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

Saturday, June 23, 2012

week ending June 23

Federal Reserve's Balance Sheet Continued to Grow in Past Week--The Federal Reserve's balance sheet grew over the last week, as the central bank announced plans to extend its program of lengthening the maturities of its portfolio holdings to help stimulate the sluggish economy. The Fed's asset holdings in the week ended June 20 were $2.873 trillion, up from $2.871 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities also increased, rising to $1.664 trillion from $1.660 trillion in the previous week. The central bank's holdings of mortgage-backed securities rose to $868.04 billion, from $867.93 billion a week ago.  Thursday's report showed total borrowing from the Fed's discount lending window was $5.42 billion on Wednesday, up from $5.38 billion a week earlier. Commercial banks borrowed $106 million from the discount window, up from $4 million in the previous week. U.S. government securities held in custody on behalf of foreign official accounts totaled $3.508 trillion, up from $3.500 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts was $2.809 trillion, an increase from $2.786 trillion a week earlier. Holdings of federal agency securities fell to $698.95 billion from $713.28 billion in the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 21, 2012 

Shiny, new, unopened & unused - When Federal Reserve officials meet this week, they will despondently confront an economy yet again falling short. Employment growth has flagged. GDP probably grew less than 2% (annualized) in the first half of this year; clouds from Europe, Asia and America's own "fiscal cliff" darken the second half. The Federal Open Market Committee's full year forecast of 2.4% to 2.9% looks out of reach. So what will they do? Much of the street expects some kind of action, a view I share. It would probably come as an extension of “Operation Twist,” the purchase of longer-term bonds in exchange for short or medium bonds already in the Fed’s portfolio. It could stretch this out over a few months or a full year.  This, however, will be fiddling at the edges. What critics say the Fed needs is a wholesale makeover of its goals and methods. Some want the Fed to raise its inflation target. Others would have it adopt a nominal GDP target. Both approaches are intended to induce easier monetary policy that would foster faster growth in employment.  At the opposite end of the spectrum, more conservative economists and Republican legislators want to take away the Fed’s responsibility for full employment and have it focus solely on inflation. 

Fed doves ready to act: A further large bout of unconventional easing is now on the agenda. As usual, the Federal Reserve will be the critical player in leading a co-ordinated easing in global monetary policy. Until recently, the Fed was not generally expected to ease policy at all after the FOMC meeting on Tuesday/Wednesday of next week, but economic conditions inside the US, not all of which are directly related to the eurozone crisis, have now changed markedly…. Why will the Fed have changed its thinking, compared to the neutral tone it was adopting only a few weeks ago? There are three key reasons for this:

  1. The US economy has slowed down markedly since the early spring. At the April meeting of the FOMC, the central tendency of the committee’s forecast for GDP growth in 2012 was 2.7 per cent, which is a little above the Fed’s 2.5 per cent estimate of long term trend. This forecast for GDP growth in 2012 is no longer tenable, and it is likely to be downgraded to around 2.0-2.2 per cent this week….
  2. Core inflation is now hovering around the Fed’s 2 per cent target. Probably the main reason why the doves fell silent earlier this year was the fact that core price inflation was running at higher levels than had been generally expected.
  3. Financial conditions have been tightening as the economy has slowed. Fed policy has always been highly sensitive to an undesired tightening in monetary conditions, caused by declines in equity prices, rises in credit spreads or appreciation in the dollar. This is exactly what has happened since the April meeting of the FOMC.

What Ben Bernanke and the Federal Reserve can do to save the US economy - Dean Baker - While the FOMC meets every six weeks, as a practical matter, the FOMC has historically been very reluctant to take major moves close to an election. After this week's meeting, we will be in the window where the Fed is unlikely to move. This means that it is especially important that the Fed take steps to boost the economy now. The fact that the economy can use an additional boost should not be in dispute. The rate of job creation in the last two months understates the underlying growth path, since it is essentially a payback from the stronger growth due to an unusually mild winter. Even the 165,000-a-month average rate of job creation for the last five months is far too slow. With the economy needing roughly 100,000 new jobs a month just to keep pace with labor force growth, it would take us more than 12 years to make up our 10 million jobs deficit at this point. If there is a clear need for more rapid growth, the data also show there is no downside risk of excessive inflation. The consumer price index fell 0.3% in May.Of course, many of us have argued that higher than normal inflation would be desirable, in any case. It would reduce real interest rates in a world where the Fed has already pushed the nominal federal funds rate as low as it possibly can. That would provide businesses with more incentive to invest. Higher inflation should also help to lift house prices, helping homeowners to rebuild equity.

Is further monetary easing warranted? - Talk of further rounds of stimulative action by the Federal Reserve have become increasingly common over recent weeks, following a string of disappointing economic data over the past months which have caused downward revisions in growth predictions for 2012. As Gavyn Davies notes, talk of further monetary easing before now has largely been rebuffed on the grounds that core consumer price inflation, along with inflation expectations, has remained stubbornly above the  Fed’s 2% target. This has also been a constant thorn in the Monetary Policy Committee’s side at the Bank of England, as inflation has remained well above the committee’s similar 2% target (CPI) for longer than expected and has regularly come in above the Bank’s own projections.  Thus the reasoning against further rounds of quantitative easing or further rate cuts (where available) up to now have largely rested upon the wholly reasonable argument that such action would increase prices even further. Some also point to the stubborn levels of inflation and simultaneously lacklustre levels of economic growth as a signal that the UK, and to a lesser extent the US, are supply constrained so that any further monetary easing would only lead to higher inflation (bar some minor temporary non-neutralities). But this may not necessarily be the case, and there may well be an argument for further easing at the next FOMC meeting.  My conjecture here rests on an area of research called “strategic-complementarity” of price changes or "state-dependent pricing" (see for instance here and here) which I will try to explain without getting too wonkish.

Will The Federal Reserve Extend Operation Twist? We Say No: – Fed Seen Twisting to Risk Management to Spur U.S. Growth
MarketWatch – Fed expected to twist again
The Financial Times- Fed’s hand could see it Twist again

As we noted earlier this month: Extending Twist is a limited option, as the Fed will have only about $175 bn of short-dated Treasuries (3 months to 3 years) in its SOMA portfolio on June 30. That would allow two to perhaps three months of further twisting at the current pace — i.e., into September. That does buy some time, but the Bernanke Fed has not been one to go for half-measures or small steps since the crisis began. If the outlook warrants more easing, we still see QE3 as the most likely tool chosen.We still believe this is the case.

Effects of Operation Twist Extension Would Likely Be Muted - Extending Operation Twist is an attractive option for the Federal Reserve at its policy meeting that begins Tuesday because the program is relatively uncontroversial. That’s in part because its impact is limited–and its effects would likely only become more muted if the central bank attempts to string it out, according to economists. Under the program known as Operation Twist, the Fed since last fall has been selling $400 billion of short-term bonds and using the funds to buy longer-term securities as part of its effort to lower long-term interest rates and spur borrowing and investment. Continuing the program beyond its June 30 expiration date is the Fed’s most likely move at its two-day policy meeting that wraps up Wednesday, according to a recent Wall Street Journal survey of economists.

Credit growth in the US should keep the Fed from implementing QE3  - With all the negative economic and market news out there it's worth pointing out a positive development that's been taking place recently. It is the expansion of bank credit in the US, which surprisingly has held up reasonably well. Certainly the rate of expansion is nothing like it was during the 04-07 period, but nevertheless it is trending up. This growth in credit is driven by improved lending (as opposed to securities purchases). The lending trend is something the Fed pays a rather close attention to. When lending continued to decline in the second half of 2010, the Fed initiated QE2. Lending in the US had bottomed in early 2011 and has been on the rise since then. The decline in 2010 was led by slowing consumer lending (which had made Bernanke &  Co. very uneasy). Consumer credit had since stabilized (arresting the decline in the overall lending - above) but for now is not showing any sustainable growth trend..In fact growth in lending has been driven by corporate loans, which began to increase sine the late 2010 and have been on a steady upward trajectory since.These trends in credit conditions should give the FOMC a pause if the Committee chooses to consider QE3. In spite of the mess in Europe, the overall liquidity conditions in the US look considerably better than they did in 2010 when the Fed felt that balance sheet expansion was warranted.

Report: Fed concerned about "Credit divide" - From Jon Hilsenrath at the WSJ: Clogged Credit Weighs on Fed Policy MakersThe housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve ...Fed officials are weighing new steps at their policy meetings Tuesday and Wednesday, following a period of disappointing jobs growth and financial turbulence in Europe. ... The credit divide factors into their thinking. Analysts think the policy options under discussion are:
1) extend the extended period to 2015, the current statement reads "the Committee ... currently anticipates that economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014".
2) Expand and extend the "program to extend the average maturity of its holdings of securities" (Operation Twist).
3) Launch QE3 (probably with more MBS buying).
None of these programs will bridge the credit divide. 

Fed Watch: Two Days Until the Fog Lifts -  Some additional stories to consider as await the outcome of this week's Fed meeting. First, tonight's Jon Hilsenrath WSJ article detailing the Fed's concern about the credit divide: The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom......Shrunken access among credit have-nots is triggering more than personal plight. It has weakened the influence of the Fed—one of the best hopes for spurring stronger economic growth—and raised doubts within the central bank about whether it is doing much to reduce unemployment...That underwriting conditions have tightened dramatically is not exactly a new story - as Hilsenrath writes, the Fed released a report urging Congress to take action to ease credit conditions in mortgage markets. What is interesting is the timing, coming just two days ahead of what is likely to be a somewhat contentious FOMC meeting. The underlying context of the story is that if credit market channels are clogged, additional action on the part of the Federal Reserve will have little impact. Consider this in terms of the risk/reward trade off that Fed official like to cite when discussing options for additional easing. They may be hesitant of taking the risk that all they get from additional easing is criticism from lawmakers - and no shortage of it during an election year - in return for very little benefit.

Fed Lacks Right Ammo to Bag ‘Animal Spirits’ - The Federal Reserve is hunting for animal spirits. But policy makers may not have the right ammunition to bag the big one.  “Animal spirits” is the phrase coined by John Maynard Keynes for risk-taking confidence among businesses, consumers and investors. In particular, the “spontaneous urge to action” spurs companies to expand facilities and hire new workers.That confidence has been sorely lacking in the labor markets this spring. The payrolls report shows job growth has averaged 96,000 in the past three months, well below the 252,000 rate in the three months before that.  The payrolls number, however, is the net change between job additions and separations. The Job Openings and Labor Turnover Survey (Jolts) fleshes out the churning within the labor markets. The April report released. Tuesday shows the spring payroll weakness reflects a very steep drop in hiring, not a rise in job losses. According to the Jolts report, new hires fell to 4.18 million in April, down from 4.34 million in March and from 4.44 million in February which had been the highest hire number since October 2008.Companies also cut back on looking for workers. April job openings fell to 3.42 million, the lowest number in five months.

FOMC Statement: Continue Twist through end of Year - FOMC Statement: (excerpt) To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Fed Statement Following June Meeting -- Read the full text of the Fed’s statement following its June meeting:

Parsing the Fed: How the Statement Changed - The Federal Reserve releases a statement at the conclusion of each of its policy-setting meetings, outlining the central bank’s economic outlook and the actions it plans to take. Much of the statement remains the same from meeting to meeting. Fed watchers closely parse changes between statements to see how the Fed’s views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language. This is the June statement compared with April. See analysis of changes below. (Click here for full version.)

Fed Extends Operation Twist, Offers No Other Monetary Policy Changes - The Federal Reserve decided to continue their “Operation Twist” program until the end of the year. It was scheduled to expire this month. The vote of the Federal Open Market Committee was nearly unanimous, with only Jeffrey Lacker of the Federal Reserve Bank of Richmond opposing the move. Here’s the full policy statement by the FOMC. The only policy change announced, the extension of Operation Twist, is described here: The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. Nobody has really judged Operation Twist as successful. It is helping to keep interest rates low, and I suppose you can say that this is partially responsible for an increase in mortgage refinancing. Mortgage purchases remain low, however, and substantial numbers of people are locked out of the lowest rates on refis because of their underwater status. Moreover, interest rates are low mostly because of the depressed economy, not Operation Twist.

US Fed opts to extend Operation Twist - The Federal Reserve has extended “Operation Twist” – a plan to sell short-term bonds while purchasing longer-term securities – to support a slowing US economic recovery, but refrained from a more aggressive plan to ease monetary policy. At the end of a two-day meeting, the Federal Open Market Committee, which sets interest rates, offered a bleaker picture on Wednesday of the US economy than it had at its last gathering two months ago. It noted that employment growth had slowed and consumer spending was rising at a weaker pace.  The Fed warned that global financial strains continued to pose “significant downside risks” to the economic outlook. Officials cut forecasts for US growth this year to a range of 1.9 to 2.4 per cent, from between 2.4 and 2.9 per cent in their previous projection in April.  In a sign that the Fed remains divided over the seriousness of the deterioration in the economy and the effectiveness of bolder steps to address the slump, it stopped short of approving a fresh expansion of the central bank’s balance sheet through new asset purchases, known as “QE3”. Still, the Fed statement strengthened its pledge to be more aggressive if required, and Ben Bernanke, Fed chairman, said the central bank was ready to ease monetary policy further if needed. “We are prepared to do what’s necessary. We are prepared to provide support for the economy,” he said at a press conference. “Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy.”

Fed Extends “Twist” Program to Drive Rates Lower — The Federal Reserve is extending a program designed to drive down long-term U.S. interest rates to spur borrowing and spending. Hiring has weakened, and the U.S. economy needs more support, the Fed said Wednesday. It reiterated its plan to keep short-term rates at record lows until at least late 2014. And it said it’s prepared to act further if the economy deteriorates. The central bank noted that Europe‘s debt crisis threatens the economy. Fed officials will be watching for any breakthrough during a summit of European leaders in Brussels next week.The Fed announced its action in a statement after a two-day policy meeting. It will continue a program called Operation Twist through year’s end. Under the program, the Fed has been selling $400 billion in short-term Treasurys since September and buying longer-term Treasurys. It said it will extend the program through December using $267 billion in securities.

The Fed acts, just - THE Federal Reserve has once again eased monetary policy to boost the flagging recovery, announcing a modest extension of "Operation Twist", that is the purchase of long-term bonds financed by the sale of short-term paper. The stockmarket initially sold off, but has bounced back as of this writing. In its statement, the Fed said: The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. In light of this less-than-merry forecast, the Fed said it would continue to sell one- to three-year bonds from its portfolio and use the proceeds to purchase six- to 30-year bonds, thereby putting downward pressure on long-term interest rates. An accompanying statement from the New York Fed said this would result in the purchase of $267 billion of longer-term bonds by the end of the year.

Fed Watch: Twist It Is - The FOMC just released their statement, dashing hopes for QE3. We are still waiting on the press conference, but some quick thoughts. First, the Fed does not appear to be particularly worried by recent weak data:  However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book. They do not appear to have marked down their forecasts as substantially as many believed. Also, they may want additional data to confirm any recent weakness. Second, they continue to state the case for more easing: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion. This is indeed maddening and is the primary reason market participants expect sizable QE is coming. The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver..

Asset Purchases Work, at Least a Little -- A paper published last month by two Federal Reserve Board economists estimated that the Fed’s first two rounds of asset purchases reduced interest rates on 10-year Treasury bonds by about one percentage point. A number of earlier studies based on different methodologies have located the impact in the same ballpark. The Bank of Canada published a good overview of that growing body of research last year. There are some important caveats, however. It appears that asset purchases have the largest impact when financial markets are frozen, so the Fed would need to buy larger quantities of securities to replicate the impact of its earlier purchases. There is also disagreement about the magnitude of the economic impact. Lower interest rates don’t directly benefit people and businesses that cannot qualify for loans. A 2010 study by economists at the Boston Fed found that the first round of purchases contributed to a surge in refinancing activity among those with good credit, but no increase in home purchase loans and uncertain benefits for the broader economy. A more recent study, published in December 2011 by economists at the Federal Reserve Bank of New York, found that the second round of Fed asset purchases — $600 billion in Treasury securities – most likely had a moderate but enduring impact on economic output, “unlikely to exceed half a percentage point.”

In FOMC Rate Decision, The Fed Does The Absolute Least It Can Do: The Federal Reserve is failing to achieve both of its legally mandated goals, full employment and stable prices. And yet it chose on Wednesday to do the absolute least it could do to change that. The Federal Open Market Committee, at the end of a two-day policy meeting, announced it was going to extend a bond-buying program known as "Operation Twist" for another six months. Under this program, the Fed sells short-term debt and buys long-term debt. The goal is to keep long-term interest rates low to help the economy. There is some debate about how much the program has really helped, but it is likely better than doing nothing. But extending the program was only just barely more than doing nothing. Former Dallas Fed President Robert McTeer told CNBC that letting the Operation Twist program simply end as scheduled at the end of the month would have actually made monetary policy less easy. Today's move is simply running in place.

Counterparties: What the Fed didn’t do - The Fed announced action today! Here’s the full statement, which is mostly notable for what the Fed didn’t do: no QE3, no nominal GDP targeting and nothing like what Fed Vice-Chairman Janet Yellen recently teased us with. In sum, the Fed is extending Operation Twist, selling short-term treasuries and buying longer-term bonds. (NPR has a nice explainer on Twist and why it mostly won’t do much.) Phil Izzo has a great tracker of how the Fed statement has evolved, inserting phrases like, “However, growth in employment has slowed.” As Bernanke said in his press conference, “the outlook has changed.” The Fed actions, though, mostly haven’t. Which is why there’s a whole host of folks who’re clamoring for the Fed to do more. Greg Ip calls the Fed’s latest move “minimalist” and worries about moving Operation Twist 2.0′s expiration date to December, the same time America is set to fall off its “fiscal cliff“. Scott Sumner argues that Bernanke has actually overseen an excessively tight monetary policy, at least in terms of nominal GDP and inflation. And Justin Wolfers, looking at the Fed’s new forecast, tweeted that the Fed essentially admitted failure on both the inflation and full-employment front – the former being low and the latter being persistently high. This explains why Binyamin Appelbaum called the Fed’s move a modest “placeholder” and why Felix wrote “it seems that unemployment, on its own, is incapable of persuading Bernanke to do more”.

Why Bernanke’s not doing more - I don’t think there’s all that much difference, in reality, between the Ben Bernanke we saw at today’s post-FOMC press conference, on the one hand, and Mohamed El-Erian, criticizing Bernanke’s decision, on the other. Both of them say that Fed action at this point is a second-best solution to the economic problems facing the US: what we really need — and aren’t going to get — is fiscal, not monetary, stimulus. Bernanke got quite a few questions today asking why he wasn’t being more aggressive; certainly extending Operation Twist by a few months is unlikely in and of itself to make much of a noticeable difference to anything. As Joe Weisenthal points out, if the market thought that Operation Twist would actually boost US growth, then the announcement should have sent long bond yields up; instead, then went down. That said, all markets are distorted right now by what you might call Global Zirp. El-Erian worries about the long-term implications, without quite coming out and saying that they’re unavoidable:

Fed’s Lacker Explains Dissent -- Fresh support from the Federal Reserve won’t significantly boost the economy without creating the risk of higher inflation, Federal Reserve Bank of Richmond President Jeffrey Lacker said Friday. However, if inflation drops, further action from the central bank could be warranted, Mr. Lacker said. The Richmond Fed chief was the only one of the 12 voting members of the Federal Reserve’s policy-making committee to vote against the group’s decision earlier this week to extend a program meant to lower long-term interest rates.

Fed's Lacker Says Operation Twist Won't Help Growth, Jobs - Federal Reserve Bank of Richmond President Jeffrey Lacker said he dissented from the Fed’s $267 billion extension of its Operation Twist program believing it would spur inflation and not significantly help the economy. “I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable,” Lacker said in a statement today from the Richmond Fed.  Central bank officials on June 20 downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy. Lacker opposed the Fed’s announcement that it will swap short-term Treasury securities with longer-term debt in an effort to hold down borrowing costs. He has dissented from all four Federal Open Market Committee decisions this year.  “While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset,” Lacker said.

Fed Watch: Where to Next? - I remain as frustrated at the outcome of this meeting as in the run-up to the meeting. Reviewing what I already wrote as well as comments across the web leaves me with this:

  1. The general argument that supported expectations of QE3 was broadly correct.  The basis of this argument was a deterioration in the forecast matched with moderating inflation data and increasing downside risks.  
  2. The Fed wants to see more data before making another move.  This seemed to be evident in Bernanke's press conference. I suspected this might be the case, but am surprised that while they are sufficiently uncertain of the data to forestall QE, they were certain enough to mark down their forecasts.
  3. The labor market remains a critical indicator.  It is clear from the final sentence that sustained progress in labor market conditions would prevent additional easing, and vice versa.  
  4. The Fed is very uncertain about the impacts of additional QE.  This uncertainty is probably the most significant impediment to additional easing.  It is really the only explanation for Bernanke's hesitation to do more now; clearly the forecast justifies additional action as it indicates the Fed does not expect to meet either its employment or inflation mandates.  
  5. The form of additional easing remains uncertain.  Like other officials, Bernanke did not close the door on additional asset purchases.  I noted earlier, however, that the statement no longer singles out balance sheet operations as the next tool.

The Fed Keeps Slouching Towards Oblivion -- It's a summer sequel so bad even Michael Bay couldn't dream it up. For the third straight year, a strong winter has given way to, well, bleh. Job growth stalled to just 69,000 in May. That's not a recovery worthy of the name. It's time for the Fed to do more, right? Yes. The Fed projects inflation to stay too low and unemployment too high for years. It's a situation that screams for Fed easing. But the Fed isn't easing. It's playing a game of wait-and-see.  Even the big news at the Fed's latest meeting wasn't really new. The big news was that the Fed  will extend "Operation Twist" -- which was set to expire -- through the end of the year. In plain English, the Fed will keep selling short-term bonds, and using that money to buy long-term bonds. It's a way to push down long-term interest rates without printing money. But that was it. There wasn't any more bond-buying. Nor did the Fed say that it expects to keep rates low for longer. It was a status quo meeting when the status quo is not good.

The scary take on Ben Bernanke’s remarks - Ezra Klein - Federal Reserve Chairman Ben Bernanke’s press conference seemed frustrating for him and for the reporters. Fed officials keep saying the economy is in bad shape, the outlook is deteriorating, and they can do more, but they keep not really doing more. Most of the questions thus fall into two categories. There’s the “Why aren’t you doing more?” category, and the “How much worse would things need to get for you to do more?” category. To the first question, Bernanke responds that there are risks to doing more, that the policy tools he’s using are not that well understood, and that it would be nice if he got a bit of cooperation from other parts of the government (translation: Do your job, Congress). To the second, Bernanke says that the Fed is waiting to get more information on whether the economy is really slowing, and if so, by how much.  If there’s more Bernanke could be doing, and if what he’s doing could be effective, then it seems downright cruel to be holding out on a labor market with 8.2 percent unemployment. If the policies he could pull out, however, are so risky and ineffective that even 8.2 percent isn’t reason enough to use them, then is there really anything more the Fed can do? To put it another way, a scary interpretation of Bernanke’s position is that he doesn’t believe the Fed could do much more to help the economy, but he doesn’t want the market to know that, and so he keeps not doing more but telling the markets he could do more if he wanted to. As one wag put it on Twitter, the bazooka Bernanke says he’s got in his pocket is really just his finger.

Does Ben Bernanke Have Any Ammo Left? - The Federal Reserve can’t seem to get any love these days.   From the left, the refrain has been that the Fed is not doing enough. The central bank has a duel mandate to keep prices stable and unemployment low, and inflation has been consistently low while unemployment remains stubbornly high. Writes Matthew Ylglesias in Slate: From the right we hear that though unemployment is a problem, the Fed doesn’t have the tools necessary to fix it, and by trying, it will cause runaway inflation and free-market distortion. In the Financial Times, Mohamed El-Erain writes, “Whether you are worried about insufficient demand or the economy’s sluggish supply response, it is hard to argue that what ails the US is in the domain of Fed tools. The most it can do is buy time while trying to inform and — at the margin — influence steps that can only be taken elsewhere . . . .” Even worse, some fear that the Fed’s stay-the-course comportment belies the fact that after two rounds of so-called quantitative easing and two rounds of Operation Twist, the central bank doesn’t have any ammo left to help a still-sputtering economy. Ezra Klein worries as much, writing yesterday:“A scary interpretation of Bernanke’s position is that he doesn’t believe the Fed could do much more to help the economy, but he doesn’t want the market to know that, and so he keeps not doing more but telling the markets he could do more if he wanted to.”

Bernanke Paves the Way for QE3 on August 1st - At the January press conference, Fed Chairman Ben Bernanke hinted at further accommodation (QE3) based on incoming data. Then the January and February employment reports were above expectations, and inflation also picked up a little due to the surge in oil and gasoline prices. In April, based on the stronger data, the FOMC participants revised up their projections for GDP and inflation, and revised down their projections for the unemployment rate - and QE3 was put on hold. Compare the current projections released today (below) not just with the April projections, but with the January projections.  2013 and 2014 are now worse. As Tim Duy wrote, the projections are "shocking". [T]his is a significant downward revision to the forecast for not just this year, but next year as well. Moreover, they expect no meaningful progress on the unemployment rate and the PCE inflation forecast remains centered well below 2%.  In the press conference today, Bernanke made it clear that further accommodation is very likely if employment indicators don't improve soon. He also pointed out that the Fed can't do any more "twisting" because of the lack of short duration securities. And that strongly suggests QE3 following the two day meeting ending August 1st.

Different Views on QE3 Timing - Yesterday I argued that Fed Chairman Ben Bernanke had paved the way for QE3 as soon as August 1st, depending, as always, on incoming data. Others think the Fed will wait longer. Here are some different views: From Merrill Lynch analysts (who all year have been predicting QE3 at the September FOMC meeting):  The Federal Reserve announced that it would extend Operation Twist through the end of the year, selling or rolling over $267bn of short-term holdings into longer-term Treasuries. We view this program as a down-payment on further easing: we still expect the Fed to launch QE3 in September and to push out its forward guidance to mid-2015 by August or September.  From Goldman Sachs analysts (who thought there was a high probability QE3 would be announced at the meeting yesterday):  The FOMC's communication was dovish. First, changes to the committee's economic outlook were larger than expected, with significant downgrades to real GDP growth and employment. The fact that the FOMC took a "substantive" easing step today probably makes another easing move in the near term relatively unlikely. And quite a few people wonder - given the Fed's own projections - why the Fed didn't do QE3 yesterday. From Paul KrugmanIts own projections show high unemployment persisting for years and years, inflation running below its target — and realistically its inflation projections are too high while its unemployment projections are too low. There is no rational argument I can see for not going all out with monetary stimulus. But what we actually got was action that was pretty obviously calculated to be the absolute least the Fed could do without generating headlines saying “Fed ignores weak economy”.

QE3 launch unlikely to make waves - The Fed moved to combat slowing growth by stretching out “Operation Twist”, or buying long-term Treasuries while selling shorter-duration debt. More significant, the central bank reminded investors that it is willing to turn again to more unconventional firepower in its arsenal if things really go south. The case for more action is growing. Reports released this week, from jobless claims, to the important Philadelphia manufacturing index, to results for bellwether shipping empire FedEx, sketch a grey picture. Steven Ricchiuto, Mizuho Securities chief economist, says: “There will be additional accommodation given the data that we’ve seen in the last couple of days.”  The Fed’s own projections pointed to growth and unemployment below targets for the year. Its monetary policy committee statement on Wednesday highlighted declining inflation, freeing its hand to further expand money supply. Bank of America Merrill Lynch, for one, expects the launch of QE3 and a commitment to a longer period of ultra-low interest rates by September.If Wall Street handicappers are right and QE3 does set sail, how will markets respond? Weakly, many strategists say. One reason is because people are still unloading the burdens of the millennial debt bubble. Low interest rates and easy money do not necessarily make them want to borrow more or to spend more. As the Financial Times reported this week, most US homeowners are still paying above-market mortgage rates as they are either unable or unwilling to refinance. “You can have interest rates pretty low like we have and still not get a lot of bang for your buck,”

Fed Helping Borrowers, Clobbering Savers - During his press conference Wednesday, Federal Reserve Chairman Ben Bernanke said monetary policy had been helping the general public. In particular, borrowers are benefiting from extremely low interest rates. Federal Reserve Chairman Ben Bernanke When signs of economic collapse appeared in 2008, the Fed cut short-term rates to zero, and Wednesday’s policy statement reiterated that rates would stay there until at least 2014. Policy makers hope cheap borrowing will spur businesses and consumers to finance big purchases to boost demand. What tends to be glossed over is the flip side to the Fed’s zero-rate strategy: Savers are getting whacked. And while some portion of interest earned is left to accumulate in savings account, any loss of income is a drag on consumer spending and consumers’ sense of financial well-being. Saving had gone out of style during the housing boom, when many families looked at their homes as giant piggy banks. The recession quickly turned shoppers into savers. Fed data show interest-related financial assets (including bank saving accounts, money-market funds and government securities) held by households increased by about 20% from the end of 2007 until the first quarter of 2012. Yet even with a larger nest egg, savers are falling behind, according to Bureau of Economic Analysis data. At the end of 2007, savers earned $1.3 trillion in interest, at an annual rate. In the first quarter of 2012, the sum had dwindled $986.2 billion.

The Fed’s risky and reckless tight money policy - I rarely use the term ‘risk’ in my macro posts.  It would barely show up in any word cloud.  I rarely use the term ‘power’ in my micro posts.  Those are my blind spots.  Today I’m going against conventional wisdom by arguing that the Fed’s ultra-tight monetary policy has dramatically increased risk in three areas: policy fragility, balance sheet risk, and financial system fragility. Who says Fed policy is ultra-tight?  Actually, Ben Bernanke said so in 2003, when he argued that the money supply and interest rates were misleading, and that the “only” way to determine the stance of monetary policy is by looking at NGDP growth and inflation.  If you average those two variables, the past 46 months have been the tightest money since Herbert Hoover was President.  NGDP growth has averaged only 1.9%/year, inflation only 1.1%. And what are the consequences of this policy?

  • 1.  It’s obviously made the financial crisis much worse, as an unexpected slowdown in nominal income growth almost inevitably makes it harder to repay loans.  After all, income represents the resources that people, businesses and governments have to repay nominal debts.  Less nominal income leads to more defaults.  This is currently an even bigger problem is Europe.
  • 2.  Less obvious is the fact that the ultra-tight monetary policy has lead to  a much bigger Fed balance sheet.  If you look  around the world you’ll see that countries with lower NGDP growth rates have lower nominal interest rates and much bigger monetary bases (as a share of GDP.)

Brief Notes From Hiding - Krugman - A couple of quick reactions to events transpiring these past couple of days:

  • 1. The G20: Jonathan Portes contrasts the latest communique with what the Very Serious People said two years ago, when Camerkozy austerity was all the rage; Portes reminds us of what I said at the time: “Utter folly posing as wisdom”. Indeed it was.
  • 2. The intimidated Fed: The minimal action — extending Operation Twist — wasn’t just inadequate, it was shameful. The Fed has a dual mandate, employment and price stability. Its own projections show high unemployment persisting for years and years, inflation running below its target — and realistically its inflation projections are too high while its unemployment projections are too low. There is no rational argument I can see for not going all out with monetary stimulus. But what we actually got was action that was pretty obviously calculated to be the absolute least the Fed could do without generating headlines saying “Fed ignores weak economy”. I’m sorry, but this looks like pure concession to political intimidation — a Fed refusing to do anything that would let Republicans accuse it of helping Obama. And for the sake of its own political comfort, the Fed is essentially betraying the unemployed.

The Fed's Unwinnable War on Unemployment - The Federal Open Market Committee decided to continue its maturity extension program (aka “Operation Twist’) through the end of the year. While this decision represents a victory, of sorts, for proponents of monetary activism, it was well short of what many advocated. The Fed committed to purchase an additional $267 billion of longer-term Treasury securities through the end of 2012. “Operation Twist” differs from quantitative easing in that the purchases of these securities are financed by the sale and redemption of shorter-term securities currently in the Fed’s portfolio. As a result, the Fed’s balance sheet remains the same size and no new reserve balances are created at member banks (aka “printing money”). Yet, with money market interest rates near zero, there is practically no difference between the two policies. In one case, the Fed finances the purchase of a 10-year bond by crediting a bank with a reserve deposit that earns 0.25% interest; in the other, the Fed finances the purchase by selling a 2-year note that yields 0.3%. If you are wondering how or why this kind of portfolio shift is supposed to engineer faster economic growth, you are not alone. Probably the best description of the pointlessness of this operation comes from John Cochrane, who asks:...of all the stories you’ve heard why unemployment is stubbornly high, how plausible is this: ‘The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this mistake.

Should the Fed Buy Munis? - Mike Konczal floats a very interesting idea emailed to him by Richard Clayton, the Research Director of Change To Win: under Section 14 b 1 the Fed has the authority to purchase any obligation of a state or local government of 6 months maturity or less. This provision seems clearly to permit a mass refinancing of state and local government debt at the current 6 month interest rate (very close to 0), which would save state and local gov’ts approximately $75 billion a year (going by the flow of funds #s for state and local interest payments). Moreover, since state and local govts do the bulk of infrastructure investing, the fed could create a program to fully fund such investment through purchases of newly issued 6 month bonds I really love this idea (the alternative being the very iffy notion of the Fed buying REITs, ETFs, etc.), but I do wonder if it’s practical. Munis would have to issue new bonds, and they’d be in the position of having to roll them over six months hence. Could they do that? Would the Fed still be there in six or twelve months? Could the whole distributed machinery really be built quickly? Would muni managers get on board? Would the political pressure on the Fed resisting what looks like a very fiscal move make it difficult to implement? Is there a large and liquidly trading existing stock of short-term munis out there that the Fed could just buy (pushing down short-term muni rates)?

Bernanke Could Trade Helicopter for Powerball – WSJ - With the Federal Reserve running out of options, maybe Chairman Ben Bernanke will finally get the chance to live up to his “Helicopter Ben” moniker. But he’d have to get creative to do it. The helicopter drop began as a thought experiment by Milton Friedman – what would happen if a helicopter flew over a community and dropped cash? – that economists have since tapped as a way a central bank could boost growth in an environment where interest rates are ultra low. To engineer a helicopter drop, the Fed would have to not just print money, but print it and give it away to people without them providing anything (labor, stocks, etc.) in return. So absent using actual helicopters, the Fed would have to come up with some sort of method of getting the cash into people’s hands. The one Mr. Bernanke suggested in his famous 2002 helicopter speech was for Congress to pass a broad-based tax cut with the Fed buying the debt the government issued to fund the cut. In today’s political climate, convincing a gridlocked Congress to go along with the idea Mr. Bernanke laid out is an obvious nonstarter. So here’s a modest proposal: The Fed should start buying trillions of dollars in lottery tickets.

MBS on Fed's balance sheet - A number of readers have asked about the declines from the peak of mortgage backed securities (MBS) holdings on Fed's balance sheet. Here is a quick overview. Right after the financial crisis, the Fed initiated the first round of balance sheet expansion (QE1) which involved MBS. The Fed at the time was buying massive amounts of these securities, effectively consuming the bulk of agency new issue and then some. The balances went above 1.1 trillion before the program ended.  QE2 did not involve MBS and neither did the Operation Twist. Unlike treasuries however, MBS tend to prepay when mortgage holders refinance. It means that the principal of these bonds naturally declines, particularly as rates drop and refinancing gains momentum. That was the reason for the decline in balances after the peak in 2010.  Late last year, the Fed decided to start replacing the portion of MBS that pays down or matures.  The Fed wanted to send a signal that it is ready to take action, and stabilizing the MBS holdings was one of them. That's when the balances stopped declining. The central bank may end up revisiting MBS purchases as part of the next easing program (as discussed here), although outright purchases are still unlikely.

Monetary Policy Is about Money, not Interest Rates - And when tight money has produced ultra-low interest rates, then thinking about monetary policy in terms of interest rates is misleading. Obviously, it seems unlikely that pushing long-term interest rates even closer to zero will have a big effect on business investment. But the point of monetary easing isn’t lower interest rates, it’s giving people more money to spend. Indeed, effective monetary easing will likely lead to a rise in interest rates, as businesses anticipate consumers with more money in their pockets will buy more goods and services. That will lead to a virtuous circle: businesses hire more workers in anticipation of increased demand, which puts more money in workers’ pockets, who then spend their earnings on goods and services, further increasing demand. But the idea that the Fed conducts monetary policy by manipulating interest rates makes it impossible to think about this process clearly.

Conflicts at the Regional Fed Banks Go Way Beyond Jamie Dimon - Some heavy-hitters are lobbying to get JPMorgan CEO Jamie Dimon to give up his seat on the board of the New York Federal Reserve. And he should — Dimon clearly wasn’t paying attention to the ABCs of banking risk. But if Dimon resigns because his bank lost more than $2 billion, and the story ends there, that would be a shame. Dimon is an embodiment of much deeper problems with the way the regional Fed banks work: In short, bankers have too much say about the financial system at the expense of everyone else. There is simply too much opportunity for all kinds of conflicts of interest. To hear Jamie Dimon testify before Congress, his bank’s trading debacle is completely unrelated to these matters. In testimony before the Senate last week, he was big on mea-culpas but short on details, insistent that his slip-up in no way diminishes his ability to steady the financial ship of state. Expect more of the same at the House committee hearing today. His prepared testimony is nearly identical. But a lot of experts aren’t buying it. Former IMF chief economist Simon Johnson has collected more than 37,000 signatures calling for Dimon to get the boot from the NY Fed. Democratic senate nominee Elizabeth Warren says not only should Dimon resign but we should restructure all of Wall Street. She has gathered nearly 122,000 signatures demanding that Congress reinstate the Glass-Steagall law that completely separated commercial banking with its federally insured deposits from the casino-like world of investment banking.

FOMC Projections and Bernanke Press Conference - Below are the update projections starting with when participants project the initial increase in the target federal funds rate should occur, and the participants view of the appropriate path of the federal funds rate. I've included the chart from the April meeting to show the change. The four tables below show the FOMC June meeting projections, and the previous two projections to show the change (January and April). Click on graph for larger image. "The shaded bars represent the number of FOMC participants who project that the initial increase in the target federal funds rate (from its current range of 0 to ¼ percent) would appropriately occur in the specified calendar year." Here is the April chart for comparison. There was a shift to 2015 with two additional participants. A key is the same number of participants think the FOMC should raise rates before 2014.

Fed Issues Gloomier Forecasts - Economic projections released by the Federal Reserve on Wednesday saw officials expecting weaker growth, higher unemployment and softer inflation over the next few years. The Fed’s “central tendency” for the U.S. gross domestic product now ranges from 1.9% to 2.4% this year, compared with the 2.4% to 2.9% gain predicted in April. Growth is seen between 2.2% and 2.8% in 2013, from the April view of 2.7% to 3.1%. U.S. GDP growth is seen between 3.0% to 3.5% in 2014.

Fed Economic Outlook - As expected, the Fed has reduced its growth and unemployment forecasts.Here are the new projections, along with the old projections. Here's what the Fed sees for 2012, vs. its previous estimate:

  • GDP: Current estimate: 1.9-2.4%, Previous estimate: 2.4-2.9%
  • UNEMPLOYMENT RATE: Current estimate: 8.0-8.2%, Previous estimate: 7.8-8.0%
  • PCEINFLATION: Current estimate 1.2-1.7%, Previous estimate: 1.9-2.0%.

You can download the full projections here.

This Is Just Sad - The projections are up, and I think they are shocking.  In contract to the tone of the statement, this is a significant downward revision to the forecast for not just this year, but next year as well.  Moreover, they expect no meaningful progress on the unemployment rate and the PCE inflation forecast remains centered well below 2%. So, the basic analysis done by those expecting QE3 was correct.  The forecast was revised significnatly downward, with no change in inflation, and downside risks have increased.  But the Fed did not follow through on the logical conclusion to pursue QE3.   What exactly is the bar to additional QE if this is not it?

Employment growth and the FOMC Summary of Economic Projections - Atlanta Fed's macroblog -- Here at macroblog we are always keen for an excuse to play with the Atlanta Fed's Jobs Calculator, and Wednesday's release of the Summary of Economic Projections (SEP) from the most recent meeting of the Federal Open Market Committee (FOMC) provides the perfect opportunity. The SEP, as you know, offers up three-year (and longer-run) projections of growth in gross domestic product (GDP), inflation measured by the personal consumption expenditure index (both headline and core), and the unemployment rate. The SEP does not directly provide information on employment growth, and each of the 19 FOMC participants among the seven governors and 12 Federal Reserve Bank presidents will have their own views about how all the dots connect between GDP growth, unemployment, and job creation. I don't presume to speak for any of them, but with a few assumptions we can get a ballpark sense of how the range of unemployment rate projections might map into payroll job changes.

The Fed And Goldilocks Economic Forecasting - Beginning in 2011 the Federal Reserve begin releasing its economic forecast for the present year and two years forward, covering GDP, Unemployment, and Inflation. The question is, after 18 months of these forecasts, just how accurate has the Fed been in forecasting these economic variables? I have compiled the data from each of the releases for each category, comparing them to the real figures, and using a current trend analysis for future estimates. When it comes to the economy the Fed has consistently overstated economic strength. Take a look at the chart and table. In January of 2011 the Fed was predicting GDP growth for 2011 at 3.7%. Actual real GDP (inflation adjusted) was 1.6%, or a negative 56% difference. The estimate at that time for 2012 was almost 4% versus 1.8% currently.  We have been stating repeatedly over the last 2 years that we are in for a low-growth economy due to the debt deleveraging, deficits and continued fiscal and monetary policies that are retardants for economic prosperity.  As of the latest Fed meeting, the forecast for 2013 and 2014 economic growth has been revised down as the realization of a slow-growth economy has been recognized. However, the current annualized trend of GDP suggests growth rates in the next two years that will roughly be half of the Fed's current estimates of 2.85 and 3.4%. A recession in 2013 is a strong likelihood given the current annualized trend of economic growth since 2000. A recession followed by a rebound in 2014 would leave economic growth running at annual rate close to 1% to 1.5% range versus the current estimate of nearly 3%.

My Question for Ben Bernanke: What if Inflation Were 8.2 Percent?: If I had a chance to ask Federal Reserve Chairman Ben Bernanke a question at his press conference today, this is what I would want to know: "Suppose that inflation were 8.2 percent and the unemployment rate was at or below 2 percent, what would you do?" The answer, obviously, is tighter money. But that wouldn't just mean an operational action to raise interest rates. You would, of course, raise interest rates. But expectations matter. If people thought that as soon as unemployment lingered above 2 percent for a month or two that rates would come down again, then inflationary expectations would never be whipped. To implement a tight money policy that worked, Bernanke would need to lecture a little bit. He'd have to say that while of course nobody wants to see unemployment go higher if you want to bring inflation down you have no choice but to tolerate somewhat higher unemployment. He would explain that the inflation isn't just annoying, but that over the long term it's quite damaging to the real growth prospects of the economy slowly but surely eroding the bases of American prosperity. Higher unemployment would be a bitter pill to swallow, but all things considered it would be the best choice for the country and the whole purpose of giving central banks operational independence is to let them make those kind of tough calls. What we saw today from the Fed was the reverse of that.

Jobs, inflation, expectations, and causation. - Matt Yglesias says that "Inflation doesn't create jobs, jobs create inflation". Well, yes and no. Both. Neither. It's simultaneous causation. It's a non-linear story, in the Artsie sense of "non-linear". And don't forget expectations. When we add in expectations, the story becomes very non-linear. Here's a simple plot summary. An increase in expected inflation, and/or an increase in expected real growth causes an increase in (the) Aggregate Demand (curve). An "increase in (the) Aggregate Demand (curve)" means a change in the whole relationship between prices and output demanded, so that more output will be demanded at the same price and/or the same output will be demanded at a higher price. An increase in Aggregate Demand causes an increase in inflation and/or an increase in real growth. It will be some mix of the two. (The exact mix is determined by the shape of the Short Run Aggregate Supply curve.) The more inflation in the mix, the less real growth in the mix. The more real growth in the mix, the less inflation in the mix. When we start talking about this mix, inflation and real growth move in opposite directions, not the same direction. But we still can't really talk about higher inflation causing lower real growth, or higher real growth causing lower inflation. It's all non-linear. It's the shape of the Short Run Aggregate Supply curve that causes (determines) the particular mix we get.

Jim Puplava: Oil Is The New Federal Funds Rate - Jim Puplava has made a decades-long career of interviewing hundreds of notable experts on the economy, energy, precious metals, geopolitics, agriculture and other sectors that impact our future.  The outlook he has developed as a result of all this input is less than sanguine. Jim concludes that economic growth will be constrained both by world governments' chronic addiction to spending more revenue than they take in, and by the systemically-rising costs of fossil fuel-driven energy. In terms growth, he sees political leadership becoming less and less relevant in its ability to effect outcomes. In fact, he declares the price of oil as now being more influential in stimulating or depressing sovereign economies than central bank interest rates. In his words, ""oil is the new Federal Funds rate"". Those managing capital -- whether at the individual or institutional level -- have a very difficult time of it today because asset prices are being buffeted by powerful, but countervailing crosswinds. The deflationary forces of credit contraction put downward pressure on asset prices, but central bank money printing and other liquidity measures push up from below. Rock-bottom interest rates are forcing investors out the risk curve, but few are comfortable with the alternative choices they have.

The National Economy: More of the Same - Dallas Fed - Real gross domestic product (GDP) grew at a disappointing 1.9 percent annualized rate in the first quarter after a more robust 3 percent rate in fourth quarter 2011. The two-quarter average—2.45 percent—exactly matches the pace of growth since the recovery began in third quarter 2009 (Chart 1). If the volatile inventory investment component of GDP is dropped (leaving final sales of domestic product), growth has held steady at about 1.7 percent over the recovery (Chart 2). Changes in consumption of nondurable goods and services can entirely account for variation around that average rate. Changes to the contributions from business fixed investment and consumption of durable goods offset one another—combining for a constant contribution of 1.3 percentage points. The negative impact of government purchases offset the positive combination of a stronger contribution from residential investment and the diminished drag from net exports. Employment increases failed to reach expectations for a third straight month. Nonfarm payrolls rose by 69,000 in May and 77,000 in April, bringing the three-month moving average to 96,000—considerably less than the 141,000-job average gain seen since payrolls began rising again in March 2010. It is possible that some of this weakness was a payback effect from elevated hiring during the unseasonably warm winter. Over the last 12 months—a span that should smooth over any weather effects—employment growth has averaged 149,000.

More Troubling Economic News - The economic news has not been good of late.  It started when we got  a revision to the First Quarter GDP to a level well below forecast levels, and well below where it needs to be to create sustained job growth. Around the same time those numbers came out, we also learned that planned layoffs had increased by 53% in the month of May alone. Overseas, there were signs that Europe’s economy is contracting. In China, there are signs that the years of strong growth  may be coming to an end. At the start of the Second Quarter, we learned that April’s Factory Orders took an unexpected drop, signalling more slowing down to come in May and June. Then we got an incredibly weak May jobs report that showed only 69,000 net jobs (of which some 83,000 were from the private sector). Now, as we head toward the end of the month and, soon thereafter, the release of the jobs report for the month of June, there are signs on the horizon that seem to indicate that the economic slowdown we saw at the end of the 2nd Quarter is continuing this month, which poses real risks for the economy itself and for the political fortunes of President Obama.The big news of the morning is the Labor Departments initial jobless claims report, which went down slightly from last week but has now hit the hit the highest weekly average since December after several months in which it seemed to be moving in the opposite direction:

America’s long slope down - A broad swath of official economic data shows that America and its people are in much worse shape than when we paid higher taxes, higher interest rates and made more of the manufactured goods we use. The numbers since the turn of the millennium point to even worse times ahead if we stay the course. Let’s look at the official numbers in today’s dollars and then what can be done to change course.First, data show that average adjusted gross income fell $2,699 through 2010 or 9 percent, compared to 2000. That’s the equivalent of making it through Thanksgiving weekend and then having no income for the rest of the year. Had average incomes just stayed at the level in 2000, Americans through 2009 would have earned $3.5 trillion more income, the equivalent of $26,000 per taxpayer over a decade. Wages per capita in 2010 were 4.3 percent less than in 2000, effectively reducing to 50 weeks the pay for 52 weeks of work. The median wage in 2010 fell back to the level of 1999, with half of workers grossing less than $507 a week, half more, Social Security tax data show. The bottom third, 50 million workers, averaged just $116 a week in 2010. Social Security and Census data show that the number of people with any work increased just 1.5 percent from 2000 to 2010 while population grew 6.4 times faster. That’s why millions of people cannot find work no matter how hard they try. In May, nearly 23 million workers, 14.8 percent, were jobless or underemployed, the Bureau of Labor Statistics reported. At, a website dedicated to exposing and analyzing flaws in government economic data, economist John Williams also counts people who have given up hope of finding work. His figure for May brings the total to almost 30 million people, one in five.

A visible slowdown in global economic activity - The global slowdown is becoming quite visible among the major economies. The US is still growing, but the latest PMI measure for June came in at 52.9, down from 54 last month. Germany's PMI came in below 50 (indicating contraction), with manufacturing PMI below 45. The last time German manufacturing PMI was this low was in mid 2009. Germany manufacturing PMI (Markit/Bloomberg) And China's PMI is now materially below 50 with a troubling downward trend. China PMI (source: HSBC) In an addict-style behavior, market participants are hoping these declining PMI numbers will invite additional government stimulus - on top of what has already been put in place. WSJ: - The HSBC initial, or "flash," measure of manufacturing also foreshadowed weakness in the months ahead as its barometer of new manufacturing orders, particularly export orders, showed further declines amid a lingering global economic slowdown.  China has already turned to an array of measures to boost growth, speeding up approvals on big projects, offering tax breaks and extending subsidies to promote consumer spending.  But at this stage stimulus will likely have temporary and limited effects on growth. Unfortunately all the uncertainties around the Eurozone's future will cap investment levels and limit new orders. And given how long it may take to remove that uncertainty, we may be looking at years of slow growth globally

Summer of 2011 redux?  -- The Citi Economic Surprise Index continues its relentless slide. The US PMI (52.9 vs. 53.3 expected), the Philadelphia Fed Diffusion Index (-16.6 vs 0 expected), Empire Manufacturing, Industrial Production, etc. are all coming in below expectations. It would seem that economists would adjust their forecasts by now, but that hasn't happened.  This is somewhat reminiscent of last summer when a mix of US budget issues and fears in Europe increased market volatility and put downward pressure on economic activity.

The US triple dip panic arrives - Sigh. Here is the Citi economic surprise index courtesy of Sober Look: The Citi Economic Surprise Index continues its relentless slide. The US PMI (52.9 vs. 53.3 expected), the Philadelphia Fed Diffusion Index (-16.6 vs 0 expected), Empire Manufacturing, Industrial Production, etc. are all coming in below expectations. It would seem that economists would adjust their forecasts by now, but that hasn’t happened. Regular readers will not be at all surprised of course. I have written many times that with the slowdown that has become obvious in manufacturing over the past three months, markets are only one bad housing report away from a full blown triple dip panic. The manufacturing decline was confirmed again last night with another material fall in the Philly Fed Index, from from -5.8 in May to -16.6 in June. From Calculated Risk comes the following chart showing the average of the NY and Philly Fed indexes compared with the ISM:

Estimating Recession Risk (One Monthly Data Set At A Time) - There are two basic ways to wrestle with recession risk. One is to forecast it, the other is to develop a high-confidence assessment of whether it's stepping on the business cycle's throat based on the data published so far. The world is awash with the former, and it comes with all the usual caveats, including a fair amount of error. That's the nature of forecasting: accuracy is all over the place, and it's up to the consumers of the outlooks to figure out who has the better prediction methodology. By contrast, calling the start of major downturns in the economy in the here and now, by using what we know rather than what we think will happen, is far less precarious (if the process is designed reasonably well).  Eventually, all is clear… if you wait long enough.  The challenge is figuring out how to maximize accuracy and minimize the signal lags. It wouldn't hurt if the process is transparent, calculated with free, publicly available data, and is relatively simple and intuitive. High parameterized models may wow 'em at the next academic conference, but the record on complex systems isn't encouraging. One possible solution that seeks to find a reasonable compromise is to focus on the key economic variables that published in a timely manner. That's an inherently subjective task, but it's par for the course in business cycle analysis—the economic gods have left mere mortals with the unpleasant work of conducting trial-and-error tests to figure out what is, or isn't, relevant.

The Rocky Balboa recovery: Is policy uncertainty holding it back? -   Rocky Balboa never gives up, or rather: “it ain't about how hard ya hit. It's about how hard you can get it and keep moving forward.”  So too with the current US economic recovery: on track in the spring, knocked down in the summer. Payroll employment rose strongly in the spring of 2010, then fell back in the summer. Many thought the slump had ended in the spring of 2011, only to be disappointed in the summer. Then again this summer, after encouraging unemployment and growth figures in early 2012, the recovery was knocked back. Like Rocky, the US economy displays an impressive resilience. But also like Rocky, it continues to get whacked (for more on the US recovery see Giannone et al. 2012). The obvious question is why the recurrent loss of momentum in the US economic recovery? The on-then-off economic recovery in the US and Europe is one of the many mysteries of the post-crisis economy. This column provides some evidence that policymakers’ indecisiveness may be part of the cause. Because policymakers act decisively when things get bad and dither when things get better, corporate and consumer demand stalls just as the recovery gets going.

Check Out The Growth Of America's Economy Once You Subtract The Growth Of America's Debt... - Recognize the chart below? This is a chart of real (inflation-adjusted) U.S. GDP over the past 60 years or so. Basically, it's a measure of our economic output. Looks pretty good, right? Now check out this chart. This is a chart of the debt America has accumulated over the past 60 years or so (and especially over the past 30). It includes three big kinds of debt: Household debt (consumers), corporate debt, and government debt. The chart also shows the growth of GDP--the same line as in the chart above (except this time not adjusted for inflation). See if you can guess which line is which: The red line is the economy, right? The goal of borrowing money, after all, is to accelerate growth. You use the borrowed money as extra fuel, and that accelerates the growth of your business (in this case, the American economy). So, the blue line is the money we borrowed...and the red line is the economic growth is it produced? As if! In the chart above, the red line is the debt. The blue line is the economy. Yes, over the past 30 years, we've generated about $1 of economic growth for every $3 we've borrowed. That's pathetic.Vital Signs: Lower Long-Term Treasury Yields - Long-term Treasury yields are falling. The Federal Reserve on Wednesday said it would extend “Operation Twist,” its effort to spur investment by driving down long-term interest rates. Yields on the 30-year U.S. Treasury bond are at 2.7%, down from about 4.5% when the recession ended. But yields are down only slightly since the Fed began its effort in October.

Beware the Bond Bubble - Few investors in these troubled times would dream of expecting double digit returns. Most are just looking for somewhere reasonably safe to park their money while they wait out the eurozone crisis, the U.S. fiscal cliff and the possibility of another double dip. The trouble is, that panicky flight to safety is creating a new kind of bubble — this time in U.S. bond markets. It’s a bubble that inflated further yesterday as the Fed continued Operation Twist, its attempt to push down longer term interest rates. But with lower rates come lower yields — and that’s just the trouble. Yields on 10-year Treasuries recent hit 220-year lows. Real returns — after accounting for inflation, that is — are negative. Yet still, investors rush in. Why? Because the U.S bond market is the only thing that’s considered a “sure thing” these days — gold is off 14%, the amount of rich country debt that’s rated triple-A has been cut in half over the last five years, and even bank deposits aren’t safe (as MF Global reminded us).

Bernanke’s Twist Sharpens Year-End Anxiety Over Stimulus - Federal Reserve Chairman Ben S. Bernanke has repeatedly warned lawmakers that a fiscal cliff threatens the economy. Now he’s created a precipice of his own.  The Fed on June 20 extended its Operation Twist program to swap $267 billion in short-term securities with longer-term debt through December. That end date coincides with reductions in federal spending, a halt to payroll-tax cuts and expiration of income-tax cuts enacted under President George W. Bush. The timing of Bernanke’s easing raises the stakes for the Fed’s four remaining policy meetings this year as investors focus on whether the central bank will provide stimulus for 2013 to help the economy overcome the impact of the fiscal tightening due to take hold in January, said Vincent Reinhart, chief U.S. economist at Morgan Stanley.  “They create their own monetary cliff to match the fiscal cliff,” said Reinhart, former head of the Fed board’s Division of Monetary Affairs. That may mean “a world of hurt” for the central bank because there would be a perception the Fed allows fiscal politics to influence its actions.

Fed Chairman To Congress: A Little Help Here? - The Federal Reserve opted Wednesday not to take significant new steps to hasten the economic recovery, further angering critics who believe it has failed to adhere to its dual mandate to keep unemployment low while maintaining price stability.  But in response to questions from skeptical media, Fed Chairman Ben Bernanke reminded reporters that the Fed isn’t the only game in town, and practically begged Congress to take affirmative steps to boost recovery. Bernanke cited “Fiscal restraint at the federal state and local levels,” as a key head wind threatening the recovery.  “Monetary policy is not a panacea,” he implored. “Monetary policy by itself is not going to solve our economic problems. We welcome help and support from any other part of the government, from other economic policy makers. Collaboration would be great.”

Bernanke Acknowledges Treasury Strategy at Odds With Fed Policy  Federal Reserve Chairman Ben Bernanke publicly acknowledged this week a policy conflict with the Treasury Department over its move to lock in low borrowing costs, which is working at odds with the central bank’s efforts to lower long-term interest rates. But there is little sign either institution is likely to alter its strategy as a result. “There’s a bit of an issue here,” Mr. Bernanke said at a press conference following the Fed’s latest policy meeting. Since September the central bank has been working to drive down long-term interest rates by selling its shorter-term securities and using the proceeds to buy longer-term ones. This week the Fed decided to extend the program, known as “Operation Twist,” through the end of the year. The Fed’s program is designed to work by taking long-term bonds off the market, nudging investors into riskier assets, such as stocks, that could help boost the economy. The problem is that while the Fed has been snapping long-term bonds off the market, the Treasury Department has been ramping up its issuance of long-term debt to take advantage of historically low long-term rates. Since October 2008, the average maturity of outstanding marketable Treasurys has climbed by nearly 32%, reaching almost 64 months in May, the agency said earlier this month. That’s its highest level in a decade.

