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

Saturday, June 16, 2012

week ending June 16

Fed's Balance Sheet Grows In Week - The Fed's asset holdings in the week ended June 13 were $2.871 trillion, up from $2.854 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities decreased to $1.660 trillion, down from $1.664 trillion in the previous week. The central bank's holdings of mortgage-backed securities increased to $867.93 billion, from $851.76 billion a week ago. Fed officials in September said they would adjust the central bank's securities portfolio to hold more long-term government debt and mortgage bonds, a move intended to spur spending and investment by making borrowing cheaper. That program is slated to expire at the end of June. Thursday's report showed total borrowing from the Fed's discount lending window was $5.38 billion on Wednesday, down from $5.47 billion a week earlier. Commercial banks borrowed $4 million from the discount window, down from $10 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.5 trillion, down from $ 3.517 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.786 trillion, a decrease from $2.798 trillion a week earlier. Holdings of federal agency securities fell to $713.28 billion, compared with $719.38 billion in the prior week. 

FRB: H.4.1 Release--Factors Affecting Reserve Balances-- June 14, 2012

Fed running out of short-term notes - Here is a quick follow-up to an earlier post discussing the Fed's diminishing short-term treasury note position. The Fed is basically running out of the 2-3 year notes to sell in order to buy long-term treasuries as part of Operation Twist (officially known as Maturity Extension Program or MEP). BofA is projecting that by the time of the FOMC meeting this month, the Fed will have $175bn of short-term treasuries on its balance sheet. That's enough to extend Operation Twist only through September. Beyond that point the Fed is likely to embark on sterilized purchases (possibly MBS) in order to extend the easing program.

Goldman: 75% chance the Fed will ease at next meeting  - Goldman's latest research suggests that the Fed is likely to ease at the next meeting this month. This assesment is primarily based on their proprietary indicator called the GS Financials Conditions Index (GSFCI). As a backdrop, they point out that the US economy has slowed, as shown in the chart below. Both the nonfarm payroll growth and the CAI index (Goldman's index of broad economic activity) have declined sharply.  At the same time the Financial Conditions Index has shown a substantial tightening.  GS: - "In light of the weakening data and the intensification of the Euro area crisis in recent weeks, Fed officials have started to raise the possibility of additional monetary easing. Fed Vice Chair Janet Yellen and New York Fed President William Dudley, for example, identified three conditions that would warrant additional easing. These include: (1) an unsatisfactory pace of economic recovery, such that little or no improvement in labor market conditions is made; (2) sufficiently large downside risks to the outlook; or (3) a notable decline in core inflation below the FOMC’s 2% objective." The chart below shows the Fed's easing probability as a function of GSFCI, which puts the probability for the next FOMC meeting at around 75%.

MBS could be part of the Fed's easing program - JPMorgan recently conducted its MBS (mortgage backed securities) investor survey. The key questions were focused on the Fed, as the next policy steps will be particularly critical for the MBS market. Let's look at the responses to two of the questions.
1. Identify the most likely policy course at the next FOMC meeting. 62% believe there will be some form of an easing action. Interestingly this number is lower than Goldman's proprietary model assessment of 75%. But consistent with that earlier post there is 2:1 expectation that this easing will be an extension of Operation Twist rather than some outright balance sheet expansion (QE3).
2. Assign the odds to the easing action involving MBS purchases, no matter what the program is. Somewhat surprisingly half the participants believe the chances are now over 40%. Only 8% of MBS investors believe the chances are below 20%.
Of course it could be wishful thinking, but that would indeed be good news for MBS investors, as any indication of such purchases will further improve the value of these securities. However even without any Fed action, MBS paper has done reasonably well as shown by the MBS total return index below.

Is Further Quantitative Easing by the Fed Warranted? - The Fed cannot do much more to lower interest rates. Not only are short term rates close to zero, but long term rates are also quite low-interest rates on 5 year US government bonds are currently only a few percent. The Fed in what is called “Operation Twist” could try to further lower long term interest rates relative to the negligible rate on treasury bills by buying long term bonds. This might reduce further the spread in interest rates (that is, flatten the interest yield curve), but this effect is limited by a fundamental economic equilibrium condition. Long term interest rates tend to be an average of current and expected short term rates since more investors would shift into short term rates when long term rates are below this average; conversely, investors shift into long term rates when these are above the average of current and expected future short term rates. Even with zero interest rates, advocates of a further “quantitative easing” (QE3) argue that the Fed’s purchase of government bonds and other assets would still increase reserves of banks, and that increased reserves will encourage further bank lending to businesses and households. The problem with this argument in the present situation is that, as indicated earlier, banks already hold huge levels of excess reserves. If banks are not lending more when they already have so many excess reserves, why would a further growth in these reserves increase lending by much, especially when interest rates are very low and the Fed pays interest on bank reserves- the current interest rate on reserves is 0.25%.

It’s the Fed’s Time to Step Up - Christina Romer - The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level. Moreover, the spate of disappointing data and the deepening crisis in Europe make continued weakness all too likely.  Some Fed members contend that monetary policy has already done its share…. Both the Fed’s chairman and its vice chairwoman have talked about the need for additional near-term fiscal stimulus as part of a gradual deficit-reduction plan. And many Fed committee members have called for a more aggressive housing policy…. I agree that we need more effective fiscal and housing policies. But neither is likely to happen; the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what’s right when politicians can’t or won’t. I find a related argument even more frustrating: that the Fed shouldn’t act because Congress wouldn’t like it and might retaliate.  But it also raises a key question: what are Fed policy makers saving their independence for? If rescuing millions of Americans from the torment of unemployment isn’t a reason to risk their independence, what is?

Monetary Policy: The Naive View - In spite of her many years of experience in academia and policy circles, Christina Romer consistently surprises me with her un-nuanced views on economic theory and empirical evidence and how they inform policymaking. Case in point: this NYT article.Romer wants to make the case that the state of the world dictates more accommodation by the Fed. First, By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level.Second, ...right now, the inflation measure that the Fed watches is a bit below its target of 2 percent...Third, the Fed’s dual mandate doesn’t say it should care about unemployment only so long as inflation is at or below the target. It’s supposed to care about both equally. If inflation is at the target and unemployment is way above, it’s sensible to risk a little inflation to bring down unemployment. The "dual mandate" specified in the Full Employment and Balanced Growth Act of 1978, or Humphrey Hawkins Act, is in fact quite vague. Under the Act, the Fed is supposed to be promoting maximum employment and price stability. But any creative central banker would find it easy to make an argument that his or her favorite policy fits well within the Act's guidelines.

Fed Watch: Easing Seems Likely, But of What Form? - The Federal Reserve meeting is bearing down upon us. We have witnessed a variety of Fed views across the spectrum over the past two weeks presenting a number of options: Continue Operation Twist, expand balance sheet operations, extend the forward guidance, other non-specified communication tools, or just plain do nothing. I would say on net the balance of talk leans toward some kind of action, although we do not know the intentions of Federal Reserve Chairman Ben Bernanke. There was no strong hint in his testimony last week. Given his revealed preferences over the past six months, I tend to believe that he is hesitant to undertake additional balance sheet operations at this time. I don't think he sees the appropriate risk/reward trade off for such an action. An extension of Operation Twist (limited though by the Fed's dwindling supply of short-term securities) seems to be a reasonable middle ground (I was probably a little pessimistic on this point last week), as it at least doesn't move policy backwards. Last week, San Francisco Federal Reserve President John Williams presented a rather dour economic forecast: The single biggest reason for the Fed to ease next week is the ongoing European turmoil. Reading between the lines, it seems clear that Williams - and I suspect this sentiment is pervasive on Constitution Ave. - believes the Europeans are generally clueless and institutionally incapable of resolving their crisis. If the Fed believes Europe is on the fast track to economic depression, the rational response is to act now to cushion the blow to the US.

Easing by the Fed Seems Likely, But What Form Will it Take? - Just a quick note to reinforce what Tim Duy said here. Many policymakers at the Fed would like to provide more help for the economy, but fear of inflation among other members of the monetary policy committee -- enough to matter -- makes it unlikely that the Fed will expand the size of its balance sheet (as another round of QE would do). The way around this is to enact or suggest policies such as "forward guidance," "Operation Twist," and "sterilization" that attempt to ease policy without changing the size of the balance sheet. Forward guidance, for example, tries to adjust inflationary expectations -- there is an implicit promise of future action to maintain low rates, but it does not require any action when it is announced (and Fed members are denying it was an explicit promise in any case), while Operation twist and sterilization both exchange short-term for long-term assets (sell short-term, purchase long-term) in an attempt to force long-term interest rates even lower than they already are (and hopefully stimulate investment and the consumption of durables). If the Fed is inclined to ease more, its instinct will be to look at these types of policies first, policies that try to help the economy without increasing the risk of inflation. But as we've seen recently, these types of policies are also limited in their effectiveness precisely because of their cautious nature.Of course, if Europe falls apart, all bets are off -- in that case the Fed may get more aggressive. But for now I expect the Fed to continue to try to find clever ways of doing something without really doing anything at all.

The Federal Reserve and the World Economic Crisis— The Federal Reserve is under some pressure, both internal and external, to reduce interest rates in an effort to stimulate U.S. output and employment. The Fed can do this by buying securities, whether short-term Treasury notes—the traditional method of stimulating the economy—or longer-term obligations, including 30-year mortgages. By buying short-term securities for cash, the Fed increases the supply of money, which in turn reduces interest rates. There is an indirect effect, because of substitutability, on long-term interest rates as well. But by buying long-term securities, the Fed can reduce long-term interest rates slightly more. A reduction in long-term interest rates will reduce mortgage interest rates, which, since houses are bought mainly with debt, should increase the demand for housing, and hence home prices. At the same time, lower short-term interest rates will make credit card debt and other forms of consumer debt and by thus stimulating consumer borrowing will stimulate consumption. The lower long-term rates will increase personal wealth by raising housing values (a house being the most valuable asset owned by most families), reducing the savings rate and thus further stimulating consumption. The higher consumer spending is, the higher the production of consumer goods will be, as well as of capital goods to enable that higher production; and the higher production, the greater the demand for labor, so unemployment will fall.

Help Is Not on the Way - An update on the distressing state of fiscal and monetary policy in the United States and Europe: Chairman of the Federal Reserve to Congress:  “I’d be much more comfortable, in fact, if Congress would take some of this burden from us ….” Congress to Bernanke:  No thanks.  And while we’re on the subject, we would be much more comfortable, in fact, if you’d just stop carrying the load entirely. Kindly leave the economy in the ditch right there.  Or as Binyamin Appelbaum put it in his NYTimes report:Republicans on the committee pressed repeatedly for Mr. Bernanke to make a clear commitment that the Fed would take no further action to stimulate growth.  “I wish you would look the markets in the eye and say that the Fed has done too much,” Representative Kevin Brady of Texas told Mr. Bernanke.  Democrats, by contrast, inquired politely after the Fed’s plans and showed surprisingly little interest in urging the Fed to expand its efforts.Perhaps the private sector can muddle through on its own?  Here’s a graph from the Levy Institute’s Strategic Analysis showing employment and unemployment rates going back to 2000:

Fed Watch: Devil's Advocate -Expectations are building for Federal Reserve action next week. Bloomberg hits on a key point: Chairman Ben S. Bernanke told lawmakers last week the “central question” confronting the Federal Reserve at its next meeting is whether growth is fast enough to make “material progress” reducing unemployment. The answer may well be no... ...“They’re not closing that employment gap as fast as they’d like, so I suspect it adds up to more action to get things moving again,”  “Bernanke has a clear economic mandate, and we’re still far from achieving it.” I think there are two issues at play, the forecast itself and the risk to that forecast. On the first point, I am not convinced that incoming data have proved sufficient to measurably change the forecast. On the key jobs issue, I keep getting pulled back to this from Bernanke's testimony: This apparent slowing in the labor market may have been exaggerated by issues related to seasonal adjustment and the unusually warm weather this past winter. But it may also be the case that the larger gains seen late last year and early this year were associated with some catch-up in hiring on the part of employers who had pared their workforces aggressively during and just after the recession. If so, the deceleration in employment in recent months may indicate that this catch-up has largely been completed, and, consequently, that more-rapid gains in economic activity will be required to achieve significant further improvement in labor market conditions. I sense a great deal of uncertainty in the paragraph, suggesting to me that Bernanke would like to see more data before committing to a new policy path. Of course, one could point to the weak tenor of the most recent string of initial claims reports as additional evidence of a flagging job market:

Economists: Fed Most Likely to Extend Twist - The Federal Reserve is most likely to decide to extend Operation Twist at next week’s policy meeting, according to a Wall Street Journal survey of economists. Facing a still-weak labor market, looming risks from the euro zone and little pressure from inflation, the central bank will probably seize the June 19-20 meeting as a chance to provide reassurance it is ready to protect the U.S. economic recovery, but hold back from stronger steps, economists predicted in a survey conducted June 8-12.

QE2 and Twist did not amount to much - In my personal totally non-expert view QE 2 and Twist did not amount to much, because they included the same key error -- purchases of Treasury Securities not Agency issued mortgage backed securities. My sense is that they had small effects on interest rates, because treasuries are quite safe, so private demand for treasuries is highly interest elastic. In contrast, I think QE 1 which consisted of purchases of MBS was highly effective. MBS were feared so demand is not highly elastic. Their price responded to Fed purchases*. So why did the Fed shift from MBS to Treasuries ? I think one reason must have been small c conservatism. The Fed normally buys treasuries, so the FOMC wanted to return to a portfolio of treasuries. To learn more I read Bernanke's August 27 Jackson Hole speech which included the first public hint of QE2.  Bernanke used the word "reinvest" because the choice to invest in treasuries was explained before the mention of QE2 (as the acronym is currently used) when Bernanke was discussing reinvesting proceeds from maturing MBS. This is a separate issue involving an estimated $ 400 Billion in 2011 decided prior to the decision to issue another $600 Billion in Fed liabilities to buy 7 year Treasury Notes**.  We decided to reinvest in Treasury securities rather than agency securities because the Federal Reserve already owns a very large share of available agency securities, suggesting that reinvestment in Treasury securities might be more effective in reducing longer-term interest rates and improving financial conditions with less chance of adverse effects on market functioning.

QE 2 and breakevens - One of the many bees in my bonnet is the argument over whether the Fed's QE 2 policy hinted, suggested, teased and announced August 10 2010 through November 3 2010 had much of an effect. My impression remains that it had remarkably little effect on anything for a roughly trillion dollar open market shift. My view is that the problem was the Fed traded money for the most money like asset which wasn't trading as a perfect substitute for money (7 year Treasury notes -- the shortest maturity paying an interest yield noticeably above 0). This would be a way to minimize the effect for a given quantity.  This post is supposed to be about evidence. The thing which struck me long ago is that the price of 7 year notes went down in the period from the first hingt of QE2 through the first actual purchases. This suggests to me that 7 year notes were treated as close substitutes for cash with a relative price not exactly their face value (perfect substitutes don't have to have equal prices). The reply was that the differential between nominal treasuries and TIPS (bonds indexed to the CPI) went up showing an increase in expected inflation which is the key. To be brief, this pattern corresponds to QE2 working as a signal of future monetary policy and not directly by changing the amount of 7 year notes private agents hold in their portfolios.

Fed Watch: Measures of Financial Stress - Since we are all running downhill and gaining speed with expectations that the Federal Reserve will do "something" on a grand scale next week, I thought I would continue on with my earlier theme of looking at the other side of the story. With that in mind, some measures of financial stress: This snapshot suggests that financial stress, at least in the US, is no worse, and on average better, than during last year's Eurocrisis flareup. Nor, as I suggested in my last post, do I think we have enough data to make significant downward revisions to the economic forecast. Yet increasingly market participants are thinking the Fed will move forward with a sizable new QE program. Which means, compared to last year's Operation Twist, expecting the Fed to do more on the basis of less. Not that they won't; the Eurocrisis is putting plenty of downside risk in the forecast. But it is something to think about.

Fed Watch: Communications Failure - Reading Cardiff Garcia's preview of next week's Fed meeting, I was struck by this chart from Nomura: The extensive discussion of options with arguments for and against reminded me of the fog that hangs over this next meeting.  We really have no idea what the Fed is going to do or why they are going to do it.  Reasonable analysis ranges from nothing to massive quantitative easing.  To be sure, I am certain of some things.  For example, that swap lines will be expanded in the event of a severe market disruption. I am stunned that this was actually considered new information yesterday - it seems that actions along these lines is a no-brainer.  But absent the all-bets-are-off-financial-collapse story, I am a bit shaken by the uncertainty going into this meeting. This strikes me as a major communications failure on the part of the Federal Reserve.  The problem, I suspect, is that they don't know exactly what they would do if more easing is called for, which is why we  see talk of all possible options - doing nothing, extending Operation Twist, communication changes, and additional assets purchases.  They can't tell us what they don't know.

Fed purchases of government debt: Flow-share versus stock-share - Atlanta Fed's macroblog - In last Friday's entry to his Economics One blog, Stanford Professor John Taylor reiterated an observation he made a week earlier in a June 1 Wall Street Journal op-ed: In fiscal year 2011, the Federal Reserve, largely as a result if its second large scale asset purchase program (or "QE2"), purchased a quantity of Treasury debt equivalent to 77 percent of all the debt issued to the public by the federal government. In his blog post Taylor refers to this as an "amazing percentage" and in the Wall Street Journal piece lumps it in with a collection of other policies that he views as problematic:  The 2011 figures cited by Taylor do reflect, in dollar terms, a large increase in the Fed's Treasury purchases. As he notes, the 77 percent represents an increase of $853 billion in Fed holdings over a $1,109 billion expansion in publicly held government debt. Prior to last year, the largest dollar increase in Federal Reserve holdings of Treasury securities over a single year was $278 billion, in fiscal year 2009 (equivalent to 16 percent of the record increase in publicly held debt of $1,741 billion). Professor Taylor's calculation focuses on the flow of debt issuance and who purchased it, and we wouldn't completely discount the proposition that flows of purchases can be important. But the accumulated evidence suggests to us that we should be really thinking in terms of something like the stock or accumulated total of Fed purchases relative to the size of publicly held Treasury debt

Fed QE Boosts Commodities More than Stocks - There is a great irony about monetary policy these days: investors and politicians would like it do more and more when it is apparent it can accomplish less and less. That wasn't the message delivered by Federal Reserve Chairman Ben Bernanke in his testimony to the Joint Economic Committee of Congress Thursday. Nor was the one sent by the Fed's Vice Chair, Janet Yellen, the previous evening in a speech to the Boston Economic Club. Indeed, Bernanke made his standard statement that the Fed is ready to act, if needed. In that, he split the difference between "doves" such as Yellen and Chicago Fed President Charles Evans, who think more monetary stimulus is called for, and hawks such as Dallas Fed President Richard Fisher, who contend further policy moves would be counterproductive. While he did not say it explicitly, Bernanke implied that there is little more monetary policy can do to spur the flagging economic recovery. It is up to Congress to put the nation's fiscal house in order, a message he's sent before (along with most previous Fed chairmen.) After all, the Fed lowered its main policy interest rate, the overnight federal-funds rate, to virtually zero back in late 2008 in the wake of the Lehman Brothers failure. Since then, the Fed embarked on QE1, its first round of quantitative easing or balance-sheeting expansion, in March 2009, which effectively gave the economy and the stock market a jolt and turned things around. 

An NGDPLP Target vs a higher Inflation Target as insurance against the ZLB - The Zero Lower Bound is something we want to avoid. Here are two ways we can change monetary policy to reduce the risk of hitting the ZLB. Both work, but one comes at the cost of higher average inflation.A permanently higher inflation target is like working at a second job just in case your house burns down and you need the extra income to buy a new one. An NGDP Level Path target is like buying fire insurance that gives you the extra income only if and when you need it. 1. Permanently raise the Inflation Target.  If the central bank had always been targeting 3% inflation rather than 2% inflation then it would have set a nominal interest rate path (approximately) 1% (one percentage point) higher than what it actually set. That will work to reduce the probability that it would want to set a negative nominal interest rate. And that's a good thing. But it comes at the cost of permanently higher inflation. 2. Switch to a Nominal GDP Level Path Target.

Nominal GDP Targeting Could Take the Place of Inflation Targeting - In my preceding blogpost, I argued that the developments of the last five years have sharply pointed up the limitations of Inflation Targeting (IT), much as the currency crises of the 1990s dramatized the vulnerability of exchange rate targeting and the velocity shocks of the 1980s killed money supply targeting.   But if IT is dead, what is to take its place as an intermediate target that central banks can use to anchor expectations? The leading candidate to take the position of preferred nominal anchor is probably Nominal GDP Targeting.  It has gained popularity rather suddenly, over the last year.  But the idea is not new.  It had been a candidate to succeed money targeting in the 1980s, because it did not share the latter’s vulnerability to shifts in money demand.  Under certain conditions, it dominates not only a money target (due to velocity shocks) but also an exchange rate target (if exchange rate shocks are large) and a price level target (if supply shocks are large).   Nominal GDP targeting was not adopted by any country in the 1980s.  Amazingly, the founders of the European Central Bank in the 1990s never even considered it on their list of possible anchors for euro monetary policy.  (They ended up with a “two pillar approach,” of which one pillar was supposedly the money supply.)

Helicopter money, Inflation targets and Quantitative Easing - I’m often asked about helicopter money, and occasionally there are calls for this policy to be implemented. (Here is a recent example.) The way I think about this, at a very basic level, is that it is equivalent to a call for a temporarily higher inflation target. The government issues money and indexed debt, and it pays the interest on debt using lump sum taxes. There are two periods. The second period has flexible prices, but the first involves sticky prices, a demand deficiency and a ZLB.     In this set up, a tax cut in the first period financed by issuing debt does nothing, because taxes rise in the second period to pay back the debt. What happens if the tax cut is financed by printing money? Prices must rise in the second period as money is the only nominal quantity, such that real balances in the second period are unchanged. What about the first period? Taxes have fallen, so it is tempting to say that lifetime income must have increased. However that tax cut needs to be kept in the form of cash, and not spent, because prices are going to rise diluting holdings of real money. So people save that tax cut as money.

Sanders Releases Explosive Bailout List - More than $4 trillion in near zero-interest Federal Reserve loans and other financial assistance went to the banks and businesses of at least 18 current and former Federal Reserve regional bank directors in the aftermath of the 2008 financial collapse, according to Government Accountability Office records made public for the first time today by Sen. Bernie Sanders.

An Institutional Flaw At The Heart Of The Federal Reserve - Simon Johnson - On the “PBS NewsHour” in late May, Treasury Secretary Timothy Geithner indicated that the continued presence of Jamie Dimon, the chief executive of JPMorgan Chase, on the board on the Federal Reserve Bank of New York creates a perception problem that should be addressed. He used the diplomatic language favored by finance ministers, but the message was loud and clear: Mr. Dimon should resign from the board of the New York Fed.Mr. Dimon has been an effective opponent of financial reform over the past four years. He remains an outspoken advocate of the view that global mega-banks can manage their own risks, and he has stated publicly that the new international and national rules on capital requirements are “Anti-American.” Mr. Dimon now finds himself at the center of a number of official investigations into how his bank could have lost so much money so quickly in its London-based trading operation – including whether adverse material information was disclosed to regulators and to markets in a timely manner.

Why the Fed is the Most Important Economic Issue You Know Nothing About -Years worth of bailouts and bank regulation debates have placed a new level of political focus on the Federal Reserve. It has been a topic for the Occupy movement and those concerned with out-of-control financial institutions and the weak recovery. And in the next year, the Federal Reserve, without political pressure, could dismantle financial regulation and stop an economy about to take off. How does the left engage the Federal Reserve? This panel will dive into potential answers.

Dems Need to Pay Attention to Monetary Policy! - For the second year in a row, some of the best economics bloggers on the Web (this year: Matt Yglesias, Mike Konczal, Karl Smith, Lisa Donner), did a session at Netroots Nation on monetary policy, and how the progressive left (including Democratic lawmakers) needs to saddle up and counter the destructive right-wing influence in this area. Why the Fed is the Most Important Economic Issue You Know Nothing About This is a big deal. Monetary policy often, even usually, has a far more potent effect on national well-being and the distribution of wealth and income than the fiscal policy that progressives consider to be so important. (At least in the short- to medium term.) Those fiscal issues are important. But ignoring monetary policy is like ignoring coal plants in discussions of global warming. Lefty idol Paul Krugman has given this example a zillion times: when Volcker opened the monetary taps in ’83 (after clamping down to tame inflation), the economy — and the employment situation — turned around hugely, within months. That was something of a special case, but it imparts the potential power and immediacy of monetary policy compared to many/most fiscal initiatives, which usually take quite a while to play out, and are rarely large enough to be big short-term game-changers. But in the political realm, Democrats have largely ceded their voices to the ‘Pubs (HT Ryan Cooper) and their inflation hysteria (which survives like a zombie that won’t die, year after year, even while being wrong, year after year.

How the Fed Destroyed its Credibility -The Fed’s credibility is obviously important. If people believe that they can and will do what they say they’re going to do — and that it will have the desired effect — they can affect the the real economy (at least short-term) by just making promises — Open Mouth Operations. (Though they must actually do things to their balance sheet, sometimes — rather than just promising to make future promises — to avoid the Turtles All The Way Down problem.) Also obvious: the Fed has great inflation-fighting cred. They’ve fetishized inflation and that credibility for thirty years. People feel damned confident that they can and will successfully stomp on price spikes — especially wages. That’s what they do. That fixation has continued even through four years in which runaway inflation has manifestly not been a credible threat. Meanwhile, their unemployment-fighting cred is in the tank. If they announced today that they’re going to do whatever is necessary to bring unemployment down to X%, people would seriously question their ability to do so, even their future commitment to doing so. Tyler Cowen agrees:The Fed, at least right now, is not able to make a credible commitment toward a significantly more expansionary policy for very long. … The market expectation has become “the Fed can/will only do so much.”

Ben Bernanke’s Office Phone Number Given Out at Netroots Nation Keynote - At a keynote address this morning at Netroots Nation, Erica Payne of The Agenda Project gave out Ben Bernanke’s office telephone number, and urged the audience to “call him every day for the next couple weeks,” specifically urging him to get Jamie Dimon to step down from the board of the New York Federal Reserve. An attendee named Alice called the number, 202-452-2955, and confirmed it was the public affairs office of the Federal Reserve. She left a message, saying “I want you to fire Jamie Dimon. I will call again tomorrow.” Payne made the point that she gave out the number because of the power relationship between central bankers and the elites. “The rich can call up Ben Bernanke any time,” Payne said, so why shouldn’t everyone else? After all, the people are the Fed’s constituents as well

What’s next for the U.S. Dollar? QE3? - The dismal U.S. jobs report for May, released last Friday, caused the price of gold to soar as the market appears to be pricing in an ever-greater chance of “QE3” – another round of quantitative easing by the Federal Reserve (Fed). But given that 10-year government debt is already down at 1.5%, the Fed may dive deeper into its toolbox in an effort to jumpstart the economy. Investors may want to consider taking advantage of the recent U.S. dollar rally to diversify out of the greenback ahead of QE3. To a modern central banker, it may be very simple: if the economy does not steam ahead, sprinkle some money on the problem. The Fed has done its sprinkling; indeed, the Fed has employed what one may consider a fire hose. But after QE1 and QE2, we continue to have lackluster economic growth, unable to substantially boost employment. Never mind that the real problem the global monetary system is facing is that the free market has been taken out of the pricing of risk:

  • When the Fed buys government securities, such securities are – by definition - intentionally overpriced. Historically, when a central bank buys government bonds, the currency tends to weaken, as investors look abroad for less manipulated returns.
  • Policy makers increasingly manage asset prices, be that by pushing up equity prices through quantitative easing; artificially lowering the cost of borrowing of peripheral Eurozone countries; or by keeping ailing banks afloat.

Economists Say Inflation Won’t Stand in Way of Fed Aid - The looming Federal Reserve meeting has economists locked in a full scale debate over whether weak economic data will force officials to provide more stimulus to the economy. The back and forth is unlikely to get much in the way of an official resolution ahead of the Federal Open Market Committee meeting scheduled for June 19 and 20. Based on the current calendar and the blackout period that precedes an FOMC meeting, Tuesday’s address by Fed governor Daniel Tarullo was the last shot policymakers had to weigh in on its outcome.

A Year Later, Core Inflation Doesn't Look So Rotten - Remember the attack on core inflation? Right about this time a year ago there was a wave of criticism aimed at the idea that core inflation—headline inflation less food and energy prices—is a useful predictor of overall pricing pressures. But a funny thing happened on the way to the lynching of core: the much-maligned concept for looking ahead turned out to be reliable… again. Consider the rolling one-year percentage changes for headline and core CPI through this past April. Each is higher by 2.3% over the previous 12 months. But the path to equality has been a volatile trek, as it always is. That’s not surprising. But while core and headline are once again running neck and neck, it won’t last. But when the next round of divergence comes, and you’re looking for some perspective on the outlook for inflation, history suggests we should start by considering core inflation.

Key Measures show slowing inflation in May - Earlier today the BLS reportedThe Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.3 percent in May on a seasonally adjusted basis ... The gasoline index declined 6.8 percent in May, leading to a sharp decrease in the energy index and the decline in the all items index. ... The index for all items less food and energy rose 0.2 percent in May, the third consecutive such increase.. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: the median Consumer Price Index rose 0.1% (1.5% annualized rate) in May. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.1% 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. ... Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers decreased 0.3% (-3.4% annualized rate) in May. The CPI less food and energy increased 0.2% (2.4% annualized rate) on a seasonally adjusted basis. Note: The Cleveland Fed has the median CPI details for May 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 2.3%, the trimmed-mean CPI rose 2.1%, and core CPI rose 2.3%. Core PCE is for April and increased 1.9% year-over-year.  Most of these measures show inflation on a year-over-year basis are still above the Fed's 2% target, but it appears the inflation rate is slowing. On a monthly basis (annualized), most of these measure were below the Fed's target; median CPI was at 1.5%, trimmed-mean CPI was at 1.1%, and Core PCE for April was at 1.6% - although core CPI was at 2.4%.

Two Measures of Inflation: New Update -- The BLS's Consumer Price Index for May, released today, shows core inflation above the Federal Reserve's 2% target at 2.26%. Core PCE, at the end of last month, is below the target at 1.89%. The Fed, of course, is on record as using Core PCE as its inflation gauge: The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. [Source]  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 chart below is an overlay of core CPI and core PCE since 2000.

All Major US Inflation Measures Fall Below Fed Targets in May - The latest data from the Bureau of Labor Statistics show sharply lower inflation. The headline number, the consumer price index for all urban consumers (CPI-U) fell at a seasonally adjusted annual rate of 3.31 percent in May, its fastest rate of decline since 2008, when the economy was still contracting. Even without seasonal adjustment, the CPI-U fell at an annual rate of 1.2 percent in the month. As the chart shows, measures of underlying inflation also slowed sharply from April to May, although they remained positive. The core CPI from the BLS, which removes volatile food and energy prices from the CPI-U, was almost flat, rising at only a 0.24 percent annual rate. The main reason was that energy prices, which usually increase at this time of year, actually fell. For example, the price of gasoline normally rises by about 3.2 percent from April to May. This year, instead, the unadjusted price fell by 3.6 percent. Putting the two numbers together, there was a 6.8 percent seasonally adjusted decrease for the month. Other energy prices also moved downward. Instead of core inflation, some economists prefer to look at the Cleveland Fed’s 16 percent trimmed mean inflation. Rather than removing food and energy from the index, trimmed mean inflation removes the 8 percent of prices that increase most each month, and the 8 percent that decrease most (or increase least). That inflation measure also slowed sharply, from an annual rate of 1.94 percent in April to 1.10 percent in May.The unadjusted CPI provides the most accurate picture of what is happening right now to the actual cost of living experienced by consumers. Economists watch measures of underlying inflation not for what they say about the cost of living, but because they strip away statistical noise and reveal the part of inflation that is more likely to be responsive to monetary policy. The Fed maintains that an inflation rate of about 2 percent is consistent with its mandate to maintain price stability.

The Cleveland Fed Reports Inflation Expectations Are Dropping Fast; Bernanke Doesn’t Seem to Care - Coinciding with the latest report on the consumer price index, showing the largest one month drop in the CPI since 2008, the Cleveland Fed issued its monthly update on inflation expectations. The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.19 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. As the attached chart shows, the current expected rate of inflation over a 10-year time horizon is at an all-time low, dropping 30 basis points in the last two months. But in his testimony to Congress this week, Chairman Bernanke did not seem to think there was any problem with monetary policy. It’s all those other guys’ fault.  Well, who exactly is responsible for falling inflation expectations, Mr. Bernanke, if not the FOMC? Does a sharp drop in inflation expectations, the sharpest since the horrific summer of 2008 give you any cause for concern? If so, is there any change in policy that the FOMC plans to undertake at its next meeting? Or is the FOMC only concerned about inflation expectations when they show signs of becoming unanchored on the upside, not the downside?

Still A Phantom Menace - Krugman - The policy response to financial crisis has, in effect, given us a great natural experiment in macroeconomics — an experiment that can and should be viewed as a test of two views of the economy. One view — which includes both freshwater macro and much of what Austrians say — is in effect classical macro as Keynes described it, in which the economy is always constrained by supply. The other is a more or less Keynesian view in which a depressed economy is constrained by demand, not supply. These two views had strong implications on three fronts. One was interest rates: would large budget deficits drive rates up, as a classical view implied, or would they do no such thing under depression conditions? A second was the effects of austerity (which has been much larger than the weak efforts at stimulus, and therefore provides the real test); would austerity policies release resources to the private sector, as per the classical view, or lead to economic contraction? Finally, a third implication involved inflation: would large increases in the monetary base produce soaring inflation, again as classicists of all kinds claimed, or do no such thing under depression conditions? You know how things have gone on the interest rate and austerity fronts. Let’s do an update on inflation. Whoops.

It Only Took A Global Depression To Reduce Gas Prices By 40 Cents - You can’t watch the mainstream media propaganda channels for more than ten minutes without a talking head breathlessly announcing that gas prices have dropped for the 24th day in a row and are now back to $3.55 a gallon. Wall Street oil analysts, who are paid hundreds of thousands of dollars per year to tell us why prices rose or fell after the fact, are paraded on CNBC to proclaim the huge consumer windfall from the drop in price. This is just another episode of a never ending reality show, designed to keep the average American sedated so they’ll continue to spend money they don’t have buying crap they don’t need. The brainless twits that pass for journalists in the corporate mainstream media never give the viewer or reader any historical context to judge the true impact of the price increase or decrease. The government agencies promoting the storyline of those in power extrapolate the current trend and ignore the basic facts of supply, demand, price and peak oil. The EIA is now predicting further drops in prices. Two months ago they predicted steadily rising prices through the summer. What would we do without these government drones guiding us?

How Large a Shadow Is Being Cast on Future Potential Output by the Current Investment Shortfall? »  Deepest and longest investment shortfall since the Great Depression...

It's Worse Than You Think: Halftime Between Two Lost Decades - The global economy is in a synchronized swoon. Brazil's economy practically stalled out in the first quarter, all of China's manufacturing figures indicate much lower growth than last year, Britain remains in recession, Spain's banking system needs a rescue and may collapse, and the U.S. -- which had been the last remaining bright spot in the global economy -- suddenly has started sputtering. The number of jobs created in May was not just half as many as expected; the figures for the previous two months were sharply revised lower as well. And for good measure, GDP growth for the first quarter was revised downward too. Many observers were surprised or disappointed, because they still do not understand the nature of this recession, which is neither exclusively cyclical, nor exclusively structural, but rather a rare collision of crises -- a financial recession, in the middle of a global slow-down, at the edge of a demographic time bomb.

Weak Retail Sales Trigger Downgrades to GDP Forecasts - May’s retail sales report showed that American consumers pulled back for the second straight month. The figures are the latest sign that the recovery remains tepid, and many economists reacted by trimming their second-quarter growth forecasts.

  • J.P. Morgan Chase now expects U.S. gross domestic product to grow at a 2.0% annual growth rate, down from its previous 2.5% projection.
  • BofA Merrill Lynch noted big downward revisions to the prior two months retail sales. “There is a clear seasonal pattern–sales have slowed after a surge in January and February. Today’s report slices 0.5 percentage point from second quarter GDP growth, leaving us tracking 1.9%.”
  • Royal Bank of Scotland lowered its forecast for second-quarter GDP to 1.9% growth from 2.2%, and now looks for real consumer spending to advance by just 2.0% annualized versus 2.5% previously.
  • Barclays Capital trimmed its tracking estimate after accounting for retail sales and business inventory data. “The retail ex-autos component, relevant for GDP tracking, rose 0.1%, in line with our forecast, although a one-tenth downward revision to March (to 0.0%) was sufficient to push our 2Q GDP tracking estimate down by one-tenth, to 1.8%.”
  • Credit Suisse also highlighted a downward revision to April’s numbers, and moved its tracking estimate for 2Q GDP to 2.2% from 2.5%. “

Fed’s Williams: Europe Woes Threaten Global Banking System - Europe’s continuing financial crisis is a “significant threat” to the global banking system, amid signs of slowing global growth, Federal Reserve Bank of San Francisco President John Williams said Monday. In brief remarks opening a conference at his bank, Mr. Williams said that “while the global financial system is stronger than it was three years ago, it remains vulnerable.” He warned the European crisis “could undermine the financial improvements in North America and Asia.”

Fed’s Evans: Euro Crisis Poses ‘Downside’ Risks to U.S. - A top Federal Reserve official expects the U.S. economy will continue growing even though he acknowledged Monday that Europe’s escalating debt crisis provides “definite downside risks.” “I’m hopeful, but it could get rocky,” said Federal Reserve Bank of Chicago President Charles Evans, referring to efforts to keep intact Europe’s unified monetary bloc.  Speaking to a business group, Mr. Evans said he is generally optimistic the debt troubles and shrinking European economies “won’t knock us off our current U.S. growth projection.”

'Bloody doomsday machine': How shock waves will reach the US if Greece drops the euro - Bankers, governments and investors are starting to prepare for Greece to stop using the euro as its currency, a move that could spread turmoil throughout the global financial system. The worst-case scenario envisions governments defaulting on their debts, a run on European banks and a worldwide credit crunch reminiscent of the financial crisis in the fall of 2008. A Greek election on Sunday will go a long way toward determining whether it happens. Syriza, a party opposed to the restrictions placed on Greece in exchange for a bailout from European neighbors, could do well. In the meantime, banks and investors have sketched out the ripple effects if Greece were to leave the euro. They think the path of a full-blown crisis would start in Greece, quickly move to the rest of Europe and then hit the U.S. Stocks and oil would plunge, the euro would sink against the U.S. dollar, and big banks would uncover losses on complex trades.

Potential Greek Exit Is More Like Katrina Than Lehman - In forecasting the economy, it isn’t the devil you know that matters; it’s the devil you don’t. Market pundits and economists are comparing a possible exit by Greece from the euro zone to the Lehman bankruptcy of 2008. The fear is that a “Grexit” would cause a seizing in the financial markets, much like Lehman did, worsening an already weak global economy. Fears of a Lehman redux loom especially large on Friday as investors take positions before Greeks vote on Sunday for a new government. Some hope global central banks will act in concert to offset any dislocations. That is why financial markets rallied on Friday despite very weak U.S. economic data. It is that element of surprise that makes Greece different from Lehman. The better comparison is Hurricane Katrina. Like the forecasts of Katrina in 2005, Greek storm warnings have been around for awhile. People have had ample time to prepare for the loss in exports or possible ratings downgrades. Global banks have tried to ring-fence Greek financial institutions. But it isn’t the event itself–whether hurricane or exit–that is the major danger to the outlook. It is the unintended consequences for which we have taken no preparations.

America’s slowdown is not about Europe, it’s about the debt -- I  have a video from my appearance on the BBC last Friday for you below but I wanted to make a few points before you look at it. For almost a year now, the Obama Administration has been extremely concerned about the goings on in Europe. The official line from the White House is that the US is in a moderate but sustainable recovery which risks being derailed because of the European sovereign debt crisis. Last year, I noted eerie parallels between Obama’s view and the view of Herbert Hoover in 1930 before the bank runs began after the failure of Credit Anstalt in 1931. Recently, the Obama Administration has been pushing forcefully both to get Europe to change tack toward growth and in getting out the message that the slowdown in the US is due to what’s happening in Europe. And while I agree that Europe’s policy responses have made things considerably worse, I don’t believe what is happening in Europe actually is the reason the US recovery has stalled. Michael Hudson makes some good points as to why, pointing to the continuing overindebtedness of US households due to the Obama Administration’s prioritisation of bank bailouts over the real economy in 2009 and 2010. And let’s be clear, it’s not just the US and Europe that are seeing a deceleration in growth. It is global. I call it a global or synchronised global growth slowdown.

America's Economic Future Will Be Determined in America, Not Europe - A country the size of the United States is overwhelmingly the author of its own destiny. The outside world does matter for the United States, but it matters in the sense that external events occur that require a policy response. Events in Europe will sink the American economy if and only if American policymakers react to those events in a substantively disastrous manner. Considering that American policymakers and policymaking institutions have demonstrated a high proclivity for disastrous decision-making over the past four or five years, I think the odds of disaster are reasonably high. But make no mistake—if disaster strikes it'll be a failure made in the United States.  It's worth insisting on this because otherwise the "pass the blame" game can become paralyzing. One reason the European policy response has been so bad is that European legislators spent most of 2009 telling everyone that the financial crisis was American in origin. This was in some sense true, but also irrelevant. If you're driving and the road curves and there's no guardrail, what you need to do is steer the car properly not complain about road engineering while your car goes off the cliff.

HUSSMAN: The Recession Is Here Right Now - In his latest note, John Hussman is bearish, and says the recession here. By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now. We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth. To a large extent, this downturn is a "boomerang" from the credit crisis we experienced several years ago. The chain of events is as follows: Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession. In effect, we're going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

Why The Economy Can't Get Out of First Gear - Robert Reich -- Rarely in history has the cause of a major economic problem been so clear yet have so few been willing to see it. The major reason this recovery has been so anemic is not Europe’s debt crisis. It’s not Japan’s tsumami. It’s not Wall Street’s continuing excesses. It’s not, as right-wing economists tell us, because taxes are too high on corporations and the rich, and safety nets are too generous to the needy. It’s not even, as some liberals contend, because the Obama administration hasn’t spent enough on a temporary Keynesian stimulus. The answer is in front of our faces. It’s because American consumers, whose spending is 70 percent of economic activity, don’t have the dough to buy enough to boost the economy – and they can no longer borrow like they could before the crash of 2008. If you have any doubt, just take a look at the Survey of Consumer Finances, released Monday by the Federal Reserve. Median family income was $49,600 in 2007. By 2010 it was $45,800 – a drop of 7.7%. All of the gains from economic growth have been going to the richest 1 percent – who, because they’re so rich, spend no more than half what they take in. Can I say this any more simply? The earnings of the great American middle class fueled the great American expansion for three decades after World War II. Their relative lack of earnings in more recent years set us up for the great American bust.

America's Hidden Austerity Program - Why is the recovery from this recession different from recoveries from past recessions? In the previous two recessions, it took 32 months for nonfarm employment to reattain its June 1990 peak, and 48 months for it to reattain its January 2001 peak. Assuming the economy keeps adding nonfarm employment at the current rate, it will have taken 88 months to reattain its January 2008 peak. The explanation most often heard is that “financial crises are different”: after a debt crisis, shaken consumers are reluctant to spend and shaken firms are reluctant to hire, slowing private-sector job growth even after the recession has bottomed out. There is some truth in this, but it is not the whole story. In fact, while the latest recession was particularly deep, the recovery in private-sector employment, once it finally started, has not been particularly slow by recent historical standards. In the 27 months since the start of the current employment recovery, the private sector has added 4.3 million jobs, fewer than the 5.0 million it added in the 27 months after February 1992 but not many fewer than the 4.5 million it added in the equivalent period after August 2003.But there is something historically different about this recession and its aftermath: in the past, local government employment has been almost recession-proof. This time it’s not. Going back as long as the data have been collected (1955), with the one exception of the 1981 recession, local government employment continued to grow almost every month regardless of what the economy threw at it. But since the latest recession began, local government employment has fallen by 3 percent, and is still falling.

Inequality, the Crash, and the Crisis: The Question of Causality -  Part 2 of this series promised to establish a causal link between inequality and the crisis. Once again, this relies upon middle and lower income consumers accumulating excessive debt as they attempt to keep up with their wealthier neighbors: Inequality, the crash and the crisis. Part 2: A model of capitalism that fails to share the fruits of growth, by Stewart Lansley: The driving force behind the widening income gap of the last thirty years has been a shift in the distribution of “factor shares” – the way the output of the economy is divided between wages and profits. ... This process of decoupling wages from output has led to a growing “wage-output gap”, with a very profound, and negative, impact on the way economies function. This is for three key reasons. First, by cutting the purchasing power needed to buy the extra output being produced, the long wage squeeze brought domestic and global deflation. Consumer societies started to lose the capacity to consume. The solution to this problem – which would have brought a prolonged recession much earlier – was to allow an explosion in private debt to fill the demand gap. ... In the US, debt reached a third more than national income by 2008. This helped to fuel a domestic boom from the mid-1990s but was never going to be sustainable. Far from preventing recession, it just delayed it.

Inequality, the crash and the crisis. Part 3: The Limit to Inequality - OECD Insights - The evidence from the last 100 years is that more equal societies soften, and more polarized ones intensify, the gyrations of the business cycle. Inequality is not just an issue about fairness and proportionality, it is integral to economic success. A capitalist model that allows the richest members of society to accumulate a larger and larger share of the cake merely brings a lethal mix of demand deflation, asset appreciation and a long squeeze on the productive economy that will end in economic turmoil. Yet that model has survived the second deepest recession of the last 100 years largely intact. In contrast, the economic crisis of the 1930s was to give way to a very different model of political economy, one that eroded the extremes of wealth that had helped create the crisis. Today, it is largely business as usual. The world’s rich have been the main winners from the global recession. In the United States, profits and dividends have risen since 2008 while real wages have fallen. According to the American economist, Emmanuel Saez, average real family income declined by a remarkable 17.4 per cent between 2007 and 2009.

President Obama’s Cleveland economy speech – high-level outline - This is the first of two posts. Here is my attempt to outline the meaty 53 minute economic speech President Obama gave yesterday in Cleveland. I built this outline to help myself analyze the speech, then realized that others might find it useful. While it is true that little of the substance was new, this is nevertheless a serious policy speech that makes what the President and his advisors think is the economic part of their best case for reelection. I will take it seriously and recommend you do so as well — this isn’t just another blow-off stump speech. This is the theory of the economic case the way the President wants you to see it. If you’re a student of economic policy I recommend you watch or read the whole speech. No summary or analysis can substitute for the candidate’s own words and presentation. Here is my plan of attack: summarize first; then explain; then respond. Today is just the first step, the summary.

President Obama’s Cleveland economy speech – detailed outline - This is the second of two posts. Here is the first, a much shorter high-level version of the outline contained here. This is my attempt to build a detailed outline of the economic speech President Obama gave in Cleveland yesterday (watch it). I used his language in some parts, but in many parts these are his concepts expressed in my words, I hope to provide more clarity. It won’t surprise regular readers that I disagree with much of this. I have tried not to let that cloud this summary.

The Role of Government - The President and Gov Romney gave dueling speeches in the swing state of Ohio yesterday, laying out broad economic themes, so it is incumbent on OTE to look under the hoods.  Here’s what I’ve got. It is, of course, impossible for politics to be anything but deeply political right now.By that cryptic statement, I mean that it’s actually hard to listen to the core of what the presidential candidates are saying through anything like an objective lens.  It’s all positioning, framing yourself and your opponent, capitalizing on their gaffes while walking yours back, presenting plans but assiduously avoiding key details.  And with the media, understandably, in full horse-race mode, an actual substantive analysis of the candidates’ positions may be nigh impossible.

Full transcript of Obama’s speech on the economy - Full transcript of President Obama’s June 14 speech on the economy at Cuyahoga Community College in Cleveland, Ohio:

Did Republicans deliberately crash the US economy? - So why does the US economy stink? Why has job creation in America slowed to a crawl? Why, after several months of economic hope, are things suddenly turning sour? The culprits might seem obvious – uncertainty in Europe, an uneven economic recovery, fiscal and monetary policymakers immobilized and incapable of acting. But increasingly, Democrats are making the argument that the real culprit for the country's economic woes lies in a more discrete location: with the Republican Party. In recent days, Democrats have started coming out and saying publicly what many have been mumbling privately for years – Republicans are so intent on defeating President Obama for re-election that they are purposely sabotaging the country's economic recovery ... in order to hurt Obama politically. Considering that presidents – and rarely opposition parties – are held electorally responsible for economic calamity, it's not a bad political strategy. Beyond McConnell's words, though, there is circumstantial evidence to make the case. Republicans have opposed a lion's share of stimulus measures that once they supported, such as a payroll tax break, which they grudgingly embraced earlier this year. Ten years ago, prominent conservatives were loudly making the case for fiscal stimulus to get the economy going; today, they treat such ideas like they're the plague.

How Dangerous Is America’s Debt? - Obviously, America’s debt is a problem – but is it a clear and present danger, or just something we need to deal with as circumstances permit? To understand how to make smart policy choices that address both these issues, it’s helpful to take the debt numbers apart. There are lots of ways to calculate debt. All the sources have different numbers. And all the figures are slightly out of date. So let’s proceed by setting some approximate benchmarks. If you compare the debt of national governments to their countries’ annual gross domestic product (GDP), the European Union averages 83% and Canada is around 85%. Call that normal. Individual European countries that are in the worst financial shape can have debt levels that are a lot higher – Italy is currently more than 120%. Call that bad. How does the U.S. compare? Officially, our figure for debt to GDP is 102%, which makes it sound as though we’re well on the way to having Italy’s problems. But our number is inflated by the peculiar way the government accounts for Social Security and a few other programs. The Social Security Trust Fund is debt that the government owes to itself. It’s really just an accounting device, indicating that money is promised for future Social Security payments. If you only look at debt held by the public, U.S. debt to GDP is just 71%, well below the danger zone.

Dean Baker: The Debt Is Not a Measure of Generational Burdens: OK folks, today we are going to learn why the national debt tells us nothing about the burdens or benefits that we are bequeathing to future generations. This will require a few minutes of clear thinking, so for the moment put out of your head whatever nonsense you just heard from a politician or economic commentator about the debt or deficit. Suppose that we have two economies at the same level of per capita income, both growing at the rate of 2.0 percent a year. Let's call them Germany and the United States. For simplicity we will say that both have zero growth in the labor force so that the growth is all due to productivity growth, meaning that each worker is producing 2.0 percent more for every hour that she works. After 10 years, both economies will be roughly 20 percent richer. Now suppose that Germany reaches 2022 with zero public debt. It managed to run surpluses and still maintain healthy growth. By contrast, the United States had to run budget deficits to keep its economy moving. By 2022 its ratio of debt to GDP is 200 percent. That's not quite up there with Japan, but substantially larger than anything the United States will see anytime soon under almost any circumstances. The next question is which country is richer? If you answered Germany, then you get an op-ed column in the Washington Post and an "F" in economics. You were just told that the countries started with economies of the same size and that they grew at the same rate. How could Germany be richer?

Asia and domestic leveraged speculators are funding US federal deficit -- As discussed earlier, Asia dominated foreign purchases of US treasuries in Q1. This time let's take a look at how the overall composition of treasury bond holders changed between the end of 2011-Q3 and 2012-Q1 - a six-month period that saw a great deal of volatility in the treasury market.  Here is the breakdown of holders at the end of Q3. The "Other" category represents treasuries held by federal pension plans, broker/dealers, insurance firms, banks, credit unions, and other US holders. By the end of Q1, the composition of the holders changed somewhat.  Just for reference, the total pie represents just under $11 trillion (click on the chart on the right to expand). As expected foreign holders percentage increased - driven by Asia. The Fed's percentage was unchanged. State and local governments' holdings as well as those of mutual funds, money market funds, and pensions also remained relatively static. What stands out is the category named "Households and nonprofit organizations". Treasuries held by households increased roughly by a third in six months. That jump from 9% to 12% of the total is substantial - roughly a quarter of a trillion dollars. In fact, according to the Fed, this increase in treasury holdings corresponds to the increase in US households' net worth over the period (click on the figure to the right to enlarge). Are households dumping their savings into treasuries?

Chart of the Day: Lengthening the Average Maturity of Outstanding Treasury Securities - Treasury Blog - Since the depths of the financial crisis in late 2008, Treasury has lengthened the average maturity of outstanding marketable Treasury securities by nearly 32 percent.  In fact, the average maturity of outstanding marketable Treasury securities (63.9 months in May 2012) is now at its highest level in a decade. It is also above the 30-year historical average of 58.1 months between 1980 and 2010.  The average maturity of outstanding marketable Treasury securities reached 70.9 months in May 2001. Over the course of the next seven years, it ultimately declined to a 28-year low of 48.5 months in October 2008.  Moving forward, we intend to continue gradually lengthening the average maturity of outstanding Treasury securities. We will do so consistent with our long-term objectives of financing the government at the lowest cost over time, and ensuring regular and predictable management of our overall portfolio.

Treasury Intends to Continue to Lengthen Average Maturity - The U.S. Treasury intends to continue to gradually extend the average maturity of the securities it issues–a tactic that locks in borrowing costs but potentially dilutes the impact of a Federal Reserve policy intended to boost the economy. The average maturity of outstanding Treasurys reached 63.9 months at the end of May–the highest level in a decade, the Treasury said in a blog posted to its website Monday. May’s level is 32% higher than October 2008 when average maturities hit a more than 20-year low of 48.5 months during the financial crisis. Extending the average maturity of the debt is “consistent with our long-term objectives of financing the government at the lowest cost over time, and ensuring regular and predictable management of our overall portfolio,” wrote Colin Kim, director of Treasury’s Office of Debt Management. But the Treasury’s policy runs counter to the motives behind the Fed’s plan known as Operation Twist. Under that strategy, the Fed has been selling shorter term debt and buying up longer-term Treasuries in an effort to push down interest rates, with the hope of boosting investment and spending.

10 Year Prices At New Record Low Yield - With the Fed buying up billions of 10 year paper 2 hours ago as we observed earlier, it was only logical that the $4.8 billion gap created by the Fed's desire to monetize would be promptly closed. Sure enough, the $21 billion 10 Year reopening just priced at a new all time record yield of 1.622%, but also priced well inside the When Issued which had been trading at 1.635%: an indication of major pent up demand heading into the auction. The Bid To Cover rose from April's 2.90 to 3.06, but the most notable number was the drop in the Primary Dealer take down which only accounted for 37.2% of the auction, the lowest since December, while Indirects and Directs received 42.0% and 20.8%, the direct number being the highest since August 2011, and only the third highest in history. Pimco's fingerprints are all over this. And maybe China's as well: recall it is now a Direct bidder too, and can bypass the Primary Dealers. All in all, a scorcher of an auction. Then again, when considering the same-day round trip already observed, perhaps this is hardly too surprising

Wall St to lobby against ‘fiscal cliff’  - When the US came within hours of defaulting on its debt last year, many Wall Street executives were angry at Congress for nearly inflicting a devastating – and avoidable – wound on the US economy. Now that the US is facing the possibility of another budgetary showdown with potentially even higher stakes – the so-called “fiscal cliff” at the end of this year – Wall Street lobbyists are preparing an aggressive campaign to stop the political brinksmanship. “The experience of last year taught everybody to be ... focused on it earlier and not assume that this is business as usual,” said one bank lobbyist based in Washington. “People who had relied on government to respond eventually were surprised when it didn’t.”  If Congress fails to pass new legislation by December 31, it would trigger a fiscal tightening of $600bn in 2013 in the world’s largest economy, probably tipping it into recession in the first half of the year. The drag would come mainly from the expiration of more than $300bn Bush-era tax rates, as well as the impact of $100bn in automatic spending cuts to domestic and defence spending. Other tax breaks would also expire, including a payroll tax cut worth $120bn. Soon after, in early 2013, the US is expected to hit its borrowing limit again, which could worsen the picture by adding the spectre of default and a financial crisis.

What the Recent CBO Reports Tell Us about Fiscal Stimulus and the Federal Budget - The Congressional Budget Office (CBO) recently released two important reports on the federal budget. One analyzes the short term, the other the long term. The first report explains what is projected to happen, both to the federal budget and to the larger economy, in the near term due to year-end expirations of various tax and spending policies. The other report projects what will happen to the federal budget over the upcoming decades. Both reports analyze two scenarios; first, if certain provisions of current law (raising taxes and cutting spending) are upheld, and second, if they are legislatively overridden. The findings of CBO’s gloomy long-term report come as no surprise. Over the most recent four years, the U.S. government has engaged in continued massive deficit spending on a scale not seen since World War II. CBO finds that the continuation of such policies in future years will lead to federal fiscal ruin and severe economic hardship.The short-term report is more nuanced. CBO finds that continued deficit-spending will increase economic growth in the near-term but weaken growth over the long term.

Fiscal Cliff, Three Ways - The ubiquitous economist Mark Zandi from Moody’ has been doing yeoman’s work analyzing different outcomes to the fiscal cliff slope we face at the beginning of next year. Here are Mark’s projections of real GDP growth under three different scenarios:

  • –Current policy: full can kick—extend all the tax increases and spending cuts;
  • –Current law: full can crush—all tax increases and spending cuts occur on schedule Jan 1;
  • –Moody’s baseline: compromise—upper income tax cuts expire, only half of automatic cuts take effect, a few other cats/dogs don’t take effect.

Basically, under the compromise baseline, we achieve about 44% of the deficit reduction that’s scheduled under current law (full expiration, full spending cuts).  Most importantly, the sun finally sets on the upper income Bush tax cuts—those to households over $250K.  That’s over $900 billion in revenue over 10 years. Equally important, as you can see from the slight difference between the Moody’s line, in which the high end cuts are gone, and current policy, in which they’re still in play, their absence has very little negative impact on real GDP growth

The American Debate: Deal traps Obama into helplessness on jobs creation - Republicans have tried to dismiss all this empirical evidence by insisting that the New Deal was an epic failure, that government spending didn't help the Depression economy (and by implication, that such spending can't help ours). This bid to rewrite history has sometimes bordered on the comical - such as when Michael Steele, then the GOP chairman, stated in 2009 that not only did the New Deal fail to create jobs but that "not in the history of mankind has the government ever created a job." He might as well have said the Earth is flat. The truth is, FDR's stimulus programs created some 15 million jobs. For instance: The Works Progress Administration put eight million people to work. (You have surely driven on roads and flown from airports built by WPA workers.) The Civilian Conservation Corps hired 2.7 million. The Civil Works Administration employed four million. The Public Works Administration created jobs for hundreds of thousands. (Perhaps you have enjoyed the PWA's handiwork, such as the Lincoln Tunnel and Philadelphia's 30th Street Station.) And not so coincidentally, the Dow Jones average rose roughly 400 percent between 1933 and 1937. But the current obsession with red ink - with slashing spending at a time when 26 million idled and underemployed Americans badly need help - ensures that Obama's job-creation efforts will remain largely rhetorical. This is great for the Republicans, because persistent joblessness will make Obama an easier target in 2012. It's not so great for the jobless.

