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

Saturday, June 30, 2012

week ending June 30

US Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.846 trillion on June 27, down from $2.854 trillion on June 20. The Fed's holdings of Treasuries totaled $1.667 trillion as of Wednesday, June 27, versus $1.664 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $27 million a day during the week versus $26 million a day previously. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was $854.98 billion versus $868.04 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.48 billion, which was unchanged on the week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--June 28, 2012

The Fed Shirks Its Duties - On June 20, 2012, the Federal Reserve System’s Federal Open Market Committee extinguished the last shred of doubt as to whether it intends to achieve its mandated objectives. Despite a substantial markdown of an already inadequate forecast, the Fed did not take any actions that would make it possible to achieve either of its objectives over the foreseeable future. The action that was announced--additional purchases of longer-term Treasuries worth $267 billion--is estimated to reduce the 10-year Treasury yield by no more than 5 to 10 basis points. That is an amount that is lost in the daily fluctuations of the Treasury market and not enough, even in the Fed’s own models, to have an appreciable effect on the economy. For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action. At this point it is not clear that the Fed has the tools it needs to get the best possible outcome without help from fiscal policy. Nevertheless, the Fed has considerable firepower remaining. It should aggressively push down mortgage interest rates and state clearly that it would welcome an inflation rate temporarily above its 2 percent target in order to make faster progress on its employment objective. These measures, discussed below, would substantially improve the economic outlook, even if there is disagreement about whether they are sufficient by themselves.

Bernanke's Testicles Are Not That Big -- Over at his own blog, Paul Krugman answers the question I asked here three weeks ago. Here are the money quotes: ...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.

Fed Watch: A Long Wait to The Next FOMC Meeting - With the outcome of the June FOMC meeting settled, we can set our sights on the August meeting. And at this point, the outcome of that meeting is just as hazy as the last. There is once again a wide range of reasonable views, spanning from QE3 at the next meeting until early 2013, or not at all. Calculated Risk reviews the various opinions here. Interestingly, Goldman Sachs, who expected QE3 to be announced last week, has completely changed gears and is no longer expecting QE until next year. This after offering up the possibility of open-ended QE on the eve of the last FOMC meeting! Goldman's view is that the extension of Operation Twist was substantive enough to keep the FOMC on the sidelines. CR takes the opposite bet, expecting QE at the August meeting, anticipating a low-bar for additional action. Still, CR makes an important point: Perhaps an argument against a QE3 announcement on August 1st is there will not be much data released between now and the next FOMC meeting. For employment, the only major report will be the June employment report to be released on July 6th. Also the advance estimate for Q2 GDP will be released on July 27th. I have tended to argue that the calendar is very important, especially when policymakers are genuinely uncertain of the next most. Absent major financial crisis, they need sufficient data to justify moving, and they just don't have it yet. That story fits with last week's Jon Hilsenrath analysis of Federal Reserve Chairman Ben Bernanke: When he has lacked conviction, though, his moves have tended to be very deliberate and have unfolded in step-by-step fashion over months, not days. One reason is that he has had to build consensus on a policy-making committee with sharply divergent views. Another is that he appears to be trying to gather information and calibrate his response.

Fed’s Fisher: Twist Plan Having Very Minor Effect - The Federal Reserve‘s Operation Twist program to push down bond yields is only having a “very minor effect” on the economy, said Richard Fisher, the president of the Federal Reserve Bank of Dallas, on Tuesday. In an interview with the Fox Business Network, Fisher said the Twist program will only complicate the Fed’s eventual exit strategy. Fisher said there is already “so much money lying fallow that’s just not being used,” including $1.5 trillion in excess bank reserves and over $2 trillion on corporate balance sheets. The money isn’t being put to work at the moment because of fiscal uncertainty, Fisher said. “They have to stop doing what Republicans and Democrats together have been doing for far too long, that is digging a giant hole in which they are burying our children with debt and unfunded liabilities,” Fisher said.

Fed’s Evans: Operation Twist Useful, but Has Small Impact - The Federal Reserve‘s decision to extend an existing stimulus program rather than adding monetary support will provide a “relatively modest” boost to the struggling U.S. economy, a Fed official said Wednesday. The nation’s central bank last week extended Operation Twist Treasury purchases through the end of the year, rather than letting the program expire at mid-year. The Fed announced it will buy about $267 billion in Treasurys with maturities of between six-and 30-years, using proceeds from the sale of shorter-term maturities. Leading up to last week’s Fed meeting, Federal Reserve Bank of Chicago President Charles Evans said he believed “any additional accommodation would be welcome.”

Fed’s Bullard Argued for Ending ‘Twist’ Program - James Bullard, president of the Federal Reserve Bank of St. Louis, said he argued at the Fed’s last policy meeting for ending its “Operation Twist” bond-buying program in June, but he would have been willing to go along with his colleagues’ decision to extend it had he had the opportunity to vote at the meeting. “I argued to end the Twist program, but I was also willing to go along with the judgment of the committee and the chairman that maybe it wasn’t the best time to end that program,” Mr. Bullard said in an interview with The Wall Street Journal.

Fed’s Lockhart Open to Further Action if Economy Weakens - While he doesn’t think it’s going to be needed, the leader of the Federal Reserve Bank of Atlanta remains open to the idea of further central bank stimulus if the economy weakens.  In an interview with Dow Jones Newswires, Atlanta Fed President Dennis Lockhart said when it comes to additional Fed action, “I simply do not rule it out. It is an option that is open depending on how things evolve.”

The Impotence of the Federal Reserve - The United States Federal Reserve’s recent announcement that it will extend its “Operation Twist” by buying an additional $267 billion of long-term Treasury bonds over the next six months - to reach a total of $667 billion this year - had virtually no impact on either interest rates or equity prices. The market’s lack of response was an important indicator that monetary easing is no longer a useful tool for increasing economic activity. The Fed has repeatedly said that it will do whatever it can to stimulate growth. This led to a plan to keep short-term interest rates near zero until late 2014, as well as to massive quantitative easing, followed by Operation Twist, in which the Fed substitutes short-term Treasuries for long-term bonds. These policies did succeed in lowering long-term interest rates. The yield on ten-year Treasuries is now 1.6%, down from 3.4% at the start of 2011. Although it is difficult to know how much of this decline reflected higher demand for Treasury bonds from risk-averse global investors, the Fed’s policies undoubtedly deserve some of the credit. The Fed is unlikely to be able to reduce long-term rates any further. Their level is now so low that many investors rightly fear that we are looking at a bubble in bond and stock prices. The result could be a substantial market-driven rise in long-term rates that the Fed would be unable to prevent.

Forecasts Hint Fed Might Change Rate Guidance - As regional Federal Reserve bank presidents return to the speaking circuit this week, many investors will be scrounging for clues as to whether the central bank plans to launch a third major bond-buying program later this summer. Fed officials may also offer hints about another step the central bank could take: shifting its guidance on when it first expects to raise interest rates. The Federal Open Market Committee, the Fed’s policy-making arm, has said since January that it expects to keep short-term interest rates near zero through at least late 2014. But comments and recently revised projections from Fed officials have some economists guessing the Fed might decide to stick with its easy-money policy into 2015.

Fed Won't Resume Quantitative Easing, UBS Says - Stephane Deo, global head of asset allocation at UBS AG, talks about Federal Reserve and European Central Bank monetary policy and the outlook for the euro. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."

Stabilizing prices is immoral - The first thing to recognize is that a policy of enforced “price stability”, whether implemented in terms of levels or rates, is a form of goverment-provided social insurance, just like unemployment or disability benefits. For all of these programs, there are states of the world in which some individuals might suffer misfortune. The government acts to counteract that misfortune, imposing costs on other individuals in order to fund a transfer of resources. Consider an adverse supply shock. Absent government action, the effect of a reduction of the supply of goods and services would be higher prices. The only way to prevent higher prices is to concomitantly reduce aggregate demand...some people will pay a cost, which will show up as a reduction of demand. Other people will enjoy a benefit from the absence of price inflation. Who are these people? Can we identify them? Sure. People who benefit from nonincreasing prices are people who hold nominal-dollar assets. That includes most obviously creditors — people with money in the bank, bondholders, etc. — but also people with stable employment but little bargaining power to pursue raises. These groups would see their purchasing power fall in an inflation. If the government restrains prices by reducing aggregate demand, it helps these groups by shifting costs to others. If prices are stabilized via monetary policy, debtors pay: both the increase in interest rates and the reduction of aggregate demand increase the burden of repaying debts. If prices are stabilized via increased taxation, then obviously whoever bears the incidence of the new tax pays. In both cases, marginal workers pay, by enduring an increased likelihood of becoming unemployed or a diminished likelihood of finding a job. [1]

Is price stability immoral? - Steve Waldman is one of the most original thinkers on the internet, and I highly recommend you read his latest piece, “Stabilizing prices is immoral“. You might never think about central bankers quite the same way again, and indeed you could start thinking that they judge themselves according to how assiduously they service the interests of the rich and well-employed. When central banks see consumer prices rising too fast, they raise interest rates to bring inflation back down under control. That’s a deliberate slowing of the economy as a whole, for the especial benefit of the kind of people who have a particular interest in low inflation. The beneficiaries, here, are lenders, and people who can’t assume that their salaries will rise with inflation. Meanwhile, debtors — and even the economy as a whole — would have been better off, at least in the short term, if the central bank hadn’t acted at all. Now central banks act the other way, too: they cut interest rates when demand is too low. And when that happens, as Waldman says, the tables are turned:

A full Fed board can fire up the US economy - As FT readers will no doubt know, the key policymaking arm of the Federal Reserve is the Federal Open Market Committee, a 12-member group that consists of the 7 board members plus five of the 12 regional Federal Reserve bank presidents. The regional banks are based in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. Their geographical location remains based on the distribution of population and economic power in 1913, when the Federal Reserve System was established, rather than that of today. The president of the Federal Reserve Bank of New York is a permanent member of the FOMC. The remaining 11 bank presidents rotate annually.  Unlike members of the Federal Reserve Board, who are nominated by the president and confirmed by the US Senate, regional bank presidents are appointed by private boards of directors for each bank. These board members tend to be important local bankers and business people in the community in which the bank is located. Consequently, regional bank presidents tend to be somewhat provincial and more concerned with representing the views of their well-to-do board members than the general public. Therefore, they tend to be much more concerned with keeping inflation down than bringing down unemployment, even though the Fed is required by law to take both into account when setting policy.

Can the Fed Really Do More? - I’ve grown increasingly frustrated by the near universal cry for more action from the Fed. My friend and fellow blogger Marshall Auerback has quipped that it’s as if every mainstream progressive received the same White House memo. I imagine it looked something like this: To: Mainstream Media (TV, Radio, Print Media) From: Office of the White House:The economic recovery is faltering. Congress will not support anything I put forward, so we’ve got to enlist the help of an independent body like the Federal Reserve if we’re going to improve things before November. So here’s what I need you to do — scapegoat the Fed. Call them out, repeatedly, for “sitting on their hands.” Demand that they do more. Tell them that “country trumps credibility.” Message received! Krugman, Baker, Yglesias, Hayes — everyone seems to have gotten the memo. Ordinarily, they insist, the Fed could reach into its tool kit and deliver a powerful shot of economic adrenaline that would set off a frenzy of borrowing and spending. But that typically potent transmission mechanism is said to be broken because borrowing costs are already essentially zero. The curse of the so-called Zero Bound! What to do? The Fed must move into uncharted territory. It must “do more.” And so instead of building a powerful, unrelenting case for further fiscal easing, mainstream progressives are focused on the Fed, demanding that it do just as much to promote growth and employment as it does to promote price stability. How? I almost hope the Fed tries it so that we can banish this proposal to the wasteland of failed policy recommendations (along with QE1, QE2 and Operation Twist). But millions of Americans are suffering and so I really do not want to see us pursue a losing policy just because the alternative looks like a political nonstarter.

Bernanke bails out Europe  - Warning that America’s sputtering economic recovery was grinding down, this week the Federal Reserve noted in classic Fed-speak that “strains in global financial markets continue to pose significant downside risks to the economic outlook.” But the Fed and its soft-spoken chairman Ben Bernanke announced nothing new to fix those strains. And they said even less about the steps they were already taking to prop up the staggering banks in Europe. Bernanke’s silence speaks loudly of the strange and controversial role that America’s central bank now plays in global finance. The Federal Reserve’s charter gives it two basic legal mandates. One is to promote price stability, which means to combat both inflation and deflation, as central banks all over the world try to do. The other, to the surprise of many, is to promote full employment, which the Fed has literally never accomplished. Nothing in its charter explicitly empowers the Fed to act as central banker to the world, or anything close. But, in contrast to his predecessors as Fed chairman, Bernanke has increasingly talked up the full-employment mandate to justify increasing global intervention. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.” The needed action has already started, as Gerald P. O’Driscoll Jr., a former vice-president of the Federal Reserve Bank of Dallas, explained last December in the Wall Street Journal. He called his whistle-blowing exposé “The Federal Reserve’s Covert Bailout of Europe.”

Battle Royale Coming Over Fed Currency Swap Lines? - Yves Smith - John Dizard of the Financial Times gives an early warning of a potential flashpoint later in the year: that of the Fed’s currency swap lines. In theory, this should be uncontroversial. The Fed is providing dollars to foreign central banks. Those central banks agree to return the currency at the end of the term of the swap. The foreign central bank takes both the foreign exchange risk and the credit risk of lending to banks in its purview.  The reason these foreign banks occasionally need dollars is, mirabile dictu, they make loans in the US, either directly, or as the Landesbanken did in the runup to the crisis, by buying dollar denominated bonds (to their misfortune, subprime mortgage-backed securities), to fund dollar-based transactions in their trading books, and meet swap commitments. And the so-called dollar funding gap has risen.  Morgan Stanley pegs the current dollar funding gap at $2 trillion.  The sticking point is that the current Fed swap line program expires February 1, 2013, deliberately after year end in case the Fed needs to facilitate the ECB providing turn-of-the-year dollar liquidity. It would seem to make sense to get a new commitment in place, since the bigger-than-ever funding gap means the desirability of having the swap lines in place is not going away any time soon. But the ECB seems wedded to its “let’s not do anything till we absolutely have to” habits. Dizard sees the potential for the swap lines to become the focus of a huge Congressional food fight, since their renewal and/or use is likely to come up when tempers will already be high over fiscal cliff negotiations. He notes: Mitt Romney announced on Face the Nation, a national CBS television talk show, that “We’re not going to send cheques to Europe. We are not going to bail out the European banks. We’re going to be poised here to support our economy. Regardless of what is happening in Europe, our banking system is able to weather the storm.”… However, when even a sophisticated financial sector person such as Mitt Romney finds it useful to take such a shot, we could have a problem come the late fall. I’ve heard from both Democratic senators and senior House Republicans that if there is any large scale use of dollar swap lines at the time of the “fiscal cliff” budget negotiations, the reaction on Capitol Hill would be “volcanic”. As one of them told me last week, “You can expect a lot of demagoguery.”

Fed officials eye darker U.S. growth, jobs picture (Reuters) - Federal Reserve officials on Friday said they were keeping an eye out for any signs that slowing growth is raising deflation risks but differed on how worrisome sluggish job markets are for the modest U.S. economic recovery. New York Federal Reserve Bank President William Dudley, a close ally of the U.S. central bank's chairman, Ben Bernanke, said he had modestly lowered his expectations for inflation in coming months. He said he would need to see more information on the U.S. jobs market and the unfolding of the European sovereign debt crisis before having a clearer sense of the health of the U.S. economy. A permanent voter on the Fed's policy-setting panel, Dudley said employment growth has "slowed considerably of late" as the economy has lost momentum. The New York Fed leader has a reputation as a policy dove and has supported aggressive measures to boost growth and bring down high unemployment. He focused on the economic outlook and did not discuss in any detail the Fed's decision last week to boost monetary stimulus for the sluggish U.S. recovery or whether more monetary easing might be needed. "Although some of the current uncertainties will take time to resolve, I can imagine material data on a number of dimensions could become available in the coming weeks and months that could lead me to adjust my forecast further,"

BIS Official Warns of Central-Bank Overreach - Jaime Caruana, general manager of the Bank for International Settlements and former governor of the Bank of Spain, warned Sunday that the recent aggressiveness of the world’s central banks may be creating “unrealistic expectations” about their power to “resolve the fundamental problems that hold back sustainable growth” and argued that more central bank action poses unwelcome risks. “Monetary policy can buy time needed for other policies to correct fundamental balance sheet problems,” he said, according to the prepared text of remarks to be delivered in Basel, Switzerland, at the annual general meeting of the BIS, a consortium of the world’s central banks. “But even in this transitory role, monetary policy is not without limits or risks. Under current circumstances, the benefits of continued monetary easing cannot be taken for granted.” Mr. Caruana’s comments come as the central bankers from Beijing to Frankfurt to Washington are under renewed pressure to step up efforts to resuscitate the slowing global economy. Some economists and politicians—and some central bankers in the U.S. and the U.K.—argue that the central banks are too hesitant, condemning their economies to slower growth and higher unemployment than necessary in the wake of the devastating financial crisis. Other economists and some central bankers—in the U.S., Germany and elsewhere—counter that curing the ills of advanced economies lies now with government deficit-cutting and policy changes that can only be made by elected politicians. Mr. Caruana is firmly in that second camp, as the BIS tends to be.

The BIS on "The Limits of Monetary Policy" - Each year the Bank for International Settlements (BIS) hosts the world’s central bankers--the BIS shareholders--at their Annual General Meeting in Basel, Switzerland. At the meeting held today, the BIS issued their Annual Report which addresses key monetary policy issues. BIS analyses often contain useful warnings, including their prescient warning in the years around 2003-2005 that monetary policy was too easy, which turned out to be largely correct, as the boom and the subsequent bust made so clear. So the Annual Report is always worth reading. This is especially true of the Annual Report released today because it devotes a whole chapter to serious concerns about the harmful “side effects” of the current highly accommodative monetary policies “in the major advanced economies” where “policy rates remain very low and central bank balance sheets continue to expand.” Of course these are the policies now conducted at the Fed, the ECB, the Bank of Japan, and the Bank of England. The Report points out several side effects:

  • First, the policies “may delay the return to a self-sustaining recovery.” In other words, rather than stimulating recovery as intended, the policies may be delaying recovery.
  • Second, the policies “may create risks for financial and price stability globally.”
  • Third, the policies create “longer-term risks to [central banks’] credibility and operational independence.”
  • Fourth, the policies “have blurred the line between monetary and fiscal policies” another threat to central bank independence.
  • Fifth, the policies “have been fueling credit and asset price booms in some emerging economies,” thereby raising risks that the unwinding of these booms “would have significant negative repercussions” similar to the preceding crisis, which in turn would feed back to the advanced economies.

BIS’s Cecchetti Sees Too Much Reliance on Global Central Banks - The global economy has become overly dependent on central banks to restore growth and stabilize financial markets, delaying key economic and fiscal-policy reforms, the chief economist of the Bank for International Settlements said. In an interview with The Wall Street Journal, Stephen Cecchetti gave bank regulators high markets for progress on implementing capital rules, known as Basel III, and for beginning to address liquidity regulation. Still, “I would have hoped that the real side of the [global] economy would have recovered more strongly and there would have been significantly less reliance on various kinds of official support,” Mr. Cecchetti said. Specifically, global policymakers have grown too reliant on their central banks to stimulate activity, he said, echoing a warning in the BIS’s annual report. “There is a growing risk of overburdening monetary policy,” said the Basel, Switzerland-based institution known as the central banks’ central bank. “Failing to appreciate the limits of monetary policy raises the risk of a widening gap between what central banks are expected to deliver and what they can actually deliver. This would complicate the eventual exit from monetary accommodation and may ultimately threaten central banks’ credibility and operational autonomy,” the BIS said.

Central bank existential crisis confirmed - The BIS Annual report released this Sunday is jam-packed with data, charts, observations and analysis. Joseph has already stuck up some of the most compelling… But one of the other key points to emerge is in its chapter on the “limits of monetary policy”. There is, it appears, a marked admission that central banks may be losing control. We don’t mean that in the old cynical sense we’ve heard before — that because central banks are zero-bound they are running out of tools — we mean it existentially. What’s more, the theme is growing in official circles. Pimco’s Mohammed El-Erian was the most recent high profile name to throw light on the issue. Commenting on the Fed’s latest decision to extend Operation Twist last week, El-Erian explicitly stated that lacking fiscal support, solitary Fed activism would only alter the functioning of markets, contaminate price discovery and distort capital allocation. The hint was very clear. Markets should stop calling for QE3, because QE3 would probably do more harm than good at this point: Already, the viability of several segments – from money markets to insurance and from pension provision to suppliers of daily market liquidity, all of whom provide financial services to companies and individuals – has been undermined. The Fed has also conditioned many market participants to believe in a policy put for both equities and bonds. And other government agencies are relieved to have the policy spotlight remain away from their damaging inactivity

Counterparties: Central banks warn about central banks - The BIS annual report is out, and you probably won’t read a more depressing economic brief this year. The gruesome details: Global economic growth in advanced economies was halved last year, to 1.6%, amidst an “abysmal fiscal outlook”; we have “a global banking system that is still dependent on economic support”; bank credit spreads are back at levels seen during the height of the crisis; and advanced economies would need 20 consecutive years of surpluses of more than 2% of GDP just to get to precrisis debt-to-GDP levels. But the world’s central banks are also warning us about themselves. The consequences of endless low rates, the BIS writes, include reduced incentives for indebted nations to cut back and “the wasteful support of effectively insolvent borrowers and banks.” Explaining why world central bank holdings have doubled in the last decade, the BIS does not mince words about who’s to blame: The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed. You wouldn’t be wrong to think that sounds a lot like Bernanke’s polite nudging of Congress over the last few years. To Matt Yglesias, the BIS report sounds like a series of excuses. Izabella Kaminska wonders if the world’s central banks have gone all Sartre. Scott Sumner, adding to the philosophical confusion, notes that some economists can’t even agree if the Fed’s post-crisis policies have actually increased the money supply or decreased it.

The twilight of the central banker - THE Bank for International Settlements is known as the central bank to central banks. It shouldn't be surprising, then, if the misjudgments common to central bankers are occasionally distilled in BIS analysis into a somewhat curious view of the global economy: one in which heroic, blameless central banks have done their utmost to keep the world economy afloat, in the face of ceaseless governmental incompetence and despite a constant bombardment of baseless outsider criticism. The ability of central bankers to bandage over the harm inflicted by bumbling politicians is limited, warns the BIS in its latest annual report. Unless the world embraces the sober leadership of the wise central banker disaster looms. The annual report is a remarkable document, one which might well come to serve as the epitaph for an era of central banking spanning the Volcker disinflation and the Great Recession—the epoch of the central banker as oracle, guru, maestro. If the end of this era is upon us, we can credit a series of revelations: that central bankers learned the lessons of economic history less well than they'd thought, that they displayed an unfortunate tendency to set aside economic rigour in favour of an obsessive focus on price stability, and (perhaps most importantly) that they are in more need of democratic accountability than is often assumed. Above all, the report captures what may be the most critical error of the modern central banker: eschewing a focus on his proper domain—demand stabilisation—in favour of an arena in which he has no business sticking his nose—the economy's supply side.

Deleveraging and the Depression Gang - Paul Krugman - The Bank for International Settlements has just come out with a report emphasizing the “limits to monetary policy”, which is apparently being taken seriously. I guess I’d start from the observation that the BIS has already embraced liquidationism, the idea that all this suffering is good for us and that trying to mitigate the pain would somehow be a bad thing. Now they’re just trying to come up with additional arguments for doing nothing. But I thought it might be worth talking for a second about how the various conventional wisdoms of the past few years — the enthusiasm for austerity that swept the VSPs in 2010, and now the chin-stroking doubts about monetary expansion — add up to an insistence that we refuse to do anything that might help us avoid a sustained depression. What, after all, is the story of this crisis? The simple take many of us have now adopted, which I think gets at most of it, runs along the lines of my Sam and Janet story. At any given time there are some people who would like to borrow more at current interest rates, but are constrained by norms about how much debt is too much. If these norms are loosened, they will borrow more — which is in fact what happened between around 1980 and 2007, as deregulation, financial innovations nobody understood, and general complacency led to a broad willingness to accept higher leverage.

Three More Governance Questions for the Fed - Simon Johnson - Over the last several weeks on this blog, I have expressed a broad set of concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed’s board because of the large, unexpected losses in his bank’s London proprietary trading operation — and the fact that these activities and their disclosure are now under investigation by the Fed. On Monday I met with senior staff members of the Federal Reserve System to deliver and discuss a petition I created, signed by 38,000 people, requesting that Mr. Dimon resign or be removed from the New York Fed board. The staff members were gracious in the time they afforded me. In addition, as a result of recent interactions with former officials and others who know the Fed intimately, I have three substantive governance concerns for the New York Fed that merit further discussion. Let me pose them as straightforward questions that I hope the Fed, at the Board of Governors or New York Fed level, will answer publicly soon.  First and most important, why didn’t Mr. Dimon step down from the board of the New York Fed in March 2008, when JPMorgan Chase bought Bear Stearns with financial support provided, in part, by the Fed? This transaction fundamentally transformed the relationship of Mr. Dimon and the New York Fed. It is awkward for any director to enter into a significant commercial transaction with an organization that he or she is charged with overseeing.

Princeton’s Blinder Says Fed Has Weak Weapons For Growth - Princeton University economist Alan Blinder said remaining options for Federal Reserve policy probably won’t provide a powerful boost to the U.S. economy.  “The basic problem for the Fed is it’s used all the heavy artillery a long time ago and it’s down to relatively weak weapons,” Blinder, a former Fed vice chairman, said in an interview today on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays.  “Even a full-scale QE3 in mortgage-backed securities is not that powerful a weapon these days with mortgage rates as low as they are” and impediments to the market, including borrowers who can’t refinance because their mortgage is larger than their home’s value, he said. The Fed, seeking to cut borrowing costs, has bought $2.3 trillion of securities in two rounds of quantitative easing, or QE.  Central bank officials on June 20 downgraded their forecasts for growth and employment while noting “significant downside risks” to the economy. At that meeting they announced they would swap $267 billion in short-term Treasury securities with longer-term debt in an extension of their so-called Operation Twist program.  “Compared to doing nothing it’s a little, little, little bit of help,” Blinder said.

Fed’s Lacker Says More Action Would Likely Push Inflation Higher - Further action now by the Federal Reserve to stimulate the U.S. economy would likely just push inflation higher, Federal Reserve Bank of Richmond President Jeffrey Lacker told Fox Business Network Monday. 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 last week to extend Operation Twist, a program meant to lower long-term interest rates.

What Should Core Inflation Exclude? - Fed paper - Abstract: Consumer price inflation excluding food and energy often performs worse than other measures of underlying inflation in out-of-sample tests of predicting future inflation or tracking an ex-post measure of underlying trend inflation. Nonetheless, inflation excluding food and energy remains popular for its simplicity and transparency. Would excluding different items improve performance while maintaining the simplicity and transparency? Unfortunately, probably not. Averaging across a series of tests suggests that knowing what items to exclude before seeing the data is problematic and excluding food and energy is not a bad ex-ante guess. However, ex-post it is not difficult to construct an index which performs considerably better than excluding food and energy.

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The latest Headline PCE price index YOY rate of 1.52% is a decrease from last month's 1.88% (an upward revision from 1.81%). The Core PCE index of 1.82% is a decrease from the previous month's 1.97% (an upward revision from 1.89%).  I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target:

Do falling commodity prices imply disinflation ahead? - Atlanta Fed's macroblog - Cost pressures at the manufacturing level appear to be easing—at least, so say the manufacturers in our Business Inflation Expectations survey. In June, manufacturers reported that unit costs were up only 1.3 percent over the last 12 months, a full percentage point below their assessment at the end of last year. Retailers, on the other hand, report unit cost increases of 2.1 percent, down a bit from May, but 0.3 percentage points higher than in December. We put a special question to our panel in June that may shed a little light on these patterns. When we asked firms to tell us what has been driving their unit costs over the past 12 months, manufacturers saw considerably less pressure coming from their cost of materials compared with other firms. Perhaps this discovery isn't very surprising. After all, commodity prices have been falling pretty sharply of late, and these costs are especially influential to manufacturers' assessment of the cost environment. (Indeed, in response to a special question we asked our panel in March, manufacturers ranked materials costs as the number-one influence on their pricing decisions.)

On The Verge Of A Historic Inversion In Shadow Banking -While everyone's attention was focused on details surrounding the household sector in the recently released Q1 Flow of Funds report (ours included), something much more important happened in the US economy from a flow perspective, something which, in fact, has not happened since December of 1995, when liabilities in the deposit-free US Shadow Banking system for the first time ever became larger than liabilities held by traditional financial institutions, or those whose funding comes primarily from deposits. As a reminder, Zero Hedge has been covering the topic of Shadow Banking for over two years, as it is our contention that this massive, and virtually undiscussed component of the US real economy (that which is never covered by hobby economists' three letter economic theories used to validate socialism, or even any version of (neo-)Keynesianism as shadow banking in its proper, virulent form did not exist until the late 1990s and yet is the same size as total US GDP!), is, on the margin, the most important one: in fact one that defines, or at least should, monetary policy more than most imagine, and also explains why despite trillions in new money having been created out of thin air, the flow through into the general economy has been negligible.  Before we get into the nuances, here, courtesy of Zoltan Pozsar is a reminder of the nebulous entity under discussion which is the definition of "baffle them with bullshit." We recommend only Intel chip technicians try to make any sense of this schematic.

Chris Martenson Discusses Shadow Bank Runs With Lauren Lyster on Capital Account - Chris Martensen had a nice interview on Capital Account with Lauren Lyster today on shadow banking. Here is the link if embedded video does not play: Chris Martenson on Shadow Bank Runs and how Central Banks are Missing the Boat!  I discussed the same topic earlier today as did Zero Hedge. Please see Zero Hedge Provides Empirical Proof of Deflation (However, He Does Not Even Realize It) for a discussion.

Breaking News: Regulators to Classify Gold as Zero-Risk Asset - In what might be the most underreported financial story of the year, US banking regulators recently circulated a memorandum for comment, including proposed adjustments to current regulatory capital risk-weightings for various assets. For the first time, unencumbered gold bullion is to be classified as zero risk, in line with dollar cash, US Treasuries and other explicitly government-guaranteed assets. If implemented, this will be an important step in the re-monetisation of gold and, other factors equal, should be strongly supportive of the gold price, both outright and relative to that for government bonds, the primary beneficiaries of the most recent flight to safety.

Where's the deflation? The supply side of banks - If banks go bust and firms can't get bank loans to finance their operations, that has supply side effects too. A firm that has plenty of customers, but can't get financing to produce enough goods to meet the demand, may raise prices. And if a firm closes down because it can't get financing, its competitors may raise their prices. And if the threat of entry is diminished because new firms can't get financing, incumbent firms may raise prices. Perhaps we should think of banks, and financial intermediaries more generally, as like producers of an intermediate good. If producers of intermediate goods go bust, that's a real shock. The demand for factors of production like labour will fall. But the supply of final goods will fall too. It creates a bigger wedge between input prices and output prices.  Yes, bank failures will affect aggregate demand, unless monetary policy can and does ensure they don't. And yes, the recent recession should be understood as a fall in aggregate demand. And yes, the fall in aggregate demand may itself have caused bank failures. But that's not what this post is about. This post is about the supply side.

The Bond Market Is Terrified, or the Bond Market Is Broken: Take Your Pick » Delong - We economists steeped in economic and financial history--and aware of the history of economic thought about financial crises and their effects as well--have reason to be very proud of our analyses over the past five years: that the rapid run-up of house prices coupled with the extension of leverage posed macroeconomic dangers, that the recognition of large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, that to prevent a deep depression required active intervention of the government as a lender of last resort, that monetarist cures were likely to prove insufficient, that sovereigns needed to guarantee each others' solvency, that there were enormous dangers in withdrawing support too soon, that premature attempts to deal with long-run budget balance would worsen the short-run catastrophe and be counterproductive even in the long-run, that we faced the threat of a jobless recovery not from any structural changes but from cyclical factors--on all of these we were right.  But we--or at least I--have gotten three significant pieces of the past four years wrong. Three things surprised and still surprise me:

  1. The failure of central banks to adopt a rule like nominal GDP targeting, or it's equivalent.
  2. The failure of wage inflation in the North Atlantic to fall even farther than it has--toward, even if not to, zero.
  3. The failure of the yield curve to sharply steepen: federal funds rates at zero I expected, but 30-Year U.S. Treasury bond nominal rates at 2.7% I did not.

Analysis: Be afraid: Some in U.S. see shades of 2008 in euro crisis (Reuters) - Grim. Serious. Terrifying. Nerve-rattling. These are the words some prominent American investors and strategists are using to describe the worsening debt crisis in the euro zone and its impact on the global economy. While growth has been slowing in China and the United States and companies warn about the effect on earnings, there is a mounting sense among the financial community that politicians and markets are operating on two completely different timelines. They see a fractured Europe fiddling in the near term, attempting to seal one fissure as another larger one appears while they talk about a five-to-10-year timeframe for real solutions, such as a more fiscally integrated euro zone. They see investors who want solutions in the next few weeks and months or else nations like Spain and Italy could find they cannot borrow at all on capital markets, starting an economic firestorm that would make today's problems seem mild. Some even suggest markets are taking on shades of the 2008 global crisis, with the potential for a collapse in investor confidence, bank runs in Europe and a seizure for the global financial system. "History may not repeat but it often rhymes. The fear is that it could be a replay of 2008. The reality is that the potential for a replay of 2008 on steroids is not exactly zero,"

The Great Abdication - Paul Krugman -- Suddenly normally calm economists are talking about 1931, the year everything fell apart.  It started with a banking crisis in a small European country (Austria). Austria tried to step in with a bank rescue — but the spiraling cost of the rescue put the government’s own solvency in doubt. Austria’s troubles shouldn’t have been big enough to have large effects on the world economy, but in practice they created a panic that spread around the world. Sound familiar?  The really crucial lesson of 1931, however, was about the dangers of policy abdication. Stronger European governments could have helped Austria manage its problems. Central banks, notably the Bank of France and the Federal Reserve, could have done much more to limit the damage. But nobody with the power to contain the crisis stepped up to the plate; everyone who could and should have acted declared that it was someone else’s responsibility.  And it’s happening again, both in Europe and in America.

Is this 1931 all over again? Paul Krugman, Nouriel Roubini, Niall Ferguson and more think so - Is the world about to repeat the economic catastrophe of 1931? A growing chorus of economists of all stripes thinks so. “Suddenly normally calm economists are talking about 1931, the year everything fell apart,” writes Nobel prize winning economist Paul Krugman in the New York Times. “The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening, write Bradford DeLong and Barry Eichengreen in the new preface to Charles Kindleberger, The World in Depression 1929-1939. “We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.” In their piece for the Financial Times entitled Berlin Is Ignoring the Lessons of the 1930s, historian Niall Ferguson and economist Nouriel Roubini argue that a silent run on the banks in the eurozone periphery has been going on for two years now. Greeks have withdrawn more than €700m from their banks in the past month.

The Global Slowdown Will Accelerate - Slowing growth as well as deficit and debt problems in the Eurozone, U.S., China and the emerging nations increases the odds of a deflationary global recession and a renewed down leg in the ongoing secular bear market. The Eurozone crisis is worsening as economic growth is being hit by front-loaded austerity measures that are exacerbating budget deficits and reducing tax revenues. The southern-tier nations, particularly Spain and Italy, cannot get credit as interest rate spreads have widened to unsustainable levels. Funds have been flowing out of the disadvantaged nations and appear on the verge of a full-fledged run if financial aid in some form is not provided in the very short term.  For the last two years the EU has enacted one emergency bailout after another only to have to come back and try again within a short period of time. Most likely, they will come up with another short-term plan this time as well, although how much time it will buy is questionable. The U.S economy has been slowing in the last two or three months. Either downside surprises or actual declines have been reported in key economic indicators relating to consumer spending, new orders, production and employment. A number of major companies have either revised down their second quarter earnings estimates or reduced their guidance for the second half. When we further consider the dysfunction in Congress, the "fiscal cliff", the prospective end of operation twist, the elections and the prospect of renewed fighting over the debt ceiling, the threats to an already fragile recovery are high.

GDP Q1 Third Estimate Unchanged at 1.9% - The Third Estimate for Q1 GDP came in at 1.9%, unchanged from last month's Second Estimate. Today's number was the general expectation. The consensus at and's own estimate were both for 1.9%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.9 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 3.0 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was also 1.9 percent. The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), exports, residential fixed investment, nonresidential fixed investment, and private inventory investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  The deceleration in real GDP in the first quarter primarily reflected decelerations in private inventory investment and in nonresidential fixed investment that were partly offset by accelerations in PCE, in exports, and in residential fixed investment and a deceleration in imports. [Full Release]

Final GDP Revision Comes In Line; Claims Continue "Improving" Even As They Continue Deteriorating -Two data points out today: the first was Initial Claims which did precisely as expected: it improved even as it deteriorated: why - the media headline will blast: "Initial Claims Decline by 6K" because last week's number of 387K was just revised to 392K. That what actually happened was a miss of baseline expectations, in that claims would drop to 385K is irrelevant. Just as it is irrelevant that next week, today's 386K number will be revised to 390K. And the media manipulation song and dance revisions will continue. More importantly, and continuing the 99 week cliff issue, 60,000 people dropped off initial and extended claims in the past week. In other words, 1.260 million people have fallen off extended benfits in the past year: people who no longer collect any form of unemployment benefits. Surely they have all "found jobs."

Real GDP Per Capita and the Year-over-Year Change - This morning we learned that the Third Estimate for Q1 real GDP came in at 1.9%, unchanged from the Second Estimate. The latest data thus does not change the long-term view of real per-capita GDP, and the recession warning implicit in the latest real GDP year-over-year percent change, remains at 1.99%. My monthly updates on GDP and its revisions feature column charts illustrating real GDP. These have the advantage of highlighting the patterns of change and the correlation between negative GDP and recessions.  For a better understanding of the historical context, here is a chart of real GDP per-capita growth since 1960. For this analysis I've chained in current dollars for the inflation adjustment. The per-capita calculation is based on the mid-month population estimates by the Bureau of Economic Analysis, which date from 1959 (hence my 1960 starting date for this chart, even though quarterly GDP has is available since 1947). The population data series is available in the FRED series POPTHM. I used quarterly population averages for the per-capita divisor. Recessions are highlighted in gray. The logarithmic vertical axis ensures that the highlighted contractions have the same relative scale.

Q1 GDP - Consumer Weaker As Weather Saves The Day - Today's release of the final estimate of 1st Quarter GDP came in unchanged at 1.9% at the headline, which was sharply lower than the 3% growth rate in the 4th quarter of 2011. However, what was masked by the headline was the impact of the unseasonably warm winter that boosted construction spending while the rest of the economy deteriorated. The first chart below shows the changes between the second and final estimates of GDP. [NOTE: All GDP and related data are subject to an annual revision on July 27th that will restate economic history since first-quarter 2009. The aggregate revisions should show a historically weaker economy.] As you will see, the consumer was weaker than originally estimated along with all the areas that the consumer directly affects, more or less the complete spectrum of goods and services. The warmest winter over the last 65 years helped to boost construction spending and investment more than originally estimated, which provided the offset from the drag in virtually every other category. Had it not been for this higher estimation in construction spending, our estimate of 1.7% would have been obtained. The push to construction and investment is likely to weaken going into the second and probably third quarter of 2012, as the realignment of the weather to more normal seasonal patterns removes the skew to the data.

Latest Data Show U.S. Corporate Profits Falling Due to Global Woes While GDP Growth Remains Sluggish - The final estimate from the Bureau of Economic Analysis shows U.S. real GDP growing at a sluggish 1.9 percent annual rate in Q1 2012, the same as in the second estimate released at the end of May. Nominal GDP grew at a 3.9 percent annual rate. That is slightly faster than previously estimated but still well below the rate that NGDP targeters consider necessary to close a persistent output gap and return the economy to full employment. The BEA also released revised data showing that corporate profits in Q1 were weaker than previously thought. The broadest measure, corporate profits before tax with capital consumption allowance and inventory adjustment, decreased by 0.3 percent compared with Q4 2011. As the chart shows, that was the first decrease since profits hit their cyclical low in mid-2008. After tax profits with adjustments decreased much more sharply, by 5.9 percent. The difference reflected a whopping 20 percent increase in corporate profits taxes for Q1 2012 compared with Q4 2011. The drop in corporate profits was largely due to weakness in the global economy. Domestic profits of U.S. corporations rose by a healthy 2.6 percent in Q1 2012 compared with Q4 2011 (5.7 percent for the financial sector and 1.4 percent for the nonfinancial sector). However, foreign profits fell by 12 percent, more than wiping out the increase in domestic profits, as receipts from the rest of the world fell and payments rose.

Do oil prices help forecast real GDP? - It has long been argued that changes in the price of oil can help forecast US real GDP growth. This column addresses the common concern among many policymakers that the feedback from oil prices to the economy may become stronger once the price of oil passes reaches a certain level.

Chicago Fed: Economic growth slower in May - Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.45 in May from +0.08 in April. ... The index’s three-month moving average, CFNAI-MA3, decreased from –0.13 in April to –0.34 in May—its third consecutive reading below zero and its lowest value since June 2011. May’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  This suggests growth was below trend in May. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

This Is Not America - Over the past few days, Henry Blodget at Business Insider posted a number of graphs, here and here, which depict something about the US economy that everybody knows to some extent or another, but that most of us won't have let thoroughly sink in. For some because the consequences are too opaque, for others because they are too scary. But make no mistake: we can only continue to ignore or misinterpret them at our own peril. And even then it's terribly late in the game. The essence of Blodget's argument is this: "... over the past 30 years, we've generated about $1 of economic growth for every $3 we've borrowed."  So while real (inflation-adjusted) GDP growth looks sort of strong over the past 6 decades: ... the growth in debt rises much faster. Note that the graph below has a vertical axis that is four times larger than the one above. The scale of the problem becomes clearer when you put both in the same graph. Note that GDP is not inflation adjusted in this one. And then you can of course subtract the debt from the growth, and you end up with this:

U.S. net debt hits $4 trillion in 2011—the cumulative toll of a generation of trade deficits - The U.S. Bureau of Economic Analysis (BEA) recently announced that the U.S. net international investment position (NIIP) was -$4 trillion at year-end in 2011 (see figure, below). The NIIP stood at -$2.5 trillion at year-end 2010. The $1.6 trillion increase in the net debt was largely caused by price changes of -$802 billion (on domestic and foreign holdings of stocks and bonds) and by net financial flows of -$556 billion. Net financial flows were largely explained by financing of the $466 billion U.S. current account deficit in 2011. The current account is the broadest measure of the U.S. trade deficit. While the costs of financing the NIIP were relatively small in 2011, they could rise rapidly if interest rates return to more normal levels in the future. The United States has been borrowing hundreds of billions of dollars per year for more than a decade to finance its growing trade deficits. However, until 2011, the U.S. NIIP has not declined proportionately, as shown in the figure below, primarily because of gains in the prices of foreign stocks, the decline of the dollar (which made foreign currency holdings more valuable), and frequent accounting revisions (which have found more and more U.S. investments abroad).

Gross Says Decades Needed to Normalize From Too Much Debt - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said economies and their financial markets take decades to normalize after the havoc of a debt crisis, making U.S. securities still the safest bet for investors. An authentic debt crisis, which the world is experiencing, can only be ultimately cured by default or printing more money in order to inflate it away, Gross said in his monthly investment outlook posted on the Newport Beach, California-based company’s website today. The U.S. Treasury market is considered the cleanest “dirty shirts” for investors, Gross wrote. “Don’t underweight Uncle Sam in a debt crisis,” Gross wrote. “Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.” Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund (PTTRX) to 35 percent in May, the first increase since January and up from 31 percent of its holdings in April. Mortgages remained the largest holding in the fund at 52 percent last month, according to data on the website.

Lost Output Over $3 Trillion And Rising - Andrew Fieldhouse at the Economic Policy Institute reports that the Congressional Budget Office now has cumulatively reduced its estimate of 2017 gross domestic product by 6.6% since the beginning of the recession in December 2007. As Fieldhouse points out, that doesn't sound like much, but when it's 6.6% of a $15 trillion economy, we are looking at about $1 trillion (with a "T") of lost income in 2017. To put it another way, that is well over $3000 of income per person that year. That is on top of $3 trillion in potential GDP already lost since the recession began, according to Fieldhouse.  The culprit, of course, is the lack of further stimulus to the economy. After the totally inadequate $800 billion stimulus package in 2009, we have had essentially nothing. At the end of 2011, Republicans had to be shamed into approving a payroll tax cut they previously favored. Indeed, as Thomas Mann of the Brookings Institute and the Norman Ornstein of the American Enterprise Institute have pointed out, it is not the case that both parties are getting more partisan. As they put it, "Let's just say it. The Republicans are the problem." It is the Republicans in Congress who are blocking further stimulus measures. Electing a new Congress that will not pass a stimulus bill will cost Americans thousands of dollars out of their pockets.

Adam Davidson Strikes Again, Tells Us to Ignore Downer Data and Trust the Confidence Fairy - - Yves Smith - While Adam Davidson’s current New York Times column, “How to Make Jobs Disappear” refrains from blatant advocacy of the interests of the 1%, his “Let Dr. Pangloss explain it” approach to economic news is still flattering to the established order. To the extent that anyone in the officialdom pays attention to his work, he’s holding up a rosy-colored mirror to their stewardship. And for the rest of us, his relentless “see, everything really is fine, now take your Soma” denies the reality of the hardships and stresses most ordinary Americans face. It’s hitting the point where I’m getting such sharp, annoyed commentary about Davidson’s columns by e-mail that I have to work to read his columns with a fresh eye. From one correspondent: Can we make Adam Davidson disappear? He seems to have carved out a special niche: Stupid-nomics. WTF is his point here? That Adam Davidson is an oh-so-reasonable-guy-who-just-wants-the-silly-competing-economic-theories-to-get-along so we can all feel good? That jobs would magically appear if we would just stop paying attention to them? His articles seem to be an experiment how somebody with either innate or willful ignorance of macroeconomics — but a superficial curiosity coupled with a desire preserve his jeopardize his paycheck –would view economic questions. If you haven’t encountered Davidson’s latest offering, he starts with the claim that the monthly nonfarm payrolls release has become a key (his breathlessness implies THE) indicator of economic performance, and is now driving hiring decisions. Davidson tells us this is terrible because actually knowing roughly how many jobs are being added when the results aren’t great frightens employers into not adding them and consumers into not spending.

The Great American Mirage - Stephen S. Roach - The US is not an oasis of prosperity in an otherwise struggling world. Yes, the US economy has been on a weak recovery trajectory over the past three years. But at least it’s a recovery, claim many – and therefore a source of ongoing resilience in an otherwise struggling developed world. Unlike the Great Recession of 2008-2009, today there is widespread hope that America has the capacity to stay the course and provide a backstop for the rest of the world in the midst of the euro crisis. Think again. Since the first quarter of 2009, when the US economy was bottoming out after its worst postwar recession, exports have accounted for fully 41% of the subsequent rebound. That’s right: with the American consumer on ice in the aftermath of the biggest consumption binge in history, the US economy has drawn its sustenance disproportionately from foreign markets. With those markets now in trouble, the US could be quick to follow. Three regions have collectively accounted for 83% of America’s export-led growth impetus over the past three years – Asia, Latin America, and Europe. (Since regional and country trade statistics assembled by the US Department of Commerce are not seasonally adjusted, all subsequent comparisons are presented on the basis of a comparable seasonal comparison from the first quarter of 2009 to the first quarter of 2012.)

We Are Living in a ‘Modern Day Depression’ -- The Federal Reserve cut its growth forecast for the second half of 2012 and 2013 last week, raising concerns yet again about the potential for a "double-dip" recession. While some, notably the cycle watchers at ECRI, believe the U.S. economy is definitely heading for another recession (or already there), Gluskin Sheff's chief economist and strategist David Rosenberg goes a big step further. "We are living in a modern day depression," he declares. This dramatic statement is based on several factors, including the record number of Americans living on Food Stamps — 46 million or 1-in-7 in 2011. Because these benefits are now given in the form of electronic debit cards, we don't have bread lines like in the 1930s, but they are there in virtual form.  In the accompanying video Rosenberg also cites:
Wealth Destruction: The Fed's recent report on the massive 40% drop in median household wealth from 2007-2010.
The Housing Bust: Despite recent signs of stabilization, the national housing market remains depressed, with nearly 30% of mortgage holders under water. This is particularly troubling for Baby Boomers, who had viewed their homes as a major source of potential income for retirement but now wear them as a "ball and chain," Rosenberg quips.
Unemployment: As with housing, Rosenberg dismisses the job market's improvement in recent years. He cites the "real" unemployment rate — currently 14.8% -- and the fact the country is still down 5 million jobs from its 2007 peak.

Can the Economy Get Healthy Without a Housing Recovery? - This spring has been filled with disappointing economic news, but one bright spot has been the possible bottoming out of the housing market. The conventional wisdom is that a stable housing market is important not only because housing as an industry makes up a large part of the nation’s yearly output, but also because the home is most Americans’ largest source of wealth. Rising home prices, or even the absence of falling home prices, would go a lt to motivate the American consumer to feel more confident.But in a recent article, “Homeownership Means Little to Economic Growth,” in the Atlantic Cities, Richard Florida tries to poke a hole in this narrative. He writes:“ For the better part of a century we’ve believed that building and buying homes is synonymous not only with the “good life” but with a productive and prosperous economy. The number of housing sales and starts is a commonly used barometer of economic health. The president, his economic advisers, and countless economists and business analysts continue to believe that economic recovery turns on the recovery of the housing market.” But with the collapse of the housing bubble so bound up with the ongoing economic crisis, a dissenting view has emerged.” Florida then goes on to study “statistical associations between the rates of homeownership and key economic development indicators like income, wages, productivity, innovation, and human capital across America’s 350 or so metro areas.”

The US debt to GDP ratio will soon look like the Eurozone periphery - Barclays Capital released the latest forecast of gross government debt-to-GDP ratios for a number of nations. Here is how the US compares to the more leveraged countries in the Eurozone going forward. The market has instilled some discipline around the periphery nations' debt growth. There is a natural limit to how much they will be able to borrow. Not so for the US, as the world seems to have a seemingly endless appetite for US government paper (for now). And of course the Fed is always there to pick up any slack. At this rate in a few years the US debt to GDP ratio will look very much like that of the Eurozone periphery.

David Walker, Former U.S. Comptroller General: Correcting America's Fiscal Imbalances (podcast)

A manifesto for economic sense, by Paul Krugman and Richard Layard - More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. The reason is simple: we are relying on the same ideas that governed policy during that decade. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature and the appropriate response.These ideas have taken root in the public consciousness, providing support for the excessive austerity of fiscal policies in many countries. ... As a result of their mistaken ideas, many western policy makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s. It is tragic that in recent years the old ideas have again taken root.The best policies will differ between countries and will require debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this manifesto for economic sense to register their agreement online and to publicly argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

Stimulus Isn't a Dirty Word - Alan Blinder - Not long ago, European policy makers seemed stuck on the notion that austerity promotes growth. Yes, we were supposed to believe that countries grow faster when their governments spend less and tax more. Events in Europe seem to have dashed that idea. But a similar debate rages here in the U.S.—with the lone exception that our pro-austerity crowd abhors tax increases. Many Democrats, including President Obama, want to help state and local governments maintain their spending, which has now dropped 6.4% since its 2008 peak—and is still falling. Most Republicans reject that idea, even when it saves the jobs of teachers, fire fighters and police officers. Many Democrats also want to build and repair more roads, bridges, tunnels and the like—taking advantage of the rare combination of historically low government borrowing rates and historically high unemployment among construction workers. Most Republicans reject that idea, too, even though the argument for more public capital is the same as the argument for more private capital—each promotes growth. Democrats also typically seek a growth strategy that boosts the incomes of the middle class, not just of the top 1%. Many Republicans counter that the most effective way to bolster middle-class incomes is via trickle-down from the rich—who start and grow businesses. Politics aside, suppose we actually got serious about a pro-growth agenda based on logic and facts rather than on partisan ideology. What would it look like? Here are a few ideas:

Stimulus Even Republicans Can Support -- Last Thursday, the National Association of Manufacturers published a report claiming that the Department of Defense budget sequestration scheduled for January will cost one million jobs in the private economy by 2014. The national unemployment rate, it said, will rise by 0.7 percent and growth of the gross domestic product will fall by 1 percent. A study released March 7 by the Aerospace Industries Association came to similar conclusions. Without further Congressional action by the end of this year, the Budget Control Act of 2011 directs that federal spending will be cut automatically by $1.2 trillion between 2013 and 2021, with cuts divided equally between military and domestic programs. Republicans have been warning about the loss of jobs from cuts in military spending for some time. According to a poll released May 2012 by the Program for Public Consultation at the University of Maryland, most Americans agree that cuts in military spending cost jobs, including three-fifths of Republicans. Defense Secretary Leon Panetta has also said that programmed cuts in military spending would raise the unemployment rate by 1 percent. This raises interesting questions. If a cut in military spending costs jobs, then doesn’t this mean that cuts in domestic spending also cost jobs? And if cuts in government spending reduce employment, then doesn’t it follow that increases in spending will create jobs?

Want to stimulate the economy? Let’s hand cash directly to the states. - Twenty-five years ago, President Ronald Reagan angered many Democrats with a broad effort to eliminate red tape and allow states discretion over federal grants. A half-century earlier, President Franklin Roosevelt angered many Republicans by using federal dollars to put millions back to work through a variety of programs that became known as the New Deal. Although we think of these two presidents and their initiatives as ideological opposites, there is no law of nature (or of economics) that prevents us from combining their ideas to help address the faltering economy today. A Reagan-Roosevelt approach — a sort of decentralized recovery that sends money directly to the states — has the best chance of putting people back to work and making America stronger.  The alternatives are not likely to succeed. With job growth faltering at home and the outlook darkening for America’s trading partners in Asia and Europe, Congress will need to heed the advice of Federal Reserve Chairman Ben Bernanke to consider another round of stimulus spending — but Washington gridlock may doom such efforts. So why not reroute the traffic away from Washington? President Obama should appeal directly to the nation’s 50 governors by proposing a direct grant to each state to spend as it sees fit.

More Evidence The Federal Budget Debate Is Not Rational - The ever-watchful CG&G alum Bruce Bartlett sent this new You Gov poll constructed by Dartmouth. The poll covers a number of issues but it was question #7 ("Which of the following would you support as ways to reduce the nation's budget deficit?") that caught Bruce's and my eye. In other words:

  1. There is significant support in the country for doing something to reduce the deficit -- tax increases on the wealthy -- the GOP in Congress absolutely refuses to do.
  2. Only one-third of the country is in favor of the reductions in military spending that are part of the sequester that will occur on January 2.
  3. Close to 90% of the country opposes the type of changes in Medicare that are one of the cornerstone's of the Republican budget proposed by budget committee chairman Paul Ryan (R-WI) that passed earlier this year.
  4. Almost a third of the country is against tax increases and reductions in Social Security,  Medicare and military spending. That leaves only about $750 billion left to deal with a deficit that will exceed $1 trillion this year.

As I've said before and this poll at least hints at once again, Americans don't want less government, they just want government that costs less. That makes for a debate in Washington that can't possibly be...and obviously isn't...considered rational.

Bowles-Simpson Budget Reform and Ecstatic Memory - Have you noticed that as the details of the tough budget reform proposed by Alan Simpson and Erskine Bowles fade into memory, more politicians are embracing the plan developed by the chairs of the 2010 White House fiscal commission? Oh, they don’t love the real plan—barely any elected official had a kind word to say about it when it was first proposed. But they are positively enamored of their own self-edited versions—usually with all the tough stuff conveniently deleted.   No more than a handful of politicians have ever been willing to publicly support the actual plan, with all its gory details. The proposal would have reduced the deficit by $4 trillion over 10 years, including $2.2 trillion in unpopular spending reductions, $1 trillion in unpopular tax hikes and the rest in interest savings. 

Wall Street still ignoring the fiscal cliff - Here we go again. Wall Street has a history of not focusing on bad news until it's too late. Then panic ensues. We might be seeing that pattern again with the so-called fiscal cliff. A recent survey found that 93% of top Wall Street strategists and economists still aren't factoring into their estimates for next year the epic mix of tax increases and spending cuts that are expected to kick in January 1. The question is whether Wall Street is correctly handicapping the fiscal cliff, or just being ignorant. "It's clear that a large percentage of Wall Street doesn't expect us to go over the fiscal cliff," says Randell Moore, who is the editor of the Blue Chip Economic Indicators, which runs the highly regarded monthly survey of Wall Street strategists. "That may be optimistic, but that's their forecast."  Yesterday, FORTUNE reported that the White House is already floating a plan that would delay some of the spending cuts for six months. The tax increases for individuals making less than $250,000 could be put off for another year. And recent history suggests that some kind of last minute deal will be struck in Washington. But if the fiscal cliff does happen, it appears it will be a surprise to Wall Street. Last week, I wrote a story on how Ethan Harris, the top U.S. strategist at Bank of America, thinks the fiscal cliff, because of uncertainty, could start to be a drag on the economy as soon as later this year. Most economists, he said, are wrongly assuming the fiscal cliff won't impact the economy until next year. But even that doesn't appear to be the case.

A Trigger for the "Fiscal Cliff" - Under current law, taxes will rise significantly and government spending will be cut next year.  This scenario has been called the "fiscal cliff" and the CBO recently estimated it would lead to a recession in early 2013.  In the Hartford Courant, I suggest going over it, but gradually, when the circumstances are more favorable: The tax increases could be made to occur at a more appropriate time by instituting triggering criteria that would delay them until the state of the economy has improved and then phase them in. For example, the tax changes could be set to begin once the unemployment rate has fallen to a more reasonable level, like 5.5 percent, and remained there for six months. At that point, the increases could occur in three or four steps, with each one occurring as long as the unemployment rate has remained below a specified level for six months.  This is another form of "state contingent" fiscal policy that I've suggested previously on this blog. In the piece, I asserted that allowing the 2001/03 income tax cuts and the 2010 temporary payroll tax cuts to expire would generate revenue "roughly consistent with the amount of spending required to maintain current programs." This is based on the idea that this would be pretty close to the "extended baseline scenario" in the CBO's projections where the US debt-to-GDP ratio gradually declines over time.   Since I was trying to keep the piece to op-ed length, I focused on the tax part because it is larger, but similar logic could be applied to the spending aspects.

Fiscal Slope Stories: Defense Industry Propaganda and the Dangers of “Tax Reform” - Kevin G. Hall in McClatchy amps up the pressure over the fiscal cliff by claiming, with some anecdata, that it’s already impacting housing. “The cold-eyed view is there is paralysis and it is likely to be a last-minute thing,” said Jim McNerney, CEO of Boeing Co. and chairman of the Business Roundtable, the lobby for big corporations. In a conference call with reporters, McNerney revealed last week that Boeing is already firing workers ahead of what’s expected to be a fractious political debate that may not resolve tax and budget issues in a lame-duck session of Congress following the Nov. 6 presidential election. McNerney wouldn’t say where the layoffs were occurring or in what divisions of Boeing. I don’t know if I’m blindly trusting the chairman of the Business Roundtable on this stuff. Especially when his tax rate is at stake. And of course, he wasn’t able to be specific. There’s one other business owner quoted in the story, and she runs a company that makes electrical parts for fighter jets. So take her and the Boeing CEO, and you have the military-industrial complex in full swing, now planting stories in the press about the Gordian knot of the fiscal cliff (it’s a slope). Then you have trade group leaders from the Business Roundtable and the National Association of Manufacturers.  But it illustrates a point. This pressure coming from self-interested business groups will unquestionably lead to a bad outcome. And we need to know what a bad outcome looks like. One of the clear buzz-phrases that will make you know it’s a less-than-optimal outcome is tax reform.

Brownian Motion and the Defense Budget = The defense budget politicians are going ga-ga over a monster they helped to create: the “sequester” of $492 billion out of the defense budget over the next nine years—the broadly undesired effect of the Budget Control Act and the failed Super Committee of 2011.  The most palpably political Secretary of Defense in decades, Leon Panetta, says it’s “doomsday” but has instructed his staff to do nothing about it—at least visibly.  The capital’s self-anointed Pentagon money huckster, Congressman Buck McKeon (R-Calif.), the Chairman of the House Armed Services Committee, provides new hyperbole every few days, and senators from both parties busy themselves, as recently as last week, demanding reports whose only real effect will be to help them write more speeches. That the Department of Defense (DOD) must be defended from sequester is one of the few unifying beliefs in Washington, even if it is quite poorly informed. Maneuvering for the elections is more important to the actors in an elections spectacle.  The Republicans want to label Democrats as “anti-defense,” idly standing by as the defense budget is cut, and the Democrats paint the Republicans as wantonly obstructionist. Both sides think they’ll leverage more votes in November and are avidly sticking to their game plan.

