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

Saturday, July 14, 2012

week ending July 14

US Fed balance sheet grows in latest week (Reuters) - The U.S. Federal Reserve's balance sheet grew in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.849 trillion on July 11, up from $2.848 trillion the previous week. The Fed's holdings of Treasuries totaled $1.663 trillion as of July 11, versus $1.666 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $8 million a day during the week versus $16 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 $855.05 billion versus $855.03 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 on July 11, which was unchanged from the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--July 12 2012

Fed’s Evans Supports More Aggressive Action to Aid Weak Economy - The Federal Reserve should be more aggressive than it currently is to aid economic growth, a top U.S. central banker argued in remarks Monday. Because the U.S. is not making “clear and steady progress toward stronger growth,” Federal Reserve Bank of Chicago President Charles Evans said, “I support using our balance sheet to provide additional accommodation.” Mr. Evans is currently a nonvoting member of the monetary-policy-setting Federal Open Market Committee. The central banker said in prepared remarks for delivery before the Sasin Bangkok Forum in Thailand that he supported the Fed’s recent decision to carry forward with a bond-buying program aimed at extending the overall maturity of the central bank balance sheet. But he also feels more could have been done.

Fed’s Williams: U.S. Close to Needing QE3 - Weakness in recent economic indicators has pushed the U.S. to “the edge” of needing more Federal Reserve monetary stimulus through quantitative easing, a key central bank official said Monday. “We’re really right at that edge, if economic data continue to come in below expectations and if our view is that we don’t expect to make progress on our mandate, then I would think we need more accommodation,” Federal Reserve Bank of San Francisco President John Williams said on the sidelines of a conference in Coeur D’Alene, Idaho.

Fed's Williams: Unemployment above Target, Inflation below Target, QE3 "most effective tool" - From San Francisco Fed President John Williams: The Economic Outlook and Challenges to Monetary Policy. Excerpt:  I expect that the unemployment rate will remain at or above 8 percent until the second half of 2013. What that means is that progress on bringing down the unemployment rate has probably slowed to a snail’s pace and perhaps even stalled. Turning to inflation, I expect the inflation rate to come in below the Fed’s 2 percent target both this year and next. This forecast reflects several factors. A sluggish labor market is keeping a lid on compensation costs. A stronger dollar is holding down import prices. And the global growth slowdown has pushed down the prices of crude oil and other commodities. My forecast is based on what I consider the most likely scenario. However, I am much more uncertain than usual about this forecast. I’ve mentioned the threat of automatic large tax increases and spending cuts at the start of 2013. But the most important wild card for the U.S. economy is Europe. What does this mean for the Fed? We are falling short on both our employment and price stability mandates, and I expect that we will make only very limited progress toward these goals over the next year. Moreover, strains in global financial markets raise the prospect that economic growth and progress on employment will be even slower than I anticipate. In these circumstances, it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates.

Monetary Policy, Money, and Inflation - SF Fed -Textbook monetary theory holds that increasing the money supply leads to higher inflation. However, the Federal Reserve has tripled the monetary base since 2008 without inflation surging. With interest rates at historically low levels and the economy still struggling, the normal money multiplier process has broken down and inflation pressures remain subdued. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Western Economic Association International on July 2, 2012.

Fed Watch: Fedspeak - And Lots of It - Lots of Fed chatter today. Most of it points toward quantitative easing, but with a caveat: In general, we are getting a rehash of already stated views, views that should have pointed in the direction of QE3 at the last meeting. First, San Francisco Federal Reserve President John Williams gave the following forecast:I now expect real gross domestic product to expand by a little less than 2 percent this year and about 2¼ percent next year...So I expect that the unemployment rate will remain at or above 8 percent until the second half of 2013. What that means is that progress on bringing down the unemployment rate has probably slowed to a snail’s pace and perhaps even stalled.Turning to inflation, I expect the inflation rate to come in below the Fed’s 2 percent target both this year and next...The implications for monetary policy: If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. Chicago Federal Reserve President Charles Evans gave an excellent speech in Bangkok earlier today. It is worth the read. He reiterates his call for additional policy, including an explicit willingness to tolerate inflation in excess of 2%. This, again, is not really news. Boston Federal Reserve President Eric Rosengren is also in Bangkok:Despite this rather gloomy collective forecast, I actually have been more pessimistic than my colleagues. My forecast for GDP is below the central tendency, my forecast for unemployment is above the central tendency, and my forecast for inflation is at the bottom of the range of the central tendency. Sounds like he too would call like more aggressive policy. Finally, for completeness, we have a Bloomberg interview with serial-dissenter Richmond Federal Reserve President Jeffrey Lacker:Lacker said "employment is close to maximum right now" given "the constellation of impediments and challenges this economy has had over the years." Lacker, who voted against additional stimulus at the last Fed policy meeting, said the current slowdown in the economy is not fatal or tipping the economy into recession. "We are just in a situation where growth is going to fluctuate between somewhat satisfactory and disappointing," Lacker said.

Fed’s Bullard: Monetary Policy Appropriate Right Now - U.S. monetary policy is “appropriately calibrated” right now and more bond buying would only be needed if the economy looked like it was heading into recession, a U.S. central banker said Tuesday. James Bullard, president of the Federal Reserve Bank of St. Louis, told reporters following a speech in London that the U.S. economy is benefiting from the actions the Federal Reserve has already taken, including ultralow interest rates and previous bouts of bond buying. “I do think it is appropriately calibrated for the situation,” Mr. Bullard said, referring to monetary policy.

Fed Watch: Employment Report Not Helpful -  Instead of the definitive report we were hoping for, we got a remarkably unhelpful report. On the margin, it points to additional easing.  But I can't say it strongly points in that direction.  It simply was neither bad enough or good enough to clear up any uncertainty about the impact of seasonal distortions in the data.  And thus, it really should be generally neutral, at least on the basis of where the Fed appears to be sitting.  Of course, I would argue that the Fed is sitting in the wrong place to begin with, and should already be easing further.  But that is another story for another time. The basics of the report are well known at this point.  Nonfarm payrolls eked out a meager gain of just 80k while the unemployment rate held steady at 8.2%.  The nonfarm payroll numbers continued to exhibit the trends we saw last year: I think Cardiff Garcia is on the right track when he says: … we find the relationship between the seasonal shifts the past three years in these economic surprise readings to be a little too close to be all coincidence. The Federal Reserve is struggling with this same question.  While the average gain over the past 3 months is just 75k, the average over the past 6 and 12 months is about 150k.  Arguably, 150k is not enough given the depth of the recession, and thus in and of itself calls for further action.  But the Fed doesn't seem to think so, otherwise they would have engaged in more easing already.  Which leads me to believe that while on the margin the headline numbers in this report suggest additional Fed easing, if the Fed choose to look through the possible seasonal distortions and see the longer term moving averages, they will not be inclined to act on this report.

Central Bankers Talk Up QE3 In Wake Of June Jobs Data --With the sting of Friday's dismal June jobs report still smarting, Federal Reserve officials who spoke on Sunday and Monday edged the central bank closer to fresh action to aid economic growth. Only a few weeks after extending until year-end a program that sells short-dated bonds to buy long-dated securities (market participants call this effort Operation Twist), expectations have been rising in recent days that the Fed will have to do even more to respond to a deteriorating economic environment. The next step as many economists see it is for the Fed to again grow its $2.9 trillion balance sheet with more bond buying. The June jobs report, with its very modest job gains and stagnant unemployment rate, was the catalyst for the changing monetary policy outlook. "We're really right at that edge, if economic data continue to come in below expectations and if our view is that we don't expect to make progress on our mandate, then I would think we need more accommodation," Federal Reserve Bank of San Francisco President John Williams said in remarks in Idaho Monday. Noting that the Fed is "falling short" on both its inflation and employment mandates, Mr. Williams said the central bank is likely to make "only very limited progress toward these goals over the next year." Because of that, "it is essential that we provide sufficient monetary accommodation to keep our economy moving towards our employment and price stability mandates,"

Fed officials favor QE3; Asian data signal drop in global demand (Reuters) - Asia's biggest exporters showed further signs of slowing down in data published on Monday, signaling a fresh slide in global demand, as two top U.S. Federal Reserve officials said they favored easing monetary policy to boost growth. Japan's core machinery orders in May plunged 14.8 percent from April, with the key gauge of capital spending sinking far below analyst expectations of a 3.3 percent decline. That raised the risk that growth momentum in the world's No. 3 economy will stall if firms start to scale back investment. Meanwhile consumer inflation in China, the world's second biggest economy, eased more than expected in June, with producer prices in outright deflation for a fourth month.  Europe's biggest economy, Germany, announced that imports and exports rose more in May than expected, but economists said it was a rebound from weak figures in April. The data points in Asia underlined a downbeat assessment of growth prospects in the world's biggest economy by Boston Federal Reserve President Eric Rosengren in a speech in the Thai capital Bangkok on Monday. "My pessimism is rooted in an expectation of weakness in investment, net exports, and government spending," including "concerns about economic and financial conditions in Europe," said Rosengren, who described himself as more pessimistic than policy-setting colleagues on the Federal Open Market Committee (FOMC).  His comments were echoed by fellow Fed official, Chicago Fed President Charles Evans, also speaking in Bangkok.

QE sera, sera - THIS week's print edition includes a long primer on QE. Asset-purchases have been the principal unconventional monetary policy tool deployed by rich-country central banks in this crisis, and their use is once again ramping up; the Bank of England just scaled up its QE plans by £50 billion, the Fed may use its next meeting to pivot from "Twist" operations back to QE proper, and the ECB's recent interest rate moves have some suggesting that QE could be on the table there, as well.  As the piece explains in detail, you can do asset purchases for a number of reasons. "Credit easing", for instance, involves the buying of specific assets, like commercial paper or mortgage-backed securities, in an effort to unblock a broken credit channel. The goal of QE proper is more narrow, however—to raise demand—and it is meant to achieve this goal in a few different ways. First, it gives investors money while taking securities out of their portfolios, in hopes the investors will turn around and use the money to acquire other assets (an effect called "portfolio rebalancing"). This process ripples through the financial system raising asset prices. Higher bond prices mean lower rates and more borrowing. Higher equity prices mean more investing and (through the wealth effect) more consumption. And higher foreign exchange prices mean more net exports. Secondly, QE can reduce government borrowing costs, thereby cutting future expected taxation. And third, QE can have an expectations effect by, for instance, making the central bank's commitment to some other stimulative goal more credible.

Monetary policy: The inflation question | The Economist - LET me see if I can boil down yesterday's long post on the questions surrounding more Fed easing into a short one. This week's QE piece comes with a chart: What you may be able to pick out there is that the Fed tends to respond to falling inflation expectations. Over the past few months, inflation expectations have been moving down; they're currently at about 1.78%. But unless there is a substantial drop in expectations in the next couple of weeks, a decision at the Fed's next meeting (on July 31-August1) to initiate new asset purchases would mark the highest level of 5-year inflation expectations at which a new purchase plan was rolled out. Now, the conventional wisdom seems to be converging on the idea that the Fed will deploy a new asset purchase plan at its next meeting. That suggests that current market expectations of inflation price in QE3, and that QE3 therefore shouldn't be expected to move inflation much higher than its current level. QE3 would be a course-maintenance programme, which is unfortunate given that most people think the current course stinks.

Fed Intervention and the Market: A Snapshot Before Today's FOMC Minutes - The current Federal Reserve intervention, Operation Twist, which was set to expire at the end of June, was extended through the end of the year at last month's FOMC. We've seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three months before the all-time high in the S&P 500. Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the collapse of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the Lehman bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy), now in its fourth year. If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke's speech at the Fed's 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.

Minutes of the Federal Open Market Committee, June 19-20, 2012

FOMC Minutes: Several Members noted "additional policy action could be warranted" if economy loses "momentum" - From the Fed: Minutes of the Federal Open Market Committee, June 19-20, 2012 . Excerpt:  Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more-accommodative financial conditions and thereby support a stronger economic recovery.... A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective.  This seems to suggest that a "few" members were already prepared to vote for QE3, and "several" were willing to support QE3 if the economy loses momentum or downside risks increase or inflation is "persistently below the Committee's longer-run objective".

Some on Fed Worried About Breaking Bond Market - The continuation of Operation Twist worried some on the Federal Reserve, who thought it might distort the Treasurys market. “Some members noted the risk that continued purchases of longer-term Treasury securities could, at some point, lead to deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy,” according to the June FOMC meeting minutes. “However, members generally agreed that such risks seemed low at present, and were outweighed by the expected benefits of the action,” the minutes said.

‘Natural’ Jobless Rate Is Key to Fed Stimulus Debate - Meeting minutes from the Federal Reserve‘s late-June gathering suggested the debate over the future of monetary policy stimulus is being fought over what officials think is the true level of “natural” unemployment. The rate in question isn’t one that can ever be definitively measured. Still, the idea is very important to economists and policy makers, because it is this level of joblessness that plays a starring role in driving inflation. Thus, it guides how stimulative or restrictive monetary policy might need to be.

Slack and Structure in Fed Debate - The Federal Reserve continues to debate the slack versus structure causes of high U.S. unemployment, but policy decisions almost certainly will continue to follow the ‘slackers.’ The issue recently arose again, as evidenced in the minutes of the rate-setting Federal Open Market Committee’s meeting of June 19-20. The minutes were released Wednesday, as scheduled. In essence, the policymakers who believe the 8.2% U.S. unemployment rate is mostly due to “slack,” or simply the weakly growing economy, continue to be in ascendance.

Fed Watch: FOMC Minutes Not a Smoking Gun - The minutes of the June FOMC meeting are out, and they did not deliver the much-anticipated smoking gun that would indicate QE3 was on its way. In fact, I think the minutes raise questions about another round of QE3 at all. The minutes hold many hints that policymakers are struggling to find a new direction for policy, one not necessarily dependent on balance sheet expansion. There will be considerable focus on this section: A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal. Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective. We already knew that there exists a contingent seeking additional stimulus. And we suspected that there was a sizable middle ground that could be turned to the cause of additional stimulus. But the conditions that they place on further action - lost momentum, downside risks, or low inflation - all seemed to have been met at the last meeting. Indeed, the inflation clause is especially curious because the minutes earlier noted: Looking beyond the temporary effects on inflation of this year's fluctuations in oil and other commodity prices, almost all participants continued to anticipate that inflation over the medium-term would run at or below the 2 percent rate that the Committee judges to be most consistent with its statutory mandate.If everyone agrees they are going to miss their target, and everyone agrees that missing the target should be cause for action, then why was action limited to simply maintaining the status quo?

Lockhart: Fed’s Stance “Untenable” If Economy Doesn’t Improve - The U.S. Federal Reserve’s economic forecast and monetary policy stance will no longer be sustainable if the economy continues on its current path, Federal Reserve Bank of Atlanta President Dennis Lockhart said in prepared remarks Friday. The central bank should be cautious in deciding to launch new programs designed to boost the economic recovery, Mr. Lockhart said Friday in remarks prepared for a speech to the Mississippi Economic Council. But the risks associated with the Fed expanding its portfolio of assets are manageable, he said, and may be needed if the economic recovery does not accelerate. “If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it,” Mr. Lockhart said in his remarks. His support for the Fed’s current stance assumes the jobs market will see a step up by the year’s end and into 2013, he said. The Atlanta Fed chief is a voting member of the Federal Open Market Committee, the central bank’s policy-making arm. Fed officials are weighing whether to take more action to support the economy and reduce the 8.2% unemployment rate. Policymakers are divided into two camps: those who support taking more action “now or before too long” and those who think the option should be “held in reserve to respond to a sharp further deterioration in the outlook,”

Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails - The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done. The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.

  1. The Fed can manipulate interest rates to near-zero
  2. The Fed can shove "free money" to the banks
That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.

Fed Harms Itself by Missing Goals - Ben S. Bernanke has made transparency one of the defining themes of his time at the helm of the Federal Reserve. The virtue of this transparency is that it’s easy to evaluate how well the Fed is conducting monetary policy. And it has become transparently clear that the central bank has failed to take the actions its own principles demand. Bernanke is the first Fed chairman to clearly state a set of principles to guide monetary policy. They recognize the dual mandate set down by Congress -- that the Fed must try to balance low inflation and unemployment -- and articulate goals for each. The Fed is targeting a 2 percent inflation rate and plans to keep unemployment near its longer-run normal rate, which it currently judges to be between 5 percent and 6 percent. By announcing these goals, Bernanke hopes to reduce uncertainty and anchor the expectations of consumers and companies. But actions speak louder than words, and the Fed’s actions have been too timid. Right now, the Fed’s preferred measure of inflation -- the deflator on personal consumption expenditures - - is less than 2 percent, with the most recent estimate showing an annual increase of 1.5 percent. And unemployment remains at 8.2 percent. If monetary policy had been used more aggressively to combat the recession, then unemployment would be lower and inflation would be closer to its target. Even if you believe monetary policy is largely ineffective at lowering unemployment, a more expansionary policy would still have pushed inflation closer to its target.

What’s to be done? - Atlanta Fed's macroblog - It's always hard to please everyone. Sometimes it's hard to please anyone. You probably don't need a lot of convincing on this point, but if you desire one more case study look no further than the past week's commentary on monetary policy, starting with Wonkblog's rather negative performance review (post by Brad Plumer) of the Fed's recent policy decisions:"Right now, unemployment is falling more slowly than the Fed expected when it issued its forecasts back in April… When the Fed published its forecasts, it expected more jobs reports like April's, which initially showed the economy adding 115,000 jobs new jobs. But that hasn't happened… Which means the Fed's own numbers prove the Fed is failing to meet its dual mandate of keeping unemployment and inflation low. (Inflation is below the central bank's target right now; unemployment is not.)" Plumer favorably references an earlier item from the Peterson Institute's Joe Gagnon, bearing the damning title "The Fed Shirks Its Duty": " 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." Carnegie Mellon's Alan Meltzer similarly wonders "What's Wrong With the Federal Reserve?" But his lament, published earlier this week in the op-ed pages of the Wall Street Journal, doesn't exactly mesh with the Gagnon-Plumer school of thought. "One of the Fed's big mistakes is excessive attention to the short term, over which it has little influence…

Bernanke should end this uncertainty about the Fed - The minutes of the Fed’s FOMC meeting on 18th and 19th June were published on Wednesday, but the markets remain confused and divided about the central bank’s true intentions on the stance of monetary policy. Surveys of market participants show that they are almost evenly split between those who expect QE3 to come this year, and those who do not. And usually highly informed commentators have differed sharply about the hidden meaning in this set of minutes.Robin Harding of the FT concluded that the tone was dovish, heralding the likely arrival of QE3 if the economy remains weak. Tim Duy, in his excellent Fed watch blog, says that Ben Bernanke is sceptical about the efficacy of a further increase in the balance sheet, and is looking for different options to ease. That could take a while. Jon Hilsenrath at the Wall Street Journal said that the Fed is in a state of “high alert” about the economy, but has not yet decided to pull the trigger, partly because “many Fed officials are uncomfortable with the mix of unconventional tools that they have to address the soft economy”. It is ironic that this outbreak of greater uncertainty about the Fed’s likely next policy steps has followed closely on the heels of reforms to the central bank’s communications policy in January. This is inevitable if many members of the committee are on the fence about the right course to follow. But the problem is that uncertainty about the Fed’s intentions is undermining the effectiveness of the easing undertaken in June. Only one person can end this uncertainty: Ben Bernanke himself.

The Puzzling Pre-FOMC Announcement “Drift” - NY Fed - For many years, economists have struggled to explain the “equity premium puzzle”—the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.”   The equity premium is usually measured as the difference between the average return on the stock market and the yield on short-term government bonds. Previous research on the size of the premium finds that it is too large for plausible levels of risk aversion (see Mehra [2008] for a review).

Market Savior? Stocks Might Be 50% Lower Without Fed - A report from the Federal Reserve Bank of New York suggests that the bulk of equity returns for more than a decade are due to actions by the US central bank. Theoretically, the S&P 500 would be more than 50 percent lower—at the 600 level—if the bullish price action preceding Fed announcements was excluded, the study showed. Posted on the New York Fed’s web site Wednesday, the study sought out to explain why equities receive such a high premium over less risky assets such as bonds.  What they found was that the Federal Reserve has had an outsized impact on equities relative to other asset classes. For example, the market has a tendency to rise in the 24-hour period before the release of the Fed’s statement on interest rates and the economy, presumably on expectations Chairman Ben Bernanke and his predecessor, Alan Greenspan, would discuss or implement a stimulus measure to lift asset prices. The FOMC has released eight announcements a year at 2:15 ET since 1994. The study took the gains in the S&P 500 from 2 pm the day before the announcement to 2 pm the day of the statement and subtracted that market move from the S&P 500’s total return over that time span. Without the gains in anticipation of a positive Fed action, the S&P 500 would stand at just 600 today, rather than above 1300.

Chart Of The Year: The Fed Has Doubled The S&P Admits... The Fed - Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drumroll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements. But, but, fundamental, technical, coffee grinds, Finance 101, and Econ 101 analysis (in declining order of relevance and increasing order of voodoo) all tell us this is im-po-ssible? Because if the Fed is right about the Fed induced drift, it is all about, you guessed it, easy money.

Federal Reserve Admits It Knew Of Barclays Libor "Problems" In 2007 And 2008 - Last Tuesday we suggested that "Now The Fed Gets Dragged Into LiEborgate" when we observed that "Barclays also cited subsequent research by the New York Federal Reserve staff members that, according to the lender, concluded that banks’ Libor quotes were systematically below their borrowing rates by 39 basis points after the Lehman bankruptcy. “Barclays own submissions for tenors of 1 month to 1 year Libor were higher than actual Barclays trades on 97% of the occasions when Barclays had actual trades during the financial crisis,” the lender said." It seems that unlike the BOE, which had no idea of any Barclays problems and was merely calling up Diamond now and then to make sure the bank's money market risk mechanisms were operational and to chit chat about the weather (as per the BOE at least), the Fed has decided to take the high road and openly admit it was well aware of Barclays' LIBOR "problems." And like that the Senatorial circus just got exciting, while that popping noise is bottles of Bollinger going off at every class action lawsuit legal firm. From Bloomberg: The Federal Reserve Bank of New York was aware of potential issues involving Barclays Plc and the London interbank offered rate after the financial crisis began in 2007, according to a statement from the district bank. “In the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and e-mails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor,”

David Kotok: LIBOR, the Fed and the TED - Somehow, the insanity of the present unsupervised system involving the Federal Reserve’s primary dealers continues. The Fed had “surveillance” in place during the Drexel Burnham failure and the Salomon Brothers affair. There were no market meltdowns attributed to either event.  Then, in the early 1990s, under the Corrigan initiative and with the approval of the FOMC and Chairman Greenspan, the Fed ceded the surveillance issue to the other regulators. Since this policy change, the toll of primary dealer casualties has grown to include Lehman Brothers, Bear Stearns, Merrill Lynch, MF Global, Countrywide, and now Barclays. How many more market shocks will we have to endure before the Fed reverses one of the worst decisions it ever made? Until the Fed ceases shirking its supervisory responsibility and restores a more formal surveillance and oversight role, there is no reason to expect things to be any different; and Einstein’s remark applies.  Below is a direct quote from the website of the Federal Reserve Bank of New York. Readers please note that the NY Fed sets the rules for primary dealers. It does not take Congress to change this. The Fed could make this change tomorrow if it chooses to do so.

Counterparties: What the Fed knew - We now know what the New York Fed knew about Barclays fudging its Libor submissions. Included in the NY Fed’s vast document dump in response to a congressional request is this confidence-deflating exchange from Apr. 11, 2008:

    • Barclays: So, we know that we’re not posting um, an honest Libor.
    • NYFR: Okay.
    • B: And yet and yet we are doing it, because, um, if we didn’t do it
    • FR: Mm hmm.
    • B: It draws, um, unwanted attention on ourselves.