Debunking economic myths, or the trouble with what you think you know - Let's start with economic myth No. 1: Firms are job creators. First of all, to an economist, jobs generally aren't a benefit. They're a cost of production. The point of having an automobile factory isn't to employ people -- it's to make cars. More critically, it's to make money by making cars. From the perspective of the firm, so long as producing cars is profitable, it really doesn't matter if the factory needs one employee or 1 million employees. Giving special deference to firms as "job creators" simply is not an accurate assessment of their mission and role in society. They make profits, not jobs. There's nothing wrong with that -- it's the way capitalist economies work -- but calling firms "job creators" is like calling a horse a zebra because they both have four hooves and a mane. So if jobs aren't firms' main goal, whose goal is it? That would be an obligation of the federal government under the Employment Acts of 1946 and 1978. Unfortunately, government isn't doing too well at this, but not for the reasons most people think. Employment in the private sector has generally risen for the past year. Unfortunately, public sector employment growth over that same period was terrible. In May 2011, government lost as many jobs as the private sector created.

Government is the solution - Why don’t Democrats just say it? They really believe in active government and think it does good and valuable things. One of those valuable things is that government creates jobs — yes, really — and also the conditions under which more jobs can be created.You probably read that and thought: But don’t Democrats and liberals say this all the time? Actually, the answer is no. It’s Republicans and conservatives who usually say that Democrats and liberals believe in government. Progressive politicians often respond by apologizing for their view of government, or qualifying it, or shifting as fast as the speed of light from mumbled support for government to robust affirmations of their faith in the private sector. This is beginning to change, but not fast enough. And the events of recent weeks suggest that if progressives do not speak out plainly on behalf of government, they will be disadvantaged throughout the election-year debate. Gov. Scott Walker’s victory in the Wisconsin recall election owed to many factors, including his overwhelming financial edge. But he was also helped by the continuing power of the conservative anti-government idea in our discourse. An energetic argument on one side will be defeated only by an energetic argument on the other.

Budget Hawk Socialism – Why Calls for Balanced Budgets Lay the Path for Socialism - Calls for balanced budgets in the present environment have long appeared somewhat confused, of that we have had little doubt for some time now as balanced budgets seem to exacerbate the problems they target rather than solve them and may lead to higher debt-to-GDP levels due to the reduction in real economic growth that they lead to. However, the left has generally agreed that the much of the motivation behind the balanced budget rhetoric was and is ideological. And with conservatives at organisations like the Peterson Institute and the Cato Institute, together with their counterparts at the Adam Smith Institute in Britain, daily attacking the deficit over the airwaves there seems to be much evidence of this assertion. Indeed, Paul Krugman recently caught some Tories with their ideological pants around their ankles in a discussion over at the BBC (watch from about 3.00 on). This is all well and good. It would certainly seem that conservatives think that by battling the budget deficit they are eroding the foundations on which the Big Government monster sits, but is this really the case? What if I told you that all the balanced budget rhetoric was actually having the objective effect of placing us on the road to socialism?

Which Spending Is Easier To Cut And By What Level Of Government? - Dean Baker at Beat the Press takes down WaPo ed page editor, Fred Hiatt, for his pushing yet again for cutting Social Security because it is supposedly "easy to do" in contrast to medical spending, with Hiatt pinning the blame on Dems for not supporting cutting either.  Baker notes that putting med costs in line with those in other countries would alone completely eliminate the federal budget deficit, and that Dems are not the ones opposing cuts to drug companies or "overpaid medical specialists." CEPR  Dean kindly avoids noting that Hiatt is part of a group of established media mavens in Washington who long ago convinced themselves that somehow not only is Social Security "in crisis," but that somehow it is the easiest program to cut (future) spending on politically, although that will do nearly nothing to limit near-term deficits and that there is nearly zero support among the public of both parties for such an action, and that efforts by various politicians of both parties in recent years to do this have ended up as embarrassing failures.   Unfortunately, the alternative appears to be a trick buried in Paul Ryan's budget proposal: send certain social safety net programs down to the states, with the leading candidate being Medicaid, which is already partly funded by the states.

'IT IS NOT POSSIBLE' To Keep Taxes Low And Avoid Entitlement Cuts - The numbers for 2012 through June have been released by Social Security (SS). Revenues are up from the first six months of 2011. Expenses are shooting through the roof. Some year over year comparisons: The YoY revenue increase at SS is a reflection of the slightly improved economy. The following is a look at the monthly revenue numbers for 2011/2012: These revenue numbers tell the same story that the overall economy is telling. The first quarter economic results were above trend (possibly due to weather?) the second quarter is showing clear signs of deceleration. If the economy continues to slow in the second half of the year (a sure bet at this point), SS’s numbers will follow the economy south. Based on all of the cash inflows and outflows at SS, I’m now projecting a cash loss at SS for the full year 2012 of $60B (-$48B in 2011). All of that shortfall must be funded with debt issued to the public. Whatever your expectations were for the federal borrowing requirements for the rest of the year, you can add another $50+B onto the list. There are economic headwinds wherever you look these days. The biggest obstacle for the USA is the fiscal cliff of 1/1/2013. The most optimistic scenario that I can imagine for US 2013 GDP is +2%. If the country were able to squeak out that much growth, it would still be very bad news for SS. If growth averages just 2% in 2013, then SS’s cash deficits will top $100B.

The Looming Showdown - Peter Orszag - It’s January 2013. The treasury secretary has warned that we’ve run out of maneuvering room to avoid hitting the debt limit again, bringing back memories of August 2011. This time, though, the debt-limit drama is happening at exactly the same time as contentious debates over the massive spending cuts triggered by the 2011 debt-limit deal and over the 2001 and 2003 tax cuts, which were allowed to expire at the end of 2012 due to political stalemate but are likely to be replaced or resurrected in some form. This trifecta—debt limit, sequestration on spending, tax cuts—is occurring right at the beginning of a new presidential term, the brief but auspicious honeymoon period for legislative action. Furthermore, even if the rest of 2012 turns out relatively well for economic growth, the labor market will remain weaker than normal in early 2013—which should further motivate legislators to avoid the substantial and immediate fiscal contraction that would occur if the tax cuts and spending cuts were to be implemented in full. If ever there were a time for a big legislative package, early 2013 would be it. And yet there’s reason to question whether meaningful legislation will emerge from this maelstrom, especially if the President is not from the same political party as the majority in the House and the Senate.

Once More, With Feeling* - Peter Orszag wrote an article for the latest Democracy** about political dysfunction and the “looming fiscal showdown” at the end of this year. A lot of it is a warmed-over description of political polarization, although Orszag ignores one of its most important causes: the growing influence of money in politics and the resulting need for politicians to go chasing after contributions from extremist billionaires. Orszag’s recommendation, however, is spot-on: First let the Bush tax cuts expire; then, assuming that economic stimulus is necessary, push for a big, across-the-board, temporary tax cut. (Orszag proposes a payroll tax cut and an increase in the standard deduction; I’ve previously proposed a payroll tax cut.) There are two major reasons why President Obama should pursue this strategy. First, one more time: the Bush tax cuts were bad policy a decade ago and they are bad policy now. Even if you believe in a large permanent tax cut, giving the vast majority of it to high earners, the investor class, and heirs of multi-millionaires is the wrong way to do it. We need to get rid of them, once and for all. Second, trying to negotiate a partial repeal of the Bush tax cuts (Obama’s current strategy) is bound to fail. Grover Norquist said it very clearly: “If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.

The fiscal cliff in America: Why so much uncertainty? | The Economist -- video - OUR correspondents discuss whether it's policy, or a lack of it, that is causing so much uncertainty in business and markets

Fiscal Cliff May Not Be That Scary. No Deal In Lame Duck Is Needed - Remember the “fiscal cliff” that everyone from Federal Reserve Board Chairman Ben Bernanke to analysts of every political stripe to media pundits have been talking about so incessantly in recent weeks as something that absolutely has to be avoided? Yes, that fiscal cliff: the one we’ve repeatedly been told will result in end-of-the-world damage for the economy as the clock strikes midnight on Jan. 1 and the one that has been driving up the nation’s collective blood pressure to such an extent that we’re all going to need the economic equivalent of Valium to get through the coming months. Well, it turns out that the cliff isn’t that scary after all, really shouldn’t be seen as the moment when all economic hell will break loose and isn’t actually something that has to be avoided at all costs. At least that’s the conclusion of a well-conceived, well-written and convincing analysis released last week by the Center on Budget and Policy Priorities that explains why fears induced by the fiscal cliff are “misguided” and won’t “plunge the economy into an immediate recession.”

Some Views on the “Cliff” -  You may have heard of the “fiscal cliff” that the federal budget will fall off in January, under existing law. It will be quite a fiscal contraction, if it happens as scheduled: about 4 percent of last year’s GDP, to use these numbers from the Congressional Budget Office (CBO). This total includes both tax increases and spending cuts, but not the offsetting effects of “automatic stabilizers,” such as lower income taxes for people whose incomes are adversely affected by the cliff itself. The CBO report projects that this set of changes would lead to a recession early next year. (Briefly, the changes that make up the cliff are (1) the expiration of the “Bush tax cuts,” the 2 percent payroll-tax holiday, and some other tax cuts; (2) the across-the-board spending cuts broadly agreed to by President Obama and Congress as part of last summer’s deal to raise the debt limit; (3) the end of new emergency extended unemployment benefits; (4) reduced Medicare doctor payment rates; and (5) tax increases included in the “Obamacare” health act passed by Congress in 2010.)

As Fiscal Slope Negotiations Heat Up, Support for Letting Tax Cuts Expire, From Republicans - It’s a testament to the mixed signals of the Democratic Party on taxes and the end-of-the-year fiscal situation that Matt Yglesias can talk to the same Senator on the same weekend as I and get a completely different impression. He basically saw no appetite for letting the Bush tax cuts expire completely and then coming back with an “Obama tax cut” package, while I did, particularly from Sen. Sheldon Whitehouse. It is worth pointing out, however, that while Matt and I and others were reading tea leaves in Providence with Senators on the more liberal side of the spectrum, the ones more interested in using the fiscal slope as an opportunity to put together a massive deficit reduction package were making their move: In an ornate room in the Capitol last Wednesday night, the Democratic senators who could hold the key to preventing a fiscal train wreck gathered for dinner and a talk with economists about their options for dealing with nearly $8 trillion in combined tax increases and spending cuts that are to be put in place automatically in January [...]What separated the unannounced Wednesday session, organized by Senator Dianne Feinstein of California, from the earlier ones was the collective weight of the participants: the Senate’s No. 2 and No. 3 Democrats, Richard J. Durbin of Illinois and Charles E. Schumer of New York; the chairman of the Finance Committee, Max Baucus; and the chairman of the Budget Committee, Kent Conrad.

Defense Establishment Starts Bargaining on Trigger Cuts - One of the more confusing positions for Democrats in the end-of-the-year “fiscal slope” negotiations concerns where they stand on the defense trigger. Obviously, with Republicans desperate to close these cuts, at least for the first year, Democrats have an opportunity to leverage that into a better deal. However, Defense Secretary Leon Panetta has undermined that by asserting that great damage would be done to national security if so much as one dime under the Administration’s budget gets cut. Now, Armed Services Committee Chair Carl Levin is working on an alternative solution, where the defense budget gets lowered in this fiscal year, to cushion the blow for the trigger cuts down the road. Sen. Carl Levin, the Michigan Democrat who heads the powerful committee, said “defense has to contribute” to a compromise to head off the across-the-board, $55-billion-a-year cuts required by the budget compromise that Congress reached last year. The provision, known as sequestration, will be triggered on Jan. 3 if Congress doesn’t come up with a 10-year, $1.2 trillion deficit reduction plan or a compromise to change the law by the end of this year. Levin suggested that some cuts could come from the costs of maintaining and modernizing the nuclear stockpile and funding for family housing for troops stationed in South Korea. Levin said a signal should be sent on a compromise before the fiscal year ends Sept. 30, because major defense contractors have already sent “warning notices” to employees of possible cuts.

Food Stamps and the Farm Bill - The version of the farm bill that emerged from the Senate Agriculture Committee contains $4.5 billion in cuts to the food stamps program over 10 years.  That amount is a small fraction of the nation’s spending on food stamps, currently nearly $80 billion a year, but would, nevertheless, be devastating for nearly half-a-million households that would have their benefits sliced by an average of $90 per month, according to the Congressional Budget Office.  Such a cutback in food benefits for struggling families and children is unconscionable in a bill containing plenty of unnecessary giveaways for corporate farming interests. With the Senate poised to take up the bill, Senator Kirsten Gillibrand, a Democrat of New York, is waging a tough fight to restore the food-stamp cut. She has offered an amendment that would make a humane and sensible change — lowering the subsidies to highly profitable crop insurance companies to avoid any trims in the food-stamp program.  It is not yet clear which of the hundreds of pending farm bill amendments will receive a vote. Senator Harry Reid, the Senate majority leader, should make sure that the Gillibrand amendment gets one, and then he must rally Senate Democrats to pass it.

Senate rejects effort to cut food stamp program: The Senate has turned back an effort by Kentucky Republican Rand Paul to drastically cut food stamp spending and replace the food aid program with block grants to the states. The 65-33 vote to defeat the Paul amendment was part of debate on a five-year, half-trillion-dollar farm and food bill. The Supplemental Nutrition Assistance Program, or food stamps, makes up about $80 billion of the $100 billion a year cost of the farm bill, providing aid to some 46 million people. The farm bill would reduce food stamp spending by $4 billion over the next decade by eliminating abuses. Paul's amendment would have saved $322 billion over the same period by capping spending at $45 billion a year and turning over funding decisions to the states.

Inequality: It’s Even Worse Than We Thought - The current debate about rich and poor -- the 1 percent versus the 99 percent -- is a bit misleading because the evidence usually is data about income, not wealth. Looking at wealth would make the comparison even starker.  There are some nice deals to be had in the income tax code these days, but most wealth accumulates and passes from generation to generation with no tax at all. Warren Buffett (who has selflessly taken on the role of all-purpose tape measure in these matters) is worth $45 billion or so. Do you think that all of that $45 billion, or even most of it, has appeared on any Form 1040 on its way to the cookie jar? Even at the special, low 15 percent rate the U.S. insanely confers on capital gains? I’m just noting that you only pay income tax when an investment is liquidated, and very wealthy people don’t have to liquidate until they actually need to spend the money.  For most of the very rich, this time is never. When you die, any unrealized capital gains disappear for tax purposes. Your heirs, if and when they sell, pay taxes only on any increase in value since they got the money. And there is no estate tax at the moment on estates of $5.12 million or less.  The Federal Reserve released new numbers on Monday. Unsurprisingly, wealth distribution is even more skewed than income distribution. In 2010, the median family had assets (including their house but subtracting their mortgage) of $77,300. The top 10 percent had almost $1.2 million, or more than 15 times as much.

We’ve been brainwashed - Joseph Stiglitz - How, in a democracy supposedly based on one person one vote, could the 1 percent could have been so victorious in shaping policies in its interests? It is part of a process of disempowerment, disillusionment, and disenfranchisement that produces low voter turnout, a system in which electoral success requires heavy investments, and in which those with money have made political investments that have reaped large rewards — often greater than the returns they have reaped on their other investments. There is another way for moneyed interests to get what they want out of government: convince the 99 percent that they have shared interests. This strategy requires an impressive sleight of hand; in many respects the interests of the 1 percent and the 99 percent differ markedly. The fact that the 1 percent has so successfully shaped public perception testifies to the malleability of beliefs. When others engage in it, we call it “brainwashing” and “propaganda.” We look askance at these attempts to shape public views, because they are often seen as unbalanced and manipulative, without realizing that there is something akin going on in democracies, too. \It is clear that many, if not most, Americans possess a limited understanding of the nature of the inequality in our society: They believe that there is less inequality than there is, they underestimate its adverse economic effects, they underestimate the ability of government to do anything about it, and they overestimate the costs of taking action.

Author Peter Edelman: Middle Class, Poor Should Unite Against The Rich -- The doctrine of Bain Capital -- as outlined by former managing director Edward Conard -- is that the super rich got that way because they "earned" it.  The logical corollary is that financially battered middle-class Americans deserve what's happening to them, too. And that the poor deserve to be poor. Peter Edelman, a Georgetown University law professor and longtime anti-poverty advocate, takes the exact opposite view in his new book, "So Rich, So Poor."At an event for the book Monday hosted by two leading liberal advocacy groups -- the Center for American Progress and the American Constitution Society -- Edelman urged action by, and on behalf of, the broadest possible coalition of the 99 percent, against the 1. "We need to have the largest 'we' we can get to defend what we have," he said.  The goal, he indicated, should be to raise taxes on the rich and strengthen the social safety net -- even as GOP leaders try to take it away. "The first task, " Edelman said, is to "stand up and say broadly" that the Republican budget proposals calling for austerity and cutbacks to social service programs "are just destructive. And the rhetoric … is just weird."

Do The Parasitic Elite Pay Any Taxes? - If we understand the difference between parasitic wealth and real value/wealth creation, we can properly align the tax structure to reality: the tax on authentic wealth creation should be low, to encourage wealth creation and the employment (broad-based wealth creation) generated by legitimate value creation. We must also understand that the Central State now protects and enables parasitic skimming as the primary function of the nation's financial system. Thus the entire financial system is parasitic on the wealth of the nation. Financial parasitic incomes should be taxed at 99%. If Mitt Romney reshuffles assets created by others and skims $100 million, 99% of that parasitic wealth should be returned to the nation via taxes. The parasite still gets to keep $1 million, more than enough to live well but not enough to buy the presidency, the Congress and the regulatory machinery of the Central State.

The Fiscal Legacy of George W. Bush - Republicans assert that Barack Obama assumed sole responsibility for the budget on Jan. 20, 2009. From that date, all increases in the debt or deficit are his responsibility and no one else’s, they say. This is, of course, nonsense – and the American people know it. As I documented in a previous post, even today 43 percent of them hold George W. Bush responsible for the current budget deficit versus only 14 percent who blame Mr. Obama. The American people are right; Mr. Bush is more responsible, as a new report from the Congressional Budget Office documents. In January 2001, the office projected that the federal government would run a total budget surplus of $3.5 trillion through 2008 if policy was unchanged and the economy continued according to forecast. In fact, there was a deficit of $5.5 trillion.

The president will do what Congress lets him do - Ryan Lizza’s latest New Yorker piece asks, “What would Obama do if reelected?” It’s an excellent article, and I highly recommend you read it. But it’s asking the wrong question. This is something I began to think a lot about after I wrote a somewhat-worse article also asking “What would Obama do if reelected?” If you take the media as a whole, the amount of reporting that goes into what the president wants to do, plans to do, and is being encouraged by others to do is immense. But on most issues, the question that really matters, both for what the president is going to propose and what is (or is not) going to get done, is what will Congress do? The president can’t raise taxes. Congress can. The president can’t spend money on infrastructure. Congress can. The president can’t lift the sequester. Congress can. Even in foreign affairs, where the president is considered to have much more autonomy, much of his power is on loan from a Congress that chooses not to get particularly involved.

Do low taxes promote growth and prevent crises? - We missed this article a couple of weeks ago from Martin Wolf in the FT, but it is a good one, looking at the debate (may we say hysteria?) in the United States over tax levels. Wolf says these are 'second or even third order issues.' Why does he say this? Well, take a look at a couple of graphs: this one, for instance: Now that shows no clear relationship. If you squint, and focus obsessively on those three outlying points, you might want to try and argue that the line slopes downwards - though it doesn't (and if you were to strip out those three apparent outliers, it would slope upwards.) And Wolf says: "The spread in the average tax ratio is quite large, at 26 per cent of GDP, from Japan to Denmark. It is even quite surprising that such a spread seems to have no effect on economic performance."So how does this picture shape up over time? Well, in a picture: Even more unarguable: The line is flat.

Reagan, Obama, Recovery - Paul Krugman - A number of people have asked me to respond to this Hubbard-Gramm piece on the Reagan recovery versus the Obama recovery, and why it proves that right-wing economics roolz.  But I already did respond. When? In February 2008 — back when people like Hubbard and Gramm were denying that there was any recession at all. In fact, as late as July 2008 Gramm declared that all we had was a “mental recession”, and that America had become a “nation of whiners”.So, more than four years ago I predicted a very slow recovery. Why? Because recessions like those of 1990-91, 2001, and 2007-2009 have very different origins from recessions like 1974-75 or the double-dip recession of 1979-82. The old recessions were more or less deliberately created by the Fed via tight money to control inflation, which meant that you had a V-shaped recovery once the Fed decided that we had suffered enough and loosened the reins. The new recessions all reflected private-sector overreach, which is much harder to make up for.Note that while I predicted a slow recovery way back when, it has been even slower than I expected. But that’s no mystery; at that point neither I nor anyone else knew just how far the private sector had overreached, plus I didn’t expect the unprecedented fiscal austerity that has been such a drag on recovery given the fact that we’re in a liquidity trap.

Gramm-Hubbard: So Many Misconceptions, So Little Time --  Glenn Hubbard appears to be getting drunk on GOP Kool-Aid again with an assist from Phil Gramm. As they try to argue that Mitt Romney will be the saving grace for our economy, they also contrast the current recession/recovery with what happened in the early 1980’s making so many ridiculous arguments, it is hard to keep track. But let’s start with their explanation for the most recent recession: The more recent recession resulted from excessive government intervention to increase homeownership by expanding subprime housing loans, on which substantial leverage was built. The resulting wave of defaults damaged the base of the banking system. Two points here. The first is that Glenn served as economic advisor to that President who kept bragging about rising home ownership. Secondly, the problem was more too little government regulation of the banking system – not excessive regulation.

Romney Adviser Takes U.S. Political Debate Overseas - A senior economic adviser to Mitt Romney criticized President Obama and his policy toward crisis-torn Europe, and Germany in particular, in an op-ed article in a leading German newspaper on Saturday, raising the question of the propriety of taking America’s political fights into international affairs. The article — written by R. Glenn Hubbard, the dean of the Columbia Business School and a former adviser in the Bush administration, and published in the business journal Handelsblatt — drew a rebuke from the Obama campaign.“Unfortunately, the advice of the U.S. government regarding solutions to the crisis is misleading. For Europe and especially for Germany,” Mr. Hubbard wrote, according to a translation of his article from the Handelsblatt Web site. He opposed what he described as the Obama administration’s efforts “to persuade Germany to stand up financially weak governments and banks in the euro zone so that the Greek crisis would not spread to other states.” “These recommendations are not only unwise,” he added, “they also reveal ignorance of the causes of the crisis and of a growth trend in the future.” Mr. Hubbard proposed a classic conservative pro-austerity, anti-Keynesian approach, arguing that cutting government spending will restore public confidence, encourage growth and avert future tax increases.

If at first you don’t succeed, make it even worse -  Well if at first austerity makes most people miserable, blame the same people and give money to the banks…blather…rinse…repeat.  Ta-dah!A bailout of up to €100bn for Spain‘s ailing banks failed to calm nerves about the future of the euro on Monday amid confusion over the plan’s details…But Spain’s borrowing costs rose on Monday, nudging closer to levels that are considered unsustainable and dragging Italy towards the danger zone. Europe‘s stock markets fell slightly, despite an early bounce, the FTSE 100 in London finishing down 0.05%. Clearly the problem is not enough suffering and not enough given to the banks. But don’t worry it won’t happen too many more times:…one of 2012 GOP presidential nominee Mitt Romney’s economic advisers appeared in a German newspaper. In the piece, Glenn Hubbard criticized the Obama administration’s approach to Europe’s ongoing economic woes, instead calling for the adoption of more austerity

How Dark-Money Groups Sneak By the Taxman - Here at Mother Jones we talk about "dark money" to broadly describe the flood of unlimited spending behind this year's election. But the truly dark money in 2012 is being raised and spent by tax-exempt groups that aren't required to disclose their financial backers even as they funnel anonymous cash to super-PACs and run election ads. By Internal Revenue Service rules, these 501(c)(4)s exist as nonpartisan "social welfare" organizations. They can engage in political activity so long as that's not their primary purpose, but skirt that rule by running issue-based "electioneering communications" that can mention candidates so long as they don't directly tell you to vote for or against them (wink, wink), or by giving grants to other politically active 501(c)(4)s. (Super-PACs, on the other hand, can spend all their money endorsing or attacking candidates, but must disclose their donors.)

Who cheats more, bankers or politicians? - Dan Ariely has long conducted experiments that try to measure dishonesty and cheating. In his new book, “The Honest Truth About Dishonesty,” he describes what happened when he gave the test to bankers and congressional staffers: At some point Racheli Barkan and I carried out our experiment in a bar in Washington, D.C., where many congressional staffers gather. And we carried out the same experiment in a bar in New York City where many of the customers are Wall Street bankers. That was the one place where we found a cultural difference. Who do you think cheated more, the politicians or the bankers? I was certain that it was going to be the politicians, but our results showed the opposite: the bankers cheated about twice as much. (But before you begin suspecting your banker friends more and your politician friends less, you should take into account that the politicians we tested were junior politicians — mainly congressional staffers. So they had plenty of room for growth and development.)

How to corral Jamie Dimon - Here’s a question to ask JPMorgan CEO Jamie Dimon when he faces the firing line of the Senate Banking Committee on Wednesday: Should Glass-Steagall be reinstated? Glass-Steagall was the New Deal-era legislation, infamously repealed at the end of the Clinton administration, that drew a strict dividing line between commercial banks and investment banks. Jamie Dimon is the CEO of the United States’ largest bank — a goliath financial institution that could never have existed in its current form without the repeal of Glass-Steagall. Dimon will be testifying before  the banking committee to explain JPMorgan’s disastrous multibillion-dollar trading loss from last month. Dimon’s answer to a Glass-Steagall hypothetical would undoubtedly be no. Dimon has long argued that for U.S. banks to be able to effectively compete on the world stage they need to be big enough to offer every kind of service a modern transnational corporation could desire. Besides, he’s a smart guy, and he would likely argue that the theory holding Glass-Steagall’s repeal as responsible for the financial crisis is weak.

House of Dimon Marred by CEO Complacency Over Unit’s Risk - JPMorgan Chase could have spotted trouble at its chief investment office long before traders there racked up at least $2 billion in losses. One reason it didn’t: Chief Executive Officer Jamie Dimon. Dimon treated the CIO differently from other JPMorgan departments, exempting it from the rigorous scrutiny he applied to risk management in the investment bank, according to two people who have worked at the highest executive levels of the firm and have direct knowledge of the matter. When some of his most senior advisers, including the heads of the investment bank, raised concerns about the lack of transparency and quality of internal controls in the CIO, Dimon brushed them off, said one of the people, who asked not to be identified because the discussions were private. Dimon’s actions contrast with his reputation as a risk- averse manager who demands regular and exhaustive reviews of every corner of the bank. While Dimon has said he didn’t know how dangerous bets inside the CIO had become, the loss on those trades calls into question whether anyone can manage a financial empire as vast as JPMorgan, which became the biggest U.S. lender last year and now has more than $2.3 trillion in assets, larger than the economies of Brazil or the U.K.

JPMorgan Provides example of "Orderly Liquidation" after a catastrophic loss - From the Financial Times: JPMorgan plan for ‘catastrophic’ eventThe presentation given at a Harvard Law School event is also an unusually frank acknowledgement that there are limits to the capital buffers of even healthy banks. In the doomsday scenario set out by [Gregory Baer, deputy general counsel], a $50bn loss would trigger “a run on the bank” - with $375bn of funding, including bank deposits, draining away. The government would then step in and mark down the bank’s assets, leading to an additional $150bn loss. Shareholders would be wiped out but senior creditors would be transferred to a new bridge company that allows “critical activities [to] continue to operate smoothly”. Here is the presentation: Orderly Liquidation of a Failed SIFI (systemically important financial institutions). This provides a "Hypothetical, illustrative example of the orderly liquidation of JPMorgan Chase". This is a pretty catastrophic event: "For illustrative purposes, we describe the impact of a catastrophic, idiosyncratic event causing a $200B loss and $550B of liquidity outflows – leading to Orderly Liquidation Authority being invoked to resolve JPMC"

Counterparties: The knives come out for Jamie Dimon -- If Jamie Dimon is worried about being attacked by Congress tomorrow over JPMorgan’s spectacularly failed hedges, he should be equally concerned about his relationship with current and former bank employees. Bloomberg and the WSJ both have pieces this morning that detail how the bank spent years dismissing internal warnings about the riskiness of its risk management division. Bloomberg’s sources are so critical of Dimon that the piece can either be read as palace intrigue, with JPM’ers gunning for Dimon, or as post hoc ass-covering. Dimon received warnings about the chief investment office’s increasingly risky behavior from “some of his most senior advisers, including the heads of the investment bank.” Bloomberg buries the names, but the “We warned you, Jamie” camp now reportedly includes: Bill Winters and Steven Black, the former co-heads of the investment bank; James “Jes” Staley, who ran asset management and now leads the investment bank; and the current chief risk officer, John Hogan. (JPMorgan denied that any of them complained about specific CIO risks.) While Jamie Dimon tackles apparent dissent from inside his own company, David Cay Johnston laments JPMorgan’s “hedginess”. Reuters suggests the SEC could build its case around the bank’s failure to disclose changes to its risk-measuring methods. And Daniel Indiviglio has a solution: JPMorgan bonuses should be tied to a synthetic bond “linked to the fate of the bad hedges.”

Jamie Dimon May Come Out Swinging Tomorrow, But His Fast Ball Isn’t What It Was  - “Which Jamie Dimon will appear before the Senate Banking Committee in Washington on Wednesday?” asks Reuters BreakingViews columnist Rob Cox in a Slate piece.  “The self-effacing JPMorgan boss offering apologies for his bank losing at least $2 billion on bum trades?,” he asks? “Or the combative JPMorgan leader who just a year ago publicly challenged the chairman of the Federal Reserve over regulation?” Cox recommends the latter, which is why the piece is titled “Jamie Dimon Should Come Out Swinging in the Senate.”  He worries that “a mealy submission from Dimon may help effectively nationalize the American banking industry for good.”  He asks us to “[c]onsider the implicit message the senators who called Dimon before them are sending: that banks must answer to the nation for any losses they incur – and that watchdogs and regulations should somehow be able to prevent them.” Dimon may come out swinging, but I expect that it will be the Democratic senators who will hit it out of the park. Dimon’s fast ball isn’t what it was.

More on the Supposedly Out of Control JP Morgan Chief Investment Office and the “Fortress Balance Sheet” - Yves Smith  - Whocouddanode? As more and more tidbits leak out about the activities of the JP Morgan Chief Investment Office, it increasingly appears to be a unit that was inadequately supervised. While that revelation is a dent to the reputation of self-styled ubermensch and alleged control freak Jamie Dimon, if he takes a few lumps in the press and otherwise can carry on as before, what difference will it make to him and the industry? Lloyd Blankfein took at least as much heat over a longer period, and he’s still firmly in place.  The CEO “I’m in charge and I know nothing” defense is alive and well because it has proven to be so successful. Even though having an operation with very large risk limits and actual exposures that was left overmuch to its own devices would seem to be a clear Sarbanes Oxley violation, the Federal government has had absolutely no appetite for going after current bank CEOs. Dimon’s speedy firing of the unit’s head, Ina Drew, and other members seems to be a successful loss mitigation strategy. But some of the latest stories reveal that the CIO was really out of control, in the sense that direct orders, both from on high and by the CIO to its traders, were ignored. This is a breakdown of the normal chain of authority. It means insubordination was tolerated. And don’t try, “Oh, you know those traders, they are really hard to manage.” Bullshit. You need to enforce discipline, and in a trading operation, the usual first step is in their face, pronto, and giving them a very public dressing down. Follow up actions include cutting position limits, and better yet, seriously docking the bonuses of traders who violate the desk’s strategy.

Serious Questions for Jamie Dimon in Occupy the SEC/Alternative Banking Senate Letter - Yves Smith  - As many readers may know, Jamie Dimon is on deck tomorrow before the Senate Banking Committee to explain how a so-called hedge produced losses that are almost certain to exceed the $2 billion the bank has ‘fessed up to. But this is likely to be at most a ritual roughing up. First, the hearing is only two hours, and that includes the usual pontificating at the start of the session. By contrast, Goldman executives were raked over the coals for 10 hours over their dubious collateralized debt obligations. The comparatively easy treatment is no doubt related to the fact that JP Morgan is a major contributor to the five most senior committee members. Per American Banker: JPMorgan is Banking Committee Chairman Tim Johnson’s second-largest contributor over the last two-plus decades, according to the Center for Responsive Politics, which analyzes campaign giving from companies’ employees and their political action committees since 1989. The same is true for the committee’s top Republican, Sen. Richard Shelby, and its second-ranking Democrat, Sen. Jack Reed. The committee’s number-two Republican, Sen. Mike Crapo, and its third-ranking Democrat, Sen. Charles Schumer, are not far behind their colleagues, with JPMorgan ranking third and fourth, respectively, among their contributors. Second is that the format of these hearings, with each Senator getting only five minutes each per witness, makes it difficult for a questioner to pin an evasive or clever witness. It won’t be hard for Dimon to either run out the clock or bamboozle his interrogators. In the hope of improving the caliber of questions, Occupy the SEC and the OWS Alternative Banking Group drafted a joint letter to the Senate Banking Committee chairman, Tim Johnson. It consists of a general discussion, and then some background for each of its questions. This letter came out of last Sunday’s Alternative Banking meeting and the signers of the letter did the heavy lifting of creating a final document. Occupy the SEC/Alternative Banking Letter to Senate on JP Morgan. (embedded)

The Cost Of The Best Senate Banking Committee JP Morgan Can Buy: $877,798 In Bribes - In about an hour's time, Jamie Dimon will sit down before the Senate Banking Committee and prove, once again, not only who is smarter and calls the shots in the great Wall Street-D.C. soap opera, but that when it comes to purchasing a room full of senators (not to mention the script for today's "hearing"), JP Morgan is always at the top. Because as the following table compiled using OpenSecrets data, it cost JP Morgan just under $1 million, or $877,798.00 to be precise in lifetime campaign contributions, to buy itself precisely one Senate Banking Committee. And where it gets really fun is that between the Chairman, Tim Johnson (D - SD), and the ranking member Richard Shelby (R - AL), JP Morgan has been the top and second biggest campaign contributor, respectively. Also, 9 (at least) of the total 22 members of the committee have received some form of bribe from JPM over the years.

Senators Suck Up to Jamie Dimon, Get Paid for It - Jamie Dimon, CEO of the JPMorgan Chase, the country’s largest bank, appeared before the committee after a clear screw-up: traders at JPMorgan placed a series of complex bets that resulted in $2 billion in losses and counting. This should be of great concern to the Senate. Since deposits at JPMorgan Chase are backed by the federal government, risky market gambling could create the need for another massive public bailout of a normally profitable private bank. But instead, a vast majority of the Senators at Wednesday’s hearing repeatedly praised Dimon’s wisdom and executive acuity while politely soliciting his opinion on how he thought his own bank should be regulated. That shouldn't be too surprising if one examines the bank's political giving--members of the committee received $522,088 of the bank's cash in recent years, with $296,557 going to Democrats and $285,531 to Republicans. (See the graphic above).

Dimon Testimony Whopper: CIO’s Gambling on Disaster = “Portfolio Hedging” -- Yves Smith  - Well, there’s nothing like seeing Jamie Dimon swinging for the fences. Dimon has taken his defense and turned it into an offense, in both senses of the word.  In Senate testimony, Dimon revealed his idea of “portfolio hedging” to be even more egregious than the harshest critics thought. Dimon presented the job of the CIO to be to make modest amounts of money in good times and to make a lot of money when there’s a crisis. (That does not appear to be narrowly true, since in the last couple of years, during which there was no crisis, the CIO’s staff were among the best paid in the bank and produced significant profits for the bank. That is a bald faced admission that the CIO’s mandate had nothing to do with hedging. A hedge is a position taken to mitigate losses on an underlying exposure should they occur. Instead, Dimon has admitted that the mission of the CIO is to place bets on tail risks that are unrelated to JP Morgan’s exposures. A massive, systemically destructive strategy like the Magnetar trade would fit perfectly within the CIO’s mandate.  Needless to say, this definition is an inversion of not just what the Volcker rule was meant to stand for (limiting financial firm gambles with taxpayer money), it’s NewSpeak, or in this case, DimonSpeak: “a hedge is whatever I say it is, no more and no less.” Another bit of DimonSpeak was his specious response when he was arguing against the Volcker rule. The JP Morgan chief asserted that a customer loan could be construed to be a prop trade. Um, no, Volcker applies to trading books. The fact that he’d run a line like that shows how little he thinks of the intelligence of the Senate Banking Committee and the public generally.

Jamie Dimon Redefines Hedging as a Studious Senate Takes Notes - Alexis Goldstein - At Jamie Dimon’s hearing before the Senate on Wednesday, the JPMorgan CEO proved that even the most cynical observers underestimated the depths of the financial industry’s duplicitousness. The hearing revealed that JPMorgan appears to have found a solution to the pesky problem of the Volcker Rule. No, it’s not buying off members of the Senate Banking committee, though given what passed for “questions” in the hearing, that is certainly Plan B. JPMorgan’s solution is far simpler. It has relabeled proprietary trading: it’s now called “portfolio hedging.” This is a convenient rebranding, because portfolio hedging is explicitly allowed in the current draft of the Volcker Rule. The Volcker Rule (which was part of the Dodd-Frank Wall Street Reform bill) has a noble goal: create a firewall that bars banks that enjoy FDIC insurance from risky, speculative gambling. On Wall Street, gambling with the firm’s funds is known as proprietary or “prop” trading.  The banks hate the Volcker Rule because prop trading is very profitable when you’re on the right side of a bet. And when you’re a “too big to fail” bank on the wrong side of a bet, the government will bail you out, and the Fed will secretly give you billions of dollars in emergency loans. The Volcker Rule aims to prevent the need for these bailouts by prohibiting banks that enjoy customer deposits and FDIC insurance from making these risky prop trades.

Amar Bhide: Dimon Should Lose His Job Over CIO Mess - Tufts professor Amar Bhide states in a Bloomberg interview that Dimon should have been ousted over the losses in JP Morgan’s Chief Investment Office. The interview is instructive on several levels, not just for his defense of that view, but also in how it put the reporters on tilt. You can see Bhide get increasingly frustrated at the interruptions and knee jerk reactions from his interlocutors (in fairness, he also appears to have been distracted by the remote monitor).

Lacker and Stern: Large Banks Need 'Living Wills' - J.P. Morgan Chase's $2 billion in hedging-related losses has been in the news of late. Overlooked in much of the commentary, however, is that a sizeable loss at a large bank holding company would not be a public-policy concern were it not for the belief that the creditors of such firms will benefit from taxpayer support in the event of failure. This highlights the question of whether the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated "too-big-to-fail"—that is, the expectation of government rescue of large financial institutions. The short and honest answer at this point is that we simply don't know. Numerous provisions of Dodd-Frank are aimed at addressing the problem. But the fate of too-big-to-fail depends on what policy makers, regulators and supervisors actually do, and not on what they assert. Whatever doubts one might harbor about the effectiveness of various components of Dodd-Frank, there is one that truly does have the potential to eventually eliminate too-big-to-fail. The provision we have in mind requires that large financial institutions prepare so-called living wills—plans for orderly wind-down in the event of financial distress.  Such plans must be approved by government regulators and are intended to enable the closure of a troubled financial institution in a timely way, without negative spillover effects on other major financial institutions or markets and, importantly, without government-funded protection for the firm's creditors.

Geithner: J.P. Morgan’s ‘Pretty Significant Failure’ Makes Case for Regulation - Treasury Secretary Tim Geithner on Wednesday offered a few positive words for J.P. Morgan Chase on a day when the bank’s chief executive, Jamie Dimon, faced a grilling on Capitol Hill.  But he mostly used the company’s mess as a defense of the Obama administration’s regulatory approach, which Mr. Dimon and most of the banking industry has assailed. Mr. Geithner, who described the bank’s recent trading loss as “a pretty significant risk-management failure,” said J.P. Morgan’s response had one strength in particular: “They were direct and clear and crisp in admitting the scale of the error and in trying to get very quickly to what produced that, and to be very quick in trying to figure out how to put in place a framework that would make that less likely in the future. And that’s a good thing.” Speaking at the Council on Foreign Relations, Mr. Geithner said J.P. Morgan’s multibillion-dollar loss served as a reminder that risk management is “inherently uncertain.” As a result, the best defense against an unavoidable problem is ensuring that firms operate with more capital and less leverage, he said. “There is no rule and there is no reform and there’s no supervisor that can define their objective as preventing these firms from taking risks or making mistakes,” Mr. Geithner said.

JP Morgan As The New Fannie Mae - - No one wants to see too big to fail JP Morgan (JPM) go belly up like Lehman Brothers did. In fact, the Senate simply won’t allow it. They’d lose too much in campaign donations. JP Morgan’s recent $2 billion loss on a wild product it created — an index of European credit default swaps (CDS)– might as well be tax payer money. “JP Morgan is the new Fannie Mae,” says Bill Black, an economist from the University of Missouri and author of the book “The Best Way To Rob A Bank Is To Own One”.Fannie Mae is a subsidized mortgage lender, backed by the full faith and credit of Uncle Sam. If Fannie Mae’s sub prime lending portfolio blows up, as it did in 2008, the federal government picks up the tab. The federal government has done the same with JP Morgan and the remaining bulge bracket banks. They are thriving, in part, on the very real belief that what they do is risk less. They are profitable because, to a large extent, then can buy Treasury bonds at a discount and sell them to the Fed at a premium. They are the too big to fail king pins of U.S. domestic policy. And if they do fail, the government will pick up the tab. At the very least, it will help them by offering them money at near zero percent interest to gamble in the markets.

Why I was won over by Glass-Steagall, by Luigi Zingales - I have to admit that I was not a big fan of the forced separation between investment banking and commercial banking along the lines of the Glass-Steagall Act in the US. I do not like restrictions to contractual freedom, unless I see a compelling argument that the free market gets it wrong. Nor did I buy the argument that the removal of Glass-Steagall contributed to the 2008 financial crisis. The banks that were at the forefront of the crisis – Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide – were either pure investment banks or pure commercial banks. The ability to merge the two types was crucial in mounting swift rescues to stabilize the system – such as the acquisition of Bear Stearns by JP Morgan and of Merrill Lynch by Bank of America. Over the last couple of years, however, I have revised my views and I have become convinced of the case for a mandatory separation. There are certainly better ways to deal with excessive risk-taking behavior by banks, but we must not allow the perfect to become the enemy of the good. In the absence of these better mechanisms, it makes perfect economic sense to restrict commercial banks’ investments in very risky activities, because their deposits are insured. Short of removing that insurance – and I doubt commercial banks are ready for that – restricting the set of activities they undertake is the simplest way to cope with the burden that banks can impose on taxpayers.

Fed’s Tarullo Pushes for Less Risk in Shadow Banking - Federal Reserve governor Daniel Tarullo pressed Tuesday for quick action to reduce risks in the shadow banking system, including in money-market mutual funds and in short-term financing markets. Murky corners of the financial system still pose vulnerabilities and regulators should work to make the “shadow banking” system more transparent and less vulnerable to risk, Mr. Tarullo said in a speech delivered via satellite to a conference at the Federal Reserve Bank of San Francisco on Tuesday. “We ought not to wait for the comprehensive solution,” he added. “We need to identify areas of vulnerability in clear established markets in order to act there.

Making Banks Boring -- Bloomberg has an editorial arguing that making banks boring won't prevent a crisis; only increasing bank capital will do so.   To the extent that its big point is that banks will suffer during an economic downturn and the only protection against that is more capital (or insurance, including from the government), it's hard to disagree.  But what this editorial misses is that 2008 wasn't just some periodic economic downturn that occured for reasons beyond our comprehension or control, like El Niño and La Niña weather patterns.  Instead, the 2008 financial crisis was made by the banks themselves. The 2008 financial crisis was the inevitable result of the financial services' industry's behavior in the 2000s.  And that's why we have to make banking boring. Boring banks might be hurt by economic crises, but they don't make them. We cannot prevent every economic downturn, but there's no reason we should suffer the preventable ones.   So how is boring banking a solution? It matters for two reasons, one widely understood, and the second entirely overlooked.  First, boring banking does a reasonably good job of aligning risks and rewards for the parties actually making loans, and this helps control against asset price bubble. The second reason for making banking boring is one that is continually overlooked in the New Glass-Steagal debate, namely the political benefit of separating commercial from investment banking, which helps ensure against deregulation.

Bankers Complain of Tension With Fed Over Pay Restrictions - A group of U.S. bankers has told top Federal Reserve officials that regulators’ focus on restraining bankers’ pay is creating “unnecessary tension.” At a meeting last month with Fed Chairman Ben Bernanke and other top officials, executives said the Fed’s goals for bankers’ incentive compensation are a source of friction with regulators. Minutes of the May 11 meeting of the Fed’s “Federal Advisory Council” were posted Monday on the central bank’s website. The advisory council has 12 banking industry representatives as members, including Citigroup Inc. CEO Vikram Pandit, Capital One Financial Corp. CEO Richard Fairbank and U.S. Bancorp CEO Richard Davis. Also present at the meeting were Fed Vice Chairman Janet Yellen and governor Daniel Tarullo. The bankers said it is “commonly perceived” that banks’ performance goals will be criticized by bank regulators if they are not easy to meet and do not reward “exceptional performance,” the minutes read. “Shareholders, however, rightfully want to encourage exceptional effort and corresponding performance, and doing so should not be viewed as inconsistent” with safe banking practices,

Incoming Regulator Promises No More Coddling of Banks - ProPublica: The Office of the Comptroller of the Currency is so lenient on the banks it is supposed to regulate that it could be mistaken for a division of the United States Chamber of Commerce. Does its new head, Thomas J. Curry, have any hope of giving it a backbone?  Mr. Curry, a former director of the Federal Deposit Insurance Corporation, a regulator that actually regulates, has been leading the O.C.C. for about six weeks. He made his debut in Congress last week, expressing contrition over his agency's failure to monitor JPMorgan Chase's trading that resulted in multibillion-dollar losses for the bank.But the agency suffers from "mission confusion," as a former regulator at a rival agency told me. Indeed, if anything, the comptroller's office is too smart and too good at what it does. The heavyweight there, by all accounts, is Julie Williams, the agency's general counsel. She is savvy, aggressive, generally knows more about bank rules than anyone else in the room — and consistently pushes for less regulation, according to other regulators and Congressional workers with whom I have spoken.

Walkback on Basel III Confirms Bank Victory on Regulation - Yves Smith - The Wall Street Journal reports that a key element of Basel III rules, its provisions on liquidity buffers, are about to be watered down. Note that many, including this blog, deemed Basel III to be too weak and flawed in many critical regards (see here, here and here for some examples; among other things, its preservation of flawed risk weightings, delayed implementation and undue reliance on moving derivatives to exchanges rather than questioning their use).The overview: Following months of intense industry pressure, regulators say they now plan to make it easier for banks to comply with a key provision of new international banking rules that will require lenders to maintain sufficiently deep pools of safe, liquid assets—like cash and government bonds—that can survive market meltdowns and other intense crises.Now, changes to the rules will allow a wider variety of assets—such as gold and equities—to count toward banks’ liquidity buffers, among other changes envisioned to soften the rules, according to people involved in the talks. Equities? Gold? This is deranged. Remember the S&P at 666? How gold would swoon with no proximate cause on bad market days? Volatile assets are to be treated as liquidity buffers? A liquidity buffer doesn’t just mean you can sell it in a pinch, it also means you can sell it and have a fair degree of certainty as to what price it will fetch.

House Republicans Try to Create the World’s Worst Criminogenic Environment -  If you wanted to reproduce the conditions that led to the Great Recession in 2007, the easiest way would be the plan unveiled last week by House Republicans: gut the regulators who are supposed to keep the worst business practices in check. At a time when the economy is still reeling from the downturn, House Republicans released a spending bill that would severely cut the budget of the Commodity Futures Trading Commission, which would keep it from regulating potentially toxic swaps and other derivatives. It refused to give the Securities and Exchange Commission the extra money it needs to carry out the Dodd-Frank financial reform bill. And the bill would cripple the Internal Revenue Service, limiting its ability to detect tax avoidance, particularly by businesses and the wealthy. (The I.R.S. cut, designed to impede the agency’s role in health care reform, will inevitably increase the deficit.)With 710 employees, the C.F.T.C. staff is barely big enough for its current responsibilities, let alone its new mission under Dodd-Frank to oversee the huge over-the-counter swaps market. Its budget is $205 million, which President Obama proposed increasing to $308 million for 2013 to deal with swaps. The House Appropriations Committee has proposed slashing next year’s budget to $180 million.

Money Market Funds and Systemic Risk - On September 16, 2008, Reserve Primary Fund, a money market fund (MMF) with $65 billion in assets under management, announced that losses in its portfolio had caused the value of shares in the fund to drop from $1.00 to $0.97. The news that an MMF had “broken the buck” spread panic quickly to other MMFs. In the two days following Reserve’s announcement, investors withdrew approximately $200 billion (10 percent of assets) from so-called “prime” MMFs, which, like Reserve, mainly invest in privately issued short-term securities. The massive redemptions and resulting strains on MMFs contributed to a freezing of the markets that provide short-term credit to businesses and financial institutions and a sudden spike in short-term interest rates. Responding to these severe disruptions, the Treasury Department intervened on September 19 with a government guarantee of the value of MMF shares, and the Federal Reserve announced on the same day a facility designed to provide liquidity to MMFs. These unprecedented actions stopped the run on MMFs (for more analysis of the run in 2008, see McCabe, 2010). In this post, we discuss why MMFs are a source of financial fragility and the need for reforms to mitigate the risks they pose to the financial system and the economy.

Wall Street’s high-stakes love affair with Europe continues - Your favorite insolvent-but-for-the-grace-of-god-and-the-taxpayer banks are still in the game, player.  Don't you worry about that... From Fortune: ...while Wall Street firms were cutting their exposure to Greece and Ireland and Portugal, they were increasing their lending and bond buying in Italy, France and other European nations that seemed more financial secure. Goldman Sachs (GS), for instance, bought $2.2 billion worth of bonds in Italy, which is widely seen as the next troubled nation after Spain, in the first three months of the year. Bank of America (BAC), too, added over $600 million of Italian government bonds to its portfolio in the first three months of the year. Morgan Stanley (MS) added $555 million in French government bonds, after largely betting against the nation's debt in the year before. Maybe these bets are sound ones? Maybe (hopefully) Europe can stay together through a combination of bailouts, treaty rewrites and poetic speechifying, in which case these bond holdings may pay off handsomely for the US banks.

Viewing Financial Crimes as Economic Homicide -- R. Allen Stanford, who was found guilty of operating a multibillion-dollar Ponzi scheme, is likely to receive a sentence later this week that will require him to spend the rest of his life behind bars. If that happens, it will continue a pattern in which white-collar defendants convicted of committing large-scale fraud have received long prison terms, far longer than what has been meted out in the past. In March, Mr. Stanford, a Texas tycoon, was convicted on 13 counts of fraud and money laundering related to the collapse of Stanford International Bank, based in Antigua. Investors lost billions of dollars in what were billed as high-yield certificates of deposit but turned out to be largely worthless. Thousands of victims throughout the United States and the Caribbean were affected. In a sentencing recommendation filed in the Federal District Court in Houston, prosecutors asked Judge David Hittner for 230 years in prison, the maximum permitted by federal law for the convictions. Not surprising, Mr. Stanford is seeking a much lower punishment that would effectively result in a sentence of time served since he was jailed after being charged in 2009. I’m not really going out on a limb by predicting that the actual sentence will be somewhere in between those two recommendations. But how high is the sentence likely to be?

Loophole at MF Global Is Headache for Regulators - Most of the senior executives at MF Global Holdings Ltd. weren't registered with commodities regulators, meaning the executives can't be charged with supervision failures related to the firm's collapse. The situation is a headache for regulators as they press ahead with their 7½-month investigation of MF Global. "Failure to supervise" sanctions generally are much easier to prove than allegations of deliberate wrongdoing, according to legal experts uninvolved in the case. In addition, the probe hasn't yet produced smoking guns that show anyone at MF Global knowingly raided the customer funds that went missing in the firm's final days.

Goldman Sachs Hires Single Morally Decent Human Being To Work In Separate, Enclosed Cubicle - Seeking to mollify critics over its role in the global financial crisis, Goldman Sachs announced Friday the hiring of junior analyst Greg Kohler, who executives said is the investment bank's first and only employee to possess a clear set of morals or a basic understanding of right and wrong. Officials confirmed the upstanding Kohler, 24, will be based out of the company's Lower Manhattan headquarters, working from within a small cubicle strategically located in a remote corner of the building where he is unlikely to have contact with his morally bankrupt coworkers. "While Mr. Kohler won't be attending a single meeting or influencing any of our business decisions, we're confident his acute sense of professional integrity will prove a valuable asset," Siewert continued. "He will technically be on our staff, collecting a paycheck, and that's really all that counts."

Active Fund Management Is A Loser's Game - Twice each year, Standard & Poor's puts out its active versus passive investor scorecard, reporting on how actively managed funds have done against their respective benchmark indexes. Every time, the results are pretty much the same, demonstrating that active management is a loser's game -- in aggregate those playing leave on the table tens of billions of dollars forever seeking alpha (outperformance, adjusted for risk). The following is a summary of the scorecard's findings:

  • For the five years ending March 2012, only 5.2 percent of large-cap funds, 5.5 percent of mid-cap funds, and 5.1 percent of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. That's less than the 6.25 percent rate we would expect from a purely random outcome.
  • Just 6 percent of large-cap funds, 4.4 percent of mid-caps funds, and 15.6 percent of small-cap funds with a top-quartile ranking over the five years ending March 2007 maintained a top-quartile ranking over the next five years. Randomly, we would expect a repeat rate of 25 percent.

To Save Money-Market Mutual Funds, Scrap Them - Long-overdue rules to prevent a repeat of the 2008 run on money-market mutual funds may not be passed this year, thanks to a provision just inserted in a funding bill before Congress by Representative Jo Ann Emerson, Republican of Missouri.  This is unfortunate but unsurprising. Because real reforms jeopardize the very existence of money-market funds, opposition from the industry has been fierce. There is a way out, however: Pairing such reforms with a creative alternative to the current model could make the demise of money funds palatable even to their sponsors.  We propose extending a government program called TreasuryDirect, which allows investors to buy Treasury securities directly from the government in accounts held with the Treasury Department. Banks and brokerages should embed a more user-friendly version of TreasuryDirect in their accounts - - call it a (new) U.S. Money Fund.

US groups face $3tn debt refinance crisis - US financial institutions and junk-rated borrowers may struggle to refinance nearly $3tn in debt set to mature by the end of 2016 as global volatility threatens demand for risk assets, Standard & Poor’s warned on Thursday.The rating agency predicted that any challenges would arise after 2013, with the robust issuance of the past few years being sufficient to cover maturities until then.  “With fears of European Economic and Monetary Union [eurozone] contagion, a harder than expected landing in China’s economy and a potential economic slowdown in the US, consistent investor demand for risky assets is not guaranteed over the next few years,” S&P said. Financial issuers account for the highest share of maturing debt, with $1tn in bonds and loans coming due within the next 4½ years, according to S&P.  But refinancing risk could be even higher for non-financial companies in sectors such as media and entertainment as well as oil and gas, which have $247bn of junk-rated debt scheduled to mature in the same period. The latest bout of risk aversion in the capital markets over the last month highlights how the appetite for certain types of debt can quickly dry up in spite of their higher yields relative to US Treasuries.

S&P again rings alarm bells on US refinancing wall - Standard & Poor's again sounded the alarm bells about an impending wall of refinancing for US companies in the next four years, this time highlighting the potential stress for financial and speculative-grade companies. S&P said US corporate issuers had around $1.38 trillion of debt maturing through year-end 2013, and warned that the greatest refinancing risk was within the Single B and Triple C categories from 2013 through 2016. Financial institutions faced a steeper maturity wall compared with non-financial institutions. Investment-grade financial issuers have $647 billion in debt maturing through 2014 compared with $457 billion for investment-grade non-financial entities. Financial companies' refinancing needs include about $100 billion in government-guaranteed debt that matures through 2012. Much of this debt has interest rates that are lower than current rates, which would increase capital costs when it is replaced, said S&P.

U.S. Bank Downgrades Loom - Downgrade fever has been sweeping across the European banking system, and the major Wall Street banks are likely to be the next to get sick. Rating agency Moody's cut ratings for five banking groups in the Netherlands, three in France and one in Luxembourg Friday. Dutch giants ING and ABN Amro were among the banks downgraded. Next up for the rating agency are banks in the U.K.. as well as 17 major banks with "global capital markets operations." That includes Wall Street firms Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley. The other rating agencies, Standard & Poor's and Fitch, cut their ratings on some of the largest U.S. banks at the end of last year. Banks have been trying to assure investors they're ready for any further rating downgrades ever since Moody's first announced a review of the sector back in February. Morgan Stanley CEO James Gorman told investors at a conference this week that even if it is downgraded by three notches by Moody's, it would be a "manageable outcome," due to the bank's liquidity. Executives at the other top banks have also said they're prepared.

Unofficial Problem Bank list declines to 923 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. (Only US banks). Here is the unofficial problem bank list for June 8, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Four failures meant four removals from the Unofficial Problem Bank List. The list stands at 923 institutions with assets of $355.7 billion. A year ago, the list held 1,002 institutions with assets of $417.4 billion. After three weeks off, the FDIC got back to closings leading to the following removal s -- Waccamaw Bank, Whiteville, NC ($533 million Ticker: WBNK); Carolina Federal Savings Bank, Charleston, SC ($54 million); First Capital Bank, Kingfisher, OK ($46 million); and Farmers' and Traders' State Bank, Shabbona, IL ($43 million).

How the Fed is Killing S&Ls, and Why You Should Care - Savings and loans — those much-vilified institutions since the crisis of more than 20 years ago — finally may have met their maker, and that could be a bad thing for consumers. Last week's Federal Reserve announcement that S&Ls would have to increase their capital requirements could doom an industry that has been able to thrive largely on its ability to lend large amounts of money, primarily through mortgages, while keeping relatively low capital. The changes are part of the new regulatory landscape that has come about in response to the 2008 financial crisis. While the good news is that mega-failures like Washington Mutual, which was sold to JPMorgan Chase during the crisis, are taken out of play, the bad news is that consumers may feel the pain of mortgage rates that start rising off record lows. "We believe that regulatory changes following the financial crisis, including the announcement of thrift capital requirement last week, have ended the viability of the thrift industry," strategists at financial services firm Keefe, Bruyette & Woods said in a research note. "Bank mortgage lenders will need to carry higher capital against mortgage loans, demanding higher returns," KBW continued. "Higher capital requirements will not support the revitalization of the thrift industry, in our opinion, and as a result the industry will continue to fade away."