Defense Spending In A Time Of Austerity - America’s most advanced fighter, the F-22 Raptor, announced its power with a thunderous roar.  In mock battles, its stealth and sensors allow a lone Raptor to kill a flock of any other kind of aircraft. But the fighter is an endangered species. One threat comes from success: in Iraq and Afghanistan, Western forces have been uncontested in the air, if not on the ground, so sophisticated fighters seem less relevant. Another comes from technology: the advance of robotic warfare may, at some point, make the pilot in the cockpit redundant. The aircraft that American field commanders most clamour for is not the F-22 but helicopters and the Predator, an unmanned drone able to stay aloft for a day.   The extent to which unmanned aircraft could or should supplant piloted ones will be debated for decades. For the moment, though, a third danger is more immediate: the economic crisis, which is forcing Western countries to cut expensive military equipment.  Robert Gates, America’s defence secretary, has ordered that production of the F-22 should end this year, capping the fleet at 187—a final cull for the Raptor, whose numbers were once supposed to reach about 750. In Europe orders for the Typhoon—a fighter made by Britain, Germany, Italy and Spain—will fall. And on both sides of the Atlantic the rising cost of the stealthy F-35 Joint Strike Fighter means its order book could shrink sharply.

Congress Said to Consider Delaying Automatic Budget Cuts - Republican and Democratic congressional leaders are weighing whether to delay automatic federal spending cuts until March 2013, according to a House aide and industry officials who were briefed on the discussions. The $1.2 trillion in automatic spending cuts over a decade, half of which would affect the Defense Department, are scheduled to begin in January 2013. At the same time, lawmakers must decide what to do about income tax cuts and other tax breaks scheduled to expire at the end of the year.  Leaders in both chambers are discussing whether to propose a catch-all bill that would delay the automatic cuts, fund the government through March or later and temporarily extend the George W. Bush-era tax cuts and other tax laws, said the House aide and industry officials, who asked to speak on condition of anonymity.

Cuts Could Hit 1,000 Social Security Workers - Social Security Administration Commissioner Michael Astrue said Wednesday his agency could be forced to lay off roughly 1,000 employees if automatic budget cuts begin in January and aren’t reversed by Congress.  Mr. Astrue, appearing before a House Ways and Means subcommittee, said some of his agency’s staffing decisions are on hold until Congress decides whether to let roughly $1.2 trillion in budget cuts over 10 years begin in January. Many lawmakers are trying to avoid the cuts, which would be split between defense and non-military spending, but so far Democrats and Republicans have not been able to reach an agreement on other deficit-reduction measures that could offset reversing the cuts. The cuts are commonly referred to in Washington as the “sequester,” and they were put into law last year as part of the deal that raised the debt ceiling.

History Shows Spending Cuts in Deficit-Reduction Packages “Stick” - Some opponents of including any revenue increases in a deficit-reduction deal — no matter how outweighed by spending cuts — argue that such cuts never “stick.”  They claim — as Grover Norquist’s Americans for Tax Reform recently did — that “when bipartisan deals are struck promising to cut spending and raise taxes, the spending cuts don’t materialize but the tax hikes do,” and they invariably cite the 1982 and 1990 budget agreements as proof.[1]   Yet an examination of the 1982 and 1990 agreements finds no basis for this assertion.  As detailed below, Congress largely followed through with the spending cuts in both agreements.

America Realizes It Likes Federal Spending After All - There’s about to be a big change in the federal budget debate. In the end, the big winner will be the part of the budget that supposedly is so unpopular — federal spending — that a candidate for office this year cannot currently say he or she supports it without risking massive political condemnation and reprisals. It’s been relatively easy to be anti-spending up to now because the reductions being proposed have mostly been theoretical and weren’t really likely to happen. After all, what does it really mean to reduce federal spending as a percentage of gross domestic product, to keep spending to its historical average or to implement an across-the-board cut? And if all that has to be done — as some wishful thinkers have repeatedly said — is to eliminate waste, fraud and abuse and you’re sure what you care about doesn’t meet any of those definitions, then cutting federal spending isn’t really that worrisome. The irony is that this is about to change because of something that spending cut proponents themselves demanded. The sequester — the spending-cut-only alternative they insisted on if the anything-but-super committee failed — that will occur on Jan. 2 is the opposite of most of the plans that have been part of the federal budget debate up to now: It’s in place and will happen unless Congress and the president take some action to prevent it. And it’s forcing companies, industries and voters to face the reality that the spending cuts could actually occur and, despite what they’ve been saying publicly, that they really don’t want it to happen.

Possible Deal on Student Loan Interest Rates in the Senate - Just to set up this week, we’re going to see verdicts in two major Supreme Court cases, on the health care individual mandate and the Arizona immigration law; a contempt vote in the House against Attorney General Eric Holder; and in Congress, we have deadlines on two important pieces of legislation, the transportation funding bill and the student loan interest rate bill. Of all that, we’re probably closest to getting a satisfactory outcome on that interest rate bill, as Senate leaders have approached a deal to avoid a doubling of the interest rate. Senate leaders have effectively reached an agreement to freeze student-loan interest rates at 3.4 percent for one year, staffers briefed on talks said on Friday evening. “There is deal that is being finalized right now,” a Senate Democratic aide said. “Right now, what they are doing is crossing t’s and dotting i’s.” An official announcement of the agreement is expected on Monday or Tuesday. Extending the interest rate at 3.4% for one year costs about $6 billion, and the holdup has always been on how to pay for it. The deal will include a mix of pay-fors from both sides. At least $1.2 billion would be covered from cutting off subsidized loans after six years. Most of the rest would come from changes to how pensions are calculated, which would lower certain business tax deductions, and increases in premiums to the Pension Benefit Guaranty Corp. But time could still run out. First of all, the Congressional Budget Office needs to score the package. And John Boehner has not been involved in the talks on the House side. So students still can fret the fact that their loan rates could double by the end of the week.

Congress Nearing Compromise on Student Loan, Highway Bills, But Not There Yet - House Speaker John Boehner assured reporters today that bipartisan deals are near on two pieces of legislation that must be passed before expiration on Saturday. The two bills, one to prevent the federal student loan interest rate from doubling, and the other to extend surface transportation funding for two years, have been tied up in Congress for months. The Senate has taken the lead on forging a student loan compromise, while there’s a House-Senate conference committee on the transportation bill. In order to get both of these measures passed quickly before the deadline, they will probably have to be combined into one package and voted out of Congress by the weekend. . Senate leaders of both parties announced a deal that would keep student loan rates in place at 3.4% for another year. It would be paid for through a mix of measures from both sides: The extension would be paid for by raising premiums for federal pension insurance, an idea acceptable to businesses because rules on how companies calculate their pension liabilities would be changed. Meanwhile, students would be limited in how long they could receive a federally subsidized loan to 150 percent of their program length — so, six years for a four-year undergraduate degree — a suggestion from Republicans. The aide said that proposal would raise $1.2 billion. As for the transportation bill, today is the drop-dead date when it must be finalized. Senate Majority Leader Harry Reid put the prospects of passage at better than 50/50, and Boehner’s words today bolster that assessment. But there are still some outstanding issues on the bill, including a possible power play.

Boehner: Congress Oh-So Close To Extending Lower Student Loan Interest Rates: The clock is ticking on the June 30 deadline for Congress to agree on a way to extend subsidies for federal Stafford student loans that would keep the interest rates from doubling to 6.8%. Now Speaker of the House John Boehner has said lawmakers are tantalizingly close to coming to an accord on the matter.  "We're moving, I think, towards an agreement on a transportation bill that would also include a one-year fix on the student loan rate increase," Members of the Senate have already agreed on a bipartisan deal that has the blessing of the White House. As to how the subsidies would be funded, here's what the AP has to say:Under the agreement, the government would raise $5 billion by changing the way companies calculate the money they have to set aside for pensions. That change would make their contributions more consistent from year to year, in effect reducing their payments initially and lowering the tax deductions they receive for their pension contributions. Another $500 million would come from increasing the fees companies pay for the government to insure their pension plans, linking those fees to inflation.

Highways-Student Loan Deal Poised for Congressional Vote — Republican leaders pushed a sweeping highways-student loans package salvaging millions of construction jobs and maintaining low interest rates on millions of new college loans toward a House vote Friday even as conservative groups mounted a last-minute and likely futile campaign against it. Favorable action by the Senate on what would be the only big jobs measure Congress has enacted this year was assured. Leaders said they hoped get it done Thursday night, but then ran into procedural hurdles that pushed back a vote until Friday. Lawmakers in both parties hoped to get an early start bragging about a rare accomplishment four months before the election. The conservative Heritage Action for America and the anti-tax Club for Growth urged a “no” vote on the bill in emails Thursday to lawmakers, warning that it will be counted as a key vote on their legislative scorecards. “This massive bill spends too much money, will continue taxpayer bailouts for highway spending and keeps subsidies that have contributed directly to skyrocketing tuition rates,” Club for Growth spokesman Barney Keller said.

Environmentalists Don’t Like Concessions in Transportation Bill - Lost in the shuffle yesterday amid the health care ruling and the contempt citation for Eric Holder was the deal reached on a minibus package for freezing student loan interest rates, extending surface transportation funding for two years, and reauthorizing for five years the flood insurance program. That package will get House and Senate votes by this afternoon, just beating key deadlines on all three measures, and allowing Congress to go home for the July 4th recess. I went over most of the key elements of the bills yesterday. The most objectionable of the three for progressives appears to be the transportation bill, where many salutary pieces were excised at the very end in order to reach an agreement. In the bargaining that led up to an agreement on the package earlier this week, House Republicans gave up their demands that the bill require approval of the contentious Keystone XL oil pipeline and block federal regulation of toxic waste generated by coal-fired power plants. Democrats gave ground on environmental protections and biking, pedestrian and safety programs [...] The bill consolidates transportation programs, reducing the number by two-thirds. It also revamps rules on environmental studies of the potential effects of highway projects, with a goal of cutting in half the time it takes to complete construction. And the measure contains an array of safety initiatives, including requirements that would make it more likely that passengers would survive a tour bus crash. But Democrats and Republicans also found plenty to criticize in the transportation deal.

Congress Passes Student Loans, Highway Jobs Bill - Finding rare political accommodation on the cusp of a holiday recess, Congress passed legislation Friday designed to salvage 2.8 million jobs and shield students from a sharp increase in loan interest rates. The legislation, which also revamps highway and transit programs and shores up the federal flood insurance program, now goes to the White House for President Barack Obama’s signatures. Lawmakers trying to leave town for a weeklong Fourth of July recess had been facing twin deadlines: Federal highway and transit aid programs and the government’s authority to levy federal fuel taxes were expiring Saturday. And interest rates on new student loans were set to double on Sunday. The burst of legislating came just four months before the November elections, giving lawmakers achievements to show off to voters who have increasingly held Congress in low esteem while the economy continues to flounder.  Boxer estimated the bill would save about 1.8 million jobs by keeping aid for highway and transit construction flowing to states and create another 1 million jobs by using federal loan guarantees to leverage private sector investment in infrastructure projects.

How to avoid shafting future retirees & creating a future taxpayer bailout -Congress will soon vote on a final version of a two-year highway spending bill.  Press reports suggest the just-concluded agreement includes a “pension funding stabilization” provision from the Senate version of the bill. This means that any Member of Congress who votes for the final bill will be (a) shafting some future retirees in defined benefit pension plans and (b) increasing the risk of a future taxpayer bailout of a government-run corporation that insures pension plans. Congress can avoid both these bad things simply by removing this provision from the final version of the bill.In a defined benefit (DB) pension plan firm managers set aside cash now to pay benefits later.  The firm then invests that cash and hopes that future cash contributions, plus the investment returns on the assets, will be sufficient to pay these benefit promises in full. It’s a bit tricky to project future pension benefits, but the principal challenge is estimating the rate of return on investing the assets in the pension fund. If a firm manager assumes a high rate of return, then he doesn’t need to set aside a lot of cash now to pay future benefits and he can use that cash for other purposes now. Of course if the investment returns fall short of his overly optimistic assumptions then the pension plan will be underfunded. That becomes a huge problem if the firm goes bankrupt. Then the firm hands the plan assets and benefit promises over to a government-run insurance company, the Pension Benefit Guaranty Corporation (PBGC)

Obama’s life-threatening allergy - Neither party has much appetite for raising taxes. To be precise, Republican orthodoxy is that 100% of Americans should never pay higher taxes; for Democrats, it’s 98%, though some now say 99.7%, conceding only that millionaires should pay more. Republican intransigence on taxes is the principal source of America's fiscal deadlock. But as the Supreme Court ruling this week on health care demonstrates, Democrats' own allergy has consequences, too. Barack Obama’s pledge never to raise middle class taxes has driven many awkward choices, such as his promise to keep all of George Bush’s tax cuts except on the wealthy, deficit reduction plans that rely inordinately on higher corporate taxes and cuts to discretionary spending, and finally, his insistence that under the Affordable Care Act the uninsured do not pay a tax, but rather a penalty or “shared responsibility payment”. This choice of words forced the administration to defend the constitutionality of the individual mandate under Congress’ powers to regulate interstate commerce and the constitution’s “necessary and proper” clause rather than Congress’ taxing powers. The strategy nearly proved fatal. By a slim 5-4 majority the Supreme Court said the mandate was not permitted by Congress’ right to regulate interstate commerce; but by an equally slim majority it said it was allowable under its taxing powers.

There is no such thing as “public opinion” (examples #233 and #234) - I occasionally post on how intellectuals tend to misuse public opinion surveys, often to argue that the public agrees with their policy preferences.  I do think there are a few questions the public is capable of responding to in a semi-coherent fashion, such as “should the death penalty be abolished.”  But when you get into the area of complex economic policy, then public opinion is just gibberish—it completely depends on how you frame the question.  This was triggered by a recent Ezra Klein post: Policy hasn’t tracked public preferences very closely. In polls, Americans have clearly supported higher taxes on the rich and a much more punitive approach to banker compensation. That’s one way of asking the question—should the filthy rich and evil bankers pay more?  But what if you ask the public what they consider to be the appropriate top income tax rate? Three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates, according to a new poll for The Hill. The big majority opted for a lower tax bill when asked to choose specific rates; precisely 75 percent said the right level for top earners was 30 percent or below. The current rate for top earners is 35 percent. Only 4 percent thought it was appropriate to take 40 percent, which is approximately the level that President Obama is seeking from January 2013 onward.

Inflation Makes Big Incomes Smaller - One hundred thousand dollars. Since the 1980s, the magical "six-figure" salary has been a benchmark for financial success. Not too long ago, that income often meant two nice cars in the garage of a large house, fun family vacations and plenty of money left over to save for retirement and college tuition. But times have changed. Not only has standard inflation steadily eroded the real value of a $100,000 income, but the cost, of housing, health insurance and college tuition have risen dramatically in recent years. Consider the rising costs of food, energy and the necessities of a middle class life, and that six-figure luxury quickly turns to six-figure mediocrity. Less than 20 percent of American households even break the six figures. But many who earn incomes near the mark find that their prized incomes don't take them as far as the hype. Many say that while breaking the $100,000 annual income mark may still be an impressive milestone, it doesn't exactly roll out the red carpet.

Dean Baker: The Regulation Monster - Those familiar with the "confidence fairy" recognize that economic policy debates in Washington are dominated by imaginary creatures. The confidence fairy, which was discovered by Paul Krugman, is the mythical creature that brings investment, jobs and growth as a reward to countries that practice painful austerity. Economies don't actually work this way, but important people in policy making positions in Washington and Europe insist that they do. And they hope that they can get the public to believe in the confidence fairy, or at least a large enough segment of the public, to stay in power. In this same vein, Mitt Romney and the Republicans are trying hard to promote the belief in the "regulation monster." The regulation monster is composed of the mounds of bureaucratic paperwork and red tape that strangles businesses. As a result of the regulatory monster, America's businesses aren't able to be the job creators that they want to be. There are a few problems with this story. First and foremost, all the data show that businesses are doing just great. The profit share of GDP is near its 50-year high. The after-tax profit share is at a 50-year high since the tax share of profits is down considerably from its levels in the '50s and '60s. This means that when we look at the economy as a whole, the regulation monster has not left any tracks.

Mitt and the junk bond king - It was at the height of the 1980s buyout boom when Mitt Romney went in search of $300 million to finance one of the most lucrative deals he would ever manage. The man who would help provide the money was none other than the famed junk-bond king What transpired would become not just one of the most profitable leveraged buyouts of the era, but also one of the most revealing stories of Romney’s Bain Capital career. It showed how he pivoted from being a relatively cautious investor to risking his reputation for a big payoff. It is one that Romney has rarely, if ever, mentioned in his two bids for the presidency, perhaps because the Houston-based department store chain that Bain assembled later went into bankruptcy. But what distinguishes this deal from the nearly 100 others that Romney did over a 15-year period was his close work with Milken’s firm, Drexel Burnham Lambert Inc. At the time of the deal, it was widely known that Milken and his company were under federal investigation, yet Romney decided to go ahead with the deal because Drexel had a unique ability to sell high-risk, high-yield debt instruments, known as “junk bonds.”

Michael J. Burry: Failed Ideologues are Writing Reality out of the History of the Economic Crisis - A deficiency in our democracy was revealed following the crisis, when people who were incapable of the analysis necessary to foresee the crisis were put in charge of guiding us through it. That, in itself, is evidence that our system is broken; any properly working - and sustainable - system removes the dead-weight as it is discovered. This applies equally to a productive business, a well-functioning ecosystem, and to an uncompromised political system. Michael J. Burry is one of the few who saw the crisis coming in all its glory and bet heavily on that unmistakable eventuality. Bernanke and Geithner and Greenspan and Summers and Rubin did not see it coming. Yet, who has been in charge of guiding us out of this predictable and self-inflicted crisis? Greenspan's prodigies: Bernanke, Geithner, Summers, Rubin and many other profoundly compromised parties. Michael J. Burry, in the video below, delivers the keynote address at the 2012 UCLA Department of Economics Commencement. In it, he describes the process he undertook in determining that the credit bubble would pop, the housing sector  would crash, and that the financial world's blindness to the obvious would, if properly harnessed, vault him into the 1%. All of it was 100% foreseeable. There was no "black swan". Yet, our most esteemed economic leaders were blind to it.

Lawmakers reworked financial portfolios after talks with Fed, Treasury officials -- Boehner is one of 34 members of Congress who took steps to recast their financial portfolios during the financial crisis after phone calls or meetings with Paulson; his successor, Timothy F. Geithner; or Federal Reserve Chairman Ben S. Bernanke, according to a Washington Post examination of appointment calendars and congressional disclosure forms. The lawmakers, many of whom held leadership positions and committee chairmanships in the House and Senate, changed portions of their portfolios a total of 166 times within two business days of speaking or meeting with the administration officials. The party affiliation of the lawmakers was about evenly divided between Democrats and Republicans, 19 to 15. The period covered by The Post analysis was a grim one for the U.S. economy, and many people rushed to reconfigure their investment portfolios. The financial moves by the members of Congress are permitted under congressional ethics rules, but some ethics experts said they should refrain from taking actions in their financial portfolios when they might know more than the public. “They shouldn’t be making these trades when they know what they are going to do,” said Richard W. Painter, who was chief ethics lawyer for President George W. Bush. “And what they are going to do is then going to influence the market. If this was going on in the private sector or it was going on in the executive branch, I think the SEC would be investigating.”

Members of Congress trade in companies while making laws that affect those same firms - One-hundred-thirty members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules, a Washington Post analysis has found. The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010. Almost one in every eight trades — 5,531 — intersected with legislation. The 130 lawmakers traded stocks or bonds in companies as bills passed through their committees or while Congress was still considering the legislation. The party affiliation of the lawmakers was almost evenly split between Democrats and Republicans, 68 to 62.  Sen. Tom Coburn (R-Okla.) reported buying $25,000 in bonds in a genetic-technology company around the time that he released a hold on legislation the firm supported. Rep. Ed Whitfield (R-Ky.) sold between $50,000 and $100,000 in General Electric stock shortly before a Republican filibuster killed legislation sought by the company. The family of Rep. Michael McCaul (R-Tex.) bought between $286,000 and $690,000 in a high-tech company interested in a bill under his committee’s jurisdiction.

More Revelations of Favorable Stock Trading By Members of Congress - The passage of the STOCK Act was supposed, in the eyes of Congress, to end all the intense anger over Congressional insider trading. The system worked, in their eyes. A problem was identified and Congress worked to address it. Everyone goes home happy. Except that’s not what happened. In a continuing series, the Washington Post delivered the goods on a host of abuses by members of Congress, both within the confines of insider trading and also well beyond them. First, they looked at how members reacted to their holdings in cases where they had lawmaking and oversight power over companies in those holdings. One-hundred-thirty members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules, a Washington Post analysis has found.The lawmakers bought and sold a total of between $85 million and $218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007 to 2010 [...]

Mapping and Sizing the U.S. Repo Market - NY Fed - The U.S. repurchase agreement (repo) market is a large financial market where participants effectively provide collateralized loans to one another. This market played a central role in the recent financial crisis; for example, both Bear Stearns and Lehman Brothers experienced problems borrowing in this market in the period leading up to their collapse. Unfortunately, comprehensive and detailed data on this market are not available. Rather, data exist for certain segments of the repo market or for specific firms that operate in this market (see this recent New York Fed staff report). The spotty data make it difficult to understand the U.S. repo market as a whole and the relative importance of its different segments. In this post, we draw upon various data sources and market knowledge to provide a map of the U.S. repo market and to estimate its size. We argue that our estimate improves upon the $10 trillion estimate of Gorton and Metrick, which has received substantial press coverage.

US Government Backstops Most Derivatives - Joining the other too-big-to-fail banks, Morgan Stanley (MS) has been moving its derivatives portfolio from its holding company to its banking subsidiary. We saw this last November, when Bank of America moved a huge chunk of derivatives from its Merrill Lynch subsidiary onto the balance sheet of its bank subsidiary. This OCC report on derivatives suggests that the total amount currently supported by the FDIC is approximately$1.11 trillion. Reuters reports: The [MS] bank increased its notional derivatives positions at its bank unit to $2.57 trillion at the end of March from $1.72 trillion at the end of December, OCC data show. The portfolio has increased from $1.21 trillion at the end of March 2011. This move probably came in part as a response to the news from February 2012 that the credit rating agency Moodys was reviewing the ratings of banks, with a negative outlook. MS knew that it was likely to get a downgrade, and that could require it to give more safe assets (like Treasuries and cash) to its counterparties on derivatives. The increased collateral protects those counterparties against the possibility that MS couldn’t pay off its obligations. If something happens to MS, the counterparties can seize their collateral, even if MS files bankruptcy, thanks to the 2005 Bankruptcy Amendments. That is what happened to AIG: it had a huge portfolio of credit default swaps, and when it got into financial trouble, its counterparties demanded more collateral than AIG could produce.

Derivatives watchdog defends global reach (Reuters) - The Commodity Futures Trading Commission (CFTC), accused by a top broker in off-exchange financial derivatives of wanting to regulate the world, said on Tuesday new rules will inevitably reach beyond its borders to police the $460 trillion market. Regulators across the globe face an end of year deadline to turn pledges made by leaders of the G20 group of the world's biggest economies to regulate the market, which is dominated by about 15 major banks such as Goldman Sachs, Deutsche Bank and Morgan Stanley who mostly trade in London and New York. Under the proposed new rules banks and other users of these derivatives like credit default swaps and interest rate swaps will have to trade on an electronic platform, and clear and report the trades to make markets more transparent and contain risks. Last week CFTC chairman Gary Gensler said London was a light-touch regulatory "loophole" being exploited by U.S. banks to conduct off-exchange derivative trades and it needed closing with rules from the United States so that taxpayers won't be asked to bail out a U.S. firm that fails there. His comments raised hackles in Europe where the industry is worried about having to comply with both EU and U.S. rules. But Ananda Radhakrishnan, the CFTC's director of clearing and risk, told the IDX derivatives conference in London on Tuesday the U.S. Dodd-Frank reform of Wall Street forces it to have regard to overseas markets that have an impact on the United States. Swaps are a global market and many big institutions have significant swaps operations in the United States. "We need to find a balance between what the statute (Dodd Frank) dictates and being amenable to the desires of our colleagues around the world," Radhakrishnan said.

The assumption that markets are 'natural' -  Graeber writes:  "People continue to argue about whether an unfettered free market really will produced the results that [Adam] Smith said it would; but no one questions whether "the market" naturally exists....we simply assume that when valuable objects do change hands, it will normally be because two individuals have both decided they would gain a material advantage by swapping them.  One interesting corollary is that, as a result, economists have come to see the very question of the presence or absence of money as not especially important, since money is just a commodity, chosen to facilitate exchange, and which we use to measure the value of other commodities.  Otherwise it has no special qualities....Call this the final apotheosis of economics as common sense.  Money is unimportant.  Economies - "real economies" - are really vast barter systems.  The problem is that history shows that without money, such vast barter systems do not occur....It's money that had made it possible for us to imagine ourselves in the way economists encourage us to do:  as a collection of individuals and nations whose main business is swapping things.  It's also clear that the mere existence of money, in itself, is not enough to allow us to see the world this way. ...The missing element is in fact...the role of government policy..."

A Piece of The Action. The Rise of Gangster Capitalism in the Face of Systemic Collapse. - We have heard a lot over the last four years on how those responsible for the economic/financial crisis of 2008-2009 have gotten away scot-free.  That the policies of Bush have been not only replicated by Obama, but enhanced and refined. Like a person with an incurable decease, when an empire begins to fall apart, it becomes desperate and is willing to try anything to forestall the inevitable.     Rules and morals and ethics that were once sacrosanct,  begin to be discarded and like Matt Taibbi and Ives Smith say, it begins to look and behave like an organized crime family. YVES SMITH: Well, the mafia, when it gets to be big enough, first thing it has services that people feel they need if they’re in a difficult situation. So, for example, loan sharking. If you really need money, they do have the money. And people enter into these loan shark deals even though they know it’s going to be very difficult to pay 20 percent or more interest and they’ll have their legs broken if they don’t pay back.

Matt Taibbi and Your Humble Blogger on Bill Moyers -- Yves Smith - Hope you enjoy this segment. I think I can speak for Taibbi in saying we had a good time with Moyers.  For those who prefer viewing the program on a bigger screen, it runs in NYC and DC on Sunday at 6:00 PM. The staff is trying to organize a Twitter Q&A at that time (6:00 to ~6:40 EDT). I haven’t gotten confirmation that this is a go, but I’ll let you know in tomorrow’s Links (and they’ll be providing a hashtag).

Yves Smith, Matt Taibbi, and Bill Moyers talk on the financial "Follies of Big Banks and Government"

JPMorgan Deploys Former Regulators to Talk to Current Regulators - Amid a sweeping overhaul of Wall Street regulation, JPMorgan Chase, the banking powerhouse, has often deployed former government officials to represent it in Washington. In a November discussion with Treasury officials, its team included a former assistant secretary of the Treasury, according to government records. In at least four meetings or conference calls with Federal Reserve staff since December, its representatives included a former official of the Federal Reserve Bank of New York. And in at least 36 contacts with federal regulators since August 2010, JPMorgan was represented by a former staff director of a Senate Banking subcommittee who is registered to lobby on the bank’s behalf.  Many of the meetings and phone calls focused on the biggest rewriting of Wall Street rules in decades—the implementation of the Dodd-Frank Act, which was adopted in response to the financial crisis of 2008 and has profound implications for banks, investors, and financial consumers.

JP Morgan: Eight Challenging Questions - The scary thing about the recently announced trading losses at JP Morgan is not that a twenty or thirty something “rogue” trader in London can lose a lot of money.  That has happened to many if not most of the Too Big to Fail Banks and the system keeps rocking along.  The really scary thing is that, just as with the mortgage mess of the 2000s, we are left with the feeling that no one, including Mr. Dimon, really understands the accounting used to book derivatives transactions. Derivatives risks are not booked by banks based on the gross exposures of the banks.  If so, JP Morgan’s $71 Trillion of derivatives exposure as of December 31, 2011 would totally overwhelm its $2.3 trillion of assets, even more so its $182 billion of net worth.  Banks depend on highly complex models to determine the net risk of their derivatives portfolios.  By netting out trades and utilizing formulas that only a Fine Hall mathematician could understand, the banks measure what they call “value at risk” (VAR) to determine the net bookings of their derivatives portfolios.  Using these formulas JP Morgan determined that, as of December 31, 2011, it had “only” $348 billion of net credit exposure (or 256% of Risk Based Capital) on its derivatives books.  It looks like both of those numbers can come down by a billion or two as a result of the original JPM announcement (or maybe several billion more based on later information and conjecture).  So here’s the scary part.  While Mr. Dimon was quick to take blame for his team’s sloppiness and bad judgment, it also appears that part of the problem came about as a result of a flawed VAR model and that the bank will go back to using an older model which they now believe may be more accurate.

JPMorgan Trading Loss May Reach $9 Billion - Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation. When Jamie Dimon, the bank’s chief executive, announced in May that the bank had lost $2 billion in a bet on credit derivatives, he estimated that losses could double within the next few quarters. But the red ink has been mounting in recent weeks, as the bank has been unwinding its positions, according to interviews with current and former traders and executives at the bank who asked not to be named because of investigations into the bank.The bank’s exit from its money-losing trade is happening faster than many expected. JPMorgan previously said it hoped to clear its position by early next year; now it is already out of more than half of the trade and may be completely free this year. As JPMorgan has moved rapidly to unwind the position — its most volatile assets in particular — internal models at the bank have recently projected losses of as much as $9 billion. In April, the bank generated an internal report that showed that the losses, assuming worst-case conditions, could reach $8 billion to $9 billion, according to a person who reviewed the report.

London Whale Trade Explodes, Current Estimate of JP Morgan Losses as High as $9 Billion - Yves Smith  - So again, what did Dimon know when? Under the hot lights at the House Financial Services Committee, he repeatedly brushed off the losses on the failed Chief Investment Office trades as no biggie. Let us remind readers that the size of the CIO’s balance sheet would make it the 8th largest bank in the US and it was running half of JPM’s total risk exposures, so it’s hard to see the failure of oversight as something to be waived off. And now it turns out the losses are going to clock in at a much higher number than the $2 billion that Dimon kept repeating in the hearings. Recall he refused to update that number, maintaining the public would have to wait for the bank’s second quarter earnings release (admittedly, he did signal the final result could come in much higher). Funny that they’ve now leaked out well in advance of that date. Per the New York Times’ Dealbook: Losses on JPMorgan Chase’s bungled trade could total as much as $9 billion, far exceeding earlier public estimates, according to people who have been briefed on the situation….The bank’s exit from its money-losing trade is happening faster than many expected. JPMorgan previously said it hoped to clear its position by early next year; now it is already out of more than half of the trade and may be completely free this year.

JPMorgan to announce $5bn ‘whale’ loss - JPMorgan Chase is expected to announce losses of about $5bn related to trades by the so-called London whale at its second-quarter earnings presentation in two weeks. People familiar with the matter say the latest estimates are twice the initial forecast but far short of some predictions. The US bank has moved to shift the bulk of its position in the CDX NA IG 9, an index that tracks a basket of credit derivatives on US corporate bonds, say those familiar with the unwinding of the trade.  That is one large part of the multifaceted trade that went sour this year. JPMorgan is expected to warn there could be additional smaller losses this year as it completes the unwind. Shares in JPMorgan fell as much as 5 per cent in pre-market trading on reports that losses from the bank’s chief investment office could reach $9bn. Jamie Dimon, the chief executive, announced losses of $2bn from trading by Bruno Iksil, a UK-based trader known as the “London whale” among hedge funds for his big position in a credit derivatives index. Mr Dimon said at the time the losses “could get worse” and people familiar with daily estimates say they have. However, he has also said the quarter will still be “solidly profitable”.  Mr Dimon had said the bank might hold on to the position for an extended period so as not to aggravate losses in a fire sale. But he appears to have prioritised getting a firm grip on the position by the time JPMorgan reports second-quarter earnings.

JPMorgan Cushions Drew’s Retirement With $21.5 Million - JPMorgan Chase & Co. (JPM)’s decision to let Chief Investment Officer Ina Drew retire four days after the bank disclosed a $2 billion loss in her division allowed her to walk away with about $21.5 million in stock and options. Drew, who resigned May 14, can keep $17.1 million in unvested restricted shares and about $4.4 million in options that she otherwise would have been required to forfeit if the New York-based bank had terminated her employment “with cause,” according to regulatory filings and estimates from consulting firm Meridian Compensation Partners LLC. A 30-year JPMorgan veteran, Drew also had accumulated 661,000 unrestricted shares of common stock worth about $23.7 million based on the May 14 closing price, $9.7 million in deferred compensation and $2.6 million in pension pay as of Dec. 31, according to company filings. Altogether, Drew’s stock, pension and deferred pay come to about $57.5 million. Drew, 55, oversaw the London traders responsible for a $2 billion loss on credit derivatives that Chief Executive Officer Jamie Dimon said “violated common sense.” Shares of the largest U.S. bank have plunged 19.1 percent since Bloomberg News first reported on April 5 that JPMorgan was having trouble unwinding illiquid bets on credit derivatives. While Dimon told lawmakers in separate hearings this month that the company could claw back two years of bonuses, Drew’s pay probably won’t be affected, according to compensation consultants.

JPMorgan’s Other Big Gamble - Recent settlements by the Securities and Exchange Commission (SEC) have sent a dangerous message to Wall Street: feel free to lie freely to investors and shareholders as long as you have deep pockets.  In 2007, Citigroup told investors it had $13 billion in subprime exposures, knowing the figure was in excess of $50 billion.  It got caught and on July 29, 2010 paid $75 million to settle charges with the SEC.  Its CFO, Gary Crittenden, was fined a puny $100,000 and the head of its Investor Relations Department, Arthur Tildesley, was fined an even punier $80,000.  That sent a clear message to Wall Street, lying about the risks you are taking or what’s on your balance sheet results in a slap on the wrist and some chump change.  Lying has now morphed into its own profit center.  On June 19, 2012, when SEC Chair, Mary Schapiro, testified before the House Financial Services Committee regarding the $2 billion and growing losses at JPMorgan Chase, she indicated that the agency is reviewing the appropriateness of the disclosures that JPMorgan Chase made to the public. According to securities law experts, prosecutions by the SEC and DOJ for misstatements or omissions are not limited to SEC filings made under the 1934 Act. Any manner of publicized  misstatement or omission can create liability.  Courts have ruled that any deceit that materially affects the purchase or sale of securities is actionable. 

Simon Johnson: JP Morgan at Risk if Euro Breaks Up - - Yves Smith  - I’m surprised it has taken this long for Someone Serious to make the argument set forth in a new article by Simon Johnson at Bloomberg, which in short form says “You are dreaming if you think a European financial crisis stays in Europe.”  Johnson somewhat undercuts the urgency and importance of his article by working from the assumption that the eurozone dissolves back into its earlier configuration of one currency per nation. Economists and analysts have discussed other scenarios, such as a exit by Greece, which has the potential to precipitate contagion in Portugal, Spain, and Italy; an exit by Germany; a split into more economically homogeneous sub-groups (most likely north v. south). And Bloomberg refrains from putting the real sizzler in the headline: Johnson considers JP Morgan to be vulnerable and explains why.  No matter how you look at it, the most important step that needed to be taken to prevent the recurrence of a global financial crisis was to reduce the interconnectedness of the major players. That has not happened to any meaningful degree. There are efforts underway to move more activities to clearinghouses, but nothing is operational, and the industry is working hard to limit the scope of these plans. So despite all the brave talk about how much better capitalized the big banks are, they’ve beaten back, delayed, and weakened efforts to deal with the biggest source of risk.

JPMorgan’s Bigger Exposure Comes From a Euro Breakup -- According to the Financial Times, as of last week, JPMorgan Chase sold up to 70% of its position in the CDX.NA.IG.9 index, where the Fail Whale trades originated. I assume they are working on the remaining 30%, though CEO Jamie Dimon has said that the trades would “not be an issue by the end of the year,” suggesting there are several months to go. But the bleeding will be eventually stanched from this trade, and sometime in July, when they announce their earnings, we’ll find out just how much JPMC lost on the deal – the speculation has been anywhere from $2 billion to $7 billion. None of this should suggest that JPMorgan Chase, or any major US bank, has insulated themselves from risk around the world. In fact, that risk is gradually growing. Simon Johnson notes today at Bloomberg that US banks have no real buffer to protect themselves from a crisis in the Eurozone: . Let’s say you have lent 1 million euros to a German bank, payable three months from now. If the euro suddenly ceases to exist and all countries revert to their original currencies, then you would probably receive payment in deutsche marks. You might be fine with this — and congratulate yourself on not lending to an Italian bank, which is now paying off in lira. But what would the exchange rate be between new deutsche marks and euros? How would this affect the purchasing power of the loan repayment? More worrisome, what if Germany has gone back on the deutsche mark but the euro still exists — issued by more inflation-inclined countries?

Barclays Libor Charges: Bank To Pay $450 Million To Settle Charges Of Market Manipulation: Barclays PLC and its subsidiaries have agreed to pay more than $450 million to settle charges that it attempted to manipulate and made false reports related to setting key global interest rates. The rates indirectly affect the costs of hundreds of trillions of dollars in loans that people pay when they get loans to go to school, purchase a car or buy a house. Britain's Barclays was just one of numerous major banks reportedly under investigation for similar violations. The U.S. Commodity Futures Trading Commission said Wednesday that the incidents occurred between 2005 and 2009 and sometimes took place daily. The $200 million civil penalty levied against Barclays as part of the settlement is the largest in the agency's history. Barclays is also paying $160 million to the U.S. Justice Department and almost $93 million to British regulators.

Quelle Surprise! Barclays Settlement on Massive Interest Rate Price Fixing Illustrates Bank Crime Pays Well -  Yves Smith  - It’s become oh-so-predictible that banks get at most “cost of doing business” punishments that they almost seem not worth noting. But that’s precisely why it’s important to keep tabs on them, to let the complicit authorities and the perps know that the public is not fooled, even it is not in a position to do anything about it…yet…Even though the Libor/Euribor price-fixing scandal hasn’t gotten much attention in the US, this is a really big deal. Admittedly, it did not crash the economy the way toxic RMBS and CDOs did. Instead, it was a massive price manipulation, the sort of victimless-looking crime where stealing a few basis points over a monster volume of transactions has a huge aggregate impact. This scheme went on for a full five years, with 20+ banks fingered, meaning everyone who was anyone was in on the game. As Ben Walsh put it: The importance of Libor and, to a lesser extent, Euribor, is hard to overstate. They are used to value of hundreds of trillions of dollars of financial instruments. Or as Matt Levine puts it, they “set the rates on pretty much all the loans and swaps in the world … CFTC order mentions $350 trillion of [over-the-counter] swaps, $10 trillion of loans, and $437 trillion of CME eurodollar contracts indexed to Libor alone”. Barclays is first to settle, and given the scale and potential profitability of this activity, the fine looks paltry: $450 million among the FSA, the CFTC, and the Department of Justice (£230 million to the US authorities, £60 million to the FSA). The DOJ has granted “conditional leniency” on anti-trust charges. Price fixing is criminal under the Sherman Act. Four top executives, including CEO Bob Diamond are also giving up bonuses this year.

This Week in Financial Not-Crime - What would it take to get the candy-ass prosecutors in the Department of Justice to indict banksters? We already knew that securities fraud wasn’t sufficient, but that got reinforced today with news that a hedge fund operator got off with civil case for taking money from the fund to pay his taxes and for manipulating the price of stocks and bonds. Phillip Falcone is facing a civil suit instead of leg shackles. Also today we learn that manipulating LIBOR isn’t a crime. Barclays Bank paid $450 million to settle charges that it deliberately manipulated the bench-mark interest rate used to establish how much people pay on $350 billion worth of credit cards, student loans and mortgages. It’s also good news for other banksters who haven’t even been sued, like HSBC, Citigroup, JPMorgan Chase and other firms that are being looked at by regulators around the world. Apparently the manipulation ran both ways, to increase the rate artificially for direct profit, and to reflect a lower rate to hide the fact that other banks were charging Barclays more than other banks because of its perceived weakness. Still, it’s hard to see a connection between a $450 million fine and the massive profits that could come by increasing LIBOR even fractionally. If LIBOR were .1% higher on $350 billion of debt, that comes to $350 million per year. The fraud went on for at least 4 years, which in my example means $1.4 billion in profits, all going directly to the bottom line. Perhaps it will help to know that four executives gave up their bonuses. No? Me neither.

Big Banks Have Become Mafia-Style Criminal Enterprises -- Two stories this week prove once again that the big banks are literally criminal enterprises. Initially, all of the big banks have engaged in Mafia-style “bid-rigging” of municipal bonds, to bilk money from every city in the nation … to the collective tune of tens billions of dollars. And Barclays and other large banks – including Citigroup, HSBC, J.P. Morgan Chase, Lloyds, UBS, Royal Bank of Scotland – manipulated the world’s primary interest rate (Libor) which virtually every adjustable-rate investment globally is pegged to.And see this. That means they manipulated a good chunk of the world economy.  Other recent stories also show criminal fraud as well. For example, the big banks have been cheating homeownersespecially veterans.And as Max Keiser explains, banking giants Mellon and State Street shaved money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide:(Details here, here, here, here, here, here, here, here, here, here, here.)  Indeed, the entire business model of the big banks is fraud. See this, this, this, this, this and this.

6 Ways the Big Banks Are Getting Back-Door Bailouts and Making Big Money From Taxpayers - Bankers love to rail against government interference in the “free market.” Jamie Dimon, grilled this week in front of Congress over JP Morgan Chase's massive recent losses, famously complained last year that some regulations are “anti-American.” And Lloyd Blankfein, CEO of Goldman Sachs, warned ominously that increased regulations might make the bank seek out another location to do its business: “Operations can be moved globally and capital can be accessed globally,” he said. Even while some of them occasionally have the grace to admit that they wouldn't still be around without the massive taxpayer bailouts of 2008 (and continued access to ultra-cheap loans from the Federal Reserve), they still like to claim that they're free-market entities, subject to the whims of the invisible hand, and that the government's meddling can only be destructive. Yet those same banks are happy to make their money from the same governments about which they love to whine. Most of us know about the big, official bailouts. But the banks get much more than that from federal and state governments. Those lobbying dollars and campaign donations aren't just to keep regulators away; they lead to lucrative contracts where banks are paid to administer government services, and are put in position to skim fees off the very same taxpayers who pay for those services.

SEC sues hedge fund billionaire for diverting money — US regulators sued hedge fund billionaire Philip Falcone for fraud Wednesday, accusing him of taking $113 million from a fund to pay his taxes. The Securities and Exchange Commission (SEC) said Falcone, who raked in billions betting against packaged mortgage securities ahead of the US real-estate crash, took clients’ money from funds run by his Harbinger Capital Partners to pay his personal taxes. It also said Falcone illegally manipulated bond prices, traded preferential treatment to investors who backed a controversial board initiative, and broke restricted period trading rules in three initial public offerings to make money on short sales.

Wall Street Forgets Its Job Is to Create Jobs - There was at least one five-minute period that cut through the pointlessness. For that, we can thank Representative Gary Ackerman, a Democrat from New York who is retiring after this term: “I used to think that all of Wall Street was on the level,” he explained, “that it facilitated investing, that it allowed people and institutions to put their money into something that they believed in and believed would be helpful and beneficial and grow and make money and especially help the economy and, on the side, create a lot of jobs and be good for our country and good for America.”  Then he picked up steam. “Now, a lot of what we’re doing with this hedging -- and you could call it protecting your investment or whatever -- but it’s basically gambling,” he said. “You’re just betting that you might have been wrong. It doesn’t help anything succeed anymore. It doesn’t encourage anything anymore.”  Fully warmed up, Ackerman got to his point about what all the hedging on Wall Street accomplishes. “I don’t see how that creates one job in America,” he said. “I don’t see how it helps the American economy. I don’t see how it helps the housing market or the building market or the let’s-make-steel or widgets market.”

Suggested Safeguards Irk Fund Industry - FOR a moment last week, watching the Senate Banking Committee hearings on money market mutual fund reforms, I thought I had fallen into a time warp. As Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, outlined proposals meant to ensure that taxpayers would never need to bail out a money fund, some of the sharp questioning she received had a depressingly familiar ring. “In my view you’re portraying an industry that’s extremely vulnerable, that has all these risks of runs, and I really find that extraordinary in light of the actual history,” needled Senator Patrick J. Toomey, a Pennsylvania Republican, citing the failure of just one money market fund — the Reserve Fund in 2008 — throughout years of crises and panics. “You’re telling us that this is a very vulnerable industry and there’s great threats of a run and using that to justify regulations that I think threaten the very existence of this industry.” Suddenly, I was back in September 2003 at a House Financial Services Committee hearing on a similar effort to avert a bailout of Fannie Mae and Freddie Mac, the mortgage finance giants that would become wards of the state just five years later. “The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see,” Barney Frank said then. “I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios.” 

Bank chiefs enjoy double-digit pay rises - Top US and European bankers, including JPMorgan Chase’s Jamie Dimon and Citigroup’s Vikram Pandit, have enjoyed double-digit annual pay rises averaging almost 12 per cent, despite widespread falls in profits and share prices, Financial Times research shows. The disclosure will stoke concern on both sides of the Atlantic over chief executive pay levels that has already led to several high-profile investor revolts, including at Citi and at Barclays. It comes as Europe’s leaders debate a cap on bank bonuses. The analysis of total pay awarded to 15 bank chiefs by Equilar, a US pay research group, shows they received an average 11.9 per cent pay rise last year to $12.8m, the second increase in a row. However, the pace of growth has slowed.  Bankers such as Brian Moynihan at Bank of America, Citigroup’s Mr Pandit and JPMorgan’s Mr Dimon enjoyed the largest gains. Mr Dimon, whose reputation as one of the best managers in banking has been hit by a $2bn trading loss in a supposedly safe division of JPMorgan, topped the list for the second year in succession with a $23.1m pay package that was 11 per cent higher. The analysis by Equilar adds up base salaries, cash bonuses and certain other benefits. It also includes option and stock awards that were granted in 2011, some of which to reward performance in previous years.  It shows that fixed salaries continue to rise while variable cash payments are sinking as regulators clamp down on bonuses. But average stock and option awards increased by 22 per cent.

U.S. Banks Aren’t Nearly Ready for Coming European Crisis - Simon Johnson - The euro area faces a major economic crisis, most likely a series of rolling, country-specific problems involving some combination of failing banks and sovereigns that can’t pay their debts in full.  This will culminate in systemwide stress, emergency liquidity loans from the European Central Bank and politicians from all the countries involved increasingly at one another’s throats.  Even the optimists now say openly that Europe will only solve its problems when the alternatives look sufficiently bleak and time has run out. Less optimistic people increasingly think that the euro area will break up because all the proposed solutions are pie-in-the-sky. If the latter view is right -- or even if concern about dissolution grows in coming months -- markets, investors, regulators and governments need to worry not just about interest-rate risk and credit risk, but also dissolution risk.  What’s more, they also need to worry a great deal about what the repricing of risk will do to the world’s thinly capitalized and highly leveraged megabanks. Officials, unfortunately, appear not to have thought about this at all; the Group of 20 meeting and communique last week exuded complacency and neglect.  Very few people seem to have gotten their heads around dissolution risk. Here’s what it means: If you have a contract that requires you to be paid in euros and the euro no longer exists, what you will receive is unclear.

Breaking Up Big Banks Hard To Do As Market Forces Fail - Seventeen years ago fund manager Michael F. Price spurred the merger of Chase Manhattan Corp. and Chemical Banking Corp., creating what was then the biggest U.S. bank and laying the foundation for JPMorgan (JPM) Chase & Co. Now he has a new message: It’s time to break up. The stocks of five of the six biggest U.S. banks -- JPMorgan, Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) -- are languishing at or below tangible book value. That means the pieces are worth more than the whole, Price said. “Within the banks are wonderful assets,” said Price, who sold his fund-management company for $610 million in 1996 and now runs MFP Investors LLC in New York. “How long are the boards of directors going to stand by and take no action and let them be pounded? So far there’s no indication that any of these banks or boards of banks is willing to do anything about it.” Politicians and regulators have resisted calls from some investors to split up conglomerates that were assembled over two decades by executives such as former Citigroup Chief Executive Officer Sanford “Sandy” Weill and former Bank of America CEO Ken Lewis. These universal banks offered customers everything from checking accounts and insurance to derivatives trading and merger advice. The 2008 financial crisis and subsequent performance of the companies is calling that into question.

Who Wants Big Banks? - Thirty years ago, Merton Miller, one of the giants of modern finance, was at a banking conference when a banker said he couldn’t raise more capital by selling stock because that would be too expensive: his stock was selling for only 50 percent of book value. Merton responded, “Book values have nothing to do with the cost of equity capital. That’s just the market’s way of saying: We gave those guys a dollar, and they managed to turn it into 50 cents.” Now that’s what a growing number of sophisticated investors are saying about today’s banking behemoths, especially JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. As Christine Harper reported in Bloomberg, stock in all of these banks is trading at or considerably below book value, while more focused competitors such as Wells Fargo and U.S. Bancorp trade for well above book value. A brief aside: Book value refers to the amount that shareholders have historically invested in a firm, plus profits that have not been paid out to them as dividends. Market value is the amount that investors think the shareholders’ investment is worth today. The ratio of market value to book value is commonly used as a shortcut way to determine how well a company has performed.

The Semiotics of Markets - The Economist this week had an interesting discussion about the epidemiology of financial contagion. It is interesting to observe the use of language. The article starts out with a correct observation about how economists choose a particular type of language used to lend their observations credibility: Economists, who like to borrow medical terms to lend themselves an air of scientific rigour, call this “contagion” (see also: Dutch disease, liquidity injection, etc). Economic troubles in one country can infect others. Can economic epidemiology predict which countries might fall sick following a Greek exit? The metaphors are extremely revealing. Irrespective of whether one sees financial contagion as a disease — viruses or microbes some other unnamed horror running around the world mucking things up — or as some kind of fluid similar to water but not quite water, there is a fundamental logical error. Capital markets are made up of transactions. Each transaction is both an artifice and a set of rules made by self aware people. In neither case is it a natural “thing” that “flows” about a bit, or “infects other things”. No matter how attractive it is to try to observe in it quasi-scientific fashion, either as a form of biology or physics, it has zero chance of working effectively. If, by some rare chance, it did happen to work as an analysis a few times, it would immediately be adopted by traders and cease to work.

Moody’s Notices That Banks Are Risky, Four Years Too Late - One day after Moody’s Investors Service cut the credit ratings of 15 major U.S. and European banks, and hours after front pages around the world proclaimed the downgrades to be Big News, the markets stopped, sighed, shrugged and moved on. The reaction is reminiscent of the events of last August, when the U.S. government’s borrowing costs fell after Standard & Poor’s stripped the country of its AAA credit rating.  Once upon a time, the proclamations of credit-rating companies and the resulting market moves tended to go in the same direction. Back in 2005, downgrades of General Motors and Ford caused the companies’ bonds to drop and whipped up a tempest in financial markets. What gives? First, there’s the obvious. At least in the U.S., banks have generally been building up their capital and cash reserves and paring down their holdings of soured loans and securities. So the downgrades contrast with recent experience.  Second, and more important, ratings are by their nature backward-looking. They fall only after the problems of a borrower are obvious and demonstrable. So they should catch markets by surprise only if investors haven’t been doing their homework.

Number of the Week: Rest of World Pulls Down U.S. Profits -- $48.1 billion: The quarterly drop in U.S. corporate profits from abroad in the first three months of 2012. It’s becoming increasingly clear that what happens overseas isn’t likely to stay overseas. The final data for gross domestic product was released on Thursday, showing that the economy grew at an unrevised rate of 1.9% in the first quarter. Markets basically yawned as they went back to focusing on the euro zone summit and the release shortly after of the Supreme Court’s health-law decision. But beneath the unchanged headline number were some worrying new details. For one, corporate profits were revised lower. The new data showed the first quarterly drop in the measure since the darkest days of the recession in the fourth quarter of 2008. At first glance, the drop in profits was a bit hard to square with job numbers for the first quarter. Sure, employment has been weak for the past few months, but it was strong in the early part of the year. The answer came in where the profit drop originated. Profits from the U.S. were actually strong in first quarter, jumping 10% from a year earlier. But earnings coming from the rest of the world tumbled 12% from the first quarter of 2011.

Young versus mature small firms seeking credit -Atlanta Fed's macroblog - The ongoing tug of war between credit supply and demand issues facing small businesses is captured in this piece in the American Prospect by Merrill Goozner. Goozner asks whether small businesses are facing a tougher borrowing environment than is warranted by current economic conditions. One of the potential factors identified in the article is the relative decline in the number of community banks—down some 1,124 (or 13 percent of all banks from 2007). Community banks have traditionally been viewed as an important source of local financing for businesses and are often thought to be better able to serve the needs of small businesses than large national banks because of their more intimate knowledge of the business and the local community. The Atlanta Fed's poll of small business can shed some light on this issue. In April we reached out to small businesses across the Sixth Federal Reserve District to ask about financing applications, how satisfied firms were that their financing needs were being met, and general business conditions. About one third of the 419 survey participants applied for credit in the first quarter of 2012, submitting between two and three applications for credit on average. As we've seen in past surveys (the last survey was in October 2011), the most common place to apply for credit was at a bank.For the April 2012 survey, the table below shows the average success of firms applying to various financing sources (on a scale of 1 to 4, with 1 meaning none of the amount requested in the application was obtained, and 4 meaning that the firm received the full amount applied for). The table also shows the median age of businesses applying for each type of financing.

Unofficial Problem Bank List declines to 917 Institutions, Quarterly Transition Matrix - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for June 29, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  The Unofficial Problem Bank List finished the first half of 2012 with 917 institutions with assets of $354.6 billion. A year ago, the list held 1,003 institutions with assets of $419.9 billion, which was the peak level in terms of assets. Net change for the month was a decline of 14 institutions and $3.4 billion of assets.With the passage of the calendar quarter, it is time to update the transition matrix. As seen in the table, there have been a total of 1,552 institutions with assets of $802.2 billion that have appeared on the list. About 41 percent or 635 institutions with assets of $369.4 billion have been removed from the list. Failure has been the prior manner of exodus as 330 institutions with assets of $286.0 billion have failed since appearing on the list. Since the list first appeared on August 7, 2009, 31 institutions have failed without being on the unofficial list. Removals from unassisted mergers and voluntary liquidations total 106 institutions. Actions have been terminated against 199 institutions with assets of $93.5 billion. During the quarter, there was an acceleration in action terminations, particularly within the pool of institutions added after publication of the original list. This group had 44 terminations compared with six terminations in the original pool. Overall, 5.3 percent of the 948 institutions on the list at the start of the second quarter were removed because of action termination.

The Banks’ Huge Eaton Loss: Showing the Note Owner - The seminal Eaton v. Fannie Mae decision by the Massachusetts Supreme Judicial Court is not a huge banking industry win going forward. In fact, if the Legislature lets it stand, it’s a huge homeowner win. Forget the part about the decision applying in the future only; while I think it is wrong, it was doctrinally reasonable and arguably protects many innocent third parties. Going forward, the really big deal is that the Court has taken the “show me the note” defense and made it “show me the note owner.” “Show me the note owner” is really hard to do in an era of mass securitization fail. Securitization fail means the trust doesn’t own the loans. And if the trust doesn’t own the loans, then the servicer isn’t the agent of the note owner and can’t foreclose non-judicially. Moreover, as this Court’s earlier Ibanez decision revealed, securitization fail may have occurred more often in Massachusetts than elsewhere. By requiring the non-judicially foreclosing servicer to have authority from the note owner to foreclose, the Court is strengthening foreclosure defense in Massachusetts. See, homeowners have tried to get the courts to take securitization fail seriously, and specifically the standing problem it creates for servicers. But generally judges hate hearing about how banks screwed up securitization, fearing it leads to undeserved free houses. In fact, a bankruptcy appellate court reviewing a Massachusetts case got basic doctrine wrong to reject the argument.Securitization fail arguments should have a lot more traction now.

Don’t Believe Everything You Read Dept.: Foreclosure Case in Massachusetts Gives New Protections to Homeowners - A ruling in a long-awaited foreclosure case in Massachusetts had an ambiguous result today, though it’s presented here by Nick Timiraos as a win for banks: The highest court in Massachusetts rejected a challenge from a Boston homeowner who had contested the validity of her foreclosure in a widely watched case that threatened to create a wave of new legal problems for banks seeking to repossess homes. The ruling allows Fannie Mae to proceed with a foreclosure and avoids what the real-estate industry had feared would be a “legal volcano” that could create clouded titles on thousands of foreclosed properties in Massachusetts, particularly after the same court issued two rulings last year that reversed foreclosures. Based on my conversations, the ruling does not allow Fannie Mae to foreclose. It remands the case back to the lower court for them to decide how to proceed. And while the case is prospective, meaning that it only applies to foreclosure actions from this point forward, as Adam Levitin explains there are still some added protections for homeowners granted. In the case, Eaton v. Fannie Mae and Green Tree Servicing, the homeowner argued that a lender cannot foreclose unless they hold both the mortgage and the promissory note. And the high court in Massachusetts agreed with that. Law Professor Adam Levitin said the decision makes clear that lenders who do not hold both the mortgage and the promissory note do not have the right to foreclose, an area of state law that until now has been ambiguous.

Lender regulation and the mortgage crisis - The far-reaching consequences of the US mortgage crisis have sent economists and policymakers searching for a better understanding of the roots of the housing bubble. Recent research shows substantial evidence that the unprecedented mortgage boom was fueled by a deterioration in lending standards, which was at least partly due to a moral hazard problem created by the process of securitising loans or, in other words, the “Originate to Distribute” (OTD) model. Yet despite the idea that enhanced regulation and supervision could have averted bad lending remains a theoretical premise with little empirical work to validate such link. The calls for tighter regulation are often met with criticism cautioning against an inefficient knee-jerk regulatory reaction to the financial crisis. But would stricter supervision and regulation of lenders have been any use during the frenzied optimism of a boom? This column argues that it might. It shows that lending by the loosely regulated non-bank companies was associated with higher foreclosure during the housing downturn when compared with lending by the more tightly regulated banks.

Federal Reserve, Regulators Arguing for More, Quicker Foreclosures - The Federal Reserve has decided to put their thumbs on the scales of justice, explicitly attempting to overturn state-based anti-foreclosure laws on the spurious grounds that they hurt the economy. This story by Tim Reid in Reuters cites the Fed arguing against the kind of laws in states like Nevada – and soon, California – that have saved hundreds of thousands of homes from foreclosure. State and federal laws enacted to protect homeowners from eviction in the wake of the 2008 housing crash may be extending the slump, according to a growing number of economists and industry experts. Foreclosures have all but ground to a halt in Nevada, which passed one of the stiffest borrower-protection laws in the country last year. Yet the housing market is further than ever from recovery, local real estate agents say, with a lack of inventory feeding a “mini-bubble” in prices that few believe is sustainable. A recent U.S. Federal Reserve study found that in states requiring a judicial review for foreclosure, delays associated with the process had no measurable long-term benefits and often prolonged the problems with the housing market. There’s been a concerted effort to overturn due process in these judicial foreclosure states, on the theory that foreclosures must be quickly flushed through the system so the market can “clear.” Incredibly, house organs like the Fed still express this opinion even after years of documented evidence of illegal foreclosures using false and forged documents in court. The explicit recommendation from the Federal Reserve is to react to systematic foreclosure fraud by closing the courthouse doors to troubled borrowers.

Quelle Surprise! Fed Economists Side Firmly With Bank Criminality Over the Rule of Law -  - Yves Smith - Although Dave Dayen already gave a well-deserved shellacking to a remarkable piece of bank PR masquerading as “insight” at Reuters, “Evidence suggests anti-foreclosure laws may backfire,” it merits longer-form treatment as a crude macedoine of anti-homeowner messaging. The way Big Lies get sold is by dint of relentless repetition. In the wake of the heinous mortgage settlement, foreclosure fatigue has set in. A lot of policy people want to move on because the topic has no upside for them. Nothing got fixed, the negotiation process took a lot of political capital (meaning, as we pointed out, it forestalls any large national initiatives in the near-to-medium term), and Good Dems don’t want to dwell on a crass Obama sellout (not that that should be a surprise by now). But the fact that this issue, which ought to be front burner given its importance both to individuals and to the economy, is being relegated to background status creates the perfect setting for hammering away at bank-friendly memes. When people are less engaged, they read stories in a more cursory fashion, or just glance at the headline, and don’t bother to think whether the storyline makes sense or the claims are substantiated. Just look at the headline: “Evidence suggests anti-foreclosure laws may backfire.” First, it says there are such things as “anti-foreclosure laws.” In fact, the laws under discussion are more accurately called “Foreclose legally, damnit” laws. Servicers and their foreclosure mill arms and legs have so flagrantly violated long-standing real estate laws in how they execute foreclosures that some states have decided to up the ante in terms of penalties to get the miscreants to cut it out.