The NYT reports that after that and other exchanges between members of the NY Fed and Barclays, Tim Geithner, then head of the NY Fed, called and emailed the head of the Bank of England with his concerns and suggestions for how to improve oversight of Libor. The governor of the BoE, Mervyn King, called those suggestions “sensible”, but as the NYT’s Marc Scott writes, none of them were actually implemented.

At Last We Know the Real Purpose of the Federal Reserve Bank of New York: It’s a Confessional for Traders Gone Rogue - Pam Martens - In unusually swift fashion (unlike the long court action to obtain details of the secret trillions in loans the Fed lavished on domestic and foreign banks) the Federal Reserve Bank of New York today handed over emails and other documents showing that Barclays, the first firm to be charged in rigging the interest rate benchmark known as Libor, was using the New York Fed’s stately offices as a confessional.  In one email, an unnamed confessor from Barclays tells Fabiola Ravazzolo, a Senior Financial Economist at the New York Fed with a sexy British accent (sort of like that comforting voice on your car GPS) that, yes, he’s sinned.

Fed officials warn of looming crisis for economy -- The Federal Reserve is open to taking further action to support the struggling U.S. economy. But minutes of the Fed's June meeting show policymakers at odds over whether the economy needs more help now.Fed officials signaled their concern that the struggling U.S. economy could worsen if Congress fails to avert tax hikes and across-the-board spending cuts that kick in at the end of the year. And they expressed worries that Europe's debt crisis will weigh on U.S. growth. Some members noted that defense contractors are already laying plans for layoffs if lawmakers don't address the package of tax hikes and spending cuts by the end of the year. Members warned that tighter government spending could slow the economy well into next year. The Fed downgraded its economic outlook. It now expects growth of just 1.9% to 2.4% in 2012, half a percentage point lower than its April forecast. A few members said the economy may already require additional support. But several others noted that further action "could be warranted" if the recovery lost momentum, if risks became more pronounced or inflation seemed likely to run below the committee's target.

The Worst Recovery Since World War II-- The latest jobs report on Friday confirmed that this is by far the slowest US recovery from a recession in employment as well as income since the end of World War II. Four years after the start of the recession in 2008, American unemployment is still above 8% compared to lower than 5% in 2007. The severity of the financial crisis implies that this would be a steep recession, but a continuation of the recession for 4 years suggests that other factors have also been in play. Before addressing these factors, it is important to recognize the seriousness of the unemployment figures, aside from the high rate. The great majority of workers can pretty well handle, both psychologically and financially, short spells of unemployment because they can consume out of past savings, they can borrow on credit cards and from relatives, and they can spend their unemployment compensation. Far more difficult to adjust to is long-term unemployment since financial resources get exhausted, skills depreciate, and there is a heavy psychological burden of not working, and not knowing when, if ever, good jobs will become available. Unfortunately, this American recession has high levels of persistent long-term unemployment: about 29% of all the currently unemployed have been out of work for over a year, and 40% have been without work for 6 months or longer. These depressing figures do not even count the large numbers of unemployed who gave up looking for work and left the labor force, or the many workers who are working part time at jobs with much lower hourly wages than they had before the recession.

The U.S. Economy Is Suffering From a Severe Case of Seasonal Affective Disorder - In the autumn of 2010, things were finally rounding into shape for the U.S. economy. Between October and April, we added more than 100,000 jobs for seven consecutive months -- our best streak since 2005. In the winter, Goldman Sachs boldly declared 2011 the Year of America and many investors agreed. We were wrong. The economy wilted in the summer of 2011. Suddenly economists were talking about a double-dip recession. Job creation averaged less than 100,000 for four consecutive months until September. In the autumn of 2011, things were finally rounding into shape for the U.S. economy. Between September and March, we added more than 100,000 jobs for seven consecutive months -- our best streak since, well, exactly a year earlier. In the winter, optimism reined on Wall Street as stocks soared in anticipation of a big 2012. We were wrong, again. The economy has wilted in the warmer months of 2012, again. Economists are fretting about a double-dip, again. With preliminary estimates in for May and June, job creation has, once again, averaged less than 100,00 for three consecutive months. For the third time in two years, economic prognosticators are getting a bad case of whiplash. What the heck is going on here? It's like economists have always said: Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, shame on seasonal adjustments.

Roubini Warns a Crisis in 2013 Would Be Worse Than 2008 - Nouriel Roubini, the dour seer who was early (too early in the minds of some) to warn of possible financial crisis prior to the Great Upheaval, has been more cautious in his calls since having ascended to official pundit status. Nevertheless, he’s been warning of a possible crisis in 2013 for some time and is not backing off from that call as the date approaches.  In this Bloomberg interview, Roubini describes why a meltdown next year would be even worse than what we saw in 2008. Notice how he ducks the question of safe havens. He also discusses the prospects for the Eurozone.

Recession Risk In Perspective - Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) said that the U.S. is in a recession now. Speaking on Bloomberg TV yesterday, he argued that “I think we're in recession already.” He may be right, but it’s impossible to know for sure at the moment. May is last full month of published economic data, and those numbers overall reflect growth. There are also a handful of June reports to review—payrolls and the ISM Manufacturing Index, in particular--and they aren’t particularly encouraging. But those two data points alone aren't smoking guns either for arguing that a recession has started, as I discussed earlier via the links above. As for what the July data will tell us, we'll have to wait until the reports begin to arrive in a few weeks. ECRI’s warning can’t be dismissed, of course. There are no shortage of reasons to wonder about where the economy goes from here. But it’s important to recognize a critical distinction between forecasting a recession and recognizing a new downturn’s onset as early as possible based on the numbers in hand. ECRI’s analysis falls into the former category. There's nothing wrong with forecasting the business cycle. It's a productive exercise. But all the usual caveats apply. For instance, ECRI has been forecasting a recession since last September.

Email Comments From John Hussman Regarding the Start of a Recession and ECRI Track Record - I received a nice email from John Hussman regarding my post earlier today Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?: Hello Mish; In Lakshman’s defense, we’re clients of ECRI, and he did note pretty clearly to ECRI subscribers that the economy was first “moving toward,” then later “squarely in the window of vulnerability” and later “locked on a glide path” to recession.  His current view that the economy has now entered a recession really is the first time in this sequence that ECRI has called a recession actually in progress. I suspect that in the interest of clarity in his interviews, Lakshman may not have brought that subtlety out enough.  For our part, we’ve been in the “oncoming” recession camp since about August of last year, which I think was deferred by the round of central bank easings late last year, but which I also view as part of the same broad signal rather than one failed signal and one probably correct one. More recently, my own views on the economy deteriorated from strong concerns in  January (Leading Indicators and the Risk of a Blindside Recession) to the specific expectation that a recession would begin in May or June (Dancing at the Edge of a Cliff).

Commodity Prices Are Headed Lower - Fresh data show the U.S. economy is weakening. The economy added a paltry 80,000 jobs in June, not enough to keep up with population growth. Earlier last week, we learned the manufacturing sector contracted in June for the first time since July 2009. Other indicators have been equally uninspiring. Why does this matter to commodities? The raw-materials sector tends to get hit harder than the rest of the economy in a downturn. If, or when, the U.S. (and/or the global) economy does start to contract, commodity prices will tumble because of three factors:

1. The dollar will most likely appreciate against other currencies. That’s bad for commodity prices because they are mostly priced in dollars. For example, if the value of the dollar rose 10%, the price of commodities should drop by 10% if everything else in the world economy stays the same.
2. Consumption of commodities will fall. That means there is less demand for the raw materials that are used to make the things that businesses buy. On top of that, consumer buying drops during recessions, but the spending pullback tends to be less than it is for the business sector.
3. Credit will be less readily available.  That constrains consumption of goods, as described above. It also does something else. Speculation in commodity markets tends to be driven by credit, because easy credit allows bigger bets. So when credit is tight, expect to see reduced activity in the commodities pits and reduced prices.

Goldman Cuts US Q2 GDP Two Times In Two Hours - First Goldman released this just after the trade data came out: The trade deficit improves broadly as expected to $48.7bn in May, as nominal exports rise (+0.2%) and imports fall (-0.7%) on the month. (The April trade deficit was revised up slightly from $50.1bn to $50.6bn). The improvement in the trade deficit, however, was driven by a decline in petroleum imports (and thus an improvement in the petroleum deficit) while the real ex-petroleum trade deficit actually widened from $40.3bn in April to $41.4bn in May. The trade report is a slight negative for our Q2 GDP growth tracking estimate which we lowered from 1.5% to 1.4%. And, moments ago after the wholesale Inventories was released, Goldman came out with this: Wholesale inventories rose in line with the consensus expectation in May (up 0.3%), but from a downward revised April level. As a result, we revised down our Q2 US GDP tracking estimate to +1.3% from +1.4%. Luckily there aren't another 13 releases today or we may be in recession right now.

In Latest Data on Economy, Experts See Signs of Pickup - Despite the recent run of disappointing economic data, a broad range of experts and forecasters expect the economy to improve slightly in coming months, thanks to lower oil prices and new signs of life from sectors like automobiles and housing.Call it a firming up, if not quite a comeback. Economists at many of the most-watched forecasting organizations, both public and private, expect growth to pick up through the summer and into the fall, although only to a pace broadly considered sluggish, if not dismal. This week, Macroeconomic Advisers, an economic consultancy often cited by policy makers, estimated the annual rate of growth in the second quarter at just 1.2 percent — well below the pace needed to reduce the unemployment rate. But the firm also projected growth to accelerate to around 2.4 percent in the third quarter. Forecasters, including those at the Federal Reserve, have been overly optimistic at several points during the slump of the last few years, of course. But the recent fall in oil prices and the stabilization of the housing market do give some gravitas to the current predictions.

GDP Forecasts in the July WSJ Survey of Economists - On July 27th we will get the Advance Estimate for Q2 GDP from the Bureau of Economic Analysis. Meanwhile, the Wall Street Journal's July survey of economists is now available. Let's see what their various crystal balls and tea leaves are telling them about the future (download the WSJ Excel File).First, some context: The BEA's Third Estimate for Q1 GDP came in at 1.9 percent, unchanged from the second estimate, which was a downward revision from Preliminary Estimate of 2.2 percent. The average GDP since the inception of quarterly GDP reporting in the late 1940s is 3.3 percent, which is nearly double the 1.7 percent 10-year moving average of GDP through the end of 2011 (illustrated here). In a nutshell, the consensus of WSJ economists, who were surveyed during July 6-10), is for a decline in GDP from the Q1 1.9 percent. The Q2 forecasts ranged from 0.7 to 2.5 percent. The median (middle) and mode (most frequent) both came in at 1.8 percent. The mean (average) forecast was slightly lower at 1.7 percent. The chart below illustrates the responses for all three remaining quarters of 2012.

Economic Report Card: Fail - Democrats controlled the House and Senate and gave him exactly what he proposed. By October 2009, the unemployment rate was 10%. Obama’s stimulus package and economic policies have been so successful that he has been able to get the unemployment rate all the way down to 8.2% after three and one half years, even though he said his stimulus package would keep the unemployment rate under 8%. And all it took to get the unemployment rate down to 8.2% was for 8 MILLION Americans to leave the labor force. A critical thinking person who doesn’t swallow the crap peddled by the BLS and the rest of the government propaganda machine might question WHY 8 million Americans would leave the workforce when people desperately need income. If the labor participation rate had stayed constant, the current unemployment rate is 10.9%. The long-term chart below tells the true story. The BLS classifying millions as not in the labor force is a crock. The Obama apologists and sycophants peddle a false storyline about Baby Boomers retiring as the cause for this labor force decline. The fact is people over the age of 55 have the highest participation rate in history and it continues to rise. Of the 142.4 million employed Americans, only 114 million works more than 35 hours per week, with 28.4 million working part-time. That means that 20% of those employed are part time workers with no benefits. In 2008, prior to the ascendency of Obama, there were 125 million full-time workers and 20 million part-time workers. Obama has been able to increase the percentage of part-time workers from 14% to 20% in just over 3 years. Remember this fact when Obama touts the 3 million new jobs he’s created since 2010.

Robert Samuelson Blames the 60s Again -- Robert Samuelson decided to blame the 60s again for the economic problems that we are suffering today. He argues that the decision by Kennedy to deliberately run higher deficits to boost the economy and to tolerate a higher rate of inflation gave us all of our current headaches. The former because we ended up with so much debt that we can't now use large deficits to boost demand and the latter because it led to the runaway inflation of the 70s. It's easy to show that both contentions are wrong. First, the decision by Kennedy to run larger deficits did not lead to an increase in our debt to GDP ratio. In fact, this continued to decline through the 60s and 70s. The rise in the debt to GDP ratio was a Reagan era innovation. The ratio actually fell in the Clinton years, so for those keeping score on such things, rising debt to GDP ratios is largely a post-Reagan Republican president story. The second part of Samuelson's argument is also wrong. There are relatively few instances where wealthy countries have seen large debt to GDP ratios. The claim that ratios above 90 percent slow growth confuses cause and effect. For example, Japan had a very low debt to GDP ratio before its stock and real estate bubbles burst in 1990. This collapse gave them both slow growth and a high debt to GDP ratio.

Sixties Madness - Krugman - Robert Samuelson has a very peculiar column in which he alleges that we can’t have Keynesian policies because irresponsible Keynesians ended budget responsibility back in the 1960s. Really. Look, I know that conservatives are still fuming over sex, drugs, rock and roll, and all that; hatred of hippies remains a powerful force in America around 35 years after the last hippie sighting. But look; here’s the history of the ratio of US federal debt to GDP: OK, something did happen to fiscal responsibility; but it happened circa 1981, not circa 1961. Who was the president then? I’m thinking, I’m thinking.

What Deleveraging? Financial Relativism and the U.S. Economy - Since one person’s liability is another’s asset, the creditors who lent the money, through defaults or debt deflation, are forced to realize massive losses.  These losses would cascade through the economy in the form of further reductions of economic demand and extremely tight credit requirements from lenders focused on repairing their own balance sheets.  This path, should it be uniformly pursued, would have the impact of clearing the system of its excesses, thus setting the stage for more sustainable economic growth, but at the possible price of a recession/depression that would be extremely severe in its magnitude.  Politically speaking, this path is never going to be taken.  Instead, policymakers continue to replace old debt with new debt, shift it from the private to the public sector, and increase the amount of base money in the system to fill the gaps in both bank and government balance sheets.  Instead of paying back the excesses of the credit boom in terms of magnitude (a more severe economic contraction that clears the system), we have opted to repay debt in the duration of our economic malaise, thereby opting to stunt the natural course of deleveraging by borrowing more at the sovereign level and printing money.  The choice for dealing with our economic hangover is simple – magnitude or duration – and for better or worse, we have chosen the latter. 

The Most Common Misconception About the Economy - James Galbraith was recently interviewed in the University of Texas Alumni magazine and offered an opinion on the “most common misconception about the economy” (via The Alcalde): “The Alcalde: What’s the most common misconception about the economy? Galbraith: The fear that we will go bankrupt. The concept of bankruptcy doesn’t apply to a country like us; the U.S. is going to be just fine, long-term. Europe is another story, because the coordinating mechanisms between countries there are dreadful. The U.S. is more resilient than it may look. My message is the financial position of the U.S. government is far stronger than a great many people think it is. Recently we’ve been seeing this notion that we’re heading toward some unprecedented, apocalyptic territory. You saw that with the panic over the debt-ceiling issue last summer. But the people who were actually buying and selling treasury bonds weren’t flustered in the least. In fact, bond rates went down.” He doesn’t quite go into the detail that I did in this post, but he’s 100% right.  This idea that the USA (a currency issuer) is similar to a household, business or Greece (all currency users) remains the most destructive myth in America today.

June deficit rises to $60 billion, receipts grow: CBO (Reuters) - The government will report a June deficit of about $60 billion, up $17 billion from a year earlier, as calendar shifts in benefit payments masked revenue growth, the Congressional Budget Office said on Monday. The June data will bring the federal budget gap for the first nine months of fiscal 2012 to $905 billion, CBO said, about $66 billion below the corresponding year-ago deficit with three months to go in the fiscal year ending September 30. The U.S. Treasury Department is expected to report official budget deficit figures on Thursday. CBO attributed the higher June deficit mostly to the shift of $36 billion in July benefit payments into June because July 1 fell on a Sunday. In addition, the government made smaller downward annual revisions to the estimated costs of student loans and other credit programs in June than it did a year earlier. Without these shifts, the June deficit would have been would have been some $19 billion less than in June 2011, CBO said. Government receipts in June were actually $11 billion higher than a year earlier, mostly due to higher corporate tax payments, CBO said. The nine-month deficit compared with a $971 billion deficit that occurred through the first nine months of the fiscal 2011. Revenues so far this fiscal year are up five percent, while outlays are up only one percent.

US June Deficit: $60 Billion, $17 Billion Worse Than Prior Year - The good news: the deficit in June was $59.7 billion, just on top of expectations of $60.0 billion. The bad news: the June deficit was $59.7 billion, following $125 billion in May (and yes, right after that shocking and one-time, tax return driven $59 billion surplus in April), and $16.7 billion higher compared to last June. Total debt in June increased by $85.7 billion so more or less in line. The cumulative deficit in Fiscal 2012 is now $904 billion through June, compared to $970 billion last year over the same period. Will this ever change? Not as long as profligate spending-encouraging record low yield is there. Tune in next month when we find that the July deficit was about $140 billion in line with historical data.

Treasuries Approach Record Low After Note Auction - Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record rate and minutes from the Federal Reserve’s last meeting showed some members favor more stimulus. The auction attracted record high demand from a group of investors that include pension funds and insurance companies. The notes drew a yield of 1.459 percent, compared with a forecast of 1.518 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The previous record low auction yield of 1.622 percent was set last month.  The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.61, the highest since April 2010, compared with 3.06 percent in June and an average of 3.07 for the past 10 sales. Direct bidders were awarded 45.4 percent of the auction, the most for any offering of U.S. government coupon securities on record. The $9.53 billion purchased was $5.16 billion more than at the previous offering on June 13. The previous record for direct demand at a 10-year note sale was 31.7 percent at the August 2011 auction.

Yield record in US Treasury sale - Investors accepted the lowest yields ever for 10-year paper in a US Treasury auction shortly before the release of Federal Reserve minutes showing a bias towards more monetary easing. The scale of demand at the auction suggests investors expect US interest rates to remain low for several years. The $21bn sale of 10-year paper sold at a yield of 1.459 per cent, the lowest ever in an auction. Shortly afterwards, the minutes of the Fed’s June meeting showed that some officials on the rate-setting Federal Open Market Committee were already looking past the limited easing they announced in June. A “few” of the 12 voting members thought that “further policy stimulus likely would be necessary”, while “several others” said it might be needed if the economy lost momentum or inflation looked set to remain below target. The language of the minutes suggest that further Fed action still depends on future economic data but there is a strong bias on the FOMC towards doing more if necessary. The US economy lost momentum through the spring with a run of disappointing data. That persuaded the Fed to extend "Operation Twist” – its programme of selling short-term securities and buying those with longer to run until maturity – at its June meeting.

The world desperately wants to loan us money, by Ezra Klein: The Financial Times reports that there was record demand for 10-year Treasurys this week. “The $21 [billion] sale of 10-year paper sold at a yield of 1.459 per cent, the lowest ever in an auction.” Remember: Low yields means we’re getting the money for cheap. It means the market thinks we’re a safe bet. And it means we have the opportunity to get capital for almost nothing and invest it productively. Actually, I got something wrong there. I said “almost nothing.” But when you account for inflation, it’s not “almost nothing.” It’s “less than nothing.” They’re negative. Negative! The market will literally pay us a small premium to take their money and keep it safe for them for five, seven or 10 years. We could use that money to rebuild our roads and water filtration systems. We could use that money to cut taxes for any business that adds to its payrolls. We could use that to hire back the 600,000 state and local workers we’ve laid off in the last few years.Or, as Larry Summers has written, we could simply accelerate payments we know we’ll need to make anyway. We could move up maintenance projects, replace our military equipment or buy space we’re currently leasing. All of that would leave the government in a better fiscal position going forward, not to mention help the economy. The fact that we’re not doing any of this isn’t just a lost opportunity. It’s financial mismanagement on an epic scale.

Global Investors Sending Giant Signal to U.S.: Please Borrow Money! - The 10-year Treasury bond, the benchmark rate for the US in borrowing money, dipped to an all-time low yesterday of 1.459%. Treasury sold notes at that price at a $21 billion auction, amid high demand. Today it’s jumped back to an astronomical 1.48%. These numbers are outrageous. It shows both what a basket case the rest of the world economy is right now, and how desperate investors are for some economic growth somewhere in the world. This kind of lending costs investors money. Adjusted for inflation, the US now borrows at a real negative interest rate. Yet this has done nothing to increase borrowing to take advantage of the rates. This is fiscal malpractice.The market will literally pay us a small premium to take their money and keep it safe for them for five, seven or 10 years. We could use that money to rebuild our roads and water filtration systems. We could use that money to cut taxes for any business that adds to its payrolls. We could use that to hire back the 600,000 state and local workers we’ve laid off in the last few years. Failing to take advantage of record-low borrowing rates is little different from setting cash on fire. We know that we have to make investments over time, just paying for them now would save tens if not hundreds of billions of dollars in the future. And while I know we had a half-decent unemployment report today, it’s probably attributable to one-time factors, and even if it weren’t, we would need years of similar reports to get the country back even close to full employment. The demand needs exist and are not being met by the private sector. Government has the capacity. Investors are begging government to spend. The refusal boggles the mind

Very Serious Predictions - Krugman - Erskine Bowles and Alan Simpson are the quintessential Very Serious People; they are mentioned in worshipful tones no matter how bizarre their remarks. And they were key players in the great hijacking of US policy debate over the course of 2010 and 2011, in which unemployment dropped off the agenda and the deficit moved front and center. So, about 16 months have passed since both men predicted a US fiscal crisis within two years. Here’s how it’s going: the US just sold a bunch of long term debt for the lowest interest rate ever. A picture (I had to overlay two slightly different series because the constant-maturity data don’t go all the way back):The truth is that predictions of am imminent fiscal crisis made no sense, and would have been considered irresponsible demagoguery if the people making the predictions weren’t so Serious.

Fed’s Bullard Says U.S. Fiscal Position Needs ‘Dramatic’ Steps - Federal Reserve Bank of St. Louis President James Bullard said the U.S. fiscal position is as weak as some euro-area countries and lawmakers must take “dramatic” measures to tackle it and restore confidence.  “The U.S. fiscal situation is similar to that of some countries in Europe and requires dramatic and sustained attention,” Bullard said in prepared remarks for a speech in London today. “The political compromise in the U.S. has been to delay action until after the November election, but markets tend to pull the uncertainty forward.” Bullard said that while the U.S. economy is growing, the pace is “sluggish” and the “most pressing” issue is the debt crisis in Europe. He said payrolls data last week hadn’t changed his outlook for a ‘modestly improving’’ performance in the second half of the year.  “Increased government spending today followed by higher future taxes is not likely to produce more rapid growth,” he said. “The most likely way forward continues to be a long period of debt paydown and sluggish growth, both in Europe and the U.S., and that the most pressing policy issue is to accept this path and prevent any additional problems from developing.”