Eric Schneiderman’s Office Spars With Foreclosure Activist, Blogger -- Relations have soured between some foreclosure activists and New York Attorney General Eric Schneiderman, who earned praise for his role in a controversial Wall Street settlement but has more recently also become an object of criticism for that same role.  Schneiderman and the Obama administration tout the $25 billion settlement as an example of their willingness to get tough on big banks that are accused of widespread fraud in the foreclosure process. But several experts, including Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, say the fine print on the deal makes it look more like a subsidy for Wall Street than any kind of punishment. Schneiderman appeared before a generally sympathetic crowd at the annual Netroots Nation conference in Providence, R.I., on Thursday and pledged to hold banks "accountable." But organizers for a panel on foreclosure fraud told HuffPost that Schneiderman's office declined an invitation to participate in the panel.  The panel, which was held on Friday, was generally critical of Schneiderman, portraying him as a public official who had betrayed the trust of troubled homeowners who believed he would fight on their behalf. The panelists and members of the audience criticized the attorney general and the Obama administration for making public statements about holding banks accountable and helping homeowners, while programs designed to deliver aid to borrowers have met problems and bank malpractice continues.

Foreclosure Fraud: The Most Dangerous Panel in the World -They’ve scheduled DDay’s Netroots Nation foreclosure fraud panel–with Lynn Szymoniak, Malcom Chu, and Neil Barofsky–in a room with no streaming, and President Obama is holding a press conference to conflict with it. Which suggests this is the most dangerous panel in the world. So I’m gonna liveblog it. DDay introduces Barofsky as the first George Bush appointee to speak at Netroots Nation. Says Szymoniak made the name Linda Green famous. Chu is a Springfield MA foreclosure activist. DDay: We told Eric Schneiderman’s Chief of Staff we could fit him in. I don’t see him here. We’ll put a seat here for Elijah. It occurs I could call this panel “Foreclosure Fraud, the first 5000 years.” Elizabeth Warren, Jeff Merkley, nothing has changed. Dissipation of a lot of the leverage that the regulators have.

There is No Systemic Mortgage Fraud and We Have the Proof -It appears that the existence of mortgage fraud is a myth perpetrated by a few firebrand internet types called bloggers. Econintersect has found irrefutable proof of this massive hoax perpetrated by a few reprobates who probably should be pursued for fraud, slander and debasement of commerce, the banking system and country. On Friday morning (8 June 2012) a panel was convened by David Dayen to discuss foreclosure fraud at the Netroots Nation 2012 conference in Providence, RI. The panel was comprised of Neil Borofsky, Lynn Szymoniak and Malcolm Chu. The title of the session: Foreclosure Fraud: How the Banks Broke the Housing Market and How We are Fighting Back. It is because of this session that Econintersect has developed its proof that there is no fraud. Follow up: We have done a Google search (at 1:30 pm New York time, Sunday 10 June 2012) for the three names: Lynn Szymoniak, Malcolm Chu, Neil Barofsky in a group, with the commas and in that order. The first page contained listings for eleven blogs with crazy names like FireDogLake, emptywheel, stopforeclosurefraud and Occupy Boston. No reputable news sources were there. (The screen shot for the top search response entries is shown below, click on display for larger image.)

Another Schneiderman Con: Proposes Likely-to-go-Nowhere Foreclosure Fraud Legislation - - Yves Smith - Having sold out the possibility of getting a decent settlement for homeowners for a seat in Michelle Obama’s box at the State of the Union address and a star turn on a Potemkin mortgage fraud task force, Schneiderman appears to be an adept student of the Obama strategy of preferring empty gestures to substance, since they generate good PR and take a lot less effort. The latest headfake is that Schneiderman has presented a bill to the New York State legislate opposing foreclosure fraud. What’s not to like? Well, for a former state Senator who got some heavily contested legislation through, Schneiderman appears not to even be doing the basics. From the Politics on the Hudson blog: Schneiderman said the bill has an Assembly sponsor in Assemblywoman Helene Weinstein D-Brooklyn, but he didn’t mention a sponsor in the Senate—where Schneiderman was a member. No Senate sponsor for a late-in-session bill? And it’s even later than that. Nevada’s attorney general, Catherine Cortez Masto pushed for legislation to criminalize foreclosure abuses and it became law last October. Schneiderman and Masto were almost certainly communicating last year; he was probably aware of the legislation before it was passed. Why did he take so long to launch (feebly) a similar measure here?

Jamie Dimon Is Taking Your Phone Calls on Foreclosure Paperwork Problems - After a discussion about how JPMorgan’s loan-to-deposit ratios are much lower than comparable banks, giving them more funds to gamble with, Sen. Herb Kohl said that his constituents often call him, and every other Senator, with loan modification problems. “Often they say the banks lose their paperwork. One constituent said to me ‘I don’t want to lose my house because they can’t get their paperwork straight.’” We know from Paul Kiel’s book that most of these “lost documents” simply went over to India in a cost-cutting measure, never to be seen again: So that was the issue at hand. Dimon’s response was priceless. First of all, he said to forward the information from the constituent to him personally, and he will take care of it. This is the typical fashion; the banks don’t jump on a foreclosure problem until it gets media attention or attention from a Senator in a hearing. After that it’s a fire alarm. Dimon then said, and I quote, “We don’t want you to lose your home because of our paperwork problem.” How many hundreds of thousands of Americans have lost their homes because of paperwork problems over the last few years? How many are being thrown out using false documents, back-dated documents, forged documents and robo-signed documents? How many homeowners have lost their home because of technical screw-ups? Lost payments? Misapplied payments? Payments with 2 cents missing (that’s a real case)? Banks trying to foreclose on homes with no mortgage? Banks breaking and entering into the wrong home, one that doesn’t even have a delinquency? Is the number even countable at this point?

Michael Olenick: How Servicers Lie to Mortgage Investors About Losses - A post last week reviewed a botched foreclosure for a mortgage loan in Ace Securities Home Equity Loan Trust 2007-HE4 dismissed with prejudice, meaning that the foreclosure cannot be refilled; a total loss for investors. Next, we reviewed why the trust has not yet recorded the loss despite the six month old verdict.

Wells Fargo Takes Revenge on Blog for Posting How Bank’s Improper Foreclosure Led to a Suicide - - Yves Smith - It appears Wells Fargo is not happy about bad press about how it has blood on its hands and is not above taking petty revenge. Even though some major sites like Barry Ritholtz’s The Big Picture have publicized the San Francisco bank’s petty and possibly illegal treatment of mortgage blog ML Implode-o-Meter, casual readers may miss the real scandal. Wells closed the blog’s bank account on dubious grounds and with no notice, and appears to have impounded customer funds. That’s tacky, but the real meat of the story, the revelations in ML Implode-o-Meter that appear to have triggered Wells to act, comes fairly late in most of these accounts.  Martin Andelman, proprietor of Mandelman Matters who sometimes has his posts picked up by ML Implode-O-Meter published a hard-hitting story about a suicide that was precipitated by an improper foreclosure action by Wells Fargo. It was picked up by ML Implode-o-Meter and was re-reported by Truthout (with attribution). The short version of this story is that Norman Rousseau paid his mortgage by cashier’s check at the branch, on time. But Wells claimed the payment had not been made and moved to foreclosure. Andelman dismissed the bank’s bogus justification:The Rousseaus file a dispute with Wells Fargo over the supposed missing payment. Wells Fargo “investigates” and comes back saying that the Rousseaus had stopped payment on the check. They stopped payment on a Cashier’s Check? Seriously?.. The fact that the Rousseaus had a receipt should settle the matter. The payment was submitted on time. Nevertheless, they enter loan modification hell, rather than simply having the error corrected. And although all modification stories are awful, this one was worse than usual even before its awful denouement. This account comes from via Truthout:

Ex-loan officer claims Wells Fargo targeted black communities for shoddy loans - For nearly a decade, Beth Jacobson lived inside the vast machinery of subprime mortgages that shook the nation’s economy. In sworn court testimony, she described watching loan officers comb through heavily African American areas such as Baltimore and Prince George’s County, forging relationships with churches and community groups to sell their members shoddy mortgages. She says she processed loans for homeowners with sterling credit ratings with higher interest rates than they needed to pay. And she says she pumped out millions of dollars in mortgages to people with no paperwork and low incomes, becoming Wells Fargo’s top-producing loan officer.The machine made her rich — the questions came later. Now, she has recast herself as a crusader for consumers in a battle that has pitted her against the system she once pushed.

Treasury Confirms That HAMP Being Used for Settlement Relief - Let me just use this space to look at one small element of the panel that we got confirmation on, almost at the same time that the panel was happening on Friday. Neil Barofsky talked about the settlement, and its deficiencies. And he reserved his most anger for one aspect. This is from Marcy’s recap:Most offensive part of settlement, when they talk about accountability. It makes me angry. Same TARP program, they get credit when they put a mortgage through HAMP. The way HAMP works is incentive based system, pays servicers and banks to reduce [principal]. If I’m a bank, I reduce a loan on my portfolio. I might get check for $50,000. As part of this settlement, they’ll get credit when they receive a taxpayer check. You have a settlement that is supposed to bring accountability. How does it work? Taxpayer $$ flowing from us to them. It is very conceivable, if they’ve already marked down the value, they’ll profit, they’re going to recognize taxpayer funded profit as part of this settlement as punishment. Part of this entire approach is why in 2 years we’ll still be here talking about this problem. I don’t see how it’s going to happen. This is something that HUD vociferously denied, even writing public communications about it. They said that “Servicers cannot use HAMP incentives to meet their obligations under the settlement, plain and simple.” That’s a clever turn of phrase that assumes money is not fungible. Maybe the money itself from HAMP incentives won’t go into the settlement. But if the banks get incentive credit through HAMP, and if HAMP loans are eligible for the settlement, then there’s no functional difference.

Harp 2 starts to help the severely underwater -  Harp 2 is starting to pay off for some deeply underwater homeowners. On June 1, the Federal Housing Finance Agency reported that total Harp refinances had jumped to 180,185 in the first quarter of this year - almost double the number done in the previous quarter. ... The vast majority of Harp refis in the first quarter were loans with LTV ratios in the 80 to 105 percent range. Guy Cecala, publisher of Inside Mortgage Finance, calls these loans the "low-hanging fruit lenders have been willing" to refinance. Only 20 percent had LTVs between 105 and 125 percent and only 2 percent had LTVs greater than 125 percent. ... Starting last week, loans with LTVs greater than 125 percent can be bundled into securities sold to investors, although they still must be segregated from other loans, Cecala says. That should give Harp 2 a big boost.

Obama’s Fannie Mae failure - Amid all the rhetoric and posturing that have accompanied every twist and turn of the great housing bust and the ensuing slow, stuttering recovery of the United States economy, a comment made last week by new Fannie Mae CEO Tim Mayopoulos to the Wall Street Journal might have seemed consequential only to the most wired-in housing wonk. ”From my perspective, I don’t believe we need principal reduction to modify loans and make [modifications] work for homeowners,” Mr. Mayopoulos said. Don’t push that snooze button! The jargon might be thick, but in the middle of a massive foreclosure crisis, Mayopoulos’ comments spoke directly to the most contentious issue in housing finance policy today: how to keep Americans in their homes. It’s a question that divides not just Democrats and Republicans, but also the executive branch of the government itself. Because you can make a good case that for all practical purposes Mayopoulous works for the federal government; and yet, his position on “principal reduction” is at direct odds with President Obama’s. That’s a big deal. The collapse of the housing sector precipitated the economic crash. Fixing it is crucial to enabling a sustainable recovery. And yet, despite years of effort, in the all-important domain of housing finance, the White House has proven itself unable to execute its agenda.

As Foreclosure Fraud Settlement Falters, Foreclosure Defense Movement Gains - Ben Hallman has an informative piece on who is starting to get relief from the foreclosure fraud settlement. The short answer, despite incentives to write down loans in the first year of the program, is not that many people. As part of the national mortgage settlement signed in March, five large banks — Chase, Bank of America, Citigroup, Wells Fargo and Ally Financial — agreed to offer at least $10 billion in loan forgiveness, or principal reduction, to some of the estimated 11.1 million homeowners who owe more on their mortgage than their home is worth. But three months later, the banks’ progress in distributing that relief is slow, said housing counselors at 12 agencies, mostly in Florida, surveyed by The Huffington Post. At nine of the agencies, counselors reported that the banks had granted just one or two principal reduction offers out of dozens requested. Counselors at three other agencies — in North Carolina, Ohio and Florida — said that they had no clients who had received a bank’s loan forgiveness offer as a result of the settlement. Banks are not saying how much principal they have written off, though a report to the government on their efforts is due in September. Servicers are simply much more likely to use forbearance – deferring principal to a lump sum payment at the end – rather than principal reduction. This has been Ed DeMarco’s mantra, and it’s largely the industry standard. The difference is that these five banks in the settlement are required to provide principal reductions for their customers who qualify, and early on, they’re just not doing it.

Negative Equity Still 800-Lb. Gorilla in Housing Market - Kathleen Pender at the SF Chronicle, one of the few national journalists to keep up with the government’s newly-tweaked HARP refinancing program, has a new story out claiming that the program is starting to “help the severely underwater.” The statistics she cites, rather than the anecdote, however, show the program isn’t really helping the severely underwater at all: On June 1, the Federal Housing Finance Agency reported that total Harp refinances had jumped to 180,185 in the first quarter of this year – almost double the number done in the previous quarter.But they still accounted for only 15 percent of all Fannie and Freddie refis compared with 8 and 14 percent, respectively, the previous two quarters.The vast majority of Harp refis in the first quarter were loans with LTV ratios in the 80 to 105 percent range. Guy Cecala, publisher of Inside Mortgage Finance, calls these loans the “low-hanging fruit lenders have been willing” to refinance.Only 20 percent had LTVs between 105 and 125 percent and only 2 percent had LTVs greater than 125 percent. Pender correctly qualifies this by saying that HARP 2 loans were only available for a couple weeks in the quarter. But we’re talking about 4,434 refinanced loans, total, in the whole country, over 125% LTV. And since that time, we’ve learned that several banks have simply cut off HARP loans about 105% LTV. And others, including the biggest banks like Chase and BofA, are refusing to refinance any underwater loans but the ones they already service, artificially limiting competition. This is being used to drive up interest rates for underwater borrowers on those loans. Pender claims there is some competition in the marketplace, particularly from Bank of the West.

Lawler: Table of Short Sales and Foreclosures for Selected Cities - Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional). Economist Tom Lawler has been digging up similar data, and he sent me the table below for several more distressed areas. From Lawler: Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales, while others (e.g., Birmingham) only report on the foreclosure share of sales. I’m not quite sure why the short-sales share (based on MLS reports) in the Minneapolis area is so low relative to other MLS-based reports for areas with “high” distressed-sales shares. The most striking shift from a year ago, of course, is the sharp drop in the foreclosure share of home sales – with the drop in Phoenix being nothing short of amazing. Most, but not all, areas also saw a significant increase from a year ago in the short-sales share of resales. And finally, most areas have seen a YOY drop in the overall “distressed” sales share, and saw a significant YOY increase in non-distressed sales.

CoreLogic: Impact of negative equity on the Supply of Unsold Homes - CoreLogic released their June MarketPulse Report today. Here is a brief excerpt on the impact of negative equity on housing supply:  While the rapid decline in months’ supply is typically good news because it indicates a better balance between demand and supply, this decline is occurring less because of an increase in sales and more because of a drop in unsold inventory as a result of negative equity. Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale. Analysis of the 50 largest markets reveals the metropolitan areas with the lowest levels of months’ supply also have the higher shares of negative equity. Markets with negative equity share of 50 percent or more have an average months’ supply of 4.7 months, compared to 8.3 months’ supply for markets with less than a 10 percent negative equity share. The presence of negative equity not only drives foreclosures, reduces the availability of purchase down payments and impedes refinances, but also restricts the ability of owners to list their homes for sale as the demand side of the market improves.  Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand.

Americans See Biggest Home Equity Jump in 60 Years - Americans are digging themselves out of mortgage debt. Home equity in the first quarter rose to the highest level since 2008 as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to pay down principal. The gain in percentage terms was the biggest jump in more than 60 years, according to an analysis by Bloomberg of Federal Reserve data. It’s the strongest sign yet that Americans’ home-loan debt burden is beginning to ease after the record borrowing that created, and ultimately popped, the housing bubble, leaving almost a quarter of homeowners with mortgages owing more than their properties were worth, Half the mortgages refinanced in the fourth quarter reduced loan size, a record, according to Freddie Mac, the government-owned mortgage buyer. “The willingness of homeowners to carry housing debt has been radically altered,” . “When the market was booming, a mortgage was used as a leveraging tool, and now it’s seen as a risk.” Measured as a share, rather than in dollars, homeowner equity was 41 percent of U.S. residential property value in the first quarter, including homeowners who don’t have mortgages, according to the Fed study released last week. The last time the share was that high was in the third quarter of 2008."

MBA: Mortgage Applications Reach Highest Level Since 2009 - From the MBA: Mortgage Applications Reach Highest Level Since 2009 in Latest MBA Weekly Survey The Refinance Index increased over 19 percent from the previous week to the highest index level since April 2009. The seasonally adjusted Purchase Index increased around 13 percent from one week earlier.  “Refinance volume increased as borrowers were able to lock in at mortgage rates below 4 percent, and purchase application volume was its highest level in over six months. HARP volume has been steady in recent weeks at about 28 percent of refinance applications.”  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.88 percent from 3.87 percent, with points decreasing to 0.43 from 0.46 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. Refinance activity continues to increase as mortgage rates are near the record low set the previous week.

Foreign Purchases of U.S. Homes Rise Strongly - The six-year slide in U.S. home prices and the dollar's weakness against some currencies are driving a property-buying binge by Asians, Canadians, Europeans and Latin Americans eager to own a piece of America.  Plowing money into real estate may sound like a risky venture to many Americans. But to growing numbers of foreigners, U.S. housing has never seemed a smarter investment. International buyers accounted for $82.5 billion, or 8.9%, of the $928 billion spent on residential real estate in the 12-month period that ended in March, according a survey released Monday by the National Association of Realtors. That was up 24% from $66.4 billion in the previous-year period.The survey showed that about 55% of all international buyers came from five countries: Canada, China, Mexico, India and the United Kingdom. Five states, meanwhile, accounted for around 55% of all sales to international buyers: Florida, California, Texas, Arizona, and New York. The survey found that 62% of international buyers paid in cash.

Shortage of homes for sale creates fierce competition - Housing inventory has sunk to levels not seen since the bubble years. ... In Southern California, inventories have plunged over the last year. The number of homes listed for sale in April fell 35% in Los Angeles County and was down 42% in Orange, 39% in San Bernardino, 42% in Riverside, 53% in Ventura and 43% in San Diego counties, according to online brokerage Redfin. Many people who bought at the top of the cycle are so deeply underwater, they can't get the price they need to sell and are therefore not bothering to put their homes on the market. "We know negative equity holds back home sales, but it also holds back the listing of sales," said Sam Khater, an economist with CoreLogic  Glenn Kelman, chief executive of Redfin, said the recovery remains tentative but the market has grown competitive because sellers feel they have time on their side, while buyers feel a sense of urgency given low interest rates and relatively cheap prices compared with the bubble years.

Report: Housing Inventory declines 20.1% year-over-year in May - From May 2012 Real Estate Data On the national level, inventory of for-sale single family homes, condominiums, townhouses and co-ops declined by -20.07% in May 2012 compared to a year ago, and declined in all but two of the 146 markets covered by The median age of the inventory fell -9.78% on a year-over-year basis last month, and the median national list price increased 3.17% last month compared to May 2011. Signs of recovery are evident in a growing number of markets that were once the epicenter of the housing crisis, and older industrialized areas in the Northeast and the Midwest are showing emerging signs of weaknesses. For example, the recovery process that began in Florida approximately one year ago has since spread to Phoenix and most recently California. At the same time, markets such as Reading, PA, Allentown, PA and Milwaukee, WI continue to lag behind the rest of the market. also reports that inventory was up 2.0% from the April level.

CoreLogic: Existing Home Shadow Inventory declines 15% year-over-year - Note: there are different measures of "shadow" inventory. CoreLogic tries to add up the number of properties that are seriously delinquent, in the foreclosure process, and already REO (lender Real Estate Owned) that are NOT currently listed for sale. Obviously if a house is listed for sale, it is already included in the "visible supply" and cannot be counted as shadow inventory. From CoreLogic: CoreLogic® Reports Shadow Inventory Fell in April 2012 to October 2008 Levels CoreLogic ... reported today that the current residential shadow inventory as of April 2012 fell to 1.5 million units, representing a supply of four months. This was a 14.8 percent drop from April 2011, when shadow inventory stood at 1.8 million units, or a six-months’ supply, which is approximately the same level as the country was experiencing in October 2008.Of the 1.5 million properties currently in the shadow inventory, 720,000 units are seriously delinquent, 410,000 are in some stage of foreclosure, and 390,000 are already in REO.This graph from CoreLogic shows the breakdown of "shadow inventory" by category. Note: The "shadow inventory" could be higher or lower using other numbers and methods; the key is that CoreLogic uses a consistent method (and removes properties currently listed) - and that their estimate of the shadow inventory is declining.

Redfin: House prices increased 2.2% Year-over-year in May - Another house price index, this one is based on price per sq ft ... From Redfin: May Real Estate Prices Increase 2.2% as Inventory Continues to Fall Redfin today released a new 19-market analysis of May home prices, sales volume and inventory levels. The Redfin Real-Time Price Tracker ... showed an annual price gain of 2.2% and a monthly gain of 2.7%. Inventory levels were down 23.5% compared to last year, and down 1.7% compared to last month. Sales volume was up 7.4% over this time last year, and pending sales were up even more, by 10.7%. Redfin’s business saw a stronger-than-expected rebound from Memorial Day weekend: with rates low and rents high more new home-buyers were touring homes last weekend, and more are now writing offers. The limit on sales volume is inventory. Not enough sellers have stepped in to provide the liquidity that once came from banks with foreclosures to sell.” There is limited historical data for this index. In 2011, sales were fairly weak in the May through July period, and a 7.4% increase in year-over-year sales would be less than the 10% year-over-year increase in April.

DataQuick: SoCal home sales up in May - From DataQuick: More Gains for Southern California Home Sales and Median Prices Last month’s total Southland sales rose nearly 21 percent compared with a year ago, and activity increased across the home-price spectrum. But the gains were strongest above $300,000. The volume of transactions in lower-cost markets has been restrained by, among other things, the dwindling inventories of homes for sale, especially foreclosures.  ...In May, a total of 22,192 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. That was up 15.1 percent from 19,284 in April, and up 20.6 percent from 18,394 in May 2011. ...On a year-over-year basis, Southland home sales have increased for five consecutive months, with last month’s 20.6 percent annual gain the largest in the series. Sales have also increased year-over-year in nine out of the last ten months. Still, last month’s sales were 14.5 percent lower than the average sales tally for all the months of May since 1988. The month-to-month and year-over-year increases in sales last month would not have been as great if this May hadn’t had one extra business day on which sales could close. While last month had 22 business days, this April and May 2011 had 21 business days.

Lawler: Early Read on Existing Home Sales in May - From economist Tom Lawler: Based on local realtor/MLS reports I’ve seen so far, I estimate that existing home sales as measured by the NAR ran at a seasonally adjusted annual rate of about 4.66 million, up 0.9% from April’s pace and up 12.3% from last May’s SA pace. For folks watching unadjusted data, May’s YOY sales gain almost certainly exceeded April’s by a far amount. However, this April’s seasonal factor was lower than last year’s (meaning SA sales YOY rose by more than NSA sales), while this May’s seasonal factor (due mainly to a higher business day count) will be higher than last May’s (meaning SA sales YOY will rise by less than NSA sales).  On the inventory side, various reports tracking listings across metro areas across the country suggest that the inventory of existing homes for sale in May were up 1-2% on the month and down 20-22%from a year ago. However, NAR inventory data month to month don’t track these “listings” reports very closely, with the monthly “differences” having a distinct seasonal component. (Every April, e.g., the NAR’s inventory number shows a much larger gain than folks who track listings.) My “best guess” is that the NAR’s inventory estimate in May will be down about 20.8% from last May. That would imply an estimate of about 2.48 million, which would be down 2.4% from April.

Why Would an Economist Expect Home Sales to Rise From Current Levels? - Economists seem to specialize in saying silly things about the economy. In a NYT article that discussed the prospect of consumers leading a recovery, Nigel Gault, chief domestic economist at IHS Global Insight, is cited as saying that it would take a jump in employment to bring about a rebound in house sales. It is difficult to understand why any economist would expect sales to move substantially above current levels. Existing home sales have been around 4.6 million in recent months. By comparison, in the relatively healthy pre-bubble economy of the mid 90s existing home sales averaged a bit more than 3.5 million. This means that sales are already close to 30 percent above their pre-bubble level even though population has only increased by around 10 percent over this period. It is hard to imagine why any economist would expect sales to be so much higher now than in the pre-bubble period.It's also worth noting that savings rate remains far below its long-term average which means that consumer spending is high relative to their disposable income. It is not clear why economists would expect consumer spending to go still higher, which would imply a lower savings rate.

Paying mortgage isn't a top priority in tough times, research shows - If we've learned one thing from the housing downturn, it's that making the monthly mortgage payment is no longer a sacred concept in many American households. When times are tight, consumers put paying for their cars first. Then the credit cards will be paid. The once-mighty mortgage has slipped to No. 3. Why have cars taken the top priority? We believe that it's primarily because consumers need their cars to get to work or to seek employment. Being able to seek employment is particularly relevant because of how long people have been out of work. Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can't use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you. But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren't involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you're looking at 10 to 20 months before you'll be evicted.

Family Net Worth Fell Almost 40% Between 2007-2010 - Families’ median net worth fell almost 40% between 2007 and 2010, down to levels last seen in 1992, the Federal Reserve said in a report Monday. As the U.S. economy roiled for three tumultuous years, families saw corresponding drops in their income and net wealth, according to the Fed’s Survey of Consumer Finances, a detailed snapshot of household finances conducted every three years. Median net worth of families fell to $77,300 in 2010 from $126,400 in 2007, a drop of 38.8%–the largest drop since the current survey began in 1989, Fed economists said Monday. Net worth represents the difference between a family’s gross assets and its liabilities. Average net worth fell 14.7% during the same three-year period. Much of that drop was driven by the housing market’s collapse. Families whose assets were tied up more in housing saw their net worth decline by more. Among families that owned homes, their median home equity declined to $75,000 in 2010, down from $110,000 three years earlier. Between 2007 and 2010, incomes also dropped sharply. In 2010, median family income fell to $45,800 from $49,600 in 2007, a drop of 7.7%. Average income fell 11.1% to $78,500, down from $88,300.

Fed Data Shows 38.8% Loss Net Worth from 2007 to 2010 - The new survey from the Federal Reserve on changes in family finances from 2007 to 2010 contains sobering news. This covers the Great Recession, so it stands to reason that there would be some ugly statistics. And sure enough, the data show that median family income fell 7.7% in this period (real mean income went down 11%), and median net worth just collapsed: The decreases in family income over the 2007−10 period were substantially smaller than the declines in both median and mean net worth; overall, median net worth fell 38.8 percent, and the mean fell 14.7 percent (figure 2). Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. The exceptions to this pattern in the medians and means are seen in the highest 10 percent of the distributions of income and net worth, where changes in the median were relatively muted. Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices. This puts a number to the losses from the housing bubble. We can now say that the bubble took away almost 40% of the average American’s net worth. At the lower levels those losses were greater, as the top 10% held on to more of their money (it was likely concentrated in stocks that bounced back in 2009 and 2010).

Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says - The recent recession wiped out nearly two decades of Americans’ wealth, according to government data released Monday, with ­middle-class families bearing the brunt of the decline. The Federal Reserve said the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010. That puts Americans roughly on par with where they were in 1992. The data represent one of the most detailed looks at how the economic downturn altered the landscape of family finance. Over a span of three years, Americans watched progress that took almost a generation to accumulate evaporate. The promise of retirement built on the inevitable rise of the stock market proved illusory for most. Homeownership, once heralded as a pathway to wealth, became an albatross. The findings underscore the depth of the wounds of the financial crisis and how far many families remain from healing. If the recession set Americans back 20 years, economists say, the road forward is sure to be a long one. And so far, the country has seen only a halting recovery.

Fed Survey: From 2007 to 2010, Median Family income declined 7.7%, Median Net Worth declined 38.8% - From the Federal Reserve: Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances - The Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2010 provides insights into changes in family income and net worth since the 2007 survey. The survey shows that, over the 2007–10 period, the median value of real (inflation-adjusted) family income before taxes fell 7.7 percent; median income had also fallen slightly in the preceding three-year period. The decline in median income was widespread across demographic groups, with only a few groups experiencing stable or rising incomes. Most noticeably, median incomes moved higher for retirees and other nonworking families. The decline in median income was most pronounced among more highly educated families, families headed by persons aged less than 55, and families living in the South and West regions. The decreases in family income over the 2007−10 period were substantially smaller than the declines in both median and mean net worth; overall, median net worth fell 38.8 percent, and the mean fell 14.7 percent (figure 2).Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. This is a portion of table 4 from the Fed Bulletin, and shows the median and mean net worth by income and head of household age for four periods (2001, 2004, 2007 and 2010). The only group (by income) with an increase in the median net worth was the top 10%.

Family Net Worth Collapses 40% In Three Years - Yesterday, the Fed released its latest Survey of Consumer Finances. The report included a lot of depressing data about the financial situation of average Americans. But nothing was so shocking and depressing as this: The median net worth of American families dropped nearly 40% from 2007 to 2010. Wow. (Yes, the situation has improved in the 18 months since 2010, but only modestly. House prices are about where they were back then.) Most of this decline came from the collapse of the housing market. But we can't just write this one off to the housing bubble. The median net worth of households has now fallen to the same level as it was two decades ago, in 1992. What does that mean? It means America just isn't working right now. Not just Americans. America itself, a country whose economy once worked for almost everyone. In the old America, if you worked hard, you had a good chance of moving up. In the old America, the fruits of people's labors accrued to the whole country, not just the top. In the old America, there was a strong middle class, and their immense collective purchasing power drove the economy for decades.

Chart of the day: Median net worth, 1962-2010 - The big news from the Fed this week is, in the words of the NYT headline, that Family Net Worth Drops to Level of Early ’90s. But if you look at the actual report, there isn’t any data in there on family net worth before 2001. So many thanks to Peter Coy, who actually went ahead and ran the numbers. Now these are Coy’s numbers, not the Fed’s. But Coy uses the Fed’s data, and here’s what he comes up with: According to these numbers, the median family net worth in 2010, $77,300, is lower than it was in 1989, when it was $79,600. And it might well even be lower than in 1983, when, according to a different methodology, it was $88,000. The 1962 and 1983 numbers can be compared to each other but not directly to the rest, because the methodology changed. But the fact is that they’re just as likely to be too low as they are to be too high. And as a general guide to household net worth, I think it’s fair to say that the median US household is no richer now than it was 30 years ago.

Family Net Worth Drops to Level of Early ’90s, Fed Says -  The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday. A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.  Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation. The new data comes from the Fed’s much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families. While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.

We are not as wealthy as we thought we were - The Census Bureau has released new data on wealth:The recent financial crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said on Monday.The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period. The story is here.  Matt adds comment and posts a good chart.

Wealth Plunged in the Aughts -- The Federal Reserve's study of consumer finances from 2007-2010 was released today, finding that the typical family ended 2010 no wealthier than the typical family had been in the early 1990s. That's because what we already knew had been a decade of declining wages and incomes also turned out to be a lost decade for stocks and of course a disaster for housing wealth. You can see some of the key data in the chart I've reproduced. The 2004-2007 period was an unusual one for the American economy. The unemployment rate had recovered from the dot-com recession, but the employment:population ratio never re-obtained its late-1990s peak and unlike in the 1990s, wages didn't rise much. What did rise, as you can see, is wealth. And now just for the 1 percent. Housing is a very broadly owned asset class, so the steady appreciation in land prices actually led the median wealth level to increase faster than the mean. In a variety of ways, many people were able to take advantage of that wealth accumulation to bolster their consumption—either through home equity loans or simply because the prevailing lending dynamics let a lot of people get a decent house with a small monthly payment.

A Wealth of Wealth Data and Why the Slog is so…Sloggy - A wealth of data on income and wealth was released today from the Survey of Consumer Finances (SCF) by the Federal Reserve.  The NYT reviews some of the main findings here, but there’s a lot more in this report. Most surveys of this sort focus on income and wages, but the SCF lets you look at net worth—assets (of which income is but one part) minus liabilities, or debts.  This is particularly important over a period with so much asset depreciation, specifically the loss of housing wealth.Probably the biggest punch line here is something we already knew, but now can see quantified in all its ugliness: the loss of wealth in the Great Recession was even worse than the loss of income.  The first figure looks at middle-income families, those in the middle fifth of the income scale, whose income level was about $45K in 2010. As you can see, their real net worth fell more than three times faster than their income, 2007-10, mostly due to the decline in home prices.  The decline in net worth in 2010 dollars was from $92.3K to $65.9K.* With declines in net worth of this magnitude, it’s no wonder the recovery has been so sluggish.  And the net worth of the median household is not just lower than it was in 2007; it’s back to the level of the early 1990s, according to the NYT.

Old Data on Plunge in Net Worth Still Pack a Wallop - We are inundated with economic data. It hits us daily, weekly, monthly. Yet one of the most telling numbers to describe the devastation of the recent recession is produced only once every three years and already is old.  Despite those limitations, those numbers fully retain their power. The key number is 40%. That percentage represents the decline in the median net worth of U.S. families between the years 2007 and 2010. The Federal Reserve, in its survey of consumer finances, let us know that Monday. That is a very big drop, a drop big enough to change people’s world views and long-term attitudes toward what they can and cannot buy. And those decisions, of course, drive the level of economic activity and employment, and around and around it goes. As it is, in our land of economic data overflow, many of us are willing to change our outlooks, with implications for everything from monetary policy to budget deficit reduction, on the basis of a couple of months of employment figures. These consumer-finances numbers are much more telling, reinforcing the notion that our post-financial-crisis world is not one we will exit easily and, as we know by now, certainly not quickly.

Wealth by Distribution, Region, and Age - The Federal Reserve has published results from the most recent Survey of Consumer Finance, the triennial survey that is the canonical source for looking at the wealth of households. The results are in an article in the June 2012 issue of the Federal Reserve Bulletin called "Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances," . The headline finding from the report is that the median household wealth level fell from $126,000 in 2007 to $77,000 in 2010. Mean wealth is of course far higher than median wealth. It fell from 584,000 in 2007 to $499,000 in 2007. During a three-year period when housing prices and the stock market declined, a fall in wealth is expected. I'm still trying to digest the data, but here, I'll focus on three patterns in the evolution of wealth that just happened to catch my eye: changes across the distribution of wealth, across regions, and across age groups. Here's a table with the mean and median household values for the 2001, 2004, 2007, and 2010 surveys.  Those in the 90-100th percentiles of the wealth distribution have median wealth of $1,864,000, and mean wealth of $3,716,000 in 2010. That's also the part of the wealth distribution that had the smallest percentage decline in the median and the mean from 2007 to 2010. 

Where Wealth Declined Most (and an Income Riddle) - The bleak portrait of the financial health of American families that the Federal Reserve published Monday shows that the impact of the economic crisis has fallen with disproportionate weight on the middle class.The middle 60 percent of American families had a larger decline in wealth and income on a percentage basis than the very wealthy or the very poor. The explanation for the disproportionate loss of wealth is relatively straightforward. As I wrote in my article about the new data, the middle class puts wealth in housing, and the median amount of home equity dropped to $75,000 in 2010 from $110,000 in 2007. While other investments have recovered much of the value lost in the depths of the crisis, housing prices have hardly budged. Why there should be a disproportionate loss of income is harder to explain. In part, more affluent families tend to derive a larger share of income from other kinds of investments, which have rebounded more strongly in value. But that’s hardly a complete explanation, and in particular it tells us nothing about the relative strength of reported income for the least affluent families. In the paper introducing the new data, Fed economists note: “Decreases in incomes were much larger for the higher education groups, and mean income actually rose for the no-high-school-diploma group,” a finding that seems at odds with the vast majority of recent research on the economic importance of education.

Wow…Just Wow: The Depth of the Hole - The articles on the Fed’s Survey of Consumer Finance release from yesterday give you an excellent flavor of the magnitude of what’s been lost in the Great Recession.  But I haven’t seen this figure posted yet (though I may have missed it somewhere, of course).  It’s simply the trend in real median net worth from the SCFs going back to 1989 (this survey is taken every three years; see data caveats below).  There’s a little dip in the 1990s downturn, a flattening in the 2001 recession, and then…a massive cliff dive in the Great Recession. We’re talking two decades of gains, gone.  Now, it is important to recognize that some those gains, particularly those from that steep climb you see in the latter 2000s, were the housing bubble at work inflating home prices.  And since homes are the primary asset of many in the middle class, that in turn inflated median net worth.

Recessions Are Nature's Way of Keeping the Little Guy Down - You’ve all probably seen the depressing reports from the newly issued 2010 edition of the Fed’s triennial Survey of Consumer Finance, in particular the 39% drop in median household net worth, ’07-’10, Here’s a picture (click for larger): The well-off have done fine. In the greatest economic downturn in eighty years, their median net worth went up. This doesn’t even touch on the top 1%, .1%, or .01%, of course. It’s very hard to calculate net worth for those folks as a group. But judging by their incomes, they’re doing just fine too: I can’t comprehend how anyone can play word games about “incentives” to suggest that this situation, created quite intentionally over the past three decades, is or could be conducive to widespread national prosperity. I can only assume that those who do so don’t actually care about widespread national prosperity.

Wealth Destruction - Krugman - I haven’t weighed in on the Survey of Consumer Finances, which shows a sharp decline in net worth and real income between 2007 and 2010. I guess the basic response should be “Well, duh” — that’s what happens when you have a massive housing bust and a severe economic slump. But I gather that some of the usual suspects are trying to claim that this is all President Obama’s fault. I’d say I was surprised, except that the total unscrupulousness of this crew is by now something to take for granted. Anyway, to make a not terribly original point, the SCF is useful because it gives us information on the distribution of net worth, not just its level. When it comes to level, we have another and more timely source, the Fed’s flow of funds data. And here’s what real net worth of households per capita looks like: To say the obvious, the plunge in net worth took place under the previous administration; it bottomed out just two months after Obama took office, which makes it hard to claim that it was his fault.

The Recovery’s Fate, Back in Consumers’ Hands - ONE bright spot in the lusterless recovery that started in 2009 has been the performance of the private sector.  In the rebound’s early stages, business investment was the driving force. And, last year, corporate earnings hit their stride — so much so that investors began to view corporate America, not consumers, as the linchpin keeping the economy spinning.  But that attitude may soon be changing.  First, profit margins have probably peaked. And, looking ahead, troubles overseas are expected to make life much tougher for businesses.  Companies didn’t need to expand real sales to enjoy foreign profit growth. Global currencies just needed to rise against the dollar to bolster the value of overseas revenue.  So far this year, though, the trends have reversed. The dollar has strengthened as Europe’s debt crisis worsens.  “That means the tail wind has turned into a headwind, and you have to start relying on consumption again,” Mr. Forester said.  The trouble is, much of Europe is already in recession, and China is decelerating. That leaves domestic consumers to prop up the ailing economy.  “The United States is still the biggest economy with the largest consumer sector in the world, so it comes down to the U.S. consumer,” “If consumer spending weakens, the market is going to remain weak,”

Consumers Are Facing Stronger Headwinds - Consumer headwinds are strengthening. Hiring is sluggish, incomes are barely keeping pace with inflation, future tax policy is uncertain. No wonder shoppers are taking a breather. Retail sales fell 0.2% in May, with non-auto sales down 0.4%. Moreover, April’s numbers were revised lower so that top-line sales fell 0.2% rather than the 0.1% gain reported earlier. A few special circumstances explain part of the weakness. Retail sales are reported nominally, so the drop in gas prices–a plus for future consumer demand–caused the 2.2% plunge in gas-station receipts. Also, the warm winter pulled forward some spending on building materials into the first quarter. Still, since consumers account for about 70% of economic activity, the lackluster shopping performance in April and May raises worries about gross domestic product. Core sales–the ones included in GDP calculation and that exclude purchases of vehicles, building materials and gasoline–are barely up so far in the second quarter. Consequently, real GDP is probably growing less than a 2% annual rate this quarter. That pace shouldn’t heighten recession fears but it isn’t good news for prospects for job growth.

Retail Sales: -0.2% in May, Second Month of Decline - The Retail Sales Report released this morning shows that retail sales in May came in at -0.2% month-over-month following a downwardly revised -0.2% in April (previously 0.1% in the Advance Estimate). Today's number matches the consensus forecast of -0.2%. The year-over-year change is 5.5%, the weakest since August 2010. 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 episode.  Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function. How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 146.6% since the beginning of this series. Adjust for population growth and the cumulative number drops to 100.5%. And when we adjust for both population growth and inflation, retail sales are up only 21.0% over the past two decades.Let's continue in the same vein. The charts below give us a rather different view of the U.S. retail economy and the long-term behavior of the consumer. The sales numbers are adjusted for population growth and inflation.

Retail Sales decline 0.2% in May - On a monthly basis, retail sales were down 0.2% from April to May (seasonally adjusted), and sales were up 5.3% from May 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 May, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $404.6 billion, a decrease of 0.2 percent from the previous month, but 5.3 percent above May 2011. Ex-autos, retail sales declined 0.4% in May.Sales for April was revised down to a 0.2% decrease from a 0.1% increase.  This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 22.1% from the bottom, and now 6.8% 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 18.9% from the bottom, and now 6.8% 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 5.9% on a YoY basis (5.3% for all retail sales). Retail sales ex-gasoline decreased 0.1% in May.

Retail Sales Slump In May, Mostly Because Of Falling Gasoline Sales - U.S. retail sales slipped 0.2% in May. That’s the biggest monthly fall in two years, although quite a bit of the drop last month was due to a sharp decline in gasoline sales. Nonetheless, the revised data tell us that retail sales have fallen for two months in a row—the first back-to-back monthly declines since 2010. Looking at retail sales on a year-over-year basis is more encouraging, but the trend is still slipping on this front too.  Only a handful of economic reports for May have been released so far and so it’s premature to comment on last month’s macro profile overall. Perhaps the tumble in gasoline sales—a plus for the economy to the extent that it reflects lower gas prices—is skewing the top-line number. But if the overall retail consumption number is the more reliable indicator, it looks like the spring slowdown has legs. Whatever the cause, the strength in the first quarter is clearly history for now. Short of a dramatic revision in the numbers (or a magnificent June report), retail sales for Q2 are on track for a reversal of fortune relative to the first three months of 2012.

Breaking Down Drop in Retail Sales - Mesirow Financial Chief Economist Diane Swonk talks with Jim Chesko about this morning’s reports on retail sales and producer prices.

Retail Sales In U.S. Declined For A Second Month In May - Retail sales in the U.S. fell in May for a second month, prompting economists to cut forecasts for economic growth as limited job and income gains hold back consumers.  The 0.2 percent decrease matched April’s drop that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding car dealerships slumped by the most in two years.  The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis. Federal Reserve policy makers gather next week to decide whether further stimulus is needed to fuel the three-year-old expansion.  Last month’s drop in retail sales matched the median forecast of 79 economists surveyed by Bloomberg News. Estimates ranged from a drop of 0.7 percent to a gain of 0.5 percent. April and May marked the first back-to-back declines in two years.

Credit-Card Customers Defy Recent Worries - The six largest credit-card lenders saw further improvements in borrower behavior in May, even as choppy economic data spark concerns over the financial state of U.S. consumers. Capital One Financial Corp., Discover Financial Services and Bank of America Corp. were among the card issuers posting declines in monthly delinquency rates, which measure the percentage of loans on which borrowers are behind paying, according to regulatory filings Friday. J.P. Morgan Chase & Co., Citigroup Inc. and American Express Co. also said delinquencies fell from April. All of the companies except for Discover also reported declines in their net charge-off rates, or the percentage of loans deemed uncollectible. Discover, which has enjoyed among the best credit quality among its competitors, said the net charge-off rate for loans it packaged into securities ticked up to 2.65% in May from 2.6% in April. The rate is still near historic lows, and the increase is “less than typical seasonal trends” seen during the month,

Vitals Signs: Slowing Retail Sales - Retail sales are slowing. Excluding cars and auto parts, retail sales fell 0.4% in May from April. Sales are still rising compared with a year ago, but more slowly than earlier in 2012. Falling gasoline prices account for much of the slowdown, just as rising prices at the pump helped explain last year’s spending increases. But even excluding gasoline, sales growth has stalled.

May producer prices fall sharply, energy plunges - Producer prices fell sharply in May as energy costs dropped the most in over three years, a sign of easing inflation pressures that could give the Federal Reserve more room to help the economy should growth weaken. The Labor Department said on Wednesday its seasonally adjusted producer price index dropped 1.0 percent last month. The drop was mostly due to a 4.3 percent decline in energy prices, the biggest drop since March 2009. Europe's debt crisis is threatening global economic growth, pushing oil prices lower. Last month, U.S. gasoline costs slumped 8.9 percent while prices also fell for residential natural gas and liquefied petroleum gas, the department said. The decline in the overall producer price index was the sharpest since July 2009 and marked the second straight month of declines. Economists polled by Reuters had expected prices at farms, factories and refineries to drop 0.6 percent. The decline left wholesale prices 0.7 percent higher in May that a year earlier, the weakest reading since October 2009.

Producer prices fall steep 1.0% in May - Wholesale prices fell 1.0% in May after seasonal adjustments, with energy prices falling 4.3%, the Labor Department reported Wednesday. This is the steepest drop in the headline PPI and energy prices since July 2009. The producer price index has risen 0.7% in the past year, the government said. This is the lowest annual rate since October 2009. The core PPI - which excludes food and energy prices - rose 0.2% in May. Core prices are up 2.7% in the past year. The drop in headline PPI and the rise in the core rate were very close to estimates of economists surveyed by MarketWatch. The PPI had fallen 0.2% in April, while the core rate was up 0.2%.

Retail Sales and Producer Prices Drop - Retail sales in the United States declined in April and May, the Commerce Department said Wednesday, pulled down by a sharp drop in gasoline prices. But even after excluding volatile gas sales, consumers barely increased their spending.  The steep drop in gasoline costs also drove down the main measure of wholesale prices in May by 1 percent, the most since July 2009. But outside the food and energy categories, prices increased moderately.  Sales at retailers dipped 0.2 percent in May, following a revised 0.2 percent decline April. The back-to-back declines were the first in two years.  The retail weakness reflected a 2.2 percent plunge in gasoline station sales. Still, excluding gas station sales, retail spending rose just 0.1 percent in May. And it dropped 0.1 percent in April. That left retail spending roughly flat outside of gasoline for the two months, a sign that slower job growth and paltry wage increases may be leading consumers to pull back on spending.

Retail Sales Miss Ex-Autos, PPI Misses; Gold Soars On More QE Expectations - Two more data points, two more disappointments: retail sales declined in May by 0.2%, in line with expectations, and unchanged from the April revision from 0.1% to -0.2%. Worse however were retail sales ex autos which had the biggest drop in 2 years, sliding by 0.4%, on expectations of an unchanged print. And so the retrenchment of the US consumer arrives. But at least "housing has bottomed." And in further 'NEW QE is coming' news, PPI also missed for the nth month in a row, printing at -1.0% on expectations of -0.6%, with foods dropping -0.6%, but energy collapsing by a massive 4.3%. PPI ex food and energy (so the items everyone uses, but nobody ever really counts) was up 0.2%. Gold, however, appears to be ignoring the core items, and has soared by $10 since the report, as today's data screams MOAR NEW QE.

Inflation Watch: Headline CPI Plunges Below Two Percent - The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 1.70%, down dramatically from 2.30% last month. Year-over year-Core CPI came in at 2.26%, which the BLS rounds to 2.3%, down fractionally from 2.31% last month. Here is the introduction from the BLS summary:  The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.3 percent in May on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.  The gasoline index declined 6.8 percent in May, leading to a sharp decrease in the energy index and the decline in the all items index. The indexes for natural gas and fuel oil declined as well, though the electricity index increased. The food index was unchanged, with a slight decline in the index for food at home offsetting an increase in the food away from home index.  The index for all items less food and energy rose 0.2 percent in May, the third consecutive such increase. The indexes contributing to the increase were largely the same ones as in April: shelter, medical care, used cars and trucks, apparel, airline fares, and new vehicles. The indexes for household furnishings and operations and for tobacco declined.  The 12-month change in the index for all items was 1.7 percent in May; this figure has been declining steadily since its 3.9 percent recent peak in September 2011. The decline has been driven mostly by the energy index, which decreased 3.9 percent over the last 12 months. This was its first 12-month decline since October 2009. More...

What Inflation Means to You: Inside the Consumer Price Index - The Fed justified a previous round of quantitative easing "to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate" (full text). In effect, the Fed has been trying to increase inflation, operating at the macro level. But what does an increase in inflation mean at the micro level — specifically to your household? Let's do some analysis of the Consumer Price Index, the best known measure of inflation. The Bureau of Labor Statistics (BLS) divides all expenditures into eight categories and assigns a relative size to each. The pie chart below illustrates the components of the Consumer Price Index for Urban Consumers, the CPI-U, which I'll refer to hereafter as the CPI.  The slices are listed in the order used by the BLS in their tables, not the relative size. The first three follow the traditional order of urgency: food, shelter, and clothing. Transportation comes before Medical Care, and Recreation precedes the lumped category of Education and Communication. Other Goods and Services refers to a bizarre grab-bag of odd fellows, including tobacco, cosmetics, financial services, and funeral expenses. For a complete breakdown and relative weights of all the subcategories of the eight categories, here is a useful link.  The chart below shows the cumulative percent change in price for each of the eight categories since 2000.

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 two months, however, gasoline prices have moderated (more on that topic here). Also, note the dramatic drop in year-over-year energy since February in the table above. 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 June 2011 Consumer Price Index for Urban Consumers (CPI-U) released today puts the May year-over-year inflation rate at 2.26%, which is well below the 3.82% 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.

Vital Signs: Easing Inflation Pressures - Consumer prices are stabilizing. Inflation rose last year amid higher oil prices. Recently, oil prices have tumbled and core inflation — which excludes volatile food and energy prices — has flattened out, with prices settling about 2.3% higher than a year ago. Easing price pressure should give some comfort to Federal Reserve officials before next week’s policy meeting

Gasoline Prices decline 16 cent over the past three weeks - From Bloomberg: U.S. Gasoline Fell to $3.6243 a Gallon, Lundberg Survey The average price of regular gasoline at U.S. filling stations declined 15.9 cents in the past three weeks to $3.6243 a gallon, according to Lundberg Survey Inc. ... The price is down 11.62 cents from a year earlier. The highest average this year was $3.9671 during the two weeks ended April 6. “Europeans’ misfortunes are American fuel consumers gain,” Trilby Lundberg, president of Lundberg Survey, said today in a telephone interview. “Our dollar looks strong against the weaker euro, which has reduced the price of crude.” Oil prices are down again today. Brent is down to $98.56 per barrel, and WTI is down to $83.36. The lower oil prices will not only lead to lower gasoline prices, but also a lower trade deficit and lower headline inflation (CPI).

Sharp fall in gas costs drives down US consumer prices by most in 3½ years — A measure of U.S. consumer prices fell in May by the most since December 2008, pulled down by a plunge in gas prices. Excluding volatile food and energy costs, prices rose only modestly.The Labor Department said Thursday that the consumer price index dropped 0.3 percent. Gas prices sank 6.8 percent, also the most since December 2008. Food costs were unchanged.  Mild price increases give consumers some relief at a time when unemployment is high and wage gains are meager. Lower inflation also gives the Federal Reservemore leeway to keep interest rates low.So-called “core” prices, which exclude food and energy, rose 0.2 percent for the third straight month.Over the past 12 months ending in May, consumer prices rose 1.7 percent, much less than the pace for the 12 months that ended in April. Core prices have risen 2.3 percent in the past year, the same as for the 12 months ending in March and April. That’s close to the Fed’s 2 percent target for inflation.

Lower Gas Prices Not Enough to Lift US Economy — Cheaper gas has yet to cause consumers to spend enough on other goods to boost the slumping economy. Americans barely increased their spending at retail businesses this spring, leading economists to predict slower economic growth in the April-June quarter. But the news from a spate of government data Wednesday wasn’t all bad. Consumers spent more in May on cars, appliances and furniture — big purchases that help drive growth. Businesses continued to restock this spring at a healthy pace.And wholesale prices outside of gasoline costs remain stable, which means consumers can expect inflation to stay mild. If gas prices stay low, Americans are likely to spend more freely this summer on other goods, from autos and furniture to electronics and vacations, that fuel economic growth. Gasoline purchases tend to provide less benefit for the U.S. economy because some of the money goes to oil-exporting nations.

Consumer Sentiment Sinks - U.S. consumers felt decidedly less upbeat about the economy at the start of this month, according to data released Friday. The Thomson Reuters/University of Michigan consumer sentiment index fell sharply to 74.1 in early June from its final-May reading of 79.3 and an early-May reading of 77.8, according to an economist who has seen the report. The end-May index was the highest sentiment level since October 2007. The drop in early June may reflect consumers reacting to weaker labor markets and financial-market gyrations caused by uncertainty over the euro-zone debt crisis and a possible exit from the currency bloc by Greece. Economists surveyed by Dow Jones Newswires had expected the preliminary June index to fall to 77.0. The current conditions index dropped to 82.1 in early June from 87.2 at the end of May, while the expectations index plunged to 68.9 from 74.3.

U.S. Auto Assemblies Unexpectedly Surge Back to 2007 Levels, Creating a Shortage of Rail Cars - The Federal Reserve reported recently that U.S. motor vehicle assemblies totaled 10.7 million units in May (seasonally adjusted at an annual rate), the highest monthly production level since August 2007, almost five years ago before the Great Recession, and almost three times the recessionary low of 3.7 million units in January 2009.  At the current rate of  monthly increases, motor vehicle assemblies will be above 11 million units within a few months, and back up to 12 million units by the end of this year. The recent, and somewhat unexpected, surge in U.S. auto production to pre-recession levels so quickly in the last year has brought about a new problem - a shortage of rail cars used to transport cars and light trucks from assembly plants to dealerships, as Automotive News is reporting: "As of May 18 , daily inventories of vehicles awaiting shipment totaled 81,470 units -- well above the standard daily inventory of 69,000 vehicles, according to a report from TTX Co., a Chicago firm that coordinates rail shipments of vehicles for the railroad industry. .   The rail-car shortage is especially bad for assembly plants in the Midwest, and somewhat less serious for West Coast ports that handle shipments of Asia-built vehicles. The delays will be tough to fix because automakers require special rail cars, called autoracks, to transport vehicles.

U.S. business inventories rise in April on autos (Reuters) - U.S. business inventories rose in April as motor vehicle dealers restocked to meet demand, according to a government report on Wednesday that showed continued careful management of stocks. The Commerce Department said inventories increased 0.4 percent to a record $1.58 trillion, after rising by an unrevised 0.3 percent in March. Economists polled by Reuters had forecast inventories rising 0.3 percent in April. Inventories in April were lifted by a 1.9 percent rise in restocking by auto dealers, in line with strong demand for motor vehicles from households earlier this year. Auto inventories had increased 1.5 percent in March. There were also gains in stocks of building materials and furniture. However, clothing inventories dipped 0.2 percent. Inventories are a key component of gross domestic product changes. Inventories, excluding autos - which go into the calculation of gross domestic product - edged up 0.1 percent. Restocking made a modest contribution to the first quarter's 1.9 percent annual growth pace in gross domestic product. Second-quarter growth is estimated at around 1.8 percent.

Producer Price Index: Headline Inflation Continues to Fall - Today's release of the May Producer Price Index (PPI) for finished goods shows the second month of decline in headline inflation while core inflation rose month-over-month. The seasonally adjusted finished goods number declined a full one percent from April and is now showing a fractional 0.8% year-over-year change, down from last month's 1.9% YoY. Core PPI (ex food and energy) rose 0.2% MoM, matching April's increase. The YoY 2.8% was unchanged from the previous month. had posted a MoM consensus forecast of -0.7% for Headline PPI and 0.2% for Core PPI. The May numbers show a deeper crossover of the YoY rates for Headline and Core, something that last occurred in late 2008. Here is a snippet from the news release: Finished energy: The index for finished energy goods fell 4.3 percent in May, the largest decline since a 4.6-percent decrease in March 2009. An 8.9-percent drop in the gasoline index accounted for over eighty percent of the May decline. Lower prices for liquefied petroleum gas and residential natural gas also contributed to the decrease in the finished energy goods index. (See table 2.)  Finished foods: Prices for finished consumer foods moved down 0.6 percent in May, the largest decline since a 0.7-percent decrease in December 2011. Over sixty percent of the May decline can be traced to the meats index, which decreased 2.2 percent. Lower prices for fresh fruits and melons also were a factor in the decline in the finished consumer foods index.

LA area Port Traffic: Imports down YoY, Exports mostly unchanged in May - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for May. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average.  On a rolling 12 month basis, inbound traffic is down about 0.2%, and outbound traffic is unchanged compared to April.  In general, inbound and outbound traffic has been moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports).  For the month of May, loaded outbound traffic was down 2.4% compared to May 2011, and loaded inbound traffic was unchanged compared to May 2011.  This suggests imports from Asia might be down a little in May, and exports mostly unchanged. (Note: the dollar value of oil imports will be down in May too, so the trade deficit should decline).

Weak oil, food prices dampen U.S. imported inflation  - U.S. import prices recorded their largest decline in nearly two years in May as energy and food costs fell, pointing to muted inflation pressures amid slowing global demand.  The Labor Department said on Tuesday import prices fell 1.0 percent, the biggest drop since June 2010, after being flat in April. In the 12 months to May, import prices fell 0.3 percent, posting their first year-on-year decline since October 2009, also reflecting a stronger dollar.  The data was the latest sign that falling energy prices were keeping inflation pressures well contained and offered evidence of weakening global demand as the debt crisis in Europe worsens.

Vital Signs: Easing Import Prices - Import prices are falling. Tumbling oil prices pushed the cost of products imported from overseas down 1% in May from the previous month, the biggest drop in nearly two years. Oil’s slide has continued in June, which could push import prices lower still. Without the effect of oil, however, the price drop would have been far more modest, down just 0.1% from April and up 1% from a year earlier.

Economy’s Mixed Blessing: Commodity Prices Fall - Businesses big and small are getting a break these days as the European financial crisis and slowing growth in China, India and the United States have pushed down the prices of a wide array of commodities in recent weeks. If the trend continues, businesses and consumers are likely to reap benefits through cheaper prices for goods ranging from cotton shirts to copper wiring and coffee beans. So far, however, businesses seem to be benefiting a lot more than their customers. Over the last month, global oil prices have declined by about 12 percent, while corn, copper, lead, cocoa and coffee have all dropped by 5 percent or more. Prices of corn, cocoa, oats, cotton, rubber, coffee, aluminum, silver, zinc and nickel are all more than 20 percent lower than a year ago. Gasoline prices are falling precipitously, too, down nearly 20 cents over the last month alone, to a national average of $3.54 a gallon on Wednesday. That is nearly 45 cents below the high for the year reached in early April. The average household consumes 1,200 gallons of gasoline a year, so every dime shaved off the price of gas translates into a $120 annual savings, according to the Oil Price Information Service.  “The world economy is in risk of a recession and on that possibility, commodity prices weaken,”

New York Manufacturing Activity Tumbles - An index covering New York manufacturing activity dropped nearly 15 points, barely staying in expansionary territory this month, according to the Federal Reserve Bank of New York‘s Empire State Manufacturing Survey released Friday. The Empire State’s business conditions index declined to just 2.29 in June from 17.09 in May. June’s reading was the lowest since November 2011. “Manufacturing activity in New York State expanded slightly over the month,” the report said. Economists surveyed by Dow Jones Newswires had expected the index to decline, but only to 10.7. The Empire subindexes deteriorated in June.