Foreclosure machinery creaks back to life - Ever since the robo-signing scandal erupted in October 2010, large U.S. banks have slowly come to realize that their practices are under ever-increasing scrutiny. A “Duh!” observation for most people, but not, apparently, for bankers. Belatedly, the bankers took a closer look at their internal procedures for handling defaulted mortgages. It did not take long for them to discover that something significant was amiss. By mid-2011, most of the major money center banks had put the brakes on their normal foreclosure machinery: “What was all this sturm und drang over some bums who don’t pay their bills? Perhaps we better look into it.”  Their internal review of how mortgages in default were handled revealed a surprising amount of chicanery. Indeed, most of what was going on had elements of something wrong. The banks might have been better served had they asked the question: “Are we doing anything legally?” As it turned out, not very much.  Large banks had long used outside law firms and third-party service processors to pursue recoveries from debtors. What made this cycle so different was the sheer volume: A massive increase in foreclosures combined with a big upsurge in outside vendors to process them. The combination ran roughshod over centuries of property laws, to say nothing of well-established banking procedures and legal practices.  Using third parties did not protect the banks from liability. As it turns out, subcontracting fraud does not insulate your organization from the illegal behavior of your hires. This created a problem for the banks.

Housing Market Depressed By Unending Foreclosure Machine - I came away from Barry Ritholtz’ column in Sunday’s Washington Post fairly well convinced that we could see a flood of foreclosure filings over the next year or so. There’s a certain logic to that. While the legal issues for banks and servicers on their foreclosure processes have not ended, the national settlement certainly took state and federal law enforcement off the playing field, giving a lot more certainty to the financial industry. Banks are benefiting from keeping that shadow inventory on the sidelines, which is about the only thing pushing up prices. But there are signs that they will slowly push out more and more borrowers in the months to come. During the abatement period, distressed home sales, including foreclosures and short sales, had fallen substantially. They were down to 28 percent of existing-home sales for April – significantly less than the 37 percent a year earlier [...] Current foreclosure filings — default notices, scheduled auctions and bank repossessions — increased in May by 9 percent, according to the RealtyTrac monthly foreclosure report.This was right on cue. With the abatements over, foreclosure starts are creeping up again. As the foreclosure machinery ramps up, the negative ramifications they bring will expand. More distressed sales, lower prices and increasingly tough comparable appraisals are likely over the next 12 months.Indeed, even in today’s relatively strong news on new home sales, you could see the persistence of the distressing gap, with the normally tight relationship between existing and new home sales broken because of these distressed sales, caused by delinquencies. A renewal of foreclosure operations only exacerbates this.

CoreLogic: 63,000 completed foreclosures in May - From CoreLogic: CoreLogic® Reports 63,000 completed foreclosures in May CoreLogic ... today released its National Foreclosure Report for May, which provides monthly data on completed foreclosures and the overall foreclosure inventory. According to the report, there were 63,000 completed foreclosures in the U.S. in May 2012 compared to 77,000 in May 2011 and 62,000 in April 2012. Since the financial crisis began in September 2008, there have been approximately 3.6 million completed foreclosures across the country. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure.  Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of May 2012 compared to 1.5 million, or 3.5 percent, in May 2011 and 1.4 million, or 3.4 percent, in April 2012.  “There were more than 819,000 completed foreclosures over the past year, or an average of 2,440 completed foreclosures every day over the last 12 months,” said Mark Fleming, chief economist for CoreLogic. “Although the level of completed foreclosures remains high, it is down 27 percent from a peak of 1.1 million in all of 2010.”  So far we haven't seen a surge in completed foreclosures - or a large increase in REO (lender Real Estate Owned) coming on the market. Note: The foreclosure inventory reported by CoreLogic is lower than the number reported by LPS of 4.12% of mortgages or 2 million in foreclosure, and the Mortgage Bankers Association’s (MBA) Q1 report showing 4.39% of loans in the foreclosure process.

Fighting Foreclosure Fatigue - Folks in Washington tell me there is a general sense of “foreclosure fatigue” in our nation’s capital. It’s just so boring to keep thinking about all the people losing their homes year after year. Can’t we move on to something new? This attitude goes along with a failure to do anything meaningful to get out of the five-year-old mortgage crisis, still very much with us. More charitably, the people who would like to do something see no political opening in an election year. Looking back on all that time, there has been no shortage of good ideas; what has been lacking is will. Remember principal write-down in bankruptcy (aka, cramdown)? Peter Swire, who coordinated housing finance policy at the National Economic Council in 2009-2010, recently admitted that the administration should have pushed for it early on. “Cram-down, on balance, today, would have been a good idea,” he said. But there is still floating around the idea of the principal paydown plan in chapter 13, which could be implemented by the Federal Housing Finance Agency.  But remember Ed DeMarco . . . here, here and here.     If it is hopeless to do anything on the federal level now, how about local initiatives? Just this week, Robert Shiller (of the Case Shiller price indices) in a New York Times piece promoted state and local government efforts to use eminent domain to seize underwater mortgages, pay their fair market value, and then write them down, making new loans for the public purposes of stabilizing the housing market and reducing blight caused by vacant homes.    

Fannie Mae and Freddie Mac Serious Delinquency rates declined in May - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in May to 3.57% from 3.63% April. The serious delinquency rate is down from 4.14% in May last year, and this is the lowest level since April 2009. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined slightly in May to 3.50%, from 3.51% in April. Freddie's rate is only down from 3.53% in May 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. These are loans that are "three monthly payments or more past due or in foreclosure". I don't know why Fannie's delinquency rate is falling faster than for Freddie.  The "normal" serious delinquency rate is under 1%, so there is a long way to go.

Principal Reduction Most Effective Type of Mod: Amherst - Amherst Securities recently released a report declaring that principal reduction modifications, without question, are the most effective form of modification. Between three types of modifications – principal, rate, and capitalization – the controversial and much-debated principal reduction mod was found to be the most effective based when it comes to its 12-month re-default rate. The report, which was co-authored by housing analyst Laurie Goodman, counted principal modifications as mods involving a balance reduction, rate mods involved an interest rate reduction, and a capitalization mod involves neither action and is when the delinquent amount owed gets added to the principal balance without charging the interest rate. Although the FHFA does not permit Fannie Mae and Freddie Mac to apply principal reduction modifications to their loans, the report revealed that in 2012, principal modifications now account for almost 40 percent of total modifications, up from 25 percent in 2011 and 11 percent in 2010. For 2011 modifications, the re-default rate after 12 months for principal modifications was 12 percent compared to 23 percent for rate modifications and 30 percent for capitalization modifications, according to the report. Other factors leading to a successful modification also include more significant payment reductions, modifications made earlier in the delinquency process, and mods that are better tailored to borrower characteristics. The report backed claims of pay relief as means for a successful mod by pointing to data on 2011 modifications, which showed that mods with pay relief less than or equal to 20 percent had a 12 month re-default rate of 30 percent, while those with pay relief greater than 60 percent had a re-default rate of 12 percent.

More Homeowners Get Mortgage Principal Reduced, but Numbers Still Small - The number of troubled U.S. homeowners who have been able to get their home-mortgage balances reduced remains small but is on the rise, according to a federal banking regulator. More than 10,400 homeowners received principal reductions from their lenders in the first three months of the year, the Office of the Comptroller of the Currency said Wednesday in its quarterly “mortgage metrics” report. The total was up 5.4% from about 9,870 in the last quarter of 2011 and more than double around 4,800 in the first quarter of last year. Banks are granting homeowners write-downs mainly if they hold those loans on their balance sheet. They typically do so for loans that are significantly “under water”–meaning that the homeowner owes far more on the property than the home is worth. Banks aren’t permitted to grant principal reductions on loans sold to Fannie Mae and Freddie Mac, the federally controlled mortgage investors. The Obama administration at the start of this year offered new incentives to encourage Fannie and Freddie to allow write-downs, but their federal regulator has yet to decide whether to accept that offer.

Refis on underwater jumbo loans nearly impossible - During the housing boom, almost 60 percent of Bay Area housing loans were jumbos - mortgages above the former limit of $417,000, according to San Diego real estate service DataQuick.  Refinancing at a lower interest rate provides a sort of household economic stimulus. "If you have that extra money in your pocket, obviously you'd be spending more, and it makes life more comfortable for people," Ghobadian said.  That economic stimulus effect inspired the government to expand its underwater refinance program. HARP 2.0, which went into effect this year, lets Fannie Mae- and Freddie Mac-backed mortgage holders refinance no matter how underwater their homes are. But Fannie and Freddie only back "conforming" or non-jumbo loans, leaving holders of jumbo loans with little recourse. And efforts to remedy the problem through legislation have gone nowhere.  "There is not much that can be done legislatively for loans that are not agency-backed because they are covered by individual private contracts," said Guy Cecala, publisher of Inside Mortgage Finance in Maryland. "Servicers will tell you they don't know who the investors are. It's very frustrating when you hear that kind of thing, but very common."

Government-Backed Loans Went to 6,300 Delinquent Taxpayers - More than 6,300 homeowners who owed millions of dollars in federal taxes received government-backed mortgages in violation of a federal policy, according to a report by a federal watchdog.The Government Accountability Office study, viewed by Dow Jones Newswires, was conducted from April 2011 through last month and examined loans made in 2009 that were guaranteed by the Federal Housing Administration, a federal agency that backs loans made to buyers with low down payments. The report also found that borrowers with unpaid taxes had foreclosure rates two to three times higher than those who had paid taxes. The agency insured over $1.44 billion in mortgages for borrowers who faced $77.6 million in federal tax debt, the GAO report said. Of those borrowers, about 3,800 received $27.4 million in tax credits for first-time homebuyers under a federal economic stimulus program that expired around two years ago. The report blamed “shortcomings in the capacity of FHA-required documentation to identify tax debts, and shortcomings in other policies that lenders may misinterpret.”

US new-home sales rose at fastest pace in 2 years --- Americans bought new homes in May at the fastest pace in more than two years. The increase suggests a modest recovery in the housing market is continuing, despite weaker job growth. The Commerce Department said Monday that sales of new homes increased 7.6 percent in May from April to a seasonally adjusted annual rate of 369,000 homes. That's the best pace since April 2010, the last month that buyers could qualify for a federal home-buying tax credit. Even with the gains, the annual sales pace is less than half the 700,000 that economists consider to be healthy. Yet the increase follows other signs that show the housing market is improving nearly five years after the bubble burst. Builders are slowing gaining confidence in the market and starting to build more homes. Mortgage rates have plunged to the lowest levels on record, making home-buying more affordable. Prices remain low and have started to stabilize. And sales of previously occupied homes are much higher than the same time last year. Though new homes represent less than 20 percent of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to the National Association of Home Builders.

New Home Sales increase in May to 369,000 Annual Rate - The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 369 thousand. This was up from 343 thousand SAAR in April. Sales in February and March were revised up. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Sales of new single-family houses in May 2012 were at a seasonally adjusted annual rate of 369,000 ... 7.6 percent above the revised April rate of 343,000 and is 19.8 percent above the May 2011 estimate of 308,000. The second graph shows New Home Months of Supply. Months of supply decreased to 4.7 in May from 5.0 in April. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). The seasonally adjusted estimate of new houses for sale at the end of May was 145,000. This represents a supply of 4.7 months at the current sales rate. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at a record low 43,000 units in May. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In May 2012 (red column), 35 thousand new homes were sold (NSA). Last year only 28 thousand homes were sold in May. This was the fourth weakest May since this data has been tracked. The high for May was 120 thousand in 2005.

Vital Signs: New Home Sales Up, but Still at Low Levels - New-home sales rose in May after falling for two consecutive months. Americans bought new homes at a seasonally adjusted annual rate of 369,000 in May, up 7.6% from April but barely above February’s pace. Compared with a year earlier, sales were up 19.8% and have been rising for eight consecutive months. Before the housing bust, Americans bought more than a million new homes a year.

Home Sales Reports: What Matters - After the existing home sales report for May was released last week, I saw several cautionary comments focused on the decline in sales in May (from 4.62 million in April to 4.55 million in May). The key number in the existing home sales report is not sales, but inventory. It is visible inventory that impacts prices (although the "shadow" inventory will keep prices from rising). When we look at sales for existing homes, the focus should be on the composition between conventional and distressed. Total sales are probably close to the normal level of turnover, but the composition of sales is far from normal - sales are still heavily distressed sales. Over time, existing home sales will probably settle around 5 million per year, but the percentage of distressed sales will eventually decline. Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. Look at inventory and the percent of conventional sales. However, for the new home sales report, the key number is sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts). It might be hard to believe, but earlier this year there was a debate on whether housing had bottomed. That debate is over - clearly new home sales have bottomed – and the debate is now about the strength of the recovery. Although sales are still historically very weak, sales are up 35% from the low, and up about 24% from the May 2010 through September 2011 average.

With existing home inventories tight, new home sales have stabilized - New single family home sales in the US rose more than expected during May.  Reuters: New single-family home sales surged in May to a two-year high and prices rose from a year ago, further signs the housing market recovery was gaining some momentum.  The Commerce Department said on Monday sales jumped 7.6 percent last month to a seasonally adjusted 369,000-unit annual rate, the highest since April 2010.  That was well above economists' expectations for a 346,000 pace and the highest since April 2010, when sales were inflated by a homebuyer tax credit.This provides further evidence to recent reports of tight inventories in the existing single family home markets.  People are not in a rush to sell existing homes at low prices and the shadow inventory is not flowing into the market at the rate some have been expecting (while "shadow demand" is growing). Tighter inventories in the existing home markets are increasing demand for new homes. Clearly this volume looks puny relative to recent history. Also anecdotal evidence suggests that homeowners are waiting for prices to firm up to sell, thus limiting the rate of appreciation (at each price point, new exiting home inventory will enter the market). Nevertheless it seems that new home sales have now stabilized.

US home prices rise for third month - US home prices showed further signs of stabilisation in April, boosting hope that the housing market is finally bottoming out.  The S&P/Case-Shiller home price index, which tracks monthly changes in the value of residential property in 20 metropolitan regions across the US, showed prices edge 0.7 per cent higher on a seasonally adjusted basis.  That followed a 0.1 per cent rise in March and was the third straight monthly gain. On a non-seasonally adjusted basis, April prices rose 1.3 per cent after holding steady the month before. Even as other parts of the country’s economy are losing momentum, recent housing data have pointed to a tentative recovery. The sector that was at the centre of the 2008 financial crisis has been hampered by low home prices and high foreclosure rates. While tight credit conditions still mean many homebuyers are unable to make purchases, others view the low mortgage rates as an opportunity to buy. “While a broad regional variation remains, the fact that some of the areas hardest hit during the housing downturn such as Florida, Arizona and California have seen gains in recent months is a positive sign that the gradual improvement in housing conditions is becoming somewhat broader based,” Tuesday’s data, which came in above consensus estimates of a 0.4 per cent increase, followed positive new home sales numbers reported on Monday. Sales of new single-family homes rose 7.6 per cent to a seasonally adjusted 369,000-unit annual rate last month, the highest since April 2010, according to the commerce department. Year on year prices fell 1.9 per cent, the smallest decline since November 2010. This was also smaller than the 2.3 per cent decrease that was forecast and less severe than March’s 2.6 per cent dip.

Home Prices In U.S. Cities Fall At Slowest Pace Since ’10 - Residential real estate prices fell in April at the slowest pace in more than a year, adding to signs the U.S. housing market was firming.  The S&P/Case-Shiller index of property values in 20 cities dropped 1.9 percent in April from the same month in 2011, the smallest decline since November 2010, after decreasing 2.6 percent in the year ended March, the group said today in New York. The median forecast of 28 economists in a Bloomberg News survey projected a 2.5 percent drop.  A turnaround in prices is a necessary step toward luring more buyers and sustaining demand for housing, which is starting to stabilize after precipitating the last recession almost five years ago. Record-low borrowing costs, due in part to Federal Reserve efforts to hold down long-term rates, may keep promoting home sales in the presence of an 8.2 percent unemployment rate.  “Sales have improved and the inventory of homes for sale has been falling, which has brought a bit more balance into the market and fed into a bit of stabilization of prices.”  Estimates in the Bloomberg survey ranged from declines of 1.7 percent to 3.1 percent. The Case-Shiller index is based on a three-month average, which means the April data was influenced by transactions in March and February.

Case Shiller: House Prices increased in April - S&P/Case-Shiller released the monthly Home Price Indices for April (a 3 month average of February, March and April). This release includes prices for 20 individual cities and two composite indices (for 10 cities and 20 cities). From S&P: Home Prices Rise in April 2012 According to the S&P/Case-Shiller Home Price Indices Data through April 2012, released today by S&P Indices for its S&P/CaseShiller Home Price Indices ... showed that on average home prices increased 1.3% in the month of April for both the 10- and 20-City Composites. This comes after seven consecutive months of falling home prices as measured by both indices. April’s data indicate that on an annual basis home prices fell by 2.2% for the 10-City Composite and by 1.9% for the 20-City Composites, versus April 2011. While still negative, this is an improvement over the annual rates of -2.9% and -2.6% recorded for the month of March 2012. The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 20 index is off 33.0% from the peak, and up 0.7% (SA) in April. The Composite 20 is also up from the post-bubble low set in March (NSA).  The second graph shows the Year over year change in both indices. The Composite 10 SA is down 2.2% compared to April 2011.  The Composite 20 SA is down 1.9% compared to April 2011. This was a smaller year-over-year decline for both indexes than in March. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  Prices increased (SA) in 17 of the 20 Case-Shiller cities in April seasonally adjusted (18 cities increased NSA). Prices in Las Vegas are off 61.1% from the peak, and prices in Dallas only off 6.2% from the peak. Note that the red column (cumulative decline through April 2012) is the lowest for only a couple of cities.

Housing markets: Primed again | The Economist - IN UNSURPRISING but good news, Case-Shiller reported new home price data this morning that showed a definitive upward move in markets across the country. From March to April, Case-Shiller's 10- and 20-city indexes rose 0.7%, seasonally adjusted. All but three of the tracked markets saw month-on-month increases. Half of tracked cities notched year-on-year price increases in April. Price rises have looked imminent for some time. Sales figures have been trending upward and inventory numbers are at remarkably low levels. Rents have also been increasing, making home purchases look ever more attractive. There is still an ample stock of distressed and bank-owned homes to work off, but America seems to have achieved bottoms for both sales and prices. Housing markets have adjusted. This turning point could be a source of considerable strength for the American economy. Rising prices should have a direct wealth effect for owners and should sharply limit new defaults and foreclosures. As a result, mortgage lending should begin to look much more attractive. A return to something like normal lending conditions could turn fledgling increases in sales and construction into strong increases, boosting GDP and construction employment.

A Look at Case-Shiller, by Metro Area - Home prices showed fresh signs of stabilization in April, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 1.3% in April from the previous month and fell just 1.9% from a year earlier. Although prices continue to fall on an annual basis, the rate has slowed indicating that home prices may be close to posting year-over-year gains. Ten of the 20 cities posted annual increases in April. (Read more about why prices are rising) “While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign,” said David Blitzer, chairman of S&P’s index committee. Just one city — Detroit — posted a monthly decline in April. Partly that’s because April marks the start of the strong spring selling season when prices traditionally move higher. But on a seasonally adjusted basis, which aims to correct for the variation, 17 of the 20 cities still posted monthly gains. The overall 20-city index was up 0.7% from the previous month by that metric.

Number of Cities with Increasing House Prices - The following graph shows the number of cities with increasing house prices on a year-over-year and month-over-month basis. This graph is based on the Case-Shiller Composite 20 cities using seasonally adjusted data starting in January 2001. Most cities were seeing month-over-month increases every month through 2005. In 2006, some cities started seeing year-over-year declines (red). There were still a few cities with increasing prices in early 2007. The increases in 2009 and 2010 were related to the housing tax credit (all of those gains and more are gone). Recently prices have started increasing in more and more cities. Note: Case-Shiller data is through April.In April 2012, 17 cities saw month-over-month price increases (SA), and 10 cities saw year-over-year price increases. I expect that the number of cities with a year-over-year price increase will continue to climb, and in a few months the Case-Shiller Composite 20 index will turn positive on a year-over-year basis.

A Home Price Upswing? We All Start Small - Perhaps housing prices have finally hit bottom and even begun to recover. That is certainly the view of a growing number of experts of various kinds, including the very rarest kind – the experts who have avoided such declarations until now. The latest hopeful evidence comes from the S.&P./Case-Shiller index, released Tuesday, which shows that sales prices reported in April were higher than those reported in March in 19 of 20 major metropolitan areas. Detroit was the exception. Prices still were down 1.9 percent compared with last April, but the pace of decline has slowed considerably. As the blog Calculated Risk noted, that’s the lowest year-over-year decline since the expiration of the first-time-home buyer tax credit. But it’s worth keeping a few things in mind. First, we are still standing at the bottom of a very deep hole.  Second, the April Case-Shiller index is derived from home sales that closed between February and April, which means that many of the deals were struck even earlier than that. This, in other words, is a report about what happened during the winter. Since prices usually start to rise with the temperature, a strong winter generally is seen as an auspicious start to the year. But this was an unusually warm winter, which seems to have given a temporary and misleading boost to a range of economic indicators.

Why Home Prices Are Rising Again (According to Case-Shiller)  Home prices typically show a seasonal gain in April, and Tuesday’s report from the S&P/Case-Shiller index was no different. Home prices were up 1.3% from March for the 20-city index. After adjusting for seasonal factors (more homes generally sell in April), prices were up by 0.7%. This year was clearly better than April 2011, when monthly prices rose by 0.7%, and when adjusting for seasonality, they fell by 0.1%. On an annual basis, prices are still falling, but the pace of those declines is easing. It’s worth remembering that Case-Shiller is a very backwards looking gauge of home prices. Tuesday’s report is showing price data from sales that closed during the three-month period of February through April, which means it’s looking at homes that went under contract in the winter. The index won’t report on prices for contracts being struck right now until this fall.Still, the next few reports should be even better, and not just for the normal seasonal reasons: First, the number of homes for sale has been much lower this year than in the past few years, even though demand has returned to levels last seen in 2010, when tax credits boosted demand and sent prices up. The function of falling supply and rising demand means prices are already going up in more markets. (We wrote about this in April in a piece about the return of “bidding wars” for a handful of markets.) Second, the share of homes selling out of foreclosure has fallen. This “distressed share” is important for home-price indexes that measure repeat sales, such as the Case-Shiller index.

Real House Prices and Price-to-Rent Ratio -  I've seen some forecasts of additional 20% price declines on the repeat sales indexes. Three words: Not. Gonna. Happen. Others, like Barry Ritholtz at the Big Picture, have argued that we could see an additional 10% price decline in the Case-Shiller indexes. I think that is unlikely, but not impossible. The argument for further price declines is that there are still a large number of distressed properties in the foreclosure pipeline - and that there are over 10 million property owners with negative equity, and that could lead to even more distressed sales. So even though prices are pretty much back to "normal" based on real prices and price-to-rent ratio (see below), the argument is that all of these distressed sales could push prices down further. Also, Barry argues that prices following a bubble usually "overshoot". Those are solid arguments, but I think that some of the policy initiatives (refinance programs, emphasis on modifications, REO-to-rental and more) will lessen the downward pressure from distressed sales - and I also think any "overshoot" will be in real terms (inflation adjusted) as opposed to nominal terms. It is probably correct that any increase in house prices will lead to more inventory (sellers waiting for a "better market"), but that is an argument for why prices will not increase - as opposed to an argument for further price declines. My view is prices will be up slightly year-over-year next March (when prices usually bottom seasonally for the repeat sales indexes). Some analysts see a small decrease (like 1% to 2%) over the next 12 months, but that isn't much different than a small increase (when compared to forecasts of 10% or 20% declines). And here is another update a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index.

When will the Case-Shiller house price index turn positive Year-over-year? - The year-over-year (YoY) decline in Case-Shiller prices has been getting smaller all year, and the Zillow forecast suggests the YoY decline will be smaller still in April - and be the smallest YoY decline since the expiration of the housing tax credit. This raises the question: When will the Case-Shiller indexes turn positive year-over-year? I looked at the recent improvement in prices (comparing the month-to-month changes for the NSA index to last year). At the current pace of improvement, it looks like the YoY change will turn positive in either the August or September reports. It is important to remember that most of the sales that will be included in the August report have already been signed. The August Case-Shiller report will be a 3 month average of closing prices for June, July and August - and the contracts are usually signed 45 to 60 days before closing. So just about all of the contracts that will close in July have been signed, and probably many of the contracts that will close in August have already been signed. So any increase in inventory will probably not impact the August Case-Shiller house price report. Note: we haven't seen any increase yet through June, and I don't expect a huge surge in inventory - but others do.

Reviving Real Estate Requires Collective Action, by Robert Shiller - In the current real estate market, the relevant group is enormous and complex. It includes those who own first and second mortgages or home equity lines of credit or residential mortgage-backed securities or the various tranches of mortgage collateralized debt obligations or shares in banks and finance companies that in turn own mortgages. These people live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break.  My colleague Karl Case and I showed in 1996 that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage. And it is well known that in foreclosures, lenders lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don’t default.  If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy.  John Geanakoplos, a Yale economist, and Susan P. Koniak, a Boston University law professor, have proposed legislation that gives community-based, government-appointed trustees a central role. The trustees would have the authority to impose a write-down of mortgage principal that served the interests of mortgage issuers as a group, without having to prove that each and every one would be better off. But Congress has not acted on their idea. And so we are still lacking the authority to make everyone sit down.

Robert Shiller Goes Off The Deep End With His New Housing Proposal - Robert Shiller has finally gone off the deep end. He wants to condemn millions of US guaranteed mortgages from the bankster mafia.  Shiller: If mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy. John Geanakoplos, a Yale economist, and Susan P. Koniak, a Boston University law professor, have proposed legislation that gives community-based, government-appointed trustees a central role. The trustees would have the authority to impose a write-down of mortgage principal that served the interests of mortgage issuers as a group, without having to prove that each and every one would be better off. But Congress has not acted on their idea…This is nuts. Mass condemning mortgages would be an unworkable mess, would take years, and would fail.  The lawyers and appraisers would make out like bandits though.  And for sure, the taxpayers would get screwed, just like they always do.

New Indications Housing Recovery Is Under Way - Announcements of a housing recovery have become a wrongheaded rite of summer, but after several years of false hopes, evidence is accumulating that the optimists may finally be right.The housing market is starting to recover. Prices are rising. Sales are increasing. Home builders are clearing lots and raising frames. Joe Niece, a real estate agent in the Minneapolis suburb of Eden Prairie, said he recently concluded a streak of 13 consecutive bidding wars over homes that his clients wanted to buy. Each sold above the asking price. Like the economic recovery that began three years ago, what happens next is likely to prove a little disappointing. The pace of recovery will probably be slow, and the prices of many homes will continue to decline. Millions of people remain underwater, owing more on their homes than the homes are worth, and unable to sell. Millions of families still face foreclosure. And a setback in the still-fragile economic recovery could easily reverse the uptick in housing prices, too. But roughly six years after the housing market began its longest and deepest slide since the Great Depression, a growing number of experts and people who actually put money into housing believe the end has come.

Irrational Exuberance, Housing Edition - It’s not only reporters from areas decimated by the bubble that are looking for signs of a housing bottom. Bill McBride of Calculated Risk (CR) calls a housing bottom like clockwork. CR somehow fails to reconcile data about underwater homeowners being unable to sell with the low inventory levels. There’s fewer houses for sale so all is peachy; never mind that inventory is being manipulated by servicers and regular sellers are locked-out of the market through negative equity. Yale Prof. Robert Shiller, co-creator of the well-known Case-Shiller house price index, takes a more sober approach. Shiller argues in the New York Times until meaningful principal reductions are put in place that house prices are hosed. Pricing may bump up on artificial scarcity caused by the relatively low number of foreclosures after the robo-signing scandal, but in the long run underwater borrowers are likely to drown. Further, because of sky-high loss severities in foreclosures – my own data shows it is not at all uncommon for investors to lose the entire face value of a mortgage in a foreclosure – principal reductions make good business sense. Shiller embraces an idea being floated about lately; having municipalities use eminent domain to “take” mortgages at fair market value. Databases like the one I’ve been compiling clearly show the loss severity of similar mortgages in similar ZIP codes, allowing municipalities to ascertain fair market value of the mortgages, as opposed to the houses. In bubble-states, where negative equity issues are most pronounced, fair market value of most mortgage would be no more than 20-percent of the face value of the first mortgages – and oftentimes far less; no more than a few cents on the dollar – while second liens would be worthless.

The Housing Market: Is It Really Getting Better? - I’ve been meaning to post these slides I put together for a housing panel last week.  Part of my rap was that there’s some evidence—dare I say it?—that the housing market has finally carved out a bottom.  I know—believe me, I know.  We’ve been here before only to have hopes dashed as home prices take another leg down.  How do I know this time is different? I don’t, but I’ve got some indicators that are suggestive that national prices are stabilizing and that supply and demand are better aligned.  That’s not to say you can’t find places that are still over-supplied where prices are declining.  It’s not to say we’ve cleared out the foreclosure pipeline.  And millions remain underwater. It’s only to say that we’re finally bumping along the bottom and I’m somewhat confident that national prices have stabilized and will eventually begin to rise.   (The NYT takes a similar view today…) Here’s why. The first figure shows a price movement we haven’t seen heretofore: an increase in the prices of distressed sales.  CoreLogic data break sales out into distressed (short sales, foreclosed properties) and non-distressed.  The figure shows that both have broken zero on a year-over-year basis, with the distressed sales up 1% over the past year.

10 Million Underwater Mortgages And Shadow Inventory Worth $246B Mean Housing Trouble -- Don’t be so sure the housing market is on its way back to health.  Despite the first monthly increase in home prices in 7 months, as the Case-Shiller indexes showed on Tuesday1, there are still more than 10 million properties with underwater mortgages, and a shadow inventory of 1.5 million, or four months supply.  Negative equity will continue to take its toll on consumption, while the shadow inventory, worth about $246 billion according to CoreLogic, will constrict lending and probably affect banks’ earnings.  Many have been claiming the housing market is on the verge of a comeback, with Barclays2, for example, expecting prices to rise about 3% in 2012. The negative conditions that have prevailed in residential real estate could continue for a lot longer than some of these people expect, though.  A note by Goldman Sachs’ global economics team highlights the risk.  Noting that there are between 10 and 11 million properties with underwater mortgages, Goldman’s analysts explain: Even if a small fraction of these borrowers were to default on their mortgages in the near future, either because of negative shocks to borrowers’ ability to pay or due to strategic defaults, it could result in another sharp decline in home prices and impede the ongoing recovery in the housing market.

Three Key Reasons Housing Not Coming Back: Demographics, Student Debt, No Jobs - Ben Bernanke is trying like mad to stimulate credit and lending but to no avail. It's an uphill battle because of demographics, student debt, and lack of jobs. Citing falling debt-service needs, some economists think consumers may be ready to go on a borrowing spree. They are badly mistaken. I agree with Jed Graham on Investor's Business Daily who says falling debt-service needs is an illusion. Graham makes the case in Consumer Credit Impaired By Under-45 Job, Debt Woes. Nearly four years after a borrowing binge gave way to financial crisis, have households slashed enough debt to take on new credit and start spending again? Yes, says a growing chorus of economists, with some evidence to back them up. The Federal Reserve's ratio of debt service payments to disposable income is at its lowest level since 1994. But that traditional measure is a poor guide today, as credit-hungry adults under 45 bear the brunt of the jobs, housing and student loan crises. Considering where more of the income is coming from (government supports), who's earning a bigger share of wages (baby boomers) and which type of debt has been on the rise (student loans), re-leveraging may be a long way off.

NAR: Pending home sales index increased 5.9% in May - From the NAR: Pending Home Sales Up in May, Continue Pattern of Strong Annual Gains The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 5.9 percent to 101.1 in May from 95.5 in April and is 13.3 percent above May 2011 when it was 89.2. The data reflect contracts but not closings. The index also reached 101.1 in March, which is the highest level since April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit. The PHSI in the Northeast increased 4.8 percent to 82.9 in May and is 19.8 percent above May 2011. In the Midwest the index rose 6.3 percent to 98.9 in May and is 22.1 percent higher than a year ago. Pending home sales in the South increased 1.1 percent to an index of 106.9 in May and are 11.9 percent above May 2011. In the West the index jumped 14.5 percent in May to 108.7 and is 4.8 percent stronger than a year ago. This was above the consensus of a 1.2% increase for this index. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in June and July.

Housing: Inventory and Negative Equity - In the Pending Home Sales report this morning, the NAR analysts noted:  Low inventory results partly from underwater homeowners who are unwilling to list their homes, which would require a lengthy short sale process, or additional cash to complete the transaction. NAR estimates 85 percent of homeowners have positive equity, with 15 percent in an underwater situation. Zillow chief economist Stan Humphries has been discussing this: The Connection Between Negative Equity, Inventory Shortage and Increasing Home Values: Why the Bottom Won’t Be as Boring as We Expected What markets like Miami and Phoenix may now be showing us is that negative equity has another very powerful effect on the supply side beyond increasing the flow of foreclosed homes onto the market: all the households that we predicted would be trapped in their homes and unable to buy new ones are similarly unable to sell their current homes, severely decreasing the overall supply of homes on the market. ...And negative equity may well be so constraining the supply side of the housing market that it’s creating acute inventory shortages that are bidding up prices. Negative equity is probably contributing to the lower levels of inventory, but I think there are other factors too. One key is the substantial increase in investor owned single family homes. These are not "flippers", but cash flow investors - and these investors will not sell just because prices have risen a few percent.

Starting life in the negative net worth column. What the Fed does not want you to know about American net worth figures.  The reports on American wealth from the Federal Reserve and U.S. Census did not get the press they deserved.  You would think that an overall decline of 40 percent for household net worth would get the attention of the press but that might throw a wrench into the consumption machine that they are promoting.  Up until the housing bubble burst, practically every other commercial was financed by real estate firms and banking institutions.  Once that money dried up it was as if nothing happened.  This ability to ignore crucial figures is partly to blame for our slowly evaporating middle class.  It seems people are more comfortable losing this little by little versus questioning the bigger aspects of the system.  The Fed and Census reports only go up to the end of 2010.  Yet if we were to go further we would realize that the typical net worth of Americans has fallen even more while a very tiny minority has been increasing their wealth at a steady clip.

Get used to your crummy shopping center - — If there’s a crummy shopping center in your neighborhood, it will probably only get crummier.  That’s Don Wood’s take, anyway. He is the chief executive officer of Federal Realty Investment Trust, a 50-year-old real estate investment trust with nearly 20 million square feet of un-crummy retail space in affluent cities on both coasts and some hoity-toity places in between.The nation is increasingly dotted with unsightly boxes that used to be Circuit City, Borders and Best Buy stores. Nobody has written a book called “101 Uses For A Used Blockbuster.” And there are only so many churches, tanning salons and “We Buy Gold” stores to fill these deteriorating spaces.   “I have never seen a period of time where the split between the haves and the have-nots is as wide as it is today.”

Consumer Confidence Hits Lowest Level Since January - U.S. consumer confidence fell for the fourth straight month to its lowest level since January, and the consumer expectations index was at its lowest level since November, according to a private sector report released on Tuesday. The Conference Board, an industry group, said its index of consumer attitudes fell to 62.0 from a downwardly revised 64.4 the month before. Economists had expected a reading of 63.5, according to a Reuters poll. May was originally reported as 64.9. "The improvement in the Present Situation Index, coupled with a moderate softening in consumer expectations, suggests there will be little change in the pace of economic activity in the near-term," said Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement. The expectations index dropped five points, to 72.3 from 77.3, while the present situation index edged up slightly to 46.6 from 44.9 last month. "It is important to keep in mind the expectations component bore the brunt and consumers are more worried about the backdrop in the months ahead," said Jacob Oubina, senior U.S. economist at RBC Capital Markets. "Not only the current month, but the prior month was revised down as well. The labor component was also down, which does not bode well for the upcoming jobs numbers."

June Consumer Confidence: The Fourth Month of Decline - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through June 14th. The 60.0 reading was well below the consensus estimate of 64.0 reported by This is a decline from last month's 64.4, which is a downward revision from the Conference Board's previously reported 64.9. In fact, this is the fourth consecutive decline, something that hasn't happened since the six consecutive monthly declines of Jan-June 2008. Here is an excerpt from the Conference Board report."Consumer Confidence declined in June, the fourth consecutive moderate decline. Consumers were somewhat more positive about current conditions, but slightly more pessimistic about the short-term outlook. Income expectations, which had improved last month, declined in June. If this trend continues, spending may be restrained in the short-term. The improvement in the Present Situation Index, coupled with a moderate softening in consumer expectations, suggests there will be little change in the pace of economic activity in the near-term."  Consumers' assessment of current conditions improved slightly in June. Those claiming business conditions are "good" increased to 14.9 percent from 13.6 percent, however, those saying business conditions are "bad" increased to 35.1 percent from 34.7 percent. Consumers’ appraisal of the job market was mixed. Those stating jobs are "hard to get" increased to 41.5 percent from 40.9 percent, while those claiming jobs are "plentiful" increased to 7.8 percent from 7.5 percent.

Vital Signs: Consumer Confidence Dips -- Consumers are becoming less confident about the economy. After dropping sharply last summer, the Conference Board’s index of consumer confidence rebounded in late 2011 and early 2012 as job growth accelerated. That momentum has since stalled, however, and confidence in June fell for the third consecutive month, to its lowest level since January.

Breaking Down Consumer Confidence, Home Prices = Senior Economist Gus Faucher of PNC Financial Services talks with Jim Chesko about today’s Conference Board report showing that consumer confidence soured in June for the fourth month in a row.

Michigan Consumer Sentiment: Lowest in Six Months - The University of Michigan Consumer Sentiment Index final number for June came in at 73.2, a 6.1 point drop from the May final of 79.3 and the weakest reading in six months. Today's number was below the's consensus forecast of 74.1. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is about 14% below the average reading (arithmetic mean), 13% below the geometric mean, and 14% below the regression line on the chart above. The current index level is at the 21.5 percentile of the 414 monthly data points in this series.

Consumers Become More Pessimistic - U.S. consumers were more worried about the economy at the end of June than they were last month, according to data released Friday. The Thomson Reuters/University of Michigan consumer-sentiment index fell to 73.2 at the end of June compared with a reading of 74.1 in early June and a final-May reading of 79.3, according to an economist who has seen the report. Consumers are benefiting from a decline in gasoline prices, but they are worried about weaker labor markets and financial-market volatility caused by uncertainty about the euro-zone debt crisis. Economists surveyed by Dow Jones Newswires had expected the end-of-June index to edge up to 74.3. The sentiment drop clouds the outlook for the important consumer sector which accounts for the bulk of U.S. economic activity. Earlier Friday, the government reported household spending was flat in May.

Consumer Confidence Climbs to 2-Month High -- Consumer confidence in the U.S. climbed last week to the highest level in two months as optimism over personal finances helped alleviate growing apprehension about the economy. The Bloomberg Consumer Comfort Index rose to minus 36.1 in the week ended June 24 from minus 37.9 in the previous period. The gauge of household finances was positive for the first time since April, while sentiment toward the state of the economy dropped to the lowest level since February.  A 57-cent decrease in gasoline prices since early April is providing some relief, helping offset concern the job market is weakening by allowing employed Americans to stretch their paychecks. At the same time, sentiment among higher-income households turned negative for the first time in three months as Europe’s debt crisis hurts stock prices.

Personal Income increased 0.2% in May, Spending decreased slightly - The BEA released the Personal Income and Outlays report for May:  Personal income increased $25.4 billion, or 0.2 percent ... in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $4.7 billion, or less than 0.1 percent. ..Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in May, the same increase as in April. ... PCE price index -- The price index for PCE decreased 0.2 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.  The following graph shows real Personal Consumption Expenditures (PCE) through May (2005 dollars) This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. You can really see the slow down in Q2 of last year. Using the two-month method, it appears real PCE will increase around 1.4% in Q2 (PCE is the largest component of GDP); the mid-month method suggests an increase of less than 1% in Q2. Also - so far - it appears spending is soft in June, so Q2 PCE growth will probably be fairly weak. Another key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up 1.8%. And it looks like the year-over-year increases will decline further in June.

Consumer Spending In U.S. Stalls As Hiring Weakens - Consumer spending stalled in May as stagnant wages and slackening employment held back the biggest part of the U.S. economy. Purchases were little changed after a 0.1 percent rise the prior month that was smaller than initially reported, according to Commerce Department figures issued today in Washington. Another report showed household sentiment dropped this month to the lowest level of the year. A lack of jobs may prompt Americans to keep focusing on replenishing depleted nest eggs, hurting sales at retailers. Economists at Goldman Sachs Group Inc. and Morgan Stanley were among those cutting forecasts after the figures, indicating the economy slowed further in the second quarter.  The data are “consistent with a weakening growth backdrop,” “There’s still this propensity for consumers to boost their rate of savings, which is what you’d expect in an environment where they are very skeptical about the outlook for the labor market.”

May consumer spending weakest in six months  (Reuters) - Consumer spending growth ground to a halt in May as auto purchases flagged, while confidence ebbed to a six-month low in June, the latest signs of trouble for the economy. Although manufacturing activity in the Midwest picked up this month, it offered little cheer for an economic recovery that has been hit by turbulence from the debt crisis in Europe and a lack of clarity on the course of fiscal policy at home. "We are at a stall speed expansion here," said Tim Quinlan, an economist at Wells Fargo in Charlotte, North Carolina. "We have a consumer who is sort of losing steam." Spending was unchanged in May, marking the first time in six months it had not risen, the Commerce Department said on Friday. It also lowered its gauge of April's spending to show a rise of just 0.1 percent. The weak data prompted economists to lower forecasts for second-quarter economic growth. Goldman Sachs trimmed its estimate to an annual pace of 1.6 percent from 1.7 percent. That would mark a slowdown from the first quarter's already anemic 1.9 percent pace.

Personal Savings Rate Rises To Highest Since January As Spending Grows At Lowest Rate In One Year The latest confirmation that the US consumer is rapidly retrenching ahead of the great unknown which is the US fiscal cliff was the just released May data on Personal Spending and Income, both of which came in as expected, at 0.0% and 0.2% over the prior month. This was the lowest rate of increase in the Personal Spending rate since June 2011, when spending posted a -0.2% decline. This was to be expected considering the ongoing contraction on the income side: "Private wage and salary disbursements increased $1.1 billion in May, compared with an increase of $5.3 billion in April. Goods-producing industries' payrolls decreased $7.0 billion, in contrast to an increase of $5.6 billion; manufacturing payrolls decreased $4.5 billion, in contrast to an increase of $3.2 billion." The collapse in manufacturing wages was somewhat offset by gains in services: "Services-producing industries' payrolls increased $8.3 billion, in contrast to a decrease of $0.4 billion. Government wage and salary disbursements increased $0.3 billion, compared with an increase of $0.4 billion." And for the best indication of just how consumers feel about the economy, one just needs to look at the savings rate: at 3.9%, this was the highest savings rate since January as any free money enters not the economy, but bank checking accounts and counterparty risk-free mattresses.

Restaurant Performance Index declines in May, Still shows expansion - From the National Restaurant Association: Restaurant Performance Index Remains Above 100 for Seventh Consecutive Month, Reflecting Continued Positive Sales The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.4 in May, down 0.2 percent from April’s level of 101.6. Despite the decline, May represented the seventh consecutive month that the RPI stood above 100, which signifies expansion in the index of key industry indicators. Restaurant operators reported positive same-store sales for the 12th consecutive month in May ... While sales results remained positive, restaurant operators reported softer customer traffic results in May.(see graph)

Gasoline Prices: $3 per gallon? - The roller-coaster ride for gasoline prices continue ... remember when some forecasters were predicting $5 per gallon? Now we are seeing prediction of $3 per gallon.  From the Atlantic Journal Constitution: Expect gas prices to fall below $3 Is it possible the average price at the pump could be below $3 a gallon by the time leaves begin to change? Absolutely, according to experts who follow fuel price trends, and some areas of Georgia have already broken the barrier. . Barring any unforeseen calamity that might disrupt production or distribution ... the price trend should continue, even with the arrival of summer and more vehicles on the road for vacations. “[T]he market is suggesting gas below $3 by Halloween, and certainly by Thanksgiving,” Tom Kloza of the Oil Price Information Service ... There are always threats to the oil supply - Iran, a storm in the GOM, a strike in Norway, but right now it looks like prices will continue to decline with adequate supply and week demand growth. Oil prices are still moving down. Brent is down to $90.98 per barrel, down another 10% over the last two weeks, and WTI is down to $79.76. The lower oil prices will not only lead to lower gasoline prices, but also a lower trade deficit and lower headline inflation (CPI)

Gasoline prices coming down - West Texas Intermediate crude oil, which had been selling for $105 a barrel at the end of March, fell to $80 a barrel last week, while Brent has come from $125 down to near $90. These price declines will translate into substantial savings for U.S. consumers in the weeks ahead. Since Brent and WTI diverged, it has been Brent that matters for U.S. retail gasoline prices; this fact and the reasons for it were discussed here. A regression of the average U.S. retail gasoline price on the price of Brent over 2000-2012 captures the close relation (OLS standard errors in parentheses): The price of gasoline and price of Brent turn out to be cointegrated, meaning that any permanent change in the price of Brent eventually shows up as a permanent change in the price of gasoline. The coefficients of the above relation are very much what you'd expect. A barrel holds 42 gallons, and the estimated coefficient (0.025) is 1/40. The intercept (0.84) captures an average state and federal tax of 50 cents per gallon plus a bit over 30 cents in markups and other costs.

Weekly Gasoline Update: A Dramatic Price Drop - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data with an overlay of West Texas Crude (WTIC). Gasoline prices at the pump, rounded to the penny, declined dramatically over the past week: regular fell ten cents and premium nine. This is the eleventh week of declines and the largest by almost double. Previously the largest drop in regular was the six-cent decline three weeks ago. Regular is now up only 21 cents and premium 19 cents from their interim weekly lows in the December 19th EIA report. As I write this, still shows the two non-continental states with the average price of gasoline above $4. California has the highest mainland prices, averaging around $3.81 a gallon with Washington as the second highest at $3.74. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer:

DOT: Vehicle Miles Driven decreased 0.4% in April -- The Department of Transportation (DOT) reported last week: Travel on all roads and streets changed by -0.4% (-1.0 billion vehicle miles) for April 2012 as compared with April 2011. Travel for the month is estimated to be 247.2 billion vehicle miles. The following graph shows the rolling 12 month total vehicle miles driven.  The rolling 12 month total is mostly moving sideways. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months.  Currently miles driven has been below the previous peak for 53 months - and still counting.  The second graph shows the year-over-year change from the same month in the previous year.  Gasoline prices peaked in April at close to $4.00 per gallon, and that was higher than the $3.85 per gallon drivers paid in April 2011 - so it makes sense that driving was off a little year-over-year. Gasoline prices were down in May to an average of $3.79 per gallon according to the EIA. Last year, prices in May averaged $3.96 per gallon, so I'd expect miles driven to up year-over-year in May.

Vehicle Miles Driven: The Recovery Shifts Into Reverse - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through April. Travel on all roads and streets declined by 0.4% (-1.0 billion vehicle miles) for April 2012 as compared with April 2011. The 12-month moving average of miles driven declined by 0.7% from April a year ago. The latest report documents the first month-over-month decrease after four consecutive monthly increases (PDF report). Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it.  My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Vital Signs: Lessors’ Confidence Slipping - Confidence is dropping among those who help firms finance and lease new and used equipment. A measure of optimism about current business conditions and future economic trends among executives in the industry sank to 48.5 in June from 59.2 in May — the second lowest level since January 2010. Firms are worried about Europe’s troubles, U.S. unemployment and political uncertainty.

Factory Activity Rebounds in Dallas Fed Region - Factory activity in the Federal Reserve Bank of Dallas‘s district came back to life in June. The bank said in a report Monday that its general business activity index for June came in at 5.8, from the prior month’s -5.1. Readings under zero denote contracting activity, while those over zero indicate expansion. The June production index hit a solid 15.5, from 5.5 in May. Hiring at Texas factories also accelerated, with the employment index at 13.7, versus 8.5 in May. Meanwhile, price pressures faded, with the price paid for raw materials index coming in at 2.7, from 20.2, while the prices received index stood at -5.8, from May’s -0.5. The Dallas Fed said that the June new orders index came in at 7.9, after May’s -0.6. The outlook for factories, however, cooled a bit, with the six month ahead general business activity index coming in at 1.3, from 4.3 last month.

Dallas Fed: Regional Manufacturing Activity "Surges" in June - Here is a bit of an outlier this month ... earlier from the Dallas Fed: Texas Manufacturing Activity Surges but Outlook Largely Unchanged: Texas factory activity surged in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 5.5 to 15.5, posting its strongest reading in 15 months. Other measures of current manufacturing conditions also indicated strengthening activity in June. The new orders index rose to 7.9, following three readings around zero, suggesting demand finally grew after staying flat since February. ... The general business activity index had been negative in April and May but increased to 5.8 this month. ... Labor market indicators reflected stronger labor demand growth and steady workweeks. Employment grew at a faster pace in June, with the index rising from 8.5 to 13.7. Twenty-one percent of firms reported hiring new workers, while 8 percent reported layoffs. The hours worked index was 1, suggesting little change in workweek length. This was above expectations of a zero reading for the general business activity index.

Richmond Fed Manufacturing Index Drops - Manufacturers in the central Atlantic region of the U.S. see economic activity shrinking this month, the Federal Reserve Bank of Richmond reported Tuesday. The service sector, however, reported revenue bouncing back. Employment indicators weakened in both sectors. The regional central bank’s manufacturing general-business index stumbled to -3 from 4 in May. Numbers below zero indicate a contraction in activity.

Chicago Fed Manufacturing Index Drops - Manufacturing output in the U.S. Midwest is estimated to have fallen 1% in May, weighed by a decline in auto production. The Federal Reserve Bank of Chicago said Wednesday that its Midwest Manufacturing Index dipped to a seasonally-adjusted 93.4, its second decline in three months after gaining 2.5% in April. The fall was driven by a 2.7% sequential drop in auto output compared with April in what is still the industry’s heartland in the U.S. National auto output fell 0.9% in May.

Kansas City Fed Reports Slowing Manufacturing Activity - Manufacturing activity in the Federal Reserve Bank of Kansas City‘s district is slowing sharply this month as reports on business conditions retreat after showing strength in May, according to a report released by the bank Thursday. The Kansas City Fed’s manufacturing composite index–an average of the indexes covering production, new orders, employment, delivery times and raw-materials inventories–fell to 3 in June retracing a rebound to 9 in May up from 3 in April. Readings above zero denote expansion. On a year-over-year comparison, the composite index dropped to 24 from 27.

Kansas City Fed: Growth in Regional Manufacturing Activity Slowed in June - From the Kansas City Fed: Growth in Tenth District Manufacturing Eased Further Activity Slowed Growth in Tenth District manufacturing activity slowed in June, and expectations eased as producers grew more uncertain.. ... The month-over-month composite index was 3 in June, down from 9 in May and equal to 3 in April ... The production index eased from 17 to 12, and the new orders index fell back into negative territory after rising slightly last month. Order backlogs continued to ease. The employment index moved lower but remained positive, while the new orders for exports index decreased. The regional manufacturing surveys were mostly weaker in June, especially the Philly Fed index. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index: The New York and Philly Fed surveys are averaged together (dashed green, through June), and five Fed surveys are averaged (blue, through June) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through May (right axis).

Chicago PMI inches higher in June -- A measure of Chicago-area manufacturing conditions in June edged higher, according to ISM-Chicago. The Chicago PMI increased to 52.9% from May levels of 52.7%. Economists polled by MarketWatch anticipated a reading of 53.0%. There was a sizable rebound of production, a slight deterioration in new orders and a further decline in order backlogs as well as an improvement in employment and slower supplier deliveries, the group said. Any reading above 50% indicates expansion.

Durable Goods Orders Up 1.1%, Above Expectations - The May Advance Report on May Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in May increased $2.3 billion or 1.1 percent to $217.2 billion, the U.S. Census Bureau announced today. This increase, up following two consecutive monthly decreases, followed a 0.2 percent April decrease. Excluding transportation, new orders increased 0.4 percent. Excluding defense, new orders increased 0.7 percent.  Transportation equipment, up three of the last four months, had the largest increase, $1.7 billion or 2.7 percent to $63.1 billion. This was led by nondefense aircraft and parts, which increased $0.4 billion. Download full PDF  If we exclude both transportation and defense, "core" durable goods orders actually declined 0.1 percent in May following a 1.0 percent increase in April, a 0.8 percent decline in March snd a 0.8 percent gain February. In other words, behavior of this metric has been essentially flat in 2012. The first chart is an overlay of durable goods new orders and the S&P 500.  An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

The ''Real'' Goods on the Latest Durable Goods Orders - Earlier this morning I posted an update on the May Advance Report on April Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer a quite sobering alternative to the standard reports on the nominal monthly data.Here is the same chart, this time ex Transportation.  Now we'll exclude Defense orders.  And now we'll exclude both Transportation and Defense for a better look at core durable goods orders. Finally, here is the chart that I believe gives the most accurate view of what Durable Goods Orders is telling us about the long-term economic trend. The three-month moving average of the real headline series per capita, nothing excluded, helps us filter out the noise of volatility to see the big picture.

Rise in Durables Orders Not Enough to Dispel Caution - A better-than-expected rise in orders for long-lasting goods wasn’t enough to cheer economists erring on the side of caution amid broader slowness. “People are taking this to be a stronger report than it really is,” said Paul Edelstein, an economist with IHS Global Insight. Orders for durable goods rose 1.1% to $217.2 billion in May — the first gain in three months. The consensus of economists surveyed by Dow Jones Newswires had predicted a more modest 0.4% increase. The jump in orders for durable goods, which include appliances and machinery built to last at least three years, was driven by transportation equipment — up 2.7%. Demand for both commercial and defense aircraft also increased by 5.5%. Excluding the volatile transportation sector, orders only increased by 0.7%. Meanwhile, orders were further skewed by a 4.1% increase in machinery, according to Edelstein. One major component, turbines, is seeing strong seasonal demand and is coming off a drop in April. Orders for nondefense capital goods excluding aircraft, which is an indicator of future investment by business owners, increased by 1.6%, but Edelstein suggests that overall business demand for capital goods has slowed.

Vital Signs: Cooling Demand for Durable Goods - Demand for long-lasting goods has been slowing down. New orders for durable goods — items expected to last at least three years — grew by 4.6% in May compared with a year earlier, more slowly than during April. Excluding volatile transportation items such as airplanes and cars, orders rose just 3.8% from the previous year, the slowest rate of growth since 2009. The manufacturing sector was an area of strength earlier in the recovery but has cooled amid global economic uncertainty.

The Political Empowerment of the Working Class is the Key to Better Employment Policy, by Mark Thoma: The high unemployment rate ought to be a national emergency. There are millions of people in need of jobs, the lost income as a result of the recession totals hundreds of billions of dollars annually, and the longer the problem persists, the more permanent the damage becomes. Why doesn’t the unemployment problem get more attention? Why have other worries such as inflation and debt reduction dominated the conversation instead? As I noted at the end of my last column, the increased concentration of political power at the top of the income distribution provides much of the explanation. Consider the Federal Reserve. Again and again we hear Federal Reserve officials say that an outbreak of inflation could undermine the Fed’s hard-earned credibility and threaten its independence from Congress. But why is the Fed only worried about inflation? Why aren’t officials at the Fed just as worried about Congress reducing the Fed’s independence because of high and persistent unemployment? Similar questions can be asked about fiscal policy. Why is most of the discussion in Congress focused on the national debt rather than the unemployed? Is it because the wealthy fear that they will be the ones asked to pay for monetary and fiscal policies that mostly benefit others, and since they have the most political power their interests – keeping inflation low, cutting spending, and lowering tax burdens – dominate policy discussions?

Fourteen Minutes a Day: What the Great Recession has Done to the Way We Spend our Time - Writers of economics textbooks like to remind us that official employment and GDP data are not very good measures of how hard we work or of the goods and services we produce, but what alternatives do we have? One little­-noticed alterative is the annual American Time Use Survey from the Bureau of Labor Statistics, which provides 24/7 coverage of the activities of the civilian population aged 15 and older. The BLS released the 2011 survey last Friday. Comparing it to the 2007 data provides an interesting perspective on how the Great Recession has affected our lives. We work less, of course. From 2007 to 2011, the employment-population ratio, one broad indicator of how much we work, fell from 63 percent to 58.2 percent, a 7.6 percent decrease. The time use survey shows the same change as a 6.3 percent decrease, from 3.81 to 3.57 hours, in the daily average time spent at work and in work-related activities like commuting. That comes out to 14.4 minutes less work per day. Fourteen minutes? Is this whole Great Recession thing, this whole “It’s the Jobs, Stupid!” election thing—is it all about 14 minutes a day? Yep. If that 14 minutes less a day were spread equally among the whole adult civilian population, we’d hardly notice the difference. According to the time use survey, we spend more time than that just shaving and doing our nails.

U.S. Jobless Claims Hover Near 2012 High - The number of applications for unemployment benefits hovered last week near the highest level of the year, showing little improvement in the U.S. labor market. Jobless claims decreased by 6,000 to 386,000 in the week ended June 23, in line with the median forecast of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The prior week’s reading was revised up to 392,000 from 387,000, matching an April figure as the steepest of 2012. Concern about the fallout from the European debt crisis and the so-called fiscal cliff that will face the U.S. at the end of this year may prompt employers to keep payrolls lean. Federal Reserve policy makers last week expanded a program to replace short-term bonds with longer-term debt in a bid to spur growth and trim a jobless rate that’s exceeded 8 percent for 40 consecutive months.

Weekly Unemployment Claims: Slightly Above Expectations - The Unemployment Insurance Weekly Claims Report was released this morning for last week. At first glance the 386,000 new claims is a 6,000 decrease from last week's number, but last week was revised upward by 5,000. The less volatile and closely watched four-week moving average dropped by 750 to 386,750. Here is the official statement from the Department of Labor:  In the week ending June 23, the advance figure for seasonally adjusted initial claims was 386,000, a decrease of 6,000 from the previous week's revised figure of 392,000. The 4-week moving average was 386,750, a decrease of 750 from the previous week's revised average of 387,500.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending June 16, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending June 16 was 3,296,000, a decrease of 15,000 from the preceding week's revised level of 3,311,000. The 4-week moving average was 3,306,000, an increase of 9,250 from the preceding week's revised average of 3,296,750.  Today's seasonally adjusted was 1,000 higher than the consensus estimate of 385K. As we can see, there's a good bit of volatility in this indicator, which is why the 4-week moving average (shown in the callouts) is a more useful number than the weekly data.

Vital Signs: Jobless Claims Remain Elevated - Fewer Americans filed new claims for jobless benefits last week. The four-week moving average of first-time unemployment filings, which smooths out weekly volatility, fell slightly to 386,750, down 750 from a week earlier. But claims are still up sharply from March, when they briefly dropped below 365,000, suggesting the labor market has continued to weaken in June after showing signs of improvement earlier this year.

For Middle-Aged Job Seekers, a Long Road Back  -- Much of the attention during the prolonged U.S. employment crisis has been on high rates of joblessness among young people. Less noticed, but no less significant to many economists, has been the plight of the middle-aged. More than 3.5 million Americans between the ages of 45 and 64 were unemployed as of May, 39% of them for a year or more—a rate of long-term unemployment that is unprecedented in modern U.S. history, and far higher than among younger workers. Millions more have quit looking for work or, like Mr. Daniel, have taken part-time jobs to get by.  The two decades between 40 and 60 are meant to be workers' prime years for earning and building wealth, the period when they buy homes, send children to college and save for retirement. Unemployment, especially for an extended period, can short-circuit that process. The effect can span generations, because middle-age workers are more likely to be supporting retired parents, sending their children to college or supporting adult children. Part of what set the most recent recession apart from the milder downturns of the 1990s and early 2000s is that this recession didn't primarily strike young workers, or those with erratic work histories. It also hit productive, steady workers in the prime of their careers—people who are ordinarily the backbone of the economy.

Economist shows the value of moving back with mom and dad - Kaplan used data on nearly 1,500 men born between 1980 and 1984. Surveys tracked the men through their 20s, capturing employment status and living arrangements for each month. By the age of 23, nearly 40 percent of the men in the sample had returned home for at least a month after initially moving away from home. Those who stopped working were 63 percent more likely to back move home in the following three months, compared to those who continued to work. Constraints of the survey data forced Kaplan to limit his sample to men who did not go to college, but an additional dataset suggests that the phenomenon applies to the broader population. "When we look at aggregate state-level data we see a similar pattern," Kaplan said. "As a state's unemployment level increases, so do co-residency rates." The data show an important long-term advantage to moving home after a job loss. Take for example an average person in Kaplan's sample who loses his job at the age of 20. People in that situation had earnings at age 26 that were 25 percent lower than someone who did not lose a job. However, this long-term effect was concentrated almost entirely among youths who did not live with their parents and did not return home after their job loss. Those who lost a job and did move back home had essentially the same earnings in later years as people who had never lost a job.

Paycheck Fairness and Market Failure -- Republicans have successfully shoved the Paycheck Fairness Act back into the closet, but it will eventually pop out again, possibly taking some hinges with it. The debate over this proposed legislation reveals serious flaws in reasoning about the impact of public efforts to promote fair pay.  The Paycheck Fairness Act would have required employers to give a “business” reason for paying men and women different wages for equal work. It would also have prohibited retaliation against employees who revealed wage information. Criticisms of the proposed legislation took several forms. A common claim was that it would do more harm than good, because pay discrimination is not the most important cause of gender disparities. Conservatives are not the only ones who insist that women are paid less primarily because they choose to devote more time to family responsibilities than men do. The New York Times columnist Eduardo Porter recently articulated a similar argument. But pay discrimination and choices to take time out of paid employment are complementary rather than competing explanations of gender differences in pay. Women who are paid less — or who anticipate fewer opportunities for promotion — than their male counterparts are more likely to drop out of paid employment. Their choices represent, in part, a response to discrimination.