What Part of 'Austerity Isn't Working' Don't People Get? - As I prepared for a talk on austerity last week, I found myself a bit stuck.  What can you say other than that it’s very clearly not working, nor should we expect it to, nor has it ever? And then I hit upon what I think is the key question: Why do governments stick with the austerity approach when all the evidence suggests it's a total failure? By austerity I mean attacking recession by cutting spending and raising taxes – the opposite of Keynesianism, which dictates that if the private sector isn't spending enough money to get the economy moving, the government needs to temporarily step in and supply the juice (aka "stimulus").  Europe and the UK are committed to austerity, and – not coincidentally – they've seen growth deteriorate and unemployment jump (to over 20 percent in Greece and Spain).  The figure below, from this excellent – and pretty readable – paper by economist Jay Shambaugh reveals the expected positive correlation between governments that cut spending and slower GDP growth. In a way, our austerity policies are actually less defensible than those in some European countries.  With the price of borrowing so extremely low here, capital markets are basically pleading for our government to borrow and get busy with temporary growth measures.  How is it that policy makers keep getting this so wrong? 

Failure to stimulate recovery is costing trillions in lost national income - In a recent blog post on the (negligible, if not nonexistent) long-run economic cost of deficit-financed fiscal stimulus at present, I noted in passing that the Congressional Budget Office (CBO) has downwardly revised potential economic output for 2017 by 6.6 percent since the start of the recession. This may seem trivial, but for a $15 trillion economy, this dip reflects roughly $1.3 trillion in lost future income in a single year, on top of years of cumulative forgone income (already at roughly $3 trillion and counting). The level of potential output projected for 2017 before the recession is now expected to be reached between 2019 and 2020—representing roughly two-and-a-half years of forgone potential income. This represents a failure of economic policy and merits considerably more attention than received, especially when weighing the benefit of near-term fiscal stimulus versus deficit reduction.Potential output is the estimated level of economic activity that would occur if the economy’s productive resources were fully utilized—in the case of labor, this means something like a 5 percent unemployment rate rather than today’s 8.2 percent. Potential output is not a pure ceiling for economic activity, but the level of economic activity above which resource scarcity is believed to build inflationary pressures. As of the first quarter of 2012, the U.S. economy was running $861 billion (or 5.3 percent) below potential output—the shortfall known as the “output gap.” This has a number of implications for federal fiscal policy:

The Efficiency Fairy and Inflation Goblins - The main objection to MMT is the belief that adoption of a fiat money necessarily leads to high inflation if not to hyperinflation. Those who adopt this critique usually see MMT as a proposal, although some (like Paul Samuelson) recognize that MMT actually describes the system we already have. The latter group fears that if we tell the truth about the existing monetary system, then elected officials will “run the printing presses” to create high inflation. Hence, best to adopt what Samuelson described as the “old time religion” of lies about the fiscal options open to sovereign government to keep the inflation goblins at bay.Aside from the fear of inflation, the second biggest bogeyman is efficiency—that is to say, lack thereof. This is mostly applied to MMT’s promotion of the job guarantee, but it also applies more generally to the MMT belief that government has a positive role to play in the economy. Government is said to be inherently inefficient, and particularly so when it comes to employing labor. Only the “free” market is capable of using “scarce” resources in the most efficient manner. Anything government does is bound to be less efficient, so the first preference is always to rely on the efficiency fairies of free enterprise. Adopting the JG gives us the worst of both worlds: higher inflation plus lower efficiency. It is better to leave people unemployed where they can help to fight inflation and inefficiency in a reserve army of the unemployed. The best use of the unemployed is to keep them unemployed. For the few bleeding heart liberals in this camp, the suffering of the unemployed can be relieved in the most efficient manner by simply providing welfare (perhaps in the form of a BIG—basic income guarantee). Their higher income is then spent in the “free” market which more efficiently uses labor to efficiently produce the consumption goods our unemployed want. Besides, it is claimed, many (most?) people really don’t want to work, so the BIG incomes allow people to choose to do what they prefer, while the efficiency fairies ensure we’ve got all the goodies people want to consume. Through BIG, we get to keep low inflation plus high efficiency with the added benefit of a life of leisure for anyone who wants it. Now, of course, the MMT+JG response to this has been that unemployment, itself, is a massive waste of our most valuable resource, labor. Unemployment destroys lives, families, and communities. It is bad for physical and mental health. It promotes crime, ethnic division, and even terrorism. It is hard to conceive of a JG program so badly designed that it does not reduce waste. Further, the JG by design helps to stabilize prices, by providing a wage anchor. The employed bufferstock is much better than the reserve army of the unemployed. And our view is that most people want to be productive members of society—and like it or not, ours is a capitalist society in which there is a strong ethical imperative to “earn” one’s keep. But our critics are not swayed.

The Cure for Budget Deficits: Train More Deficit Hawks - Dean Baker - The United States has more than 25 million people unemployed, underemployed, or out of the labor force altogether because of the weak economy. Investors are willing to make long-term loans to the country at 1.5 percent interest. The idea that the budget deficit should be the country's major concern is close to loony, but nonetheless in policy circles that seems to be the case. This is best demonstrated by Niall Ferguson's nutball column in the Financial Times, which we are warned is only the first of four. I would tear this thing to shreds but I want to get some sleep tonight. I'll just pick one choice nugget. Ferguson tells us: "The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury. Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion." Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth?  If this proves true, over an infinite horizon we will have a very bad deficit problem.

Don't Tell Deficit Fanatics To Go To Hell; They're Already There - Despite all of the fire-and-brimstone warnings, the discussion about where you end up for all eternity has always been belief or spin and not fact. It may work for those preaching it and those who need an easy-to-understand guide for their lives, but it definitely doesn’t work for me. The same is true when it comes to the federal budget. The equivalent of hell — the absolute guarantee that we’ll be economically doomed if we don’t immediately repent on the deficit and live a virtuous balanced budget life — has never worked for me because it’s never been proved to be true. In addition, those who have insisted that reducing the federal deficit no matter what the economic situation have seemed to be proselytizing to validate their personal beliefs or accomplish their unrelated political goals rather than actually analyzing anything. The problem for the budget evangelists is that the past few years have provided what Nobel Prize-winning economist Paul Krugman said in his blog last week was “a great natural experiment” whose results should test the faith of those who continue to say with unrepentant certainty that economic lighting bolts will be hurled down at all of us because of the federal deficit. And, as Krugman explained, the great experiment showed that the three most often guaranteed deficit-related plagues — inflation, a limit on resources available to the private sector and higher interest rates — didn’t occur despite the deficit that critics likened to a tool of the devil.

Changing Media Stance on Deficit Cutting: New “Austerity Doesn’t Pay” Headlines and Dissing of Sovereign Ratings - - Yves Smith - Bloomberg has a useful piece up tonight describing how markets are reacting in no consistent way to ratings agency actions on sovereign debt. The story is long and prominent enough that it looks to be an indicator of shifting stances in the media on deficit cutting. A mere few months ago, it was hard to find major press stories that didn’t push deficit hawkery.  This story stresses there have been noteworthy examples of downgrades leading to bond yields tightening, which is the reverse of what you’d expect to see. It also makes clear that the ratings agencies have based their grades on deficit orthodoxy: that balancing budgets are a Good Thing. In fact, as we’ve explained and results increasingly prove out, trying to cut government spending when the private sector is deleveraging will produce a downward spiral. GDP falls faster than deficits do (in fact, they often rise as tax revenues fall and banks get sicker), making debt to GDP ratios even worse.  The most noteworthy example of markets dissing a rating action was S&P’s effort to browbeat the US over its downgrade from AAA, which we predicted would wind up looking like a scare. The key excerpt from the Bloomberg story: Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark…

Fiscal Cliff Road Paved by Those Who Took U.S. to Brink - The people responsible for averting the end-of-year fiscal cliff are the same ones who almost caused a U.S. debt default, let airline ticket taxes lapse for two weeks and came within two hours of shutting down the government. The 112th Congress, paralyzed by ideological divides and deadlocked on routine issues, may approach the brink again. Lawmakers are nowhere near an agreement on what to do about $607 billion of tax increases and spending cuts slated to kick in at the beginning of 2013. “If people wanted to resolve these problems, we’d have them resolved,” said Representative Henry Waxman, a California Democrat first elected in 1974. “People used to work out compromises for the good of the country.” Instead, Waxman and lawmakers in both parties said they don’t expect much from Congress until after the Nov. 6 election. That delay will force a compressed legislative session with the economy and the role of government in the balance. If Congress does nothing the economy will probably fall into a recession in early 2013, according to the Congressional Budget Office, because of what Federal Reserve Chairman Ben S. Bernanke has called a fiscal cliff.

Fiscal cliff is closer than you think -— The fiscal cliff may be six months away, but it is already affecting the United States economy.  As I warned at the beginning of last month ( see column ), unless current law is changed, taxes will rise and spending will fall big time, come year-end.  Taxes are set to jump by $500 billion, while federal spending is set to decline by more than $130 billion. Combined, this will equal 5% of our gross domestic product.  Along with Europe’s debt crisis and the uncertainties over the longevity of the euro, this is enough to turn weak growth into an outright downturn — in other words, a new recession.  And as I pointed out back on May 1, don’t think for one minute that this scenario will not unfold until 2013. It will very likely unfold sooner.  Guess what, it is already here. The last few weeks’ worth of economic data were bad across the board. Here is just a sample:
• retail sales in May were much weaker than expected;
• not surprisingly, unsold goods piled up in the nation’s warehouses;
• weekly jobless claims have jumped sharply;
• payroll employment rose only slightly in May for the third straight month;
• the unemployment rate increased — the first monthly rise in a year;

Avoiding Fiscal Armageddon - This graph of government spending as a percentage of GDP (from Jim Bianco) isn´t as scary as the other two pictures, but it only includes Federal spending, and absent decisive action, the worst is yet to come.  The reason the worst is yet to come is simple: the U.S. population is getting older as birth rates drop and the Baby Boomers (from an earlier era of high birth rates) reach retirement age.  Other than defending our country and acting as the world´s policeman, the big expenses of the Federal government are the programs intended to take care of older Americans: Social Security, Medicare, and the part of Medicaid that goes to pay for nursing-home costs of people who have used up their own resources.  Everything else the Federal government does pales in comparison to Defense and taking care of older Americans (although Obamacare could add a large enough government responsibility for the medical care of younger Americans to compete in this contest).  Thus, more older Americans means more expenses of the Federal Government.  As I have only begun to explain in my posts “What is a Supply-Side Liberal?” “Can Taxes Raise GDP?” and “Why Taxes are Bad,” the taxes needed to support high levels of government spending come at serious cost.  This is likely to continue to be true even if we try to be very clever (as we should try to be) at raising revenue with the least possible distortion. 

Trigger Cuts on Discretionary Side, Along With Defense, Would Devastate Economy - For all the talk of the “fiscal cliff” or “Taxmageddon,” precious little attention has been paid to one element of it – the automatic cuts, not to defense, but to the discretionary budget. Republicans – and the Defense Department – have been quick to denounce the defense cuts and look for a replacement plan. That sense of urgency has not been there on the discretionary side. And yet, those cuts would be just as debilitating, if not more so, in the near term. In a paper for the Center for American Progress, Scott Lilly looks at the “swiftly ticking time bomb” that is the discretionary trigger. First of all, he finds that many contractors have already begun planning their budgets as if the cuts will happen, which will dampen spending at the end of the current fiscal year, starting in just a couple weeks, on July 1. He adds that the threat made by defense contractors also applies to the discretionary side: Sequestration will cut government contracts with private industry in the coming year by about 10 percent, or $50 billion. Problem is, the contractors do not know which $50 billion of the approximately $530 billion the government spends on contract each year will be cut. That is a real problem because they are required by federal law to send layoff notices to any employee that is removed from their payroll at least 60 days, and in some states 90 days before the layoff occurs. Most will probably find that the judicious course is to send such notices to any employee that might be affected, and that could be most of the workforce of many contractors. If contractors decide to notify half their employees of possible layoffs, it will mean about 3 million notices going out in September and October—hardly a good approach to strengthening consumer demand in a weak economy.

The Sequester Could Dramatically Change Budget Politics - A good friend who works for one of the largest military contractors sent me an email yesterday complaining about the sequester -- the spending cut scheduled to occur on January 2 that was triggered when the anything-but-super committee failed to agree last November on a deficit reduction plan -- that expressed grave concern about the impact the reduction will have on his area. This was his major point...we have a somewhat different issue regarding DoD. First, (there are) thousands of contracts in acquisition attached to many more thousands of contracts with sub-contractors. Saving a dollar may require terminating or cutting $1.10 to $1.20 of program. Second, we are starting to feel the effects now as (Department of Defense contracting officers) don't enter into contracts for already appropriated funds. Third, about a quarter of DoD funds (personnel) will be exempted meaning the full burden will fall disproportionately on the rest of the defense budget. Fourth, the cut will have to be applied to the remaining three quarters of FY13 thereby magnifying the impact. Fifth, since personnel are exempt, and there is no (base realignment and closure) function included, and since the cut drops the (FY13) spending profile significantly, DoD will not be able to shape the force structure, base structure, and end strength over several years as it would certainly prefer to do. Sixth, the current DoD bureaucracy has no experience in doing this and will be swamped by (a) huge contract adjustments, (b) huge reprogramming requirements, {...} It will take months to sort all this out - if not a year, if not two. Meanwhile, we'll all be forced to furlough a lot of people.

To pay for the next war...we raise taxes, cut spending elsewhere? -- The Armed Services full committee meeting in light of the end of the latest round of talks with Iran and harsher sanctions (oil embargo) scheduled to take effect, points us to the need to figure out how to pay for another conflict that is not quick and victorious. The Washington Post quotes Senator Leahy:At last, after 11 years of the United States at war, a few minutes of public discussion of a tax to pay for the fighting. But that would be for the next war. “What would be the impact of going to war again without committing to pay for that war with up-front taxes, something we did not do in either Iraq or Afghanistan, for the first time in the history of the country?” Sen. Patrick J. Leahy (D-Vt.) asked Defense Secretary Leon E. Panetta.That’s a question that should be asked before any president sends U.S. forces into a fight overseas or members of Congress propose legislation that authorizes some sort of military action abroad. "We basically ran that war [Iraq] on a credit card,” Leahy told Panetta, who was there to discus the fiscal 2013 Defense Appropriations bill. “Now we find people who are calling for more military action in other parts of the world; at the same time, they do not want to consider any way of paying for it.”

Voters Value Entitlements Over Deficit Reduction - While Americans claim to, in the abstract, care about the deficit, they overwhelmingly don’t want entitlement programs cut to reduce the deficit, according to the new Pew Research poll. The public overwhelmingly regards Social Security as a program that has been good for the country, with 87% holding that view. More than three-quarters (77%) also share the concern that its financial condition is only fair or poor. But that’s where the consensus ends. There is strong resistance to any cuts in entitlement programs in order to reduce the deficit, with 58% of Americans saying that to maintaining benefits as they are trumps deficit reduction, (35% favor taking steps to reduce the deficit). Nearly six-in-ten (59%) put a higher priority on avoiding any future cuts in benefit amounts than on avoiding Social Security tax increases for workers and employers, with 32% believing that avoiding tax increases is more important.  Agreement that Social Security benefits should be maintained at current levels even if it removes one way to cut the deficit is shared among all age groups. But beyond that consensus, there are generational divides on a host of issues. Voters simply don’t want Social Security or Medicare cut. Raising taxes primarily on the rich and reducing military spending on needless wars are the few big deficit reduction ideas relatively acceptable to voters

Mitt Romney: Deficit Increaser -- This post from the libertarian Cato@Liberty blog by Christopher Preble about the sizeable increase in the deficit Mitt Romney's military spending plans will cause caught my eye yesterday thanks to the ever-watchful CG&G alum Bruce Bartlett. In case you're not familiar with it, Romney has pledged to spend at least four percent of GDP on the Pentagon’s base budget. And, also just in case you're not familiar with it, this would be a huge increase in federal spending and, without offsetting tax increases or spending cuts (which given the amount of additional spending and the need to reduce the deficit would be impossible to do), a substantial rise in the deficit. Here's the money quote from Cato. Romney’s Four Percent Gimmick would result in taxpayers spending more than twice as much on the Pentagon as in 2000 (111 percent higher, to be precise), and 45 percent more than in 1985, the height of the Reagan buildup. Over the next ten years, Romney’s annual spending (in constant dollars) for the Pentagon would average 64 percent higher than annual post-Cold War budgets (1990-2012), and 42 percent more than the average during the Reagan era (1981-1989). How does someone who claims to have strong experience managing the bottom line of a a business explain how he can both dramatically increase Pentagon spending AND reduce the deficit (and also cut taxes, but that's another story for another time)? This is so typical GOP: Claim to be fiscally responsible when just the opposite is true.

Trust in Government, Declining With Cuts -- Tyler Cowen’s Economic View column on Sunday argued that the government’s economic tool kit was less effective because Americans lacked trust in the government: Various policies that are being put on the table, including forms of fiscal and monetary stimulus, try to accelerate [the process of rebuilding American wealth]. They would all be likely to underperform, partly because the public, rightly or wrongly, doesn’t see them as ways to rebuild confidence. We have become skeptical of our own macroeconomic authorities and abilities, and that, in turn, makes successful policy harder to pull off.The column also suggests that trying to preserve or even increase government jobs or government spending could cause public trust to erode further. But I wonder if the opposite is true. Declining confidence in institutions and cutting funds for those institutions can be a self-perpetuating cycle.People lose faith in their government institutions, perhaps because those institutions are poorly run or because pundits declare that the institutions are poorly run (usually, some combination of the two, it seems). Voters and/or their politicians then sharply cut funds for those institutions. Insufficient funds and staffing then make these institutions even less effective, reducing confidence in them further and thereby prompting even more cuts. And so on.

Farm Bill Deal Reached for Amendments in Senate - The Senate reached a deal on amendments to the farm bill, which will allow them to begin voting today. In all, 73 mostly but not entirely germane amendments will be voted upon, stretched over two days, with the goal of wrapping up the bill by the end of the week. So what is in this decade-long farm bill, potentially the biggest matter that Congress will legislate this year? The new five-year measure would cost $969 billion over the next decade and includes $23.6 billion in proposed cuts, making it a slimmed-down version of legislation that historically served as one of the main opportunities for members of Congress to deliver pork-barrel spending to their constituents. How does that $969 billion get split up? As this chart shows, most of it goes to the food stamp program. There are cuts in this area which Kirsten Gillibrand is trying to remove through an amendment that will get a vote. The cuts, mainly from disallowing food stamp benefits for some recipients of federal heating assistance, would translate into $90 a month reductions for hundreds of thousands of families. The House wants to cut far beyond the Senate’s $4.5 billion, including potentially block-granting the program.

Farm bill showdowns go to wire - With a blueprint in hand, the Senate began grinding out votes on its farm bill Tuesday, moving quickly from catfish inspections and wind loans to a classic “black hat-white hat” showdown at dusk between crop insurance companies and food stamp advocates. The industry, which faces more severe challenges Wednesday, escaped intact, helped by the fact that senators are also angry with states for taking advantage of Washington’s rules and leveraging token amounts of federal home heating aid to gain more in food stamps. Indeed, a $1 or $5 annual heating payment can become a ticket for hundreds more in food stamp benefits. And the cost to Washington is approaching $1 billion a year with at least a dozen states practicing some variation of the “heat and eat” policy. The farm bill seeks to stem this tide by tightening the rules to save an estimated $540 million a year. And on a 66-33 roll call, the Agriculture Committee leadership prevailed despite emotional — sometimes accusatory — appeals from one of the panel’s own, Sen. Kirsten Gillebrand (D-N.Y.). “It’s beneath this body to cut food assistance for those who are struggling the most among us,” said Gillebrand, proposing that equal savings be taken instead from the returns enjoyed by the crop insurance industry.

Food Stamp Vote In Senate Blocks Bid To Restore $4.5 Billion In Aid -- The Senate overwhelmingly rejected a bid to preserve some $4.5 billion in food stamps funding, as part of the massive farm bill, on Tuesday. The amendment to keep that spending in the Supplemental Nutrition Assistance Program, offered by Sen. Kirsten Gillibrand (D-N.Y.), failed 33 to 66. Sixty votes were needed to pass. Gillibrand had hoped to prevent food aid cuts in the $969 billion bill by trimming the guaranteed profit for crop insurance companies from 14 to 12 percent and by lowering payments for crop insurers from $1.3 billion to $825 million. "We all here in this chamber take the ability to feed our children for granted. That is not the case for too many families in America," Gillibrand said just before the vote. "Put yourselves for just a moment in their shoes. Imagine being a parent who cannot feed your children the food they need to grow. It's beneath this body to cut food assistance for those who are struggling the most among us." The cuts target the so-called heat-and-eat initiative in which 14 states automatically make families eligible for more food aid if they receive even $1 in help paying their utility bills. The Congressional Budget Office estimated the decrease would amount to about $90 a month for an affected family, representing a quarter of its food budget.

US Chamber calls on Congress to pass transportation bill  -Yesterday, the U.S. Chamber of Commerce sent a letter to House and Senate Transportation Conference Committee members calling on them to resolve their differences over surface transportation legislation and pass a report out of the committee prior to the expiration of current surface transportation legislation on June 30. “Congress must build on the strong bicameral and bipartisan support for transportation reform and investment and enact thoughtful policies that will increase public trust and confidence in federal highway, transit and safety programs; help stabilize critical industries; and strengthen America’s competitive edge,” the letter states. The letter notes that, while there are differences between House Republicans’ transportation legislation and the Senate Democrats’ two-year transportation bill passed earlier this year, there also are many common elements in major policy categories.Among those common elements: consolidating and focusing programs; increasing state flexibility on transportation legislation; requiring accountability for transportation projects; accelerating project delivery by reducing federal bureaucracy; improving freight movement of goods throughout the United States by reducing traffic congestion and bottlenecks; improving highway safety; improving transit; enhancing research and technology; and expanding public-private partnerships and private participation

Highway Bill Unlikely to Emerge from Conference Committee - With two weeks until two key measures expire, Congress appears poised to do what it does best – absolutely nothing.  At issue are the doubling of the student loan interest rate, and the surface transportation bill. Democrats and the White House seized on the student loan issue, getting Republicans to agree on the basic principle of averting a doubling of the interest rate on federal loans, from 3.4% to 6.8%. But despite the relatively low cost – about $6 billion to avert it for a year – the two sides have not reached consensus on how to offset it (the question should actually be whether to offset it at all). Harry Reid offered a plan last week that would change how employer’s private pension contributions are calculated, resulting in lower business tax deductions. Reid would also increase premiums for pension insurance from the Pension Benefit Guaranty Corp. The sticking point is that these offsets are already part of the Senate’s surface transportation bill, which passed with 74 votes. They would take in much more than $6 billion, and could cover the make-up offsets in the highway bill as well (most of the highway bill is funded through the federal gas tax). But Reid said that, if the highway bill dies, then a portion of the offsets should be used on the student loan interest rate bill. Sadly, it looks like that transportation bill is dead, despite the conference committee put together to negotiate inter-party differences.

Decision Time Nears for Student Loan, Highway Bills - I’ve been tracking the two deadlines for Congress coming up in just over a week. If no action is taken, new federal student loans will see an interest rate of 6.8%, double the current 3.4%. And there will be no surface transportation bill, meaning that highway projects with federal participation will grind to a halt, and the 18-cent-per-gallon federal gas tax would go uncollected (heck, at this point, that might be the only stimulus we see this year). The news is officially more encouraging on both fronts, though I’ll believe it when I see it. First, on the student loan interest rate deferral, we have this from the National Journal: Senate Democrats said on Thursday that they are close to a deal with congressional Republicans to freeze student-loan interest rates at 3.4 percent before the July 1 deadline. “We have great hope that we can get that done,” Senate Majority Leader Harry Reid, D-Nev., said, citing progress made in a series of meetings over the last 48 hours. “ House Speaker John Boehner, R-Ohio, is informed of the progress but his office is not a primary negotiator, GOP aides said. The lack of participation from Boehner makes me very dubious. But his position all along is that the Senate had to pass the bill first. Sen. Tom Harkin gave more indications in the story of how the relatively paltry $6 billion one-year cost would be covered. Democrats have offered changes in how pensions are calculated to prevent certain business tax breaks, and an increase in insurance premiums to the Pension Benefit Guaranty Corp. Republicans have offered a plan to cut off subsidized student loan rates after six years of higher education. That would save $1.2 billion a year. Politico had more details on all this.

Boehner: 'Clearly there's some movement' in highway negotiations - House Speaker John Boehner (R-Ohio) said Thursday that "clearly there's some movement" in negotiations in Congress about a new transportation spending bill. Asked during a news conference for an update on the bicameral negotiations, which are coming down to the wire because of a June 30 deadline for the expiration of the current funding for road and transit projects, Boehner said lawmakers were "continuing to do our work" on the highway conference.Boehner's comments echoed optimistic statements from the Senate majority leader, Reid, who told reporters earlier on Thursday that the transportation negotiations were "certainly in a lot better shape than we were 24 hours ago."

Simon and Matt: More Taxes All Around–or At Least On Our Kids (Along with Everything Else That Will Screw Them) - I found this very nice video of Simon Johnson explaining to CNN-Money’s Lex Harris why taxes will have to come up for everyone–not just the rich. (Simon’s video was embedded in an also-nice CNN-Money column by Joe Thorndike on the topic of “fairness” and taxing the rich.) Simon explains the basic math that I have emphasized over and over again here: (i) the fiscal gap is just too large to put just on the backs of (even) the rich; and (ii) yes, taxes will have to be part of the solution (no matter what you think about their role in creating the “problem”), because the spending paths are not something we could or would choose to flat-line, even as we try our best to damp them down. (BTW, I’m now reading Simon’s new book on the national debt, White House Burning (with James Kwak), which is excellent–particularly in putting the current problem in historical context and making common-sense recommendations that emphasize that “fiscal sustainability” depends on the paths of both the numerator of the debt and the denominator of the size of the economy.) And what of the fact that the “Just Raise Taxes” solution is not yet gaining enough traction? Matt Miller explains the consequences in his Washington Post column:

McConnell: Tax code benefits the poor and needs to be changed - Senate Minority Leader Mitch McConnell (R-KY) says that the U.S. tax system is unfair to the wealthiest Americans.  “I understand full well that our friends on the other side live to every day to raise taxes,” McConnell told CBS host Charlie Rose on Tuesday. “Almost 70 percent of the federal revenue is provided by the top 10 percent of taxpayers now. Between 45 and 50 percent of Americans pay no income tax at all.” “We have an extraordinarily progressive tax code already,” he added. “It is a mess and it needs to be revisited again.”

Soak The Middle Class - Senate Dems give The Washington Post the jump on a new analysis that puts one of the worst kept secrets in Washington into helpful numerical context: Republicans want the broad middle class to pay more taxes than they currently do, and the upper class to pay significantly less.  This time around, Democrats on the Joint Economic Committee, with the help of data from the Tax Policy Center, take a look at the House GOP tax plan in Paul Ryan’s budget, and reach an important conclusion: If he honors his commitment to keeping his plan revenue neutral, middle class taxpayers will see their tax burden increase, while the wealthiest Americans will enjoy a huge tax cut.The idea is pretty straightforward. Republicans want to dramatically lower the top tax rate and eliminate brackets so there are only two — one at 25 percent, one at 10 percent. That would put a huge amount of cash in the pockets of high income earners. For middle class earners, it’d be a much more modest sum. To make the plan revenue neutral, Ryan claims Republicans would close myriad loopholes that disproportionately benefit the upper-middle and upper classes — he just won’t say which ones.  The rub is that Ryan’s tax cuts are expensive and to pay for ithem he’d likely have to clawback the biggest middle-class tax benefits — like the mortgage interest deduction, and the tax exclusion on employer health benefits — such that the net effect for people making less than $200,000 would be a higher annual tax burden. The plan redistributes wealth upwards.

Whistling in the Dark: How We Could Be Doing More to Close the Tax Gap -  But while we’re worlds ahead of Greece in this regard, this piece by Bloomberg journalist Jesse Drucker made me wonder if we’re not trying to emulate this aspect of the Greek tragedy on the US stage.  The piece tells a detailed and fascinating, if depressing, story about how weakly the IRS follows up on referrals of tax avoidance from whistleblowers. There’s actually legislation to incentivize the blowing of whistles where tipsters can get back as much as 30% of what the IRS recovers from their tips (and, of course, the agency shields their reputation).  But as Drucker reports: The IRS whistle-blower program — created by Congress in 2006 to boost tax revenue by giving incentives to tipsters — has become the place where allegations of tax avoidance go to die. Over the past five years, more than 1,300 claims have been filed against almost 10,000 companies and individuals, alleging tax underpayments of at least $2 million apiece. Just three awards have been paid. The IRS won’t disclose the total dollar amount. Taxpayers annually owe $385 billion more than the IRS is able to collect, the agency said.  How can this be?  We desperately need revenue but we’re leaving hundreds of billions on the table.  How “Greek” of us.

The Filthy Stinking Rich Are Creating Their Own Economy - What's there to say about an economy where $190,000 cars sell like hot cakes and half-price Mercedes can't find a buyer? Or where $5,000 earrings can't sell, but $58,000 gold bracelets won't stay in stock? The ultra-rich have practically bought themselves out of the normal economy, Bloomberg reports, while the rest of the top 10% (those making between $150,000 and $250,000) exhibits the same anxiety and trepidation as the rest of the country. But why shouldn't the rich have their own economy? For many reasons -- economics of superstars, global capital markets, financial innovation, and so on -- the wealth of the top 0.X% increasingly has nothing to do with the wealth of everybody else.* In April, Scott Winship presented this awesome chart explaining the incredible wealth of the world's billionaires by plotting them along Dubai's Burj Khalifa. The upshot is that the world's 0.01% are so much richer than the 1% that, in the big picture, Mitt Romney joins the rest of the 99.9% in the lobby.The Atlantic's Matt O'Brien graphed this phenomenon a few months ago when he calculated how the 0.1% were breaking away, not only from GDP-per-capita, but also from the 1%. 

Robin Hood Tax Campaign Comes to the US - Kacey Dreamer reports on the resumption of a movement to tax financial transactions, with some high-profile supporters. In the past certain progressive organizations had a financial transaction tax as part of their overall strategy, but they did not have a campaign specifically designed around it. That’s the difference with the current Robin Hood Tax campaign, which has been imported from Europe. Some of the same groups, like National People’s Action, are involved in the Robin Hood Tax campaign, but it puts the financial transaction tax front and center. The basic idea behind a financial transaction tax is to levy a small tax – less than one-half of 1% – on all financial transactions which go through an exchange or clearinghouse. This would be an almost unseen payment to the average investor, but with volumes on Wall Street, it would pile up money in a hurry. The organizers believe that an FTT could raise hundreds of billions of dollars, which could be channeled into job creation, anti-poverty and climate change programs. In addition, the cost would tend to discourage speculative behavior without social utility, like high-frequency trading. So in addition to the money an FTT would raise, it would limit some of the riskiest behavior in the financial system. Actor Mark Ruffalo, musicians Tom Morello (Rage Against the Machine) and Chris Martin (Coldplay), economists Jeffrey Sachs, Joseph Stiglitz and Larry Mishel (EPI), and Bishop Desmond Tutu have endorsed the FTT as part of the US coalition. National Nurses United, one of the leading labor groups on this issue, has taken a role in this project as well. They have planned rallies in 15 US cities over the course of the week. The three aforementioned celebrities appear in the above video.

The Chart That Scares The "1%" The Most - Capitalists have been gripped by 'systemic fear' making them worry not about the day-to-day movements of growth, employment, and profit, but about 'losing their grip'. An interesting recent article by the Real-World Economics Review on the Asymptotes of Power focuses on the fact that the capitalists are forced to realize that their system may not be eternal, and that it may not survive in its current form. The authors fear that, peering into the future, the '1%' realize that in order to maintain (or further increase) their distributional power (their net profit share of national income - which hovers at record highs) they will have to unleash even greater doses of social 'violence' on the lower classes. The high level of force already being applied makes them increasingly fearful of the backlash they are about to receive (think Europe to a lesser extent) and nowhere is this relationship between the wealthy capitalists and social upheaval more evident than in the incredible correlation between the Top 10% share of wealth and the percent of the labor force in prison. In order to have reached the peak level of power it currently enjoys, the ruling class has had to inflict growing threats, sabotage and pain on the underlying population. Although there are no hard and fast rules here, it is doubtful that this massive punishment can be increased much further without highly destabilizing consequences. This crisis is rooted in our past sins and we are unlikely to escape the punishment we justly deserve.

Senators Grovel, Embarrass Themselves at Dimon Hearing - Matt Taibbi - I was unable to watch J.P. Morgan Chase CEO Jamie Dimon’s Senate testimony live the other day, so I had to get up yesterday morning and check it out on the Banking Committee’s web site. I had an inkling, from the generally slavish news reports about the hearing that started to come out Wednesday night, that it would be a hard thing to watch. But I wasn’t prepared for just how bad it was. If not for Oregon’s Jeff Merkley, who was the only senator who understood the importance of taking the right tone with Dimon, the hearing would have been a total fiasco. Most of the rest of the senators not only supplicated before the blowdried banker like love-struck schoolgirls or hotel bellhops, they also almost all revealed themselves to be total ignoramuses with no grasp of the material they were supposed to be investigating. That most of them had absolutely no conception of even the basics of the derivatives market was obvious. But what was even more amazing was that several of them had serious trouble even reading aloud the questions their more learned staffers prepared for them. Many seemed to be reading their own questions for the first time.It would be one thing if this had been a bunch of hick congressmen from the plains asking a panel of MIT professors about, say, ozone depletion, or the potential dangers of nuclear fallout. But these were members of the Senate Banking Committee, asking Dimon questions as though he were an alien from another world: "Tell us, Mr. CEO, what is this ‘derivative trading’ to which you refer? How long has it been in use on your planet?"

Dimon Redux: Why Bank Risk-Taking = Risk Making - Yves Smith - In case you haven’t had enough of Congresscritters lobbing softballs at Jamie Dimon, the JP Morgan CEO is appearing before the House Financial Services Committee on Tuesday. There have been a number of suitably scathing accounts of how members of the Senate Banking Committee fawned over Dimon, with Matt Taibbi pointing out that Dimon was actually not terribly persuasive, stumbling and mumbling over the parts of his defense that were a stretch. But most important, they had an opportunity to demand explanations, such as of what the trade actually is, who was involved in approving it, when did it start to go awry and when did management realize there was a problem, and muffed it. For the overwhelming majority of the legislators, that was no accident. As we wrote, Dimon took what is actually an indefensible position: that any bank risk taking should be permitted, so long as it will arguably do well when there is a crisis (watch for this to be broadened to merely be a bet to improve bank profits when its regular businesses are under stress). We pointed out that this logic would justify engaging in systemically destructive activities like the Magnetar trade, and that with government backstopping behind it to boot. And that is a bigger risk than it might seem at first blush.

Predators and Professors - Simon Johnson - In what was apparently his first-ever interview or public statement on banking-reform issues (or even finance), Bollinger’s main point was that Dimon should continue to serve on the board of the New York Fed. He used surprisingly nonacademic language – stating that “foolish” people who suggest that Dimon should resign or be replaced have a “false understanding” of how the system really works. I am currently petitioning the Board of Governors to remove Dimon from this position. Nearly 37,000 people have signed the on-line petition at, and I am optimistic that I will have a meeting soon with senior Washington, DC-based Board staff to discuss the matter. Bollinger’s intervention may prove helpful to Dimon; after all, Columbia University is one of the world’s best-regarded universities. On the other hand, it could also prove productive in advancing the public debate about how “too big to fail” bankers sustain their implicit subsidies.I have written a detailed rebuttal of Bollinger’s position. I hope that Bollinger, in the spirit of open academic dialogue, replies in some public form – either in writing or by agreeing to debate the issues with me in person. We need a higher-profile conversation about how to reform the unhealthy relationship between universities and subsidized global financial institutions, such as JPMorgan Chase.

Summarizing Jamie Dimon's Congressional Testimony -- As expected, absolutely nothing new was disclosed in today's latest Jamie Dimon dog and pony show. To summarize what we did learn:

  • "JPM is not too big to fail, but it is not at risk of failing unless the earth is hit by the moon"
  • "We make CDS for the benefit of veterans, retirees, orphans and widows"
  • "We only bought Bear's assets in a firesale while the Fed backstopped its liabilities, because the US government made us"
  • "VaR can be made to show anything. We have a closet full of models"
  • "Gambling is not investing"

Finally, Jamie Dimon once again refused to disclose the to-date losses on the CIO trade, but promises the firm will be profitable. Which only leaves one question open: how much "profit" from "reserve release" and "DVA", aka blowing out in JPM CDS, will the firm need to take to mask the CIO losses?

Counterparties: Jamie Dimon’s congressional testimony, in 11 tweets --Jamie Dimon appeared before Congress once again today to talk about JPMorgan’s multibillion-dollar hedging losses. (Here’s our take on Dimon’s first round.) Appearing this time before the House Financial Services Committee, Dimon faced tougher, if equally confusing, questions. The regulators came first, in the form of the heads of the CFTC, FDIC, OCC and SEC; you can read Reuters’ wrap of the hearing here. Then came Dimon. Here’s our own Q&A of his appearance, with all credit due to the twittersphere. JPMorgan’s botched hedges could lose it up to $5 billion. Could the losses have been much bigger still? Like, two orders of magnitude bigger?

Dimon Plays Humpty Dumpty to Congress -- Yves Smith -- “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master— that’s all.”The House Financial Services Committee hearings on the losses in JP Morgan’s Chief Investment Office were an improvement over the Senate version, in that there was comparatively little fawning over Jamie Dimon and more earnest, even if not very successful, efforts to pry information from him (one wonders whether the fact that Chuck Schumer has been hitting Wall Street up for superPac donations was a contributing factor). Even some Republicans got a bit stroopy with him, including the Representative from Bank of America, Patrick McHenry. But to anyone who knows bupkis about finance, the striking thing was how many times Dimon gave sloppy to downright dishonest answers. And they didn’t have the feel of the kind of careful word parsing that Goldman execs did when under Congressional hot lights in 2010, of people who’ve been scripted and rehearsed to give very narrow answers and duck anything that will put them on rocky ground. While there was nothing wrong with Dimon’s manner, our buddy Amar Bhide was right when he called Dimon’s answers Orwellian. He played remarkably fast and loose with words and definitions. It was disrespectful, but not in a way that anyone could have called him out on it. The five minute limit on questions made it impossible to do the sort of questioning it would have taken to nail down Dimon’s misrepresentations.Let’s give a few examples of Dimon’s crude propaganda efforts.

Matt Taibbi and Your Humble Blogger Will Be on Bill Moyers’ Show This Friday -  Yves Smith  - We taped earlier today and the subject was the JP Morgan hearings as a window into the role of banks in politics and the economy. Moyers is (not surprisingly) really gracious and skilled host and it was fun being on with Taibbi (I’ve spoken to him on the phone but we have not met until now). Moyers and his staff (which is very professional but quite relaxed) do a great job of putting guests at ease. They seemed really stoked after the session, so it appears to have gone well even by their stringent standards.  Check here for local broadcast times (it runs more than once at many PBS affiliates). I’ll put it up at NC once they post a web version.

Study: Mega Bank JP Morgan Chase Receives A $14 Billion Annual Subsidy From The U.S. Government - JP Morgan Chase CEO Jamie Dimon testified on Capitol Hill today for the second time in two weeks, appearing before the House Financial Services Committee to discuss the trading debacle that has cost his bank billions of dollars. Before the hearing, Bloomberg News pointed to a new study showing that JP Morgan Chase receives a $14 billion annual subsidy from the U.S. government. This subsidy is due to JP Morgan’s reputation as a too-big-to-fail bank, which lets it borrow money at lower rates than other, less systemically risky banks: JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fund and our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. [...] To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education. JPMorgan’s share of the subsidy is $14 billion a year, or about 77 percent of its net income for the past four quarters. In other words, U.S. taxpayers helped foot the bill for the multibillion-dollar trading loss that is the focus of today’s hearing.

Dimon in the Rough: How Wall Street Aims to Keep U.S. Regulators Out of Its Global Betting Parlor - Robert Reich: The Commodity Futures Trading Commission, the main regular of derivatives (bets on bets), wants to extend Dodd-Frank regulations to the foreign branches and subsidiaries of Wall Street banks. Horror of horrors, say the banks. “If JPMorgan overseas operates under different rules than our foreign competitors,” warned Jamie Dimon, chair and CEO of JP Morgan, Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.” This is the same Jamie Dimon who chose London as the place to make highly-risky derivatives trades that have lost the firm upwards of $2 billion so far – and could leave American taxpayers holding the bag if JPMorgan’s exposure to tottering European banks gets much worse. Dimon’s foreign affair is itself proof that unless the overseas operations of Wall Street banks are covered by U.S. regulations, giant banks like JPMorgan will just move more of their betting abroad – hiding their wildly-risky bets overseas so U.S. regulators can’t control them. Even now no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down.Call it the Dimon loophole. This is the same Jamie Dimon, by the way, who at a financial conference a year ago told Fed chief Ben Bernanke there was no longer any reason to crack down on Wall Street. “Most of the bad actors are gone,” he said. “[O]ff-balance-sheet businesses are virtually obliterated, … money market funds are far more transparent” and “most very exotic derivatives are gone.”

JPMorgan's Wild, Crazy Insane Gamble Puts Global Economy at Risk: Bill Black (interview) Jamie Dimon was not on Capitol Hill Tuesday but he and JPMorgan's big loss were center stage at a Senate Banking Committee hearing. "The company's massive trading loss is a stark reminder of the financial crisis of 2008 and the necessity of Wall Street reform," said Committee Chairman Tim Johnson (D-SD). The Securities and Exchange Commission is looking into the "appropriateness and completeness" of JPMorgan's "financial reporting and other public disclosures," SEC chairwoman Mary Schapiro told the committee. Gary Gensler, chairman of the Commodity Futures Trading Commission, said the CFTC is also investigating trades that led to JPMorgan's loss of $2 billion -- and counting. At this point, the debate seems to be over whether or not JPMorgan's losses are a reason to strengthen financial regulations -- "it would be wrong for us not to take this example," Schapiro said. William Black, an associate professor of economics and law at the University of Missouri-Kansas City and a former senior financial regulator, agrees and goes a step further. "Regulators need to replace Dimon with a manager who is not addicted to exploiting federal subsidies to gamble on financial derivatives," Black writes, echoing views expressed here by MIT's Simon Johnson

Dimon Lambastes Loans and Expresses His Devotion to Derivatives - William K. Black - The ongoing U.S. crisis was driven largely by financial derivatives.  Nine of America’s systemically dangerous institutions (SDIs) failed or had to be bailed out – Bear Stearns, Lehman, Merrill Lynch, Fannie, Freddie, AIG, Countrywide, Wachovia, and Washington Mutual (WaMu).  The SDI failures were primarily due to losses caused or aided by the sale and purchase of enormous amounts of fraudulent derivatives, and deregulation, desupervision, and de facto decriminalization proved exceptionally criminogenic.   That public policy argument against subsidizing dangerous bets by banks in derivatives is compelling and cuts across all political spectrums.  Among banks, only the SDIs are massive users and issuers of financial derivatives.  The largest SDIs love financial derivatives.  Merrill Lynch failed because it was the largest purchaser of its own “green slime” derivatives, particularly collateralized debt obligations (CDOs) “backed” largely by endemically fraudulent liar’s loans.  Such purchases were guaranteed to swiftly make Merrill’s investment officers wealthy and destroy the firm.  My most recent columns have quoted Dimon’s dictum about accounting control fraud: “Low-quality revenue is easy to produce, particularly in financial services.  Poorly underwritten loans represent income today and losses tomorrow.” Dimon’s dictum is equally true about the purchase of derivatives and the sale of CDS “protection.”  AIG’s managers in charge of selling CDS protection took advantage of a “sure thing.”  They booked income immediately and posted no reserves against the credit risk they were taking.  They grew massively and employed extreme leverage.  Those tactics maximize reported (fictional) income and modern executive compensation.  The catastrophic losses come years later and are borne by others (the government, creditors, and shareholders).  The officers become wealthy through the accounting scam.

[JPM Whale-Watching Tour] Where the OCC should have looked - Isn’t it a problem if bank regulators depend, seemingly exclusively, on the banks themselves for information? Weren’t trade information warehouses, such as DTCC’s for credit derivatives, built in part to give regulators a bird’s eye view of markets? If so, why the hell does it sound like they aren’t being used? JPMorgan management have put their hands up since the announcement of $2bn of losses, effectively saying, ‘yeah, whoops, we totally messed that one up. Buck stops here. We’re looking into preventing that from ever happening again.  Where is the equivalent from a regulator, or regulators? (Honorable mention to former regulator Sheila Bair for stating that regulators should have caught it and should admit their mistake.) Are regulators only as good as the banks they monitor? One of the lessons FT Alphaville has learned from the losses on the synthetic credit portfolio of JPMorgan’s CIO is that regulators like the Office of the Comptroller of the Currency will fail to notice particularly risky positions as and when the monitoring functions at banks also fail to spot them. From the mouth of CEO Jamie Dimon himself, when questioned by Senator Brown of Ohio about whether the OCC was informed about the CIO’s loss-making positions: In this particular case, since we were a little misinformed, we probably had them misinformed. We passed that mistake onto them.

MF Global Customers “Get the Chance” To Auction Off Their Hopes For the Return of Stolen Funds - Great news for customers who had their money stolen by Wall Street! No need to worry about its return, now they can sell their claims at a discount to -- Wall Street! Perhaps we can get rid of the FDIC and cumbersome banking regulation and let people auction off their looted savings deposits and CD's when the Bankers lose their money by gambling on derivatives. And as for education, well, children do have a lot of time and energy that might be better utilized in manual labor. Free market! Assymetry of information! Predatory finance! Innovation! It's got something for everyone -- well, everyone that counts, that is.

Bill Black: Abacus Fraud Prosecution is not a Test Case - Anthony Lee Pacchia interviews Bill Black for Bloomberg Law. Video embedded following text. On the Abacus Bank Prosecution: Prosecuting Abacus is very minor but it does give lie to the claim that there is no way to prosecute fraudulent lending. Now that we have established that it is possible to prosecute fraudulent lending: There should be hundreds of senior officers at hundreds of banks being prosecuted. Unfortunately, we will likely see only tiny cases - and maybe one politically-motivated big case, given that it is an election year. The impunity with which these bankers operate is embarrassing. On the fraud leading up to the crisis: By 2006, 1 of 3 of all home loans made in the USA were liars loans. The incidence of fraud in liars loans is 90%. It was overwhelmingly the lenders an their agents who put the lie in the liars loans. The Financial Crisis Inquiry Commission reported that the big banks were massive players in this. We were seeing over 1,000,000 cases of fraudulent loans per year by the big banks alone in 2006. Overall, it was over 2,000,000 fraudulent loans per year by 2006.

The Scam Wall Street Learned From the Mafia - Matt Taibbi - Someday, it will go down in history as the first trial of the modern American mafia. If you heard about it at all, you're probably either in the municipal bond business or married to an antitrust lawyer.The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.

Oil Regulators Wimp Out on Requiring More Transparency - Yves Smith - A Wall Street Journal article tonight has the whiff of disinformation about it. It dutifully reports that oil regulators have retreated in a serious way from requiring more disclosure of oil market transaction. The article never offers an explanation for the change in stance and focuses attention on actors who are highly unlikely to be the moving force. First, on the regulatory retreat: In an interim report to the G-20, ahead of final recommendations later this year, the International Organization of Securities Commissions, an association of global financial-markets regulators such as the Securities and Exchange Commission, retreated from an earlier proposal to set up a regulatory body to oversee the so-called physical oil market—where oil on tankers and in pipelines is traded between major oil producers and refiners such as Exxon Mobil Corp and Royal Dutch Shell PLC… Trading in physical oil has been of particular concern to regulators, who worry that it has caused volatility and pushed up oil prices globally. Physical oil prices often act as a benchmark for the larger and more actively traded commodities-futures market, including more than 800 exchange-traded energy contracts in the U.S. alone… “Even if this situation is not currently being abused, the potential for abuse is obvious,”  Keep in mind that manipulation and lack of decent information have long plagued the oil market. OPEC (yes, the powerful OPEC) no longer uses the spot market as the basis for its oil pricing because it was too easily manipulated. Oil supply and demand data are dreadful. Inventory information isn’t as germane as it is in other markets because some critical inventories, like the Strategic Petroleum Reserve, aren’t included, plus (and most important) oil can be inventoried in the ground, by cutting production schedules. So more information in this murky arena would seem to be enormously valuable to policymakers and the public.

Moody's downgrades 15 major global banks  (Reuters) - Moody's Investors Service cut the credit ratings of 15 of the world's biggest banks on Thursday in an expected move that was part of a broad review of major financial institutions. Moody's announced the review on February 15, saying these global investment banks' ratings did not capture the evolving challenges of more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's Global Banking Managing Director Greg Bauer said in a statement. Among the moves, Moody's cut JPMorgan's long-term senior to A2 from Aa3 and assigned it a negative outlook. It also cut Morgan Stanley's long-term senior unsecured debt only two notches to Baa1 from A2 and also assigned it a negative outlook.

Moody's downgrades 15 major banks - The credit ratings agency Moody's has downgraded 15 banks and financial institutions. UK banks downgraded include Royal Bank of Scotland, Barclays and HSBC. In the US, Bank of America, Citigroup, Goldman Sachs and JP Morgan are among those marked down. BBC business editor Robert Peston reported on Tuesday that the downgrades were coming and said that banks were concerned as it may make it harder for them to borrow money commercially. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities," Moody's global banking managing director Greg Bauer said in the agency's statement. The other institutions that have been downgraded are Credit Suisse, UBS, BNP Paribas, Credit Agricole, Societe Generale, Deutsche Bank, Royal Bank of Canada and Morgan Stanley

Moody's Cuts Credit Ratings of 15 Big Banks - Already grappling with weak profits and global economic turmoil, 15 major banks were hit with credit downgrades on Thursday that could do more damage to their bottom lines and further unsettle equity markets. The credit agency, Moody’s Investors Service, which warned banks in February that a downgrade was possible, cut the credit scores of banks to new lows to reflect new risks that the industry has encountered since the financial crisis. “The risks of this industry became apparent in the financial crisis,” said Robert Young, a managing director at Moody’s. “These new ratings capture those risks.” Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After the downgrades, the banks stand barely above the minimum for an investment grade rating, a level also known as junk and a sign of the difficult business conditions they face.

Ratings Cut for Giant Banks - Moody's Investors Service dealt a fresh blow to the financial sector, downgrading more than a dozen global banks to reflect declining profitability in an industry being rocked by soft economic growth, tougher regulations and nervous investors. The move hit five of the six biggest U.S. banks by assets, including Morgan Stanley, which had mounted a campaign to persuade Moody's not to cut its rating by three notches. It was downgraded instead by two. The lower ratings are likely to raise the companies' borrowing costs and affect how they raise capital, and could deprive some banks of trading revenue. The higher costs for banks could be passed on to customers such as municipalities, corporations and others who get loans from banks. "All of the banks affected by today's actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities," said Greg Bauer, a managing director of global banking at Moody's, in a statement. Although some of the banks' other businesses can provide "shock absorbers," Mr. Bauer said, they "also provide unique risks and challenges."

Moody's Downgrades 15 Major Global Banks, Including BofA, JPMorgan Chase - The credit rating agency Moody's Investor Services just downgraded the ratings of 15 of the world's largest banks. Bank of America, JPMorgan Chase, Citigroup and Goldman Sachs were among them. The AP reports: "The ratings agency said late Thursday that the banks were downgraded because their long-term prospects for profitability and growth are shrinking. "The ratings agency said it was especially concerned about banks with significant capital market activities during a time of increased volatility in markets."Credit Suisse, the second largest bank Switzerland, was most severely affected, cut by three levels. "The downgrades may force banks to post additional collateral to trading partners in derivatives deals while boosting the companies' borrowing costs," reports Bloomberg. "Moody's said when it announced the review that it was seeking to reflect the banks' reliance on fragile confidence in funding markets and increased pressures from regulation and a difficult market environment." A full list of the affected banks is at Moody's website

Bank of America Settlement on Customer Overbilling Proves Bank Crime Pays - Yves Smith - Here’s the Bloomberg story on one of today’s regulatory theater announcements: Bank of America Corp.’s Merrill Lynch wealth-management unit was fined $2.8 million by the Financial Industry Regulatory Authority for overbilling customers by $32.2 million over an eight-year period. Merrill Lynch charged the fees to about 95,000 accounts between April 2003 and December 2011, FINRA said in a statement today. New York-based Merrill Lynch, which was acquired by Bank of America in 2009, lacked an adequate supervisory system to ensure that customers were billed in accordance with their contracts and disclosure documents, the regulator said. Now of course, the bank says this was all a mistake, but it’s pretty certain the way Finra found about about it was via customer complaints, since the average amount pilfered per customer was under $400. This means that even if it was an initially error, Merrill and later BofA refused to correct it when alerted (customers who noticed would presumably try to get the charge reversed, and only then try other routes).  Since this took place over eight years, let’s assume the average amount outstanding of money the bank had that it wasn’t entitled to was half that, or $16 million. This was free money, absolutely no cost of funds. If you assume even a low rate of return, roughly 2% or higher, and factor in that the fine was paid in arrears, and a full year after the practice stopped, the fine wasn’t even a punishment.

 C.E.O. Pay Is Rising Despite the Din - Probably the most-heard complaint about big business these days, one seemingly tailored for the 99 percent, is how much money corporate C.E.O.’s routinely pull down. Despite a lot of noise from shareholders and a few victories at big names like Citigroup and Hewlett-Packard, executive pay just keeps climbing.  Yes, some corporate boards seem to be listening to shareholders, particularly on contentious issues like the seven-figure cash bonuses that helped define hyperwealth during the boom. Since the bust, corporate America on the whole has moved to tie executive pay more closely to long-term performance by skewing executive paychecks more toward restricted stock, which can’t be sold for years.  But rewards at the top are still rich — and getting richer. Now that 2011 proxy statements have been filed, the extent of executive pay last year has finally become clear. Median pay of the nation’s 200 top-paid C.E.O.’s was $14.5 million, according to a study conducted for The New York Times by Equilar, a compensation data firm based in Redwood City, Calif. The median pay raise among those C.E.O.’s was 5 percent. (The full list is available here.)  That 5 percent raise is smaller than last year’s. But it comes at a time of stubbornly high unemployment and declining wealth for many ordinary Americans. Even corporate pay experts say that this is hardly the kind of change that will quell anger over the nation’s have-a-lots by the have-lesses, particularly in an election year.

AIA: Architecture Billings Index declines sharply in May - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Substantial Drop in Architecture Billings Index Following the first negative reading in five months, the Architecture Billings Index (ABI) has had a significant drop in May. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the May ABI score was 45.8, following a mark of 48.4 in April. This score reflects a sharp decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 54.0, down slightly from mark of 54.4 the previous month.  “For the second year in a row, we’re seeing declines in springtime design activity after a healthy first quarter. Given the ongoing uncertainly in the economic outlook, particularly the weak job growth numbers in recent months, this should be an alarm bell going off for the design and construction industry,”  This graph shows the Architecture Billings Index since 1996. The index was at 45.8 in May, the lowest since July of last year. Anything below 50 indicates contraction in demand for architects' services.

Unofficial Problem Bank list declines to 919 Institutions - Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. So this is an unofficial list of Problem Banks compiled only from public sources. (And only US banks). Here is the unofficial problem bank list for June 15, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  As anticipated, the OCC released its actions through mid-May 2012. That release and several failures contributed to some changes to the Unofficial Problem Bank List. In all, there were six removals and two additions. The changes leave the list with 919 institutions with assets of $354.0 billion. A year ago, 996 institutions with assets of $416.7 billion.

Residential Capital Files Bankruptcy: Part 2 of 2 - In Part 1 of this series, we discussed the circumstances leading to the bankruptcy filing of Residential Capital (ResCap) , a residential mortgage loan originator and a subsidiary of Ally Financial Inc. (formerly GMAC.) In anticipation of the bankruptcy filing, ResCap’s board had approved the bankruptcy filing and the sale of substantially all of its mortgage servicing and related assets to Fortress Investment Group LLC and Nationstar Mortgage Holdings Inc. for approximately $2.32 billion. As we noted in Part 1, according to Chairman and CEO of ResCap, Thomas Marano, Fortress and Nationstar will not assume the liabilities that Berkshire had proposed assuming. However, it does appear that Ally had taken steps to get key creditors on board with this plan. Right before the bankruptcy filing, Ally and ResCap negotiated an $8.7 billion settlement with 17 institutional investors in non-agency mortgage backed securities over alleged violations of representations and warranties. In exchange for such settlement, the institutional investors entered into an agreement to support the company’s filed plan of reorganization.

US judge orders ResCap probe -- A judge has ordered an independent examination of the bankruptcy of Residential Capital, the mortgage business of Ally Financial, a majority government-owned lender.  Ally, which was the financing arm of General Motors until the government rescue of the carmaker in 2009, put ResCap into bankruptcy last month to avoid redeeming billions of dollars of bonds.  Treasury officials had signalled approval, but creditors, including Warren Buffett’s Berkshire Hathaway, had urged the judge to appoint an independent examiner to probe pre-bankruptcy dealings between Ally and ResCap, whose net effect, Berkshire said, “was to transfer a substantial share of ResCap’s operating assets to [Ally]”.Judge Martin Glenn said at a hearing in New York on Monday that “given the facts and circumstances of this case, the court concludes that appointment of an examiner is required and appropriate”.