NY Fed: Regional manufacturing activity "expanded slightly" in June Survey - From the NY Fed: Empire State Manufacturing Survey The June Empire State Manufacturing Survey indicates that manufacturing activity expanded slightly over the month. The general business conditions index fell fifteen points, but remained positive at 2.3. The new orders index declined six points to 2.2, and the shipments index fell a steep nineteen points to 4.8. Price indexes were markedly lower, with the prices paid index falling eighteen points to 19.6 and the prices received index dropping eleven points to 1.0. Employment indexes also retreated, though they still indicated a small increase in employment levels and a slightly longer average workweek. The employment index declined to 12.4 from 20.5. This is the first regional manufacturing survey released for June, and this was well below the consensus forecast of 13.8.

US Factory Production Declined 0.4% in May - U.S. factories produced less in May than April, as automakers cut back on output for the first time in six months. The report indicates that manufacturing, a key driver of the economic growth, is slowing. The Federal Reserve said Friday that factory output declined 0.4 percent last month, after increasing 0.7 percent in April. Auto production fell 1.5 percent, the first drop since November. Auto sales rose sharply earlier this year but slowed in May. Overall industrial production, which includes mines and utilities, dipped 0.1 percent, after a solid 1 percent rise in April. Both mines and utilities increased production. Separately, a survey of manufacturers showed that factory activity in the New York region grew much more slowly in June than in May. The New York Federal Reserve Bank’s Empire State index fell sharply to 2.3, from 17.1 in May. That means factories barely expanded this month. A reading below zero indicated contraction.

Industrial Production down in May, Capacity Utilization declined - From the Fed: Industrial production and Capacity Utilization Industrial production edged down 0.1 percent in May after having gained 1.0 percent in April. A decrease of 0.4 percent for manufacturing production in May partially reversed a large increase in April. Outside of manufacturing, the output of mines advanced 0.9 percent in May, while the output of utilities rose 0.8 percent. At 97.3 percent of its 2007 average, total industrial production in May was 4.7 percent above its year-earlier level. Capacity utilization for total industry declined 0.2 percentage point to 79.0 percent, a rate 1.3 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 12.2 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 79.0% is still 1.3 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 80.6% in December 2007.  The second graph shows industrial production since 1967. Industrial production declined in May to 97.3. This is 16.6% above the recession low, but still 3.4% below the pre-recession peak.

Industrial Production Weakens In May, But Annual Pace Remains Firm - Industrial production posted a slight loss in May, the Federal Reserve reports. That’s one more reason to worry about the business cycle in the wake of slower job growth and a deepening euro crisis in Europe. Nonetheless, today’s industrial production update falls well short of a fatal blow for thinking positively. Although industrial production declined last month, the retreat was marginal. In fact, one could argue that economic activity has held up surprisingly well so far in the face of so much bad news coming out of Europe. Looking at industrial production on a monthly basis, last month’s slight 0.1% drop looks quite modest after April’s strong 1.0% increase. As far as this indicator goes, May doesn’t look like a major turning point to the dark side of the cycle. The future may bring calamity, or not, but there's minimal sign of trouble by this data point. As usual, it’s hard to tell much about the bigger-picture trend from monthly data, an obstacle that’s partly minimized by looking at rolling one-year percentage changes. On this front, the numbers du jour continue to reflect a fair amount of strength. Industrial production rose 4.7% for the year through last month. That’s down a bit from April’s 5.1% year-over-year pace, but it’s hard to argue that the change amounts to much more than the usual statistical noise.

Hopeful Sign: Small Manufacturers Buy Big Machines - Small businesses that make machines and components for other manufacturers are experiencing an upswing that could be a sign of things to come for the broader economy. The industries fueling the demand vary. In some cases, business is coming from medical device makers, which are expected to see increasing growth as baby boomers age and need more medical care. An uptick in orders is coming from oil and gas producers supplying energy to growing economies in countries such as China and India. And then some are getting a pop in sales from aerospace manufacturers that are busy building fuel-efficient aircraft and engines and need special parts to get the job done. As different as these manufacturers may be, they have two things in common: Their industries are expected to see continued growth and they’re investing in expensive machinery that can cost millions of dollars. This small manufacturer machinery boom may seem at odds with an economy that is suffering from slow job growth following the worst recession many can remember. But the increase in demand for gear that businesses use to make a variety of machines, parts, tools and devices is a sign that companies are more confident and are willing to spend. They’re also getting loans from banks to buy the equipment — evidence that lenders are feeling more secure.

Failing U.S. Transportation Infrastructure - A top-notch economy requires a top-notch infrastructure. Yet in the U.S., roads are crumbling. In the past 25 years, miles traveled by car or truck have doubled, but total highway length has barely budged--one reason the World Economic Forum ranked American infrastructure a troubling 24th out of 124 nations. "We're not in the back of the pack, but we used to be in the front, and we're falling," says Edward Alden, a senior fellow at the Council on Foreign Relations, which has released a new report on the issue. (See the report at The graphic below, taken from CFR's report, starkly illustrates just how much ground the U.S. has to make up.

NFIB: Small Business Optimism Index "Stagnates" in May - From the National Federation of Independent Business (NFIB): Small-Business Optimism Index Stagnates: No Progress Made for Small-Business Sector in May Dropping just a tenth-of-a-point in the month of May, the Nation Federation of Independent Business (NFIB) Index of Small Business Optimism came in at 94.4. A reading of 94.4 is historically low and consistent with the sub-par performance of GDP and employment growth. The individual indicators were mixed, with expected sales in a three month decline. However, some employment components improved and profit trends remained relatively stable after its sharp gain in April.  The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past three months dropped 2 points, falling to two percent, the second highest reading in 60 months (the highest was April’s reading of 4 percent).  Twenty (20) percent reported that “poor sales” are their top business problem, up 1 point from April.  This graph shows the small business optimism index since 1986. The index decreased slightly to 94.4 in May from 94.5 in April.

Small-Business Confidence Falls - Small-business owner confidence dipped slightly in May, as sales expectations dropped, according to data released Tuesday. The National Federation of Independent Business‘s small-business optimism index fell 0.1 point to 94.4 in May. The NFIB said the index is back to its level of February 2011. “The Index has produced no signs that economic activity will pick up at all,” the report said. Small business owners are slightly more upbeat about overall economic conditions but a growing proportion worry about future demand. The subindex of expected business conditions in the next six months increased 3 percentage points to -2% last month, but the expected higher real sales subindex declined 4 points to 2%. The net earnings trend subindex weakened 3 points to -15%, but that followed a large 11-point gain in April. The May new-jobs subindex rose one point to 6%. The net change in employment per firm was zero in May. Among small business owners looking to hire, a greater percentage report greater difficulty finding qualified workers. The job opening hard to fill index rose 3 points to 20% in May, the highest reading since June 2008.

23% of Small Business Owners (Approximately 6.21 million) Report "No Pay for a Year" - Citing a new survey by Citigroup, CNBC Reports All Work, No Pay for Some Small Business Owners. Here are some interesting highlights.

  • Over the past few years, business owners report that they have, at one time or another, taken less profit (78 percent), worked more hours than usual (70 percent), and used their own money to help the business survive (69 percent).
  • 54 percent of respondents say they have gone without a paycheck in order to keep the business running.
  • 23 percent of owners have gone without pay for one year or more.
  • More than one-third of owners (38 percent) said their employees worked overtime without pay
  • 18 percent of owners said employees either missed paychecks or had paychecks delayed.
  • Access to financing doesn’t come up in the top five most important issues among small businesses. Instead, business owners cite lack of sales and consumer confidence.

100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits -  Here are some charts from Reader Tim Wallace that help explain my report a few days ago that 23% of Small Business Owners (Approximately 6.21 million) Report "No Pay for a Year" The first chart below shows actual employment of covered workers compared to the civilian population and labor force. Covered employees are those eligible for unemployment benefits (working or not). Some are currently collecting those benefits. In the following charts, "covered employment" or "net employment" refers to those with benefits and currently working. Self-employed workers and contractors are not eligible for unemployment benefits even though they have to contribute to state unemployment insurance schemes. The next chart shows state level employment data. Net covered employees (those currently with a job covered with unemployment benefits) was calculated by subtracting continuing unemployment claims from the pool of all covered workers. The next chart compares BLS employment numbers to net covered employees (those actually working). Notice the widening gap between covered employment and employment as reported by the BLS. In 2008 and again in 2010 the difference between BLS employment and Covered Employment as noted by the green line (right axis) was about 15 million. This month the difference is nearly 19 million. The table below shows the precise numbers.

Obama " Private Sector Doing Fine" - A couple of weeks ago President Obama said that the private sector was doing fine. Needless to say this was subject to much criticism from some sources. But is that criticism justified ? Let's see what the data says. This chart of real business output compares output in the five long cycles since WW II -- it omits the 1950s and 1970s because of the multiple recessions in those decades. What the chart shows is that compared to the two long cycles before the Great Moderation that growth is much weaker but compared to the 1990s and 2000s cycles, growth this cycle is essentially identical. In other words there is no difference between private sector growth now and in the 2000s that Larry Kudlow called the Goldilocks economy. Let's see what happened to private sector profits in these cycles. Profits this cycle appear to be about the same as in earlier long cycles. What about business investments? Investments are much stronger than the were in the early 2000s and roughly the same as they were in the 1990s. It should be no surprise that investment are weaker than in the 1960s or 1980s. Private payrolls look much like investments -- weaker than in the old style recoveries in the 1960s and 1980s but about the same as in the 1990s and stronger than in the early 2000s.

Does the Government Really Need More Help Than the Private Sector? - Much has already been said and written about President Obama’s statements of last Friday that, “The private sector is doing fine. Where we're seeing weaknesses in our economy have to do with state and local government.” I am disinclined to critique the President’s choice of words, which are routinely scrutinized to a degree that very few of us could withstand. I am nevertheless reminded of Michael Kinsley’s definition of a gaffe as being when a politician accidentally tells the truth – or, in this instance, what he believes to be true.  President Obama’s comment did not come out of thin air. For several months many policy advocates have argued that government cutbacks are hampering economic recovery and that the federal government should provide more aid to States and localities. The President’s statement signals that he has internalized this view. This policy view is important – more important than an inartful choice of words – because it pertains to a fundamental disagreement about the appropriate roles of the private and public sectors in our economy. In recent months several left-of-center economics blogs have presented graphs somewhat similar to one reproduced below from Joe Wiesenthal at Business Insider

Would The Private Sector Be Doing Better or Worse Without American Austerity - One natural conclusion is that overall growth would be a lot stronger if only the government sector was growing. However, is that true?I am not completely sure. The simple reason is that the Federal Reserve has show reluctance to do anymore than it is currently to improve the state of the economy. For years, I had taken Ben Bernanke at his direct implication when he asked he said “It would be nice to get some help from the Congress” The direct implication of course is that Congress and the Fed would work together to increase growth and decrease unemployment. Yet, the behavior of the Fed in 2012 has cast doubt on that. Not only have various members repeatedly asserted that they were OK with the current overall growth rate, but when the economy appeared to speed up in the beginning of the year the Fed refused to squash rumors that it would tighten the money supply in response. More troublesome Ben Bernanke has stated that it would be “reckless” to allow more inflation in order to get a “somewhat faster decline in unemployment.” Those actions lead me to strongly suspect that the Fed would not allow the private sector to grow any faster than it currently. Indeed, one interpretation of the the consistent private sector growth rates in the two recoveries is that this is the maximum growth rate the Fed is prepared to allow.

Jobless Claims in U.S. Unexpectedly Rose - More Americans than forecast applied for unemployment insurance payments last week, another sign the labor market is struggling to improve.  Claims for jobless benefits unexpectedly climbed by 6,000 to 386,000 in the week ended June 9 from a revised 380,000 the prior week that was more than first estimated, Labor Department figures showed today in Washington. Economists projected claims would fall to 375,000, according to the median estimate in a Bloomberg News survey.A pickup in dismissals may raise concern the labor market will have trouble rebounding after a slowdown in job creation in the past four months. Weaker economic growth and a lack of clarity about the business environment may discourage companies from hiring at a pace needed to speed up the expansion.

Unemployment Aid Applications Increase to 386,000 - More Americans sought unemployment aid last week, suggesting hiring remains sluggish. The Labor Department said Thursday that weekly unemployment benefit applications rose 6,000 to a seasonally adjusted 386,000, an increase from an upwardly revised 380,000 the previous week. The four-week average, a less volatile measure, rose for the third straight week to 382,000. That’s the highest in six weeks.

Jobless Claims Rise Last Week. A Warning Sign Of Things To Come? - Today’s update on initial jobless claims doesn’t look good, but it isn’t a death blow either. In “normal” times, one might dismiss the latest numbers as noise. But in the current climate, with the potential for a deepening of the euro crisis, it’s hard to overlook even small bits of deterioration in economic news. The main issue is that claims are creeping higher (again). The drift so far falls well short of convincing evidence that the cycle has turned. Indeed, it's not yet obvious that the latest numbers reflect anything more than the usual volatility. But with worries about what happens next on the Continent, it’s hard to put a positive spin on today’s data. New filings for unemployment benefits rose last week by 6,000 to a seasonally adjusted 386,000. The increase itself isn’t the problem so much as the appearance of a bottoming out in the downward trend over the past year.

Breaking Down Slower Inflation, Rising Jobless Claims - Vincent Malanga, president of LaSalle Economics, talks with Jim Chesko about the latest data on consumer inflation and jobless claims.

Employment in Oil & Gas Drilling - I regularly see right wingers and republicans claiming that we should allow unlimited oil and gas drilling because it would create so many jobs. If you look at the recent data on growth in employment in oil & gas drilling it appears they may have a good argument.  Over the past year employment in oil & gas drilling rose 11.3%,  only down slightly from its January peak of 14.5%.  Employment growth in the sector almost reached its  1980 peak growth rate of 16.5 %. In March, oil & gas extraction employed some 193,000 people.  Assume the optimists are right and that over the next 8 years oil & gas extraction  employment will grow at near record annual rate of 12.5%.    By 2020 this sector's employment would reach some 470,000  -- more than double current levels. To put this in perspective, assume continued sluggish economic growth of some 2% to 3% real GDP growth and annual employment growth of around 1.6%. .  By 2020 this would bring the unemployment rate under 5%. Currently, oil & gas exploration employment is some 0.15% of total payroll employment.  That is correct, zero point fifteen percent, not fifteen percent.  Under the assumed sluggish growth scenaro, oil & gas employment would reach a new record share of 0.32%f of payroll employment in 2020..   The some 289,000 increase in oil & gas extraction employment would account for about 1.6% of the total employment gains.

Levels, Percentages, and Structural Unemployment - Paul Krugman - When you do stuff with data, here is the universal rule: do what makes sense given the question you’re trying to answer. It’s like the issue of where the y-axis in a diagram starts — it depends on context. Starting at zero isn’t a universal rule, certainly not when changes of a few percent up or down are in fact crucially important for the policy discussion. So on unemployment, one favorite story out there is that we have lots of unemployment, and must have lots of unemployment, because the pre-crisis structure of the economy was unsustainable: too many people were building houses in Nevada, too few doing other stuff in other places, so there has to be unemployment as workers move from the occupations/localities that were oversized to those that were undersized. OK, so what would be the “signature” if this story were true? There would be lots of job losses among construction workers in Nevada, of course; but for the story to make sense there should be rising employment in those other sectors people are supposedly moving to. But of course, that’s not at all what you see. Instead, you see job losses everywhere, with most of the total job loss taking place in sectors that were clearly not overinflated by the bubble. And that is the relevant comparison: if non-bubble sectors are losing rather than gaining jobs, and in fact account for most of the job losses, then this story is just wrong.

The case for a new Works Progress Administration - In a press conference last Friday, President Obama said that reasonable progress had been made in restoring the private-sector jobs that were lost since the financial crisis but that progress in restoring lost jobs in state and local government had been slower. As this observation is conventional wisdom at this point, it’s surprising that it got any media attention. The more interesting question to ask is why the hiring at the state and local levels has not bounced back as quickly as private-sector hiring. A post on the New York Times‘s Economix blog attempts to answer that question: [W]hile the latest recession was particularly deep, the recovery in private-sector employment, once it finally started, has not been particularly slow by recent historical standards….But since the latest recession began, local government employment has fallen by 3 percent, and is still falling. In the equivalent period following the 1990 and 2001 recessions, local government employment grew 7.7 and 5.2 percent. Even following the 1981 recession, by this stage local government employment was up by 1.4 percent… Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent.

Share the Work, by Barry Eichengreen, Commentary, Project Syndicate: The United States today is facing a crisis of long-term unemployment unlike anything it has seen since the 1930’s. Some 40% of the unemployed have been out of work for six months or more... For those unfortunate enough to experience it, long-term unemployment ... is a tragedy. And, for society as a whole, there is the danger that the productive capacity of a significant portion of the labor force will be impaired.What is not well known, however, is that in the 1930’s, the United States, to a much greater extent than today, succeeded in mitigating these problems. Rather than resorting to extensive layoffs, firms had their employees work a partial week. ... The 24% unemployment reached at the depths of the Great Depression was no picnic. But that rate would have been even higher had average weekly hours for workers in manufacturing remained at 45. Cutting hours by 20% allowed millions of additional workers to stay on the job. ... Why was there so much work-sharing in the 1930’s? One reason is that government pushed for it. ... Second, legislation encouraged it. ... [Today,] unemployment insurance ... could be restructured to encourage it. Partial benefits could be paid to workers on short hours...In fact, the US already has something along these lines: a program known as Short-Time Compensation. Workers can collect unemployment benefits pro-rated according to their hours... Unfortunately, the financial incentives that the federal government provides are ... limited... And those programs, in turn, are too modest...

Is Globalization Good for America's Middle Class? Part 1 - In this blog, I have frequently documented economic trends that have been bad for the middle class: Declining real wages, steadily falling bang for the healthcare buck, stagnant educational attainment, the gigantic cost of tax havens, etc. With this post, I want to begin exploring one possible reason for the economic insecurity of the middle class, namely globalization. Today, we will look at who wins and who loses from international trade, one of the key elements of globalization. In some circles, one is likely to see a variant of the claim that "everybody" is better off because of freer trade. Even according to the most mainstream economic theory, this is simply false. The workhorse theory for determining the distributional effects of trade (i.e., who wins and who loses) is called the Stolper-Samuelson Theorem, To understand this theory, you need to know that economists think about national economies in terms of the amount of land, labor, and capital they have compared to all other countries in the world. These "factors of production" can be in relatively high supply compared to the rest of the world, in which case they are referred to as "abundant," or in relatively low supply compared to the rest of the world, in which case we call them "scarce."

Is Globalization Good for the Middle Class? Part 2 - In Part 1, I examined what economic theory has to say about the winners and losers from trade. The main conclusion is based on the Stolper-Samuelson Theorem: Because the United States is labor scarce in a global perspective, an expansion of trade will reduce the real wages of labor. As we have seen, this theoretical prediction has been borne out as real wages remain below their peak level for the 39th year running. In this post, I analyze what I consider to be the other main element of globalization, the expansion of the mobility of capital. Just as transportation innovation and cost declines made trade easier, they also make it easier for owners of capital to locate it in a broader range of places than 30 or 40 years ago. Similarly, the decline in communication costs make it easier for owners of capital to coordinate production on a global scale as well as offering additional ways of moving financial capital (think tax havens). Note that I have said nothing about actual movements of capital. Simply the ability to move capital strengthens capital owners in their negotiations with business and labor, because it makes the threat of moving credible and thereby gives companies greater bargaining power. Kate Bronfenbrenner showed clearly that after the passage of the North American Free Trade Agreement (NAFTA) in 1993, companies more frequently resorted to threats in their bargaining with workers, even to the point of violating the National Labor Relations Act by threatening to move during union organizing drives.

Why the World Should Care About America's Middle Class - Tim Worstall, in his Forbes blog, attacks my series (here and here) on whether globalization is good for America's middle class. Not on the basis that he disagrees with my conclusion (though he does), but because, he argues, there are much more important facts about globalization than a decline in the economic well-being of the middle class in America and Europe. In particular, he points to the great decline in poverty among developing nations that have embraced globalization: This growth in incomes, in wealth, has been uneven, this is true. Largely speaking those places which have been taking part in globalisation, Indonesia, China, India, have been getting richer. Those that have not been, Somalia perhaps as an example, have not been.Let's leave aside the fact that these successful countries are hardly poster children for the kinds of so-called "free-market" policies that Worstall espouses, a point made particularly well by Dani Rodrik. And in the spirit in which Worstall granted my claims for the sake of argument, let's grant his as well. (But if you want to get down into the weeds on the extent to which poverty reduction claims may be overstated, take a look at Robert Wade's work.)  Here is the crux of Worstall's argument:  So I would actually posit that whether the American, or European, or rich world, middle class benefits from globalisation is actually an incomplete question. Incomplete enough to be the wrong question. Almost to the point that the answer is “who cares?”.

Labor Department backs off plan forcing reporters to use government-issued computers - The Labor Department has backed off a plan to force news agencies to use government-issued computers and other equipment to report on jobless reports and other key economic data, following a GOP-led House hearing this week, according to several published reports. Agency officials have said they want reporters who analyze, then write about economic reports inside their so-called “lock up” room to use U.S. computers, software and Internet lines so the government can further protect against such potential security breaches as hacking. But the plan also resulted in cries about potential free-speech violations and the government now having computer access to news agencies. “This proposal threatens the First Amendment,” Bloomberg News Executive Editor Dan Moss said during a House Oversight and Government Reform Committee hearing. “The government would literally open the reporters’ notebooks.”

Post-New Deal America Needs Unions - One of the unfortunate consequences of the still more unfortunate failure of the unions’ effort to recall Wisconsin governor Scott Walker earlier this month is the gloating and schadenfreude that’s come forth from labor’s enemies. Some comes straight up, as in this column from Charles Krauthammer. Some comes with the caveat that private sector unions are fine in their place, but public sector unions have no place at all, an opinion expressed in this blog post from Chuck Lane. One of the most common arguments against unions is that they were necessary in the bad old days, when sweatshops abounded, wages were low, and the wage-and-hour legislation of the New Deal was yet to be enacted. They were needed in the pre-New Deal economy, but have been superfluous since. What the argument misses is that we’re now deep into a post-New Deal economy, and the low-wage work, wage theft, unpaid overtime and job insecurity—in the technical parlance of economists, the shit jobs—that abounded before the New Deal have returned in full force. Among the occupations that the Bureau of Labor Statistics says will have the most job growth between 2010 and 2020 are cashiers (median annual wage as of 2010, $18,500; projected growth 250,000 new jobs), childcare workers ($19,300; 262,000 new jobs), home health and personal care aides (roughly $20,000; 1.3 million new jobs), food prep and fast-food workers ($17,950; 398,000 new jobs), and retail sales workers ($20,670; 707,000 new jobs).

What happens if America loses its unions - What would America look like without a union movement? That’s not a hard question to answer, because we’re almost at that point. The rate of private-sector unionization has fallen below 7 percent, from a post-World War II high of roughly 40 percent. Already, the economic effects of a union-free America are glaringly apparent: an economically stagnant or downwardly mobile middle class, a steady clawing-back of job-related health and retirement benefits and ever-rising economic inequality.  In the three decades after World War II the United States dominated the global economy, but that’s only one of the two reasons our country became the first to have a middle-class majority. The other is that this was the only time in our history when we had a high degree of unionization. From 1947 through 1972 — the peak years of unionization — productivity increased by 102 percent, and median household income also increased by 102 percent. Thereafter, as the rate of unionization relentlessly fell, a gap opened between the economic benefits flowing from a more productive economy and the incomes of ordinary Americans, so much so that in recent decades, all the gains in productivity — as economists Ian Dew-Becker and Robert Gordon have shown — have gone to the wealthiest 10 percent of Americans. When labor was at its numerical apogee in 1955, the wealthiest 10 percent claimed just 33 percent of the nation’s income. By 2007, with the labor movement greatly diminished, the wealthiest 10 percent claimed 50 percent of the nation’s income.

The Land Of Opportunity? - Joe Stiglitz - America likes to think of itself as a land of opportunity, and others view it in much the same light. But, while we can all think of examples of Americans who rose to the top on their own, what really matters are the statistics: To what extent do an individual’s life chances depend on the income and education of his or her parents? Nowadays, these numbers show that the American dream is a myth. There is less equality of opportunity in the United States today than there is in Europe—or, indeed, in any advanced industrial country for which there are data.  This is one of the reasons that America has the highest level of inequality of any of the advanced countries—and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1 percent of US income earners captured 93 percent of the income growth. Other inequality indicators—like wealth, health, and life expectancy—are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

The "American Dream" Is Now A Myth - One of the most distressing aspects of the state of the US economy is the decrease in social mobility. It is much, much harder now than it used to be for Americans to improve their circumstances. In other words, if Americans are born poor, they're overwhelmingly likely to stay poor. Similarly, if Americans are born rich, they have a much better chance of staying rich than someone born poor or middle class. No one minds inequality as long as one's station in life is a function of one's own decisions and effort. When inequality becomes the luck of the draw, however, if becomes much more profoundly unfair.America's social mobility is now not only one of the lowest in the country's history--it's one of the lowest in the first world. If that doesn't change, the fundamental promise of America for the past 250 years will disappear. The country will no longer be a place in which you can control your economic destiny. Rather, it will become the sort of society that so many of those who emigrated here sought to escape: A country in which your destiny is determined at birth. Earlier this week, professor Joseph Stiglitz sat down with my Yahoo colleague Aaron Task to talk about this issue. Here's the video and Aaron's writeup:

The vicious cycle of economic inequality - Joseph E. Stiglitz - Americans see that something is happening to our society: We have become increasingly divided. We may all be in the same boat — but some are traveling steerage and others first class. Inequality is now far higher than just 30 years ago. The top 1 percent today gets around 20 percent of the nation’s income — twice what it did two decades ago. The top 0.1 percent’s share has almost tripled. Disparities in wealth are even greater. Some on the right argue that this is the politics of envy. They say what matters is not the share of the pie — but the size of the slice. But inequality, especially of the U.S. variety, is bad for growth. The country grew faster in the decades after World War II — when it was also growing together, with all groups seeing increases in income. But those at the bottom were growing the most. By comparison, growth since 1980 has been slower, as the share of the bottom and middle has diminished. That means that those in the middle, ordinary Americans who work for a living, let alone those at the bottom, are getting a smaller slice of a pie that is smaller than if we had continued growing as we did postwar. The net result is disheartening: Most Americans are worse off today than they were 15 years ago.

Prebuttals, part 2 - John Quiggin - The facts about inequality in the US, and increasingly in other developed countries, are now so clear-cut that the defenders of the status quo have little solid ground left on which to stand. So, they are mostly confined to arguments that have already been effectively rebutted. As new talking points emerge, it’s become increasingly easy to pick them out before they are fully formed and have a prebuttal ready. That’s the case with data showing that income inequality arises mainly from differences in current incomes rather than from inheritance. As I pointed out a couple of months ago, the absence of large inherited inequalities is a logical consequence of the fact that the distribution of income in the postwar generation was relatively equal. Sure enough, here’s the prebutted talking point, stated by John Cochrane[1], who asserts: There are a lot of facts: the widening distribution comes from a skill premium, not inherited wealth. He goes on with some older points, long rebutted It’s new people getting rich, not the old rich keeping more money. It’s pretax income, not the rich keeping more money.  Consumption inequality is much less than income inequality. And so on. In reality, income mobility is falling not rising, and the tax system has become less progressive not more. And I’ve dealt with the consumption inequality point here and here.

Motherhood Still a Cause of Pay Inequality - Women have made huge strides in the job market since President Kennedy signed the Equal Pay Act in 1963. Yet almost half a century after it became illegal to pay women less than men for the same job, the weekly wage of a typical woman who works full time is almost 18 percent less than that of the typical working man. That wage gap is drawing renewed attention as President Obama courts women’s votes ahead of the November election. Last week Republicans in the Senate blocked the Paycheck Fairness Act, a bill supported by the administration that would have limited the reasons employers can use to justify paying a man more than a woman for doing a similar job. “It is incredibly disappointing that in this make-or-break moment for the middle class, Senate Republicans put partisan politics ahead of American women and their families,” Mr. Obama said in a statement. “My administration will continue to fight for a woman’s right for equal pay for equal work.”

The 20 Million - Help wanted: Salary: $19,000 (some may be withheld or stolen). No health insurance, paid sick days or paid vacation.  Opportunity for advancement: nearly nil.  This job, or something much like it, is held by nearly 20 million people, 10 million of whom work in restaurants. They are the workers employed in producing, processing and delivering our food, who have been portrayed in vivid and often dispiriting detail in a new report called The Hands That Feed Us. Written by the Food Chain Workers Alliance, the report surveyed nearly 700 workers employed in five major sectors: production, processing, distribution, retail and service. The upshot: Our food comes at great expense to the workers who provide it. “The biggest workforce in America can’t put food on the table except when they go to work,” Yet though you can’t be a card-carrying foodie if you don’t know the provenance of your heirloom tomato, you apparently can be one if you don’t know how the members of your wait staff are treated. We don’t seem to mind or even notice that our servers might be making $2.13 an hour. That tip you debate increasing to 20 percent might be the difference in making the rent.

Let’s Play “You Be The Sucker!” - Let’s see. Business and banks have heaps of money – and aren’t hiring, spending their money, or loaning it out. Meanwhile, a few million working-age Americans have no money and no work, and many are young, strong, highly trained and capable. Business is complaining that they can’t get suitable employees for some sectors. But they aren’t training them, and in sectors where wages are low, they aren’t raising wages. Houses stand empty, while thousands are homeless or living in cramped conditions with family or friends. They are all playing “Don’t Make Me The Sucker.” It’s like a game of musical chairs where no-one gets off their chairs except the terminally benign or naïve. You can crank up the music all you want, but nobody’s moving. And in this game, they’re all correct. If any of them moves without all the others moving, they get to be The Sucker. For instance, what if the unemployed went first? Suppose they went to the zero lower bound of wages and offer to work for free till the economy improves, “to show willing,” as the Brits say. But the losses they would court – loss of unemployment support, loss of time for real job search – are hardly balanced by the slim possibility that the humble homage they pay to the source of all human worth, the employer, will in the future be rewarded by a decent wage and steady work. Giving something for free hardly ever raises its price. In a rising economy this could work, for some. In a stagnant one, the unpaid employee is the sucker.

This Week in Poverty: Justice for Janitors and Low-Wage Workers - Last week I reported that janitors in Houston reached an impasse in their month-long effort to renegotiate their expiring contract with cleaning contractors. The janitors are currently paid an hourly wage of $8.35 and earn an average of $8,684 annually. They seek a raise to $10 an hour over the next three years, but the contractors offered just a $0.50 pay raise phased in over five years. In response, the janitors began asking building owners and tenants to intervene on their behalf—especially since the cleaning contractors claimed that those corporations were unwilling to cover higher wages, so their hands were tied. Indeed 3,200 janitors in the city clean the offices of some of the largest and most powerful corporations in the world. Surely these powerbrokers could influence the outcome of any negotiations? Yet despite janitors sharing their personal stories of struggling in poverty and asking for help from the likes of Chevron, ExxonMobil, Wells Fargo, Shell, JPMorgan Chase and real estate giants like Crescent Real Estate Equities (a subsidiary of Barclay’s) and Hines Real Estate, no party stepped forward as hoped.

Workers for Wal-Mart Supplier Forced Into Slave Labor - Wal-Mart is under fire after guest workers at a seafood supplier of theirs in the Gulf Coast went on strike, alleging slave labor conditions and 24-hour work shifts. Forty guestworkers from Mexico work at C.J.’s Seafood peeling and boiling crawfish five months out of the year. The company sells an estimated 85% of its crawfish to Walmart. Workers at the seafood company are said to work up to twenty-four hours straight without overtime pay. They pay $45 of their earnings per week to live in crowded trailers with vermin and no air conditioning, according to one worker. These conditions were documented in a complaint filed last week with the Department of Labor and the Equal Employment Opportunity Commission. This is the flip side to the immigration debate. When you don’t give workers the rights accorded with citizenship, you leave them available to exploitation. I’m sure the answer on the other side of this is that they ought to leave and let American workers perform these tasks, but that’s precisely what the employer doesn’t want. They only meet their profit margins through exploiting powerless labor. These people were barricaded in their work space and denied any protections or benefits like overtime. One supervisor is quoted as saying that the workers are “ignorant people” who would be “made to understand with a shovel.” You couldn’t take that posture with someone imbued with individual rights of citizenship.

What to expect when you’re expecting cuts to food stamps - For Republicans, nothing says government waste quite like a lottery winner on food stamps. Democrats have often dismissed such complaints as political scapegoating. Senate Agriculture Chairwoman Debbie Stabenow (D-Mich.) and ranking GOP member Pat Roberts (R-Kan.) have put together a bipartisan farm bill that addresses concerns about food stamp waste, fraud and abuse that Republicans have long raisedThe Senate farm bill tightens enforcement measures to prevent waste and errors in the Supplemental Nutrition Assistance Program (SNAP). Under a separate provision, it also cuts $4.5 billion in food stamps to families that receive a nominal amount of heating aid — typically $1 to $5 per year— to so they can qualify for higher assistance. The Congressional Budget Office estimates that the latter will reduce benefits for about 500 million families by an average of $90 a month. The changes are meant to appease Republican concerns about food stamp abuse and waste, while also giving Democrats more flexibility on farm subsidies, the other major focus of the farm bill.

Bloomberg Cuts Threaten Thousands with Eviction as NYC Homeless Population Hits Record 43,000 - Despite the prospect of sending thousands back to shelter and the streets, Bloomberg officials claim the city can no longer afford to spend $140 million per year on rent subsidies. But critics note that the city spent more than four times that amount last year on commercial and industrial subsidies. Advocates like Patrick Markee at Coalition for the Homeless say that when it comes to fighting homelessness in New York City, fiscal responsibility isn’t the real issue. Mayor Bloomberg and top Bloomberg administration officials continue to view the problem of homelessness as a behavioral problem. They keep thinking that if you try and implement punitive policies against homeless children and families, against homeless individuals, that you’re somehow going to address the problem of homelessness.  The end of the Advantage program is the story of a budget squabble between New York City and New York state. The state canceled its share of Advantage funding in March 2011, and the Bloomberg administration countered by closing off the program to new families. Then, in February this year, a state court ruled that New York City could legally stop payment to all Advantage recipients.

Influx of Unaccompanied Migrant Children a Tragedy that Requires Congressional Attention - Despite border fences, increased militarization and drones patrolling our southern border, every year thousands of children from Latin America traveling without parents or adult relatives risk death to reach their loved ones in the United States. Illegal immigration across the southern border has dipped to historic lows, yet this year the number of unaccompanied minors is expected to reach 14,000 children -- an 86 percent increase from previous years. The influx took government officials by surprise. Since early spring, they have been scrambling to find shelters to accomodate all of the children -- some as young as six years old. Many of these children are arriving in Texas. Government officials shouldn't be surprised. The root causes of this tragedy -- the poverty and violence back home as well as our outmoded immigration policies have existed for decades. Nonprofit agencies such as the U.S. Committee for Refugees and Immigrants who work with these children daily have been sounding the alarm for years to no avail. In this following op-ed by Lavinia Limon, CEO of the U.S. Committee for Refugees and Immigrants, Limon urges that Congress do something to address the unfolding crisis.

Cost to Raise a Child: Around $300,000, Not Including College - Middle-income parents who welcomed a new child last year can expect to spend nearly $300,000 over the next 17 years, according to a new report. The U.S. Department of Agriculture prepares an annual report about families’ expenditures on children for use in developing state child-support and foster-care guidelines. Annual child-rearing expense estimates ranged between $12,290 and $14,320 for a child in a two-child, married-couple family in the middle-income group, which is defined as a before-tax income between $59,410 and $102,870. The amount spent on a child by families in the highest income group, on average, was more than twice the amount spent by families in the lowest income group. A child born last year to someone in the lowest income group would cost $212,370 over 17 years, compared to $490,830 for highest earners. The biggest share of the expense in raising a child, according to the report, is housing at 30%, followed by child-care and education at 18%, food at 16%, transportation at 14% and health care at 8%.

Kids: Now More Expensive Than Ever - Earlier this week, we learned that median family wealth has fallen dramatically over the past several years, taking us back to levels not seen since the early 1990s. Now the Department of Agriculture (which for some reason studies these things) reports that the cost of raising kids from birth to the age of 17 has increased by some $8,000, to a whopping $235,000 for middle-income Americans. Great. I’m not entirely sure why it’s the USDA that’s looking into the cost of raising kids. Kids aren’t veal, and as far as I know most parents aren’t planning to eat their children once they hit the age of 18. But the USDA has been issuing these reports since 1960, and they are used to develop guidelines for child support and foster care payments. In calculating the cost of raising kids, the USDA considers expenses for everything from housing and food (the two biggest expenses) to education, health care, clothing, transportation, and so on. The estimates for this year are 3.5% higher than those from last year, mainly due to increases in the costs of gas, food, education and child care.

States Note Slower Hiring - Hiring slowed or halted in a number of states last month, as the economy slipped further into a spring lull. The unemployment rate rose in 18 states in May from a month earlier, government data released by the Labor Department show. The rate fell in 14 states and held steady in 18 states. Housing-bust-state Nevada continued to have the highest jobless rate at 11.6%, though that was a tenth of a point lower from a month ago. Resource-rich North Dakota had the lowest at 3.0%, the same as in April. Part of the rise in jobless rates was due to a rise in the number Americans searching for jobs, thus expanding the broader pool of workers. The national unemployment rate, released earlier this month, stood at 8.2%, a tenth of a point higher from April. Meantime, the number of workers on employer payrolls rose in 27 states, declined in 22 states and was unchanged in Maine. In terms of hiring, California led the way with 33,900 new workers, followed by Ohio (19,600 additional workers) and New Jersey (17,600). North Carolina, Pennsylvania, and Maryland saw the biggest declines in employment from the prior month. See the full interactive graphic.

State Unemployment Rates little changed in May - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in May. Eighteen states recorded unemployment rate increases, 14 states and the District of Columbia posted rate decreases, and 18 states had no change, the U.S. Bureau of Labor Statistics reported today. Forty-nine states and the District of Columbia registered unemployment rate decreases from a year earlier, while only one state experienced an increase. ... Nevada continued to record the highest unemployment rate among the states, 11.6 percent in May [down from 11.7% in April]. Rhode Island and California posted the next highest rates, 11.0 and 10.8 percent, respectively [down from 11.2% and 10.9%]. North Dakota again registered the lowest jobless rate, 3.0 percent, followed by Nebraska, 3.9 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). Every state has some blue - indicating no state is currently at the maximum during the recession. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009. In early 2010, 18 states and D.C. had double digit unemployment rates.

Public workers in fiscal, political bull’s-eye - This has been a difficult year for government workers across the country, who are fighting uphill battles to hang on to their pensions and stable salaries — and it’s not over yet. From California to Pennsylvania, workers are facing efforts to sharply curtail the job security and benefits they have enjoyed for years, perks long viewed as compensation for the sometimes lower salaries in the public sector.Now, the perks that came with being a firefighter or a teacher have become a target, not only for conservative lawmakers but for Democrats under pressure to make deep cuts in government budgets. Experts note a decline in public support for government workers and their powerful unions, a sentiment shared by conservative activists eager to weaken organized labor. And never have they been more confident than this week, when Wisconsin Gov. Scott Walker (R) fended off a recall attempt orchestrated largely by unions outraged at his efforts to end collective bargaining for most public employees and teachers. “We absolutely intend to use this going forward,” said Brendan Steinhauser, spokesman for FreedomWorks, a tea party organization that has been working to undercut public employee unions’ power through state legislatures. The group views the failed attempt to unseat Walker as a powerful motivator for other Republican governors.

Executives Say Government Hiring Going in Wrong Direction - Some top-level U.S. executives remain skeptical over whether a jobs bill could bolster the American economy amid growing turmoil in Europe, but most think government hiring is going in the wrong direction, according to a new survey. The poll was conducted by Korn/Ferry International — a management consulting firm based in Los Angeles — surveyed 129 senior-level. Of those polled, 66% responded that a jobs bill wouldn’t be enough to offset the effects of global economic trends such as the Euro crisis, but when asked if they thought local government hiring was going in the wrong direction, 67% agreed. “There’s no silver bullet answer to our dilemma,” He said the results suggest that executives might see the jobs bill, which may stimulate hiring in the public sector with additional civil service jobs, as a short-term lift to a long-term problem. “We have to look at all the options, both privately and publicly,”

Public Sector Layoffs and the Battle Between Obama and Conservative States - Last Friday, both presidential candidates had a back-and-forth over the issue of public sector jobs. President Obama said that the private sector is doing fine but the public sector needs help and is threatening the recovery, and Mitt Romney attacked the idea that "we need more firemen, more policemen, more teachers.”. Two major economists from Yale, Ben Polak and Peter K. Schott, just wrote a post at at Economix titled "America’s Hidden Austerity Program." Polak and Schott argue that "there is something historically different about this recession and its aftermath: in the past, local government employment has been almost recession-proof. This time it’s not... Without this hidden austerity program, the economy would look very different. If state and local governments had followed the pattern of the previous two recessions, they would have added 1.4 million to 1.9 million jobs and overall unemployment would be 7.0 to 7.3 percent instead of 8.2 percent." But why is this happening? One possibility is that we are witnessing a secular change in state and local politics, with voters no longer willing to pay for an ever-larger work force. An alternative explanation is that even though many state and local governments are constrained not to run deficits, they can muddle through a standard recession without cutting jobs. But when hit by a huge recession like that of 1981 or the latest one, the usual mix of creative accounting and shifting in capital expenditures cannot absorb the shock, and jobs have to go.

States Trim Rate of Spending Growth - State general-fund spending is projected to grow 2.2% in nominal terms in the next fiscal year, much slower than in the past two years and less than half of its long-run average, according to a report released Tuesday by the National Governors Association and the National Association of State Budget Officers. States’ general fund spending — which is roughly defined as spending on day-to-day operations of government and usually excludes special items like big infrastructure investments — grew at an average pace of 5.6% from the 1979 to 2013 fiscal years. In the 2013 fiscal year, which for most states starts July 1, state spending is projected to grow 2.2%. That’s a slower pace than in both 2011 and 2012, in part because states are no longer getting federal stimulus dollars. Their revenues, while growing, remain relatively sluggish along with the economy and in many cases haven’t grown fast enough to make up for federal losses. The state and local government sector has been a considerable weight on the nation’s painfully slow economic recovery, both in terms of employment and the growth. Spending on state and local government has been a net drag on gross domestic product growth since the third quarter of 2010.

How Wall Street Hustles America’s Cities and States Out of Billions - Tom Ferguson - Yves here. While the municipal swaps fiasco may seem like old news, this piece discusses a post-crisis type of swap which is even more appalling. The old scam was to talk local and state authorities who would have been far better served with old-fashioned fixed rate financing into doing floating rate financing and entering into a series of swaps to get a fixed rate deal, with a supposed improvement in funding costs. The problem is that many of those floating rate deals were auction rate securities, and when that market failed in early 2008, the borrowers were doubly hosed. The ARS went to penalty rates. In addition, payments on the swaps often kicked up shortly thereafter (due to the slow-motion failure of monoline guarantors, which was the hidden trigger behind both events. The downgrade of the monolines de facto downgraded the municipality, which led to increased payments on the swaps). The latest scam is more appalling. Municipal authorities would borrow fixed rate, then enter into a variable rate swap on the side. Earth to base, no responsible manager wants uncertain funding costs on a long-term capital investment. This is tantamount to the owner of a candy store borrowing money at a fixed rate from his bank to finance an expansion of his business, then betting at the racetrack to try to lower his costs. Not surprisingly, many of these swaps have proven to be costly time bombs.

Banks Could Return a Favor to Governments - LIKE millions of homeowners, shrewd state and local governments are looking to refinance. Interest rates have hit rock bottom. So why not save some public money by replacing old debts with new ones at lower rates? The bad news for taxpayers is that such easy refis are out of the question for many governments and agencies short on cash. And that’s because these borrowers have been trapped by Wall Street. Behind all of this is — you guessed it — derivatives. Bankers have embedded interest-rate swaps in many long-term municipal bonds. Back when, they persuaded states and others to issue bonds and simultaneously enter into swaps. In these arrangements, the banks agreed to make variable-rate payments to the issuers — and the issuers, in turn, agreed to make fixed-rate payments to bond holders. These swaps were supposed to save the public some money. And, for a while, they did. Then the financial crisis hit — and rates went south and stayed there. Now issuers are paying bond holders above-market rates as high as 6 percent. In return, they are collecting a pittance from banks — typically 0.5 percent to 1 percent. Why not just refinance the old bonds? Well, if you think it’s costly to refinance a home mortgage, try refinancing a derivatives-laced muni. The price, in the form of a termination fee, can be enormous. New York State, for one, has paid $243 million in recent years to extricate itself from swaps-related debt. That money went straight from taxpayers’ pockets to Wall Street.

Institute for Truth in Accounting Report Says States Have $900 Billion Off-Balance Sheet Debt - The Institute for Truth in Accounting (IFTA) today released its second annual study of all 50 states’ assets and liabilities, including pension and retirement health care obligations. All the states together have more than $900 billion in off-balance sheet liabilities, and the taxpayer burdens in most states continue to grow due to poor budgeting rules and outdated accounting principles.  “Antiquated government budgeting rules and accounting standards are to blame” The report reviews each state's financial condition and identifies the top five "sinkhole" states, or the states in the worst financial condition, as well as the top five "sunshine" states, so named since they have adequate assets available to pay their obligations.  The five “sinkhole states” and the amount each taxpayer would have to send to its state treasury are: Connecticut ($49,000), New Jersey ($35,800), Hawaii ($32,700), Illinois ($31,600), and Kentucky ($23,500). The top five "sunshine states” and per-taxpayer surpluses are: Alaska ($21,200), Wyoming ($20,200), North Dakota ($9,500), Utah ($2,600), and Nebraska ($2,400). The study showed that one state, Hawaii, saw its unfunded health care obligations increase by $3 billion in just one year. A download of the full report is available at

State and Local Governments Outpace Growth of Private Sector - State and local governments depend on the private sector for their survival. Almost every dollar that these governments spend is either borrowed or taxed from the private economy. Yet, for more than half a century, these governments have continuously outpaced the growth of the private sector on which they depend. In the chart below, Mercatus Center senior research fellow Matthew Mitchell uses inflation-adjusted data from the Bureau of Economic Analysis to illustrate the unsustainable growth of these governments. The blue line shows the size of the private sector as a multiple of its 1950 value and the red line shows the size of state and local government spending as a multiple of its 1950 value.The graph shows that, after 60 years, the private economy is 5 times its 1950 size. But state and local governments are spending almost 13 times as much as they did in 1950. “This is like a household whose income has grown five-fold over a period of time,” Mitchell reports. “That's great news. But, unfortunately, their spending habits have grown 13-fold. This divergence is unsustainable.”

US: 2011 State GDP Growth Shows Excruciatingly Modest Gains: No matter how you slice it up, 1.7 percent GDP growth nationwide translates into only modest gains across most states. There were a few hot spots, most notably areas with ties to the oil boom and tech sectors.  State GDP figures indicated that growth last year among the states rose 1.5 percent, on a sum of states basis, after posting a 3.1 percent increase in 2010. The major industry sectors contributing to state growth last year were durable goods manufacturing, professional, scientific and technical services along with information services and healthcare. The state economies that produced the largest gains in 2011 had higher concentrations of these key industry sectors. Durable goods production accounted for significant portions of the high growth states, such as Oregon and Michigan. The professional, scientific and technical services sector was the key driver of growth for Virginia, Massachusetts, New York, Maryland, New Jersey, Florida and Arkansas. The information services industry, which includes media and wireless telecommunications, accounted for the bulk of growth in Colorado and Utah. The mining sector contributed significantly to growth in North Dakota (7.6 percent) and West Virginia (4.5 percent). Real estate, rental and leasing activities subtracted from growth in several states, reflecting the after effects of the housing bust.

Does Obama Know Why the Public Sector Isn’t ’Doing Fine’? - On Friday President Barack Obama spoke about why the economic recovery has been so slow. People are focusing on his gaffe -- saying “the private sector is doing fine” -- and Ezra Klein admonishes us to focus on the president's substantive point, which is that job losses in the public sector have undermined the recovery overall. Unfortunately, Obama didn’t mention a major barrier to job growth in the public sector -- and neither did Ezra: unsustainable compensation structures. This problem existed before the recession, but it’s gotten worse during the recession, because public pension systems are designed to have very rapid rises in current-year cost in the years following a recession.Take a look at the attached chart from San Jose, California. As you can see, San Jose had an average of 7.5 employees per 1,000 residents from 1986 to 2005, and never dropped below 7.0. But in the last two years, that ratio has cratered -- to 5.6 per thousand this year, with further cuts expected next year. This is partly because revenue has risen only modestly, with general fund receipts rising 19 percent in a decade. But the main reason is that costs for a full-time equivalent employee are astronomical and skyrocketing. San Jose spends $142,000 per FTE on wages and benefits, up 85 percent from 10 years ago. As a result, the city shed 28 percent of its workforce over that period, even as its population was rising.

Texas Is the Future - Some interesting tidbits about the economic health of the 50 states, from the government’s annual estimate of growth by state, released Tuesday: Six state economies shrank last year. While the nation’s gross domestic product grew by 1.7 percent in 2011, economic output shrank in five states: Wyoming, down 1.2 percent; Alabama, down 0.8 percent; Mississippi, also down 0.8 percent; Maine, down 0.4 percent; New Jersey, down 0.5 percent; and Hawaii, down 0.2 percent. Only one of those states, Wyoming, also declined in 2010. Manufacturing is the past future. Increased production of durable goods was the largest contributor to growth in 26 states. Oregon benefited most. The state’s economy expanded by 4.7 percent last year — and more than 80 percent of the growth came from manufacturing. In Michigan, manufacturing accounted for half of the 2.3 percent expansion. Resource extraction is the future. Excepting Oregon, fuel states posted the strongest growth. North Dakota’s economy expanded by 7.6 percent; West Virginia’s, 4.5 percent; Alaska’s, 2.5 percent. Or maybe Texas is the future. The Texas economy grew 3.3 percent in 2011, and the growth was broad-based. Not just oil, not just manufacturing. Texas now accounts for 8.7 percent of the nation’s economy, up from 7.4 percent a decade ago.

Unkovic to US, Corbett: Stop PA ‘corruption,’ ‘unchecked greed‘ - "Hundreds" of U.S. municipalities "are suffering the financial ravages caused by the unchecked greed of major financial institutions and their local enablers," writes David Unkovic, longtime bond lawyer at Philadelphia-based Saul Ewing Remick & Saul and Cozen & O'Connor, and PA Gov.Tom Corbett's former receiver for cash-strapped Harrisburg PA, in this extraordinary piece in the Harrisburg Patriot-News. Unkovic resigned after concluding that Harrisburg-area public officials, New York investment bankers and Pennsylvania bond professoinals had violated Pennsylvania’s Local Government Unit Debt Act, the law governing performance bonds for public construction projects, and other state laws, as laid out in this Harrisburg Authority fiorensic audit and this Harrisburg Authority management and financial audit. He has called for state and federal investigations of the Harrisburg bond sales. His article renewed those calls: "In order for a Democratic republic to work, a fundamental respect for the law is essential, particularly by the public officials elected to carry them out and their lawyers and agents. ... Disdain for the law is so embedded in Harrisburg’s political culture that it constitutes a very insidious form of corruption.

Romney's America: Fewer Cops, Fewer Firefighters, Fewer Teachers? - Here is Mitt Romney, criticizing Barack Obama's plans to help the states and localities reverse the shrinkage in government employment currently dragging us back into recession: "He wants another stimulus, he wants to hire more government workers. He says we need more fireman, more policeman, more teachers. Did he not get the message of Wisconsin? The American people did. It's time for us to cut back on government and help the American people." I haven't seen any polling on this, but if Romney wants to make this election about whether we need more cops, firefighters, and teachers, Barack Obama ought to accept the invitation. At least Romney is more honest (or just more tone-deaf) than his co-partisans such as Scott Walker, who usually pretend we can cut taxes by eliminating "bureaucrats." Of course the real hard-core Ayn Rand types think it's a good thing if a schoolteacher loses her job and has to become a stripper -- since, after all, by definition private-sector employment is productive while public-sector employment is unproductive -- but Mitt's welcome to that 25% of the vote.

More Firemen, More Policemen, More Teachers – Krugman - First, Mitt Romney ridiculed Obama for saying that we need more public employment: He says we need more firemen, more policemen, more teachers. Did he not get the message in Wisconsin? Afterwards, some commentators wondered, couldn’t he have chosen different professions to ridicule? And the answer is no. When we talk about public workers, that’s pretty much who we’re talking about: When we look at the unprecedented public austerity in this recession, we’re basically looking at cutbacks on education and public protection.

We Don’t Need No Teachers! - There’s a squabble in the presidential campaign over whether Mitt Romney said the country needs fewer police officers, firefighters and teachers. Here’s the he said, he said: Mr. Romney said: [The president] says we need more firemen, more policemen, more teachers. It’s time for us to cut back on government and help the American people. Naturally the Obama campaign jumped all over this, releasing the following statement: As President Obama urges Congress to pass his plan to put cops, firefighters, teachers, and construction workers back to work — after they left as many as 1 million jobs from his plan on the table — Mitt Romney has decided we need less jobs for middle class Americans, not more. Then, earlier today, Mr. Romney went on Fox and tried to Etch A Sketch his gaffe away. Of course, teachers and firemen and policemen are hired at the local level and also by states. The federal government doesn’t pay for teachers, firefighters or policemen. So obviously, that’s completely absurd. He’s got a new idea, though, and that is to have another stimulus and to have the federal government send money to try and bail out cities and states. It didn’t work the first time. It certainly wouldn’t work the second time. Confused? I think that’s probably the intended effect. But let me try to cut through the clutter a bit, because the back-and-forth actually turns on something important. Obviously, Mr. Obama can’t hire firefighters personally (even if he wants to), and Mr. Romney can’t fire them (even though he likes firing people).

We Don’t Need No Education, by Paul Krugman - Hope springs eternal. For a few hours I was ready to applaud Mitt Romney for speaking honestly about what his calls for smaller government actually mean. In the remarks Mr. Romney later tried to deny, he derided President Obama: “He says we need more firemen, more policemen, more teachers.” Then he declared, “It’s time for us to cut back on government and help the American people.”  You can see why I was ready to give points for honesty. For once, he actually admitted what he and his allies mean when they talk about shrinking government. Conservatives love to pretend that there are vast armies of government bureaucrats doing who knows what; in reality, a majority of government workers are employed providing either education (teachers) or public protection (police officers and firefighters). Conservatives would have you believe that our disappointing economic performance has somehow been caused by excessive government spending, which crowds out private job creation. But the reality is that private-sector job growth has more or less matched the recoveries from the last two recessions; the big difference this time is an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be. And, if we had those extra jobs, the unemployment rate would be much lower than it is — something like 7.3 percent instead of 8.2 percent.

Romney's Education Agenda: Beliefs Do Not Replace Policies - The NYT reports that Governor Romney will strongly push school vouchers if he gets into the White House. It told readers: "Now Mr. Romney is taking his party back to its ideological roots by emphasizing a lesser role for Washington, replacing top-down mandates with a belief in market mechanisms." Top down mandates are a policy. The policy is not replaced with beliefs, it is replaced with other policies. In this case, the piece tells us the policy is a voucher that can be used for private schools. While the article repeatedly assures readers that the motive is an ideological belief in markets, there is another possibility that goes completely unmentioned in this article. There are companies that profit from running private schools. Such companies could make large amounts of money if the Federal government were to pressure state and local governments to give students a voucher that could be used in their schools. It is possible that Romney and his advisers are motivated by the desire to appease people running for profit schools rather than an ideological belief in the idea that market forces will somehow fix education for low income student. This possibility seems especially plausible since there is now considerable evidence that increased use of market mechanisms will not improve the quality of education.

Does Mitt Romney Believe Downsizing Education Helps Growth? - Pema Levy reports on what appears to be a real difference of opinion between President Obama and Mitt Romney.  First up this quote from Romney:  He wants another stimulus, he wants to hire more government workers. He says we need more firemen, more policemen, more teachers. Did he not get the message of Wisconsin? The American people did. It’s time for us to cut back on government and help the American people. It has been widely reported that the fiscal contraction by our state and local governments is holding back our feeble recovery from the Great Recession. And yet the Republican Party is calling for even more austerity. I guess they are taking their cues from those European austerians. How well is that working out? Both parties agree in principle that we need to improve our education system as part of a strategy for long-term growth. But this is where Team Romney seems to have extremely bizarre reasoning:

States to residents, localities: forget promises to restore funding — When Wichita Public Schools Superintendent John Allison learned that, thanks to rising revenues, Kansas was projected to have a budget surplus of more than $300 million at the end of the year — the state’s first surplus since the recession — he hoped that the legislature would use the money to restore the hundreds of millions of dollars that it had cut from education in the last three years. From 2008 to the end of the current fiscal year on June 30th, Kansas will have slashed school funding by nearly $700 per student, a decline of more than 12 percent in inflation-adjusted dollars. In Wichita, the state’s largest school district, those cuts came to about $60 million of its $600 million budget, Allison said, and translated into large-scale layoffs; the closure of five schools; the elimination of programs such as driver’s education, art, and music. When news broke about the surplus, “We thought, ‘Finally, things are going to start getting back to normal.’” But lawmakers in Kansas had different ideas. In the final days of the legislative session last month, they used the surplus to justify the largest tax cut in the state’s history. Among other changes, the cuts reduce the top rate to 4.9 percent from 6.45 percent, and are projected to cost $3.7 billion over the next five years, converting this year’s surplus into long-term budget deficits that could total $2.5 billion by 2018.

Reading, Pennsylvania: Poorest U.S. City Loses Pre-Kindergarten, 170 Teachers: Teachers were less than joyous for the awards ceremony because 110 of them received pink slips earlier that day, placing them on unpaid leave until further notice. In addition, they learned 60 retiring teachers would not be replaced. The schools of America's poorest city had run out of cash and cleaving 13 percent of the teachers from the payroll was just the beginning.Reading will lose pre-kindergarten entirely next year. Special courses in industrial arts will be curtailed. Selena's mom, MalissaKarner, said she expects her children's classes to grow to 40 or 50 students because of the shortage of space and personnel. Selena Karner started a Facebook group to advocate for the city's teachers, who were furloughed based on seniority. "It's a big mistake," Malissa Karner said of the pre-K cuts. "My kids were fortunate enough to attend pre-school, which helped them catch up and start learning faster. I can't imagine what would have happened otherwise."

