a political union now,” he said. But he said that would not mean the creation of a European superstate, or a “United States of Europe”. A debate was needed on precisely what responsibilities should be transferred to European level, on the principle that whatever tasks could best be done locally, regionally or nationally should not be changed.  One answer would be to give a face to European political union with a directly elected EU president in Brussels.

The dogma of ‘credibility’ endangers stability - Arguments based on faith are impossible to refute: if magic fails, it is because we do not believe enough in magic, if credibility fails to bring about the desired outcome, it is because our commitment is too weak to establish credibility. Since the only markets in which you can immediately see prices adjusting to economic events are securities markets, these markets’ movements provide the test of credibility. The resulting power was why James Carville, Bill Clinton’s adviser, prayed for resurrection in the more influential role of the bond market. The elevation of credibility into a central economic doctrine has turned a sensible point – that policy stability is good for both business and households – into a dogma that endangers stability. The credibility the models describe is impossible in a democracy. Worse, the attempt to achieve it threatens democracy. Pasok, the established party of the Greek left, lost votes to the moderate Democratic Left and more extreme Syriza party because it committed to seeing austerity measures through. Now the Democratic Left cannot commit to that package because it would lose to Syriza if it did. The UK’s Liberal Democrats, by making such a deal, have suffered electoral disaster. The more comprehensive the coalition supporting unpalatable policies, the more votes will go to extremists who reject them.

Britain: Thousands Join Strike to Oppose Austerity Measures - Thousands of off-duty police officers marched through London on Thursday in a demonstration over pay and budget cuts, while tens of thousands of British public sector workers walked off their jobs to protest the government’s proposed changes to pension plans. Union leaders said more than 400,000 civil servants, border agents, prison employees and other workers joined the protests, but the government said only 100,000 had taken part.

Eating the Seed Corn - Krugman -- Jonathan Portes is angry, and rightly so. He points out that the Cameron government is systematically starving public investment: There might conceivably be a justification for this policy if Britain were facing an intense cash squeeze. But it isn’t — it’s able to borrow very cheaply, with near-zero real interest rates even on very long-term borrowing. And given that public investment is, you know, productive, this is almost surely a case of self-defeating austerity: by shortchanging infrastructure now the Cameron government is saving only a trivial amount on interest payments while reducing long-run growth and hence revenues. The fact that this passes for responsible behavior is proof that the lunatics are running the economic policy asylum.

Dangerous Voices and Macroeconomic Spin -Dangerous voices are what the British Prime Minister called those who criticised austerity in a speech on Thursday. In response one of those dangerous voices, Martin Wolf, became shrill in Friday’s FT ($). After noting the observation by Jonathan Portes that public investment could currently be financed very cheaply because UK long term real interest rates are so low, he writes “it is impossible to believe that the government cannot find investments .... that do not earn more than the real cost of funds. Not only the economy, but the government itself is virtually certain to be better off if it undertook such investments and if it were to do its accounting in a rational way. No sane institution analyses its decisions on the basis of cash flows, annual borrowings and its debt stock. Yet government is the longest-lived agent in the economy. This does not even deserve the label primitive. It is simply ridiculous.”    Ridiculous it is, but as a piece of spin, the focus on reducing debt works as long as the Euro crisis lasts. I was puzzled at first by the phrase ‘dangerous voices’ in the Prime Minister’s speech. Why focus on the act of saying, rather than the content (as in ‘dangerous advice’ for example). Maybe it is just a little Freudian. They are dangerous voices, not because the advice they offer is dangerous, but because they offer a persuasive alternative to the dominant macroeconomic spin. Let’s start with that spin.

Is it all Gordon Brown’s fault? - Someone reading my recent post on major UK macro policy errors asked whether my blog was becoming more political. I hope not, in the sense of being party political for its own sake. However, when the issue involves macroeconomic policy, then I do my best to say what I think is right rather than what is politically expedient. This is in part because I have very negative views about the role of ideology (left or right) in influencing economics. ( I guess this makes me one of those old fashioned fogeys who believe in the possibility of evidence based social science.)     Perhaps this is why I have not so far explicitly commented on the oft repeated refrain by the current government that austerity is necessary to ‘clear up the mess’ left by excessive deficits under Gordon Brown? It is nonsense of course, but like all the best slogans it contains a half-truth. I think it is certainly true in hindsight, and almost certainly true ex ante, that spending in the later Brown years was underfunded (or excessive, depending on your viewpoint). By exactly how much I plan to explore in more detail for a paper over the next few months. The untruth, of course, is that this problem had to be corrected immediately and quickly during a recession.

Four charts and why history will judge us harshly - When I'm asked in interview or articles to sum up concisely why I think the government should change course on fiscal policy, I usually say something like this: "with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense. " The charts below (click on each to enlarge) try to illustrate this. ... [P]ublic sector net investment - spending on building roads, schools and hospitals - has been cut by about half over the last three years, and will be cut even further over the next two.  But, at the same time, the cost to the government of borrowing money - the real interest rate on gilts - is at historically low levels. Not to put too fine a point on it, the government can borrow money for basically nothing. ...In other words, we could fund a massive job-creating infrastructure programme with the pasty tax.

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