Bill Greider on Federal Lines of Credit: "A New Way to Recharge the Economy" In my second post, “Getting the Biggest Bang for the Buck with Fiscal Policy,” I wrote about my interview with Bill Greider and promised I would let you know when his article came out. Bill Greider is national affairs correspondent for The Nation, and the author of Secrets of the Temple, a history of the Federal Reserve. And at the link under the picture, you can see a short clip of Bill Greider talking to Bill Moyers that will give you some of the experience I had in meeting Bill Greider. Bill’s article is out now, on The Nation’s blog. Here it is. The simple summary is that Bill is pushing my proposal of Federal Lines of Credit as hard as he can, while connecting it to some of his own longstanding interests.  Let me say what I hope is obvious: this blog and my relatively accessible academic paper “Getting the Biggest Bang for the Buck in Fiscal Policy” are authoritative about what I am proposing in relation to Federal Lines of Credit, not Bill Greider’s post. (See also the Powerpoint file for my presentation at the Federal Reserve Board.) But though Bill’s nuances are very different from mine, only serious issue I have with his post is that Bill makes it sound as if I want to have a less independent Fed. Far from it!

The Fiscal Cliff, and the Enduring Legacy of EGTRRA/JGTRRA and a Certain Discretionary Spending Measure Starting in 2003 - The CBO recently released a document that places our current policy dilemma in context ( CBO, Changes in CBO’s Baseline Projections Since January 2001, June 7, 2010).The fiscal cliff refers to the end of several tax provisions and the implementation of the sequester which will amount to some 5% of GDP, and assuming plausible fiscal multipliers, will result in a recession in 2013. [1] The CBO prediction of a short, sharp recession is predicated on relatively rapid growth in the absence of the fiscal cliff. It is useful to recall why there is a conflict between stimulus, and fiscal constraint, at least in some people’s eyes. It has to do with the inherited deficit. Figure 1 shows the composition of changes in the budget balance, going from the January 2001 to January 2012 projections. The tax cuts accounted for a large share of the deficits through the 2000’s, and even in 2010, accounted for 1.3 percentage points increase in the deficit. In 2011, the extension of the EGTRRA meant that the Bush tax cuts lived on (in red, under TAX2010). Had the President’s proposal been implemented, the red block would have been about half the size shown (see Table 1-3 of CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011 (March 2010); the red block is $391 billion).

Four fiscal cliffs ahead, and a jobs war - —Election wars are masking the fiscal cliff that America is destined to drop off in early 2013, warns the Congressional Budget Office. History tells us our politicians will slowly drive America off the fiscal cliff and into a mid-1930s-style sinkhole. Why? Because no matter who’s elected, our dysfunctional government will continue to be driven by secretive super-PAC billionaires obsessed about either holding on to or regaining the presidency in 2016. America’s fiscal cliff is actually four cliffs. And any one can easily trigger the other three. By 2013 the public will wake up to discover America is still a political war zone facing a recession no politician can solve, igniting further rage with warring politicians and their billionaire buddies.  The fiscal cliff includes four dangerous cliffs:

  1. The health-care cliff: Admit it, it’s a systemic failure. And repealing or tweaking Obamacare won’t stop the hemorrhaging. Costs will keep rising, no matter who’s chief.
  2. The taxes/spending cliff: The CBO says that allowing the Bush-era tax cuts to expire, combined with agreed-upon spending cuts, would reduce GDP by 1.3%.
  3. The military budget cliff: Do nothing and the Pentagon automatically gets $55 billion cut in 2013, more over the next decade. In addition, Romney’s on record to increase military spending, even as two wars wind down. U.S. Representative Paul Ryan, Republican from Wisconsin, has said the same.
  4. The social programs cliff: Along with military cuts, the same deal negotiated last year included automatic cuts to domestic social-program spending by $492 billion over the next decade.

Report on Infrastructure Banks for Transportation - CBO -- If future government spending on surface transportation infrastructure matched recent amounts, the condition of the highway and transit systems would probably deteriorate. To increase the funding available for infrastructure projects and to improve the selection process for those projects, some analysts and policymakers have suggested the creation of an “infrastructure bank.”  In a report released today, CBO analyzes an illustrative federal infrastructure bank—one that is representative of those in many recent proposals.  As envisioned, an infrastructure bank would be federally funded and controlled and would select and finance surface transportation projects nationwide that would provide significant national or regional economic benefits. Project sponsors (a combination of states, local governments, and private entities) would apply to the bank for loans or loan guarantees to pay for their proposed project. To repay the loans, projects financed through the infrastructure bank would have to include tolls, taxes, or other dedicated revenue streams.

GOP Senators May Raise Taxes to Avert Defense Cuts - Senate Republicans eager to avert deep automatic cuts in defense beginning early next year have begun serious talks with Democrats about raising revenues – the dreaded “R” word – to help blunt the impact of the looming budget cuts mandated by a new deficit reduction law. Senators John McCain of Arizona and Lindsey Graham of South Carolina and four other Republicans on the Armed Services Committee are exploring ways to block long-term defense cuts with a combination of alternative reductions in domestic programs and $40 billion to $50 billion of new fees and taxes. Graham told reporters Tuesday that he has proposed a 3-to-1 ratio of government spending cuts to revenue raising provisions, along the lines of the deficit reduction recommendations unveiled in December 2010 by the Simpson-Bowles presidential fiscal reform commission. Graham said that if Republicans agree to raise $40 billion or $50 billion in new revenues, “It’s going to be easier to get Democrats’ help with the $60 billion or $70 billion that we’ll have to find throughout the other parts of the government,” according to The Hill.

This Is Our Government - The Republican-controlled House of Representatives - including five Democrats - has voted to repeal the Affordable Care Act for the 33rd time. They have now spent almost 89 hours, funded by you and me, in what one Democrat called a "boil-the-bunny" effort to remove health coverage for 30 million Americans. Immediately after the vote, they turned to the day's other pressing issue: the "dedication and hard work" of their  Congressional golf team. No, really.

CBO | The Distribution of Household Income and Federal Taxes, 2008 and 2009 - Changes in households’ before-tax income and average tax rates in 2008 and 2009 were substantial and differed markedly across the income distribution. Average after-tax income fell notably, owing to a drop in market income caused by the recession that began in December 2007 that was only partially offset by increases in government transfers and decreases in federal taxes. In this report CBO extends its estimates of the distribution of household income and federal taxes through 2008 and 2009, the latest year for which comprehensive data are available, and compares those estimates with estimates for 2007 and for the 1979–2009 period. Average Before-Tax Income for All Households Fell 12 Percent from 2007 to 2009 in Real (Inflation-Adjusted) Terms. In 2009, the shares of total before-tax income (which includes government transfer payments, such as Social Security benefits) received by households in certain income quintiles were:

  • Lowest quintile: 5.1 percent
  • Middle quintile: 14.7 percent
  • Highest quintile: 50.8 percent

Average before-tax income fell between 2007 and 2009 for households in all income quintiles, but the amount of that decline varied by quintile. The declines in before-tax income were 5 percent or less for households in each of the four lowest income quintiles and 18 percent for households in the top quintile. For households in the top one percent, income fell by 36 percent, reducing their share of before-tax income from 18.7 percent to 13.4 percent.

Distribution of Taxes in 2009: CBO - The Congressional Budget Office has put out another of its useful reports on the distribution of the tax burden across income levels: "The Distribution of Household Income and Federal Taxes, 2008 and 2009.1"  I suspect that many readers will see in these numbers an affirmation of their own beliefs about whether taxes on the rich should be either higher or lower. I don't expect to persuade people about the extent to which they find inequalities of income to be "evil or unlovely." But at least it would be useful if everyone was arguing from the same fact base. I'll focus my comments mostly on describing the situation of the top 1%, and let readers consider the rest of the data on their own. For starters, here's  a table showing average tax rates for different kinds of federal taxes, across income levels.  Thus, the second column shows that the top 1% paid on average 21% of their income in federal income taxes. Conversely, the lowest quintile and the second quintile had negative income tax rates: that is, after taking into account refundable tax credits, their after-tax income was higher than their before-tax income. The top 1% paid 2.5% of income in social insurance taxes, a much lower rate, because Social Security taxes are only collected up to a certain income limit, which was $106,800 in 2009. The CBO estimates what income groups actually end up paying corporate taxes, and since those with high incomes own more stock, they pay a higher share of corporate taxes. The top 1% has income that is 5.2% lower because of corporate taxes. Federal excise taxes on gasoline, cigarettes, and alcohol weigh more heavily on those with lower income levels, and the top 1% pays 0.2% of its income in such taxes, compared with 1.5% for the lowest quintile.

Data on Tax Rates, by Quintiles - About two years ago, law school professor Todd Henderson complained about the difficulties of making ends meet on slightly more than $250,000, as a way of arguing against the proposal to allow the Bush tax cuts expire for incomes above $250,000, since he was not "rich" in his own estimation. Given the CBO’s release of the actual (data based) estimates of tax rates [1], I thought it useful to revisit the debate over the plight of the top 1%. Professor Henderson took down the blog post soon after posting, and most repostings have been expunged from the Web, but fortunately one can find a repost of this gem here. The key quote: ... Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why. Interested readers can read the professor’s entire post here (after the first paragraph).  The graphs based on the CBO data are quite striking, and are at variance with the beliefs held in the fevered imagination of some commentators that taxes have risen enormously under the current Administration.

Obama Poised for New Fight With G.O.P. Over Tax Cuts With a torpid job market and a fragile economy threatening his re-election chances, President Obama is changing the subject to tax fairness, calling for a one-year extension of the Bush-era tax cuts for people making less than $250,000. Mr. Obama plans to make his announcement at the White House on Monday, senior administration officials said. The ceremony comes as Congress returns from its Independence Day recess, and as both parties and their presidential candidates head into the rest of the summer trying to seize the upper hand in a campaign that has been closely matched and stubbornly static. House Republicans plan to vote this month to extend for a year all of the Bush tax cuts, for middle- and upper-income people. The president’s proposal could also put him at odds with Democratic leaders like Representative Nancy Pelosi of California and Senator Charles E. Schumer of New York, who have advocated extending the cuts for everyone who earns up to $1 million. And it will most likely do little to break the deadlock in Washington over how to deal with fiscal deficits, an impasse that has only hardened as Republicans sense a chance to make gains in Congress this fall.

Transcript of Obama Tax Remarks - President Obama is launching a push to extend tax cuts for the middle class, as he seeks to shift the election-year economic debate away from the dismal jobs market. Here is the transcript of his remarks delivered Monday.

Will Ending Tax Cuts for the Rich Hurt the Economy? - President Obama on Monday proposed extending most of the Bush tax cuts, but not those for the highest-income Americans. Republicans responded that all of the tax cuts should be extended, since tax hikes of any kind would hurt economic growth. Are they right? Will allowing the tax cuts for the highest earners to lapse put a damper on gross domestic product? Most likely. I should note, though, that the magnitude of the drag is likely small, at least relative to other fiscal tightening that looms when this year ends. Mark Zandi, the chief economist at Moody’s Analytics, estimates that allowing tax cuts for Americans who earn above $250,000 to expire at the end of 2012 would reduce gross domestic product growth in 2013 by $40 billion, or about 0.24 percentage points. Allowing the “middle class” tax cuts to expire would shave an additional 1.06 percentage points off economic growth. That means letting all of the Bush tax cuts phase out would cut about 1.3 percentage points from growth. Here’s a table showing Mr. Zandi’s estimates for how each of the spending cuts and tax increases scheduled at the end of 2012 would hurt economic growth:

The best case for Obama’s tax plan - I know there’s controversy about whether President Obama should have chosen a higher wage than $250,000 for the group that will lose the Bush tax cuts. Sen. Chuck Schumer and Rep. Nancy Pelosi, two liberals, are said to prefer the nice round number of $1 million for the cutoff, concerned that people in their home states of New York and California, with their higher costs of living, aren’t actually “rich” if they make a quarter of a million dollars. I just want to introduce some reality to this debate. If you’re in the top 2 percent of American wage earners, you may not feel wealthy, but you’re incredibly privileged. It’s slightly crazy to have Democrats denying that, although I understand it. (I live in San Francisco.) Schumer and Pelosi, of course, have now come out strongly behind the president’s plan, but the initial impression that Democrats were in disarray – isn’t that a “dog bites man” story now, the default for mainstream media? – was an unnecessary stumble in the rollout of the president’s plan, and I think it’s worth talking about. There are several reasons the president is right to make the break where he did. One of them is a reality check: A major culprit in the tax troubles of the $250K earners who feel poor is the lower tax rate on capital gains and carried interest. If guys like Mitt Romney paid the top marginal tax rate on their quarter-billion a year, we might be able to afford a better tax rate for those at a quarter million.

Small Business tax myths: Most firms are not affected by Obama tax proposals. - President Obama reiterated Monday his opposition to Republican efforts to fully extend the Bush tax cuts beyond their scheduled expiration at the end of this year. Instead, Obama says he wants to extend most of the tax cuts for one year (2013) while allowing the top two tax brackets to revert to Clinton-era levels. His hope is that Congress will use 2013 to pass broad tax reform. Under Obama’s plan, households with taxable incomes above $250,000 will pay higher taxes, which the GOP is furious about, especially citing the dire impact on small business owners. What’s striking about this whole debate is how the very business owners and politicians who seem certain that tax shifts will radically harm the economy are bizarrely uninformed about how the tax code actually works. In particular, they don’t appear to understand what marginal tax rates and tax brackets actually are. The Republican majority on the House small business committee unveiled a small-businessopen mic site on Monday to reveal “what small business owners are saying about the president’s plan to raise taxes.” Some of what they’re saying is that they don’t know what they’re talking about.The way U.S. income tax brackets work is that taxes are levied on marginal income. In other words, the rate applied to income earned over the $250,000 threshold is irrelevant to the first $250,000 worth of taxable income. If you have $250,010 of taxable earnings then only that last $10 is taxed at the higher rate. In all cases, higher pre-tax earnings lead to higher after-tax income.

The Truth About Obama's Tax Proposal (and the Lies the Regressives are Telling About It) - Robert Reich - To hear the media report it, President Obama is proposing a tax increase on wealthy Americans. That’s misleading at best. He’s proposing that everyone receive a continuation of the Bush tax cuts on the first $250,000 of their incomes. Any dollars they earn in excess of $250,000 will be taxed at the old Clinton-era rates. Get it? Everyone is treated exactly the same. Everyone gets a one-year extension of the Bush tax cut on the first $250,000 of income. No “class warfare.” Yet regressive Republicans want Americans to believe differently. The editorial writers of the Wall Street Journal say the President wants to extend the Bush tax cuts only “for some taxpayers.” They urge House Republicans to extend the Bush tax cuts for “everyone” and thereby put Senate Democrats on the spot by “forcing them to choose between extending rates for everyone and accepting Mr. Obama’s tax increase.” Pure demagoguery. Regressives also want Americans to think the President’s proposal would hurt “tens of thousands of job-creating businesses,” as the Journal puts it. More baloney. A small business owner earning $251,000 would pay the Bush rate on the first $250,000 and the old Clinton rate on just $1,000.

Obama Has a Serious Tax Credibility Problem - This weekend on CNN Robert Gibbs, a surrogate for President Obama, said Obama was 100 percent committed to letting the Bush tax cuts expire for those making above $250,000 a year. Given Obama’s track record on his tax related campaign promises, I have a tough time believing his team on this issue, and I’m likely not alone. When it comes to keeping his tax promises, Obama’s record falls somewhere between poor and abysmal. Most important is his comically bad record on identical promises he previously made about the Bush tax cuts. Obama spend years campaigning on his promise to let the Bush tax cuts expire for those making over $250,000. Yet for his first two years  in office Obama completely failed to achieve this goal. Obama could have easily ended this tax break using reconciliation when he still had very large Democratic majorities in Congress. Not only did Obama fail to do that, but his team made no serious effort during those months when they stood the best chance of succeeding. After basically ignoring the promise for two years, Obama was forced to deal with it when all the Bush tax cuts were scheduled to expire. At that critical moment, instead of sticking to his promise, Obama completely folded. Not only did Obama give in to Republican demands to extend them all, but in his public statements afterwards he seemed to imply he would have to fold if the GOP used the same tactics again.

Let’s Hit the “Reset” Button on the Bush Tax Cuts - Bill Gale is very wise in this CNN opinion piece.  He reminds us that policymakers continue to treat the Bush tax cuts with far more love than they deserve: Earlier this week, President Barack Obama proposed to extend the Bush-era income tax cuts, which expire at the end of this year, for one year for people with income below $250,000. People with higher income would continue to receive all of the benefits of lower taxes on their first $250,000 of income, but the tax rate they face on income above that amount would rise. One might wonder why we need more tax cuts, given that the Congressional Budget Office just released a study showing that tax burdens as a share of income for almost all households were the lowest in 2009 that they have been in decades and given that we face a long-term deficit problem that will require more revenues over time. Given that the Bush tax cuts (whether all of them or even just most of them that President Obama has always wanted to continue and deficit finance) have proven unimpressive in terms of either short-term stimulus (they aren’t steered enough toward cash-constrained households) or longer-term, supply-side growth (the large deficits they cause mean national saving falls), Bill recommends this strategy (emphasis added): A better way to stimulate the economy and move the broader debate forward would be to let all of the Bush tax cuts expire as scheduled and be considered as part of a broader tax reform and medium-term deficit reduction effort, and institute instead an explicitly temporary cut, again a payroll tax cut comes to mind.

Taxes at the Top - Krugman - It looks as if Mitt Romney’s personal finances are going to be back in the news. One thing we’ll be hearing from his defenders is the argument that he doesn’t really pay only 14 percent of his income in taxes, because you should count the taxes paid by the corporations in which he invests. But my guess is that conservatives really shouldn’t want to go there. Because if we do, we realize that tax cuts are a much bigger story in rising inequality than the right wants to hear. Piketty and Saez (pdf) have looked at tax rates including imputed corporate taxes, and here’s what they get: Tax rates for the super-elite, the top .01%, have fallen in half since Mitt Romney’s father ran for president; or to put it differently, after tax income for this group has doubled due to policy alone. And bear in mind that the US economy flourished just fine under those 60-70 tax rates …

Mitt’s Gray Areas, by Paul Krugman -  Once upon a time a rich man named Romney ran for president. He could claim, with considerable justice, that his wealth was well-earned, that he had ... done a lot to create good jobs for American workers. Nonetheless, the public understandably wanted to know both how he had grown so rich and what he had done with his wealth; he obliged by releasing extensive information about his financial history. But that was 44 years ago. And the contrast between George Romney and his son Mitt ... dramatically illustrates how America has changed. Right now there’s a lot of buzz about an investigative report in the magazine Vanity Fair highlighting the “gray areas” in the younger Romney’s finances. More about that in a minute. First, however, let’s talk about what it meant to get rich in George Romney’s America, and how it compares with the situation today.  What did George Romney do for a living? The answer was straightforward: he ran an auto company, American Motors. And he ran it very well indeed: at a time when the Big Three were still fixated on big cars and ignoring the rising tide of imports, Romney shifted to a highly successful focus on compacts that restored the company’s fortunes, not to mention that it saved the jobs of many American workers. It also made him personally rich. His returns also reveal that he paid a lot of taxes — 36 percent of his income in 1960, 37 percent over the whole period. This was in part because, as one report at the time put it, he “seldom took advantage of loopholes to escape his tax obligations.”

Whose Incentives? - Paul Krugman - There is no question that incentives matter, that other things equal, someone facing a high marginal tax rate will work less than he or she would otherwise. How much they matter is another issue; in fact, careful empirical study suggests that they matter far less than right-wing mythology would have it. But there’s a further point: if you care about incentives, you should care about everyone’s incentives. The top 0.01 percent may like to imagine that it is the engine of the economy, but there is no good reason to believe that there is anything special about their role other than the fact that they make lots of money. Or to be a bit more specific, there is no reason to believe that there is a larger gap between the social marginal product of super-elite earners and their pay than there is for anyone else. (If anything, given the prominence of dubious financial activities in the top .01’s income, the presumption goes the other way). So if you’re worried about the effect of marginal tax rates on work incentives, you should worry about that effect at all income levels. And here’s the thing: it’s actually a well-documented fact that effective marginal rates are highest, not on the superrich, but on workers toward the lower end of the scale. Why? Partly because of the payroll tax, but largely because of means-tested benefits that fade out as your income rises. Here’s a recent discussion by Eugene Steuerle (pdf), with this figure included:So if you’re really, really concerned about incentives, you should focus not on top rates but on this lower-income trap.

Romney’s VERY Private Equity - By now there’s been a lot of discussion in the media about the Vanity Fair and Associated Press exposés of Romney’s and his wife’s offshore bank accounts, to the limited extent that information about them is publicly available.  Romney is now likening overseas bank accounts and shell/money-laundering corporations to investing in real overseas companies—as if investments in overseas companies guarantee profit rather than loss in the same way that Bain and its executives usually were guaranteed profits, through financial-transaction fees and “consulting” fees they arranged for themselves irrespective of whether the acquisitioned company made money or instead collapsed under the weight of the debt Bain forced it to incur, in large part, in order to pay Bain those fees.  And as if personal profits from overseas investments aren’t taxable here in the United States unless those profits are stored in bank accounts elsewhere.   But there’s one aspect of the investigative reports that I think has not been given enough attention and analysis: that Romney’s IRA account from his 15 years as CEO of Bain Capital—a period of time when annual IRA investments could be no more than $2,000—now has assets of more than $100 million.  I’m wondering: what kinds of investments would have to have been for this money to have so wildly metastasized?  Apple stock?  If so, how much Apple stock?  Precious-metal funds?  A quiet Louvre heist? 

Romney Discrepancies Over When He Left Bain Capital Could Constitute a Felony -  Over the last week, plenty of ink has been spilled over when precisely Mitt Romney left his position as CEO of Bain Capital. I wasn’t sure why this mattered. I recognize, per this story from the Boston Globe, that Romney’s statement about the timing of his departure matters because of his responsibility for certain companies under Bain’s purview that laid off workers and went bankrupt: But that just seemed like a little white lie, good for campaign fodder but mostly meaningless beyond that. However, in this case, Romney is lying about an SEC filing. The statements filed with the SEC list him as the chief executive of Bain after when he stated publicly since way back in 2002 that he left (and that continues – statements from both Romney and Bain today say that he retired in 1999).

Who’s Very Important?, by Paul Krugman -  “Is there a V.I.P. entrance? We are V.I.P.” That remark, by a donor waiting to get in to one of Mitt Romney’s recent fund-raisers in the Hamptons, pretty much sums up the attitude of America’s wealthy elite. Mr. Romney’s base — never mind the top 1 percent, we’re talking about the top 0.01 percent or higher — is composed of very self-important people. Specifically, these are people who believe that they are, as another Romney donor put it, “the engine of the economy”; they should be cherished, and the taxes they pay, which are already at an 80-year low, should be cut even further. Unfortunately, said yet another donor, the “common person” — for example, the “nails ladies” — just doesn’t get it. O.K., it’s easy to mock these people, but the joke’s really on us. For the “we are V.I.P.” crowd has fully captured the modern Republican Party.. And there is, of course, a good chance that Republicans will control both Congress and the White House next year. If that happens, we’ll see a sharp turn toward economic policies ... especially solicitous toward the superrich — I’m sorry, I mean the “job creators.” So it’s important to understand why that’s wrong.

Ask Not What Your Country Can Do For You - Ask how you can avoid paying for it. As David Firestone notes, that seems to be the new GOP definition of patriotism:Republicans aren’t just in favor of lowering taxes; now they’re applauding wildly complex efforts by the wealthiest Americans to avoid paying billions in taxes by shipping capital to other countries.“It’s really American to avoid paying taxes, legally,” said Senator Lindsey Graham, Republican of South Carolina, on Tuesday. He was defending Mitt Romney, who, as this morning’s editorial in The Times notes, appears to have the most elaborate history of tax avoidance – offshore tax havens, disputed sheltering mechanisms, complex trusts – of any major presidential candidate in history.Invest in the Cayman Islands, Mr. Graham seems to be saying. It’s the patriotic thing to do.