Gwinnett County Schools Teachers Work For Free During Summer Months To Help Georgia Students Read -- A group of teachers at Benefield Elementary School in Lawrenceville, Ga. are offering free reading classes to students this summer. Led by teacher Karon Stocks, more than 40 teachers are volunteering three hours once a week during the summer months to keep kids' minds sharp, helping them review what they learned during the academic year. Around 100 families have already shown up for the classes in the three weeks the teachers have been operating."I think it's really important that the [kids] not just be on the computer or watching TV," Stocks told WGCL-TV. The initiative by Stocks and her coworkers comes as Gwinnett County schools is facing an $89 million revenue shortfall. The drop in funding is attributable to environmental changes like declines in tax revenue, loss of federal stimulus funds, increase in health insurance premiums for employees and the need to hire more teachers due to enrollment growth.

Seeking Academic Edge, Teenagers Abuse Stimulants - Before opening the car door he twisted open a capsule of orange powder and arranged it in a neat line on the armrest. He leaned over, closed one nostril and snorted it. Throughout the parking lot eight of his friends did the same thing. The drug was not cocaine or heroin, but Adderall, an amphetamine prescribed for attention deficit hyperactivity disorder that the boy said he and his friends routinely shared to study late into the night, focus during tests and ultimately get the grades worthy of their prestigious high school in an affluent suburb of New York City. The drug did more than just jolt them awake for the 8 a.m. SAT; it gave them a tunnel focus tailor-made for the marathon of tests long known to make or break college applications. “Everyone in school either has a prescription or has a friend who does,” the boy said. At high schools across the United States, pressure over grades and competition for college admissions are encouraging students to abuse prescription stimulants, according to interviews with students, parents and doctors. Pills that have been a staple in some college and graduate school circles are going from rare to routine in many academically competitive high schools, where teenagers say they get them from friends, buy them from student dealers or fake symptoms to their parents and doctors to get prescriptions.

Subprime college educations - George Will - Glenn Harlan Reynolds, a University of Tennessee law professor, believes that college has become, for many, merely a “status marker,” signaling membership in the educated caste, and a place to meet spouses of similar status — “associative mating.” Since 1961, the time students spend reading, writing and otherwise studying has fallen from 24 hours a week to about 15 — enough for a degree often desired only as an expensive signifier of rudimentary qualities (e.g., the ability to follow instructions). Employers value this signifier as an alternative to aptitude tests when evaluating potential employees because such tests can provoke lawsuits by having a “disparate impact” on this or that racial or ethnic group. In his “The Higher Education Bubble,” Reynolds writes that this bubble exists for the same reasons the housing bubble did. The government decided that too few people owned homes/went to college, so government money was poured into subsidized and sometimes subprime mortgages/student loans, with the predictable result that housing prices/college tuitions soared and many borrowers went bust. Tuitions and fees have risen more than 440 percent in 30 years as schools happily raised prices — and lowered standards — to siphon up federal money. A recent Wall Street Journal headline: “Student Debt Rises by 8% as College Tuitions Climb

College is mostly about human capital, not signaling - Some people think college is about signaling, not about building human capital. I'd say most economists believe this. But what exactly do they think is being signaled? Intelligence? No, that doesn't make sense. It's way too easy to tell who's smart. To signal general intelligence, all you need to do is take some tests - AP tests and SAT 2's if you're trying to signal moderate intelligence, International Math Olympiad if you're trying to signal exceptional mathematical intelligence, and so on. You don't need 4 years at an elite school to show you can do some math problems or memorize some stuff.  In fact, in Japan, most employment decisions are based on exactly this sort of signal. High school students who want good careers spend all of high school studying for some really long college entrance exams, and employers basically pick the students who get the best scores on these exams. So what else could people be signaling at college? The ability to do hard work in the face of massive leisure temptation? I actually think this is a reasonably big deal, especially in the U.S. If college performance is a signal, it's a signal of people's desire to study when they could be partying.

For future prosperity, US should strengthen efforts to maintain world-class research universities: American research universities are essential for U.S. prosperity and security, but the institutions are in danger of serious decline unless the federal government, states, and industry take action to ensure adequate, stable funding in the next decade, says a new report by the National Research Council, the operating arm of the National Academy of Sciences and National Academy of Engineering. As trusted stewards of public funds, universities must also meet "bold goals" to contain costs, enhance productivity, and improve educational pathways to careers both within and beyond academia, the report says. Congress requested the report, which was written by a committee that includes industry CEOs, university presidents, a former U.S. senator, and a Nobel laureate. It recommends 10 strategic actions that the nation should take in the next five to 10 years to maintain top-quality U.S. research institutions. The report builds upon Rising Above the Gathering Storm, a landmark Academies' study on U.S. competitiveness.

Q: How is College Like Owner-Occupied Housing? …A:  When loans to purchase it are subsidized, the price of it goes up! I’m fascinated by this story that appeared in the Wall Street Journal this week (by Josh Mitchell), with the subtitle “As Student Debt Grows, Possible Link Seen Between Federal Aid and Rising Tuition.”  The article explains the link this way: Rising student debt levels and fresh academic research have brought greater scrutiny to the question of whether the federal government’s expanding student-aid programs are driving up college tuition. Studies of the relationship between increasing aid and climbing prices at nonprofit four-year colleges found mixed results, ranging from no link to a strong causal connection. But fresh academic research supports the idea that student aid in the form of grants leads to higher prices at for-profit schools, a small segment of postsecondary education. The new evidence?  The new study found that tuition at for-profit schools where students receive federal aid was 75% higher than at comparable for-profit schools whose students don’t receive any aid. Aid-eligible institutions need to be accredited by the Education Department, licensed by the state and meet other standards such as a maximum rate of default by students on federal loans. The tuition difference was roughly equal to the average $3,390 a year in federal grants that students in the first group received, The authors said their findings lent “credence to the…hypothesis that aid-eligible institutions raise tuition to maximize aid.“

The College Graduate as Collateral - - ACADEMIC economists work in the least competitive and most subsidized industry of all: higher education.  We criticize predatory loans by mortgage brokers, when student loans can be just as abusive. To avoid the next credit bubble and debt crisis, we need to eliminate government subsidies and link tuition financing to the incomes of college graduates.  Nearly eight million students received Pell grants in 2010, costing $28 billion. In addition, the federal direct loan program, which allows nonaffluent students to get government-guaranteed loans at low interest rates, cost taxpayers $13 billion in 2010-11. Total subsidies to university education amount to $43 billion a year, including around $2 billion in Congressional earmarks — and that does not even include tax subsidies (for college funds); tax breaks (for university endowments, for example); and subsidies dedicated to research.  Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college. Between 1977 and 2009 the real average cost of university tuition more than doubled.  These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan.

Student loan payback gets White House attention - The deadline for Congress to extend the low 3.4% interest rate on student loans is fast approaching. But the Obama administration, eager to make college debt a re-election issue, is looking for a way to lessen the burden on graduates. Last week, the White House rolled out a plan to make it easier for graduates to enroll in a special program that caps loan repayment, based on income. Under the present terms of the 4-year-old Income-Based Repayment Plan, graduates who enroll get charged 15% of their monthly discretionary income to pay off loans. All debt is forgiven after 25 years. Currently, the program has 700,000 participants, according to Secretary of Education Arne Duncan. But the administration believes millions more could benefit from the capped loan payments.  President Obama directed the education agency to create a new way to allow students to enroll into the income-based loan program online, with a single click. Graduates will be able to upload financial data directly from the IRS -- instead of filling out an application with information from a personal income tax filing.

Intimidation Tactics? - At 7:02 a.m. on Sept. 30, 2010, scant hours after an op-ed he had written for the San Francisco Chronicle criticizing his university appeared in print, Michael Wilkes received an e-mail from an administrator at the University of California at Davis. Wilkes, a professor at the medical school, was told that he would no longer lead a program sequence that taught better patient care, and support for a Hungarian student exchange program he headed would be withdrawn. Within weeks, Wilkes was told that he would be removed as director of global health for the UC Davis Health System. He also received letters from the university’s health system counsel suggesting that the university could potentially sue him for defamation over the op-ed.  Now, a committee on academic freedom at the university that investigated allegations of intimidation and harassment against Wilkes has found them to be true. The faculty committee said in its report, a copy of which was obtained by Inside Higher Ed, that the actions of the university administrators cast doubt on its ability to be a “truthful and accountable purveyor of knowledge and services."

South Carolina’s Pension Push Into High-Octane Investments -  It turns out that Mr. Borden liked his investments the way he liked his cars. Which is to say, fast. With the help of some big names on Wall Street and a nod from officials here, he transformed this state’s go-slow public pension system into one of the most high-octane in the nation. So far, though, the results have been mixed. The long-term consequences — for retirees, public workers and taxpayers here — are as yet unknown. What is sure is that while he was running things, South Carolina ended up paying hundreds of millions of dollars in fees — $344 million last year alone — to a Who’s Who of hedge fund managers and private equity deal makers. In return, it got a trove of investments that haven’t really provided the bang that people here had hoped for. Today, the pension fund has a higher share riding on private-equity and hedge-fund plays — called “alternative investments” in some circles — than almost any other state’s: $13 billion, or more than half its total. What is also certain is that Mr. Borden is long gone. Mr. Borden, who resigned last December to join a private investment firm, says he is proud of what he accomplished in his nearly six years at the helm of the $24.5 billion South Carolina Retirement Systems.

Congress should fix Postal Service pension problem it created  - The Heritage Foundation’s latest attack on the Postal Service is a convoluted collection of half-truths and untruths. The author, David John, doesn’t want the Postal Service to benefit from $11.6 billion in overpayments it made for its pension obligations even though he grudgingly admits “this surplus appears to exist.” The overpayment should be refunded to the Postal Service to help it met its operating costs, but Heritage wants those funds locked up in the pension plan, which it claims would “follow the private-sector practice of using the current surplus—whatever it is—to defray future retirement payments.” This is baloney. When a private corporation overfunds its pension plan, it can transfer excess funds to pay retiree health obligations. In the case of USPS, it could use the funds to pay both current obligations ($2.4 billion a year) and the congressionally mandated pre-funding for future obligations ($5.6 billion a year). When it’s inconvenient, Heritage abandons its suggestion that the Postal Service should be treated like the rest of the private sector. Private sector employers are not required to pre-fund their retiree health benefits, and most of them fund retiree health benefits on a pay-as-you-go basis.  If USPS “followed the private-sector practice,” it wouldn’t contribute a nickel to the future retiree health obligations; it would pay them as they came due, yet Heritage supports a requirement that USPS “fully prefund this benefit.”

Pensions Under Stress, Worldwide - In Sunday’s newspaper, I wrote about the risks for older workers who have been forced to claim Social Security early because of job loss. Even as more workers are delaying retirement to extend their earning years and build up their savings, those who were laid off during the recession and afterward have had a particularly difficult time finding new work. To get by, many have started collecting Social Security retirement benefits at 62, four years before the current full retirement age. As a result, their monthly payments are 20 to 30 percent lower than they would have been had they waited until they were 66 to start drawing benefits. A new report from the Organization for Economic Cooperation and Development underscores why it is so important for people to work longer, not just for their own financial well-being but for the fiscal health of their countries. Because of the financial crisis, as well as the aging of the populations in many of the 34 O.E.C.D. countries, public pension funds are under intense stress. Many countries have changed the terms of their pension systems, including increasing the full retirement age, cutting benefits and giving people more incentives to work longer. Half of the O.E.C.D. countries, for example, will raise the full retirement age to 67 in the medium term, or have already done so.

Older, Jobless and Forced Onto Social Security - Ms. Keany had always expected to work into her 70s and add to her retirement cushion. But after losing her job as an executive assistant at an advertising agency in 2008, she searched fruitlessly for full-time work and exhausted her unemployment benefits. For a while, she strung together odd jobs and lived off her 401(k) retirement and profit-sharing accounts. Then, this year, with her savings depleted and no job offers in sight, she reluctantly applied for Social Security.  “I would rather be functioning and having a job somewhere,” said Ms. Keany, 62, whose pixie haircut, trim build and crinkling smile suggest someone much younger than her years. “I really don’t enjoy living like this. I’ve got too much to do still.” Even as most Americans are delaying retirement to bolster their savings accounts, the recession and its protracted aftermath have forced many older people who are out of work to draw Social Security much earlier than they had planned. According to an analysis by Steve Goss, chief actuary for the Social Security Administration, about 200,000 more people filed initial claims in 2009 and 2010 than the agency had predicted before the recession and he said the trend most likely continued in 2011 and 2012, though that is harder to quantify. The most likely reason is joblessness.

Payroll Taxes Cover About a Third of Medicare Costs - I get the impression that many Americans believe Medicare is financed like Social Security. They know that a portion of payroll taxes goes to Social Security and a portion goes to Medicare. So they conclude workers are paying for Medicare benefits the same way they are paying for Social Security benefits. That isn’t remotely true, as new data from the Congressional Budget Office demonstrate. In 2010, payroll taxes covered a little more than a third of Medicare’s costs. Beneficiary premiums (and some other earmarked receipts) covered about a seventh. General revenues (which include borrowing) covered the remainder, slightly more than half of total Medicare costs. If you prefer to focus on just the government’s share of Medicare (i.e., after premiums and similar payments by or on behalf of beneficiaries), then payroll taxes covered about 40% of the program, and other revenues and borrowing covered about 60%. In contrast, payroll taxes and other earmarked taxes covered more than 93% of Social Security’s costs in 2010, and that was after many years of surpluses. The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don’t get payroll revenues; instead, they are covered by premiums and general revenues.

Concentration in Health Care Markets - This Policy Study by Barak Richman at AEI is well worth your time.  We purchase our health care in markets with a lot of potential (and actual) monopoly power.  For example, a large hospital system basically enforces collusion among what might otherwise have been many small, competing providers.  It is not a surprise that the prices are high, rising, and disproportionate to customer satisfaction.  Markets in which high fixed costs and monopoly are so pervasive invite government regulation, for good or ill.  Richman discusses any number of anti-trust strategies to address the problem.   I have written on a related issue of insurer market power in earlier blog posts, here and here.

Kennedy’s Pivotal Vote Focuses on Freedom as Court Ruling Looms - Anthony Kennedy has cast pivotal votes at the U.S. Supreme Court on terrorism, school integration, clean water, the death penalty, gun rights, abortion and campaign finance. Health care may be next. By month’s end, the high court will determine the fate of President Barack Obama’s health-care law, designed to extend coverage to at least 30 million uninsured Americans. The decision may rest with Kennedy, the court’s swing vote since Justice Sandra Day O’Connor retired in 2006.“Justice Kennedy is the axis around which the court spins in a case like this,” said Tom Goldstein, an appellate lawyer whose Scotusblog website, sponsored by Bloomberg Law, tracks the court. “On this closely divided court, someone inevitably has to be the center vote, and he is consistently it.” The case marks the first time the high court has considered tossing out a president’s defining legislative accomplishment in the middle of his re-election campaign. Three days of arguments in March suggested the nine-member court will divide along ideological lines, with Kennedy and perhaps Chief Justice John Roberts casting the deciding votes.

A Back Door to the Public Option, by Robert Reich: Any day now the Supreme Court will issue its opinion on the constitutionality of the Accountable Care Act, which even the White House now calls Obamacare. Most high-court observers think it will strike down the individual mandate in the Act that requires almost everyone to buy health insurance,... but will leave the rest of the new healthcare law intact. But the individual mandate is so essential to spreading the ... cost of health care over the whole population, including younger and healthier people, that some analysts believe a Court decision that nixes the mandate will effectively spell the end of the Act anyway. Yet it could have exactly the opposite effect. If the Court strikes down the individual mandate, health insurance company lobbyists and executives will swarm Capitol Hill seeking to have the Act amended to remove the requirement that they insure people with pre-existing medical conditions. They’ll argue that without the mandate they can’t afford to cover pre-existing conditions. But the requirement to cover pre-existing conditions has proven to be so popular with the public that Congress will be reluctant to scrap it. This opens the way to a political bargain. Insurers might be let off the hook, for example, only if they support allowing every American, including those with pre-existing conditions, to choose something very much like Medicare. In effect, what was known during the debate over the bill as the “public option.” ...

China Goes Where Obamacare Refused to Tread: Takes on Big Pharma on High Priced Drugs -- Yves Smith - Emerging economies are increasingly flexing their muscles over stratospherically-priced life-saving drugs. And before the Big Pharma defenders start caviling about how the high cost of drug development is squeezing profits, it’s hard to be sympathetic. First, the Federal government pays for a staggering amount of drug research (it’s hard to get solid numbers, since the National Institutes of Health is the biggest but not sole funder, but the latest estimate I saw was over 30% of the total). Second, pharmaceutical companies have not done much truly new drug development in a while. Well over 80% of the so-called “new drug applications” are for extensions or reformulations (eg, a delayed release version) of an existing drug. Third, Big Pharma spends more on marketing than on R&D. The move by China follows targeted measures by Malaysia, Indonesia, Thailand and most recently India to use “compulsory licenses” to make their own generic versions of patented drugs. From Reuters: The amended Chinese patent law allows Beijing to issue compulsory licenses to eligible companies to produce generic versions of patented drugs during state emergencies, or unusual circumstances, or in the interests of the public. For “reasons of public health”, eligible drug makers can also ask to export these medicines to other countries, including members of the World Trade Organisation.

Is rising obesity a product of income inequality and economic insecurity? - Three decades ago, 15% of American adults were obese. Today 35% are. Obesity has increased in many other rich nations too. Why? Although we burn fewer calories now than in the past, reduced physical activity likely played only a minor role in obesity’s rise. Instead, the main cause was a sharp increase in the number of calories we consume. Why did that happen? The most common story focuses changes in the supply of food. Tasty, high-calorie food became cheaper and more easily accessible in larger quantities, so we began eating more of it. In the past several years some researchers have advanced an alternative hypothesis that blames rising income inequality and/or economic insecurity (see here, here, here, here). These are said to increase stress, which in turn prompts overeating. How well does this square with the evidence? Begin with the over-time trend in the United States. The obesity rate was flat in the 1960s and 1970s and then shot up in the 1980s. The timing fits for income inequality, which has increased significantly since the 1970s. Economic insecurity, too, has risen during this period, though I’m not sure its increase has been large enough to have produced the massive jump in obesity that occurred.

Type 1 Diabetes Rate Rises Among U.S. Youth - In the first major national analysis of diabetes trends among American youth, researchers Saturday reported an alarming 23% rise in type 1 diabetes prevalence over an eight-year period ending in 2009. The surprising increase, reported at a meeting of the American Diabetes Association, comes amid similar growth of type 2 diabetes in children. But unlike type 2, which is linked to the high prevalence of obesity in youth, researchers have no explanation for why the autoimmune form of the disease is growing at such a clip. Funded by the Centers for Disease Control and Prevention and the National Institutes for Health, the study used data from 20,000 children and youth under 20 at multiple hospitals and health centers in five states. Prevalence of type 2 diabetes over the same period increased 21%, the researchers found. The study found that children and adolescents with diabetes have measurable signs of complications including nerve damage that could lead to amputations. It also identified early signs of cardiovascular damage raising risks for future heart disease.

Black plague, rare in U.S., surfacing in more affluent areas -- Although the plague is typically considered a remnant of the Middle Ages, when unsanitary conditions and rodent infestations prevailed amid the squalor of poverty, this rare but deadly disease appears to be spreading through wealthier communities in New Mexico, researchers report.Why the plague is popping up in affluent neighborhoods isn't completely clear, the experts added. "Where human plague cases occur is linked to where people live and how people interact with their environment," This latest study confirms previous reports that living within or close to the natural environments that support plague is a risk factor for human plague, Schotthoefer said. Plague is caused by a fast-moving bacteria, known as Yersinia pestis, that is spread through flea bites (bubonic plague) or through the air (pneumonic plague). The new report comes on the heels of the hospitalization on June 8 of an Oregon man in his 50s with what experts suspect is plague. According to The Oregonian, the man got sick a few days after being bitten as he tried to get a mouse away from a stray cat. The cat died days later, the paper said, and the man remains in critical condition.

CT scans on children ‘could triple brain cancer risk’ - Multiple CT scans in childhood can triple the risk of developing brain cancer or leukemia, a study suggests. The Newcastle University-led team examined the NHS medical records of almost 180,000 young patients. But writing in The Lancet the authors emphasised that the benefits of the scans usually outweighed the risks. They said the study underlined the fact the scans should only be used when necessary and that ways of cutting their radiation should be pursued. During a CT (computerised tomography) scan, an X-ray tube rotates around the patient's body to produce detailed images of internal organs and other parts of the body. In the first long-term study of its kind, the researchers looked at the records of patients aged under 21 who had CT scans at a range of British hospitals between 1985 and 2002. Because radiation-related cancer takes time to develop, they examined data on cancer cases and mortality up until 2009. Brain cancer and leukemia are rare diseases.

Diesel engine exhaust linked with increased risk of lung cancer - The world’s most prestigious cancer research group on Tuesday classified diesel engine exhaust as carcinogenic to humans and concluded that exposure is associated with increased risk of lung cancer. The International Agency for Research on Cancer — part of the World Health Organization — made the announcement at a meeting in France, finding, in part, “that diesel exhaust is a cause of lung cancer, and also noted a positive association with an increased risk of bladder cancer. The Working Group concluded that gasoline exhaust was possibly carcinogenic to humans.” The California Air Resources Board came to the same conclusion in 1998, finding that particulates associated with diesel emissions from trains, trucks, tractors and construction equipment pose a hazard to public health. That decision was met with an outcry from fuel producers and other industry groups who argued that regulating diesel emissions would cripple California’s economy. When the state’s Scientific Review Panel made that determination 14 years ago, it was the first official agency to connect diesel to cancer, according to John Froines, who chairs the review panel, which identifies toxic air contaminants for the state.

Spread of ‘baby boxes’ in Europe alarms United Nations - The United Nations is increasingly concerned at the spread in Europe of "baby boxes" where infants can be secretly abandoned by parents, warning that the practice "contravenes the right of the child to be known and cared for by his or her parents", the Guardian has learned. The UN Committee on the Rights of the Child, which reports on how well governments respect and protect children's human rights, is alarmed at the prevalence of the hatches – usually outside a hospital – which allow unwanted newborns to be left in boxes with an alarm or bell to summon a carer. The committee, a group of 18 international human rights experts based in Geneva, says that while "foundling wheels" and baby hatches had disappeared from Europe in the last century, almost 200 have been installed across the continent in the past decade in nations as diverse as Germany, Austria, Switzerland, Poland, Czech Republic and Latvia. Since 2000, more than 400 children have been abandoned in the hatches, with faith groups and right-wing politicians spearheading the revival in the controversial practice. Their proponents draw on the language of the pro-life lobby and claim the baby boxes "protect a child's right to life" and have saved "hundreds of newborns".

FAO Media Centre: FAO Food Price Index drops sharply: Global food prices have dropped sharply in May due to generally favourable supplies, growing global economic uncertainties and a strengthening of the US dollar, FAO said today. The FAO Food Price Index, measuring the monthly change in international prices of a basket of food commodities, fell by four percent in May. It averaged 204 points and was 9 points down from April. This was the lowest level since September 2011 and about 14 percent below its peak in February 2011. "Crop prices have come down sharply from their peak level but they remain still high and vulnerable due to risks related to weather conditions in the critical growing months ahead," said FAO's grain analyst Abdolreza Abbassian. FAO at the same time raised the forecast for world cereal production by 48.5 million tonnes since May, mainly on the expectation of a bumper maize crop in the United States. FAO's latest forecast for world cereal production in 2012 stands at a record level of 2 419 million tonnes, 3.2 percent up from the 2011 record. The bulk of the increase is expected to originate mainly from maize in the United States amid an early start of the planting season and prevailing favourable growing conditions. As a result, the global coarse grain production is forecast at 1 248 million tonnes, a huge 85 million tonnes increase from the previous year.

Farm Bill Would Slash Food Stamps In Favor of Corporate Subsidies to Crop Insurers - The farm bill is always one of the more sausage-making bills in Congress, actually literally so. Every five years agribusiness interests and the politicians who get contributions from them divy up a giant pot of money and ensure that the corporate welfare can keep flowing. In previous years, subsidies went to commodity crops like corn and soybeans over fruits and nuts by an 8:1 margin. And the top 20% of farmers got 81% of the subsidies. There was some thought that this year, the jig would be up for the farm bill. There were multiple efforts in the various “grand bargain” bills to factor out direct subsidies to farmers, and that was thought to be a done deal. And that’s mostly the case, the subsidies get replaced this year by a crop insurance piece, to compensate farmers in low-yield years. But in the apparently bipartisan zeal – the Senate farm bill is the product of both Republican Pat Roberts and Democrat Debbie Stabenow – to cut more out of the farm bill, to save a relatively paltry $24 billion over ten years, another source of money has been attacked – food stamps. The Senate farm bill tightens enforcement measures to prevent waste and errors in the Supplemental Nutrition Assistance Program (SNAP). Under a separate provision, it also cuts $4.5 billion in food assistance to families that receive heating aid. The Congressional Budget Office estimates that the latter will reduce benefits for about 500 million [sic: thousand?] families by an average of $90 a month.The changes are meant to appease Republican concerns about food stamp abuse and waste, while also giving Democrats more flexibility on farm subsidies, the other major focus of the farm bill.

How To Make U.S. Agriculture Even Stronger -  One tangible sign of America’s sustained agricultural productivity is that we are a large net exporter of agricultural goods. Farming, in other words, stands alongside software, media, financial services, tourism, airplanes, and military equipment as one of the main things we sell to the world in exchange for our imports of oil and consumer goods. The lion’s share of our exports—about $50 billion worth last year—were basic staples: soybeans, corn, wheat, and cotton. The big destinations for American farm goods are our neighbors in Canada and Mexico, plus the hungry mouths of land-scarce Asia—China, Japan, South Korea, and Taiwan. And rising living standards in the Pacific Rim promise even more agricultural bounty ahead. As people get richer, they start to want to eat more meat. America exports meat ($12.5 million worth of pork, beef, and chicken in 2011), but, more to the point, our staple grains feed animals. A cow is essentially a low-efficiency, high-status method of transforming grain into food for humans, so steady growth in world demand for meat implies enormous growth in demand for feed crops. But to fully take advantage of these trends, America needs to increase its overall agricultural output, not just our total factor productivity. That means getting more inputs.

Brazilian farmers win $2 billion judgment against Monsanto - Five million Brazilian farmers have taken on US based biotech company Monsanto through a lawsuit demanding return of about 6.2 billion euros taken as royalties from them. The farmers are claiming that the powerful company has unfairly extracted these royalties from poor farmers because they were using seeds produced from crops grown from Monsanto’s genetically engineered seeds, reports Merco Press. In April this year, a judge in the southern Brazilian state of Rio Grande do Sul, ruled in favor of the farmers and ordered Monsanto to return royalties paid since 2004 or a minimum of $2 billion. The ruling said that the business practices of seed multinational Monsanto violate the rules of the Brazilian Cultivars Act (No. 9.456/97). Monsanto has appealed against the order and a federal court ruling on the case is now expected by 2014. . Farmers claim that Monsanto unfairly collects exorbitant profits every year worldwide on royalties from “renewal” seed harvests. Renewal crops are those that have been planted using seed from the previous year’s harvest. Monsanto disagrees, demanding royalties from any crop generation produced from its genetically-engineered seed..

Early Death Assured In India Where 900 Million Starve - The death certificate for 3-year-old Rashid Ahmed hides more than it reveals.  What it doesn’t say is how little he weighed when he was brought to hospital with the disease in New Delhi one August night, how his ribs jutted from his chest, or how helpless his doctor, 28-year-old Gyvi Gaurav, was in trying to save him “It was hunger that killed him,” said Gaurav, who worked the night of August 15 at St. Stephen’s Hospital and was on watch when the toddler died. “He was so weak, so malnourished, that he would have died the first time he ever got really sick - - from malaria, diarrhea, anything.”  For Rashid’s mother, Nazia, the three-decade road from her birth to the death of her son ran alongside a slow collapse in India’s elemental struggle to feed its people. More than three- quarters of the 1.2 billion population eat less than minimum targets set by the government, up from about two-thirds, or 472 million people, in 1983. India’s failure to feed its people came as the economy accelerated, with gross domestic product per capita almost doubling in the past decade.  In the 2005 National Family Health Survey, when India last weighed, measured and counted its children for signs of hunger, it found 46 percent -- 31 million -- weighed too little for their ages, almost an entire Canada of malnourished under-three-year-olds. In 1999, that number was 47 percent.

India, What Did You Eat Yesterday? - Inflation continues to soar in India as the economy cools, raising food prices faster than incomes for many working men and women. Meanwhile, the country’s food distribution system is so fundamentally broken, Vikas Bajaj writes in The New York Times, that most of the massive crops of wheat and grain grown in India never reach the people they are intended for, and tons of food is rotting away. India Ink took to the streets to some basic questions: ‘What did you have to eat yesterday?’ and ‘Is it less than you ate a few years ago?’

Manure could prove farmers' carbon cash cow - It is a far cry from traditional farming techniques, but dairy farmers are being encouraged to earn carbon credits from the Federal Government by destroying cow manure. Under the Carbon Farming Initiative, the Government says dairy producers will be able to earn carbon credits if they capture and destroy methane and other greenhouse gasses emitted by manure.  Farmers who participate in the program will cover manure ponds, then have the choice of burning and destroying the captured gas, or using it to fuel internal combustion engines to produce electricity.  Either way, they will earn carbon credits for preventing the gas from entering the atmosphere.  Pig farmers will also be able to earn credits by reducing emissions from manure.

Groundwater Depletion in Semiarid Regions of Texas and California Threatens US Food Security -- Three results of the new study are particularly striking: First, during the most recent drought in California's Central Valley, from 2006 to 2009, farmers in the south depleted enough groundwater to fill the nation's largest human-made reservoir, Lake Mead near Las Vegas -- a level of groundwater depletion that is unsustainable at current recharge rates. Second, a third of the groundwater depletion in the High Plains occurs in just 4% of the land area. And third, the researchers project that if current trends continue some parts of the southern High Plains that currently support irrigated agriculture, mostly in the Texas Panhandle and western Kansas, will be unable to do so within a few decades. California's Central Valley is sometimes called the nation's "fruit and vegetable basket." The High Plains, which run from northwest Texas to southern Wyoming and South Dakota, are sometimes called the country's "grain basket." Combined, these two regions produced agricultural products worth $56 billion in 2007, accounting for much of the nation's food production. They also account for half of all groundwater depletion in the U.S., mainly as a result of irrigating crops.

Warmest U.S. spring on record: NOAA | Reuters: (Reuters) - So far, 2012 has been the warmest year the United States has ever seen, with the warmest spring and the second-warmest May since record-keeping began in 1895, the U.S. National Oceanic and Atmospheric Administration reported on Thursday. Temperatures for the past 12 months and the year-to-date have been the warmest on record for the contiguous United States, NOAA said. The average temperature for the contiguous 48 states for meteorological spring, which runs from March through May, was 57.1 degrees F (13.9 C), 5.2 degrees (2.9 C) above the 20th century long-term average and 2 degrees F (1.1 C) warmer than the previous warmest spring in 1910. Record warmth and near-record warmth blanketed the eastern two-thirds of the country from this spring, with 31 states reporting record warmth for the season and 11 more with spring temperatures among their 10 warmest. "The Midwest and the upper Midwest were the epicenters for this vast warmth," Deke Arndt of NOAA's Climatic Data Center said in an online video. That meant farming started earlier in the year, and so did pests and weeds, bringing higher costs earlier in the growing season, Arndt said. "This warmth is an example of what we would expect to see more often in a warming world," Arndt said.

The Heat Is On: U.S. Temperature Rise Is Accelerating  - Global warming isn’t uniform. The continental U.S. has warmed by about 1.3°F over the past 100 years, but the temperature increase hasn’t been the same everywhere: some places have warmed more than others, some less, and some not much at all. Natural variability explains some of the differences, and air pollution with fine aerosols screening incoming solar radiation could also be a factor. The Temperature Change from 1912-2011: Our state-by-state analysis of warming over the past 100 years shows where it warmed the most and where it warmed the least. We found that no matter how much or how little a given state warmed over that 100-year period, the pace of warming in all regions accelerated dramatically starting in the 1970s, coinciding with the time when the effect of greenhouse gases began to overwhelm the other natural and human influences on climate at the global and continental scales.

NOAA: Second Hottest May On Record Globally, Hottest For Northern Hemisphere - NOAA has released its “State of the Climate Global Analysis” for May 2012. Here are the highlights:

  • The combined global land and ocean average surface temperature for May 2012 was 0.66°C (1.19°F) above the 20th century average of 14.8°C (58.6°F). This is the second warmest May since records began in 1880, behind only 2010.
  • The Northern Hemisphere land and ocean average surface temperature for May 2012 was the all-time warmest May on record, at 0.85°C (1.53°F) above average.
  • The globally-averaged land surface temperature for May 2012 was the all-time warmest May on record, at 1.21°C (2.18°F) above average.

This warmth is particularly impressive because, as NASA noted earlier in the year, “The cool La Niña phase of the cyclically variable Southern Oscillation of tropical temperatures has been dominant in the past three years” –  and that is normally associated with cooler global temperatures. NOAA points out, “ENSO neutral“ ocean conditions just emerged in May. It’s just hard to stop the march of manmade global warming … other than by reducing greenhouse gas emissions, that is.

NOAA Environmental Visualization Laboratory - May Global Temperatures Second Warmest on Record - According to scientists at NOAA’s National Climatic Data Center, the globally-averaged temperature for May 2012 marked the second warmest May since record keeping began in 1880. May 2012 also marks the 36th consecutive May and 327th consecutive month with a global temperature above the 20th century average.  Most areas of the world experienced much warmer-than-average monthly temperatures, including nearly all of Europe, Asia, northern Africa, most of North America and southern Greenland. Only Australia, Alaska and parts of the western U.S.-Canadian border region were notably cooler than average.  With the dissipation of La Niña in April, ocean conditions in May were neutral. According to NOAA’s Climate Prediction Center, there is a 50-percent chance that El Niño conditions will emerge during the second half of 2012.

Jeff Masters: Hottest rain on record? Rain falls at 109 °F in Saudi Arabia. Mekkah hits new temperature record of 124.5 °F (51.4 °C) on June 2, 2012 - Pilgrims to the holy city of Mekkah (Mecca), Saudi Arabia, must have been astonished on Tuesday afternoon, when the weather transformed from widespread dust with a temperature of 113 °F (45 °C) to a thunderstorm with rain. Remarkably, the air temperature during the thunderstorm was a sizzling 109 °F (43 °C), and the relative humidity a scant 18%. It is exceedingly rare to get rain when the temperature rises above 100 °F, since those kind of temperatures usually require a high pressure system with sinking air that discourages rainfall. However, on June 4, a sea breeze formed along the shores of the Red Sea, and pushed inland 45 miles (71 km) to Mekkah by mid-afternoon. Moist air flowing eastwards from the Red Sea hit the boundary of the sea breeze and was forced upwards, creating rain-bearing thunderstorms. According to weather records researcher Maximiliano Herrera, this is the highest known temperature that rain has fallen at, anywhere in the world. He knows of one other case where rain occurred at 109 °F (43 °C): in Marrakech, Morocco, on July 10, 2010. A thunderstorm that began at 5 p.m. local time brought rain at a remarkably low humidity of 14%, cooling the temperature down to 91 °F within an hour.

Research shows humans are primary cause of global ocean warming over past 50 years: The oceans have warmed in the past 50 years, but not by natural events alone. New research by a team of Lawrence Livermore National Laboratory scientists and international collaborators shows that the observed ocean warming over the last 50 years is consistent with climate models only if the models include the impacts of observed increases in greenhouse gas during the 20th century. Though the new research is not the first study to identify a human influence on observed ocean warming, it is the first to provide an in-depth examination of how observational and modeling uncertainties impact the conclusion that humans are primarily responsible. "The bottom line is that this study substantially strengthens the conclusion that most of the observed global ocean warming over the past 50 years is attributable to human activities."The group looked at the average temperature (or heat content) in the upper layers of the ocean. The observed global average ocean warming (from the surface to 700 meters) is approximately 0.025 degrees Celsius per decade, or slightly more than 1/10th of a degree Celsius over 50 years. The sub-surface ocean warming is noticeably less than the observed Earth surface warming, primarily because of the relatively slow transfer of ocean surface warming to lower depths. Nevertheless, because of the ocean's enormous heat capacity, the oceans likely account for more than 90 percent of the heat accumulated over the past 50 years as the Earth has warmed.

As the Earth warms, forest floors add greenhouse gases to the air - Huge amounts of carbon trapped in the soils of U.S. forests will be released into the air as the planet heats up, contributing to a “vicious cycle” that could accelerate climate change, a new study concluded.. “As the Earth warms, there will be more carbon released from soils, and that will make the Earth warm even faster,” said Eric Davidson, who studies soil carbon at the Woods Hole Research Center in Massachusetts but was not involved in the new study. Forests are an important buffer against climate change, absorbing some of the carbon-dioxide pollution released from burning fossil fuels. Fallen leaves and dead trees return carbon to the soil, which takes its brown color from the element. But scientists have disagreed about how much of this huge store of locked-in carbon is at risk for release into the atmosphere. “Young carbon” — such as that stored in leaves —rapidly returns to the air as microbes decompose plant matter. As the air warms, the decomposition speeds up, releasing more carbon. That process is well-known. But deeper in the soil, older carbon is locked away as “humus” — the soft, brown material that makes forest floors spongy. Some scientists have asserted that this carbon will stay locked away even as the planet warms.

Arctic Sea Ice Extent declines below record-breaking 2007 melt curve - Follow along at:

Arctic Sea Ice Dips Below Ominous Milestone —This week the extent of Arctic sea ice dipped below the extent for 2007, according to the National Snow and Ice Data Center1 (NSIDC). As you may remember, the 2007 season holds the record for lowest Arctic sea-ice extent in recorded history. National Snow and Ice Data Center Walt Meier at NSIDC tells me the melt is accelerating, notably in the Bering Sea, where higher than normal winter ice hung around roughly two weeks longer than average. But it's thawing fast now. Arctic Ocean, 14 June 2012, sea ice opening at Beaufort and Laptev seas: NASA The Beaufort Sea north of Alaska and Canada and the Laptev Sea north of Siberia are also melting quickly. "We don't normally see ice opening so fast in those areas," says Meier. "This is an indication that the ice there is pretty thin." As you can see from the satellite mosaic of the Arctic for today, 14 June (above), the rapidly melting Laptev Sea lies at the downstream end of the mighty Lena River in Siberia. The Beaufort Sea lies at the downstream end of Canada's mightiest river, the MacKenzie River (delta not visible)—where May temperatures rose well above the 20th-century average (see last image, below).

Arctic Sea ice extent more than half a million square miles lower than record 2007, but showing signs of leveling off - graph link:

How Climate Change Could Reshape Geopolitics Around The Arctic - The Arctic is warming at an alarming rate – twice as fast as the rest of the planet – and according to a new report, those changes will be a key driver of geopolitics in the coming years. As the rapidly melting ice unlocks commercial opportunities in shipping, tourism and oil and gas extraction, the world’s largest economies are jockeying for control of the region. According to the Center for Climate and Energy Solutions, the melting of the Arctic is a “bellwether for how climate change may reshape geopolitics in the post-Cold War era.”. Accelerating changes in the region are causing sea ice to melt at a rate exceeding scientists’ predictions.  The absence of ice will open up strategic waterways, such as the Northwest Passage, for longer periods of time and allow more opportunity for activities like offshore oil exploration that require open water. Analysts believe the economic impact could be significant – new and expanded shipping routes can significantly reduce the transit time between Asia, North America and Europe, and oil companies like Royal Dutch Shell are eager to unlock the “great opportunity” for fossil fuels they believe lies beneath the pristine Arctic waters.

Mitt Romney worked to combat climate change as governor   During his first 18 months as governor of Massachusetts, Mitt Romney spent considerable time hammering out a sweeping climate change plan to reduce the state's greenhouse gas emissions.  As staff briefed him on possible measures and environmentalists pressed him to act, Romney frequently repeated a central thought, people at those meetings said: That climate change is occurring, that the United States has the resources to handle its vast impact but that low-lying poor countries like Bangladesh would suffer greatly."It was like a mantra with him," said a person who attended those meetings who declined to be identified because of the sensitivity of the topic. "His Cabinet members would look at him like, 'What?' He was the radical in the room."

Report: Storm Surge Could Cost U.S. Hundreds of Billions…A new analysis highlights the enormous exposure the U.S. has to storm surge-related impacts, which is one of the most significant hazards posed by a land-falling hurricane. The report from CoreLogic, a private company that provides financial and property information for risk management, shows that for the country as a whole, more than 4 million residential structures are at risk from storm surge flooding in a worst-case scenario storm, with a total estimated price tag of $710 billion. The report ranks New York City and Long Island as the most at-risk metropolitan area, where a Category 4 storm could inflict damage to residential homes of up to $168 billion. “Even a Category 1 hurricane or low-level tropical storm can wreak billions of dollars of destruction on cities and states many might have previously assumed to be safe from the strong winds and floods of hurricane events,” the report said. “Millions of homes are in fact at risk, from Maine to the southernmost tip of Florida, facing hundreds of billions of dollars in residential property damage.”

Dozens of dolphins stranded in Texas since fall: The deaths of more than 120 dolphins off the Texas coast has prompted a federal agency to declare the event "unusual" and launch an investigation into whether they were related to a drought-related algae bloom or a more widespread mortality event that has plagued the northern Gulf of Mexico for two years.The U.S. National Oceanic and Atmospheric Administration has called the stranding of 123 dolphins on Texas shores from November through March an "unusual mortality event," an official federal listing that allows the agency to access additional funds and set up a team of researchers. All but four of the dolphins that washed up in Texas were dead, and the few that turned up alive died a short time later, said Blair Mase, the southeast marine mammal stranding network coordinator for NOAA Fisheries. What alarmed scientists though, was the age of the bottle-nosed dolphins that washed up — juveniles rather than the very young or elderly that normally would be found — and the fact that Texas had a years-worth of dead dolphins turn up in a five-month period. The cause, however, may not be known for months, if at all, Mase said.

A Rising Tide of Acid Off California - Humanity's use of fossil fuels sends 35 billion metric tons of carbon dioxide into the atmosphere every year. That has already begun to change the fundamental chemistry of the world's oceans, steadily making them more acidic. Now, a new high resolution computer model reveals that over the next 4 decades, rising ocean acidity will likely have profound impacts on waters off the West Coast of the United States, home to one of the world's most diverse marine ecosystems and most important commercial fisheries.  Since preindustrial times, ocean acidity has increased by 30%. By 2100, ocean acidity is expected to rise by as much as another 150%.  Declining pH of seawater reduces the amount of carbonate ions in the water, which many shell-building organisms combine with calcium to create the calcium carbonate that they use to build their shells and skeletons. The lower carbonate availability, in turn, decreases a measure known as the saturation state of aragonite, an easily dissolvable mineral form of calcium carbonate that organisms such as oyster larvae rely on to build their shells. If the aragonite saturation state falls below a value of 1, a condition known as undersaturation, all calcium carbonate shells will dissolve. But trouble starts well before that. If the aragonite saturation state falls below 1.5, some organisms such as oyster larvae are unable to harvest enough aragonite to build shells during the first days of their lives, and they typically succumb quickly.

Hartmann: Republicans ‘helping to destroy all life on Earth’ -- In a segment broadcast Monday night, progressive talk host Thom Hartmann doubled down on the true threat of climate change, explaining the oceanic biology that underpins all life on planet Earth, then highlighting how Republicans at nearly every level of government are leading the charge to crush it.  The situation has grown so dire and the hour so late, he said, that it is now fair to describe anti-science policies pursued by Republican as “helping to destroy all life on Earth.” Tiny, ocean-dwelling plants called phytoplankton, which act as the basement level of the planet’s food chain and supply about half of the oxygen in Earth’s atmosphere, have been dying off at an increasing rate due to ocean acidification brought on by climate change.  In a segment broadcast Monday night, progressive talk host Thom Hartmann doubled down on the true threat of climate change, explaining the oceanic biology that underpins all life on planet Earth, then highlighting how Republicans at nearly every level of government are leading the charge to crush it.  The situation has grown so dire and the hour so late, he said, that it is now fair to describe anti-science policies pursued by Republican as “helping to destroy all life on Earth.”Tiny, ocean-dwelling plants called phytoplankton, which act as the basement level of the planet’s food chain and supply about half of the oxygen in Earth’s atmosphere, have been dying off at an increasing rate due to ocean acidification brought on by climate change.

Scientists Uncover Evidence Of Impending Tipping Point For Earth - If we stay anywhere near our current greenhouse gas emissions path, we will cross many climate tipping points this century. There’s the nearby tipping point for an ice-free arctic, with all that means for making our weather much more extreme and for triggering another tipping point, the rapid loss of carbon from the permafrost. There’s the tipping point for the “self-amplifying” disintegration of Greenland and, after that, an ice free planet (though we’d cross the point of no return long before the full melting ever happened). Other lines are blurrier: Dust-Bowlification looks to be a continuous process. We’re near 400  parts per million atmospheric concentration of C02, rising 2+ ppm a year (a rate that is projected to rise as emissions increase and carbon sinks saturate). While no one knows the exact line of demarcation for the various tipping points, the latest science suggests that if we go substantially above, say, 450 ppm we risk starting the chain of events, while going substantially above 500 ppm seems downright suicidal (see links below). We are, sadly, on track for 800 to 1000 ppm this century, which would be the end of modern civilization as we know it today, according to the most recent science. Long before then, however, we’ll cross all the big tipping points. Indeed, as Dr. Tim Lenton explains in Scientific American, ”The worse case would be that kind of scenario in which you tip one thing and that encourages the tipping of another. You get these cascading effects.” A major new study has been released on tipping points in Nature, “Approaching a state shift in Earth’s biosphere” (subs. req’d). The news release is reposted below.

On Not Reaching Carbon Goals - Reducing carbon dioxide emissions by enough to prevent global temperatures from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) is “still within reach,’’ the International Energy Agency reported on Monday, but at the moment, trends in energy use are running in the wrong direction. In the latest version of Energy Technology Perspectives, a report issued biennially by the agency, it said the technology to achieve that goal is available. But as Maria van der Hoeven, executive director of the agency, put it, “we’re not using it.’’ Since the agency published its first Energy Technology Perspectives in 2006, the evidence of climate change has only grown stronger, she said, but “if anything, it has fallen further down the political agenda.’’ Coal consumption, for example, is still rising around the world, and that is “the single most problematic trend in the relationship between energy and climate change,” the report said. Building more efficient coal-fired plants operating at higher temperatures could cut emissions by 30 percent per kilowatt-hour. But to reduce global carbon dioxide emissions by 2050, coal use would have to fall by 45 percent from 2009 levels, the report said. Natural gas is not the answer to this problem, the report points out. Gas-fired plants may emit only half as much carbon dioxide per kilowatt-hour generated than coal-fired plants, but by 2025 the amount emitted will be higher than the average for the entire electric system, it said.

Oil Companies That Caused Climate Change Now Fear Its Financial Impacts -  When it comes to protecting their profits, oil companies explicitly acknowledge that climate change poses a threat to their bottom line. ExxonMobil tells its investors that “rising greenhouse gas emissions pose risks to society and ecosystems that could be significant.” Chevron says on its website: “[T]he use of fossil fuels to meet the world’s energy needs is a contributor to an increase in greenhouse gases … There is a widespread view that this increase is leading to climate change, with adverse effects on the environment.” ConocoPhillips goes further: “ConocoPhillips recognizes that human activity, including the burning of fossil fuels, is contributing to increased concentrations of greenhouse gases in the atmosphere that can lead to adverse changes in global climate.” BP even cites the Intergovernmental Panel on Climate Change on its website. And Shell urges that “CO2 emissions must be reduced to avoid serious climate change.”

Fighting Climate Change With Carbon Capture May Cause Quakes - Businessweek: Burying carbon dioxide in the ground, considered a promising way to combat climate change, may increase the risk of earthquakes, according to a report. The process, in which liquefied carbon dioxide is stored in caverns, “may have the potential for causing significant induced seismicity,” the National Research Council said today. Injecting wastewater underground from natural-gas fracking may also trigger earthquakes, while using hydraulic fracturing to get trapped gas doesn’t pose a “high risk,” the report found. Burying carbon may pose a higher risk of quakes than wastewater disposal because it involves the continuous injection of high volumes of liquefied gas at high pressure, said Murray Hitzman, professor of economic geology at the Colorado School of Mines (27653MF) and chairman of the committee that produced the report. “Those larger volumes then will increase the pressure in the subsurface over very large areas,” Hitzman said on a conference call. “The bigger the area of the high pressure, the more chance of seeing a fault. The more distance that it moves, the bigger the earthquake.”

Paper, Plastic or Cloth: Which Bag is Best for the Environment? - Which is the most earth-friendly: paper bags, plastic bags or cloth bags? The answer to the question depends upon whether or not you really believe in science, because as they say in certain environmental activist circles, the "science is settled"! Here's the summary description of the bag found to be the best for the environment, which is defined as being the bag with the least negative impact upon the environment, as found in a very recent and thorough study on the topic: The conventional HDPE bag had the lowest environmental impacts of the lightweight bags in eight of the nine impact categories. The bag performed well because it was the lightest bag considered. The lifecycle impact of the bag was dictated by raw material extraction and bag production, with the use of Chinese grid electricity significantly affecting the acidification and ecotoxicity of the bag. Yes, the convential High-Density Polyethylene (HDPE) (aka "plastic") bag had the least impact upon the environment of all the bags considered in the study, which considered a number of bags made from different plastics, as well as both paper and cotton-based materials!

Gallup Poll: 57 Percent Of Chinese Believe Environmental Protection Should Be Their Country’s Top Priority - Gallup has just released new poll results showing that a majority of Chinese citizens care more about cleaning up the environment than they do about growing the economy. Among Chinese adults Gallup surveyed last year, 57 percent believe that protecting the environment should be their country’s priority, even if improving environmental standards slows the pace of economic growth. Only 21 percent believe that economic growth is more important than environmental protection. These poll results reflect a growing trend in Chinese society. As China climbs up the economic ladder, its citizens are increasingly deciding that economic growth is not enough. Being able to buy bigger houses and higher-end consumer goods is nice, but quality of life is about more than purchasing power. Real quality of life also requires good public health. In China, public health is suffering due to rampant pollution, and the citizens are desperate to change that. Here in the United States, some anti-regulatory politicians like to claim that removing or weakening our environmental standards would make the United States a more prosperous country. In reality, however, it doesn’t pay to be rich if you can’t be healthy too. No one knows that more than the Chinese. Ask the Chinese citizens living in cancer villages if losing their friends and relatives to cancer is a worthwhile price to pay for the dirty factory that provides jobs but poisons their villages with lead, cadmium, and other carcinogens.

U.S. Energy Output Jumps as China Spurs Global Demand, BP Says - The world’s two largest economies followed opposite paths on energy last year as the U.S. boosted oil and gas production while Chinese consumption jumped, according to BP’s Statistical Review of World Energy.  Shale production made the U.S. the world’s largest gas producer and the country’s oil output climbed more than any nation outside the Organization of the Petroleum Exporting Countries in 2011, BP said today in its annual survey. China accounted for 71 percent of global demand growth.  The U.S. experience “shows how an open and competitive environment drives technological innovation and unlocks resources,” BP Chief Executive Officer Bob Dudley said in a statement. “The message for policy makers is to follow this model and to encourage competition wherever possible.”

U.S. solar installations jump in first quarter | Reuters: (Reuters) - Solar installations in the United States jumped 85 percent in the first quarter of 2012 from the previous year, according to an industry report that prompted a research firm and a lobbying group to raise their capacity forecasts for the year. That growth comes despite the pain solar panel makers around the globe have suffered in recent months as an oversupply of equipment nearly erased their profits and sent their share prices tumbling. A total of 506 megawatts of solar power capacity was added during the first three months of the year, the second highest quarterly total to date, according to the report by GTM Research for the Solar Energy Industries Association. The spike in capacity came as a surprise because the period is usually the weakest of the year."This really shows the beginning of what we think is going to be a breakout year for the U.S. solar industry," said Rhone Resch, president of the Solar Energy Industries Association. Part of the first-quarter's growth was likely to due to solar developers finishing projects that qualified under a U.S. grant program, which expired at the end of 2011. Those projects could help keep installations strong through the middle of the year.

Navy Sails to Greener Future - Next month, in naval exercises off the coast of Hawaii, five U.S. warships will make history: They will be the first to use biofuels to power their huge turbines, as well as the jet planes screaming off a carrier's deck and helicopters hovering overhead. The flotilla—powered by a mixture of cooking grease and algae oil—is the centerpiece of the U.S. Navy's efforts to shake off its centurylong dependence on petroleum. But now it has become the center of a political storm. Lawmakers in both houses of Congress last month voted to stop the Navy from buying any more of the still-pricey alternative fuel and to keep the Pentagon from investing $170 million in new biofuel refineries."Using defense dollars to subsidize new-energy technologies is not the Navy's responsibility," Sen. John McCain, a Republican from Arizona and a third-generation naval officer, told Secretary of the Navy Ray Mabus at a hearing earlier this year.

Estimating the Potential Impact of Failure of the Fukushima Daiichi Unit 4 Spent Fuel Pool - Dr. Paul Gailey sent me the following email: Because so many claims were flying around with regard to Fukushima’s spent fuel pool number 4, we performed a technical analysis of the situation to gain some perspective on the parameters of the crisis. If you are interested, there is a link to our Special Report on Fukushima at , along with some overview perspectives in our April newsletter also at that web address. Our analysis is done in a way that is difficult to dispute because we based everything on published scientific reports and measurements and performed the analysis in a straightforward way. While the many anecdotal radiation measurements and reports by members of the public may very well be accurate and important, we felt there was a need for a scientifically defensible analysis that did not depend on public measurements, which are difficult to substantiate and can be easily criticized. Gailey’s new report notes that the risk of a fire in fuel pool number 4 is real, and that the risks of contamination are so severe that an international effort is required.

The biggest climate victory you never heard of - - Coal is going down in the United States, and that's good news for the Earth's climate. The US Energy Information Administration has announced that coal, the dirtiest and most carbon-intensive conventional fossil fuel, generated only 36 per cent of US electricity in the first quarter of 2012. That amounts to a staggering 20 per cent decline from one year earlier. And the EIA anticipates additional decline by year's end, suggesting a historic setback for coal, which has provided the majority of the US' electricity for many decades. Even more encouraging, however, is the largely unknown story behind coal's retreat. Mainstream media coverage has credited low prices for natural gas - coal's chief competitor - and the Obama administration's March 27 announcement of stricter limits on greenhouse gas emissions from US power plants. And certainly both of those developments played a role.  But a third factor - a persistent grassroots citizens' rebellion that has blocked the construction of 166 (and counting) proposed coal-fired power plants - has been at least as important. At the very time when President Obama's "cap-and-trade" climate legislation was going down in flames in Washington, local activists across the United States were helping to impose "a de facto moratorium on new coal", in the words of Lester Brown of the Earth Policy Institute, one of the first analysts to note the trend.

Falling Coal Use in U.S. Fails to Stem Global Growth: BP - Falling coal consumption in the U.S. last year failed to stem the pace of growth in the fuel’s use globally, which was driven by China, Australia, Ukraine and South Korea, according to BP Plc.  Coal represented 30 percent of global energy consumption, the highest since 1969, the oil producer said today in its annual Statistical Review of World Energy.  Global use rose 5.4 percent in 2011, similar to the downgraded 5.5 percent pace in 2010, BP said. U.S. consumption dropped more than any other nation, declining 24.2 million metric tons of oil equivalent, or 4.6 percent, to 501.9 million tons. China’s use surged 9.7 percent to 1.84 billion tons.  The 2.5 percent growth in global primary energy consumption was caused by increases in emerging economies, BP said. China accounted for 71 percent of growth last year. Use in Organisation for Economic Co-operation and Development nations declined 2.5 percent, led by a 5 percent drop in Japan. The data suggests that growth in global CO2 emissions from energy use continued in 2011, but at a slower pace than in 2010, BP said.

The Hypocrisy of “Clean Coal”  - You may have heard about the recent kerfluffle surrounding the Obama campaign’s late addition of “clean coal” to the list of energy priorities listed on its website. This has me wondering why so many Dirty Energy politicians are so excited about “clean coal.” The premise behind “clean coal” is presumably that coal is inherently dirty, but that if you do enough to deal with all that filth, you can make it clean. Many would argue that coal can never be clean. But, watching the polluter posse’s votes in congress and listening to their rhetoric on the campaign trail, you’d think that coal isn’t even dirty. Here is just a selection of the recent times when Members of Congress had the chance to go on the record in support of cleaning up coal:
In April 2011, an amendment in the Senate to strip EPA of its ability to reduce the carbon pollution received 50 votes. Since coal fired power plants are a large source of carbon pollution, this was presumed to be part of EPA’s “War on Coal.” The House version of the bill had passed in a vote of 255 to 172.
In October, the House voted on and passed a bill that would prohibit the EPA from setting strict rules on how to dispose of toxic coal ash, which is filled with arsenic, lead and mercury. It passed with 267 votes. The Senate companion already has 13 cosponsors. Pro-coal members are now trying to tuck a version of this bill into the transportation bill, since it is unlikely to be signed into law by President Obama.

Power producers shifting away from coal  (graphs) As discussed back in March, the US coal sector is facing severe headwinds as the power industry shifts to natural gas. That trend has now become quite evident based on the latest data from EIA. Net generation using coal has declined sharply on an absolute basis. And on a relative basis coal is becoming a smaller component of the net. Given the US natural gas supply fundamentals, this trend is likely to continue.

Hydrofracking Under Cuomo Plan Would Be Restricted to a Few Counties - Gov. Andrew M. Cuomo’s administration is pursuing a plan to limit the controversial drilling method known as hydraulic fracturing to portions of several struggling New York counties along the border with Pennsylvania, and to permit it only in communities that express support for the technology.The plan, described by a senior official at the State Department of Environmental Conservation and others with knowledge of the administration’s strategy, would limit drilling to the deepest areas of the Marcellus Shale rock formation in an effort to reduce the risk of groundwater contamination. Even within that southwest New York region — primarily Broome, Chemung, Chenango, Steuben and Tioga Counties — drilling would be permitted only in towns that agree to it and would be banned in Catskill Park, aquifers and nationally designated historic districts.  The officials spoke on the condition of anonymity because the deliberations in the administration are continuing.

New York Fracking Ban: Cuomo's Energy Proposal Polarizes Supporters And Opponents: — Landowners along New York's southern border who support natural gas drilling are cheered by reports that the Cuomo administration is considering allowing hydraulic fracturing on a limited basis in towns that want it, though opponents call the idea "shameful." The administration is pursuing a plan to limit the controversial shale gas drilling technology to portions of Broome, Chenango, Steuben and Tioga counties, The New York Times quoted a senior official at the state Department of Environmental Conservation as saying, along with others with knowledge of the situation. That region, along the border with heavily drilled Pennsylvania, is considered most likely to yield significant quantities of natural gas in New York. The Joint Landowners Coalition of New York, which is seeking to lease land for drilling, has persuaded several dozen towns to pass resolutions supporting drilling. Many more towns have passed bans or moratoriums on drilling.