Securitization Fail-Litigation Update - The wheels of litigation move slowly, but there are a couple of recent securitization fail litigation decisions that are worthy of note. First, in the Congress case, a wrongful foreclosure action in Alabama (see my previous blogging on it here), the Alabama appellate court reversed and remanded, a victory for the homeowner. The reversal and remand was on a rather narrow ground, namely that the trial court applied too demanding a standard when evaluating the homeowner's argument that the allonge in the case had been fabricated. Yet this means that this securitization fail case is still alive. It's also interesting to see how suspicious some courts have become about mysteriously appearing allonges and the like. Second, the Illinois Court of Appeals for the 2d District just issued a ruling in a commercial mortgage foreclosure case, Bank of Am. Nat'l Ass'n v. Bassman FBT, 2012 Ill. App. LEXIS 487 (Ill. App. Ct. 2d Dist. 2012), with some wide reaching implications for securitization fail arguments. It's mainly a choice of law opinion, but there are two interesting things about the case. First, the Illinois court very clearly understood the securitization fail standing argument made by the defendants and was taking it seriously. Second, the Illinois court applied New York law to the interpretation of the PSA. This is critical because once the argument shifts to New York trust law, its 90% of the way there. The Illinois court got hung up on a question of whether a conveyance to a trust in contravention of the trust documents is void or voidable.

Judging De Minimis: Does the Judge in Your Foreclosure Case Own Stock in the Bank -- What would you do if you found out that the judge presiding over your foreclosure owned stock in the bank foreclosing on you?   Michael J. Fuchs has been living through a Hawaii court process that turned into a reality show nightmare.  The Judge in his case owns a lot of stock in the foreclosing bank! And that’s not all… HBO‘s former CEO and Chairman of the Board, Michael J. Fuchs, invested over $100 million (dollars) in a Big Island Hawaii development that sank like the Titanic with the economy in 2007.  The Hawaii scales of justice have not been tipped in Mr. Fuchs’ favor –  apparently they haven’t even been balanced. Hawaii attorney Gary Dubin, discovered a seriously conflicted situation with more than an appearance of impropriety and asked that the Judge, Honorable Bert I. Ayabe, recuse himself from the case because of…stock investments in Bank of Hawaii, campaign donations to a U.S. senatorial candidate… a law firm first representing Fuchs and then representing the opposing parties… whose lead attorneys were law school chums of the judge, the judge’s wife may have performed legal work for the developer…  and the list goes on.

Video - Homeowner Aid Gives Big Banks a Boost - A government program that helps struggling homeowners take advantage of low interest rates to cut monthly mortgage payments is providing an unexpected revenue boost to large banks such as Wells Fargo and J.P. Morgan Chase. Banks that collect those payments, known as mortgage servicers, could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc.Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura's figures. The contrast is the latest illustration of the competing demands policy makers must juggle when they devise responses to the housing bust, now in its sixth year. Federal officials last year revised the HARP program in a bid to encourage banks to refinance borrowers who were current on their payments but owed more than their properties were worth. The revisions have driven a sharp increase in refinancings, following years in which the program fell short of government projections. But some critics, including members of the Obama administration, say the changes risk making HARP a giveaway to big banks.

Confirmed: HARP 2.0 Ripping Off Underwater Borrowers - The Wall Street Journal gets around to noticing that the latest version of HARP, the Home Affordable Refinance Program, has been manipulated by the leading mortgage servicers to trap their borrowers. And they add a bit of a twist. Because servicers set the fees from closings on refinances, this trapping of their borrowers also happens to be quite lucrative. Banks that collect those payments, known as mortgage servicers, could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc. Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura’s figures [...] That is because the new HARP rules make it easier for borrowers to refinance their loans with existing lenders. That, the critics say, allows large lenders to charge a captive customer base above-market interest rates on the refinanced loans. Borrowers refinancing through their existing lender make up about 75% of HARP refinancings, according to government figures.

Loan Modifications During Foreclosure Crisis Provide Only Temporary Relief - The other day, New York Attorney General Eric Schneiderman announced a $60 million program for housing counseling and legal services for borrowers threatened with foreclosure. This will enable them to fight their evictions and get the support they need for working with banks for modifications. I’m happy to see any money from the foreclosure fraud settlement go in the general direction of homeowners. We just learned that California sealed the state budget today by taking even more of the hard dollar settlement funds to fill that hole. But a new report out from TransUnion tells a very cautionary tale for those who get the kinds of loan modifications that are likely to come out of counseling and negotiation with the banks. Six out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months, but there may be a modest silver lining buried in the high recidivism rates. A study by TransUnion has found that borrowers who received a mortgage modification performed materially better on new auto loans and credit cards than those who did not receive any help, an indication that some consumers who fall far behind on monthly bills are able to regain their financial footing [...] The study found that borrowers who had previously gone delinquent only on their mortgages — but not other loans — were better credit risks than borrowers who went delinquent on other loans as well as their mortgages.

Fascinating Mortgage & Housing Data Points - My Washington Post column got rolled over until next week (caused by a few snafus on my side and theirs). There are some fascinating details within the column, and since it won’t be published for a few days, I wanted to share them with you. Here is an early look:

    • -There have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.
    • -Foreclosure starts nationwide increased on an annual basis after 27 consecutive months of year-over-year declines.
    • -Bank repossessions are still down 18% year over year. Voluntary foreclosure freezes and increasing pre-foreclosure sales are the primary factors.
    • -Distressed home sales, which include both foreclosures and short sales, had fallen substantially. They were down to 28% for April 2012 – significantly less than the 37% in April 2011.
    • -Distressed sales tend to be about 20% less than non-distressed sales.

With that as a background, I spoke with ace housing analyst Laurie Goodman of Amherst Securities. Goodman dazzled me with several astonishing statistics. Let’s briefly look at two of these:

    • 1) 2.8 million Americans are 12 months or more behind on their mortgages.
    • 2) “Since 2007, 19% of all borrowers (~9 million borrowers) have gone >90 days delinquent on their mortgages, or have had their mortgage liquidated.

Nearly 200,000 borrowers want foreclosure review - Nearly 200,000 borrowers have requested a review of their mortgage foreclosures to see if they are eligible to receive compensation or other remedies because of errors, federal regulators said Thursday. The Federal Reserve and the Office of the Comptroller of the Currency also extended until September 30 the deadline for borrowers to submit their request for a foreclosure review to bank regulators. The previous deadline was July 31. The foreclosure reviews are required by major banks that were sanctioned by the OCC and other regulators in April 2011 for negligence in residential mortgage loan servicing and foreclosure processes. Borrowers are eligible for a review if their mortgage was active in the foreclosure process between Jan. 1, 2009, and Dec. 31, 2010. The agencies said that until the end of May 2012, nearly 4.4 million people were sent letters explaining how to request a free review of the mortgage file if they believe they have suffered financial harm because of servicer errors. Also, as part of the review, independent consultants selected 144,817 mortgage files from the servicers’ portfolios to be checked.

LPS: Mortgage delinquencies increased in May - LPS released their First Look report for May today. LPS reported that the percent of loans delinquent increased in May from April, and declined year-over-year. The percent of loans in the foreclosure process decreased slightly and remains at a very high level. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) increased to 7.20% from 7.12% in March. The percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.97%, so delinquencies have fallen over half way back to normal. The increase was in the less than 90 days delinquent category. The following table shows the LPS numbers for May 2012, and also for last month (April 2012) and one year ago (May 2011). The number of delinquent loans, but not in foreclosure, is down about 15% year-over-year (644,000 fewer mortgages delinquent), and the number of loans in the foreclosure process is down 6% or 137,000 year-over-year (the percent in foreclosure is mostly unchanged, but the number of total loans has declined)

Lawler: Fannie, Freddie Delinquency Rates and REO by State for March - From economist Tom Lawler: Last Friday FHFA released its GSE “Foreclosure Prevention Report” for Q1/2012, which has data on Fannie Mae’s and Freddie Mac’s foreclosure prevention activity, foreclosure and other “home forfeiture” activity, delinquencies, and REO. Starting with last quarter’s report, FHFA began showing individual state data, for folks who like to track such things. Here is the report. Included in the report is the number of delinquent loans by length of delinquency. In some states the percentage of “seriously delinquent (90+) loans that have been delinquent for a year or more is astonishingly high. Below is a chart showing the serious delinquency rate for combined GSE conventional SF mortgages by state broken out by length of delinquency. Florida, of course, is still “off the charts” in terms of its SDQ rate, and 73% of the seriously-delinquent SF loans in Florida have been delinquent for a year or more. For the combined GSEs, states with the highest “really super-seriously” delinquency rates – i.e., 365+ -- at the end of March were Florida (8.15%), New Jersey (4.27%), Nevada (3.65%), Illinois (2.84%), New York (2.83%), Maine (2.68%), and Maryland (2.54%). For Maryland vs. Virginia “fans,” the “really super-seriously” delinquency rate in Virginia in March was 0.56%.

The Federal Government, Throwing Families Into The Street To Make Billionaires Out of Millionaires - “The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors — vulture funds.” “These homes,” wrote Arnold, “which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value. You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.” Warren Buffett, one of the richest men in the world, obviously, would have no trouble qualifying for the privilege of bidding in this fire sale for the super-rich. And the “Oracle of Omaha” appears to be more than casually interested in getting in on the game. The Wall Street Journal reported on March 20, 2012: “Warren Buffett, considered a sage investor and chief executive of Berkshire Hathaway Inc., said in an interview with CNBC-TV last month that he would buy up ‘a couple hundred thousand’ single-family homes if he could do so easily, given the high yields on rental investments.”

The Coming Train Wreck - The U.S. housing market and any economic recovery are confronting a brick wall, and no one is discussing it. Like a speeding train, the housing market and our economy are heading over a cliff with no bridge. Yet no one in Washington wants to discuss this very real and approaching danger. Recently, Salon ran an article on the conflicting, confusing and ineffective nature of housing policy to date. The article traced the conflicting narratives and debate associated with principal reduction and the Obama Administration's efforts in this arena. Andrew Leonard, the author of the article, interviewed me as he was trying to sort out the different issues, and the article correctly states that I believe there is a "nightmare scenario" in which Congress fails to extend essential legislation before it expires at the end of this year. If Congress does not act, we will almost inevitably see a further collapse in the housing market, with a ripple effect that has the potential to destroy vital consumer confidence, stop any economic recovery or even cause an economic catastrophe. There's even a nightmare scenario in which the entire fight over principal reduction becomes "irrelevant." Here's why: That's because, says Judson, tax law historically treats principal reduction as income to the homeowner who gets it. In other words, if you have a $300,000 mortgage on a house that is now only worth $200,000, and your bank gives you a $100,000 break to bring the mortgage and the home value in line with each other, the IRS will consider that $100,000 break taxable income.

Why using eminent domain for liens is a bad idea - A couple of weeks ago, Matt Goldstein and Jenn Ablan had an intriguing story: Mortgage Resolution Partners, a politically well-connected firm in San Francisco, was shopping to municipalities the idea of using eminent domain to restructure mortgages. Then, on Tuesday, Cornell University’s Robert Hockett weighed in, saying that the idea was a compelling one. “To solve a collective action problem, we need a collective agent,” he wrote. “That’s what governments are.” According to Imran Ghori of the Press-Enterprise in San Bernadino, where the idea seems to be furthest along, Hockett “has been working with Mortgage Resolution Partners” but “said he has no financial interest in the proposal”. I don’t really know what that means, but I think it’s fair to assume that if this happens, Hockett is very well placed to make a lot of money from it. So it’s worth approaching the idea with a skeptical eye. In principle, I think I can like this idea. On Monday I met with Jorge Newbery of American Homeowner Preservation, whom I’ve written about a few times in the past; his company buys pools of defaulted underwater mortgages from banks, often for just $1 each, and then, having bought the mortgages at massive discounts to par value, can come up with any number of ways to successfully modify the mortgage, nearly all of which involve principal reduction. This is a very successful outcome for nearly everybody involved, but there’s a problem: while Newbery can buy pools of bank-owned mortgages, he can’t buy mortgages which have been securitized. And those mortgages represent the vast majority of defaulted subprime debt.

FNC: Residential Property Values increase 0.6% in April -In addition to Case-Shiller, CoreLogic, and LPS, I'm also watching the FNC, Zillow and other house price indexes.  FNC released their April index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.6% in April (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased about 1.0% in April. These indices are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). The year-over-year trends continued to show improvement in April, with all four composite indexes down about 2.4% compared to April 2011. For the 10, 20, and 30 city indexes, this is the smallest year-over-year decline in the FNC index since 2007 (five years ago).This graph is based on the FNC index (four composites) through April 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. Some of the month-to-month gain is seasonal since this index is NSA. The key is the indexes are showing less of a year-over-year decline in April. If house prices have bottomed, the year-over-year decline should turn positive later this year or early in 2013

US House Prices Rise in April for a Third Month, FHFA Says - U.S. house prices rose 0.8 percent in April from the previous month, the third straight advance, as the property market shows signs of stabilization, the Federal Housing Finance Agency said. The increase beat the 0.4 percent gain that was the average estimate of 19 analysts in a Bloomberg survey. Prices jumped 3 percent from a year earlier, the FHFA said in a statement today. The FHFA index, which measures price changes of single- family houses, showed increases in six of the nine regions covered on a seasonally adjusted basis. The monthly gain was led by a 2.2 percent jump in the area that includes California and Oregon. Prices fell 1.2 percent in the region that includes Massachusetts and Maine. The U.S. gauge is 18 percent below its 2007 peak and is at roughly the same level it was in April 2004, the FHFA said.

Zillow's forecast for Case-Shiller House Price index in April - Note: The Case-Shiller report is for April (really an average of prices in February, March and April). This data is released with a significant lag, see: House Prices and Lagged Data  Zillow Forecast: Zillow Forecast: April Case-Shiller Composite-20 Expected to Show 1.9% Decline from One Year Ago On Tuesday, June 26th, the Case-Shiller Composite Home Price Indices for April will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will decline by 1.9 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will decline by 2.4 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from March to April will be 0.5 percent for both the 20 and 10-City Composite Home Price Indices (SA). All forecasts are shown in the table below and are based on a model incorporating the previous data points of the Case-Shiller series and the April Zillow Home Value Index data, and national foreclosure re-sales.  April is the third consecutive month with monthly appreciation for the Case-Shiller indices, with April projected to be particularly strong. Buyers are experiencing many markets with extremely low inventory, which is propping up prices in the near term, paired with a decreasing share of foreclosure re-sales.  Despite the recent uptick in home prices, we do believe that 2012 will end on a lower level than 2011.

MBA: FHA Mortgage Refinance Applications increase sharply - From the MBA: Government Refinance Applications More Than Double in Latest MBA Survey The Refinance Index increased 1 percent from the previous week. The seasonally adjusted Purchase Index fell 9 percent from one week earlier. “Refinance volume increased again last week, but the composition of activity changed markedly. Despite rates remaining near all-time lows, conventional refinance application volume declined, and the HARP share of refinance activity dropped to 20 percent,” said Michael Fratantoni, MBA's Vice President of Research and Economics. “On the other hand, FHA refinance volume exploded to an all-time high, more than doubling over the week. New, lower FHA premiums on streamlined refinance loans came fully into effect, and borrowers seized the opportunity to lower their mortgage rates without increasing their FHA premiums. Refinance activity continues to increase, especially with the surge in FHA streamline refinancing - and because mortgage rates are near the record low set the previous week. It usually takes around a 50 bps decline from the previous mortgage rate low to get a huge refinance boom - and rates have fallen about that far - and refinance activity is now at the highest level since 2009.

Rate on 30-Year Mortgage Falls to Record 3.66 Percent - The average U.S. rate on a 30-year fixed mortgage fell this week to a record low for the seventh time in eight weeks. Cheap mortgages have helped drive a modest recovery in the weak housing market this year. Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan dropped to 3.66 percent. That’s down from 3.71 percent last week and the lowest since long-term mortgages began in the 1950s. The average rate on the 15-year mortgage, a popular refinancing option, declined to 2.95 percent. That’s down from 2.98 percent last week and just above the record 2.94 percent reached two weeks ago. The rate on the 30-year loan has been below 4 percent since December. Low rates could provide some help to the economy if more people refinance. When people refinance at lower rates, they pay less interest on their loans and have more money to spend. Still, the pace of home sales remains well below healthy levels. Sales of previously occupied homes dipped in May to a seasonally adjusted annual rate of 4.55 million, although they are up from the same month last year.

Mortgage Rates: Another Week, Another Record Low - Below is a graph comparing mortgage rates from the Freddie Mac Primary Mortgage Market Survey® (PMMS®) and the refinance index from the Mortgage Bankers Association (MBA). The MBA reported yesterday that refinance activity increased again last week.  Earlier today from Freddie Mac: 30-Year Fixed-Rate Mortgage Averages 3.66 Percent Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average mortgage rates easing amid worsening economic indicators. Both the 30-year fixed and the 5-year ARM registered new average record lows.  30-year fixed-rate mortgage (FRM) averaged 3.66 percent with an average 0.7 point for the week ending June 21, 2012, down from last week when it averaged 3.71 percent. Last year at this time, the 30-year FRM averaged 4.50 percent.  This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  The Freddie Mac survey started in 1971 and mortgage rates are currently at the record low for the last 40 years.

Low rates not reaching many US homeowners - Most US homeowners are paying above-market mortgage rates, new data show, indicating that government efforts to spur refinancings have yet to fully benefit households despite ultra-low headline borrowing costs. “Many Americans are able to take advantage of lower interest rates. Many people have refinanced or bought homes,” Ben Bernanke, Federal Reserve chairman, said on Wednesday at a news conference. But he added: “Mortgage access is much tighter than it’s been in a long time.” The average rate on a new 30-year fixed-rate home loan is 3.71 per cent, according to Freddie Mac, the government-controlled mortgage financier, spurring millions of Americans to lock in record low rates. But figures from CoreLogic, a housing data provider, show 20.5m of 39m creditworthy “prime” borrowers are paying rates of more than 5 per cent while just 5.7m households are enjoying rates of less than 4 per cent.The data speak of a credit divide that the Fed and Barack Obama’s administration have struggled to close despite numerous schemes to enable borrowers to refinance into cheaper mortgages. That gap is having an impact on consumer spending, which makes up roughly 70 per cent of US economic activity, as a greater share of borrowers’ cash than necessary is being spent on housing.

Morgan Stanley: Home prices will fall another 5% to 8% - Analysts at Morgan Stanley predict a 5% to 8% decline in home prices between the fourth quarter of 2013 and the first quarter of 2014. In its latest report on the state of housing, they expect a prolonged bottom, with post-trough home prices growing mainly at the rate of the consumer price index. Among nondistressed homes, prices will fall 5% to 10%, they said, notwithstanding historically high affordability metrics, driven mainly by continued constraints on mortgage credit availability. A new report from Fannie Mae's economic research team projects home prices will reach bottom in 2013. On the other hand, analysts at Morgan Stanley said they see a spiking demand for rental properties as increasing household formation creates a demand for shelter. But unlike in past cycles of economic recovery, they said, the strengthening demand for shelter cannot translate into a rise in homeownership precisely because of the constrained mortgage credit availability.

Existing Home Sales in May: 4.55 million SAAR, 6.6 months of supply - The NAR reports: Existing-Home Sales Constrained by Tight Supply in May, Prices Continue to Gain - Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.5 percent to a seasonally adjusted annual rate of 4.55 million in May from 4.62 million in April, but are 9.6 percent above the 4.15 million-unit pace in May 2011. ... Total housing inventory at the end of May slipped 0.4 percent to 2.49 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace; there was a 6.5-month supply in April. Listed inventory is 20.4 percent below a year ago when there was a 9.1-month supply. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in May 2012 (4.55 million SAAR) were 1.5% lower than last month, and were 9.6% above the May 2011 rate. The second graph shows nationwide inventory for existing homes.  The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory. Inventory decreased 20.4% year-over-year in May from May 2011. This is the fifteenth consecutive month with a YoY decrease in inventory.

Existing Home Sales: Inventory and NSA Sales Graph - The NAR reported inventory decreased to 2.49 million units in May, down 0.4% from the downwardly revised 2.50 million in April (revised down from 2.54 million). This is down 20.4% from May 2011, and down 2.6% from the inventory level in May 2005 (mid-2005 was when inventory started increasing sharply). It is very likely that inventory will be below the comparable month in 2005 for the rest of the year. It is even possible that inventory has peaked for 2012 (or is at least very close to the peak). Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included.  In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year. The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of May since 2004, and inventory is below the level in May 2005 (not counting contingent sales). However inventory is still elevated using months-of-supply. The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA (red column) are above the sales for the 2008, 2009 and 2011 (2010 was slightly higher because of the tax credit). Sales are well below the bubble years of 2005 and 2006. Also it appears distressed sales were down in May.

Breaking Down Drop in Home Resales -- Stuart Hoffman, chief economist at PNC Financial Services, talks with Jim Chesko about May’s 1.5% decrease in sales of previously homes and a separate report showing that last month’s leading economic indicators edged higher by 0.3%.

US housing: shadow supply meets shadow demand - One of the negative economic surprises this morning was the existing home sales number which dropped 1.5% in May. Not a real surprise, right? Slowing economy is resulting is slower sales. But it turns out there is something else afoot here. According to NAR, sales have slowed because of  housing supply shortages.  NAR: - Limited supplies of housing inventory held back existing-home sales in May, but sales maintained a strong lead over year-ago levels and home prices are on a sustained uptrend in all regions, according to the National Association of Realtors.  Total existing-home sales1, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 1.5 percent to a seasonally adjusted annual rate of 4.55 million in May from 4.62 million in April, but are 9.6 percent above the 4.15 million-unit pace in May 2011. Lawrence Yun, NAR chief economist, said inventory shortages in certain areas have been building all year. "The slight pullback in monthly home sales is more likely due to supply constraints rather than softening demand. The normal seasonal upturn in inventory did not occur this spring," he said.  Is the shadow demand finally catching up with the supply? House prices for actual transactions are indeed showing signs of improvement. FHFA House Price Index was up again, an increase of 0.8% for May.

Housing Starts in U.S. Fall 4.8% in May - Builders broke ground on more single-family houses for a third consecutive month in May and rising construction permits pointed to further gains, showing the residential real-estate market is weathering the U.S. economic slowdown. Work began on 516,000 one-family houses at an annual rate last month, up 3.2 percent from April and the most this year, the Commerce Department reported today in Washington. A slump in construction of apartments, which is often volatile, led to an unexpected drop in total housing starts. Building permits, a proxy for future construction, climbed to the highest level since September 2008, showing the combination of lower prices and record-low mortgage rates is underpinning demand and encouraging new projects. Toll Brothers (TOL) Inc. is among homebuilders benefiting from an improving housing market on rising demand for move-up homes. “We saw a very strong number in new permits, indicating builders are seeing improving demand,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. The report “was a lot better than the headline number would suggest.” Total starts dropped 4.8 percent to a 708,000 annual pace in May from a revised 744,000 rate in the prior month that was the highest since October 2008, today’s report showed. The median forecast of 77 economists surveyed by Bloomberg News called for a 722,000 rate. Estimates ranged from 685,000 to 750,000.

Housing Starts at 708 thousand in May, Single Family starts increase to 516 thousand -- From the Census Bureau: Permits, Starts and Completions Privately-owned housing starts in May were at a seasonally adjusted annual rate of 708,000. This is 4.8 percent below the revised April estimate of 744,000, but is 28.5 percent above the May 2011 rate of 551,000. Single-family housing starts in May were at a rate of 516,000; this is 3.2 percent above the revised April figure of 500,000. The May rate for units in buildings with five units or more was 179,000. Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 780,000. This is 7.9 percent above the revised April rate of 723,000 and is 25.0 percent above the May 2011 estimate of 624,000. Total housing starts were at 708 thousand (SAAR) in May, down 4.8% from the revised April rate of 744 thousand (SAAR). Note that April was revised up from 717 thousand. March was revised up too. Single-family starts increased 3.2% to 516 thousand in May. April was revised up to 500 thousand from 492 thousand. The second graph shows total and single unit starts since 1968.

Housing Starts Retreat In May As New Building Permits Climb - Is the rising economic anxiety taking a toll on the housing industry… again? The answer depends on the data set you’re looking at. Housing starts fell nearly 5% last month vs. April's tally, the Census Bureau reports. But newly issued building permits jumped by almost 8% in May to the highest level since September 2008. That's a sign that housing starts will stay firm if not rise in the months ahead. As economist Richard Yamarone writes in The Trader's Guide to Key Economic Indicators: "Economists have found that privately-owned housing units authorized by building permits generally precede housing starts by about one month and sales by three." It could be different this time, of course, in which case the retreat in new starts last month may be a sign of things to come. But when we filter out the monthly noise, the record over the last 12 months still looks encouraging. Indeed, both permits and starts have increased substantially vs. the year-earlier levels.

McBride: Total Housing Starts Decline in May, but the Trend Is Positive - The U.S. Census Bureau and the Department of Housing and Urban Development reported this morning that housing starts declined to 708 thousand in May, on a seasonally adjusted annual rate (SAAR) basis, down from 744 thousand in April (April was revised up from 717 thousand).  Single family housing starts increased in May to a 516 thousand annual rate, up from 500 thousand in April.  The decline in total starts was related to the volatile multi-family sector, and overall this was a fairly strong report with an increase in single family starts, a sharp increase in building permits, and upward revisions to prior months. For excerpts from the report and graphs, please see Housing Starts in May. Two key points:

  • Total housing starts are up significantly from the record low of 554 thousand starts in 2009.  This nascent housing recovery is starting to make a positive contribution to both GDP and employment growth.
  • Housing starts and completions have been at record low levels over the last four years.   This low level of starts and completions has significantly reduced the number of excess vacant housing units in the US.

Vital Signs: Building Permits on the Rise - Home building is poised to pick up. Permits to build new single-family homes rose 20% in May from a year earlier, to their highest level in more than two years. Authorities issued permits at a seasonally adjusted rate of 494,000 homes a year last month, up 30% from the recent low point in February 2011, but still less than half the rate before the housing bust.

Housing, Like Generalissimo Francisco Franco, Is Still Dead - Back in its early days, Saturday Night Live had a running joke of reporting “Generalissimo Francisco Franco is still dead.” The Federal Reserve‘s attitude about housing is similar. Once again Fed officials met and concluded housing was stuck in the mud. Wednesday’s policy statement said despite signs of improvement, “the housing sector remains depressed,” phrasing not much different from the assessments in January, March and April. Housing’s weakness is a large reason why the current recovery is lagging. By extending Operation Twist, the Fed hopes to keep long-term interest rates, including mortgages, low. But monetary action isn’t likely to help housing much.

Detroit to Demolish 10,000 Abandoned Properties - Detroit is finally chipping away at a glut of abandoned homes that has been piling up for decades, and intends to take advantage of warm weather and new federal funding to demolish some 3,000 buildings by the end of September. Mayor Dave Bing has pledged to knock down 10,000 structures in his first term as part of a nascent plan to "right-size" Detroit, or reconfigure the city to reflect its shrinking population. When it's all over, said Karla Henderson, director of the Detroit Building Department, "There's going to be a lot of empty space." Mr. Bing hasn't yet fully articulated his ultimate vision for what comes after demolition, but he has said entire areas will have to be rebuilt from the ground up. For now, his plan calls for the tracts to be converted to other uses, such as parks or farms.

Residential Remodeling Index increases 2 percent in April - BuildFax Remodeling Index Residential remodels authorized by building permits in the United States in April were at a seasonally-adjusted annual rate of 2,729,000. This is 2 percent above the revised March rate of 2,683,000 and is 12 percent above the April 2011 estimate of 2,447,000. Seasonally-adjusted annual rates of remodeling across the country in April 2012 are estimated as follows: Northeast, 397,656 (up 5% from March and up 11% from April 2011); South, 1,102,000 (up 5% from March and up 14% from April 2011); Midwest, 484,000 (down 11% from March and up 7% from April 2011); West, 768,000 (up 2% from March and up 10% from April 2011). "Remodeling continues to grow steadily in the U.S. on a seasonally-adjusted basis; more residential remodeling projects were started in April 2012 than in any of the prior six Aprils," Three key components of residential investment are increasing: home improvement, new multi-family structures, and recently new single family structures.

NAHB Builder Confidence increases slightly in June, Highest since May 2007 - The National Association of Home Builders (NAHB) reports the housing market index (HMI) increased 1 point in June to 29 (May was revised down to 28, so this was unchanged). Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises One Point in June Builder confidence in the market for newly built, single-family homes gained one point in June from a slightly revised level in the previous month to rest at 29. This is the highest level the index has attained since May of 2007.  In June, the HMI component measuring current sales conditions rose two points to 32, which is its highest level since April of 2007. Meanwhile, the components measuring sales expectations in the next six months and traffic of prospective buyers held unchanged at 34 and 23, respectively. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the June release for the HMI and the April data for starts (May housing starts will be released tomorrow). A reading of 29 was at the consensus.

US Builder Confidence Ticks Up to 5-Year High — Confidence among U.S. builders ticked up this month to a five-year high, an indication that the housing market is slowly improving. The National Association of Home Builders/Wells Fargo builder sentiment index rose in June to 29, the highest reading since May 2007. It increased from a reading of 28 last month, which was revised down one point from its initial figure. The index, which was released Monday, has risen in seven of the past nine months, suggesting builders are starting to see the seeds of a recovery taking shape after years of stagnation. Yet, the market has a long way to go. Any reading below 50 indicates negative sentiment about the housing market. The index hasn’t reached that level since April 2006, the peak of the housing boom. In June, builders reported seeing the best sales level since April 2007, according to a separate measure in the survey. Their outlook for sales in the next six months, however, hasn’t changed from May.

Census: Number of Shared Households increased 2.25 million from 2007 to 2010 - From the Census Bureau: Sharing a Household: Household Composition and Economic Well-Being: 2007–2010 In spring 2007, there were 19.7 million shared households. By spring 2010, the number of shared households had increased by 11.4 percent, while all households increased by only 1.3 percent. According to the report, there were 22.0 million shared households in spring 2010. Most of the adults sharing a household were related:  In both 2007 and 2010, additional adults were more likely to live with relatives than with nonrelatives. In 2010, additional adults related to the householder accounted for 81.8 percent of all additional adults. ... additional adults related to the householder rose by 2.4 million ... Additional adults not related to the householder, i.e., roomates, housemates, or boarders, increased by 910,000 between 2007 and 2010. About 1.2 million were adult children of the householder (823 thousand were in the 25 to 34 age bracket). These are the people that we discussed as "moving into their parent's basement". Other relatives moving in included parents, siblings, adult grandchildren (190 thousand), and others.

Census Bureau: Millions more Americans shared households in face of recession -  Millions of economically pressed Americans cushioned themselves against the recession by doubling up in houses and apartments, according to a Census Bureau report released Wednesday. The number of adults sharing households with family members or other individuals jumped 11.4 percent between 2007 and 2010, the report said. Overall, such living arrangements accounted for 22 million households in 2010 — or 18.7 percent of all U.S. households, compared with 17 percent in 2007. Young adults were the most likely to double up, the report said, accounting for more than half of those who moved in with family members or friends. Between 2007 and 2010, the number of adult children who lived in their parents’ homes increased by 1.2 million to 15.8 million. Those between the ages of 25 and 34 made up two-thirds of that increase, underscoring a prime reason for a broader slowdown in household formation that economists call both a symptom and a cause of the nation’s continued economic doldrums.

Low Rate of Household Formation Hurting Housing Market - A new report by the US Census shows why it’s going to be so difficult to get a housing recovery going. We already have seen that the 9 million families locked out of the market by virtue of a recent delinquency or foreclosure dampens supply. The up to 16 million families who are underwater have almost no chance at being “step-up” buyers, purchasing a bigger home or a home closer to a new job. The only way to generate demand, then, would be to have a run of first-time homebuyers with good credit, typically young people just getting into the housing market. But the Census report shows that household formation just isn’t happening these days: This research defines a shared household as a household with at least one resident adult who is not enrolled in school and who is neither the householder, nor the spouse or cohabiting partner of the householder. In spring 2007, there were 19.7 million shared households. By spring 2010, the number of shared households had increased by 11.4 percent, while all households increased by only 1.3 percent (Table 1). In 2010, shared households accounted for 18.7 percent of all households, up from 17.0 percent in 2007. This is not about the marriage rate rising, it’s about multi-family shared homes, roommates, etc. So the rate of shared households, defined thusly, is going up. And considering the stagnating wages, high unemployment, and lack of purchasing power in the broad middle, this stands to reason. The big stat here is that additional adults living with a relative rose from 2007 to 2010 by 2.4 million, accounting for 68% of the increase in this metric of shared households. That just goes right to affordability. People cannot afford to live on their own, so they move back in with their parents or another relative. Household formation remains low as a result.

Our Net Worth Is Down 39%. How Worried Should We Be? - It was hard not to be shocked by last week’s Federal Reserve report showing that the typical American family’s net worth fell 39% between 2007 and 2010. Similarly, figures released by the U.S. Census Bureau on Monday showed a 35% decline in net worth between 2005 and 2010. For people between the ages of 35 and 44, the drop was a staggering 59%, although the dollar amounts were smaller. Of course, you’d expect people to be worse off because of the recession, but the sheer size of the loss was so great that commentators immediately started trying to explain it away. Most of them blamed the largest part of the decline on the bursting of the housing bubble: First, home prices soared, reaching a peak in 2006. Then when the boom ended, prices plummeted. By this reckoning, losses from the housing bust weren’t real losses – they were simply the result of giving back capital gains that had existed only on paper. There’s some truth to that explanation. While home equity accounts for well over half the net worth of many American families, it doesn’t necessarily affect people’s day-to-day finances. But it would be a mistake to dismiss deteriorating net worth figures as nothing more than a statistical fluke that has little impact on the real standard of living. The data in the Fed report point to deeper, long-term problems in the U.S. economy. To see what they are, it helps to correct three misconceptions about the recent sharp decline in household net worth:

The perils of not diversifying - THE financial crisis decimated the wealth of the average American. The latest round of data from the triennial Survey of Consumer Finances reveals that real, median household wealth in 2010 was just below its 1989 value. That suggests Americans have not gotten any richer in 21 years. It’s important to understand that this survey gives a snapshot of the population at different points in time. It does not track the asset history of individuals. Most people build up wealth over their lifetime. The average 55-year-old is richer than the average 35-year-old because he earns more and has been saving longer. So you can’t look at the declining wealth numbers and say the average individual is not better off. Median wealth for 35- to 44-year-olds was $90,800 in 1989 (in 2007 dollars). But in 2010 median wealth for 55- to 64-year-olds was $171,200. The news is still grim, though. Given the aging population you wouldn’t expect median wealth for the entire population to decline. Also the data reveal how hard the crisis has been on the young. The figure below is median wealth for 35- to 44-year-olds from 1989 to 2010:

As Income Inequality Grows, Some Movement at the Top and Bottom - On June 11, the Federal Reserve published the latest results of its triennial survey of consumer finances. News reports focused on the decline in the median net worth of all families to $77,300 in 2010 from $126,400 in 2007, reflecting the devastating impact of the financial crisis. The data also demonstrates that there is some fluidity in income mobility at both the top and the bottom of the income tables. The table below is from the Fed report. It examines the income of families in 2007 and the same families in 2009, distributed in 20 percent brackets. The numbers in bold show the percentage of each group in the same bracket in both 2007 and 2009. Thus, 69.4 percent of those in the lowest income bracket in 2007 were also in the lowest bracket two years later; 19.1 percent rose to the second quintile, 6.7 to the middle, 3 percent to the fourth and 1.9 percent went from the bottom bracket all the way to the top bracket.Conversely, 75.1 percent of those in the top quintile remained in the top quintile, but 17.8 percent fell one bracket, 4 percent fell two brackets, 2 percent fell three brackets and 1.1 percent went from the top quintile to the bottom quintile in just two years.

Did the Federal Reserve Survey on Wealth Exclude the Top 400 Wealthiest People in America? - Matt Stoller - The recent Federal Reserve analysis of the effects of the Great Recession on household wealth and income was a doozy, showing that median income dropped 7.7% and median net worth fell by 38.8% from 2007-2010.  But that may not be the whole truth – the Fed might actually be leaving a very significant group of people out of the sample – the top 400 wealthiest people, or the 0.0000035%.   Someone brought this part of the the Fed study to my attention (note to self, always read the section on methodology).Second, a supplemental sample is selected to disproportionately include wealthy families, which hold a relatively large share of such thinly held assets as noncorporate businesses and tax-exempt bonds. Called the “list sample,” this group is drawn from a list of statistical records derived from tax returns. These records are used under strict rules governing confidentiality, the rights of potential respondents to refuse participation in the survey, and the types of information that can be made available. Persons listed by Forbes magazine as being among the wealthiest 400 people in the United States are excluded from sampling. You might say that the exclusion of 400 people isn’t significant; after all, it’s just 400 people.  How big a difference could that really make?  Well, it turns out, as of 2011, that the top 400 people in America own more than the entire bottom 60% of Americans.  So this is not a trivial exclusion.  The Fed claims in the report that it has a method for adjusting for rich people who don’t respond to their survey.  Why the Fed has just not included the Forbes 400 is not clear, and I’m curious how they adjust for leaving out Mr. Gates and Mr. Buffett and company.  I’ll send an email to the Fed to find out.

Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low - Business Insider: In case you needed more confirmation that the priorities of US companies and the US economy are screwed up, here are three charts for you.

  • 1) Corporate profit margins just hit an all-time high. Companies are making more per dollar of sales than they ever have before. (And some people are still saying that companies are suffering from "too much regulation" and "too many taxes." Maybe little companies are, but big ones certainly aren't).
  • 2) Fewer Americans are working than at any time in the past three decades. One reason corporations are so profitable is that they don't employ as many Americans as they used to.
  • 3) Wages as a percent of the economy are at an all-time low. This is both cause and effect. One reason companies are so profitable is that they're paying employees less than they ever have as a share of GDP. And that, in turn, is one reason the economy is so weak: Those "wages" are other companies' revenue.

A Different Look at Inflation: MIT's Billion Price Project - This is something I like to check occasionally as a differnt measure for inflation - as opposed to CPI from the BLS. This is the US only index of the MIT Billion Prices Project. This index uses prices for online goods. From MIT: These indexes are designed to provide real-time information on major inflation trends, not to forecast official inflation announcements. We are constantly adding new categories of goods, but we do not cover 100% of CPI goods and services. The price of services, in particular, are not easy to find online and therefore are not included in our statistics. It appears that year-over-year inflation is around 1.5%. The recent monthly decline is probably related to oil and gasoline prices, but this is another measure that suggests inflation is not currently a problem.

BPP@MIT Annual Inflation Rate Falls Below 1.5% -The Billion Prices Project @ MIT just released daily online price index data through May 31, and the annual inflation rates from that price index are displayed in the chart above going back to late 2009 (red line). According to this real-time information of major inflation trends in the U.S., inflationary pressures have been subsiding for the last year, and the current annualized inflation rate of about 1.5% through May is the lowest rate since late 2009. In contrast to the MIT-BPP inflation, annual inflation based on the CPI is running higher, at about 2.25% through May.    The breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward from a recent peak of 2.43% in April, and is currently at 2.07%, indicating that the bond market expects future inflation to continue to remain low.  The one-year breakeven rate just turned negative, so that might indicate some expectation of mild deflation over the next year. 

Americans Worked More in 2011 - As the economy gradually recovers, Americans are spending more time at work. They’re also spending a couple more minutes sleeping and a couple less doing housework. They’re even cutting back a bit on watching TV. The Labor Department on Friday released the American Time Use Survey, an annual snapshot of how Americans spend their days. Based on an annual survey of about 12,500 people, the report provides data on everything from how much time Americans spend in church to how many people work weekends. In recent years, the big story has been the effects of the 2007-2009 recession. During the downturn, Americans spent much less time at work and more time asleep and watching television. As the economy has recovered, those trends have reversed, but only part way. People with jobs worked about 7.99 hours per day last year, compared to 7.82 hours in 2010. Americans still spent a lot of time watching TV at 2.75 hours a day, down a bit from 2.73 hours a year earlier. But by far, we spend more time sleeping than any other single activity — 8.71 hours per day, the highest level in data going back to 2003.

Latest Data Show US Export Drive is Faltering - The latest international trade data for the United States show that the country’s export drive, which has been a bright spot in an otherwise weak recovery, is now faltering. Nominal exports of goods grew a modest 1.6 percent in Q1 2012; a broader measure of exports that includes goods, services, and income receipts grew just 0.7 percent.  In his 2010 State of the Union address, President Barack Obama promised a doubling of U.S. exports over a five-year period. The promise was couched in general terms, but many observers have taken it to mean a doubling of nominal exports of goods. There was considerable skepticism about the promise at the time, but for the first two years, exports moved close to the doubling track, as this chart shows. Now even by the favorable measure of nominal goods exports, the actual data are dropping below the doubling path. It is hard to fault administration policy for the shortfall.  Winning Congressional approval of long-delayed free-trade pacts with South Korea, Colombia, and Panama was one of the president’s few major legislative victories. Instead, forces outside U.S. control appear to be to blame for faltering export performance.

Offsetting America's Trade Deficit, We've Attracted $7.6T in Net Foreign Investment Since 1990 - The Wall Street Journal reported on Friday that: "Foreigners are stepping up investment in the U.S. after retreating during the depths of the financial crisis, with the latest flurry spurred partly by Europeans seeking havens amid the Continent's debt crisis. The U.S. attracted $28.7 billion in foreign direct investment between January and March, the 12th consecutive quarter of positive flows, the Commerce Department said Thursday. Foreign direct investment (FDI) includes long-term bets by companies and individuals such as corporate acquisitions and real estate, but not purchases of Treasury bonds and other U.S. securities. Foreign investment in the U.S. last year totaled $234 billion, a 14% jump over $205.8 billion in 2010, with around two-thirds of the cash coming from Europe. Foreign investment in the U.S. has now exceeded its average of the past 10 years in 2010 and 2011, suggesting America's lure for capital has recovered from the crisis. The pickup in foreign direct investment in the U.S. has boosted stock prices and employment in the manufacturing sector, a cornerstone of the recovery. Overseas investment collapsed in 2009 as economic turmoil froze global capital flows."

ATA Trucking index declined 0.7% in May - From ATA: ATA Truck Tonnage Fell 0.7% in May The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 0.7% in May after falling 1.1% in April. (April’s loss was the same as ATA reported on May 22.) The latest drop lowered the SA index to 117.8 (2000=100), down from April’s level of 118.7. Compared with May 2011, the SA index was 4.1% higher, the largest year-over-year increase since February 2012. Year-to-date, compared with the same period last year, tonnage was up 3.8%. “Two straight months of contractions is disappointing,” ATA Chief Economist Bob Costello said. “The drops in tonnage are reflective of the broader economy, which has slowed.” Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index. The index is above the pre-recession level and still up 3.8% year-over-year - but has been moving mostly sideways in 2012. From ATA: Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.

Vital Signs: Slowing U.S. Manufacturing - Factory activity in the U.S. has been slowing. Manufacturing output declined 0.4% in May from April, the second drop in three months. While output is still rising compared with a year ago, the rate of growth has slowed amid weakening demand for U.S. products overseas and a cooling domestic economy. That leaves the recovery more vulnerable to shocks from abroad.

Manufacturing in Philadelphia Region Shrinks at Faster Pace - Manufacturing in the Philadelphia region shrank in June at the fastest pace in almost a year, showing the global economic slowdown is holding factories back. The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 16.6 in June, the lowest level since August, from minus 5.8 the previous month. Economists forecast the gauge would improve to zero, the dividing line between growth and contraction, according to the median estimate in a Bloomberg News survey. The report covers eastern Pennsylvania, southern New Jersey and Delaware. Manufacturing may keep ebbing as consumer spending, business investment and exports cool, reflecting the slowdown in global growth caused, in part, by the European fiscal crisis. The Philadelphia Fed’s new orders measure slumped to minus 18.8, also the lowest since August, from minus 1.2 in May. A gauge of employment improved to 1.8 in June from minus 1.3. A measure of shipments gauge dropped to minus 16.6, the lowest since September, from 3.5. The index of the average workweek plunged to minus 19.1, the weakest in three years, from minus 5.4 in May.

Philly Fed Business Outlook Survey: Second Month of Significant Decline - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows the second consecutive decline in General Activity after eight months of increases. The June decline of 10.8 points follows the 14.3 point decline in May. Here is the introduction from the Business Outlook Survey released today:  Firms responding to the June Business Outlook Survey indicated weaker business conditions this month. The survey's indicators for general activity, new orders, shipments, and average work hours were all negative this month, suggesting overall declines in business. Input price pressures were less in evidence this month, with more firms reporting declines in input prices. And for the second consecutive month, more firms reported declines in prices for their products than reported increases. The survey's indicators of future activity remained positive and improved slightly, suggesting that the current weakness in activity is expected to be short-lived. (Full PDF Report) . The first chart below is based on the complete historical series for general activity dating from May 1968 with recessions highlighted.

Factory, jobs data highlight struggling recovery - U.S. manufacturing grew at its slowest pace in 11 months in June and the number of Americans filing new applications for unemployment aid fell only slightly last week, further evidence the economy was weakening. Other reports on Thursday underscored the difficulty the economy was having breaking out of a soft patch. Factory activity in the Mid-Atlantic region tumbled to a 10-month low in June and home resales slipped in May. "Today's numbers are ugly. The economy is in another mid-year slump, growth will struggle to breach 2 percent and the odds are rising that the Fed will need to do more, probably as soon as its August meeting,"

Markit Index of Manufacturing in U.S. Fell to 52.9 in June - The Markit Economics index of U.S. manufacturing fell to 52.9 in June from 53.9, the London-based group said in its preliminary estimate today.  A reading above 50 in the purchasing managers’ measure indicates expansion. The initial figure is based on replies from about 85 percent to 90 percent of those manufacturers who respond to the poll of the more than 600 companies surveyed.  The Markit gauge of U.S. manufacturing was released today for the second time. The company surveys purchasing managers in more than 30 countries and regions including Europe and China.  Other data today showed Euro-area manufacturing output shrank in June at the fastest pace in three years and a Chinese output gauge indicated contraction as Europe’s worsening fiscal crisis clouded global economic-growth prospects.

Fiscal-Cliff Concerns Hurting U.S. as Companies Wait -- Companies are starting to delay hiring and spending out of concern that Congress won’t reach a compromise in time to avoid automatic tax increases and budget cuts that would pull billions of dollars of purchasing power out of the economy.  Faced with a so-called fiscal cliff of more than $600 billion in higher taxes and reductions in defense and other government programs in 2013, U.S. companies are pulling back, though the deadline for congressional action is more than six months away.  The best strategy for companies to follow when confronted with such uncertainty ahead of Dec. 31 is to “stay lean and keep your inventories taut,” Economists are predicting this trend will pick up through the year. “A lot of people see the fiscal cliff as a 2013 story, but you don’t board up the windows when the hurricane is there, you board up the windows in anticipation,”

Broken Trust Takes Time to Mend, by Tyler Cowen - president Obama caused a stir recently when he said that “the private sector is doing fine” and pinned many of the nation’s economic troubles on a decline in public-sector employment. He cited some interesting numbers, but he didn’t draw the right lesson — namely, that America is witnessing a collapse of trust in politics, including the shaping of its broad economic policy.  Since Mr. Obama took office, 780,000 private sector jobs have been created, while the number of public sector jobs has fallen by about 600,000, mostly at the state and local level. A quick look might suggest that we need only to bolster the number of public sector jobs to have a healthier economy, but there is a deeper way to think about the problem. State and local governments are controlled by politicians and, indirectly, by voters. And for better or worse, those voters have lost faith in the social returns of these jobs and our ability to afford them. The voters have responded by looking to cut expenses, and they’ve chosen state and local government employment as a target.

Is lack of trust a fundamental macro problem? - Ezra responds to my column of Sunday with this post.  Excerpt:…Tyler Cowen attributes the decline in public-sector employment to “a collapse of trust in politics.” In fact, he says, “the reason that we aren’t getting more expansionary macro policy is fundamental: a lack of trust.” I don’t buy it. I think the reason we aren’t getting more expansionary macro policy is a polarized political system oriented toward gridlock. If there’s been a decline in trust toward state and local governments, it’s hard to find it in the polling. State and local governments rank as highly trusted. In a March 2011 poll — so, the period when state and local cutbacks were at their worst — Gallup found that most Americans thought state and local governments had “about the right” amount of power. I view political polarization as another manifestation of lack of trust.  For instance the core voters behind the two major parties do not trust each other in power.  In addition Republicans, many independents, and also many Democrats do not trust that tax hikes or rising deficits actually will be used to provide useful public services.  (Ezra himself has stressed in the past how far to the right the Democrats have moved on taxes.)  They still like their local school teachers, but they also do not trust “Federal-state/local coordinated fiscal stimulus.”  Obama stopped boasting about the first round of stimulus some time ago, correctly or not.

Losing Faith in American Institutions - As Tyler Cowen (and then I) wrote about earlier this week, trust in government is declining. The decline in American trust is not unique to government, though, and it’s also not terribly recent. Gallup has just released its latest figures on Americans’ confidence in various institutions. The numbers are all pretty grim, with new lows recorded for Americans’ confidence levels in public schools, churches, banks and television news. These latest record-lows were within the margin of sampling error for last year’s measurements, I should note, but the longer-term trend is still down, down, down. Here’s an interactive chart I put together showing the share of Americans who have expressed “a great deal” or “quite a lot” of confidence in a selection of major institutions since 1973: Click on almost any category charted in the graph above, and you’ll see that confidence has generally been falling. (Mousing over individual data points will show you the specific share of American adults expressing confidence in any given year, too.) Institutions that have enjoyed a relatively steady increase in public confidence — like the military — are the exception.

BLS: Job Openings declined in April - From the BLS: Job Openings and Labor Turnover Summary There were 3.4 million job openings on the last business day of April, down from 3.7 million in March, the U.S. Bureau of Labor Statistics reported today.  ...Although the number of total nonfarm job openings declined in April, the number of openings was 1.0 million higher than at the end of the recession in June 2009. The quits rate can serve as a measure of workers’ willingness or ability to change jobs. In April, the quits rate was unchanged for total nonfarm, and essentially unchanged for total private and government. The number of quits was 2.1 million in April 2012, up from 1.8 million at the end of the recession in June 2009.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. Jobs openings declined in April to 3.416 million, down from 3.741 million in March. However the number of job openings (yellow) has generally been trending up, and openings are up about 13% year-over-year compared to April 2011.

U.S. Employers Post Fewest Job Openings in 5 Months — Employers in April posted the fewest job openings in five months, suggesting hiring will remain sluggish in the months ahead. The Labor Department said Tuesday that job openings fell to a seasonally adjusted 3.4 million in April, down from 3.7 million in March. The March figure was the highest in nearly four years. The decline could mean employers are growing more cautious about adding workers in the face of financial turmoil in Europe and slower growth in the United States. Job openings can take one to three months to fill. There were 12.5 million unemployed people in April. That means there was an average of 3.7 people competing for each open job. In a healthy job market, the ratio is usually around 2 to 1. Openings have risen by almost a third since the recession ended in June 2009. But they are still below pre-recession levels of about 5 million per month.

Job Openings Decrease Most in Almost 4 Years - Job openings in the U.S. decreased in April by the most in almost four years, the latest sign that the labor market is cooling. The number of open positions dropped by 325,000, the biggest decline since September 2008, to 3.42 million from 3.74 million the prior month, the Labor Department said today in Washington. Hiring slowed from the prior month and firings climbed. The decrease in openings coincides with the slowdown in hiring seen in April and May, signaling employers are pulling back as the economy cools. The number of jobs available is down from an average 4.46 million in the two years before the recession began, showing the labor market continues to struggle. “The most worrisome development is this big drop in hiring,” “If you have the outlook that things are getting little bit better, you eventually have to hire more people. But the fact that this is not happening -- that’s worrisome.”

As Job Openings Plunge By Most Since May 2010, Beveridge Curve Goes Berserk -- The BLS April JOLTS survey was released earlier and it was ugly - of particular attention was the number of "job opening" which collapsed from 3.741MM to 3.416MM, a drop of 325,000, which just happens to be the biggest decline since May 2010. It is also the 6th largest drop in history as the second chart below from John Lohman shows. Adding to the dire jobs picture was the New Hires number which dropped by 160,000, the biggest sequential drop since April 2011, and finally separations, which after months of increases (remember: more separations is a good thing supposedly, meaning people are confident they can find better paying jobs elsewhere), had their biggest drop by 81,000, also the most since April 2011.

Weekly Initial Unemployment Claims mostly unchanged, Four week average highest this year - The DOL reports: In the week ending June 16, the advance figure for seasonally adjusted initial claims was 387,000, a decrease of 2,000 from the previous week's revised figure of 389,000. The 4-week moving average was 386,250, an increase of 3,500 from the previous week's revised average of 382,750.  The previous week was revised up from 386,000 to 389,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 386,250. The average had been between 363,000 and 384,000 all year, so this is a new high for the year. And here is a long term graph of weekly claims:

Jobless Claims Fell Slightly Last Week, But Stagnation Prevails This Year - Initial jobless claims slipped by 2,000 last week to a seasonally adjusted 387,000. That's enough to put a lid on fears that the economy's falling off a cliff now, today, this minute. But today's update also falls well short of inspiring confidence that stronger, sustained growth will quickly resume. Nonetheless, it's still hard to make a case that a new recession is imminent based on the latest numbers.  It's clear, however, that the downward trend in jobless claims has slowed if not stalled. As the chart below shows, new filings for unemployment benefits have stagnated at roughly the 370,000-to-390,000 level. Confirmation arrives via the four-week moving average of new claims, which rose last week to the highest level since last December. We can call it a rough patch, a slowdown in the recovery, or a prelude to another recession. But whatever it's called it's undeniable that the labor market's expansion has slowed. That's old news, of course, to anyone who read the monthly employment report for May. The recent trend in jobless claims suggests that more sluggish jobs reports await.

Weekly Unemployment Claims: 4-Week Moving Average Highest Since Last December - The Unemployment Insurance Weekly Claims Report was released this morning for last week. At first glance the 387,000 new claims is a 2,000 decrease from last week's number, but last week was revised upward by 3,000. The less volatile and closely watched four-week moving average rose to 386,250, a 3,500 increase to the highest level since December 3rd of last year. Here is the official statement from the Department of Labor:  In the week ending June 16, the advance figure for seasonally adjusted initial claims was 387,000, a decrease of 2,000 from the previous week's revised figure of 389,000. The 4-week moving average was 386,250, an increase of 3,500 from the previous week's revised average of 382,750.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending June 9, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending June 9 was 3,299,000, unchanged from the preceding week's revised level. The 4-week moving average was 3,293,750, an increase of 5,250 from the preceding week's revised average of 3,288,500.

Vital Signs: Worrying Jobless Claims - The number of Americans applying for unemployment insurance is growing. The four-week moving average of initial jobless claims rose by 3,500 to 386,250 last week. While such claims eased this spring, they’ve now climbed to the highest level of the year. The rise suggests employers are increasing layoffs and the job market may be weakening again.

A Darkening Jobs Picture - Krugman - The jobs picture is darkening. The latest batch of economic data has been fairly weak, especially surveys from the manufacturing sector. As a result, The Times’s weekly jobs tracker, based on forecasts from Moody’s Analytics, now shows a projected employment gain of only 125,000 in June, down from a projection of 150,000 last week. Economists at Moody’s write: June is shaping up as another difficult month for the U.S. job market, raising the odds that the Federal Reserve will have to do more, potentially as soon as August. … Manufacturing has been the backbone of the recovery, but industry is showing signs of fatigue; factory output has declined in two of the past three months. Manufacturers’ confidence appears to have been rattled, as the first two regional manufacturing surveys for June were weak, including the employment details. … Initial jobless claims failed to drop appreciably in the week ending June 16, leaving them up 15,000 between the May and June payroll survey weeks. The four-week moving average of new filings is at its highest level this year. Still, initial claims haven’t spiked, which signals that businesses are retrenching.

The truck driver shortage - Today's N&O runs a story about how hard a time trucking firms are having filling open positions for truck drivers.  Economic logic would make one skeptical of this claim: unemployment remains over 8% and trucking jobs pay relatively well ($38-40k plus benefits for entry level) for work with low educational requirements.  Given the massive loss of construction jobs (compared to five years ago), one would think trucking would easily absorb some of the surplus labor from that sector.   The article says one cause of the surplus is that prospective truckers are unwilling or unable to pay the $4-6k cost of learning to drive a truck.  Another is federal regulations requiring clean safety records of all new truckers.  But the real mystery to me is why pay is not rising to attract even more people into the field.

Made in China Not Worth Hassle for Small Firms Returning to U.S. - As costs in China rise and owners consider the challenges of using factories 12,000 miles and 12 time zones away, many small companies have decided manufacturing overseas isn’t worth the trouble. American production is “increasingly competitive,” says Harry Moser, founder of the Reshoring Initiative, a group of companies and trade associations trying to bring factory jobs back to the U.S. “In the last two years there’s been a dramatic increase” in the amount of work returning.  An April poll of 259 American contract manufacturers -- which make goods for other companies -- showed 40 percent of respondents benefited this year from work previously done abroad, Bloomberg Businessweek reports in its June 25 issue. Nearly 80 percent were optimistic about 2012 sales and profits, according to the survey by, a website that helps companies find manufacturers.  “A decade ago you just went to China. You didn’t even look locally,” says Ted Fogliani, chief executive officer of Outsource Manufacturing Inc., the San Diego company working with LightSaver. “Now people are trying to come back. Everyone knows they’re miserable.”