The Romney job record in Massachusetts - For the period January 2003 – January 2007, the Romney record on state government job growth is compared against the national state employment aggregate. Likewise, private sector job growth in Massachusetts is compared against the national private sector aggregate, thus, benchmarking the Romney record against the national record. The comparisons make clear that state government employment increased 2.8% in Massachusetts, more than twice the national state government employment aggregate of 1.1%. Private sector employment over the same period in Massachusetts increased 1.4%, less than a quarter of the national aggregate of 5.9%. It should be noted that this comparative performance decrement mirrors economic growth in the state as annual real GDP grew 1.6% over Romney’s tenure, as opposed to an annual increase of 2.7% nationally.

The Great Capitalist Heist: How Paris Hilton’s Dogs Ended Up Better Off Than You - Unemployment is soaring. Across America, millions of terrified people are facing foreclosure and getting kicked to the curb. Meanwhile in sunny California, the hotel-heiress Paris Hilton is investing $350,000 of her $100 million fortune in a two-story house for her dogs. A Pepto Bismol-colored replica of Paris’ own Beverly Hills home, the backyard doghouse provides her precious pooches with two floors of luxury living, complete with abundant closet space and central air. By the standards of America’s rich these days, Paris’ dogs are roughing it. In a 2006 article, Vanity Fair’s Nina Munk described the luxe residences of America’s new financial elite. Compared with the 2,405 square feet of the average new American home, the abodes of Greenwich Connecticut hedge-fund managers clock in at 15,000 square feet, about the size of a typical industrial warehouse. Many come with pool houses of over 3,000 square feet.  Steven Cohen of SAC Capital is a typical product of the New Gilded Age. He paid $14.8 million for his Greenwich home, which he stuffed with a personal art collection, Not satisfied, Cohen spent millions renovating and expanding, adding a massage room, exercise and media rooms, a full-size indoor basketball court, an enclosed swimming pool, a hairdressing salon, and a 6,734-square-foot ice-skating rink. By the time it was finished, Cohen's house had swelled to 32,000 square feet, the size of the Taj Mahal. Even at Taj prices, cost mattered little to a man whose net worth is estimated by the Wall Street Journal at $8 billion — with an income in 2010 of over $1 billion. Cohen’s payday is impressive, but by no means unique. In 2005, the 25 hedge-fund managers averaged $363 million. In cash. Paul Krugman observes that these 25 were paid three times as much as New York City’s 80,000 public school teachers combined. And because their pay is taxed as capital gains rather than salary, the teachers paid a higher tax rate!

Judge blasts colleagues for defying SCOTUS, allowing financial patent - The nation's top patent court has stopped a lower court from throwing out four patents on financial software, used to sue a bank dealing in foreign currency exchanges. The controversial opinion, countered by a blistering dissent by one member of the three-judge panel, shows that the US Court of Appeals for the Federal Circuit is in disarray about just what is patentable. An "abstract idea" can't win a patent, but the judges on the court are in disagreement about just what that is.

Big Dealers Sweat as Swaps Face Reckoning - In a potential setback for large financial firms, regulators are expected to vote Tuesday on a rule requiring banks with more than $10 billion in assets to trade swaps through a central clearinghouse, according to a person familiar with the rule. The vote will be accompanied by a separate ruling on the precise definition of swaps, the financial contracts at the heart of the 2008 credit crisis. That definition will set in motion a series of other rules affecting trillions of dollars of financial contracts. The voting at the Commodity Futures Trading Commission "starts the scramble to the finish line," said Joel Telpner, a lawyer at Jones Day who specializes in derivatives. "It's the trigger for moving forward with the next phase" of the Dodd-Frank financial overhaul passed by Congress in 2010. The CFTC's proposed clearinghouse rule would force banks with more than $10 billion to post extra cash to back their swaps deals, a requirement for all clearinghouse clients. Critics of the requirement have said it would hurt the economy by forcing firms to tie up cash they could use for retail or business loans, and banks have pushed for a wider set of exemptions.

Banks face swaps threat after cut ratings -- Sovereigns, banks, deals – the whole financial system relies on ratings provided by Moody’s, Standard & Poor’s and Fitch.So when Moody’s downgraded 15 of the world’s biggest banks last month, many financial institutions and investors were focused on the wider impact a rating drop would have on the derivatives swaps agreements at the heart of many structured finance deals. The issue centres on the fact that banks often act as counterparties in interest rate or currency swaps that are put in place to hedge against risk in structured finance deals such as asset-backed securities, covered bonds, residential mortgage-backed securities and collateral loan obligations. The swaps themselves are not rated, but they are designed with trigger points that are set off when a counterparty falls below a minimum ratings threshold.  The concern is that a downgrade of a bank counterparty will ultimately lead to a swath of downgrades of structured finance deals, potentially forcing up the cost of funding for banks as investors demand more for lower rated deals. So far there have been relatively few new structured finance bond issues to test the water. Transaction downgrades have also largely been avoidable. But some of the ways to dodge a downgrade of a transaction incur additional costs for the banks involved.

Watch Charles Ferguson's "Inside Job" - Charles Ferguson is an American hero. He produced, wrote, and directed this masterpiece about the fraud and corruption that led to the crisis. Upon winning the Academy Award for Best Documentary in 2011, he began his acceptance speech by stating, "Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that's wrong." Ferguson recently published his book, Predator Nation, and has continued his crusade to expose fraud, criminality, and corruption, in the private sector, in government, and in academia. If you have not seen this movie, you must do so. Then share it. Every American should be aware of what is transpiring at the highest levels of our establishment. Of course, this goes beyond America's borders; everyone should be aware of the injustice, criminality, and corruption that sways policy and creates a needlessly precarious financial world for us all.

ROUBINI: Break Up The Banks Or Hang Someone In The Streets - What can we do to prevent banking scandals? In a recent interview, Bloomberg's Caroline Connan asked Nouriel Roubini what he thought about the Barclays LIBOR rate-fixing scandal. Rather than addressing it directly, Roubini argued that many of the structural issues that caused the financial crisis have not yet been addressed since the financial crisis. "The incentives of the banks is still to cheat and do things that are either illegal or immoral," he said. "The only way to avoid that is to break up these financial supermarkets. When you have within the same firm commercial banking, investment banking, asset management, prime brokerage, insurance, underwriting , derivatives...there are no Chinese walls and there are massive conflicts of interest." Roubini thinks its wiser to address the system than the players. "Bankers are greedy," he continued. "They've been greedy for the last hundreds of years. It's not a question of if they're more immoral today than they were a thousand years ago. You have to make sure they behave in ways in which they minimize those risks. One way of doing it is to separate those activities so you minimize the conflicts of interest. Otherwise these things are going to happen over and over again." However, this is not to say people shouldn't be punished. Roubini thinks that everything should be done to create disincentives to prevent bankers from acting in bad ways. And currently, the punishments just don't go far enough. "Nobody has gone to jail since the financial crisis. The banks, they do things that are illegal and at best they slap on them a fine. If some people end up in jail, maybe that will teach a lesson to somebody. Or somebody hanging in the streets."

Money Talking: Could Dodd-Frank Fix the Financial Sector? -On this week’s edition of WNYC’s Money Talking, Rana Foroohar of Time and Joe Nocera of the New York Times weigh in on whether the Dodd-Frank financial reform law would have prevented the financial snafus that have plagued the banking sector recently. July 21 marks the two-year anniversary of Dodd-Frank, but the vast majority of the rules have yet to be finalized. Those two years have seen no shortage of big bank scandals, many of them recent. Barclays admitted to manipulating the LIBOR interest rate. JPMorgan suffered a multi-billion trading loss. Commodities brokerage firm MF Global collapsed. Then this week, another brokerage firm, PFGBest, filed for bankruptcy, and $215 million in customer money appears to be missing. Foroohar and Nocera discuss how effective Dodd-Frank will be once all the rules are written.

The Wall Street Scandal of all Scandals - Robert Reich - Libor is the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. It’s compiled by averaging the rates at which the major banks say they borrow. So far, the scandal has been limited to Barclay’s, a big London-based bank that just paid $453 million to U.S. and British bank regulators, whose top executives have been forced to resign, and whose traders’ emails give a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Robert Diamond, Jr., the former Barclay CEO who was forced to resign, said the emails made him “physically ill” – perhaps because they so patently reveal the corruption.) But Wall Street has almost surely been involved in the same practice, including the usual suspects — JPMorgan Chase, Citigroup, and Bank of America – because every major bank participates in setting the Libor rate, and Barclay’s couldn’t have rigged it without their witting involvement. In fact, Barclay’s defense has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is “cooperating” (i.e., giving damning evidence about other big banks) with the Justice Department and other regulators in order to avoid steeper penalties or criminal prosecutions, so the fireworks have just begun.

Things That Make You Go Hmmm - Such As The Transition From Conspiracy Theory To Conspiracy Fact - Attempts to manipulate free markets invariably end badly - after all, they are, supposedly, by their very nature, free. ... Over the past few weeks, the exposure of the Libor-rigging scandal has monopolized the headlines of the financial press and inveigled its way onto the front pages of every major news publication in the world through the sheer size and scale of the story. Something as big as this just CAN’T be hidden from the public. Only... it can. It has been. It no doubt still is to a certain extent. I’m not going to go through all of the events of the past few weeks as you are no doubt familiar with them, but [simply understanding how LIBOR works makes for a simple conclusion]. I’m afraid it’s rather obvious. Given that almost half the reported inputs that help establish the Libor rate are discarded immediately, Barclays simply CANNOT have manipulated the Libor rate alone. Period.

Barclays Whistleblower: Diamond Knew About Libor Fixings - A whistleblower from Barclays Bank makes the obvious point that former CEO Bob Diamond had to know about the various fixings of the Libor benchmark inter-bank lending rate before he claims to have found out: Speaking on condition of anonymity, the banker says that senior Barclays bosses would have been told about Libor concerns because staff were drilled to pass anything untoward up to their managers. Failure to do this meant the sack. “Libor fixing was escalated by several people up to their directors, they would then have escalated it up the line because at Barclays if you don’t escalate, and it is found out that you haven’t, it is grounds for disciplinary action. You will be dismissed.” The banker also spoke of management by intimidation, even physical threat, punishing hours and a ruthless grading system that left workers in terror of their annual appraisals. Employees were often reduced to tears by the end of a day, but only when they had departed from the building. Such weakness would not be tolerated inside. Diamond’s testimony before Parliament never made any sense. He claimed simultaneously that he just found out about the seriousness of the Libor rigging, and that he held a conversation with the Bank of England’s top officials in 2008 that Barclays Libor submissions were coming in on the high end, with a wink-and-a-nod encouragement to lower those numbers. These two things cannot be true at the same time.

Libor Manipulation: The Markets’ Worst-Kept Secret? - As fresh details continue to emerge about the Libor fixing scandal that has already claimed the head of Bob Diamond, the American chief executive of British bank Barclays, everybody, it seems, is shocked – shocked! – to  discover that this benchmark interest rate underlying trillions of dollars worth of financial transactions worldwide was allegedly being manipulated. That’s the official line from the Bank of England, market regulators, the British Banking Association that oversees the Libor process, politicians on both sides of the Atlantic — and even from Diamond himself. He told a parliamentary hearing on July 4 that he was “sickened” to read emails by Barclays traders asking favors of their colleagues on the Barclays team that helped to fix the rate. But talk to bankers and current and former traders in the markets, especially those who specialized in interest-rate swap transactions, and it turns out that this generalized state of shock may be a tad disingenuous. For suspicions about manipulation of Libor, the London interbank offered rate, and its European cousin Euribor, the European interbank offered rate, are both manifold and long-standing. In the Barclays case, the CFTC found evidence dating back to 2005. But the bigger doubts about Libor and Euribor’s reliability became particularly apparent after the bankruptcy of Lehman Brothers in August 2007 and the ensuing turmoil in bank lending markets, when credit all but dried up.

Libor Scandal Intensifies Spotlight on Bank Regulators - As big banks face the fallout from a global investigation into interest rate manipulation, American and British lawmakers are scrutinizing regulators who failed to take action that might have prevented years of illegal activity. Politicians in both London and Washington are questioning whether regulators allowed banks to report false rates in the run-up to the 2008 financial crisis and afterward. On Monday, Congress stepped into the fray, requesting information about the role of the Federal Reserve Bank of New York, according to people close to the matter. The focus on regulators and other financial institutions has intensified in the last two weeks after the British bank Barclays agreed to pay $450 million to resolve an enforcement case. British and American authorities accused the bank of improperly influencing key interest rates to deflect concerns about its health and bolster profits.

Wall Street's link to Libor - Robert Reich - Britain is abuzz with the Libor scandal, but so far it's been a yawn in the United States. That's because Americans have assumed that the wrongdoing is confined to the other side of the pond. After all, "Libor" is short for "London interbank offered rate", and the main culprit to date has been London-based Barclays. It's further assumed that the scandal hasn't really affected the pocketbooks of average Americans anyway. Wrong, on both counts. It's becoming apparent that Barclays' reach extends far into the US financial sector, as evidenced by its $453m settlement with American as well as British bank regulators, and the US justice department's active engagement in the case. Even by American standards, the Barclays traders' emails are eyepopping, offering a particularly a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Bob Diamond, the former Barclays CEO, says the emails made him "physically ill" – perhaps because they so patently reveal the corruption.) Most importantly, Wall Street will almost surely be implicated in the scandal. The biggest Wall Street banks – including the giants JP Morgan Chase, Citigroup and Bank of America – are likely to have been involved in similar manoeuvres. Barclay's couldn't have rigged the Libor without their witting involvement. The reason they'd participate in the scheme is the same reason Barclay's did – to make more money. In fact, Barclays' defence has been that every major bank was fixing Libor in the same way, and for the same reason.

Satyajit Das: Mr. Smith Goes to Leaves Wall Street - Barclays Bank’s admission that they “fixed” money markets rates and JP Morgan’s admission that so called hedges were “incorrect” are merely symptoms of a deeply compromised global financial system. Significantly, even The Economist, sympathetic to capitalism and finance generally, resorted to the word “banksters”. Something is rotten it the state of global finance. On 14 April 2012, former Goldman Sachs Executive Director Greg Smith recorded a very public and sensational exit interview in the opinion pages of the New York Times. The letter criticised “toxic and destructive” practices and cultures within Goldman Sachs, one of the world’s largest, most important and influential investment banks. The criticism focused on practices that exploited clients and put the interests of the bank first. It alleged a culture that was focused on getting clients to invest in securities or products that Goldman was interested in getting rid off. The letter highlighted the use of complexity to confuse clients and the focus on highly profitable and (sometimes) unsophisticated clients who did not fully understand the risks of the transactions that they were being encouraged to enter into. The most-noteworthy farewell speech since the film Jerry Maguire has been parsed as an expose of the alleged practices of his former employer. It is more subtle, highlighting a deeply flawed financial system as well as the poisonous and brutal culture of modern financial institutions.

Rules of American justice - Gretchen Morgenson, the New York Times business reporter, yesterday wrote about aggressive action taken by British financial authorities against top Barclays executives in connection with illegal manipulation of LIBOR interest rates, including the bank’s Chairman, Marcus Agius, and its CEO, Robert E. Diamond Jr., both of whom were forced out of their jobs. In doing so, Morgenson bluntly summarizes the general, governing rules of American justice for financial elites: One of the most revealing exchanges in the Barclays documents came when a bank official tried to describe why Barclays’s improper postings were not as problematic as those of other banks. “We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down. “Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument. . . .

LIBOR Scandal: The Crime of the Century? - The 21st has been a banner century for financial and accounting scandals. Enron, the dotcom bust, the subprime-mortgage crisis and the bank bailouts have all contributed to the very low esteem in which the American public holds Corporate America in general, and high finance in particular. So it is no small feat that the latest interest-rate-fixing LIBOR scandal is being heralded as the most egregious in a generation or, as Robert Scheer put it in the Nation, “the crime of the century.” LIBOR is an acronym for the London interbank offered rate, and it is used to price hundreds of trillions of dollars worth of financial instruments, from high-yield corporate debt to student loans. Considering the importance of this benchmark rate and the financial industry’s recent track record, it is no wonder that many in the press are up in arms about Barclays’ recent admission that it intentionally submitted false rates in order to manipulate LIBOR for its own gain. Barclays has been fined more than $450 million by British and American regulators, but it is by no means the only bank thought to have deceptively tried to influence LIBOR — thus the outrage expressed this past week in the media. Scheer, for instance, pulled no punches in his polemic: “Modern international bankers form a class of thieves the likes of which the world has never before seen. Or, indeed, imagined … It reveals that behind the world’s financial edifice lies a reeking cesspool of unprecedented corruption. The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend.”

The Libor $candal Explained – The Largest Banking Scandal in History - infographic

Libor Scandal Grows: Barclays Banged On the Door of the New York Fed 12 Times - Current U.S. Treasury Secretary, Timothy Geithner, was President of the Federal Reserve Bank of New York in 2008.  He has now conceded that he was aware of problems with the setting of Libor interest rates as early as 2008 and sent an email to the Bank of England with recommendations for addressing the problems.  Why the rigging was allowed to continue remains an open question.  According to the chart below, released by Barclays, it made a total of 12 complaints to the Federal Reserve beginning as early as August 28, 2007, the date it contacted the Fed twice in one day.  Its contacts with the Fed continued through October 27, 2008.  The Federal Reserve Bank of New York is set to release documents this morning, presumably showing what it knew and when, following a written request by Randy Neugebauer, a House Republican from Texas.

  • Blue Boxes: Contacts With the Federal Reserve
  • Yellow: British Bankers Association
  • Green: Bank of England
  • Pink: Financial Services Authority (FSA)

Geithner Tried to Curb Rate Rigging in 2008 - When Timothy F. Geithner ran the Federal Reserve Bank of New York, he acknowledged fundamental problems with the process for setting key interest rates in the midst of the 2008 financial crisis, according to documents provided to The New York Times.. Mr. Geithner, who is now the United States Treasury secretary, questioned the integrity of the benchmark as reports surfaced that Barclays and other big banks were misrepresenting the rates. In 2008, Barclays had several conversations with New York Fed officials about the matter. Mr. Geithner then reached out to top British authorities to discuss issues with the interest rate, which is set in London. In an e-mail to his counterparts, he outlined reforms to the system, suggesting that British authorities “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to the documents. But the warnings came too late, and Barclays continued the illegal activity.

Libor Scandal May Have Broken Key Market-Stress Measure -- The price-fixing scandal involving the benchmark London interbank offered rate known as Libor is raising questions about the quality of another key market measure looked to for signs of market stress. In a note to clients, Cumberland Advisors Chairman David Kotok observed that what is known as the TED spread–which measures the difference between short-term interest rates and Treasury yields–may have suffered collateral damage in the scandal having to do with the manipulation of the Libor.

The Economist, Then and Now, on Bankers - - Yves Smith - Last week, the British press was in full-throated cry on the Libor scandal , both as a political story (the connections to the Conservative party; the questions over the Bank of England’s role) and for its economic repercussions (who else was involved, who wound up on the losing side). Many commentators took note of the Economist’s cover: But despite the dramatic image and the use of the pejorative “banksters,” the article combined some helpful analysis with a call not to act against banks in haste: The attempts to rig LIBOR (the London inter-bank offered rate), a benchmark interest rate, not only betray a culture of casual dishonesty; they set the stage for lawsuits and more regulation right the way round the globe. This could well be global finance’s “tobacco moment”.The dangers of this are obvious. Popular fury and class- action suits are seldom a good starting point for new rules. Yet despite the risks of banker-bashing, a clean-up is in order, for the banking industry’s credibility is shot, and without trust neither the business nor the clients it serves can prosper…. Translation: don’t do too much while tempers are hot. Yet this stance also happens to be the one used again and again by incumbents and lobbyists: drag out discussions of what to do until the public’s attention has moved elsewhere. As Frank Partnoy recounted in his book Infectious Greed, this strategy was particularly effective in the 1994 derivatives wipeout, which destroyed more wealth than the 1987 crash. A series of investigations and hearings in the end produced close to nothing because the banking industry was able to drag out the process, and then argue that things were back to normal, so why were any changes needed?

Time for 'Banksters' to be prosecuted- “Banksters,” the cover of the Economist magazine charges, depicting a gaggle of bankers dressed as extras off the “Goodfellas” lot. The editors were reacting to Libor-gate, the collusion among traders of major banks to fix the London interbank offered lending rate, the most recent, most obscure and the most explosive revelation from what seems a bottomless pit of corruption in global banks. Once more the big banks are exposed in systematic fraudulent activity. When Barclays agreed to a $450 million fine for trying to rig the Libor, its CEO offered the classic excuse: Everyone does it. Once more the question remains: Will CEOs and CFOs, as well as traders, be prosecuted? Or will they depart with their multimillion dollar rewards intact, leaving shareholders to pay the tab for the hundreds of millions in fines?  The Barclays settlement exposed that traders colluded to try to fix the Libor rate. This is the rate used as the basis for exotic derivatives as well as mortgages, credit card and personal loan rates. Almost everyone is affected. Fixing the rate even a few hundreds of a percentage point could make Barclays millions on any single day — money taken out of the pockets of consumers and investors. Once more the banks were rigging the rules; once more their customers were their mark. The stakes are staggering. The Libor should be as good as gold. It pegs the value of up to $800 trillion in financial instruments. The collusion was systematic and routine.

The Market Has Spoken, and It Is Rigged - Simon Johnson - In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees. This is a big mistake, in terms of the economics at stake and the likely political impact. The behavior at Barclays has all the hallmarks of fraud – intentional deception for personal gain, causing significant damage to others. The Commodity Futures Trading Commission nailed the detailed mechanics of this deception in plain English in its Order Instituting Proceedings (which is also a settlement and series of admissions by Barclays). Most of the compelling quotes from traders involved in this scandal come from the commission’s order, but too few commentators seem to have read the full document. Please look at it now, if you have not done so already. The commission’s order portrays a wide-ranging conspiracy (or perhaps a set of conspiracies) to rig markets, including, but not limited to, any securities for which the price is linked to a particular set of short-term interest rates.

The Spreading Scourge of Corporate Corruption - Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?  The misconduct of the financial industry no longer surprises most Americans. Only about one in five has much trust in banks, according to Gallup polls, about half the level in 2007. And it’s not just banks that are frowned upon. Trust in big business overall is declining. Sixty-two percent of Americans believe corruption is widespread across corporate America. According to Transparency International, an anticorruption watchdog, nearly three in four Americans believe that corruption has increased over the last three years.  We should be alarmed that corporate wrongdoing has come to be seen as such a routine occurrence. Capitalism cannot function without trust. As the Nobel laureate Kenneth Arrow observed, “Virtually every commercial transaction has within itself an element of trust.”

The BBC as Apologist for Lying about Libor - Bill Black - The right has a reservoir of writers who can be relied on to defend and even praise elite white-collar criminals, but the center has managed to produce eager apologists for lies. This column discusses the BBC’s Business Editor, Robert Preston. The title of his article emphasizes his view that it is exceptionally difficult to know whether the banks’ lying about Libor was desirable: “The elusive truth about Barclays’ lie.” Preston frames the question in a fashion that favors finding Barclays’ lies desirable. “Aside from the forensic analysis about who said what to whom, there is a very simple question at the heart of the furore of Barclays’ involvement in the LIBOR-rigging scandal: is it ever acceptable to lie?” That question rigs the answer. Of course it is acceptable to lie in some circumstances. Had the Nazis successfully invaded England and demanded that the banks identify their Jewish customers it would have been an act of moral courage to lie and forge documents purporting to show that the bank had long refused to do business with Jews. Preston makes clear that the City of London is amply stocked with senior bankers who think it was noble for bank officials and (faux) regulators to lie in setting Libor. “As it happens, a number of senior figures in the City who are unconnected to Barclays think this lying was the right thing to do in the circumstances. They think Mr [Paul] Tucker [Deputy Governor of the Bank of England] encouraged Barclays to lie and they applaud him for doing so.