Study finds fracking can cause earthquakes - Certain oil and gas operations that involve injecting wastewater underground can cause earthquakes, but the risk from hydraulic fracturing is generally low, said a US scientific report Friday. The report by the National Research Council found that the most significant risk of earthquakes is linked to secondary injection of wastewater below ground to help capture remaining hydrocarbons from a petroleum reservoir. Also, a technique called carbon capture and storage that aims to reduce carbon dioxide emissions to the atmosphere by capturing, liquefying and injecting them below ground at high volumes, “may have potential for inducing larger seismic events,” the report said.

Energy technologies run risk of causing earthquakes, new report says - Hydraulic fracturing has a low risk for causing earthquakes -- but underground injection of fracking wastes and other energy technologies present greater seismic risks, a report from the National Research Council says. Oklahoma has seen a series of small but high-profile earthquakes in recent months. A 4.7-magnitude quake Nov. 5 was felt widely across the state, and a 5.6-magnitude shaker shortly thereafter may have been the biggest seismic event of the state’s contemporary history. The most recent Oklahoma quakes came at 1:21 a.m. Wednesday, a 3.3-magnitude event centered just northeast of Oklahoma City and a second event 15 minutes later in Okfuskee County. The swarm of Oklahoma earthquakes have resulted in no deaths and only modest, local damage. The U.S. Geological Survey reports show the number of earthquakes in the central part of the U.S. has increased sharply, from an average of 21 a year from 1970 to 2000 to 87 in 2010 and 134 in 2011. Other man-made earthquakes have been documented in Alabama, Arkansas, California, Colorado, Illinois, Louisiana, Mississippi, Nebraska, Nevada, New Mexico, Ohio and Texas, Friday’s report says.

Apache discovers huge shale gas reservoir in northern B.C.: One of three companies planning a $4.5-billion liquefied natural gas terminal at Kitimat on Thursday announced an "outstanding" new shale gas discovery in British Columbia's remote and largely unexplored Liard Basin. The find by Apache Corp. is estimated to contain enough gas in itself to justify doubling the size of the Kitimat terminal it's proposing with partners Encana Corp. and EOG Resources. The company is calling it the best and highest quality shale gas reservoir in North America, based on the volume of gas three test wells are producing. Apache, the second largest U.S. independent oil and natural gas producer by market value, said the tests suggest it has 48 trillion cubic feet of marketable gas within its Liard Basin properties. One well alone produced 21 million cubic feet of gas a day over a 30-day period, the company said.

Using natural gas - The figure below plots the price of crude oil in dollars per barrel and the price of natural gas on an equivalent BTU basis. Historically, the two prices had tended to stay fairly close together. But they began to diverge significantly in 2006. Even with the recent easing in oil prices, today you'd have to pay over $14 to get a million BTU in the form of crude oil, but only $2.30 if you were willing to use natural gas as an alternative. That's a lot of incentive to try to use natural gas for more of what we do with oil. And people are responding to those incentives. For example, Westport Innovations Inc. issued the following press release last week: Westport Innovations Inc. (WPRT), a global leader in natural gas engines, has signed agreements with Caterpillar Inc. (CAT) to co-develop natural gas technology for off-road equipment, including mining trucks and locomotives. Caterpillar and Westport will combine technologies and expertise, including Westport (TM) High Pressure Direct Injection (HPDI) technology and Caterpillar's industry leading off-road engine and machine product technology, to develop the natural gas fuel system. Caterpillar will fund the development program....

North Dakota’s Oil Boom Brings Damage Along With Prosperity - Hydraulic fracturing — the controversial process behind the spread of natural gas drilling — is enabling oil companies to reach previously inaccessible reserves in North Dakota, triggering a turnaround not only in the state's fortunes, but also in domestic energy production. North Dakota now ranks second behind only Texas in oil output nationwide. The downside is waste — lots of it. Companies produce millions of gallons of salty, chemical-infused wastewater, known as brine, as part of drilling and fracking each well. Drillers are supposed to inject this material thousands of feet underground into disposal wells, but some of it isn't making it that far. According to data obtained by ProPublica, oil companies in North Dakota reported more than 1,000 accidental releases of oil, drilling wastewater or other fluids in 2011, about as many as in the previous two years combined. Many more illicit releases went unreported, state regulators acknowledge, when companies dumped truckloads of toxic fluid along the road or drained waste pits illegally. State officials say most of the releases are small. But in several cases, spills turned out to be far larger than initially thought, totaling millions of gallons. Releases of brine, which is often laced with carcinogenic chemicals and heavy metals, have wiped out aquatic life in streams and wetlands and sterilized farmland. The effects on land can last for years, or even decades. Compounding such problems, state regulators have often been unable — or unwilling — to compel energy companies to clean up their mess, our reporting showed.

Water grab in Kansas oil boom -- In the farm country of southern Kansas, water is a precious commodity. And not just for farming -- for fracking.  In hydraulic fracturing, water is injected into the ground at a high pressure to help crack shale rock and bring oil to the surface. The industry says it takes as much as 2 million gallons of water to drill a single horizontal well in Kansas.  Most drillers use groundwater or surface water from ponds and rivers. But first they must receive permission from whoever has rights to it and get a permit. Water permits have soared to the highest level in 30 years.  At the same time, many of the Kansas oil boomtown counties are already under "drought watch," and last month was the second driest May on record.

Canada Seeks Alternatives to Transport Oil Reserves - As the United States continues to play political Ping-Pong with the fate of the Keystone XL pipeline, Canadian officials and companies are desperately seeking alternatives to get the country’s nearly 200 billion barrels in oil reserves — almost equal to that of Saudi Arabia — to market from landlocked Alberta. Oil companies complain that they are losing revenues from pipeline bottlenecks. So Canada is plunging ahead with plans to build more pipelines of its own.  To hasten development of new export routes, the Conservative government is streamlining permit processes by accelerating scheduled hearings and limiting public comment. The government has also threatened to revoke the charitable status of environmental groups that are challenging the projects. And Public Safety Canada, the equivalent of the United States Department of Homeland Security, has classified environmentalists as a potential source of domestic terrorism, adding them to a list that includes white supremacists.  While Joe Oliver, Canada’s minister of natural resources, said in an interview that the United States would remain Canada’s “most important customer,” billions of barrels of oil that would have been refined and used in the United States are now poised to head elsewhere. Expansion of Canada’s fast-growing oil-sands industry will be restricted by the lack of pipeline capacity before the decade’s end, he said, which “adds to the urgency of building them so that the resources will not be stranded.”

The Oil Drum | Reflections on ASPO 10, Vienna 2012 – Part 1: From an engineering point of view, it appears to me that access to the resource and energy return is sufficient for a good deal more tar sands production, although I have little idea how soon the availability of water might become a limiting factor. Otherwise it seems that value judgements by the Canadian people themselves, about the level of mining they are willing to tolerate, will be the long-term deciding factor in how much of the tar sands are converted to oil. Having just spent two months in Canada, it does not feel like the Albertans are about to lose enthusiasm anytime soon. Despite valid questions about the size of the accessible resource and how quickly it can be produced, peak oil analysts would be wise not to dismiss the future production as inconsequential. In the short and medium-term, a contracting economy and a low oil price could easily disrupt additional development. Given that tar sands have high marginal costs, even existing operations could be shut-down by a weak economy.

The Number of U.S. Oil Rigs Has Increased by 7X in 3 Years, Bringing U.S. Production to a 14-Year High - The top chart above shows the remarkable switch over the last several years in the number of U.S. rigs drilling for crude oil compared to the number of rigs drilling for natural gas.  The number of natural gas rigs fell to almost a 13-year low of 562 this week, which is only about one-third of the gas rigs of more than 1,600 at the peak in the summer of 2008, and the lowest for any week since September of 1999.  Meanwhile, the number of oil rigs has skyrocketed, from fewer than 200 in the summer of 2009, to more than 1,400 this week, an amazing seven-fold increase in less than three years.   The bottom chart shows the relationship since 2000 between the number of U.S. oil rigs and the price of crude oil (WTI).  As U.S. oil rigs increased 7 times over the last three years, it brought U.S. crude oil production to level we haven't seen since 1998, fourteen years ago. Note that the record high number of oil rigs and increased oil production has also been associated with a period of fairly stable, and now falling oil prices over the last three months.

The Saudis tightening the noose around Iran  -- Saudi Arabia is putting severe pressure on Iran by pumping record amounts of crude. It is starting to look more like a geopolitical move rather than an OPEC based targeting of supplying the market. The Saudis have gone beyond simply marginalizing Iran as a major oil producer.SFGate: - Traditional rivals Saudi Arabia — a Sunni Muslim nation — and Shiite Muslim Iran are jockeying for influence in the Middle East as well as in OPEC.  Iran has warned the Saudis not to use the oil weapon against it by increasing supplies to countries that no longer get Iranian crude due to the sanctions. Saudi oil minister Ali Naimi has denied such intentions, telling reporters his country sells to whoever buys.  "We don't sit and say `we want to sell to this country or that country (or) whatever," he said.  But Saudi overproduction is clearly rankling the Iranians. In comments to Iran's Mehr news agency, former Iranian oil minister Gholam Hossein Nozari noted that "political issues have overshadowed OPEC," while analysts say the political implications of Saudi Arabia's production policy cannot be ignored.

Saudi under OPEC pressure to prevent oil price collapse - Saudi Arabia came under pressure on Wednesday from fellow OPEC producers to cut oil output to prevent a further slide in crude prices. Price hawks in the Organization of the Petroleum Exporting Countries are fretting that slowing economic growth will send crude, already off $30 since March, plummeting further. "We think that given the economic situation, above all in Europe, there is a serious threat that prices might fall drastically and so our policy is to defend the production ceiling agreed in December of 30 million barrels a day," said Venezuelan Oil Minister Rafael Ramirez. "I am afraid of this fall, anything below $100 is very painful for Libya," said Libyan Oil Minister Abdulrahman Ben Yazza. Brent crude traded at just over $97 a barrel on Wednesday having peaked this year at $128 in March. A moderate on oil prices, Saudi Arabia initially floated a proposal to lift OPEC's output target. After Riyadh quickly dropped that idea, the 12-member group looks set at a Thursday meeting to leave its formal production ceiling unchanged at 30 million barrels daily.

Iraq and Iran form alliance within Opec  - Iran and Iraq are forming a strengthening alliance inside Opec, raising concerns among moderate Arab Gulf producers like Saudi Arabia and increasing the potential for discord in the oil producers’ group. With the EU sovereign debt crisis worsening and growing fears for the global economy, the deep divisions within Opec risk undermining the organisation’s ability to do its job of effectively managing oil supply and preventing violent price swings. A person familiar with the matter said Opec’s meeting in Vienna on Thursday was overshadowed by “strong disagreements” over issues ranging from the acceptable price of oil, to the global supply-demand balance, to who should replace the current secretary general of the organisation. A particular bone of contention was a proposal by Venezuela – backed by other Opec hardliners like Iran, Iraq and Algeria – that the group should protest against the EU sanctions against Tehran over its nuclear programme. The move was rebuffed by Saudi Arabia and other moderates including Nigeria, Libya and Kuwait, who argued that such protests were the preserve of foreign ministers, not oil ministers. Riyadh is determined to prevent the group being dragged into Iran’s nuclear standoff with the west, and until Thursday, member states had done a good job of papering over their differences on the issue.

Why Saudi Arabia wants to bathe the world in affordable oil - Oil watcher and economist Phil Verleger has some reasons why Saudi Arabia’s insistence on raising production quotas is a sincere bid to keep prices under control, and would willingly risk prices falling below its own “break even” price. He summarised his reasons this way:

    • The economy. Saudi Arabia recognizes that lower prices in 1999 were a great helping solving the Asian debt crisis.
      Russia: The Saudis are very upset with the situation in Syria. Lower oil prices will convince Putin to cooperate
      Iran: Lower oil prices will increase pressure on Iran.
      Canada and the US: Lower prices will slow development of shale oil and tar sands.
      Conservation: lower price might just slow the move of the US to efficiency. (might)
      G20: Saudi Arabia likes to be considered part of the club. Lower prices would help renew their membership.

Oil Trades Near Eight-Month Low Before OPEC Meeting - OPEC, which convenes in Vienna today, will probably maintain its output ceiling as concern that global growth is shrinking outweighs calls for supply cuts to stem sliding crude prices, three of the group’s ministers said. Oil advanced after approaching a technical support level, data compiled by Bloomberg showed.  “The market is in a distinctive wait-and-see mode,” . After the results of the OPEC meeting the “immediate focus will switch to Greece elections this weekend because that’s really where demand side questions will be answered,” he said.

Divided OPEC grapples with whether to cut production, prop up oil prices - The Washington Post: With the global economy at a tipping point, a deeply divided Organization of the Petroleum Exporting Countries meeting in Vienna wrangled over whether to cut production and prop up crude oil prices. Saudi Arabia, the world’s biggest oil exporter and the cartel member with the greatest latitude for tightening or opening its taps, arrived vowing to maintain its output and hold the line on quotas for the group. Other OPEC members, led by Iran and Venezuela, have wanted to trim output quotas to boost the price of oil. Analysts said they expect no change in the end. With the approach of the traditional summertime surge in oil demand and with the imposition date for international sanctions on Iranian oil sales imminent, the Saudi government and other key OPEC nations have indicated their concern over stabilizing the oil market.

OPEC chief sees oil at $110 a barrel as fair -  Oil prices could rise about $25 from their present levels to $110 a barrel without threatening the world economy, OPEC Secretary General Abdullah Al-Badry said Friday. Crude prices have dropped steeply in recent months with the U.S. benchmark selling Friday at just below $85 a barrel. That's about 20 percent less than where they were in February, and Al-Badry said it's far below what consumers can afford. "$110 is not a threat to the world economic growth," Al-Badry told reporters a day after OPEC oil ministers agreed to keep the cartel's total output ceiling at 30 million barrels a day. Many of the 12 member nations of the Organization of the Petroleum Exporting Countries consider present prices too low and came to Thursday's meeting seeking a production cutback to reduce supplies and push prices upward. That, however, was opposed by OPEC kingpin Saudi Arabia - and Saudi oil minister Ali Naimi had even initially suggested he was looking for a production boost. The Saudis have signaled their readiness to make up for any shortfall caused by international embargoes on Iranian crude and already account for about a third of total daily OPEC output of nearly 32 million barrels, including Saudi and other overproduction.

Peak oil and price incentives - Here I describe some interesting new research on modifying Hubbert's model of peak oil to take into account the incentives for additional production that higher oil prices would be expected to bring. A recent IMF Working paper begins by noting the trend in forecasts of oil production from the U.S. Energy Information Administration. In earlier years, these forecasts were primarily just extrapolations of trends in global demand, with the assumption that supply would grow as needed to meet demand. If EIA's 2001 forecast had proven accurate, the world today would be producing about 100 million barrels of oil each day. The EIA forecast for 2012 has been revised downward in each successive year, and now stands just under 90. The IMF researchers note that although forecasts based on mechanical extrapolation of trend have done badly, so too have the pessimistic forecasts of geologist Colin Campbell, who expected his definition of conventional oil production to have fallen much more rapidly than has actually been observed.

CHART OF THE DAY: This Chart Destroys The Idea Of Peak Oil - For 61 years, BP's annual Statistical Energy Review has been one of the most closely watched studies in the industry.  And given the upheavals in the energy industry in recent years, this year's edition was going to be particularly significant .It does not disappoint.Below is a graph that we believe cast serious doubt on peak oil theory — the idea that we are imminently in danger of exhausting the world's hydrocarbon supply.BP has a more nuanced, though no less categorical take:"The world is not structurally short of hydrocarbon resources – as our data on proved reserves confi rms year after year – but long lead times and various forms of access constraints in some regions continue to create challenges for the ability of supply to meet demand growth at reasonable prices." Here are worldwide proved reserves, by decade.

India’s crude oil import bill jumps 40% to $140 bn in FY12  - India’s oil import bill leaped 40 per cent to a record $140 billion in 2011-12 as high oil prices shaved off much of the nation’s GDP growth rate, Oil Minister Mr S Jaipal Reddy said today.  Mr Reddy said it was “estimated that a sustained $10 increase in oil prices lead to a 1.5 per cent reduction in the GDP of developing countries“.  “We have seen evidence of this in our own country: India’s GDP grew at 6.9 per cent during the last financial year (2011-12) down from the 8 per cent plus growth rate experienced in the past few years,” he said.  Mr Reddy said between the 2010-11 and 2011-12, the world’s fourth largest oil importer saw its average cost of imported crude oil rising by $27 per barrel, “making India’s oil import bill rise from $100 billion to $140 billion dollars“.  “Higher international oil prices lead to domestic inflation, increased input costs, an increase in the budget deficit which invariably drives up interest rates and slows down the economic growth,” he said.  Also, net oil importing countries like India experience deterioration in their balance of payments, putting downward pressure on exchange rates.

China Tells U.S. What It Can Do With Its Iran Oil Import Sanctions - While the US magnanimously decided to exempt several nations from U.S. sanctions on Iranian oil imports, it appears the Chinese government has indicated it has no plans to change its position on oil purchases from Iran. As Voice of America reports, China's FinMin spokesman Liu Weimin said the purchases are necessary, because of its economic development, describing their 'purchase channels' as 'completely legal' and 'normal, open, and transparent'. China is the world's largest buyer of Iranian oil and is the last remaining major importer exposed to possible penalties when the U.S. sanctions are imposed, likely later this month. When asked if China and the United States are still in discussion about the sanctions, the spokesman would only say that Beijing has clearly informed Washington of its position. China's purchases of oil from Iran declined earlier this year, but analysts say the cutback was the result of a price dispute. Purchases went back up in April and have continued. Raise to you Hillary.

Chinese Economy Shows a Second Month of Anemic Growth - The Chinese economy, widely seen until the last few weeks as the strongest remaining locomotive that could drag the global economy back from the brink of recession, showed a second month of anemic growth in May and performed even worse than the already lowered expectations of most economists. Growth in industrial production, retail sales and investment in fixed assets like factories and office buildings was little changed from April, according to data released on Saturday afternoon in Beijing by China’s National Bureau of Statistics. Some economists had considered the April figures to be a fluke and had predicted a rebound in May, when the Chinese government began measures to rekindle growth. April had been the weakest month in China since 2001 for growth in fixed-asset investment, and May was slightly weaker still. Before adjustment for inflation, retail sales grew even more slowly in May than in April. But retail sales were a little stronger in May after they were adjusted for inflation, which has slowed steadily this spring. Industrial production grew at a slightly faster pace in May from a year earlier, 9.6 percent, than it had in April, when growth was 9.3 percent. And in an unexpected piece of good news released Sunday morning, China’s exports and imports both grew twice as fast last month as economists had expected. Exports rose 15.3 percent, triple the pace in April, and imports grew 12.7 percent after stalling the month before.

China Data Signal Some Strength - —China's exports and imports both rose sharply in May, while inflation slowed substantially, hopeful signs for the world's second-largest economy. A raft of data released over the weekend by the Chinese government present a mixed picture, but overall suggest an economy stronger than many market players feared at the end of last week. A surprise-interest rate cut by the central bank Thursday prompted speculation that the monthly data for May would be especially weak. Instead they showed that industrial-production growth ticked up slightly, albeit from an April pace that was the slowest in nearly three years, and that auto sales and property investment were stronger—signs of life for the Chinese economy, despite the sovereign debt crisis in Europe and a sluggish recovery in the U.S.The data indicate that measures taken by the Chinese government to support growth are already having an effect, said HSBC economist Ma Xiaoping. "It is almost certain that China's economy will bottom out in the second quarter and rebound in the third quarter," she added. Government initiatives rolled out in recent weeks include purchase incentives for energy-efficient household appliances, targeted tax cuts and accelerated approval for investment projects by companies and local governments. On Friday, officials called for additional spending on railway construction.

China’s mixed May - Over the long weekend, China dumped a huge amount of macro data for May. The upshot is that the economy continues to slow but at more shallow rate than April. Stimulus is already having some effect and the chances of more has declined. We begin with the news that China’s CPI inflation continued with its downward trend in May. The headline consumer prices index inflation fell to 3.0% yoy, the lowest reading since June 2010, down from 3.4% yoy for the previous month, and below market expectations of 3.2%.  On a month-on-month basis, CPI fell by 0.3% in May, down from  a fall of 0.1% in the previous month. We are seeing sharply lower food prices in May, which fell by 0.8% on the month, while on a year-on-year basis, food prices inflation is down to 6.4%.  Non-food prices increased by 1.4% compared to a year ago, while it remained unchanged on a month-on-month basis. On another note, the producer price index is down also to –1.4% yoy, from –0.7% yoy, and again below consensus of –1.1%.

China second-quarter GDP growth may dip below 7 percent - government adviser | Reuters: (Reuters) - China's annual economic growth could fall below 7 percent in the second quarter if weak activity persists in June, an influential government adviser was quoted on Wednesday as saying. The forecast by Zheng Xinli, a former deputy director of the Chinese communist party's policy research office, is among the most bearish by any government and private sector economists. "GDP growth in the second quarter could fall below 7 percent if there is no significant improvements in economic data for June," the overseas edition of the People's Daily quoted Zheng Xinli, now deputy head of the China Center for International Economic Exchanges (CCIEE), a top government think-tank, as saying. China's industrial output growth usually outpaces GDP growth by 3-5 percentage points, the newspaper cited Zheng as saying. China's industrial output rose 9.6 percent in May from a year earlier, picking up slightly from a three-year low of 9.3 percent stuck in April.

Selling Abroad, China Eases Slump at Home - With China’s domestic economy stumbling badly this spring as construction and retail sales slow, this country is unleashing a fresh surge of exports that is preserving millions of jobs in Chinese factories but could fan trade tensions with the West. China’s General Administration of Customs announced on Sunday that exports had surged 15.3 percent in May from a year earlier, twice as fast as economists had expected and vaulting May past last December as the biggest month ever for Chinese exports. China’s trade surplus has expanded in each of the last three months. As indebted European economies slip into recession and unemployment inches back up in the United States, Chinese factories are outcompeting rivals in developing countries and the West to claim larger market shares even as global demand is barely rising. “Our sales have picked up significantly and we’re now overbooked,”

New life in China’s property bubble - Yesterday I noted how the change in government policies in China’s realty market belied its rhetoric of rebalancing. Even though the Chinese government has been telling everyone for some time that that they are serious in trying to curb home prices, it is now becoming clear that they are now giving up on real estate market curbs already. In fact, not only has the government been fine-tuning real estate policies at the local governments level, it has now cut lending rates, as we have all known. Between attempting to maintain high growth and letting the economy to adjust, the government speaks the latter and does the former. As a result of all these subtle changes in language and actual policies, it seems that the real estate market is heating up again in various cities.  Suddenly we are seeing queues in property sales offices again, in Beijing, in Shenzhen and in other places, as people believe that as the tightening is over.  Real estate prices will rise again according to Sina.

China giving up on rebalancing? - Now that it is clear that the Chinese economy is slowing rapidly, there is more and more evidence that the Chinese central government has given up on the project to rebalance the economy. Even though they say real estate market curbs will continue, and that local government debts will be cleaned up, the reverse is happening in policy. They have, therefore, also unofficially given up on rebalancing the economy away from investment and towards consumption. The China Banking Regulatory Commission (CBRC), for instance, has dropped the proposal that risk-weighting for second home mortgages be higher than the first home (via Sina). Also, various media are reporting that banks are now allowed to offer as much as 30% discount from benchmark rates for mortgages, a clear sign of saying one thing (i.e. continue to tighten real estate market) and doing another thing (easing mortgages). Also, as we know, the government is already accelerating future investment projects, and that implies that banks will have to lend to fund said projects. In short, Chinese banks are increasingly policy driven. We have seen consistently weak loan demand in the past few months, indicating that China is probably already in some version of a liquidity trap as loan demand falls. However, new loans ended up higher than expected as the rush to lend in the final week of May took place. Notably, the final rush to lend coincided with China accelerating investment project approvals and easing mortgages.

China’s Battle of the Banks - China’s leaders have fired the opening salvo in what might turn out to be the battle of the banks. Late last week, in parallel with an interest rate cut to boost growth, China’s central bank moved to allow the market a greater role in setting lending and deposit rates – kicking off a long awaited reform of China’s creaking financial sector and threatening to eat away the main source of banks’ profitability. What’s the problem with the old approach to setting interest rates, and what’s at stake in reform? China Real Time lays it out with a little help from The Wall Street Journal’s chart wizards in Hong Kong. China’s banking sector is concentrated. The big four state owned banks – Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, and Bank of China, control almost 50% of deposits. The same number for the top four banks in the U.S. is 35%. A wide government-set margin between the deposit and lending interest rates means the banks are guaranteed a substantial profit on every yuan they lend out.

Chinese Consumers Pay More, but Expect More, Too — Chinese consumers can afford to splash out more on higher quality products but also expect better value for their money than in the past, an American Chamber of Commerce study found. China’s consumer market is forecast to become the second largest in the world after the U.S. by 2015. Both Chinese and foreign companies are struggling to keep up as the market evolves, said the report, released Wednesday. “There is no doubt that the Chinese marketplace is maturing,” said Joni Bessler, a partner with consultancy Booz & Co. in Shanghai, who helped compile the report. The past divide between luxury or premium products and affordable ones is blurring as the middle class grows, with most consumers expecting good value and wide choices, even for less expensive goods.

Could Deflation Come to China? - The words deflation and China appeared in the same headline over the weekend at GEI News. What sort of stuff are they smoking over there? Wait a minute!!! Over there is right here – I am the editor of that electronic rag and that was my headline. And whatever it is they have been smoking “over there” didn’t make it to my lungs so I feel cheated. So let’s take a critical look at that “reckless” headline and see what is going on. This look is being written in an Op Ed because, although we will look at and try to interpret data, the examination is less thorough than this analyst wants to put in the Analysis Blog. Follow up: The news article was reviewing a slew of data released Saturday by the official Chinese government agency, the National Bureau of Statistics (NBS). The headline number, the CPI, was up 3.0% year-over-year, hardly a deflationary number. But, when you read further in the article you find that PPI was down 1.4% year-over-year. And that is where a deflationista’s ears should perk up. It is not just the fact that PPI is negative that should get your attention, but also of note is the rapidity with which it got there: Just ten months ago the PPI rate of growth was 7.5%, so PPI has not only gone negative, it has gotten there via a massive collapse. And that is not all, other sharp declines in inflation measurements have also occurred. From the same article:

The Macroeconomics of Chinese kleptocracy - China is a kleptocracy of a scale never seen before in human history. This post aims to explain how  this wave of theft is financed, what makes it sustainable and what will make it fail. There are several China experts I have chatted with – and many of the ideas are not original. The synthesis however is mine. Some sources do not want to be quoted. The macroeconomic effects of the Chinese kleptocracy and the massive fixed-currency crisis in Europe are the dominant macroeconomic drivers of the global economy. As I am trying a comprehensive explanation for much of the world's economy in less that two thousand words I expect some kick-back. China is a kleptocracy. Get used to it. I start this analysis with China being a kleptocracy – a country ruled by thieves. That is a bold assertion – but I am going to have to assert it. People I know deep in the weeds (that is people who have to deal with the PRC and the children of the PRC elite) accept it. My personal experience is more limited but includes the following:
(a). The children and relatives of CPC Central Committee members are amongst the beneficiaries of the wave of stock fraud in the US,
(b). The response to the wave of stock fraud in the US and Hong Kong has not been to crack down on the perpetrators of the stock fraud (so to make markets work better). It has been to make Chinese statutory accounts less available to make it harder to detect stock fraud.
(c). When given direct evidence of fraudulent accounts in the US filed by a large company with CPC family members as beneficiaries or management a big 4 audit firm will (possibly at the risk to their global franchise) sign the accounts knowing full well that they are fraudulent. The auditors (including and arguably especially the big four) are co-opted for the benefit of Chinese kleptocrats.

Financial Repression, Chinese Style - Krugman - I have no idea whether this John Hempton piece on China is at all right, but it’s a terrific read, and provides food for thought. Hempton basically argues that China has turned financial repression — controlled interest rates on deposits, which ensure a negative real rate of return — into a giant engine of kleptocracy. The banks extract rent from depositors, transfer those rents on to state-owned enterprises in the form of cheap loans, and then the Party elite essentially embezzles the money. Underlying the whole system is a high savings rate that Hempton attributes to the one-child policy. Actually, if he’s right about the demographic underpinnings, there’s a time bomb lurking in the system quite aside from his concerns about inflation running too hot or too cold: eventually, and as I understand it fairly soon, those older Chinese who have been frantically saving because they don’t expect enough grandchildren to support them will become net dissavers, pulling money out of the banks to live on. And then, if his basic story is right, the whole system implodes.

The Macroeconomics of Chinese Kleptocracy - Damn, Krugman beat me to this yesterday. I thought I would be bringing in a fascinating piece from the fringes of the Australioblogosphere. Bronte Capital: The Macroeconomics of Chinese kleptocracy. My basic take is the same as Paul’s: I have no idea whether this John Hempton piece on China is at all right, but it’s a terrific read, and provides food for thought. The logic of the piece is very much dependent on the loanable-funds model: The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.  As we saw quite clearly in The Great Keen-Krugman Debate, Paul is a firm believer in that model (and obviously Hempton is too). I and many others (notably Keen) have suggested that the model is ridiculous and nonsensical on its face. If we look at the Hempton piece through other eyes — MMT for instance — does it still hold up? How can we rewrite it to explain things better while retaining its rather convincing insights? Now here’s what’s fascinating: my hat tip goes to a post two days ago by Craig Tindale at … Steve Keen’s blog — a blog where you find little patience for the loanable funds model.

Putting China's Economic Power in Perspective - In January, David Leonhardt noted a finding that more Americans said China was the world’s leading superpower than said the United States was. New global survey data from Pew Research Center suggests this view is becoming more widespread around the world — although, tellingly, not in China itself. Pew conducted annual surveys in 14 different countries by telephone or through face-to-face interviews from 2008 to 2012, and asked about which country was considered to be the leading superpower. Economic awe for China surpassed that for the United States in the last year: Not all people in all countries feel this way, of course. Here’s a breakdown, by country, of responses to the question when it was asked this spring. The left column shows which country was answering the question, and the rows show what percentage of respondents in that country said the United States, China, Japan or the European Union is the world’s leading economic power.

Japan and China Bypass US in Direct Currency Trade Japan and China started direct trading of their currencies, the yen and the yuan, on the inter-bank foreign exchange markets in Tokyo and Shanghai on June 1 in an apparent bid to strengthen bilateral trade and investment between the world's third- and second-largest economies. Direct yen-yuan trades also aim to hedge the risk of the dollar's fall in the long run as the world's key settlement currency and as the main reserve currency in Asia, the world's economic growth center in the 21st century. By skipping the dollar in transactions, the region's two biggest economies indicate their intention to reduce their dependence on dollar risk and US monetary authorities' leeway and prowess on the Asian economy. The move aids China's goal of undercutting US influence in the region while strengthening China-Japan financial ties. This is the first time that China has allowed a major currency other than the dollar to directly trade with the yuan. For Beijing, this new step brings benefits of further internationalization of the yuan. For Tokyo, direct trading confers a favor of incorporating China’s dynamic growth more effectively and economically. The possible future correction of China's still artificially undervalued yuan may also result in a weaker yen, boosting the competitiveness of Japanese exporters such as Toyota and Sony in the long term.

Trade Protectionism Rises as Economies Slow - As worries rise about an economic slowdown, major nations around the world are ramping up measures to protect their economies from trade threats.  Global Trade Alert, an independent monitoring group, says in a new report today that at least 110 new protectionist measures were implemented around the world since the Group of 20 advanced and developing economies met in France last November. Of those 110, 89 were by G-20 members, who meet again next week in Mexico. Protectionist measures such as export restrictions and higher tariffs spiked after the 2008 financial crisis but didn’t subside afterward. Since then, nations have been pursuing stealthier measures — “murky protectionism” — to circumvent international trade rules, the group says.The latest updated tally names the 27-member European Union as the leading culprit since November 2008, with 302 discriminatory measures, followed by Russia and Argentina with about half that number each. China ranked at the top of a list of “number of trading partners affected” — with 193, or nearly all of them, followed by the European Union at 187.

U.S. trade proposal would let corporations overrule laws - The Trans-Pacific Partnership (TPP), a forthcoming U.S. trade agreement that looks to solidify a seamless regional economy in the Pacific-rim, would give multinational corporations the power to challenge and even avoid compliance with laws in member countries — including the U.S. — provided a super-national corporate tribunal agrees with their claim. That’s according to documents leaked this week by the Citizens Trade Campaign, an activist group responsible for leaking TPP proposals on intellectual property last year. The latest leak details a TPP draft chapter on “investments,” which proposes an independent dispute arbitration process that would be empowered to supersede domestic laws or regulatory actions in member states if they are seen as conflicting with the TPP’s framework. Consumer advocacy group Public Citizen said Wednesday that it “has verified that the text is authentic,” and described the proposals as being fraught with “dangers.”

Trans-Pacific Partnership Documents Show Trade Treaty Could Grow Much Larger Than NAFTA - Public Citizen’s Lori Wallach has an analysis of that leaked document from the negotiations of the Trans-Pacific Partnership, and it’s really even worse than anticipated. The leaked text provides stark warnings about the dangers of “trade” negotiations occurring without press, public or policymaker oversight. It reveals that negotiators already have agreed to many radical terms granting expansive new rights and privileges for foreign investors and their private corporate enforcement through extra-judicial “investor-state” tribunals.Although TPP has been branded as a “trade” agreement, the leaked text shows that TPP would limit how signatory countries may regulate foreign firms operating within their boundaries, with requirements to provide them greater rights than domestic firms. The leaked text reveals a two-track legal system, with foreign firms empowered to skirt domestic courts and laws to directly sue TPP governments in foreign tribunals. There they can demand compensation for domestic financial, health, environmental, land use laws and other laws they claim undermine their new TPP privileges. The leak also reveals that all countries involved in TPP talks – except Australia – have agreed to submit to the jurisdiction of such foreign tribunals, which would be empowered to order payment of unlimited government Treasury funds to foreign investors over TPP claims.

S&P Says India May Be First in BRIC to Lose Investment Grade - India may become the first BRIC nation to lose its investment-grade credit rating, Standard & Poor's said, citing slowing growth and political roadblocks to economic policy making. The rupee weakened and stocks fell. "Setbacks or reversals in India's path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality," Joydeep Mukherji, an analyst at Standard & Poor's in New York, said in a statement today. India is rated BBB- by S&P, one level above junk and the lowest in the BRIC group, which also includes Brazil, Russia and China. Indian gross domestic product rose 5.3 percent last quarter from a year earlier, the least in nine years, stoking concern the nation's economic prospects have deteriorated as policy gridlock deters investment and Europe's debt crisis crimps exports. S&P lowered India's credit outlook to negative from stable in April, contrasting with ratings upgrades in Asian nations from Indonesia to the Philippines in recent months. "It's another warning signal reflecting weakening growth fundamentals, and if it happens it may have a negative impact on inflows,"

Is the India Growth Story Over? - Is India heading towards the end of its much-touted growth story? A report by global credit rating agency Standard and Poor’s (S&P) released on June 11 seems to suggest so. Titled “Will India be the first BRIC fallen angel,” the report cautions that India may become the first so-called “BRIC” (Brazil, Russia, India and China) country to lose its investment grade rating. According to the report, slowing growth and political road-blocks in policy making could lead to Indian paper being relegated to junk bond status. The report notes that “the division of roles between a politically powerful Congress president who can take credit for the party’s two recent national election victories, and an appointed Prime Minister has weakened the framework for making economic policy.” It further warns that “setbacks or reversals in India’s path towards a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality.” S&P’s latest statement on India is in line with its earlier move a few weeks ago. In April, the agency had lowered India’s rating outlook from stable to negative and warned that further action would follow if India did not get its act together. India’s sovereign rating by S&P is BBB-, which is the lowest investment grade rating among the BRIC countries. It is also the only BRIC country with a negative outlook.

Africa Specializing in Capital Exodus? - Even as Africa faces severe shortages of skilled labor at home, it experiences large and increasing outflows of highly-skilled labor migration to industrialized economies in search of better job opportunities. The investments made in the training of these professionals are losses to African countries but translate into hefty gains for receiving countries.  Thus resource-starved African nations are subsidizing developed countries’ industries and social services. A recent study by Canadian scholars estimates that South Africa alone may have lost up to $1.4 billion due to the export of medical doctors to Australia, Canada, the United Kingdom and the United States.[1] In turn, the UK may have gained up to $2.7 billion from the services of doctors from the nine sub-Saharan countries surveyed in the study.[2] Some observers argue that the remittances sent home by migrant doctors are a form of returns to investment in their education; some even claim that the sending African countries receive official development aid from the host countries that contributes to financing the training of doctors, among other things. However, these inflows fade in comparison to the losses due to migration of skilled health care professionals. The same holds for other professional areas beside the medical field. In general, there is a net transfer from Africa, making the continent a ‘net financier’ of the rest of the world. Parallel to this exodus of human capital is the illicit export of financial capital from African countries – or capital flight. This is not a new phenomenon, and it shows no signs of abating.

It’s Time for a Development Wake-up Call: Sad News for Global Education and the Millennium Development Goals | Brookings Institution - The UNESCO Institute for Statistics and the Global Monitoring Report recently released new numbers for out of school children. According to the data, 61 million children of primary school age were not in school in 2010. At first glance, this seems like an improvement over the 67 million kids reported out of school in 2009. Unfortunately, that’s not the case. If you take a look at the footnotes, you find that UNESCO used new UN Population Division data to calculate the number of out-of-school children.  Using the new calculations, UNESCO had previously revised the 2009 statistic down to 61 million. While we should be outraged that we are only able to analyze education statistics that are two years out-of-date, we should be more outraged about what this says about our commitment to education: it is stagnating and declining.

Geography of inequality - One vision of the digital electronic future is that it would “erase” place and space. One can Skype over a cell phone with people half a globe away. A law firm can send audio to India and get back transcriptions in the morning. A firm in California can order goods from Korea and have them shipped to a customer in Europe. The vision that all places are one is not new. Over a hundred years ago a journalist wrote that, thanks to the telephone, by our time everyone would live on their own mountain top and do their work over the electronic wire. Didn’t happen then; isn’t happening now. Where you live and work seems to matter economically and culturally at least as much now as decades ago. The obvious example is the continuing concentration of the IT industries themselves – Silicon Valley, Silicon Alley, Silicon Wadi, etc. (here). This musing is occasioned by a recent article in the Times occasioned by a report from the Brookings Institution on how American metropolitan areas are becoming increasingly different from one another with respect to the educational levels of their residents. Some places, like Washington, Boston, and San Francisco are experiencing growing concentrations of the college-educated; others like Las Vegas, Memphis, and Dayton are falling further behind. Early followers of this blog will have read of this trend 16 months ago and of a related trend, the concentration of twenty- and thirty-something college graduates in particular downtown neighborhoods of those cities.  But why does this matter?

Will Globalization Go Bankrupt? - Michael Pettis - About ten years ago I published an article in Foreign Policy that I just recently re-read.  In the article I extended one of the arguments I made in my book, The Volatility Machine, that the globalization process is driven primarily by monetary expansion and the consequent increase in risk appetite.  What was new in this piece, because I hadn’t realized it when I wrote my book, is that every period of globalization coincided with a stage of the industrial revolution in which accompanying the expansion in international trade and capital flows is a major technological boom, driven also by monetary expansion. After re-reading the article I thought it might be useful to republish it on my blog with a couple of comments while waiting for the next entry (which should come out this week).  I think the point it makes about the process in which globalization is reversed is still worth considering.

What Determines Government Spending Multipliers? - IMF - This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.

Lessons from Latvia - IMF Direct: Olivier Blanchard - In 2008, Latvia was widely seen as an economic “basket case,” a textbook example of a boom turned to bust. From 2005 to 2007, average annual growth had exceeded 10%, the current account deficit had increased to more than 20% of GDP.  By early 2008 however, the boom had come to an end, and, by the end of 2008, output was down by 10% from its peak, the fiscal deficit was shooting up, capital was leaving the country, and reserves were rapidly decreasing. The treatment seemed straightforward: a sharp nominal depreciation, together with a steady fiscal consolidation.  The Latvian government however, wanted to keep its currency peg, partly because of a commitment to eventually enter the euro, partly because of the fear of immediate balance sheet effects of devaluation on domestic loans, 90% of them denominated in euros.  And it believed that credibility required strong frontloading of the fiscal adjustment. Many, including me, believed that keeping the peg was likely to be a recipe for disaster, for a long and painful adjustment at best, or more likely, the eventual abandonment of the peg when failure became obvious.Nevertheless, given the strong commitment of both Latvia and its European Union partners, the IMF went ahead with a program which kept the peg and included a strongly front-loaded fiscal adjustment.Four years later, Latvia has one of the highest growth rates in Europe, the peg has held, and the fiscal and current accounts are close to balance.

Wolkenkuckucksheim - Paul Krugman - Martin Wolf reports on a letter he has received from the Director General of the German Finance Ministry; taken in context with the speech just given in Riga by Germany’s man at the ECB, what we get is a terrifying picture. Basically, it seems that even as the euro approaches a critical juncture, senior German officials are living in Wolkenkuckucksheim — cloud-cuckoo land. Now, I know the phrase normally refers to a state of naive optimism, not normally something one attributes to German officials. But a broader interpretation would be that of believing, despite all the evidence, that the world is the way you want it to be, and acting on that false belief. So the man from the finance ministry asserts that the euro crisis was brought on by fiscal irresponsibility, and in particular by “short-termism” — so that the remedy is to focus on long-run fiscal irresponsibility plus structural reform, which he insists has never failed. All one can say is, My God. You have to be willfully blind not to know that private excess, not public, caused the problems in Spain and Ireland — and nowhere, not even in Greece, did Keynesian stimulus efforts have anything at all to do with the crisis. As for fiscal responsibility plus reform solving the kind of problem we face now — massive real overvaluation with a fixed exchange rate — it would be truer to say that this has never worked. As Wolf says, just look at Argentina.

Moody’s may lower European sovereign debt ratings - Moody’s Investors Service said Friday that it may consider downgrading debt ratings for some eurozone nations if Spain seeks a bailout for its banking sector or Greece ends up dropping the euro as its national currency. The ratings firm said it is assessing the implications of a bailout for Spain and is prepared to make rating changes to reflect any heightened risk for Spain’s government creditors. There’s growing speculation that Spain could decide within days or weeks to ask the European Union for a bailout for its banks, which have been crippled by soured real estate investments. advertisement If Spain ends up asking for aid, that would make it the fourth country in the 17-member eurozone to do so since the EU debt crisis broke out. Under Moody’s rating scale, Spain now has a rating of “A3,” which is still investment-grade. But the outlook is “negative,” which means there’s at least a 40 percent chance Moody’s will downgrade its ratings for Spain.

Spain seeks eurozone bailout - Spain is to seek EU aid to rescue its struggling financial sector, in a bailout that will impose no new economic reform conditions on Madrid other than existing EU budget rules. After months of denials by Spanish leaders that the country needed a bailout, it fell to Luis de Guindos, the economy minister, to declare in Madrid on Saturday that “the government of Spain declares its intention to request European financing” for its banking system. Although Mr de Guindos did not say how much money Spain would seek, the eurogroup of finance ministers said in a statement it was prepared to lend “up to” €100bn.  “The loan amount must cover estimated capital requirements with an additional safety margin,” the eurogroup said in a statement, issued by Jean-Claude Juncker, the Luxembourg prime minister who heads the group. The decision, taken during a two-and-a-half hour call between eurozone finance ministers on Saturday, allows funding to be channelled through the Spanish government’s Fund for Orderly Bank Restructuring (Frob), which would then inject capital into the country’s teetering banks. Because Frob is part of the Spanish government, bailout loans would still be on Madrid’s sovereign books and the government would bear ultimate responsibility for repayment.

Spain Blinks: Accepts €100 Billion Bailout Via EFSF/ESM; FROB to Receive the Money - After months of denials, a short Eurogroup Statement shows Spain will submit a formal request to Brussels for a bailout.  Here is the statement in full. The Eurogroup has been informed that the Spanish authorities will present a formal request shortly and is willing to respond favourably to such a request. The financial assistance would be provided by the EFSF/ESM for recapitalisation of financial institutions. The loan will be scaled to provide an effective backstop covering for all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors. The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to EUR 100 billion in total. Following the formal request, an assessment should be provided by the Commission, in liaison with the ECB, EBA and the IMF, as well as a proposal for the necessary policy conditionality for the financial sector that shall accompany the assistance. The Eurogroup considers that the Fund for Orderly Bank Restructuring (F.R.O.B.), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned. The Spanish government will retain the full responsibility of the financial assistance and will sign the MoU.

Spain to access eurozone rescue funds (Video)

Bailout Lite? There's Really No Such Thing; €30 Billion Needed? It's Now €100 Billion; Contagion of Economic Idiocy - A few days ago Spain was purportedly going to need another €30 billion to €70 billion to recapitalize Spanish banks. I suggested the amount would be at least triple that and it did not take long to do so. Yahoo! Finance reports Spanish bailout could reach 100 billion euros A bailout for Spain's teetering banks, once requested by Madrid, could amount to as much as 100 billion euros, two senior EU sources told Reuters on Saturday. Spain has not yet made a formal request for European aid but it could come during a conference call of euro zone finance ministers, the sources, who were both on an earlier call to discuss the technicalities of a rescue, said. A decision on Spain will only be taken ... by the ministers (in a second call). Madrid has not officially asked for help yet," one of the officials said. "The statement will mention 100 billion euros as an upper limit." As with Greece, every economic number from Spain is revised to the downside, month in and month out. For now, the EU economic wizards will likely concoct a number just under that alleged "upper limit". My best guess is €90 billion. Then within six months, possibly as soon as the money is handed over, more problems will surface, more meetings will take place, and still more money will be stolen from Spanish taxpayers and handed over to the banks and bondholders.

The EuroTARP Cometh - Krugman - OK, so Spain gets a bank bailout. It’s basically like the TARP: a Spanish government agency will give banks cash, presumably in return for an ownership stake, with the goal of reassuring depositors and interbank lenders that their funds will remain safe even if the banks turn out to have big losses; the point is that these losses will initially come out of the new cash hoard, so that default on debts won’t happen. The twist is that the Spanish government itself is cash-poor and must pay high rates to borrow on the market, so this money comes as a loan from stronger European economies, presumably at below-market rates. The question you should ask is, what problem does this solve? It may — may — put a temporary end to the “doom loop” of funds fleeing Spanish banks, forcing the banks to sell assets, driving asset prices down and creating further doubts about solvency. (It won’t help even here to the extent that fears involve euro breakup rather than default). But it does nothing to restore Spanish competitiveness or lessen the suffering from austerity. So the whole thing at best buys time — just like the ECB’s lending program from last fall. What will Europe do with that time? If past behavior is any indication, the answer is, nothing.

Spain's Bank Bailout (Video)

Rajoy defends ‘victory’ for EU credibility - Mariano Rajoy, the embattled Spanish prime minister, has defended the eurozone’s €100bn bailout for Spanish banks as a victory for European credibility. He repeated Spanish assertions that the EU aid was different from the full bailout programmes previously provided to Greece, Ireland and Portugal by the EU and the International Monetary Fund, which involved detailed austerity targets and monitoring. “There’s no conditionality of any kind. This does not affect the deficit,” Mr Rajoy said, placing the new loan deal in the context of his centre-right government’s efforts to restructure the banking system, cut the budget deficit and reform the labour market since it took power less than six months ago. Economists and analysts say the EU loan nevertheless amounts to a rescue for Spain because the money will go to the state Fund for Orderly Bank Restructuring and was necessary only because Spain itself could not access the sovereign bond markets at a reasonable price. An opinion poll published on Sunday in the newspaper El País showed that 78 per cent of Spaniards had “little or no” confidence in Mr Rajoy, whose Popular party won an overwhelming election victory over the Socialists in November.

Another Bank Bailout, by Paul Krugman - Oh, wow — another bank bailout, this time in Spain. Who could have predicted that? The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it’s only the banks that get rescued, not the unemployed. Just to be clear, Spanish banks did indeed need a bailout. ... What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless. Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move. And that doesn’t even take into account the growing risk of a euro crackup.

Spanish Bank Rescue: Will the Treatment Make the Patient Worse? - Spain has reversed itself and asked the Eurozone for “up to” €100 billion after not long ago insisting it could go it alone. The proximate cost was the increase in its sovereign debt yields in the wake of the announcement of a bailout of Bankia, which was cobbled together from dud cajas. But will the latest, yet to be finalized remedy do anything more than buy a little time? The half life of Euro-interventions is shortening. George Soros has argued that the Europeans have at most three months, and the action they need to take must be decisive. Unfortunately the Germans are signaling movement, but the ideas they are touting, such as having debtor nations agree to cede more sovereignity and implementing pan-European banking supervision, aren’t like to be achieved quickly; indeed, they may require treaty approvals.  And there are reasons to wonder whether the Spanish bank rescue will accomplish its aim of bringing Spanish bond yields back to a more sustainable level. The first question is whether it is big enough. Without a fix for the underlying economy, it’s not hard for the powers that be to underestimate the stresses Spanish banks will face as the impact of job losses work their way through the economy. Second is the bank rescue is being routed through Spain’s Fund for Orderly Bank Restructuring and repayment will be an obligation of the government, bringing its total debt outstanding from roughly €600 billion to as much as €700 billion. There is a good possibility that this change alone will lead ratings agencies to downgrade Spain from singe A to BBB.

Why didn’t Europe bail out Spain’s banks directly? -- The FT has the best explanation of the way that Europe has this weekend agreed to bail out Spain’s banks. The big question, going into this weekend, was whether Europe would be willing to recapitalize Spain’s banks directly, or whether it would simply help Spain bail out its banks. And the answer seems to be somewhere in the middle. Europe is going to lend money to Frob, which is basically the Spanish Tarp; Frob, in turn, will use that money to recapitalize the banks. So really there are two bailouts here. The Spanish government is getting debt finance from Europe, and the Spanish banks are getting equity finance from the Spanish government. Because the money is ultimately going to the banks, the Europeans and the Spaniards have an excuse for not imposing tough austerity conditions on Spain. And that’s good: Spain has never been fiscally profligate in the way that Greece was, and there’s no reason why it would ever benefit from some kind of Germanic nanny double-checking and second-guessing every check it writes. On the other hand, all the money for bailing out Spain’s banks is immediately going to become Spanish sovereign debt. And that’s not good, for anyone worried about the Spanish fiscal situation. What’s more, it’s unclear how much of the money is going to come from the ESM rather than the EFSF. That might seem like a niggardly distinction, but it’s an important one: the ESM has preferred-creditor status, which means that it’s senior to anybody buying Spanish sovereign bonds..

Spain’s Bailout Defeat Weakens Rajoy’s Goal - Prime Minister Mariano Rajoy’s surrender to European officials on taking a bailout for Spain’s banks may weaken his political authority and his credibility in financial markets.  Rajoy’s June 9 request for as much as 100 billion euros ($126 billion) after stating two weeks ago that Spain wouldn’t need a rescue marks a swift reversal for the premier who won the biggest majority in 30 years in November. It may fuel skepticism he can meet his deficit-cutting promise“The emperor’s clothes are tattered,” . “Unless he uses this money to attack the regions and control the failed cajas, what threads he has left will be stripped off him.”  Rajoy is trying to persuade regional leaders and voters to accept austerity, and convince bond investors the cuts will deliver the deficit goals he has pledged. Should he fail, he may have to return for a larger rescue for the Spanish sovereign, potentially draining the euro area’s financial ammunition.

How to save Spain’s banks – and the eurozone - If you want to know whether any set of proposals for a European banking union is sensible, you should ask the following simple question: will it render Spain’s position in the eurozone sustainable?  The Spanish government has confirmed that it is now ready to seek EU aid. But the idea for the European Financial Stability Facility to lend money to the Spanish bank recapitalisation fund, known by its Spanish initials Frob, does not meet this test. It reshuffles debt from one end of the Spanish economy to another. Spain’s total debt was 363 per cent of gross domestic product in mid-2011, according to a report by the McKinsey Global Institute, and with the prospect of a severe economic depression ahead, its crisis cannot be solved through a combination of austerity and liquidity support. The eurozone must recognise that some form of debt relief, or default, will be inevitable.

Satyajit Das: The Spanish “Bailout”, Whoops – “Assistance”! - On 11 April 2011, then Spanish Finance Minister Elena Salgado stated: “I do not see any risk of contagion. We are totally out of this.” A little over a year later, Ms Salgado and her party are no longer in power and Spain is well and truly in it. After weeks of prevarication, Spain will now apply for a bailout for its banking system. Sorry it’s not a “bailout”. As the Spanish Finance Minister clarified: “What is being requested is financial assistance. It has nothing to do with a rescue”. It is quite a turnaround. The new Finance Minister Luis de Guindos stated on 30 March 2012: “We are convinced that Spain will no longer be a problem, especially for the Spanish, but also for the European Union”. The Spanish Prime Minister Marino Rajoy attempts to maintain confidence a few days later on 12 April 2012 were confusing: “To talk about a bailout for Spain at the moment makes no sense. Spain is not going to be rescued. It’s not possible to rescue Spain. There’s no intention to, it’s not necessary and therefore it’s not going to be rescued.” But the bailout may not work. The amount – €100 billion or more depending on the independent assessment of the needs of Spanish banks- may not be enough. On the surface, the amount appears around three times the €37 billion the International Monetary Fund (“IMF”) says is needed. The capital requirements of Spanish banks may turn out to much higher – as much as €200-300 billion.

Spain’s Economic Pain To Deepen Despite Bank Rescue - Spain's prime minister, Mariano Rajoy, says his country's deep economic misery will worsen this year despite the country's acceptance of a European financial lifeline of as much as $125 billion to rescue its struggling banks. Rajoy says Spain will stay stuck in its second recession in three years, and unemployment will rise above the current level of nearly 25 percent, the highest among the 17 nations that use the common euro currency. Rajoy told reporters Sunday that his decision to ask for outside help a day earlier was difficult but will save the country from total economic devastation while strengthening the shaky status of the European Union. He refused to call the rescue package a bailout, saying it is different from those received by Greece, Italy and Portugal.

My Self-Esteem A Mess Is Refrain For Spain’s Unemployed - More than 4 million Spaniards are jobless in a double-dip recession that is hitting young people hardest. More than half of 15-to-24 year-olds are unemployed, and 37 percent of those 25 to 34 live with their parents. Rather than starting families and building careers, many young people spend their days playing video games and watching television. As their skills stagnate, they risk falling behind permanently, said Katherine Newman, a sociologist. “For the rest of their lives, they’re damaged,” said Newman, who has written about labor and families in Spain. “They don’t recover occupationally, their earnings are depressed for 20 years, they don’t marry at the same rate.” Joblessness, combined with the destruction of household savings, “tears the social fabric apart,” she said.

Eurozone buys itself some time - Madrid’s role in the financial crisis has the erratic quality of Dr Jekyll and Mr Hyde. It has veered unpredictably between embodying the euro’s greatest threat and pushing the reforms the monetary union badly needs. It is vital that the deal on eurozone financial assistance for Spain’s banks should be a step to a permanent solution and not a redoubling of past mistakes. It is good that the agreement activates a new power granted to Europe’s rescue funds last year. Madrid will borrow money not for its main budget but for the Frob, its bank bailout fund. The assistance will be limited to the banking system, without Spain entering a programme subject to the eurozone-International Monetary Fund troika. This reward for genuine commitment to austerity and structural reform will hopefully prevent relations with Europe from becoming as poisoned as in some other countries. The key dysfunction of the euro, however, is not addressed. Rather than sever the lethal embrace between stressed sovereign debt and weak banking systems, a cash advance to bail out banks with taxpayer funds adds to the burden of Madrid’s public finances. If the state of Spanish banks is much worse than expected, this action could amount to lending the country rope with which to hang itself – repeating the Irish mistake.

Spain told it will be under "troika" supervision - Spain faces supervision by international lenders after a bailout for its banks agreed at the weekend, EU and German officials said on Monday, contradicting Prime Minister Mariano Rajoy who had insisted the cash came without such strings. Financial markets responded with relief to Saturday's euro zone deal to lend Madrid up to 100 billion euros to recapitalise debt-laden banks, with investors scooping up battered financial shares. Spanish and Italian bond yields fell after the deal eased fears of a run on Spanish banks. But previous "bailout bounces" on financial markets have been short-lived, often fizzling within a day or two as investors anticipate the next flare-up in the euro zone's unresolved debt crisis. Greece's general election next Sunday could rapidly change market sentiment if radical leftists hostile to the austerity terms of Athens' EU/IMF bailout outpoll the mainstream conservative and centre-left parties that signed the deal, or the vote ends in another deadlock.

Things You Really Don't Want To See The Morning After A Bailout - Krugman - It’s a commonplace that the half-life of euro rescue plans has been steadily falling — that is, the time between the initial euphoria over the latest bailout loan or whatever and the realization that the fundamentals have not been addressed keeps getting shorter. Apparently that half-life is now down to a few hours.

Spanish Yields Surge As Bank Bailout Stokes Sovereign Debt Fears - A mooted rescue package worth up to EUR100 billion for Spain's beleaguered banks failed to restore confidence in the country's creditworthiness as concerns mounted that the deal will load more debt onto the Spanish state and threaten to subordinate bondholders behind official creditors. An early rally in Spanish and Italian debt quickly reversed with yields on both Spanish and Italian 10-year government bonds climbing more than 20 basis points. "The proposed bailout strengthens rather than weakens Spain's pernicious sovereign-bank nexus and threatens to accelerate the ongoing rapid decamping of foreign investors. The feel-good vibe looks to be dissipating more quickly than we expected," said interest rate strategists at Rabobank International. While the bank rescue removes a key cause of short-term uncertainty, it would increase Spain's indebtedness, and has the potential to deter some investors in Spanish debt, if the bailout funds are given senior creditor status over ordinary bondholders. Moreover, soaring unemployment and an economy mired in recession will make it tougher to bring Spain's budget deficit under control, while Sunday's Greek election threatens to send another bout of contagion through Europe's financial markets.

The euro crisis: Plugging leaks | The Economist - AS REPORTED last Friday, euro-area finance ministers negotiated a Spanish bank bail-out over the weekend, in the form of up to €100 billion in lending from emergency funds to the Spanish government. From Newsbook: The bailout will be channelled through the state-backed bank bailout fund, the FROB (Fund for Orderly Bank Restructuring), and so will count as sovereign debt. If used in total, it would add about 10% of GDP to Spain's debt burden. Even then, the debt to GDP would probably peak at below 100% in 2015. This is still less than other highly indebted countries in the euro zone. Yet several details of the bailout are still fuzzy. First, it is not clear exactly what conditions would be attached to the aid. The government claimed there were no conditions for the rest of the economy. Other European ministers might disagree. Second, the Eurogroup did not specify whether Spain would be borrowing from the existing rescue fund (the European Financial Stability Facility or EFSF) or from the new European Stability Mechanism which is due to start in July. This matters because loans from the EFSF are not senior to other bondholders, whereas the ESM loans do have priority over privately held debt. A loan from the latter could spook investors in Spanish sovereign bonds.