How Skilled Immigrants Create Jobs - President Obama thrust immigration back into the spotlight last week with his executive order halting deportations for certain young illegal immigrants. In the context of America's jobs crisis, however, this is the wrong immigration issue to focus on. Our most pressing immigration problem marched across platforms at American colleges and universities in recent weeks—skilled foreign-born graduates whom we do not adequately incentivize to stay and work here. Won't more immigrant graduates staying in America mean fewer jobs for Americans? No. On the contrary, they will create jobs for Americans—in large corporations and new companies alike. Large companies that hire skilled immigrants tend to hire more U.S. nationals as well. Bill Gates has testified that for every immigrant hire at Microsoft, an average of four non-immigrant employees are hired.  As for start-ups, a 2007 study by researchers at Duke and UC Berkeley found that 25% of all U.S. high-technology firms established between 1995 and 2005 had at least one foreign-born founder. In 2005, these new companies employed 450,000 workers and generated over $50 billion in sales.Skilled immigrants have long supported U.S. jobs and living standards. They bring human capital, financial capital, and connections to opportunities abroad. Despite all this dynamism, U.S. policy toward skilled immigrants has long been far too restrictive.

So You Think You Can Be a Hair Braider? - After graduating from college, she considered getting an office job but decided instead to start her own hair-braiding operation and began advertising on a local Web site. “It’s not like it was bringing me millions,” she says, “but it was covering groceries.” At least until a stranger who saw the ad e-mailed her a demand to delete it. “It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license,” the e-mail read. “Please delete your ad, or you will be reported.”  A cosmetology license required nearly two years of school and $16,000 in tuition. But Clayton hoped for an exemption. After all, many Utah cosmetology schools taught little or nothing about African-style hair-braiding, and other states allowed people to practice it after passing a hygiene test and paying a small fee.  The board, made up largely of licensed barbers and cosmetologists, shot her down.  This isn’t just a random Utah law. There are more than 1,000 licensed professions in the United States, partly a result of more than a century of legal work.

NYT Book Review of Krugman Gets it Mostly Wrong - The NYT’s Book Review today includes a review of Paul K’s new book and while the reviewer nicely summarizes the macroeconomics of the book and our historical moment–the terribly damaging dominance of austerity both here and in Europe–his critiques struck me as wrongheaded. Complaining about Paul’s exclusive focus on demand, the reviewer conflates the structural with the cyclical: The rise in unemployment may be largely the result of inadequate demand, but that does not mean there has been no contribution from structural changes like the substitution of cheap foreign workers and innovative technology for some jobs in rich countries. This is just plain wrong.  Technology and trade are ongoing, structural forces that have been influencing jobs and wages and much else for decades.  Unless the reviewer is asserting that tech and trade somehow accelerated sharply in the recession, they don’t explain the change in unemployment.  And even in expansions, this type of hand-waving falls short.  In the Clinton boom, trade and tech were huge factors, yet the job market achieved full employment for the first time in decades.   Unemployment fell below 4% for a few months in 2000.  Clearly, there was a bubble in the mix—when hasn’t there been in recent years?—but the point is that strong demand offset the trade and tech impacts.

Young Americans get the shaft - Hear me, Americans under 35! There’s plenty that divides the parties in this pivotal election — from taxes to drones, from public workers to private equity. But there’s one uber-policy that brings Democrats and Republicans together that doesn’t get the attention it deserves.That policy involves you, younger Americans. You’re in big trouble. You don’t even know it. You’re busy trying to get a degree, land a job, start a family, save for a home. You don’t follow the news. But trust me — you’ve been taken for a ride by your elders.  The question isn’t whether such talk will stir up generational war. That’s already being waged — and you’re losing. The question is whether you’ll wake up and engage in a little generational self-defense. Let me see if I can motivate you.

Up to 95 Million Low-Skill Workers in Danger of Being Left Behind - Between 90 and 95 million low-skill workers around the world could be without jobs by 2020 because there simply won’t be enough positions available for them to apply for, according to a new report from the McKinsey Global Institute. The report said both the private and public sector should make a “concerted” effort to alleviate this and that if little is done, those low-skill workers could be doomed to long-term joblessness. “If we don’t up the efforts we make to increase the skills of the labor force and at the same time create jobs for low-skilled people at a much higher pace, we’re going to face a world where we’re going to have a long-term group of unemployed people with all of the social costs that that brings,” said McKinsey Global Institute director Richard Dobbs, in a podcast interview accompanying the report’s release. McKinsey also identified a potential shortage of around 38 to 40 million high-skill workers, which could hold back economic growth in countries around the world, if employers aren’t able to hire qualified people to expand their businesses.

Many American Workers Are Underemployed and Underpaid - When she began driving a passenger van last year, Woods’s earned $9 an hour and worked 40 hours a week. Then her wage was cut to $8 an hour, and her hours were drastically scaled back. “I’m looking for something else, anything else,” she said. “More hours. Better pay. Actual benefits.” These are anxious days for American workers. Many, like Ms. Woods, are underemployed. Others find pay that is simply not keeping up with their expenses: adjusted for inflation, the median hourly wage was lower in 2011 than it was a decade earlier, according to data from a forthcoming book by the Economic Policy Institute, “The State of Working America, 12th Edition.” Good benefits are harder to come by, and people are staying longer in jobs that they want to leave, afraid that they will not be able to find something better. Only 2.1 million people quit their jobs in March, down from the 2.9 million people who quit in December 2007, the first month of the recession. “Unfortunately, the wage problems brought on by the recession pile on top of a three-decade stagnation of wages for low- and middle-wage workers,” said Lawrence Mishel, the president of the Economic Policy Institute, a research group in Washington that studies the labor market. “In the aftermath of the financial crisis, there has been persistent high unemployment as households reduced debt and scaled back purchases. The consequence for wages has been substantially slower growth across the board, including white-collar and college-educated workers.”

Low-Wage Nation: Poverty and Inequality Are Threatening Our Democracy - With its catchy "We are the 99 Percent" slogan, the Occupy movement focused millions of Americans on our nation's chronic inequality. As that movement regains momentum, it must pay more attention to the whole 99 percent. We certainly should worry about how the wealthiest 1 percent of Americans isn't paying its fair share of the cost of running the country. But we should be just as worried about how people at the other end are doing. It's not just about the continuing wave of foreclosures. Millions of people are stuck in low-wage jobs that don't pay enough to make ends meet. And millions more live on incomes so low that it's hard to imagine how they survive. Low-wage work is a pandemic. A third of our population ekes by on less than $36,000 for a family of three. That's 103 million people living on less than twice the poverty line, but most of them technically aren't poor or don't consider themselves poor. Yet they struggle every month to make ends meet and are one medical emergency or protracted illness away from bankruptcy. Why so much low-wage work? Because over the past 40 years, well-paying industrial jobs disappeared, unions lost much of their clout, the minimum wage stagnated, and the field of competition in many areas became globalized. The result: half of U.S. jobs now pay $34,000 or less a year. A quarter of U.S. jobs pay less than $22,000, the poverty line for a family of four. And the wages for those jobs have been stuck for four decades. Today, they pay only 7 percent more than they did in 1973.

At Bain, Romney Invested in Companies That Shipped Off American Jobs - The big story of the day is a deeply reported piece by Tom Hamburger, showing that Mitt Romney’s Bain Capital in many ways invented the cottage industry of shipping US jobs overseas. During the nearly 15 years that Romney was actively involved in running Bain, a private equity firm that he founded, it owned companies that were pioneers in the practice of shipping work from the United States to overseas call centers and factories making computer components, according to filings with the Securities and Exchange Commission. While economists debate whether the massive outsourcing of American jobs over the last generation was inevitable, Romney in recent months has lamented the toll it’s taken on the U.S. economy. He has repeatedly pledged he would protect American employment by getting tough on China [...]But a Washington Post examination of securities filings shows the extent of Bain’s investment in firms that specialized in helping other companies move or expand operations overseas. While Bain was not the largest player in the outsourcing field, the private equity firm was involved early on, at a time when the departure of jobs from the United States was beginning to accelerate and new companies were emerging as handmaidens to this outflow of employment.

Walmart's Forced Labor: We Feel Like We Are Slaves - video - How does Walmart keep its prices so low? The so-called guest workers from Mexico who peel crawfish at a Louisiana seafood supplier for Wal-Mart know: They are locked inside the plant, forced to work 24-hour shifts, cursed and threatened with beatings by shovel if they fail to make their quota, and endure  constant surveillance at their nearby trailers from a boss who warns them, "You don’t want to know me as an enemy." Having gone on strike from C.J.’s Seafood and filed federal complaints, they head to New York today to protest Wal-Mart, its subsidiaries and related boards - including Goldman Sachs - at their corporate headquarters and homes. Brought to you by the feisty National Guestworker Alliance.

Studies: Increasing The Minimum Wage During Times Of High Unemployment Doesn’t Hurt Job Growth - A group of House Democrats recently proposed legislation that would raise the federal minimum wage to $10 an hour, roughly where it would have to be to match the peak buying power the wage reached in 1968. Cities and states across the country are taking action on their own, raising their minimum wages in an effort to help low-income workers. Opponents of minimum wage increases contest that raising the minimum wage will be costly for businesses and have a negative effect on job growth and employment. An analysis by the Center for American Progress’ Nick Bunker, David Madland, and the University of North Carolina’s T. William Lester, however, found five recent studies showing that increasing the minimum wage — even during periods of high unemployment — does not have a negative effect on job growth: A significant body of academic research has found that raising the minimum wage does not result in job losses even during hard economic times. There are at least five different academic studies focusing on increases to the minimum wage—including increases ranging from 7 percent to 12.3 percent made during periods of high unemployment—that find an increase in the minimum wage has no significant effect on employment levels. The results are likely because the boost in demand and reduction in turnover provided by a minimum wage counteracts the higher wage costs. Similarly, a simple analysis of increases to the minimum wage on the state level, even during periods of state unemployment rates above 8 percent, shows that the minimum wage does not kill jobs. Indeed the states in our simple analysis had job growth slightly above the national average. [...] All the studies came to the same conclusion—that raising the minimum wage had no effect on employment.

What does real gross state product tell us about Seventh District economic growth? - Real gross state product (GSP) is the state analogue of real gross domestic product (GDP), which measures national economic activity.[1] That is, real GSP is the most comprehensive measure of state economic activity. Although the release of other state economic indicators like employment figures are timelier, they exclude developments such as productivity enhancements and the application of capital and machinery to manufacturing processes that make real GSP a more complete measure of economic activity. Real GSP is also preferred because its values are adjusted for inflation, making comparison across time more informative.[2]  Additionally, real GSP is informative in describing how much value a particular industry adds to a state’s economy. For example, in 2011, 12.8% of Michigan’s nonfarm payroll employees worked in manufacturing, while this industry constituted 16.6% of Michigan’s economic activity. In contrast, 15.7% of Michigan’s nonfarm payroll employees worked in the government sector, which only constituted 11.2% of Michigan’s economic activity.  Initial estimates of GSP are later revised on an annual schedule as new data and information become available. Table 1 details the real GSP growth revisions. In the most recent release, significant revisions were made to the data going back to 2008.

Public Workers Face Continued Layoffs, Hurting the Recovery - Companies have been slowly adding workers for more than two years. But pink slips are still going out in a crucial area: government.  In California, the governor is threatening to eliminate 15,000 state jobs. When school begins in Cleveland this fall, more than 500 teachers probably will be out of work. And in Trenton — which has already cut a third of its police force, hundreds of school district employees and at least 150 other public workers — the only way the city will forestall the loss of 60 more firefighters is if a federal grant comes through.  Government payrolls grew in the early part of the recovery, largely because of federal stimulus measures. But since its postrecession peak in April 2009 (not counting temporary Census hiring), the public sector has shrunk by 657,000 jobs. The losses appeared to be tapering off earlier this year, but have accelerated for the last three months, creating the single biggest drag on the recovery in many areas.  So while the federal government has grown a little since the recession, and many states have recently begun to add a few jobs, local governments are making new cuts that outweigh those gains. More than a quarter of municipal governments are planning layoffs this year, according to a survey by the Center for State and Local Government Excellence. They are being squeezed not only by declining federal and state support, but by their devastated property tax base.

Americans Want to Keep Teachers, Cops, and Firefighters on the Job - It’s no secret anymore (particularly since Obama's The-Private-Sector-Is-Doing-Fine-Gate) that there have been huge numbers of government worker layoffs during the recovery. Many are rightly pointing out that this is only making the jobs crisis worse. But what’s behind those losses? In a column at the New York Times yesterday, Tyler Cowen suggested that it’s Americans’ lack of trust in government, which has been steadily eroding over recent decades. And he is certainly right that Americans are distrustful of their government. Approval ratings have been hitting record lows lately. But is that what’s driving cuts in the public sector workforce?  It may be true that many voters are showing support for cutting public workers’ benefits. But the job losses, as shown by research my colleague Mike Konczal and I conducted, are a result of the ultraconservative agendas carried in by the Republicans who took over state legislatures in 2010. These job cuts are not happening across the board; they’re clustered in a small handful of red states. The eleven that went Republican in the 2010 midterms—Alabama, Indiana, Maine, Michigan, Minnesota, Montana, New Hampshire, North Carolina, Ohio, Pennsylvania and Wisconsin—were responsible for 40 percent of public sector job losses last year. Add in the massive red state of Texas and we can account for almost three-quarters of all the layoffs. All other states lost a far lower percent of their government workers: just about half of their payrolls, on average.

Republicans seek cuts to food stamp program with new farm bill - - The 1,000-page "farm bill" being debated in the Senate is somewhat of a misnomer. Four of every five dollars in it — roughly $80 billion a year — goes for grocery bills for one of every seven Americans through food stamps. Republicans say Congress could cut the cost $2 billion a year by just closing a pair of loopholes that some states use to award benefits to people who otherwise might not qualify.The program has swelled from 28 million to 46 million participants and its costs have doubled in the past four years. The recession and slow recovery have increased the number of people unemployed over the same period from 8 million to 12 million. The Agriculture Department credits the program with keeping about 5 million Americans out of poverty every year. Before 2004, people received paper stamps or coupons worth $1, $5 or $10. Since then, all 50 states, the District of Columbia, Puerto Rico, the Virgin Island and Guam have moved to debit-type cards that allow recipients to authorize transferring their benefits from a federal account to retailer accounts.

Why Are Republicans Waging War on Food Stamps Now? - Here is a fact that should disturb everyone, regardless of their politics: Today, about one out of every seven Americans receives food stamps. That's a population of 45 million people -- roughly the size of Spain -- who rely on government help to feed themselves. There are two ways to interpret this number. On the one hand, you could take it as evidence of just how crucial the social safety net has become in the wake of the Great Recession, as families are quite literally struggling to put food on the table. On the other, you could just read it as an example of government welfare run amok. Guess which view is popular among conservatives these days. This past week, Republican Senator Jeff Sessions of Alabama proposed a handful of amendments to the farm bill that would tighten food stamp eligibility and end payments to states that increase the size of their rolls. They were relatively modest, reaping up to $20 billion in savings from a program expected to cost $770 billion over the next ten years, and were rejected by Senate Democrats as well as a handful of GOP moderates. But the cuts were part of a growing Republican animosity to the food stamp program. Libertarian hero Rand Paul had previously proposed cutting it by more than 40 percent. The Republican-led House, where Oversight Committee chair Darryl Issa has been rampaging about alleged fraud in the program, has passed a bill that would nix $34 billion from its budget.

Bid to Restore Food Stamp Cuts Fails in Senate - Hundreds of thousands of food stamp recipients will lose at least $90 a month in benefits, after an amendment to the farm bill failed badly in the Senate. The Senate overwhelmingly rejected a bid to preserve some $4.5 billion in food stamps funding, as part of the massive farm bill, on Tuesday. The amendment to keep that spending in the Supplemental Nutrition Assistance Program, offered by Sen. Kirsten Gillibrand (D-N.Y.), failed 33 to 66. Sixty votes were needed to pass. Under a “heat-and-eat” initiative, state qualify any family who receives low-income heating assistance (under the program known as LIHEAP) for food stamps. The farm bill would end that program, which would affect roughly 500,000 recipients, with an average of $90 a month in benefit reductions. But Gillibrand could only muster 29 Democrats and 4 Republicans for the amendment to restore the funding. Senate Agriculture Committee Chair Debbie Stabenow joined 22 Democrats in opposition.

This Week in Poverty: Disposable Families in Ohio - Since January 2011, Ohio has thrown nearly 70,000 people—including 40,000 children—off of the Temporary Assistance for Needy Families (TANF) cash assistance program, called Ohio Works First (OWF). That’s nearly 25 percent of the state’s TANF caseload. The reason? The state faces up to $130 million in federal penalties if 50 percent of the adults receiving assistance don’t meet the federal work participation requirement by September 30. “Seventy thousand people is more than the entire TANF roll in thirty-nine states,” says Jack Frech, director of the Athens County Department of Job and Family Services in Appalachian Ohio,  “You can imagine if someone announced they were going to throw all the children in Virginia off of cash assistance it would be national news. But that many get thrown off in Ohio and it’s barely even local news.” Like Ohio, four other states face similar penalties for achieving low work-participation rates among TANF recipients in 2007. Advocates assert that forcing states to maintain those rates during a recession runs counter to the program’s goal of providing basic assistance to children in poverty. Last year Ohio applied for relief from its penalty. But according to Liz Schott, senior fellow at the Center on Budget and Policy Priorities (CBPP), the state’s circumstances didn’t meet the “limited bases for relief” under federal statute, so the Obama administration denied its request.

Bloomberg Cuts Threaten Thousands with Eviction as NYC Homeless Population Hits Record 43,000 -  The Coalition for the Homeless reports the number of people living in New York City homeless shelters has reached an all-time high of 43,000. Critics attribute the spike in homelessness to the Bloomberg administration’s alleged failure to help move homeless families into permanent affordable housing. Housing advocates say the problem was exacerbated by the city’s cancellation of the "Advantage" apartment rental subsidy, with as many as 8,000 former aid recipients now facing eviction. We get a report from Democracy Now!’s Chantal Berman, who interviewed several aid recipients who could soon lose their homes, and speak to Patrick Markee, senior policy analyst at Coalition for the Homeless in New York City. [includes rush transcript]

'Back At Square One': As States Repurpose Welfare Funds, More Families Fall Through Safety Net: -- Brianna Butler would prefer never again to see the inside of the DeKalb County welfare office. She is eager to work. This she says repeatedly. But she is a 19-year-old single mother with no one to look after her 10-month-old daughter, making work essentially beyond reach. Reluctantly, she has turned to an alternative that might at least provide minimal sustenance: She is applying for monthly $235 welfare checks from the state of Georgia. Butler is eligible for those checks. Officially, she is homeless and has no income. Most nights, she sleeps on the floor at her mother's house in this predominantly African-American suburb of Atlanta, where 1 in 5 people live in poverty. Her mother is out of work and behind on her bills. When Butler runs out of money for baby food, she gives her daughter nothing but "water or juice for a day or two," she says, "just to tide her over." Without childcare, however, she cannot satisfy Georgia's requirements that she first attend four weeks of classes designed to teach her how to look for a job, how to write a resume, how to handle an interview. So, instead of a job or welfare, Butler has only a bitter sense of resignation that she must do whatever it takes to secure cash. She calls up older men whom she meets on the bus, en route to the county welfare office, in the aisles at the grocery store, wherever -- men who have made plain their appreciation for her youthful looks, while offering their phone numbers. She negotiates transactions that stave off tragedy for another day: sex for diaper money; a night's companionship for a sum that buys frozen vegetables and infant formula.

Illinois child welfare agency mulls cuts, layoffs - Already in open violation of a federal decree on child welfare investigations, the Illinois agency that oversees well-being of families faces new budget cuts that could lead to hundreds of worker layoffs and the elimination of services that have helped keep thousands of children out of foster care. The Department of Children and Family Services would see some $85 million in trims under the budget lawmakers passed last month to deal with the state’s financial crisis. Several agencies are facing steep reductions and difficult decisions as a result, but DCFS Director Richard Calica said the budget cuts could be particularly painful for his department. Each year, it has contact with some 150,000 Illinois children and initiates about 63,000 investigations through a child-abuse hotline. “The safety net that we’ve provided for the community has been eroded based on what the people of Illinois have allocated to our work,”

Prisons, Privatization, Patronage, by Paul Krugman -  Over the past few days, The New York Times has published several terrifying reports about New Jersey’s system of halfway houses — privately run adjuncts to the regular system of prisons. The horrors described are part of a broader pattern in which essential functions of government are being both privatized and degraded. The Times’s reportsportray something closer to hell on earth — an understaffed, poorly run system, with a demoralized work force, from which the most dangerous individuals often escape to wreak havoc, while relatively mild offenders face terror and abuse at the hands of other inmates.  It’s a terrible story. But, as I said, you really need to see it in the broader context of a nationwide drive on the part of America’s right to privatize government functions, very much including the operation of prisons. What’s behind this drive?  You might be tempted to say that it reflects conservative belief in the magic of the marketplace, in the superiority of free-market competition over government planning. And that’s certainly the way right-wing politicians like to frame the issue.  But if you think about it even for a minute, you realize that the one thing the companies that make up the prison-industrial complex — companies like Community Education or the private-prison giant Corrections Corporation of America — are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn’t any market here, and there is, therefore, no reason to expect any magical gains in efficiency. Privatized prisons save money by employing fewer guards and other workers, and by paying them badly. And then we get horror stories about how these prisons are run. What a surprise!

Taxmageddon to Hit These States and Congressional Districts Especially Hard - Taxmageddon is getting ready to suffocate the U.S. economy under crushing tax increases on January 1, 2013. These tax hikes include the expiration of the 2001 and 2003 tax reductions and the tax increases from the 2010 health care law. The Heritage Foundation’s Center for Data Analysis (CDA) ran the numbers based on data from the IRS and found how much Taxmageddon will cost the average taxpayers in each state and congressional district. The $494 billion in new tax increases is $4,138 more in taxes for the average family in 2013, but some places will pay more. Here is how much the average tax return in the worst hit states will pay:

How Much is Wall Street Stealing from Your City, Your State, And You?  - Matt Taibbi hits another one out of the park: The Scam Wall Street Learned From the Mafia.  It’s simple and brazen: there’s a system for banks to bid on what rate they’ll pay to states and cities on their stock of money “in the bank.” The bidding system is intentionally rigged so the banks pay a few basis points (hundredths of a percent) less on that money. The banks keep the skim. (The scum.) This has been the ubiquitous practice of all the big banks for at least a decade.  Matt points out that it’s tough to figure exactly how much Wall Street makes off this scam, but I thought I’d give it a shot.  Matt’s article and the court case he describes are about money from bond issues that has yet to be spent on building sewer plants or whatever — money that might only be spent down over long periods.  State and local debt outstanding is about $3 trillion — $1.8 trillion, or 60%, issued in the last ten years.Let’s say cities and states have $1 trillion in the bank. Each basis point that Wall Street skims subtracts $10 billion from state and local budgets. That may seem like small change; state and local expenditures exceed $2 trillion a year, so we’re talking half a percent of their budgets being stolen every year.  That’s $32 a year from you and each of your family members, every year. Do you remember ticking that checkbox on your tax return?  Neither do I.

Please don't have any kids – mathbabe - I consider having children a deeply irrational thing to do – any kind of cost/benefit analysis focusing on material costs and such would steer me very wide of the practice of sacrificing my health, my time, and enormous amounts of resources to these little economic leeches that likely won’t even talk to me after they leave for college, which I will be paying for if I can afford it. And not only is having kids a stupid idea in terms of economics – it’s also a hugely dangerous proposition, because it’s so much easier to screw up your kids than it is to raise healthy, well-adjusted people. There are pitfalls in every direction, and when it comes to it I think there should be a 4-year college, with forced enrollment of people who are embarking on the parenting thing, before it happens. That nothing like this happens, that kids themselves can have kids without any planning or training, is actually crazy considering how much maturity is required to do a half-decent job of it. The only defense I really have of bearing three children is that my instincts told me to do it, and they, my instincts, didn’t play fair. In fact until I turned 23 I didn’t want kids, and I had a completely rational view of how much of a pain they’d be, and how much they’d take over my life, etc.. But somehow when I turned 23, there was something deep in my gut that kicked in and made me start missing my as-yet-unborn kids, as if I’d forgotten to kiss them goodnight and they were whimpering upstairs in their rooms. I know, I know, it’s over the top, but there you have it, instincts take no prisoners.

Study shows half of school districts have a year’s worth of cash — More than half of Illinois’ 800-plus school districts have more than one year’s worth of operating cash on hand, suggesting some downstate and suburban school systems might be able to shoulder part of the funding burden for educators’ pensions. Those numbers from the State Board of Education were released Monday as Gov. Pat Quinn and the four legislative leaders prepare for a round of late-week negotiations on a package to help solve Illinois’ $83 billion pension crisis. A Quinn aide Monday night said the results demonstrate that shifting some pension costs away from the state to school systems won’t pose a catastrophic financial hit to them. “The bottom line is school districts can certainly afford to have a stake in the contracts they negotiate, and overall the numbers make it clear there is no excuse not to do pension reform and do it quickly,” Quinn spokeswoman Brooke Anderson said.

Facing deficit, DeKalb contemplates cutting 10 more school days  - The DeKalb County School District still doesn't have a budget after a tense and accusatory meeting Wednesday of the county school board. Deliberations on the budget for the fiscal year starting July 1 ground to a halt after a board member made a proposal that stunned some of his colleagues and highlighted just how difficult the financial situation is: Paul Womack wants to cut an additional 10 days from the school calendar. In approving a tentative general fund budget, the board had already voted to reduce the school calendar for students by two days. Four furlough days approved for teachers in prior years would also remain, but they would not affect students. Officials said it costs the system $3 million a day to operate, so the proposal could save $30 million -- enough to balance the budget without a tax increase. But they needed time to check on the details, so the budget deliberations were postponed until 6 p.m. Thursday.

Education tax credit to expand in new Pa. budget - A nearly $27.7 billion state budget taking shape in the Pennsylvania Capitol includes a substantial expansion of a tax credit available to businesses whose contributions can be used for scholarships to private schools, top state Republican lawmakers and legislative aides said Thursday. The Educational Improvement Tax Credit, which is popular with the school choice movement, will potentially double to $150 million from the $75 million set aside in the current year's budget. It would be one of the largest expansions of a discretionary program from the budget that's in force now. The exact amount available for the fiscal year that begins July 1 is still being decided on by budget makers, said Senate Majority Leader Dominic Pileggi, R-Delaware. Many details of the spending plan agreed to Wednesday evening by Gov. Tom Corbett and his fellow Republicans who lead the state Legislature remain under wraps while work is finished on it behind closed doors. But the approximately $400 million increase in spending is largely attributable to rising costs for health care and public employee pension costs.

How a Book Burning Party Saved the Library - What good is knowledge, if no one has access to it?  That was the underlying question in Troy, Michigan where Tea Party activists sought to thwart a small tax increase to keep the award winning library open. This was the third effort, and the anti-tax crowd was well organized.  But the people who wanted to save the library had an idea. Chris Meadows at Teleread, writes: . The company produced a guerilla and social marketing campaign (PDF) in which they pretended to be a clandestine group urging people to vote to close the library so they could hold a book-burning party afterward.  They put up yard signs all over town, placed a classified ad asking for clowns and caterers for the party, and posted a Facebook page for their campaign where they made cute little inflammatory announcements like "Our agenda's pretty simple. We want the library to close so we can have a book burning party. What's not to get?" This had the effect of focusing the public's attention away from the question of a tax increase and onto the question of losing a library's worth of books. (They did reveal it was a hoax before the actual election.)  The campaign apparently worked; voter turnout in the election was 38%, double the anticipated 19%, and the vote won by a significant margin.

‘Teacher of the Year’ fired in ruthless California budget cuts - A California teacher has been given the sack despite winning the prized 'Teacher of the Year' award for her school district. Sutterville Elementary School sixth-grade teacher Michelle Apperson was handed the pink slip just weeks before being announced Sacramento City Unified School District's best teacher, according to KXTV. Ms Apperson is among nearly 400 teachers in the area to receive lay off notices in May due to state budget cuts. California law follows a last in, first out policy, firing teachers based on seniority rather than whether they are good at their job or not. 'It hurts on a personal level because I really love what I do,' Ms Apperson told KXTV. 'But professionally, politically, I get why it happens.' Parents at the school are outraged their top teacher is being given the boot.

Why are teachers being fired? - Economics professor Tyler Cowen attributes the decline in public-sector employment to “a collapse of trust in politics.” In fact, he says, “the reason that we aren’t getting more expansionary macro policy is fundamental: a lack of trust.”  I don’t buy it. I think the reason we aren’t getting more expansionary macro policy is a polarized political system oriented toward gridlock. If there’s been a decline in trust toward state and local governments, it’s hard to find it in the polling. State and local governments rank as highly trusted. In a March 2011 poll — so, the period when state and local cutbacks were at their worst — Gallup found that most Americans thought state and local governments had “about the right” amount of power. Only 34 percent wanted state governments to have less power, and only 22 percent wanted local governments to have less power. They outpolled banks, corporations, the federal government and the courts. Local government outpolled churches.  Moreover, the particular classes of workers being laid off in state and local cutbacks rank as, again, the most trusted in the nation. A December 2010 poll — the most recent survey of attitudes toward various professions that I could find — shows grade school teachers and police officers to be among the most trusted professions in the country. That’s not exactly the same as saying that Americans want to spend more money on teachers and firefighters. But it’s difficult to detect a lack of trust here.

Teach For America is Proud to Partner with J.P. Morgan - Joining Teach For America before pursuing a career in business will provide you with the management experience and skills that will help you have a greater impact in the business world. By committing two years to teach in a low-income community, you will have an unparalleled opportunity to assume tremendous responsibility—managing a classroom of students, setting ambitious goals, and inspiring your students to meet those goals. Through this experience, alumni say that they developed invaluable communication and time-management skills that are highly transferable to a career in business. Partnership Benefits:

  • Two-year deferrals for students who are accepted into both Teach For America and J.P. Morgan's Investment Bank Analyst Program.
  • J.P. Morgan mentor for corps members during their two-year corps experience.
  • Summer internship at J.P. Morgan between first and second year of corps experience for those who participate in the deferral partnership.
  • J.P. Morgan recruits Teach For America corps members for summer internship opportunities. (J.P. Morgan will treat Teach For America as a 'core recruiting school').

How to Escape a Lowly Socioeconomic Class: Go to College - The latest installment in our Is College Worth It? series comes courtesy of the Treasury Department, which on Thursday released a report titled “The Economic Case for Higher Education.” The report included this nifty chart: It shows how likely you are to end up in any given income quintile, based on the income quintile your parents were in. In other words, how much mobility do Americans really have? Are they stuck in the income class they were born to? The answer depends largely on whether you went to college. As the report notes: Without a degree, children born to parents in the bottom income quintile have a 45 percent chance of remaining there as adults. With a degree, they have less than a 20 percent chance of staying in the bottom quintile of the income distribution. Higher education appears important for those born into relative wealth, too. Look at the fifth (and highest) parents’ income quintile. The children of this group who didn’t go to college are just barely more likely to stay at the top than they are to end up in each of the other income groups. That’s basically what you would expect if your economic fate were not influenced at all by your parents’: that you’d have an equally likely chance of ending up anywhere in the income distribution when you grow up.

Teresa Sullivan fired from UVA: What happens when universities are run by robber barons. - In the 21st century, robber barons try to usurp control of established public universities to impose their will via comical management jargon and massive application of ego and hubris. At least that’s what’s been happening at one of the oldest public universities in the United States—Thomas Jefferson’s dream come true, the University of Virginia. On Thursday night, a hedge fund billionaire, self-styled intellectual, “radical moderate,” philanthropist, former Goldman Sachs partner, and general bon vivant named Peter Kiernan resigned abruptly from the foundation board of the Darden School of Business at the University of Virginia. He had embarrassed himself by writing an email claiming to have engineered the dismissal of the university president, Teresa Sullivan, ousted by a surprise vote a few days earlier. The events at UVA raise important questions about the future of higher education, the soul of the academic project, and the way we fund important public services.

Sometimes trust isn't enough to overcome perceptions »  As University budgets have tightened over the past decade, researchers have increasingly turned to 'nontraditional' sources for funding.  Ufortunately, despite the best intentions of the researcher, it is often difficult to separate the funding source from the objectivity of the research itself.  As I report in The Times, a central question in the controversy over a new fracking study from the State University of New York at Buffalo is where the money came from to finance the report and the new institute on gas drilling that released it. The university says the money came from discretionary funds in the budget of the College of Arts and Sciences but that the new institute is seeking funds from the natural gas industry and other sources. Industry grants for academic research are simply a fact of life, many universities say. Alexander Cartwright, vice president for research at SUNY Buffalo, said that ultimately universities have to trust their researchers. “We value our faculty and we trust that they’re going to do the right thing,” he said. “It’s the essence of academic freedom.”

Fastest Growing US Export To China: Education - "While we are importing billions of 'cheap' products labeled 'Made in China,' the fastest growing export from U.S. to China does not even need a label. Chinese parents are acutely aware that the Chinese educational system focuses too much on rote memorization, so Chinese students have flocked to overseas universities and now even secondary schools, despite the high cost of attending programs in America. Chinese enrollment in U.S. universities rose 23% to 157,558 students during the 2010-2011 academic year, making China by far the biggest foreign presence. Even the daughter of Xi Jinping, the presumed next president of China, studies as an undergraduate at Harvard. This creates opportunities for universities to bring American education directly to China. Both Duke and New York University are building campuses in the Shanghai area to offer full-time programs to students there."

State Universities Want Maximum Tuition Increase – Nearly every state university plans to ask the Florida Board of Governors for the maximum tuition increase this year of 15 percent. The University of Florida sought only a nine percent increase in tuition and the University of South Florida initially wanted a 15 percent increase, but later decided to ask for just an 11 percent increase. The increase is allowed under the state’s “differential tuition” law, according to the News Service of Florida. Schools across the state said the added dollars would be used to offer more classes. According to the NSF, Miami-based Florida International University said it would use $13.3 million to hire undergraduate faculty with an eye on increasing graduate rates. The school would also use $12.3 million for financial aid. The schools also threatened the Board of Governors with potential major consequences if the board doesn’t approve the requests. “There will be a significant negative impact on availability of required general education course sections, students’ ability to obtain required courses, resulting in inability to continue education, larger class sizes, decreased graduation rates, increased time to degree and excess hours from taking unnecessary courses if required courses are not available,”

Equity Financing of Higher Education »  Luigi Zingales had an op-ed in the NY Times a few days back proposing equity financing of higher education combined with IRS collection of educational debt. Sound familiar? It should to Credit Slips readers.  I suggested the very same thing right here on this blog back in April.  In thinking about it further, it strikes me that there are a few fundamental problems and concerns with an equity financing system.   First, no one, absolutely no one knows how to price equity financing of education on either side of the market.  The financiers don't know what cut of future income they should be demanding and the students don't know what cut of future income they should agree to pay.  Relatedly, the difficulty in pricing (and the delayed cash flows) means that equity financing would almost certainly have to come from private risk capital, rather than from schools themselves. A Second, equity financing could be just as distortional to education as debt financing. Government guaranteed debt financing means that there is no market discipline in education financing. The Harvard MBA pays the same rate as the community college associate's degree poetry major for an uncollateralized loan, even though their future ability to repay is likely to be quite different. Removing government support from the market--either moving to entirely private student loans or private equity financing would reverse the effect. But I shudder to think of the effects on our higher education system. "Impractical" departments would disappear.

Student Loan Bill: “Failure Is Not an Option” Says Education Secretary Duncan (video interview) Time is quickly running out for Congress to pass stopgap legislation that would prevent interest rates on subsidized student loan debt from doubling to 6.8 percent July 1. Failure to pass this legislation would adversely affect nearly 7.4 million new undergrad borrowers. But surprisingly, at a time when extreme partisanship drives today's political agenda, the desire to keep the lower rates in place has broad bipartisan support. So why the delay in passing the bill? The holdup rests largely upon how to recoup the $6 billion it will cost the government to keep rates at 3.4 percent for the next year. For Education Secretary Arne Duncan, "failure is not an option." "Congress has been fairly dysfunctional…[but] this is a real opportunity for them to come together and do the right thing," Duncan tells The Daily Ticker in the accompanying interview. "This would be too devastating to over 7 million young people and families around the country." While Congress seems to be on the brink of passing this legislation, Duncan is not getting his hopes up until the bill actually passes. "I will remain doubtful until this gets done," he says. "This is not about words. This is about action."

U.S. public retiree benefits gap grows to $1.38 trillion (Reuters) - The funding gap for U.S. state public employee retirement benefits climbed by $120 billion to $1.38 billion in fiscal 2010, according to a report released on Monday. The report comes at a time when many voters and politicians already claim that compensation for public employees is bloated. The Pew Center on the States said that public pension systems in 34 states were funded at less than the 80 percent level that is considered the threshold for a healthy pension. That's in stark contrast to 2000, when more than half of the states' pension plans were 100 percent funded. "The larger (the shortfalls) are, the higher the cost for taxpayers today and for many years to come," said David Draine, a Pew senior researcher, who compared many states to credit card holders who hadn't paid their bills in full but kept racking up charges. Since 2009, the dire lack of funding has led at least 43 states to enact some reforms, many of which may not go far enough. Reforms passed after 2010 were too recent to be reflected in the new study, the Pew Center said.

Soaring UC pension costs raise pressure for more cuts, tuition hikes – The cost of pensions and retiree health benefits is soaring at the University of California, increasing pressure to raise tuition and cut academic programs at one of the nation's leading public college systems. The 10-campus system is confronting mounting bills for employee retirement benefits even as it grapples with unprecedented cuts in state funding that have led to sharp tuition increases, staff reductions and angry student protests. The UC system, including medical centers and national laboratories, is scrambling to shore up its pension fund as it prepares for a wave of retirements and tackles a roughly $10 billion unfunded liability. The UC Retirement Plan's huge deficit was created by investment losses during the global economic crisis – and the nearly two decades when campuses, employees and the state did not contribute any money toward pensions. "The regents made a serious error and the Legislature made a serious error by not putting money aside for 19 years while accumulating this obligation," said Robert Anderson, a UC Berkeley economist who chairs the system's Academic Senate. "Now we have to pay for it."

Have A State Pension? Don't Count On It. - One to the biggest issues that face millions of retiring individuals in the coming years is the grossly underfunded pensions for state workers nationwide. Just recently the PEW Center For The States released their annual update on the status of state pension plans. The bottom line is not good. "States continue to lose ground in their efforts to cover the long-term costs of their employees' pensions and retiree health care, according to a new analysis by the Pew Center on the States, due to continued investment losses from the financial crisis of 2008 and states' inability to set aside enough each year to adequately fund their retirement promises. States have responded with an unprecedented number of reforms that, with strong investment gains, may improve the funding situation they face going forward, but continued fiscal discipline and additional reforms will be needed to put states back on a firm footing." The report, which is based on fiscal year 2010 data which is that latest complete data set available, the gap between states' assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9 percent from the fiscal year 2009. Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care.

Politicians snuck a pension provision into the transportation bill - With all the talk about mark to market accounting, nobody seems to care that US pensions do not use these accounting principles when determining the present value of their liabilities. Pensions mark to market their bond portfolio based on current rates and spread levels (i.e. current yield/spread curve). However liabilities are discounted using a 2-year average of the investment grade corporate curve (see attached document for the latest rates). That means that pension liabilities are currently undervalued relative to pension assets because rates have come down so sharply in the past two years. One would think however that in the next two years this problem should correct itself as low rates get reflected in the average. As the 2-year average starts including these low rates and liabilities become worth more on a present value basis, an increasing number of pensions will become underfunded and corporations will be required to inject more capital. And that in fact has already been taking place.  But no worries - the corporate pension lobby was able to get to the US politicians before the really low rates got into the average. And the politicians snuck in a little provision into (of all places) the Transportation Spending bill that was recently passed by the US Senate changing the rolling 2-year averaging into a 25 (twenty five) - year average. Rates of course were significantly higher in the past 25 years than they are now and will likely be in the next few years.

'What New Law?' - As Robin Layman, a mother of two who has major health troubles but no insurance, arrived at a free clinic here, she had a big personal stake in the Supreme Court's imminent decision on the new national health care law. Not that she realized that. "What new law?" she said. "I've not heard anything about that." Layman was one of 600 people who on a recent weekend came from across southeastern Tennessee for the clinic held by Remote Area Medical, a Knoxville-based organization that for two decades has been providing free medical, dental and vision care in underserved areas. Most everyone had spent the night in their parked cars, to get a good spot in line. Daybreak found them massed outside the turreted stone gymnasium of the 150-year-old college, the University of the South, some still wearing pajamas or wrapped in blankets, waiting quietly for the 6 a.m. opening of the doors.It was Remote Area Medical's 667th clinic. But this one came at an unusual moment: as the Supreme Court deliberates whether to uphold the health care law that will have a disproportionate impact on the sort of people served by the organization.

Millions Still Go Without Insurance If Law Passes - One of the biggest misconceptions about President Obama’s health care overhaul isn’t who the law will cover, but rather who it won’t. If it survives Supreme court scrutiny, the landmark overhaul will expand coverage to about 30 million uninsured people, according to government figures. But an estimated 26 million Americans will remain without coverage — a population that’s roughly the size of Texas and includes illegal immigrants and those who can’t afford to pay out-of-pocket for health insurance. “Many people think that this health care law is going to cover everyone, and it’s not,” To be sure, it’s estimated that the Affordable Care Act would greatly increase the number of insured Americans. The law has a provision that requires most Americans to be insured or face a tax penalty. It also calls for an expansion of Medicaid, a government-funded program that covers the health care costs of low-income and disabled Americans. Additionally, starting in 2014, there will be tax credits to help middle-class Americans buy coverage.

Distaste for Health Care Law Reflects Ad Spending - Ms. Losse, 33, a part-time worker at a bagel shop, is no fan of the law, which will require millions of uninsured Americans like herself to get health coverage by 2014. Never mind that Ms. Losse, who makes less than $35,000 a year, would probably qualify for subsidized insurance under the law.  “I’m positive I can’t afford it,” she said.  A Supreme Court ruling on the constitutionality of the health care law is expected any day now, but even if the Obama administration wins in the nation’s highest court, most evidence suggests it has lost miserably in the court of public opinion. National polls have consistently found the health care law has far more enemies than friends, including a recent New York Times/CBS News poll that found more than two-thirds of Americans hope the court will overturn some or all of it.  “The Democrats have done a very poor job of selling the program,” said Gary Schiff, 65, a retired teacher and businessman here. “All you hear about it now is the Republicans saying what’s wrong with it: that it’s socialism, that it’s going to bankrupt the country. I’ll give them credit; they’re great at framing the debate.”

“That’s the reason Democrats cooked up the individual mandate in the first place”  - Ezra Klein has a piece in the forthcoming New Yorker titled “Unpopular Mandate: Why do politicians reverse their positions?” He describes the evolution of Republican views on the individual requirement to purchase health coverage. He rightly notes that the mandate has been “at the heart of Republican health-care reforms for two decades.” There are some obvious reasons for their attention. Suppose we wish to protect every sick or injured American from the risk of financial catastrophe. We might accomplish this task in several way. Whatever we do, we must somehow address the possibility that people might gamble by going uncovered when they are healthy, and then seek to buy coverage under favorable terms when they get sick. It is a main concern of any serious national reform, particularly one that places heavy emphasis on individual coverage within the private insurance market. This Sunday’s Wall Street Journal editorial page takes up these issues, as it considered Republican responses to whatever the Supreme Court chooses to do.

The future of Obamacare, and the New Deal, is in Justice Kennedy's hands - One man now basically holds the fate of the New Deal in his deciding hand: Justice Anthony Kennedy. That's because the one hope court watchers, and the Department of Justice, had been holding out—judicial consistency from Justice Antonin Scalia—has been dashed.  Many analysts have pointed to Scalia's concurrence on the 6-3 Gonzales v. Raich decision, in which Scalia endorsed the broad authority of the federal government to regulate interstate economic activities under the Constitution’s Commerce Clause. With Raich, the court decided that Congress had the authority, under its power to regulate interstate commerce, to prohibit a licensed medical marijuana patient from growing on his or her property, even if that cultivation was legal under state law. The case was decided largely on the precedent of Wickard v. Filburn, a 1942 case in which the court ruled that a farmer's wheat crop fell under federal production quotas, even though much of the crop was consumed on his own farm. That ruling cemented the government's power to regulate interstate commerce. In a new book, however, Scalia appears to be ready to make an about face, not even respecting his own, personal stare decisis, and overturn the Affordable Care Act. In the new book, he: [...] concedes that he “knows that there are some, and fears that there may be many, opinions that he has joined or written over the past 30 years that contradict what is written here” in the health care ruling, the Times reports. He notes that while precedent factored into some of them, in other cases it’s “because wisdom has come late.”

Awaiting the Supreme Court's Health Care Ruling - The core question before the court is whether the Commerce Clause in Article 1, Section 8, Clause 3 of the Constitution grants the federal government the authority to mandate individual Americans to purchase specified, minimally adequate health insurance coverage from private health insurers. In this instance, the best legal minds in the nation cannot agree on what the Commerce Clause means. So we look to nine justices to tell us what they think the clause might mean. With legal theory in such disarray, ideological predilection among the justices may triumph.  I recently posted a commentary on the options before the Supreme Court. Expanding upon that post a bit, I would describe the options before the Court thusly:

    • 1. The Affordable Care Act is upheld as constitutional in all of its provisions.
    • 2. Only the individual mandate is struck down, and it is deemed severable from the rest of the act.
    • 3. Title 1 (Insurance Reform) of the act is struck down, but the rest of the act is upheld.
    • 4. Both Titles 1 and 2 (Public Programs, including the expansion of Medicaid) are struck down, but the rest of the act is upheld.
    • 5. The entire Affordable Care Act is struck down, on the grounds that the clause covering the individual mandate, deemed by the justices to be not authorized by the Commerce Clause, is deemed not severable from the rest of the bill.

Health Care Reminder: The True Power of the Bully Pulpit - With the Supreme Court likely to decide on the Affordable Care Act next Monday, Pew Research has a poll of voters’ reactions to some of the possible rulings. As expected there is a huge partisan divide, with Republicans wanting the whole law thrown out and Democrats wanting the whole law kept.  What I find amazing is that a majority of Democrats would be unhappy if the Court only threw out the individual mandate but kept all the “good” provisions. From Pew:But the other widely discussed possibility – that the court could reject the part of the law that requires individuals to have health insurance while keeping the rest – does not satisfy either side. Among Democrats, 35% would be happy with this outcome, while 56% would be unhappy. Republicans, who have consistently opposed the individual mandate, are not much happier: 43% would be happy if the court strips only this provision, while 47% would be unhappy. For many partisans, only an “all or nothing” outcome will be acceptable. Four-in-ten (40%) Republicans say they will be happy only if the entire law is overturned, while another 29% would be happy with either overturning the entire law or just the mandate. Conversely, 39% of Democrats say they will be happy only if the entire law is upheld, while 17% would be happy with either keeping the entire law or removing the mandate but keeping the other elements.

A Health Care Mandate That Might Not Matter - Within the next few days, the Supreme Court may strike down the provision in the Affordable Care Act requiring every American to buy health insurance. What’s harder to figure out is what will then happen to health insurance. Advocates of health care reform argue that eliminating the mandate could gut the president’s plan. Most health economists would probably agree. But this consensus is based on a fairly optimistic view that the individual mandate and accompanying fines for failing to comply will be highly effective at persuading Americans to buy health insurance that they would otherwise forgo. Ultimately, the answer will depend on Americans’ behavior. Specifically, how far will we go for a free lunch? The case for the individual mandate rests on the belief — shared by most economists — that most people go through life seeking the best possible deal, always looking to get the most out of any given situation. The health care act requires insurers to charge everybody the same rates regardless of their health status. Healthy Americans could save money by dropping their insurance until they were sick. Think of a world in which people bought car insurance only when their car was lying crumpled in a ditch after an accident and you’ll understand why an insurance market like this would implode.

Counterparties: SCOTUS’s massive healthcare decision - The Supreme Court is holding off issuing a ruling on the constitutionality of Obamacare until next week. The are four basic scenarios of what the Court can do and the decision has massive economic implications. The industry accounts for some 18% of US GDP; billions of dollars in federal spending and the future of hundreds of community healthcare centers are in play. No matter how obsessively you check SCOTUSblog – your single best resource for all things Supreme – you won’t hear anything early. Unlike the rest of the branches of government, the Supreme Court is a leak-free machine. Until the official word comes, comfort yourself with the Vegas odds and courthouse gossip. The decision likely hinges on Justice Kennedy: Dahlia Lithwick calls him “the original independent swing-state voter”. Or it could just as easily hinge on what the justices think of the mandated eating of broccoli, a vegetable Americans actually do like, it turns out. And if you need to be hit over the head with the human importance of this issue, the NYT’s Annie Lowrey looks at an Oregon program that found providing health insurance to adults in poverty made them “healthier, happier and more financially stable”.To help lead you through the twists and turns of the healthcare decision, we’ve compiled a Twitter list of the best people to follow. A huge thanks to Erin Geiger Smith and the Reuters Legal team for helping with this.

White House, Democrats Still Have No Health Care Plan B for Supreme Court Decision - Even though there is a very good chance the Supreme Court could rule against some or all of the Affordable Care Act, the Obama administration seems to have done nothing to prepare Democrats in Congress for this eventuality, according to Politico.Congressional Democrats who wrote Barack Obama’s health care plan into law say they’re getting virtually no guidance from the White House on how to deal with the fallout if the Supreme Court overturns any part of the law.There have been no meetings, no phone calls and no paper exchanged with the administration, according to Democratic lawmakers and staff. The top aides to Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi, David Krone and John Lawrence, did meet with the White House’s chief congressional lobbyist, Rob Nabors, last week to discuss a variety of issues. But Nabors didn’t provide any information on how the president plans to approach the court’s ruling, according to sources familiar with the meeting. I find this profoundly strange and very disconcerting. Even if the White House thinks it is unlikely that the Supreme Court will rule against them, which they shouldn’t at this point, there should always be a Plan B. When dealing with any issue at this high level, there should always be contingency plans to deal with even a remote possibility that has serious implications.

More Proof Obama Made a Deal With PhRMA to Keep Your Drug Prices High - It was first reported back in 2009 that the Obama administration cut a deal with the PhRMA to break specific campaign promises he made about health care reform in exchange for PhRMA spending money to politically support the bill. Thanks to some newly revealed emails via Philip Klein at the Washington Examiner we now have more details of how the deal was made.Nancy DeParle, then director of the White House Office of Health Reform, wrote the following email to PhRMA’s chief lobbyist on June 3, 2009: “Yes – I pushed this to everyone (Messina, Rahm) is in Egypt with POTUS but Phil Schrillo, Dana Singlser and I made decision, based on how constructive you guys have been, to oppose importation on this bill.”[...] That September, top PhRMA lobbyist Bryant Hall reported to his coworkers in an email that he “had a good call w Messina,” and wrote: “Confidential: WH is working on some very explicit language on importation to kill it in health care reform. This has to stay quiet.” Despite the best efforts of Senators like Byron Dorgan (D-ND) a bipartisan effort to include drug re-importation in the Affordable Care Act was effectively stopped by the Obama team and their congressional allies. The Obama administration’s FDA even sent a highly political and frankly technically bullshit letter right before the amendment came up for a vote to undercut support.  As a result of Obama betraying his campaign promise on drug importation both government spending and individual spending on prescription drugs will remain artificially high. At the time the CBO found the amendment would have saved the government $19.4 billion and consumers roughly $100 billion over the next decade.

Health Care Thoughts: Human Capital Edition - In the past six weeks I have talked to and with health care executives and practitioners from at least 40 states. All of the conversations have been interesting to say the least. What I hear from the hospital and (integrated) health system levels is the combination of PPACA (Obamacare), economics, health finance, technology and assorted regulations are making health care incredibly complicated, which is driving an executive feeding frenzy as organizations try to staff up to cope with change and as executives see new opportunities for their careers. This is not all for the good. One of my former students is, IMHO, one of the top integrated-with-hospital physician group managers in the country. Her take? "The biggest danger now to health care are 30-something MBAs who are career builders."  And clinical human capital? Right now it is important but not as important as the executive career hustle.  Take away?  Send your college-age children to study health care administration

What if the Doctor Market Was Like the Lawyer Market? -- Andrew Oh-Willeke points us to this, on the job market for lawyers: Slightly more than half of the class of 2011 — 55 percent — found full-time, long-term jobs that require bar passage nine months after they graduated, according to employment figures released on June 18 by the American Bar Association. I couldn’t find a comparable figure for medical graduates on a quick search, but I’m guessing the number’s in the low single digits. The lawyer glut has been going on for a while, and at least in Canada (the only place I’ve found data) it’s been having predictable effects on legal fees — down 40% in nine years ’01–’10: I doubt that doctors’ fees are the prime driver behind our crisis of rising health-care costs (what providers charge). But at least one analysis says it’s an important part (Todd Hixon, Forbes): U.S. spending annual on physicians per capita is about five times higher than peer countries: $1,600 versus $310 in a sample of peer countries, a difference of $1,290 per capita or $390 billion nationally, 37% of the health care spending gap. (source)**. This suggests that relieving the supply shortage – especially for primary care doctors — could have a big impact. Not a new insight, but I thought this data point would be of interest.

Drug Shortages Caused by the FDA - Shortages of drugs, especially generic injectables, continue to cause significant harm to patients. A new Congressional report offers the best account to date of the shortages and provides details confirming my earlier post. The story in essence is this: The FDA began to ramp up GMP rules and regulations under the new commissioner in 2010 and 2011 (see figure at left). In fact, the report indicates that FDA threats shut down some 30% of the manufacturing capacity at the big producers of generic injectables. The safety of these lines was not a large problem and could have been handled with a targeted approach but instead the FDA launched a sweep against all the major manufacturers at the same time. These problem have been exacerbated by a change in Medicare reimbursement rules and by the rise of GPOs (buying groups) which reduced the prices of generics. Thus, in response to the cut in capacity, firms have shifted production from less profitable generics to more profitable branded drugs, so we get shortages of generics rather than of branded drugs.Add to these major factors a few unique events such as the FDA now requiring pre-1938 and pre-62 drugs to go through expensive clinical trials, the slowdown of ANDAs and crazy stuff such as DEA control over pharmaceutical manufacturing and you get very extensive shortages.

The World Is Fat (Especially America) - The world could stand to shed a few pounds. Fifteen million metric tons, in fact, according to a new study. In the study, published in the open-access journal BMC Public Health, researchers used country-specific data on body mass index and heights to estimate the biomass of the world’s entire adult population. They concluded that in 2005, the global adult human biomass was about 287 million metric tons. About 15 million metric tons of that biomass were the extra pounds of people who were overweight (here defined as having a body mass index value above 25). About 3.5 million metric tons of that total biomass were because of obesity (having a B.M.I. above 30). The United States is to blame for a lot of those spare tires. While America holds about 5 percent of the world’s adult population, it accounts for about a third of the excess weight because of obesity. Japan and the United States in particular demonstrate the extreme variations in weight. The average B.M.I. in Japan in 2005 was 22.9, and in the United States it was 28.7. If all countries had the same B.M.I. distribution as Japan, the world’s total biomass would fall by 14.6 million metric tons, or 5 percent. If, on the other hand, all countries were about as overweight as the United States, total biomass across the globe would increase by 58 million metric tons, or about 20 percent.

Planet Girth: Study Finds World Is Way Too Fat, North America to Blame - Researchers at the London School of Hygiene and Tropical Medicine have published a study in this month's BMC Public Health claiming the collective population of the world is 17 million tons overweight. Prof. Ian Roberts, one of the study's authors, says the goal was to move away from the focus on obesity in individuals. "One of the problems with definitions of obesity is that it fosters a 'them and us' ideal," he told BBC News. "Actually, we're all getting fatter." That being said, some are still significantly fatter than others. Roberts and his team found that, despite accounting for only 6% of the global population, North America was single-handedly responsible for a third of the world's obesity. Compare that with Asia: 61% of the global population, but only 13% of its obesity.2005 World Health Organization figures used by the researchers make the North American contribution even clearer: While the global body weight average stood at 137lbs, the average North American clocked in at 178lbs — over 50lbs heavier than the average Asian.

Why the surge in obesity? - The Weight of the Nation is a four-part series on obesity in America by HBO Films and the Institute of Medicine, with assistance from the Centers for Disease Control (CDC) and the National Institutes of Health (NIH). It’s been showing on HBO and can be viewed online. Each of the four parts is well done and informative. Obesity is defined as having a body mass index (BMI) of 30 or more. For a person 6 feet tall, that means a weight of more than 220 pounds. For someone 5’6″, the threshold is 185 pounds. People who are obese tend to earn less and are more likely to be depressed. They are at greater risk of diabetes, heart disease, stroke, and some types of cancer, and they tend to die younger. The CDC estimates the direct and indirect medical care costs of obesity to be $150 billion a year, about 1% of our GDP. The chart below, which appears several times in The Weight of the Nation, shows the trend in obesity among American adults since 1960, the first year for which we have good data. The data are from the National Health and Nutrition Examination Survey (NHANES). They are collected from actual measurements of people’s height and weight, rather than from phone interviews, so they’re quite reliable. After holding constant at about 15% in the 1960s and 1970s, the adult obesity rate shot up beginning in the 1980s, reaching 35% in the mid-2000s.

Why Our Food Is Making Us Fat - The specially designed ambulance carries an array of bariatric gizmos including a "spatula" to help with people who have fallen out of bed or, on a recent occasion, an obese man jammed between the two walls in his hallway. As well as the ambulance, there's a convoy of support vehicles including a winch to lift patients onto a reinforced stretcher. In extreme cases, the cost of removing a patient to hospital can be up to £100,000, as seen in the recent case of 63st teenager Georgia Davis. But these people are not where the heartland of the obesity crisis lies. On average, in the UK, we are all – every man, woman and child – three stone heavier than we were in the mid-60s. We haven't noticed it happening, but this glacial shift has been mapped by bigger car seats, swimming cubicles, XL trousers dropped to L (L dropped to M). An elasticated nation with an ever-expanding sense of normality. Why are we so fat? We have not become greedier as a race. We are not, contrary to popular wisdom, less active – a 12-year study, which began in 2000 at Plymouth hospital, measured children's physical activity and found it the same as 50 years ago. But something has changed: and that something is very simple. It's the food we eat. More specifically, the sheer amount of sugar in that food, sugar we're often unaware of.