Class war at the Supreme Court - The Washington Post: On the eve of the Supreme Court’s much anticipated ruling on Obamacare, here is a simple test for detecting the politics behind a decision: When reading the rulings, look for the double standards and answers to questions not posed by the cases themselves. By those measures, the Supreme Court’s record in the past week fairly reeks of the justices’ politics. Exhibit A is Justice Samuel Alito’s majority opinion in Knox v. Service Employees International Union, Local 1000, in which nonunion California state employees whose wages and benefits were nonetheless set through the collective bargaining process of SEIU — the state’s largest union — sued the local to get back a special dues assessment it levied in 2005 to fight two ballot measures. The union’s normal practice was to allow nonmembers to opt out of paying the roughly 44 percent of dues that went to matters not directly related to collective bargaining, such as election campaigns. In this instance, however, no such opt-out was allowed. The issue before the court was whether mandating the collection of the special assessment from nonmembers violated their constitutional rights to free speech. Alito and the four other conservative justices ruled that it did, and liberal Justices Sonia Sotomayor and Ruth Bader Ginsburg agreed in a concurring opinion. But Alito’s opinion didn’t stop there. It also changed the long-standing practice of allowing nonmembers to opt out of paying dues toward union functions outside collective bargaining, mandating instead that the unions “may not exact any funds from nonmembers without their affirmative consent.” In other words, unions would have to ask for nonmembers’ permission to collect political assessments and, possibly, any dues at all. “Individuals should not be compelled to subsidize private groups or private speech,”

American Airlines vs. Communications Workers of America: The obscure Texas court case that spells the real end for American unions. - Slate Magazine - Labor relations in the airline industry are governed by the Railway Labor Act rather than the generic labor-law framework that covers most of the economy. Under longstanding RLA rules, if 35 percent of workers in an unrepresented “craft or class” signed a card indicating a desire for union membership, that triggered an election. A union attempting to organize such a workplace still needs to win the election, and the 35 percent bar is slightly higher than the 30 percent one that prevails in most other circumstances, but the RLA gives unions more latitude in terms of permitted strike tactics once they are organized.* The CWA made considerable headway in trying to organize Americans’ customer service agents. American Airlines management, like most of corporate America, takes a dim view of labor unions and was not excited about this development. For starters, American Airlines was already in financial trouble and, indeed, filed for bankruptcy last November in hopes of wriggling out of obligations to its existing unionized workers. The bankruptcy process itself, however, has generated considerable pressure from some creditors—and also from American’s unions—for the airline to agree to a merger with US Airways. From a management perspective, this would be an unappealing outcome: With American bankrupt, it would amount to a US Airways takeover and lead to job losses among American executives.

Extreme Poverty Sets a New Record (Again) The rate of extreme poverty (income less than half the poverty line also called "deep poverty" and "severe poverty") set a new record in 2010 for the second year in a row (the record only goes back to 1975.  I don't know why). I have three thoughts. The first (as in my old post) is that there is clear evidence that AFDC (pre-reformed welfare) had an important effect on deep poverty. Since the Welfare reform bill of 1996, the rate of deep poverty and not so deep but still pretty damn bad poverty (50 to 75% of the poverty line) have diverged. Both declined in the late 90s boom (which convinced people with short attention spans and no understanding of omitted variable bias that welfare reform was a great success). Since 2000 the increase in deep poverty dwarfs the increase in not so deep but still pretty damn bad poverty. Also note the late 70s. This was a period of rapidly declining unemployment and high inflation. AFDC benefits were not indexed to inflation -- instead the dollar amount was adjusted by state legislatures or, quite often, wasn't. I think the divergence of the two rates which Soltas shows in the 1970s corresponds to real benefit levels in many states falling below half the poverty line. I note before a commenter does that the change in the 70s is overstated as food stamp benefits, which are not counted in income for calculation of poverty rates, automatically increase as cash benefits decrease. I note that the change due to the welfare reform bill of 1996 is, if anything, understated as the bill also included huge cuts to food stamps which accounted for much more of the forecast spending reduction than the change from AFDC to TANF.

Where is poverty in the national agenda? - Our elected officials are charged to do their best to create legislation and policies that work best to secure the important life interests of all citizens.  This is how we want it to work, and we feel morally offended when legislators substitute their own wants and opinions for those of the public. For example, a striking number of legislators bring their own personal and religious convictions into their work. Legislators all too often attempt to draft legislation that furthers their moral opinions on issues like stem cell research, gay marriage, abortion, and even birth control. But given that reasonable and morally grounded people disagree about these issues, how could they possibly be the legitimate object of legislation? Legislation needs to be designed to treat all citizens equally and fairly, so how can the personal moral or religious opinions of the legislator ever be a legitimate foundation for legislation?  Or how about this puzzle: every state in the country has serious problems of poverty and discrimination. That means that every state has a percentage of its citizens who live under demeaning and impoverishing circumstances. And in many cases this current fact derives from a past history of segregation, discrimination, and unfair treatment. These problems are urgent and pressing. If the responsibility of legislators is to identify and address urgent, pressing problems, they ought to be intensely interested in poverty, discrimination, and racial disparities. So why is it that virtually all governors and state legislators continue to ignore these facts -- even when their own departments of human services are fully able to document the human results of these facts about poverty?

America is no longer a land of opportunity, by By Joseph Stiglitz, FT: US inequality is at its highest point for nearly a century. ... One might feel better about inequality if there were a grain of truth in trickle-down economics. But the median income of Americans today is lower than it was a decade and a half ago... Meanwhile, those at the top have never had it so good.   Our political system has written rules that benefit the rich at the expense of others. ... There is good news in this: by reducing rent-seeking and the distortions that give rise to so much of America’s inequality we can achieve a fairer society and a better-performing economy. .. America used to be thought of as the land of opportunity. Today, a child’s life chances are more dependent on the income of his or her parents than in Europe, or any other of the advanced industrial countries for which there are data. ...We can once again become a land of opportunity but it will not happen on its own... The country will have to make a choice: if it continues as it has in recent decades, the lack of opportunity will mean a more divided society, marked by lower growth and higher social, political and economic instability. Or it can recognize that the economy has lost its balance. The gilded age led to the progressive era, the excesses of the Roaring Twenties led to the Depression, which in turn led to the New Deal. Each time, the country saw the extremes to which it was going and pulled back. The question is, will it do so once again?

Exclusive Interview: Joseph Stiglitz Sees Terrifying Future for America If We Don’t Reverse Inequality - Nobel Prize-winning economist Joseph Stiglitz, one of America's most prescient voices, wrote an article for Vanity Fair several months before Occupy Wall Street was born. "Of the 1%, by the 1%, for the 1%" called attention to the widening gap between rich and poor and its deadly impact on our society and its democratic institutions. In his newly released book, The Price of Inequality, Stiglitz returns to this theme of a divided society, delving into the origins and consequences of economic unfairness. I caught up with Professor Stiglitz and talked to him about how the persistent myths and beliefs associated with our capitalist system help to drive this trend, turning America from a land of opportunity to a land of broken dreams.

The Left’s Big Sellout – How the ACLU and Human Rights Groups Quietly Exterminated Labor Rights - Progressive intellectuals have been acting very bipolar towards labor lately, characterized by wild mood swings ranging from the “We’re sorry we abandoned labor, how could we!” sentiment during last year’s Wisconsin uprising against Koch waterboy Scott Walker, to the recent “labor is dead/it’s all labor’s fault” snarling after the recall vote against Gov. Walker failed. It must be confusing and a bit daunting for those deep inside the labor movement, all these progressive mood swings. At the beginning of this month, New York Times’ columnist Joe Nocera wrote a column about having a “V-8 Moment” over the abandonment of labor unions, an abandonment that was so thorough and so complete that establishment liberals like Nocera forgot they’d ever abandoned labor in the first place! The intellectual-left’s wild mood swings between unrequited love towards labor unions, and unrequited contempt, got me wondering how this abandonment of labor has manifested itself. So I did a simple check: I went to the websites of three of the biggest names in liberal activist politics: Amnesty International, Human Rights Watch, and the ACLU. Checking their websites, I was surprised to find that not one of those three organizations lists labor as a major topic or issue that it covers.

Top secret: $80B a year for food stamps, but feds won’t reveal what’s purchased - Americans spend $80 billion each year financing food stamps for the poor, but the country has no idea where or how the money is spent. Food stamps can be spent on goods ranging from candy to steak and are accepted at retailers from gas stations that primarily sell potato chips to fried-chicken restaurants. And as the amount spent on food stamps has more than doubled in recent years, the amount of food stamps laundered into cash has increased dramatically, government statistics show. But the government won’t say which stores are doing the most business in food stamps, and even it doesn’t know what kinds of food those taxpayer dollars buy. Coinciding with lobbying by convenience stores, the U.S. Department of Agriculture, which administers the program in conjunction with states, contends that disclosing how much each store authorized to accept benefits, known as the Supplemental Nutritional Assistance Program (SNAP), receives in taxpayer funds would amount to revealing trade secrets. As a result, fraud is hard to track and the efficacy of the massive program is impossible to evaluate.

This Week in Poverty: Ms. Vasquez Goes to Washington - On Tuesday, Adriana Vasquez sat to the left of the table where JPMorgan Chase Chief Executive Officer Jamie Dimon testified before the House Financial Services Committee for two hours. A 37-year-old janitor and a single mother of three, she had traveled from her home in Houston to Washington, DC, to ask Dimon one simple question. When the hearing adjourned, she crossed to talk to him. Vasquez is accustomed to speaking to executives at the JPMorgan Chase Tower where she works, so she wasn’t intimidated. But she says she “felt strange” as she approached the table. “I’m not used to being in that environment—surrounded by cameras and journalists,” Vasquez tells me through an interpreter. “It’s chaotic. But when it came time to ask the question I didn’t feel strange at all. He’s a person, just like me—the only difference is he has money, and I don’t.”She stood before Dimon and asked: “Despite making billions last year, why do you deny the people cleaning your buildings a living wage?” Vasquez says Dimon’s entourage reacted “as if I had a weapon on me,” quickly surrounding him. “Call my office,” Dimon replied, before being ushered toward the exit.

Harsh Skid Row policies driven by business lobby, say advocates | l.a. activist: In Los Angeles at least, the battle is not over parks, but sidewalks and the right of homeless people to exist on them. This issue was recently amplified by a health dept. inspection of Skid Row. On June 5, the Los Angeles Times reported that city officials were “armed with a new county report citing the health dangers of feces, urine and hypodermic needles” found on the streets of Skid Row that “could resume controversial cleanup sweeps.” According to the Associated Press, it was the city attorney’s office that requested the Los Angeles Department of Public Health inspection as part of its battle against a federal injunction that forced the city to stop confiscating or destroying homeless people’s property they deemed abandoned. Though city officials may be leading the charge against the injunction, they are well supported by a powerful lobby, called the Central City Association, that advocates for aggressive tactics in dealing with downtown’s homeless population.

Homeless families who turn to D.C. for help find no room, risk child welfare inquiry - When Shakieta Smith, a homeless mother of two, called the District’s shelter hotline in March, she was told the city’s shelters were full — and then the intake worker added a chilling warning:  If she and her kids had nowhere safe to sleep, she’d be reported to the city’s Child and Family Services Agency for a possible investigation into abuse and neglect. Since then Smith has spent her days looking over her shoulder and her nights worrying about her family’s uncertain future. Could Child Protective Services investigators find her and her two kids at a cousin’s apartment in Southeast, where they often stay? Would they sweep in and take Da’Quan and Da’Layah from their elementary school one afternoon? The fear haunts her. “I was afraid that my kids would be taken from me just because I can’t afford to live in D.C.,” Smith, 25, a hairdresser, said recently. “It’s not like I’m abusive or none of that. I ran into a situation where I don’t have no place to go.”

Mismeasuring Poverty: The “facts” about poverty can be deceiving. In her magisterial book Behind the Beautiful Forevers, Katherine Boo tells the stories of the inhabitants of a Mumbai slum on the edge of a sewage lake who lack jobs, housing, running water, health care, education, and police protection. It is not unusual to see rats and frogs fried for dinner, feet covered with black fungus, and maggots breeding in wounds wrought by trash-picking. Yet, Boo writes, “almost no one in the slum was considered poor by official Indian benchmarks. …Our government’s own count of the poor, while not denying their existence, also minimizes their number—not by undercounting them (though that’s a factor, too) but by setting the poverty bar so low that tens of millions of poor Americans are not accounted for. This miscategorization not only paints a picture of a more prosperous America than in fact exists. It also excludes large numbers of the poor from assistance that they need and might otherwise obtain. In fact, the poor are with us today in greater numbers than we have seen since we started keeping track over half a century ago. If we counted them by the standards that most other industrialized democracies employ, their numbers would increase by a third—from 46 million to roughly 69 million. To understand how that can be, it is important to grasp the way we define poverty and what that definition has to do with economic hardship.

The Death Penalty and Deterrence: Why No Clear Answers? - A panel of the National Research Council headed by Daniel S. Nagin and John V. Pepper has published "Deterrence and the Death Penalty." The report can be ordered or a free PDF can be downloaded here. The report refers back to a 1978 NRC report which concluded that "available studies provide no useful evidence on the deterrent effect of capital punishment." The latest study reaches the same conclusion.  "The committee concludes that research to date on the effect of capital punishment on homicide is not informative about whether capital punishment decreases, increases, or has no effect on homicide rates. Therefore, the committee recommends that these studies not be used to inform deliberations requiring judgments about the effect of the death penalty on homicide. Consequently, claims that research demonstrates that capital punishment decreases or increases the homicide rate by a specified amount or has no effect on the homicide rate should not influence policy judgments about capital punishment."

Reciprocal Fear and the Castle Doctrine Laws - In his timeless classic The Strategy of Conflict, Thomas Schelling began a chapter on the "reciprocal fear of surprise attack" as follows: If I go downstairs to investigate a noise at night, with a gun in my hand, and find myself face to face with a burglar who has a gun in his hand, there is a danger of an outcome that neither of us desires. Even if he prefers to just leave quietly, and I wish him to, there is danger that he may think I want to shoot, and shoot first. Worse, there is danger that he may think that I think he wants to shoot. Or he may think that I think he thinks I want to shoot. And so on. "Self-Defense" is ambiguous, when one is only trying to preclude being shot in self-defense. This effect is empirically important, and is part of the reason why homicide rates vary so greatly across otherwise similar locations, and can change so sharply over time at a given location. In our attempt to understand why the Newark homicide rate doubled in just six years from 2000-2006 while the national rate remained essentially constant, Dan O'Flaherty and I found a substantial number of homicides to be the outcome of escalating disputes between strangers or acquaintances often over seemingly trivial matters. High rates of homicide make for a tense and fearful environment within which the preemptive motive for killing starts to loom large, and this itself reinforces the cycle of tension, fear, and continued killing. Incremental reductions in homicide under such circumstances are unlikely to be feasible, but sudden large scale reductions that transform the environment and break the cycle can sometimes be attained. Similar effects arise with international arms races.

Death and the Bottom Line - Xavius Scullark-Johnson is why the profit motive and a politically powerless population should never be combined. Scullark-Johnson, 27, was three months from getting out of prison for a probation violation when Minnesota corrections officials "put him to death" in his urine-soaked cell in June 2010 by refusing him medical care and turning away an ambulance after he suffered several seizures, says a federal lawsuit brought Monday by his family. A state spokesman says the DOC's contract with a for-profit health care company works to "manage care in a cost-efficient manner" and "balance the needs of our offender population with the limited resources appropriated by the Legislature." That balancing act, says Olivia Scullark, killed her son.

News Flash: It is Illegal for Debt Collectors to Stalk Debtors on Facebook or Threaten to Kill Their Dogs - Do any of you read It is a great source of info on various topics, not just credit cards. Today’s story featured three debt collection horror tales, as well as a state of the nation of nasty collection efforts. According to the story, in 2011, the FTC received 180,000 complaints about debt collectors, an increase of over 40,000 from 2010. In one case, a debt collector filed a lawsuit against a California debt collector, hired by a funeral home, who threatened to dig up the body of the debtor's daughter -- and also to shoot her dog. Here is a run-down of three other featured stories.  In the first one entitled “terrorized by text,” Jessica Burke fell behind on her car payments. She called the financing company, and they agreed to give her extra time to pay. But the next day, she got a call from a man using a fake name who threatened to sue. He got her address and other private information from her cell phone company (say what?) by impersonating her father and asking to be added to her account. He called and texted and called and texted, after some time of which she called the police, who ordered the collector to stop contacting her. But the texts continued for weeks, coming from a disguised number and implying that he was watching her. In one, he called her "Porky Pig" and a "200-pound slob" and added, "I got picture messages of you today." Late one night, she says, he texted her, claiming he was outside her house. She says: "It was 11 o'clock at night, I lived in a very rural area and I was home by myself. I was terrified." 

The Reflexive Libertarianism of Mainstream Economists, as Applied to the Analysis of Conditional Cash Transfers: Consider the logic of conditional cash transfer (CCT) programs, which pay money to households in return for their agreement to make sure their kids attend school or receive health checkups. These have been roaring successes in just about every country that has adopted them: they reduce poverty, increase education and raise the living standards and future prospects of children. They are not without problems, of course, and I will discuss the shadows as well as the light in my report. But back to the logic. If you are an economist, your first question is, why the conditionality? Why compel households to change the education and health decisions they make for their kids? Why not just give them the money and let them do whatever they want with it? You know the diagram: just giving away money has an income effect, allowing the households to migrate to a higher indifference curve, but imposing conditionality forces them to adhere to a particular threshold for education or health “goods” (substitution effect), which pushes them off their welfare-maximizing tangency and on to a low indifference curve. Economists go through many years of schooling in order to think this way reflexively.If you are still an economist, you look for two kinds of answers. One is that there must a market failure somewhere. Maybe households are ill-informed. Maybe they don’t take into account the utility of children. Maybe there are spillover benefits to education and health not captured at the household level. Of course, if you are thinking along these lines, you will want evidence and not just speculation: show me the market failures. Quantify them.

BEA: News Release: State Personal Income: First Quarter 2012: State personal income growth accelerated to 0.8 percent in the first quarter of 2012, from 0.4 percent in the fourth quarter of 2011, according to estimates released today by the U.S. Bureau of Economic Analysis. Personal income rose in 47 of the 50 states, fell in Kansas and Mississippi, and was unchanged in Oklahoma. The percent change across states ranged from 2.3 percent in North Dakota to –0.3 percent in Mississippi. Inflation, as measured by the national price index for personal consumption expenditures, increased to 0.6 percent in the first quarter of 2012 from 0.3 percent in the fourth quarter of 2011.  Overall, earnings grew 0.8 percent in the first-quarter of 2012, after growing 0.5 percent in the fourth quarter. Earnings increased in 16 of the 24 industries for which BEA prepares quarterly estimates, with the largest percentage increases in the accommodations industry (which grew 2.5 percent, up from 1.2 percent in the previous quarter) and the construction industry (which grew 2.1 percent, up from 1.0 percent). The largest contributions to earnings growth were in health care (which increased $17.3 billion in the first quarter of 2012, up from a $6.8 billion increase in the fourth quarter) and professional services (which increased $16.5 billion, up from $7.1 billion).

States Lacking Income Tax Get No Growth Boost - Governors seeking to expand their economies by eliminating income taxes find little support for the idea in the record of U.S. states that lack such a levy. The BGOV Barometer shows the nine states with the highest personal income taxes on residents outperformed or kept pace on average with the nine that don’t tax their residents’ incomes, according to a study of economic output, unemployment and household income by the nonpartisan Institute on Taxation and Economic Policy. The findings show cutting state income taxes to stimulate growth relies on “flawed analysis” based on the theories of economist Arthur Laffer, said Carl Davis, a senior analyst at ITEP in Washington and author of the report. Laffer’s work was cited by Republican Governors Sam Brownback of Kansas and Mary Fallin of Oklahoma as a reason to cut income taxes as a way to stimulate job growth and attract business. 

Fiscal Drag from the State and Local Sector? -- NY Fed - With July just around the corner, most cities and states are preparing for the start of a new fiscal year. Since the start of the recent recession, some have worried that fiscal stress on the sector would result in massive municipal bond defaults. At the end of 2011, many breathed a sigh of relief as aggregate state government revenues finally re-attained the peak they had achieved before tumbling during and after the recession. Unfortunately, relief may be premature. When adjusted for inflation, 2011 state tax revenues were still below their levels of four years ago, and local tax revenue continues to decline. In this post, we explore how the state and local public sector functions as part of the broader economy, how it responded to the most recent downturn, and why it could potentially be a drag on economic activity for years to come.

Brown Closes $16 Billion Budget Gap With Tax Increase - California Governor Jerry Brown signed a $91.3 billion budget for the most indebted U.S. state, putting his signature to a second consecutive on-time spending plan after decades of delays amid partisan battles.  The budget passed by the Democrat-dominated Legislature relies on voters approving higher taxes in November. It uses funds intended for mortgage relief and counts on the sale of greenhouse-gas credits to polluting industries. State workers will take a temporary pay cut, and the poor will find it harder to collect welfare if they don’t try to get work.  Brown’s spending plan erases a $15.7 billion deficit, combined with the tax increase, and is aimed at ending years of persistent deficits. In February, Standard & Poor’s, which rates California’s credit the lowest among U.S. states, boosted its outlook to positive, saying the state was poised for an upgrade depending on financial improvement.

Gov. Jerry Brown vetoes funding for college aid, child care, parks  - Gov. Jerry Brown vetoed $129 million from the state budget passed by Democratic lawmakers before signing the spending plan into law late Wednesday night. Among the cuts were a $22.6-million reduction in state financial aid for college students and a $20-million hit for state child-care programs. Divisions on those two issues were among the final sticking points in budget talks between Brown and Democratic legislative leaders.Brown also cut funding for state parks by $31 million and slashed nearly $30 million from preschool programs. While lauding such programs, the governor cited the need to balance the state's books. The budget closes the state's $15.7-billion deficit and depends on voters approving more than $8 billion in temporary tax hikes at the ballot box in November. Without a higher sales tax and increased levies on the wealthy, the governor says, the state will cut billions of dollars from public schools.

City populations boom as young people opt against settling down in the suburbs - For the first time in a century, most of America's largest cities are growing at a faster rate than their surrounding suburbs. New 2011 census estimates show that the change is due to young adults seeking a foothold in the weak job market by shun home-buying and stay put in bustling urban centers.Driving the resurgence are young adults, who are delaying careers, marriage and having children amid persistently high unemployment. Burdened with college debt or toiling in temporary, lower-wage positions, they are spurning homeownership in the suburbs for shorter-term, no-strings-attached apartment living, public transit and proximity to potential jobs in larger cities.

FHFA Wants Money Transferred from Local Government to Bondholders -- FHFA has sued the State of Illinois and some local government units claiming that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. FHFA's argument is basically that the GSEs are subject only to non-discriminatory real estate taxes and real estate transfer taxes aren't real estate taxes.  Zhuuuuuup.  Yes, that's the sound of my eyes rolling. This is what FHFA is spending time and effort on as conservator? What's particularly aggrevating about this litigation is the incredible short-sightedness of FHFA as conservator, a problem we've seen previously, most notably in regard to principal reduction modifications. FHFA seems to understand its role as conservator in the most narrow of senses--maximizing the GSEs' assets in the short term. Perhaps this is what we should expect when we have a career civil servant, rather than a politically accountable appointee running FHFA, but one would hope that anyone running FHFA would understand that the GSEs exist first and foremost for the national benefit--hence their special federal charters--and that they should be serving national policy interests, rather than pursuing a narrow, thrifty conservatorship. That the Obama Administration hasn't put a strong hand in the whip seat at FHFA continues to amaze me. But it is in keeping with the Adminsitration's abdication of housing policy in general. (If you doubt that, tell me what is US housing policy today and who is making it?)

Mayor: Stockton appears headed for bankruptcy, as mediation deadline passes - Stockton could become the largest U.S. city to declare bankruptcy after a Monday deadline to make a deal with its creditors passed and the city’s mayor said she did not believe a settlement had been reached. Mayor Ann Johnston told KCRA-TV ( on Tuesday that a formal bankruptcy filing now appears “very likely.” — In opting to become the nation’s largest city to seek federal bankruptcy protection, this river port of 290,000 took a rare financial step of last resort after struggling with the economic downturn, soaring pension costs and contractual obligations. Thirteen cities, counties and other government entities filed for bankruptcy protection last year — the highest annual level in nearly two decades. Stockton was the seventh U.S. municipality to file this year and the first California city since Vallejo, which sought protection in 2008, according to James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies.

Stockton Becomes Largest American City to File for Bankruptcy Protection  — In opting to become the nation’s largest city to seek federal bankruptcy protection, this river port of 290,000 took a rare financial step of last resort after struggling with the economic downturn, soaring pension costs and contractual obligations. Thirteen cities, counties and other government entities filed for bankruptcy protection last year — the highest annual level in nearly two decades. Stockton was the seventh U.S. municipality to file this year and the first California city since Vallejo, which sought protection in 2008, according to James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies. “Filing bankruptcy is time-consuming, expensive and complicated,” said Spiotto, noting that Vallejo spent millions of dollars alone on attorneys and other bankruptcy professionals. “And you never get the results you desire.” That’s why experts are divided on whether other financially struggling cities, towns and other government entities will follow Stockton to bankruptcy court. Spiotto said it will be hard and expensive for Stockton to obtain financing.

Stockton bankruptcy will make history; residents reeling - Officials said Tuesday that Stockton would become the nation's largest city to seek protection under the U.S. bankruptcy code. The city stopped making bond payments, and City Manager Bob Deis said he expected to file bankruptcy papers immediately. Stockton has been in negotiations with its creditors since late March under AB 506, a new California law requiring mediation before a municipality can file for reorganization of debt. It was the first use of the law, and policy analysts who watched its torturous and tedious progress have titled their report on it "Death by a Thousand Meetings." Mediations ended Monday at midnight. Recent council meetings have been contentious. Tuesday night's meeting was quieter, with an evident sadness on faces in the packed audience. Many residents said they were there mostly to hear for themselves that the day so long expected had finally come. "It's a seminal moment in this city's history and I needed to be here," said Dwight Williams, who runs a nonprofit housing organization. "I can't just read about this in tomorrow's paper. I need to hear for myself if there is some inkling as to where we go from here."

Stockton is largest US city to seek bankruptcy - Stockton has filed for Chapter 9 protection, making it the largest American city ever to declare bankruptcy. City Manager Bob Deis said officials sought the status Thursday in federal bankruptcy court in Sacramento, as expected. The filing comes after officials were unable to reach a deal with the city's creditors to restructure hundreds of millions of dollars of debt under a new state law designed to help municipalities avoid bankruptcy. Stockton, a river port of 290,000 in Central California, was one of less than a half dozen larger governments to seek Chapter 9 protection in U.S. history, according to James Spiotto, a Chicago bankruptcy attorney who tracks municipal bankruptcies. It's the first California city to file for bankruptcy since Vallejo, which sought protection in 2008. Chapter 9 has been used sparingly and mostly by small government entities such as water utilities and other special districts, Spiotto said, because it halts a city's ability to develop.

Stockton, California’s Bankruptcy Makes ‘Normal’ Cities Nervous - There’s not a big, identifiable problem that’s driving Stockton, Calif., into bankruptcy. That’s why other cities are worried about its example. Many of the high-profile public-sector bankruptcies over the past few years were triggered by massive projects that went bad, like the $3 billion sewer bond problem in Jefferson County, Ala., or Harrisburg, Pa.’s big incinerator. That has allowed municipal mavens to argue that forecasts of waves of bankruptcies from the likes of analyst Meredith Whitney are overblown. The central California valley town of Stockton, however, has no such signature failure. Its woes are the result of a combination of many different factors. Sitting beyond what was once considered the outer edge of the Bay Area, Stockton has been particularly hard hit by foreclosures. Its retirement benefits have been on the generous side -- people who worked for the city for as little as a month could count on health coverage for life. It also borrowed money during boom times for some high-profile projects along its waterfront. The city made some poor decisions, but nothing hundreds of other places haven’t done. Because its recipe for disaster was not unusual, many other California cities are nervous. City officials from Fresno to San Jose are using Stockton as a warning of what could happen if they aren’t able to trim pensions and make other changes to what has been standard operating procedure. (Please read Stockton, California's Debt Problems May Set Precedent.)

Stockton bankruptcy will hit retirees hard - When Stockton becomes the largest U.S. city ever to file for bankruptcy, it will strike a hard blow to residents, especially city employees and retirees whose health benefits and pensions helped drive the city toward insolvency. City Manager Bob Deis said late Tuesday that officials were left with little choice but to recommend bankruptcy after failing to hammer out deals with creditors to ease the city’s $26 million budget shortfall. Deis expects the city to file for Chapter 9 protection by Friday. Stockton will join a number of other cities and counties across the nation that have plunged into financial crisis as the recession made it tough to cover rising costs involving current and former employees, bondholders and vendors.“What’s going on in Stockton is endemic to what's going on all over the state and the country,” Michael Sweet, a San Francisco bankruptcy attorney at Fox Rothschild LLP, said. “Local governments are hurting and strained under the current pension and compensation systems. These systems are not appropriate for the type of economy this country has evolved into.”

Cities Consider Selling Ads as Economic Lifelines - After Baltimore officials made the wrenching decision to close three fire companies later this summer, the City Council initially sought to avert the cuts with a new money-raising strategy: it passed a resolution this month urging the administration to explore selling ads on the city’s fire trucks.  It is far from clear whether corporate logos will be painted on Baltimore’s fire engines any time soon. But in exploring the option, Baltimore is joining dozens of other financially struggling cities, transit systems and school districts around the country that are trying to weather the economic downturn by selling advertisements, naming rights and sponsorships to raise money.  Such marketing schemes have long been used by sports teams and some arts organizations. But now, straphangers in Philadelphia buy fare cards blazoned with ads for McDonald’s and ride the Broad Street Line to AT&T Station (formerly Pattison Station), where the turnstiles bear the company’s familiar blue and white globe.

The Resistance Continues as Citizens Fight Budget Cuts - Much has been written about the future of Occupy: the movement is dead, it is not dead, it evolved into something else, it will experience a resurgence in the fall etc. But what has received less air time are all the ways in which citizens, be they part of Occupy or not, continue to battle budget cuts in their own communities and across the country. The blasé reception of this ongoing resistance might be explained, in part, by the decline of Occupy’s occupations. Revolution is sexy, but the quiet resistance of low-key direct action lacks Liberty Park’s flash. Yet the resistance continues, in ways large and small. A city in central New York is losing its top two law enforcement officers to retirement after lawmakers announced major spending cuts for the police department. Auburn Police Chief Gary Giannotta said the cuts to his department will be detrimental to public safety. In another example, NETWORK, a national Catholic social justice lobby, and the NETWORK Education Program organized fourteen nuns to ride in a “Nuns on the Bus” vehicle through nine states to protest federal budget cuts proposed by Representative Paul Ryan (R-WI).

Which Cities Are Growing Faster Than Their Suburbs? - U.S. cities are growing faster than their suburbs for the first time in decades, but how does that break down from city to city?  Below is a chart of the 51 U.S. metropolitan areas that have one million or more people. The most dramatic suburb to city shift has been in the New Orleans metro area, most likely due to distortions caused by Hurricane Katrina. The city has grown 3.1 percentage points faster than the suburbs, as people continue to return to an area ravaged by the natural disaster.The Atlanta, Denver, Washington and Charlotte metro areas have all seen their urban core grow faster than their suburbs, as well. But the trend isn’t present everywhere. Old line cities in the Northeast and Rust Belt continue to see big flights to the suburbs: Baltimore, Detroit, Indianapolis and Cincinnati are all among metro areas where suburbs still outpace cities. In the chart below, the Difference column represents suburb growth minus city growth. A negative number means the city is growing faster and a positive number means the suburbs are growing faster.

Detroit firefighters battle 26 fires in 24 hours - More suspicious fires burned early Tuesday in Detroit. 3, large, vacant structures caught fire at the corner of Belvidereand St. Paulon the city’s east side. Firefighters there say it’s a possibility that the same person suspected of setting close to a dozen fires Monday could be responsible for this morning’s fires. Detroit Firefighters say they had to fight 26 fires in the city in the past 24 hours and at the same time deal with the blow delivered by Mayor Dave Bing. The mayor announced that 164 firefighters will be laid off due to budget problems by the end of July.What the Mayor didn’t mention is the reduction of Detroit’s elite arson squad. The team of 19, highly trained law enforcement officers is now down to 14 investigators and that number is expected to be cut to 9 in July. Investigators call the firefighter layoffs and the cuts in the arson squad “The Perfect Storm” of bringing the city of Detroitright back to being the arson capital of the world. Investigators warn that with fewer investigators, currently there are no arson squad members staffing the afternoon and overnight shifts.

The states cutting the most to schools and cities -- Funding from local governments’ two biggest sources -- state aid and property taxes -- fell for the first time since 1980, according to a report released this month by the Pew American Cities Project. The decrease in funding from these two sources has forced many local areas to cut expenses significantly. Relying on the Pew report, 24/7 Wall St. identified eight states slashing local funding to cities, towns, counties and school districts. 24/7 Wall St.’s independent analysis of data from the Center on Budget and Policy Priorities and the U.S. Census Bureau indicates states that cut funding the most had budgets that were particularly hard hit during this period. Some suffered budget shortfalls that forced them to cut spending. Others experienced drops in tax revenue that prompted the same response. Advertise | AdChoicesOf the eight states with the highest cuts in local funding, four experienced among the steepest declines in tax revenue. Wyoming, which had the worst decline in tax revenue, fell a whopping 21.9 percent during the period. Budget shortfalls were among the worst in many of these states. Arizona, California and Nevada, among the eight states cutting local budgets, had the first, second and third highest budget shortfalls as a percentage of their general fund. Arizona faced a 65 percent shortfall in 2010.

Parenting for the Elite - A few years ago, I was lucky enough to interview William Dougherty, a professor of family social science at the University of Minnesota about that eternal American conundrum: Why, I asked, oh why won’t our children perform chores– or, for that matter, pick up the occasional stray toy — without epic parental pleas? I didn’t expect the response I got. “Children,” he told me, “should be considered citizens of the household, not consumers of household services.  I’ve thought quite a bit about Dougherty’s remark over the years, and it came to mind again while reading Elizabeth Kolbert’s parental cri de coeur in this week’s New Yorker. Kolbert compared the American children studied by the University of California, Los Angeles’ family study program, an anthropological longitudinal study of current parenting practices, with the kids of an Amazonian tribe. The tribal kids were a group of self-sufficient doers, able to forage food and otherwise help out with the chores of daily living.  Our crew? A bunch of entitled whiners heading off to junior high still expecting their moms and dads to tie their shoes – and complaining if they don’t do a good enough job of it. As Dougherty would say, the tribal kids are citizens. Ours are consumers of household services.

Louisiana Schools Teach That ‘Existence’ Of Loch Ness Monster Proves Creationism - You probably wouldn’t be surprised to learn that many schoolchildren in Louisiana are learning that evolution is a lie and creationism is real. What might surprise you is what their Christian curriculum is teaching to prove the theory of creationism – the Loch Ness Monster. The Loch Ness Monster, or ‘Nessie’ as they call her in Scotland, is similar to other legendary creatures such as Big Foot, the Chupacabra or the Yeti in that there are a number of people who believe with all their hearts that the monster exists, but even in Scotland, Nessie is largely considered to be just a legend. Among American Christian educators with Accelerated Christian Education (ACE), though, Nessie is alive and well and she is proof that humans and the dinosaurs walked together. From the Scotland Herald: One ACE textbook – Biology 1099, Accelerated Christian Education Inc – reads: “Are dinosaurs alive today? Scientists are becoming more convinced of their existence. Have you heard of the ‘Loch Ness Monster’ in Scotland? ‘Nessie’ for short has been recorded on sonar from a small submarine, described by eyewitnesses, and photographed by others. Nessie appears to be a plesiosaur.” Another claim taught is that a Japanese whaling boat once caught a dinosaur. It’s unclear if the movie Godzilla was the inspiration for this lesson.

The Loch Ness Monster Is Real, And Five Other Insane Lies Taught By Louisiana Textbooks: “The Great Depression was exaggerated by propagandists, including John Steinbeck, to advance a socialist agenda.”

New LAUSD Budget Cuts School Year - With deficits in the hundreds of millions of dollars, Los Angeles Unified School District board members signed off on a $6.03 billion budget Thursday that eliminates thousands of jobs and shaves as many as 10 days off the next school year. The board voted 6 to 1 to approve the budget that closes a $390 million deficit the district faced heading into the new school year; LAUSD has faced a cumulative $2.7 billion deficit since 2008-09, due in large part to reduced state funding, according to a statement released by the district Thursday night. "The budget is dramatically tight," Superintendent of Education John Deasy told board members. "You can always advocate for additional things once the school year opens up." Adult education programs will be hit with 3,200 layoffs and a new payment structure may require some older students to pay fees, which members anticipate will save about $84 million.

Chicago Public Schools to levy maximum tax hike allowed to cover cut in state, federal funding — Chicago Public Schools officials say the district will impose the maximum allowed increase of its property tax levy in Fiscal 2013 to help pay for a longer school day and cover a nearly $700 million deficit. School district officials say the increase will mean an additional $28 will be added to the property tax bill of the owner of a $250,000 Chicago house. It is expected to generate $41 million, less than half a $114 million cut in federal and state funding. School board President David Vitale said the increase will help preserve the district's "commitment to class size, the full school day and early childhood development." Both teachers union and school district officials said Wednesday contract negotiations have picked up since teachers voted this month to authorize a strike.

$28,409 Per Student Cost of D.C. Public Schools Puts Them In Elite Group, But Without the Results - Judging by the expenditures per student of almost $30,000 (Andrew Coulson at Cato crunches the numbers), the "pricy" District of Columbia public schools are among the most elite of all of the D.C.-area schools, see the chart above.  The $28,409 per-student educational price tag for D.C. schools is just slightly below two of the area's most prestigious private schools - Georgetown Prep ($29,625), founded in 1789 as the nation's oldest Jesuit school, and Sidwell Friends School ($33,000), the "school of choice" for President Obama's daughters.   However, judging by the graduation rate of D.C.'s public high schools of only 58.6% for the Class of 2011 (compared to a national average of 75.5% for public schools), District taxpayers might wonder why they're getting such poor results from such an elite level of spending.  For every 100 students who graduated from D.C. high schools in 2011, there were 71 of their freshman classmates who either dropped out or didn't graduate on time. 

$50 Million Priorities: TVs on Back of Stadium Seats? 35 Students per Class? - Not completely sure who’s right on the legal technicalities, but this is our world, where mainstream ‘news’ tells us we should be shocked over the following: Out of nowhere, Santa Clara County officials have yanked $30 million in tax funds promised for the San Francisco 49ers’ new Santa Clara stadium, saying they would rather spend the money on teachers than install “little televisions in the back of stadium seats.” But, in this economy, pulling back $30 million on a deal where the city of Santa Clara — population 116,000 – borrowed $850 million (from Goldman Sachs, Bank of America and U.S. Bank) to build a $1.2 billion dollar stadium for the San Francisco 49ers? I mean whose side is your heart on? Even if you’re a Niners fan? In fact, the article indicates the new Santa Clara County board of supervisors is within its rights to take from the rich and give to the teachers and schools in this instance. Hey, good for them! County tax collector George Putris, who proposed the idea, states his understanding that the Niners  want to spend $50 million to install televisions on the back of seats like those on airliners

Foreign Inventors Have Hand in Most Patents From Top Universities - Most patents that come out of major American universities have at least one foreign-born creator, according to a new study aimed at fostering changes to the U.S. immigration system.  The report from the Partnership for a New American Economy, a group of mayors and business leaders supportive of immigration reform, calls for action to help the U.S. economy by ensuring that foreigners who come to study here are able to stay, become entrepreneurs and succeed in business and innovation. The group said that university research is crucial for the U.S. to stay ahead in science and technology and added that “from 1980 to 2010, more than 6,000 new companies were created to commercialize research conducted at U.S. universities.”In 2011, 76% of patents awarded to the top 10 patent-producing American universities had at least one foreign-born inventor, according to the report. In “high-growth” fields of today’s economy, foreign nationals living in the U.S. are particularly strong in their innovation. “Everything you hear about these students is true,” . “They start companies and contribute in huge and enormous ways to our country and our economy.”

Is science a girl thing? - mathbabe - The European Commission’s latest effort to inspire girls to do science is truly repugnant (hat tip Debbie Berebichez, a.k.a. Science Babe). It’s a commercial where you see a standard male scientist (in a white lab coat no less) being surprised, and, we assume, aroused, when three girly models come in, giggle, dance, and generally adorn the commercial. At the end they put on lab goggles in the style of an ironic accessory. They’re all wearing high heels and there’s even lipstick in a few shots for some unexplained reason (are we supposed to infer that wearing lipstick makes you more scientific-alicious?). And although there are a couple of shots of an actual female writing what could be actual formulas on a hyped-up whiteboard, that’s more than balanced by some other shots of the models with unmistakable come-hither looks, gestures and blown kisses. People. At the European Commission. Do you have no advisors!? Do you have no common sense? Who vetted this garbage video?!?

The Growing Myth about Federal Student Loans - Despite all the political hubbub and posturing over federal student loans, the benefits to students and their families would be relatively modest compared to the legislation’s substantial price tag. Only 3 percent of the roughly $1 trillion of overall outstanding student debt will carry the low interest rate extension this year. President Obama won kudos on college campuses and from young voters earlier this year by vigorously pressing Congress to block the scheduled rate increase on highly subsidized Stafford loans from 3.4 percent to 6.8 percent.  Few realize that the actual cost-benefit ratio of the legislation will be relatively low. That’s because the bargain basement 3.4 percent interest rate currently applies to only about a third of students holding or seeking subsidized federal loans. the borrower would save a maximum of $800 to $1,000 over the life of the loan, assuming he borrows the $5,500 maximum available to a third or fourth-year student. That works out to a savings of about $9 a month.  The interest savings would be even less for first-year students who could  borrow no more than $3,500 at the lower interest rate.

Public Pensions Face Wider Deficits Under New Rules - State and local governments coping with years of underfunding and weak investment returns will be forced to clarify the extent of pension deficits under rules set today that will widen the gaps for some plans. The measures adopted by the Governmental Accounting Standards Board alter methods of calculating liabilities and assets by the retirement systems. The changes will mean pensions for public workers in Illinois, New Jersey, Indiana and Kentucky have less than 30 percent of assets needed to meet liabilities, according to the Boston College Center for Retirement Research.“We’re expecting some troubled credits to look worse,” “That will cause some shock and awe.” The board voted unanimously to make the changes, starting next year, during a teleconference. States and cities rattled by the credit crisis that deepened the longest recession since the Great Depression have been pressed to put more money into their pensions and cut benefits to prevent shortfalls from leading to insolvency. The rules may provide fodder for politicians seeking to roll back government obligations to retirees

Is Your Pension Underfunded? - By most accounts, pension plans are in trouble. How many plans and how much trouble depends, at least in part, on the accounting. And now that the Governmental Accounting Standards Board has adopted new rules for calculating pension liabilities today, the hole faced by many pension plans could look a lot deeper. As we wrote in our story, States Face Pressure on Pension Shortfalls, the new rules will require state and local officials to use more conservative assumptions when calculating pension liabilities. As a result, some plans could see their liabilities double, according to an analysis by the Center for Retirement Research at Boston College of how the changes could affect 126 state and local pension plans. The list of the plans analyzed by BC is below. Before you dive in, there are a few important caveats. First, the numbers come from 2010 when pension funds were smaller than they are today. With some plans, funding levels would have decreased if the GASB changes were implemented in 2010 because investments were doing poorly. Depending on how the stock market does, these plans may not reflect a shortfall when the rules take effect in 2013. But for plans that already have large deficits, the hole is likely to look bigger, regardless of the market.

Are We Lying to Ourselves About Our Pension Problems?  The news just keeps getting worse as it relates to retirement security. Private pensions are underfunded and fading away, and the agency that insures them is itself running a record deficit. Now we learn that pension funds covering public employees are more seriously underfunded than previously believed. There’s nothing dramatically different about the way public pensions are being run. But, as reported this week in The New York Times, the Governmental Accounting Standards Board is changing the bookkeeping rules. It seems we’ve been lying to ourselves about retirement security for years, and the board wants new pension plan reporting to reflect reality. The new rules do not hit in full until 2015. But already we can see what they will show. As of 2010 and under current accounting rules, public pension plans had 76 cents for every dollar they must pay retirees in the future, according to an analysis by the Center for Retirement Research at Boston College. Under the new accounting rules, cash on hand would be just 57 cents on the dollar—nearly twice the shortfall. The new rules won’t change the underfunded status of all public pensions—only those that are running such a large deficit that they are all but certain to need to borrow money to make good on their obligations. The plans must now account for those future borrowing costs, which translates into strikingly higher deficits.

U.S. Automakers Cut Retirees Loose - GM and rival Ford Motor (F), rebounding from their near-death experiences during the financial crisis, are eager to rid their balance sheets of the huge pension obligations that Wall Street views as onerous debts weighing on their credit ratings and stock prices. So this spring they came up with an ambitious solution: buy out the lifetime pension payments due 140,000 salaried retirees. With both carmakers suddenly flush with profits—GM and Ford made $9.2 billion and $20.2 billion, respectively, in 2011—it seems like a smart way to remove decades of uncertainty from their finances. Yet because the buyouts are based on actuarial assumptions about what each retiree’s pension stream is worth using IRS projections about inflation, many ex-employees worry they may outlive their payments.GM says its $134 billion pension obligation is the largest of any company worldwide and was underfunded by $25.4 billion at the end of 2011. Ford’s $74 billion pension liability was underfunded by $15.4 billion at the end of last year. GM is offering buyouts to 42,000 pensioners, or about 36 percent of its salaried retirees, who left from Oct. 1, 1997, to Dec. 1, 2011. Those who refuse the lump-sum buyouts will find their pension plan shifted to a unit of Prudential Financial (PRU) along with those of other retired U.S. salaried workers. GM will spend $3.5 billion to $4.5 billion to create a group annuity at Prudential and to offer the buyouts. The moves will excise its 118,000 salaried retirees from its books, though the company will continue to cover the pensions of about 400,000 hourly retirees. GM says the lump-sum payments and annuity will together cut $26 billion from its pension load.

The Generation Gap Is Back - IN a partisan country locked in a polarizing campaign, there is no shortage of much discussed divisions: religious and secular, the 99 percent and the 1 percent, red America and blue America.  But you can make a strong case that one dividing line has actually received too little attention. It’s the line between young and old.  Draw it at the age of 65, 50 or 40. Wherever the line is, the people on either side of it end up looking very different, both economically and politically. The generation gap may not be a pop culture staple, as it was in the 1960s, but it is probably wider than it has been at any time since then.  Throughout the 1980s and ’90s, younger and older adults voted in largely similar ways, with a majority of each supporting the winner in every presidential election. Sometime around 2004, though, older voters began moving right, while younger voters shifted left. This year, polls suggest that Mitt Romney will win a landslide among the over-65 crowd and that President Obama will do likewise among those under 40.  Beyond political parties, the two have different views on many of the biggest questions before the country. The young not only favor gay marriage and school funding more strongly; they are also notably less religious, more positive toward immigrants, less hostile to Social Security cuts and military cuts and more optimistic about the country’s future. They are both more open to change and more confident that life in the United States will remain good.

Share the Wealth - WE’RE always saying that “children are our nation’s most valuable resource.” Unfortunately, we don’t behave as if we believe it. Between 2000 and 2010, the number of children living in poverty in America increased by 41 percent, and now includes nearly one-quarter of our kids. Growing up in poverty is bad. It leads to lower graduation rates (a third of these children will not graduate from high school); lower incomes (nearly half will still be living in poverty at age 35); and lower life expectancy (by about eight years). The story of older Americans is completely different. In 1959, over a third of those over age 65 were poor; today, only 9 percent are. Contrary to campaign rhetoric about old ladies on fixed incomes, many Social Security recipients are quite well-to-do: the median income of married couples between the ages of 65 and 69 is $61,000, and a quarter of these households bring in more than $100,000 each year. The rising standard of living among older Americans is largely a result of the tens of thousands of dollars each collects from Social Security and Medicare. And this huge transfer of wealth is harming our children. Older Americans aren’t selfish. Many would be willing to forgo some of their government benefits, if only they could be sure the money would go to a worthy cause.

Oregon Study Shows Benefits, and Price, for Newly Insured - In 2008, Oregon opened its Medicaid rolls to some working-age adults living in poverty, like Ms. Parris. Lacking the money to cover everyone, the state established a lottery, and Ms. Parris was one of the 89,824 residents who entered in the hope of winning insurance.  With that lottery, Oregon became a laboratory for studying the effects of extending health insurance to people who previously did not have it. Health economists say the state has become the single best place to study a question at the center of debate in Washington as the Supreme Court prepares to rule, likely next week, on the constitutionality of President Obama’s health care law: What are the costs and benefits of coverage?  In a continuing study, an all-star group of researchers following Ms. Parris and tens of thousands of other Oregonians has found that gaining insurance makes people feel healthier, happier and more financially stable. The insured also spend more on health care, dashing some hopes of preventive-medicine advocates who have argued that coverage can save money — by keeping people out of emergency rooms, for instance. In Oregon, the newly insured spent an average of $778 a year, or 25 percent, more on health care than those who did not win insurance.

How Wider Coverage Affects Health Spending - In an article over the weekend, I took a close look at a continuing health study relevant to the Supreme Court ruling due Thursday on the federal health care law, the Affordable Care Act. The landmark study is the country’s best analysis of how Medicaid coverage changes the lives of previously uninsured, low-income adults – about 17 million of whom would automatically qualify for coverage in 2014 under a provision of the law. In 2008, Oregon had enough money to offer Medicaid to about 10,000 uninsured adults living at or below the poverty line. About 200,000 Oregonians fit that description, so the state held a lottery and about 100,000 individuals applied. A prestigious team of researchers then surveyed lottery winners and losers, giving a clear picture of the effect of coverage. The Oregon Health Study found that getting Medicaid significantly improved study participants’ self-reported mental and physical health, as well as their finances. But the Medicaid-insured group on average accounted for $778 more in annual medical expenses than the uninsured, a 25 percent difference. Readers had a number of great comments and questions that I’ll try to respond to here.

Single Payer Fight to Intensify in States if Court Strikes Down Health Care Law = One school of thought in progressive circles, if the Supreme Court strikes down the Affordable Care Act, is that this will afford an opportunity to return to the public with a full-throated call for “Medicare for All,” a single-payer system that would use taxes to fund health coverage for all of the country’s citizens, as is done throughout the world. This would reduce administrative costs and create added bargaining power to lower costs throughout the system. That has been the sine qua non of health policy on the left for some time, not least because it has proven effective in virtually every other country in the industrialized world. It fits best with the moral argument for universal care, contrasted with the cruelty of denying care in the name of “cost-cutting.” Leading this effort at the national level would be National Nurses United, the union for registered nurses that grew out of the old California Nurses Association. “The right fought [the Affordable Care Act] just as bitterly as they would have fought if it was single payer,” said Chuck Idelson, spokesman for National Nurses United — a union and trade association of registered nurses that has consistently supported Medicare for all. “Medicare continues to be an extremely popular reform — it’s one of the most popular reforms in U.S. history,” said Idelson.

11 facts about the Affordable Care Act - Ezra Klein  - In the past week, both Alec MacGillis and Sabrina Tavernise have written articles touching on how little the uninsured actually know about the Affordable Care Act. Given that polling shows the law remains unpopular even as its component parts — with the notable exception of the individual mandate — are very popular, it seems they’re not alone. So here’s a refresher on some of the law’s most significant policies and consequences:
1. By 2022, the Congressional Budget Office estimates (pdf) the Affordable Care Act will have extended coverage to 33 million Americans who would otherwise be uninsured. Here’s the graph:
2. Families making less than 133 percent of the poverty line — that’s about $29,000 for a family of four — will be covered through Medicaid. Between 133 percent and 400 percent of the poverty line —  $88,000 for a family of four – families will get tax credits on a sliding scale to help pay for private insurance.

Will we love the health-care law if it dies? - Any day now, the U.S. Supreme Court may make possible something that has yet to happen: an honest and complete discussion of the Patient Protection and Affordable Care Act (ACA). And if it throws out all or part of the law now popularly known as “Obamacare,” we will need a fearless conversation about how a conservative majority of the court has become a cog in a larger right-wing project to make progressive political and legislative victories impossible.  And here is where the court’s reintroduction of the health-care issue into the political debate could be turned into a blessing by allies of reform, provided they take advantage of the opportunity to do what they have never done adequately up to now. They need, finally, to describe and defend the law and what it does. The ACA is the victim of a vicious cycle: Obamacare polls badly. Therefore, Democrats avoid Obamacare, preferring to talk about almost anything else, while Republicans and conservatives attack it regularly. This makes Obamacare’s poll ratings even worse, which only reinforces the avoidance on the liberal side. The media have abetted the problem, but this is partly a response to the impact of the vicious cycle on how the issue has been framed. As a study by the Project for Excellence in Journalism has shown, terms used by opponents of the law, such as “government-run,” were much more common in the coverage than terms such as “pre-existing conditions.”

Healthcare reform op-ed - The current uptick in 'medical inflation' in private sector health industry is worth a separate post. The Standard and Poor Healthcare Economic Indices can be found here. Lifted from a note from Run 75441 on the link I sent on healthcare reform. Recently, Matt Stoller claimed Obama had a 61 vote majority in the Senate and enough to secure either Universal or Single Payer Healthcare. We all forget the one Senator from Aetna stand which killed any other options an Medicare for those starting at 55. President Obama did not have a filibuter proof 61 votes in the Senate for any other healthcare options muchless the ACA. The Blue Dogs (Nelson(s), Bacus, Bayh, Cantwell, Feinstein, Lincoln, Pryor, Widen, Conrad, etc) wouldn't move for any healthcare plan unless they brought home the bacon as Nelson attempted to do for Nebraska. Just plain ordinary obstructionism to block whatever this President would attempt to do. Senator Lieberman killed anything beyond the ACA. Former Editor of the New England Journal of Medicine and others should be sorry if the entire ACA is struck down or dismembered as we will go another decade before a President and a Congress take up the issue again and heathcare costs (for which healthacre insurance is a reflection) will again rise faster than inflation. Because of the power of Medicare, it has been able to rein in rising healthcare costs so far at less than 3% than that of the commercial market at about 9% %. Standard and Poors Healthcare Economic Indices .

From SCOTUISblog: The individual mandate survives as a tax. OH. MY. GOD!!!! -In Plain English: The Affordable Care Act, including its individual mandate that virtually all Americans buy health insurance, is constitutional. There were not five votes to uphold it on the ground that Congress could use its power to regulate commerce between the states to require everyone to buy health insurance. However, five Justices agreed that the penalty that someone must pay if he refuses to buy insurance is a kind of tax that Congress can impose using its taxing power. That is all that matters. Because the mandate survives, the Court did not need to decide what other parts of the statute were constitutional, except for a provision that required states to comply with new eligibility requirements for Medicaid or risk losing their funding. On that question, the Court held that the provision is constitutional as long as states would only lose new funds if they didn't comply with the new requirements, rather than all of their funding.

Supreme Court Upholds Mandate as Tax - In a surprise conclusion to a constitutional showdown, Chief Justice John Roberts joined the Supreme Court's four liberals Thursday to uphold the linchpin of President Barack Obama's health plan, the individual mandate requiring citizens to carry insurance or pay a penalty. By a 5-4 vote, the court held the mandate valid under Congress' constitutional authority "to lay and collect Taxes" to provide for "the general Welfare of the United States." The penalty for failing to carry insurance possesses "the essential feature of any tax," producing revenue for the government, Chief Justice Roberts wrote. Although the Obama administration always asserted the penalty was valid under the federal taxing power, until Thursday no court had fully accepted that theory. Those that upheld the Patient Protection and Affordable Care Act, as the law is known, did so under Congress's constitutional power to regulate interstate commerce. The court did find one part of the law unconstitutional, saying its expansion of the federal-state Medicaid program threatened states' existing funding. The court ruled that the federal government can't put sanctions on states' existing Medicaid funding if the states decline to go along with the Medicaid expansion.

185 pages later: The Affordable Healthcare Act stands - ScotusBlog is liveblogging this momentous event here. The Chief Justice went with the four liberal judges, with Kennedy dissenting. The entire decision can be read in pdf form here. The only thing that was certain was that one side of the aisle would be pissed at this decision and it appears that the rightwingers are the ones w/their panties in a wad. The mandate was taken as a tax by the court. There were at least three arguments put forth by the govt on this question, supporting it and the judges took the last argument and agreed with that one, namely that the mandate is really a tax. From the ruling, Roberts states: We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders. We ask only whether Congress has the power under the Constitution to enact the challenged provisions.”

The Supreme Court Says the Health Care Mandate is a Constitutional Tax - In its long-awaited decision on the Affordable Care Act, the Supreme Court has ruled that Congress can require people to either have health insurance or pay a tax if they don’t.   Because the High Court found that the penalty for not having coverage is a tax and not a fee or a banana, it ruled Congress has the constitutional authority to impose such a levy. In effect, the 5-4 decision written by Chief Justice Roberts concluded that Congress can tax you for failing to acquire insurance. Thus, the mandate as created by the ACA is constitutional. But the Court rejected the White House’s main legal argument—that Congress has the authority under the Commerce Clause to require people to get insurance. It will be interesting to see how legal scholars read this in the coming weeks: Is the Court saying that tax policy is the only tool Congress has to enact certain social welfare programs? If so, it would put an already-stressed tax code under even greater pressure.   The 5-4 decision is very complex. With dissents and concurring opinions, it runs 193 pages. Chief Justice Roberts joined Justices Ginsburg, Breyer, Sotomayor, and Kagan to uphold the ACA. Four justices—Thomas, Scalia, Alito, and Kennedy—concluded that the entire ACA is unconstitutional. Oddly, while the Court ruled the no-insurance penalty is a tax for the purpose of determining its constitutionality, it also said that it not a tax for other purposes. A law called the Anti-Injunction Act says that no-one can sue to stop the collection of a tax until after they have paid it. And some argued that the ACA was not ripe for legal review since no-one has yet paid the fee. But the Court concluded that, since Congress never called the penalty a tax, the law it not subject to the Anti-injunction law.     

Just a “Tax” -- I find it kind of funny that, in the end, what saved President Obama’s health care reform law was to go ahead and call a tax (the crucial cost-controlling provision previously known as a “mandate”), a “tax.” From the Washington Post’s Robert Barnes: At the core of the legislation is the mandate that Americans obtain health insurance by 2014. The high court rejected the argument, advanced by the Obama administration, that the individual mandate is constitutional under the Commerce Clause of the Constitution. Before Thursday, the court for decades had said it gave Congress latitude to enact economic legislation. But Roberts found another way to rescue it. Joined by the court’s four liberal justices — Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan — he agreed with the government’s alternative argument, that the penalty for refusing to buy health coverage amounts to a tax and thus is permitted. Roberts summed up the split-the-difference decision: “The federal government does not have the power to order people to buy health insurance,” he wrote. “The federal government does have the power to impose a tax on those without health insurance.” Later in the Post story, Justice Kennedy explains that the basic problem was that Congress (and implicitly the Obama Administration as well) wouldn’t call a tax a “tax”...

What the Supreme Court didn’t do - Though the Supreme Court’s ruling on the ACA has many implications, what its focus on the law doesn’t do by itself is make progress on the problems of cost, quality, and access in our health care system. Those problems remain in approximately the same state they were in when the ACA was passed in 2010. That law is an attempt to begin to address each of them, to various degrees and over time. But even its strongest advocates know it is only a first step. If health reform is to be further advanced, it will be through legislation, not litigation. In short and in my view, the Supreme Court’s attention to the ACA did nothing to promote a health and health system improvement agenda, despite what it may have done for the Court’s constitutional agenda or the political ambitions of some of the litigants.

The economics of the SCOTUS health care decision - The Supreme Court ruled today that the health care mandate is a tax, and hence constitutional. A majority of the Justices ruled that the penalty that must be paid if someone refuses to buy insurance is a form of tax that Congress can impose under its taxing power. That is, of course, good news for supporters of health care reform since a mandate, or something like it, is needed to stop health care markets from breaking down due to what economists call an "adverse selection" problem. The intent of the mandate is to overcome this adverse selection problem. Adverse selection, a type of market failure, plagues insurance markets of all types, and health care is no exception. The problem is that providers of health insurance do not have as much information about the health of the people buying the insurance as they have about themselves. The health insurance companies try to overcome this informational disadvantage through check-ups prior to granting coverage, health histories, and other means, but even so individuals are better informed about their current health and their health histories than the insurance companies.