Crime of the Century - Robert Scheer - Forget Bernie Madoff and Enron’s Ken Lay—they were mere amateurs in financial crime. The current Libor interest rate scandal, involving hundreds of trillions in international derivatives trade, shows how the really big boys play. And these guys will most likely not do the time because their kind rewrites the law before committing the crime. Modern international bankers form a class of thieves the likes of which the world has never before seen. Or, indeed, imagined. The scandal over Libor—short for London interbank offered rate—has resulted in a huge fine for Barclays Bank and threatens to ensnare some of the world’s top financers. It reveals that behind the world’s financial edifice lies a reeking cesspool of unprecedented corruption. The modern-day robber barons pillage with a destructive abandon totally unfettered by law or conscience and on a scale that is almost impossible to comprehend. How to explain a $450 million settlement for one bank whose defense, in a plea bargain worked out with regulators in London and Washington, is that every institution in their elite financial circle was doing it? Not just Barclays but JPMorgan Chase, Citigroup and others are now being investigated on suspicion of manipulating the Libor rate, so critical to a $700 trillion derivatives market.

LIBOR Ain’t Nothing But an Acronym: We Must Abolish the Finance Capitalist Class - Black Agenda Report  - The latest finance scandal concerns the LIBOR, the acronym for the interest rates banks offer each other for loans. Because the LIBOR rate is used as the basis for so many other financial calculations, some people say the scandal is potentially the biggest in the world. And then, there are those of us who wonder if the LIBOR case, in and of itself, really matters at all.  It is almost as if a bank has just been robbed, and the customers are all worried about the way that the robbers are calculating the value of the loot. The fact of the matter is, the robbery was an inside job. In this case, it appears that virtually all the big bankers and the people who were supposed to be regulating them were in on the crime – although, so far, only Barclays Bank in Britain has been fined. The banking system was not victimized by some shadowy group of predators who could be quarantined – after which all would be well. No, the system itself is a criminal enterprise that preys on the entire planet. What we have observed, most dramatically since the meltdown of 2008, is that the banksters who run the global financial criminal enterprise also control the political mechanisms of the western world. The state and, ultimately, the people pay the cost of the bankers’ crimes. Not only are the criminals not punished, they are rewarded with trillions of dollars in virtually free money from world’s central banks, including the U.S. Federal Reserve. This allows them to grow even bigger, and to commit ever larger criminal transactions, which the banks ultimately record as profits or pass on as losses to the public at-large. The LIBOR scandal is only a big deal, in that it shows once again that global capital is a thoroughly criminal enterprise. Tinkering will not do – the class that created the system must be disempowered. The $1,000 trillion derivatives casino “is a bomb – a world-threatening monstrosity – that must be dismantled.” LIBOR is merely “a gauge on the console of the bankers’ crime machine.”

Will the Libor Scandal Lead to Prosecutions? Some Hidden History and Current Prospects -- We have a video double header, with both clips addressing the question of what action officials might take as a result of the escalating Libor scandal. First is a segment on Max Keiser with journalist/broadcaster Ian Fraser. His interview starts at 11:45 of this clip and reviews when and why banks started to be treated as above the law in the UK.  Second is a Bloomberg interview with Neil Barofsky, former special inspector general for the TARP, on Geithner’s inaction when he learned of possible Libor gaming and the prospect for indictments in the US (click here if you have trouble getting the segment to load):

Libor Scandal: Old Articles - First, from the NY Times today: New York Fed Was Aware of False Reporting on Rates: The Federal Reserve Bank of New York learned in April 2008, as the financial crisis was brewing, that at least one bank was reporting false interest rates. At the time, a Barclays employee told a New York Fed official that “we know that we’re not posting um, an honest” rate, according to documents released by the regulator on Friday.  From the Financial Times in September 2007: “The Libor rates are a bit of a fiction. The number on the screen doesn’t always match what we see now,” complains the treasurer of one of the largest City banks.  The screen will say one thing but people are actually quoting a different level, if they are quoting at all,” says one senior banker. From the WSJ in April 2008: Bankers Cast Doubt On Key Rate Amid CrisisThe concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans.  From Bloomberg in May 2008: Libor Set for Overhaul as Credibility Is Doubted  "The Libor numbers that banks reported to the BBA were a lie," said Tim Bond, head of global asset allocation at Barclays Capital in London. "They had been all the way along. The BBA has been trying to investigate them and that's why banks have started to report the right numbers."

Libor Cheats: On This Side of the Pond, Who Had the Most to Gain -- Pam Martens - The big money to be made from cheating on Libor was from exchange traded interest rate contracts and over-the-counter interest rate swaps.  According to the Office of the Comptroller of the Currency, as of March 31, 2012, U.S. banks held $183.7 trillion in interest rate contracts.  Just four firms represent 93% of total derivative holdings: JPMorgan Chase, Citibank,  Bank of America and Goldman Sachs.   A criminal investigation by the Canadian Competition Bureau into the rigging of Libor has implicated JPMorgan Bank Canada, Citibank Canada, HSBC Bank Canada, Deutsche Bank AG, and the Royal Bank of Scotland N.V. (RBS).  UBS is cooperating with the probe and providing documents.The Bureau’s demand for production of documents at each of the banks suggest that their derivative traders used emails and instant messaging to communicate artificially high or low bids to the bank’s staff who were submitting rate information for inclusion in the Libor calculations. Instead of a Chinese Wall that is supposed to separate proprietary trading from confidential activities, the proprietary traders appear to be not just privy to the confidential information but generating it.  This is certain to revive debate on the Volcker Rule here in the U.S. – the still unimplemented part of the Dodd-Frank financial reform legislation that would restrict gambling for the house at Wall Street firms.

Libor: They all knew – and no one acted - Regulators on both sides of the Atlantic failed to act on clear warnings that the Libor interest rate was being falsely reported by banks during the financial crisis, it emerged last night. A cache of documents released yesterday by the New York Federal Reserve showed that US officials had evidence from April 2008 that Barclays was knowingly posting false reports about the rate at which it could borrow in order to assuage market concerns about its solvency. An unnamed Barclays employee told a New York Fed analyst, Fabiola Ravazzolo, on 11 April 2008: "So we know that we're not posting, um, an honest Libor." He said Barclays started under-reporting Libor because graphs showing the relatively high rates at which the bank had to borrow attracted "unwanted attention" and the "share price went down". The verbatim note of the call released by the Fed represents the starkest evidence yet that Libor-fiddling was discussed in high regulatory circles years before Barclays' recent £290m fine. The New York Fed said that, immediately after the call, Ms Ravazzolo informed her superiors of the information, who then passed on her concerns to Tim Geithner, who was head of the New York Fed at the time. Mr Geithner investigated and drew up a six-point proposal for ensuring the integrity of Libor which he presented to the British Bankers Association, which is responsible for producing the Libor rate daily. Click HERE to view 'The missed warnings how us authorities demanded changes... and were ignored' graphic

Seven ways to clean up our banking ‘cesspit’ - The Libor scandal has nailed the coffin of the banks’ reputations shut. After a huge financial crisis and a long list of scandals, banks are now viewed as incompetent profiteers run by spivs. Such disgust over what Paul Tucker, deputy governor of the Bank of England, has called a “cesspit” is quite natural. But disgust alone must not shape reform. Here are my seven suggestions of how best to respond. First, accept that misbehaviour is going to happen, particularly where so much money is at stake.  Second, there are ways of lowering the risk of such a scandal being repeated: heavy penalties are one, more transparency another. Data for actual transactions should be used. Transparency is no panacea for the ills of banking. But it would help. Third, banks need far more equity. This, too, is relevant to the Libor scandal. Regulators would have been far less worried about relatively high reported Libor rates in October 2008 if people had not believed the banks were dangerously close to collapse. Fourth, more equity cannot mean 100 per cent equity. Laurence Kotlikoff suggests not what he calls “limited purpose banking”, but the end of banking. IFifth, in setting these equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. Sixth, the case for implementing all the recommendations of the Independent Commission on Banking, of which I was a member, is now even stronger. In particular, it remains vital that banks be easily resolved, in the event of mishap: ringfencing of the retail banks, where continuity of service is essential, should facilitate this. It, including the brutal treatment of unauthorised overdrafts and the misselling of “payment protection insurance”, reflects the absence of sound charging for the costs of providing banking services. Finally, I see no more persuasive a case for full separation of retail from investment banking than before the scandal, provided funding of the latter is separated from the deposit base of the former.

Rate Scandal Stirs Scramble for Damages - As unemployment climbed and tax revenue fell, the city of Baltimore laid off employees and cut services in the midst of the financial crisis. Its leaders now say the city’s troubles were aggravated by bankers’ manipulation of a key interest rate linked to hundreds of millions of dollars the city had borrowed. Baltimore has been leading a battle in Manhattan federal court against the banks that determine the interest rate, the London interbank offered rate, or Libor, which serves as a benchmark for global borrowing and stands at the center of the latest banking scandal. Now cities, states and municipal agencies nationwide, including Massachusetts, Nassau County on Long Island, and California’s public pension system, are looking at whether they suffered similar losses and are weighing legal action. Dozens of lawsuits filed by municipalities, pension funds and hedge funds have been consolidated into a few related cases against more than a dozen banks that are involved in setting Libor each day, including Bank of America, JPMorgan Chase, Deutsche Bank and Barclays. Last month, Barclays admitted to regulators that it tried to manipulate Libor before and during the financial crisis in 2008, and paid $450 million to settle the charges. It said other banks were doing the same, but none of them have been accused of wrongdoing.

Wall Street's latest sucker: Your hometown -- When it comes to Wall Street scandals these days you can pretty much bet who the biggest loser will be: Your hometown.Financial pressures have pushed cities and states to look for ways to save a buck, and into the arms of Wall Street hucksters. The recent Libor fiasco is no different. The banks' alleged manipulation of the key benchmark interest rate may have cost municipalities, hospitals and other large non-profits as much as $600 million a year, according to one expert. Nonetheless, because the Libor fixing mostly resulted in lower rates, a number of commentators have argued that it might have been a "victimless crime." We've heard that about Wall Street's misdeeds before. Remember Abacus, the designed-to-fail Goldman Sachs mortgage bond. Some said Goldman wasn't at fault because it sold the bond to a large German bank that, unlike individual investors, should have understood what it was buying. But the German bank didn't hold onto the doomed investment. It was repackaged into seemingly safe investments that were sold to Cedar Rapids, Iowa and others. Take a closer look and it appears the real losers in the Libor trading case are cities across America. Baltimore is the lead plaintiff in a class action suit against Barclays and a number of other banks that claims the city lost money due to Libor manipulation.

U.S. states look to enter Libor manipulation case (Reuters) - State attorneys general are jumping into the widening scandal over whether banks tried to manipulate benchmark international lending rates, a move that could open a new front against the top global banks. A handful of state attorneys general said they are looking into whether they have jurisdiction over the banks, and are starting preliminary discussions to determine what kind of impact the conduct involving the Libor rate may have had in their states. "Our office is aware of the allegations around the manipulation of the Libor, and we are working with other state agencies to determine whether Massachusetts has suffered any losses as a result," a spokesman for Massachusetts Attorney General Martha Coakley said. A spokesman for Florida Attorney General Pam Bondi said his office is aware of the recent settlement reached by British bank Barclays with U.S. and UK authorities and "will look at the case to the extent that our office might have any jurisdiction in the matter." Libor is used for $550 trillion of interest rate derivatives contracts, as well as influencing rates on mortgages, student loans and credit cards. State banking regulators are also monitoring the issue, according to a spokeswoman for the Conference of State Bank Supervisors.

Libor Scandal Threatening To Turn Companies Off Syndicated Loans - The scandal surrounding the London interbank offered rate is threatening to undermine confidence in syndicated loans and hasten companies’ flight to bonds. “What corporate treasurers are concerned about is the damage this Libor problem will do to market confidence,” said John Grout, the policy and technical director at the Association of Corporate Treasurers in London, which has about 4,500 members. “If people lose trust in banks and Libor, which is indexed to a huge amount of debt and derivatives instruments, market liquidity could be reduced and borrowing costs could rise for corporates.” Corporate loans typically pay interest pegged to Libor or its equivalents in other currencies, and the rate-rigging scandal is spreading uncertainty about whether the benchmarks reflect lenders’ true cost of funding. At least a dozen banks are being investigated for manipulating Libor, prompting Barclays Plc (BARC) Chief Executive Officer Robert Diamond to quit last week after the U.K.’s second-biggest lender was fined a record $451 million. Loans are already on the wane as a funding option for companies in the U.S. and Europe. More stringent capital requirements introduced by regulators to prevent the risky lending practices that exacerbated the financial crisis have made it more expensive for banks to extend loans, and prompted lenders in Europe to pledge more than $1 trillion of balance- sheet cuts.

Here Come The Libor Liability Estimates - Just as we noted here, the analyst estimates for the potential impact of Libor (litigation and regulatory) liabilities have begun. Morgan Stanley sees up to a 17% hit to 2012 EPS (from $420 to $847 million per bank) in a worst case from just regulatory costs, and a further 6.8% potential hit to 2013 EPS if the top-down $400 million average per banks losses from litigation are taken on one year (considerably more if the bottom-up numbers of more than $1 billion are included). They see LIBOR risk in three parts: regulatory fines (we est median 7-12% hit to ‘12 EPS; litigation risk (7% EPS hit over 2 yrs); and less certainty on forward earnings. There are a plethora of assumptions - as one would expect - but the ranges of potential regulatory fine and litigation risk are very large though the MS analysts make the greater point that the LIBOR 'fixing' broadens investor support for more transparency in fixed income trading in addition to fixed income clearing leaving the threat of thinner margins as another investor concern

Banks’ Libor costs may hit $22bn - Twelve global banks that have been publicly linked to the Libor rate-rigging scandal face as much as $22bn in combined regulatory penalties and damages to investors and counterparties, according to Morgan Stanley estimates. The analysis, which the authors admit is “crude”, assumes that 11 more banks will be penalised like Barclays, which paid $456m last month to US and UK authorities for attempting to manipulate the London Interbank Offered Rate, the benchmark for $360tn in derivatives, loans and mortgages. The calculation excludes the potential fallout from ongoing US and European Union cartel investigations, which could result in multibillion-dollar fines. Joaquín Almunia, the EU’s competition enforcer, will on Friday say the year-old EU cartel probes into interest rate derivatives linked to Libor and two similar rates known as Euribor and Tibor are one of his “top priorities”. Mr Almunia will say that the “shocking” Libor scandal represents some of the banking sector’s “most irresponsible behaviour of the past”. Should his concerns be confirmed, he wants the punishment to prompt “a change in culture” in a banking sector hitherto largely untouched by cartel enforcement.

Exclusive: Push For Libor Settlement - Leading investors in large international banks are pushing for regulators to agree an industry-wide settlement in the Libor-fixing scandal amid concerns that a drip-feed of fines could prompt a Barclays-style purge of top executives.Major shareholders tell me that they are keen to initiate discussions with financial regulators to highlight their fears that a repetition of events at Barclays could leave some of the world's biggest banks rudderless at a time of profound regulatory change and the ongoing crisis in the Eurozone. It's unclear whether regulators would be responsive to such a request, or whether they even have the means to be, given that the multiple Libor-fixing probes being undertaken involve so many different national regulatory bodies in Europe, the US and Asia.

Follow-On Civil Litigation Emerges as LIBOR Scandal Continues to Unfold - The fallout from the alleged manipulation of LIBOR and other interbank offered rates continues to accumulate. In the wake of Barclays’ record fines, the regulatory investigation continues, and authorities reportedly have also launched criminal investigations. Along with the governmental investigatory and enforcement activity has also come civil litigation activity as well. The latest suit to be filed is an antirust action filed I on July 6, 2012 in the Southern District of New York. The complaint, which can be found here, alleges that Barclays, several Barclays entities, and several other banks, conspired to artificially manipulate the reported European Interbank Offered Rates (“EURIBOR”), which, the complaint alleges is “the baseline interest rate used in the valuation of more than $200 trillion in derivative financial products.” The complaint, which purports to be filed on behalf of a class of persons or entities in the United States who purchased EURIBOR-related financial instruments between January 1, 2005 and December 31, 2009, relies heavily on documents, emails and other materials and information amassed as part of the governmental investigations. The complaint alleges that the defendants entered an agreement in restraint of trade, in violation of Section 1 of the Sherman Act. The complaint also alleges violation of the Commodity Exchange Act. The plaintiff’s lawyers’ July 6, 2012 press release about the EURIBOR antitrust suit can be found here. Allison Frankel has a thorough overview of the Euribor antitrust lawsuit in a July 9, 2012 post on her On the Case blog (here).

Corporations Dodge LIBOR Scandal Bullet -- In the wake of the ongoing LIBOR scandal, corporations looking to fruitfully sue Barclays or any other bank on the basis of ill-gotten gain may find it hard to make a convincing case. In the words of a knowledgeable treasury expert who spoke on condition of anonymity, “We have struggled to find who the net losers are, apart from the banks themselves, and maybe some hedge funds.” For the following reasons, it is difficult to see how corporates could have suffered as a result.

  • • LIBOR is not used for wholesale deposit rates: the rate paid is negotiated directly with the bank or through a broker. The rate the bank agrees to will be a blended rate, taking into account several factors of which LIBOR may be just one. Any mispricing of LIBOR could not have had anything but a very negligible impact, if any, on the agreed deposit rate.
  • • Commercial-property mortgages tied to LIBOR would have been cheaper, not more expensive, as a result of the manipulation.
  • • Corporates that issued fixed-rate bonds and then swapped back into floating rates would have received “fixed” and paid “LIBOR,” which has been understated: again, that is to the benefit of the corporate.

So How Much Did the Banksters Make on Libor-Related Ill-Gotten Gains? - Yves Smith  -- Commentators and analysts have been starting to estimate what the costs to banks for their Libor manipulation might be. We’ve pointed to an estimate by the Economist that says the damages for municipal/transit authority swaps due to Libor suppression (during the crisis and afterwards) could be as high as $40 billion. Cut that down by 75% and you still have a pretty hefty number. Other observers (CFO Magazine) have argued that the losers were mainly other banks, and since banks are pretty much certain not to sue each other, the implication is the consternation is overdone. But these markets were so huge ($564 trillion was the 2011 trading volume in one contract, the CME Eurodollar contract, which uses dollar Libor as its reference rate) that even a little leakage to end customers still adds up to a lot of exposure. FT Alphaville has posted a new effort to pencil out the cost to the banks, prepared by Morgan Stanley. It focuses only on Libor suppression, that is, the lowballing of Libor during the crisis and afterwards. As the analysis points out, while the Barclays settlement discussed manipulation only from 2005 to 2009, a suit by Charles Schwab alleges the suppression continued through 2011. The assumption is that that is where the bigger damages lie; the banks were apparently all leaning in the same direction while in the earlier periods, the belief, based on the Barclays-related revelations, is that the banks would sometimes try to push rates up as well as down, and the impact at any one time may also have been less in total (we need to stress that that is an assumption, and given that industry participants also say the Libor manipulation goes back much further than 2005, it is probably more accurate to say that the forensics on the earlier period are more difficult, and we just don’t know yet how big the impact was over that time frame).

The Libor Scandal's Consumer Upside - Let’s say that you have an adjustable-rate mortgage. Your interest rate changes as a given index rate changes. That index rate very well could be Libor. When the rate goes up, your interest payments go up. When the rate goes down, your interest payments go down. In a $450 million settlement with authorities in Britain and the United States, Barclays has admitted that it manipulated Libor. During the financial crisis, it lowballed its estimated borrowing costs to make the bank look healthier. At other times, it submitted a false rate to help traders – both in-house and in other firms – make some money on a financial bet.  There’s a lot of speculation that traders in other big banks will come forward and admit that they were doing the same thing, and that some regulators might even have been in on it. So what does it mean for you? Well, when Barclays artificially suppressed the Libor rate, it would have resulted in cheaper loans for consumers. When the rate was artificially inflated, it would have resulted in more expensive loans for people on the street. It seems that they were doing the former more than the latter – so the consumer very well might have a big thank-you to write those European traders, for the lost basis points, if not for the erosion of trust in the banking system and illegal collusion to undermine a foundation of global finance.

Another MF Global? Customer Accounts Frozen at Futures Broker PFGBest (Updated) -- Yves Smith - Another blow to what credibility is left in the futures brokerage business in the US may have come in the form of the failure of midsized commodities and foreign exchange broker PFGBest, which claimed to have roughly $400 million in customer assets. Although details are sketchy, the firm was may have been falsifying bank records; the founder of the firm tried but failed to kill himself. Customer accounts were put on hold today and the firm is being liquidated. Per the Wall Street Journal: "What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBest is not authorized to release any funds,” said PFGBest in its statement… The NFA said it has taken “Member Responsibility Action to protect customers because PFG has failed to demonstrate that it meets capital requirements and segregated funds requirements.” The group also said it “has reason to believe” the firm doesn’t have enough assets to meet obligations to customers. Update 11:00 PM: Per the statement of the National Futures Association, it looks like half the customers’ money, or roughly $200 million of $400 million, has gone missing:

Hundreds of Millions in Client Funds Go Missing At Another Commodities Firm - One would have thought that after $1.6 billion of customer funds went missing at MF Global, the large commodities firm run by former U.S. Senator and Governor from New Jersey, Jon Corzine, that the Commodity Futures Trading Commission would have verified bank balances at every futures merchant it regulates.  It didn’t. In an enforcement action announced yesterday, the National Futures Association (NFA) said that accounts have been frozen, except for liquidating positions, at Peregrine Financial Group, Inc. (PFG) and Peregrine Asset Management.  According to the NFA, PFG was reporting $400 million in segregated funds for customers and a bank balance of $225 million. (The difference would have conceivably been margin balances.) The actual bank funds that can now be accounted for are $5 million.  According to the NFA, the dramatic overstatement of bank balances dates back to at least 2010.  According to media reports, the firm’s founder and CEO, Russell R. Wasendorf, Sr., attempted suicide and is in the hospital. The firm operates PFGBest, whose web site bills itself as “one of the largest non-clearing U.S. Futures Commission Merchants, with customers, affiliates and brokerage offices in more than 80 countries.”

Another Fallen Financial Firm, More Broken Bonds of Trust - A deeply troubling message for America is unfolding around Russell Wasendorf, Sr., owner of Peregrine Financial Group, who lies in a coma in an Iowa City hospital after an attempted suicide with a hose attached to the exhaust pipe of his car outside the corporate monument he built to his wealth and success.  A monument he sustained with money stolen from his clients. According to regulators, Wasendorf’s commodities and futures firm is missing at least $200 million of customer funds. The troubling message is this: from Bernie Madoff’s cell in North Carolina, to $1.6 billion of missing customers’ funds at MF Global, overseen by a former U.S. Senator and Governor of New Jersey, Jon Corzine, to the news last week that some of the largest banks in the world had created a culture where their traders felt free to email and instant message instructions to cheat and rig one of the most important interest rate benchmarks in the world – we may be moving from the lost decade to the lost generation.  Exactly whom are today’s young people to look up to in the business world if everything is an illusion that eventually comes crashing down.