Chinese GM Cows Make Human Breast Milk - Chinese scientists have genetically modified dairy cows to produce human breast milk, and hope to be selling it in supermarkets within three years. The milk produced by the transgenic cows is identical to the human variety and has the same immune-boosting and antibacterial qualities as breast milk, scientists at China's Agricultural University in Beijing say. The transgenic herd of 300 was bred by inserting human genes into cloned cow embryos which were then implanted into surrogate cows.The technology was similar to that used to produce Dolly the sheep. The milk is still undergoing safety tests but with government permission it will be sold to consumers as a more nutritious dairy drink than cow's milk. Workers at the university's dairy farm have already tasted the milk, and say it is sweeter and stronger than the usual bovine variety.

EasyJet Refuses To Allow Professor To Board With Vital Organ Container Because It Was Not In A 100 Milliliter Bottle - EasyJet is known as an airline that reduces travel to just above a cattle car. However, the airline reaches a new low recently when it refused to allow professor Martin Birchall of Bristol University to board a plane with a medical container because it was larger than the 100 milliliter limit for a liquid. Birchall showed the airline that it contained a specially treated trachea needed within hours in Barcelona or the vital organ (and months of work) would be lost. While he insisted that he had previously consulted with the airline, they insisted that they had no record of the request and that he would have to leave the organ behind.

India in Race to Contain Untreatable Tuberculosis - India's slow response to years of medical warnings now threatens to turn the country into an incubator for a mutant strain of tuberculosis that is proving resistant to all known treatments, raising alarms of a new global health hazard. "We finally have ended up with a virtually untreatable strain" of tuberculosis in India, said Dr. Zarir Udwadia, one of the country's leading TB authorities. In December, Dr. Udwadia reported in a medical journal that he had four tuberculosis patients resistant to all treatment. By January, he had a dozen cases, then 15.  A government backlash began immediately. Anonymous health-ministry officials denied the reports through media outlets. They accused Dr. Udwadia and his colleagues of starting a panic. A Mumbai city health official seized patient samples for verification in government labs. In April, the government quietly confirmed the strain, according to internal Indian health-ministry documents reviewed by The Wall Street Journal. Spread of the strain could return tuberculosis to the fatal plague that killed two-thirds of people afflicted, before modern treatments were developed in the 1940s, said Dr. Mario Raviglione, director of the Stop TB Department of the World Health Organization. The WHO is now assisting India to combat the strain.

They Fought The Law: Big Utilities Sue the EPA and Lobby the Senate to Stop Public Health Protection - Last year the EPA issued two rules that would reduce smog, acid rain, and airborne toxic chemicals: the Cross-State Air Pollution Rule and the Mercury and Air Toxics Standards. On July 6, 2011, the EPA finalized the Cross-State Air Pollution Rule to reduce sulfur dioxide and nitrogen oxide pollution—two of the main ingredients in acid rain and smog—from power plants in upwind states that were polluting downwind states. An interactive EPA map demonstrates that pollution doesn’t stop at state borders. Then, on December 16, 2011, the EPA finalized the first standards to reduce mercury, arsenic, lead, and other toxic air pollution 21 years after controls on such pollution became law. Today more than 130 coal companies, electric utilities, trade associations, other polluting industries, and states are suing the EPA in federal court to obliterate, undermine, or delay these essential health protection standards. A parallel effort is underway to block the mercury reduction rule in the Senate, which is scheduled to vote on it this week. This CAP investigation found that these utilities were responsible for 33,000 pounds of mercury and 6.5 billion pounds of smog and acid rain pollution in 2010 alone.

In United States, there’s a lot of food being wasted - In the United States, “farm to fork” has become “farm to dumpster” as American farms, processors, manufacturers, grocers, restaurants and homes increasingly waste food. The Environmental Protection Agency says that food waste has increased dramatically, rising 50 percent between 1974 and 2003, and recently replaced paper as the largest single component in our landfills.Every day, America wastes enough food to fill the Rose Bowl stadium. From farms to processors, from retailers to restaurants and homes, food is lost at every step of the way. According to one government study, 40 percent of food grown or raised domestically is not eaten. Across the globe, a third of all food — about 1.3 billion tons per year — goes to waste, according to the U.N. Food and Agriculture Organization. This has significant environmental and economic impact. Wasting food squanders the oil and water used to produce it, and food rotting in landfills creates climate-changing greenhouse gas emissions. Food not consumed represents a $250 billion loss per year, according to a 2011 McKinsey & Company report. U.S. supermarkets alone lose about 11 percent of their fresh fruit to waste, according to the U.S. Department of Agriculture. And then there’s the dubious morality of throwing away so many potential meals in a nation where 15 percent live in food-insecure homes.

Farm Bill update - The Senate is debating the 2012 Farm Bill, which reauthorizes agriculture, conservation, and nutrition assistance programs for another five years. You can read coverage at Politico, the Washington Post, the Food Politics blog, and Roll Call. Overall, the Farm Bill is likely to save some taxpayer money by replacing some agricultural subsidies with new crop insurance programs.  These government subsidized crop insurance programs are likely to cover "shallow losses" -- comparatively modest losses that don't meet the threshold for serious losses already covered.  These new crop insurance subsidies may be a little less expensive than the crop subsidies they replace, but they still reflect the agriculture industry's capture of legislators, who can be persuaded to do the industry's bidding, rather than representing sound policy.  Senate leaders agreed to consider a list of 73 amendments. You can follow the specific votes on the Senate website. If I understand correctly, an amendment to approve a compromise between the egg industry and animal welfare organizations regarding treatment of chickens was not on the list of amendments for consideration, perhaps because it was blocked by hardliners in other meat industries who oppose such compromises. An amendment to protect the Supplemental Nutrition Assistance Program from medium-sized cuts failed (it would have saved the money by reining in the new crop insurance subsidies). An amendment to limit the size of payments in a marketing loan subsidy program passed.

Senate rejects bid to label genetically modified food - The Senate on Thursday rejected an amendment to the farm bill that would have given states the power to require labels on genetically modified food. “This is the very first time a bill on labeling genetically engineered food has been brought before the Senate,” said Vermont Sen. Bernie Sanders (I), who introduced the proposal. “It was opposed by virtually every major food corporation in the country. While we wish we could have gotten more votes, this is a good step forward and something we are going to continue to work on. The people of Vermont and the people of America have a right to know what’s in the food that they eat.” Senate Agriculture Committee chair Debbie Stabenow opposed the amendment, claiming it could interfere with the development of drought resistant crops. 

House Poised to Stop Progress on Farm Bill - The Senate farm bill is likely to pass today. And while I disagree with the cuts to the food stamp program dressed up as fraud prevention, the bill does end the practice of paying farmers not to produce, which in practice was a subsidy to southern farmers who relied on the subsidies (insert your snarky quote about how Southern Republicans “hate government handouts to the undeserving” here). The subsidy payments that remain, particularly on crop insurance payments, will be limited in significant ways – adjusted gross income limits for eligibility used to be $1.5 million, and will now get cut to $750,000. Payments will be capped at $50,000 for individuals and $100,000 for couples. And “farm managers” who make money off a farm they don’t really have involvement in (think Blanche Lincoln, Michele Bachmann, etc.) will be ineligible for payments. These are relatively small changes, and advocates still believe that agribusiness will make out far too well on this bill, still taking in the majority of the subsidy payments. But it’s a small step forward. Which is why it will never pass. The House Agriculture Committee is abruptly pulling back from its planned farm bill markup next week, amid signs that Republican leaders want a pause to consider how to proceed given the progress made in the Senate on its five-year bill. Cantor’s aides said the majority leader wanted to “push the pause button” and allow time for some assessment of the political situation.The political situation is that a farm bill might pass, and the GOP can’t have that, at least not without holding the system hostage for some set of goodies.

Monsanto Corn Injured by Early Rootworm Feeding in Illinois -- Monsanto Co. corn has been overwhelmed in parts of Illinois by rootworms that hatched a month early, renewing concern that the bugs are becoming immune to the insecticide engineered into the crop. An "amazing" number of rootworms have emerged as adult beetles, the earliest start in at least 30 years, Michael Gray, an entomologist at the University of Illinois at Urbana, said today in an online journal. The insects "severely pruned" the roots of corn observed June 7 at a farm in Cass County, about 200 miles (322 kilometers) southwest of Chicago. The western corn rootworm is one of the most destructive pests and historically cost U.S. farmers about $1 billion a year in damages and chemical pesticides before crops with built-in insecticide were developed. Corn fields in four states were overrun with the bugs last year, incidents that the Environmental Protection Agency suspects is a sign of increasing resistance to the insecticide. The damaged fields in Illinois have been planted with corn continuously for at least 10 years, including six consecutive years with corn engineered to produce the Cry3Bb1 protein from Bacillus thuringiensis, or Bt, a natural insecticide, Gray said. "Under these conditions, the selection pressure for resistance development is markedly increased," he said.

In Defense of Genetically Modified Crops - Genetically modified Bt crops get a pretty bad rap. The pest-killing Bacillus thuringiensis (Bt) bacteria protein these plants are bioengineered to make has been accused of harming monarch butterflies, honey bees, rats, and showing up in the blood of pregnant women. Just one problem: None of that is true. (Click on any of those links to see a scientific refutation of each claim.) Seven independent experts in genetically modified crops I spoke to all confirmed that the science shows Bt crops to be safer than their alternative: noxious chemical insecticides. In Europe—where suspicions over GM crops run even deeper than in the United States—the European Food Safety Authority just rejected a French ban on Bt corn, saying "there is no specific scientific evidence, in terms of risk to human and animal health or the environment." A comprehensive report on 10 years of European Union-funded research, comprising 50 research projects, drew the same conclusions about Bt safety.   There are more scientific papers and reports backing the relative safety of Bt than PDF pages your browser can probably handle, which raises this question: How did the gulf between public perception and scientific evidence of Bt safety get so yawningly wide? The answer might be the very people who push GM the hardest—the agricultural industry. Suing a farmer for patent infringement is just one example of how Monsanto bullies its way into crop fields and courtrooms in pursuit of profit.

Disproven In Real Time - “Mother Jones” sometimes prints real pieces on food. But as part of the liberal media, it feels compelled to give the pro-corporate agriculture party line “equal time” (that is, to add to the overwhelming pro-corporate preponderance). Sure enough, at the exact moment MJ’s hack was touting the “reduced pesticide use” lie for Bt crops, we have the results of India’s recent conference reviewing Bt cotton’s history at the ten year anniversary of its full commercial deployment.  And even its pro-GM participants conceded that over the longer run (the 10+ years of the massive, uncontrolled experiment) pesticide use has gone back up to exceed the pre-Bt status quo. The macro data shows that pesticide consumption in different states has not declined but is either the same or is on the increase in different states except in the case of Andhra Pradesh. Several micro-studies however show that pesticide use has decreased especially for bollworm control initially, while it is on the rise again now, for other pests as well as bollworm including newer cocktails of toxic chemicals… On pesticide consumption data, some micro-studies seem to indicate pesticide use reduction initially, with use on sucking pests and other pests increasing, with per acre pesticide usage increasing in the past and a dangerous cocktail of pesticides on the rise, while others indicate a steady increase. However, official data on pesticide consumption in India does not reflect any decline, except in Andhra Pradesh, where large-scale adoption of Non-Pesticide Management (NPM) is being followed.

Corn prices surge as crops begin to droop in hot, dry weather; metals, energy products mixed -The price of corn jumped 3.5 percent Monday as crops have begun drooping under a blanket of hot weather across the Midwest. The blistering weather has sent temperatures above normal in parts of several states, including Indiana, Illinois, Ohio, Kansas, Nebraska and Iowa. Recent U.S. Agriculture Department reports have shown deteriorating conditions in the corn crop. About 66 percent of the crop was rated in good-to-excellent condition for the week that ended June 10. That compared with 72 percent the previous week. Traders questioned whether dry conditions would erode the quality of the crop and lead to a smaller harvest than has been expected. If there isn't sufficient rainfall soon, yields could fall below 160 bushels per acre, predicted Mike Zuzolo, president of Global Commodity Analytics. That compares with the U.S. Agriculture Department's recent forecast of 166 bushels per acre. 

Agricultural Phosphorus Shortage Made Worse By Biofuels? - The depletion of world rock phosphate reserves will restrict the amount of food that can be grown across the world, a situation that can only be compounded by the production of biofuels, including the potential large-scale generation of biodiesel from algae. The world population has risen to its present number of 7 billion in consequence of cheap fertilizers, pesticides and energy sources, particularly oil. Almost all modern farming has been engineered to depend on phosphate fertilizers, and those made from natural gas, e.g. ammonium nitrate, and on oil to run farm machinery and to distribute the final produce. A peak in worldwide production of rock phosphate is expected by 2030,1 which lends fears over how much food the world will be able to grow in the future, against a rising number of mouths to feed. Consensus of opinion is that we are close to the peak in world oil production too. Phosphorus is an essential element in all living things, along with nitrogen and potassium. These are known collectively as, P, N, K, to describe micronutrients that drive growth in all plants and animal species, including humans. Global demand for phosphate rock is predicted to rise at 2.3% per year, but this is likely to increase in order to produce crops for biofuel production. As a rider to this, if the transition is made to cellulosic ethanol production, more phosphorus will be required still since there is less of the plant (the "chaff") available to return as plant rubble after the harvest, which is a traditional and natural provider of K and P to the soil.

Lone Star Tick Bites Linked With Meat Allergy - Ticks might spread more than just Lyme Disease or Rocky Mountain spotted fever -- they may also be responsible for an allergy to meat, according to new research. ABC News reported on a possible link between bites from the lone star tick -- found throughout the U.S. -- and an allergy to meat.  The research comes from University of Virginia scientists, who found that some people who are bitten by the tick develop an allergic reaction to meat, in the form of itchy hives and even anaphylactic shock, about three to six hours after eating the food, according to ABC News.  "It's hard to prove," researcher Dr. Scott Commins, an assistant professor of medicine at UVA, told ABC News. "We're still searching for the mechanism." CNN reported that more than 1,500 people have so far been affected by this strange meat allergy, called galactose-alpha-1,3-galactose, or alpha-gal. "Perhaps there is an organism in the tick's saliva that makes a person allergic to the alpha-gal sugar in mammalian meat,"

Forbes Still Publishing Heartland’s Climate Nonsense - A recent Forbes column alleges that federal scientists are “doctoring” temperature data to fabricate a warming trend, after the National Oceanic and Atmospheric Administration announced that the last 12-month period was the warmest on record for the continental U.S. But what the column paints as a nefarious conspiracy is actually just proper science — NOAA painstakingly applies peer-reviewed adjustments to account for errors and gaps in the raw data from thousands of temperature stations across the country. The resulting temperature record has been independently evaluated and corroborated. The column is by James Taylor of the Heartland Institute, the libertarian group that recently made headlines with a short-lived billboard campaign tastelessly invoking the Unabomber. This is not the first time Taylor has used his platform at Forbes to  malign scientists and spread bad information about climate research.

Study predicts more hot spells in Southern California - UCLA researchers say the number of days topping 95 degrees each year will jump by as much as five times. The study could help local governments prepare for extreme temperatures and reduce risk to residents, L.A. Mayor Antonio Villaraigosa says. By the middle of the century, the number of days with temperatures above 95 degrees each year will triple in downtown Los Angeles, quadruple in portions of the San Fernando Valley and even jump five-fold in a portion of the High Desert in L.A. County, according to a new UCLA climate change study. The study, released Thursday, is the first to model the Southland's complex geography of meandering coastlines, mountain ranges and dense urban centers in high enough resolution to predict temperatures down to the level of micro climate zones, each measuring 2 1/4 square miles. The projections are for 2041 to 2060. Not only will the number of hot days increase, but the study found that the hottest of those days will break records, said Alex Hall, lead researcher on the study by UCLA's Institute of the Environment and Sustainability. The record for downtown Los Angeles is 113 degrees, set Sept. 27, 2010, when the Department of Water and Power electricity demand reached a historic peak of 6,177 megawatts.

When the rivers run dry -- the review - Fred Pearce is an English journalist who's been covering water issues for 20+ years. I read the second edition of When the rivers run dry: Water -- the defining crisis of the twenty-first century several months ago. The 320pp book -- one of the best general overviews of water problems that I've read [1] -- is organized into 10 sections with 34 short chapters. Each chapter describes how "a river runs dry" (abundance ends) in some part of the world. Here are some ideas I noted and thoughts I had while reading:

  • Small-scale farmers and fishermen who cannot make a living when water is directed to larger and more powerful groups will not only be unemployed -- they can turn to violence.
  • The "risk-free" living of Indian farmers who use subsidized electricity to pump water that's sold at market prices to dyeing manufacturers (polluters) is an appalling example of unintended consequences. The same can be said of the "confident" engineers who sank so many wells into arsenic-laced groundwater in Bangladesh, contributing to the (ongoing) poisoning of millions.
  • The rise of our modern consumptive lifestyle since the Industrial Revolution is not just based on mining (and burning) fossil fuels, but mining (and using) fossil water. Neither trend is sustainable in terms of growth, consumption or the environment, and I doubt that human ingenuity will overcome the damages that come from these consumptions, either to maintain our own quality of life or restore the ecosystems that make that quality of life possible.

Africa’s Hidden Water Wealth - FOR a continent where more than 300 million people lack access to safe drinking water, Africa is sitting on a lot of it.  The journal Environmental Research Letters recently published a set of maps of groundwater resources in Africa, the results of two years of research led by the British Geological Survey and financed by the British Department for International Development. The research showed that in Africa the volume of water naturally stored underground within the cracks and pores of rocks is much larger (possibly 20 times more) than the 8,000 cubic miles of water visible in lakes and rivers. This water holds enormous potential to help people and nations move out of poverty, produce more food and better adapt to climate change. But it also could lead to tensions between neighboring countries.  At least 45 transboundary aquifers have been identified in Africa so far, and competition sometimes leads to serious tensions. However, since groundwater moves very slowly (usually less than three feet per day), shared aquifers should be seen as vehicles for cooperation, rather than competition, and identifying and characterizing the aquifers is the first step.

Global warming worse than it appears: Nobel Prize laureate - (Xinhua) -- Carlo Rubbia, who shared the 1984 Nobel Prize in physics, says global warming is a much bigger problem than most people realize. "My message is that the situation is much worse than one sees and believes," Rubbia, an Italian particle physicist and inventor, told Xinhua in an interview on the sidelines of the U.N. Conference on Sustainable Development (Rio+20 Earth Summit). Rubbia mentioned two "contradictory phenomena" -- global warming and the aerosol masking effect which effectively offset the effects of the former. Otherwise, the temperature of the Earth would have increased to about three degrees centigrade by now, he said. "The man in the street does not realize the effects of climate change," because in the last 10 years, the temperature did not increase substantially. So "people feel the pressure of global warming is not a reality," he said.

Death Spiral Watch: Arctic Sea Ice Takes A Nosedive - The melting season is well underway now and in the last two weeks sea ice has been disappearing so fast that 2012 is leading all other years on practically all sea ice extent and area graphs. Take for instance the top graph I’ve made, based on Cryosphere Today sea ice area data. That looks pretty spectacular, doesn’t it? Sea ice area has never been so low for this date in the satellite record, not even close to it. 2012 has over half a million of square kilometres less ice than record minimum years 2007 and 2011. There was a distinct possibility this would happen, although I didn’t expect it to happen quite this early. But now that it has happened, it’s not difficult to see what the causes are. First of all, the extra ice in the Bering Sea that caused the late maximum, was wafer-thin and so has now virtually disappeared (I compared this year’s situation with previous years in this post on the ASI blog). All the easy ice is as gone as the easy oil. Second, that vulnerability on the Siberian side of the Arctic is becoming ever more visible, with the Northern Sea Route possibly opening up for commercial shipping very early this year. Here’s a comparison to previous years for the western part of the Northern Sea Route (the eastern side doesn’t look so great either):

Global warming: The vanishing north | The Economist - NOW that summer is here, the Arctic is crowded with life. Phytoplankton are blooming in its chilly seas. Fish, birds and whales are gorging on them. Millions of migratory geese are in their northern breeding grounds. And the area is teeming with scientists, performing a new Arctic ritual. Between now and early September, when the polar pack ice shrivels to its summer minimum, they will pore over the daily sea ice reports of America’s National Snow and Ice Data Centre. Its satellite data will show that the ice has shrunk far below the long-term average. This is no anomaly: since the 1970s the sea ice has retreated by around 12% each decade. Last year the summer minimum was 4.33m square km (1.67m square miles)—almost half the average for the 1960s.  The Arctic’s glaciers, including those of Greenland’s vast ice cap, are retreating. The land is thawing: the area covered by snow in June is roughly a fifth less than in the 1960s. The permafrost is shrinking. Alien plants, birds, fish and animals are creeping north: Atlantic mackerel, haddock and cod are coming up in Arctic nets. Some Arctic species will probably die out. Perhaps not since the 19th-century clearance of America’s forests has the world seen such a spectacular environmental change. It is a stunning illustration of global warming, the cause of the melt. It also contains grave warnings of its dangers. The world would be mad to ignore them.

The melting north | The Economist: The Arctic is one of the world’s least explored and last wild places. Even the names of its seas and rivers are unfamiliar, though many are vast. Siberia’s Yenisey and Lena each carries more water to the sea than the Mississippi or the Nile. Greenland, the world’s biggest island, is six times the size of Germany. Yet it has a population of just 57,000, mostly Inuit scattered in tiny coastal settlements. In the whole of the Arctic—roughly defined as the Arctic Circle and a narrow margin to the south (see map)—there are barely 4m people, around half of whom live in a few cheerless post-Soviet cities such as Murmansk and Magadan. In most of the rest, including much of Siberia, northern Alaska, northern Canada, Greenland and northern Scandinavia, there is hardly anyone. Yet the region is anything but inviolate. Fast forward A heat map of the world, colour-coded for temperature change, shows the Arctic in sizzling maroon. Since 1951 it has warmed roughly twice as much as the global average. In that period the temperature in Greenland has gone up by 1.5°C, compared with around 0.7°C globally. This disparity is expected to continue. A 2°C increase in global temperatures—which appears inevitable as greenhouse-gas emissions soar—would mean Arctic warming of 3-6°C. Almost all Arctic glaciers have receded. The area of Arctic land covered by snow in early summer has shrunk by almost a fifth since 1966. But it is the Arctic Ocean that is most changed. In the 1970s, 80s and 90s the minimum extent of polar pack ice fell by around 8% per decade. Then, in 2007, the sea ice crashed, melting to a summer minimum of 4.3m sq km (1.7m square miles), close to half the average for the 1960s and 24% below the previous minimum, set in 2005. This left the north-west passage, a sea lane through Canada’s 36,000-island Arctic Archipelago, ice-free for the first time in memory. Scientists, scrambling to explain this, found that in 2007 every natural variation, including warm weather, clear skies and warm currents, had lined up to reinforce the seasonal melt. But last year there was no such remarkable coincidence: it was as normal as the Arctic gets these days. And the sea ice still shrank to almost the same extent.

The science: Uncovering an ocean | The Economist: The melting Arctic is the main subject of discussion in Ny-Alesund, and evident. Your correspondent visited in late winter, yet the fjord was unfrozen. The glacier at its head is rapidly retreating. How unusual is this? Monitoring sea ice is a fairly recent activity. It began seriously in the 1950s, from aboard nuclear submarines. Satellite monitoring started in 1979. Since then the summer sea ice has shrunk by 12% a decade. That is consistent with the trend predicted by climate-change models over the past three decades, an indication that their mathematical simulations of global warming are roughly right. Using Viking epics, whaling and pollen records, log books, the debris shed by melted ice rafts, diatoms (silicon-armoured algae found in marine sediments), ice cores and tree rings, scientists have constructed a record of the Arctic past which suggests that the summer sea ice is at its lowest level for at least 2,000 years. Six of the hottest years on record—going back to 1880—have occurred since 2004. According to the IPCC, the last time the polar regions were significantly warmer was about 125,000 years ago.This transformation is in fact happening faster than anyone had predicted. According to an authoritative 2011 assessment for the Arctic Council, “it is now becoming very clear that the cryosphere is changing rapidly and that neither observations nor models are able to tell the full story.”

Will Arctic Sea Ice Reach Record Low This Year? - Recent years have brought unprecedented melting to Arctic sea ice, the white cap that covers the far north. Now, months before the sea ice reaches its annual minimum extent, this summer looks likely to follow suit, bringing unusually ice-free waters. Satellite observations analyzed by the U.S. National Snow and Ice Data Center show the extent of the sea ice hovering below the baseline, the average between 1979 and 2000, for most of the spring and dipping particularly low in June. "It definitely portends a low-ice year, whether it means it will go below 2007 (the record minimum in September), it is too early to tell," Meier said.

Does Arctic Amplification Fuel Extreme Weather in Mid-Latitudes? - YouTube - The "Arctic Paradox" was coined during recent winters when speculations arose that the dramatic changes in the Arctic may be linked to severe snowstorms and cold temperatures in mid-latitudes, particularly along the U.S. east coast and in Europe. Recent studies have illuminated these linkages. Evidence is presented for a physical mechanism connecting Arctic Amplification -- the enhanced warming in high northern latitudes relative to the northern hemisphere -- with the frequency and intensity of several types of extreme weather events in mid-latitudes, such as droughts, floods, heat waves, and cold spells.

The Great Thaw - In the past few decades, scientists have discovered that parts of Antarctica have been warming faster than anywhere else on Earth. Icebergs appear to break away more frequently (though we don’t know for sure, since we haven’t known the continent long enough to make a fair comparison). On the northernmost and hence warmest part of the continent — the Antarctic Peninsula stretching toward the southern tip of South America — there is almost a perceptible sense of change: the drip, drip, drip of a freezer that is beginning to defrost. Entire ice shelves there have shattered. Rather than regard Antarctica as robust and mighty, we have begun to see it as a pristine but fragile wilderness in urgent need of human protection.  Which is the true face of Antarctica? Is it that “awful place” that took the lives of Scott and his men? Or is it a vulnerable place that needs our help?  First the facts. Antarctica is the highest, driest, windiest continent on Earth. Of course it is also the coldest. A few Russian souls wintering there in 1983 recorded the lowest air temperature ever experienced by humans on our planet: minus 89.2° Celsius — so cold that steel can shatter like glass, and diesel fuel can be cut with a chain saw. Even at “normal” Antarctic temperatures, in the minus 60s, every scrap of skin has to be protected against exposure to the air for even for an instant.

The Importance of Seagrass in Removing Carbon from the Atmosphere - Humanity is currently in the middle of a war with an invisible enemy, CO2; and unfortunately CO2 is winning. According to the International Energy Agency (IEA) CO2 emissions hit a record high in 2011, despite governments (admittedly feeble) attempts to reduce carbon emissions. China led the way with carbon emissions, but surprisingly Fatih Birol, the IEA’s chief economist, is pleased with China’s 10 percent increase in emissions, stating that it could have been a lot worse. “What China has done over such a short period of time to improve energy efficiency and deploy clean energy is already paying major dividends to the global environment.” As carbon emissions are released by human activities, so nature is actually reducing the CO2 levels in the atmosphere. According to the US Environmental Protection Agency, in 2010 the US emitted 5.7 billion tonnes of CO2 into the atmosphere, whilst at the same time US forests and farms removed 1.1 billion tonnes, about 18 percent, from the atmosphere. The ocean is actually the largest carbon sink, sequestering about 25 percent of global carbon emissions, and whilst seagrass covers less than one percent of the ocean floor, it accounts for10 percent of the carbon trapped in the ocean each year

Are we moving toward a fact-free future? - Psychologist Daniel Kahneman likes to pose the following problem to audiences to illustrate our habitual modes of thinking:  A bat and a ball cost $1.10 together and the bat costs one dollar more than the ball. How much does the ball cost? It turns out that about 50 percent of students at the Massachusetts Institute of Technology got the answer wrong. The proportion reached as high as 90 percent at other unnamed universities. Okay, now that you've had time to reflect on the answer, you'll realize that your instinct was probably to answer 10 cents. But, of course, that's wrong. And, all you have to do is some elementary math to realize it's wrong, and then arrive at the correct answer: The ball costs 5 cents. What's in operation here are two systems of interpreting the world, one associative and one logical, often referred to in psychology as System 1 and System 2, respectively. System 1 picks up the numbers $1.10 and $1 and makes an incorrect leap that the ball costs 10 cents. System 2 does the math and then corrects the error. It's something that happens every day in our lives. And, this brings me to my topic. Issues such as climate change and peak oil seem so abstract to most people that they do not see them as pressing issues that require a thorough analysis and immediate action. This is true because the effects are not immediately impinging on them or, at least, they unable to connect what effects there are to themselves. And, the usual fact-filled analysis that is often thrown at them therefore doesn't interest them much.

Energy Etch A Sketch - As governor of Massachusetts, Mitt Romney endorsed an aggressive program to reduce the state’s greenhouse gas emissions, pushed to close old coal-fired power plants and embraced wind and solar power. Then came his bids for the Republican presidential nomination, first in 2008 and now in 2012. On climate change as on other issues, he has transformed himself, bit by reactionary bit. Today he is a proclaimed skeptic on global warming, a champion of oil and other fossil fuels, a critic of federal efforts to develop cleaner energy sources and a sworn enemy of the Environmental Protection Agency. Mr. Romney has plainly decided that satisfying his party’s antiregulatory base is essential to his political future. But the policies he espouses would be devastating for the country and the planet. If there are doubts on that point, the most recent findings from the International Energy Agency should dispel them: the agency reports an alarming one-year increase in global greenhouse gas emissions, largely because of increasing coal use around the world. The agency also said that keeping global temperatures below a dangerous threshold is “still within reach” if nations aggressively reduce fossil-fuel consumption while nurturing low-carbon alternatives. And where is Mr. Romney on that? Nowhere. The man who once worried about climate-driven sea-level rise in poor countries like Bangladesh now says things like “My view is that we don’t know what’s causing climate change on this planet,” as if mainstream science were wrong and humans had nothing to do with it.

In Rising Use of Air-Conditioning, Hard Choices - Air-conditioning sales are growing 20 percent a year in China and India, as middle classes grow, units become more affordable and temperatures rise with climate change. The potential cooling demands of upwardly mobile Mumbai, India, alone have been estimated to be a quarter of those of the United States.  Air-conditioning gases are regulated primarily though a 1987 treaty called the Montreal Protocol, created to protect the ozone layer. It has reduced damage to that vital shield, which blocks cancer-causing ultraviolet rays, by mandating the use of progressively more benign gases. The oldest CFC coolants, which are highly damaging to the ozone layer, have been largely eliminated from use; and the newest ones, used widely in industrialized nations, have little or no effect on it.  But these gases have an impact the ozone treaty largely ignores. Pound for pound, they contribute to global warming thousands of times more than does carbon dioxide, the standard greenhouse gas.  The leading scientists in the field have just calculated that if all the equipment entering the world market uses the newest gases currently employed in air-conditioners, up to 27 percent of all global warming will be attributable to those gases by 2050.

A Rio Report Card - One of the world’s pre-eminent scientific publications, Nature, has just issued a scathing report card in advance of next week’s Rio+20 summit on sustainable development. The grades for implementation of the three great treaties signed at the first Rio Earth Summit in 1992 were as follows: Climate Change – F; Biological Diversity – F; and Combating Desertification – F. Can humanity still avoid getting itself expelled? We have known for at least a generation that the world needs a course correction. Instead of powering the world economy with fossil fuels, we need to mobilize much greater use of low-carbon alternatives such as wind, solar, and geothermal power. Instead of hunting, fishing, and clearing land without regard for the impact on other species, we need to pace our agricultural production, fishing, and logging in line with the environment’s carrying capacity. Instead of leaving the world’s most vulnerable people without access to family planning, education, and basic health care, we need to end extreme poverty and reduce the soaring fertility rates that persist in the poorest parts of the world. In short, we need to recognize that with seven billion people today, and nine billion by mid-century, all inter-connected in a high-tech, energy-intensive global economy, our collective capacity to destroy the planet’s life-support systems is unprecedented. Yet the consequences of our individual actions are typically so far removed from our daily awareness that we can go right over the cliff without even knowing it.

As Rio summit commences, Americans see environment deteriorating - On the eve of a major gathering to discuss the state of the planet, a Washington Post poll shows that most Americans think the world’s natural environment has deteriorated over the past decade, and more than six in 10 say humans are making the problem worse. Leaders from more than 130 nations are now meeting in Rio de Janeiro for the high-level session of the U.N. Conference on Sustainable Development, also known as the Rio+20 Earth Summit. The meeting, which happens once a decade, aims to identify how to achieve economic growth without depleting the planet’s natural resources.  Negotiators produced a final text Tuesday for heads of state to vote on this week, calling for a new emphasis on the economic value of the natural world, although it came under intense criticism from many civil society groups as being weak and lacking concrete goals and timetables. Perhaps more significantly, two dozen major firms made new environmental commitments Monday at the conference. Coca-Cola pledged to develop plans to protect the water sources for its 200 bottling plants worldwide, while Dow Chemical said it will assess the economic value it gets from the ecosystems connected to its new bioplastics plant in Brazil.

Diplomats agree on "weak" text for Rio+20 summit - - Diplomats from over 190 countries agreed on a draft text on green global development on Tuesday to be approved this week at a summit in Rio de Janeiro, but environmentalists complained the agreement was too weak. The summit, known as Rio+20, was supposed to hammer out aspirational, rather than mandatory sustainable development goals across core areas like food security, water and energy, but the draft text agreed upon by diplomats failed to define those goals or give clear timetables toward setting them. It is "telling that nobody in that room adopting the text was happy. That's how weak it is," the European Union's climate commissioner Connie Hedegaard said on social network Twitter. The text "has too much 'take note' and 'reaffirm' and too little 'decide' and 'commit'. (The) big task now for U.N. nations to follow up" on this, she added. Expectations were low for the summit because politicians' attention is more focused on the euro zone crisis, a presidential election in the United States and turmoil in the Middle East than on the environment.

Dark Ages Redux: American Politics and the End of the Enlightenment - We are witnessing an epochal shift in our socio-political world. We are de-evolving, hurtling headlong into a past that was defined by serfs and lords; by necromancy and superstition; by policies based on fiat, not facts. Much of what has made the modern world in general, and the United States in particular, a free and prosperous society comes directly from insights that arose during the Enlightenment. Too bad we’re chucking it all out and returning to the Dark Ages. Literally.  As Stephen Colbert so aptly put it: if your science gives you results you don't like, pass a law saying that the result is illegal. Problem solved. Except it isn’t.  Wishing reality away, doesn’t make it go away.  Pretending that the unreal is real doesn’t make it real.  And the descent into the Dark Ages is marked by more than global warming. Take austerity budgets. There is an extensive historical record showing that implementing austerity measures in an economic slowdown is counter productive. And this data is backed up by current experience in Europe, where austerity measures have been disastrous.   So the data is telling us austerity during a jobs crisis hasn’t worked in the past and isn’t working now.  What to do?  Pass an austerity budget, of course.  Welcome to the Dark Ages.  The litany of ignorance goes on and on. Teach Creationism.  Teach the “controversy” on climate science and intelligent design.  Declare deregulation – which was a primary cause of the 2008 economic collapse – to be the solution to it. Preach trickle down economics, even after it has failed every time it’s been adopted; even as we watch wealth rocket up the income brackets.  What’s next?  Give the flat-earthers a say.  Oh hell, why stop there. Let’s put Earth back in the center of the solar system where it belongs.

Four more years - George Monbiot's latest has this keeper: Political systems that were supposed to represent everyone now return governments of millionaires, financed by and acting on behalf of billionaires. It's funny 'cause it's true!  Oh wait, it's not funny.  Still true though.  And then there's this: You have only to see the way the United States has savaged the Earth summit's draft declaration to grasp the scale of this problem. The word "equitable", the US insists, must be cleansed from the text. So must any mention of the right to food, water, health, the rule of law, gender equality and women's empowerment. So must a clear target of preventing two degrees of global warming. So must a commitment to change "unsustainable consumption and production patterns", and to decouple economic growth from the use of natural resources. Most significantly, the US delegation demands the removal of many of the foundations agreed by a Republican president in Rio in 1992. In particular, it has set out to purge all mention of the core principle of that Earth summit: common but differentiated responsibilities.

How about a green recession? - The ecological limits that science has warned us about for decades are coming into view, and it's now possible to see how little room remains for growth. According to calculations by Vaclav Smil of the University of Manitoba, the human economy has already reduced the total weight of plant biomass on the Earth's surface by 45 per cent. About 25 per cent of each year's total plant growth, and a similar proportion of all fresh water flowing on the Earth's surface, is already being taken for human use. And if you could put all of our livestock and other domestic animals on a giant scale, they would weigh 25 times as much as the Earth's entire dwindling population of wild mammals.       Three years ago, a group of 29 scientists from seven countries published a paper in which they defined nine "planetary boundaries" within which humanity can "operate safely". If we cross those boundaries and don't pull back, they reasoned, there could be catastrophic ecological breakdown on a global scale. Given the uncertainties involved in any such projections, they proposed to set the limits not at the edge of the precipice but at some point this side of it, prudently leaving a modest "zone of uncertainty" as a buffer. They were able to attach numbers to seven of the nine boundaries that are not to be crossed:

Plastic Planet in english by Werner Boote - full 1hr35min - YouTube

40 years of energy consumption in the UK: where do we get our power from? - Sustainable energy experts Evo Energy and designers Epiphany have created a series of interactive graphics illustrating the changing face of energy consumption in the UK since 1970. The top panel breaks down the primary energy sources used to produce energy consumed in the UK. Beneath that are the same figures but for processed energy, i.e including electricity generated from primary sources. Three further graphics show consumption by sector, total UK consumption and changes in energy intensity. Follow the instructions on the visualisations to explore interactive content.

U.K.’s Trash Becomes Biofuel Treasure -- Efforts to turn waste into energy are increasing around world, and booming in the United Kingdom. Supermarkets especially are investing in biogas technologies, or at least shipping their waste to renewable energy plants, according to a Bloomberg report. Government subsidies and requirements play a part in encouraging the purchase of clean energy, but so do the hefty landfill taxes. The U.K. garbage tax, which was £64 (about US $100) per ton in April, increases by £8 every year. For the large supermarket chains, that fee adds up, as do their heavy energy bills. Executives agree that reducing energy costs is just good business, and that means renewable energy—and the government energy credits that go with it.

Solar Industry Has One Year Of Inventory, French Lobby Says – Makers of solar panels and cells have inventory representing about a year of sales, meaning that the industry will see further bankruptcies and consolidation, the head of France’s Renewable Energy Association said.  Production capacity in the photovoltaic industry is “about double the estimated market size, and inventories represent about one year of sales,” Jean-Louis Bal, the president of the lobby group, said today at a conference organized by L’Usine Nouvelle magazine in Paris. “There are a lot of manufacturers, including large Chinese players, which are in financial difficulties. There will be restructuring.”  Global demand for solar panels may climb to 32 gigawatts this year from 27 gigawatts in 2011, he said.

Japan Poised to Become Second-Biggest Market for Solar Power - Japan is poised to overtake Italy and become the world’s second-biggest market for solar power, as incentives starting July 1 propel sales. It could eventually top Germany, which holds the No. 1 spot. Industry Minister Yukio Edano on Monday set a price for solar electricity that is about triple what industrial users now pay for conventional power. That may drive at least $9.6 billion in new installations with 3.2 gigawatts of capacity, Bloomberg New Energy Finance forecast. That is about equal to the output of three atomic reactors. “The tariff is very attractive,” said Mina Sekiguchi, associate partner and head of energy and infrastructure at KPMG in Japan. “The rate reflects the government’s intention to set up many solar power stations very quickly.” Prime Minister Yoshihiko Noda’s effort to cut dependence on atomic energy, which provided about 30 percent of Japan’s power before the Fukushima nuclear meltdown in 2011, will help a solar industry suffering from incentive cuts across Europe. Under the new program, utilities will buy solar, biomass, wind, geothermal and hydro power. All costs will be passed on to consumers in surcharges, which the government estimates will average about ¥100 a month. 

World Solar Power Goes Parabolic – Gregor - From a very small base, and from a tiny position in world energy supply, the buildout of global solar power is starting to go parabolic. Last year, according to the just released BP Statistical Review (you must access the Excel workbook for solar data), global solar generation nearly doubled to reach 55.7 TWh (terrawatt hours). To put this power capacity in context, North America generated almost 100 times as much power in 2011 from all sources (coal, natural gas, hydro, nuclear, wind, solar), to reach 5204.5 TWh. By that measure, solar power capacity on a global basis can barely be detected, and is therefore a kind of joke, right? Uhm no, that would be wrong.As world nuclear power goes into retreat, because of its enormous expense, catastrophe-risk, and complexity, it is power generated by solar that offers easy time-to-completion benefits and project clarity, especially in the developing world. (Indeed, nuclear power again lost primary energy share last year, according to the BP Statistical Review). Moreover, as the world is no longer able to fund economic growth with oil, owing to flat global supply, the industrial economy continues to migrate towards the electrical grid. While this certainly means that coal fired power generation will dominate for the next decade, it’s also the case that a more robust powergrid will become the receptacle for solar power

The exponential growth in solar consumption - Gregor MacDonald, energy journalist and renewables guru, flagged up a really interesting piece of data from the latest BP Statistical Review this weekend. It comes in the shape of the following chart (mocked up by MacDonald) showing an exponential growth in global solar consumption since 2001:Much of the growth, it turns out, has come at the cost of nuclear power. Indeed, as MacDonald explains: As world nuclear power goes into retreat, because of its enormous expense, catastrophe-risk, and complexity, it is power generated by solar that offers easy time-to-completion benefits and project clarity, especially in the developing world. (Indeed, nuclear power again lost primary energy share last year, according to the BP Statistical Review. … Moreover, as the world is no longer able to fund economic growth with oil, owing to flat global supply, the industrial economy continues to migrate towards the electrical grid. While this certainly means that coal fired power generation will dominate for the next decade, it’s also the case that a more robust powergrid will become the receptacle for solar power. But could this also mark a singularity-type moment — as predicted by futurist and scientist Ray Kurzweil earlier this year — for solar too? MacDonald himself is not entirely sure about that. Nevertheless, he does acknowledge the significant role played by plummeting solar voltaic prices in facilitating the consumption burst:

If it's green and folds - GREENING the world economy is not going to come cheap. The International Energy Agency reckons that investment in low-carbon energy technologies will have to rise from an annual $165 billion in recent years to an eye-popping $750 billion each year by 2030 and $1.6 trillion per annum by 2050. HSBC, an investment bank, has even higher estimates. It sees $10 trillion being spent during this decade alone. As these green technologies mature and become less risky, HSBC points out, we should expect them to be financed mostly by bonds not equity. (The historical split is 60% bonds and 40% equity).  The bank commissioned a report by the Climate Bonds Initiative, a non-profit organisation trying to encourage green investment. The results showed that the market for such “climate bonds” is surprisingly well-developed. The market includes $174 billion of climate-themed bonds issued since 2005 (the year the Kyoto Protocol came into force). An additional $577 billion of bonds are more or less closely related to green projects. The vast majority (82%) are issued by corporations, with financial institutions (including development banks) making up most of the remainder.

The Rage Of A Dying Dinosaur: Coal’s Decline In The U.S. - The coal industry, long accustomed to being the Tyrannosaurus Rex of American politics, is on the ropes, battered by forces outside its control, but angry enough to damage people while it searches for an escape route. Long term use of coal in the US is declining: “The share of U.S. electricity that comes from coal is forecast to fall below 40% for the year, its lowest level since World War II. Four years ago, it was 50%. By the end of this decade, it is likely to be near 30%.” Coal’s decline is widely attributed to three reasons, which I’ve cleverly named EPA — Environmental Protection Agency, Price, Activists. One is far less important than the other two. Congressional Republicans blame the EPA, but every time I’ve looked at “EPA regulations force this coal plant shutdown” cries, I’ve found a decrepit old plant shut down most months because maintenance costs are too high. EPA regulations are a relatively minor factor in coal plant shutdowns.

30.3% -- That’s the percentage of global energy consumption that is provided by coal, according to BP’s just-released statistical energy review (PDF) for 2012. That’s the biggest share coal—the largest single contributor to air pollution and carbon emissions—has had globally since 1969. Last year coal consumption grew by 5.4%, making it the only fossil fuel to record above-average growth. (For comparison’s sake, non-hydro renewable sources like wind and solar accounted for just 2.1% of global energy consumption last year, though it grew by an above-average 17.7%.) All together global primary energy consumption grew by 2.5% last year, with much of that growth coming from developing nations. The fact that coal globally is doing better than it has in decades is likely to come as a surprise to many in the U.S., whether a supposed “war on coal” is being waged by environmentalists and the Obama Administration and where natural gas from shale deposits has been supplanting coal for many utilities. Indeed, coal’s share of U.S. electricity fell to 34% in March, the lowest level since at least January 1973. (In March natural gas provided 30% of U.S. electricity.) But coal’s loss in the U.S. is being more than made up in developing nations like China, where coal consumption grew by nearly 10% last year.

Major Design Flaws Uncovered at Calif. Nuclear Plant; Watchdog Groups Petition for Closure - On Sunday, Federal investigators revealed the findings of a months long investigation into a radiation leak discovered at California's San Onofre nuclear power plant in January. Officials maintain that major design flaws in new equipment were the leading cause of the malfunction. Nuclear watchdog groups petitioned the Nuclear Regulatory Commission Monday morning to keep the reactors shut down while a comprehensive safety review is conducted. The ocean-side twin-reactor plant has been idle since January, after a tube break in one of four steam generators released traces of radiation. The federal regulators at the Nuclear Regulatory Commission have concluded that design flaws are the cause of excessive wear in tubing that carries radioactive water through the virtually brand new equipment. Plant operators at Southern California Edison could face penalties stemming from the investigation; however, the company has been preparing to submit a proposal to the NRC to restart one or both of the reactors in the near future. Friends of the Earth has been working to stall the restart, and has now filed a legal petition to require the NRC to keep the reactors shut down until and unless their operator obtains a 'license amendment'.

Computer Design Flaw Does in California Nuclear Power Plant - The Associated Press reported on Monday that a design flaw traced to an incorrect computer analysis will keep Southern California Edison’s controversial San Onofre nuclear power plant offline for some time to come. San Onofre, which is Southern California’s only nuclear plant, produces enough power to serve about 1.4 million households. Back in January, “a leak from a tube at one unit [Unit 3] released a small amount of radiation”, which caused the plant’s operator to shut the reactor down, reported this LA Times story. The story went on to note that two days after the incident, during routine maintenance on the other unit, Unit 2, “nuclear regulation officials found extensive wear on tubes that carry radioactive water in a steam generator. The tubes were installed less than two years ago after they were delivered by the Japanese manufacturer of the generators, Mitsubishi Heavy Industries.” In 2009 and 2010, the plant’s four steam generators were replaced at a cost of $671 million, and were expected to last until 2022. According to the LA Times story, Nuclear Regulatory Commission officials found that, “two of the tubes showed more than 30% wall thinning, 69 had 20% thinning and more than 800 had 10% thinning.” Then in March, the NRC announced (pdf) that the San Onofre nuclear power plant would not be allowed to be restarted until the unusual wear on the steam generator tubes was understood and fixed, a follow on LA Times story reported.  The NRC stated in a news release that the wear at Unit 3 was caused by the tubes vibrating and rubbing against adjacent tubes and against support structures inside the steam generators, while at Unit 2 the tubes were rubbing against the support structures but not rubbing against adjacent tubes. At the time, the NRC stated that it did not know why this was happening.

Government ignored U.S. radiation monitoring data in days after 3/11 - Even as thousands of residents pondered the implications of the nuclear disaster in Fukushima Prefecture last year, Japanese government officials took little notice of up-to-the-minute high radiation measurements provided by the U.S. Energy Department. The Energy Department used its Aerial Monitoring System (AMS) between March 17 and 19, 2011, and compiled a detailed map of radiation levels on the basis of 40 hours of flight time over Fukushima Prefecture. The data was provided to Japanese government officials, but not released to the public. The map clearly shows an area of high radiation levels extending in a northwesterly direction from the crippled Fukushima plant.Thousands of Fukushima residents living near the plant, unaware of the danger they faced, evacuated in the direction of those high radiation areas. This is not the first time the Japanese government has been shown to be slow to respond to the unfolding disaster at the Fukushima facility following last year's Great East Japan Earthquake and tsunami. The central government also failed to quickly release forecasts of radiation spreading in Fukushima and beyond made by its System for Prediction of Environmental Emergency Dose Information (SPEEDI).

Due to International Pressure, Tepco Agrees to Start Removing Radioactive Fuel from Fukushima Fuel Pool a Year Early -- Tepco was going to wait until late 2013 to even begin to start addressing the greatest threat to humanity. There is some good news. Specifically – due to international pressure – Tepco has agreed to speed up the timetable.  As Reuters notes: Workers at the crippled Fukushima nuclear plant will begin removing fuel rods from a damaged reactors a year ahead of schedule, a government minister said Thursday, a move to address concerns about the risk of a new quake that could cause a further accident and scatter more radioactive debris.

After the goldrush – learning from US shale gas experience - Geological Consultant Arthur Berman explains to the ASPO 2012 conference his view that the "goid rush" period of shale gas in the US is over. As Art puts it "Once you start drilling shale wells you can never stop...shale plays are not a renaissance or a revolution, this is a retirement party. "  Video:

Collapse Now and Avoid the Rush - First, industrial society was only possible because our species briefly had access to an immense supply of cheap, highly concentrated fuel with a very high net energy—that is, the amount of energy needed to extract the fuel was only a very small fraction of the energy the fuel itself provided.  Starting in the 18th century, fossil fuels—first coal, then coal and petroleum, then coal, petroleum and natural gas—gave us that energy source. All three of these fossil fuels represent millions of years of stored sunlight, captured by the everyday miracle of photosynthesis and concentrated within the earth by geological processes that took place long before our species evolved.  They are nonrenewable over any time scale that matters to human beings, and we are using them up at astonishing rates.  Second, while it’s easy to suggest that we can simply replace fossil fuels with some other energy source and keep industrial civilization running along its present course, putting that comfortable notion into practice has turned out to be effectively impossible.  No other energy source available to our species combines the high net energy, high concentration, and great abundance that a replacement for fossil fuel would need. Those energy sources that are abundant (for example, solar energy) are diffuse and yield little net energy, while those that are highly concentrated (for example, fissionable uranium) are not abundant, and also have serious problems with net energy.

Landfills refusing sludge from fracking wells - Truckloads of mud from oil well fracturing are on an odyssey to find an unloading location. The companies hauling the mud are trying to dispose of the product and are looking at landfills as a potential dumping area, but most landfills, including the Pratt County Landfill, are saying ‘no’ to the mud. The problem with the mud is moisture. Fracking produces lots of mud with high water content. A drier mud might be accepted, but fracking byproducts are very wet. “That’s just one of the rules of the landfill. We just don’t take liquid,” said Dean Staab, director of Environmental Services for Pratt County. A rule of thumb for the landfill is if material is placed in a paint filter and fluid runs out it is too wet to put into the landfill, Staab said.

Experts find 30 trillion tons of toxic liquid injected into earth poisons ground water - Over the past several decades, U.S. industries have injected more than 30 trillion gallons of toxic liquid deep into the earth, using broad expanses of the nation’s geology as an invisible dumping ground. No company would be allowed to pour such dangerous chemicals into the rivers or onto the soil. But until recently, scientists and environmental officials have assumed that deep layers of rock beneath the earth would safely entomb the waste for millennia. There are growing signs they were mistaken. Records from disparate corners of the United States show that wells drilled to bury this waste deep beneath the ground have repeatedly leaked, sending dangerous chemicals and waste gurgling to the surface or, on occasion, seeping into shallow aquifers that store a significant portion of the nation’s drinking water. In 2010, contaminants from such a well bubbled up in a west Los Angeles dog park. Within the past three years, similar fountains of oil and gas drilling waste have appeared in Oklahoma and Louisiana. In South Florida, 20 of the nation’s most stringently regulated disposal wells failed in the early 1990s, releasing partly treated sewage into aquifers that may one day be needed to supply Miami’s drinking water. 

The Regulation Monster and the Confidence Fairy - Dean Baker -- Paul Krugman introduced the world to the "confidence fairy," the creature that proponents of austerity think will cause investment and growth because governments cut budget deficit. Only people with the right eyes, and a well-respected perch in policy making, are able to see the confidence fairy. In the same vein, we should also recognize the "regulation monster." The regulation monster is the creature that strangles businesses in bureaucratic paperwork and red tape so that they can't invest and hire people. The NYT had a great piece documenting the work of the regulation monster in western Pennsylvania. Those following Mitt Romney's presidential campaign or listening to Republicans in Congress have heard their complaints that President Obama's regulations are bottling up domestic energy production. These regulations are unnecessarily leaving the United States at the mercy of foreign oil producers, obstructing job growth and forcing us to pay more for energy.   Having heard these stories, Jonathan Weisman went to western Pennsylvania, which is at the center of the Marcellus Shale, in search of the regulation monster. While the piece includes comments from industry people who complain about regulation, the people who live in the area all report no evidence of any regulation whatsoever. They seem to believe that the industry gets away with pretty much whatever it wants.

Apache Corp Make the World's Largest Shale Gas Discovery in British Columbia - American oil and gas prospector Apache Corp stunned natural gas investors Thursday June 14, 2012 with a natural gas discovery announcement, the main point of which is, “ . . . . in terms of just resource, with the 1 well we drilled horizontal, we put 6 fracs on it. It’s going to go to 18 Bcf of gas, came on at 22 million a day, a tremendous resource.” That’s 22 million cubic feet a day, an estimate of 18 billion cubic feet from the well in its primary production.  One well, only one, in a shale formation.  For investors in natural gas this is a long term, low profit, produce all you can at the lowest possible price – problem.  Some folks swirling comments about Chesapeake would have the blame fall on one guy, but the facts are North America has a huge supply of natural gas and its gotten more huge last week.  The industry has just been knocked onto its heels; the next big profit period will be years, probably a couple decades away. For consumers natural gas has just become a very reliable source of fuel at historically low prices.  For those thinking about natural gas vehicles and other uses of natural gas, the potential for long-term supplies at good prices has improved dramatically.  In the meantime there will be economic growth, jobs and new products and services to distribute and use all this gas.  North America’s luck has just turned.

What Role for Natural Gas in Transportation? - Will natural gas ever catch on as an important transportation fuel? Yes, argues MIT Professor Christopher Knittel, in a new discussion paper for the Hamilton Project. Given the now-enormous spread between gasoline and natural gas prices, Knittel thinks that natural gas vehicles should become increasingly popular. Here, for example, are his calculations of the lifetime operating costs for various vehicles using gasoline or natural gas (click to enlarge, and be sure to read the caveat in the footnote):  As you would expect, the biggest potential savings accrue to the most fuel-guzzling vehicles, heavy-duty trucks in particular. Knittel does not believe, however, that the private market will exploit this potential as fast or extensively as it should. He thus proposes policies to accelerate refueling infrastructure build-out and to encourage natural gas vehicles. His ”steps to promote the use of natural gas vehicles and fuels” are subsidies and regulations. Regular readers will recall that I believe environmental taxes would be a better way of addressing environmental concerns and, in particular, of promoting natural gas over gasoline. Of course, that view hasn’t gained much traction among policymakers.

Canadian Oil Spills Raise Pipeline-Safety Worries - Three large Canadian oil spills over the past 30 days have increased concern over pipeline safety here, just as the government and the Canadian petroleum industry are trying to drum up support for a series of new pipeline projects. Enbridge Inc. said late Tuesday that one of its pipelines, carrying heavy oil-sands crude, spilled some 1,450 barrels in eastern Alberta earlier in the week. Earlier this month, Plains All American Pipeline spilled up to 3,000 barrels into a reservoir near the small resort town of Sundre, Alberta. And last month, Pace Oil spilled some 5,000 barrels from a well in a remote corner of northwestern Alberta. More pipelines cross the oil-rich province of Alberta than anywhere else in Canada, and the province's economy relies heavily on oil and natural-gas production. That has all helped to raise tolerance for minor spills among many residents. But amid a spate of big spills this year and last year, environmental groups have stepped up calls for more regulation. That has coincided with an effort by Canadian officials and the industry to push a series of ambitious new projects—from a proposed Enbridge pipeline that will take oil from Alberta to the Canadian west coast to a series of plans aimed at reversing or expanding pipeline flows, including a controversial proposed expansion of TransCanada Corp.'s TRP -2.18%Keystone pipeline in Canada and the U.S. The projects are being undertaken to redirect oil or gas to account for new production areas, particularly in the U.S.

Climate change: Cold comfort | The Economist - The Arctic is clearly melting. Its floating ice cap is shrinking and thinning and its glaciers are retreating. By the end of this century, maybe much sooner, there will be frequent Arctic summers with almost no sea ice at all. Why does this matter? For millennia man has been changing the landscape, hacking and burning forests and ploughing up grasslands.  Why should the melting Arctic, a product of man-made global warming, be any different?  For most people living there, it is not. Many welcome the changes. They certainly know what is happening. “No one in Greenland would think of climate change as a theory: it’s observation,” says Minik Rosing, a Greenlandic scientist. Yet many would prefer their winters a bit less chilly. They are also looking forward to the rich opportunities a warmer Arctic will open up in resource development, shipping and the service industries that will flourish around them. These new Arctic industries will not come about overnight and may well deliver less than their cheerleaders promise. Even as the ice recedes, the Arctic will remain extraordinarily cold, dark, remote, expensive and difficult to operate in. But Arctic oil could make a significant contribution to global supplies—maybe as much as 10% of the total. That will be of huge benefit to Arctic economies. So those greens who have set their hopes on the eco-attuned Inuit or Scandinavians taking a stand against Arctic warming are likely to be disappointed. The best hope is that Arctic governments will continue to develop the region as carefully and harmoniously as they have been doing in recent years.