The Real Winners, by Paul Krugman - So the Supreme Court — defying many expectations — upheld the Affordable Care Act, a k a Obamacare. There will, no doubt, be many headlines declaring this a big victory for President Obama, which it is. But the real winners are ordinary Americans... How many people are we talking about? You might say 30 million... But add in every American who currently works for a company that offers good health insurance but is at risk of losing that job...; every American who would have found health insurance unaffordable but will now receive crucial financial help; every American with a pre-existing condition who would have been flatly denied coverage in many states. In short, the winners from that Supreme Court decision are your friends, your relatives, the people you work with — and, very likely, you.

Health Care: Solidarity vs. Rugged Individualism - Chief Justice John Roberts was the deciding vote on the decision to view the “penalty” to be imposed on Americans who disobey the mandate to have health insurance as a form of tax and, on that basis, declared the mandate in the health care act to be constitutional.The penalties under the act amount to $695 per year per person (up to a maximum of $2,085 per family), or 2.5 percent of household income, which will be phased in during 2014-16. There are exemptions for individuals or families for whom these penalties would be a financial hardship. Given these relatively low penalties, one would predict that many younger and healthier Americans will choose to remain uninsured and pay the penalties rather than insure at the community-rated premiums that force them to subsidize the health care of sicker Americans.  While the federal subsidies toward the purchase of private health insurance through the state exchanges will mitigate this effect — by substantially lowering the net premium payable by lower-income people — healthy, higher-income people without the benefit of subsidies are likely to choose just to pay the penalty, knowing that they can avail themselves of community-rated coverage in case of serious illness. Viewed from that perspective, one could also construe the penalty under the mandate as something approximating the average per-capita actuarial cost that such individuals might impose as a group on hospitals. Such expenses — for what is known as “uncompensated care” — arise when patients without coverage are treated and released with unpaid bills.

Thank you, Judge Posner The chief justice, echoing Justice Scalia's "broccoli" comment at the oral argument, rejected (as did the four dissenters, and so that is now the view of a majority of the justices) the Commerce Clause ground for the mandate, saying that to accept that ground would mean that "Congress could address the diet problem by ordering everyone to buy vegetables." This argument, reassuring though it is to our obese population, confuses separate constitutional provisions. The Commerce Clause would empower Congress to order everyone to buy vegetables, because the market for most vegetables is interstate, but the "liberty" protected against the federal government by the Fifth Amendment would doubtless be interpreted to forbid such an imposition, just as it would be interpreted to forbid a federal law requiring everyone to be in bed with the lights out by 10 p.m. in order to economize on the use of electricity and, by doing so, reduce carbon emissions from electrical generating plants.-- Judge Richard A. Posner, on Slate, 5:38 p.m. today. Amen.   Justices Ginsburg, Breyer, Sotomayor and Kagan also made that point, in their concurrence today.  I’m thrilled to be in such exalted company.

How Chief Justice Rube Goldberg Saved the Individual Mandate - Imagine that the US Congress someday decides that as a matter of national security it is imperative for each American adult to be in possession of a smartphone.  (Perhaps they believe that we might all need to receive an important text message from Homeland Security in the event of a major terrorist attack.)   Suppose also that at the time of this decision there are 100 million American adults still without smartphones, and that the average smartphone costs $200. According to the Supreme Court of the United States, here is a procedure Congress is permitted to follow:

  • Step 1: The government levies a one-time $200 tax on everyone who does not possess a smartphone.
  • Step 2: The government purchases 100 million smartphones from companies of its choosing.
  • Step 3: The government delivers the 100 million smartphones to the people without smartphones.
  • But here is something Congress is not permitted to do:
  • Step 1: The government mandates that everyone without a smartphone buys a smartphone from the company of their own choosing.
  • Step 2:  Nothing else.   All done.

Now isn’t this restriction ridiculous?  For one thing, the extra steps in the first procedure add pointless bureaucratic costs to accomplish the very same end result accomplished by the second procedure.  Also, in the second procedure, American adults without a smartphone get to choose their own smartphone company.   But if the first procedure is followed, the government buys the phones for them from the companies the government chooses.  What sensible country would permit the former procedure but prohibit the latter?

What happens if a state refuses to expand Medicaid? Ctd - The Supreme Court decided today that states can refuse the ACA Medicaid expansion without having to give up federal funding for their existing Medicaid program. This was the threat in the ACA, the stick that was intended to persuade (or coerce, if you like) states into compliance. According to the court, that stick is unconstitutional. In terms of health policy, this is the most significant aspect of the court’s ruling. On Twitter, I’m seeing a lot of questions about what happens to the would-be Medicaid eligible people in states that refuse the ACA Medicaid expansion. I believe that Jared Bernstein has it right: Because the law was written assuming that the uninsured poor would be covered by Medicaid, subsidies to purchase health insurance in the exchanges don’t kick in until higher income levels [above 133% of the federal poverty level]. The poor won’t have to pay the tax penalty formerly known as the mandate because of a hardship exemption in the law, but neither will they get the subsidy until their incomes go up enough. .  Typically, as your income rises you become ineligible for benefits.  Here, you become eligible. I agree with Bernstein and Aaron and Kevin Drum (all posts worth reading) that it is unlikely many states will actually refuse the money that comes with Medicaid expansion due to the pressure they’re likely to receive from providers. But it is possible some may try, and in particular they may do so to extract concessions from regulators.

SCOTUS Post-Mortem: What's Next? - Today’s Supreme Court decision is complex and will likely take weeks to fully digest in terms of what it means for the future of ObamaCare. But a few things are becoming clear. For starters, the Court found that at least one part of ObamaCare is indeed unconstitutional. Specifically, the provisions of the statute by which the federal government would try to coerce the states into a massive Medicaid expansion were ruled invalid by the Court. This could potentially have very significant implications for the law, including how many people gain coverage and federal costs for the premium credit program (which is supposed to cover people above Medicaid eligibility up to 400 percent of the federal poverty line). Second, the fact that the Supreme Court allowed the mandate to stand by asserting that it is really a tax and not a mandate could have both important political and legal repercussions. Among other things, if the mandate is just an optional tax that can be paid in lieu of getting health insurance, then the basis by which the law was estimated by the Congressional Budget Office (CBO) would seem to be flawed. CBO, taking a page from the book of “behavioral economics,” assumed that very large numbers of American would sign up for insurance under the law even though it would be against their financial interests to do so. For many people, they would be far better off paying the tax than paying premiums to a health plan, but CBO assumed they would pay premiums nonetheless largely because signing up for coverage would be perceived as “the right thing to do” given its “mandatory” nature under federal law.  If CBO revises its estimates accordingly, the coverage numbers could fall dramatically even as the federal deficit estimates take a very large hit.

Health Law Ruling Removes One Economic Uncertainty - Business executives might not like the health-care law, but at least they now know that they’ve got to live with it.  The Supreme Court’s decision to uphold President Barack Obama’s signature piece of legislation has one clear upside: It diminishes an important piece of uncertainty from the business landscape which could has been impeding business hiring or investing. Love it or hate it, it is now clearly the law of the land. Talk to business executives these days, and they will tell you that one of the biggest problems holding them back from hiring and investing is uncertainty. Of course, there is always uncertainty, but the problem seems to be greater than normal these days … uncertainty over U.S. fiscal policy, uncertainty over Europe’s malaise, uncertainty over turmoil in the Middle East, and of course, uncertainty over the future of the U.S. health-care system. Health-care costs represent a large and growing piece of total employer spending on workers. In April, for instance, employers spent $1 on contributions to worker health and retirement plans for every $6 they spent on wages and salaries, according to Commerce Department data. Business executives have repeatedly told reporters at the Wall Street Journal in recent months that they have had trouble making decisions about the future because they don’t know what their cost base will look like even a few months down the road. The mere act of making a decision could now make it a little easier for decision makers to start planning.

Counterparties: The Supreme Court’s healthcare tax argument - If you haven’t seen by now, or were, like President Obama, confused by CNN and Fox News – or are already fleeing for Canada – the Supreme Court upheld Obamacare today. The individual mandate, Chief Justice John Roberts wrote in his ruling, is not broccoli or car insurance. It’s effectively a tax (even if Obama didn’t want to call it one). The court ruled that the penalty for not buying health insurance contained in Obamacare is part of Congress’s wide constitutional power over the tax code. Legal scholar Erwin Chemerinsky, in comments to NPR, put this into context: “Since 1937 not one Federal tax and spending program has been declared unconstitutional”. David Leonhardt helpfully points out that the tax code effectively penalizes Americans for all sorts of things – like not having children. The economic impact of the ruling is immense. To the right, it’s the “biggest permanent tax increase in history”. To the left, millions more Americans will now have access to healthcare. (In the long term, some 30 million more Americans will have health insurance; the short-term benefits include adding some 3.1 million young Americans to the ranks of the insured.) The ruling, Jared Bernstein writes, did have at least one dark cloud for Obamacare fans. The bill said the federal government could withhold all Medicaid funding from states that didn’t agree to expand Medicaid coverage to older and poorer Americans. The court shot that portion of the bill down, leading to worries that some states would begin withdrawing from Medicaid altogether. Josh Barro isn’t concerned; the choice is really “should we take this nearly free money from the federal government?”

‘Health law upheld, but health needs still unmet’: national doctors group -The following statement was released today by leaders of Physicians for a National Health Program ( Their signatures appear below. Although the Supreme Court has upheld the Affordable Care Act (ACA), the unfortunate reality is that the law, despite its modest benefits, is not a remedy to our health care crisis: (1) it will not achieve universal coverage, as it leaves at least 26 million uninsured, (2) it will not make health care affordable to Americans with insurance, because of high co-pays and gaps in coverage that leave patients vulnerable to financial ruin in the event of serious illness, and (3) it will not control costs. Why is this so? Because the ACA perpetuates a dominant role for the private insurance industry. Each year, that industry siphons off hundreds of billions of health care dollars for overhead, profit and the paperwork it demands from doctors and hospitals; it denies care in order to increase insurers’ bottom line; and it obstructs any serious effort to control costs.

Money Talking: Will Obamacare Ruling Save You Money? - Will the ruling on Obamacare actually save you money? Does it address the right issues? And is the age of the celebrity CEO back? New York Times columnist Joe Nocera and I take a look at these questions and more on the latest installment of WNYC’s new radio show, “Money Talking,” which you can hear by clicking on the play button below.

How the Affordable Care Act affects you - The Patient Protection and Affordable Care Act, or ACA, was upheld by the Supreme Court Thursday. Specifically, the high court ruled that the requirement that either individuals buy health insurance or pay a penalty is not a violation of the United States Constitution.  But that doesn't change the fact the law is a tangled mess of rules, regulations and policies. Several changes went into effect in 2012 and some of the biggest changes won't happen for several years and some changes will be phased in. There is no doubt that the new health care rules will have an impact on what folks pay for health insurance. By 2014, when the law is required to be fully phased in, the insurers will no longer be able to turn away anyone because of a pre-existing condition. Also, most people will be required to obtain at least basic health insurance coverage or pay a fee if they do not have health insurance. Here is what you need to know about some of the changes that have already taken effect.

Conservatives seize on tax label to attack healthcare ruling -— Critics of President Obama's healthcare overhaul are seizing on the Supreme Court’s ruling that the individual mandate can be upheld as a tax penalty, saying that formulation offers them a fresh way to attack the measure. “If they’re going to uphold it, frankly this is the most helpful way to uphold it,” said Tim Phillips, president of the conservative advocacy group Americans for Prosperity, which on Friday launched a new $9-million ad campaign calling the measure “one of the largest tax increases in American history.” “Shouldn’t Obama’s priorities have been creating jobs and ending reckless spending?” asks a female narrator in the spot, which the group says is airing in Colorado, Florida, Iowa, Minnesota, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Pennsylvania, Virginia and Wisconsin. “Instead, he focused on a $2-trillion healthcare takeover that we have to pay for. How can we afford this tax? We’re already struggling.” The same talking point was also taken up by Crossroads GPS, another tax-exempt advocacy group, which said Friday it updated an ad it is running in North Dakota against Democratic Senate candidate Heidi Heitkamp to accuse her of supporting a measure that “raises half a trillion dollars in taxes on Americans.”

The Obama Poll Tax - I’ve said my piece about the health racket bailout and Stamp mandate. I don’t have anything to add, except that I’m pleased to see how the SCOTUS punted on the most totalitarian interpretation of the commerce clause, instead choosing to validate the mandate as a constitutionally allowed poll tax. (This was a slightly less bad de jure corporatist enshrinement, since politicians have a harder time defending corporatism via a tax than they do where they can use subterfuges like “the commerce power”. Not that it makes a big difference as far as what’s actually done, but it does provide more opportunities for political wedges. Plus, the joke’s on the liberals as they have to keep flip-flopping to follow their Fuehrer’s party line on this – It’s not a tax! (Political/legislative stage); Yes it is a tax! (Judicial stage.) It’s always amusing to see liberals having to defend increasingly regressive taxation while out of the other side of their mouths they beg for more progressive taxes. It’s also good to get lessons in how, for the 99%, all taxation is regressive and will remain so, until we abolish it completely.) For the occasion, I’ll repost my essay on the Stamp mandate as a poll tax, and how in the past mass civil disobedience has defeated similar assaults. One thing which is beyond any doubt is that this mandate is not only a mechanism for propping up the health insurance rackets, but to force people trying to withdraw from the cash economy back into it. That’s always the purpose of any poll tax, the most radically regressive tax of all.

Roberts' Switch - Robert Reich: Today a majority of the Court upheld the constitutionality of the Affordable Care Act, otherwise known as Obamacare in recognition of its importance as a key initiative of the Obama administration. The big surprise, for many, was the vote by the Chief Justice of the Court, John Roberts, to join with the Court’s four liberals. Roberts’ decision is not without precedent. Seventy-five years ago, another Justice Roberts – no relation to the current Chief Justice – made a similar switch. Justice Owen Roberts had voted with the Court’s conservative majority in a host of 5-4 decisions invalidating New Deal legislation, but in March of 1937 he suddenly switched sides and began joining with the Court’s four liberals. In popular lore, Roberts’ switch saved the Court – not only from Franklin D. Roosevelt’s threat to pack it with justices more amenable to the New Deal but, more importantly, from the public’s increasing perception of the Court as a partisan, political branch of government. Chief Justice John Roberts isn’t related to his namesake but the current Roberts’ move today marks a close parallel. By joining with the Court’s four liberals who have been in the minority in many important cases – including the 2010 decision, Citizen’s United vs. Federal Election Commission, which struck down constraints on corporate political spending as being in violation of the Constitution’s First Amendment guaranteeing freedom of speech – the current Justice Roberts may have, like his earlier namesake, saved the Court from a growing reputation for political partisanship.

Supreme Court puts new limits on Commerce Clause. But will it matter? - So the Supreme Court upheld the Affordable Care Act. But in doing so, Chief Justice John Roberts’ majority opinion appears to have placed new limits on Congress’s ability to regulate interstate commerce. Will this make future federal legislation harder to enact? Or does Congress still, in theory, have the power to make everyone buy broccoli? That’s a key question legal scholars are now mulling as they pick through the decision. In its decision Thursday, five justices, including Roberts, ruled that the health reform law’s requirement for all Americans to purchase health insurance runs afoul of the Constitution’s Commerce Clause. Basically, the court ruled that Congress can regulate existing interstate commercial activity, but it can’t directly force people to enter into a market (by, say, requiring them to purchase health insurance). “The power to regulate commerce,” Roberts wrote, “presupposes the existence of commercial activity to be regulated.” This subtle distinction between regulating activity and inactivity is one that libertarian legal scholar Randy Barnett had developed and pushed into the mainstream. It’s a new concept. Yet for the purposes of the Affordable Care Act, it ended up not mattering. Roberts ruled that the individual mandate was akin to a tax — Americans can either purchase health insurance or pay a fine through the IRS. And, since taxes are perfectly within Congress’ powers to levy, the law was upheld.

The difference between Social Security/Medicare and Medicaid under the Spending Clause, in light of the ACA opinion - While the Court’s upholding the mandate is deservedly taking front stage in the media coverage, the Court’s decision to strike down a part of the Medicaid expansion may ultimately have broader jurisdprudential consequence.  That, at least, will be a subject of debate among lawyers and academics in the days and weeks to come.  This is the first time (as far as I know) that the Court has actually found a Spending Clause condition unconstitutionally coercive.  Whether it establishes principles that make many other programs vulnerable is a question that will require further analysis and debate.  -- Kevin Russell, Medicaid holding may have broad implications, SCOTUSblog I one of the many updates to my initial post this morning, mentioned this exchange between Lyle Denniston and Tom Goldstein (SCOTUSblog’s publisher: Lyle: The rejection of the Commerce Clause and Nec. and Proper Clause should be understood as a major blow to Congress's authority to pass social welfare laws. Using the tax code -- especially in the current political environment -- to promote social welfare is going to be a very chancy proposition. Tom: I dissent from Lyle's view that the Commerce Clause ruling is a major blow to social welfare legislation. I think that piece of the decision will be read pretty narrowly.

My opinion: Almost no practical limiting effect on Congress’s regulatory powers Some people think Roberts cleverly used this case to severely limit Congress’s regulatory powers.  Others strongly disagree. I’m with the others. I think that as a practical matter, this will have almost no limiting effect at all on Congress’s regulatory powers. I can’t think of any circumstance in which this limitation would apply and in which there would be no other enumerated power under which Congress could enact the law. In this case, the other enumerated power is the taxing power. In the case of, say, the Selective Service Act, the enumerated power is the power to provide for the national defense. Etc. The reason that this limitation is insignificant is that the Commerce Clause argument was really a disguised Fifth Amendment due process (liberty! broccoli!) argument, and Roberts flatly rejected that. He said, no, the Commerce power doesn’t allow this but the taxing power does—and, no, it doesn’t violate fundamental constitutional concepts of freedom, of liberty! There may be other things that could be compelled under the taxing power—broccoli purchases, maybe—that would violate Fifth Amendment due process concepts (freedom! liberty!) and thus be unconstitutional on that basis, just as there are things that could be compelled under the Commerce power that would violate that concept of due process and thus be unconstitutional on that basis. But this does not violate that concept of due process

More on ACA Decision: “A Dark Cloud on a Sunny Day” -  Yves here. This post amplifies Lambert’s key concern about the Supreme Court decision on the Affordable Care Act, that it would curtail Congress’ ability to pass social welfare laws, and facilitate the continuing rollback of New Deal protections. Cross posted from TalkLeft. Yesterday, a happy day for many of us, where the Affordable Care Act was upheld in a 5-4 decision (PDF) authored by Chief Justice John Roberts, there is a dark cloud attached. The Chief Justice accepted the federal government’s argument that Congress had exercised its taxing power in enacting the mandate. But rather than being a judicial minimalist and deciding only those constitutional questions that must be decided, the Roberts Court bulled on to decide issues that need not have been addressed—whether the mandate exceeded the Congress’ Commerce and Necessary and Proper power. And the Roberts opinion on the scope of the national government’s power to address national problems is a shot across the bow to the Supreme Court’s New Deal jurisprudence that underpins our modern national government. In the early 20th century, this Court regularly struck down economic regulation enacted by the peoples’ representatives in both the States and the Federal Government. [...]THE CHIEF JUSTICE’s Commerce Clause opinion [...] bear[s] a disquieting resemblance to those long-overruled decisions. Ultimately, the Court upholds the individual mandate as a proper exercise of Congress’ power to tax and spend“ for the . . . general Welfare of the United States.” [...] I concur in that determination, which makes THE CHIEF JUSTICE’s Commerce Clause essay all the more puzzling. Why should THE CHIEF JUSTICE strive so mightily to hem in Congress’ capacity to meet the new problems arising constantly in our ever developing modern economy? I find no satisfying response to that question in his opinion.12 [Emphasis supplied.] —Justice Ruth Bader Ginsburg

Ruling Could Allow Republicans to Deny Medicaid to Millions of Poor Americans - The Affordable Care Act didn’t survive entirely as passed—somewhat lost amidst the intense focus on the individual mandate was a ruling that part of the law’s Medicaid expansion was unconstitutional. The Supreme Court’s modification of the law probably won’t have a fundamental, long-term impact, but does make it easier for rogue Republican governors to exempt their states from participating in the expansion—and could cost millions of low-income, uninsured Americans a chance at government health care. First, a brief refresher on what the ACA did to Medicaid: States set up their Medicaid system according to federal regulations and get most of the money from the feds, while funding some of the program themselves. Healthcare reform aimed to expand coverage, in part, by expanding Medicaid to cover people up to 133 percent above the poverty line (as compared to 63 percent now)—that is, at or below income of $30,700 for a family of four. This expansion would extend coverage to 16 million additional people by 2019. To facilitate this expansion, the law offered states 90 percent of the cost, coupled with severe penalties if they chose not to participate—states would lose almost all existing federal grants for the program. This made it extremely unlikely that any governor or legislature, no matter how red, would essentially trash Medicaid in their state by opting out of an expansion. Twenty-six states then challenged that part of the law, arguing that it unconstitutionally coerced them to join a federal program. What the Court ruled, after much internal maneuvering, was that while the federal government could offer incentives for states to expand Medicaid, the penalties for not doing so were indeed unconstitutionally coercive.

Why Republican Governors Will Absolutely Hold Out on Expanding Medicaid - Those who liked yesterday’s 5-4 verdict in NFIB v. Sebelius, the formal name of the Affordable Care Act lawsuit, have made two arguments knocking down concerns that the ruling could have negative ramifications. One of them I completely disagree with, and one I think needs to be looked at a bit differently. I want to take both of them in turn in separate posts. Let’s start with the one where I disagree. As I explained yesterday, the part of the ruling around the Medicaid expansion, where 7 justices agreed that this was basically a new program, and existing Medicaid funds could not be taken back by the federal government if states declined to comply, has the most near-term consequences for health care itself. Given that Medicaid expansion created half of the coverage increases in the bill, this offered half of the states the opportunity to really take an axe to the program by simply refusing to expand their Medicaid programs. And it leaves the poor between around 50% and 133% of the poverty line in a real no man’s land, because they would both be ineligible for Medicaid AND the coverage subsidies in the exchanges (and ineligible for the mandate, but that just puts them in the status quo, which is terrible). This has been dismissed by the Democratic establishment as implausible. But it’s such a good deal for those states, they say. But everyone’s in Medicaid now, they say. Nancy Pelosi has a representative sample:

Medicaid Expansion Rejection Would Particularly Impact People of Color - I was just on a conference call where Governor Martin O’Malley (D-MD) was asked whether he thought Republican governors might opt out of the Medicaid expansion in light of the Supreme Court’s ACA ruling yesterday. He replied, “I don’t know. Some of our colleagues would like to get out of being members of the Union.” I think that’s the right way to look at it. These are an ideologically extreme set of characters, and they’re not going to go quietly, meekly accepting funds that expands health care for poor people. That goes against their worldview. O’Malley did take the persistent view, on three separate occasions, that states which fail to implement that and other elements of Obamacare will find themselves at a competitive disadvantage. Touting Maryland as an “early implementer, O’Malley said that “We believe that covering our people, bringing down health costs long-term, that makes our states more competitive.” He in particular singled out potential Romney VP picks Bobby Jindal and Bob McDonnell, his gubernatorial counterpart in neighboring Virginia. In a memorable line, he said that McDonnell has problems with his legislature in Virginia, because “the only health care mandate they can embrace is trans vaginal ultrasounds for women.” Again, this is the mentality. It’s not logical or rational in the short term. But it’s pretty clear that will be their perspective. Especially because those who would be left on the other side of the divide, in the event of rejecting the Medicaid expansion, would so clearly be on the side of the “other”:

Over 9 Million Low-Income Americans at Risk From State Medicaid Expansion Opt-Out - I keep seeing these confident predictions from health care experts that no state would be so foolish as to reject the Medicaid expansion for their state. I want to set up a poker game with these people, to provide for my family in retirement. How many times can you say “well that’s so radical and extreme, it could never happen!” and be wrong before you review your assumptions? Here comes the New York Times with the first wave of quotes from Republican states. I’m going to annotate these with the number of people who would be covered under the Medicaid expansion (a full list will come later in the post):Republican officials in more than a half-dozen states said they opposed expanding Medicaid or had serious doubts about it, even though the federal government would pick up all the costs in the first few years and at least 90 percent of the expenses after that [...] Gov. Dave Heineman of Nebraska (83,898 covered in Medicaid expansion), a Republican who is chairman of the National Governors Association, indicated that he was against expanding Medicaid eligibility. In South Carolina (344,109 covered), Rob Godfrey, a spokesman for Gov. Nikki R. Haley, said, “We’re not going to shove more South Carolinians into a broken system that further ties our hands when we know the best way to find South Carolina solutions for South Carolina health problems is through the flexibility that block grants provide.” In New Hampshire (55,918 covered), State Representative Andrew J. Manuse said he and other Republicans were already working to block the expansion of Medicaid. “We can’t afford it,” Mr. Manuse said. “It’s as simple as that. Thank God the Supreme Court gave us an option.”

George Will: Supreme Court gives conservatives a consolation prize - Conservatives won a substantial victory Thursday. The case challenged the court to fashion a judicially administrable principle that limits Congress’s power to act on the mere pretense of regulating interstate commerce. At least Roberts got the court to embrace emphatic language rejecting the Commerce Clause rationale for penalizing the inactivity of not buying insurance: “The power to regulate commerce presupposes the existence of commercial activity to be regulated. . . . The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority. . . . Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and — under the government’s theory — empower Congress to make those decisions for him.”  If the mandate had been upheld under the Commerce Clause, the Supreme Court would have decisively construed this clause so permissively as to give Congress an essentially unlimited police power — the power to mandate, proscribe and regulate behavior for whatever Congress deems a public benefit. Instead, the court rejected the Obama administration’s Commerce Clause doctrine.

The Supreme Court and ACA -- I liked Will’s post, these comments from John Cochrane, Ross Douthat, Megan McArdle, and these remarks by Ezra, among others.  See also Krauthammer.  A few points:

  • 1. Trust is higher now, and that is worth something, even if like me you never favored the mandate segment of ACA.
  • 2. Implicit in some of these writings is the notion of “contingent on the fact that Roberts upheld ACA.”  You might have thought ex ante: “I don’t think Roberts should uphold ACA.”  But Roberts is a smart and savvy guy, smarter and savvier than most of us and of course better informed about the Court than just about anyone.  You could have held this view ex ante and still now hold: “Conditional on the fact that Roberts upheld ACA, I should think he did the right thing.” Hardly anyone employs that line of reasoning, but that is a sign of our irrationality.
  • 3. The Court maximizing or at least defending its prestige is sometimes necessary, even in a well-established constitutional democracy.  The Court is not there to do what you want it to, or even necessarily to do what is right.  Get used to that.

David Brooks thinks that the ACA should be replaced with … lots of stuff already in the ACA - In a column about the Supreme Court’s health care decision today, David Brooks offers up a series of recommendations about how to improve the nation’s health care system that he’s positive are not already in the Affordable Care Act (ACA). It’s worth quoting at length because it’s so revealing: “Crucially, we haven’t addressed the structural perversities that are driving the health care system to bankruptcy. Obamacare or no Obamacare, American health care is still distorted by the fee-for-service system that rewards quantity over quality and creates a gigantic incentive for inefficiency and waste. Obamacare or no Obamacare, the system is still distorted by the tax exclusion for employer-provided plans that prevents transparency, hides the relationship between cost and value and encourages overspending. … Republicans tend to believe that the perverse incentives can only be corrected if we repeal Obamacare and move to a defined-benefit plan — if we get rid of the employer tax credit and give people subsidies to select their own plans within regulated markets.” Let’s take these in turn: American health care is still distorted by the fee-for-service system that rewards quantity over quality … inefficiency and waste”Actually, no. The ACA has introduced pretty sweeping reforms to payment delivery; see the Independent Payments Advisory Board (IPAB), created precisely to engage the issues Brooks raises.“Obamacare or no Obamacare, the system is still distorted by the tax exclusion for employer-provided plans that prevents transparency…”Again, no. The ACA does indeed limit the value of this tax exclusion over time.

The Enemy of My Enemy is Not My Friend, or John Roberts Plays the Long Game - It was only last week when liberal pundits were more alert.  What some of them knew about Arizona, all of them appear to have forgotten about PPACA. The Supreme Court decision last week invalidated three points of severe state overreach; even Anthony Kennedy couldn’t imagine that “you will carry your papers at all times” was reasonable.  But they left in place a fourth issue—collateral paper-checking for another reason—until it could go into effect.    And if they do not, there will be a case that will reach the Supreme Court after the law is in effect and further revision will be possible. Steve Benen appears to have gotten it correct: John Roberts took one look at the company he was keeping—and maybe spoke with a few hospital administrators—and flipped sides. Or, to quote Benen: The four dissenters demanded that the Supreme Court effectively throw out the entirety of the law -- the mandate, the consumer protections, the tax cuts, the subsidies, the benefits, everything. To reach this conclusion, these four not only had to reject a century of Commerce Clause jurisprudence, they also had ignore the Necessary and Proper clause, and Congress' taxation power. I can't read Chief Justice John Roberts' mind, but it wouldn't surprise me if the extremism of the four dissenters effectively forced him to break ranks. What abides is that Roberts also knows that he will probably get a better case from which to dismantle “Obamacare.” It didn’t especially take contortion to call the penalty a taxRoberts, it’s a small step to saying that it is enforced and administered in the same manner as a tax, and therefore it may be called a tax.  Voila; he doesn’t have to declare that we have returned to the 19th Century. He has those votes when he wants them: when the "tax" is administered "unfairly." some time in late 2014 or early 2015, when 2014 Federal Income Tax forms are filed.

It’s Still Sick, the Price of Medicine - It’s sick, the price of medicine. Thursday’s Supreme Court ruling does little to change the rising trajectory of health-care costs. The court upheld the Affordable Care Act‘s mandate that all individuals carry insurance. Like other major parts of ACA, this provision won’t go into effect until 2014. What mandates ensure is that more money will be available for insurance companies to pay medical costs. In effect, it shifts money that would have been spent elsewhere in the economy into the health-care sector. What broader insurance coverage doesn’t do, however, is address the cost problem. Medical care already accounts for about 18% of U.S. economic output–and growing. The projected surge in costs is the coming train wreck that threatens to overwhelm economic resources especially on the government level.Controlling costs under ACA is supposed to come through recommendations by the Independent Payment Advisory Board. The 15-member IPAB — made up of health-care professionals and representatives for consumers and retirees — will focus on finding ways to reduce the growth of Medicare. (With no changes, the Congressional Budget Office projects Medicare spending to almost double in the next 10 years.)

PNHP Research: The Case for a National Health Program | Physicians for a National Health Program - Over the past two decades, PNHP research has “framed” the debate and focused it on the need for fundamental health care reform. Some of these findings have become so well known that new members of PNHP (and most members of Congress) may not know that we are the source:

1. Administrative costs consume 31 percent of US health spending, most of it unnecessary.
2. Medical bills contribute to half of all personal bankruptcies. Three-fourths of those bankrupted had health insurance at the time they got sick or injured.
3. Taxes already pay for more than 60 percent of US health spending Americans pay the highest health care taxes in the world. We pay for national health insurance, but don’t get it.
4. Despite spending far less per capita for health care, Canadians are healthier and have better measures of access to health care than Americans.
5. Business pays less than 20 percent of our nation’s health bill. It is a misnomer that our health system is “privately financed” (60 percent is paid by taxes and the remaining 20 percent is out-of-pocket payments).
6. For-profit, investor-owned hospitals (Cite 1, Cite2, Cite 3, & Cite 4), HMOs5 and nursing homes (Cite 6 & Cite 7) have higher costs and score lower on most measures of quality than their non-profit counterparts.

Millions to stay uninsured under Obamacare - 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 U.S. residents 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," says Nicole Lamoureux, executive director of the Alexandria, Va.-based National Association of Free & Charitable Clinics, which represents about 1,200 clinics nationally. 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.

Look Who Opposes Obamacare, by Fat Margins - The Supreme Court today upheld the Affordable Care Act, otherwise known as Obamacare.  Judging from the polls, American public opinion appears to be very sharply divided over the legislation.  Some view it as socialism, others as the first success in a half-century of efforts to achieve a sensible national policy on health care.   What explains the wide divergence of views?   An economists’ approach - cynical or naïve depending on how you look at it - would be to assume that citizens vote according to their own personal interests.   Getting the uninsured onto paid insurance through the individual mandate is very much in some people’s interest, but not necessarily as strongly in others’ interests.  Let’s take a look.  Those who have the most to gain from President Obama’s health care legislation are those who have a pre-existing condition or are pre-disposed to illness, for example because they are overweight.  They are more likely to need medical care in the future, but can be charged higher rates if they try to buy private insurance, by virtue of their condition.  They can be excluded completely.   (Each obese American incurs medical costs 42% higher than those of normal weight.)   Figure 1:  States with higher obesity rates tend to oppose the Affordable Care Act

Mandate No! MLR SI!: Heard here frist (sic)  Starting with the MLR. Which you did hear about here first in this AB post from July 2009 HR3200 Sec 116: Golden Bullet or Smoking Gun . MLR stands for Medical Loss Ratio which in the final version of ACA was set at 85% for the Group market and 80% for the Individual market for health insurance policies issued by private insurers. Now 'Medical Loss' is itself an interesting term of art, it represents the actual amount of insurance premiums collected 'lost' via being expended on actual care paid for under your policy. That is for insurance companies the actual end service being delivered from purchase of their product is from their perspective a dead loss to be reduced. Hence a business model built around denying claims. MLR minimums start to flip that model on its head. Under the rule if the ratio of premium collected to provider payments issued exceeds 15% or 20% respectively in Group or Individual market the difference has to be rebated to the policy holder. And indeed such rebate checks actually went out this year, this provision having already kicked in. Well after this morning's ruling that rule will continue to operate until specifically repealed. And it is important, though maybe not as much as I was able to convince Donny Shaw of when he put this post up on Open Congress on Nov 14, 2009 The Most Important Health Care Reform Provision You've Never Heard Of. I still think MLR is transformational.

Health Spending Stopped Growing - in Other Rich Countries - In 2010, health care spending stopped growing altogether across the member countries of the Organization for Economic Cooperation and Development, according to a report released Thursday. From 2000 to 2009, total health spending grew by an average of about 5 percent each year in these developed countries, after adjusting for inflation. But in 2010, it ground to a halt, the organization said. The stagnation was primarily caused by declines in public health care spending in many of Europe’s distressed economies. The United States did not follow suit. As you can see in the chart below, American health spending growth slowed to 2.4 percent in 2010 from an average of 4.3 percent in each of the previous 10 years, but it did not stop altogether:

In Documents on Pain Drug, Signs of Doubt and Deception - A research director for Pfizer was positively buoyant after reading that an important medical conference had just featured a study claiming that the new arthritis drug Celebrex was safer on the stomach than more established drugs. “They swallowed our story, hook, line and sinker,” he wrote in an e-mail to a colleague. The truth was that Celebrex was no better at protecting the stomach from serious complications than other drugs. It appeared that way only because Pfizer and its partner, Pharmacia, presented the results from the first six months of a yearlong study rather than the whole thing. The companies had a lot riding on the outcome of the study, given that Celebrex’s effect on the stomach was its principal selling point. Earlier studies had shown it was no better at relieving pain than common drugs — like ibuprofen — already on the market.

Role of stress in dementia investigated - UK experts are to begin a study to find out if stress can trigger dementia. The investigation, funded by the Alzheimer's Society, will monitor 140 people with mild cognitive impairment or "pre-dementia" and look at how stress affects their condition. The researchers will take blood and saliva samples at six-monthly intervals over the 18 months of the study to measure biological markers of stress. They hope their work will reveal ways to prevent dementia. The results could offer clues to new treatments or better ways of managing the condition, they say. People who have mild cognitive impairment are at an increased risk of going on to develop dementia - although some will remain stable and others may improve. And past work suggests mid-life stress may increase a person's risk of Alzheimer's disease. A Swedish study that followed nearly 1,500 women for a period of 35 years found the risk of dementia was about 65% higher in women who reported repeated periods of stress in middle age than in those who did not. Scottish scientists, who have done studies in animals, believe the link may be down to hormones the body releases in response to stress which interfere with brain function.

Glucose Deprivation Activates Feedback Loop That Kills Cancer Cells, Study Shows - Compared to normal cells, cancer cells have a prodigious appetite for glucose, the result of a shift in cell metabolism known as aerobic glycolysis or the "Warburg effect." Researchers focusing on this effect as a possible target for cancer therapies have examined how biochemical signals present in cancer cells regulate the altered metabolic state. Now, in a unique study, a UCLA research team led by Thomas Graeber, a professor of molecular and medical pharmacology, has investigated the reverse aspect: how the metabolism of glucose affects the biochemical signals present in cancer cells. In research published June 26 in the journal Molecular Systems Biology, Graeber and his colleagues demonstrate that glucose starvation -- that is, depriving cancer cells of glucose -- activates a metabolic and signaling amplification loop that leads to cancer cell death as a result of the toxic accumulation of reactive oxygen species, the cell-damaging molecules and ions targeted by antioxidants like vitamin C.

Chart: What Killed Us, Then and Now - Via The Washington Post's Sarah Kliff comes this incredible chart from the New England Journal of Medicine comparing the reasons we die now to the way Americans went to their graves a century ago:  The chart ranks the top ten causes of death for each year. In addition to the remarkable decline in mortality overall, it's also noticeable how heart disease and cancer have surged to become two of America's top killers. In 1900, cancer and heart disease accounted for 18 percent of all deaths. Today, that figure's jumped to 63 percent. In addition to being responsible for a greater share of deaths overall, the absolute number of people being killed by these chronic conditions has also grown, from 201 people out of every 100,000 in 1900 to nearly 380 per 100,000 today. Part of the increase can be traced to our increasingly sedentary lifestyles. But we shouldn't forget that vaccines, regular screenings, and other advances in medicine have drastically reduced the incidence of other ailments that once sealed many an American's fate. The way we've chopped up and redefined some conditions has also changed the country's death profile. There's the seemingly endless "discovery" of new diseases. And it's worth pointing out that the rise of cancer and heart disease, as illnesses that generally affect people late in life, are themselves an indicator of improvements in a society's overall health. The fact that more people are living long enough to be diagnosed with cancer says something about how far we've come.

World's first GM babies born - The world's first genetically modified humans have been created, it was revealed last night. The disclosure that 30 healthy babies were born after a series of experiments in the United States provoked another furious debate about ethics. So far, two of the babies have been tested and have been found to contain genes from three 'parents'. Fifteen of the children were born in the past three years as a result of one experimental programme at the Institute for Reproductive Medicine and Science of St Barnabas in New Jersey. The babies were born to women who had problems conceiving. Extra genes from a female donor were inserted into their eggs before they were fertilised in an attempt to enable them to conceive. Genetic fingerprint tests on two one-year- old children confirm that they have inherited DNA from three adults --two women and one man. The fact that the children have inherited the extra genes and incorporated them into their 'germline' means that they will, in turn, be able to pass them on to their own offspring. Altering the human germline - in effect tinkering with the very make-up of our species - is a technique shunned by the vast majority of the world's scientists. Geneticists fear that one day this method could be used to create new races of humans with extra, desired characteristics such as strength or high intelligence.

Bone marrow donors soon may be compensated - Certain bone marrow donors could soon be compensated for their life-saving stem cells after federal officials declined to take the matter to the U.S. Supreme Court, allowing a lower court order to become law. At least one agency,, hopes to begin a pilot program offering up to $3,000 in scholarships, housing vouchers or charity donations -- but not cash -- in exchange for matching donations of marrow cells derived from blood. “This decision is a total game-changer,” said Jeff Rowes, a senior attorney with the Institute for Justice, which filed the lawsuit three years ago on behalf of cancer victims and others seeking bone marrow matches. “Any donor, any doctor, any patient across the country can use compensation in order to get bone marrow donors.”

2009 swine flu outbreak was 15 times deadlier: study (Reuters) - The swine flu pandemic of 2009 killed an estimated 284,500 people, some 15 times the number confirmed by laboratory tests at the time, according to a new study by an international group of scientists. The study, published on Tuesday in the London-based journal Lancet Infectious Diseases, said the toll might have been even higher - as many as 579,000 people. The original count, compiled by the World Health Organization, put the number at 18,500.

Weaponized Bird Flu Research Published as Virus ‘Just Mutations’ Away from Pandemic - A scientific paper was released this past week after much controversy. The findings of the paper, some feared, could be used to develop a highly contagious versionof the Avian H5N1 (Bird Flu) virus. While those fears have largely been quelled, the researcher’s findings indicate that a pandemic of H5N1 is “just 3 mutations away.”  Currently, H5N1 can only be transmitted to humans from birds. It cannot pass from human to human like the cold virus or other influenza viruses. According to The Times of India, scientists say there are already some strains of the bird flu that are three mutations away from being passable by humans. “With the information we have, it is impossible to say what the exact risk of the virus becoming airborne transmissible among humans,” said Professor Derek Smith, one of the study authors. “However, the results suggest that the remaining three mutations could evolve in a single human host, making a virus evolving in nature a potentially serious threat.”

Natural Contamination - Groundwater is water located beneath the earth's surface in soil pore spaces and in the fractures of rock formations. A unit of rock or an unconsolidated deposit is called an aquifer when it can yield a usable quantity of water. The depth at which soil pore spaces or fractures and voids in rock become completely saturated with water is called the water table. Ground water, of course, can be contaminated. However, it is not only contaminated due to man made activities. Potentially harmful levels of naturally occurring arsenic, uranium, radium, radon and manganese have been found in some bedrock groundwater that supplies drinking water wells in New England, according to a new U.S. Geological Survey study. While the presence of contaminants, such as arsenic, in some groundwater was already known, this new study identifies several that hadn’t been previously identified. This new report also provides information on the type of bedrock geologic formations where high concentrations are most likely to be found, which will help identify areas most at risk of contamination.

Poisoning Workers at the Bottom of the Food Chain - Laboring in the blackberry fields of central Arkansas, the 18-year-old Mexican immigrant suddenly turned ill. Her nose began to bleed, her skin developed a rash, and she vomited. The doctor told her it was most likely flu or bacterial infection, but farmworker Tania Banda-Rodriguez suspected pesticides. Under federal law, growers must promptly report the chemicals they spray. It took the worker, and a Tennessee legal services lawyer helping her, six months to learn precisely what chemical doused those blackberry fields. The company ignored her requests for the information. The Arkansas State Plant Board initially refused to provide records to her lawyer, saying it didn't respond to out-of-state requests. An Arkansas inspector, dispatched after the complaint, didn't initially discern what pesticides were used the day the worker became ill, records show. The episode is as telling a snapshot today as it was six years ago for one of America's most grueling and lowest-paying vocations. Pesticides can endanger farmworkers, but thin layers of government protect them and no one knows the full scope of the environmental perils in the fields.

The Surprising Reason Lyme Disease is Out of Control - Many people think a robust deer population is to blame for the rising rates of Lyme disease in many states. But a new study appearing in the Proceedings of the National Academy of Sciences suggests it's the decline of another animal that's actually causing the Lyme disease spike.  Researchers found that as coyotes expand their range and build a larger population, they're feeding on more red foxes, who would typically control Lyme-disease-carrying mice. Deer also carry Lyme, but this study suggests that deer populations had little to do with Lyme disease epidemics in certain states.  Lyme disease is a bacterial infection that causes a wide range of waxing and waning symptoms, making it sometimes hard to diagnose the disease. While finding a bull's-eye rash on your body after a tick bite is a surefire way to tell you've been infected with Lyme, many people never get the rash. In fact, most people with chronic Lyme never even recall being bitten by a tick in the first place.

DuPont Says Claims Over Herbicide Are Rising - DuPont, which introduced a herbicide last year that was later linked to the deaths of thousands of trees, has begun processing claims for compensation that are running into the hundreds of millions of dollars, company officials said. Some 30,000 homeowners, golf courses, municipalities and landscapers across the country have submitted claims, said Rik Miller, DuPont’s president for crop protection. The formal deadline for submission was Feb. 1, but a few are still trickling in and are being accepted, he added. DuPont has declined to estimate how many trees have died from exposure to the herbicide, marketed under the name Imprelis, but tree experts say it is probably at least in the hundreds of thousands.. Weeks after homeowners and lawn care professionals began applying the new product on lawns, golf courses and cemeteries around the country in the spring last year, many trees on those properties, primarily conifers, started turning brown and dying. By August, DuPont had pulled the chemical from the market, and the federal Environmental Protection Agency banned it shortly afterward. Heavily promoted to the lawn care industry as environmentally friendly because of its low toxicity to mammals, the product has proved a costly setback for the company. DuPont officials say that they have set aside $225 million for claims people have already submitted, and that the payout could eventually reach $575 million.

Mysterious Mass Cattle Deaths May Be Caused By Random Grass Mutation -- A mysterious mass death of a herd of cattle has prompted a federal investigation in Central Texas. Preliminary test results are blaming the deaths on the grass the cows were eating when they got sick. The cows dropped dead several weeks ago on a ranch in Elgin, just east of Austin. Three weeks ago, the cattle had just been turned out to enjoy the fresh grass, when something went terribly wrong. "When our trainer first heard the bellowing, he thought our pregnant heifer may be having a calf or something," said Abel. "But when he got down here, virtually all of the steers and heifers were on the ground. Some were already dead, and the others were already in convulsions." Within hours, 15 of the 18 cattle were dead. "That was very traumatic to see, because there was nothing you could do, obviously, they were dying," said Abel. Dr. Gary Warner, an Elgin veterinarian who specializes in cattle, conducted the 15 necropsy. Preliminary tests revealed the Tifton 85 grass, which has been here for years, had suddenly started producing cyanide gas, poisoning the cattle. 

Genetic Engineers Explain Why GE Food Is Dangerous - A report released June 17, GMO Myths and Truths, challenges these claims. The report presents a large body of peer-reviewed scientific and other authoritative evidence of the hazards to health and the environment posed by genetically engineered crops and organisms. One of the report’s authors, Dr. Michael Antoniou of King’s College London School of Medicine in the UK, uses genetic engineering for medical applications but warns against its use in developing crops for human food and animal feed. “GM crops are promoted on the basis of ambitious claims—that they are safe to eat, environmentally beneficial, increase yields, reduce reliance on pesticides and can help solve world hunger,” said Dr. Antoniou. “I felt what was needed was a collation of the evidence that addresses the technology from a scientific point of view.” “Research studies show that genetically modified crops have harmful effects on laboratory animals in feeding trials and on the environment during cultivation,” Antoniou said. “They have increased the use of pesticides and have failed to increase yields. Our report concludes that there are safer and more effective alternatives to meeting the world’s food needs.” “Crop genetic engineering as practiced today is a crude, imprecise and outmoded technology,” said Dr. Fagan. “It can create unexpected toxins or allergens in foods and affect their nutritional value. Recent advances point to better ways of using our knowledge of genomics to improve food crops, that do not involve GM.”

Latest US Drought Map and Colorado - We are long overdue to catch up on the map of the Palmer Drought Severity Index.  Above is the version for June 23rd.  As you can see, much of the interior west is in extreme drought conditions, and has also been suffering a record breaking heat-wave (even though it's not the height of summer yet): Record highs continue to fall Tuesday afternoon in the central U.S., where Denver, Colorado had its fifth consecutive day of triple-digit heat after it reached 100°F at 1pm MDT, and could continue to rise this afternoon. This ties the all-time record for consecutive 100°F+ days. Nebraska and Kansas are particularly toasty this afternoon; McCook, Nebraska has reached 113°F so far, and Hill City, Kansas is up to 112°F. Though, to put that in perspective, the state record for Nebraska is 118°F, and the state record for Kansas is 121°F. The heat moves east tomorrow, and by Thursday, many of the major Midwest cities are forecast to be in the triple-digits, including Chicago, St. Louis, and Indianapolis.

More record-setting heat; Waldo Canyon Fire consumes 15,000 acres - Tuesday's heat toppled many records in the Central U.S., particularly in Colorado, Nebraska, and Kansas. On Monday and Tuesday combined, 11 locations tied or broke their all-time record high temperature, 78 locations broke their all-time record high for the month of June, and 382 daily high records fell. Some notable Tuesday records from our Weather Historian:
115° in McCook, Nebraska is the all-time record for any month.  Yesterday's 115° at Mc Cook also broke the all-time Nebraska state June record of 114° which was set in Franklin in 1936.
105° in Denver, Colorado, ties Monday's all-time record, and ties the 5-day record for number of days above 100°.
101° in Colorado Springs, Colorado is the all-time undisputed record high for any month.
111° in Miles City, Montana is the all-time high for any month.
111° in Lamar, Colorado tied that all-time heat record in any month.
115° in Hill City, Kansas is the new June record, but fell short of all-time 117° reading, and one degree short of Kansas state June record.

Pondering a Link Between Forest Fires and Climate Change - This week, record temperatures and wildfires have scorched the western United States. The National Climate Data Center reports that 41 heat records (6,027 weather stations take measurements around the country) have been broken or tied since Sunday, mostly in Colorado, Kansas and Nebraska, which is quite unusual for this time of year.  Scientists taking part in a conference call on Thursday arranged by the nonprofit science outreach group Climate Communication said that while they could not directly link this week’s events to global warming, there was agreement that they fit into a pattern of extreme weather events and catastrophic fires that climate scientists predict will only worsen in decades to come. “What we’re seeing is a window into what global warming really looks like,” said Michael Oppenheimer, a geoscientist at Princeton University. “It looks like heat. It looks like fires. It looks like this type of environmental disaster.” According to “Heat Waves and Climate Change,” a new report from Climate Communication, as of June 18 there had been nearly 10 times as many high-temperature records this year as low-temperature records. If the climate were neither warming nor cooling, one would expect that on average, low-temperature records would be broken as often as high-temperature ones. In the last decade, high-temperature records have outnumbered low-temperature records by a ratio of 2 to 1.

West's wildfires a preview of changed climate: scientists - (Reuters) - Scorching heat, high winds and bone-dry conditions are fueling catastrophic wildfires in the U.S. West that offer a preview of the kind of disasters that human-caused climate change could bring, a trio of scientists said on Thursday. "What we're seeing is a window into what global warming really looks like," Princeton University's Michael Oppenheimer said during a telephone press briefing. "It looks like heat, it looks like fires, it looks like this kind of environmental disaster ... This provides vivid images of what we can expect to see more of in the future." In Colorado, wildfires that have raged for weeks have killed four people, displaced thousands and destroyed hundreds of homes. Because winter snowpack was lighter than usual and melted sooner, fire season started earlier in the U.S. West, with wildfires out of control in Colorado, Montana and Utah. The high temperatures that are helping drive these fires are consistent with projections by the U.N. Intergovernmental Panel on Climate Change, which said this kind of extreme heat, with little cooling overnight, is one kind of damaging impact of global warming. Others include more severe storms, floods and droughts, Oppenheimer said.

Hot Weather Threatening US Corn Crop - The projected US corn crop is currently in worse condition than it’s been in since 2002, which were then the worst since 1990. Only 56% of this year’s crop was judged to be in “good” or “excellent” condition last week. That’s a drop of 7 points from the week before The soybean crop is already in worse condition than in any year since 1990. Hot, dry weather throughout the Midwest gets the blame for the poor crop conditions, and no help is in sight from this week’s weather forecast, which continues the hot, dry trend.

Drought leaves 4.3m people short of drinking water - SEVERE drought has been plaguing areas along the Yellow and Huaihe rivers due to a lack of rain and high temperatures. Temperature rising to over 35 degrees Celsius in some areas will make the drought worse, the meteorological center said. Some 4.28 million people and 4.85 million livestock are said to be suffering from a shortage of drinking water in parts of Henan, Anhui, Shandong, Yunnan and Hubei provinces and Inner Mongolia. In Hubei alone, 813,000 people are short of water in about 30 cities, where reservoirs hold 22 percent less than last year.

Leaky pipes compound Delhi’s water crisis - Delhi has blamed Haryana for its water crisis, accusing it of supplying less water from the Yamuna than what is mandatory to keep its water treatment plants running. Bhupinder Singh Hooda, the Chief Minister of Haryana, claims that his state is releasing more water than what Delhi requires. Caught in this fight of figures are nearly half of Delhi’s residents who are grappling with water scarcity and are paying exorbitant price to buy it. People from unauthorised colonies with hardly any government water connections are feeling the pinch more than others and are reaching police station every other day over water disputes. “The city might see water wars in next 5-10 years if the problems are not solved,” \ Delhi requires close to 4200 Million Liters (ML) every day, while it gets supplied only 3200 ML from all the sources. Notwithstanding the quantity unavailable due to dispute with Haryana over the water saved through Munak canal, experts claim that Delhi loses more than 40 percent of the its water due to leakages from its network of water supply pipelines. Thus, the city effectively ends up with just 1900 ML of water every day for a population of more than 160 lakhs, providing just 120 liters of water on an average for a person.

How to Feed A Planet - THIS chart is the nearest thing to a snapshot of everything you need to know about feeding the world. It comes from Cargill, a grain trading company, and shows which regions of the world have a food surplus or deficit, and how imports or exports have changed since 1965. The big changes in food production during that time came in South America (Brazil, mainly) and in Eastern Europe (Russia, mainly). The worry is that these increases were down to one-off factors: the farming of land that had been left alone in Brazil and the collapse of Communism in Russia. Meanwhile, on the consumption side, it seems likely that Asia and the Middle East and Africa will continue to require increased imports to satisfy growing populations. To feed itself for the next half century, the world needs an agricultural revolution in Africa.

Global Warming And The Pine Beetle Scourge - Colorado and mountainous areas stretching north to the Yukon have been experiencing the worse pine beetle infestation in recorded history. The Atlantic recently ran a story about those dying forests with the peculiar title As Politicians Debate Climate Change, Our Forests Wither. "These trees are dead; they just don't know it." Along a back road to a campsite in Rocky Mountain National Park, the chief of resource stewardship at the park points out seemingly healthy trees covered in ugly, popcorn-shaped masses, a lodgepole pine's natural response to the mountain pine beetle. A healthy tree can forcefully push burrowing beetles out, but many of Colorado's pines are water-stressed and aging. Beetles have mass-attacked them, an onslaught that can overwhelm even healthy trees, Mack says. North America is witnessing the largest pine-beetle epidemic in recorded history. From Canada's Yukon Territory to New Mexico, pine trees by the hundreds of millions are succumbing to a fungus that the beetles carry. The pine needles of infected trees first turn a violent red, then they fall, and, finally, the dead tree topples over. [See the image below.] Year by year, communities have watched a scourge advance across mountainsides and through neighborhoods, trees turning from green to red to gray. The beetles now attack 12 pine species, from the high-elevation whitebark pine to the lower-elevation ponderosa and piñon. The blight has devastated 3.3 million acres in Colorado alone since the 1990s.

Goodbye to Mountain Forests? - When the smoke finally clears and new plant life pokes up from the scorched earth after the wildfires raging in the southern Rockies, what emerges will look radically different than what was there just a few weeks ago. According to Craig Allen, a research ecologist with the United States Geological Survey in Los Alamos, New Mexico, forests in the region have not been regenerating after the vast wildfires that have been raging for the last decade and a half. Dr. Allen, who runs the Jemez Mountains Field Station at Bandelier National Monument, says those forests are burning into oblivion and grasslands and shrublands are taking their place. “Rising temperature is going to drive our forests off the mountains,” he said. During two presentations at environmental conferences in Aspen, over the weekend and on Monday morning, Dr. Allen sketched a bleak picture of how climate change is redrawing Southwestern landscapes. Using data from tree ring studies, scientists have reconstructed a history of fires in the Southwest. The wildfires of the past were frequent and massive, but they stayed close to the ground and mainly helped prevent overcrowding. Take 1748. “Every mountain range we studied in the region was burning that year,” Dr. Allen said. “But those were surface fires, not destroying the forest but just keeping an open setting.” Cyclical wildfires were the norm.

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

Power demand sets June record - Texans cranking air conditioners to deal with triple-digit temperatures Monday sent electricity demand to a record for June, the state’s main grid operator reported. Electricity use from 4 to 5 p.m. averaged 65,047 megawatts, the Electric Reliability Council of Texas said, besting the previous June high of 63,102 megawatts on June 17, 2011. ERCOT forecast that electric use could exceed 66,000 megawatts Tuesday. The record demand for any month was 68,379 megawatts last Aug. 3. A megawatt is enough to power about 200 residencies during periods of peak usage, typically on summer afternoons. With high temperatures forecast for several more days, ERCOT officials encouraged conservation measures — including higher thermostat settings, especially during periods when houses aren’t occupied, and reduced use of large appliances other than air conditioners such as stoves and clothes dryers — from 3 p.m. to 7 p.m.

Jason Box: Greenland ice sheet reflectivity at record low, particularly at high elevations - An updated compilation of NASA MODIS observations of Greenland ice surface reflectivity through 22 June, 2012 indicates that now, well into into the 2012 melt season, the ice sheet remains in a darkened state (see Greenland Ice Sheet Getting Darker). Ice sheet reflectivity this year has been the lowest since accurate records began in March 2000. In this condition, the ice sheet will continue to absorb more solar energy in a self-reinforcing feedback loop that amplifies the effect of warming. It’s not a runaway loop, just an amplifier. A record setting melt season is likely if this pattern keeps up this year.  Perhaps most remarkable about the 2012 pattern is how much darker the snow and ice is becoming, not only at the lowest elevations around the ice sheet periphery where melting is always most intense, but in the higher elevation net snow accumulation area. June monthly average

Arctic sea-ice levels at record low for June - Sea ice in the Arctic has melted faster this year than ever recorded before, according to the US government's National Snow and Ice Data Centre (NSIDC). Satellite observations show the extent of the floating ice that melts and refreezes every year was 318,000 square miles less last week than the same day period in 2007, the year of record low extent, and the lowest observed at this time of year since records began in 1979. Separate observations by University of Washington researchers suggest that the volume of Arctic sea ice is also the smallest ever calculated for this time of year. Scientists cautioned that it is still early in the "melt season", but said that the latest observations suggest that the Arctic sea ice cover is continuing to shrink and thin and the pattern of record annual melts seen since 2000 is now well established. Last year saw the second greatest sea ice melt on record, 36% below the average minimum from 1979-2000. "Recent ice loss rates have been 100,000 to 150,000 square kilometres (38,600 to 57,900 square miles) per day, which is more than double the climatological rate. While the extent is at a record low for the date, it is still early in the melt season. Changing weather patterns throughout the summer will affect the exact trajectory of the sea ice extent through the rest of the melt season," said a spokesman for the NSIDC. The increased melting is believed to be a result of climate change. Arctic temperatures have risen more than twice as fast as the global average over the past half century.

Confirming The Human Fingerprint In Global Ocean Warming - Although over 90% of overall global warming goes into heating the oceans, it is often overlooked, particularly by those who try to deny that global warming is still happening.  Nature Climate Change has a new paper by some big names in the field of oceanography, including Domingues, Church, Ishii, and also Santer (Gleckler et al. 2012).  The paper compares ocean heat content (OHC) simulations in climate models to some of the newest and best OHC observational data sets from Domingues (2008), Ishii (2009), and Levitus (2009) which contain important corrections for systematic instrumental biases in expendable bathythermograph (XBT) data.  The paper makes several important points.

  • The 0-700 meter layer of the oceans warmed on average 0.022°C to 0.028°C per decade since 1960.
  • Climate model simulations which include the most complete set of external forcings – natural (solar and volcanic) and anthropogenic (greenhouse gases and sulphate aerosols) – are consistent with the rate of warming observed over the past 40 years (see the 20th Century multimodel response including volcanic forcings [MMR VOL 20CEN] and multimodel response including volcanic forcings projected forward using the IPCC SRES Scenario A1B [MMR VOL SRESA1B] in Figure 1).
  • The ocean warming observed over the past 40 years cannot be explained without anthropogenic greenhouse gas emissions; it is a ‘fingerprint’ of human-caused global warming (Figure 3).

Rising sea level puts US Atlantic coast at risk: report - The sea level on a stretch of the US Atlantic coast that features the cities of New York, Norfolk and Boston is rising up to four times faster than the global average, a report said Sunday. This increases the flood risk for one of the world's most densely-populated coastal areas and threatens wetland habitats, said a study reported in the journal Nature Climate Change. Since about 1990, the sea level along the 1,000-kilometre (620-mile) "hotspot" zone has risen by two to 3.7 millimetres (0.08 to 0.15 inches) per year. The global rise over the same period was between 0.6 and one millimetre per year, said the study by the US Geological Survey (USGS). If global temperatures continue to rise, the sea level on this portion of the coast by 2100 could rise up to 30 centimetres over and above the one-metre global surge projected by scientists, it added. The localised acceleration is thought to be caused by a disruption of Atlantic current circulation. "As fresh water from the melting of the Greenland Ice Sheet enters the ocean, it disrupts this circulation, causing the currents to slow down," USGS research oceanographer and study co-author Kara Doran explained. "When the Gulf Stream current weakens, sea levels rise along the coast and the greatest amount of rise happens north of where the Gulf Stream leaves the coast (near Cape Hatteras).