FT Alphaville » #NoEsUnRescateEsUnSaqueo: Trending, rápidamente in Spain on Saturday… It means “Not a rescue, it’s a looting.”

Details Emerge About Spain's Cramming Down "Bailout" Loan…While details are largely missing in the aftermath of yesterday's historic announcement from Spain, the one thing that we did catch inbetween the various conferences and announcements, and probably the most important thing, is that the ESM/EFSF funded bailout loan, whose use of proceeds will go to fund the FROB, not one which will rank pari passu with the FROB, will have "terms better than market" - always a code word for priming and cramdown of other debt classes. Today, we learn that this is precisely the case, and the worst case outcome from Spain's pre-primed sovereign creditors. El Pais reports: "European aid (through the EFSF or ESM) are actually loans to recapitalize the financial system, which the Treasury. Again, the State comes to the rescue of the bank. Of course, it is soft loans, in much better shape than the market: around 3%, according to sources familiar with the negotiations between Spain and its European partners. Faced with this 3%, Treasury currently pays interest of 6% over the 10-year debt." And there you have it: Bankruptcy 101, lesson on Equitable Subordination, where one always gets a priming DIP at terms much better than other classes of debt, when secured and guaranteed by unencumbered assets. Such as what is happening here, because for one to accept 3% rate compared to 6% for 10 Year Spanish GUCs, there obviously has to be some security incentive. It also means that, as we suggested yesterday, subordination has come to Spain.

Spain Bailout: Things Will Get Worse Before They Get Better, Says Prime Minister: — Spain's grinding economic misery will get worse this year, despite the country's request for a European financial lifeline of up to (EURO)100 billion ($125 billion) to save its banks, Prime Minister Mariano Rajoy said Sunday. A day after the country conceded it needed outside help following months of denying it would seek assistance, Rajoy said more Spaniards will lose their jobs in a country where one out of every four are already unemployed. "This year is going to be a bad one," Rajoy said Sunday in his first comments about the rescue since it was announced the previous evening by his economy minister. The conservative prime minister added that the economy, stuck in its second recession in three years, will still contract the previously predicted 1.7 percent in 2012 even with the help. Spain on Saturday became the fourth – and largest – of the 17 countries that use Europe's common currency to request a bailout. This is a big blow to a nation that a few years ago took pride as the continent's economic superstar only to see it become the hot spot in the eurozone debt crisis. Its economy is the eurozone's fourth largest after Germany, France and Italy.

Stealth Austerity Coming to Spain? - So the worst kept and most predictable secret happened over the weekend with the Spanish bank bailout. I don’t think I need to go through the details. I am sure anyone who cares about it has already read at least 10 articles on the fact that Spain has secured up to a €100bn loan from Europe in order to recapitalise its ailing banking system. Initially the deal appeared positive for Spain, but as usual the devil is in the detail. It must be noted that I don’t consider this something that, by itself, changes the medium to long term outcome of the country. This is simply a new loan that will be required to be paid back and doesn’t change the fact that the Spanish government is still attempting to deleverage while the private sector does the same in the absence of a true floating currency or an offsetting current account surplus. Supposedly these loans will give the Spanish banks the ability to re-capitalise and begin lending again, but this seems fanciful. This is the same story we heard the ECB when the 3 year LTRO was announced and it completely ignores the fact that even if the banks were capable of lending no one wants the debt. The Spanish unemployment rate is nearly 25% and by the government’s own admission the economy is going to get worse over the next year. It defies all logic that anyone expects the private sector to have renewed vigour for credit under these circumstances even if the banks were in a state to grant it.

A Bigger Bailout Awaits, by Tim Duy: The half-life of European bailouts is getting shorter and shorter, which should come as no surprise in these kinds of repeated games. The announced Spanish bank bailout triggered some early euphoria in financial markets which at the moment is quickly fading. Why? I suspect that market participants fear the bank bailout is simply a precursor to a much bigger bailout of Spanish government debt, a bailout that will involve some sizable private sector involvement. One of the most telling stories is this from the FT:Spain’s Treasury on Monday vowed to continue as normal with sovereign bond auctions, arguing that the eurozone’s weekend agreement on a €100bn bailout for Spanish banks would underpin the country’s debt market. Spain desperately needs to be able to finance at lower bond yields - the fiscal situation simply is not sustainable at interest rates currently north of 6%. They can't close deficits fast enough at those yields. Moreover, the ECB for all intents and purposes is out of the game. Not only do they feel honor bound to avoid anything that looks like the direct financing of national deficits, but they have likely run out of patience. Recall ECB President Mario Draghi's comments in May: In a damning indictment of Spain’s handling of the problems at Bankia, its third largest lender, ECB president Mario Draghi said national supervisors had repeatedly underestimated the amount a rescue would cost. “There is a first assessment, then a second, a third, a fourth,” Mr Draghi said. “This is the worst possible way of doing things. Everyone ends up doing the right thing, but at the highest cost.”

Europe Solves A Debt Problem With More Debt --  NPR: The Spanish government has been borrowing tons of money from its banks, largely because foreign lenders are unwilling to lend the government money. Spain's banks, struggling as the country's real estate bubble bursts, have been borrowing money back from the government. We learned this weekend that Spain will borrow up to $125 billion from Europe's bailout fund to keep its banks from collapsing. This may help interrupt the cycle of borrowing within Spain. But it's unclear if this can help Spain in the long run. The biggest question surrounding the money is the one that's been part of European bailouts for well over a year now: Can you solve a debt problem with more debt? Under European rules, the money Spain is borrowing will likely be the first money it has to pay back. That may make other international lenders even more wary of lending money to Spain.

Moody’s Zandi Gives Spain ‘Fighting Chance’ to Avoid Sovereign Bailout - Spain has a “fighting chance” to avoid a sovereign bailout with the banking rescue negotiated over the weekend, according to Mark Zandi, chief economist of Moody’s Analytics. “I think they have at least even odds of doing that – of stabilizing the economy and avoiding a bailout,” Zandi said in an interview on the sidelines of an annual economic conference in Montreal. The economist said the rescue of Spain’s banking system is also a “partial road map for trying to help the Italian banks and other banks in Europe as well.” Mr. Zandi said that, although Italy’s economy is also struggling, its borrowing needs are much lower and its private sector is in good shape in terms of debt. “I think Italy has better-than-even odds of making their way through this without stumbling,” he said.

Finland Trying to Dictate Terms of Spanish Bank Bailout: “No Funds to Bad Banks” - Yves Smith - The Finland effort to dictate terms to the Spanish bank bailout may well turn out to be noise, but it is yet another indicator that despite the general optimism about a rescue, there are a lot of details to be nailed down. In addition, as we have pointed out, some of the pieces that do seem to be in place, such as having the bailout money be an obligation of Spain, are contrary to the objective of reducing Spain’s borrowing costs.As Bloomberg reports: Finland doesn’t want any of Spain’s bailout to prop up unhealthy lenders and expects some troubled banks to be split up as the northernmost euro member outlines the conditions it understands are attached to the rescue deal agreed on June 9. “The unhealthy banks should be brought down or some banks should be possible to chop up” so that the healthy parts continue and the rest ends in a so-called bad bank, Finnish Prime MinisterJyrki Katainensaid in an interview in Norway today. “There must be a possibility to restructure the banking sector because it doesn’t make sense to recapitalize banks which are not capable of running.” This may sound appealing on the surface, but it isn’t anywhere near that cut and dried. Earth to Finland, when you set up a good bank/bad bank structure, you ALSO need to fund the bad bank. This was a huge bone of contention in the US savings and loan crisis. Congress was very unhappy at having little choice but to fund the Resolution Trust Corporation, which required working capital (mainly funding of the assets of the bad bank) of $50 billion. One of the results was that Congress pressured the RTC to wind up sooner rather than later, and some analysts have argued that forcing the RTC to sell off some of its assets faster resulted in worse prices for the taxpayer.

In spite of the bailout of Spain's banks, periphery redenomination risks loom - The media is putting a great deal of emphasis on the EU-arranged Spanish bank rescue (discussed here), which will clearly provide Spain some much needed relief. But it's important to step back and look at the larger problem the Eurozone will still have to confront going forward. Here is a sobering assessment from Antonio Garcia Pascual of Barclays Capital:  Overall, the financial assistance by the EFSF/ESM to recapitalise Spanish banks is likely to be a net positive for Spain: the strict conditionality to complete the bank clean-up, including restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector, should help restore credibility and transparency; it should also help alleviate funding pressures. However, the problem confronting Spain, and the rest of the periphery, is bigger. While the completion of bank recapitalisation processes is welcome, the solution to the crisis also requires the euro area/core to make explicit decisions and strong commitments to the periphery, especially after the PSI exercise and the open discussion of a Greek exit. In fact, should market events accelerate the ongoing capital reversal (and a Greek exit remains a material contagion risk), given the contagion to other weak economies (eg, Italy has been trading at a spread versus Spain of c.30-70bp for 10y bonds), it would be unlikely that the financial assistance could be circumscribed to the banks only or even to Spain alone. And for that, there are no sufficient rescue funds readily available (ie, for multi-year full-fledged programmes for Spain and, depending on contagion dynamics, for Italy as well).

Europe: A Thousand Miles Behind - Production and exports are plummeting in Italy, Holland, Finland, Germany, just about anywhere; in China, production growth falls sharply. But your "leaders" will keep on talking about restoring growth, recovery etc. Spain will - secretly - ask for some $200-300 billion in bank bail-outs on Saturday (and get much less, the Wall Street Journal reports it will be €125), and 24 hours later play its first game in the Euro Cup, for which it's the great favorite. The potential Spain bailout will need to be financed through EFSF bonds. The IMF has stated that the banks will need €40 billion, but that number looks ridiculously low. €40 billion every week over the entire summer sounds more like it. Ambrose Evans-Pritchard quotes a few voices:  Is a Spanish bail-out viable? Megan Greene, from Roubini Global Economics, says Spain's banks will need up to €250bn - a claim that no longer looks extreme. New troubles are emerging daily. The Bank of Spain said yesterday that Catalunya Caixa and Novagalicia will need a total of €9bn in new state funds. JP Morgan is expecting the final package for Spain to rise above €350bn, while RBS says the rescue will "morph" into a full-blown rescue of €370bn to €450bn over time - by far the largest in world history. But then there's always that nasty and inconvenient question: "Where is the money going to come from?" asked Simon Derrick, from BNY Mellon. "Half-measures are not going to work at this stage and it is not clear that the funding is available."

Joseph Stiglitz: Spain Bank Bailout 'Not Going To Work': (Reuters) - Europe's plan to lend money to Spain to heal some of its banks may not work because the government and the country's lenders will in effect be propping each other up, Nobel Prize-winning economist Joseph Stiglitz said. "The system ... is the Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government," Stiglitz said in an interview. The plan to lend Spain up to 100 billion euros ($125 billion), agreed on Saturday by euro zone finance ministers, was bigger than most estimates of the needs of Spanish banks that have been hit by the bursting of a real estate bubble, recession and mass unemployment. If requested in full by Madrid, the bailout would add another 10 percent to Spain's debt-to-gross domestic product ratio, which was already expected to hit nearly 80 percent at the end of 2012, up from 68.5 at the end of 2011. That could make it harder and more expensive for the government to sell bonds to international investors. With Spanish banks, including the Bank of Spain, the main buyers of new Spanish debt in 2011 - according to a report by the Spanish central bank - the risk is that the government may have to ask for help from the same institutions that it is now planning to help. "It's voodoo economics," Stiglitz said

Spain bank rescue glee morphs into markets rout - Euphoria over a lifeline of up to €100 billion ($125 billion) to rescue Spain‘s hurting banks morphed into a financial markets rout in a matter of hours Monday, as investors digested the still-undefined plan and became concerned the country may be unable to repay the new loans. The rate on Spanish 10-year bonds — a measure of market trust in a country’s ability to repay debt — rose to an alarmingly high yield of 6.47 percent at the close of trading after falling to 6 percent in the morning. Overshadowing Spain’s acceptance over the weekend of a bailout for banks burdened by toxic property assets and loans are Greek elections next weekend and concerns that the anti-bailout left-wing party Syriza could become the largest party in parliament, putting the country’s membership in the zone at risk.Investors also zeroed in on Italy, sending its bond yields sharply higher amid worries it could be next in line for a bailout because of a deepening recession and increasing pressure on the administration of Premier Mario Monti. And Spain’s economy is in terrible shape with no sign of improvement anytime soon.

Vital Signs: No Relief for Spanish Bond Yields - Spanish bond yields are on the rise. The weekend news of a planned bank bailout led to a brief recovery in Spanish government debt on Monday morning. But the rally fizzled within hours and the yield on Spain’s 10-year government bonds ended the day up 0.28 percentage point at 6.52%, close to their May peak. Bond yields rise when their prices fall.

More like fail-out - I THINK it's safe to conclude that markets were hoping for a somewhat different response to Spanish banking troubles than what they got. Spanish yields continued to climb today. The 10-year yield touched record highs this morning, and the 2-year yield, while well below November's frightening highs, marched steadily upward. Perhaps more troubling, contagion was back in full effect. The 10-year Italian yield is firmly above 6% once again. Yields on both short- and long-term government debt are rising around the euro area, including, strikingly, in Germany.  Concern may stem from the potential fiscal burden of bail-outs. The Spanish bank rescue, recall, consists of a plan to lend the Spanish sovereign money, adding to its debt burden and potentially pushing private creditors farther down the payment priority list. With Italy's banks also teetering, markets may be growing worried that the list of countries in need of saving may soon outpace the list of "safe" countries. Unless the central bank is clearly standing as lender-of-last-resort behind bank and sovereign guarantees, a fiscal death spiral could result.

Could Spain’s bank bailout trigger its CDS? - Matt Levine has an excellent post on the latest storm in a CDS teacup, which has been prompted by Europe’s bailout of Spanish banks. If you feel any need to follow this kind of thing at all, here’s basically what you need to know. Firstly, this bailout is going to add a good €100 billion or so to Spain’s national debt, over and above its existing bonds. That in and of itself makes Spain less creditworthy: the more debt you have, the lower the chances are that you’re going to be able to pay it all back. More worryingly, for holders of Spain’s national debt, this new bank-bailout debt (which is owed by the country of Spain, remember, since the money isn’t going directly to the banks) carries something known as preferred creditor status. That means that if push comes to shove, Spain will repay the bailout debt before repaying any of its bonds. To take a simplified example: if Spain has €100 billion in bailout debt due and another €200 billion in bond payments due, and only has €150 billion on hand, then an equitable treatment would be to ask each of its creditors to take a 50% haircut. But with preferred creditor status, Europe will get its €100 billion back in full, and bondholders would have to take a 75% haircut. So holding Spanish bonds just became significantly riskier, this weekend.

Spain’s Blood Wedding, Ireland’s Muted Rage, Europe’s tragedy - Today, we have another Bodas de Sangre in the making. A postmodern version. All of the tragedy’s elements are here, except for the splendid prose and poetry of a Lorka. Instead, we have inanities from Mr Rajoy, from Brussels and from Frankfurt. Spain’s pain is not novel. It is a carbon copy of Ireland’s. A period of ponzi growth was occasioned by money-capital fleeing the metropoles of financialised capitalism, toward places like Spain and Ireland, in search of higher returns. It found its lucrative returns in a bubble created in the real estate business, aided and abetted by local banks, developers, politicians. Then, Wall Street came crashing down, capital fled (as is its wont at times of financial implosion) and the losses of the banks were passed on to states (the Spanish and Irish governments) which had been, interestingly, running a very tight ship for some time before the Crash. The change in political personnel made little difference. No state, however tightly or austerely is run, can survive (a) once mountains of losses are deposited on it, and (b) when it has no Central Bank of its own to help it remain afloat. Just like Ireland’s government almost two years ago, so Spain’s now went through the same emotional cycle. First, they refused to accept that the state and the ‘national’ banks were embraced in deadly embrace that condemned both to insolvency. Denial caused angry rejections of the notion that the country would seek EU assistance. However, frustration was bound to follow the realisation that no other avenue was open to them. And, lastly, the bailout was announced in almost triumphant terms – as the road to national recovery and a demonstration of the wonders of European solidarity.

Ireland Pursues Debt Gain From Spain’s Banking Pain - Spain’s difficulty may be Ireland’s opportunity. Spanish Prime Minister Mariano Rajoy is seeking as much as 100 billion euros ($125 billion) to recapitalize his nation’s banks. Ireland, locked out of the bond market since 2010, says it may use any leeway won by Spain to seek partial restitution for the 63 billion euros it spent shoring up its financial system during the past three years. Ireland is “perversely hoping for a further worsening of the situation in other countries in a bid to progress its own cause,” After the European Central Bank told the government to save its banks in 2008, Ireland took over five of the six biggest domestic lenders. At the ECB’s behest, it’s also repaying senior bank bond holders. “We were first in the firing line,” Energy Minister Pat Rabbitte said on June 7. “In order to protect the European banking system, we took a huge hit. We want recognition for that.”

Here They Come: Ireland Demands Renegotiation Of Its Bailout Terms To Match Spain -  Well that didn't take long. The ink on the #Spailout is not dry yet (well technically there is no ink, because none of the actual details of the Spanish banking system rescue are even remotely known, and likely won't be because when it comes to answering where the money comes from there simply is no answer) and we already have an answer to one of our questions. Recall that mere hours ago we asked: "We also wonder how will Ireland feel knowing that it has to suffer under backbreaking austerity in exchange for Troika generosity, while Spain gets away scott free." We now know. From the AFP: "Ireland wants to renegotiate its rescue plan to benefit from the same treatment as Spain, which looks set to win a bailout for its banks without any broader economic reforms in return, European sources said on Saturday." And with Ireland on the renegotiation train, next comes Greece. Only with Greece the wheels for a bailout overhaul are already in motion and are called a "vote of Syriza on June 17." And remember how everyone was threatening the Greeks with the 10th circle of hell if they dare to renegotiate the memorandum? Well, Spain just showed that a condition-free bailout is an option. Which means Syriza will get all the votes it needs and then some with promises of a consequence free bailout renegotiation. In other words Syriza's Tsipras should send a bottle of the finest champagne to de Guindos - he just won him the election.

French Socialists on course to score absolute majority in parliament -The left has scored well in the first round of French parliamentary elections, leaving the Socialist party within reach of an absolute majority that would give François Hollande, the president, a free hand in his approach to dealing with the economic crisis. The Socialists need 289 out of the 577 seats in the national assembly to take an absolute majority in the final runoff on Sunday 17 June. First-round results show the Socialists are predicted to take between 275 and 315 seats, according to polling company TNS Sofres, and could make up the numbers with the backing of their electoral allies, the Greens. The first round vote results suggest that the broad left will dominate parliament. Early results and estimates showed the left in general taking 47%, the right 35% and the far-right Front National 13%.

Details of the Secret "Nannyplan" Emerge; Proposed Nannygroup Uniforms -EU nannycrats are marching forward with plans without regards to Germany or German constitutional issues.  The plan is dead on arrival because it includes eurobonds and other questionable items, but nannycrats do not care about such issues. List of Nannycrats Working on the Master Nannyplan:

  • European Union Commission President Jose Manuel Barroso 
  • European Council President Herman Van Rompuy 
  • Euro group head Jean-Claude Juncker 
  • European Central Bank President Mario Draghi 
Notably missing is anyone representing Germany although though the plans include eurobonds. Even if one ignores the eurobond issue, the nannyplan cannot possibly fly. I pieced together details from an article on Reuters: Europe works on new euro zone bond plan The original source is cited as Der Spiegel but as is typical in economic articles, no links to external sources are provided.

Vital Signs: Euro vs. Dollar - The dollar has climbed against the euro amid Europe’s troubles. One dollar buys around 80 euro cents, compared with roughly 74 cents in late February. The euro-zone crisis has sent investors out of risky investments and into the perceived safety of the American currency. A higher dollar, however, can hurt U.S. companies by making their exports cost more for overseas buyers.

Niall Ferguson is On a Roll - Niall Ferguson has jut published some great articles on the Eurozone crisis. They are a great place to  get up to speed on this important issue.  His first one with Nouriel Roubini starts as follows: We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.  We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent. Ferguson and Roubini go on to list both macropolicies and structural policies that would help the Eurozone.  Structural reforms are important since the Eurozone is a flawed currency union.  However, in order to make those structural changes the ECB needs to restore aggregate nominal spending to a more robust levels so that there can be enough time for such reforms. 

The ECB is Passively Tightening - Something that many observes miss about the Eurozone crisis is that by doing nothing the ECB is doing something: it is passively tightening monetary policy.  Total current Euro spending is falling, either through a endogenous fall in the money supply or through an unchecked decrease in velocity, and the ECB is failing to respond to it.  The impact of passive tightening is no different than that of an overt tightening of monetary policy. Currently it is tearing the Eurozone apart. Michael Darda sees this passive tightening by the ECB and is not impressed: European markets quickly ran out of steam today on news of a Spanish bank recapitalization over the weekend. Given the ongoing pressure on Spanish and Italian sovereign debt markets—and the correspondingly level of regional inflation expectations—the Spanish bank recapitalization is highly  unlikely to be enough to set the eurozone on  a more robust growth trajectory. Indeed, we do not believe additional EFSF/ESM measures will be effective unless they are coupled with a much more  accommodative ECB monetary policy (i.e., one that provides for faster euro-area nominal GDP growth). The key here is for the ECB to manage expectations properly. Closed-ended, ad hoc actions that are limited in scope are not likely to bear fruit, as increases in base money get  absorbed by  falling base velocity. A more open-ended and aggressive commitment to reflationary policies, however, would likely require the ECB to do less with its balance sheet, as market forces would help the ECB ease.

Bundesbank: the eurozone’s secret dictator - Perhaps it was foolhardy bravado provoked by French President Francois Hollande’s decision to side with the eurozone’s Latin bloc — a symbolic switch of allegiance following his predecessor ­Nicolas Sarkozy’s diehard ­solidarity with Germany. But, for whatever reason, over dinner in Brussels on May 23, Europe’s leaders raised the tantalising prospect for Spain of a rescue without a direct bail-out. Its crippled banks, they suggested, could be recapitalised from pooled eurozone funds with no austerity strings attached. It was not to be. As early as this weekend , Spain was expected to apply for a formal European rescue. The money, as much as €100bn (£80.9bn), will be channelled through public finances and used to recapitalise the country’s stricken lenders. When the details of the bail-out are agreed, it will almost certainly be presented as generous to Spain and evidence of Germany’s unstinting support for the eurozone project. Spain is expected to be pledged the funds from the European Financial Stability Facility (EFSF) or the IMF’s precautionary credit line — set up to help the “innocent victims” of the euro crisis. Under the deal, Madrid will borrow the money to recapitalise its banks at a rate it would not be offered in the market. German Chancellor Angela Merkel may be the dominant force in the eurozone but the Bundesbank, Germany’s powerful central bank, is the power behind the throne.

Europe’s democracies must not subcontract their destiny to the Bundebank - Europe has lit the fuse on an economic and financial bomb. The rescue package for Spain cannot plausibly be contained to €100bn once it begins, given the subordination of private creditors and collapse of global confidence in the governing structure of monetary union. Italy must guarantee 22pc of the bail-out funds, even though it cannot raise money itself at a sustainable rate. You could hardly design a surer way to pull Italy into the fire. Citigroup warned over the weekend that Italy’s economy will shrink by 2.5pc this year and another 2pc next year as the fiscal squeeze starts in earnest, with grim implications for debt dynamics. Public debt will jump from 121pc of GDP to 137pc by 2014. “The situation could rapidly become critical, because the country is highly vulnerable if the sovereign debt crisis persists or intensifies. A significant further rise in yields would deepen and extend the recession and accelerate the rise in the debt/GDP ratio, triggering a worsening vicious circle. We expect that Italy will have to request help,” it said. The world is uncomfortably close to a 1931 moment. Italy’s public debt is the world’s third largest after the US and Japan at €1.9 trillion. There is no margin for political error.

Germany, Not Greece, Should Exit the Euro - All the debate about the pros and cons of a Greek exit from the euro area is missing the point: A German exit might be better for all concerned.  Unless Europe’s leaders take some kind of radical action, such as adopting and executing some of the many reform ideas they have floated, the currency union is headed for disintegration.  The problems of Greece, Ireland and Portugal have spread to Spain, the fourth-largest economy in the euro area. Italy is probably next. The other members of the currency union can’t afford to bail them all out. Further loans will serve only to exacerbate the fundamental problem of too much debt and add to the growing enmity between the strong northern tier and its wards to the south. Without healthy economic growth -- and Europe is now back in a recession -- multiple countries will have to restructure their sovereign debts. Greece’s agonizing two-year restructuring experience suggests that doing several more would be extraordinarily difficult, if not impossible.  A Greek exit from the currency union would make the situation even worse. There is no mechanism to decide, or deal with, whichever nation might be next, and even that presumes that exits could be managed. The more terrifying prospect is that the other afflicted countries might exit in an uncontrollable panic, complete with bank runs, failures and general disarray. The accompanying repudiation of hundreds of billions of euros in debt would overstrain the European financial system, even Germany’s. The global economy would be paralyzed as everyone wondered which domino would be next to fall.

Merkel Says Will Campaign for Financial Transaction Tax - - German Chancellor Angela Merkel said on Monday she would campaign for a financial transaction tax, addressing concerns in the centre-left opposition that her government was only using the issue as a way to get euro crisis legislation through parliament.  "The federal government, as agreed with the opposition, will campaign for (a financial transaction tax)," Merkel said, adding that Germany needed both functioning banks and justice in the financial sector.  German weekly Der Spiegel reported on Sunday that Merkel's Chief of Staff, Ronald Pofalla, had said such a tax would not get passed in the current legislative period so the centre-right coalition could support the idea in principle knowing it would not have to act on it anytime soon.

Smaller companies heading to Bulgaria in droves - Thousands of small and medium-sized businesses (SMEs) are looking for the road to financial recovery in Bulgaria. Even though the trend of Greek businesses relocating to the neighboring country had already begun before the crisis, in the past few months there has been a fresh spurt of interest, taking the total number that have moved there to 6,000. “The first wave of Greek companies moving their headquarters to Bulgaria came in 2006, when it became a member of the European Union, and they were mostly large construction and textile firms,” Alexandros Adamidis, a lawyer who heads a company that specializes in such transfers, told Kathimerini. In contrast to the widespread belief that those first businesses moved in order to reduce operating costs, Adamidis said their motives were more about increasing profits, with Greek construction firms today leading the market for big infrastructure projects in Bulgaria. In 2008, the list of businesses relocating to Bulgaria grew with the addition of services, e-commerce and manufacturing. In January of that same year, when the global financial crisis exploded, plastics factories, photovoltaic panel producers, telecoms, medical equipment manufacturers, printers, security systems operators, food manufacturers and even film production companies began joining the club of emigres.

Greek Blackouts Risked as Power Companies’ Cash Runs Out: Energy - Greece faces the threat of rolling power blackouts as the economic crisis leaves utilities without cash to pay for natural-gas imports and operate power stations. Regulators will meet with Greece’s power market operator as early as today to discuss an emergency loan of 300 million euros ($375 million) to cover payments for gas imports from Russia’s OAO Gazprom (GAZP), Turkey’s Botas AS and Italy’s Eni SpA. (ENI) The country’s largest power producer is almost out of money and likely to default after unpaid accounts jumped more than 50 percent in a year, according to Standard & Poor’s. As Greece prepares for a second national election in six weeks, a vote that may determine whether it remains in the euro, the collapse of the energy sector has emerged as a risk for a country that imports most of its oil and gas. At the start of the main vacation season, power cuts that leave tourists trapped in dark hotels without air conditioning would be a further blow to an economy in its fifth year of recession. “Blackout is definitely a risk,” “Greece is going to face higher costs because suppliers will want to have better creditor protection. And if the country cannot pay the bill, well, it’s a real problem.”

Exclusive: Euro zone discussed capital controls if Greek exits euro: sources (Reuters) - European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro. EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area. But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said. The discussions have taken place in conference calls over the past six weeks, as concerns have grown that a radical-left coalition, SYRIZA, may win the second election, increasing the risk that Greece could renege on its EU/IMF bailout and therefore move closer to abandoning the currency

CNBC graphic of the day, Greek bond yield edition - Martin Wolf appeared on CNBC today, which is never a good idea. Between all the swishing noises and flashing graphics, it was pretty hard to understand what he was saying — and in any case, the questions from Andrew Ross Sorkin were generally of the form “tell me what’s going to happen in the future”, rather than “analyze what we know about the present”.. Wolf is a fascinating and erudite man, and I’ve never had a conversation with him where I didn’t learn a lot. But maybe if I asked him that kind of question, it could be possible for me to walk away none the wiser about anything.  But CNBC is a place for heat rather than light, so instead of an interesting conversation between two smart journalists, we got shown the graphic above, twice. It purports to show a real-time quote for the Greek 2-year bond, which currently seems to be yielding 349.152%. According to the chart, the yield on this instrument has been rising steadily until now: there’s no indication that there was even a dip after the bond restructuring in –  But the chart stops in March, when the restructuring took place and the Greek 2-year bond ceased to exist. No wonder the yield is “unch”! CNBC has more than its fair share of meaningless graphics, but this one is especially stupid: it’s a chart of an instrument which ceased to exist three months ago, showing what the yield on that instrument did in the run-up to its default.

Greek elections decision tree - Here is a thorough overview of the various scenarios in the upcoming Greek elections. This also shows that the situation in Spain can not be divorced from the Greek outcome.  Source: Barclays Capital

In Europe, Banks Borrowing to Stay Ahead of the Tide — As Europe works to prop up Spain’s wobbling banks, its leaders still face a problem that plagues the Continent’s increasingly vulnerable financial institutions — a longstanding addiction to the borrowed money that provides the day-to-day financing they need to survive. The weakness afflicts banking systems including that of Italy, whose fragile economy is even bigger than Spain’s and whose banks also rely heavily on borrowed money to get by. In Spain’s case, the flight of foreign money to safer harbors, combined with a portfolio of real estate loans that has deteriorated along with the economy, led to the collapse of Bankia, the mortgage lender whose failure set in motion the country’s current banking crisis. Europe hopes that this latest bailout — worth up to 100 billion euros that will be distributed to Spain’s weakest banks via the government in the form of loans, adding to their long-term debt — can resolve the problem. Financial markets were once again on edge, with analysts cautiously welcoming the stopgap development, while leery about whether the bailout would hurt or help Spain’s borrowing costs and whether the coming Greek elections would inflame the markets.

Bank Holiday Reported – In Italy - This release is from May 31, 2012 from Banca Network (BNI) in Italy. The suspension of payment of liabilities is for a period of one month. This bank is now reported to be closed for a bank holiday and clients are not able to access their accounts. When will the diversions stop and the real economic news be reported?

Italy Enters Crisis Crosshairs as Spain Bailout Rally Fizzles -- The 100 billion-euro ($126 billion) rescue for Spain's banks moved Italy to the frontline of Europe's debt crisis as an initial rally in the country's bonds fizzled on concern it may be the next to succumb. Italy's 10-year bonds reversed early gains today in the first trading after the Spanish bailout and declined for a fourth day, sending the yield up 7 basis points to 5.84 percent. "The scrutiny of Italy is high and certainly will not dissipate after the deal with Spain," "This bailout does not mean that Italy will be under attack, but it means that investors will pay attention to every bit of information before deciding to buy or to sell Italian bonds." Italy has 2 trillion euros of debt, more as a share of its economy than any advanced nation after Greece and Japan. The Treasury has to sell more than 35 billion euros of bonds and bills per month -- more than the annual output of each of the three smallest euro members, Cyprus, Estonia

The Italian economy is sliding - Rebecca Wilder - Today I.Stat released the breakdown of Q1 2012 real GDP for the Italian economy. Weak external demand plus a precipitous drop in private sector spending dragged the headline real gross domestic product (GDP) 0.8% over the quarter (3.2% at an annualized rate). The highlights are the following:

  • Gross fixed capital formation (investment net of inventory formation) fell 3.6% over the quarter, or 13.7% at an annualized rate. This was the fastest quarterly rate of decline since Q1 2009 when GFCF fell 5% over the quarter.
  • Private consumption dropped 1.0% over the quarter, or 3.9% at an annualized rate
  • Imports fell 3.6%, or 13.6% at an annualized rate
  • Exports fell 0.6%, or 2.2% at an annualized rate
  • The only positive contribution to domestic spending was government consumption, which increased 0.4% over the quarter, or 1.4% at an annualized rate.

Eurozone Crisis: Italian Economy Confirmed In Deep Recession: - Official statistics confirm that Italy's economy contracted by a quarterly rate of 0.8 per cent in the first three months of the year, the worst contraction in three years. The painful recession keeps pressure on Premier Mario Monti's government, which is struggling to fend off the debt crisis and the perception that Italy could be next to seek a bailout following Spain's decision over the weekend to ask for help for its ailing banks. The ISTAT statistics agency says the contraction is the worst since the first quarter of 2009, when the economy contracted by 3.5 per cent. ISTAT forecasts that the Italian economy will contract by 1.3 per cent this year, slightly more than the government's estimate of 1.2 per cent.

Italian Paradox: Italy is Borrowing money at 4-5% to Lend to Spain at 3%; Official Denials From Italy That Italy is Next - Sovereign bond yields in Spain and Italy have been climbing across the board, not just the longer durations. Please consider Italy pays dearly to issue one-year debt Italy sold €6.5bn of one-year debt at the highest cost since December, underscoring how one of the world’s biggest bond markets has been dragged back into Europe’s debt crisis. The 364-day bills were priced to yield 3.972 per cent, but the bid-to-cover ratio fell to 1.73 from 1.79. At the last auction of similarly dated debt Rome’s Treasury only paid 2.34 per cent, according to Bloomberg.  Italy’s prime minister Mario Monti "forcefully denied" Italy would be next in line to seek a eurozone bailout.  Monti said comments by Austria’s finance minister that Italy was at risk of needing a rescue were “inappropriate”. Yield charts from Bloomberg seldom if ever match the posted yield. In this case, at the time of capture, Bloomberg show a yield of 4.72%, up 19 basis points. Italy is Borrowing money at 4-5% to Lend to Spain at 3% (assuming borrowing is at short end of the curve)

Italian Bonds Back In The Crosshairs - 10Y Italian bond spreads are surging wider intraday as it appears Europe's bond vigilantes (otherwise known as portfolio managers executing some level of due diligence to cover their fiduciary duty) have rotated their attention to Italy. After a few days in a row of Italian bank stock halts, the implicit LTRO-driven relationship between banks and sovereign is snapping 10Y yields above their Aug 2011 crisis peaks - at almost 5 month highs. A 20bps jump from the intraday lows this morning in spreads, underperforming any other European sovereign, seems to reflect our earlier concerns of Italy's lifeline running short. 5Y CDS are also pushing higher - near record wides but do not forget Spain which is also now legging higher in yield and wider in spread after some relief earlier in the day.

Mohamed A. El-Erian: Spain Shows Policymakers Are Running Out of Time: Monday's disappointing market reception to the bailout package for Spanish banks is a reminder to European policymakers of something that is more than familiar to veteran sovereign crisis managers in emerging countries: The greater the erosion of policymaking credibility, the harder it is to get the private sector to buy into your plans. As a result, rather than crowd in private capital, seemingly bold policy measures end up facilitating its exit. The answer is not to do less but, rather, to be more comprehensive and coherent in what you do. On paper, the Spanish package seemed impressive. Specified at up to 100 billion euros, it was notably larger than the range of estimates of the hole in Spanish banks (40 - 90 billion euros, with the IMF coming out on the low side). . And, through its design, it sought to avoid some of the features that have turned the other three bailout countries into quasi-permanent wards of the European state (Greece, Ireland, and Portugal). After an initial welcome, markets comprehensively dismissed the Spanish bank rescue as insufficient and poorly designed. Most worrisome of all, the yield and risk spreads on Spanish sovereign bonds ended Monday higher than before the announcement of yet another costly bank bailout. In addition to increasing -- rather than lowering the cost of borrowing -- this sent a very negative message about policy effectiveness. And, to make things worse, other vulnerable and potentially-vulnerable European sovereign bonds were negatively impacted.

Fitch Managing Director Says Spain Will Miss Budget-Deficit Targets By "Substantial Margin"; Yields in Spain and Italy Soar; Spanish 10-Year Yield Hits Record High 6.83% - The selloff on Spanish and Italian bonds continued today with yields in Spain hitting euro-era record highs. On the deficit side of matters, I do not believe Spain will meet its budget-deficit targets, and neither does Fitch. Fitch Managing Director Ed Parker said Spanish Prime Minister Mariano Rajoy will miss budget-deficit targets this year “by a substantial margin.” according to a Bloomberg report. The previous euro-era 10-year Spanish Bond Yield high-water mark was 6.7%. That record was shattered today with a rise to 6.83%, closing at 6.7%, right at the previous high. The yield closed up 20 basis points (.2 percentage points). 10-Year bonds in Italy were hammered as well, with the yield climbing as high as 6.3% before settling at 6.17%, up 14 basis points. Yesterday, on news of a Spanish bailout, stocks and bonds gapped up (yields down). The yield on the 10-year Spanish bond dropped as low as 6.01%, but the selling began immediately.

Spain Bailout Terms: 100 Billion Euros for 15 Years at 3% Interest, No Payment for 5 Years; How to Pay it Back? Hike VAT on Consumers - According to a Google Translate from Libre Mercado, Spain will receive €100 billion for 15 years at 3% interest with no payment due for 5 years. How will Spain pay for this?By sticking it to taxpayers, that's how. Pressure on Spain from Brussels to hike the VAT is intensifying according to a second article on Libre Mercado. Don't worry, tax hikes will be done "very carefully so that social needs are met". Expect an announcement by June 30. Can someone tell me why taxpayers are responsible for banks making stupid loans?  Other than platitudes like "socialize the losses, privatize the gains" there is no answer or excuse. Yet it happens nearly every time (until voters finally tell bankers to go to hell). Hopefully that is the message this Sunday in Greece.

Victory claims fade as Spanish mood darkens - Rarely has a declaration of victory been so short-lived. It was only on Sunday that Mariano Rajoy, Spanish prime minister, was boasting that an EU agreement to provide up to €100bn in aid for his country’s banks was a triumph that had averted a full-scale bailout of Spain. Even the next day, many bond market investors and analysts were sceptical of Mr Rajoy’s claims. But by Thursday, the mood was gloomier still, and most were convinced that Spain – like Greece, Ireland and Portugal before it – would need a rescue programme run by the EU and the International Monetary Fund. Spain’s fragile hopes of a reprieve from the sovereign bond markets had been shattered by confusion over which EU body would provide funds for the bank bailout – were it to be the European Stability Mechanism, it would have precedence over other creditors – and a sovereign downgrade on Wednesday from Moody’s, the credit rating agency, that left Spanish bonds just above “junk” status.On Thursday, the country’s 10-year bond yield rose sharply and briefly topped 7 per cent, a level considered to have triggered the bailouts of the other three eurozone economies. “Spain will need a full bailout. Italy will need a bailout as well,” said Edward Hugh, the Barcelona-based economist who has monitored the spreading debt crisis in the eurozone over the past four years.

Why Spain’s Big Bank Bailout Is Really a Big Bust - EU Commissioner Olli Rehn called the bailout “a very clear signal to the market, to the public that the euro area is ready to take decisive action in order to calm down market turbulence.” But the decision barely registered on the sentiment meter. By Monday afternoon, the yields on Spanish bonds – a measure of how risky investors perceive them to be – were again on the rise. By Tuesday, they were spiking towards the 7% level at which other euro-zone countries were forced to seek a rescue, putting more pressure on the government in Madrid. What went wrong? The usual charge – that Europe’s leaders responded too feebly – can’t necessarily be leveled this time. The promised funds for Spain’s banks exceed some estimates of what the sector might actually require in new capital. In a recent report, the International Monetary Fund, which called the Spanish banking crisis “unprecedented in its modern history,” estimated that the banks will require some $46 billion in fresh capital. But the problem starts with how the bailout will be implemented. Rather than inject money from the euro zone’s bailout fund directly into Spanish banks, the E.U. rescue will take the form of loans funneled through Spain’s government bank repair vehicle, called the Fund for Orderly Bank Restructuring, or Frob, which will then use that financing to recapitalize the banks. That means the Spanish government will ultimately be on the hook for paying the bailout loans back.

Don’t worry about Target2 - Moody’s just slashed Spain’s credit rating three notches — a clear sign that the bank bailout, even though it hasn’t happened yet, is being seen in the markets as decidedly deleterious for Spain’s creditworthiness. Spain’s 10-year bond yield is now 6.75%, up from less than 5% in early March, and approaching the levels at which market access shuts down entirely. Worries over the future of the euro are back — and, like clockwork, whenever those worries appear, people start talking about Target2. Last week, George Soros warned about the “the Bundesbank’s claims against peripheral countries’ central banks within the Target2 clearing system”; today, in the NYT, Hans-Werner Sinn says that the Bundesbank is owed $874 billion in Target2 money by Europe’s periphery. “Should Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing, while the euro survives, Germany would lose $899 billion,” he writes. Meanwhile, in a recent report, Jonathan Carmel, of Carmel Asset Management, publishes this chart, with the explanation that “the Bundesbank has replaced the exposure to peripheral debt that the German banks reduced”; he explains that “periphery debt is now the Federal Republic of Germany’s problem”.

Full text: Moody’s downgrades Spain’s government bond rating to Baa3 from A3, on review for further downgrade - Moody’s Investors Service has today downgraded Spain’s government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade. Moody’s expects to conclude the review within a maximum timeframe of three months. The decision to downgrade the Kingdom of Spain’s rating reflects the following key factors:

  • 1. The Spanish government intends to borrow up to EUR100 billion from the European Financial Stability Facility (EFSF) or from its successor, the European Stability Mechanism (ESM), to recapitalise its banking system. This will further increase the country’s debt burden, which has risen dramatically since the onset of the financial crisis.
  • 2. The Spanish government has very limited financial market access, as evidenced both by its reliance on the EFSF or ESM for the recapitalisation funds and its growing dependence on its domestic banks as the primary purchasers of its new bond issues, who in turn obtain funding from the ECB.
  • 3. The Spanish economy’s continued weakness makes the government’s weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years.

Spain Borrowing Costs Soar After Moody’s Downgrade - Spain’s borrowing costs hit a high not seen since the country joined the euro in 1999 after a credit ratings agency downgraded the country’s ability to pay down its debt. The interest rate — or yield — on the country’s benchmark 10 years bonds rose to a record 6.89 percent in early trading Thursday, close to the level which many analysts believe is unsustainable in the long term and at which countries such as Greece, Ireland and Portugal have sought an international bailout. The ratings agency Moody’s downgraded Spain’s sovereign debt three notches from A3 to Baa3 Tuesday evening — just one notch above “junk status”. Moody’s said the downgrade was due to the offer from eurozone leaders of up to €100 billion to Spain to prop up its failing banking sector, which the ratings agency believes will add considerably to the government’s debt burden. This score will means that even fewer investors will buy Spanish debt as organizations such as pension funds are mandated not to invest in assets with such a low score.

Spanish 10-Year Bond Yield Hits 6.96%, a New Euro-Era High; 2-Year Bond Yield Hits 5.19% - A big selloff in Spanish government bonds is underway this morning at 3:15AM central. Conditions can change by the US equity market open, but the results are currently very ugly. At the time of this writing, the yield on 2-Year Spanish Bonds is 5.12% (up 20 basis points) having soared as high as 5.19% (at that time up a whopping 27 basis points). The yield on 10-Year Spanish Bonds is 6.96% (up 20 basis points), having hit a euro-era high of 6.90%. The European bond market is coming unglued fast. It will be interesting to see if ECB president Mario Draghi steps in, and with how much "firepower".

How Germans Botched the Spanish Bank Bailout - Europe’s latest initiative to subdue its financial crisis fell apart in less than a day.  European Union leaders thought the plan would impress the markets because the sum committed to support Spain’s banks, 100 billion euros ($125 billion), looked adequate -- bigger, in fact, than investors expected. The EU thought it was getting ahead of events for once.  It wasn’t. Mistakes in the deal’s design made the plan self-defeating. These errors are worth noting, because they lie at the core of the EU’s larger strategy.  The crucial thing is that the EU gave its support not directly to Spain’s banks but to Spain’s government, which would then lend it on. This had two fatal consequences. First, it added to Spain’s public debt, making its government less creditworthy. Second, depending on how the loans are structured -- a detail left vague as the rescue was announced -- Spain’s new debt to the EU might subordinate existing bondholders. Curbing the risk of a faster run on Spain’s banks was good, investors presumably calculated, but not good enough.

Eurozone industrial output falls sharply in April — Factory output in the eurozone fell sharply in April, official data revealed Wednesday, an early indication the 17-nation economy may shrink again later this year after it narrowly escaped recession in the first quarter. Industrial production fell in Spain and Portugal, two of the southern European countries engulfed in the region's debt crisis, as well as in Italy, which is fighting to reform its economy and avoid the need for outside help. But Germany, the region's industrial powerhouse, also saw production fall sharply, raising doubts about its ability to withstand the downturn affecting its weaker neighbors. Industrial production in the 17 nations that use the euro fell 0.8 percent month-to-month in April, the steepest fall in four months, after a 0.1 percent drop in March, statistics agency Eurostat said. That left overall industrial output at its weakest level since September 2010. Economists polled by Dow Jones last week expected a slightly steeper month-to-month fall in April, of one percent.

Euro Area ‘Hard Data’ Catching Up with the ‘Soft Data’ – Industrial Production

   - Rebecca Wilder - Euro area industrial production (ex construction) declined 0.8% in the month of April. Across the major sectors, the largest decline occurred in capital goods; however, the trend in consumer and intermediate goods is worse than that of capital goods. The regional divergence is clear, as the two-month trend in industrial production – I use the two month trend since this series is quite volatile month-to-month – is strongest in Luxembourg, Slovakia, Slovenia, and Ireland, and weakest in the Netherlands, Spain, Estonia, and Greece. Another way to look at the divergence is to plot German production against the rest of Europe. It’s evident that Germany, with its large 35% weight in this index, is propping up the average. German industrial production is 10% above 2005 levels, while the Euro area ex Germany’s industrial production is 8% below levels in 2005. That’s an 18 ppt divergence. Finally, a comparison to the US is illustrative. The US industrial sector is outperforming that in Europe, as production continues its positive trend with relatively easy fiscal and monetary policy accommodating the private sector’s desire to save. The US production base is 2% above that in 2005, while that in the euro area (including Germany) is 2% below

Contractionary Fiscal Contraction, Quantified: European Edition - From Deutsche Bank, “Fighting the Clock,” Fixed Income (May 2012) [not online], some estimates of changes in structural balances, multipliers, and output impacts: Note that these are multipliers for composites of transfers, taxes, and spending on goods and services. Multipliers for pure spending on goods and services (government consumption) would be larger. (Just an observation -- these are not guesses from ivory-tower bound academics, but from business sector economists.)A recent IMF working paper by Corsetti, Meier and Mueller notes: This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis.

Euro Area Inflation: A Very Slow Burn - Rebecca Wilder - Euro area consumer prices increased at a 2.4% annual pace in May, down 0.2 ppt from the 2.6% pace in April. Core inflation fell to 1.8% in May from 1.9% in April. Headline and core inflation peaked in the fourth quarter of 2011, and disinflation is underway. Euro area price inflation is burning out but at a very slow pace.The 0.6 ppt differential between headline and core inflation is explained by energy and unprocessed food prices. In May, the energy component in HICP (harmonized index of consumer prices) fell 1.4% over the month and posted a 7.3% pace compared to May 2011. Energy prices peaked in April 2012, but base effects will prop up headline inflation through early 2013 even if energy prices go unchanged over the near term. That means headline inflation could be sticky for some time above 2%. But core inflation is not. President Draghi often speaks of the upward pressure on inflation stemming from tax hikes across the various fiscal austerity programs. Stripping out the tax effects (this data is provided by Eurostat), the theoretical inflation rates in Portugal and Italy are 1.8ppt and 0.8ppt, respectively, below the headline rate. The downward pressure on inflation may quicken through next year, as the effects of VAT and various tax hikes wear off across the region…barring a miraculously robust economic recovery, of course.

€370bn of unsecured bank bonds mature before bail-in provisions kick in  - Eurozone banks have 5.5 years to convert their €370bn of unsecured debt into secured bonds. They certainly won't be able to roll most of that debt because the bail-in provisions are expected to kick in on 1-Jan-2018 when unsecured bonds will essentially carry "equity risk". Source: Barclays Capital (click to enlarge) As Barclays points out in a bail-in "equity would absorb losses first, followed by subordinated bondholders, then senior bondholders". Withing the next 5 years many banks who still have some unencumbered assets would move to covered bonds to refinance these notes. Interestingly, deposit guarantee programs (but not the guaranteed depositors) would be pari passu with senior unsecured creditors. That's why Germany (who has more than one deposit insurance program) is concerned about moving to a pan-Eurozone deposit guarantee program. If periphery banks fail, Germany would once again be on the hook.

Credit Suisse Explains "The Real Issue", And Why There Is Two Months Tops Until France Is In The Bulls Eye Credit Suisse's William Porter is strangely laconic and oddly brief in his latest issue of the European Credit Flash titled "The Real Issue": Recapitalization of the banks versus funding the sovereign is of course a semantic issue given the nature of the interplay. But it enables the attempted finesse we describe below. "Portugal cannot rescue Greece, Spain cannot rescue Portugal, Italy cannot rescue Spain (as is surely about to become all too abundantly clear), France cannot rescue Italy, but Germany can rescue France.” Or, the credit of the EFSF/ESM, if called upon to provide funds in large size, either calls upon the credit of Germany, or fails; i.e, it seems to us that it probably cannot fund to the extent needed to save the credit of one (and probably imminently two) countries that had hitherto been considered “too big so save” without joint and several guarantees. The issue can be finessed for a while by addressing the issues as bank issues and recapitalizing the banks by bond transfer. This hides from the (primary) market and is simply another manifestation of the “Sarko trade” given by the LTRO. That rally lasted four months. Given the market’s adaptive learning behaviour, we suspect that this finesse might last two. The eventual denouement should be flagged by symptoms of the failure of the credit of EFSF/ESM and/or France

A new form of European union - Martin Wolf - Here is the biggest question about the eurozone: can we envisage a set of reforms that are not only politically feasible and economically workable, but would let it prosper, as it is. If so, what might they be?  We already know that, as designed, the eurozone did not meet this test. Hence all the improvisation of today. The original design created huge imbalances. When the flow of finance dried up, these delivered a wave of financial and fiscal crises and a legacy of unaffordable debt. Furthermore, the forces driving those imbalances generated divergences in competitiveness. These also need to be redressed, as quickly as possible. In response, the eurozone has developed a strategy based on fiscal austerity and structural reform. In addition, the European System of Central Banks, as lender of last resort, and the International Monetary Fund and eurozone governments, via the temporary European Financial Stability Fund and, soon, the permanent European Stability Mechanism provide indirect financing for fragile economies and sovereigns. The $100bn proposed rescue of Spanish banks is the latest example of this strategy at work. It is unlikely to be the last. Will the strategy work? Probably not. If external deficits are to be reduced, domestic demand must shrink. If done too swiftly, this would raise unemployment, possibly enormously (see chart). In the long run, high unemployment, aided by market-oriented reforms, should drive down nominal wages. But this could take many years. Meanwhile, persistently weak economies mean a growing mountain of bad private debt, high fiscal deficits, rising public debt, high interest rates and extremely fragile financial systems.

German sovereign CDS widening is a troubling sign - The focus recently has all been on the Eurozone periphery, but signs of strained financial conditions are now showing up in German sovereign CDS. The spread has been steadily rising (as discussed here). This CDS widening has been taking place at the time when German bond yields have been falling. This divergence (bond/CDS basis) indicates that bond prices are driven by demand for "safe" paper in the euro area while German sovereign risks, visible in the CDS markets, are perceived to be increasing. Somewhat of a contradiction. But these have become common in the stressed environment we are in. One could presumably lock in this difference by shorting the 5-year government bond (by borrowing it in the repo market) and by selling the 5-year CDS against it. Assuming this position is held for 5 years, the trade will work. However until then the spread could widen even further if for example the 5-year yield goes to zero and/or the CDS widens. The mark to market volatility of this position could be substantial and the return on capital wouldn't be great because of the margin required (initial and variation) for shorting the CDS. That's why market participants are not all jumping into this "arbitrage" situation (also if the German CDS were about to trigger, there may not be a DC [ISDA committee] around to trigger it - but that's a topic for another discussion.)

Germany Can’t Fix the Euro Crisis - ALTHOUGH Europe may seem far away from the economic life of the average American, the fate of the euro zone weighs heavily on the United States economy. Pension funds have invested in bonds issued by southern European states, while banks and insurance companies have underwritten a sizable fraction of the credit-default swaps protecting investors against default. It’s no wonder, then, that President Obama is urging Germany to share in the debt of the euro zone’s southern nations. But in doing so, he and others overlook several critical facts. For one thing, such a bailout is illegal under the Maastricht Treaty, which governs the euro zone. Because the treaty is law in each member state, a bailout would be rejected by Germany’s Constitutional Court. Moreover, a bailout doesn’t make economic sense, and would likely make the situation worse. Such schemes violate the liability principle, one of the constituting principles of a market economy, which holds that it is the creditors’ responsibility to choose their debtors. If debtors cannot repay, creditors should bear the losses. If we give up the liability principle, the European market economy will lose its most important allocative virtue: the careful selection of investment opportunities by creditors. We would then waste part of the capital generated by the arduous savings of earlier generations. I am surprised that the president of the world’s most successful capitalist nation would overlook this.

Bundesbank warns on EU banking union - Germany’s Bundesbank has warned of possible risks from banking union in the EU, saying it would be tantamount to a back-door pooling of sovereign debt, unless accompanied by fiscal union that allowed control over national budgets. Sabine Lautenschläger, vice-president of the Bundesbank, said banking union could only work in tandem with fiscal union – meaning some common cross-border binding rules on how countries could set budgets. The “decisive question” of banking union was the “interplay between liability and control” because a crisis in one country’s banks could require financial help from taxpayers in other countries, Ms Lautenschläger said. “Whoever accepts liability also has to have a right to control, especially when it is potentially a question of very large sums as in the case of a banking crisis.” “The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.” Ms Lautenschläger also cast doubt on how quickly any banking union could be implemented, saying “comprehensive EU treaty changes” would be needed.

Bank Bonds vs German Intransigence - The fallout from the Spanish bank “bailout” continued overnight with Spanish yields moving back up and over their November 2011 euro area highs: Sovereign yields, however, are the outcome. The root cause of is a mix of enforced government austerity and collapsing housing bubble, and on the latter the news continues to get worse: The house prices fell by 11.1% yoy in May, which accumulates and a drop of 30.2% from their peak levels in December 2007, according to the Spanish Real Estate Market Index (IMIE) of Tinsa.It seems that the backfiring bailout it also dragging Italy back into the spotlight as we see the country’s yields also trending up again. That probably wasn’t helped by the Austrian finance minister’s latest comments on the country’s outlook:Raising the stakes in Europe’s debt crisis, Austria’s finance minister said Italy may need a financial rescue because of its high borrowing costs, drawing a furious rebuke on Tuesday from the Italian prime minister.But this wasn’t the only overnight stoush. As I mentioned a couple of times over the last few weeks Europe’s “fabulous 4″ (European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi, Eurogroup Chairman Jean-Claude Juncker and European Council President Herman Van Rompuy ) are supposedly working on grand plans for Europe to be presented at the next EU summit.

German Vote on ESM Fails; Still Not Ratified by Germany, Austria, Belgium, Estonia, Slovakia, Netherlands; Political Football Over Financial Transaction Tax - The Wall Street Journal reports European Economics Commissioner Olli Rehn expressed concern Monday that Germany, Austria, Belgium, Estonia, Slovakia, and the Netherlands were dragging their feet in ratifying the ESM. In the meantime, the Journal reports Spain May Tap EFSF. The article states "Power broker Germany has yet to complete the process but is expected to do so soon." That is a distinct downplay of what is really happening. In Germany, Chancellor Merkel does not have the votes to ratify the ESM. She needs help from opposition parties. Those opposition parties want a financial transaction tax before they will sign. Last Sunday German opposition fumed before fiscal pact talks: A media report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact.  Last week, the government and opposition parties agreed on the outlines of a transaction tax proposal. On Monday, further talks between senior party members are due to take place and Merkel wants these to form a basis for a final deal when party chiefs meet on Wednesday.Of course, Merkel responded she was really serious about financial transaction taxes as per this headline on Monday: Merkel strongly backs financial market tax

Marshall Auerback: Germany’s Constitutional Conundrum - Hans-Werner Sinn, president of Germany’s Ifo Institute and the director of the Center for Economic Studies at the University of Munich, has taken to the pages of the NY Times to explain why Berlin is balking on a further bailout for Europe. Amongst the points that Sinn makes against German sharing in the debt of the euro zone’s southern nations is a legal one:  For one thing, such a bailout is illegal under the Maastricht Treaty, which governs the euro zone. Because the treaty is law in each member state, a bailout would be rejected by Germany’s Constitutional Court. Sinn also argues that Germany’s counterparty credit exposure already exposes the country to immense credit risk: Should Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing, while the euro survives, Germany would lose $899 billion. Should the euro fail, Germany would lose over $1.35 trillion, more than 40 percent of its G.D.P. Sinn does raise a huge potential conundrum as far as Germany and its broader relationship to the Eurozone’s institutions go. In fact, recent German Constitutional Court rulings on bailouts could well blow apart the European Monetary Union. This is because the potential unlimited liabilities to which Germany is exposed under Target 2, the ELA, and various other lender of last resort facilities adopted by the European Central Bank do on the face of it run afoul of the court’s ruling, which argued that any future bailouts had to be limited and subject to the democratic consent of Germany’s Parliament. What happens, for example, if someone in Germany were to challenge the very legality of Target 2 on those grounds?

Any Rabbits Left in the Hat? - Inquiring minds are pouring over the ESM Treaty to see how it is supposed to work in theory, assuming it will be ratified by counties with the required 90% of EMU voting rights. Given that Spain is supposed to get €100 billion from the ESM, some might be surprised to learn ESM Still Not Ratified by Germany, Austria, Belgium, Estonia, Slovakia, Netherlands  Finland is missing from the above group. Finland has signed but not yet ratified the treaty and May Ask for Collateral for Spanish Banking Bailout Political football is holding up treaty ratification in Germany, with the opposition demanding a Financial Transaction Tax in return for passage. Assuming the treaty passes, please turn your attention to Article 41. ARTICLE 41 ... payment of paid-in shares of the amount initially subscribed by each ESM Member shall be made in five annual instalments of 20 % each of the total amount. The first instalment shall be paid by each ESM Member within fifteen days of the date of entry into force of this Treaty. The remaining four instalments shall each be payable on the first, second, third and fourth anniversary of the payment date of the first instalment.  Reader Brett who pointed out that provision writes ... The ESM total budget for 5 years is 700 billion euros. That means for 2012 the ESM will be able to contribute 140 billion euros. I have shown the breakdown by country (listed in Annex II) and amended another column to show their first contribution.