Artic Drilling Vessels Get Military Protection - SUMMARY: The Coast Guard is establishing a temporary safety zone around the nineteen vessels associated with Arctic drilling as well as their lead towing vessels while those vessels are underway in the Puget Sound Captain of the Port Zone. The safety zone is necessary to ensure the safety of the maritime public and specified vessels while they transit and will do so by prohibiting any person or vessel from entering or remaining in the safety zone unless authorized by the Captain of the Port or a Designated Representative. DATES: This rule is effective with actual notice from June 7, 2012, until June 22, 2012. This rule is effective in the Code of Federal Regulations from June 22, 2012 through August 1, 2012.

On The Energy Cliff's Early Warning Signal - The XLE closed yesterday at 63 - only a buck above the June 1 lows. For the year, XLE is now down a whopping 8 bucks. And of course oil, which started the year at 103 and peaked at 110, has dropped to 78. Jefferies David Zervos offers some critical insight into the energy sector bloodbath in the last few months, which of course begs the question - what in the world is going on? Shouldn't all this accomodative policy by the Fed, ECB, SNB, BoE and BOJ be sending commodities to the moon? The BoJ has been implementing additional QE, the Swiss have been printing francs at a breakneck pace to hold the peg, the BoE just announced the ECTRF (Extended Collateral Term Repo Facility), and Ben just extended the twist for 6 more months; if the worlds' central banks are so easy, why is energy collapsing? And how can gold be unchanged YTD? The answer is straightforward - central banks are NOT being accomodative enough. These downward trends in the energy and commodity complex should be a warning sign to anyone with a "price stability" mandate. There is a hefty disinflation trend developing and given the amount of debt in the system - and the weakness of global aggregate demand - any signs of significant disinflation should be cause for grave concern. We cannot mix a lot of debt with a lot of deflation - that will be the end of us!! That is Irving Fisher 101!

BP global energy statistics: the world's oil production, reserves and energy consumption - BP have published the June 2012 edition of their Statistical Review of World Energy. Use the interactive visualisation below - created by Craig Bloodworth at the Information Lab - to explore key statistics by country, year and energy source. Select from the three tabs along the top of the graphic to browse different categories. Clicking on a country in any of the individual panels will highlight it in corresponding charts and bring up a statistical summary.

2012 Global Fuel Supply Still Flat  - May figures for global liquid fuel supply are out from OPEC and the IEA and they continue to show that global supply has increased very little since January (in contrast to the very strong increases in the second half of 2011).  See graph above. Other things being equal, we would expect this to lead to rising prices.  Instead, prices have been weak/falling as a result of Eurozone fears.  The fears about the eurozone are legitimate, but still, at present the global economy has got to be growing, if a little weaker than normal.  Only Europe is actually contracting at present and that mildly.  Thus, if the fears do not translate into much more pronounced global contraction in reality fairly soon, oil prices could jump up quite a bit.  On the other hand, of course, if Europe does turn into a full-blown financial crisis then they could fall further. There is a strong Schrodinger quality to the oil markets at present: prices are a superposition of the state in which Europe turns into a major global financial crisis, and the state in which it doesn't.  I wonder how long before the measurement is made? 

Saudi Arabia's Largest Oil Field Has Entered Inescapable Decline - There is a growing impression being given in the discussion of oil and natural gas supplies that the world is moving into a period where there will soon be such a plentiful sufficiency of crude that the US may consider exporting some of its production. But if one looks behind the headlines, and particularly at the current status of the largest oilfield contributing toward this rosy picture - the Ghawar field in Saudi Arabia - that optimism becomes more evidently built on a very transient set of data that, as this series of posts seeks to show, will not be sustainable for any significant period into the future. The three major oil producers (i.e. those producing more than 5 mbd each) are currently seeing surges in production as the world moves to an overall production of 90 mbd. The OPEC June Monthly Oil Market Report (MOMR) notes that this has brought Russia to 10.33 mbd in May, some 100 kbd over the same period in 2011; and Saudi Arabia is reported to have averaged 9.917 mbd in May, up 40 kbd over April. The United States is running at 6.236 Mbd of crude (from the EIA TWIP), while importing 9.117 mbd. The MOMR reports US oil supply at 9.66 mbd on average, but counts more than just crude in this value. The gain over the past year is around 600 kbd. It is interesting to note, in regard to OPEC production the continued difference between the volumes that OPEC reports from direct contact with the suppliers, and that when the numbers are obtained from “secondary sources.”

Qatar, Saudi Arabia conspire to topple Iraqi government: Maliki - Iraqi Prime Minister Nouri al-Maliki has accused Qatar and Saudi Arabia of hatching plots against his government to overthrow the political system of the country. “Toppling the (political) system of Iraq, not me, is their objective,” Maliki said in an interview with Lebanon-based al-Mayadeen satellite channel which was founded by journalists who left the al-Jazeera news channel.  The Iraqi premier noted that both Arab states are trying to topple his government through financing opposition groups, holding anti-government meetings and inducing that a “tribal system” is governing the country.

Venezuela Passes Saudis to Hold World’s Biggest Oil Reserves - Venezuela surpassed Saudi Arabia to become the world’s largest holder of proven oil reserves, a resource that President Hugo Chavez promises to tap if he gets re-elected in October. The South American country’s deposits were at 296.5 billion barrels at the end of last year, data from BP Plc (BP/) show. Saudi Arabia held 265.4 billion barrels, BP said yesterday in its annual Statistical Review of World Energy. The 2010 estimate for Venezuela increased from 211.2 billion in the previous report. "These reserves are quantified and certified by third parties and recognized by the entire world as being the biggest proven reserves of the world,” Venezuela’s Oil Minister Rafael Ramirez said today in Vienna. “We have always said that in the future the natural resources will become scarce and when the economy recovers and demand will come back then we will be one of the few countries able to respond to that.” Chavez wants to more than double the country’s oil- production capacity to 6 million barrels a day by 2019, according to a government plan released June 12. Ramirez has said oil prices need to be higher than $100 a barrel. The recent slump in crude is dangerous for producers, the oil minister said June 12 in Vienna, where the Organization of Petroleum Exporting Countries is meeting today to decide production quotas.

Is Barack Obama Morphing Into Dick Cheney? - Cheney concluded that the global supply of energy was not growing fast enough to satisfy rising world demand, and that securing control over the world’s remaining oil and natural gas supplies would therefore be an essential task for any state seeking to acquire or retain a paramount position globally.  He similarly grasped that a nation’s rise to prominence could be thwarted by being denied access to essential energy supplies.  As coal was to the architects of the British empire, oil was for Cheney -- a critical resource over which it would sometimes be necessary to go to war. More than any of his peers, Cheney articulated such views on the importance of energy to national wealth and power.  “Oil is unique in that it is so strategic in nature,” he told an audience at an industry conference in London in 1999. “We are not talking about soapflakes or leisurewear here.  Energy is truly fundamental to the world’s economy.  The Gulf War was a reflection of that reality.”

Chart of the week: a picture of world oil - Falling demand amid the eurozone crisis and increased production by Saudi Arabia have pushed down oil prices in recent weeks. But oil still averages over $100 a barrel for the past 18 months.  Oil is crucial to the world’s energy supply, representing a third of global energy consumption – the largest component. So who produces it, who uses it, who has it? And how do emerging markets compare to developed economies? Chart of the week takes a look. Last week saw the publication of BP’s World Statistical Review 2012, a highly-regarded industry overview. We have selected the top five oil consumers, producers and holders of proven reserves, a list that overlaps a fair bit, to give 11 countries. In that 11, there are three developed economies (US, Canada, Japan), six emerging markets (Brazil, Russia, India, China, Venezuela and Saudi Arabia), and two frontier markets (Iran and Iraq). As you can see in the chart, the US stands out as the top consumer, still way ahead of China. It also has significant oil production. But it is a relatively small bubble – that’s the size of its reserves. But look at the line that slants bottom left towards the top and right. That shows where production equals consumption. Any country below that line is consuming more than it produces; any country above it is producing more than it consumes. The US and Japan (a tiny dot on the x-axis) are unsurprisingly below the line. But so are three of the Brics – China, India and Brazil are all consuming more than they produce. As these three economies grow, so too should their oil consumption, pushing them further to the right. Only if they can ramp up production will they get closer to that diagonal line on the chart. Brazil, with its potentially enormous pre-salt reserves, is the best placed to achieve that.

China Defends Curbs on Rare Earths - China on Wednesday defended its curbs on rare earths mining and exports amid a World Trade Organization challenge brought by the United States, Europe and Japan. The government said its controls are meant to protect the environment and preserve dwindling resources and are in line with its WTO free-trade commitments. China accounts for most of the world’s production of rare earths, which are used in mobile phones and other high-tech products. Global manufacturers were alarmed when China announced it would limit exports while trying to build up its own industry to manufacture products that use rare earths. The United States, the European Union and Japan filed complaints in March with the World Trade Organization charging that China is limiting its export of rare earths, minerals that are vital to the production of high-tech goods. China accounts for more than 90 percent of global production of 17 rare earth minerals that are used to make goods including hybrid cars, weapons, flat-screen TVs, mobile phones, mercury-vapor lights, and camera lenses. China has cut export quotas while it tries to build up its own industry to manufacture lightweight magnets and other products made with rare earths. Senior U.S. administration officials have said Beijing’s export restrictions give Chinese companies an advantage by giving them access to more rare earths at a cheaper price, while forcing U.S. companies to manage with a smaller, more costly supply.

China Punches Back in Rare Earths Row, Claims Rising Scarcity Justifies Export Curbs – Yves Smith - The US, the EU, and Japan jointly filed a WTO case in 2012 against China over its export curbs, China looks more and more likely to gain from pressing its advantage. The US and other countries can’t ramp up production quickly, particularly given the environmental hazards involved. China is using its chokehold on supplies to reward companies that locate more higher-value-added manufacturing in China, allowing them to move up the skill chain. The latest salvo took place today, apparently in response to the March WTO lawsuit. The parties have met in late April as part of a formal dispute resolution process. If no agreement is reached within 60 days, the case will then go to a panel for a ruling. Given the timing, this move appears to signal that the negotiations are at an impasse (quelle surprise!) and China is taking its case public in case the talks fail. China is now claiming that its supplies are falling (peak rare earths, or at least in China). From the BBC: China has warned that the decline in its rare earth reserves in major mining areas is “accelerating”, as most of the original resources are depleted. In a policy paper, China’s cabinet blamed excessive exploitation and illegal mining for the decline… “After more than 50 years of excessive mining, China’s rare earth reserves have kept declining and the years of guaranteed rare earth supply have been reducing,” China’s cabinet said in the paper on the rare earth industry published by the official Xinhua news agency. China is also talking up the environmental damage associated with rare earths production. Since China has been remarkably unconcerned about this issue on numerous other fronts, this sort of talk seems a bit disingenuous.

China property price falls ease - See above today’s May China property price data from the National Bureau of Statistics. The number of cities registering price falls on  a yearly basis increased but on a monthly basis increases rose in all three dwelling categories. It’s clear that, for the time being at least, price falls are moderating (at least on this incredibly broad data).

Worlds tallest building will be built in China, over 90 days – video - Broad Sustainable Building (BSB) is an innovative Chinese architectural firm whose mission is to erect "medium-cost, super-saving utility buildings and to promote a futuristic urban lifestyle." They are planning to build the world's tallest building, the Sky City Tower in Changsha, Hunan, whose 220 storeys will be erected in 90 days. The timelapse video above shows another BSB project, a 30-storey hotel that went up in 15 days. The company claims its designs are extremely seismically robust and environmentally efficient. From CNNGo:  Its 220 stories will provide a total of 1 million square meters of usable space, linked by 104 elevators.  Zhang said Sky City is expected to consume a fifth of the energy required by a conventional building due to BSB’s unique construction methods, such as quadruple glazing and 15-centimeter-thick exterior walls for thermal insulation. The company's construction methods also seem to save money.

China: more manufacturing weakness as Flash PMI falls again - China’s factories are still under real and increasing pressure, according to the latest HSBC Flash PMI. The index fell from 48.4 in May to 48.1 in June – the lowest since last year. Contraction accelerated in a number of sub-indexes, including new orders, new exports orders and overall output.HSBC’s China economist Qu Hongbin added this to the release: With external headwinds remaining strong, exports are likely to decelerate in the coming months. The sharp fall of prices and moderation of new orders suggest weak domestic demand, posing destocking pressures for Chinese manufacturers. All will likely weigh on the jobs market. So far China’s slowdown has had little impact on employment. Indeed, earlier this week factory owners in the Pearl River Delta complained that labour shortages were, if anything, getting worse. But any changes in the situation could well force Beijing’s hand.

Fresh signs of weakness in Chinese economy - China’s manufacturing sector has slowed further in June and a decline in new orders shows that the weakness is likely to drag on, according to a survey released on Thursday. HSBC said its Chinese purchasing managers’ index was on track to fall to 48.1 in June from 48.4 in May, which would mark a seven-month low. In dipping further below the 50 threshold, the flash figure, which is the earliest piece of monthly economic data for China, indicates a steepening contraction of factory activity. The data added to concerns about the health of the Chinese economy, with the benchmark stock index in Shanghai down 1.5 per cent in morning trading.  The government has already started to shift its policy stance to stimulate the economy, though it has moved only cautiously so far because officials believe that growth, while weak, is not collapsing. Virtually every component of the PMI survey, from manufacturing output to stocks of finished goods, pointed in a negative direction. But the declines were nowhere near as severe as late 2008 when the global financial crisis erupted. Qu Hongbin, HSBC chief economist for China, said: “With external headwinds remaining strong, exports are likely to decelerate in the coming months. The sharp fall of prices and moderation of new orders suggest weak domestic demand, posing destocking pressures for Chinese manufacturers.

China Manufacturing PMI 7-Month Low, Sharpest Decline in New Export Orders Since March 2009 -- The global economy continues to slow led by Europe and China. The HSBC Flash China Manufacturing PMI is at a 7-month low. Moreover manufacturers report the sharpest decline in new export orders since March 2009. Key points:

  • Flash China Manufacturing PMI™ at 48.1 (48.4 in May). 7-month low. 
  • Flash China Manufacturing Output Index at 49.1 (49.7 in May). 3-month low.

Note that inventories of finished goods are up, everything else is down. It's time to admit the global economy is in recession. The US is there too, or soon will be.

China Closes Window on Economic Debate, Protecting Dominance of State — As China heads toward a once-a-decade change of its top leadership, its vaunted embrace a generation ago of markets and economic openness — which catapulted the country from isolated poverty to its place as a global export powerhouse — is also at a turning point. After nearly a decade of President Hu Jintao’s focus on strengthening the state, a broad consensus of Chinese economists says the country is overdue for another big push to encourage private enterprise and to foster a shift toward a more consumer-driven economy. The challenge, they say, is turning back China’s domineering state sector. But that seems increasingly unlikely. Publicly controlled enterprises have become increasingly lucrative, generating wealth and privileges for hundreds of thousands of Communist Party members and their families. And in a clear sign of its position, the government has moved to limit public debate on economic policy, shutting out voices for change. While political reform has always been a taboo topic in China, in economics, from the late 1970s to the early 2000s, almost anything went, with powerful voices backing strong measures that challenged the status quo. But now, despite the rise of social media, fewer prominent voices within China are able to make the case for a systemic overhaul that would prepare the nation for long-term prosperity on sturdier foundations.

Chinese Data Mask Depth of Slowdown, Executives Say - As the Chinese economy continues to sputter, prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles. Related China Data Show Drops in Exports and Prices (June 22, 2012) Record-setting mountains of excess coal have accumulated at the country’s biggest storage areas because power plants are burning less coal in the face of tumbling electricity demand. But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said. Electricity production and consumption have been considered a telltale sign of a wide variety of economic activity. They are widely viewed by foreign investors and even some Chinese officials as the gold standard for measuring what is really happening in the country’s economy, because the gathering and reporting of data in China is not considered as reliable as it is in many countries. Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.

Follow up to the China kleptocracy post - The China kleptocracy post has received a lot of comment - mostly favourable. It was my first post to get 100 thousand views.  Only a few of those views are from China. Alleging that China has a ruling kleptocracy was sufficient to get my blog blocked by the Great Chinese firewall - something that happened within one hour of the post going public. That said, within China the people who have been in business there for more than a decade were mostly in agreement. The people who have been there a couple of years were less in agreement. Bill Bishop (who I read and respect) was in the less in agreement group. I will not name the people in agreement because many have to live in China. My thesis was
(a). The savings rate in China was abnormally high driven by the one-child policy,
(b). The options for investing those savings for most the population were extremely limited - mostly bank deposits.
(c). The bank deposit market was rigged so that deposit rates were consistently below the inflation rate.
(d). That repressed interest rates were mainly used to subsidize state owned enterprises and that
(e). This funded the widespread looting of State Owned Enterprises by party officials.

Greece > China -- Everyone is in awe of China's economy. Its prodigious exports, heroic rates of investment and colossal foreign reserves are both deeply impressive and a little intimidating. China's economic policymakers are a competent, confident bunch. Even they, however, worry about the fabled "middle-income trap", the tendency for fast-developing countries to slow dramatically when their per capita GDP reaches middle-income levels. In February China's Development Research Centre, a think tank serving China's cabinet, published a 468-page report with the World Bank entitled China 2030. The report detailed all of the reforms China requires over the next couple of decades if it is to become a high-income economy. It was a sobering list, covering land, labour, power, competition, banking, capital markets, state-owned enterprises, taxes and spending. The report featured a chart (which we have reproduced before) that conveyed the difficulty of the task. It classified countries as high-income if their per capita GDP, measured at purchasing-power parity, exceeds 43% of America's*.  Of the scores of middle-income countries in 1960, only 13 passed that threshold to become high-income economies by 2008.

The Chinese economy and political attack - I sit here in Beijing hearing, seeing and reading some of the comments about the Chinese economy that are coming out of Australia and wonder if people are talking about the same place I'm living in. For a while I thought that the disjoint between analysis and reality was a problem of perspective. For example: on what planet, I wondered, could around 8 per cent GDP growth be "sluggish"? I assumed that the only reason that a new set of figures which didn't look too alarming to me could "bad, "poor" or "worrying" to others was that people had come to expect so much of the Chinese economy that anything short of zingingly fast or breathtakingly huge just didn't impress but now I think that there are other elements at work here. Welcome to the Chinese economy as a political tool. In short, it seems that China has to be "shaky", "risky", "in danger of a hard landing" and the like because otherwise somebody in the Federal Government has been making at least some sensible economic decisions.

The Ponzi Arithmetic of Profit - Michael Pettis has written a most illuminating perspective on the long term cycles of the macro economy in his great analysis “Globalization and Minsky”! Pettis observes: “Indeed, with the exception of the globalization period of the early 1900s, which ended with the advent of World War I, each of these eras of international integration concluded with sharp monetary contractions that led to a banking system collapse or retrenchment, declining asset values, and a sharp reduction in both investor risk appetite and international lending.” That should immediately lead one to wonder how it could be that money could grow and contract in such a fashion.  Where does the money come from that savers have in their deposit accounts?  Where does “liquidity” come from?  And where does it go when the system suffers from “illiquidity”?

Malaysia Joins Indonesia, China Seeing Asian Strength - Asian nations are more prepared to face global economic shocks after they strengthened domestic demand and financial systems since the 1997-98 regional crisis, said Malaysian central bank Governor Zeti Akhtar Aziz, a veteran of that turmoil.  Asia is in a “better state of readiness” to face shocks as policies geared toward strengthening domestic demand anchor growth prospects, Zeti, 64, said in a speech in Jakarta today. Her confidence echoes the sentiment of policy makers across the region, with China saying its economy is heading for a rebound this month and Indonesia saying this week that its banks are still growing amid Europe’s woes, underscoring domestic strength.Malaysia’s economic expansion has stayed above 4 percent since it emerged from a recession in 2009, as rising public spending and a yearlong pause in interest-rate increases countered Europe’s debt crisis and a faltering U.S. recovery. Zeti, who oversaw the country’s capital controls in response to the Asian crisis, has guided monetary policy in the Southeast Asian nation through regional health epidemics, natural disasters and the last global slump.

S.Korea household debt growing alarmingly: Moody's - South Korea's household loans have grown "at an alarming rate" to $553 billion in April and are vulnerable to financial shocks arising from a global economic downturn, a report said on Tuesday. More people are borrowing just to meet living expenses and there is an increase in borrowers from the older age group and lower income group, said the report from Moody's Investors Service. The credit ratings agency said outstanding household loans at the country's banks and non-banks totalled 639.6 trillion won (now equivalent to $553 billion) at end-April, compared to 622.2 trillion in July 2011. The debt-to-disposable income ratio was 135 percent last year, higher than 114 percent in 2002, the year before the country's credit card crisis.

What Gina did next -- Having spent many years keeping herself out of the headlines, Gina Rinehart is now taking to the media with gusto. It was June 9, 2010, and it would become a seminal moment for Australia's richest person. After being badly burned by 10 years of torrid publicity after her father's death, the softly spoken billionaire had decided it was time to emerge from her cocoon and be heard - again and again and again. Her image, splashed across newspapers and television stations that night and the next day, became a potent symbol of the increasingly acrimonious war of words between the big mining companies and the Rudd Labor government. The big miners, aware that prime minister Kevin Rudd was struggling in the polls, waged an all-out campaign, costing $22 million, to sink the proposed tax. It would become one of the most effective campaigns to blindside an Australian federal government since the sacking of Gough Whitlam as prime minister nearly 35 years earlier. Fifteen days later Rudd resigned as prime minister and the super tax morphed into a weak compromise as the new Gillard government agreed to take billions of dollars a year less than the original tax had been set to provide. The result gave Gina a fresh taste of the power of the media. Today, she is fast becoming an unstoppable force, acting out her father's teachings about the media by buying up stakes in Ten Network and then buying shares in Fairfax Media, which owns The Age,The Sydney Morning Herald and The Australian Financial Review.

Shipping: Short and sharp - There has been a big increase in Arctic shipping in recent years. A 2009 assessment by the Arctic Council counted 6,000 vessels in the Arctic, mostly fishing trawlers and mining barges in the lower reaches. But the traffic that has got everyone excited is using the Arctic to shorten the journey between continents. Almost all of it is taking the NSR. The 34 vessels that traversed it last year shipped 820,000 tonnes of cargo; official Russian forecasts suggest that this year’s figure will be 1.5m tonnes. By 2020, according to American estimates, that will rise to 64m tonnes. Last September, shortly before the end of the NSR’s four-to-five-month season, Mr Putin predicted that the NSR would one day rival the Suez Canal.He could be right. Using the NSR would cut the distance between Rotterdam and Shanghai by 22%. Taking the north-west passage, which weaves between Canada’s high Arctic islands, could reduce the distance by 15%. This would mean a shorter journey time, or alternatively allow ships to go more slowly, saving on bunker fuel, the price of which rose by a third last year. The Arctic passages are also free of the piracy that is rampant in some parts of the world, costing shipping companies an estimated $7 billion-12 billion a year in insurance premiums, ransoms and disruption

Global Trade Dropped in March and April - I updated my series for global trade (above - imports and exports should match but don't due to measurement error).  The monthly data (through April) come from the WTO and I seasonally adjust them. After growing from early 2009 to mid 2011, global trade appears to have roughly stagnated for most of the last 12 months.  In particular, it appears to have had a bump up in February of this year, but then to have fallen back in March and April.  This coincides with the movement in oil prices - which peaked around March 8th. So, oil production has not been growing in 2012 and global trade has not been growing either.  How much can the global economy have been growing?

Mexico Joins Trans-Pacific Partnership Trade Negotiations - The leaked documents from the Trans-Pacific Partnership showed the possibility for the agreement to expand well beyond the original countries that are party to the agreement. And before the TPP has completed negotiations or been signed, we’re already seeing evidence of that. In remarks yesterday at the outset of the G20 summit, Mexican President Felipe Calderon announced that his country would join the negotiations of the trade deal: But there’s one topic of the greatest importance that we’d like to share with you, and that is that the United States, together with the other eight countries that make up the TPP — the Trans-Pacific Partnership — have welcomed Mexico for it to join the negotiations of this initiative.  The Trans-Pacific Partnership is an expansion of the trade agreement that was known initially as P-4, and that began in 2006 by Brunei, Chile, New Zealand and Singapore. And this commercial trade initiative was added into by Australia, the United States, Malaysia, Peru, and Vietnam afterwards. So this is one of the free trade initiatives that’s most ambitious in the world and would foster integration of the Asia Pacific region, one of the regions with the greatest dynamism in the world. Mexico already has a trade deal with the United States, the much-maligned NAFTA. So their move to join the Trans-Pacific Partnership shows how this new treaty can eventually turn into the organizing structure for global trade, with participation of potentially every country in the world. That makes the leaked documents on investor-state relations, which would allow corporations to surmount national rules and regulations on labor, environmental and many other standards, all the more consequential.

I think Stephen Gordon gets trade wrong - Stephen Gordon writes about trade in the Globe and Mail: [T]he [Canadian] Conservatives are selling trade agreements with the European Union and a way of increasing Canadian exports. [But t]he real benefit to international trade is the opportunity to obtain goods more cheaply than by producing them domestically. The proper way to view exports is as a cost: in an ideal world, foreigners would provide us with an infinite amount of imports for free. It seems to me that this is misleading and incomplete. Here's why. The "ideal world", in which foreigners provide us with infinite free imports, is impossible. In the real world, imports must always be paid for, either today or tomorrow. We pay for them with exports - either current exports or future exports. But pay we must. Suppose I increase imports by one dollar today without increasing exports. Am I better off? According to Gordon, yes I am. But in reality it is not clear. Because the way I pay for that dollar of imports - since I don't export anything in return - is with a financial asset. I give one dollar of stocks, or bonds, or real estate, or collectible trading cards, to the foreigner who gave me the dollar of imports.

World Leaders Meet in a Mexico Now Giving Brazil a Run for Its Money - Mexicans looked on with envy in recent years as Brazilians won a reputation as Latin America’s chosen people. With a surging economy and a prominent place on the world stage, Brazil was the country poised for greatness while Mexico remained mired in bloodshed and destitution. But just as momentum can change suddenly in a match at the World Cup or an event at the Olympics — both competitions that Brazil will host in the next four years — so can the dynamics between nations. Last year, Mexico’s economy grew faster than Brazil’s, and it looks set to outpace its larger Latin rival again in 2012. Brazil’s slowdown can be attributed partly to debt-burdened consumers and the erosion of industrial production, which is tied to the recent strength of Brazil’s currency, the real. On top of that, slowing global growth, particularly in China, has pushed down prices of the commodities that Brazil exports. Meanwhile, Mexican factories are exporting record quantities of televisions, cars, computers and appliances, replacing some Chinese imports in the United States and fueling a modest expansion. Economically, Mexico does not appear as grim a place anymore. “The best way to improve your image is G.D.P. growth,”

The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap --When the US Dollar is ultimately dethroned as the world's reserve currency (and finally gets rid of all those ridiculous three letter post-Keynesian economic "theories") nobody will have seen it coming. Well, nobody except for the following headlines: ""World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees." And while the expansion of the "dollar exclusion zone" was actually quite glaring to anyone who dared to look, one thing was obvious: it was confined to Asia. No more courtesy of the following FT headline: "Brazil and China agree currency swap." More: "Brazil has provided a vote of confidence in China’s efforts to promote the renminbi as a reserve currency by becoming the biggest economy yet to agree a swap deal with Beijing. Brazil and China announced the R$60bn (US$29bn) local currency swap after a bilateral meeting between Wen Jiabao, the Chinese premier, and Dilma Rousseff, Brazil’s president, on the sidelines of the Rio+20 environmental summit in Rio de Janeiro."

BRICS to Study Central Bank Foreign Exchange Swaps and Reserve Pooling - Key emerging market leaders said Monday they’d boost International Monetary Fund lending resources and study currency swaps and pooling reserves, as Europe’s financial crisis threatens to spill over into the global economy. The leaders of the so-called BRICS countries—Brazil, Russia, India, China and South Africa–meeting ahead of a Group of 20 industrialized and developing nations summit in Mexico said their new IMF contributions are based on the assumption that key powers at the IMF would move forward on governance reform at the fund that would give the emerging economies greater power and say. Swap arrangements–allowing central banks to lend each other currencies in emergencies to help keep markets funded–and pooling foreign exchange reserves are contingency measures for crises such as Europe’s debt problems. They are also likely to be seen as part of a broader move by emerging markets to move away from reliance on the dollar and the euro, and on the IMF, which requires strict conditions for its loans. China in particular wants its yuan to become a global reserve currency and key emerging markets would like to become less exposed and reliant on the euro and dollar markets. Beijing also holds more than $3 trillion in foreign currency reserves, largely in dollars and euros, and ostensibly could use that to help other emerging markets if they are short those currencies.

Fitch lowers India’s credit rating outlook to negative - Within three months of Standard & Poor’s action in April and its follow-up threat last week, global rating agency Fitch, on Monday, scaled down India’s sovereign credit outlook to ‘negative’ from ‘stable’ while citing much the same reasons as S&P — corruption and the absence of or inadequate reforms. However, unlike in the case of S&P’s strictures when the government appeared to go on the defensive, Finance Minister Pranab Mukherjee junked the downgrade saying that the rating agencies’ observations were based on “old data” and did not reflect the recent developments. In a statement, pointing out that the revision in rating outlook by Fitch to the lowest investment grade notch was because it had ignored the recent positive economic trends, Mr. Mukherjee said: “While the markets had already anticipated that Fitch would revise the outlook and so there is no surprise in the announcement, it must be pointed out that Fitch has primarily relied on older data, and has ignored the recent positive trends in the Indian economy”.

India's QE would even make Bernanke jealous - Expectations were high last week that India's central bank would cut rates. After all, the slowdown in growth has become quite visibleReuters (last week): - ... supporting bond prices are expectations the RBI will cut interest rates by 25 basis points this month after recently weak January-March economic growth data. Some analysts expect an additional cut in the cash reserve ratio, or the money banks must park with the central bank. Instead we got no change in rates today with the following statement:  RBI - ... notwithstanding the moderation in core inflation, the persistence of overall inflation [CPI is above 10%] both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation. Inflation indeed remains sticky. With the rupee at 56 to the dollar (near all-time low), risks of food inflation are still substantial, while labor costs continue to grow (wage inflation has been a real issue). It seems however that some of these inflationary pressures and currency weakness may be caused by RBI's own policies of balance sheet expansion. Reuters: - The OMOs [open market operations] from the Reserve Bank of India would resume bond purchases after a two-week absence, helping offset the impact of expected outflows as corporates start paying taxes ahead of the June 15 deadline.

Indian Firms Face ‘Nightmare’ Due to Dollar Debt: S&P  - Indian companies are coming under significant financial pressure as a result of weakness in the rupee, which is hampering their ability to service foreign currency debt, Standard & Poor’s (S&P) warned on Thursday. According to the ratings agency, half of the 48 companies in India with foreign currency convertible bonds (FCCBs) maturing this year, could default on their payments. FCCBs worth $5 billion are due for redemption between now and December. These bonds, which give investors the option to convert into equity shares at a pre-determined price – were viewed as a convenient and cheap source of funding for Indian corporates in recent years. They allowed firms to borrow with coupon rates as low as zero percent. “For some Indian companies, issuing foreign currency convertible bonds during the stock market boom seemed like a bright idea. But it’s now running into a nightmare,” Vishal Kulkarni, primary credit analyst at S&P, said in a report on Thursday.

Making the Transition from Poor Country to Rich Country - Deirdre McCloskey posted her wonderful essay “Factual Free-Market Fairness” on a few days ago.  In it, she focuses on the follies of government.  Her essay has generated a huge debate: 193 comments so far.  These are central issues being debated. For example,  here are Noah Smith’s comments.  Noah points out that governments have also done good things and that some of the most successful economies in the world have high tax rates and high levels of government spending.  I have several reactions (which I will put here rather than in Deirdre’s comment thread where you would have trouble finding them in the thick forest of surrounding comments). First, regulation is much like distortionary taxation in its costs, only worse.  In particular, by mandating a particular way of doing things, regulation often tends to stifle innovation in a way that distortionary taxation doesn’t.  But regulation, like distortionary taxation, typically has benefits as well as (often fearsome) costs.  One of Deirdre’s key points is that the costs can often outweigh the benefits even for the intended beneficiaries of a regulation. One of the biggest questions in all of the social sciences is why some countries are rich and some countries are poor, with per capita incomes differing by more than a 100 times from poorest to richest.  (The richest countries have per capita incomes above $40,000 per year; the poorest countries have per capita incomes below $400 per year.)  Let me give you my view on that question in a nutshell.

The Case for Wage-Led Growth - The share of wages and salaries in Gross Domestic Product (GDP) has declined in most rich nations over the past 20 to 30 years. Over the same period, income inequality has grown in most of these nations, and rapidly in some of the largest of them, resulting in slow wage growth for most consumers. The result of wage growth that is persistently slower than the growth of GDP, and a simultaneous shift in distribution towards high-end earners who save more and consume less, has been an inadequate level of aggregate demand needed for rapid, job-creating GDP growth. Stagnant or, at best, slow-growing standards of living are economic failures in themselves and may well lead to political instability. But they are also harbingers of a more serious crisis. The main theme of this paper is that low-wage policy regimes have resulted in an over-reliance on export-led growth models in nations like Germany and China and debt-led growth policies in countries like the U.S. In export-led economies, there has in turn been pressure to maintain low wages to keep exports price-competitive, especially as newer, even lower-wage economies became integrated into the international system

McWages Around the World - It's hard to compare wages in different countries, because the details of the job differ. A typical job in a manufacturing facility, for example, is a rather different experience in China, Germany, Michigan, or Brazil. But for about a decade, Orley Ashenfelter has been looking at one set of jobs that are extremely similar across countries--jobs at McDonald's restaurants. He discussed this research and a broader agenda of "Comparing Real Wage Rates" across countries in his Presidential Address last January to the American Economic Association meetings in Chicago. The talk has now been published in the April 2012 issue of the American Economic Review... But the talk is also freely available to the public here as Working Paper #570 from the Princeton's Industrial Relations Section.  ... Ashenfelter has built up McWages data from about 60 countries. Here is a table of comparisons. The first column shows the hourly wage of a crew member at McDonald's, expressed in U.S. dollars (using the then-current exchange rate). The second column is the wage relative to the U.S. wage level, where the U.S. wage is 1.00. The third column is the price of a Big Mac in that country, again converted to U.S. dollars. And the fourth column is the McWage divided by the price of a Big Mac--as a rough-and-ready way of measuring the buying power of the wage.

Rule to Encourage Africa Trade Set to Expire A clause in a U.S. trade law designed to stimulate trade with Africa is set to expire Sept. 30 and, so far, there appears little prospect that it will be renewed by Congress. At issue is a provision in the African Growth and Opportunity Act, which was passed with bipartisan support by Congress in 2000 and gives 40 African countries tariff-free access to the U.S. market. Some 90% of exports to the U.S. from Africa since then have been oil. But a clause called the “third-country fabric rule” has been successful in encouraging the growth of African textile and apparel manufacturing, which is part of the development goal of AGOA, as the law is known. ... But the provision had a built-in expiration date of Sept. 30, 2012. And, so far, there appears to be little prospect Congress will renew it. The reason: partisan bickering, says Witney Schneidman, a former deputy assistant secretary of state for African affairs under President Bill Clinton who recently authored a report on AGOA for the Brookings Institution.

Africa and the Great Recession: Changing Times - iMFdirect - The world economy has experienced much dislocation since the onset of the global financial crisis in 2008. ... But in sub-Saharan Africa, growth for the region as a whole has remained reasonably strong (around 5 percent). Of course, not all economies have fared equally well. The more advanced economies in the region (notably South Africa) have close links to export markets in the advanced economies, and have experienced a sharper slowdown, and weaker recovery, than did the bulk of the region’s low-income economies.  Countries affected by civil strife (such as Cote d’Ivoire, and now Mali) and by drought have also fared less well... So why has most of sub-Saharan Africa continued to record solid growth against the backdrop of such a weak global economy?  And can we expect this solid growth performance to continue in the next few years?  As we show in the latest IMF Regional Economic Outlook for Sub-Saharan Africa the region has been growing consistently strongly for over a decade. This solid growth record has been supported by significantly less civil conflict, the generally favorable commodity price developments benefiting Africa’s natural resource exporters; and the extensive debt relief provided to most highly-indebted poor countries. But I would ascribe key importance to sound policy choices by African governments – both in terms of pursuing appropriate macroeconomic policies and pressing ahead with important reform measures.

The Africa Progress Panel Report — Jobs, Justice and Equity for Africa - Brookings: In the bullish environment at last week’s World Economic Forum (WEF) on Africa in Addis Ababa, the launch of the Africa Progress Panel report stood out as an island of balanced reflection and cautious optimism. Chaired by the former UN Secretary General Kofi Annan, the Africa Progress Panel (APP) includes leaders from government, business and civil society. This year’s report, focused on jobs, justice and equity. The panel takes a long, hard look at Africa’s recent record on economic growth, democracy and governance. It provides a hefty dose of good news. More than any other region, Africa’s economies have demonstrated great resilience in withstanding the worst effects of the global recession. The WEF host country, Ethiopia, has been posting higher growth rates than China; Mozambique has been out-performing India. Over 70 percent of the region’s population lives in countries growing in excess of 4 percent a year. The record on democracy and governance is also encouraging. Multi-party democracy has emerged intact from disputed elections in Cote d’Ivoire and Senegal. Several governments have moved to strengthen anti-corruption measures. And budget transparency is improving.

Challenges for Women in the African Economy -- Via Brookings, a video, one of the many things I read/watched to get ready for the trip to Kenya: In many African countries, women still cannot own land or resources, a significant barrier to their ability to start businesses and take advantage of the continent’s economic potential. Fellow Anne Kamau explores their plight.

Think the Unthinkable - It used to be unthinkable that the Euro would break-up. Now the common question is not if, but when and how much.  Another unthinkable is that China's economy will not only slow, but will shrink significantly. Even more unthinkable is that the Politboro's power will be challenged. The economic news from China looks to have turned into a vicious negative cycle. Yes, there is still hope by many that the government will manage a recovery, but I doubt that hope will survive the year. When hope is lost, it is difficult to regain and most stimulus projects become impotent because consumers don't consume and investors don't invest no matter how big the government incentives are. My crystal ball isn't clear enough to see if China's political system is overthrown; I doubt it, but again, it is thinking the unthinkable. And so two of the largest economies in the world will retreat for a decade or two. Perhaps the US will become like Japan and have 25+ years of zero growth, zero inflation, and constant deficits. And who knows what will become of Japan - can they borrow forever? We study Greece too much and Japan too little. Looking back, we will ask why it happened, and how it could have been avoided. The old self rightous vices of debt and sloth will be trotted out, with perhaps a bit of avarice and gluttony too. But it was all avoidable, if we followed a few simple rules

The Two Worlds of 2012: Will We Have “Inflation” or “Deflation”? -  To describe the media’s reporting and analysis as merely simplistic would be inaccurate. One can be simplistic while still engaging in coherent analysis – i.e. discussing “the big picture” in superficial terms. However what the mainstream media is engaging in is much different.It is as if the media spends ½ of its time reporting while covering one eye with its hand, and the other half of its reporting is done while covering the other eye. The result is as predictable as it is inevitable: a complete and utter lack of “depth perception”. Thus on the same day we have the following two articles being published in Bloomberg: Greek Default Risk Returns As Bond Maturity Nears” [emphasis mine] Brazil Futures Yields Rise From Record On Faster Inflation [emphasis mine] As you read through Bloomberg’s bipolar reporting on the global economy, you will note no mention (at all) of the soaring inflation gripping most of the world when you read about another, imminent Greek debt-default. Meanwhile, the inflation article on Brazil contains merely one, vague illusion to “caution” in Europe. This is despite the fact that these two trends are not only directly correlated, but causally connected.

Death Throes - Paul Krugman - My colleague David Brooks tells us that Republicans see the economic crisis as showing that the welfare state is in its “death throes”. And it’s true — that is what they think, or claim to think. And I understand why that’s what they want to think. But the fact that they think this is a testimony to the ability of people to see what they want to see, in the teeth of the evidence. I mean, how do we measure the size of the welfare state? It’s not a perfect measure, but the OECD calculation of the share of government social expenditure in GDP (pdf) is a reasonable proxy. Here’s what it looks like for selected European countries: If you look at these data and see them as evidence of the welfare state in its death throes, well, you’re saying a lot about yourself and nothing about reality.

“Great Latvian Success Story!” You too can be an IMF success story if you grind your population into penury by wearing the austerian hairshirt. And this little video (hat tip Nathan) has to skip over capture some of the extreme measures operating in Latvia, such as bankers taking souls as collateral for loans.  As Warren Mosler noted today in “The Eurozone Torture Chamber”: Publicly, at least, they all still think the problem in the euro zone is that the public debts/deficits are too high. And to reduce debt the member nations need to cut spending and/or hike taxes, either immediately or down the road. A good economy with rising debt and ECB support to keep it all going isn’t even a consideration. They’ve painted themselves into an ideological corner. And deficit spending, exacerbated by austerity, may nonetheless be high enough for it all to muddle through at current (deplorable) levels of economic performance. This economic ‘torture chamber’ of mass unemployment can, operationally, persist indefinitely, even as, politically, it’s showing signs of coming apart.

Hazardous Games - The world is dead broke. (By "world" I mean those places where the electricity is on more than it is off.) The world spent all of its future capital to stage an orgy of blow-out development and then the future arrived and there was no money to run everything. To make matters worse, there are massive interest payments due on all that money misspent. Nobody has the means to pay the interest. All the activity around this fact is an Olympiad of money games that amount to musical chairs and hot potato, signifying that 1) there is not enough to go around, and 2) somebody has to end up stuck with a problem.  The orgy averred to above coincided with the last years of cheap and abundant energy supplies to run the development. That's over and done with, too, despite the strenuous efforts of wishful thinkers, cornucopian propagandists, and corporate racketeers to pretend that technological magic can make up for dwindling cheap supplies. The net effect of all this is that advanced societies all over the planet have entered a comprehensive compressive contraction of activity and, more ominous, of technological progress. The world can't cope with contraction. For one thing, it wreaks havoc in the mechanisms of capital formation. Capital can only be formed under conditions where interest can be paid. That is, loans are only tenable when they can be paid back with interest. Hence, the current insanity in world financial markets and banks - the mad scramble to pretend that interest payments will be made on bailouts tendered to nations that cannot make interest payments.

Debt Solution - Most of the economic problems in the developed world are due to high levels of private debt that purchased overpriced speculative assets. Many will add their own spin to blame somebody for it (governments, central banks, banks, lazy people, greedy people, etc.). If blame were a solution then our economies would have long ago recovered.  There are several common reactions to a debt crisis:

  1. Liquidate the borrowers.
  2. Forgive the borrowers.
  3. Lend the creditors money from the government and/or central bank.

Most people initially want to liquidate or forgive, but if they bother with the details they learn that either would not only destroy most banks, but also destroy credit markets and collateral values for decades.  And debt forgiveness would make lenders very reluctant to lend in the future.  Since liquidation and forgiveness don't work on a large scale, debt crises soon end up with the delay tactic of lending from the government/central bank/IMF. A controversial fourth way would be for the central bank to purchase bad debt after it has been restructured. Eligible debt would be defined as debt that the market will not refinance (or requires an excessive premium to do so). The central bank would need to set restructuring policies that share the cost between the lender and borrower (contrary to popular opinion, both are often to blame for bad loans).

Full Text: George Soros on Reflexivity and a Potential Eurozone Breakup - The following is the text of recent remarks on the European sovereign debt crisis made by legendary investor George Soros at the Festival of Economics in Trento, Italy.

The Genius of Mutual Indebtedness - Nigel Farage - YouTube - European Parliament, Strasbourg, 13 June 2012

European Leaders to Present Plan to Quell the Crisis Quickly - The head of the European Central Bank and other euro zone leaders worked on Saturday on a grand vision for the euro zone meant to reassure investors and allies that flaws in the currency union will be addressed quickly.  The plan will include measures to prevent bank runs and reduce what has become a vicious cycle of government debt problems turning into banking crises, as has happened in the past two years. In addition, the plan will push for countries to remove the regulations and layers of bureaucracy that inhibit competition, keep young people out of the work force or make it difficult to start a new business.  The goal would be to make the euro zone less vulnerable to crises and better able to grow its way out of the current debt crisis. But it is unclear whether yet more pledges of reform, which would face significant hurdles, will calm financial markets.  Under the plan, euro zone leaders will seek to establish the central bank as supreme bank regulator with broad powers, in place of the relatively toothless European Banking Authority.  Countries would also create a deposit insurance program to augment national programs. The goal would be to reassure ordinary depositors and prevent bank runs, an imminent danger in Spain as well as Greece. But any sharing of financial burdens almost automatically encounters opposition in Germany. For example, Mr. Draghi has not advocated pooling euro zone debt into common bonds, an alternative that Germany rejects, at least for the near term.

Options for Europe -- This problem is not fixing itself. Bob Barbera and Jonathan Wright offer this assessment of the situation in Europe: Up until a few weeks ago, all European officials declared at all moments that there were no conditions that could lead to a nation leaving the euro. Suddenly that was no longer true. Contagion fears-- if Greece can be thrown out, why not Spain and Italy-- quickly appeared. This produced a quick calculation. If my money is in a bank in a nation at risk, I might go to bed with 10,000 euros and wake up with 10,000 pesetas. In other words, my deposit was guaranteed, but the currency value of the deposit was not. The simple remedy? Open an account in Germany. Wire transfer the money. Conduct business, still in euros, but from an institution that might convert your euros to deutschmarks. And in growing numbers, first businesses and then individuals have been making just this kind of transfer....  Central bank data makes it clear that as of April, a bank run was in full force in Greece and that a bank 'trot' was taking hold in Spain and Italy. Target2 statistics reveal that Spain and Italy borrowings from the ECB had mushroomed from roughly 150 billion euros to close to 300 billion euros, over the first four months of 2012. Germany, in mirror image, registered loans to the ECB of nearly 700 billion euros. May data is unavailable, but almost certainly witnessed a material acceleration of flows.

Capital flight out of Eurozone seen in foreign deposits at the ECB - When a non-Eurozone central bank holds euros, it tends to deposit those euros with the ECB. So when the Fed executed its liquidity swap, it received euros as collateral and deposited  them in its account at the ECB. That deposit by the Fed created a "non-Eurozone resident" liability at the ECB.  But the Fed's liquidity swap is now a fraction of what it was at its peak. The ECB returned the dollars and the Fed returned the euros. That means the ECB's liability to non-Eurozone residents should have declined. And it has, until recently. But now we have a new spike in non-resident liability at the ECB. So who outside the Eurozone is depositing a massive amount of euros? The Swiss National Bank (SNB) of course. As as the SNB defends the Swiss Franc from strengthening (trying to keep the peg at 1.2), it buys a great deal of euros and of course promptly deposits them at the ECB, increasing the non-resident liability . Therefore this second spike is created by flight of capital our of the Eurozone (the ECB provides this data on a weekly  basis allowing one to monitor the trend closely - ht Kostas Kalevras). Note, these euros are still held within the Eurozone (the amount of euros is always fixed unless the ECB chooses to change it), but they no longer belong to Eurozone residents. These Eurozone residents have swapped their euros for Swiss Francs.

Greeks withdraw cash ahead of cliffhanger vote (Reuters) - Greeks pulled their cash out of the banks and stocked up with food ahead of a cliffhanger election on Sunday that many citizens fear will result in the country being forced out of the euro. Bankers said up to 800 million euros ($1 billion) were leaving major banks daily and retailers said some of the money was being used to buy pasta and canned goods in case of shortages, as fears of returning to the drachma were fanned by rumors that a radical leftist leader may win the election. The last published opinion polls showed the conservative New Democracy party, which backs the 130-billion-euro ($160 billion) bailout that is keeping Greece afloat, running neck-and-neck with the leftist SYRIZA party, which wants to cancel the rescue deal. As the election approaches, publishing polls is now legally banned and in the ensuing information vacuum, party officials have been leaking contradictory "secret polls". On Tuesday, one rumor making the rounds was that SYRIZA was leading by a wide margin.

No place to hide if Greece smashes the euro - Sometimes the eurozone feels like a Horizon holiday brochure from the 1970s: last week Spain, this week Greece. Horizon went bust, and the question is whether one or more eurozone members will suffer a similar fate. I shall come to Greece in a moment. First, let me offer my take on Thursday’s Mansion House announcements by George Osborne and Sir Mervyn King. Having been banging on for longer than I can recall about the need to boost bank lending, including last Sunday, I welcome these initiatives. The £80 billion “funding for lending” scheme, the additional liquidity of at least £5 billion a month under the extended collateral term repo scheme and giving the Bank’s new financial policy committee an additional growth mandate add up to a reasonable package. I do not believe this initiative will lead to a rush of risky lending. We can also dismiss the tired old “pushing on a piece of string” cliche: weak credit is holding back demand. The dangers are on the other side, that the banks have locked them into a mindset in which they genuinely believe there are few creditworthy borrowers out there.

Merkel ally tells Greece: Vote right or euro's gone  - A leading German right-wing politician warned Saturday that if the far left wins Greece's elections this weekend, the country's exit from the eurozone "will be only a matter of time." "If the radical left carries on saying it wants the help of all the other countries in the eurozone but does not offer anything in return, then it will only be a matter of time before Greece exits" the eurozone, said Wolfgang Bosbach, chairman of the interior ministry committee in parliament and a close ally of Chancellor Angela Merkel. Even without Sunday's elections, Greece is not fit to be a member of the eurozone, the top Christian Democratic Union official said. "The country's economy lacks dynamism, competitiveness and efficient governance. And billions more aid will not change that fundamentally," he said in excerpts from an interview with Frankfurter Allgemeine Zeitung, to be published in full on Sunday.

Meanwhile, In the Role Model - Krugman - Early in the euro crisis, Jean-Claude Trichet knew what the Greeks had to do: “Greece has a role model and the role model is Ireland,” he told the European Parliament in March 2010. So how’s it going? The IMF recently released its sixth review under the Irish “extended arrangement”, IMF-speak for bailout — and the fact that this is report number 6 tells you a lot right there. The funny/sad thing is that the Irish have been proclaimed a success story not once but twice — last fall, a year and a half after Trichet’s triumphalism, Merkel declared Ireland an “outstanding example” and Sarkozy declared the country “almost out of the crisis”. But once again they were premature. The most interesting and depressing thing about the latest IMF report is the cold water it throws on claims about the success of “internal devaluation”, the attempt to regain competitiveness with a fixed exchange rate. Last fall there was much trumpeting of a big fall in Irish unit labor costs due to rising productivity; this report more or less concedes (Figure 2) that this was a statistical illusion, reflecting the fact that very capital-intensive industries, especially pharma, had weathered the crisis better than labor-intensive sectors. Meanwhile, the real thing — slight wage decline in Ireland while wages rise in Germany — has been proceeding at a relatively glacial pace. And the promised payoff in increased market share is still invisible:

A Moment’s Respite in Europe - So it would appear that New Democracy will win approximately 130 seats of the 300 available and therefore technically be able to form a ruling coalition with any of the other top 4. I say “techinically” because there are already reports out of Greece that their previous coalition partner PASOK has stated it won’t form a coalition with New Democracy unless SYRIZA comes on board as well. SYRIZA has already ruled this out stating it will stay in Opposition. This suggest that PASOK officials are concerned that New Democracy will be quickly ousted from parliament due to undeliverable promises leaving SYRIZA in a position to cement its power come a new election. In other words, PASOK appears to want everyone to drink from the same poison chalice because it doesn’t want to be caught on the wrong team if/when the new government fails. Now there’s confidence ! But I guess I can understand the political dilemma. Even though New Democracy appears to be the less extreme option it wasn’t long ago that Antonis Samaras was the bad guy of Greece and the post-election statements from the German foreign minister are a stark reminder of the road ahead:German Foreign Minister Guido Westerwelle signaled on Sunday that Greece could get small concessions from the euro zone over its painful bailout programme but nothing like a full renegotiation.“There can’t be substantial changes to the agreements but I can imagine that we would talk about the time axes once again, given that in reality there was political standstill in Greece because of the elections, which the normal citizens shouldn’t have to suffer from,”

Greece: the exit poll? - So New Democracy (ND) has won a narrow victory.  Indeed, leftist Syriza led among 18-34 year-olds and 35-54s. So the ND victory is entirely due to seniors like those quoted above.  There has been a polarisation on the right towards ND and to the left around SYRIZA, but the anti-bailout parties still polled more than the pro-austerity parties by 53% to 47% (including those parties that did not make parliament). ND’ s victory is a blow to the chances of the Greek people of getting out of the deep depression that the economy is in, with near 25% unemployment, a contraction in output of around 7% annual rate (down nearly 20% since the peak) and the government and utilities running out of money to provide basic services like health, lighting and heating. ND is the leading right-wing party and responsible, along with ‘collaborationist’ ‘socialist’ PASOK, for the mess in the first place.  ND represent the rich, the people who don’t pay their taxes and big business and the banks in Greece.  They have ended up as the largest party ahead of the leftist SYRIZA through a combination of fear that Greece will be thrown out of the European Union if the people elect the left; through black propaganda against the left; and through hints and promises by the Euro leaders that the pro- bailout parties can negotiate a better deal on austerity.  During the campaign, much was made by ND that it could so.  The Euro leaders made it clear that a new deal could be negotiated.  And the OECD on the eve of the election called for a new package.  These promises just won it for ND.

New Democracy party hails 'victory for Europe' - The leader of Greece’s pro-memorandum conservative party has claimed victory in the country’s second election in as many months, describing it as a “victory for Europe”. “The people of Greece have shown their will to stay anchored in the euro zone and honour our commitments,” said Antonis Samaras, in a victory speech delivered in Greek and English. “They have voted for a European course and our stay in the euro. They voted for jobs, justice and safety. No more adventures.”

Euro jumps broadly after Greek vote results - The euro hit a three-week high against the U.S. dollar after official Greek election projections showed parties committed to Greece's multi-billion-euro bailout were on course to secure a slim parliamentary majority.The euro rose to around $1.2730 according to Reuters data in early Australasian Monday trade, from around $1.2655 late in New York on Friday. It hit its strongest since May 22 according to Reuters charts.

And Then What? - Krugman - So it appears that the governing coalition in Greece has pulled out a narrow victory — winning only a minority of votes, but getting a narrow majority in the parliament thanks to the 50-seat bonus New Democracy gets for coming in first. So they will now have the ability to continue pursuing an unworkable policy. Yay! Joe Wiesenthal tells us that there’s a meme in Greece to the effect that Syriza didn’t really want to win, because it would rather see the current government flail some more. Conversely, establishment types should actually be dismayed by this outcome: if current policies fail completely, which seems almost a given, and Greece exits the euro anyway, which seems highly likely, the entire Greek center will end up discredited; better, in a way, to be able to blame the radicals. And I gather I’m not the only one thinking along these lines; Business Insider also reports hints that Pasok, which has suffered terribly from its identification with failing policies, might not continue in the coalition unless Syriza is also brought on board — which then raises the question, why would Syriza do that?  The debacle rolls on.

Long Run Greek Competitiveness - Krugman - One of the things you keep hearing about Greece is that if it exits the euro one way or another there will be no gains, because Greece basically can’t export — so structural reform is the only way forward. But here’s the thing: if that were true, how did Greece pay its way before the big capital flows starting coming? The truth is that before the euro and the capital flow bubble it created, Greece ran only small current account deficits (the broad definition of the trade balance, including services and factor income):(All data from Eurostat).And Greece’s net international investment position — the difference between its overseas assets and liabilities — was negative, but only to the tune of 25 percent of GDP, a rather modest number: Yes, Greece was poor and relatively unproductive. But its famous lack of competitiveness is a recent development, caused by massive post-euro inflows of capital that raised costs and prices. And that’s the kind of thing that currency devaluations can cure.

Greece as Victim, by Paul Krugman -Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.  No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places.  Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Unemployment was high but not catastrophic, and the nation more or less paid its way on world markets, earning enough from exports, tourism, shipping and other sources to more or less pay for its imports.  Then Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive. To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.

Greek Elections: Returning to the Unsustainable Status Quo - New Democracy (ND) just barely pulled ahead of the anti-bailout, left-wing Syriza in the election on June 17th. According to the Greek constitution, the party in first place wins 50 bonus seats in parliament. With roughly 85% of the votes counted and Syriza having conceded defeat, it looks like ND will have 130 seats, Syriza 71, Pasok 33, the Independent Greeks 20, Golden Dawn 18, the Democratic Left 16 and the KKE 12. The markets will view a ND victory as good news, but is it really? I expect the rally to be short, as this election has just returned us to the utterly unsustainable status quo. The only thing that the leaders of the main parties in Greece can agree on is that Greece needs to form a government, and quickly. This represents a significant shift compared with the May 6th election, when it was clear early on that most parties were more interested in party politics than the national interest (ND spent only six hours trying to form a coalition, and Syriza in particular was intent on pushing the country to new elections). Once Greek President Karolos Papoulias gives New Democracy the green light to form a government, ND will have three days to attempt to form a coalition. Syriza will insist on remaining in opposition, and who can blame them. Syriza can stand on the sidelines and soak up new supporters with its anti-austerity rhetoric as the new government struggles to comply with the terms of the bailout. This could put Syriza in position to win the next election once this government collapses.