Study: Region's sea levels rising faster - If you think there are flooding problems in the North Shore now, just wait — it’s going to get a whole lot worse, according to a study released Sunday by the U.S. Geological Survey. Scientists have found that the North Shore is part of a unique, 600-mile-long “hot spot” along the Atlantic Coast where sea levels are rising at a significantly faster rate than the world as a whole — three to four times faster. The hot spot stretches down the Atlantic Coast from north of Boston to North Carolina. “Flooding right now is an annoyance, but it will be more of an annoyance and bad enough that you’ll think twice about parking your car in the driveway if there’s a storm coming and it’s the spring tide,” said Peter Howd, a co-author on the study and a contracted oceanographer with the U.S. Geological Survey. Since about 1990, sea-level rise in the 600-mile hot spot has increased 2 to 3.7 millimeters per year; the global increase over the same period was 0.6 to 1 millimeter per year, according to the study. As a result, scientists predict that sea levels in the northeast Atlantic will rise 8 to 11.4 inches more than the global average by 2100. That is over and above the 2- to 3-foot rise in sea level that many scientists expect to occur globally over that span. Although north of Boston is “on the low end of the range we’re talking about,” the North Shore is still facing a dramatic increase in the number of significant flooding events, Howd said. “That additional 1 foot of water could be enough so that smaller storms cause chronic coastal flooding, as opposed to an acute event like a hurricane,” said Howd, who has family on the North Shore.

Sea Level Rise on US Atlantic Coast 3-4 Times Faster than Global Average - The East Coast of the United States is home to many of its major population centers. While some of the early colonizers migrated west, many stayed and built up some of America's great cities, including Portland, Boston, New York, Philadelphia, Norfolk, Charleston, and Miami. Now this region is facing an unprecedented challenge caused by the changing climate. The sea level is rising, and due to a variety of oceanographic and topographic factors, it is rising faster on the US Atlantic Coast than it is globally. The greatest increase will be felt in the "hot zone", from Cape Hatteras, North Carolina to north of Boston, Massachusetts. United States Geological Survey (USGS) has studied global sea level rise for over 20 years. They found that since 1990, sea level rise in the hot zone was 2-3.7 millimeters per year. Globally, the increase was only 0.6-1.0 millimeters per year over the same period.

"Warming Oceans Will Follow Laws of Physics - You can't hold back the tide. Or sea level rise. There’s melting ice, of course. But H2O that’s already liquid expands as it warms—and the oceans are warming from climate change. That sea level rise isn't the same everywhere. The moon's pull, oceanic currents, the Earth's rotation—these all play a role in what ocean water is where. Turns out the U.S. East Coast is experiencing sea level rise three to four times higher than the global average, according to a study from the U.S. Geological Survey in the journal Nature Climate Change. (Scientific American is part of Nature Publishing Group.) That's bad news for the highly populated region and suggests storm surges are going to prove ever more problematic from New York City to Cape Hatteras. By the end of this century, greenhouse gases in the atmosphere could produce sea level rise of as much as 80 centimeters along the East Coast. Further into the future, even a low emissions scenario sees the seas rise by a meter and a half and if we continue emitting at our present pace sea level rise might be close to three meters—and still rising. No matter what some folks choose to believe.

Rising seas mean shrinking South Florida future, experts say - A conference on climate change sponsored by Florida Atlantic University made it clear that ignoring the threat has done nothing to slow it down — particularly in South Florida, which has more people and property at risk by rising sea levels than any place in the country. The two-day summit in Boca Raton, which wrapped up Friday, painted a bleak and water-logged picture for much of coastal Florida.  Under current projections, the Atlantic Ocean would swallow much of the Florida Keys in 100 years. Miami-Dade, in turn, would eventually replace them as a chain of islands on the highest parts of the coastal limestone ridge, bordered by the ocean on one side and an Everglades turned into a salt water bay on the other. Ben Strauss, chief operating officer of Climate Central, an independent research and journalism organization, warned that much of the southern peninsula south of Lake Okeechobee would be virtually uninhabitable within 250 years. “There’s good reason to believe southern Florida will eventually have to be evacuated,” Strauss told some 275 scientists and climate and planning experts from government agencies, insurance companies, construction experts and other businesses likely to be impacted by rising seas.

Researchers Observe Climate Change, First-Hand : NPR (audio & transcript) As the climate changes, scientists are documenting measurable shifts in the natural world — from a tremendous loss in Arctic sea ice and an increase in extreme weather like drought, floods and heatwaves, to the migration of plants and animals to new latitudes.

BREAKING: U.S. Appeals Court Upholds EPA Greenhouse Gas Emission Rules - The U.S. Court of Appeals for the District of Columbia Circuit today unanimously ruled in favor of the Environmental Protection Agency’s (EPA) legal authority to limit industrial carbon pollution under the Clean Air Act to protect Americans’ health. Carol M. Browner, former Environmental Protection Agency Administrator, and Distinguished Senior Fellow at the Center for American Progress said: “The Court’s decision should put an end, once and for all, to any questions about the EPA’s legal authority to protect us from industrial carbon pollution through the Clean Air Act. This decision is a devastating blow to those who challenge the overwhelming scientific evidence of climate change and deny its impact on public health and welfare.” These rules were challenged in Coalition for Responsible Regulation v. EPA. Plaintiffs included the American Petroleum Institute and other major sources of industrial carbon pollution. The Court affirmed the following EPA policies:

  1. The Climate Pollution Endangerment Finding, which determined that the latest science demonstrates that climate pollution endangers human health.   This finding was first made by then EPA Administrator Stephen Johnson in 2008, following the 2007 Supreme Court decision in Massachusetts v. EPA. President Bush refused to make this finding, but the Obama administration complied with the law by making it in 2009.
  2. The Clean Cars Standards that limit carbon pollution from motor vehicles, primarily by modernizing fuel-efficiency standards for passenger cars and light trucks.  In addition to reducing carbon pollution from vehicles by 6 billion tons, these standards will help families save thousands of dollars on gasoline and decrease our dependence on oil.  The standards are supported by U.S. auto makers and the United Auto Workers union, among others.

Can U.S. carbon emissions keep dropping? That depends on Congress. - Here’s a green trend that more people should know about: Since 2007, the United States has managed to curtail its global-warming pollution by quite a bit — energy-related carbon emissions have fallen roughly 6 percent over the past five years. Some of that, it’s true, has been due to the recession. Less economic activity means less demand for energy. But not all of it.  The key question is whether this progress will continue. Will U.S. carbon emissions keep falling? Or were the past five years just a weird blip? Here’s one way to look at it: The Energy Information Administration just published its Annual Energy Outlook for 2012 report (pdf), and this chart offers up three scenarios for the future. Let’s look at the options. The “Reference” case is what EIA predicts will happen if Congress doesn’t enact any new energy measures between now and 2035. Renewable energy will keep getting cheaper and more popular, natural gas will continue to displace coal, and the energy-efficiency of buildings will improve slowly. Carbon emissions from the energy sector will start rising again, though the country will still stay below 2007 levels. The United States will miss its climate targets by a lot.

Other Air Pollutants: Soot and Methane - It sometimes seems to me that the arguments over carbon emissions and the risk of climate change have crowded out attention to other environmental issues--including other types of air pollution. Thus, I was intrigued to see the article by Drew Shindell called "1Beyond CO2: The Other Agents of Influence," in the most recent issue of Resources magazine from Resources for the Future. Shindell focuses on the benefits of reducing soot (more formally known as "black carbon") and methane emissions (which are a precursor to more ozone in the atmosphere), and identifies which emissions to go after. He is reporting the results of a study with a larger group of authors appeared here in the January, 13, 2012, issue of Science magazine. I'll quote from both articles here. Here's a capsule overview of the effects of soot and methane from the Resources article:  "When the dark particles of black carbon absorb sunlight, either in the air or when they accumulate on snow and ice and reduce their reflectivity, they increase radiative forcing (a pollutant’s effect on the balance of incoming and outgoing energy in the atmosphere, and the concept behind global warming), and thus cause warming. They can also be inhaled deeply into human lungs, where they cause cardiovascular disease and lung cancer. "Methane has a more limited effect than black carbon on human health, but it can lead to premature death from the ozone it helps form. That ozone is also bad for plants, so methane also reduces crop yields. It is a potent greenhouse gas as well, with much greater potential to cause global warming per ton emitted than CO2. But its short atmospheric lifetime—less than 10 years, versus centuries or longer for CO2—means that the climate responds quickly and dramatically to reductions. CO2 emissions, in contrast, affect the climate for centuries, but plausible reductions will hardly affect global temperatures before 2040."

Could “Green” Bonds Help Tackle Climate Change? - Delegates from across the world poured into Rio de Janeiro to attend the UN’s sustainable development summit to discuss how to tackle climate change. One item on the agenda: Could the issuance of “green bonds” be part of the answer? Investor interest for green bonds exists, but potential purchasers of such products are not being offered appropriate investments on a big enough scale. Ben Caldecott, head of policy at investment manager and adviser Climate Change Capital, said that investors such as pension funds and insurers are interested long-term green bonds to match their existing liabilities. He said: “Utilities and banks, which need to deleverage their balance sheets, could securitize their renewable energy loans and issue asset-backed securities.” Last month, the Climate Bonds Initiative issued a discussion paper advocating the creation of green-covered bonds. The idea is that an issuer, typically a bank, could issue a “covered” bond that is secured upon a pool of renewable energy loans, perhaps loans to wind farms or solar panel manufacturers. But many are skeptical about this kind of approach.

Solar firm that got DOE loan to declare bankruptcy - A Colorado-based solar panel maker that received a $400 million loan guarantee from the Obama administration said Thursday it will file for bankruptcy, the latest setback for an industry battered by the recession and stiff competition from companies in China. Abound Solar of Loveland, Colo., said it will suspend operations next week, after talks with potential buyers broke down. The company received about $70 million from the Energy Department before officials froze its credit line last year. Abound is the third clean-energy company to seek bankruptcy protection after receiving a loan from the Energy Department under the economic stimulus law. California solar panel maker Solyndra and Beacon Power, a Massachusetts energy-storage firm, declared bankruptcy last year. Solyndra received a $528 million federal loan, while Beacon Power got a $43 million loan guarantee.

Are we sustainable? - Al Jazeera - Hopeful rhetoric had preceded the Rio+20 UN Conference on sustainability. World leaders, along with thousands of participants from governments, NGOs, the private sector and other groups met in an attempt to find ways to reduce poverty and increase social equity while ensuring environmental protection. But they have their work cut out for them. Resource wars, global warming-driven extreme weather events, poverty, and the disparity between poor and rich are at all time highs and escalating. Researchers told Al Jazeera they believe the solution lies in localising food production, transportation, and water issues. But can this be accomplished on a global level? By way of example of one resource, water, the crisis confronting us is clear.  Nearly one-fifth of the world's population (around 1.2bn people) live in areas of physical scarcity of water, with another half a billion people approaching this situation, according to the UN. Meanwhile, another 1.6bn people, nearly one quarter of the world's population, face economic water shortages. Current projections show that by 2025, 1.8bn people will be living in countries or regions with absolute water scarcity, and two-thirds of the total global population could be living under water-stressed conditions.

We’re done – Guy McPherson -  As I pointed out in this space a few years ago, I concluded in 2002 that we had set into motion climate-change processes likely to cause our own extinction by 2030. I mourned for months, to the bewilderment of the three people who noticed. And then, shortly thereafter, I was elated to learn about a hail-Mary pass that just might allow our persistence for a few more generations: Peak oil and its economic consequences might bring the industrial economy to an overdue close, just in time. Like Pandora with her vessel, I retained hope. No more. Stick a fork in us. We’re done, broiled beyond hope wishful thinking. It seems we’ve experienced a lethal combination of too much cheap oil and too little wisdom. Yet again, I’ve begun mourning. It’s no easier the second time. As always, I’m open to alternative views — in fact, I’m begging for them, considering the gravity of this particular situation — but the supporting evidence will have to be extraordinary. Before you launch into the ridicule I’ve come to expect from those who comment anonymously from a position of hubris and ignorance in the blogosphere, I invite you to fully consider the information below. I recommend setting aside normalcy bias and wishful thinking as you peruse the remainder of this brief essay.

Hydropower Provides 65% of Latin Americas Electricity Generation - Hydropower is the most popular source of renewable energy in the world, and the overall main energy source in Latin America which boasted a capacity of 153GW in 2010, providing about 65% of all electricity generated; way above the world average of 16%. The popularity of hydropower projects in South America has grown due to rising electricity prices from other energy sources, government incentives for renewable energy projects, and large amounts of private investment. According to the International Hydropower Association, (IHA) the largest hydroelectric markets include Brazil, Chile, and Columbia. Osvaldo San Martin, president and CEO of Voith Hydro Latin America, one of the largest hydro power companies in South America, responsible for 45GW of capacity spread over 600 projects, said that “the untapped hydropower potential is still huge and renewable energy continues to be one of the region's most valuable assets. We see continued growth in Brazil, especially in the new hydropower sector.” Brazil already generates 74% of its electricity from hydropower, and possesses the second largest hydroelectric project in the world with the 14GW Itaipu installation on the Parana River. They are currently in the middle of building the $11 billion Belo Monte project, another 10+GW plant on the Xingu River.

Lead from gasoline discovered in Indian Ocean - Since the 1970s, leaded gasoline has been slowly phased out worldwide, as studies have shown that lead can cause neurological and cardiovascular damage and degrade vehicles’ catalytic converters. Today, 185 countries have stopped using leaded gasoline; six others, including Afghanistan, Iraq and North Korea, plan to phase it out in the next two years. But while leaded gasoline usage has decreased drastically in the last few decades, lead is still pervasive in the environment.  Ed Boyle, a professor of ocean geochemistry in MIT’s Department of Earth, Atmospheric and Planetary Sciences, has been tracking lead and other trace elements in Earth’s oceans for the past 30 years. Most recently, Boyle and his students in MIT’s Trace Metal Group have analyzed water and coral samples from the Indian Ocean, using the coral to trace the history of anthropogenic lead over the last 50 years.  The researchers have now discovered high concentrations of lead in the open ocean, as well as closer to population centers such as Singapore. The group found that lead concentrations in the Indian Ocean are now higher than in the northern Atlantic and northern Pacific oceans. One explanation, Boyle says, may be that Asian and African countries lagged North America and Europe both in industrialization and then in phasing out leaded gasoline. The result, he says, is that the Indian Ocean has had less time than the Atlantic and Pacific to dissipate lead pollution.

Powder River Coal – Huge Coal Giveaways Have Made Coal Artificially Cheap, and Subsidized China - Taxpayers missed out on an estimated $28.9 billion in revenues over 30 years due to the failure of the federal Bureau of Land Management (BLM) to get fair market value for U.S.-owned coal mined in the Powder River Basin, which currently produces 44 percent of the nation’s coal, according to a major new analysis by the Institute for Energy Economics and Financial Analysis (IEEFA).   The report calls for a moratorium on additional Powder River Basin coal sales and a full-scale federal investigation of the deeply flawed BLM program. A major “red flag” identified in the report:  Since 1991, only four out of 26 major Powder River Basin (PRB) coal sales have had more than one bidder, and the small handful that were “competitive” only had two bidders each.  IEEFA concludes that this failure resulted from of a lack of transparency under which BLM coal-leasing activities neither have been audited nor subjected to any other publicly available external review for almost 30 years. This lack of oversight is especially troubling as a scandal erupted three decades ago over the same industry give-away practices, and clear, transparent reforms were laid out in the wake of that scandal by Congress. Issued just days ahead of another major BLM coal sale Thursday (June 28, 2012), the new IEEFA report, titled “The Great Giveaway: An analysis of The United States’ Long-Term Trend of Selling Federally Owned Coal for Less Than Fair Market Value” is available online at

The end of the coal boom? - The sharp drop in the price of coal over recent months might be just one of the fluctuations that go on all the time in commodity markets. That’s the preferred view of Fitch Ratings cited by Coalspot, saying “the weakness seen in thermal coal prices in recent months should reverse once demand from major importers recovers”. On the other hand, though “there is a risk low prices may persist into 2013, changing the industry’s supply side dynamics.” The crucial point is that most coal contracts are negotiated annually, so suppliers can ride out months, but not years, of low prices. News from the US today increases the likelihood of a sustained drop in prices. The US Court of Appeals delivered a complete and unanimous rejection of an attempt to block regulation of CO2 emissions by the EPA, under the Clean Air Act. That could be overturned if the Repubs make a clean sweep in November, but otherwise it means, for practical purposes, the end of new coal-fired power plants in the US, and the shutdown of many existing plants. As noted in the Fitch report, declining US demand for coal is already pushing US coal onto world markets, contributing to the declining price. Fitch is optimistic about demand from China and India, but there’s plenty of room for doubt about China. Not only does it appear that economic growth is slowing, but China is giving a lot of support to renewables which are now the focus of an incipient trade war with the US, and may also be expanding doemstic coal production. From whatever cause, coal is piling up on the docks.

Coal: The Ignored Juggernaut - Oil, natural gas, and alternatives dominate the headlines when it comes to energy. But there's a big and largely-overlooked revolution occurring with the energy source likely to become the most preferred fuel for a world in economic decline: coal. The United States coal sector has been hit very, very hard this spring. Demand has been crushed by over 10%, as warm weather and bountiful supplies of cheap natural gas have induced power plant operators and all other users where possible to switch away from domestic coal. From Bloomberg: Central Appalachian thermal coal futures, the U.S. benchmark, averaged $60.20 during the first quarter, down from an average of $73.58 in the year ago period and down from a high of $143.25 in July 2008. “It’s like a perfect storm,” Mann said. “The three main challenges are the really mild winter, a lethargic economy and on top of that, with gas prices being so low, those utilities that can burn gas have opted to burn gas instead of coal because gas is so cheap.”  (Source) Given the rather weak near-term and long-term outlook for US coal demand, it’s not surprising that within such a capital-intensive business, a number of smaller coal producers were hit recently with bankruptcy rumors. Indeed, even large cap names like Arch Coal have seen an escalation of concern over debt levels. Accordingly, many have concluded that coal -- in an era of solar, wind, and natural gas -- has finally displaced itself due to its problematic extraction, distant transportation, and overall costs. Is coal finally going away as an energy source?

Old king coal back in power - COAL has overtaken gas as the main method of keeping the UK’s lights on, figures show. Britain is burning more now than at any time since 2006, despite official promises to move to greener fuels. Imports are up 20 per cent to 18 million tons this year — with coal responsible for generating 42 per cent of all UK electricity, the Department of Energy says. Experts say the high price of gas has forced power firms to return to coal. The fossil fuel also generates much more electricity than nuclear, wind or hydro-electric power. Energy campaigner Paul Steedman of Friends of the Earth said: “This gives the lie to the Government’s promises.” Oxford University energy expert Professor Sir David King, said: “We are stepping back to being coal dependent. It is a retrograde step.”

Japan Announces Huge New Incentives for Solar Power - In an effort to move away from nuclear power, Japan announced big, big plans this week to incentivize solar power. Before the meltdown, atomic energy provided about 30 percent of Japan’s power, but now, post-meltdown, even the prime minister realizes that the country needs to decrease its reliance on nuclear power. Taking a page from Germany’s book, Japan’s government is sharply increasing the amount that utilities must pay consumers who generate solar power, a subsidy that is expected to rejuvenate the country's struggling solar industry. Japanese consumers who decide to install solar panels will be paid roughly 53 cents per kilowatt-hour of solar power that they produce. (To put that number into context, it's about twice as high as the subsidy rate in Germany, which has long been the world leader in solar power). Bloomberg New Energy Finance estimates that the subsidy will encourage consumers to invest up to $9.6 billion in solar power, leading to new solar output equivalent to not one, not two, but three nuclear plants. In other words, the subsidy will make solar power more profitable for both consumers and solar companies, likely making Japan the world’s second-largest market for solar power.

Budget Cuts Force U.S. out of the Nuclear Fusion Race - Nuclear fission is the process by which atoms are split apart to release energy, the process which powers modern nuclear reactors. But fission also has a more powerful, more efficient, cleaner cousin; nuclear fusion. In nuclear fusion atoms are fused together to release even greater amounts of energy. The stellerator was always intended to be the next step in the US’s attempts to create a nuclear fusion power source. It was designed to generate and safely contain starmatter; a superhot plasma within which nuclear fusion can take place, but after running over its initial $75 million dollar budget in 2008 the project has been left incomplete due to a lack of federal funding.  In a time when federal budgets are tight and cuts must be made wherever possible, nuclear fusion has suffered. In his new budget President Obama has made a choice to cut domestic fusion research by 16 percent to $248 million, shutting down a fusion lab at MIT, and reducing the team of scientists working at Princeton by 50-100.

Extremely High Radiation Detected on Floor Above Crippled Fukushima Reactor - Extremely high level of radiation has been detected on a floor just above the No.2 reactor at the crippled Fukushima nuclear power plant in Japan, the plant operator said on Thursday. The Tokyo Electric Power Company (Tepco) said a reading of 880 millisieverts per hour of radiation was detected on the fifth floor, which is 4.5 meters above the reactor containment vessel. The reading was taken by a robot which the company deployed in the reactor building on Wednesday. Tepco suspects that radioactive substances leaked from the No.2 reactor moved through the location.

Radioactive hot spots found in Tokyo park - Tokyo officials are to start decontamination of a 92-hectare park where high levels of radiation have been detected. On Monday, officials tested 14 locations at Mizumoto Park in Katsushika Ward, following reports from the public about radiation hot spots there. Thirteen of tested locations registered radiation above one microsievert per hour at one meter above ground, with the highest reading at 1.22. According to science ministry guidelines, decontamination is required when radiation is at least one microsievert higher than surrounding areas. Based on these guidelines, 9 of the 14 surveyed places in Mizumoto Park will be decontaminated. Since last year's accident at the Fukushima Daiichi nuclear plant, the ministry has received about 150 reports of Tokyo hot spots, as of March.

China responds to Fukushima - Before the Fukushima nuclear disaster, China had a relatively small fleet of 14 nuclear reactor units with a relatively small capacity -- less than 12 gigawatts of electricity -- but the country had big nuclear plans. It led the world in new reactor construction, with 27 units under way, five units approved and awaiting construction, and another 16 units scheduled. If all current construction went forward as planned, the country would be ensured of reaching its original target of 40 gigawatts of nuclear-generated electric capacity by 2020. In the immediate aftermath of the Fukushima disaster, the Chinese government claimed it would not change its nuclear power development policy. Although the Chinese government reaffirmed nuclear energy as an indispensable resource, the suspension of new nuclear projects sent shock waves through the ranks of international nuclear vendors and investors. Since then, China's media have reported several scenarios for a potential restoration of nuclear construction. Finally, after 15 months of waiting, the State Council approved the nuclear facility safety inspection report and the new nuclear safety plan proposed by National Nuclear Safety Administration. The full text of the inspection report and safety plan was released to the public in June. The new medium- and long-term nuclear development plan proposed by National Development and Reform Commission is, however, still pending approval.

Chesapeake and rival plotted to suppress land prices (Reuters) - Under the direction of CEO Aubrey McClendon, Chesapeake Energy Corp. plotted with its top competitor to suppress land prices in one of America's most promising oil and gas plays, a Reuters investigation has found. In emails between Chesapeake and Encana Corp, Canada's largest natural gas company, the rivals repeatedly discussed how to avoid bidding against each other in a public land auction in Michigan two years ago and in at least nine prospective deals with private land owners here. In one email, dated June 16, 2010, McClendon told a Chesapeake deputy that it was time "to smoke a peace pipe" with Encana "if we are bidding each other up." The Chesapeake vice president responded that he had contacted Encana "to discuss how they want to handle the entities we are both working to avoid us bidding each other up in the interim." McClendon replied: "Thanks." That exchange - and at least a dozen other emails reviewed by Reuters - could provide evidence that the two companies violated federal and state laws by seeking to keep land prices down, antitrust lawyers said.

As Congress looks away, U.S. tiptoes toward exporting a gas bounty (Reuters) - In a bitterly divided U.S. political environment, there's at least one thing Republicans and Democrats can agree on: Avoid a public showdown on natural gas exports, arguably the most important energy policy decision in recent memory. While fluctuating gasoline prices, the Keystone pipeline and the fight over fracking steal headlines, the question of how much of the newfound U.S. shale gas bounty should be shared with the rest of the world goes largely without comment or coverage -- despite holding far wider and longer-lasting consequences. The reason is clear: unlike the relatively simple, black-and-white issues that politicians often favor and voters connect to, liquefied natural gas (LNG) is deep, deep gray. It affects a tangled web of constituents, from Big Oil to international allies such as Japan, pits free-trade orthodoxy against the domestic economy, and requires an awkward explanation of why allowing some exports -- inevitably raising U.S. energy prices in the short term, even if at the margin -- may ultimately be better for the country in the long run. All the same, this U.S. president or the next will have to make a tricky decision, and its consequences may only become clear years from now: How much U.S. gas should be sold to other countries if it means boosting prices for consumers at home?

Natural gas gold rush: Is your state next?  - The script might not play out exactly the same in each new community touched by the nationwide boom in natural gas and oil drilling, but the changes have a familiar echo:  Trucks. Noise. Cash. Conflict.  Since the late 1990s, American landscapes have become dotted with a small forest of shale gas wells — 13,000 new ones a year, or about 35 a day, according to the American Petroleum Institute. In the past decade, this steady stream of development has become a gusher as nearly half the country has staked claim to these energy riches. In 2000, the USA had 342,000 natural gas wells. By 2010, more than 510,000 were in place — a 49% jump — according to the U.S. Energy Information Administration.  Twenty states have shale gas wells, so-named because they tap rock layers that harbor the gas in shale formations (with names such as Marcellus, Utica, Barnett). The bulk of the drilling has come since 2006, according to the EIA. Wherever drilling happens, life changes.

Dirt Cheap Natural Gas Is Tearing Up The Very Industry That's Producing It - The economics of fracking are horrid. All wells have decline rates where production drops over time. But instead of decades for traditional wells, decline rates in horizontal fracking are measured in weeks and months: production falls off a cliff from day one and continues for a year or so until it levels out at about 10% of initial production. To be in the black over its life under these circumstances, a well in the Barnett Shale would have to sell its production for about $8 per million Btu, pricing models have shown. ...Drilling is destroying capital at an astonishing rate, and drillers are left with a mountain of debt just when decline rates are starting to wreak their havoc. To keep the decline rates from mucking up income statements, companies had to drill more and more, with new wells making up for the declining production of old wells. Alas, the scheme hit a wall, namely reality... ...The natural gas business is brutal. The peak in drilling occurred in September 2008 with 1,606 rigs. Then the financial crisis threw it into a vertigo-inducing plunge. After last years mini-peak, the plunge continued... Production lags behind rig count, and while rig count for gas wells has been setting new decade lows, production has been rising month after month to new record highs. But lagging doesn't mean decoupled. And someday.... Oops, it already happened. It has started. Production has turned the corner, and not just in one field, but across the US.

Documents: Leaked Industry E-Mails and Reports - Interactive Feature - Over the past six months, The New York Times reviewed thousands of pages of documents related to shale gas, including hundreds of industry e-mails, internal agency documents and reports by analysts. A selection of these documents is included here; names and identifying information have been redacted to protect the confidentiality of sources, many of whom were not authorized by their employers to communicate with The Times.

Halliburton blames guar bean shortage for profit warning - Halliburton has warned that a shortage of guar beans in India will hit its profits. The oilfield services company said its North American profit margins would fall by twice as much as expected in the current quarter. Guar is a key ingredient in hydraulic fracturing, or fracking, fluids, which are used to extract natural gas from rocks. Guar is also used to make ice cream and sauces. The rising price of the beans, which are mostly grown in India, was also noted in Tate & Lyle's results last week. The increase in fracking, especially in North America, has led to a big increase in demand for the beans. Halliburton said it expected its profit margins in North America to fall from 25% in the first quarter of the year to between 19.5% and 20% in the second quarter, which is three percentage points more than it predicted in April. "The price of guar gum has inflated more rapidly than previously expected due to concerns over the potential for shortages for the commodity later in 2012," Halliburton said in a statement.

Shale Gas Reality Begins to Dawn - It has long been our position at The Automatic Earth that North America is collectively dreaming with regard to unconventional natural gas. While gas is undeniably there, the Energy Returned On Energy Invested (EROEI) is dramatically lower than for conventional supplies. The critical nature of EROEI has been widely ignored, but will ultimately determine what is and is not an energy source, and shale gas is going to fail the test. As we pointed out in Get Ready for the North American Gas Shock in July 2011, the natural gas situation is not what it seems at all: The shale gas bubble is a perfect example of the irrationality of markets, the power of perverse short-term incentives, the driving force of momentum-chasing, the dominance of perception over reality in determining prices, and the determination for a herd to stampede over a cliff all at once.  The perception of a gas glut has driven prices so low that none of the participants are making money (at least not by producing gas) or creating value. We see a familiar story of excessive debt, and the hollowing out of productive companies dead set on pursuing a mirage. Many industry insiders know perfectly well that the prospects for recovering substantial amounts of gas are poor, and that the industry is structured as a ponzi scheme. Still, there has been money to be made in the short term by flipping land leases and building infrastructure to handle gas.

Fossil Fuel Subsidies Are 5 Times Larger than Wind Energy Subsidies (12 Times Larger than Renewable Energy Subsidies) - But the fact remains: fossil fuel subsidies are much larger than clean energy subsidies. “International Energy Agency figures show that government subsidies for fossil fuels are 12 times greater than those for renewable energy,” the Guardian notes. Julian Scola of the European Wind Energy Association (EWEA) writes: “It makes me wonder — how do politicians and media can get away with talking about removing subisidies from renewables without even mentioning the existence — let alone withdrawal — of much larger subsidies for much more established energy technologies? It is hard to understand.” [sic] It is a wonder. Julian goes on to point out the difference between fossil fuel and wind power subsidies: … public subsidies for wind power are dwarfed by those channelled to fossil fuels and nuclear. OECD figures show that coal, oil and gas in the UK were subsidised to the tune of £3.63 billion in 2010, while onshore and offshore wind received only £700 million in the year to April 2011 — that’s more than five times less than fossil fuels. Moreover, International Energy Agency figures show that coal, oil and gas subsidies in 37 countries received a total of $409 billion in 2010, compared to $66 billion for renewables.

Greenpeace Launches ‘Unprecedented’ Campaign to ‘Save the Arctic’ - Greenpeace today announced a new international campaign -- what they call an "unprecedented bid" -- calling for a global sanctuary in the Arctic. The campaign -- backed by international celebrities, scientists and explores, business leaders and environmentalists -- is demanding that oil drilling and unsustainable fishing be banned in Arctic waters and comes as world leaders gather in Rio de Janeiro to discuss sustainable development at the Earth Summit and as the Shell oil company makes final preparations for offshore drilling in Alaska this summer. “The Arctic is coming under assault and needs people from around the world to stand up and demand action to protect it," said Greenpeace International executive director Kumi Naidoo. "A ban on offshore oil drilling and unsustainable fishing would be a huge victory against the forces ranged against this precious region and the four million people who live there. And a sanctuary in the uninhabited area around the pole would in a stroke stop the polluters colonizing the top of the world without infringing on the rights of Indigenous communities.” The campaign was backed by an A-list of celebrities, including Paul McCartney, Robert Redford, Penelope Cruz, Ed Norton, and many others.

U.S. Grants a Keystone Pipeline Permit - The Obama administration, moving swiftly on the president’s promise to expedite the southernmost portion of the disputed Keystone XL pipeline, has granted construction permits for part of the route passing through Texas, officials said on Tuesday. The Army Corps of Engineers on Monday told TransCanada, which wants to build a 1,700-mile pipeline to carry heavy crude from Alberta to the Gulf Coast, that it could begin construction on the portion of the proposed pipeline that would end at the gulf port of Nederland, Tex. The Corps of Engineers is still reviewing permits for a section of the pipeline beginning at a major oil depot in Cushing, Okla., and linking up with the final leg ending at the gulf. In January, President Obama denied TransCanada permission to build the northern part of the pipeline from Canada to Oklahoma, saying Congress had not given him sufficient time to review the environmental impact. But at a political appearance in March in Oklahoma, he announced he was taking steps to speed approval of the portion of the project running from Cushing to the gulf to relieve a bottleneck in oil supplies at the Oklahoma oil terminal. The president also invited the company to resubmit its application for the rest of the pipeline. The company did so in early May.

Whatever Happened to the Keystone XL Pipeline? - Four and a half years of studies and five failed votes in the House later, exactly where are we with the Keystone XL pipeline? Stuck on the US-Canadian border where it is likely to remain until mid-2013 despite the headline-grabbing issuance of one of three permits to begin construction in Texas for the smaller and much less controversial portion of the pipeline.  On 26 June, the US Army Corps of Engineers granted TransCanada Corp one of three permits required in order to begin construction on the $2.3 billion southern section of the Keystone XL pipeline, which would run from Cushing, Oklahoma to the Gulf of Mexico in Texas. This first in the permit series covers construction across the wetlands and waterways of Texas’ Galveston district. TransCanada still needs to more permits from Tulsa, Oklahoma and Forth Worth, Texas, to complete this southern Gulf portion of the pipeline extension. Tulsa is set to rule on the second permit in a month and a half.  This southern section of the extended pipeline will carry 700,000 barrels a day of crude, to start with, to Texas refineries from Cushing. Construction will begin this summer. The southern line, permits pending, could be functional by mid-to-late next year. Indeed, Obama pledged to speed up the approval process to make this a reality.

Insight: In hours, caustic vapors wreaked quiet ruin on biggest U.S. refinery (Reuters) - In the end, all it took was a small chemical spill -- perhaps less than a barrelful -- to bring down the newest, mightiest oil refinery in the United States. Three weeks ago, while workers repaired a minor leak at the Port Arthur, Texas plant owned by Motiva Enterprises, a few gallons a day of so-called "caustic" was inadvertently seeping into the newly built crude distillation unit (CDU), the 30-story-high network of interconnected cylinders and latticed pipelines at the heart of the refining process. While harmless when mixed with crude, the undiluted caustic vaporized into an invisible but devastating agent of corrosion as the chamber heated up to 700 degrees Fahrenheit (370 Celsius); the chemical gas raced through key units, fouled huge heaters and corroded thousands of feet of stainless steel pipe. Now, just weeks after they commissioned the biggest U.S. refinery project in a decade, two of the world's biggest oil titans -- Royal Dutch Shell and Saudi Aramco, which own Motiva -- are rushing to repair the potentially billion-dollar glitch that has added an embarrassing and costly coda to a landmark $10 billion expansion.

U.S. "tight oil" output to double by 2035-EIA (Reuters) - The U.S. government published its first official forecast for booming "tight oil" production on Mo nday, estimating that shale formations such as the Bakken in North Dakota will more than double output in the next two decades. The projections, one small part of the Energy Information Administration's updated long-term forecasts, shed light on the agency's take on the role of the oil found in low-permeability reservoirs such as shale and chalk formations, the largest new source of U.S. supply since offshore Gulf of Mexico. U.S. output from eight tight oil prospects covered by the report will more than double to 1.23 million barrels per day by 2035 from 2011 levels, the EIA said, breaking out specific data on tight oil production for the first time in its 2012 Annual Energy Outlook. In 2012, tight oil output will reach 720,000 bpd, or 12.5 percent of domestic production, it said. The estimates -- based on a "reference" case, which assumes current technological and demographic trends will continue -- show that total U.S. oil output will reach a peak of 6.7 million bpd in 2020, the highest since 1994. A bo ut 18 percent of this will come from tight oil. The 2020 forecast for total domestic production is unchanged from the draft report the administration released in January. The EIA expects tight oil to account for 20.5 percent of the 5.99 million bpd of the total it expects will be produced in the United States. The 2035 figure is lower than earlier estimates.

American oil - FOR decades, American politicians have bemoaned their economy's dependence on foreign oil and failed utterly at doing anything about it. Now, two key developments—soaring prices and new technologies—are beginning to accomplish what politicians couldn't. Consider two charts. First, from the Energy Information Administration's Annual Energy Outlook: And second, from an interesting new report from Harvard researcher Leonardo Maugeri: American oil consumption fell from 2005 to 2010 as a result of spiking prices and recession, and it is projected to do little more than return, very slowly, to the pre-recession peak over the next two decades. Meanwhile, America's shale oil boom is turning the country into one of the world's dominant energy producers (with Canada rapidly assuming a position just behind). An enormous share of the world's oil may soon be produced in North America, in other words, potentially altering the economics and politics of oil in dramatic ways.

Brent - WTI curves are not converging any time soon - The Brent-WTI crude oil spread has dropped materially from the peak, but managed to stay above $11/barrel. It has now recovered to $13. What's more interesting is the difference in the shapes of the two curves - particularly given that Brent and WTI are essentially the same products.Brent is in backwardation, while WTI is in contango. Backwardation generally means tighter supply (more demand for the spot product) - a bullish indicator, while contango tends to indicate the opposite. It says that the crude market in the US (particularly in Cushing, OK) is well supplied, which is not the case with Brent (at least not nearly as much).  There is talk however that the gap between these two curves will close fairly soon.  Bloomberg/BW: - The energy guys at Goldman Sachs, led by analyst David Greely, think that by the end of 2012 the price of WTI will be just $5 below Brent, largely because new pipeline projects, such as the recently reversed Seaway, will allow more domestic crude to reach refineries along the Gulf Coast, making WTI more valuable.  Some people doubt Goldman's forecast however. If traders truly believed in this rapid convergence, the two curves above would be approaching $5 spread six months out. Instead the difference in the January 2013 contracts is above $11. Analysts instead are looking at brisk US crude production that has been on the rise this year (we had signs of that increase earlier in the year).

Big Users Bet on More Oil Price Falls - Airlines, trucking companies and other big energy consumers are betting on further oil price falls, with many reluctant to lock in at current levels amid fears prices could plunge if the global economy weakens further. Consumers are largely on the sidelines of the oil market in spite of a 30 percent drop in price, from $125 in March to $90 now, commodities bankers said. The price of Brent crude hit an 18-month low last week. Oil consumers fear the current slide in prices – largely due to slower economic growth in China, the main engine of oil demand, and the eurozone sovereign debt crisis – is only the beginning of a major sell-off. Saudi Arabia has this year boosted production to a 30-year high, further subduing prices. “If the global economy continues to deteriorate, I will not be surprised if we see more downward pressure on oil prices,” Fatih Birol, chief economist at the International Energy Agency, the oil watchdog, told the Financial Times.

Oil, Gas Producers Look to Arctic - Two of the world's major oil and gas producing nations, bolstered by big Arctic discoveries in recent years, are looking to further develop one of the world's most remote regions as a more vibrant hub of exploration. Norway plans to award new drilling licenses for dozens of blocks of sea acreage in icy Arctic waters as early as 2013, Norway's oil ministry said at a conference here Tuesday. U.S. Secretary of the Interior Ken Salazar, speaking at the same conference, said the Obama administration plans to further open and develop its own Arctic areas for drilling to continue reducing that nation's dependence on foreign imports. The comments come amid growing appetite in recent years for the vast Arctic region as a potential source of new oil and gas resources. Although criticized for being a costly and difficult area to explore, the region north of the Arctic Circle is believed to contain about a fifth of the world's undiscovered oil and gas, according to the most recent data. Yet the frontier remains largely unexplored. Norway is the world's seventh biggest oil exporter in 2010 and looks to ride a swell of interest by awarding licenses for 72 blocks or partial blocks of acreage in the Barents sea, and 14 additional locations in the Norwegian sea, Oil Minister Ola Borten Moe said. Applications for licenses are due Dec. 4, and Norway will complete the licensing by next summer. "We are now experiencing record levels of interest in the Barents Sea," Mr. Moe said.

Interior Department Will Likely Allow Shell to Drill in Arctic - Interior Secretary Ken Salazar said Tuesday that it was “highly likely” that the agency would grant Shell permits to begin drilling exploratory wells off the North Slope of Alaska as early as next month.  Mr. Salazar, while acknowledging that the Arctic presented unique environmental and safety challenges for oil and gas operations, said he was confident that Shell would meet the Interior Department’s new standards for offshore drilling. He noted that Shell had successfully tested a new oil spill containment device in Washington State’s Puget Sound in recent days and said he believed the company’s claims that it could collect at least 90 percent of any oil spilled in the event of a well blowout.  “I believe there will not be an oil spill,” Mr. Salazar said. “If there is, I think the response capability is there to arrest the problem very quickly and minimize damage. If I were not confident that would happen, I would not let the permits go forward.”

Obama Administration’s Plan For Arctic Offshore Drilling Safety: ‘I Believe There’s Not Going To Be An Oil Spill’ - With virtually no infrastructure available to clean up an oil spill in the sensitive Arctic, the Obama Administration is still pushing to get offshore drilling projects developed in the region. What’s the messaging strategy from the Administration? Trust Shell. Talking to reporters about exploration permits for Arctic waters yesterday, Interior Secretary Ken Salazar summed up the Administration’s approach: “I believe there’s not going to be an oil spill.” Really? Shell has faced more legal prosecutions for safety and environmental transgressions than any other major oil company drilling offshore in the North Sea. And let’s remember, the Arctic is a place where the Coast Guard has warned “if [a spill] were to happen … we’d have nothing. We’re starting from ground zero today.” Heck, even one of the world’s largest insurance pools refuses to back offshore drilling operations in the Arctic, saying the environment is “highly sensitive to damage” and that the risk is “hard to manage.”

Exclusive: Venezuela wants OPEC price band restored - Venezuela on Wednesday proposed that OPEC set an oil price band of $80 to $120 a barrel, Energy Minister Rafael Ramirez told Reuters, bidding to restore a policy the cartel tried 12 years ago in a failed attempt to control prices in a tight range by adjusting supply. The Organization of the Petroleum Exporting Countries in 2000 adopted a $22 to $28 price band, requiring its members to cut or raise output in an effort to keep prices in that range for an OPEC basket of crudes. The policy quickly proved unworkable, however, and increasing demand from China pushed prices irreversibly through $30 in 2004.

Latest Saudi Production - The chart above shows all the latest publicly available oil-production data for Saudi Arabia. The black line is the average and probably of most interest to the average reader. The data are not zero-scaled to better show changes. The red line far below the others is the in-country oil-rig count and should be read against the right scale. Saudi Arabian production is always of great interest for one reason or another; the current reason is to know, if oil prices keep falling below the current level of $92 (Brent), at what point they will start to cut production to support prices. My guess is that it won't be too much further, if any at all.  The data above go through May, and you could read a small fall into the May data point - though you'd probably be a bolder analyst than me to call it the beginning of a trend all by itself.  On a technical/data note, something new in recent months is that OPEC has started reporting numbers based on direct reporting from the member countries, in addition to the data based on secondary sources (presumably tanker-counting consultants) that they have traditionally provided. The new data appear to match the JODI data (also self-reported) where they overlap, but has an extra two months available (in this case April and May). Thus I have combined this with the JODI data series.

Tech Talk - Saudi Arabia and Natural Gas Liquids - The price of crude oil has been shown to have significant impact on the global economy, and in the current and somewhat fragile state of the various parts of that economy, the lower prices help. Yet Stuart Staniford has commented that given the Saudi need for income to hold off “Arab Spring” dissatisfaction, they are unlikely to let prices fall too far before cutting production, since even a 10% reduction in output could raise prices 20%, thereby resolving their future income concerns. This reflects well the role of the Texas Railroad Commission back when it controlled US production in order to sustain an acceptable price for oil. But that role collapsed when overall US production was no longer able to spring to the rescue when demand rose and US production could not, passing the control over prices to OPEC and more particularly the Kingdom of Saudi Arabia (KSA), who have shown a willingness to control output to ensure that it proximately followed demand and has kept prices within an acceptable range for them. Their recent increase in production to offset possible Iranian sanctions, however, is likely to be transient, since – apart from annoying Iran, it has also driven prices below that benchmark. It is relatively easy to return to a more acceptable price by curtailing production, and as Stuart noted, this can increase KSA revenue at a time of falling global demand. However, in the opposing case, where the global economy requires a “reasonable” price for oil and will require them to increase production on a sustained basis, as they have done transiently..

Saudi Arabia keeps oil tap on for world growth, Russia hurts (Reuters) - Saudi Arabia is showing no sign of changing its policy of high oil output to support global economic growth, despite a fall in crude prices below $90 a barrel for the first time in 18 months. Gulf and Western government sources in contact with Saudi officials said the OPEC power can tolerate oil at $90 or below for months, price levels that hurt Iran and Russia as they face off against Riyadh over the conflict in Syria. Saudi Arabia has a built up a revenue surplus in the first half of the year and requires a much lower oil price to balance its budget than most of its fellow OPEC members and leading non-OPEC producer Russia. "If we keep producing at roughly the same rate, we're not flooding the market," said a senior oil official from a Gulf producer. "And we want to act responsibly for the sake of the world economy." Strong supporters of fellow Sunni Syrian rebels seeking to oust Syrian President Bashar al-Assad, Saudi leaders have criticised Russia for defending him. With Iran, Russia is Syria's main ally, providing most of its arms. Both Moscow and Tehran need crude at $115 a barrel to meet budget requirements. "Russia's economy is vulnerable to a sharp drop in oil prices," said U.S. oil analyst Phil Verleger. "The Saudis may be able to exploit that vulnerability by keeping production at 10 million barrels per day."

May Iranian Oil Production - Two data points are available for Iran in May: what the Iranian's themselves say (gold curve above), and "Opec secondary sources" (blue).  The Iranian's themselves have been claiming lately that their production is increasing slightly on an exactly linear trajectory.  The probably isn't true; everyone else claims their production has been falling quickly.  The actual level of production is widely uncertain between sources.  In any case, the OPEC secondary sources say production continued to fall in May. More sanctions are coming in June.  And in a world in which Brent is flirting with $90 instead of $130, it's going to be a good deal less painful for the rest of the world to impose harsher sanctions on Iran than it would have been.  Iranian leverage has been greatly reduced. Here's the comparison with Saudi production that I've been maintaining:

Iran acknowledges oil exports down 20-30 pct  (Reuters) - Iran acknowledged for the first time on Wednesday that its oil exports have fallen sharply, down 20-30 percent from normal volumes of 2.2 million barrels daily.  A National Iranian Oil Company official in Moscow denied exports had been hit by sanctions against Iran's nuclear programme, saying that oilfields were under maintenance and crude production was being diverted for refining.  But the admission that exports have fallen substantially is a change of tack from Tehran which until now has denied that the U.S. and European measures have had much or any impact.

New study by Harvard Kennedy School researcher forecasts sharp increase in world oil production capacity, and risk of price collapse - Harvard - Belfer Center for Science and International Affairs: Oil production capacity is surging in the United States and several other countries at such a fast pace that global oil output capacity is likely to grow by nearly 20 percent by 2020, which could prompt a plunge or even a collapse in oil prices, according to a new study by a researcher at the Harvard Kennedy School. The findings by Leonardo Maugeri, a former oil industry executive who is now a fellow in the Geopolitics of Energy Project in the Kennedy School’s Belfer Center for Science and International Affairs, are based on an original field-by-field analysis of the world’s major oil formations and exploration projects. Contrary to some predictions that world oil production has peaked or will soon do so, Maugeri projects that output should grow from the current 93 million barrels per day to 110 million barrels per day by 2020, the biggest jump in any decade since the 1980s. What’s more, this increase represents less than 40 percent of the new oil production under development globally: more than 60 percent of the new production will likely reach the market after 2020.

Is 2012 The Next 2008? - There is some economic hope in the new government in Greece, but if oil prices are any sort of barometer, the global economy has a long way to go before 2008 is in the rear-view mirror. In general crude oil prices for the year are down more than 20 percent amid lingering concerns that a dismal European economy will do anything to encourage demand. Iranian threats early this year caused a spike in oil prices, but those fears were largely emotional. Now, as prices move further away from $100 per barrel, it seems the threat to global economic recovery comes not from decisions made in Tehran but from the lack of decisions in the Eurozone. It may be premature, however, to pull the net away. In July 2008, oil prices moved close to $150 per barrel. By December of that year, roughly $100 was off the price as the global economy began to sink. Nearly four years later, and not much has changed. Most political statements are still couched in promises of employment prospects and last week, the Dow lost two percent of its value. That suggests there's not much in the markets to give investors any sense of optimism. The U.S. economy is sluggish, China is slowing down and reports of a dismal European economy have resonated to the point of redundancy.

U.S. could become independent of Middle East oil by 2035 - For nearly 40 years, policy makers have talked about weaning the U.S. off imported oil from the Middle East to little or no avail because of America’s huge thirst for energy. Now, The Wall Street Journal reports that a rise of supplies from Canada, South America, as well as greater shale oil output at home could help the U.S. finally achieve that goal by 2035. The story focuses only on oil and doesn’t even factor in the possible impact of electric cars, and natural gas-powered trucks that are filtering into the complicated U.S. energy equation. A recent study by the Organization of Petroleum Exporting Countries, which first hobbled the U.S. with a spike in gasoline prices in the 1973 oil embargo, noted that oil shipments from the Middle East to North America “could almost be nonexistent” in 23 years as renewable fuels and rising oil production make their way into the domestic market. Even without Middle East oil being sold to the U.S., the region will still shape global oil prices in the future. But over time, the U.S. could pare back its attention on the politically volatile region, at least in terms of its energy and military policies.

No Peak Oil in Sight: We've Got an Unprecedented Upsurge in Global Oil Production Underway - . Contrary to what most people believe, oil is not in short supply and oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. From a purely physical point of view, there are huge volumes of conventional and unconventional oils still to be developed, with no “peak-oil” in sight. The full deployment of the world’s oil potential depends only on price, technology, and political factors. More than 80 percent of the additional production under development globally appears to be profitable with a price of oil higher than $70 per barrel.  The shale/tight oil boom in the United States is not a temporary bubble, but the most important revolution in the oil sector in decades. It will probably trigger worldwide emulation, although the U.S. boom is difficult to be replicated given the unique features of the U.S. oil (and gas) arena. Whatever the timing, emulation over the next decades might bear surprising results, given the fact that most shale/tight oil resources in the world are still unknown and untapped. China appears to be the first country to follow the U.S. example. Moreover, the extension of horizontal drilling and hydraulic fracturing combined to conventional oil fields might dramatically increase world’s oil production and revive mature, declining oilfields.

Optimistic Lunatic Says We'll Soon Be Swimming In Oil  - Optimism is a natural tendency of the human mind, and is expressed through various positive cognitive biases which researchers have discovered over the years. One such optimist is Leonardo Maugeri, a former oil executive (ENI, Italy) and now a Research Fellow at the Harvard Kennedy School. Those of us who used to write about oil years ago remember that Maugeri was a delusional optimist then, and it is therefore unsurprising to learn that he is the same way now. His new report Oil: The Next RevolutionThe Unprecedented Upsurge of Oil Production Capacity and What It Means for the World has been received with much fanfare since it was released earlier this week. And although it has been a slow week here at the George Carlin Center, I find that I am bored when I'm not writing. So I looked at the report, knowing more or less exactly what I would find there. It turns out the next oil revolution will be led by Iraq and the United States (with lesser roles for Canada and Brazil). Maugeri did a "bottom up" study examining new projects starting up or in the works, and found that— ... more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd... After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their “reserve growth” (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date, as shown in Figure 3 [below]. This would represent the most significant increase in any decade since the 1980s.

Here's Everything You Missed At The Peak Oil Conference In Vienna - ASPO is a no-budget loose association of people interested in studying Peak Oil. It was formed in 2002 (10th anniversary this year) by Colin Campbell and Kjell Aleklett, both petroleum geologists. The term Peak Oil (which often creates confusion - I don't know how many times I had to say "no, not Pig Oil - Peak Oil") by the way was "created at that moment". They thought that ASOP (Association for the study of the oil Peak) did not sound so good so they changed the word order. The community meets yearly and consists of scientists and analysts /consultants. All speakers are on invitation only and there are mainly plenary sessions. Many speakers are contributors of the community's main communication platform The Oil Drum, which is a high profile, quite strictly edited blog and one-stop-shop for everything related to Peak Oil (PO).  [Editors note: many talks mentioned below are available on the ASPO YouTube channel. Several links for specific speakers are given at the end.]

Forget peak oil, we may have reached 'peak GDP'  - Economic growth and population growth, these are undoubtedly the questions of our time. These questions are highlighted by most of today's major news events: climate disruption, economic meltdown, hunger, poverty, species extinction and economic inequity. We have all heard of peak oil, but we will find out in this century whether we are living in the era of peak everything: peak food, peak water, peak biodiversity, peak energy, peak population and even peak gross domestic product. Several of these scenarios are potentially cataclysmic and we face them precisely because we have been embracing values and pursuing policies that are inherently unsustainable.  Behind these values and policies is a nearly universal belief in the benefits and essentiality of growth. Increasing the scale of humanity - population and economic throughput - has long been considered both good and inevitable. As a civilization, we have avoided examining whether such expansion continues to benefit us and whether it is even feasible going forward.

Cheap oil won’t save the world’s economy - Earlier this year, oil prices spiked upward, and observers worried that high prices could pinch the global economy. Then the global economy stumbled on its own — with slowdowns in the United States, China, Europe, and elsewhere — and oil prices slumped again. Crude traded in the United States sunk from $108 per barrel back in February down to $78 per barrel today. So will the reverse be true? Can low oil prices provide a stimulus? A little, but not much. According to Andrew Kenningham, a senior economist with Capital Economics, a $20 fall in oil prices basically transfers about 1 percent of global GDP from countries that mainly produce oil (such as Russia and Saudi Arabia) to countries that mainly use oil (lots of places). Since oil-consuming countries tend to spend a bit more money on goods and services, this wealth transfer will likely boost the global economy by about 0.5 percentage points. That helps. But it’s not nearly enough to solve the world’s problems. “Cheaper oil may cushion the fall in demand, particularly in the U.S., where the pass-through from crude oil to gasoline prices is high,” Kenningham told Housing Wire. “But it cannot reverse the slowdown.”

Greece's New Centrality - and Dilemmas - in Energy - Greece began assuming a new geopolitical significance in May and June 2012 as the “energy war” — or “pipeline war” — between US and Russian interests took on a new intensity. While, in many respects, Moscow has effectively dominated the competition to this point, the US has begun waging a campaign to ensure that non-Russian options gain ground in the provision of oil and gas to the European markets.  In this regard, the prospect of major gas flows from Eastern Mediterranean offshore fields into Europe, via Greece, give Athens a new leverage in European affairs — and in the thoughts of Washington — which counteracts the economic and political malaise which led up to the June 17, 2012, Parliamentary elections in Greece. The Eastern Mediterranean energy discoveries reaching through Israeli, Cypriot, and Greek waters, and south into Egyptian waters, could mark the strategic turning point for Greece. Equally, Turkey has begun moves to demand a share of the bounty, even as its energy fortunes begin to wane with the reality that the Nabucco pipeline — which would have transited Turkey — was no longer economically or politically viable.  But if Washington has been thwarted by Russia over Nabucco, it has begun [in May and June 2012] applying strong, discreet pressure on Greece and Serbia over the exploitation and transit of Mediterranean gas, in a move to counter Moscow’s pipeline dominance.

China resumes buying Iranian oil -  China got what it wanted out of Iran - crude oil materially below market price. Their strategy of isolating Iran helped convince the desperate nation that China and India are its only large customers, but Iran needs to agree to significant price concessions (see this post). Now after using the sanctions to get the concessions it needs, China is back buying Iranian oil.  Reuters: - China's crude imports from Iran recovered in May to offset a first-quarter plunge in shipments to nearly half the annual average, after the two nations resolved a wrangle over the terms of annual oil sale contracts When it comes to resources, China is all about business. China Daily: - A spokesman for China's Foreign Ministry said Thursday that the country's oil imports from Iran are "fully reasonable and legitimate," and do not violate any relevant UN Security Council resolutions. "China's importing of Iranian oil is based on its own economic development needs," spokesman Hong Lei told a daily news briefing. "This is fully reasonable and legitimate." Stressing that China has repeatedly expressed its position on this issue, Hong said China is always against one country imposing unilateral sanctions on a certain country, and "it is even less acceptable for such unilateral sanctions to be imposed on a third country."

U.S. exempts China, Singapore from Iran sanctions — The United States on Thursday exempted China and Singapore from sanctions over purchases of oil from Iran hours before a deadline, saying that major economies were united in pressuring Tehran. The United States, however, did not grant exemptions to smaller-scale importers such as Pakistan and Afghanistan, meaning that banks from those countries could face punishment if they handle transactions for Iranian oil. Secretary of State Hillary Clinton ruled that China and Singapore had “significantly reduced” their crude oil purchases from Iran, granting them exemptions on the final day before sanctions take effect.Under a law aimed at pressing Iran over its nuclear program, the United States will bar financial institutions that buy oil from Iran, essentially forcing them to choose between Tehran and the world’s largest economy. Clinton credited the threat of sanctions with severely cutting Iran’s crude oil exports and estimated that it cost the country some $8 billion in lost revenue each quarter.

Vietnam says South China Sea oil bid illegal - China's plans to invite foreign oil bids in a disputed area in the South China sea have been protested by Vietnam. The move was 'illegal' and a serious 'violation of Vietnam's sovereignty', according to the foreign ministry. The blocks are said to be deep inside Vietnam's exclusive economic zone and not a contested area". China National Offshore Oil Corporation (CNOOC) said on Saturday that nine offshore blocks were open to foreign bids this year. CNOOC's website stated that "part of open blocks in waters under jurisdiction of the People's Republic of China" were "available for foreign co-operation". Hong Lei, Chinese Foreign Minister, said during a news briefing yesterday that the tender "normal business activity" and asked that Vietnam "not further complicate and aggravate the dispute". However, Vietnam disagrees, with Vietnam's foreign minister saying '"this is absolutely not a disputed area. [CNOOC's move] is illegal and of no value, seriously violating Vietnam's sovereignty."

Coal inventory at China's Qinhuangdao Port hits record - Recently the Tianjin Port in China was showing record levels of coal inventories. Now the Qinghuangdao Port coal inventories in storage have also risen dramatically (ht Patrick Chovanec). But unlike Tianjin, Qinhuangdao is the world’s largest coal loading port handling half of China's coal needs (see this website for more background on  Qinghuangdao.) Want China Times: - The amount of steam coal held in storage at the port city Qinghuangdao in northern China's Hebei province is approaching maximum capacity and has sparked safety concerns that the pile could combust without warning. Coal prices are set to continue to fall as high inventory levels have forced suppliers to try to boost sales. Inventories at power plants are at the highs and the buyers are holding off. Pricing is becoming a problem and some coal buyers are walking away from their contracts. Want China Times: - Industry insiders said the coal inventories of power plants are currently high and they will not buy any more coal for the time being unless the price falls to a certain level. The actual transaction value of the coal was reportedly lower than the price offered in Qinghuandao and is likely to continue to fall.

Coal inventory at China's power plants hits record; indicates reduced power usage  - This weekend we discussed the massive buildup of thermal coal inventories at China's key ports. The reason for the buildup is the reduction in power usage (driven by slower economic activity) which increased coal stocks at China's power plants. We now have the data that demonstrates this "downstream" inventory increase. Slowly but surely the US housing market is climbing out of that deep hole it was in for some time. Pending home sales came in way above expectations (5.9% MoM vs. 1.5% expected).A couple of things worth noting about the pending home sales chart above.

  1. Contrary to popular belief, the housing recession started in 2007, possibly even in 2006, not after the Lehman crash in 08.
  2. The First-Time Homebuyer Credit stimulus program had a tremendous impact on home sales. It tells us that tax incentive programs are quite effective but have a short "half life".

China's Economy Down More Than We Thought - It's long been believed that China's economic data is untrustworthy, but now that the Chinese economy is clearly cooling down, that theory is being put to the test, and it seems to be confirmed that the government isn't always forthright about the numbers. Keith Bradsher at The New York Times has a good overview of the situation. He notes that in addition to there being an ">">">economic slowdown, this is a year of political transition, which further creates pressure on folks at all levels of government and in state-owned-enterprises to juice up the data. The government officials don’t want to see the negative, so they tell power managers to report usage declines as zero change, said a chief executive in the power sector. Another top corporate executive in China with access to electricity grid data from two provinces in east-central China that are centers of heavy industry, Shandong and Jiangsu, said that electricity consumption in both provinces had dropped more than 10 percent in May from a year earlier. Electricity consumption has also fallen in parts of western China.  Yet, the economist with ties to the statistical agency said that cities and provinces across the country had reported flat or only slightly rising electricity consumption.

Financial Repression and China’s Extractive Elite -- Financial repression and extractive institutions are two of the big memes in international economics today. Financial repression occurs when governments intervene in financial markets to channel cheap funds to themselves. With sovereign debts skyrocketing, for example, governments may try to force their citizens, banks, and others to finance those debts at artificially low interest rates. Extractive institutions are policies that attempt to redirect resources to politically-favored elites. Classic examples are the artificial monopolies often granted by governments in what would otherwise be structurally competitive markets. Daron Acemoglu and James Robinson have recently argued that such institutions are a key reason Why Nations Fail. . Over at Bronte Capital, John Hempton brings these two ideas together in an argument that Chinese elites are using financial repression to extract wealth from state-owned enterprises. In a nutshell, he believes Chinese authorities have artificially lowered the interest rates that regular Chinese citizens earn on their savings (that’s the repression), and have directed these cheap funds to finance “staggeringly unprofitable” state enterprises that nonetheless manage to spin out vast wealth for connected elites and their families. I don’t have the requisite first-hand knowledge to judge his hypothesis myself. But both his original post and recent follow-up addressing feedback are worth a close read.