Debt crisis: Germany signals shift on €2.3 trillion redemption fund for Europe - The German government has begun opening the door to shared debts for the first time in a profound change of policy, agreeing to explore proposals for a €2.3 trillion (£1.9 trillion) stabilization fund in order to stop the eurozone’s crisis escalating out of control. Officials in Berlin say privately that Chancellor Angela Merkel is willing to drop her vehement opposition to plans for a “European Redemption Pact”, a “sinking fund” that would pay down excess sovereign debt in the eurozone. “It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month. Mrs Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse. Fast-moving events may have forced her hand. She is under immense pressure from the US, China, Britain, and Latin Europe to change course as the crisis engulfs Spain and Italy, threatening a global cataclysm.

Bundesbank: Policymakers Should Refrain From "Wild Goose Chase" of Higher Firewalls; Merkel Warns "Limited German Resources"; Sensationalist Silliness -  Several people asked me to comment on The Telegraph article Germany signals shift on €2.3 trillion redemption fund for Europe by Ambrose Evans-Pritchard.. The headline is nothing but sensationalist silliness. There is no shift, and even if there was a shift, it could not possibly come in time. “It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month. Mrs Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts. Fast-moving events may have forced her hand. The statement, not even from chancellor Merkel, warned there would be "no master plan", only that the idea was "conceivable". That alone proves such a shift, even if it was real, could not possibly come on time. This is what happened: "Fast-moving events" forced a meaningless statement out of an unnamed source in the Chancellor's office, hoping to calm the market. Simply put: There is no meaningful shift.

Bailout Rebellion Reawakens In Germany  - Josef Ackermann, Deutsche Bank’s CEO until a couple of weeks ago, who knows a thing or two about skeletons hidden in the bank’s vast closets, said at the Atlantic Council that he is “grateful the US is pushing Europe to act faster.” Just like his US counterparts on Wall Street in 2008, he wanted massive taxpayer-funded bailouts of the banks and exhorted the Eurozone to complete the latest bailout fund, the ESM, quickly. He pushed Chancellor Angela Merkel to permit banks to draw on these funds directly—though these funds were designed to bail out countries, not corporations. And the German parliament approved them on that basis. He had “no doubt” that the German people would support rescuing the Eurozone, he said, though he left unclear why he exempted, for example, the French or his own compatriots, the Swiss, who’re also suffering from the Eurozone’s woes. And he was confident that “everything would be done to bail out the Eurozone.” But the German people weren’t so sure about that—and started to demonstrate. So they were in the streets in Munich to express their opposition to what was being shoved down their throats. The demonstration was organized by Freie Wähler (Free Voters), an organization of voter groups with 19% of the seats in the Bavarian parliament. In addressing the crowd (video), their leader Hubert Aiwanger called for a “Europe of democracy” that would be “open to the world.” He was worried about the “future of our children,” a future where a “child, just after being born, is already liable for the bailout umbrella that great-aunt Merkel had signed.” Rousing applause.

“The Euro Is Like a Knife in the Hands of a Child”  - While France is preoccupied with the legislative elections next weekend, Germany and Austria plunge into intense public soul searching about the euro, its meaning, its relevancy, the sheer and endlessly growing expense of maintaining it. To which are now added the $125 billion for bailing out Spain, the first in a series as Greece and others have shown: the bailout to solve the problem once and for all proves insufficient and is followed by more bailouts. Spain won’t be an exception. And then there’s Italy. And yet, the German-language media scream about the expense of abandoning the euro. They call it the crazy option of returning to the D-Mark and warn of gigantic losses. But the very fact these discussions appear on the front pages of established newspapers moves the option a step closer to reality. Because, once the debate is opened up—and it’s a big can crammed with ugly worms—it’ll be difficult for governments to sweep all these worms under the rug and to revert to the con-game. “As it’s going at the moment, the monetary union cannot function long term,” affirmed German Bundesbank President Jens Weidmann on Sunday. He warned of the consequences of the break-up of the Eurozone, which would produce unpredictable and huge costs and risks. In the same breath, he cautioned that the threat of these costs and risks must not make Germany vulnerable to extortion.

IMF Reiterates No Plans to Fund Financing for Spain, Only Monitoring - The International Monetary Fund has no plans to provide any financing for Spain, only to take a monitoring role in a 100-billion-euro European bailout for the country’s banks, an IMF official reiterated Thursday.  But IMF spokesman Gerry Rice repeated that the fund believes Europe should use its emergency bailout funds to take direct stakes in ailing banks as opposed to lending to governments, which then uses the cash to recapitalize banks. Otherwise, Europe risks boosting governments debt burdens and pushing borrowing costs higher. The IMF’s point has been highlighted in recent days as Germany’s opposition to use euro funds for bank bailouts has fueled market concerns that Spain’s bailout will mean Madrid will be unable to pay its obligations, pushing its borrowing costs to unsustainable levels. Asked if Europe it’s facing its last chance to fix the crisis at two upcoming euro summits in June–as some economists believe– Mr. Rice said IMF Managing Director Christine Lagarde has repeatedly warned Europe of the urgency of prompt action on a comprehensive crisis plan. The IMF has said the E.U. needs to strengthen the capacity of its bailout funds, spur growth through looser monetary policy and tweaking budget-tightening plans, and creating a banking union.

Spain PM Calls for ECB Action: Spanish Prime Minister Mariano Rajoy urged Europe to deploy all available tools to combat market turbulence and put the blame for the handling of a banking-sector crisis on his political rivals as he parried criticism Wednesday over a EUR100 billion ($125 billion) rescue deal that is being questioned by lawmakers and investors. While he appeared in parliament to face aggressive questions from opposition-party lawmakers for the first time since he agreed to accept aid from the European Union to bail out the country's ailing banks, Mr. Rajoy mentioned the contents of a letter he sent to European leaders last week. In the letter, dated June 6 but released Wednesday, Mr. Rajoy said the euro zone "needs to use all the instruments at its disposal" to counter the volatility. "The only institution that has the capacity to ensure necessary stability and liquidity that's needed at present is the European Central Bank," he added. Mr. Rajoy defended the country's request for the external aid, a step he had long rejected as unnecessary, and he and his cabinet ministers blamed the previous Socialist Party government for failing to act swiftly in previous years to address the effects of the collapse of a housing bubble on the country's financial sector.ECB’s Weidmann: Must Resist Efforts to Expand Central Bank Mandate - The European Central Bank must resist calls to widen its mission of defending price stability, even against the backdrop of the escalating debt crisis ravaging the currency zone, ECB Governing Council member Jens Weidmann argued Thursday. Letting inflation rise wouldn’t solve the continent’s problems, said Weidmann, who also serves as president of the Deutsche Bundesbank, according to the text of a speech prepared for an event in Mannheim, Germany.

Fears rise over EU handling of debt crisis - Spain's borrowing costs hit a euro-era high on Tuesday amid sagging investor confidence that Europe can prevent its debt crisis from worsening and wrangling among policy makers over how to implement cross-border banking supervision. The yield on Spanish benchmark 10-year debt hit 6.8 per cent just days after eurozone finance ministers agreed a €100bn bailout package for the country's banks. The move was accompanied by rising bond yields in countries deemed less risky, such as Germany and the UK, where market interest rates have been at record lows."The crisis is deteriorating at an ever-increasing pace,"  "Investors are increasingly pricing in either of the two tail risks -- full eurozone break-up or fiscal union." Officials have insisted the EU has sufficient short-term mechanisms to deal with the crisis in the form of its rescue funds, while the debate over longer-term measures has shifted towards greater fiscal co-ordination and Europe-wide banking supervision. Angela Merkel, German chancellor, spoke out in support of European banking regulation, although she stopped short of backing a region-wide resolution scheme, which Berlin fears could burden the country with joint liability for other's debts."Germany -- and I can say this for the whole country -- is prepared to do more on integration but we cannot get involved in things which I am convinced will lead to an even bigger disaster than the situation we are in today," she said.

2012 Eurozone funding requirement by country - Here are the amounts of debt that the major Eurozone nations will need to issue this year. Let's put things in perspective. Spain's requirement for 2012 is to raise €35.5bn. With the new €100bn aid to the banking system, Spanish banks will have no trouble absorbing this debt. Even with higher haircut requirements due to the downgrades, Spain's banks will be able to finance a big portion of these bonds at the ECB.  Italy on the other hand will have a tougher time. At €120bn, the nation's requirement is the highest in the Eurozone. As Italy undergoes a severe recession and faces more auctions, the markets' attention will inevitably shift in that direction.

Financial panic flaring in Italy -  - Italian Premier Mario Monti saw nearly seven months of confidence-building by his government wiped out by Wednesday, when the country's borrowing rates in a bond auction skyrocketed back near levels last seen in December. A sale of 12-month bonds, a warm-up for Thursday's weightier longer-term debt auction, demonstrated the speed with which market jitters spread from Spain following Madrid's weekend concession that its banks need a bailout. Italy paid an interest rate of 3.972 percent up from 2.34 percent in a similar auction last month to borrow euro6.5 billion ($8.12 billion) in 12-month money from bond markets. Though demand was strong, the high rate suggests investors worry Italy may eventually need a rescue of its own. "Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain's request for external assistance," sovereign debt expert Nicholas Spiro said. Markets, he noted, are no longer differentiating fiscally-stronger Italy from Spain, "which is a sign that panic has set in." Just before the debt sale, Monti urged lawmakers to speed the pace of reforms in a bid to persuade skeptical investors whom he referred to as "observers that don't nurture an innate sympathy for our country" that Italy is able to make the necessary economic sacrifices to escape the debt crisis.

Hungary Lauds Hitler Ally Horthy as Orban Fails to Stop Hatred. Hungary has a new hero.  Towns and villages are putting up statues and naming streets after Miklos Horthy, a former head of state who led the country into World War II on Adolf Hitler’s side. From such hamlets to the halls of the neo-Gothic Parliament in Budapest, where the nationalist Jobbik is the second-largest opposition party, radicalism and its symbols are spreading as Hungary heads into its second recession in four years. Prime Minister Viktor Orban is seeking to obtain an international bailout after Hungary’s debt was downgraded to junk last year.

Golden Dawn threatens hospital raids against immigrants in Greece - In an atmosphere that has become increasingly electric before Greece's crucial election, the far-right Golden Dawn has ratcheted up the rhetoric by threatening to remove immigrants and their children from hospitals and kindergartens. Earning loud applause at an election campaign rally in Athens, Golden Dawn MP Ilias Panagiotaros said: "If Golden Dawn gets into parliament [as polls predict], it will carry out raids on hospitals and kindergartens and it will throw immigrants and their children out on the street so that Greeks can take their place." Medical supplies and beds at some hospitals are running desperately short. The governor of the state-run Nikea hospital, Theodoros Roupas, called on doctors to stop non-essential surgical interventions because of a critical shortage of gloves, syringes and gauze. The order was revoked when Roupas found emergency supplies later in the day.

Down-Under Greeks Send Money As Crisis Awakens Ties To Homeland - Half a century after leaving Greece and more than 12,000 kilometers (7,500 miles) from Athens, Paul Afkos says there’s no escaping the calling of his motherland.  With Greek unemployment four times higher than in his adopted Australia, the 59-year-old head of Afkos Industries, a maker of mining components based near Perth, has plowed A$18 million ($17.9 million) into a 109-bed hotel in northern Greece that opened in April. Australia’s Greek population has grown from seven pirates dispatched by Britain in 1829 to a diaspora of about half a million, making Melbourne the third-largest Greek city behind Athens and Thessaloniki. Armed with patriotism and the best- performing currency against the euro since late-2008, Australia’s Greeks are deploying wealth amassed in the fastest growing major developed economy to a nation that’s needed 240 billion euros ($300 billion) in bailouts. Greece votes June 17 in an election set to decide its future in the euro zoneJohn Tripidakis, a Greek lawyer with an Athens practice who splits his time between Sydney and Melbourne, said half his clients are interested in buying property in Greece, up from less than 10 percent two years ago.

Greece's super-rich maintain lavish lifestyles and low profiles - Nearly three years into their country's worst crisis in modern times, life goes on as normal for Greece's super-rich. As the sun sets, oligarchs, shipowners, singers and media stars gather at the Poseidonion hotel on the island of Spetses opposite the little bay. They tuck into a menu that includes pasticcio laced with foie gras. Among them is a middle-aged man in a T-shirt proclaiming: "More is less". Three days before Greeks cast their ballots in a make-or-break election, their country could not be more divided. Here there is no talk of the pain of crisis – the only topic of conversation elsewhere in Greek society. The destitution and despair of Athens is a world away – and for many quite clearly it is best kept that way. "Greeks brought this crisis upon themselves," said a London-based shipowner upholding the sector's vow of silence by insisting on anonymity. "They allowed crooks and corruption to prosper."

Greek Bank Deposit Outflows Said to Have Risen Before Elections - Greek deposit outflows have accelerated before this weekend's elections, two bankers familiar with the situation said, on concern the nation may move closer to abandoning the euro. Daily withdrawals have increased to the upper end of a 100 million-euro ($125 million) to 500 million-euro range this month, one banker said, asking not to be identified because the figures aren't public. A second banker said the drawdown may have exceeded 700 million euros yesterday. An official for the Bank of Greece, the Athens-based central bank, declined to comment. Greek banks are under strain after individuals and companies withdrew about 72 billion euros since the nation triggered a region-wide sovereign-debt crisis in October 2009. While lenders have access to European Central Bank funding, an exit from the euro would cut them off. Depositors are seeking to preserve their cash on concern Greece may adopt a new currency that would immediately drop in value.

Withdrawals up again due to uncertainty - The political polarization and uncertainty regarding Greece’s position in the eurozone generated a fresh spike in bank withdrawals last week. In the last few days, withdrawals have increased again as bank clients convert their money into foreign bonds (mostly German) or opt for various alternative investments based on the US dollar in mutual funds. In May, deposit withdrawals were estimated to have amounted to 5 or 6 billion euros. Bank officials say the situation remains under control, pointing at the completion of the first phase of the recapitalization plan with the disbursement of 18 billion euros to the country’s four main commercial banks that has strengthened them considerably.

Greek Bank Run Update: Up To $1 Billion A Day Now - Yesterday, we did an update of the Greek bank jog, when noting that between €100-€500 million per day was being withdrawn from Greek banks based on Kathimerini reports. 24 hours later the jog has become a trot with the most recent estimate from Reuters now estimated at nearly double: "Combined daily deposit outflows from the major Greek banks have reached 500-800 million euros over the past few days, with the pace picking up as the election draws closer and rising noticeably on Tuesday, two bankers said." This is roughly $1 billion a day in the upper case, and a number that is approaching 0.5% of the entire documented €170 billion (now likely much less) deposit base.

French president warns Greeks over euro - The new French president has warned Greeks that if they vote to move away from international bailout commitments in the upcoming election, they could be pushed out of the eurozone. Greece holds a repeat election June 17 after an inconclusive May 6 ballot left no party with enough Parliamentary seats to form a government, while and coalition negotiations collapsed. Voters deserted the two formerly main parties in favor of smaller, mostly anti-bailout groups on the right and left of the political spectrum. "I respect the Greek people. They will decide what they want on the occasion of the election" Francois Hollande told the private Mega television station in an interview aired Wednesday. "But I must warn them, because it is my duty, because I am a friend of Greece, that if the impression is given that the Greeks want to move away from the commitments that were taken and abandon all prospects of revival, then there will be countries in the Eurozone that will want to end the presence of Greece in the eurozone."

Debt crisis: Greeks pulling €800m a day from banks - Telegraph: Greeks are withdrawing up to €800m a day from their banks and stocking up on basic food supplies ahead of the election on Sunday that many fear will result in the country being forced out of the euro.This includes cash withdrawals, wire transfers and investments into money market funds, German Bunds, US Treasuries and EIB bonds," said one banker, who spoke on condition of anonymity. The estimates of daily withdrawals provided yesterday by banking officials are now running higher than at any time since the country was first bailed out two years ago. It came as it was suggested that Greece could even need another EU bail-out. "If a state insolvency is to be avoided, then the Europeans will need to jump in again," said the German newspaper Die Zeit.

Greece on edge of financial collapse as paralysis takes hold in election runup - Whatever government emerges from Greece's make or break ballot on Sunday, it will take over a country on the edge of financial collapse. The telltale signs are too obvious to ignore: the early morning queues outside banks, the banner headlines predicting economic disaster, the businesses shuttered and boarded up, the deals and projects put on hold. "Absolutely nothing is moving either in the public or private sector," said a prominent Athenian lawyer who sits on the committee of a large foreign hedge fund. "No one wants to invest, or make any commitment in such uncertainty," she said. "They are all waiting to see what will happen after the election." If the economy is all about psychology, then Greece is already fighting a lost war – even if the Athens stock exchange soared on Thursday on secret polling data suggesting that a pro-European coalition, committed to punishing reforms, would win the election. The country's main stock index closed a staggering 10.1% higher, with banking shares posting a collective 23.6% increase. But the surprise development comes against a backdrop of devastation. Heightened talk of Athens's exit from the eurozone in recent months has not only led to credit lines drying up but has spurred ever greater numbers of panic-stricken citizens to pull their savings from banks.

Dread and Uncertainty Pervade Life in a Diminished Greece - Anyplace else, they might be signs of progress: Traffic moves faster on once clogged streets. Cigarette smoking has dropped sharply. Far less garbage heads for landfills each day.  But this is Athens, and the statistics are grim reminders of a middle-class society in rapid decline. Many fear that elections, including voting scheduled for Sunday, offer no clear route out of a deepening political and economic crisis. From its wealthy northern suburbs to the concrete blocks of downtown, there is a sense of an endgame in Athens.  “It’s the last days of Pompeii,” said Aris Chatzistefanou, a co-director of “Debtocracy,” a provocative 2011 documentary about the Greek crisis, For many Greeks, the question is not which party will win. The next months and years will be difficult no matter which government is in charge. Increasingly, they wonder whether they themselves — and their country — will emerge from the crisis with a secure future. Giorgos, a 27-year-old economics major who did not want to reveal his last name, said the sense of uncertainty was oppressive.  “There is a depression in the Greek people, in all my friends,” said Giorgos,“They keep saying: ‘I can’t take it. There’s depression about our jobs, depression on the news, depression about the economic situation, depression in our family, depression and fighting among friends.’ ”

Quarterly unemployment hits record 22.6% - Unemployment hit a record high in the first quarter of 2012, data showed on Thursday, days before the country votes again on whether to back the harsh austerity needed to appease international lenders or risk a chaotic exit from the euro zone. The jobless rate hit 22.6 percent in the first three months of the year - double the euro zone average - reflecting the deep economic malaise that forced many voters to reject austerity in an inconclusive election early last month. The data will provide ammunition to politicians campaigning against the bailout terms imposed on the country by the IMF, the EU and European Central Bank. The statistics service said the number officially unemployed reached 1.12 million in the first quarter, up 57.3 percent year-on-year, feeding public discontent and hurting consumer confidence ever more. "Employment is still shrinking rapidly in construction and manufacturing. Even the more resilient sectors like wholesale, retail trade and tourism are taking a hit,"

Long-term jobless figure hits 600,000 - Unemployment rose to 22.6 percent in the first quarter of the year, according to data released on Thursday by the Hellenic Statistical Authority (ELSTAT), but even more worrying is the soaring number of long-term jobless. ELSTAT’s survey showed that in the first three months of 2012 the total number of unemployed people climbed to 1,120,097, with 56.5 percent of these seeking work for over a year. Among young people aged up to 24 the jobless rate stood at 52.7 percent, while for women in that age group the rate came to a staggering 60.4 percent. The biggest drop in employment was in the manufacturing sector, where it fell 15.1 percent compared to the first quarter of 2011. In the primary sector it contracted by 5.8 percent while in the service sector employment shrank by 7.2 percent. Foreigners had a jobless rate of 30.5 percent, far above that of Greeks (21.8 percent).

What's at Stake in the Greek Vote -This Sunday Greeks go to the polls confused, fearful and experiencing a frightening deterioration of their standard of living. The country's voters now face a crucial dilemma that will determine the future of Greece for generations: Stay in the euro or commit fiscal suicide with a return to the drachma.  At first glance, there is an easy answer to the dilemma: Stay in the euro—the preference of about 80% of Greeks, according to opinion polls. Of its own initiative and per the commitments in its EU-IMF debt agreement, Greece has undergone severe austerity for more than two years. It has been in recession for five years, while managing to dramatically reduce its primary deficit to 5% in 2010 from 10.4% in 2009. Although Greece has lost competitiveness in terms of unit-labor costs since the first quarter of 1999—as have all euro-zone countries except for Germany and Austria—Greece has adopted significant wage and salary cuts. In the past two years the country has written off close to one-third of its debt and now has very low interest rates on its remaining debt. Its future success depends on the implementation of drastic reductions in public spending, more efficient tax-collection, and productivity improvements.

Greece’s Choice: Bargaining versus pleading - Now, bargaining only makes sense if both sides enjoy a modicum of bargaining power. And what determines that? The simple answer is: a readiness to draw a ‘line in the sand’ and credibly resolve to walk away from the negotiations if that ‘line’ is crossed.  Today, Greek voters are going to the polling stations torn by the momentous choice that they must make. Should they vote for a party (Syriza) promising to bargain with Europe for better terms and conditions or for parties (primarily conservative New Democracy and/or the socialist PASOK) that are, effectively, proposing to plead with Europe for better terms and conditions? Ostensibly, both sides of the argument are promising to negotiate with the troika (the European Central Bank, the European Union and the International Monetary Fund). However, in truth, the so-called pro-bailout parties (ND and PASOK) are running on a platform that any deal with Greece’s official creditors is better than no deal. So, in view of the preceding definition of genuine bargaining, they are ruling genuine negotiations out, courtesy of their determination not to draw a ‘line in the sand’

Counterparties: Greece votes - On Sunday Greece will hold yet another election, which is being widely portrayed as a referendum on whether it will stay in the euro zone – even if, among the main political parties, only the communists want to ditch the euro. The resurgent leftist Syriza party, which has vowed to reject the euro zone’s crippling bailout requirements, is the strongest opponent of the conservative, pro-bailout New Democracy party. As the election nears, reports from the field in Greece are getting increasingly grim. The WSJ spoke to one writer whose friends are “hiding money in jars, under the bed, even burying it in the mountains” in the event of post-election chaos. This is more rational than it seems: In just one year unemployment is up 57%. Greece’s healthcare system is barely hanging on, as underfunded and understaffed hospitals struggle; some Greek diabetics have been unable to get insulin. Late last year, Greek suicides were found to have increased by 40% over the same period in 2010.

Crédit Agricole Girds Greek Unit for Greece Euro Exit - The owner of Greece's largest foreign-held bank is making plans to walk away from the bank if the country leaves the euro zone, the latest sign of growing international concern over the future of Europe's currency union. The contingency plan for Crédit Agricole SA, ACA.FR -1.80%France's third-largest publicly traded bank, comes ahead of pivotal elections in Greece Sunday that could set the country on a path to leave the 17-nation currency bloc.  A host of international companies have said they are preparing contingency plans, with many voicing concerns about how to retrieve cash in the country if Greece exits the euro zone. But none have disclosed potentially walking away from their assets in Greece. In a sign of heightened nervousness within the country, depositors have been steadily increasing their withdrawals from Greek banks. The withdrawals, according to senior bankers in Athens, approach the level of deposit flight seen when government coalition talks collapsed after inconclusive elections on May 6, forcing the new vote.A senior banker at a large Greek lender said between €600 million ($754 million) and €900 million has left the banking system daily over the past few days, a number he expects to increase leading up to the vote. Other people familiar with the banking system confirmed the estimates.

Euro zone discussed capital controls if Greek exits euro - EU officials have told Reuters the ideas are part of a range of contingency plans. They emphasized that the discussions were merely about being prepared for any eventuality rather than planning for something they expect to happen - no one Reuters has spoken to expects Greece to leave the single currency area. But with increased political uncertainty in Greece following the inconclusive election on May 6 and ahead of a second election on June 17, there is now an increased need to have contingencies in place, the EU sources said. Belgium's finance minister, Steve Vanackere, said at the end of May that it was a function of each euro zone state to be prepared for problems. These discussions have been in that vein, with the specific aim of limiting a bank run or capital flight. As well as limiting cash withdrawals and imposing capital controls, they have discussed the possibility of suspending the Schengen agreement, which allows for visa-free travel among 26 countries, including most of the European Union.

ECB Tells Court Releasing Greek Swap Files Would Inflame Markets - The European Central Bank said it can’t release files showing how Greece may have used derivatives to hide its borrowings because disclosure could still inflame the crisis threatening the future of the single currency.  Bloomberg News is suing the ECB to provide the documents under European Union freedom-of-information rules. The papers may help show the role EU authorities played in allowing Greece to mask its deficit for almost a decade before the nation’s troubled finances necessitated a 240 billion-euro ($301 billion) bailout and the biggest debt restructuring in history.

Manna for Bankrupt Cyprus - In Greece’s chaotic wake bobs the listing Republic of Cyprus, soon to be the fifth Eurozone country, out of seventeen, to get a bailout. By June 30. And on July 1, in the ironic European manner, the tiny country on a Mediterranean island that is geographically closer to Turkey, Syria, and Israel than any European country, will automatically rotate into the Presidency of the Council of the European Union for a six-month term—mechanized democracy at the EU level. Only last year’s €2.5 billion loan from Russia has kept it afloat. Its economy is shrinking, unemployment is at a record, and real estate is collapsing after a phenomenal bubble and after an even more phenomenal nationwide title-deed scandal that bankers, lawyers, and developers were colluding in to their immense benefit. And it has taken down the banks.  So the banks need to be “recapitalized.” As is the case in Eurozone bailouts, the losses will be socialized to taxpayers in distant countries. €1.8 billion, or 10% of GDP, is needed just to recapitalize its second-largest bank, Cyprus Popular Bank. Many more billions will be needed for the other banks. And as the first bailout is never enough, more money will be needed for the second wave. The government itself needs to be bailed out too; it has been cut off from the markets and can’t get its deficits under control—amazing how a country with 803,000 people can concoct problems of such magnitude.

Troubled Greek Economy Is Being Left to Fend for Itself - No matter what happens in this weekend’s elections, Greece is rapidly becoming an isolated economy. Carrefour, the giant French supermarket and retail group, said on Friday that it was selling its entire stake in Greece at a loss to its local franchise partner, so it could concentrate “on markets where it sees growth,” a spokesman said. Coca-Cola’s operations in Greece were also downgraded by Moody’s Investors Service, which cited the increased likelihood that Greece could exit the euro zone. A day earlier, the French bank Crédit Agricole said it was ring-fencing its Greek operations to protect itself should that happen. Two of the world’s largest import-export insurers, Euler Hermes and Coface, have recently refused to cover transactions involving companies in Greece, imperiling the import of basic goods. Global businesses and investors are retreating both because of the uncertainty on whether they might be paid someday in a devalued currency, and because domestic consumption has plunged after three years of painful austerity. Nearly a quarter of the people are out of work. Buying power has shriveled. Sales of clothing and pharmaceuticals have slumped, and even gas purchases are down as people drive less to save money. Companies short on cash have stopped paying one another.

Austerity Kills: How the EuroCrisis is Being Used to Break the Social Contract - Yves Smith  - One aspect of the Eurocrisis that has not gotten the attention it deserves is the way it is destroying not just jobs, but the very underpinnings of society. People who took actions that were prudent at the time are increasingly at the mercy of forces beyond their control. And this isn’t a tsunami-type disaster but a man-made one whose severity is worsened by the callous attitudes of the European elites. We’ve featured stories from time to time on how Greece is unraveling. Suicides have increased sharply. Garbage is not being picked up. Public transportation is largely a thing of the past. Even though Greece always had a large black market, more people are resorting to barter, which shrinks the tax base.  And in some ways worst of all, the health care system is on the verge of collapse. Critical medicines are not being imported and hospitals are short of basic supplies. Not only are people dying unnecessarily due to their inability to get drugs and operations, but worse, the breakdown of healthcare greatly increases the risk of a public health crisis. How many children are being vaccinated, for instance? What happens when curable but silent killers such as syphilis go untreated? Key excerpts from a Reuters story: Greece’s rundown state hospitals are cutting off vital drugs, limiting non-urgent operations and rationing even basic medical materials for exhausted doctors as a combination of economic crisis and political stalemate strangle health funding…. Long queues have been forming outside a handful of pharmacies that still provide medication on credit – the rest are demanding cash upfront until the government pays up a subsidy backlog of 762 million euros, or nearly $1 billion.

ECB on standby for Greek election fallout - The European Central Bank is on standby to keep banks flush with liquidity if Greece creates fresh financial market turmoil, its president has indicated, joining a global chorus of central bankers pledging support ahead of Sunday’s elections. Mario Draghi’s comments on Friday followed the announcement by the UK’s central bank of plans to pump £100bn into the ailing British economy, hinting at a coordinated strategy by the world’s top central bankers. “The ECB has the crucial role of providing liquidity to sound bank counterparties in return for adequate collateral. This is what we have done throughout the crisis ... and this is what we will continue to do,” Mr Draghi said. Eurozone central banks “will continue to supply liquidity to solvent banks where needed,” he added, without giving details.

Greece Now Just a Footnote, by Tim Duy: This weekend's Greek elections are the focus of intense speculation with market participants - and, so we are told, global central bankers - preparing for the worst. I am not quite sure that Greece should be such a focus at this point. I think Kiron Sakar over at The Big Picture is on the right track on this one: The reality is that Mr Tsipras wont be able to negotiate a better deal (he is delusional) and if he is in power and maintains his current position, Greece will be out of the EZ pretty soon thereafter. If New Democracy wins and can form a coalition, there will be some give from the rest of the EZ, but the Greeks will never deliver, which suggests to me that they will be forced to exit, but a little bit later. That sounds about right; Greece is pretty much a lost cause at this point, regardless of this weekend's outcome. And worrying about contagion from Greece is just a little too late. The story is now Spain, whose ten-year yields brushed up against 7% today. And Italy, who sold three-year debt at 5.3% and ten-year yields above 6%. And increasingly you hear France as well. This has gone way beyond Greece at this point. Meanwhile, the ECB remains on the sidelines, reportedly waiting for European fiscal policymakers to make the next step. According to Nouriel Roubini from his frequent emails: A successful strategy would entail less front-loaded fiscal austerity and structural reforms; a growth compact that is substantial and not just cosmetic; a full banking union, starting with EZ-wide deposit insurance; and fiscal union and debt mutualization in the EZ. Well, that's pretty much asking for heaven and earth, isn't it? I don't see how the Europeans are going to pull that together before their summer vacation.

Which Eurobonds? - Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict. The short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.Long-run fiscal rectitude is the only way to accomplish that goal. But it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable. The introduction of Eurobonds – joint, aggregate eurozone liabilities – could be part of the solution, if designed properly. There is certainly demand for them in China and other major emerging countries, which are desperate for an alternative to low-yielding US government securities. But a different version has begun to gain traction in Germany. The German Council of Economic Experts1 has proposed a European Redemption Fund2 (ERF). The plan would convert into de facto 25-year Eurobonds the existing sovereign debt of member countries in excess of 60% of GDP, the threshold specified by the Maastricht criteria and the SGP.

The TARGET2 circle of life - Kostas Kalevras, who diligently watches central banks, today observed an increase in Bank of Spain's TARGET2 liability for the month of May. In fact this number has been climbing every month for the past year. There are multiple questions that keep coming up on this topic as we see these balances grow. It's worth addressing two of them here.
1. How is it that TARGET2 continues to grow so rapidly even after the LTRO program? The answer is that depositors in Spain are moving money out of Spanish banks, while Spanish banks in turn replace their deposit funding with the MRO short-term funds from the central bank (Bank of Spain). The central bank provides this MRO loan by crediting the Spanish bank and debiting the Eurosystem (increasing the MRO on the asset side, offset by TARGET2 increase on the liability side). And so goes the TARGET2 "circle of life" - see the diagram below. If it turns counterclockwise, the Bank of Spain TARGET2 liabilities rise. If the flow changes direction, the liabilities fall.
2. Who cares? Why do these balances matter at all? The best way to answer this is to address some of Felix Salmon's commentary called Don’t worry about Target2:Certainly a Greek exit would be small enough not to worry about at all. Greece has a negative Target2 balance of about €100 billion. What that means is that Greek banks owe the Bank of Greece €100 billion, which is fully collateralized; and that in turn the Bank of Greece owes the ECB €100 billion on an unsecured basis. If Greece were to chaotically devalue and default, then it’s entirely reasonable to assume that the Bank of Greece would default on those obligations to the ECB, and would keep the Greek banks’ collateral for itself, to help prop up as much as possible the nascent drachma.

European Bond Yields - It is a fascinating picture (h/t Frances Wooley at WCI):  Frances asks "what were they thinking?" It seems clear enough that with the introduction of the Euro, bond traders came to view the debt of several European sovereigns as very close substitutes--a perception that seems to have vanished since the beginning of the financial crisis.  The better question, as Frances points out, is why were they thinking that? Actually, the "they" in this question should probably be replaced with a more uncomfortable "we." Yes, what were we thinking--if we were thinking anything at all. (If you were thinking otherwise, I presume you were holding significant short positions throughout the episode?)  I remember what I was thinking when I was teaching my section on International Monetary Systems years ago. After discussing the benefits of a common currency (or multilateral fixed exchange rate agreement), I'd turn to the evidence and discuss why the experiment seems to have worked in some cases and not others. A recurring theme for success appeared to be (among other things) some notion of "fiscal coordination" among potentially disparate regions of the union. I came to view this conclusion as a "duh, kinda obvious" sort of lesson that any future monetary union would surely respect and deal with accordingly. Oops. So maybe I was being unduly naive in this respect. But is it reasonable to suppose that agents managing large bond portfolios were equally naive?

You should care about Spain’s 7 percent bond yields. Really. - Click over to any business or financial site today and you’ll see horrified headlines. Spanish bond yields hit 7 percent! Italy’s are rising too! Europe is doomed! So why is 7 percent such a scary number? The Spanish government needs to borrow money to fund its day-to-day operations. To do so, it sells (among other things) 10-year bonds. In return for cash from investors, the Spanish government promises to pay a fixed rate of interest — say, 5 percent — every year for 10 years. At the end of that period, the investors get all of their original cash back. When investors are nervous that the government might not repay in full, they demand higher interest rates as a sweetener. That’s happening right now. Investors are skeptical about Spain’s ability to repay, especially after the Spanish government said it could borrow up to $125 billion to shore up its banks and Moody’s downgraded Spain’s debt. So investors are now demanding 7 percent interest rates from Spain. A very big, very fat sweetener.  Inflation is at a low 2 percent. So when bond yields rise to 7 percent, Spain effectively has to generate a 5 percent return on the cash it borrows.

Europe’s Tragic Farce: Europe’s top politicians, led by German Chancellor Angela Merkel, seem determined to repeat the same mistakes over and over again. Last weekend, the financial crisis seemed to be contained for the moment when the Germans and the European Central Bank agreed to commit 100 billion euros through the European Union’s (E.U.) rescue funds to recapitalize Spain’s faltering banking system. The Spanish government bargained hard, and won an agreement that the bailout would not be tied to new austerity demands of the sort imposed on Greece and Portugal. But as more details emerge, it’s clear that the cure could be worse than the disease. For starters, the money is being lent to the Spanish government, not to Spain’s banks. As a consequence, this will increase Spain’s government debt by about ten percentage points of GDP. That, in turn, will increase speculative pressure against Spanish government bonds. To help the speculators along, the bond rating agencies responded by downgrading Spain’s government debt by three notches, to just above junk bond status. Spain’s borrowing costs are now at their highest level since Spain adopted the Euro.

Spanish housing-price decline accelerates - The decline of Spanish housing prices accelerated in the first quarter, signalling the country's housing bust is likely to continue weighing on the country's weak local economy and undermining its fragile banking industry.  Spanish housing prices fell at an 12.6% annual rate in the first quarter, after falling by 11.2% in the fourth quarter and by 7.4% in the third, the country's statistics agency INE said Thursday. After over a decade of overbuilding and a rapid run-up in prices, Spain's housing boom ground to an abrupt halt in 2008, sending the economy into a tailspin.  Late Friday, Moody's Investor Service lowered Spain's government bond rating, citing an ailing economy and the 100 billion euros ($125 billion) in European-Union aid the government has requested to help recapitalize local banks.

Sombre Spanish lessons on fighting credit bubbles - Spain’s turmoil spells trouble for the eurozone, but it also poses a tough question for the wider world. After the 2008 crisis, Spain’s banking regulation was held up as a model. Its central innovation – that banks should squirrel away extra reserves in boom times – was eagerly incorporated into the Basel rules on bank capital. But now that Spain’s banks are a disaster, the Spanish solution to the problem of unstable credit booms looks rather less convincing. It is time to think afresh about financial bubbles – and face up to a harsh lesson for deficit-addicted governments in the rich world. Spain’s policy became the toast of central bankers because it filled a gap. In most advanced economies, central banks use interest rates to target inflation and therefore cannot simultaneously use them to prevent bank lending from getting out of hand. Meanwhile, supervisors focus on banks’ capital-to-asset ratios, ignoring the fact that a normally adequate capital buffer may be woefully inadequate if credit is expanding furiously, signalling a likely bust. The Spanish innovation – that buffers should vary across the economic cycle – seemed simple and elegant. During the bubbly phase of a credit boom, higher reserve requirements promised to restrain reckless lending. Then, during the downturn, the buffer would allow lenders to survive without a bailout.

Still too few details on Spain's bank bailout; cashless transaction may be preferred - Details are still scarce on the proposed bailout of the Spanish banking system. The thinking now is to have a "cashless" transaction in which the EFSF (and/or ESM) issues some bonds, but instead of selling them into the market, it delivers these bonds to Spain's bank rescue vehicle called FROB. FROB will then swap the EFSF bonds for equity of banks that need to be recapitalized. This avoids EFSF having to issue bonds in the capital markets and getting embarrassed if the market is not too receptive (as happened before). Ideally FROB should also have the ability to haircut banks' unsecured debt or force a debt for equity swap if those banks become undercapitalized again. It's not clear if such provisions will be put in place, though some in the Eurozone are demanding it. Some are also demanding the "bad bank" type split, similar to Ireland, but so far Spain is not going for it. FROB would supposedly pay EFSF back in 15 years (@3% rate). That's assuming FROB recovers the funds to pay EFSF back. If there are losses on this capital injection, the first say 10-15% would be absorbed by FROB (thus the Spanish government), but above that level, there would be some loss sharing with EFSF/ESM. This needs to be finalized soon. The longer the uncertainty about this structure lingers, the more jittery the markets (and the rating agencies) will become.

Irish Tell Spain To Imagine The Worst In Banking Bailout - Ireland has this banking advice for Spain: imagine the worst and double it.  Like Ireland, Spain sought a bank bailout after being felled by a real-estate crash. Now, just as the Irish did, the Spanish are awaiting the results of outside stress tests gauging the size of the hole in the banking system.  “Think of the worst possible scenario on banking losses: then double it,” said Eoin Fahy, an economist at Kleinwort Benson Investors in Dublin. “Adopt the most conservative assumptions.”  Nine hundred miles northwest of Madrid, Irish analysts wring three lessons from its own banking crisis, among the worst in history. First, quickly present an accurate estimate of the bad loans. Second, force banks to face up to losses, possibly through the creation of a so-called bad bank. Third, share as much of the loss as possible with bank bondholders.  “Spain should face the economic reality, even if they have to value property loans at discounts of 40, 60 or even 80 percent,”

Spain Grazing Junk Status Fuels Contagion Risk - Spain’s slide down the credit-rating ladder has brought the nation within a hair of junk status and risks triggering contagion in Italy and beyond should investors completely shun its bonds. The yield on Spain’s benchmark 10-year notes was at 6.89 percent at 2:33 p.m. in Madrid, after rising to a euro-era record 6.92 percent yesterday. That came after Moody’s Investors Service cut its rating three levels to Baa3, one step above junk. Investors demanded 5.3 percentage points more to hold its 10-year debt than that of Germany, with which it shared an AAA rating as recently as September 2010. Moody’s said Spain’s decision to seek as much as 100 billion euros ($126 billion) of European funds to shore up its banks increased the risk the country would need a full bailout. Spain’s aid request and the credit-rating reduction have increased foreign investor flight, leaving the Treasury increasingly reliant on the soon-to-be rescued domestic banking industry to buy its debt.

More pain for Spain - IF THE timing was meant to reassure markets over the viability of Spain in the days before the Greek elections, then the content of the International Monetary Fund’s latest report card on the country may do the opposite. In its latest Article IV consultation with Spain, the IMF gives official credence to the view, already prevalent in some corners of the markets, that the country won’t meet its deficit targets. For this year, the IMF’s staff think “the very ambitious 5.3 percent of GDP deficit target…will likely be missed.” And more missing of targets is expected over the following few years too: “Given the lack of detailed measures after 2012, staff projects the deficit to significantly overshoot targets and to fall only gradually over the medium term.” There is some good news in the assessment. The IMF heaps praise on Spain for deciding to recapitalise its banks. And it welcomes some of the reforms already put in place, such as an ambitious effort to get its labour market working.  Yet the tone of the overall report seems remarkably tetchy for an organisation that usually talks quite softly. Take its criticism of Spain’s budget-miss last year in which it said: “The fiscal slippage in 2011 greatly undermined the credibility of Spain to deliver fiscal consolidation and increased the needed fiscal adjustment for 2012. The impact of the large overrun (almost 3 percent of GDP) was exacerbated by maintaining the message, until almost the end of the year, that the deficit was on track, and by the lack of timely and reliable data.”

IMF Pressures Spain to Lower Salaries, Raise the VAT, Eliminate Housing Deduction -- My friend Bran reports from Spain that IMF urging Spain to raise VAT, reduce public pay and positions, and eliminate housing deduction is the headline of every main news broadcast and newspaper. The International Monetary Fund (IMF) has recommended Spain to cut the salaries of employees and increase the VAT and excise duties temporarily to compensate for the uncertainty over planned spending cuts, while the Government has claimed that eliminate the deduction of home buying and accelerate privatization. The report comes the same day it is known that the country's debt in the first quarter reached a record high of 72.1%. In the annual analysis of the Spanish economy for the Article IV of the institution, the IMF notes that spending cuts are planned in the "right areas", but warns that "take time to identify them, will be difficult to implement and the results are uncertain. "  Therefore emphasizes that to assure that the projected savings will materialize, "future cuts in public wages and increases in VAT or excise duties could be approved now and cancel only if the objectives are achieved."

Debt crisis: ECB last hope as dam breaks in Spain - Spain's borrowing costs have surged to record highs and are perilously close to the point of no return, threatening a full-blown sovereign crisis unless the European Central Bank comes to the rescue. "We're facing maximum tension. The situation is unsustainable over time," said the country's finance minister Luis de Guindos. Yields on 10-year Spanish bonds yields punched to almost 7pc, above levels that triggered ECB intervention to back stop Spain last November. "The ECB needs to intervene very quickly or it is game over," said Nicholas Spiro from Spiro Sovereign Strategy. "There is a whiff of capitulation in the air." The dramatic escalation comes just days after the eurozone agreed a €100bn rescue package for the Spanish state to recapitalise its crippled banks. "It is very worrying. Markets are behaving as if the eurozone is heading for break-up," said Jens Sondergaard from the Japanese bank Nomura. France's industry minister Arnaud Montebourg said the markets were flying out of control because the ECB was failing to take charge. "We need an ECB that does its job," he said. In an astonishing outburst for a French minister, he lashed out at German Chancellor Angela Merkel and the "German right" for driving much of Europe into slump. "Certain European leaders, led by Mrs Merkel, are fixated by blind ideology."

Is Anyone Answering the Phones at the ECB?, by Tim Duy: As of today, the Spanish bank bailout remains a phenomenal policy failure. Spanish bond yields continue to rise, with the impact of the ECB's LTRO operations now effectively negated: Worse, this policy disaster extends now into Italy, with short term debt now taking a hit:  The Rome-based Treasury sold the one-year bills at 3.972 percent, 1.63 percentage points more than the 2.34 percent at the previous auction on May 11. Investors bid for 1.73 times the amount offered, down from 1.79 times last month. And long-term yields in Italy are heading higher as well: The only player left on the field that can move fast enough and with enough firepower to pull Europe back from the brink is the ECB, and the pressure is on them to act. From BloombergThe leaders of southern Europe’s biggest economies went on the offensive as bond yields jumped following the announcement of a bailout for Spanish banks that was intended to quell concern over the countries’ finances. The decline wiped out the effects of 1 trillion euros in ECB loans for euro-region banks that had held yields in check since December. Truly desperate pleas, but will they fall on deaf ears? For their part, the ECB seems content build upon the policy inaction at the last policy meeting and continue to do nothing: Honestly, I find it incomprehensible to believe that the ECB will not soon come to the aid of Spain and Italy with additional bond purchases. Only the most irresponsible policy body would take such a risk. To not do so almost guarantees the destruction of the Eurozone and a deepening recession if not depression throughout Europe. They cannot possibly believe that fiscal and structural reforms will bear sufficient fruit in any reasonable time frame. Nor can they possibly believe that Spain and Italy can implement a IMF-type structural reform program in the absence of the competitive boost provided by currency devaluation.

ECB Ready to Play?, by Tim Duy: Draghi blinks. After dropping the ball and holding rates steady at the last meeting, ECB President Mario Draghi is signaling he is ready to get back into the game. Via Reuters: European Central Bank President Mario Draghi said on Friday in comments that heightened expectations the ECB could cut interest rates or take other policy action soon. ...There are serious downside risks here," Draghi told the annual ECB Watchers conference in Frankfurt. "This risk has to do mostly with the heightened uncertainty." I am not so sure about this "heightened uncertainty" line. It seems pretty certain that Spain is in trouble if rates hold at these levels or head higher, and this is the immediate problem. Draghi might have in mind bringing down rates with another stab at the temporary solution the LTROs provided last year. Helpful, but still only temporary. It would be more helpful if he switched gears to outright quantitative easing via government bond purchases (oddly, though, the expectation is that the Federal Reserve will do more than Europe in response to a European problem). What would be most helpful is a clear signal that the ECB will not let the Eurozone collapse because default fears are driving unpleasant dynamics. Consider this helpful chart from Frances Woolley:

Satyajit Das: The Euro-Zone Debt Crisis – It’s Now ABOUT Germany NOT UP TO Germany! -  It’s now about Germany, not about Greece, Spain, Italy, Ireland or Portugal! Germany is financially vulnerable. Irrespective of the course of events, it faces crippling costs. Gas gangrene is a deadly infection that causes massive necrotic damage to tissue. Treatment is by antibiotics and hyperbaric oxygen therapy to inhibit the growth of and kill the bacteria. But if that fails, amputation is necessary. Germany may be in great danger, having left it to late to excise the gangrenous body parts of the Euro-Zone. To date, Germany has had a very good European debt crisis. The German economy is one of the few economies to have grown since 2008. Unemployment is low and workers have received pay rises. Interest rates on its government bonds, Bunds, are at a record low. On 23 May 2012, the two year note was issued with a zero coupon and gave investors a return of 0.07% per annum, prompting the Financial Times to post the headline: Oh Schatz: No Coupon (the German two year bond is known as the Schatz). A few days later the bonds were yielding zero percent. Shortly thereafter, the yield on the 2-year bonds was negative. The low rates reflect safe haven buying as investors flee other European markets.

Merkel attacks French economy - Deepening splits between Angela Merkel and François Hollande erupted into the open on Friday as the German chancellor attacked Paris for allowing the French economy to stall. Mrs Merkel warned the policies of the new Socialist president could destroy the eurozone by bringing the sovereign debt crisis to France itself. Tensions are running so high that Jean-Marc Ayrault, the French prime minister, was forced to deny that Paris had broken off the Franco-German partnership, following Berlin anger at a Franco-Italian summit in Rome on Thursday. There was a growing sense of crisis in European capitals after David Cameron, the Prime Minister, took part in a tense conference call with Mrs Merkel, Mr Hollande and Mario Monti, the Italian prime minister.  As tensions within the eurozone deepened on Friday, the German chancellor dismissed "quick fixes" and refused to consider any discussion on pooling debt for eurobonds or Germany underwriting bank deposits in other eurozone countries. She hit out at Mr Hollande for blocking EU supervision of national spending and supporting eurobonds, which she warned would "mask" divergences between Germany and "mediocre" or declining eurozone economies, such as that of France.

Global weakness: Are we out of policy tools? - Despite a promising start to 2012, the global economy is now experiencing a deep and unsettling retraction that threatens to precipitate a new recession. The causes are manifold, but chief among them is instability in the eurozone: failed austerity programs and the probability of Greece’s exit from the monetary union are edging the crisis into Spain and Italy. Added to that is the uncertainty generated by both the US “fiscal cliff”—the set of sharp tax increases and spending cuts scheduled for the end of the year—and economic slowdowns in the world’s major developing economies. Some actions could still be taken to reverse the crisis, but with political considerations hindering proper economic responses to the downturn, the situation is dire. Key points in this Outlook:

  • With nearly two-thirds of the global economy either shrinking or slowing, the 2008 economic and financial crisis is back with a vengeance and threatens to bring on a recession that engulfs the world’s major economies.
  • A convergence of factors—including an intensifying European financial crisis, a slated year-end US tax hike, and increased slowing of major developing economies—have increased uncertainty in the global economy.
  • The recession may slow if Europe takes appropriate measures to stabilize its banking system and adjust its monetary policy and if the Greek election produces a cooperative government—however, these outcomes are unlikely, meaning the euro system may not survive the summer.

The End of the World as We Know It - Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union. German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.Fearing that a financial collapse is imminent, Greek depositors rush for the exit. The Greek government institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity. With Greece out of the eurozone, all eyes turn to Spain. Germany and others are at first adamant that they will do whatever it takes to prevent a similar bank run there. The Spanish government announces additional fiscal cuts and structural reforms. Bolstered by funds from the European Stability Mechanism, Spain remains financially afloat for several months. But the Spanish economy continues to deteriorate and unemployment heads towards 30%.  Violent protests against Prime Minister Mariano Rajoy’s austerity measures lead him to call for a referendum. His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos. Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough. A Spanish bank run, financial crash, and euro exit follow in short order. In a hastily arranged mini-summit, Germany, Finland, Austria, and the Netherlands announce that they will not renounce the euro as their joint currency. This only increases financial pressure on France, Italy, and the other members. As the reality of the partial dissolution of the eurozone sinks in, the financial meltdown spreads from Europe to the United States and Asia.

Banks’ Fire Drill for Greece Election - The banks are on high alert. Hundreds of employees at big firms, some part of special teams, will be on standby this Sunday, awaiting the results of Greece’s pivotal election. They are preparing for the worst case. The fear is that the vote will heighten the chances of Greece exiting the euro and the global financial system will be shaken when the markets open on Monday. After being largely unprepared for the extreme stress of the 2008 crisis, large banks in the United States are determined to be ready this time. They have been taking measures to deal with instability in Europe for over a year. In recent months, they have stepped up their contingency planning, especially after it became clear that Greece was struggling to comply with the terms of a March bailout that was intended to keep the country in the euro. In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses. As clients get nervous, banks have been guiding clients on how to react to a range of situations, from just one country leaving the euro zone to the dissolution of the euro itself.

Central bankers brace for euro break-up -- At least one country will leave the eurozone in the next five years, according to a survey of central bank reserve managers who collectively control more than $8,000bn. The results of the poll, conducted by UBS, highlight the concern among some of the world's top central bank officials ahead of the Greek election this weekend that is widely seen as a pivotal moment for the future of the single currency. UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions. The results were not weighted for assets under management. The central bankers and SWF managers said that a break-up of the eurozone was the greatest risk to the global economy over the next 12 months. Nearly three quarters of them said at least one country would leave the eurozone within five years. Of those, roughly a quarter said that more than one country would drop the euro. The prospect of a eurozone break-up has unnerved investors of all types in recent months, triggering a sharp sell-off in European equities, a jump in the bond yields of peripheral eurozone governments and a slide in the value of the euro.

Debt crisis: Banks prepare for worldwide chaos after weekend election - Central bankers are preparing radical action to stem the turmoil if Sunday's Greek elections wreak havoc in the markets. Speculation is mounting that central banks including the Bank of England, Bank of Japan and US Federal Reserve are readying emergency support measures to fight the market fall-out which the result of the polls could unleash. G20 officials said central banks were ready to step in if needed to stabilise financial markets after the vote. Canada is “ready to act” if the situation takes a serious turn for the worse or there is “an external shock”, a spokesman for its prime minister said. The head of the European Central Bank, Mario Draghi, also fuelled speculation of looming action, as he indicated inflation was not a threat which would prevent a move. “There are serious downside risks here,” he said. “This risk has to do mostly with the heightened uncertainty.”

There is only so much central banks can do - Mohamed El-Erian - Judging from the growing number of official remarks, central banks – in a standalone capacity and jointly – have been discussing what to do in the event of major disruptions to the European payments and settlement system. The immediate focus is, of course, Sunday’s highly uncertain election in Greece. But the contributing factors go well beyond this as they are entwined in Europe’s increasingly messy debt and banking circumstances. In welcoming such signs of responsible contingency planning, it is important to distinguish between what central banks can deliver and what they are incapable of doing. In the context of today’s complex crisis in Europe, these critical institutions have essentially been reduced to the role of fire brigades. They can try to reduce the risk of a fire and, should one occur, stand ready to fight it and contain damage. But, acting on their own, they are unable to alter materially the behaviour of those who place whole neighbourhoods at risk. Through both emergency liquidity operations and the willingness to stand as a solid counterparty in dysfunctional markets, central banks can offset (but not eradicate) disruptions to the payments and settlement system. Most critically, they can reduce the devastating impact of market “sudden stops,” which are the equivalent of economic and financial heart attacks for capitalism. But central banks are not the reason why Europe faces the tail risk of catastrophic disruptions. If anything, they have been working hard to prevent Europe from getting into the mess it finds itself in today. This, in turn, speaks to the critical policy distinction between willingness, ability and effectiveness.

A Global Perfect Storm, by Nouriel Roubini - Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere.  For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery. The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months. Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels. ... As a result, disorderly breakup of the eurozone remains possible. Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential.  Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election.  In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late.  Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013.

King hits panic button - The Governor of the Bank of England and the Chancellor of the Exchequer last night announced measures designed to prevent a new credit crunch that would push Britain's economy deeper into recession. The move was a clear sign that the Governor and the Treasury are alarmed by the prospects for the economy in the face of potential financial shocks from the eurozone. Speaking at the annual Mansion House dinner in the City of London, the Governor, Sir Mervyn King, and George Osborne said the Bank and the Treasury were working on a liquidity operation – a "funding for lending" scheme – which would provide private banks with cheap funding in exchange for a commitment from lenders to provide cheap loans to ordinary businesses and households. Sir Mervyn said he expected the scheme to be up and running "within a few weeks". Last night, the Treasury said it hoped the measures would increase annual lending flows to the economy by about 5 per cent, or £80bn. The scheme would permit private British banks to pledge their existing, illiquid loans as collateral at the Bank of England in exchange for highly liquid UK government bonds, which they could then sell on. In return for this cheap financing, banks would be required to commit to using the proceeds to increase the volume of loans to businesses and households, and to make that lending cheaper than it otherwise would have been.

Bank of England launches lending stimulus - The Bank of England will introduce two new stimulus packages to boost bank lending in response to the ‘heightened uncertainty’ over the state of the economy, governor Sir Mervyn King has revealed. Speaking at last night’s Lord Mayor’s Banquet at the Mansion House in the City of London, King said that the current ‘exceptional circumstances’ required further loans to banks to act as a ‘bridge to calmer times’. Analysts suggested that the schemes could provide £140bn worth of funding. Under one proposal, the Bank will provide loans to high street banks at below market rates, so they can then increase lending to the wider economy. This ‘funding for lending’ plan, which should be in place within a few weeks, would tackle the high-level costs of loans directly, said King, alongside the government’s existing credit easing policy. He also announced that the Bank would activate powers to make additional loans to banks to ensure they have enough liquidity to deal with ‘exceptional market stress’, such as possible shocks from the eurozone.

Crony Keynesianism - Krugman - George Osborne, the architect of Britain’s austerity policies, has just done an about face (without, of course, admitting it). Jonathan Portes has the goods: he points out that the assumptions under which the UK government’s new policy of subsidizing private investment — including infrastructure investment! — through loan guarantees makes sense are exactly the same assumptions under which debt-financed government spending on, say, infrastructure makes sense. So why funnel the money to private corporations via loan guarantees rather than simply doing the obvious and restoring the huge cuts that have recently taken place in public investment? One answer, of course, would be that doing that would be an implicit admission that the Cameron government has just wasted two years doing exactly the wrong thing. It has, of course, and apparently realizes its mistake; but presumably the government hopes that privatizing the process will confuse enough people that it can escape blame. But let’s also note that funneling funds through the private sector offers an opportunity to lavish favors on friends. Now, to be fair, so does government contracting; but that’s a familiar enterprise, with well-established rules and safeguards in place. This will be something new, which may make it possible to slip in some big giveaways that nobody notices.

BOE’s Posen: Bank of England Should Buy Small Business - The Bank of England should purchase bundles of small business loans in an effort to boost the supply of credit and end an “investors’ strike” that is holding back the economy, BOE rate-setter Adam Posen said Monday. In a reprise of an earlier appeal, Posen said major central banks around the world should engage in a fresh round of stimulus and target their efforts at parts of their economies most in need of official help. In the U.S., that is the residential mortgage market. In the U.K., it is lending to small businesses, Mr. Posen said, according to a text of his speech.

Two cheers for Britain’s bank reform plans - This is how George Osborne, UK chancellor of the exchequer, explained the government’s intentions at the Mansion House dinner on Thursday: “High street banking will be ringfenced so that taxpayers are better protected when things go wrong. We will be able to bail in creditors when a bank fails rather than turning to the public purse. And I believe that we have found a workable way to solve what I called the ‘British dilemma’ – so we are proposing to protect taxpayers in a way that does not make the UK uncompetitive as a home of global banks.” As the ICB’s interim report noted, the assets of UK banks were close to five times gross domestic product in 2009, against just one time in the US and three times in Germany and France. Against this background, the ICB made two principal recommendations relating to financial stability: the ringfencing of domestic retail banking from other banking activities and a need for greater loss-absorbing capacity, in the form of both equity and “bail-enable debt”. As Mark Hoban, financial secretary to the UK Treasury, noted on Thursday: “The ringfence won’t stop a bank failing, but it will insulate the deposits of families and businesses and, if a bank does fail, these essential parts of the banking system can continue without recourse to the taxpayer.”

U.K. Household Incomes Post Biggest Drop in 30 Years - Britons suffered their largest decline in real incomes in three decades during the fiscal year that ended in March 2011, with rich being hardest hit, according to a private think tank that scrutinizes government fiscal policies. The Institute for Fiscal Studies said Thursday that in the 12 months to March 31 last year, the median household income dropped to what it was as of March 2005. “Incomes fell right across the income distribution,” said the IFS, which based its study on figures published earlier by the U.K. Department for Work and Pensions. “But incomes fell proportionally more for richer households than poorer ones, leading to a large fall in income inequality.” Unlike previous years in which the wealth gap narrowed, however, the institute’s latest analysis “did not reflect rising absolute living standards among poorer households,” the IFS said. “Absolute measures of poverty increased for the population as a whole.”

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