Greek elections: Status quo prevails, but crisis is far from over - The results of the Greek elections are in: New Democracy, the conservative “pro-bailout” party, has come in first and appears to have enough support to form a new government. So what does this mean? In the very short term, it likely means Greece won’t be leaving the euro zone. New Democracy’s leader, Antonis Samaras, basically wants to abide by the terms of the country’s bailout agreement with the rest of Europe. Greece will continue to stick with its austerity program — spending cuts, tax hikes, paring back public-sector jobs. And in return, the “troika” (the European Central Bank, the European Commission, the IMF) will keep sending Greece billions of euros to run its day-to-day operations.  But how tenable is this overall situation? Greece continues to struggle through one of the worst depressions in modern history — its economy contracted 7 percent last year and unemployment is at a staggering 21 percent. Many economists have argued that Greece’s austerity program — intended to rein in its staggering debt load — is only hurting growth and making things worse. And, Paul Krugman notes, as long as Greece is tethered to the euro, its economy will remain uncompetitive.

A vote for misery not disaster - WHEN deciding whether to grant citizenship to an outsider, the Ancient Greeks would put the matter to a vote, tossing coloured pebbles into a clay jar. On June 17th almost 29.7% of voting Greeks picked the colours of New Democracy, a centre-right party that broadly supports the country's EU bail-out agreement. It was seen as a vote to remain citizens in good standing of the single currency. New Democracy narrowly beat Syriza, the "coalition of the radical left", which was threatening to rip up the bail-out agreement. That would have resulted in ejection from the euro area or at least ostracism (another Ancient Greek practice) from its fellow members. On the face of it, this do-over election has generated the kind of result euro-officials were hoping to see in the first election on May 6th. The leader of New Democracy, Antonis Samaras, will now seek to form a coalition with other parties that broadly support the bail-out. The Greek people can look forward to the sweat of fiscal austerity, not the tears of financial chaos. They can expect chronic misery rather than acute disaster. But it would be wrong to conclude that Greece or the euro area has reverted to the status quo ante. A lot has changed in the last six weeks, both politically and economically.

Samaras’ victory offers relief but no answers - So, huge sighs of relief all round. Greece’s New Democracy party, led by Antonis Samaras, managed in Sunday’s elections to head off growing support for the radical left wing Syriza alliance. Mr Samaras looks set to become Greece’s next Prime Minister. The Athens ATMs won’t run dry, there will be no sudden reintroduction of drachmas and Greece will happily be able to persuade itself that it remains firmly held in the bosom of Europe. The euro lives to fight another day. Mr Samaras will now attempt to form a ragtag government including more or less everyone except Syriza. At the very least, that means a coalition involving both teh centre-right New Democracy and the socialist Pasok party, hardly the cosiest of bedfellows. They have, after all, been at each other’s throats for the past few decades. Still, both New Democracy and Pasok claim to be both pro-euro and pro-austerity, so Greece’s European partners and the wider world should be able to breathe a sigh of relief. In the midst of the euphoria that will doubtless dominate financial markets in the days ahead, a few choice facts will be conveniently pushed to one side. New Democracy was, arguably, the party that got Greece into its current mess in the first place, having been in office between 2004 and 2009. Pasok was the party in charge of putting things right between 2009 and 2011. During that period, the Greek economy collapsed, too many austerity promises were broken and the Germans and French eventually ran out of patience, warning Greece that, if it didn’t behave, its days in the euro were numbered. And Greece has no real history of cosy coalition politics: it may just be possible to form a government after Sunday’s election but how long it will last is another matter altogether.

Greek agony drags on as Asphyxiation Bloc wins - Europe’s establishment is delighted by the victory of New Democracy and pro-asphyxiation bloc. This relief is unlikely to last much beyond today, if that. Greece’s new leaders have a mandate from Hell. Almost 52pc of the popular vote went to parties that opposed the bail-out Memorandum in one way or another. There is no national acceptance of the Troika’s austerity policies whatsoever. As for New Democracy, it cannot meet the terms of each quarterly Troika payment in the future even if it secures the support of PASOK socialists because the terms are – politically – impossible to meet. Year after year of "internal devaluation" will drive unemployment to catastrophic levels before it breaks the back of the labour movement sufficiently to clear the way for drastic pay cuts. It is basically a Fascist policy. The electoral settlement is not decisive enough to lance the boil either way so there will no recovery of investment or hope of return to normal life. Even big companies have lost access to routine trade credit. The pro-Memorandum chorus say Greece would face chaos if it left the euro. What do they think it is now? It would be a different story if the Troika knew what it is doing. It does not. The experts from the IMF have been overruled by the ideologues from the ECB. The necessary liberation of euro exit was ruled out from day one – obviously – so the Troika has been making things up as it goes along.

Effects of capital controls on Greece - Controls on the flow of capital between euro area countries have now moved beyond journalistic and academic speculation; European Commission officials are now openly acknowledging they are a subject of discussion. The use of the “Article 65” loophole in the Treaty on European Unity that allows for controls to be imposed for the purposes of taxation, prudential supervision of financial institutions, as well as “public order and public security”, is, for the moment, confined to Greece. How long, though, will depositors in other “peripheral” countries avert their eyes from the risk? It is already getting more difficult to make transfers from Greek banks without having to prove the tax-paid purity of the money in question. Don’t worry, though, it could take at least a month, or maybe two, if the European Central Bank is indulgent, for the barriers on transfers to the north to come down. There are no serious plans for Greece to drop the euro and adopt a new drachma. It’s just that the euros in Greece will not be as transferable, or useful, as euros elsewhere. Here’s how it works: The IMF-ECB-EU troika comes next month to perform its review of Greece’s progress under the memorandum. Progress is at a halt, of course, and discussions on minor or major modifications are set to continue with the new government. In the meantime, Greece finances itself through its banking system with, effectively, drawings on the ECB’s Emergency Liquidity Assistance lines via the National Bank of Greece. That is good for some single-digit billions of euros. That can handle the government’s cash shortfall until September, supplemented by strategic non-payment of bills.

Greece, the post-election questions - The New Democrats are off to attempt forming a coalition, Pasok’s busy making itself look important but will probably join, while Syriza says it’ll be “very powerful” in opposing them. It’s already conceded to, and ruled out allying with, the NDs. So…

  • 1.) How soon does the Troika renegotiation team touch down in Athens?
  • 2.) Will they make that offer to lower the rate on the bilateral eurozone loans?
  • 3.) In which case — how far are we getting to fiscal-transfer territory? That’s if many countries end up lending to Greece below their own borrowing cost. The current loan margin sits at 150bps.
  • 4.) Wouldn’t that be quite a eurozone precedent?
  • 5.) As for the bailout programme proper, no change on the substance, said Jean-Claude Juncker. What does substance mean exactly?
  • 6.) Does it rule out spreading out the Greek adjustment beyond 2014? This seems to be the latest coming out of Berlin… Never mind it’s what the IMF staff suggested back in March.
  • 7.) When the dust settles, what’s going to be this year’s primary budget target?

Greece Races As Cash Dwindles With Europe Seeking Austerity - Greece’s two traditional political rivals are in a race to forge a coalition as the state’s cash dwindles, bank deposits flee and Europe demands renewed austerity pledges before releasing more emergency aid.  The euro erased an initial advance, stocks fell and borrowing costs in Spain and Italy surged on concern an election win by Greece’s biggest pro-bailout party would provide only a brief respite from Europe’s financial crisis.  Greece will run out of money in mid-July, the Syriza party, which placed second in yesterday’s election, said on June 13 after being briefed by Acting Finance Minister Giorgios Zanias. Caretaker Labor and Social Security Minister Antonis Roupakiotis refused to offer assurances pensions will be paid in August, Athens News Agency reported the same day.  “There’s no time to lose or leeway for small party games,” Antonis Samaras, leader of New Democracy, said in Athens yesterday after placing first in a rerun vote that leaves him needing the support of third-place Pasok party to rule. “The country must be governed.”

Greece likely to need third bail-out as soon as new government is formed - GREECE is expected to ask for a third international bail-out agreement as soon as a government is formed, ramping up the pressure on Germany and Brussels to back the eurozone or break it. While Antonis Samaras, leader of New Democracy, scrambled to forge a coalition with Pasok, his officials admitted their first task would be to renegotiate the €130bn (£104.4bn) bail-out agreed in May. Dimitrios Tsmocos, a senior economic adviser, Mr Samaras intends to “honour Greece’s contractual obligations but will actively and aggressively renegotiate the memorandum”. Another senior aide warned of a “social explosion” in Greece if the bail-outs terms were not relaxed. Athens has to reduce its budget deficit to below 3pc of GDP in 2014 and find a further €11bn in public spending cuts from 2014 to 2016. But spiralling economic woes have already driven Greece off course. But experts warned Greece will need another cash injection if the terms are relaxed.

Greece and the Rest of the Eurozone Remain on the Road to Hell - So for the short term, it appears we won’t have a “Grexit”, which has led many commentators to suggest (laughably) that a crisis has been averted.  It is worth pondering how acceptance of the Troika’s program (even if cosmetic adjustments are made) will help hospitals get access to essential medical supplies (see here), whilst the government persists in enforcing a program which is killing its private sector by cutting spending and not paying legitimate bills, and an unemployment rate creeps towards 25 per cent and 50 per cent for youth.  Prior to the June 17th vote, Greek voters were intimidated with a massive number of threats of what would happen if they didn’t vote “the right way” (i.e. anybody but the “radical leftists” in Syriza). Even then the conservatives on just led the vote count from their main anti-austerity rival. Amazingly, New Democracy leader Antonis Samaris suggested in his victory speech last night that the results reflected a vote for “growth.” There is more than a touch of Orwell at work when one can redefine the kinds of programs  which the Greeks will be forced to swallow as conducive to “growth” and “prosperity”. So the Greek government will continue to plug away at austerity and the Troika will continue to pretend that such policies will ultimately lead to a Greek economic recovery. There will be some fake advertising about Europe making it easier on the Greeks, but it will be something without substance. Then things will get worse to the point where Samaras might have to take a helicopter to flee the crowds.

The Greek election has roiled markets by insisting on more of the same. - Over the weekend, the world was supposed to be terrified that Syriza—the Greek self-proclaimed “radical left” party that’s been surging as the old order is discredited in the face of economic collapse—would win an election. Syriza, you see, planned to refuse to implement austerity measures already agreed to by the Greek government and the “troika” of the IMF, the European Commission, and the European Central Bank. This dangerous game of chicken would lead either to Germany caving and offering more generous terms or Greece getting kicked out of the eurozone. But the voices of the conventional wisdom got their way and the center-right New Democracy party eked out a narrow win that should let it form a coalition with the center-left Pasok and go on implementing a policy agenda cooked up in Berlin and Frankfurt. Markets were supposed to be reassured. Instead they’re freaking out. European stock markets are declining, and Spanish bond yields are back into the 7 percent danger zone. What went wrong? Perhaps the better question to ask is how it ever got to be conventional wisdom that maintaining the Greek status quo was the reassuring option? Greece’s economic woes have, as ever, short-term and long-term elements. In the short-term, this election outcome means continuing to stay the course of fiscal austerity and made-in-Germany monetary policy that’s indifferent to depression conditions in Greece.

The Monday After, by Tim Duy: Today is the first day after the "crucial" Greek vote. Except that vote was probably not all that crucial. Nothing fundamental has changed in Europe over the weekend. At best, all that has been accomplished is pushing out the end-game once again. The Financial Times reports that Greece is on the verge of forming a government: Antonis Samaras, leader of Greece’s New Democracy, began talks to form a coalition government on Monday following his party’s failure to secure an outright majority in the country’s election. If Europe thought this would be the end of the story on the last bailout, think again: Mr Samaras told reporters after his meeting with Mr Tsipras that he would invite all pro-European parties to join a coalition government. He also restated his determination to seek “alterations” to the bailout by renegotiating the terms with Greece’s creditors. Bloomberg reports that German Chancellor Angela Merkel just says "nein" to such bluster: German Chancellor Angela Merkel said Greece shouldn’t be granted leeway on terms for its bailout, rejecting signals from her foreign minister that creditors may relent on austerity measures......“The important thing is that the new government sticks with the commitments that have been made,” Merkel told reporters at the G-20 meeting in the Mexican resort of Los Cabos. “There can be no loosening on the reform steps.” Yes, another showdown is certain. Merkel will give up only the slightest sliver of ground, almost ensuring the Greek economy remains locked in a never ending cycle of austerity. And according to rumor this is exactly why Alexis Tsipras, the leader of Syriza, has no interest in joining with New Democracy in a coalition government, instead leaving the inevitable failure of this next bailout on the shoulders of his opponents.

Europe Gets Emerging Market Crisis Ultimatum As G-20 Meet - European leaders are under pressure at the Group of 20 summit in Mexico to stamp out the debt crisis as global partners hint at help to keep the world economy afloat.  As elections in Greece reduced the immediate risk of the euro area’s breakup, China and Indonesia signaled growing exasperation with more than two years of European crisis- fighting that has failed to stem the threat of global contagion. World Bank President Robert Zoellick said that policy makers bungled their attempt to rescue Spain’s banks.  “I hope that one way or another our European colleagues will reach an agreement on rigorous methods to manage the crisis,” Indonesian President Susilo Bambang Yudhoyono, who heads Southeast Asia’s biggest economy, said in a speech in the Mexican resort of Los Cabos yesterday. “The absence of such methods will have unsettling consequences to all of us.”  The two-day G-20 summit starting today kicks off a week of crisis meetings taking place after Spain this month became the fourth euro-region nation to seek a bailout amid the weakest global economy since the 2009 recession.

Euro Chiefs Signal Greek Austerity Softening as Summit Looms = European governments signaled a willingness to relent on Greece’s austerity measures as leaders turn from an election victory by Greek bailout proponents to focus on safeguarding the other 98 percent of the euro economy.  Greece’s new government must emerge “swiftly” from yesterday’s contest, which showed pro-bailout New Democracy in a position to form a coalition, euro finance chiefs said in a statement. German Foreign Minister Guido Westerwelle said negotiators could consider giving Greece more time to fix its finances, telling ZDF television that the political gridlock over the past six weeks “has done damage.”  Greece’s international monitors will “return to Athens as soon as a new government is in place to exchange views with the new government on the way forward,” the finance ministers’ statement said. They want “the swift formation of a new Greek government that will take ownership of the adjustment program.”  The election result in the country where the debt crisis began in 2009 paves the way for euro leaders’ fourth make-or- break summit in a year. While Chancellor Angela Merkel warned global leaders last week that Germany rejected what she called quick-fix management of the crisis, a softening of the terms of Greece’s bailout may provide a template for how euro leaders overcome policy differences.

Austerity, Forced and Unforced - The GIIPS countries on the periphery of Europe are undertaking fiscal retrenchment that is largely self-defeating, because they have little choice given the structure of the eurozone’s governance, and Germany’s policy position. The United States, is undertaking reducing government spending not because it has to, but because of an ideology that sees austerity as a convenient means of bludgeoning the opponents of a reasoned fiscal policy.Last week, I had the opportunity to participate in a panel on “Assessing the Austerity Experiment”, at the Center for American Progress. (The video of the proceedings is here). The panel included Carlos Mulas-Grenados, Jared Bernstein, and Zach Schiller, and was moderated by Michael Ettlinger, and took place at an opportune time; that morning France had been downgraded by Moody’s, and Italian yields had risen above Spanish yields (which were both above 7%).

Nothing Has Changed: Analysts Expect Greece To Exit The Euro - As it so happens, none of the major investment banks really view this weekend's election results out of Greece as having much impact on whether the country will exit the eurozone or not.  Citi leaves their odds of a Greek exit between 50 and 75 percent over the next 12-18 months: While the outcome of the election, and the likely agreement on an ND-led government has reduced the risk of an exit in the very near term, with the large role of SYRIZA in Parliament and its power to organize protest against further austerity measures and far-reaching structural reforms on the streets, it looks to us unlikely that Greece will be able to fulfill only slightly amended conditions of the MoU.Morgan Stanley still has the chances that Greece leaves the euro at 35 percent over the next 12-18 months, but that could change:To the extent that a government willing to cooperate with Europe emerges, the probability of a near-term eurozone exit, which we put at 35% over 12-18 months, will diminish -- regardless of whether this government can comply with the conditions. This is because Europe could at least say that Greece is back on track, perhaps with a slightly different programme given a a deeper recesision than expected; and the Greek politicians can present a somewhat milder adjustment path to the Greek people. Credit Suisse still has the chances of a Grexit this year pegged at 20 percent, and that includes a 10 percent chance that the entire eurozone breaks up. Credit Suisse analysts published a note this morning saying the following:

Euro’s Greek honeymoon short-lived - The election victory for pro-austerity parties in Greece failed to assuage fears over the eurozone’s future, as investors ratcheted up the pressure on policymakers by sending Spain’s benchmark borrowing costs to a new euro-era high. Markets initially rallied on news that New Democracy and Pasok, two mainstream parties that support the austerity conditions of the eurozone’s bailout, gained enough seats to form a parliamentary majority in Athens. But the optimism was swiftly deflated by dismal bad bank loan figures in Spain that underlined the country’s woes. Data from the Bank of Spain showed that the non-performing loan ratio of Spanish banks rose to 8.7 per cent of their outstanding portfolios in April – the highest in almost two decades.  The eurozone has already promised €100bn to help recapitalise Spain’s banks, but investors are concerned it could merely increase Madrid’s debt burden and eventually lead to a full sovereign rescue.Spain’s benchmark 10-year bond yields, which move inversely to prices, climbed as high as 7.28 per cent on Monday, while the euro retreated sharply against most other major currencies. Italy’s 10-year bond yields rose above the 6 per cent mark again.“The Greek election merely postpones a consideration of the underlying problems,” said Sushil Wadhwani, a hedge fund manager and former member of the Bank of England’s monetary policy committee. “The markets are tiring of things that buy a little time and do not deal with the underlying, fundamental issues.”

The Euro Crisis: Why Greece’s Election Doesn’t Matter - Sunday’s national election was supposed to be a major turning point for the future of the euro. The fear in financial markets was that a government led by a party with a radical approach to the country’s three-year debt crisis would take power, or that no stable coalition would form at all, setting in motion a chain of events that would end in Greece’s exit from the euro zone and inevitable chaos. First, the good news. The outcome of Greece’s election was probably the best possible one for the euro. Rather than a clear “antibailout” party, like Syriza, winning the election, the “probailout” New Democracy party garnered the largest number of votes, and now its chief, Antonis Samaras, is attempting to cobble together a ruling coalition. Assuming he achieves that task on Wednesday, the election result will likely quash worries of an immediate Greek exit, or Grexit, as it is being called. Now, the bad news. The importance of this election was overblown. Sure, we might have dodged the most dangerous bullet. But the reality is that the overall situation, for Greece and the euro zone, has not improved, let alone changed much. We are no closer to a resolution of the crisis than we were before. In fact, we may be even further away.

Greece a Sideshow as Euro's Fate Rests on Spain: Blejer Greece’s election outcome is a “sideshow” as the battle to prevent a breakup of the euro zone shifts to Spain, said Mario Blejer, a former Bank of England adviser who took the reins of Argentina’s central bank after its 2001 default.  “If the system can’t protect one of the most important countries then it really can’t be sustained,” Blejer, 64, said during an interview yesterday in Los Cabos, Mexico, ahead of a summit of leaders from the Group of 20 richest nations.  Financial markets will probably welcome the victory of the pro-bailout New Democracy party in yesterday’s Greek parliamentary vote as “the least bad result” that avoids any “immediate clash” between the debt-saddled nation and its creditors, Blejer said. Still, the government that takes office will lack “legitimacy” and will soon need to reopen the terms of the bailout to build political support for its pledge of austerity.  “You can’t put forward all of these measures, which are very unpopular, with a majority of five people,” said Blejer.

Hollande’s Socialists win absolute parliament majority in French election - French President François Hollande’s Socialists won an absolute parliamentary majority on Sunday, strengthening his hand as he presses Germany to support debt-laden euro zone states hit by austerity cuts and ailing banks. The Socialist bloc secured between 296 and 321 seats in the parliamentary election runoff, according to reliable projections from a partial vote count, comfortably more than the 289 needed for a majority in the 577-seat National Assembly. The left-wing triumph means Hollande, elected in May, won’t need to rely on the environmentalist Greens, projected to win 20 seats, or the Communist-dominated Left Front, set for just 10 deputies, to pass laws. The centre-left already controls the upper house of parliament, the Senate.

Rescue Me - I guess we will never know whether or not Mariano Rajoy uttered the two magic words so effectively immortalized in song by Aretha Franklin that Saturday afternoon in late May as he cruised down the Chicago River in what Spanish media called a “Love Boat” ride, but one thing certainly is now clear, Angela Merkel has finally and definitively accepted Spain into the German embrace. Whether it will be a tender and loving one remains to be seen. What is obviously true is that Spain is in trouble, and needs help. Five years after the Global Financial Crisis broke out unemployment is at 25% of the labour force (and rising), house prices continue to fall, non performing loans continue to rise in the banking sector, bank credit to the private sector is falling, and, as Finance Minister Cristobal Montoro said two weeks ago, the sovereign is having increasing difficulty financing itself. Hence the bank bailout. On top of which Spain’s economy is once more in recession, a recession which will last at least to the middle of 2013, even on the most optimistic forecasts, and is in danger of falling into the dynamic which has so clearly gripped Greece, whereby one austerity measure is piled onto another in such a way that the economy falls onto an unstable downward path, as austerity feeds yet more austerity. Spain’s citizens are naturally nervous, anxious and increasingly afraid. Hardly a dynamic which is likely to generate the kind of confidence which is needed for recovery to take root.

Bill Maher Interview Nobel Winning Economist, Joseph Stiglitz. - YouTube

Spanish Yields at 7% Show Investors Slamming Door - Investors who oversee more than $3.2 trillion expect Spain to become the fourth euro member to need external funding as borrowing costs surge to levels too punitive for the nation to finance its needs on the capital markets.  Spanish debt has slumped, pushing the 10-year yield today to a euro-era record of 7.13 percent, as investors at Fidelity Investments, Frankfurt Trust and Principal Investment Management say the nation may lose market access. The bonds are the worst performers among 26 developed markets since June 9, when Economy Minister Luis de Guindos said he would request as much as 100 billion euros ($127 billion) of emergency loans from the euro area to shore up a Spanish banking system hobbled by bad assets.  “Yields are at levels at which Spain can’t really afford to finance itself for more than a few months,” “The banking bailout doesn’t really help Spain’s credibility in the market and the probability is rising that it will be asking for a bailout for the sovereign.” Veysey said he doesn’t own Spanish government bonds and has no plans to purchase them.

Mariano Rajoy, Spain's Prime Minister, Says He Will Not Implement IMF's Recommendations For Now: — Spain will not immediately implement the International Monetary Fund's latest recommendations, which include cutting government workers' wages further, because they are nonbinding advice, the prime minister said Saturday. The IMF is one of three organizations Mariano Rajoy's government turned to for an assessment of the state of Spain's banking sector ahead of a (EURO)100 billion ($125 billion) bailout for failing lenders. The latest IMF document, released Friday, was not part of a bank sector report, but one of regular economic analyses issued on the state of Spain's economy. It was critical of how the country had missed its deficit reduction target in 2011, despite insisting "until almost the end of the year that the deficit was on track." Spain's deficit for 2011 had to be revised upward twice to finish at 8.9 percent of economic output, instead of the 3 percent maximum level set by the European Union. Rajoy has set a goal of reducing the deficit to 5.3 percent of GDP in 2012. The IMF report called that goal "very ambitious" and said it would "likely be missed." Rajoy said the IMF proposals, contained in the Friday report, were only suggestions and he would not implement them for now. Meanwhile, several thousand demonstrators marched late Saturday in at least three Spanish cities to protest what they said was disgraceful mismanagement of banks that had left them on the verge of bankruptcy.

Spain crisis: Bond yield hits bailout danger zone - Oil and the euro fell while Spain’s 10-year yield rose to a record as an increase in bad Spanish loans fueled concern the debt crisis is deepening, overshadowing wins by pro-bailout parties in Greece. Most U.S. stocks rose. Oil lost 1 percent at 2:19 p.m. New York time to pace a retreat in commodities. Natural gas rallied on speculation hotter weather will boost demand at power plants. The euro fell 0.4 percent to $1.2587 after strengthening for four straight days. The 10-year Spanish yield jumped as much as 41 basis points to 7.29 percent before trading at 7.16 percent. The Standard & Poor’s 500 Index added 0.4 percent to 1,347.78 as four stocks gained for every three that fell on U.S. exchanges. Ten-year Treasury yields rose two basis points to 1.60 percent. Spain, which has asked euro-region governments for as much as 100 billion euros to help shore up its banks, reported today that bad loans jumped in April to 8.72 percent of total lending, the highest since 1994. German Chancellor Angela Merkel said Greece should not be given more leeway to comply with austerity measures needed to secure international aid after pro-bailout parties won enough seats to form a majority in parliament.

Can't Get No Satisfaction - Krugman - At any given time, there tends to be one number I check on waking up to see how close we are to the apocalypse. Often it has been the US 10-year — where down is bad, because it shows pessimism about the economy. Right now it’s the Spanish 10-year, where up is bad, because it shows pessimism about the future of the euro. And guess what: after an election that supposedly was a victory for the forces of orthodoxy, the yield has spiked. 7.25 percent! The reasons aren’t hard to see: we have a maybe coalition that received a minority of the votes, pursuing a strategy almost guaranteed to fail, with parties ranging from radical to full-on fascist waiting in the wings. But what was the market expecting? In a way, the worst thing about the Greek election is the possibility that it will encourage the Germans and the ECB to persist a bit longer with their fantasies about how things might work.

Spain treasury minister urges ECB action on markets (Reuters) - Spain's treasury minister urged the European Central Bank on Monday to respond firmly to market pressures, after a Greek election did little to soothe investor concern about the spread of the debt crisis, pushing Spanish bond yields to their highest since the inception of the euro. "The ECB must respond firmly, with reliability, to these market pressures that are still trying to derail the joint euro project," Treasury Minister Cristobal Montoro told the Spanish Senate during a budget hearing. Yields on benchmark 10-year Spanish bonds rose by more than 20 basis points on the day to hit 7.138 percent by 0642 EDT, their highest since the launch of the euro in 1999, having gained a full percentage point this month alone.

Italy-Spain spread reaches a record as Spain's fiscal problems come into focus  - As analysts look deeper under the hood of Spain's public finances, they are finding an an increasingly unstable engine. It's not just the growth in the debt to GDP ratio that worries people but also the "contingent" liabilities and other debt not yet included in this ratio. In many cases the central government will be stepping in to bail out regional governments, some of which are in trouble (sometimes unable to pay vendors such as garbage collectors, etc.). FROB (Fund For Orderly Bank Restructuring) that gets consolidated into government's balance sheet has contingent liabilities to the banking system. And the government continues to guarantee bank-issued unsecured bonds that banks use as collateral at the ECB to borrow funds. That allows them to buy more Spanish government paper to support Spain's bond auctions. The chart below shows how government guarantees have grown in the past few years - both on an absolute basis as well as the percentage of the GDP.

Spanish CDS at record high - Credit default swaps on Spanish debt hit a record high on Monday, underscoring the level of nervousness surrounding the outlook for the eurozone’s fourth-largest economy. The cost of insuring against a Spanish debt default jumped 27 basis points to 622bp, equating to annual costs of $622,000 to insure $10m of debt for five years. Italian CDS meanwhile rose sharply to 554bp, according to data provider Markit. CDS on banks including BBVA and Santander also traded wider, highlighting how closely correlated Spanish banking stocks have become to the Spanish sovereign. News of a €100bn bailout for Spain’s banks failed to calm markets last week and, despite a brief market rally in the wake of Greece’s election results, yields on Spain’s 10-year government debt continued to rise. On Monday they hit a fresh euro-era high. As banks in the eurozone have looked to shrink and offload assets on the back of regulatory and market pressure, lenders have become increasingly closely aligned to their sovereign. Analysts point out that those links have been reinforced in so-called periphery countries by a recent €1tn-plus capital injection into the eurozone banking system by the European Central Bank. Many banks in Spain and Italy borrowed heavily from the ECB via its three-year longer-term refinancing operations, using the money to buy their own government’s bonds.

Spain debt costs to jump - Spain is likely to pay record high rates to borrow at debt auctions this week after the Greek election failed to ease concerns about the future of the euro zone and amid uncertainty over whether Madrid will need a full sovereign bailout.  The yield on Spanish 10-year bonds hit a fresh high of above 7 percent on Monday, jumping by as much as 37 basis points, as initial relief over the victory of pro-bailout parties in Greece gave way to ongoing fears of deeper problems facing the bloc.  Seven percent is considered too pricey for a country to afford over the long term. Such levels have previously led to bailouts in Greece, Ireland and Portugal.

Another "We are Saved" Euphoria Lasts Only Moments; European Bond Market Revolts Already as Spain 10-Year Yield Hits Record High 7.28% - Following news of the victory of the "pro-bailout the French and German banks party" known in Greece as "New Democracy", the euro sailed to 1.2760 and a lovefest in the Asian equity markets began. However, the rally in the euro did not last long. There was no rally in the European bond markets to begin with. The US stock market opened in the red. Euro 15-Minute Chart The rally in the euro lasted about 39 candles, 585 minutes, or roughly 9.75 hours. It was essentially straight downhill once the European markets opened. The far more important European bond market never got going in the first place as the following charts from Bloomberg show.

Spain banks need €150 billion provisions: report -  Spanish banks could need additional provisions for bad loans worth up to €150 billion ($189 billion) according to the results of an independent audit due to be released later this week, business daily El Confidencial reported on Monday. The newspaper, citing various sources, noted that total includes provisions across the retail mortgage portfolio. Yields on 10-year Spanish government bonds shot above the psychologically important level of 7% on Monday as earlier cheer over a victory for the pro-austerity, pro-euro New Democracy party faded. Data released earlier in the day showed bad loans for banks continued to rise in April.

What happens if Angela Merkel does get her way - The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union. They have 10 days to disentangle that knot.  The interesting thing is that all statements are correct in a certain way, but only the French president offered a practical solution; without crisis resolution, there can be no political union. Mr Hollande made a concrete proposal to allow the European Stability Mechanism to inject unlimited equity into banks; allow it to refinance itself through the European Central Bank; and to let the ECB supervise the 25 largest financial institutions. The German chancellor responded, respectively, with Nein, Nein and Ja.  Unfortunately, the 25 largest banks have no bearing on this problem. It is the other banks that matter. Ms Merkel has accepted the weakest and least relevant bit of Mr Hollande’s proposal. With so many ideas on the table, it is critically important to understand what is required right now. Spain needs an equity injection into its banking system from the eurozone, not through a loan to the Spanish recapitalisation fund. Only when that happens, can Mariano Rajoy, the Spanish prime minister, claim to have nailed the problem and set off to watch the football – an activity at which he excels. And to address Italy’s problem, the EU needs to find a way to lower its interest rates. This can only occur through one of the following three measures: a eurobond; direct bond purchases through the ECB, or the ESM. But Italy is too big to fit under the umbrella, the ECB does not want to monetise debt and Germany is opposed to a eurobond.

"Germany is a Credit Risk" Says Bill Gross; Germany Exiting Eurozone is One of Very Few Scenarios in Which German Bonds Do Well - Bill Gross echoes my statements that Germany is poised for a big hit either by a piecemeal breakup of the eurozone, by Germany indefinitely ponying up more money to keep the eurozone intact, or by Germany saying it has had enough and goes back to the deutsche mark. On Bloomberg TV’s “Market Makers” Bill Gross of PIMCO spoke to Erik Schatzker and Stephanie Ruhle today and said, “I would be leery of German bunds simply because there are only a few scenarios in which they can do well…Germany for me is a credit risk. It’s not an attractive market.” (video)

Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?" - Here is a Target2 Balance Example: If a Greek depositor sends money to a foreign bank (say a German bank), that bank now has additional deposits. To the extent it doesn't want to recycle them (in the past, it may have used them to buy Greek government bonds), it deposits them with a NCB (national central bank) - in this case the Bundesbank (Germany's Central Bank). Target claims are created because the Greek bank that loses deposits gets funding via the ECB's ELA (Emergency Liquidity Assistance) program. Simply put, the ECB sends money to the Bank of Greece in a kind of open credit line to make up for the cash that left the Greek bank. There are some restrictions, but not many. This is not a major problem unless Greece changes currencies or defaults. If it does, Greece will repay the credit line with Drachmas, not euros (or if the radical left had won, perhaps not at all). This is precisely one of the things that had everyone excited. Germany is responsible for its share of any such losses at the ECB according to its percentage in the EMU, roughly 27%. France, Italy, and Spain are next in line to take losses. There is a table of percentage Responsibility Percentages on Wikepedia. The table may not be perfectly up to date, but it should be close enough.

Worried Banks Resist Fiscal Union - The seemingly endless series of euro zone crises has European officials pushing for a banking union that would watch over and bind together the currency group’s faltering financial institutions. But for Europeans, there seems to be little appetite for such a compact right now. In fact, banks and their national regulators, anxious about the Greek elections and Spain’s hastily arranged bailout, are behaving more parochially than ever. That poses a threat to the interbank lending across borders that is crucial to maintaining liquidity — the free flow of money that is the lifeblood of the global financial system. French and German banks have clamped off much of the lending to their counterparts in Italy and Spain, which in turn are primarily giving loans to their own debt-laden governments. And in Madrid, even after European finance ministers agreed to a 100 billion euro, or $125 billion, rescue of Spain’s failing banks, the always proud Spanish government is insisting that it — and not Brussels bureaucrats — will take charge of how and where the funds are deployed.

Europe's Grandma Crisis - The 67-year-old retired police officer and his wife have taken their daughter's family back into their one-bedroom apartment in Rome. Mr. Arcidiacone takes his two toddler grandsons to the playground and pediatrician. Ms. Arcidiacone makes homemade gnocchi and peels the skin off grapes so the boys don't choke. This summer, the extended family is decamping to the grandparents' native region of Calabria, in southern Italy. "Mamma and papà are fundamental. We couldn't cope without them," Grazia Arcidiacone, a smiley 36-year-old brunette, said on a Saturday morning as she sat in her parents' kitchen cuddling 14-month-old Francesco. The Arcidiacones are part of Southern Europe's unheralded social safety net—an army of older family members who are helping younger generations make ends meet during the region's crippling economic crisis. Half of all abuelos, or grandparents, in Spain take care of their grandchildren nearly every day, and 68% of all children under 10 in Italy are looked after by their nonni when not in school or with parents, according to official numbers. By way of comparison, 19% of preschoolers in the U.S. were taken care of primarily by grandparents while their mothers worked in 2010, according to Census Bureau figures.

Counterparties: Euro next - Sunday’s Greek election ended with a narrow victory for the conservative, pro-bailout New Democracy party, which now must try to form a coalition government. That is, of course, the same untenable status quo that preceded the election. Meanwhile, the NYT reports that European leaders are working toward a “grand vision” that, at first blush, sounds a lot like the many vague promises we’ve heard from eurozone officials before. The plan this time is to prevent bank runs and what the NYT’s Jack Ewing calls the “vicious cycle of government debt problems turning into banking crises”. But like everything in Europe, the politics of this are tricky; Lisa Pollack walks us through who wants banking union, a closer political union, a fiscal union or some permutation of the three. There are already indications a banking union is on the horizon: European Commission president Jose Manuel Barroso reiterated his earlier statement that some form of deposit guarantee system and resolution authority will be proposed by this fall. You can wait until then, right? In the interim, Tim Duy thinks the only way to stop lurching from one sovereign-debt panic to another (aka the status quo) is for the ECB to be able to act as lender of last resort when euro zone countries are at risk of default. Hugo Dixon says that as imperative as a banking union may be, it will take years to complete.

Rising European Nationalism Is Destroying The Euro - The European crisis and the recent round of elections in Europe have shown an undercurrent of political nationalism, writes UBS economist Paul Donovan. In Greece, Golden Dawn got nearly 7 percent of the vote in June 17 elections, and Syriza also campaigned on a nationalism platform. In France, the Front Nationale secured 14 percent of the vote in the first round and managed national assembly representation for the first time in decades. Meanwhile, The True Finns are the third party of Finland, while Sinn Fein is in the second spot in Ireland if recent opinion polls are to be believed. And this nationalism is making it harder to resolve the European crisis. What's causing the wave of nationalism? Donovan believes nationalist parties are gaining political support because of two common characteristics among their supporters. First, they tend to come from the economically insecure strata of society though not the lowest income groups. "It is more likely to be those in society who feel themselves as being most at risk in economic terms," writes Donovan. "That implies that they have something to lose (thus are not the lowest income groups) and that they feel threatened." This also explains why nationalism is as prevalent in non-periphery, as it is in peripheral Europe. They are also hostile to immigration and perceive outsiders to pose an economic and a cultural risk.

Chart of the Day: The smoking gun showing how the ECB wrecked the Spanish economy - Edward posted a thorough analysis of the situation in Spain this weekend. I recommend that piece, Rescue Me, highly. Here’s a chart that caught my eye.  Edward writes:Well one thing should be clear by now, part of the responsibility for the situation lies with the ECB who applied (as they had to) a single size monetary policy even though this was clearly going to blow bubbles in the structurally higher inflation economies. And so it was, Spain had negative interest rates applied all through the critical years, and now we have the mess we have.Back in 2006 inspectors at the Bank of Spain sent a letter to Economy Minister Pedro Solbes complaining of the relaxed attitude of the then governor, Jaime Caruana (the man who is now at the BIS, working on the Basle III rules) in the face of what they were absolutely convinced was a massive property bubble. Their warning was ignored. Negative real interest rates aka easy money have recently been re-labelled financial repression. Now in the aftermath of a property bubble, they are seen, not as emblematic of central banks’ blowing bubbles, but of central banks stealing net interest income from savers to bail out debtors.  Think of it this way, just after the Euro came into being, the German economy was in what I labelled a soft depression due in large part to Germany’s own post-unification credit excesses. So the ECB decided to prop up the German economy with low interest rates, rates that produced negative real interest rates and housing bubbles in Ireland and Spain. This was a policy designed to "bail out" the indebted German economy. We called it easy money then because it allowed massive speculation to be funded by cheap loans in credit markets. Now that the bubbles have popped, easy money has morphed into financial repression. But the goal is the same as it ever was: to "bail out" the indebted by ‘repressing’ interest income that creditors can receive.

Spain pleads for ECB rescue as bond markets slam shut - Europe's leaders have vowed to mobilise all possible means to counter the region's escalating crisis after Spain's borrowing costs threatened to spiral out of control. Yields on 10-year Spanish bonds surged to a record high of almost 7.3pc as investors ignored the victory of pro-bailout parties in Greece's elections. The closely-watched two-year yield rocketed by 65 basis points in a matter of hours, signalling a near-total collapse of confidence in Spain's €100bn (£80.3bn) rescue from the EU last week to shore up its banking system. Cristobal Montoro, the economy minister, warned that Spain is now in a "critical" condition and pleaded with the European Central Bank to act with "full force" to defeat markets hostile to the euro project. Bank of America said Spain may need a second rescue to tide it through the next three years, pushing the total loan package towards €450bn – a sum that would test the EU bail-out machinery and cause serious knock-on effects for Italy. A draft communique from the summit of G20 leaders in Mexico said Europe will take "all necessary measures" to hold the eurozone together and break the "feedback loop" between sovereign states and banks. A separate text for next week's EU summit vowed to "mobilise all levers and instruments", though details were thin. Italy said it would push for a "semi-automatic mechanism" – probably involving the ECB – to cap the bond yields of states in trouble.

Six Reasons Why Italy May Exit the Euro Before Spain; Ultimate Occupy Movement - Reader Andrea who is from Italy but now resides in France writes ... As I told you some days ago, in Italy something quite new and disruptive is happening in the political landscape. As expected, the “Movimento 5 Stelle” (5 Stars Movement) had been the real winner of the recent round of regional elections a couple of weeks ago, and in my opinion it is worth to keep an eye on them especially in the light of the recent elections outcome in many European countries.  The movement is quite different from the other parties. It does not not a clear, hierarchic and defined organization. It is more a mixture of a method, a guideline and a set of rules to select candidates and programs and obtain its logo be part of the network. Main Rules for the Five Star Movement

  • Not be an elected politician prior to 5 Stelle
  • Commit to stay in charge for no longer than 2 terms
  • Commit to take a minimum salary and give the rest back to the community
  • Post a public platform on the internet
  • Be willing to hold a public debate on the platform
  • Get out of the Euro and default on debt

Finance: A union to bank on - Not so long ago, it was an idea confined to the dreams of policy makers: the unified control of Europe’s financial system and the public guarantees that underpin it. All 27 EU countries would surrender some of their sovereignty to create one banking authority, one taxpayer-funded backstop – one banking union. Visionary stuff, but politically improbable. Even its advocates thought this great leap towards European federalism would take decades, if it came at all, such were the political and technical obstacles. Yet now, amid ever bleaker events in the eurozone, this is precisely the option that EU leaders have seized upon as a means to address the crisis. Their motivation is not high-minded European federalism, however. It is necessity. Labouring under the yoke of indebted sovereigns and the banks that finance them, the 17-member currency union is fighting a crisis that could cripple its financial system. Even positive events – such as Sunday’s Greek election victory for a pro-bailout party – give little respite. Big bang “solutions” – from “eurobonds” to bottomless bailout funds – either fizzle or emerge stillborn. Banking union is the latest hope for a fix that puts steel in the eurozone structure, shares some financial risks – but is, it is hoped, acceptable to Germany, the eurozone’s paymaster. “We urgently need to adopt a vision for a fully developed economic and monetary union. The moment of truth has arrived,” says Michel Barnier, the EU’s top financial regulator. “In acting on our vision we will no doubt have to make a quantum leap to a banking union.”

Potential three-party coalition emerges: New Democracy, PASOK and Democratic Left are poised to agree on the formation of coalition government Tuesday after holding “constructive” talks yesterday. Anti-bailout SYRIZA and Independent Greeks have rejected the chance to join the administration. Conservative chief Antonis Samaras met with the leaders of all the potential coalition partners after receiving the mandate to form a government from President Karolos Papoulias. Samaras’s overtures were turned down by SYRIZA’s Alexis Tsipras and Panos Kammenos of Independent Greeks but PASOK’s Evangelos Venizelos and Fotis Kouvelis of Democratic Left suggested that there was enough common ground to form an alliance.Kathimerini understands that PASOK will seek an active role in the administration and could put forward several of its officials for ministerial roles. Also, Venizelos is not opposed to the idea of Samaras leading the new government as prime minister. Samaras, meanwhile, has suggested that 30 percent of the Cabinet should comprise non-political figures.

Back to the 1930s: the hammer, sickle and swastika - Ten days before Greece’s elections, a member of the neo-nazi party, Golden Dawn, repeatedly hit a female candidate of the communist party while appearing live on a television talk show and threw water over a female candidate of the radical left Syriza. The communist had just called him a “bloody fascist” and he addressed her as a “commie”. Greek elites (journalists, intellectuals, politicians) condemned his violence almost unequivocally. Yet the ugliest part of this incident was the readiness of many lay people to defend him, even cheer him, while the neo-nazis rose in the polls.Unfortunately this episode was not isolated. Despite the narrow victory of a centrist party in Sunday’s vote, almost every day extremist violence breaks out in Athens and beyond. Neo-nazis against immigrants, anarchists and leftists. Anarchists, ultra-leftists and other fringe groups of the nationalist-populist camp against riot police, mainstream politicians, journalists, liberal intellectuals, even artists. Add to this a surge in crime and rising tolerance of violence and you have a clearer picture of today’s Athens. Does it remind you of anything? That’s right. Greece’s situation recalls the Weimar Republic. Violence (and its banalisation), hate, rage, polarisation, fear, despair and resignation. As for the police, it has already taken sides: neo-nazis won by a landslide in polling stations where officers were assigned to vote.The electoral results demonstrate the dangers to the Greek democracy. The centre-right New Democracy party may have edged ahead, but the parliament, for the first time in Greek history, will be full of extremists. Besides the neo-nazis and a Stalinist communist party there is Syriza, whose leader is a fan of Mao Zedong, Fidel Castro and Hugo Chávez. It is difficult to find a notable dictator, even among the great butchers of the 20th century, without a steady following in the Greek parliament. The three protagonists of the dreadful TV incident were also elected. Imagine them together in routine parliamentary proceedings. Golden Dawn members have already made it clear they would come down hard on any member of parliament saying something they strongly disapprove of.

What Would a Grexit Look Like? - Slate‘s Matt Yglesias nicely captures the gap between the reactions of opinion-makers to the Greek election results and the reactions of markets: “Markets were supposed to be reassured. Instead they’re freaking out. European stock markets are declining, and Spanish bond yields are back into the 7 percent danger zone. What went wrong?  Perhaps the better question to ask is how it ever got to be conventional wisdom that maintaining the Greek status quo was the reassuring option?” A Greek exit from the eurozone is still very much a live possibility."    So what would a Greek exit actually look like?  C. J. Polychroniou tackles this question in a new policy note. Polychroniou argues that it was a mistake not to allow Greece to proceed with an orderly default two years ago.  While Greece is in for some economic pain whether it stays on the euro or returns to the drachma, it would, he argues, be better off in the latter scenario given a well-worked-out strategy for an orderly default (which is to say, better off compared to being continuously “rescued” with what are essentially bailouts of the EU’s banks attached to austerity directives, leaving Greece with the doubtful task of substantially reducing its debt-to-GDP ratio while shrinking its economy).  Polychroniou’s assessment of the relative costs of a Greek exit is based in part on his reading of the background political conditions:

German Construction Is Looking a Bit ‘Bubbly’ – Rebecca Wilder - Eurostat released its volume-adjusted estimate of construction for April (release here, .pdf). Over the month, Euro area construction declined 2.75% following a large 11.41% monthly increase in March. Across the countries that make monthly data available (8 countries total), Slovenia and Portugal saw the largest decline in April construction activity, -9.3% and -6.7%, respectively, while France was the only country to see an increase in construction, +2.3%. The trend is clearly down, as 3-month over 3-month Euro area construction declined 4.8% through April. Germany is getting a bit bubbly as regards domestic construction. This shouldn’t be surprising, given that longer dated bunds (even the 10yr) are negative on a real ex-post basis, i.e., using historical measures of inflation. I re-scaled the volume-adjusted indices to 2001=100 to fully capture the bubble in countries like Spain – the bubble illustration wouldn’t be quite as obvious with Eurostat’s index to 2005.  Going forward, this construction data does give real-time evidence that the German economy is moving marginally toward domestic-led growth….or we’re seeing the outset of a bubble in German construction.

Spain's borrowing costs double in bond auction - Spain's short-term borrowing costs jumped in a government bond auction this morning, reflecting growing investor concern over the debt levels of the country and its banks. The Spanish government sold €3.39bn (£2.7bn) in 12- and 18-month bonds, beating the top end of its target to sell €3bn, but the interest cost on the loans almost doubled. The interest rate on the 12-month bills shot up to 5.07pc from 2.98pc at the last such auction on May 14. The rate on the 18-month bills soared to 5.1pc from 3.3pc. In the secondary market, where previously issued debt is traded, the yield on benchmark 10-year Spanish bonds remained perilously high at 7.13pc. The bond auction was significant because it was Spain's first debt sale since announcing it would seek a €100bn EU bailout for its banks last week, becoming the fourth eurozone member to request financial assistance.

Spain: It is worse than is imagined - The first point is that, after the election, the Greek crisis has (at least temporarily) moved off the centre stage, to be replaced with Spain. In particular, the bailout of Spanish banks indirectly through a loan to Spain saw the loan given preferred creditor status: 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. . So holding Spanish bonds just became significantly riskier, this weekend. That this would ratchet the crisis upwards was predicted by many commentators, and the sharp increase in the cost of Spanish borrowing proved the critics to be correct: As Spain’s creditworthiness deteriorates, bondholders are wary of being subordinated to the EU agencies that might demand priority repayment for supplying aid to the nation. Lenders to Greece lost more than 70 percent of their investments when the nation restructured its debts, while the ECB and other official lenders were exempt from the discounts.  What finally dragged me back to the posting was the mooted bailout of Spain at the G20 summit. This from the GuardianAngela Merkel is poised to allow the eurozone's €750bn (£605bn) bailout fund to buy up the bonds of crisis-hit governments in a desperate effort to drive down borrowing costs for Spain and Italy and prevent the single currency from imploding.The key point in the report is the final point about nothing being decided yet. As Ambrose Evans-Pritchard correctly identifies, there is a big gap between rhetoric and reality

ECB lending hits €1.2 trillion, a new record - The latest snapshot of the ECB's balance sheet (see Kostas' post for more detail) shows an incremental €21bn of lending for the week. This takes the total balance above €1.2 trillion of loans to Eurozone banks.  About €9bn of that increase likely came from deposits moving out of the Eurozone periphery nations to Switzerland as the euro-denominated liabilities to non-residents rose again. The rest is probably due to deposits moving from the periphery to Germany. In both cases the ECB had to step in to replace those private funding sources.

ECB lending by country - Here is a nice chart from Barclays that shows how much the various nations' banking systems rely on ECB funding. The data is as of the end of May except for three countries.  The bulk of this is via LTRO (3-year) loans. Spain's banks however also tapped MRO (short-term) loans in May because the 3-year LTRO is not currently available and banks had to shift funding from private sources (deposits) to the central bank. Given that all of these loans are collateralized, some have asked where do banks get this seemingly unlimited amounts of collateral. The answer is that once banks run out of assets that are "ECB eligible", they create new collateral with the help of their governments (as discussed here and here).

The Euro crisis is all their own doing - I gave an interview for SBS (Special Broadcasting Service), which is a national multicultural radio/television network in Australia. They wanted to know whether I thought the crisis in Europe had now stabilised given the Greeks avoided “chaos” by voting for New Democracy and more austerity. They also noted that the financial markets were turning on Spain and Italy. I responded by suggesting their question answered itself and that it would be better not to be seduced by the Euro elite spin that Greece is now firmly in the Eurozone and markets will stabilise with austerity. The reality is that the election outcome in Greece just ensures the Greek people will have to endure more debilitating austerity and their growth prospects are virtually zero. In that sense, they were let down by Syriza who promised the impossible – no austerity but retention of the Euro. Given the design of the EMU and the conduct of the ECB, as the currency-issuer, within that monetary union, austerity will be anti-growth and the problem will spread. But then the EC President Barroso is sick of outsiders lecturing the Europeans on how to run their economies. He said today – “this crisis was not originated in Europe”. It all depends on which crisis one is referring to. The Europeans have concocted their own crisis which made the initial “flu” originating in the US turn into something much more deadly. They are totally culpable in this and appear to require external education given the ham-fisted attempts they have made to solve the issue. I told SBS that the solutions proposed and implemented by the Euro elites to the non-problem merely exacerbate the actual problem which is the Euro itself. The following graphs tell you why the Greek election outcome fails to address the real problem.

Might Eurobonds be the Answer to the Euro Crisis? - Any solution to the euro crisis must meet two objectives.  One is short run and the other is long run, and they tend to conflict. The first necessary objective is to put Greece, Portugal, and other troubled countries back on a sustainable debt path, defined as a long-term trajectory where the ratio of debt to GDP is declining rather than rising.  Austerity won’t restore debt sustainability.  It has raised debt/GDP ratios, not lowered them.   A write-down would do it.  New bigger bail-outs might too, but would then create moral hazard and thus make even it even harder to satisfy the second necessary objective. That second objective is to reform the system so as to make it less likely that similar debt crises will recur anew in the future.   Long-run fiscal rectitude is indeed the way to accomplish this.  But it is hard to commit today to fiscal rectitude in the future.  Rules to cap debt such as the Maastricht fiscal criteria, “no bailout” clause and Stability and Growth Pact (SGP) didn’t work because they were not enforceable. Eurobonds could be part of the solution, if designed properly to take into account fiscal fundamentals, both short term and long term.  These are defined as government bonds that would be the liability of euroland in the aggregate.

Abandoning Ship - It will be no surprise to readers that the news coming out of the Eurozone just gets worse and worse. The reality is that Ireland, Portugal, Spain, Italy, Belgium, Greece, and France (in no particular order) are all in debt traps from which there is no escape. A debt trap is sprung when bankruptcy becomes the only outcome. With corporations, this usually becomes readily apparent and directors are forced by law to stop trading, but countries conceal this reality by printing money. Otherwise there is no difference in the two cases, despite what politicians and neoclassical economists would have us believe. This is why we are painfully aware that the Eurozone is in trouble, since nation states are unable to cover and conceal their obligations by printing money, having surrendered this role to the European Central Bank (ECB). he ECB is meant to be independent of politics and political pressures. But the reality facing any central banker is that s/he cannot stand by and let politicians drown in their own mess. The politicians know this, and it's what is behind current attempts to move away from austerity towards Keynesian growth. The plea is exactly the same as that of the spendthrift who tells his bank manager that the only chance he has of getting his money back is to increase the overdraft to allow him to trade his way out of difficulty.

Greece and the Limits of Anti-Austerity - German-led austerity program for the eurozone’s troubled southern members ran up against substantial resistance. Likewise, France’s recent presidential election bolstered those who argue that Europe must grow its way out of its debt-heavy public sector, rather than aim for immediate fiscal orthodoxy. And there is no guarantee that Greece’s newly elected center-right New Democracy party, which favors honoring the country’s bailout terms, will be able to form a majority government. .The United States, by contrast, has pursued expansionary and growth-oriented macroeconomic policies since the 2007-2009 financial crisis, despite massive budget deficits. Thus far, judging from the modest recovery in the US versus non-recovery in Europe, American policy accommodation is performing better than European austerity. But simply choosing between expansion and austerity is not the whole story. Macroeconomic policies interact with on-the-ground microeconomic realities in subtle but powerful, rarely remarked-upon ways. Simply put, Europe’s microeconomic structure makes the same growth-based macroeconomic policies less effective in the European Union than in the US. Here’s why: macroeconomic easing, by lowering interest rates or otherwise pumping money into the economy, aims to increase economic activity. With more money moving around, businesses rehire employees and ask existing employees to work more hours. But the EU cannot realize this scenario as easily as the US can, because micro-level rules in the EU generate friction that slows that kind of an expansion.

Clarity about Austerity - Michael Spence - I have just had the privilege of speaking at the main annual conference of Germany’s Economic Council, the economic and business arm of the Christian Democratic Union, the current governing party. Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble were among the other speakers. It was an interesting event – and, more important, an encouraging one. It seemed clear that Germany (or at least this rather large gathering of government, business, and labor leaders) remains committed to the euro and to deeper European integration, and recognizes that success will require Europe-wide burden-sharing to overcome the ongoing eurozone crisis. The reforms in Italy and Spain are rightly reviewed as crucial, and there appears to be a deep understanding (based on Germany’s own experience in the decade and a half following reunification) that restoring competitiveness, employment, and growth takes time.Greece has no good options, but a serious contagion risk remains to be contained in order to prevent derailment of the fiscal and growth-oriented reforms in Italy and Spain. In the face of high systemic risk, private capital is leaving banks and the sovereign-debt markets, causing governments’ borrowing costs to rise and bank capitalization to fall. This in turn threatens the functioning of the financial system and the effectiveness of the reform programs.Thus, the central European Union institutions, along with the International Monetary Fund, have an important role to play in stabilization and the transition to sustainable growth.

Krugman on Germany's 'Whips and Scourges' - PBS - Welcome to "Paul Krugman Week" here on Making Sen$e. We'll be devoting the next five days to excerpts from our extensive interview with him a few weeks ago at his home in Princeton, N.J., plus parts of a public interview at in Harvard Square, Cambridge with NPR's Tom Ashbrook, the remarkably knowledgeable host of "On Point." We also will excerpt our interview with economist Robin Wells, Krugman's partner in life and textbook writing. In our first installment, Krugman discusses European austerity, and makes the point that no country that has its own currency is experiencing the problems the eurozone now faces. Below, a rebuttal of sorts from Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics.  The principal assertion made by professor Krugman concerning the German response to the euro area crisis is that it is all about "morality and debt is evil". That, however, is a mischaracterization of the underlying reasons for the German unwillingness to immediately sanction large bailouts and focus on harsh austerity measures in the euro area. The real issue is moral hazard, not morality, and is rooted in the design flaws of the common currency, which grants member states (or at least did until the crisis) full sovereignty over issues such as their banking sector and most fiscal policy.

The European Central Bank Needs More Power - AS the world economy teeters again, pressure is mounting on central banks to reopen their spigots, make it even cheaper for companies and households to borrow money, and prop up commercial banks to prevent another financial crisis. On Wednesday, the Federal Reserve, which had already promised to keep short-term interest rates near zero until the end of 2014, extended its latest, modest strategy to keep long-term rates down, too.  The Fed’s counterpart, the European Central Bank, was created in 1998 to maintain price stability in the new euro zone. With so many depositors taking their money from troubled banks in Greece and Spain, observers are urging the central bank, based in Frankfurt, to fire another round of the “big bazooka” — the roughly 1 trillion euros in cheap loans that it granted to banks in December and February.  But even if it is willing to do this, the central bank is not equipped to do so without putting Europe’s financial system at risk. Its design is flawed..  Bizarrely, although the deutsche mark, franc and lira are gone, members of the euro zone still have their own national central banks, which can step in and lend euros. Since 2007, the credit extended by the central banks of Italy, Spain, Greece, Portugal and Ireland has increased tenfold, in part because the criteria for the collateral put up in exchange for central-bank loans were relaxed significantly in 2008 (and later, in Greece, Ireland and Portugal, almost completely discarded).

The euro crisis: The moral core - The Economist -- IN A recent post, Simon Wren-Lewis assigned blame in the euro crisis in a provocative way: it's the core's fault! He clearly wants to provide a counterweight to the opposite story ("It's the periphery's fault!"). However, he goes a little too far. Mr Wren-Lewis correctly points out that the core countries of Europe, when setting up the euro, did not take proper account of the macroeconomics of a currency union, focusing instead on an inadequate limit on public debt. When the Euro was formed, its fiscal architecture was embodied in the Stability and Growth Pact (SGP). ...  That fiscal architecture was all about containing deficits, and said nothing about using fiscal policy to control domestic demand. To many economists, this was something of a surprise. Much of the academic work leading up to the formation of the Euro had stressed the crucial role that countercyclical policy could play in reducing the consequences of asymmetric shocks in a monetary union. The SGP effectively ignored that work. Indeed. But even though the SGP ignored this academic work, there was nothing to stop the peripheral countries taking its warnings to heart anyway--as Sweden did. Those peripheral countries that got carried away during the pre-crisis boom could have used fiscal policy or macro-prudential tools to engineer the necessary counter-cyclical policy. After all, there was nothing in the Stability Pact to prevent countries running tighter policy.