The Looting of China by the Kleptokapitalist Bourgeoisie Roaders -- As I set out in The Fall of the Communist Dynasty, and a HT to John Hempton’s piece within which he contends that the entire Chinese economy is a Kleptocracy , this week we have news from Citron Research who reports that  Evergrande Real Estate Group Ltd is ‘a deception on a grande scale’ .Citron quote: ‘Evergrande who ranks among the top 5 Chinese property companies. Our analysis and primary research reveal that: 1] Evergrande is insolvent; and  2] Evergrande will be severely challenged from a liquidity perspective. The Company’s management has applied at least 6 accounting shenanigans to mask Evergrande’s insolvency. Our research indicates that a total write-­down of RMB 71bn is required and Evergrande’s pro forma equity is negative 36bn.’  Meanwhile, Chinese Postal Bank, the country’s 7th largest bank in terms of assets, had its President led away by investigators. The remarkable  aspect of this story is that is that it is not remarkable ; billionaire senior party figures get taken away for questioning  on a weekly basis.

Chinese business to boost $US? - Interesting research from Standard Chartered shows that corporate China is short the US dollar. That may seem surprising, but it makes sense if the Chinese yuan is expected to go up while the US dollar is expected to go down, which has been the case for the best part of the last 2 or 3 years. That expectation has not disappeared until recently. Essentially, Standard Chartered is suggesting that while corporate China have to sell US dollars whenever they receive their payments in that currency, the data suggests that they are selling a lot more US dollars than the trade surplus data suggests that they should, thus they seem to have been building up a net short position in US dollars.  Or, in other words, they borrow US dollars. I note that StanChart is aware of the potential inaccuracies on these numbers (as I noted yesterday, China’s trade figures can be very inaccurate), thus it is not certain how large this net short position is.  However, if this is indeed the case, a deleveraging of the short US dollar position due to an expectation of a depreciation of Chinese yuan and appreciation of US dollar (which are both happening) would mean a lot of US dollar buying.

Chile Is Latest Country To Launch Renminbi Swaps And Settlement - The dollar exclusion list is becoming bigger and bigger with every passing day as China gets ready. For simplicity's sake here is the full list of "bilateral" arranagements in the past year as presented previously: "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", "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap."  And now the latest: "China, Chile To Establish Strategic Partnership, Boost Trade... Launch Currency Swap and Settle In Renminbi. China and Chile agreed Tuesday to upgrade their bilateral ties to a strategic partnership, and double trade in three years. Chinese Premier Wen Jiabao and Chilean President Sebastian Pinera announced Tuesday the establishment of China-Chile strategic partnership and the completion of negotiations on investment-related supplementary deals to a bilateral free trade agreement.

China’s, ahem, “stabilising trade” --While country A’s import from country B should be equal to the export from country B to country A, statistics from different countries do not always match up.  That is understandable as there are differences in how things are counted. In the China case, the difference itself is not what interests me at the moment. Digging into the data from the US Fed, Eurostat, and China Customs, Chinese data of exports to the other two economies are wildly different from import data reported by the US and the European Union.  The chart below, for instance, shows the difference between data from China and the US: That’s not what concerns me. What is more interesting is the discrepancy between European data and Chinese data.  Imports from China by the European Union have fallen very significantly this year.  Although not as bad as 2009 (yet), the decline this year is significant already.  On the other hand, China’s exports to the European Union appear flattish compared to the previous year:In terms of year-on-year growth (and forgeting about the discrepancies in 2010 for the moment), European data (import) dipped into negative territory for the first time in September 2011, and it only turned positive once in February 2012.  Meanwhile, Chinese data (export) only dipped into negative territory in January this year.  Also, the decline is much smaller in Chinese data. 

China’s capital outflow hitting yuan - Recently, the Chinese yuan has stopped strengthening against the US dollar. Indeed, it has been weakening, as I predicted it would. What’s interesting when we look at the prices for USDCNY at daily closing and the People’s Bank of China daily fixing is that, increasingly, the Chinese yuan is closing at rates much weaker than PBOC’s fixing against the US dollar. That is to say that the PBOC fixes the exchange rate at a relatively strong level, and the market sells off yuan to a weaker level. The net result is that while the yuan has been weakening, nothing particularly dramatic has happened. The chart below shows the gradual weakening of the yuan against the dollar. Note that the daily closing for the yuan is now consistently weaker than the PBOC’s fixing: The chart below shows two things. The red line is the difference between PBOC fixing and the closing price of the previous day. The blue line is the difference between the closing price and the PBOC fixing of the same day. Increasingly, the PBOC sets the yuan at a stronger rate than the previous day closing, while the closing price turns out to be weaker than the PBOC fixing. In other words, the PBOC has been setting yuan consistently above the market price.

BRICs Biggest Currency Depreciation Since 1998 to Worsen - The largest emerging markets, whose economies grew more than four-fold in the past decade, are making losers out of everyone from central bankers to Procter & Gamble Co. (PG) as their currencies post the biggest declines since at least 1998. For the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation. P&G, the world’s largest consumer-goods maker, cut its profit forecast for the second time in two months last week in part because of currency losses. Brazil’s Fibria Celulose SA (FIBR3), the biggest pulp producer, asked banks to loosen restrictions on dollar loans as the real hit a three-year low. Investors are fleeing the four biggest emerging markets, known as the BRICs, after Brazil’s consumer default rate rose to the highest level since 2009, prices for Russian oil exports fell to an 18-month low, India’s budget deficit widened and Chinese home prices slumped. Investors are bracing for more losses as economic growth slows.

EM growth doubts hit currencies - Emerging market currencies are suffering their biggest sell-off in a decade. Now this turmoil is starting to ripple into the corporate world.  Standard Chartered Bank has become the latest multinational to warn of the impact of this year’s sharp decline in EM currencies. The bank said on Wednesday that income and pre-tax profit growth would fall below 10 per cent in the six months to the end of June, due to the economic slowdown in Asia and a drop in Asian currencies against the US dollar, notably the Indian rupee. StanChart’s statement comes after Procter & Gamble, the consumer goods group, and Philip Morris International, the cigarette maker, both warned of the impact of emerging market currency swings. Given the turmoil in EM currencies, there will be others. The rupee and the Russian rouble are both down by nearly 11 per cent in the second quarter of 2012, and the Brazilian real by 12 per cent. Other heavily traded currencies have fared a little better – the Czech crown is down 10 per cent on the quarter, the South African rand by 9.3 per cent, Poland’s zloty by 8.6 per cent and the Mexican peso by 6.8 per cent. All in all, on Bloomberg data, the second quarter of 2012 looks set to be the worst on record for EM currencies since the 1998 Asian financial crisis.

India needs to cut fuel subsidies to avoid fiscal deterioration - India's government took action today to stem the currency declines, as INR reached all-time lows on Friday. Reuters: India announced steps on Monday to bolster the embattled rupee, including a $5 billion increase in the foreign investment cap in government bonds, but disappointed markets hoping for bolder action to prop up a currency that hit a record low on Friday. And here is the result: The market pretty much shrugged it off, leaving the INR to USD exchage rate almost where it was before the new policy was announced. Too little, too late. Beyond India's economic deterioration, one of the things that's spooking investors (and keeping the currency weak) is the government's fiscal situation. With strong GDP growth, government debt levels looked acceptable. But the slowdown will materially increase risks to sovereign bondholders (particularly as RBI becomes a key buyer - remember subordination? ).

Japan's Industrial Production Plunges In May - Japan's industrial production declined in May from the previous month, according to data released by the Trade Ministry Friday.  The data reported that industrial output fell 3.1 percent in May, raising concerns about the country's faltering economic growth momentum. A decrease of 0.2 percent was reported in April. The continuing crisis in Europe, the weakness in the U.S. market and the strengthening of the Japanese yen have hampered the growth of Japan's export-focused companies. The debt crisis in the euro zone has revived with the rising borrowing cost of Spain and Italy, consequently affecting Japan's market sentiments adversely. Construction projects in Japan are on the rise in tsunami-damaged areas. However, except for the boost from reconstruction spending that largely reflects the replacement of lost assets, economic fundamentals are relatively weak.

Japanese manufacturing output falls for first time in 2012 to date - June data pointed to the first month-on-month reduction in manufacturing output since December 2011, as both new business and new export orders fell. Backlogs of work decreased as a result, while employment growth eased to only a marginal rate. On the price front, factory gate charges fell further in June, in response to a first reduction of average costs in 20 months. After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers’ Index™ (PMI™) dipped fractionally below the neutral 50.0 threshold in June, to post its lowest reading in seven months. “June data suggest that Japan’s manufacturing sector upturn is fading into mid-year, with output and new business falling simultaneously for the first time since December 2011. Growth in the year to date has been supported by earthquake-related reconstruction projects. The latest survey findings indicate that the boost from these efforts is starting to ebb, however, with investment goods producers noting a particularly sharp fall in output during June. This bodes ill for growth heading into the second half of the year, especially given the fragility of demand in external markets – highlighted by an accelerated fall in new export business during June.”

Future Heroes of Humanity and Heroes of Japan - The Bank of Japan has amazing legal authority to print money and buy a wide range of assets, and has the rest of the government actually pushing for easier monetary policy. So they could do it. They just need to buy assets chosen to have nominal interest rates as far as possible above zero in quantities something like 30% or more of annual Japanese GDP. Japan needs monetary expansion, particularly if it is going to raise its consumption tax, and would be doing the world a huge service by settling the scientific question of whether Wallace neutrality applies to the real world. I spent two weeks at the Bank of Japan in each of May 2008 and May 2009 precisely because I think there is no central bank in the world that could do more to help the world economy as a whole, as well as Japan’s, by improving its monetary policy. I know that some on the Bank of Japan’s monetary policy committee do not think that printing money and buying massive quantities of assets will work. But the value of experimentation in economic policy is vastly underrated: trying a policy of “print money and buy assets” on a massive scale such as 30% or more of the value of annual GDP is the way to find out. And there is no country in the world for which the possible side effect of permanently higher inflation would be more harmless.  The Bank of Japan has officially set an inflation target at 1%, which is 1% higher than where Japan is at, and there would be nothing terrible about having a 2% inflation target, like the inflation targets for the Fed and the European Central Bank. So the Bank of Japan should do it. If the Bank of Japan shifts to such a decisive policy, those pushing for this approach on its monetary policy committee will ultimately go down in history as heroes of humanity as well as heroes of Japan.

There’s more to good policy than increasing GDP - Quiggin - Economists are regularly criticized for worrying about Gross Domestic Product (GDP), and similar measures. Much of the time, this criticism is misplaced. For the purposes of medium-term macroeconomic management, that is, trying to maintain full employment and low inflation, it is important to measure how much economic activity is going in aggregate. If aggregate demand is weak, for example, it is sensible to stimulate the economy by cutting interest rates or increasing public spending. GDP is the best single measure of economic activity, precisely because it captures all output, taking existing market prices as the measure of value. In the longer term though, the problems with GDP start to matter, even in relatively narrow issues of economic policy. In measuring economic performance, as opposed to activity, GDP suffers from three major drawbacks in this respect

  • It’s Gross – that is, depreciation of physical and natural capital is not deducted
  • It’s Domestic – that is, it measures output produced in Australia, even though the resulting income may flow overseas[1]
  • It’s a Product – the ultimate aim of economic activity is not production in itself but the income it generates, which should be taken to include the economic value of leisure, household work and so on

Australian banks most profitable in the world - The Bank of Interntional Settlements (BIS) released its 2011/12 annual report over the weekend and the results were spectacular for Australia’s banks for the year: As a percentage of total assets, that’s Australian banks at number one, with net interest margins at fourth, loan loss provisions at sixth and operating costs at second. No wonder they’re on top. This is all the more remarkable given the following table of GDP and credit gowth, on which Australia’s perfomance is miserable: Except fo course for one thing. This is a brilliant depiction of disleveraging, with Australia sporting what is clearly the best credit/GDP gap in the world by miles, even though credit is still growing. By crickey, we’re a lucky lot! Especially the banks.

As Growth Ebbs, Brazil Powers Up Its Bulldozers - More than 40,000 laborers swarm the port complex here in northeast Brazil, building a refinery for the state oil company. Five thousand others toil at a shipyard, another government-led project. Real estate prices are soaring and unemployment is falling in this region along the Atlantic coast, once known for its festering poverty. In a show of the extraordinary sway that Brazil’s government wields in nearly every important area of the economy, President Dilma Rousseff is accelerating an array of stimulus projects throughout the country aimed at blunting a slowdown that has reduced Brazil’s economic growth to a snail’s pace. Ms. Rousseff’s assertiveness in enhancing the government’s role in molding economic policy is not wholly unlike China’s state-led investment, an increasingly popular model in the developing world. Brazil’s stimulus spending has helped preserve jobs, keeping unemployment at a historic low of 5.8 percent, down from 13 percent a decade ago. Months into a sharp slowdown, Ms. Rousseff’s approval ratings stand at more than 60 percent. But in an echo of the debate about heavy government borrowing in the United States and Europe after the global downturn, Ms. Rouseff’s moves are starting to meet resistance in Brazil. Some experts fear that Brazil is becoming too dependent on government intervention to smooth the ups and downs of an economy that remains tied to commodity cycles; others fear that the creation of state-supported champions in the business world give the government even greater power to dictate policy shifts, potentially eroding Brazil’s exposure to market forces.

Beijing, a Boon for Africa - In 2009, China became Africa’s single largest trading partner, surpassing the United States. And China’s foreign direct investment in Africa has skyrocketed from under $100 million in 2003 to more than $12 billion in 2011.  Since China began seriously investing in Africa in 2005, it has been routinely cast as a stealthy imperialist with a voracious appetite for commodities and no qualms about exploiting Africans to get them. It is no wonder that the American government is lashing out at its new competitor — while China has made huge investments in Africa, the United States has stood on the sidelines and watched its influence on the continent fade.  Despite all the scaremongering, China’s motives for investing in Africa are actually quite pure. To satisfy China’s population and prevent a crisis of legitimacy for their rule, leaders in Beijing need to keep economic growth rates high and continue to bring hundreds of millions of people out of poverty. And to do so, China needs arable land, oil and minerals. Pursuing imperial or colonial ambitions with masses of impoverished people at home would be wholly irrational and out of sync with China’s current strategic thinking.  Moreover, the evidence does not support a claim that Africans themselves feel exploited. To the contrary, China’s role is broadly welcomed across the continent. A 2007 Pew Research Center survey of 10 sub-Saharan African countries found that Africans overwhelmingly viewed Chinese economic growth as beneficial. In virtually all countries surveyed, China’s involvement was viewed in a much more positive light than America’s; in Senegal, 86 percent said China’s role in their country helped make things better, compared with 56 percent who felt that way about America’s role. In Kenya, 91 percent of respondents said they believed China’s influence was positive, versus only 74 percent for the United States.

Kenya's Ownership Society - The community service workers we have met here in Kenya are very, very worried about social programs creating dependency on the government. Thus, whenever they talk about their social programs, they emphasize the importance of the individuals "taking ownership." For example, elementary schools are supposed to be free, but in practice they are not. Parents must buy school uniforms, they must pay teachers extra to get the "full curriculum," there can be development fees for buildings, and so on. In the end, though it's supposed to be free, a substantial number of students are excluded from basic education. The purchase of the school uniform seems to be the biggest barrier (and high school is very expensive for most families, there is tuition in addition to uniforms and other costs, so that most families of limited means cannot afford it). As another example, Ol Pejeta. the (privately owned) conservancy for endangered animals, helps the communities around it in order to create acceptance for the conservancy (which imposes many costs on the communities). But when they help students, they only pay the fees, they won't pay for uniforms or other costs because, they say, parents must take some degree of ownership (even though this attitude hurts substantial numbers of children who are excluded from the school system). Similar attitudes were applied to maternity care, parents must take some degree of ownership or be excluded, even when it might hurt unborn children.

Global Trade Confidence Stable Despite Worries - Given turmoil in Europe, slowdowns in China, India and Brazil, and lackluster growth in the U.S., one might expect trade-oriented businesses globally to be dour about the future. Well, not quite yet. HSBC’s Trade Confidence Index, a semiannual survey of exporters and importers in 20 countries, ticked up slightly in the latest reading published Tuesday. The overall reading was 113, little changed from the 112 score last October. A reading below 100 indicates a negative outlook; above 100 indicates a positive view. More than 70% of the companies surveyed expected trade volumes to stabilize or grow in the next six months. “Businesses are still continuing to trade. They are cautious, but we are still seeing growth,” said Noel Quinn, HSBC’s regional head of commercial banking, Asia Pacific, where he oversees lending to businesses across 17 countries. The survey of 5,800 businesses was conducted mostly in April and May and thus missed the full reverberations from Greece’s electoral stalemate and Spain’s bank bailout. And a clearer picture of China’s slowdown has emerged since the survey.

Europe, Colombia and the Role of Free Trade - Colombia and Peru are fast approaching the final stages of ratification of a Free Trade Agreement with the European Union. It is a major agreement that offers a bridge for ever-widening relations and commerce between South America and the Union. And in our age of globalization such a bridge is very necessary. The F.T.A. was well-negotiated by the European Commission, and has already been ratified by the Council, which is made up of the governments of the European Union. The final step now lies with the European Parliament, which must ratify it too. This is as it should be: The liberalization of commerce between the European Union and the two Latin American countries concerned will ultimately create more opportunities, more jobs and a better future for the peoples of Colombia, Peru and the European Union. It is therefore only fitting that the direct representatives of the peoples of Europe have a central role in assuring that the accord takes into account essential principles of economic viability — as well as social justice, human and labor rights and environmental sustainability. However, a narrow, almost exclusive, focus on these issues can also prevent us from understanding the broader importance of the agreement — not just for Colombia and Peru, but for Europe and its role as a leading political and commercial actor in the world

Greek Coalition Outlines Plan to Renegotiate Loan Deal - Two days before Greece’s international creditors return to Athens to begin talks on keeping the nearly bankrupt country solvent, the new coalition government on Saturday highlighted the main points it plans to renegotiate with lenders, aiming to revoke certain taxes, suspend planned layoffs in the bloated public sector and extend by two years the deadline for imposing additional austerity measures. A joint policy statement issued by Prime Minister Antonis Samaras, a conservative, and his coalition partners — Evangelos Venizelos, chief of the socialist Pasok party, and Fotis Kouvelis, leader of the moderate Democratic Left party — summarized the new government’s chief aim as “tackling the crisis, opening the road to growth and revising the terms of the loan deal without putting at risk the country’s European course or its continued presence in the euro zone.” The initiative is aimed at easing public opposition to two years of austerity, which led to big vote tallies in last Sunday’s elections for parties opposed to the $170 billion bailout and obliged the more established parties to forge a tenuous coalition. But some of the goals set out in the document are unlikely to please Greece’s creditors, the European Commission, the European Central Bank and the International Monetary Fund, whose officials have repeatedly said in recent weeks that there was only marginal room for maneuvering, with an extension of the deadline for meeting fiscal deficit targets the only likely concession. The chief priorities highlighted in the policy statement — the product of several days of tense negotiations between the coalition parties — include the extension of Greece’s “fiscal adjustment period” by at least two years, to 2016, so that fiscal targets can be met without further cuts to salaries and pensions. The blueprint also aims to revoke changes to collective bargaining agreements in the private sector and to ease the burden on taxpayers by ensuring that they pay no more than 25 percent of their income in overdue obligations.

Greece Asks Troika For Moon; Time Means Money -- It will be interesting to see how long the coalition in Greece will last after Germany shoots down Bailout Easing Proposals by Greece to ....

  • Cut the VAT
  • Freeze layoffs
  • Extend timeline to reduce its deficit by two years
  • Recapitalize lenders
  • Provide more help for the unemployed
  • Accelerate payments to providers of government services.
Bloomberg reports Greece Seeks at Least Two-Year Extension to Bailout Goals noting that "New Democracy, Pasok and the Democratic Left agree that plans to cut 150,000 public-sector jobs should be scrapped." The coalition parties (New Democracy, Pasok, Democratic Left) can agree to whatever they want. They may as well agree the moon is made of green cheese while requesting slices on a platter. Immediately following the election in Greece German chancellor Angela Merkel stated Greece must stick to commitments:German Chancellor Angela Merkel said on Monday a new Greek government had to meet commitments made to international lenders. Speaking to reporters at a Group of 20 leaders' meeting, Merkel said any loosening of agreed reform pledges after Sunday's narrow election victory for Greece's pro-bailout parties would be unacceptable.

Greece Seeks At Least Two-Year Extension To Bailout Goals - Greece will push its creditors to extend fiscal deadlines under the country’s bailout program by at least two years, according to a policy document drawn up by the three parties in the country’s governing coalition. New Democracy, Pasok and the Democratic Left agree that plans to cut 150,000 public-sector jobs should be scrapped, the document, received by e-mail from the Greek government today, showed. Proposals also include reducing sales tax for cafes, bars, restaurants and the agricultural industry, and increasing the threshold for paying income tax. The government affirmed its commitment for the need to reduce deficits, control debt and implement the structural reforms the country needs, the policy statement showed. Greece has slipped behind budget-cutting targets that euro- area nations and the IMF imposed in exchange for 240 billion euros in aid pledges in the past two years.

Greek PM, Finance Minister Will Miss Summit Due to Illness - Illness means both Greece's new prime minister and finance minister will miss an anxiously awaited summit of European leaders later this week and delayed a visit by the country's international lenders. According to a document prepared for the June 28-29 meeting, European leaders will discuss specific steps towards a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund. But Prime Minister Antonis Samaras underwent eye surgery on Saturday and Vassilis Rapanos is in hospital after suffering from nausea before he could be sworn in as finance minister. Instead, Greece's foreign minister and outgoing finance minister will attend the meeting to ask for the terms of the 130 billion euro ($162.96 billion) bailout to be loosened.

Greece’s New Leaders to Miss Crucial Meeting - Less than a week after Greece ushered in a new government, uncertainty has returned in a rather unexpected form. The nation’s newly installed prime minister, Antonis Samaras, and his nominee for the crucial post of finance minister, Vassilis Rapanos, have been in the hospital since Friday. They will miss a crucial European Union summit meeting on Thursday and Friday that is intended to discuss whether to ease the terms of Greece’s bailout conditions, a government spokesman said Sunday. Mr. Samaras, who is recovering from eye surgery, and Mr. Rapanos, who was struck by intense abdominal pain, nausea, sweating and dizziness on Friday, will be replaced at the meeting by a ministerial delegation. With the two men in the hospital, representatives of Greece’s so-called troika of foreign creditors have postponed a trip to Athens that was scheduled for Monday, state television reported Sunday. Conny Lotze, a spokeswoman for the International Monetary Fund’s mission chief in Greece, Poul M. Thomsen, confirmed in an e-mail that Mr. Thomsen had postponed his visit and that a new date had yet to be set. The creditors — the European Commission, the European Central Bank and the International Monetary Fund — are supposed to review Greece’s progress in installing the terms of a recent bailout package of 130 billion euros, or $173 billion, something that they have been unable to do for several months because of the political upheaval here.

Greek finance minister resigns, crisis deepens - Greece's new finance minister resigned because of ill health on Monday, throwing the government's drive to soften the terms of an international bailout into confusion days before a European summit.  Vassilis Rapanos, 64, chairman of the National Bank of Greece, was rushed to hospital on Friday, before he could be sworn in, complaining of abdominal pain, nausea and dizziness. Greek media said he had a history of ill-health. The office of Prime Minister Antonis Samaras, who himself only took office last Wednesday following a June 17 election, said Rapanos had sent a letter of resignation because of his health problems and it had been accepted. Samaras himself has only just emerged from hospital after undergoing eye surgery to repair a damaged retina. Both he and Rapanos had already said they would not be able to attend the June 28-29 European summit.

Yanis Varoufakis: Greece is Finished  - Yves here. Yanis just posted an interview with ABC (Australia’s BBC) which describes how Greece cannot be salvaged. Its fate will be determined at the eurozone level, and its possible outcomes range from bad to awful. You can watch the conversation here. Transcript below:

Fitch Downgrades Cyprus Credit Grade to Junk - Fitch ratings agency says it has downgraded Cyprus’ sovereign credit grade to junk status, citing a rise in the amount of rescue money needed by its banks, which are heavily exposed to Greece. The agency lowered the eurozone country’s rating by one notch to BB+ from BBB- and kept a negative outlook, which means more downgrades are possible in coming months. Cyprus is expected to ask for foreign aid to rescue its banks, either from its fellow eurozone nations or from Russia. The banks were big holders of Greek sovereign bonds whose value was written down sharply this year. In a statement, Fitch says “its estimates of the losses and capital needs of Cypriot banks are subject to considerable uncertainty.”

Cyprus Becomes 5th Euro Zone Member to Seek Rescue - On the eve of a crucial summit meeting of European leaders in Brussels, Spain on Monday formally requested billions of euros in aid for a banking sector battered by the country’s real estate collapse and Cyprus announced that it would apply for a bailout. Few realize that the actual cost-benefit ratio of the legislation will be relatively low. That’s because the bargain basement 3.4 percent interest rate currently applies to only about a third of students holding or seeking subsidized federal loans. the borrower would save a maximum of $800 to $1,000 over the life of the loan, assuming he borrows the $5,500 maximum available to a third or fourth-year student. That works out to a savings of about $9 a month. The interest savings would be even less for first-year students who could borrow no more than $3,500 at the lower interest rate.

Cyprus bailout may equal half its economy - Cyprus, the fifth euro zone country to seek emergency funding from Europe, may need a bailout of up to 10 billion euros — over half the size of its economy — officials said on Tuesday. The Mediterranean island, with a banking sector heavily exposed to debt-crippled Greece, said on Monday it was formally applying for help from the European Union's rescue funds. Cyprus is the euro zone's third smallest economy but it joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds to try and stay afloat, and is the latest sign that policymakers have failed to stop the debt crisis spreading. European leaders will meet at a summit on Thursday and Friday but they are not expected to come up with a lasting solution to the region's problems that have also sent Italy's borrowing costs soaring.

Spain Asks for Bank Rescue -- Spain has made a formal request for a loan to help clean up its troubled banking sector, Economy Minister Luis de Guindos said Monday. However, the country has yet to specifiy how much of the (EURO)100 billion ($125.39 billion) loan package offered by the 17 countries that use the euro it will ask for. De Guindos said the figure will be made known July 9 when Spain and its single currency partners reach agreement on the terms of the loan, such as the interest rate. Last week, two international audits commissioned the government said l that Spain’s banks could need up to (EURO)62 billion ($77.7 billion) to survive if the economy were to suffer an extreme deterioration. Spain earlier this month finally admitted that some of its banks were in severe trouble owing to the build-up of toxic assets following the collapse of the country’s bloated real estate sector after 2008.

Capital Controls Hit Spain: Government Laws Prohibit Cash Transactions Over €2,500; Minimum Fine of €10,000 for Failure to Report Foreign Accounts - If Spain is seeking further instability, a new law on financial transactions is sure to do just that. Via Google Translate, Spain passes a law limiting cash payments to 2,500 euros. Key Provisions:

  • Minimum fine of  €10,000 for taxpayers who do not report their foreign accounts.
  • Fine of  €5,000 for each additional account
  • Cash transactions greater than €2,500 prohibited
  • Cash transaction restrictions apply to individuals and businesses

The US requires reporting of foreign accounts as well, supposedly for the same reason, preventing tax fraud. In Spain however, consumers and businesses are already very nervous  (and rightfully so), of a Spain exit from the euro with a  return to the Spanish peseta accompanied by an immediate devaluation. In that context, these controls are only going to make consumers and businesses even more nervous, if not outright suspicious about what is going on.

Revenge of the Optimum Currency Area - Paul Krugman - The creation of the euro was supposed to be another triumphant step in the European project, in which economic integration has been used to foster political integration and peace; a common currency, so the thinking went, would bind the continent even more closely together. What has happened instead, however, is a nightmare: the euro has become an economic trap, and Europe a nest of squabbling nations. Even the continent’s democratic achievements seem under threat, as dire economic conditions create a favorable environment for political extremism. Who could have seen such a thing coming? Well, the answer is that lots of economists could and should have seen it coming, and some did. For we have a long-established way to think about the prospects for currency unions, the theory of optimum currency areas – and right from the beginning, this theory suggested serious concerns about the euro project. These concerns were largely dismissed at the time, with many assertions that the theory was wrong, irrelevant, or that any concerns it raised could be addressed with reforms. Recent events have, however, very much followed the lines one might have expected given good old-fashioned optimum currency area theory, even as they have suggested both that we need to expand the theory and that some aspects of the theory are more important than we previously realized. In what follows, I’ll start with a very brief and selective review of what I consider the key points of optimum currency area theory, and what that theory seemed, some two decades ago, to say about the idea of a single European currency. Next up is the crisis, and the continuing refusal of many leaders to see it for what it is. Finally, some thoughts on possible futures.

"We Certainly Don't Want to Divide Europe." -- German Finance Minister Wolfgang Schäuble believes that only further EU integration can save the euro. SPIEGEL spoke with him about how the currency can be strengthened, the hurdles presented by Germany's constitution and what the 27-member club might look like in five years.

Europe Takes a First Step - It’s another week and another summit for Europe. The latest EU summit will be held in Brussels on Thursday and Friday and once again it is a ‘summit to end all summits’. Last Friday saw the leaders of the four largest Eurozone economies meet in Rome and the outcome was relatively positive: The countries with the four-largest euro-zone economies agreed on Friday to an economic growth program with a total value of €130 billion ($163 billion). The sum represents 1 percent of the European Union’s gross domestic product, Italian Prime Minister Mario Monti said in Rome after a meeting with German Chancellor Angela Merkel, French President François Hollande and Spanish Prime Minister Mariano Rajoy. Germany, France, Italy and Spain all agreed that growth measures undertaken so far have not been enough to pull Europe out of a debt crisis that is threatening to unravel the continent’s common currency, the euro. They also agreed that budget discipline alone will not be enough to fuel economic growth and create jobs for the mass of unemployed Europeans. Chancellor Merkel said the plan was the “message we need.” She also admonished Europe to venture even closer political integration. Although much of this wasn’t new money I think it is an important step forward because of the acknowledgement that the current ‘austerity only’ plan is failing to fix the Eurozone’s problems. I’ve always thought that ‘austerity alone’ would be a total disaster for Europe and that the idea would eventually be abandoned but that it would probably take the effects of the policy to start effecting one of the largest economies before we saw some reversal of policy.

Stimulating Europe - One specific way of significantly stimulating European growth would be to greatly expand lending by the European Investment Bank (EIB) within Europe, so that it could finance increased investment, especially but not only in the countries suffering most from the crisis. By boosting investment to help restructure those economies with viable projects and make them more competitive, this could have positive medium-term supply effects; in the short-term it would also contribute to expanding aggregate demand in all European countries, lifting growth and employment. One crucial advantage of this proposal is that with fairly limited public resources, a very large impact on investment, growth and employment can be achieved with the benefits of leverage. A second major advantage is that, as an existing successful European institution – the EIB – can be used. The measures can be quickly implemented. There are two promising paths to use limited public resources to achieve important multiplier effects. The first is to achieve leverage with the EU budget. A very small amount (as proportion of the EU budget), equal to €5bn a year could be allocated as a risk buffer. This would allow the EIB to lend an additional €10bn annually both for financing infrastructure projects (project bonds) as well as projects to promote innovation. The second path is to increase EIB capital by EU member states. Only a very small proportion of capital, (5%) has to be paid-in. Therefore if this paid-in capital is doubled, it would require only a total of €11.6bn from EU member states.

Eurozone big four pledge 1% of GDP to underwrite banks and stimulate growth - The leaders of the eurozone's biggest economies announced on Friday night that 1% of the European Union's GDP was to be set aside to help the continent grow its way out of the financial crisis. But doubts were immediately expressed as to what share of the package – said to be worth €130bn (£105m) – would be genuinely new money. After several hours of apparently tense discussions, there was no immediate agreement on a plan outlined by Italy's prime minister, Mario Monti, on Thursday, aimed at stabilising Europe's banks and protecting countries under attack in the markets. "There was an agreement between all of us to use any necessary mechanism to obtain financial stability in the eurozone," said Mariano Rajoy, the Spanish prime minister, afterwards. But the German chancellor, Angela Merkel, insisted that the EU must take full advantage of the instruments already at its disposal. Her remark suggested she is wary of two new funds – to guarantee bank depositors and as a lender of last resort to ailing banks – understood to have been on the agenda at Friday's talks. In a sign that tempers are becoming increasingly frayed before next week's crucial summit, the normally gentlemanly Monti used his closing remarks to attack France and Germany publicly.

Is There a Limit on Central Bank's Ability to Inflate? - On Friday, ECB President Mario Draghi announced ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral. Reaction from the German central bank was immediate: Bundesbank Swipes at Draghi as European Fault Lines DeepenWe’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said. Looser collateral is the latest issue to divide Europeans days before a summit that Italian Prime Minister Mario Monti said must succeed or risk a bond-market selloff. German policy makers are reluctant to put too much on the line to help debt- strapped nations before they fix their budgets and banks. French and Italian leaders are pushing for a wider range of crisis- fighting tools. Those debates have flared on the ECB’s Governing Council too. Two years ago, the German central bank came out and opposed the ECB’s unprecedented decision to buy the bonds of distressed nations as part of a broader push to stamp out a crisis that was starting to spread from Greece. While the German central bank ultimately went along with the plan, it has since been largely shelved and deemed ineffective by most ECB officials.

How Europe Can Rescue Europe - George Soros – At their meeting in Rome last Thursday, the leaders of the eurozone’s four largest economies agreed on steps towards a banking union and a modest stimulus package to complement the European Union’s new “fiscal compact.” Those steps are not enough. German Chancellor Angela Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums that both countries are now confronting. As a result, the EU’s upcoming summit could turn into a fiasco, which may well prove lethal, because it would leave the rest of the eurozone without a strong enough financial firewall to protect it from the possibility of a Greek exit. Even if a fatal calamity can be avoided, the division between creditor and debtor countries will be reinforced, and the “periphery” countries will have no chance to regain competitiveness, because the playing field is tilted against them. This may serve Germany’s narrow self-interest, but it will create a very different Europe from the open society that fired people’s imagination and propelled European integration for decades. It will make Germany the center of an empire and permanently subordinate the “periphery.” That is not what Merkel or the overwhelming majority of Germans stand for. Merkel argues that it is against the rules to use the European Central Bank to solve eurozone countries’ fiscal problems – and she is right. ECB President Mario Draghi has said much the same. Indeed, the upcoming summit is missing an important agenda item: a European Fiscal Authority (EFA) that, in partnership with the ECB, could do what the ECB cannot do on its own.

Soros: We Have 3 Days to Avoid ‘Fiasco’ (Bloomberg TV video) -- Billionaire investor George Soros tells Bloomberg that the upcoming EU summit could become a "fiasco"

Pressure for Action at Brussels Meeting - If the past is any guide, European Union leaders will leave their summit meeting this week waving promises to weave the euro zone more tightly together. They are likely to back a plan to finance infrastructure projects in stricken countries. But unless the usual expressions of resolve are bolstered by concrete action or at least a binding timetable, financial markets are likely to continue to penalize Spain and other troubled countries by pushing up their borrowing costs to levels that will eventually prove unaffordable. “We know by experience that recent summits have generated expectations that were not met by decisions,” Joaquín Almunia, vice president of the European Commission, said in Frankfurt last week. “We at the European Commission hope that this time will be different.” The ideal outcome from the meeting in Brussels on Thursday and Friday, as a rising chorus of central bankers and foreign leaders has made clear, is deliberate movement toward a euro zone in which countries would backstop one another’s banks and bonds, while at the same time policing one another’s spending. On Sunday, the Bank for International Settlements, a clearinghouse for central banks whose board includes the Federal Reserve chairman, Ben S. Bernanke, was the latest to urge euro zone leaders to establish a banking union, including stronger measures to guarantee deposits and prevent bank runs. The International Monetary Fund and the European Central Bank have made similar pleas.

European Officials Release Grand Vision for Euro — A top E.U. official is calling for countries that use the euro to grant a European authority the power to demand changes to their national budgets as part of a grand vision to save the currency. Other ideas in the plan, published Tuesday by European Council President Herman Van Rompuy on the council website, include issuing medium-term debt backed by all countries and a banking union with a single authority that would insure banking deposits and have the power to recapitalize banks directly. The document, to be debated at a summit of E.U. leaders Thursday and Friday, was published on the European Council website Tuesday. It was drawn up by Van Rompuy, European Commission President Jose Manuel Barroso, eurogroup head Jean-Claude Juncker and European Central Bank President Mario Draghi.

Running Silent - This week the Federal Reserve will likely be overshadowed by the European summit and the expected Supreme Court ruling on health care, both of which I will miss in real time. Of course, if markets tank on European news and there is a sudden dollar shortage, we would expect the Fed to assist via expanded swap lines. For their part, the Europeans are reaching a critical moment in history. They still have time to walk back from the abyss, but they need to move quickly. Paul Krugman outlines three sensible proposals that offer the most near term hope - shared backing of the banking system, enable the ECB to act as lender of last resort to governments, and a higher inflation target. A real fiscal union is too much to hope for anytime soon. That said, while the Europeans have the capacity to move forward, the odds are all too high that they will choose to move backwards. At this point, I can't see the latter two proposals seeing the light of day. On the first point, today's comments by German Chancellor Angela Merkel seem pretty clear. Via Bloomberg: Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution.  The ball is in Germany's court, and they are dropping in it.

An Agenda for Europe’s Weary Magicians - Europe’s leaders will meet again at the end of June. The question they must answer this time is not whether they can rescue this or that country, but whether they can rescue the eurozone – if not the European Union in its current form. To see why, just review the last 12 months. In July 2011, Europe’s leaders agreed on a (limited) restructuring of Greek debt, while at the same time making financial assistance nimbler and cheaper. A year later, Greece remains on knife-edge. Throughout last autumn, they agonized over the rise of Spanish and Italian bond rates, until finally the European Central Bank decided to administer pain relief in the form of large-scale liquidity provision to banks. But, despite the arrival of new, reform-minded governments in both Italy and Spain, the relief proved short-lived. Then, last December, they agreed on a new fiscal treaty, a more robust financial firewall, and new resources for the International Monetary Fund, so that it could intervene on a larger scale. But, by early spring, bond rates for Spain and Italy were again approaching unsustainable levels. Finally, earlier this month, they decided to devote €100 billion to help Spain clean up its ailing banks. The market’s reaction was to send Spanish government bond rates even higher.

World's oldest bank in Italy 'wants 3bn state aid'  - Banca Monte dei Paschi di Siena, the world's oldest bank, may be forced to request over three billion euros ($3.75 billion) in state aid, just as Italy struggles to stave off debt crisis contagion. The Tuscan bank may ask for more than three billion euros in so-called "Tremonti bonds" in order to pay off a government loan agreed in 2009 and plug a capital gap, Il Sole 24 Ore business daily said on Tuesday. The lifeline would allow BMPS to pay off its earlier 1.9 billion euro state loan, as well as boost its own capital by up to 1.2 billion, the paper said. The bonds, named after former Italian Economy Minister Giulio Tremonti, are bought by the government from banks, which have to pay interest on them.

World's oldest bank gets government bailout - The government has adopted "urgent measures to raise BMPS's capital funds," it said in a statement, as Italy struggles to stave off debt crisis contagion. The aid was necessary because the bank had admitted it was "impossible" to find private investors to boost its funds because of "currently highly volatile market conditions" as the eurozone crisis intensifies, the government said. The financial lifeline will allow the Tuscan bank, founded in 1472, to bring its core tier one capital ratio to 9.0 percent of total assets, thereby conforming to the rules of the European Banking Authority (EBA).

Tony Blair calls on Germany to back 'grand plan' to save eurozone - The eurozone is doomed unless Germany agrees to underwrite the debts of struggling members, Tony Blair has warned. The former prime minister said on Sunday that the problems were now so serious that a "grand plan" was the only way to prevent a break-up. He also suggested that Britain could still join the single currency area if it stabilised. Blair's intervention came as EU leaders prepare for a crunch summit this week that could determine the eurozone's fate. In a new twist, it emerged that the newly-elected Greek prime minister, Antonis Samaras, will miss the event after undergoing eye surgery. Speaking on the BBC's Andrew Marr show, Blair said: "The only thing that will save the single currency now is in a sense a sort of grand plan in which Germany is prepared to commit its economy fully to the single currency. "That means treating the debts of one as the debts of all, which is very hard for Germany to do.  

Bundesbank Swipes At Draghi As European Fault Lines Deepen - The Bundesbank opposition to the European Central Bank’s plan to help ailing financial institutions is its latest swipe at the crisis-fighting efforts of Mario Draghi’s central bank. As Spanish banks scramble for collateral to use in the refinancing operations that are keeping them afloat, the Frankfurt-based ECB said it will cut the rating thresholds and amend eligibility requirements for some asset-backed securities. While the move will give stressed banks greater access to ECB liquidity, it may also increase the amount of risk on the central bank’s balance sheet. “We’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said. The criticism highlights one of the fault lines dividing European officials as they struggle to end a crisis threatening to rip the currency union apart. As Draghi’s officials scramble to put together policies that will fight the latest stage of the turmoil, German policy makers are emphasizing the dangers of pursuing unorthodox policies that potentially put taxpayers on the hook for future losses.

Merkel Parries Debt Push; Chiefs Agree on Pact - 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.

Merkel Hardens Resistance to Debt Sharing - Chancellor Angela Merkel hardened her resistance to euro-area debt sharing to resolve the region’s financial crisis, setting Germany on a collision course with its allies at a summit of European leaders this week. Merkel, speaking to a conference in Berlin today as Spain announced it would formally seek aid for its banks, dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution. “It’s not a bold prediction to say that in Brussels most eyes -- all eyes -- will be on Germany yet again,” Merkel said. “I say quite openly: when I think of the summit on Thursday I’m concerned that once again the discussion will be far too much about all kinds of ideas for joint liability and far too little about improved oversight and structural measures.” The German chancellor will face an increasingly united bloc of euro-area nations at the summit as fellow leaders in France, Italy and Spain plus investors such as George Soros press her for more ambitious policies to help bring down borrowing costs across the 17-nation euro region. Soros urged Merkel to agree to a fund to buy Italian and Spanish bonds in return for those governments implementing budget cuts, or risk a “fiasco.” 

Monti Threatens to Resign if No Eurobonds; Specter of Early Elections - Courtesy of Google Translate, via a link posted on the Guardian Live Blog, please consider this choppy clip from Monti: EU summit difficult But Knight gives the alarm Perhaps the Prime Minister Mario Monti has finally accepted the ultimatum of Cav and decided to download Frau Merkel. Perhaps the government, dealing with the preparation of the European Council of 28 and 29 June, will have a movement of pride and will be presented in Brussels slamming his fists on the table. Perhaps, indeed. For now, sources close to Palazzo Chigi, Monti wants to ensure that clamped down on the German Chancellor. A professor there to shake the thought that Silvio Berlusconi has decided to launch an ultimatum to the government "should immediately change direction." At the end of the summit with Prime Minister, Cavalieri, the actual government falters in an absolute uncertainty and that, to get himself out of this impasse is to take a firmer line in Europe: "We are left with a feeling of uncertainty about the proposals Italy will do.

Germany to borrow more to meet eurozone aid commitments  The Federal Finance Agency, which handles Germany's debt issuance, said in a statement it would issue a total 71 billion euros ($89 billion) in debt in the period from July to September, 3.0 billion euros than first planned. "Due to the increase of the net borrowing requirement decided with the supplementary federal budget, the federal government will adjust its issuance programme in the third quarter of 2012," the statement said. About 21 billion euros would be issued in short-term (six- and 12-month) and 50 billion euros in medium-term and long-term (two- to 30-year) bonds, the agency said. Berlin has had to revise its budget deficit forecast for the current year after the planned launch of the European Stability Mechanism (ESM), a permanent bailout fund, was brought forward. Germany's contribution this year to the ESM is 8.7 billion euros, meaning the budget deficit will now reach 32.1 billion euros this year, compared with the initial forecast of 26.1 billion euros.

Default Coverage Costs More as Crisis Touches Berlin - Credit-default swaps on Germany, hitherto the safest of safe havens, have come under the gun as fears over the creditworthiness of Europe's strongest economy finally take root. The slow climb of German bund yields may have grabbed the headlines, but analysts point out that CDS rates—the cost of insuring a country's debt against default—also provide a telling measure of sentiment. The risk of German taxpayers having to foot the bill for their European neighbors has long been acknowledged. Likewise, the Continent's powerhouse defaulting on its debt is seen as a nearly impossible event.

EU could rewrite eurozone budgets -- The EU would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times. The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union, giving Brussels more powers to serve like a finance ministry for all 17 members of the currency union. They are contained in a report to be presented at the summit, which will also outline plans for a banking union and political union. Thursday’s summit comes amid investor fears that the eurozone is re-entering a danger zone. Bond and equity markets were hit on Monday as Cyprus became the fifth country to apply for an international bailout, citing its banking sector’s large exposure to the Greek economy. In Greece, the five-day-old coalition government suffered a setback as its finance minister resigned. Berlin has demanded tough controls over national budgets as a prerequisite for mutualising sovereign debt within the eurozone and the proposals appear to be an effort to get the German government to support a move towards commonly issued eurozone bonds. Under the plans for closer fiscal union, the European Commission would present detailed adjustments for a country in breach of its commitments. The changes would be put to a vote of all other EU countries.  Although the budget amendments would be described as a “proposal”, the EU has strong new tools to punish countries that do not adopt such proposals, including levying big fines.

Spain Has Budget Deficit of 3.41% of GDP Through May (Not Counting Regional Governments); Target for Entire Year was 3.5% - Spain has reached it budget deficit target of 3.5% of GDP. The problem is, Spain did it in 5 months, not 12. Via Google translate, Spain has Budget Deficit 36.364 Billion Through May. The State had until May a deficit of 36.364 billion euros in national accounting terms, equivalent to 3.41% of GDP, representing an increase of 30.6% compared to 2.59% in the same period 2011. The figure almost touches the 3.5% target it has set the state for the entire year. Secretary of State for Budget, Marta Fernandez Currás, said that Spain suffers from a weakness of the collection because it crosses the "worst" macro. Executive forecasts are ending the year with a deficit target of 3.5% for the state and 5.3% of GDP for the whole of the government.

Spain Poised for a Cut to Junk as Default Swaps Near Records  (Bloomberg) -- Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs. Credit-default swaps on Banco Santander SA, the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA surged 70 percent to a record 540 basis points. Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.

Spain's borrowing cost soars  - Spain's borrowing costs soared in a pair of short-term auctions Tuesday as investors worried that the country would not be able to manage an expensive rescue of its ailing banking sector. The Treasury auctioned 3.1 billion euro ($3.9 billion) in the two maturities, just above its target range, and demand was strong. But the cost was very high - an indication that investors are concerned that the Spanish government will be stuck with huge expenses after a European bailout of its fragile banking system. The interest rate on 3-month bills was 2.36 percent, nearly triple the 0.85 percent paid in the last such auction on May 22. The rate on the 6-month bills was 3.24 percent, nearly twice as much as the 1.7 percent paid in May. The auction came a day after Spain formally requested financial aid for its banks from its partners in the eurozone. The move was a formality - it had expressed its intent a week early.

Spanish Bank Bailout To Spark Firesale Of Stakes In Top Companies: (Reuters) - The European bailout for Spain's banks will push them to sell an empire of stakes in the nation's top companies, ending a cosy culture of corporate-banking links and prompting a wider shake-up in ownership of the company landscape. Spain formally requested euro zone rescue loans to recapitalise debt-laden former savings banks on Monday, but those who receive funds will be subject to European Union state-aid rules that include selling equity assets. With the price of such assets languishing as the euro zone's financial crisis drags on, that will involve the likely fire sale of big chunks of Spain's corporate titans, including telecoms leader Telefonica, oil major Repsol and power firm Iberdrola. UBS estimates 22 billion euros ($28 billion) of Spanish stakes could be up for sale, most of which is in the hands of savings banks. This represents as much as 9 percent of the capitalisation of the country's blue-chip index. Over the years, Spain's savings banks have gained board seats on some of the country's biggest firms, exerting a powerful role in shaping corporate and industrial strategy in sectors ranging from tourism and real estate to energy and telecommunications.

Spanish Officials Hailed Banks as Crisis Built - As Spain edged closer to a real estate and banking crisis that led to its recent bank bailout, Spanish financial leaders in influential positions mostly played down concerns that something might go terribly wrong. The optimism of Spanish central bankers who went on to top jobs at the International Monetary Fund echoes the attitudes of officials in the United States who misjudged the force of a housing collapse several years ago that crippled banks and the economy. And it underscores the complications that can arise when government officials take watchdog roles at international agencies that pass judgment on the policies they once directed. Spain’s travails have now become central to the festering financial problems in Europe. The country’s biggest mortgage lender has failed, and European leaders are scrambling to prevent the Continent’s crisis from spreading further. “The I.M.F. should be saying unpleasant things to countries to get them to reform,” said Jonathan Tepper of Variant Perception, a London-based research firm that in 2009 published one of the first reports to warn that Spanish banks were in serious trouble. “They have been quite late in Spain.” From their lofty perches, first at Spain’s central bank and then as the I.M.F.’s top executives assessing global banking risk, José Viñals and Jaime Caruana were well positioned to sound alarms about the looming bank debacle. But at a news conference in Washington in April 2010, when analysts were raising red flags about failing Spanish real estate loans, Mr. Viñals — who a year earlier had succeeded Mr. Caruana — offered assurances. The Spanish system was “fundamentally sound,” he said, and its needs for cash “very small.”

Spanish riot police clash with activists as PM says Spain cannot finance itself much longer =Riot police and activists clashed on the streets of Spain today as Prime Minister Mariano Rajoy warned that his country could not carry on funding itself for long. The clashes, in the northern Spanish city of Oviedo, were part of an ongoing protest against the eviction of residents from their homes.  More than one million Spanish people are facing crippling mortgage debt. Spain's Prime Minister Mariano Rajoy today warned that his country could not carry on funding itself for long. He said he will ask other European Union leaders at a summit starting tomorrow to use existing options to stabilise financial markets. Speaking in parliament before a meeting of European heads in Brussels tomorrow and Friday, Mr Rajoy warned Spain would not be able continue financing itself at current yields for a long time."

Spain Scraps Election Pledge as Worsening Slump Hits Deficit -Spain’s government is studying tax increases to rein in the budget deficit, including scrapping a rebate for homeowners that Prime Minister Mariano Rajoy introduced six months ago to meet a campaign pledge. The government needs to plug the deficit as data showed the central administration’s shortfall for the first five months approaching the full-year target and the Bank of Spain said the recession deepened in the second quarter. The government in Madrid may eliminate the tax rebate for mortgage holders and create environmental levies, Deputy Budget Minister Marta Fernandez Curras said yesterday.Spain’s six-month old government enacted two election pledges at its second Cabinet meeting in December, raising pensions and restoring the rebate for homeowners scrapped by the previous administration. That policy is now in danger after the government already broke campaign promises by cutting firing costs and raising income tax as it battles the deficit amid a recession.

Spain considers tax hikes to curb deficit, please EU - Spain is considering raising consumer, energy and property taxes, the government said on Tuesday, as it struggles to reduce a public deficit that may have already exceeded one of its budgeted ceilings for the full year. Underlining the state of Spanish finances as it negotiates an international bailout for its banks, the central government deficit was 3.41 percent of gross domestic product from January to May, close to a end-year target of 3.5 percent, Treasury data showed. Madrid is under intense pressure by nervous debt markets to tame one of the highest public shortfalls in the euro zone and the government will be hoping to have a new slew of austerity measures to show European leaders at a summit later this week. The high central government deficit figures were due to early cash transfers of almost 9 billion euros to Spain's struggling regions had stretched the deficit to 36.4 billion euros ($45.4 billion) by the end of May, the Treasury said.

Bankia ​​valued at EUR -13.635 Billion; Spain Becomes Sole Owner, Shareholders Totally Wiped Out; Entire Bankia Board Resigns - Five days ago we heard from the Bank of Spain that Spanish banks only need between €16bn and €62bn in new capital. In the same report we also heard that the three largest bank groups do not need any capital at all. Bear in mind that was allegedly in a "stress" scenario. Today we learned that Bankia is Valued at EUR -13.635 Billion The seven banks that founded Bankia be left out of the shareholders of the entity and the State will be made with one hundred percent of the group's parent, Bank Savings Financial (BFA), the latter having a negative value of 13.635 million euros According to the assessment commissioned by the state. After the assessment, the FROB becomes the sole owner of BFA. Thus, the seven savings banks that created the group, Caja Madrid, Bancaja, La Caja de Canarias, Caja de Avila, Laietana Caixa, Caja Segovia and Caja Rioja, stay out of the shareholders.  Finally, BFA proceed to recapitalize its subsidiary, Bankia, with an injection of 12,000 million euros. He The European Commission today gave its approval temporary nationalization and recapitalization of the matrix BFA waiting for Spain to send to Brussels a restructuring plan of the institution in the next six months.

Cyprus Bailout May Be Up To 10 Billion Euros, Over Half The Size Of Its Economy: (Reuters) - Cyprus, the fifth euro zone country to seek emergency funding from Europe, may need a bailout of up to 10 billion euros, over half the size of its economy, officials said on Tuesday. The Mediterranean island, with a banking sector heavily exposed to debt-crippled Greece, said on Monday it was formally applying for help from the European Union's rescue funds. Cyprus is the euro zone's third smallest economy but it joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds to try and stay afloat, and is the latest sign that policymakers have failed to stop the debt crisis spreading. European leaders will meet at a summit on Thursday and Friday but they are not expected to come up with a lasting solution to the region's problems that have also sent Italy's borrowing costs soaring. Two euro zone officials said that a package of up to 10 billion euros was being considered for the 17.3 billion euro Cyrpriot economy.

Beyond Spain and Cyprus, Europe’s Mightiest Banks Still Grapple With Crisis - Five years after the financial crisis began, many banks throughout the euro zone are still in a weakened state, cut off from money markets because investors do not trust them, and effectively on life support from the European Central Bank.   While the talk has been mostly about Spain and Cyprus, European leaders meeting in Brussels on Thursday and Friday must confront broader problems in the banking system if they want to stabilize the euro zone, economists say. What country could be next to face a banking crisis? It may not be one of the usual suspects. If the key elements are banks with exposure to declining economies, thin capital cushions and a government that would be stretched to finance a bailout, even France could be vulnerable.  Three of the four largest French banks had capital shortfalls even by the relatively lenient standards applied by European regulators, and the fourth has suffered a 27 percent share decline so far this year because of its exposure to Greece.

Italian borrowing costs spike at auction - Italy sold 3.91 billion euros worth of 2-year bonds, near the top range set for the auction. Borrowing costs soared to the highest level seen since December, rising to 4.7%. Additionally, the country's Treasury auctioned 3.9 billion euros in zero-coupon and inflation-linked bonds, meeting the target. Yields on these papers also increased considerably in comparison with those seen last month. Italy will also sell 6-month debt on Wednesday and 5- and 10-year debt on Thursday.

Italy Pays More For 6 Month Debt Than America Pays For 30 Year, As LTRO Claims Its First Bank Insolvency - Today Italy had a rather critical Bill auction in which it sold €9 billion in debt due six months from today. Obviously, since the maturity is well inside of the LTRO, the auction itself was rather meaningless from a risk standpoint. Still, the good news is that Italy managed to place the entire maximum amount targeted. The bad news: it cost Italy more to raise 6 months of debt, or 2.957%, than it costs the US to borrow for 30 years (2.70%). Not only that but the average yield 2.957% was the highest since December when the Italian 10 Year was north of 7%, and nearly 50% higher compared to the 2.104% at auction on May 29, or less than a month ago. The Bid/Cover of 1.62 was unchanged compared to the 1.61 at the May 29 auction.  It gets worse. Recall that the LTRO was conceived back in December 2011 precisely to facilitate the sovereign debt ponzi in a way where domestic banks would borrow from the ECB only to buy their own sovereign debt, a circumvention of the ECB's prohibition to buy sovereign debt in the primary market, and a plan that was so circular those who actually could see through it would scream a warning to anyone who cared. Six months later, the chickens have come home to roost: Italy's third-largest lender Monte dei Paschi dei Siena said on Wednesday it would progressively reduce its holdings of Italian government bonds, after tapping state aid to plug a capital shortfall partly due to its exposure to sovereign risk.

Four presidents propose power of eurozone authorities over national governments European leaders have drafted a radical plan to turn the 17 countries of the eurozone into a full-fledged political federation within a decade in an attempt to placate the financial markets by demonstrating a political will to save the single currency in the medium-term. The incendiary proposals for a banking, fiscal, and economic unions resulting in a “political union” are to be debated at an EU summit on Thursday and Friday. Following two bad-tempered meetings of European leaders in Mexico and Rome over the past week, the Brussels summit looks likely to see major clashes over the future of Europe as well as the immediate crisis surrounding sovereign debt, bad banks, and the euro’s survival. The crisis has shifted from the periphery of the EU to its very heart, with Berlin and Paris seriously at odds for the first time since the Greek drama started 30 months ago. The logic of the draft proposals will also pose major dilemmas for David Cameron, perhaps putting Britain at a crossroads in its relationship with the continent.   The seven-page document, obtained by the Guardian, has been drafted by the “gang of four” — a quartet of European presidents: Herman Van Rompuy of the European Council, Mario Draghi of the European Central Bank, José Manuel Barroso of the European commission, and Jean-Claude Juncker of the 17-country Eurogroup. It calls for a quick start on establishing a new European banking union, says that the ECB could be given supervisory authority over EU banks quickly, and proposes common resolution funds (for winding up bad banks, funded by a banking levy to spare EU taxpayers) as well as a common deposit guarantee scheme for Europe’s savers.

Will European Peripheral Sovereigns be Monetized? -The ECB has settled no sovereign bond purchases under its SMP last week, the program is now nearing 5-months of inactivity. Pressures are building on Germans to allow monetizing and/or backstopping of peripheral bonds [George Soros]. In an interview with Der Spiegel, German MoF Schauble seemed to echo Soros. Sounds like the ball is back in Italy, Spain and Portugal’s court. This seems like very fundamental to the fiscal union approach but begs the question: what about all the excess existing debt? SPIEGEL: What would a fiscal union have to look like so that Germany could accept euro bonds? Schäuble: In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: “Should we spend more money on families or on road construction?” Bottom line is that the markets are already restoring some discipline to European sovereign debt (minus Greece). The “safe haven” United States on the other hand is running amok. The specs are loaded to bear on long term Treasuries, one of the more crowded trades ever..

Banking Disunion - The line of credit to Spain from fellow eurozone governments may help to stabilize a fragile banking system, at least in the short term, but it is a missed opportunity. Spain’s banking crisis provides a perfect opening to move towards a European banking union. In the medium term, help to Spain will merely reinforce the link between the sovereign and the banks’ problems, causing even greater fragmentation in the European banking market and pushing Spain closer to potential insolvency by increasing its debt burden. By contrast, a direct equity stake in Spanish banks taken by an appropriate eurozone investment vehicle would decouple bank and sovereign risk. It would represent a decisive step toward unified European banking supervision, which could imply easier liquidation of non-viable institutions. Such a move would also contribute to banking integration if the equity stakes were eventually sold in an open EU-wide auction. The issue is whether such a vehicle, and the appropriate control mechanisms for assisted banks, can be established in a short time frame. A banking union is a necessary condition for survival of a monetary union that is unable to implement a strict no-bailout policy for member countries. Such a union should be understood as a centralized bank supervisor, resolution authority (RA), and deposit insurance fund (DIF), at least for systemically important and cross-border institutions, as well as a unified rule book for prudential supervision. There are, however, four major issues that must be confronted in order to move ahead with such a banking union.

One Big Union - In the last few weeks, the idea of establishing a European banking union has become the latest remedy advanced as a solution to the long-running euro crisis. But, whatever the merits of a banking union – and there are many – proposals to establish one raise more questions than can currently be answered. The motivations of those who advocate a banking union differ markedly. For some, particularly in southern Europe, it is seen as a means of shifting the burden of supporting their indigent banks to those with deeper pockets. For others, especially in the European Union’s Brussels Eurocracy, it is seen as another leap forward in the construction of a European super-state. Taking their cue from the sacred Rome Treaty’s reference to “ever closer union,” the European Commission’s theologians view every crisis as an opportunity to advance their federalist agenda. The European Central Bank has been more thoughtful, though no less enthusiastic, arguing that a banking union should have three objectives. First, stronger eurozone-wide supervision should reinforce financial integration, “mitigate macroeconomic imbalances,” and improve the conduct of monetary policy. How a single EU supervisor would address the problem of imbalances is not explained, but it is surely a worthy aim. The second objective should be to “break the link between banks and sovereigns,” which has been a particularly dangerous feature of the last year, while the third is to “minimize the risks for taxpayers through adequate contributions by the financial industry.” The third aim could be achieved country by country, but it is certainly arguable that an across-the-board banking levy, or a Europe-wide financial-transaction tax, would eliminate competitive distortions.