At Peregrine Financial, Signs of Trouble Seemingly Missed for Years - Today, the only impressive thing about Peregrine is the depth of its problems. After a suicide attempt by its founder on Monday, regulators discovered about $215 million in customer money was missing. The Commodity Futures Trading Commission filed a lawsuit charging fraud. Criminal authorities are investigating. Peregrine has filed for bankruptcy and shut down. As the founder Russell Wasendorf lies in critical condition in an Iowa City hospital, Peregrine’s angry customers are asking, How could futures industry regulators have missed another potential fraud? The scandal comes just months after MF Global, the defunct futures brokerage firm, lost more than $1 billion in clients’ money. It now appears that regulators missed the red flags for years. In 2004, a Peregrine client sent a letter to the National Futures Association, the firm’s primary regulator, and the C.F.T.C., asking it to intervene to prevent the firm from misusing its customers’ money, according to a person with knowledge of the correspondence and a copy of the letter obtained by The New York Times. Five years later, a tipster wrote to the N.F.A. asking it to review Peregrine’s bank account information for accuracy, according to people briefed on the matter who spoke on the condition of anonymity because the investigation was private.

CEO Of Collapsed Future Brokerage’s Suicide Note: ‘I Embezzled Millions Of Dollars From Customer Accounts’ - The AP reports Russell Wasendorf Sr., the CEO of collapsed futures brokerage Peregrine Financial Group, has been arrested by the FBI. He's been charged with making false statements to regulators. Bloomberg is reporting that prosecutors are saying the fraud began 20 years ago.Attain Cappital, which has been at the forefront of speaking on behalf of an outraged brokerage community, has a copy of the complaint.It quotes from the suicide note found in Wasendorf's car."I have been able to embezzle millions of dollars from customer accounts," the complaint quotes Wasendorf as writing."I had no access to additional capital and I was forced into a difficult position: Should I go out of business or cheat?"

As 'Statute of Limitations' Approaches, Wall Street Crimes of 2008 Go Unpunished - The US Securities and Exchange Commission is quickly running out of time to file charges against financial firms and high-level executives involved in fraud and other crimes leading up to the 2008 financial crisis. Federal laws require the SEC to file official charges within five years of the alleged crimes due to a statute of limitations. Officials at SEC, according to the Wall Street Journal, are now scrambling to file lawsuits before the five-year time limit runs out. The failure of the SEC to file charges and allow these crimes to go unchallenged "feeds the public sense of cynicism," Arthur Wilmarth, a law professor at George Washington University and consultant to the Financial Crisis Inquiry Commission, told the Journal.

As Evidence Mounts, DC Insiders Worry About Holder's Inaction on Wall Street Crime - More and more Washington insiders are asking a question that was considered off-limits in the nation's capital just a few months ago: Who, exactly, is Attorney General Eric Holder representing? As scandal after scandal erupts on Wall Street, involving everything from global lending manipulation to cocaine and prostitution, more and more people are worrying about Holder's seeming inaction -- or worse -- in the face of mounting evidence.  Confidential sources say that the President's much-touted Mortgage Fraud Task Force is being starved for vital resources by the Holder Justice Department. Political insiders are fearful that this obstruction will threaten Democrats' chances at the polls. Investigators and prosecutors from other agencies are expressing their frustration as the ever-rowing list of documented crimes by individual Wall Street bankers continues to be ignored. Meanwhile the scandals and revelations go on. The new LIBOR rate-fixing scandal led the bank-friendly and conservative magazine The Economist to run a cover about "Banksters" and to publish a piece entitled "The rotten heart of finance." But there have already been stories -- lots of stories, terrible ones -- about corruption, bribery, perjury, forgery and a dozen different kinds of fraud. There have been stories about laundering money for the Mexican drug cartels, including a new lead that surfaced this week. There's already ample evidence that Wall Street bankers have defrauded cities, deceived investors and cheated their own clients. A growing number of people are privately expressing concern at the Justice Department's long-standing pattern of inactivity, obfuscation and obstruction. Mr. Holder's past as a highly-paid lawyer for a top Wall Street firm, Covington and Burling, is being discussed more openly among insiders. Covington & Burling was the law firm which devised the MERS shell corporation that has since been implicated in many cases of mortgage and foreclosure fraud.

Shake-Up at New York Fed Is Said to Cloud View of JPMorgan’s Risk -- After the financial crisis, regulators vowed to overhaul supervision of the nation’s largest banks. As part of that effort, the Federal Reserve Bank of New York in mid-2011 replaced virtually all of its roughly 40 examiners at JPMorgan Chase to bolster the team’s expertise and prevent regulators from forming cozy ties with executives, according to several current and former government officials who spoke on the condition of anonymity. But those changes left the New York Fed’s front-line examiners without deep knowledge of JPMorgan’s operations for a brief yet critical time, said those people, who spoke on the condition of anonymity because there is a federal investigation of the bank.Forced to play catch-up, the examiners struggled to understand the inner workings of a powerful investment unit, those officials said. At first, the examiners sought basic information about the group, including the name of the unit’s core trading portfolio. By the time they got up to speed, it was too late. In May, JPMorgan disclosed a multibillion-dollar trading loss in the investment unit. They “couldn’t ask tough questions,” said a former official who was based at JPMorgan.

Claw Is Out for ‘Whale’ Officials -- J.P. Morgan Chase plans to reclaim millions of dollars in stock from executives at the center of the trading blunder that shocked Wall Street and tarnished the reputation of Chief Executive James Dimon. The nation's biggest bank is expected to claw back compensation from individuals including Ina Drew, who ran the company's Chief Investment Office, or CIO, according to people familiar with the bank's plans. Ms. Drew was a top lieutenant of Mr. Dimon's before she resigned this spring following the disclosure of the trading losses. The bank could disclose the plans as early as Friday when it announces earnings, these people said. The clawback amounts were still being determined this week because of the complicated formulas and conditions for imposition, according to one person familiar with the situation. J.P. Morgan's plan is the most prominent instance of a major U.S. bank seeking to recover pay from a high-ranking executive since the financial crisis. Other members of the CIO, including Bruno Iksil, the London-based trader known as the "London whale" for his outsize bets on certain corporate credit indexes, and his bosses Achilles Macris and Javier Martin-Artajo also are expected to face clawbacks, the people said.

JPMorgan traders may have hidden derivatives losses (Reuters) - JPMorgan Chase said its traders may have deliberately hidden losses that have since climbed to $5.8 billion for the year, in a development that may result in criminal charges against traders at the bank. The bank's Chief Investment Office made big bets now known as "the London Whale trades" on corporate debt using derivatives. JPMorgan said in the worst-case scenario those trades will lose another $1.7 billion, and it has fixed the problems in the CIO's office. Even with the bank's trading losses, it earned nearly $5 billion overall in the second quarter, thanks to strong performance in areas like mortgage lending. But JPMorgan's disclosure that CIO traders may have lied about their positions could bring even more intense regulatory scrutiny to the bank, analysts said. It is already under investigation by agencies ranging from the FBI to the UK's Financial Services Authority.

JP Morgan: The clawback narratives - Two weeks ago, Bloomberg’s Dawn Kopecki reported that Ina Drew would be allowed to keep all of the money she was paid over the past two years — more than $20 million in all. Today, Kopecki’s headline is very different: “JPMorgan’s Drew Forfeits 2 Years’ Pay as Managers Ousted”. What happened in the interim? There are three possibilities, as I see it, all of which can overlap: The first is the official story: that Drew unilaterally approached Dimon, offering to return two years’ pay. This is actually entirely consistent with everything I’ve read about Drew’s conscientiousness and professionalism, and although returning $20 million surely hurts, Drew isn’t exactly impoverishing herself by doing so: Kopecki estimates that she retired with about $57.5 million in stock, pension and other pay. The second possibility is that Drew was always going to give back her pay, and that Kopecki’s initial story was simply wrong. There was no JP Morgan source for that story, which was based on the idea that if Drew was subject to any kind of clawback, that would have been reflected in an SEC filing; Kopecki had no JP Morgan source for her article, and JP Morgan had no particular reason to scoop itself with a formal denial, if it had long planned to announce the clawback today.Finally, there’s the other bit of new news today: the way that JP Morgan has started pointing fingers at its now-departed traders:

JPMorgan: Top Execs in Bad Trade Dismissed - JPMorgan Chase says top managers tied to its highly publicized trading blunder have been dismissed without severance pay. The bank says it’s taking back two years’ pay from those officials. The bank is discussing the trading loss with Wall Street analysts. It says the loss from the trade in the most recent quarter was $4.4 billion. The bank’s original estimate was $2 billion. JPMorgan also says it has discovered information that “raises questions about the integrity” of values placed on certain trades. CEO Jamie Dimon says: “We’re not making light of this error, but we do think it’s an isolated event.” JPMorgan Chase says its surprise trading loss grew to $4.4 billion. The bank’s original estimate was $2 billion. The bank made the announcement Friday as it reported its quarterly earnings. CEO Jamie Dimon says the bank has “significantly reduced” the risk involved in the trade.

New Fraud Inquiry as JPMorgan’s Loss Mounts - JPMorgan Chase disclosed on Friday that losses on its botched credit bet could climb to more than $7 billion and that the bank’s traders may have intentionally tried to obscure the full extent of the red ink on the disastrous trades. Mounting concerns about valuing the trades led the company to announce that its earnings for the first quarter were no longer reliable and would be restated. Federal regulators, who were already examining the trades, are now looking at whether employees of the nation’s biggest bank by assets intended to defraud investors, according to people with knowledge of the matter. The revelations left Jamie Dimon, the bank’s chief executive, scrambling for the second time within two months to contain the fallout from the trading debacle. It has already claimed one of his most trusted lieutenants, compelled Mr. Dimon to appear before Congress to account for the blunder and prompted the bank to claw back millions in compensation from three traders in London at the heart of the losses. A top bank official said that the board could also seize pay from Mr. Dimon, but did not indicate that it would do so.

JPMorgan refuses to hand over emails in energy manipulation case (Reuters) - JPMorgan Chase & Co reasserted attorney-client privilege as the reason it will not hand over emails to U.S. regulators investigating the bank for possible electricity market manipulation, according to court documents filed on Friday. The investigation by the Federal Energy Regulatory Commission follows complaints from grid operators that JPMorgan traders may have bid up electricity prices by some $73 million in California and the Midwest. The federal energy market regulator issued two subpoenas, one in April and one in May, ordering the bank to produce 25 emails or give a reason why it should not by 5 p.m. EDT (2100 GMT) on Friday. "The investigation remains in the fact finding stage and FERC has made no determination that Respondent engaged in misconduct," lawyers representing the bank stated in the 23-page memo. The FERC is expected to file a reply by noon EDT on Tuesday. Tom Olson, the lead FERC investigator, declined to comment. A spokeswoman for JPMorgan said the bank had no further comment beyond the filing.

Profiting From Market Failure: How Today’s Capitalists Bring Bad Things to Life - Capitalists can pick between two responses to markets that are failing. They can bet their capital on fixing them – on bringing more good things to life. Or, they can do everything possible to extract more and more profit by extending, expanding and exacerbating the failures.  Capitalist myth-makers claim the first response prevails. This is the core of the “God’s work” that Goldman Sachs CEO Lloyd Blankfein claims to do at his bank. The Blankfeins of our economy pretend there are many more Joe Wilsons than health insurance executives.  The facts tell a different story. Profiting from market failures instead of expanding good things dominates the healthcare industry: Big Pharma, managed care and health insurance. And the same destructive activities dominate the housing market. For a decade at least, capitalists have siphoned off enormous wealth from deep and broad failures. Before the financial crash, two dramatically different types of lenders were competing in America’s housing markets. The first type of lender — the subprime group — offered bad products that caused borrowers to become delinquent and foreclosure rates to skyrocket. The second type of lender — America’s nonprofit housing enterprises — offered decent products that led to limited delinquencies and foreclosures. But investors in the second group were running against the tide of American capitalism.

Quarter Of Wall Street Executives See Wrongdoing As Key To Success: Survey - If the ancient Greek philosopher Diogenes were to go out with his lantern in search of an honest many today, a survey of Wall Street executives on workplace conduct suggests he might have to look elsewhere. A quarter of Wall Street executives see wrongdoing as a key to success, according to a survey by whistleblower law firm Labaton Sucharow released on Tuesday. In a survey of 500 senior executives in the United States and the UK, 26 percent of respondents said they had observed or had firsthand knowledge of wrongdoing in the workplace, while 24 percent said they believed financial services professionals may need to engage in unethical or illegal conduct to be successful. Sixteen percent of respondents said they would commit insider trading if they could get away with it, according to Labaton Sucharow. And 30 percent said their compensation plans created pressure to compromise ethical standards or violate the law. "When misconduct is common and accepted by financial services professionals, the integrity of our entire financial system is at risk," 

Why is Wall Street full of psychopaths? - What are the symptoms of Wall Street psychopaths?   They "generally lack empathy and interest in what other people feel or think," writes DeCovny, who bases her report on interviews with several trade psychologists. Financial psychopaths are capable of displaying "an abundance of charm, charisma, [and] intelligence," but also possess an "unparalleled capacity for lying, fabrication, and manipulation."How does it affect their work? In extreme cases, financial psychopaths become compulsive gamblers, driven by "the chemical rush of serotonin and endorphins" that accompanies gambling, writes Alexander Eichler at The Huffington Post. Of course, "an appetite for risk can seem like a positive business trait on Wall Street, where big gambles sometimes lead to big rewards." But when bets go bad, psychopaths "dig themselves into a deeper hole and deny any wrongdoing or failure," DeCovny says. Financial psychopaths lie to others — and themselves — about the extent of their problem, and "commit forgery, fraud, theft, and embezzlement to support their habit."Why are there so many psychopaths on Wall Street?  In some cases, people with psychopathic personalities seek out jobs in the financial industry, where charisma, confidence, risk-taking, and a singular focus on self-interest are often rewarded. But some Wall Street workers also develop these traits because of the job and its attendant pressures. DeCovny says compulsive gambling, for example, is "often latent — neither they nor anyone else knows they have this propensity."

Payday Loans and the Tribal Sovereignty Model - Think about what happens when you pit tribal sovereign immunity against effective consumer protection laws. In my view, no one wins. Yet payday lenders are now very actively seeking tribes with whom to partner, in order to get the benefits of tribal sovereign immunity.  As one might expect, the payday lenders make out big and in most cases, the tribes get very little, at least so far.  Many news reports have come out describing these new relationships, and today another caught my eye, this time in The Fresno Bee. The article mentions how three tribes and their loan business partners were sued by the Federal Trade Commission after consumers complained about their business practices. This Fresno article also mentions a new payday loan trade association called Native American Financial Services Association, which caters to these new alliances.Before you jump to conclusions about the legitimacy of all this, realize that it is complicated.  Tribal self- determination is critical to a just society, since justice never flows from oppression. Consumer protection is also important to a just society.  Read more about this conflict in my and Josh Schwartz’s article, The Alliance Between Payday Lenders and Tribes: Are Both Tribal Sovereignty and Consumer Protection at Risk?

What is a bank loan? - When a bank makes a loan, does it create money “from thin air“? Are banks merely intermediaries, where “if people are borrowing, other people must be lending“? Let’s just understand what a bank loan is, in terms of real resources and risk. Suppose I go to my local bank and ask for a loan. The bank says yes, and suddenly there is “money in my account” where there was not before. Am I now a “borrower” and the bank a “creditor”? No. Not at all. The transaction that has occurred is fully symmetrical. It is as accurate to say that the bank is in my debt as it is is to say that I am in debt to the bank. The most important thing one must understand about banking is that “money in the bank” also known as “deposits” are nothing more or less than bank IOUs. When a bank “makes a loan”, all it does is issue some IOUs to a borrower. The borrower, for her part, issues some IOUs to the bank, a promise to repay the loan. A “bank loan” is simply a liability swap: I promise something to you, you promise something of equal value to me. Neither party is in any meaningful sense a creditor or a borrower when a loan is initiated. Now suppose that after accepting a loan, I “make a purchase” from someone who happens to hold an account at my bank. That person supplies to me some real good or service. In exchange, I transfer to her my “deposits”, my IOUs from the bank. Suddenly, it is meaningful to talk about creditors and debtors. I am surely in somebody’s debt: someone has transferred a real resource to me, and I have done nothing for anyone but mess around with financial accounts. Conversely, the seller is surely a creditor: they have supplied a real service and are owed some real service in exchange.

Visa, MasterCard, banks in $7.25 billion retail settlement- Visa Inc, MasterCard Inc and banks that issue their credit cards have agreed to a $7.25 billion settlement with U.S. retailers in a lawsuit over the fixing of credit and debit card fees in what could be the largest antitrust settlement in U.S. history. The settlement, if approved by a judge, would resolve dozens of lawsuits filed by retailers in 2005. The card companies and banks would also allow stores to start charging customers extra for using certain credit cards in an effort to steer them toward cheaper forms of payment. The settlement papers were filed on Friday in Brooklyn federal court. Swipe fees - charges to cover processing credit and debit payments - are set by the card companies and deducted from the transaction by the banks that issue the cards, essentially passing on the cost to merchants, the lawsuits said. The proposed settlement involves a payment to a class of stores of $6 billion from Visa, MasterCard and more than a dozen of the country's largest banks who issue the companies' cards. The card companies have also agreed to reduce swipe fees by the equivalent of 10 basis points for eight months for a total consideration to stores valued at about $1.2 billion, according to lawyers for the plaintiffs.

Appeals Court Calls Bank’s Security “Commercially Unreasonable”  - The United States Court of Appeals on Tuesday reversed a lower court’s decision, ruling that  the IT security system used by a domestic bank was not “commercially reasonable” to protect its customers.  The ruling (PDF), in the case of People’s United Bank (formerly Ocean Bank of Maine) versus Patco Construction Company could have broad implications in the U.S., where businesses that are the victim of account takeovers and fraudulent transactions are suing banks to recover lost funds.  The case against People's United Bank stems from six allegedly fraudulent transactions that occurred over the period of a week in May, 2009 and drained close to $589,000 dollars from Patco's accounts. Patco alleged that People’s United Bank’s did an inadequate job of protecting them against fraud.

Location, location, location: ATM Fee Disclosure Edition - The number one agenda item for small banks is to repeal the physical, on-machine disclosure requirement for ATMs.  Yes, I'm serious, that, that is the top agenda item for small banks. And they wonder why they're not doing so well... Still, it's worth understanding why they're focused on this issue.  The Electronic Funds Transfer Act requires disclosure of ATM fees both physically on the machine, as well as on the screen. Failure to do so subjects the financial institution to liability, including actual damages (close to zero), statutory damages (up to $1000/violation but with a class action cap) and attorneys fees. As it happens a cottage industry has emerged bringing strike suits over missing ATM signs (query how signs just fall off ATMs...). I've blogged a bit about it here.  This weekend I saw an ATM that shows why merely requiring physical disclosure doesn't accomplish much--the disclosures were perhaps a foot off the ground and the ATM was in a space where kneeling was impractical (unless you want to get hit on the head with a door). I'm not sure if that was the fee disclosure (which must be in a "prominent and conspicuous location") or some other disclosure, but it's pretty useless for anyone who isn't crawling.  Check it out after the break.

Unofficial Problem Bank list declines to 913 Institutions - Note: The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public. (CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.) As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest. So this is an unofficial list of Problem Banks compiled only from public sources. (And only US banks). Here is the unofficial problem bank list for July 6, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808:  Changes to the Unofficial Problem Bank List this week were limited to four removals. Afterward, the list holds 913 institutions with assets of $353.4 billion. A year ago, the list hit its high at 1,004 institutions with assets of $418.8 billion.

Housing Groups Point to Justice Department as Stonewalling Investigations into Banks - A coalition of housing advocates that supported the state/federal investigation into securitization abuses that accompanied the foreclosure fraud settlement has turned against it sharply, charging the Justice Department with stonewalling the investigation and denying it critical resources that could move prosecutions against leading banks for their role in the housing crash and subsequent economic crisis. The coalition, including Campaign for a Fair Settlement, the New Bottom Line, and members of the Campaign for America’s Future, have been frustrated with the agonizingly slow pace of the investigations into the Residential Mortgage Backed Securities (RMBS) working group for some time. But the focus on DoJ, and Eric Holder in particular, is new, and frankly a bit implausible. It was fairly clear to some of us when the RMBS working group was announced inside a revived financial fraud enforcement task force that it would be a repository for existing investigations that could be re-branded as “going after the banks” in an election year. Indeed, masaccio has found the task force taking credit for investigations having nothing to do with securitization abuses. So the slow-walking of investigations should really come as no surprise: “task force” is what people in Washington create when they don’t want to do anything about a particular issue. Delaying the investigations also serves the purpose of allowing statutes of limitations to run out on various financial frauds

Justice Department Details Higher Rates Charged to Minority Borrowers : At least 34,000 African-American, Hispanic and other minority borrowers paid more for their mortgages or were steered into subprime loans when they could have qualified for better rates, according to the Department of Justice. The DOJ settled a fair-lending lawsuit with Wells Fargo, the nation’s largest mortgage lender, on Thursday. That adds up to real money – and, in some cases, real stress: As a result of being placed in a subprime loan, an African-American or Hispanic borrower… was subject to possible pre-payment penalties, increased risk of credit problems, default, and foreclosure, and the emotional distress that accompanies such economic stress. The complaint also says that between 2004 and 2008, “highly qualified prime retail and wholesale applicants for Wells Fargo residential mortgage loans were more than four times as likely to receive a subprime loan if they were African-American and more than three times as likely if they were Hispanic than if they were white.” During the same period, the complaint says, “borrowers with less favorable credit qualifications were more likely to receive prime loans if they were white than borrowers who were African-American or Hispanic.” Bank of America agreed to pay $335 million in settling similar charges in December.

Wells Fargo Will Settle Mortgage Bias Charges -  Wells Fargo, the nation’s largest home mortgage lender, has agreed to pay at least $175 million to settle accusations that its independent brokers discriminated against black and Hispanic borrowers during the housing boom, the Justice Department announced on Thursday. If approved by a federal judge, it would be the second-largest residential fair-lending settlement in the department’s history. An investigation by the department’s civil rights division found that mortgage brokers working with Wells Fargo had charged higher fees and rates to more than 30,000 minority borrowers across the country than they had to white borrowers who posed the same credit risk, according to a complaint filed on Thursday along with the proposed settlement.  Wells Fargo brokers also steered more than 4,000 minority borrowers into costlier subprime mortgages when white borrowers with similar credit risk profiles had received regular loans, a Justice Department complaint found. The deal covers the subprime bubble years of 2004 to 2009. Wells Fargo admitted no wrongdoing as part of the settlement.

Wells Fargo pays $175 million for racist lending -Top US bank Wells Fargo is to pay $175 million to resolve allegations that it charged African-American and Hispanic borrowers higher fees and interest rates than whites, the Justice Department said Thursday. The bank is accused of engaging “in a pattern or practice of discrimination against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 through 2009.” Customers were also steered toward riskier sub-prime loans, while their white peers received standard loan terms, according to the Justice Department.The San Francisco-based bank denies the claims, according to a statement Wednesday, but said it was settling to avoid litigation. The bank will pay $125 million in compensation to around 4,000 customers who paid higher fees than white borrowers. It will also pay $50 million in direct aid to communities hard hit by the housing crisis.