Frayed Tempers at G-20: Euro-Zone Leaders Tired of Criticism from Abroad - Angela Merkel is seen internationally as a key figure for overcoming the euro crisis. As such, it seems appropriate that the chancellor was the first government leader to speak at the G-20 Summit in Mexico on Monday afternoon following host Felipe Calderon's speech. The gathering is taking place in San Jose de los Cabos. What she had to say likely came as no surprise to the gathered statesmen. She counted off what the Europeans have done in the past year to make the common European currency crisis proof: the fiscal pact, the euro rescue fund, bank capitalization, the growth pact and the upcoming additional steps toward a political union. With this list Merkel countered the argument that the Europeans, with their half-hearted crisis management, are endangering the world economy. We are indeed doing something, was her message from the resort town. It still, however, seems to be insufficient. The euro crisis has regularly dominated headlines for two years and there's no end in sight. Just in time for the G-20 Summit, the cover of "Newsweek" magazine showed a broken one-euro coin surrounded by the words "Kaput? Fini? Finito? The End?" The shaky victory of the conservative New Democracy party in Sunday's Greek election, despite providing a measure of stability to the political landscape in Athens, serves as yet another reminder of just how fragile the currency union is.

G20 summit: perils of a half-baked rescue for Spain and Italy - Chancellor Angela Merkel and President Francois Hollande have to do something. The market reaction to Spain's €100bn EMU rescue for its banks has been calamitous. Monday's explosive rise in Spanish two-year bond yields was a warning that Spain's crisis would spiral out of control within days, taking Italy with it. Yet the deal explored over ceviche and mango at Los Cabos in Mexico remains murky. Any plan will backfire horribly unless conducted in the right way, and with overwhelming force. From what we know, the eurozone's leaders aim to deploy the European Stability Mechanism (ESM) to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market. Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won't have much money. It has a theoretical limit of €500bn -- a nice wish -- but its paid up capital will start at just €22bn. Britain's George Osborne cautioned against exuberance. "One thing we have learnt is: don't expect a single summit to solve the eurozone's problems, otherwise you are going to be disappointed. The eurozone is inching towards solutions."

G20 bid to cut cost of euro borrowing - Eurozone members of the Group of 20 leading economies have committed to driving down borrowing costs across the single currency area, according to the communiqué from the summit in Mexico. On the day that Spain was forced to pay more than 5 per cent to borrow money for one year, the need for action to stem the spiral of rising government bond yields was accepted on Tuesday by Germany, France and Italy, the G20’s three eurozone members. According to officials briefed on the discussions, Mario Monti, Italy’s prime minister, raised the possibility of using the eurozone’s €440bn rescue fund to buy peripheral bonds on the open market. But Angela Merkel, Germany’s chancellor, was non-committal about the idea during a formal session on Monday night. However, officials said Ms Merkel had subsequent conversations on the sidelines of the summit which led her interlocutors to believe “she may be willing to do more,” said one European official. The official cautioned, however, that Ms Merkel was not yet ready to commit to any definite course of action.  Speaking to journalists before he started the second day of negotiations, François Hollande, France’s president, said the borrowing costs of Spain and Italy were unacceptable. “We must show a much faster ability to intervene,” he added.

Europe gets lengthy G-20 homework assignment - — The Group of 20 leaders presented a lengthy homework assignment to their European colleagues and said it was critical that some of the work be completed at the European Union summit meeting later this month. The thorniest task the euro-zone accepted at the meeting in Los Cabos, Mexico will be ”to break the feedback loop” between weak banks and weak sovereigns. Another challenge will be to make sure that countries like Spain and Italy can borrow at sustainable interest rates. President Barack Obama called Europe “a very complicated situation” but stressed he was confident that Europe will meet its challenges. U.S. officials say they see no point in hectoring Europe to act. ”We’re trying to be careful not to add to their complications,” a senior administration official said. Instead, Obama said he wanted to create “a positive cycle” where markets settle down and give Europe time to reform.

Italy raises bond buying idea at G20, Germany cold - Italy put forward a proposal at the G20 summit in Mexico on Tuesday for the euro zone's rescue funds to start buying the debt of distressed EU countries, European officials said, but Germany said no specific initiative was discussed. The Italian proposal would involve the EU's two rescue funds, known as the EFSF and the ESM, buying bonds of countries such as Spain and Italy in the secondary market to help bring down bond yields and lower refinancing costs. The ideas were first set out by Italy's Europe minister, Enzo Moavero, in Brussels on Monday. Moavero said the plans would be discussed at a meeting of finance ministers in Luxembourg on June 21-22, but Italian Prime Minister Mario Monti decided to bring them up with G20 leaders at the two-day summit, European officials said. The 440-billion-euro European Financial Stability Facility and the 500-billion-euro European Stability Mechanism, which comes into force next month, both have the capacity to buy bonds in the primary and the secondary market, although that can only happen with a request from the country in question and involves signing up to a rescue program. Such a move would be similar to the bond buying the European Central Bank has carried out in the past to lower the borrowing costs of countries such as Greece, Ireland, Spain and Italy, except now the purchases would come from EU rescue funds.

German Press Reacts to G-20 Summit - Spiegel - Merkel was certainly in the hot seat, once again, as many nations pressed her to do more for the euro -- at a time when many Germans feel their country has already done too much.  European leaders were also annoyed that their problems consistently grab the headlines, while many other countries have equally serious issues to deal with. They were quick to point out the financial crisis did not start in Europe, but in the United States.  But in the end, the leaders attempted to gloss over their differences, praising Merkel for her efforts as the two-day conference ended on an upbeat tone. Now Merkel's partners -- and the markets -- are waiting for the EU summit at the end of this month to see what else is in store to save the common currency.  On Wednesday, German commentators defended the country against foreign critics but also argued that little or no progress was made at the G-20 summit. They say such gatherings are not conducive to serious political debate, which is sorely needed these days.

French President: EU, U.S. to Discuss Tools for Fighting Speculation on Sovereign Debt --European leaders at the meeting of the Group of 20 leading economies will meet with U.S. President Barack Obama on Tuesday to discuss mechanisms to fight speculation on sovereign debt, French President Francois Hollande said Tuesday. The meeting had been set to take place Monday evening after the dinner of G-20 heads of state and government, but was canceled at the last minute because of the late hour, Mr. Hollande said. "It's not on growth. It will be more on mechanisms that allow us to fight speculation," Mr. Hollande told reporters, referring to the planned meeting. The French president said rates paid by Spain and Italy to borrow on debt markets were "unacceptable" considering the aid to Spanish banks and the efforts Italy has made to repair public finances. "We must show a much faster capacity for action," Mr. Hollande said. The French president didn't say how Europe could react faster to market moves on sovereign debt, or whether the burden for swifter action would be placed on the European Central Bank or the intergovernmental bailout funds

European Parliament Votes Through Credit-Rating-Company Rules - The European Parliament Tuesday voted through draft legislation to tighten rules on credit-rating companies, which have come under heavy criticism from several European politicians for their assessments and actions in the region during the financial crisis. "The debt crisis in the euro zone has shown that credit rating agencies have gained too much influence, to the point of being able to influence the political agenda," "In response, we have strengthened rules on sovereign debt ratings and conflicts of interest," The draft legislation, approved by the Economic and Monetary Committee, aims to regulate sovereign ratings, reduce investor reliance on ratings and restrict the scope for conflicts of interest. Members of parliament "also decided to take the first step towards developing an internal public rating capacity at EU level," the European Parliament said in a press release.

A bitter fallout from a hasty union - Heads of government of the group of 20 leading countries who do not come from the euro zone must feel like marriage counsellors trying to reconcile partners far too different in character and values to live happily together. The careless lending before 2007 aggravated the danger. That carelessness, exacerbated by the notion that the marriage made all equal, has made the crisis far worse. Those whom borrowing afforded a standard of living above what they could afford are being forced to accept a plunge into poverty. Not surprisingly, they resent the change. The Greeks, unhappiest of all, have apparently chosen a government of parties slightly less unenthusiastic about the agreed program than the others. Antonis Samaras was an opportunistic opponent of austerity in opposition, while his party, New Democracy, bears a full share of responsibility for the pre-crisis mismanagement. Much trouble lies ahead: Alexis Tsiparas of the far-left party, Syriza, has 27 per cent of the vote already. He will be only too happy to exploit rising public anger. Spain is hoping for a €100-billion bailout of its banks but, alas, one that benefits the creditors of banks at the expense of the creditworthiness of the government. At current rates of interest, it is only a matter of time before Spain requires a fiscal rescue. That would exhaust the available resources of the euro zone. It also risks turning a proud country into a dependency, with frightening results for stability.

Banks' borrowing at ECB rises as Spain stress grows (Reuters) - Bank borrowing from the European Central Bank rose on Tuesday as turmoil in the euro zone government bond markets pushed more banks to take up the ECB's regular offering of seven-day loans. Demand for the funds, currently used largely by banks who can no longer borrow money affordably elsewhere, rose by 36 billion euros to 167 billion euros. The number of banks bidding at the auction rose to 101 from 94. "The rise in the number of bidders points to signs of new stress. I would say Spanish names are behind that," said Matteo Regesta, strategist at BNP Paribas in London. Spain has become the focus of the euro zone debt crisis over the last week after a bank rescue plan worth up to 100 billion euros failed to win market confidence and propelled 10-year bond yields above the 7 percent danger level. Spanish banks have suffered huge losses on souring portfolios of property loans and most have been frozen out of the interbank market where banks borrow money to lend on at a profit. Data released on Monday showed Spanish banks' bad loans hit their highest since April 1994.

Spain pharma sounds alarm on regional debt threat - The future of Spain's drug industry could be in jeopardy if the government does not prevent overspending regions from racking up more piles of unpaid medical bills in a sector bearing the brunt of austerity measures. Madrid said in February it would clear the regions' debts accumulated by end-2011, and expects to do so this month. Hospitals owed more than 6.3 billion euros ($8 billion) to drug companies at the end of last year, according to lobby group Farmaindustria. But payments of around 1.5 billion euros for debt run up this year remain outstanding and many regions are piling up debt at a faster pace than in 2011, Jordi Ramentol, president of Farmaindustria, said.

Spain crisis leading to crop theft - Drop those cherries, you're under arrest. Crops and cops are converging along Spain's journey through economic crisis: People enduring hardship are stealing the earth's bounty from farmers to help get by from day to day. Police have added the patrolling of farmland - sometimes on horseback - to their list of daily tasks. Farmers in some areas are teaming up to carry out nighttime patrols on their own. In villages near farming areas, several thousand paramilitary Civil Guards, regional and local police are even setting up checkpoints to sniff out not drugs or drunken drivers but stolen fruit or farming equipment, like copper wire used in irrigation systems. The Civil Guard says sometimes its officers mount "cage operations" - sealing off whole villages to check cars and trucks for, say, pilfered pears. The stolen goods are mainly for resale: The food ends up in small roving street markets and the metal goes to scrap dealers. Last year alone more than 20,000 thefts were reported at Spanish farms. The Interior Ministry says it has no comparative figures from other years, or for so far in 2012. But authorities and farm groups blame the thefts on Spain's economic crisis and say they are a big enough problem for the patrols, which began last season, to stay in force this year.

Spanish short-term debt costs reach alarm levels (Reuters) - Spain lurched closer to becoming the largest euro zone country yet to be shut out of credit markets when it had to pay a euro era record price to sell short-term debt on Tuesday. The soaring borrowing costs showed that a euro zone deal to lend Spain up to 100 billion euros ($126 billion) for its banks had not solved the country's problems or restored investor confidence and suggests more aid may be needed fix its finances. They also illustrated how Europe's troubles run much deeper than Greece, brought back from the brink of default by Sunday's parliamentary election that has cleared the way for a renegotiation of the terms of its bailout package. The two-and-a-half year old debt crisis has hobbled the global economy and world leaders meeting in Mexico piled pressure on the euro zone to move towards a fiscal and banking union to fix the crisis that now threatens to engulf Spain. "The decidedly elevated yield levels leave a question mark firmly in place as regards the sustainability of Spain's public finances while doing nothing to temper speculation as to how long the country might hold out before looking for a more comprehensive bailout,"

Spanish, Italian Bonds Rise on Debt-Buying Bets - Spanish and Italian government bonds surged for a second day amid speculation European leaders are seeking ways to reduce the borrowing costs of the region’s lower-rated nations. German 10-year bunds slid, sending yields to the highest in six weeks, after French President Francois Hollande said leaders are exploring letting the European Stability Mechanism rescue fund buy debt from countries that have taken fiscal- consolidation steps. Spain’s 10-year rate slipped below 7 percent. Greek bonds stayed lower even as politicians reached an agreement on forming a coalition government. The prospect of the ESM buying Spanish and Italian bonds “is giving Italy and Spain a short-term boost, but it’s only talk at the moment, there’s nothing concrete,” “It looks like it’s going to be discussed at a European level. Longer-term something much more substantial needs to happen.” Spain’s 10-year bond yield fell 30 basis points, or 0.30 percentage point, to 6.74 percent at 4:41 p.m. London time. It rose to 7.29 percent on June 18, a euro-era high.

Italy Banks Waning Loan Quality Hurts Efforts on Capital - Italian banks are struggling to increase capital levels as fallout from the European debt crisis and the country’s third recession in a decade force them to boost provisions against rising bad loan levels. Italian corporate and household bad debt totaled 109 billion euros ($138 billion) in April, an increase of 15 percent from a year earlier, according to Bank of Italy data. Impairments, excluding writedowns, rose to 58 billion euros from 50 billion euros. “Asset quality and high non-performing loans are growing problems for Italian banks, especially as capital levels and internal capital generation do not provide sufficient buffers,” . “The economy is already frail and credit is clearly not flowing,” she said. Italy’s economy has lagged the euro region for the past decade and is expected to contract 1.4 percent this year, the European Commission estimates. The recession is reducing the ability of borrowers to repay loans, forcing lenders to increase provisions and hurting their profitability.

Contagion may drag Italy back to heart of crisis (Reuters) - Italy risks being pulled back to the heart of the euro zone debt crisis as the fallout from a Spanish bank bailout makes market access more expensive even though Italian economic fundamentals are seen as stronger than Spain's. The correlation between moves in Italian and Spanish bonds has risen sharply since March, showing the increased risk attached to holding Spanish debt is feeding through to Italy. Many in markets believe rising borrowing costs will push Spain into a sovereign bailout, damaging investor confidence in lower-rated euro zone debt such as Italy's and depleting the regional funds available if Rome needed assistance. Spain is the euro zone's fourth largest economy and Italy the third. If Spain were to need a sovereign bailout, which many analysts predict, it would exhaust the region's rescue funds. Contagion risk could make it increasingly costly for Italy, seen as the country most likely to fall under market scrutiny after Spain, to raise funds in debt markets in the absence of a crisis solution or further European Central Bank bond purchases.

Italy Home Sales Fall Most on Record Amid Recession - Home sales in Italy fell the most in at least eight years in the first quarter as real estate owners in the recession-hit country faced the prospect of a new property tax. With about 110,000 transactions in the three months through March, home sales declined 20 percent from a year earlier, the Finance Ministry’s Agenzia del Territorio said in a report posted on its website today. That was the biggest drop since data collection began in 2004. Total sales fell an annual 18 percent. The decline was “mainly driven” by the recession, the agency said in today’s report, while a new property tax that began to influence buyers in the first quarter “won’t be an incentive for the market.”

Italy’s Monti offers using bailout fund to buy sovereign debt - Italian Premier Mario Monti has proposed using the eurozone's €440 billion ($555 billion) bailout fund to buy sovereign debt and ease pressure on Italian and Spanish borrowing rates, AP reports. Monti told a briefing at the close of the Group of 20 summit that using European Financial Stability Facility funds "was one of the topics of conversation" among leaders. The news agency LaPresse quoted the Italian premier Wednesday, June 20, as saying the idea would be discussed further when he meets with the leaders of Germany, France and Spain in Rome on Friday. The leaders plan to come up with proposals for an EU summit the following week. Spain's admission last week that it needs a bailout for its banks has sent both Spanish and Italian borrowing costs skyrocketing to perilous levels.

Italy, Spain Heading for Full Bailouts, Fidelity’s Stuttard Says - Italy and Spain, which account for more than a quarter of the euro-area economy, are heading for sovereign bailouts in the next 12 months that will send shockwaves through the global economy, Fidelity Investments’s Jamie Stuttard said. Both sovereigns will likely stumble over debt auctions in the next year, forcing European authorities to find official funding for them to hold the single-currency area together, Stuttard, Fidelity’s head of international bond portfolio management in London, said in a telephone interview on June 19. Southern Europe’s two major economies have 2.8 trillion euros ($3.6 trillion) of government debt, four times the total of Greece, Portugal and Ireland, threatening to overwhelm Europe’s crisis defenses. Backstopping them may undermine even Germany’s creditworthiness unless officials allow inflation to accelerate to reduce the real value of their borrowing or the currency weakens boosting exports, Stuttard said. “We are onto the big countries now,” he said. “A rescue for Italy is pretty much impossible without a major change in German borrowing costs, a major change in overall euro-zone levels of inflation, a major change in the level of the euro, or a major change in the structure of the euro zone.”

Debt crisis: Spain and Italy to be bailed out in £600bn deal - European leaders are poised to announce a £600 billion deal to bail out Spain and Italy, it emerged at the G20 summit on Tuesday night.Two rescue funds are to be used to buy the debts of the troubled economies, the cost of which have reached record highs in recent weeks. It is hoped that the move, which represents a substantial shift in policy for Germany’s chancellor, Angela Merkel, will send a strong signal to financial markets that Europe’s biggest economy is finally prepared to back its weaker neighbours. Mrs Merkel and other European leaders have come under intense pressure at this week’s G20 summit to take radical action to stem the growing euro crisis which has pushed up the cost of Spanish bonds to unsustainable levels. The communiqué issued at the end of the G20 summit, which finished in Mexico last night, said that European leaders had agreed to take action to bring down borrowing rates. Under the proposed deal, two European rescue funds – the £400 billion (€500 billion) European Stability Mechanism (ESM) and the £200 billion (€250 billion) European Financial Stability Facility (EFSF) – will buy bonds issued by European countries.

Italy and Spain to be given £600 billion bailout - EUROPEAN leaders moved towards a rescue package for the euro last night as Germany prepared to back a bailout scheme for Italy and Spain worth £600 billion – money which would be used to buy the two countries' government bonds. German Chancellor Angela Merkel is poised to announce that two eurozone funds will be used to buy up the debts of the two countries. George Osborne suggested single currency countries were inching towards a solution to their sovereign debt crisis. "I think there are signs that the eurozone is moving towards richer countries standing behind their banks and standing behind the weaker countries," he said. The European Central Bank has already bought €210 billion in bonds issued by eurozone governments, but stopped the programme last year amid German protests. Merkel has been hugely resistant to moves that would result in her having to persuade German taxpayers to prop up other members of the eurozone. The latest move, which G20 officials suggested could be announced within days, will be seen as the first step towards sharing the burden of stricken countries' debts across the single currency's 17 members. A communiqué issued at the end of the G20 summit, which finished in Mexico last night, said that European leaders had agreed to take action to bring down borrowing rates.

Debt crisis: bond buying plan to ease euro debts only 'theoretical' says Angela Merkel - Telegraph: Angela Merkel put Germany on a collision course with its European neighbours by insisting an idea to allow bail-out funds to buy Spanish and Italian debt was "purely theoretical".  The German Chancellor agreed that the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) had the "possibility of buying bonds" but said no discussions were being held about such a move. Her comments came as a top European Central Bank policymaker publicly backed the idea. Benoît Cœuré said that the action could ease the “very severe strain” on Spain and Italy. "Certainly it's a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility," he told the Financial Times in an interview. François Hollande, the French president, told reporters that the idea had been raised at the G20 meeting in Mexico and would be discussed at tomorrow's summit of Europe's big four nations – Italy, Germany, France and Spain. "Italy has floated an idea which deserves consideration, we'll speak about it at Rome," said Mr Hollande. "We are looking for ways to use the ESM for this. At the moment it is just an idea, not a decision. It is part of the discussion," he said.

Berlusconi says Italy euro exit "not blasphemy"  - Italy should consider leaving the euro unless Germany agrees to the European Central Bank acting as a guarantor for sovereign debt and printing money to reflate the economy, former Prime Minister Silvio Berlusconi said on Wednesday. "Leaving the euro is not a blasphemy," he wrote on his Facebook page. If Germany does not agree to a new role for the ECB then it should consider leaving the euro itself, Berlusconi said. "I have spoken to some German experts who would be in favor," said Berlusconi, leader of one of two main parties backing pro-European Prime Minister Mario Monti. The 75-year-old media magnate, whose People of Freedom party (PDL) lost heavily in local elections last month and has been shedding supporters steadily over the last year, is increasingly targeting the euro in a bid to regain popularity. With less than a year before the next general election, Italy faces the prospect of at least two large parties running on an anti-euro ticket. The Five Star Movement led by comedian Beppe Grillo, who urges an exit from the euro, has overtaken the PDL according to recent polls to become Italy's second largest party, with more than 20 percent of voter support.

ECB to relax loan rules for Spanish banks - The European Central Bank is expected to give Spanish banks a much-needed boost with a significant loosening of rules on collateral required to obtain its liquidity, which could be followed by steps to reduce the role of credit-rating agencies in its operations. The concession, which could be announced as early as Friday, would allow Spanish banks to make greater use of asset-backed securities when drawing ECB funds. The move – coming as European authorities and Madrid draw up plans to recapitalise the country’s banks – will help to offset a possible liquidity squeeze caused by downgrades by credit rating agencies. The decision by the ECB’s 22-strong governing council is part of a review of collateral rules aimed at ensuring liquidity continues to flow to sound eurozone banks – and to reduce its reliance on external bodies such as Standard & Poor’s and Moody’s. One option under consideration is to drop completely the use of external ratings when deciding how much banks can borrow using government bonds as collateral. At present, the ECB uses a sliding scale, imposing a larger “haircut” on bonds rated below the A grades, which means banks can borrow a smaller percentage of the bonds’ value. Spain is at particular risk because only DBRS, the Canadian rating agency, still has the country within the A band – and has signalled that it, too, could downgrade the country. Spanish banks drew heavily on the ECB’s offers of unlimited three-year liquidity in December and February.

ECB to relax loan rules for Spanish banks - Benoît Cœuré, an ECB executive board member, told the Financial Times in an interview this week: “We certainly have to make sure that sound counterparties have the means to access our liquidity, including in terms of collateral availability.“ He warned that collateral buffers had “become more strained in some places” and added: “There is an ongoing reflection on how to alleviate these tensions.” However, the debate is sensitive within the ECB council, with many of its members worried about the risks involved and the dangers of substituting actions by governments to strengthen public finances. The decision on the use of asset-backed securities – bonds backed by loans – was taken separately from the wider review of collateral rules and appears designed to buttress efforts by eurozone authorities to strengthen Spain’s banks. Under the new rules, such securities will be eligible for use as collateral providing they have a credit rating of at least BBB (minus), according to eurozone officials. Previously, the minimum requirement was for at least an A rating.

Spain is doomed, in three charts - On Sunday, a small-yet-decisive minority of Greek voters decided that they’d rather endure years of grinding austerity than risk an exit from the euro. Financial markets heaved a sigh of relief for, oh, three hours or so — before they remembered that the real crisis in Europe is still in Spain and panicked again. After all, Greece is a fairly small country, with a GDP of about $300 billion (and shrinking!). Spain’s GDP is about $1.4 trillion, the 13th-largest in the world. And Spain’s very much in trouble. Three simple charts should show this. First, new data from the Bank of Spain showed that the number of “bad loans” made by Spanish banks is at its highest level in two decades: That means there’s a risk that Spain’s banks could sustain big losses in the future. And who’s on the hook for these banks? The Spanish government, which has made all sorts of implicit guarantees to its financial sector and local governments, as Sober Look explains:  When you add up all of these “contingent guarantees” to Spain’s official debt, notes Kostas Kalevras, you get a number that’s more than 100 percent of Spain’s GDP. And as a result, few people want to keep lending the Spanish government more money. On Monday, Spanish bond yields spiked to record levels  —  well past the 7 percent mark, which is the level at which Greece, Portugal, and Ireland all needed bailouts:

Madrid moves to ease bailout fears - Spain has sought to ease investors’ fears that it needs a full-scale international bailout of its economy by publishing two “stress tests” showing that Spanish banks need between €16bn and €62bn in new capital. The estimates of how much extra capital its banks might need fall well within the sum of up to €100bn that Spain requested for its financial system from its eurozone partners this month. Fernando Restoy, deputy governor of the Bank of Spain, said the numbers were “a long way from the maximum that the eurogroup agreed to make available to Spain”. “The three biggest groups in the country don’t need assistance in the form of new capital, even in the stressed scenario,” he said in a reference to Santander, BBVA and Caixabank.

Rompuy’s Euro Plan Includes Options on Bills -- European Union President Herman Van Rompuy’s blueprint for the future of the euro is shaping up to include a discussion of jointly issued short-term bills, a debt- redemption fund and common banking supervision, according to two officials familiar with the work on the project. The findings will be presented to EU leaders in Brussels next week by Van Rompuy, European Central Bank President Mario Draghi, European Commission President Jose Barroso and Luxembourg’s Jean-Claude Juncker, who leads the group of euro- area finance ministers. The report is confidential and still in development, and it isn’t clear whether it will include a recommended course of action along with its highlighted topics, said the officials, who asked not to be identified.

Greece, Italy, Spain, Germany in the shadow of a disintegrating euro: Interviewed by Doug Henwood - Click here for the 30 minute interview

Contractionary Fiscal Contraction Is Even More Contractionary - Once one takes into account spillover effects, which are likely to be large in the Eurozone.  In my post from last week in which I made the commonsensical observation that contractionary fiscal policy is contraction, I reproduced this table from a Deutsche Bank publication. In a personal communication, Not the Treasury View’s Jonathan Portes observed that the multipliers, and associated impact on the eurozone, would be larger once one takes into the spillover effects, as closely linked countries embark on fiscal contraction (see this Vox post). Another communication from NIESR’s Dawn Holland indicates that treating the eurozone as a single economy implies the weighted average should be increased by about 30%. NIESR’s macroeconometric model, NiGEM, [1] suggests the individual standard country multipliers should be adjusted upward by different amounts (the NIESR's NiGEM multipliers are likely to be different than DB's).

Banks Face $15 Billion Demand on Spain Downgrade: Credit Markets  - Spanish lenders face the prospect of needing as much as 12 billion euros ($15 billion) of extra collateral for their central bank loans, raising pressure on the banks as they negotiate a 100 billion-euro bailout. The additional security will be required on about 245 billion euros of sovereign and government-guaranteed debt pledged by Spanish banks should DBRS Inc. become the fourth ratings company to downgrade the nation to the cusp of junk, according to JPMorgan Chase & Co. Bonds of Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA (BBVA) are the worst performers in the Bank of America Merrill Lynch EMU Financial Corporate Index this month. The European Central Bank will demand deeper discounts on Spanish debt should DBRS cut its A High rating to match grades from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, according to JPMorgan. Spain is seeking a rescue for its banks after they were shut out of credit markets amid concern bad loans will escalate as the recession deepens.

Abandoning Ship - The Eurozone Is Failing At An Accelerating Rate - Despite what her officials say publicly, austerity has limited support within the ECB itself, because it is run at the top by neoclassical economists. Instead, the real constraint is Germany, whose citizens’ savings are on the line and which faces the prospect of its third currency collapse in a century. So this is where the lines are drawn up: spendthrifts desperate for more money, a conflicted central bank, and Germany. Angela Merkel has made considerable progress in pushing the German electorate in a direction that is completely against its instincts by playing the political card marked “there is no alternative.” With her considerable political skills, she may be able to push her people some more, but it is becoming increasingly difficult, because everyone in Germany can see that committing real savings to bailing out the spendthrifts only wipes out the savings. These are not euros simply conjured out of thin air, because the Bundesbank cannot print them and probably wouldn’t do so anyway. But the pressure is mounting on her, and she is being squeezed by governments such as the British and the Americans, who are now panicking over the consequences of failure. This is why both countries went public last week, with David Cameron even visiting Merkel in person. It is a sure indication that major governments outside the Eurozone are beginning to expect the worst, and that unless Germany gives way, it will happen quickly.

EU rules could push up cost of retirement - PENSIONERS could face a reduction in income of up to 20 per cent if new European Union rules on capital requirements are implemented, according to accountancy firm Deloitte. The Solvency II reforms are set to shake-up the continent’s insurance business by setting common standards and increasing capital requirements. But this could have the side effect of forcing annuity providers to hold significantly more reserves, causing them to switch from investing in corporate bonds to lower-yielding assets such as government debt. Research by Deloitte suggests that in the best case scenario this would reduce annuity rates by five per cent, but it might lead to a fall of up to 20 per cent, depending on the outcome of ongoing EU negotiations. For a pensioner with a £100,000 pension fund, these changes could reduce their income by between £300 and £1,100 a year.

Greece and the Rest of Us: A Discussion: Paul Krugman, Edmund S. Phelps, Jeffrey D. Sachs, George Soros - Following the election of a pro-bailout party in Greece on June 17, the new Greek government being formed this week will try once more to negotiate a solution to its intractable debt crisis that will keep it in the eurozone. But how did Greece get into this situation in the first place? Are other countries at risk of falling into the same predicament? In a panel discussion at the Metropolitan Museum of Art earlier this year sponsored by the Review and Fritt Ord, these and other questions were explored by Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros. Many of their comments remain relevant now. Here are some excerpts.

The Euro Is Flat - Krugman - As we contemplate the euro mess, there’s a strong tendency to think of it as having a lot to do with the fundamental inequalities in overall productivity and economic development between euro members — backward, semi-developed countries like Greece or Portugal (not my view, but what you often hear) awkwardly tied to powerhouses like Germany. So it comes as something of a shock to look at Eurostat data (pdf) on real GDP per capita (or productivity, which look similar). Sure, Greece and Portugal are relatively poor, with GDP per capita of 82 and 77 percent, respectively, of the EU average; this means roughly 76 and 71 percent of the eurozone average, since the euro countries are a bit richer than the EU as a whole. Meanwhile, Germany is at 120 percent of the EU, or 112 percent of the EZ. But it’s no different, really, than the US situation (look under per capita GDP). Alabama is at 74 percent of the US average, Mississippi at 67, with New England and the Middle Atlantic states at 118 and 116. In other words, as far as underlying economic inequalities are concerned, the EZ is no worse than the US.

Antonis Samaras sworn in as Greek prime minister - Antonis Samaras, head of Greece's conservative New Democracy party, has been sworn in as the country's new prime minister, following his victory in Sunday's general election. New Democracy, the socialist party Pasok and the smaller Democratic Left came to an agreement on Wednesday to form a coalition government. All three parties support Greece's loan commitments, unlike the second-placed Syriza, but have pledged to rewrite the conditions of the bailout. Samaras took the oath at a Greek Orthodox ceremony in Athens. "With the help of God we will do whatever passes from our hands to get out of this crisis," he said in his first statement in office.

Same Parties in Charge: New Government, But No New Beginning in Athens - Greek bureaucracy doesn't exactly have a good reputation at the moment. Neither are the country's politicians considered to be very efficient. But Germany's politicians could take a leaf out of the Greek parties' book when it comes to this week's coalition negotiations in Greece. On Wednesday, just three days after Sunday's election, a coalition government was formed consisting of the conservative New Democracy, the Socialists (PASOK) and the moderate Democratic Left (Dimar). The new Greek prime minister is Antonis Samaras, leader of New Democracy, who was sworn in on Wednesday afternoon in Athens. The success of the negotiations marks the end of weeks of uncertainty for the country and the rest of Europe, where leaders had feared that the left-wing Syriza alliance might win the election, causing the debt crisis to escalate and forcing Greece to leave the euro zone. For now at least, that danger appears to have been averted. In contrast to Syriza, all three parties in the new government broadly support Greece's bailout deal with the European Union and International Monetary Fund (IMF).  But there is little sense of a new beginning in Athens. After all, New Democracy and PASOK took turns in running the country for 37 years. Many voters blame them for getting the country into its current debt mess.

Greek government to seek two-year extension to bailout term (Reuters) - Greece's new government promised on Thursday to renegotiate the terms of the country's bailout without endangering its future in the euro, trying to ease social tensions but also risking a showdown with European powers. The three-party coalition called for changes to the deal that is helping Greece avoid bankruptcy after the announcement of an 18-member cabinet dominated by the conservative New Democracy party of Prime Minister Antonis Samaras. National Bank Chairman Vassilis Rapanos was named finance minister and New Democracy deputy leader Dimitris Avramopoulos became foreign minister. Once jailed for fighting Greece's 1967-74 military dictatorship, Rapanos must now cure its sick public finances while negotiating with euro zone leaders who are losing patience with Athens after two multi-billion euro bailouts since 2010 that have failed to end the crisis. "The unity government's goal is to tackle the crisis, open the road to growth and revise terms of the bailout without putting at risk the country's European course, nor its euro zone membership," said a policy document endorsed by the coalition.

Merkel Ally Rejects Bailout Concessions for Greece - As New Democracy tries to form a government in Greece, there have been suggestions that the terms of the EU bailout could be relaxed. But now a senior member of German Chancellor Merkel's conservatives has insisted the deal stands. Athens needs to "make up for lost time," he told SPIEGEL. With the prospect of a pro-bailout government being formed in Greece following New Democracy's victory in Sunday's election, some European politicians have suggested that the strict conditions for Athens' deal with the European Union and International Monetary Fund could now be relaxed a little. Reacting to the election result, German Foreign Minister Guido Westerwelle, a member of the business-friendly Free Democratic Party, said that although there could not be "substantial changes" to the agreement with the EU and IMF, he could "well imagine talking again about timelines." But politicians from Angela Merkel's conservatives have resisted the suggestion that Athens should be given more time. Now a key Merkel ally has rejected relaxing the terms of Greece's bailout deal and called on Athens to increase the pace of reforms. In an interview with SPIEGEL ONLINE, Volker Kauder, 62, floor leader of the conservatives' parliamentary group, rejected granting concessions to Athens, saying that the country has already wasted a lot of time due to the new elections. "In the case of Greece, time can mean a lot of money," he said. "That's why I can't imagine that we could make changes in that regard."

German court may delay bailout fund ratification  (Reuters) - Germany's constitutional court said on Thursday it will need time to study the euro zone's permanent bailout mechanism after its expected approval in the German parliament next Friday, which could delay its scheduled start date on July 1. Angela Merkel's government and the centre-left opposition reached a deal on economic growth measures on Thursday which should enable parliament to ratify Merkel's fiscal pact and the European Stability Mechanism (ESM) on June 29. The ESM cannot come into effect without ratification by Germany, the biggest economy in the euro zone. But a spokeswoman for the top court said the ESM is so complex it expects head of state Joachim Gauck to delay his signature of the text approved by parliament until the court has had time to study it.

Germany Faces Delay in Ratifying Euro Rescue Fund - Germany's highest court asked the country's president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel. The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. German President Joachim Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government -- the permanent bailout fund known as the European Stability Mechanism (ESM) -- would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.  Gauck doesn't want to sign the two laws, at least for now, when they are presented to the two houses of the German legislature -- the federal parliament, the Bundestag, and the upper legislative chamber, the Bundesrat -- for ratification next week. However, laws in Germany are only considered ratified, and therefore binding under international law, when signed by the president. Now it could take another two or three weeks before the court rules on possible emergency appeals.

“The Eurozone’s Strategy is a Disaster” - Yves here. Mr. Market is in a tizzy today over, per Bloomberg, “concerns over the slowdown of growth”. Cynics might note that journalists have to attribute motives to market moves, when their waxing and waning often defies logic. Nevertheless, we’ve had disappointing reports out of China, a bad Philly Fed manufacturing report, a less than stellar initial jobless claims report, and not so hot housing data this AM, and more and more signs of inability to bail out the sinking Titanic of the Eurozone (a meaningless announcement compounded by continued focus on ongoing German court challenges to more aggressive support of rescues. Even if these cases lose, any uncertainty and delay has the potential to accelerate the ongoing bank run out of periphery countries).  This post from VoxEU is a good short form summary of how the Eurozone got into this fix. Its last para takes an unduly scolding tone that may turn off some readers, and does not reiterate the point made at the top, which is that the ECB needs to step up in a serious way to stem the crisis. Other remedies will take too long to implement and thus cannot change the trajectory under way.

Confidence Indicators Deteriorated Significantly This Week - Rebecca Wilder -- This week national confidence surveys rolled in with just one story: the economic infection in Europe is spreading. Business confidence indicators in France and Germany declined 1.1% and 1.6%, respectively, in the month of June. In Italy consumer confidence hit another record low since 1996 of 85.3 after falling 1.4% in June. The National Bank of Belgium and Statistics Netherlands released their balance measures of consumer confidence. Both balances fell 2 points over the month of June. Notably, consumer confidence in the Netherlands is depressed, hitting a record low since 1986 at -40 in June. These are highly credible indices with robust correlations with hard data like real retail sales and production. Given the precipitous decline in confidence, it’s hard to imagine how European economic sentiment will turn around without truly innovative policy action

Spain to Make Official Aid Request Monday - Spain's government said Friday it plans to make its official request for European Union aid for its banking sector Monday, and expects to have the terms for such aid set by July 9, as discussions continue on ways to inject European aid funds directly into ailing Spanish banks. Spanish Finance Minister Luis de Guindos said that pumping money directly into banks, which would seek to break the current link between banking and sovereign risks that helped push the country's financing costs to record highs earlier this week, "is definitely a possibility." These comments indicate that direct injections of capital from the EU bailout funds, which appeared to be all but ruled out days ago, have returned to the discussion table despite opposition from Germany—the euro zone's paymaster—and other northern European countries. This is important because observers say that injections via Spain's government could drive Spanish sovereign debt to dangerous levels. Mr. De Guindos said that as the recapitalization of Spanish banks will proceed in several stages, direct injections—which he called a "fundamental" tool to lower sovereign risk—may be part of it later on, even if they aren't used in the early stages. This, he added, would be done within the framework of a wider banking union in the euro zone, also including a bank resolution and a deposit guarantee scheme. The design of this union, he added, is already in the works.

ECB takes further measures to increase collateral availability for counterparties - On 20 June 2012 the Governing Council of the European Central Bank (ECB) decided on additional measures to improve the access of the banking sector to Eurosystem operations in order to further support the provision of credit to households and non-financial corporations. The Governing Council has reduced the rating threshold and amended the eligibility requirements for certain asset-backed securities (ABSs). It has thus broadened the scope of the measures to increase collateral availability which were introduced on 8 December 2011 and which remain applicable. In addition to the ABSs that are already eligible for use as collateral in Eurosystem operations, the Eurosystem will consider the following ABSs as eligible:

  • 1.Auto loan, leasing and consumer finance ABSs and ABSs backed by commercial mortgages (CMBSs) which have a second-best rating of at least “single A” [1] in the Eurosystem’s harmonised credit scale, at issuance and at all times subsequently. These ABSs will be subject to a valuation haircut of 16%.
  • 2.Residential mortgage-backed securities (RMBSs), securities backed by loans to small and medium-sized enterprises (SMEs), auto loan, leasing and consumer finance ABSs and CMBSs which have a second-best rating of at least “triple B” [2] in the Eurosystem’s harmonised credit scale, at issuance and at all times subsequently. RMBSs, securities backed by loans to SMEs, and auto loan, leasing and consumer finance ABSs would be subject to a valuation haircut of 26%, while CMBSs would be subject to a valuation haircut of 32%.

Mario Monti: we have a week to save the eurozone - Italy's prime minister, Mario Monti, has warned of the apocalyptic consequences of failure at next week's summit of EU leaders, outlining a potential death spiral that could threaten the political and economic future of Europe. The Italian leader is to hold talks with Chancellor Angela Merkel of Germany, the French president, François Hollande, and Spain's prime minister, Mariano Rajoy, in the hope that the single currency's big four countries can pave the way for a breakthrough at next week's meeting. Speaking to the Guardian and a group of leading European newspapers, Monti said that, without a successful outcome at the summit, "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries". The attacks would be focused not only on those who had failed to respect EU guidelines, but also on those like Italy, which he said had abided by the rules "but which carry with them from the past a high debt".Monti warned: "A large part of Europe would find itself having to continue to put up with very high interest rates that would then impact on the states and also indirectly on firms. This is the direct opposite of what is needed for economic growth."

Euro Leaders Agree to Push for Stimulus Package - Leaders from the leading euro zone economies pledged Friday to reinforce the single currency and to push together for a 130 billion euro program to stimulate economic growth. After a two-hour meeting here, the leaders of France, Germany, Spain and Italy also pledged to give a clearer, more comprehensive vision of the future, while acknowledging the serious crisis sweeping the Continent. “The 130 billion euros is a strong signal,” French President Francois Hollande said at the news conference following the private meeting, and is part of “a road map that presupposes fiscal and banking union.” The meeting’s host, Italian Prime Minister Mario Monti, said the stimulus package met the leaders’ primary objective, which he said was “to re-launch growth through investments and the creation of jobs.” The message that the four countries want to come out of next week’s European Council meeting in Brussels is that “the euro is here to stay, and that we all mean it,” Mr. Monti said. German Chancellor Angela Merkel reiterated: “We need more Europe.” Yet the four leaders did not ignore their differences. Mr. Hollande stressed that he would continue to work for the swift introduction of euro bonds, which he described as “a useful measure for Europe” that the Germans have opposed for the near term.

European leaders push for $163 bln in measures - The leaders of France, Germany, Italy and Spain agreed to push for a growth package worth up to €130 billion ($163 billion) at a key European Union summit next week aimed at kickstarting the economy and safeguarding the currency bloc. President Francois Hollande of France, German Chancellor Angela Merkel, Spanish Prime Minister Mariano Rajoy and Italian Premier Mario Monti, playing host, provided few concrete details beyond agreement on pursuing a financial transaction tax — something that Germany has championed. Perhaps the biggest breakthrough of the brief summit was Merkel's acknowledgement that austerity alone won't cure the euro's woes. Merkel has come under increasing pressure to give ground on key pro-growth measures. "We say that growth and solid financials are two sides of a coin. Solid financials are not sufficient," Merkel said. Monti, who met with his fellow leaders at a government villa in Rome, is trying to build a bridge between Merkel's insistence on fiscal discipline and the focus on growth by recently elected Hollande. He acknowledged that steps taken so far have not been sufficient, and that markets and European Union citizens alike need to view the euro currency as "irreversible."

Merkel Parries Push for Euro Debt Plan as Growth Outline Agreed - German Chancellor Angela Merkel parried attempts to get her to accept more flexibility for the euro-region’s rescue funds, while agreeing with leaders of Italy, Spain and France on an outline to spur economic growth.  At a four-way summit meeting in Rome yesterday, Merkel, Italian Prime Minister Mario Monti, French President Francois Hollande and Spanish Prime Minister Mariano Rajoy said they would lobby their European Union partners to accept a growth plan of as much as 130 billion euros ($163 billion), or about 1 percent of the euro-region’s economic output.With pressure mounting on Merkel to relent on her rejection of additional joint debt burdens, European leaders are looking to focus on growth as a way out of a sovereign debt crisis now in its third year. They are racing to come up with a plan to salvage the monetary union by a summit in Brussels next week, the fourth such make-or-break meeting this year, as concerns over Spain’s banks and flagging growth across the bloc shake investor confidence.

Leaders Vow to Defend Euro, but Hint at Rifts on How - The leaders of the euro zone’s four largest economies vowed Friday to defend the common currency with all means necessary, trying to reassure jittery financial markets before yet another summit meeting of the European Union next week in Brussels. But clear disagreements remained on what those mechanisms ought to be. Chancellor Angela Merkel of Germany gave little indication of heeding calls for pooling the region’s debt or using European bailout funds to prop up the government bonds of Spain and Italy, despite increasing pressure from the European leaders and the International Monetary Fund. She said that she and the leaders of Spain, France and Italy had agreed on a $160 billion growth plan, but that is a modest effort that largely redirects existing money, adding so-called project bonds through which the euro zone will provide credit to private companies for infrastructure projects and job creation. “There was an agreement among all of us to use any necessary mechanism to obtain financial stability in the euro zone,” Spain’s prime minister, Mariano Rajoy, said at a joint news conference with Ms. Merkel; Mario Monti, his Italian counterpart; and President François Hollande of France. “The euro is here to stay, and we all mean it,” Mr. Monti broke into English to say. But he added that although much had been done to stem the euro crisis, the measures were still insufficient. Markets are sure to agree. And so the impasse remains, even after a sharp public rebuke Thursday evening by the monetary fund’s managing director, Christine Lagarde, who urged European leaders to get on with fixing the euro zone’s economic problems.

Latest European Bailout Plan Fizzles In Record Time - UPDATE: The Bundesbank, as usual, ready to pur some 'reality-based' cold-water on the situation: *BUNDESBANK SAYS IT WON'T ACCEPT COLLATERAL IT DOESN'T HAVE TO" They came, they spoke, they spiked EURUSD; but now just over 90 minutes later the full force and furor of the 3 horse-men (and 1 woman) of the Euro-zone have tried and failed to get any market belief in their constant tirade of the same facts and denials. No matter what Monti, Hollande, and Rajoy say, Merkel's reply summarizes to: "No Free Lunch" and while markets exhibit their 'spasmodic' response function to any comment from Europe, sooner now (rather than later) we revert to pre-bullshit levels. As a reminder, the half-life of the Spanish Bailout was 7 hours as we noted here which must make this total reversion particularly worrying for the 'elite'.

Race to save euro will follow ‘Grexit’ - Following the re-run of the Greek parliamentary elections, we have a New Democracy-led coalition government. This removes the risk of an early “Grexit” as it is likely the minimum demands for relaxation of fiscal austerity by the new government will not exceed the maximum fiscal austerity concessions Germany and other core euro area member states are willing to make. Some relaxation on the timing of austerity, some limited early disbursement of funds to pay for essential public goods and services, and some token pro-growth gestures courtesy of the European Investment Bank and EU structural and cohesion funds will most likely keep Greece in the euro for the time being. However, we consider it highly unlikely that Greece will comply sufficiently with even “lite” fiscal austerity conditionality, let alone with structural reform conditionality, including privatisation targets, which are unlikely to be relaxed. Political opposition to both austerity and reform is now stronger in Greece than ever before. So is resistance to bailouts in the core. The troika – the European Commission, European Central Bank and the International Monetary Fund – may forgive a Greek failure in the September progress assessment, but is unlikely to tolerate another failure to comply on all fronts by the December assessment. Grexit may well be triggered by a troika review declaring Greece wilfully non-compliant with the conditionality of its programme, stopping the disbursements to the Greek sovereign. Greece defaults and the eurosystem and the Greek ELA (emergency liquidity assistance provided by the Greek central bank) stop funding the Greek banks. At that point Greece exits the euro area, following the imposition of capital controls, foreign exchange controls, restrictions on deposit withdrawals and a temporary suspension of the Schengen agreement.

Why devaluation isn’t a viable option for Greece: Insights from a small open economy - There is a fallacy at the root of most of the discussion of the European economic crisis, and it is that countries like Greece would have the option to grow their economies through exchange rate depreciation, were they outside the Eurozone. In reality, exchange-rate depreciation always depresses output in small open economies, because there is zero elasticity of substitution between internationally traded goods and services and domestically produced goods and services, either in consumption or in production. There are no expenditure switching effects of a devaluation; devaluation “works” by depressing real income and imports, by enough to eliminate the excess demand for foreign exchange.This column provides some hands-on insights from another small open economy, Barbados. It argues that for these economies that rely heavily on imports, devaluation will never be a viable option.

Debt crisis: Angela Merkel defies Latin Europe and the IMF on bond rescue -- German Chancellor Angela Merkel has shot down calls for full mobilisation of the eurozone's bail-out funds to halt the raging bond crisis in Spain and Italy, ignoring unprecedented pleas for action from the International Monetary Fund. "Each country wants to help but if I am going to call on taxpayers in Germany, I must have guarantees that all is under control. Responsibility and control go hand in hand," she said after a crucial summit of the eurozone's Big Four powers in Rome. Mrs Merkel -- or La Signora No in Italy -- doused hopes of a break-through on proposals by the "Latin Bloc" leaders of Italy, France, and Spain to deploy the funds (EFSF and ESM) to cap the bond yields of "virtuous" countries vulnerable to contagion, or to recapitalize banks directly to take the strain off sovereign states. "If I give moneystriaght to Spanish banks, I can't control what they do. That is how the treaties are written," she said, before racing off to Danzig to tonight for Euro 2012 quarter final between Greece and German.. Christine Lagarde, the head of the IMF, warned before the summit that the eurozone is under "acute stress" and at risk of a downward spiral. "The viability of the European monetary system is questioned. There must be a recapitalisation of the weak banks, with preferably a direct link between the EFSF/ESM and the banks, in order to break the negative feedback loop that we have between banks and sovereigns."

Some unpleasant eurozone arithmetic  - Another week, another summit. Once again, we are being told, this time by Italian prime minister Mario Monti, that there is only one week left to save the euro. Yet the crisis still does not seem sufficiently acute to persuade eurozone leaders that a full resolution is necessary. The next summit on June 28 and 29 will unveil a long term road map towards fiscal and banking union, which in better economic circumstances could appear highly impressive. But unless there is some form of debt mutualisation at the summit, resulting in a decline in government bond yields in Spain and Italy, the crisis could rapidly worsen. Debt mutualisation can come in many forms. The European Redemption Fund, proposed by the Council of Economic Experts in Germany (and discussed here) seems to have receded into the background this week but could still have an eventual role. More immediately, the main option on the table seems to be the use of the eurozone firewall (ie a combination of the EFSF and ESM) to buy secondary government debt, or inject capital directly to the banks. But the problem here is simple: a lack of money. So far, the EFSF has lent €248bn of its original €440bn lending capacity. At the end of this month, the ESM treaty is supposed to be ratified, and the entity will become immediately operational with a maximum lending capacity of €500bn. However, there have been problems with ratification in several member states, including Germany, where the legal challenge being brought by the Left at the constitutional court could take a while to resolve.

Why an ESM programme could be a kiss of death: Recovery values and subordination - Spain, needing a bailout for its banks, was granted a vague promise by EZ leaders for up to €100 billion. The details remain obscure, yet they matter enormously. This column argues that the so-called subordination effect of fresh official lending could put Spain on the slippery road to ruin. It argues that if sovereign bonds must be bought, this should be done in the secondary market which, would be pari passu with private investors and thus avoid the subordination trap.

The End of the Euro Is Not About Austerity - Simon Johnson - Most current policy discussion concerning the euro area is about austerity. Some people, particularly in German government circles, are pushing for tighter fiscal policies in troubled countries (i.e., higher taxes and lower government spending). Others, including in the new French government, are more inclined to push for a more expansive fiscal policy where possible and to resist fiscal contraction elsewhere. The recently concluded Group of 20 summit meeting is being interpreted as shifting the balance away from the “austerity now” group, at least to some extent. But both sides of this debate are missing the important issue. As a result, the euro area continues its slide toward deeper crisis and likely eventual disruptive breakup. The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised never to change that exchange rate. This amounted to a very big bet that their economies would converge in productivity – that the Greeks (and others in what we now call the “periphery”) would, in effect, become more like the Germans. Alternatively, if the economies did not converge, the implicit presumption was that people would move; Greek workers would go to Germany and converge to German productivity levels by working in factories and offices there. It’s hard to say which version of convergence was less realistic.

Euro-Area Manufacturing, Services Output Shrink - Euro-area manufacturing output shrank at the fastest pace in three years in June and a Chinese output gauge indicated contraction as Europe’s worsening fiscal crisis clouded global economic-growth prospects. A gauge of euro-region manufacturing fell to 44.8 from 45.1 in May, London-based Markit Economics said today in an initial estimate. That’s the lowest in 36 months. The preliminary reading was 48.1 for a Chinese purchasing managers’ index from HSBC Holdings Plc and Markit. A reading below 50 indicates contraction. The euro area’s turmoil is undermining global growth by eroding confidence of investors and consumers as companies step up job cuts. Manufacturing in the U.S. probably expanded at a weaker pace in June, a Bloomberg News survey shows. Group of 20 leaders this week pushed Europe to step up measures that might contain the crisis. “No significant recovery can be expected as long as the future of the euro zone remains in doubt,”

Switzerland and Britain Gird Against the Storm -— The two largest European economies that do not use the euro announced measures on Thursday to help shelter their countries from a crisis that has engulfed Greece and Spain and appears poised to sweep over Italy. While Britain and Switzerland will never be immune to the problems of the euro zone, their leaders are trying to set up whatever bulwarks they can to prevent their financial systems and broader economies from being dragged down if the crisis deepens. In Britain, the government and central bank announced plans for a special bank-financing effort to increase lending to businesses, while Switzerland’s central bank said it was prepared to take action to keep the value of the Swiss franc from rising further. It also said that Credit Suisse needed to increase its capital this year to prepare for a potential worsening of the debt crisis. The British plan would provide banks with funds below market rates in exchange for collateral and a commitment to lend to businesses, Mervyn King, the governor of the Bank of England, said in a speech. He said the program could be in place within weeks. The step would be less far-reaching than the European Central Bank’s longer-term refinancing operation, which temporarily improved confidence in European markets after it was announced in December. But it would come in addition to an existing Bank of England program to purchase £325 billion ($505 billion) in bonds. Mr. King also hinted that the central bank would expand the bond purchasing program further because the economic outlook was deteriorating.

Quantitative Easing and Fiscal dominance - I am sure I have heard Mervyn King say, probably before he became Governor, that the one thing central bankers hate more than inflation are budget deficits. One rationale for this attitude is that central banks see themselves as playing a game with the fiscal authorities. Governments may be tempted, because they are not benevolent, to occasionally ignore debt when setting fiscal policy. If the monetary authority monetises that debt, this behaviour may be encouraged. This matters because an outcome where the fiscal authority always ignores debt is very bad.  (It is very bad if the central bank gives in, because it will lead to inflation. If the central bank does not give in, it is very bad either because it leads to a debt explosion and default, or – if you follow the Fiscal Theory of the Price Level - because you get inflation anyway. I do not think it matters in this context which bad it is – see McCallum and Nelson for an example from this debate.)  If we want to prevent this very bad outcome, so the argument goes, it is important that the monetary authorities do nothing to encourage this fiscal policy behaviour. In purely macroeconomic terms, there may well be occasions when it is efficient to use interest rates to help reduce the debt stock – particularly when the debt stock is high. One half of what I call the consensus assignment – that monetary policy should have nothing to do with debt control – therefore needs to be justified by arguments with a more political economy flavour. This particular political economy argument is the one I helped put forward in more detail here.

We've never had it so bad: how Breadline Britain has been hit - How tough are times right now? Britain is now a country where unemployment is inching up and six unemployed people chase every job. Meanwhile, the ONS reports recently that 10.7 million people in the UK were defined as being at risk of poverty in 2010, with the highest risk level among those over the age of 65. 17.1% of the UK's population was at risk of poverty in 2010, slightly above the EU average of 16.4%. So, what has happened to the cost of living and public spending? The cost of living is going up…The latest figures show that inflation stood at 3% in April 2012, down from 3.5% in March.More precisely the consumer price index (CPI) measure of inflation stands at 3%. In September last year, when the CPI stood at 5.2%, it had never been higher in recorded history.  At the same time, salaries have not kept pace with inflation. If you look at the chart below you can see that normally, wages increase just above inflation. Since this recession hit, wages have sunk well below the cost of living - they increased only 0.1% in March 2012.

Our poor excuse for an understanding of poverty - In Britain a poor household is officially defined as one with an income less than 60 per cent of the median. A law passed by the last government declares an unattainable target of reducing the proportion of children who live in poor households to below 10 per cent by 2020. No surprise, therefore, that in today’s austere circumstances Iain Duncan Smith, the UK’s work and pensions secretary, has attempted to start a debate about the definition of poverty. But his motives are not entirely cynical: Mr Duncan Smith has a record of real social concern. People who struggle to find enough food to eat are poor. The World Bank’s poverty line is an income of less than $1.25 a day. Financial Times readers, who spend more than that amount on their morning newspaper, are in no position to dispute that judgment. In the past two decades, economic growth in China and India has reduced global poverty by an unprecedented amount. That achievement is not diminished because some individuals in both these countries have become very rich. Fundamentally, poverty is about absolute deprivation.

The Austere Land - THE LAST FOUR YEARS have created what economists call a “natural experiment” in economic policy. As a consequence of deregulation and globalization, Britain and the United States experienced the financial crisis of 2008 in much the same way. Large parts of the banking system collapsed and had to be rescued; the real economy went into a nosedive and had to be stimulated. But after 2010, the United States continued to stimulate its economy, while Britain chose the stonier path of austerity.  While the Obama administration continued to stimulate the U.S. economy—through the Recovery and Reinvestment Act of 2009—George Osborne, the new British Conservative chancellor, pursued a modified Hayekian experiment. The government set out to slash public expenditure by £99 billion—or 7 percent of GDP—per year by the 2015–2016 fiscal year and increase taxes by another £29 billion per year.  Two years later, the score card is in. Since May 2010, when U.S. and British fiscal policy diverged, the U.S. economy has grown—albeit slowly. The British economy is currently contracting. Unemployment in the United States has gone down by 1.4 percentage points; in Britain, it has gone up by 0.2 percentage points. And despite keeping up stimulus measures, the Obama administration has been more successful in reducing the government deficit—by 2.5 percentage points compared with Osborne’s 1.9 percentage points.

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