Eurozone's banking union will not be credible; FDIC-type fund seems out of reach - There has been a great deal of discussion about the Eurozone's so-called "banking union" that would create pan-Eurozone banking regulation and depositor protection.  NYTimes: The summit, which will be followed by a separate meeting of euro zone leaders on Friday, is expected to focus on agreeing on the elements of a banking union, which is seen as a concrete step even though it would not come into operation until 2013 at the earliest. Those elements would include a system to liquidate insolvent banks, a central deposit guarantee fund, and a bigger supervisory role for the European Central Bank, among other measures.The issue with any such arrangement is that the euro countries' banking systems are just too big for their "home" economies. Barclays Capital: - Nobody questions the credibility of the US government as a rescuer of last resort of the US banks. And that is because the US banks’ total liabilities only represent 1x the GDP of the US. Where it becomes problematic is when the system gets too big, and that goes to the heart of the problem with Europe's banks; simply put, they are much too big for their individual sovereigns to protect credibly...[for example] The largest US bank – JP Morgan – has liabilities equal to 13% of US GDP. By contrast 20 European banks have liabilities of more than 50% of their home country's GDP.

Strangely, Mario Monti may object to a full blown banking union - As expected, the bickering over the proposed Eurozone banking union has begun. And as discussed, the stronger economies will object to the scheme. WSJ: - The idea of closer European banking ties gained steam earlier this month when European Central Bank President Mario Draghi raised the issue in testimony to the European Parliament.  But Ms. Urpilainen said Finland couldn't accept a system that was based on shared liability. "It is important to develop EU banking regulations and supervision and to safeguard depositors. However Finland cannot accept a banking union based on shared responsibility," she said in a written response to a question tabled by the opposition Finns Party.  She said the European Banking Authority could be mandated with new powers to oversee the European banking system, but added that national governments should still be the ultimate regulator of their financial systems.  But even some in the Eurozone periphery may object to this banking union idea. Here is why. It has been suggested that the euro area leaders should dip into the EFSF/ESM funds to provide a backstop to the yet-to-be-created entity that would guarantee Eurozone's deposits.

CITI: Traders Aren't Betting On All Out Euro Calamity - Newspaper headlines and investor feedback continue to suggest that the euro debt crisis is the leading risk to the global economy and financial markets. But the currency markets don't seem to reflect this sentiment. "You can’t walk into a bar without hitting a discussion of euro zone tail risk – and this includes bars in very out of the way places," writes Steven Englander, Citi's currency guru. "Yet the amount of tail risk that is actually priced in is astonishingly small." Englander points to the currency options markets. Simply put, Englander notes put options betting on a 15 percent or greater decline in the euro in six months look surprisingly cheap. In fact, similar options on other arguably more stable currencies look much more expensive.

The Myth That Entitlements Ruin Countries, Busted in 1 Little Graph  - Here's the dirty little secret of the euro debt crisis. There is no euro debt crisis. There is a euro crisis.  What makes a country "Greece"? It's become shorthand for wild government overspending -- especially on entitlements. Paul Ryan says we don't have long to avoid the same fate. Neither does the terrifyingly successful investor Michael Burry. They think that absent drastic reform -- read: cuts -- to the social safety net, we'll end up in penury like the Greeks. It's a scary story. But it's just a scare story. Yes, we have a long-term healthcare spending problem. But that doesn't make us Greece. Heck, Greece isn't even Greece. At least not the "Greece" that's become such a political football. The evidence -- or lack thereof -- is in the chart below. It compares each country's average social spending since 1999, via the OECD, against its current borrowing costs. See the pattern?  There is none. Europe's biggest social spenders don't have any problems. And Europe's biggest problem countries don't spend that much on social programs. The death knell of the welfare state this is not.

The path forward - French Socialist President François Hollande is set to increase the minimum wage by more than inflation, betting consumers will help revive the country’s stalling economy, while his government levies more taxes on the wealthy and large corporations in a bid to reduce the budget deficit.…The government also is preparing to unveil tax increases to make good on its pledge to reduce the budget deficit to 4.5% of yearly output this year and 3% in 2013. The list includes a new tax on dividends, a new top income-tax bracket of 75% for people earning more than €1 million a year, and increases in the wealth and inheritance taxes. The government is hoping to achieve a nominal freeze in spending next year, but wants its citizens first to see that taxes have been raised on the rich.  As for the minimum wage increase, the unions are complaining that it is no more than “equivalent to an extra baguette per week.”Here is more, “France to Lift Minimum Wage in Bid to Rev Up Economy.”

French Jobless Claims Rise to 12-Year High as Growth Stalls - French jobless claims rose to the highest in more than 12 years in May as stalling growth prompted companies to trim payrolls.  The number of people actively looking for work rose by 33,300, or 1.2 percent, to 2,922,100, the Labor Ministry said today in an e-mailed statement from Paris. Four economists surveyed by Bloomberg News expected claims of between 2.29 million and 2.91 million.  Faced with a sovereign debt crisis in its third year, governments across Europe are trying to reduce budget deficits, lowering demand for French goods and services at home and abroad. That’s prompted companies ranging from cement maker Lafarge SA to airline Air France-KLM Group and retailer Carrefour SA (CA) to reduce staff.

French Debt Less Attractive as Reality Bites --During his first two weeks in office, President Francois Hollande saw French borrowing costs go in one direction, and that was down. Not anymore. The yield on the French benchmark 10-year bond advanced to 2.63 percent at 4:00 p.m. in Paris, up from a euro-era low of 2.071 percent on June 1. It was as high as 2.902 percent on May 15, when Hollande took office. The rate is at risk of rising further with French banks vulnerable to the region’s debt-ridden nations as economic growth stalls. Investors already demand more than 6 percent to buy 10-year Spanish securities and almost as much for similar Italian debt. While Hollande has sought to reassure investors in France’s 1.35 trillion-euro ($1.7 trillion) sovereign debt market by repeatedly pledging to cut France’s budget deficit, the financial turmoil to the south makes his task more difficult. “France has been out of the spotlight, but once the sheer misery of Spain and Italy is figured in, the next target will be France,”

France boosts minimum wage as spending freeze bites (Reuters) - France's new government announced a cosmetic 2 percent increase in the minimum wage on Tuesday as it seeks to soften the blow from tax hikes and spending freezes to the struggling economy. President Francois Hollande is pushing for Europe to refocus away from austerity towards measures to boost growth and is relying at home largely on planned tax increases to shrink the public deficit within a target of 4.5 percent of gross domestic product by the end of 2012.His five-week-old Socialist government will drop 1 billion euros ($1.25 billion) of planned spending this year, on top of a three-year spending freeze that kicks in 2013, Budget Minister Jerome Cahuzac said. Eager to show that belt-tightening is not its sole concern, the government agreed to raise the minimum wage from July 1 by 2 percent, although the increase fell far short of union demands.

Heavily exposed to Greece, Italy: France fights to avoid euro zone bank contagion - Greece, Ireland, Portugal, Spain, Italy — France? With a gaping public deficit and record level of debt, the euro zone’s second largest economy wants to be sure it is not sucked into the bloc’s game of debt-crisis dominoes, hence Paris’s forceful lobbying for ways to shore up Europe’s banks. France is one of the strongest advocates of a Europe-wide banking union and, with an eye on its own banks’ exposure to vulnerable debt in struggling countries, for immediate recapitalisation of banks from euro zone rescue funds. . Apart from France’s own financial stress — its gross debt is about 90% of gross domestic product and rising — its banks have major exposure to the euro zone’s most fragile economies. BNP Paribas, BPCE, Credit Agricole, Societe Generale and Dexia, meanwhile, have a combined exposure of 32.5 billion euros to Italian sovereign debt. Moody’s noted that BNP was exposed to Italy through its local subsidiary BNL, which has a 71-billion-euro loan book, and 11 billion euros of Italian government debt. Dexia is the most exposed to Italian government debt, with 11.7 billion euros on its books, but even if the debt crisis does not engulf Italy, the deeply troubled municipal lender could be a big drain on French public finances.

Italy’s economic crisis deepens - Italy’s main employers’ association revised downwards its forecasts for the country’s economy on Thursday, predicting a deeper ongoing recession and the subsequent failure in balancing the budget by 2013. Confindustria expects that the Italian economy, the third largest in the eurozone, will contract 2.4 per cent in 2012, down from the minus 1.6 per cent figure published in December and double the 1.2 per cent fall predicted by the government. The gloomy report also predicts the economy shrinking 0.3 per cent next year, significantly down from the last forecast for growth of 0.6 per cent. Luca Paolazzi, chief economist, explained that “previous forecasts were based on the expectation of more contained debt financing costs. As the bond yields have risen again, we had to revise down our projection.” “The second quarter showed a deterioration in the whole euro region, with Italy being negatively affected by the earthquakes in the Emilia region. Investments fell and households have changed their spending and saving behaviours as available income fell,” he added. In a sign of the growing nervousness surrounding the country’s debt, Italy on Thursday was forced to pay the highest interest rates since December in a €5.24bn auction of five- and 10-year government bonds.

Borrowing costs in Italy and Spain soar as leaders meet - Spain’s borrowing costs jumped above 7% while Italy had to pay through the nose to raise debt at an auction this morning, heaping more pressure on European leaders as they gathered for a eurozone crisis summit in Brussels. Madrid’s 10-year bond yields shot up in early trading, before falling back slightly to 6.99%. Meanwhile, Rome had to pay 6.19% to offload new, 10-year bonds and 5.84% to sell five-year bonds, the highest interest rates since last December. Employers’ group Confindustria warned that the Italian economy is in an “abyss” and it expected a contraction of 2.4% over the year, up from a previous estimate of a 1.6% fall. Italian prime minister Mario Monti and his Spanish counterpart, Mariano Rajoy, have urged the eurozone to take urgent action to bring down their countries’ borrowing costs, including issuing joint guarantees for debt and using the EU bailout funds to buy up their bonds directly. But German Chancellor Angela Merkel said this week that Eurobonds would not happen in her lifetime. And German government sources this morning warned the Brussels summit, where leaders are also due to discuss a plan for a pan-European banking union and closer fiscal integration between member states, is unlikely to deliver any detailed decisions.Analysts warned that a weak summit conclusion could cause market and political chaos.

Merkel backs Europe-wide growth package - Germany’s Chancellor Angela Merkel rallied on Wednesday for a €130 billion ($162 billion) Europe-wide stimulus package in a gesture to French President Francois Hollande—but the two leaders remained at odds over the bigger, tougher steps needed to end Europe’s spiraling debt crisis. The so-called growth pact was the only obvious area of agreement as Hollande and Merkel went into talks on Wednesday night meant to set the stage for a closely watched summit of European Union leaders in Brussels on Thursday and Friday. Earlier in the day, Merkel brushed aside the latest push to pool European debt, arguing that it would be “economically wrong and counterproductive” before governments have shown they can comply with budget rules. Pressure has been mounting on Germany from the other leading economies in the euro zone to soften its opposition to joinly issued euro bonds or other forms of debt pooling. Hollande, who won election last month campaigning against austerity policies championed by Merkel, has pushed for the €130-billion stimulus package and smiled broadly when Merkel, standing stiffly at his side, offered her endorsement.

Draghi May Enter Twilight Zone Where Fed Fears to Tread - European Central Bank President Mario Draghi is contemplating taking interest rates into a twilight zone shunned by the Federal Reserve. While cutting ECB rates may boost confidence, stimulate lending and foster growth, it could also involve reducing the bank’s deposit rate to zero or even lower. Once an obstacle for policy makers because it risks hurting the money markets they’re trying to revive, cutting the deposit rate from 0.25 percent is no longer a taboo, two euro-area central bank officials said on June 15. “A negative deposit rate is something they need to consider but taking it to zero as a first step is more likely.” Should Draghi elect to cut the deposit rate to zero or lower, he’ll be entering territory few policy makers have dared to venture. Sweden’s Riksbank in July 2009 became the world’s first central bank to charge financial institutions for the money they deposited with it overnight. The Fed rejected cutting its deposit rate from 0.25 percent last year. With Europe’s debt crisis damping inflation pressures and curbing growth, the ECB may feel the benefits outweigh the negatives.

Germany the Euro winner? - The NYT carries a data filled op-ed by Gunnar Beck, and takes a stance not widely discussed in media (at least from a quick survey).  There are ins and outs to the idea not in the article, but then we need to hear from readers : ...Those who think that Germany has been a winner with the euro almost always rest their case on Germany’s export surpluses. The euro created stability; it eliminated exchange rate risks; appreciated less than the Deutsch mark would have, and thus aided German exports. But has the euro benefited Germany more than other countries? According to my calculations, based upon the federal statistics, German exports rose most — by 154 percent — to the rest of the world; by 116 percent to non-euro E.U. members; and least of all, 89 percent, to other euro zone members. In 1998 the euro zone still accounted for 45 percent of all German exports; in 2011 that share had declined to 39 percent. Between 1995 and 2008, Germany saved more than most, yet it exhibited the lowest net investment rate of all O.E.C.D. countries. On average, from 1995 to 2008, 76 percent of aggregate German savings (private, governmental and corporate) were invested abroad.  There is more of course, so it is worth a visit to see his complete reasoning.

Germany the Euro Winner? Hardly - The familiar view of Germany’s role in the euro crisis is simple enough: Germany has been the principal beneficiary of the euro, and for this reason ought to show solidarity with those euro-zone members in crisis. Once the euro zone is back on its feet, Germany will be the main beneficiary again. Unfortunately, this view does not appear to fit the facts. Those who think that Germany has been a winner with the euro almost always rest their case on Germany’s export surpluses. The euro created stability; it eliminated exchange rate risks; appreciated less than the Deutsch mark would have, and thus aided German exports. But has the euro benefited Germany more than other countries? It is true that between 1998 (the year in which the European Monetary Union was effectively introduced, although euro currencies and bills were not introduced until 2000) and 2011, German exports grew by 117 percent, according to the Federal Statistical Office. But if the euro was so vital to Germany’s external trade, then the increase in exports to euro zone members would have been greater than the increase to other countries. In fact, the reverse is the case. According to my calculations, based upon the federal statistics, German exports rose most — by 154 percent — to the rest of the world; by 116 percent to non-euro E.U. members; and least of all, 89 percent, to other euro zone members. In 1998 the euro zone still accounted for 45 percent of all German exports; in 2011 that share had declined to 39 percent. These trends are continuing. The euro zone remains very important to Germany’s export trade, but it is hardly the motor of growth.

George Soros Says Germany Must Change Course on Euro Crisis - Spiegel - With the EU summit set to start on Thursday, pressure is on European leaders to find a way out of the euro crisis. Investor George Soros is pessimistic that a solution will be found and says time is extremely short. In an interview with SPIEGEL ONLINE, he warns that Germany could develop into a hated, imperial power.

Monti lashes out at Germany ahead of summit - Mario Monti has set the stage for a tough fight with Germany at the EU summit this week, insisting that he will continue to push Italy’s proposal to use eurozone bailout funds in an attempt to stabilise financial markets. Italy’s technocratic prime minister’s frustration with Germany surfaced in a combative speech to parliament, saying he would not go to Brussels to “rubber-stamp” pre-written documents and was ready to extend the two-day summit until Sunday night if needed to reach agreements before markets reopen on Monday. Aides said Mr Monti was not referring to a highly-anticipated report published on Tuesday by Herman Van Rompuy, president of the European Council, outlining a path towards banking and fiscal union within the eurozone.  The report proposed an EU-wide bank supervisor with powers to intervene in all European banks coupled with a deposit guarantee and bailout fund that could eventually be backstopped by the eurozone rescue fund, the €500bn European Stability Mechanism. Mr Van Rompuy’s report also advocated tighter budget rules, including agreeing annually the “upper limits” of national budgets and government debt levels, forcing eurozone governments to get prior approval before breaching such limits.  But the report also dropped some of the more ambitious proposals contained in earlier drafts, including giving the EU power to rewrite national budgets of countries that have violated debt and deficit rules. Despite Mr Van Rompuy’s efforts, focus ahead of the summit has turned towards Mr Monti’s efforts to get quicker action agreed by his EU counterparts, particularly in Berlin. Speculation over the fate of his government has become so feverish in Rome that officials were forced to deny that the prime minister had threatened to resign if he were to leave Brussels without success.

The European Summit is a Write Off - Spain took a beating overnight after Moody’s downgraded the long term debt and deposit ratings of 28 Spanish banks on the back of the sovereign downgrade earlier in the month. Yields on short term debt spiked at auction: Spain’s short-term borrowing costs nearly tripled at auction on Tuesday, underlining the country’s precarious finances as it struggles against recession and juggles with a debt crisis among its newly downgraded banks. The yield paid on a 3-month bill was 2.362 percent, up from just 0.846 percent a month ago. Longer term yields were also up with 10 years heading back towards 7%. Spain, however, was not the only bearer of dour news. Data from Italy continues to disappoint, this time it was retail sales: Italian retail sales plummeted in April, falling 1.6% in seasonally-adjusted terms from the month before as residents of the euro zone’s third-largest economy reduced purchases of both food and other goods and services, national statistics institute Istat said Tuesday. Retail sales in Italy are now down 6.8% in unadjusted terms from April 2011, Istat said. And, to the resolution… Overnight the Europe’s fabulous 4 (European Commission President Jose Manuel Barroso, European Central Bank President Mario Draghi, Eurogroup Chairman Jean-Claude Juncker and European Council President Herman Van Rompuy) released an already shortened draft paper for the up-coming EU summit. The draft (available below) is jam packed with all of the plans I have been discussing over the last few weeks including banking unions, shared issuances and the move of fiscal sovereignty to Brussels which includes the right of veto over national budgets.

Look beyond summits for euro salvation - Yet again, the EU is about to hold a summit to deal with the crisis in the eurozone. Yet again, it is likely to fall far short of a convincing solution. A heavy weight rests on the shoulders of weary and disillusioned leaders. The question is whether there is hope for success. What is needed, as I have argued before, is a solution that is both politically feasible and economically workable. The former means an ability not only to achieve agreement among governments responsible to national electorates, but also to obtain at least toleration of that agreement among those voters, something that greatly worries Angela Merkel, the eurozone’s most significant politician. Economic workability means offering electorates enough hope for the future to persuade them to elect leaders prepared to stick with membership of the eurozone. Against those criteria, let us consider three possible solutions: federal Europe; the status quo; and limited reforms. The broad thrust of proposals for a banking and fiscal union, via eurozone bonds, along with greater fiscal discipline, is to solve the difficulties of today’s fragile eurozone. It is obvious that such measures attract supporters of the European ideal and those who want others to pay for the consequences of past mistakes. It is obvious, equally, that such proposals anger and frighten those who think they will then have to subsidise the improvidence of others. If one wanted to sell such proposals, one would need to argue that the whole would be stronger than the sum of the parts. One would need to state that it is not a matter of forcing Germany or the Netherlands to bail out their profligate partners. It is, instead, a matter of making everybody stronger by banding together. After all, it can be argued, the eurozone as a whole is in better fiscal shape than the US (see charts). Together, all might benefit from the low interest rates the US enjoys. Similarly, if insurance is offered to banks collectively, rather than from weak governments that are no longer fully sovereign, the eurozone banking system would be stronger because counterparties in the weaker countries would become more robust. Finally, it can be argued, the worst of the current fiscal crises would then fade, giving embattled members the freedom to manage their immediate crises

Why Thursday’s Euro Summit Really Is a Make-or-Break Moment. Really. Once again, leaders of the 27 European Union nations are holding a crisis summit meeting to tackle a spreading economic crisis and shore up the floundering euro. Once again there are ambitious proposals on the agenda of the two-day meeting, which starts Thursday in Brussels. And once again, financial markets are waiting to pounce at any sign of indecision, leading some people to warn that this is a “make or break” summit. They include the legendary investor George Soros, who is giving Europe just three days to sort out its messes.  If this sounds like déjà vu all over again, that’s because it may well be. Over the past 30 months, the EU has bounced from one crisis summit to the next, agreeing on measures that sound bold but which, on further examination, turn out to be insufficient. The initial relief on financial markets switches back to renewed pessimism, and the troubles keep growing. The “big bazooka” that British Prime Minister David Cameron called for last October, an ambitious and credible political action plan that could bring an end to the crisis, remains as elusive as ever.

Europe Has No Levers for Growth - It’s the eve of the 19th EU summit and as I type Angela Merkel and Francois Hollande should be getting started on their pre-summit meeting. I don’t think there is doubt in anyone’s mind that although we have seen 18 before it, this summit is of particular importance. Hollande and Merkel had a few words to say before their meeting: “Many are looking to Europe,” Hollande said: “We want to affirm its consistency, its strength, its unity and its solidarity.”  Merkel said the two-day EU summit starting in Brussels Thursday will be “of very great importance for the future of Europe.” “Significant progress has already been made regarding the growth pact,” she said, referring to a plan to invest up to 130 billion euros ($162 billion) in kickstarting eurozone economic growth. “We need more Europe, we need a Europe that works, the markets are expecting this, and we need a Europe whose members help each other,” she added.  Fine words, but it is actions that tell the truth and in that regard recent history tells a very different tale. As I mentioned yesterday if the growth pact in its current form is the only thing to come out of the summit then I suspect the rest of the world will see it as a massive failure. Spiegel published an article yesterday crucifying the pact as nothing more than window dressing and an attempt to make it appear as if the summit actually achieved something:

Germany's Liability From Rescue Funds Up To E310 Bln: Press - Germany's maximum liability from the Eurozone's temporary and permanent rescue funds totals E310.3 billion, according to a German Finance Ministry report obtained by German business daily Handelsblatt. The report, sent to the parliament's budget committee, argues that even this total liability is far less than the cost of a complete break-up of the Eurozone, though it does not estimate the cost of such a collapse, Handelsblatt reported. The liability estimate includes credits of up to E285.3 billion for the European Stability Mechanism -- which is scheduled to become operational in July -- and European Financial Stability Facility, which will continue to run parallel with the ESM. Other liabilities added to the total include E15.2 billion from Greece's first aid package and E9.8 billion for aid stemming from the European Union's budget. The estimate marks Germany's total liability if all of the ESM and EFSF's remaining funds were needed.

Merkel urged to back euro crisis measures - Sigmar Gabriel, leader of Germany’s opposition Social Democratic party, on Tuesday called for Berlin to back urgent crisis measures to reduce eurozone sovereign borrowing costs, warning that without such action “the currency union will simply explode”. Stepping up domestic pressure on Angela Merkel, German chancellor, for emergency action to be agreed at this week’s European summit in Brussels, Mr Gabriel said it was needed to protect eurozone member states “where the fundamentals do not justify a big interest rate spread” - a reference to Spain and Italy. His call came in a wide-ranging interview with the Financial Times in which he backed Ms Merkel in opposing jointly-guaranteed eurozone bonds or a debt redemption fund, saying they were not possible under the present German constitution. However, he threw his weight behind François Hollande, the new French president, and Mario Monti, Italian prime minister, in their efforts to persuade Ms Merkel to allow further short-term measures to calm the markets. And he criticised the chancellor for delaying agreement on a more vigorous economic growth strategy. “We must now create a firewall to protect individual countries from this interest rate blackmail,” Mr Gabriel said. “I would urge that we improve our crisis management, so that we create at least the possibility of intervention if spreads get too great.”

Merkel digs in heels over action on euro - Senior European officials worked behind closed doors to agree short-term measures to help lower Spanish and Italian borrowing costs ahead of a high-stakes EU summit on Thursday, but Angela Merkel, the German chancellor, dug in her heels, dubbing such quick remedies as “eyewash and fake solutions”. Despite the public resistance, senior officials involved in the closed-door deliberations said the German government was becoming more amenable to quick action and they were hopeful an agreement could be reached at the two-day summit.  The most likely plan, officials said, was to use the eurozone’s €440bn rescue fund to purchase Italian and Spanish bonds, but the officials cautioned that no deal had been reached last night. Such a programme would require new reform conditions for both countries, particularly if the fund purchased bonds directly at auction rather than on the open market.  Other ideas, including finding ways to funnel bailout funds to Spanish banks through special investment vehicles, were also being explored, as was removing seniority status for Spanish bailout loans, according to people familiar with the talks.  Mariano Rajoy, the Spanish prime minister, once again urged the European Central Bank or the rescue fund to dip into the Spanish and Italian bond markets to lower borrowing costs, a move backed by his French and Italian counterparts but resisted by Ms Merkel. Borrowing costs on benchmark 10-year Spanish bonds rose to near euro-era highs again on Thursday, closing above 6.9 per cent.

German Press Review on Split in Europe Ahead of EU Summit - Europe's leaders convening in Brussels on Thursday for an European Union summit are under intense pressure to come up with a new plan to save the euro, but they seem as divided as ever.  Chancellor Angela Merkel used uncommonly strong language on Tuesday when she rejected the idea for common euro bonds by saying Europe would not share total debt liability "as long as I live."  But German media commentators have drawn some comfort from a blueprint (downloadable here as a PDF file) for a radical revamp of the euro zone's architecture presented this week by the "gang of four" European presidents: European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, Euro Group President Jean-Claude Juncker and European Central Bank President Mario Draghi. Their ideas would entail a dramatic loss of national sovereignty through the establishment of a central authority with the power to demand changes in individual members' national budgets. They would also involve a "medium term" move towards euro bonds, as well as a banking union with a single authority that would insure banking deposits and have the power to shut or recapitalize banks directly, with help from Europe's permanent bailout fund, the European Stability Mechanism.

Merkel: no EU total debt liability in my life: sources - German Chancellor Angela Merkel was quoted as telling a meeting of one of the parties in her coalition on Tuesday that she does not think Europe will have shared total debt liability in her lifetime. "I don't see total debt liability as long as I live," Merkel was quoted as telling members of parliament from the Free Democrats (FDP), junior partners in her centre-right coalition, by sources who took part in the meeting.The chancellor also said there would be no shared liability of debt in Germany either, days after her government agreed plans with federal states to issue joint "Deutschland bonds". Merkel has warned against focusing on proposals for shared debt liability - such as the eurobonds favored by France's new Socialist leader Francois Hollande - and other "easy" solutions to the euro zone crisis at this week's European Union summit. She said in a speech on Monday that sharing debt liability within the 17-nation single currency area would be "economically wrong and counterproductive".

Chancellor Merkel Vows No Euro Bonds as Long as She Lives - That Angela Merkel is not a fan of collectivizing euro-zone debt is hardly new. The German chancellor has long voiced her concern that the introduction of euro bonds could remove incentives for debt-stricken countries to reform. But on Tuesday, ahead of the crucial European Union summit in Brussels on Thursday and Friday, she was clearer than ever in her rejection of debt sharing across the common currency area. During a meeting with parliamentarians from the Free Democratic Party (FDP), her junior coalition partner, she said there would be no full debt sharing "as long as I live." SPIEGEL ONLINE was told that several FDP lawmakers responded by saying: "We wish you a long life." Until now, Merkel's message had been measured. Euro bonds, she often said, are not "currently" the correct strategy to fight the crisis. She insists that any debt sharing be preceded by far-reaching reforms that ensure greater Brussels control over national budgets and borrowing. One lawmaker told the Associated Press that Merkel's Tuesday statement was in reference only to full debt sharing.

Schaeuble says Berlin open to euro-bond talks: WSJ -- German Finance Minister Wolfgang Schaeuble told The Wall Street Journal that Berlin may be willing to move more quickly than expected to accept shared liability of euro-zone debt and would back short-term measures to deal with financing problems faced by some governments in the region, the newspaper said Thursday. Schaeuble said Germany could agree to some form of debt mutualization once Berlin is convinced the path toward establishing central European controls over national budgets is "irreversible." "There will be no jointly guaranteed bonds without a common fiscal policy," he told the Journal.

Eurozone Retail Sales Drop 8th Month; Italy, France are Down; Germany Retail Sales Up, Outlook Down -German retail sales bounced back for the second month, but not enough to prevent the aggregate eurozone sales from falling for the eighth consecutive month.  Summary of June findings: The Eurozone retail sector remained in contraction mid-way through 2012, according to PMI® data from Markit. Sales fell on a month-on-month basis for the eighth successive month – the third-longest sequence in the survey history – and purchases of new goods by retailers declined at the second-fastest pace on record. That said, the rate of decline in sales slowed sharply during the month. The key sentence is "purchases of new goods by retailers declined at the second-fastest pace on record." Will inventory liquidation continue or will retail sales rebound? Liquidation can only go so far, but that does not mean sales will rebound in a meaningful way. There is certainly no reason to expect a rebound in sales, but data seldom runs in a straight line.

Italy's consumer hits a wall. The only boost to sentiment can come this Sunday. (graphs) The latest economic indicators coming out of Italy are just awful. The recession is getting far worse than most economists had predicted. That's part of the reason Monti has been pushing so hard to get the ESM and the ECB to buy Italy's debt. With such a deep recession engulfing the nation, the fiscal situation can't be good. Here are the latest economic figures. As Italy's industries slow dramatically (see Industrial Production below) and unemployment hits 10%, the consumer begins to struggle.What's particularly troublesome is that Italy's inflation remains stubbornly high. And high unemployment mixed with relatively high inflation has pushed Italy's misery index to new recent highs. This trend has played havoc with Italy's consumer sentiment. The index of consumer confidence is now sharply below the lows of 2008. This decline in confidence is now translating into a record drop in retail sales. Retail sales numbers tend to be volatile, but this last decline clearly stands out (below). And that coupled with higher taxes and increased austerity measures will do more damage to industrial production and employment .... Unfortunately at this stage there is nothing that Monti's government can do to give Italian consumers an immediate boost. The ECB who is clearly going to cut rates next week can also do little to ease tight credit conditions in Italy.

French economy stalls as debt nears 90% of GDP - The French economy, the euro zone's second largest, ground to a halt in the first quarter of the year at the same time as debt rose sharply to nearly 90% of annual output, demonstrating the urgency and magnitude of the challenge facing new President Francois Hollande. French gross domestic product failed to expand in the first quarter from the end of last year as consumer spending growth remained weak and investment dropped for the first time since the end of 2009, data from statistics bureau Insee showed. In the final quarter of last year, GDP expanded only 0.1% on the quarter, and Insee expects the French economy to eek out only 0.4% growth for the whole of this year, after 1.7% last year. Meanwhile, France's public debt shot up to 1.789 trillion euros ($2.229 trillion), a rise of over EUR72 billion in three months, the highest quarterly increase in debt for France in the history of the euro. Public debt now stands at 89.3% of GDP.

German unemployment rate rises to 6.8% in June: The number of people out of work in Germany rose by 7,000 in June to give a jobless rate of 6.8% of the workforce, according to official figures. The German Employment Agency's figures recorded the third consecutive monthly increase. However, the relatively modest rise left the percentage of the workforce without a job unchanged. The actual number out of work in June was 2.882 million, from an upwardly revised 2.875 million in May. The head of the agency, Frank-Juergen Weise, said the figures were a sign of a slowing jobs market: "The German labour market in June is showing signs of weaker development," noting that the unemployment rate usually drops more sharply in June because of an increase in seasonal work. Germany's economy has been the best performer of the eurozone, growing by 3% in both of the past two years. However, its key fellow eurozone customers have been struggling, and exports to fellow nations have been weakening.

No, the Greeks Aren't Lazy. The Germans Are. - A lot of people out there seem to have the notion that Greece’s troubles are the result of laziness. That really doesn’t seem to be true. OECD: And no, labor force participation is not wildly different: 55% in Greece, 60% in Germany. To quote my friend Katherine: “It’s those goddam hyper-efficient Germans with their ‘work smart not hard’ screwing things up for the rest of us.” Tongue in cheek there, of course, but it does seem to be German productivity in a single-currency regime that makes it impossible for Greek banks to stay solvent. And it’s not that Greek bankers, politicians, or workers are lazy. No matter how hard they work, the financial system doesn’t seem to make it possible for them to live a lifestyle in which they crush their grapes with their childrens’ feet. No matter how much they want the “liberty” to live that lifestyle.

Crisis Postponed - Ten days ago, the apocalypse did not happen. The Greek elections took place, and the radicals did not win. Syriza—the neo-Marxist, anti-austerity party whose members call one another "comrade" and whose policies include the creation of 100,000 new government jobs—did not get the most votes. New Democracy, the establishment center-right party, emerged victorious, though just barely. It formed a shaky coalition, in partnership with two center-left parties, and promised to push through the budget cuts that the European Union has imposed as a quid pro quo for propping up Greece's economy. The financial world breathed a sigh of relief: Crisis averted.  That relief may have been premature. Ten days ago, the apocalypse did not happen, but since then, the apocalypse has continued to unfold in slow motion. The new government has pledged to maintain "austerity" even as crises of various kinds erupt all around it. The newly appointed Greek finance minister resigned after being hospitalized on the day he was supposed to be sworn in. The newly appointed Greek minister for the merchant marines resigned after being accused of conflicts of interest. The newly appointed Greek prime minister is recovering from an emergency eye operation and couldn't attend a crucial European Union summit this week. Early Wednesday morning, three armed men drove a bus containing gasoline canisters through the entrance to Microsoft's Athens headquarters and then set it alight. The building didn't blow up, but the ground floor was heavily damaged.

"Emergency" ECB borrowing jumps above 5 billion euros (Reuters) - Banks took over 5 billion euros of overnight ECB loans on Thursday, a rise that came as Spain's banks came under fresh funding pressures and Cypriot banks were hit by their government's debt becoming ineligible as ECB collateral. Banks are usually reluctant to use the ECB's instant access facility - also known as its 'emergency' window - because it charges 0.75 percentage points more interest than normal ECB funding. The ECB does not disclose which banks use the funding. Thursday's uptake of 5.21 billion euros was the highest since a Greek-debt restructuring-related spike in March and adds to a steady rise in overnight borrowing in recent days. (for data click right click 'graph') It follows the ECB's move to stop accepting Cypriot sovereign debt as collateral in its mainstream lending operations after its rating dropped below the central bank's BBB- eligibility threshold. Unless Cypriot banks have other forms of usable collateral, they have to pay back money borrowed from the ECB's mainstream operations.

Anxiety rises and wealthy rush to Swiss banks - Investors trying to protect their wealth from global economic uncertainty have been stashing bank notes, gold bars and other valuables in Swiss banks, fuelling demand for safe deposit boxes. The euro zone debt crisis and fear that loose policy by central banks will stoke inflation have sent investors in search of extra security. New deals to prevent secret bank accounts in Switzerland being used for evading taxes may also be contributing to the trend. Some banks in Switzerland, known for its financial stability, say they have even run out of space. "We are experiencing a rise in demand for safety deposit boxes. This rise can't really be quantified, however. In many branches the safe deposit boxes are fully rented,"

Analysis: Money’s Retreat Home Threatens Globalization (Reuters) - The European banking shock and its aftermath have sent finance and investment running for home, a process that could hurt world growth, globalization and developing economies for years to come. "There has been massive deleveraging with some home bias, not just in our region but in general. We see a clear and present danger," said Piroska Nagy, director for country strategy at the European Bank for Reconstruction and Development, which monitors private sector financing across the former communist countries of central and eastern Europe. Policymakers explained the surge in globalization and world growth through the 1990s and 2000s and the parallel rise in accounting imbalances between major economies partly by banks and investors lifting their sights beyond their home countries.

Merkel's Hard Line Could Cause End of Euro - German Chancellor Angela Merkel is generally known for her cautiously worded comments and her desire to hedge her bets. That makes her statement this week that euro bonds would not happen in her lifetime all the more surprising.  On Tuesday, ahead of the crucial European Union summit in Brussels, she told parliamentarians from the business-friendly Free Democratic Party (FDP), her junior coalition partner, that there would be no full debt sharing "as long as I live." Several FDP lawmakers reportedly wished her a long life in response.  Merkel has long insisted that any form of jointly issued euro-zone debt be preceded by far-reaching reforms that grant Brussels greater control over national budgets and borrowing. But she has never expressed her opposition to euro bonds in such strong terms.  Merkel has since tried to relativize her comments, with the Chancellery taking pains to explain the context of her statement.  But the statement does not bode well for the summit, which begins on Thursday afternoon. Merkel has also made clear that she is unhappy with a strategy paper developed by a quartet of EU leaders -- European Council President Herman Van Rompuy, European Central Bank head Mario Draghi, European Commission President José Manuel Barroso and Euro Group chair Jean-Claude Juncker -- which opens the door to the medium-term introduction of some form of shared debt.

Demands for Bond-Buying Agreement Roil European Summit - French President Francois Hollande said Italy and Spain ought to receive support from the euro area’s firewall funds and that their yields are still too high after the efforts they’ve made to reform their economies. Spain’s 10-year yields breached 7 percent and Italy auctioned 10-year securities at the highest yields since December yesterday.  Hollande said the growth remarks “aren’t enough” and that he’ll withhold endorsement of an EU fiscal pact, which was endorsed by his predecessor, Nicolas Sarkozy in December, at least until the end of the two-day summit. “The euro zone cannot stay in the current circumstance, without a budgetary union and even more without a banking union,” Hollande told reporters.

Monti Withholds EU Growth Pact Approval Unless He Gets Interest Rate Relief - Italian Prime Minister Mario Monti may block the 120 billion-euro ($149 billion) growth initiative announced by European Union President Herman Van Rompuy without an effort to reduce its borrowing costs, two Italian officials said. Italy is withholding its official endorsement as it pushes for collective action at an EU summit in Brussels to push down its bond yields, said the officials who spoke on the condition that they not be named.

Eurozone officials in all-night aid fight - German officials gave their clearest indication to date that they were prepared to intervene to shore up Italian and Spanish borrowing costs, saying eurozone leaders should use existing powers with their €440bn rescue fund for short-term help. After weeks of insisting they would not budge on short-term measures, the sudden German acquiescence led to a flurry of activity in Brussels, where EU leaders gathered for the latest in a series of high-stakes summits intended to solve the crisis. Unexpectedly, senior officials from all 17 eurozone finance ministries met on the sidelines of the summit to weigh emergency plans for Rome and Madrid which focused on using the rescue fund to buy Italian and Spanish bonds to reverse the recent spike in yields.

EU Leaders Ease Debt-Crisis Rules On Spain In Merkel Retreat - Euro-area leaders agreed to relax conditions on emergency loans for Spanish banks and possible help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis. After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, chiefs of the 17 euro countries dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s blighted banks and opened the way to recapitalizing lenders directly with bailout funds once Europe sets up a single banking supervisor. Stocks and bonds in Spain and Italy rallied and the euro posted its biggest gain this year.   The politicians struggled for consensus on reducing market pressure, where surging borrowing costs in Spain and Italy stoked concern among investors and global policy makers that the currency union threatened to splinter and risk damaging the global economy. Euro governments can now gain access to rescue loans without relinquishing control of their economies.

A late-night deal - From the FT’s Peter Spiegel and Joshua Chaffin in Brussels: Eurozone leaders agreed to radically restructure Spain’s €100bn bank recapitalisation plan, allowing EU bailout funds to eventually be injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books. The change, agreed as part of a deal struck in the early hours of Friday morning, will not happen immediately, however. Instead the leaders agreed it would come only after the eurozone set up a single banking supervisor to be run by the European Central Bank. Read the rest, and of course real-time coverage will resume on the FT’s World blog in the morning. Find a text of the statement here. Quite a change from earlier, when the Italians were refusing to sign the previously-agreed growth pact as a negotiating tactic. Seems like it might have worked?…

Full EU Summit Statement (In All Its Conditional Wishy-Washy Glory) - The early Friday morning release of an entirely conditional 'plan' for a 'plan' that will likely require the ESM contracts to be torn up and a new contract to be re-ratified (by ALL members - including Finland and Germany), due to the stripping of the ESM seniority via the EFSF 'workaround', was high-fived by any and all EU leader still standing."We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

Cornered by other Eurozone leaders, Merkel concedes -- With Hollande supporting Italy and Spain, Germany has became isolated. "Merkozy" is no more. Worn down Merkel conceded, sending risk assets to a massive rally. Caught in a short squeeze, the euro rallied nearly 2 % this morning. But with all the hoopla, let's take a step back and see what exactly did Germany agree to in the middle of the night. Here are some highlights.
1. Spanish banks will be bailed out (€100bn) directly out of ESM/EFSF rather than going through the Spanish government. Amazingly only last week Merkel said she could never agree to direct lending to these banks because she would be unlikely to "get her money back".
2. The Spanish bank bailout will not subordinate the bond holders as was expected.
3. The most important agreement however was that the European Stability Mechanism (ESM) could buy government bonds to reduce periphery borrowing costs. The only official statement was that the ESM will be used to buy bonds in “in a flexible and efficient manner”. No further details for conditions on such purchases were provided. This is clearly a victory for Mario Monti, who's been pushing hard for this measure.
4. There is an agreement to set up a single banking supervisor in 2013.

European Leaders Agree to Use Bailout Fund to Aid Banks - Working through the night in the face of pressure from the embattled euro zone countries Italy and Spain, European leaders agreed early Friday to use the Continent’s bailout funds to recapitalize struggling banks directly, according to the European Council president, Herman Van Rompuy. The decision, by leaders of the 17-nation euro zone, would allow help to banks without adding directly to the sovereign debt of countries, which has been a problem for Spain and potentially for Italy. Both countries have seen the interest rates on their debt rise to levels that would be unsustainable in the long term, and the Italian and Spanish leaders, Prime Ministers Mario Monti and Mariano Rajoy, came here to push their colleagues to help. Late Thursday, they said they would block all other agreements, on a 130 billion euro growth pact for example, until their colleagues did something to help take the pressure off the third- and fourth-largest economies in the euro zone. If their countries could not go to the markets to rollover their debt, Mr. Monti and Mr. Rajoy argued, there would be an existential threat to the euro in the short to medium term. Spain is seeking 100 billion euros to recapitalize its banks, damaged by a property bubble. Mr. Van Rompuy called the agreement a “breakthrough that banks can be recapitalized directly,” which represents a concession by northern European countries, including Germany. The leaders agreed that the euro zone’s permanent bailout fund, the 500 billion euro European Stability Mechanism, due to come into being next month, could recapitalize banks directly once a banking supervisory body overseen by the European Central Bank has been set up. That should happen by the end of the year, he said.

A good day - EUROPEAN leaders came out of a late-night summit meeting with a statement that exceeded expectations for once, and markets are ecstatic. Spanish and Italian equities are up over 4% today, and yields on long-term sovereign debt are down by even more. Charlemagne describes the nature of the agreement: Just before dawn, they staggered out to announce they had agreed (statement is here) that the euro zone’s rescue funds could directly recapitalise troubled banks. The decisions heralds the start of a euro-zone “banking union” and marks the first step in trying to end the dance of death in which weak sovereigns and weak banks progressively stifle each other – especially in Spain. Not for the first time, markets rejoiced on the news, even though much of the detail remains to be settled. Before banks can be recapitalised directly, the euro zone will have to create a strong central supervisor, centred on the European Central Bank (ECB). This will take time, with several thorny problems to settle – not least the question of which banks should be supervised. Germany has tried to limit scrutiny to big cross-border banks. But in Spain, and probably in Germany too, the worst problems lie in smaller regional banks. Another issue will be the relationship with banks and supervisors in non-euro countries, such as Britain (which does not want to join the euro) and eastern European members (many of whom are committed eventually to adopting the single currency)...

June 2012 EU Summit Verdict: A good decision that will, probably, go to waste - Mrs Merkel went to Brussels intent on striking two birds with one stone, pick up her bag immediately and return to Berlin with no further ado. . The two birds were, respectively, the SPD opposition back home (which had set as its condition for supporting the ratification of the ESM some ‘movement’ on growth) and Mr Hollande (who also needed some semblance of a Growth Pact to sell it to his voters as sugar coat with which to swallow the bitter pill of the Fiscal Pact). The early part of the summit was expended discussing this inconsequential ‘Growth Pact’. When it was seemingly in the bag, Mr Rumpoy and Mrs Merkel tried to make a clean getaway, hoping that the summit was over. It was at that point that Mr Monti called the Chancellor’s bluff. In effect, he threatened the summit with permanent delay until two agreements were reached: One was the direct recapitalisation and supervision of banks (from the EFSF and the ECB); precisely as outlined in our Modest Proposal two years ago. The other was that Italy (and one presumes other countries) gains access to direct EFSF funding (i.e. that the EFSF is allowed to purchase Italian bonds in the primary market). Naturally, Mrs Merkel resisted. But, as if to prove once again that her recalcitrance was always paper thin, the moment Spain and France sided with Italy, she buckled. The result was the very first sensible EU Council agreement since the Crisis erupted.

Biderman's Disbelief In The Market's Unending Belief In 'Something For Nothing' - Epic Rant. Everyone's favorite Bay Area truthsayer is back and this time he is taking on the general ignorance of an indoctrinated mainstream media and the brainwashed investing public. Dismissing the nonsense of one media blogger's belief that the 'Euro would be better off without the meddling Germans' - implying that once the ECB was left to follow the path of stupidest resistance of printing and spending that all will be well with the region, Biderman conjures Lewis Black (spit and all) in the incessant belief that more debt can solve a problem of too much debt. Furthermore, the expectation that a European QE can bring rates down for Europe (without a German pillar of sanity) is ludicrous: "Unreal, what sane person would by short-term zero-interest rate debt instruments issued by a combination of broke debtor nations?" Reading the media or watching nitwits opine on CNBC and Bloomberg that everything is #winning: 'just because the Federal reserve or ECB prints money' is clearly frustrating as the TrimTabs CEO concludes "You just cannot print money and solve the world's problems".

More questions than answers after the summit - In the wake of yet another summit, we need to ask our usual question: is this the eurozone’s game changer, or in football parlance the “Balotelli moment”? Clearly, there have been some late night concessions from Germany, which could turn out to be very significant in the long term. Spanish and Irish debt ratios will markedly benefit as the costs of their bank bail-outs are removed from the sovereign balance sheets and absorbed by the eurozone. The markets have welcomed these developments, and rightly so. In particular, the opening sentence of the statement, which says boldly and simply that “we affirm that it is imperative to break the vicious circle between banks and sovereigns”, could prove to be a major breakthrough. Some think it might be the beginning of a Euro-tarp. But my fear is that, as so often in the past, the devil will prove to be in the detail. The more carefully one examines the text of the statement, the more questions are raised about how the proposed measures will actually work. In particular, it is debatable whether there are any terms for direct eurozone recapitalisation of Spanish banks which will be acceptable both to the Spanish government and to the German Bundestag. (The latter will be empowered to “monitor” the new arrangement, according to Mrs Merkel’s spokesman.) And the shortage of remaining funds in the EFSF/ESM, which I discussed here last week, has certainly not been solved.I would like to discuss each of the key points raised by the summit separately.

Currency Ideals - The slow motion train wreck that is the Euro is grinding relentlessly on. Commentators are smugly, if not gleefully, announcing the currency’s imminent demise, enjoying their triumphant occupancy of the moral high ground. The European elites are just as determinedly asserting that the currency will survive, looking for some sand to stick their heads in. The financial markets are looking to exploit the situation to best advantage, gloriously mixing self righteousness with hyper venality. It is quite a soap opera, a sort of financial Groundhog Day.The noise is obscuring the real questions. The most obvious of these is: “What will the currency markets look like when the situation is resolved?” In terms of structure, there seem to be three possibilities. First scenario is that the Euro survives and the world moves into a three part currency world: the American dollar, China’s yuan and the Euro, with the yen, Swiss franc and Australian dollar on the sidelines. This would have an effect on the power of the greenback as the world’s reserve currency because there would be significant euro-yuan trade, partially sidelining the $US for the first time since the 1950s. Second scenario is that the Euro breaks up, with the world being dominated by the greenback and the yuan. This would leave the $USD with its hegemony, allowing America a degree of financial freedom on its economic policy that no other country enjoys. Third scenario is that the Euro collapses and the world starts to revert to a more nationalist currency regime, as it had twenty years ago. Once again, this would leave the $USD supreme

What Must Be Done Now to Save the Euro? - The European economic and financial crisis is deepening and threatens to throw the United States and global economies into a tailspin. European leaders are meeting this week in yet another summit meeting to seek agreement about how to contain the crisis. If previous summit meetings are any guide, they are not likely to succeed. Past summit meetings have resulted in partial measures and empty promises to buy time, but time is running out. The risk of a breakup of the euro is distressingly high. Tragically, it did not have to turn out like this. More than three years of misdiagnosis and policy errors have succeeded in turning containable debt crises in a few small periphery countries into a Europewide economic and political crisis. What explains the misdiagnosis and policy blunders? And what should be done now?

What if the euro’s not worth saving?: The world is hardly lacking in clever ideas for how to salvage the euro zone. On Tuesday, several influential officials (including European Council President Herman von Rompuy and European Central Bank President Mario Draghi) put out yet another report calling for sweeping changes to the currency union. The usual proposals — banking union! common debt! — made an appearance. All that’s needed, we keep hearing, is the political will.  But what if all these endless proposals for holding together the fractious euro zone are a mistake? What if the euro zone shouldn’t be salvaged? In a long post on Tuesday, economist Scott Sumner explores the notion that no one wants to discuss. “Yes,” he says, “a collapse would be very messy, and perhaps it should be avoided, but let’s not ever forget that the system we are trying to save is a bad one, and if we ‘succeed’ then the eurozone will be condemned to further crises in the future.”  Many economists have argued that the euro zone should develop a “transfer union” like the United States has, in which richer states subsidize poorer ones. But Sumner argues that this analogy isn’t perfect: America’s fiscal union is still based on a more stable foundation, after all, there are affluent taxpayers spread all across America.  There aren’t many affluent Greek taxpayers residing in Hamburg.

Robert Mundell, evil genius of the euro - The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. That progenitor is former University of Chicago economist Robert Mundell. The architect of "supply-side economics" is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell's research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.  Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed: "They won't even let me have a toilet. They've got rules that tell me I can't have a toilet in this room! Can you imagine?" But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.) "It's very hard to fire workers in Europe," he complained. His answer: the euro.

Brussels acts over garlic tax - The European Commission is taking Britain to court in a battle over an unpaid bill of millions of pounds in duty on imports of garlic. The European Commission announced legal action after an ultimatum to pay £15m to Brussels or face action in the European Court of Justice expired. The wrangle is over the fact that import tariffs on frozen garlic from outside the EU are lower than the rates for fresh garlic. And, according to the Commission, UK authorities carelessly levied the lower rate applicable to frozen garlic on imports of the fresh product from China, in breach of EU customs rules.

Rate swap scandal: FSA review to reveal evidence of serious misselling - The Financial Services Authority is to reveal it has found evidence of serious mis-selling at some of Britain’s largest banks as part of a review of the way lenders pushed small businesses to buy controversial interest rate swaps. Banks are braced for a formal regulatory investigation into how thousands of small and medium-sized businesses came to be sold billions of pounds worth of complex interest rate derivatives.  The lenders are likely to come under pressure to agree to a voluntary compensation scheme for victims.  A full investigation would take at least a year and would raise the prospect of banks being hit with large fines as well as the possibility of bans for any staff found to have broken FSA rules. The results of the FSA’s initial review of the interest rate swap scandal will be announced on Friday. The inquiry was prompted by evidence uncovered by an investigation by The Sunday Telegraph and The Daily Telegraph, which uncovered cases where small businesses such as chip shops, electrical stores and bed and breakfasts had been sold interest rate swaps despite not understanding how they operated.

Tax scandal reaches No.10 as it’s revealed Cameron’s spin doctor helped run ‘avoidance’ scheme for BBC presenter wife - David Cameron's spin doctor helped his celebrity wife run an 'avoidance' scheme that may have diverted thousands away from the tax man, it was claimed today. Craig Oliver's partner, BBC news presenter Joanna Gosling, could have pocketed an extra £22,000 a year by being paid through a private company the pair set up, according to newspaper reports. It comes just days after the Prime Minister declared comedian Jimmy Carr 'morally wrong' for putting millions in an offshore tax dodging scheme. But it appears one of his closest aides helped his wife to run a company for several years that may have reduced the tax she paid on her estimated £150,000-a-year earnings.

RBS boss says outsourcing not to blame for computer glitch - Stephen Hester rejects union claims that 30,000 job cuts and outsourcing have led to the six-day computer problems.  Royal Bank of Scotland is continuing to keep thousands of branches open for longer in an effort to contain the fallout of its ongoing computer crisis, which analysts said would cost the bailed-out bank tens of millions of pounds. On the sixth day of the computer problems that have stopped as many as 13 million customers of NatWest, Ulster Bank and RBS from accessing account information, the chief executive, Stephen Hester, spoke publicly for the first time to say that the bank was "well on the road to recovery" in tackling the crisis. Bonuses next year would take account of the inconvenience to customers, he added. Banking analyst Ian Gordon of Investec estimated that the crisis could cost RBS tens of millions of pounds in repaying overdraft charges and other fees, ensuring customers stuck abroad were not left out of pocket, and covering overtime bills for staff, about 7,000 of whom were parachuted in over the weekend to open branches on a Sunday for the first time. Putting a price on reputational damage was tougher – especially if customers move their accounts.

LIBOR manipulation: "dude, you’re killing us" - The FSA released records of their LIBOR manipulation claim against Barclays. The full document is attached below. Some of the trader/submitter conversations are incredible - and it's quite amazing what people will say on recorded lines, e-mails, or text. No wonder it's going to cost Barclays half a billion to settle. Here is a sample: FSA: - ... on 5 February 2008, Trader B (a US dollar Derivatives Trader) stated in a telephone conversation with Manager B that Barclays’ Submitter was submitting “the highest LIBOR of anybody […] He’s like, I think this is where it should be. I’m like, dude, you’re killing us”. Manager B instructed Trader B to: “just tell him to keep it, to put it low”. Trader B said that he had “begged” the Submitter to put in a low LIBOR submission and the Submitter had said he would “see what I can do”; ... [another conversation] “I really need a very very low 3m fixing on Monday – preferably we get kicked out. We have about 80 yards [billion] fixing for the desk and each 0.1 [one basis point] lower in the fix is a huge help for us. So 4.90 or lower would be fantastic”. Here is an example of Barclays manipulation of EURIBOR in 2007. Hard to argue against this type of evidence.

Libor affair shows banking’s big conceit  - Sometimes in life it feels sweet to say “I told you so”. This week is one such moment. Five long years ago, I first started trying to expose the darker underbelly of the Libor market, together with Financial Times colleagues such as Michael Mackenzie. At the time, this sparked furious criticism from the British Bankers’ Association, as well as big banks such as Barclays; the word “scaremongering” was used. But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers. And the British bank may not have been alone. No doubt some financiers would like to dismiss this as the work of a few rogue traders. And, in line with usual banking practice, the more junior authors of the incriminating emails have already been fired. But the wider symbolic significance of these revelations cannot be overstated; for they expose a big conceit at the very heart of the modern banking world. Most notably, in recent decades large investment banks in the City of London and Wall Street have increasingly wrapped their activities with an evangelical adherence to the rhetoric of free markets; But what the story of Libor shows is that this free market language has been honoured as much in the breach as the observance, to borrow Shakespeare’s phrase. And that was not just because a few Barclays traders were failing to “post honest prices”, as the emails admit. Instead, the real issue was that Libor was never organised as a proper market in the first place, which is precisely why the manipulation continued unchecked on such a wide scale for so long.

Relations with bankers stretch to breaking point - The anger at Westminster is raw. In what may come to be seen as a defining moment in relations between the British parliament and the City, Barclays’s attempt to rig interest rates has tipped the political mood from resentment to outright contempt. George Osborne, the chancellor, spoke on Thursday of a financial system that had “elevated greed above all other concerns and brought our economy to its knees”; already the chancellor is plotting his revenge. The cynical emails of Barclays employees trying to manipulate the interest rates of ordinary families and companies – “Dude, I owe you big time – come over one day and I’m opening a bottle of Bollinger” – fuelled the toxic mood in the Commons. Mr Osborne said the missives read “like an epitaph to an age of irresponsibility”; John Thurso, a Lib Dem member of the Commons treasury committee, said the market had become “a sewer of systematically amoral dishonesty”.

U.K. Posts Larger-Than-Forecast Deficit on Tax - Britain had a larger budget deficit than economists forecast in May as the recession depressed tax receipts and government spending surged.  The shortfall, which excludes government support for banks, was 17.9 billion pounds ($28 billion) compared with 15.2 billion pounds a year earlier, the Office for National Statistics said in London today. Economists forecast a deficit of 14.8 billion pounds, according to the median of 16 estimates in a Bloomberg News survey. Spending jumped 7.9 percent and revenue rose 1.6 percent. Income-tax receipts fell 7.3 percent.  The figures may provide ammunition to the opposition Labour Party, which says the government is making the recession worse by trying to cut the deficit too quickly. With the euro-region debt crisis intensifying, the data cast doubt on whether the government can achieve its goal of cutting the deficit to 120 billion pounds in the current fiscal year.

British recession worse than previously thought -Britain’s recession is deeper than thought as official data on Thursday shows the economy shrank 0.3 percent in the first quarter following a higher-than-expected 0.4-percent contraction in late 2011. The Office for National Statistics said in a statement that British gross domestic product (GDP) shrank 0.3 percent between January and March compared with the final quarter of last year — confirming its previous reading. But it revised its data for the fourth quarter of 2011, stating that GDP contracted by 0.4 percent between October and December, worse than a previous estimate of minus 0.3 percent.

Gloomy BoE sees outlook darken - Britain's economic outlook has worsened markedly in the space of just six weeks due to the deepening euro zone crisis and signs that a global slowdown is taking root in the United States and emerging markets, the Bank of England said on Tuesday. Bank Governor Mervyn King told legislators the world is not yet halfway through the financial crisis that began in 2008, and that Britain risked a downward spiral as businesses continue to put off investment due to the turmoil in the euro zone. His comments bolster expectations that the Bank will launch a new round of asset purchases next month under its quantitative easing programme, and suggested the central bank and British government may need to come up with further measures. ᠀ Evoking the depression-ridden 1930s, King said it would be difficult to overcome the hit to confidence from the "black cloud" of uncertainty with consumer and business spending alone. "We are in the middle of a deep crisis, with enormous challenges to put our own banking system right and challenges for the rest of the world that they are struggling with," King told parliament's Treasury Committee.

The case for truly bold monetary policy - How would you feel if you were told that two-thirds of the apparently scary rise in the stock of UK government debt since the start of the crisis has taken the form of ultra-cheap, irredeemable bonds? Would you not feel reassured that the government need never redeem this debt or, if it wanted, even pay interest upon it? Yet as soon as you learn that this ultra-cheap debt is money, the phrase “Zimbabwean economics” might trip at once off your tongue. Eric Lonergan of M&G Investments has made the point in a post on’s Economists’ Forum. As a result of “quantitative easing”, the Bank of England’s balance sheet has risen roughly fourfold since August 2007, to almost £350bn. Yet, even as the monetary base has exploded, the broad measure of the money supply (M4) has shrunk by more than 6 per cent since the beginning of 2010. The late Milton Friedman would have thought this highly disturbing. By engaging in £325bn of QE, the BoE has monetised the government’s debt, by replacing the bonds in the public’s hands with deposits at commercial banks. The latter, in turn, hold reserves at the BoE on which they currently earn interest of 0.5 per cent a year. The case for such action has been overwhelming. In its absence, long-term interest rates would have been higher and the money supply smaller. That might have triggered debt deflation. Instead of merely stagnating, output would have fallen and the real costs of debt to the public would have risen, in a lethal downward spiral. True, inflation has in fact been above target. But this has been overwhelmingly caused by temporary factors. The threat is deflation, not hyperinflation.

Governments can borrow without increasing their debt - Despite running a large budget deficit in each of the past three years, the net debt of the UK government has barely risen. The distinction between gross and net debt is central to any consideration of a government’s solvency. Gross debt usually refers to the total stock of current non-contingent financial liabilities of government, principally bonds outstanding, and net debt subtracts liquid financial assets held by government departments, such as foreign exchange reserves or holdings of government bonds. Net debt is the basis for any calculation of fiscal solvency, as long as the assets held by government are highly liquid. If departments within the government hold gilts, it makes sense to net them off the stock of debt, because the government is making interest and principal payments to itself. The treatment of quantitative easing in the estimation of the UK government’s net debt is therefore critical to any estimate of the fiscal solvency of the country. QE involves the Bank of England purchasing government debt with newly-created cash. This constitutes a reduction in the net debt of the government. Indeed, given that the Bank holds almost 30 per cent of the total debt outstanding, it almost entirely eliminates the increase in debt caused by budget deficits since the financial crisis.

Iceland De-zombifies-While Americans Fork Over $14 billion a Year for JPMorgan Salaries - Hooray for Iceland. The nation has effectively purged an entire class of zombies. Late on Friday, the Icelandic government repaid $483.7 million in loans to the International Monetary Fund. Ahead of schedule. On top of another early payment totaling $900 million in March. “Iceland’s main commercial banks collapsed in the space of a week as the global financial crisis struck in late 2008,” says a Reuters dispatch, “imploding under the weight of huge debts built up during an aggressive overseas expansion.” “But the country’s rebound has been equally surprising,” the article goes on. “Iceland’s economy expanded in the first quarter at its fastest pace since its near meltdown, powered by a surge in exports, tourism and domestic consumption.” No, it’s not surprising at all. Iceland allowed its rotten-to-the core banks to fail. A couple of bank executives have even — gasp — been hauled off to prison. Meanwhile in the United States, “the productive sector of our economy is being eaten alive by the unproductive, zombie sector,” wrote Bill Bonner recently.

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