Libor Investigation Extended to US Mortgages, but What About TALF Loans? -- Yves Smith - A good report by Shahien Nasiripour recounts that the OCC has woken up to what a hot potato the Libor scandal has become, and has identified the mortgages that might (stress might) have been hurt by the rate diddling.To start with, the universe that might have been affected is not that large. Per the Financial Times account: There are at least 900,000 outstanding US home loans indexed to Libor that were originated from 2005 to 2009, the period the key lending gauge may have been rigged, investigators have said. Those mortgages carry an unpaid principal balance of $275bn, according to the Office of the Comptroller of the Currency, a bank regulator…The number of US home loans in the OCC study represents 3 per cent of mortgages originated from 2005 to 2009. As we’ve said before, it is not yet clear whether US mortgage borrowers were affected, since the priorities of the manipulators in the case of Barclays was improving the price of their derivatives positions, and then in the crisis, lowering their Libor posting to help look healthier than they were.

Housing Groups Point to Justice Department as Stonewalling Investigations into Banks - A coalition of housing advocates that supported the state/federal investigation into securitization abuses that accompanied the foreclosure fraud settlement has turned against it sharply, charging the Justice Department with stonewalling the investigation and denying it critical resources that could move prosecutions against leading banks for their role in the housing crash and subsequent economic crisis. The coalition, including Campaign for a Fair Settlement, the New Bottom Line, and members of the Campaign for America’s Future, have been frustrated with the agonizingly slow pace of the investigations into the Residential Mortgage Backed Securities (RMBS) working group for some time. But the focus on DoJ, and Eric Holder in particular, is new, and frankly a bit implausible. It was fairly clear to some of us when the RMBS working group was announced inside a revived financial fraud enforcement task force that it would be a repository for existing investigations that could be re-branded as “going after the banks” in an election year. Indeed, masaccio has found the task force taking credit for investigations having nothing to do with securitization abuses. So the slow-walking of investigations should really come as no surprise: “task force” is what people in Washington create when they don’t want to do anything about a particular issue. Delaying the investigations also serves the purpose of allowing statutes of limitations to run out on various financial frauds

U.S. home foreclosure filings rise - US home foreclosure filings rose in the second quarter for the first time in two years, according to a report released Thursday. During the April-June period, 311,010 properties started the foreclosure process, a 9 percent increase from the previous quarter, said RealtyTrac, a publisher of foreclosure data. The foreclosure starts were up 6 percent compared with the second quarter of 2011, the first annual quarterly rise since the fourth quarter of 2009, RealtyTrac said. In June, foreclosure filings rose annually for the second consecutive month. In the first six months of the year, homes in some stage of the foreclosure process — default notices, auction sale notices and bank repossessions — topped one million, RealtyTrac said. One in 126 homes in the country had at least one foreclosure filing. Nevada had the highest state foreclosure rate: one in 57 homes. Arizona, Georgia, California and Florida rounded out the top five. First-half filings were up two percent from the second half of last year, but they were down 11 percent from the same period a year ago. The report underscored the persistent deep strains in the housing market six years after a price bubble collapsed.

LPS: Mortgages in Foreclosure still near record high, Much higher in Judicial States - LPS released their Mortgage Monitor report for May today. According to LPS, 7.20% of mortgages were delinquent in May, up slightly from 7.12% in April, and down from 7.96% in May 2011.  LPS reports that 4.12% of mortgages were in the foreclosure process, down slightly from 4.14% in April, and up slightly from 4.11% in May 2011.  This gives a total of 11.32% delinquent or in foreclosure. It breaks down as:
• 1,967,000 loans less than 90 days delinquent.
• 1,575,000 loans 90+ days delinquent.
• 2,027,000 loans in foreclosure process.
For a total of 5,569,000 loans delinquent or in foreclosure in May. This is down from 6,350,000 in May 2011. This following graph shows the total delinquent and in-foreclosure rates since 1995.The second graph shows percent of loans in the foreclosure process by process (Judicial vs. non-judicial). From LPS: "Foreclosure inventory in judicial states is 6.5% - more than 2.5X that of non-judicial states (2.46%); national average is 4.14%. ... The third graph shows new problem loan rates continue to decline...This graph shows the percent of loans that are seriously delinquent that were current 6 months ago. There is much more in the Mortgage Monitor report.

May Foreclosure Starts Nearly Triple Sales: LPS - In May, foreclosure starts outnumbered foreclosure sales by a near 3-1 ratio, according to a report from Lender Processing Services (LPS). Even though foreclosure starts and sales saw similar monthly increases in May, 11.6 percent and 10 percent respectively, the actual number of foreclosure starts was significantly higher than foreclosure sales. Foreclosure starts numbered 202,707 while foreclosure sales totaled 73,439. Also, foreclosure inventory maintained historically high levels at 4.14 percent. “ “In judicial states, 6.5 percent of all loans are in some stage of foreclosure – that’s more than 2.5 times the rate in non-judicial states where only 2.5 percent of loans are currently in the foreclosure pipeline. Blecher added both figures are significantly higher than the pre-crisis average of 0.5 percent, but noted the average yearly decline in non-current loans for judicial states is less than one percent compared to 7.1 percent in non-judicial states. Unlike non-judicial states, lenders must receive court approval before initiating a foreclosure. This leads to a longer timeline for when foreclosures actually exit the pipeline. In non-judicial states, foreclosure sales were three times greater than in judicial states, with 6.46 percent of foreclosure inventory making its way out of the foreclosure pipeline in May compared to only 2.14 percent in judicial states. Judicial states also hold a much higher percentage of past due loans that are more than two years old. In judicial states, about 53 percent of loans in foreclosure have been delinquent for more than two year compared to just over 30 percent of loans in non-judicial states. At 7.2 percent, delinquencies in May were up slightly by 1.1 percent, but down almost 12 percent a year ago.

More U.S. Homes Facing Foreclosure Risk in June — Banks are increasingly placing homes with unpaid mortgages on a countdown that could deliver a swell of new foreclosed properties onto the market by early next year, potentially weighing further on home values. June provided the latest evidence of this trend, as the number of U.S. homes entering the foreclosure process for the first time increased on an annual basis for the second month in a row, foreclosure listing firm RealtyTrac Inc. said Thursday. California in particular saw a big spike in foreclosure starts, or homes placed on the foreclosure path for the first time. They increased 18 percent versus June last year, the firm said. The increase in foreclosure starts comes as banks make up for time lost last year as the mortgage-lending industry grappled with allegations that it had processed foreclosures without verifying documents. The nation’s biggest mortgage lenders reached a $25 billion settlement in February with state officials. And that’s cleared the way for banks to address their backlog of unpaid mortgages. Lenders initiated foreclosure on 12 percent of the loans behind in payment in June — the highest level since the first half of 2009, according to Fitch Ratings.

Foreclosures are on the rise again in Las Vegas - After months of steady decline, foreclosure activity picked up last month in Las Vegas. Las Vegas moved from No. 15 to No. 13 on RealtyTrac's list of large metro areas with the highest foreclosure rates. For Las Vegas, the figures released Wednesday showed a reversal in pattern. Before inching back up last month, Las Vegas moved from No. 1 on the foreclosure list in January to No. 7 in April to No. 15 in May. Notices of default, which are the first step in the foreclosure process, jumped in the Las Vegas area from 1,097 in May to 1,352 in June, RealtyTrac said. Total foreclosure filings increased from 3,122 to 3,181. That means one in 264 homes in Las Vegas received a foreclosure notice in June, well above the national rate of one in 666 homes. The overall slowdown in bank takeovers is believed to be responsible for a smaller inventory of homes for sale and a resulting rise in price. The Greater Las Vegas Association of Realtors said this week that the median price of a single-family home was $131,785 in June, up 3 percent from $128,000 in May and up 5.9 percent from one year ago. Nationwide, while overall foreclosure activity fell last month based on year-over-year rates, foreclosure starts increased from May, according to RealtyTrac. National notices of default rose from 22,622 in May to 25,824 in June. Still, those numbers remained well off the pace of June 2011, when 30,202 notices were issued nationwide.

When Foreclosure Supplies Fall, the Bottom Falls Out of Housing - Growing activity in the spring housing market brought new growth in home prices, but those gains are growing ever more precarious because they are dependent on low-priced, distressed properties. While foreclosures brought home prices down initially, they are now driving them up because there is so much demand from investors and first time buyers, looking for bargains. Supplies of these cheap homes are also dwindling, because banks are still working to modify many troubled loans, and states that require a judge in the foreclosure process are still facing a huge backlog. This new lack of distressed supply may lead to what housing analyst Mark Hanson calls, “an investor gut check.” He sees early results that sales volume in many of the markets that were deemed to be “recovering” are actually falling. “First is the artificial lack of distressed supply, which is the market in all of the miracle 'recovery' regions. As I have pounded the table over for years ... 'investors and first timers are thin and volatile cohorts that have been known to up and leave markets in a matter of a month or two leading to a demand collapse'. But equally responsible are Zombie Homeowners; those without enough equity to pay a Realtor 6 percent and put 20 percent down on a new house and/or good enough credit or strong enough income to secure a new mortgage loan,” writes Hanson.

Lawler: Preliminary Table of Short Sales and Foreclosures for Selected Cities in June - Yesterday I posted some distressed sales data for Sacramento. I'm following the Sacramento market to see the change in mix over time (short sales, foreclosure, conventional).  Economist Tom Lawler has been digging up similar data, and he sent me the following table yesterday for several more distressed areas (I added Sacramento). For all of these areas the share of distressed sales is down from June 2011 - and for the areas that break out short sales, the share of short sales has increased (Mid-Atlantic only increased slightly) and the share of foreclosure sales are down - and down significantly. Previous comments from Lawler:Note that the distressed sales shares in the below table are based on MLS data, and often based on certain “fields” or comments in the MLS files, and some have questioned the accuracy of the data. Some MLS/associations only report on overall “distressed” sales. The most striking shift from a year ago, of course, is the sharp drop in the foreclosure share of home sales ... CR Note: So far there is no evidence of an increase in distressed sales this summer following the mortgage settlement.

Foreclosure Report: California "Homebuyers should brace themselves for significantly less inventory next year" - Two foreclosure reports: one national predicting an increase in distressed sales; the other regional (west) predicting less foreclosure inventory.  RealtyTrac released their midyear foreclosure report this morning: 1 Million Properties With Foreclosure Filings in First Half of 2012 Overall foreclosure activity was down in the second quarter, driven primarily by a drop in bank repossessions (REOs), but 311,010 properties started the foreclosure process during the quarter, a 9 percent increase from the previous quarter and a 6 percent increase from the second quarter of 2011 — the first year-over-year increase in quarterly foreclosure starts since the fourth quarter of 2009.A total of 31 states posted year-over-year increases in foreclosure starts in the second quarter — 17 judicial foreclosure states and 14 non-judicial foreclosure states. And from Foreclosure Radar (just a few states): Foreclosure Inventory Continues To Decline June 2012 Foreclosure Sales were significantly down in the three largest foreclosure states in our coverage area. California Foreclosure Sales were down 13.4 percent over last month, and down 48.8 percent vs. June 2011. Arizona Foreclosure Sales were down 18.5 percent over last month, and down 42.1 percent vs. June 2011. Nevada Foreclosure Sales were down 14.6 percent over last month, and down 72.1 percent vs. June 2011 driven by the new regulation that took effect in October 2011.... with the declining level of Foreclosure Sales the inventory will continue to decrease. In California, banks take on average 272 days to resell properties they take back at auction, thus, Realtors, investors, and homebuyers should brace themselves for significantly less inventory in next years' selling season

RealtyTrac, CoreLogic Confirm Housing Bear Thesis: 85-90% of REO Being Held Off Market, Meaning “Tight” Inventories Are Bogus - - Yves Smith  - We’ve been mystified with the housing bull argument that things really are getting better. While real estate is always and ever local, and some markets may indeed be on the upswing, there are ample reasons to doubt the idea that an overall housing recovery is in. For instance, the recent FHFA inspector general report stated: Further, general distress in the housing sector will likely continue to result in elevated REO inventories. For example, the Enterprises’ financial data indicate that, as of the end of 2011, more than 1.1 million mortgages held or guaranteed by the Enterprises were “seriously delinquent,” i.e., were 90 or more days past due. At that time, the volume of seriously delinquent mortgages was more than six times the size of the Enterprises’ REO inventories.  We finally have some official confirmation of our thesis. From AOL’s Real Estate blog, “‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest“: As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole. Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said. Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10 percent of all REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration. As of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.

CoreLogic: Negative Equity Decreases in Q1 2012 - This graph shows the break down of negative equity by state. Note: Data not available for some states. From CoreLogic:  "Nevada had the highest negative equity percentage with 61 percent of all mortgaged properties underwater, followed by Florida (45 percent), Arizona (43 percent), Georgia (37 percent) and Michigan (35 percent). These top five states combined have an average negative equity share of 44.5 percent, while the remaining states have a combined average negative equity share of 15.9 percent. The second graph shows the historical negative equity share using the new CoreLogic methodology. More from CoreLogic: "As of Q1 2012, there were 1.9 million borrowers who were only 5 percent underwater. If home prices continue increasing over the next year, these borrowers could move out of a negative equity position."This graph shows the break down of negative equity by state. From CoreLogic: "Nevada had the highest negative equity percentage with 61 percent of all mortgaged properties underwater, followed by Florida (45 percent), Arizona (43 percent), Georgia (37 percent) and Michigan (35 percent). These top five states combined have an average negative equity share of 44.5 percent, while the remaining states have a combined average negative equity share of 15.9 percent." The second graph shows the historical negative equity share using the new CoreLogic methodology. More from CoreLogic: "As of Q1 2012, there were 1.9 million borrowers who were only 5 percent underwater. If home prices continue increasing over the next year, these borrowers could move out of a negative equity position."

FHA's mortgage delinquencies soar - The mortgage market appears to finally be stabilizing -- as long as you ignore loans backed by the Federal Housing Administration.  Increasingly, FHA-insured loans are falling into foreclosure or serious delinquency, moving in the opposite direction of loans guaranteed by Fannie Mae and Freddie Mac or those held by banks, which are all showing signs of improvement. And taxpayers could ultimately be on the hook for FHA's growing number of troubled mortgages. The agency's finances are already on shaky ground, and additional losses from loans going sour could prompt the need for a federal bailout, experts said. "We can't escape this one,"  "This is an arm of the U.S. government." The share of government-guaranteed loans, a majority of which are backed by FHA, that were 90 days or more delinquent soared nearly 27% during the year ending March 31. Foreclosures jumped nearly 17%, according to a report published recently by federal regulators.

FHA mortgage delinquencies skyrocket more than 25% - The FHA has been the lender of last resort throughout the housing bubble crash. They insured loans which didn’t properly price in risk during a declining market. No private lender would have made such loans, particularly as the super-low interest rates engineered by the federal reserve. The FHA has tried to raise its cost of money to cover the risk by increasing the insurance fees which drives up the effective interest rate, but their onerous fees have fallen short of covering the upcoming losses.In the FHA’s defense, the loans they underwrote were of high quality, and although they reached pretty low for FICO scores, the documentation and underwriting was sufficient to protect the taxpayer from unqualified borrowers. What the FHA couldn’t protect the taxpayer from is the losses associated with falling prices.The problem isn’t that FHA borrowers are subprime borrowers, although some are sprinkled into the mix. The real problem is that prices went down, and the only viable choices for FHA borrowers are short sale or strategic default. Either ones means the FHA insurance fund takes a hit, and if enough borrowers need or want to move, the FHA will face serious losses. I think a bailout is inevitable.

Michael Olenick: The Real Estate Market’s Continuing Data Vacuum - As markets seized in 2008 as counterparty risk became apparent and bankers stopped lending to one another Treasury knew that they had a problem, though when they tried to find the source of the problem – rather than the symptom – they found a black hole, a dearth of data. Former Assistant Secretary Treasury Phillip Swagel describes this unwelcome surprise in a 2009 paper, The Financial Crisis: An Inside View: Despite that components of the more expensive and higher risk Super SIV arguably manifested in the various TALF programs not widely known when the paper was published the much less risky and less expensive Project Restart never even got its first start; we continue to fly blind. Later, Swagel concludes about the idea “What was surprising was that this database did not exist already – that investors in MBSs had not demanded the information from the beginning.” I’ll add that what’s even more surprising is that neither government nor investors are willing to enforce the basic laws that lead to a lack of transparency even now, years later, despite that these issues continue to decimate the underbelly of the economy. Take data from the National Association of Realtors. This data, used regularly by government and pundits, consists of summary data – not primary data – retrieved by a lose collection of entirely independent real-estate listings scattered throughout the country. Using data from a conflicted group that is continually revised downward as dispositive is akin to scanning Craigslist hook-up ads to determine upcoming household formation and project the birth rate. Nevertheless, website like Calculated Risk faithfully plot this it in simplistic red and blue lines, then “prove” it by showing a correlation to other real-estate data-sets, like those that scan online real estate want-ads. Since the latter is often electronically generated from the former it’s not surprising that they don’t closely correlate; rather it’s surprising they don’t match precisely. However, unless a person is trying to gauge the completeness of online real-estate ads to MLS data the correlation is entirely meaningless.

Housing’s Last Chance? - San Bernardino County has one of the highest unemployment rates in the nation: 11.9 percent. Home prices have collapsed. Astonishingly, every second home is underwater, meaning the homeowner owes more on the mortgage than the house is worth. It is well documented that underwater mortgages have a high likelihood of defaulting — and, eventually, being foreclosed on. It has also been clear for some time that the best way to keep troubled homeowners in their homes is by reducing the principal on their mortgages, thus lowering their debt burden and more closely aligning their mortgage with the actual value of the home. Which is why Greg Devereaux, the county’s chief executive officer, found himself listening intently when the folks from Mortgage Resolution Partners came knocking on his door. They had spent the previous year kicking around an intriguing idea: have localities buy underwater mortgages using their power of eminent domain — and then write the homeowner a new, reduced mortgage. It’s principal reduction using a stick instead of a carrot. I know. When you first hear this idea, it sounds a little crazy. Eminent domain to take a mortgage? But the more closely you look at it, the more sense it starts to make. It would be a way to break the logjam that keeps mortgages in mortgage-backed bonds — securitizations — from being modified. It could prevent foreclosures. And it could finally stabilize housing prices.

Should Eminent Domain Be Used to Save Underwater Homes? - The one glimmer of hope in a otherwise disappointing recovery is the recent bottoming out of the housing market. But that doesn’t change the fact that because of the housing bubble bust, nearly one quarter of all U.S. homes are underwater. And even if home prices have ceased falling, it will take a very long time for owners of these homes to rebuild equity. And this epidemic of negative equity remains a drag on the economy. That is why there has been widespread calls for the federal government –in its role of conservator of Fannie Mae and Freddie Mac — and other holders of underwater mortgages to forgive principal owed. Unfortunately for proponents of principal reduction, efforts to get this policy implemented on a large scale have failed. This has led to increasing support in the media and among academics and public officials for a proposal first originated by Mortgage Resolution Partners for municipalities to use the age-old power of eminent domain to purchase mortgages at market value and to offer homeowners new mortgages that reflect the actual market value of the property. As Yale Econmics Professor Robert Shiller argues, the fact that the private sector isn’t already doing this is an example of a “collective action problem.” Shiller says that principal write-downs are in everyone’s interest, that coming to an honest assessment of what a mortgage is worth would obviously help homeowners, but also mortgage lenders who would benefit from fewer homeowners defaulting on their loans.

Eminent Domain to Clear the Backlog - The idea of local governments using eminent domain to acquire mortgages is scary to me. First, eminent domain could be used for punishment or profit rather than for the greater good as is the intent of the law. Second, many local governments have better intentions than they have expertise and operational capacity to pull it off (lots of things can go wrong). But eminent domain is compelling in several ways. There are vacant mortgaged houses in legal limbo for years due to a variety of reasons. There are delinquent borrowers with income who can't get a modification because their incomes aren't from the steady jobs needed for documentation requirements. And there are servicers who have neglected to adequately service delinquent mortgages. In these cases the borrower is often worse off, the mortgage investor is worse off, and the municipality is always worse off because it impairs property condition, property values, and tax revenues. These situations often exist because proper risk management has been lost to the dysfunctional bureacracies of the legal system and the mortgage servicer. Hundreds of thousands of borrowers haven't made a payment in years (a lot of those houses don't look too good). Someone needs to intervene and either make it a performing mortgage or sell the house to someone who can afford it. That's where eminent domain could be useful.

The Mortgage Condemnation Plan: Fleecing Municipalities as Well as Investors - Beware of financiers bearing gifts.  A scheme proposed by a group called Mortgage Resolution Partners, which is being considered by San Bernardino, CA, to use the traditional power of eminent domain to condemn mortgages, was pretty certain to be a non-starter, so I’ve ignored it. But it’s gotten enough attention to have roused the ire of a whole host of financial services industry lobbying groups, as well as endorsements from Bob Shiller and Joe Nocera, and a thumb’s down from Felix Salmon, so it looked to be in need of serious analysis.  One of the big problems with this plan, which seems to have been overlooked so far, is that any municipality who goes down this path is likely to be the designated bagholder. Mind you, that isn’t based just on the general tendency of municipalities to be easy prey for clever bankers, but also based on the few, but nevertheless troubling, operational details that have been made public.  This is the theory of how the plan would work, from one of its prime promoters, law professor Robert Hockett: Protecting the citizenry and heading off blight is what municipal eminent domain authority is for…And it is for them to do so in partnership with private investors who effectively render the Plan publicly costless – just as we’ve done since the earliest days of our republic in carrying out and financing local projects If you believe that, I have a bridge I’d like to sell you. No, this plan isn’t a “partnership”. There has been troubling little detail about what Mortgage Resolution Partners will do or how it will be paid. This whole process has been hidden from public view. Why wasn’t the original request for proposal made public? Why haven’t the operational arrangements, as in what the roles and obligations of the parties are, and most important, what the fees are, been reported anywhere? The way this plan works is that MRP and its allies plan to steal. And no, I’m not exaggerating.

City Bankruptcy Could Raise Hurdles for Mortgage Seizure Plan - San Bernardino County is forging ahead with deliberations on a proposal to seize delinquent mortgages, despite its largest city's decision Tuesday night to seek bankruptcy. The California city is not directly involved in the proposal, but industry members say its bankruptcy could interrupt funding and create other hurdles for the county and its partners. San Bernardino County, which is considering a plan to use eminent domain to restructure underwater mortgages, is still planning to host its first meeting to discuss mortgage modification proposals on Friday, spokesman David Wert said on Wednesday. The proposal has raised the ire of investors in private-label mortgage-backed securities, who could face significant losses if the loans are seized. The county recently joined forces with two of its cities, Fontana and Ontario, to form the Homeownership Protection Program Joint Powers Authority, which would be empowered to use eminent domain for the modifications if the county decides to go forward with the plan. The city of San Bernardino is not currently part of the JPA, and Wert downplayed the influence of the potential bankruptcy on the county's eminent domain proposal.

Location, Location, and Pacification: The Effect of Crime Reduction on Residential Property Value – NY Fed - In this post, we document the relationship between crime and house prices in the city of Rio de Janeiro, Brazil. One fully expects crime, as a public “bad,” to exert a downward force on prices; indeed, this is a common finding in the literature on amenity valuation. Our recent study quantifying this relationship is novel in its: (i) use of extremely detailed property price data for a large number of neighborhoods, (ii) application to a developing economy, and (iii) examination of the link between crime and reduced house-price inequality. We focus on the extent to which prices are responsive to crime-related outcomes, as demonstrated by a recent policy experiment and with the use of detailed offer-price data from the online classified website ZAP ( We find that prices are quite sensitive to falling crime, which implies large welfare gains due to crime reduction.    Since there are many different factors that can affect house prices simultaneously, we study the housing market around the time of a specific policy event tightly linked to the objective of crime reduction. This event is the introduction of the Unidade Pacificadora da Policia (“Pacifying Police Unit,” or UPP) program in Rio, beginning in late 2008. As in many cities in developing countries, a significant fraction of the population of Rio live in very low-income communities with a high concentration of substandard, informal housing; in Rio, these communities are called favelas.

MBA: Record low mortgage rates, Mortgage Purchase activity increases slightly - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey:The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier. ... This week’s results include an adjustment for the Fourth of July holiday.The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.79 percent, the lowest rate in the history of the survey, from 3.86 percent, with points decreasing to 0.36 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The decline in refinance activity was from a very high level. The purchase index has increased for two consecutive weeks, but is mostly moving sideways.

Vital Signs: Mortgage Rates Hit Record Low - Mortgage rates keep falling. The rate on a 30-year fixed mortgage has dropped to 3.56%, a record low — down from 3.62% on July 5. The average 30-year rate has remained below 4% for 16 weeks. Fueling the drop: a fall in U.S. bond yields as investors worry about the economy and wonder if the Federal Reserve will take more steps to stimulate growth.

Let's push 15 year refinances - If someone refinances a 30 year 6 percent mortgage (with 27 years of payments left on it) into a 15 year 2.86 percent mortgage, the payment goes up by 10 percent, which is not nothing.  But within 5 years, more than 25 percent of the principal  on the 15 year mortgage is paid down.  For those who can afford the payment, this would largely solve the underwater mortgage problem.

Redfin: House prices increased in June, Inventory declined - Another house price index, this one is based on prices per sq ft ...  From Glenn Kelman at Redfin: June Prices Increased 3.0%, But Sales Slowing Across 19 major metropolitan markets, June prices increased 3.0% year over year, and 2.6% month over month. The number of homes for sale declined 25.3% from June 2011 to June 2012, and by 2.4% since May. Sales increased 4.3% over last year, but actually slipped 1.1% since May. The percentage of listings that sold within 14 days of their debut remained steady since May at 28.5%.  Inventory has been slow to rise because some home-owners can’t sell; their home is worth less than they owe the bank. Many others more don’t want to sell, because they can rent their house for more each month than their bank payment, and because they believe prices may improve. With vacancies are on the decline and rents rising, for many sellers it just makes more sense to rent out the home rather than sell. There is limited historical data for this index. In 2011, sales were fairly weak in the April through July period, and a 4.3% increase in year-over-year sales for June would be less than the approximately 10% year-over-year increase in sales NAR reported for April and May of this year.

Will the Fed rev the housing engine? - LAST week, Reis, a real estate information service, released new data on apartment market conditions in America. The stand-out data point from the relase, as you can see in the chart at right, is the ongoing and extraordinary decline in the vacancy rate; at 4.7%, the vacancy rate is now at the lowest level in a decade. As you can also see in the chart, the plunge in vacancies came on the heels of an epic collapse in construction. You might also notice that the boom years were not particularly unusual for apartment construction, and that the rebound in construction since the depths of the recession has left the pace of new building still well below normal. Vacancies are dropping rapidly, in other words, on the back of a significant and growing shortage of housing in the market. That, in turn, is propelling rents upward; in the second quarter of the year effective rents rose by 1.3%, the fastest rate of increase since 2007. So what can we expect moving forward? Given the time it takes to get new apartments to market, vacancies will probably continue to drop and rents will rise. That will raise interest in new construction. That, in turn, will generate new construction employment; as Bill McBride points out here, employment inevitably tracks new starts, but on a lag. There is a boomlet in the pipeline.

The U.S. Housing Bust Is Over -  The U.S. finally has moved beyond attention-grabbing predictions from housing "experts" that housing is bottoming. The numbers are now convincing.  Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. "We finally saw some rising home prices," S&P's David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.  Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months' worth despite all the foreclosed homes that lenders own. The fraction of homes that are vacant is at its lowest level since 2006.  The reduced inventory of unsold homes is key, says Mark Fleming, chief economist at CoreLogic, a housing data-analysis firm. For the past couple of years, house prices have risen in the spring and then slumped; the declining supply of houses for sale is reason to believe that won't happen again this year, he says.

Report: Some Americans Have Lost Homes Over As Little As $400 - A report from a consumer group released today says that vulnerable owners are losing their homes for owing as little as $400 in back taxes. The AP reports: "Outdated state laws allow big banks and other investors to reap windfall profits by buying the houses for a pittance and reselling them, the National Consumer Law Center said in a report being released Tuesday.\ "Local governments can seize and sell a home if the owner falls behind on property taxes and fees. The process helps governments make ends meet at a time when low property values and the weak economy are squeezing tax revenue. "But tax debts as small as $400 can cause people to lose their homes because of arcane laws and misinformation among consumers, says John Rao, the report's author and an attorney with NCLC."  The report details how the process works. In most cases, companies like JPMorgan Chase and Bank of America buy tax liens from the city and eventually evict the original owners. The investors then resell the house for a hefty profit. A $200,000 home, for example, might be sold on tax lien sale for $1,200.

Q1 2012: Mortgage Equity Withdrawal strongly negative - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity - hence the name "MEW", but there is little MEW right now - and normal principal payments and debt cancellation. For Q1 2012, the Net Equity Extraction was minus $107 billion, or a negative 3.6% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now). The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q1. Mortgage debt has declined by $885 billion over the last four years. This decline is mostly because of debt cancellation per foreclosures and short sales, and some from modifications. There has also been some reduction in mortgage debt as homeowners paid down their mortgages so they could refinance.

Consumer Credit Expands at Fastest Pace in 5 Months - U.S. consumer credit expanded in May at the fastest pace in five months, even as the economy broadly showed signs of cooling. Consumer credit grew from April by a seasonally adjusted $17.12 billion to $2.573 trillion, a Federal Reserve report showed Monday. Consumer credit expanded at an 8.04% annualized rate during May, the best pace since an 8.27% jump in December 2011. Economists surveyed by Dow Jones Newswires had forecast only a $7.8 billion expansion in credit during May. In April, consumer credit grew a revised $9.95 billion, up from an initial estimate of a $6.51 billion gain. The expansion in credit could be a positive sign for the economy, showing that Americans are still willing to seek financing for cars and big-ticket items and obtain loans for their educations. That runs counter to other recent government reports showing that consumer spending was unchanged in May for the first time in six months and that job creation this spring was weak. The economy added an average of only 75,000 per month in the second quarter of 2012 compared to 226,000 jobs a month in first. Nonrevolving credit, which includes student loans and auto financing, rose by $9.10 billion to $1.703 trillion during May, on a seasonally adjusted basis. Meanwhile, revolving credit, which includes credit-card debt, increased by $8.01 billion in May to $870.19 billion.

Consumer Credit Increased 8% in May 2012 - The Federal Reserve's consumer credit report for May 2012 shows a 8% annualized monthly increase in consumer credit. Revolving credit surged, 11.2%, and nonrevolving credit increased 6.5%. The Credit Kraken comes out of it's cave.  Overall consumer credit increased $17.1 billion dollars to $2.573 trillion, seasonally adjusted. Revolving credit increased $8 billion while non-revolving increased $9.1 billion. Revolving credit are things like credit cards and non-revolving are things like auto loans and student loans. Mortgages are not included in this report.  The report gives percent changes in simple annualized rates, also known as a continuously compounded annualized rate of change. Below is the graph of the monthly annualized percentage changes in consumer credit going back to 1980. Monthly consumer credit hasn't increased this much since September 2007, when computer credit showed an 8.1% monthly increase.  From the above graph we can see outstanding consumer credit drops correlate to recessions. This report does not include charge offs and delinquencies, which hit another low, October 2007 levels, in May: Securitized credit card charge-offs in the US declined 31 basis points in May to 4.90% from 5.21% in April, according to Moody's Credit Card Indices. The drop more than reversed an anomalous one-month increase in April, says Moody's in the index report "Credit Card Charge-offs Fall in May; Payment Rates Reach Another All-Time High." The May decline in the charge-off rate index is consistent with Moody's forecast that the index will continue to fall lower in the coming quarters to reach about 4% by the end of 2012.

Vital Signs: Credit-Card Debt Shows Biggest Jump Since 2007 - Americans ratcheted up their use of credit cards in May. Revolving consumer credit, which includes mostly credit cards, jumped 11.2% to $870.20 billion –the biggest percentage rise since November 2007. While the data are volatile, the jump suggests consumers were more willing to spend this spring. Overall borrowing, including car and student loans, grew 8% in May to $2.57 trillion.

Consumer Credit Jumps... a Good Thing? - Bloomberg details:  Consumer credit climbed more than forecast in May, led by the biggest jump in credit-card debt in almost five years that may signal Americans are struggling to make ends meet. The $17.1 billion increase, exceeding the highest estimate of economists surveyed by Bloomberg News and the largest this year, followed a $9.95 billion gain the previous month that was more than previously estimated, the Federal Reserve said today in Washington. Revolving credit, which includes credit card spending, rose by $8 billion, the most since November 2007. In a "normal" mean-reverting downturn, an increase in consumer borrowing is a good sign as it allows a consumer to maintain their purchase level (even without the current income to pay for it), with the expectation that they can cover their borrowing when their wages "revert" higher in the future.  The concern is that we are now in year 4 year of the muddle through recovery, thus some concern that people are spending money on goods via debt that they may have trouble repaying. Back to Bloomberg: A pickup in borrowing coincides with a slowdown in hiring and declines in consumer confidence that indicate the job market is failing to spur enough gains in wages to cover expenses. Employers added fewer workers to payrolls than forecast in June while the jobless rate stayed at 8.2 percent.

Weekly Gasoline Update: First Price Increase in 13 Weeks -  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, rose for the first time in 13 weeks: regular and premium both increased 6 cents. Regular is now up 18 cents and premium 17 cents from their interim weekly lows in the December 19th EIA report. As I write this, still shows only the two non-continental states with the average price of gasoline above $4. California has the highest mainland prices, averaging around $3.68 a gallon with Connecticut as the second highest at $3.64. How far are we from the interim high prices of 2011 and the all-time highs of 2008? Here's the answer.

Consumers’ outlook darkens in July - Americans are getting gloomier about the economy. Consumer sentiment fell to its lowest level of the year in early July, according to a preliminary reading from Thomson Reuters and the University of Michigan. The groups’ sentiment index fell to 72.0 at the start of July from 73.2 in June, according to an economist who has seen the report. This reading marks the lowest of the year. Consumer sentiment rose steadily earlier this year, leading to hopes among some economists that household spending would drive economic activity and support the recovery process. But slower job growth and other recent weak economic data have cut into both confidence and actual spending. The ever-evolving euro-zone debt crisis and the financial-market volatility it causes also continues to dent sentiment, which also fell in June. “The latest confidence data suggest that although consumers remain cautious, at least they aren’t panicking,”

Michigan Consumer Sentiment: A Case of the Summer Blues - The University of Michigan Consumer Sentiment Index preliminary number for June came in at 72.0, a 1.2 point drop from the June final and a whopping 7.3 point decline from May. We've apparently got a case of the summer blues on our hands. Today's number was below the's consensus forecast of 73.5. 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 16% below the average reading (arithmetic mean), 15% below the geometric mean, and 15% below the regression line on the chart above. The current index level is at the 19.5 percentile of the 415 monthly data points in this series. The Michigan average since its inception is 85.0. During non-recessionary years the average is 88.0. The average during the five recessions is 69.3.

Hotels: Occupancy Rate declines in latest weekly survey - From STR: US hotel results for week ending 7 July In year-over-year comparisons for the week, occupancy ended the week with a 3.7-percent decrease to 61.4 percent, average daily rate increased 3.0 percent to US$101.67 and revenue per available room ended the week virtually flat with a 0.8-percent decrease to US$62.37. The decline in occupancy last week was due to the timing of July 4th (and probably impacted by the mid-week holiday). The 4-week average is still above last year, and is close to the pre-recession levels. Note: ADR: Average Daily Rate, RevPAR: Revenue per Available Room. The following graph shows the seasonal pattern for the hotel occupancy rate using a four week average.. The red line is for 2012, yellow is for 2011, blue is "normal" and black is for 2009 - the worst year since the Great Depression for hotels. Looking forward, leisure travel usually increases over the summer months, and occupancy rates will probably average 70% for the next couple of months. It looks like 2012 will have higher occupancy than 2011, and be close to the pre-recession median.

Trade Deficit declines in May to $48.7 Billion - The Department of Commerce reported: [T]otal May exports of $183.1 billion and imports of $231.8 billion resulted in a goods and services deficit of $48.7 billion, down from $50.6 billion in April, revised. May exports were $0.4 billion more than April exports of $182.7 billion. May imports were $1.6 billion less than April imports of $233.3 billion. The trade deficit was at the consensus forecast of $48.7 billion. The first graph shows the monthly U.S. exports and imports in dollars through May 2012. Exports increased in May and imports decreased. Exports are 10% above the pre-recession peak and up 4% compared to May 2011; imports are at the pre-recession peak, and up about 4% compared to May 2011. The second graph shows the U.S. trade deficit, with and without petroleum, through May.  The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Oil averaged $107.91 per barrel in May, down from $109.94 per barrel in April. This will decline further in June. The trade deficit with China increased to $26 billion in May, up from $24.9 billion in May 2011. Once again most of the trade deficit is due to oil and China.  Exports to the euro area were $17 billion in May, up from $16.4 billion in May 2011; so the euro area recession didn't lead to less US exports to the euro area in May.

Oil and the real trade balance (4 charts) The US real trade balance has been bouncing around current level for the last two years --being neither a significant contribution nor a significant drag on growth. This is a significantly different picture than the nominal trade balance shows where the trade deficit is still widening. Much of the apparent stability in the real trade balance has been oil as the real non-oil trade balance has continue to widen and dampen economic growth. On a net basis -- imports less exports-- oil imports have collapsed over the past few years. Net real petroleum imports are now only about half of their peak level in 2005.. Moreover, oil exports -- both crude and refined products -- are now equal to about one third of imports as refiners are taking advantage of the lower price of West Texas Intermediate to take foreign markets away from foreign refiners that use the more expensive Brent crude. This data also demonstrates that all the wild claims about the need to open a new pipeline from Canada is just political posturing. Oil is almost perfectly fungible and it will make little difference to the world oil markets or what we pay for oil, if Canada exports its oil via pipelines to Oklahoma or through its Pacific ports. Essentially all the pipeline would do is permit US Gulf Coast refineries to refine the Canadian oil and reexport it.

Breaking Down Slowing U.S. Trade Amid Falling Oil Prices - Standard & Poor’s Deputy Chief Economist Beth Ann Bovino talks with Jim Chesko about the fact that the U.S. trade deficit narrowed for the second-straight month in May.

June import prices tumble on plunge in oil costs (Reuters) - Import prices fell last month by the most in more than three years mostly due to a plunge in the cost of imported oil, further icing inflation pressures. Overall import prices dropped 2.7 percent, the Labor Department said on Thursday. It was the third straight month of declining prices for goods and services bought abroad. Import prices have only risen once in the last seven months. June's decline was the steepest since December 2008. The decline last month was even more than analysts had expected, and could give the U.S. Federal Reserve more scope to ease monetary policy if policymakers think the economy needs it. The Fed targets annual inflation of 2 percent, and policymakers' preferred measure of inflation showed prices up 1.5 percent in May from a year earlier. Prices for imported petroleum plunged 10.5 percent, also the sharpest drop since December 2008. Even stripping out fuels and food, import prices were down 0.3 percent. That could be a sign of the recent cooling in the global economy, which has been largely caused by Europe's debt crisis.

Import Prices in U.S. Fell in June by Most Since 2008 - Prices of goods imported into the U.S. decreased more than forecast in June as declining energy costs curbed inflation.  The 2.7 percent plunge in the import-price index was the biggest since December 2008 and followed a 1.2 percent drop in May, Labor Department figures showed today in Washington. Prices excluding fuel fell 0.3 percent, the most in almost two years.The cost of goods and materials that the world’s largest economy purchases from abroad may remain depressed as cooling markets from Europe to Asia restrain demand for commodities like oil. A rising dollar also means American companies can hold the line on prices, consistent with Federal Reserve policy makers’ projections that inflation will ebb.   Import costs were projected to decline 1.8 percent, according to the median forecast of 47 economists in a Bloomberg News survey. Projections ranged from decreases of 0.4 percent to 2.8 percent.

U.S. wholesale prices rise 0.1% in June  - U.S. wholesale prices rose a seasonally adjusted 0.1% in June as higher costs for food, light trucks and appliances offset another decline in energy costs, the Labor Department said Friday. Excluding the volatile categories of food and energy, core wholesale prices rose a slightly faster 0.2%. Economists surveyed by MarketWatch had predicted a 0.2% decrease in the overall producer price index and a 0.2% gain in the core PPI. Energy prices fell 0.9% last month. The wholesale cost of food, meanwhile, rose 0.5%, mainly because of higher meat prices. Over the past year wholesale prices have risen an unadjusted 0.7%. Just one year ago, the year-over-year increase stood at nearly 7%

May Wholesale Trade Down From April; Up From Last Year - The U.S. Census Bureau announced today that May 2012 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $409.6 billion, down 0.8 percent from the revised April level, but were up 5.7 percent from the May 2011 level. The April preliminary estimate was revised downward $2.1 billion or 0.5 percent. May sales of durable goods were up 0.6 percent from last month and were up 9.0 percent from a year ago. Sales of computer and computer peripheral equipment and software were up 1.4 percent from last month. Sales of nondurable goods were down 1.9 percent from April, but were up 3.2 percent from last May. Sales of petroleum and petroleum products were down 4.7 percent from last month and sales of drugs and druggists’ sundries were down 1.7 percent. Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $484.1 billion at the end of May, up 0.3 percent from the revised April level and were up 6.4 percent from the May 2011 level. The April preliminary estimate was revised downward $0.7 billion or 0.1 percent. May inventories of durable goods were up 0.6 percent from last month and were up 10.1 percent from a year ago. Inventories of machinery, equipment, and supplies were up 1.4 percent from last month and inventories of motor vehicle and motor vehicle parts and supplies were up 1.3 percent. Inventories of nondurable goods were down 0.2 percent from April, but were up 1.4 percent from last May. Inventories of farm product raw materials were down 5.1 percent from last month, while inventories of grocery and related products were up 2.9 percent

Wholesale inventories up 0.3% in May: U.S. wholesale companies added modestly to their stockpiles in May. But sales at the wholesale level dropped by the largest amount in three years, a troubling sign for future growth. The Commerce Department said Wednesday that wholesale stockpiles rose 0.3 percent in May. That followed a 0.5 percent increase in April, which was revised lower from an initially reported 1.1 percent gain. But sales at the wholesale level fell 0.8 percent in May, the biggest decline since March 2009. Greater restocking means companies ordered more goods, which increases factory production. But the broader economic benefits from faster restocking were likely offset by the decline in sales, which could prompt wholesalers to restock more slowly in the coming months. Stockpiles at the wholesale level stood at $484.1 billion in May. That is 25.8 percent above the post-recession low of $384.9 billion in September 2009.

US Wholesale Inventories Up 0.3% in May; Sales Fall - Inventories at U.S. wholesalers increased only mildly in May as sales showed the largest drop in more than three years on declining petroleum prices. U.S. wholesalers' inventories increased by 0.3% from the prior month to a seasonally adjusted $484.13 billion, the Commerce Department said Wednesday. Economists surveyed by Dow Jones Newswires had forecast a 0.4% gain. Sales for wholesalers were down 0.8% in May to $409.63 billion. That was the steepest decline since March 2009. Fuel prices abated in May after a run up earlier in the year. Wholesale petroleum purchases fell 4.7% and wholesale petroleum inventories dropped 3.6%, as measured in dollars. Total non-durable goods inventories moved down 0.2% as declining fuel stockpiles offset increased inventories of drugs and groceries. Meanwhile, inventories of durable goods increased by 0.6% in May, led by restocking of autos, up 1.3% during the month, and machinery, up 1.4%. Wholesalers must carefully monitor their inventory levels as consumer spending appears to be weakening. Those businesses don't want warehouses of goods they can't sell, but also want to be able to meet demand of shoppers who have proven to be resilient, despite a rocky overall recovery.

Dredging Up the Potential of a Post-Panamax World - Everybody wants to go to 50 feet. In the battle amongst U.S. port cities along the East and Gulf Coasts, there is a rush to see which major ports can make a 50-foot depth to dock the larger post-Panamax cargo ships that will move through the Panama Canal, possibly as early as August 2014 if the Panamanians can hit their desired completion date. But you have to have the capability to handle those mega cargo ships to get the millions or possibly billions of dollars of trade, not to mention the accompanying shipping, rail, highway and river infrastructure jobs that come with handling those mega cargo ships at your terminal. Your port has to handle a ship's 50-foot draft, or get awfully close to it. Battles over port expansions within the ranks of Congress prompted lawmakers to ask the U.S. Army's Corps of Engineers for a report examining some of the various factors to consider.  The study by the Corps gives a good summary of trends in population, infrastructure capacity of roads, rail and waterways, as well as trade across the country. The Corps states Panama's expanded third lock will double the canal's shipping capacity. "The resulting economy of scale advantage for larger ships will likely change the logistics chains for both U.S. imports and exports." A handful of eastern ports can handle, or are close to handling 50-foot ships, but none south of Norfolk, Va. Charleston, S.C., sometimes can if the tide is right. So from there around Georgia, Florida and the Gulf Coast, there are now some major efforts to find a way to dredge.

NFIB: Small Business Optimism Index declines in June - From the National Federation of Independent Business (NFIB): June Small-Business Optimism Lowest Since October 2011 - In a disappointing reversal of several months of slow but positive growth, June’s Index of Small Business Optimism dove three points, falling to 91.4. The decline is significant, and relinquished the gains achieved earlier this year. Only one of the ten Index components improved; labor market indicators and spending plans for capital equipment and inventories accounted for about 40 percent of the decline. ... Nearly one-quarter of owners cite weak sales as their most important business problem (23 percent) [up from 20 percent in May]. Note: Small businesses have a larger percentage of real estate and retail related companies than the overall economy. This graph shows the small business optimism index since 1986. The index decreased to 91.4 in June from 94.4 in May. This index remains low, and once again, lack of demand is the biggest problem for small businesses. (In the survey, the "single most important problem" was "poor sales".

Small Businesses Turn More Downbeat - More signs are emerging of a slowing U.S. economy with the latest coming from small businesses. Last week, when the Institute for Supply Management shocked investors by saying America’s manufacturing sector shrank in June for the first time in three years, some economists warned against reading too much into the report. U.S. factories may struggle amid weaker demand for their goods from Europe and China, but manufacturers aren’t a huge part of the U.S. economy — especially compared with the service-related businesses that cater to ordinary Americans. The bigger companies captured by the Institute’s report also are more likely to sell things abroad and sneeze when the global economy catches a cold, The ISM’s sister report on the service sector, released late last week, fell to its lowest level in more than two years. And now confidence among small-business owners is tanking. The National Federation of Independent Business’s Small Business Optimism Index fell to 91.4 in June, down 3 points from May, according to data released Tuesday. Economists had predicted a milder fall to 93.

Small Business Sentiment: A 3-Point Nosedive - The latest issue of the NFIB Small Business Economic Trends is out today (see report). The July update for June came in at 91.2, which is the lowest reading since October of 2011. The indicator has slipped back to a level first seen three months into the last recession. Here is the opening summary of the report:  The Index of Small Business Optimism declined 3 points in June, falling to 91.4. The decline is significant, relinquished the gains achieved earlier this year and is a clear indication of slow growth. Only one of the 10 Index components improved, expected credit conditions. Nearly one-quarter of owners cite weak sales as their most important business problem (23%), followed by taxes (21%) and unreasonable regulations and red tape (19%).  The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.

Picking On the Job Creators - Cue the world’s smallest violin (again, I guess) for the country’s “job creators.” So BR emails me the other day that links here with the message “Have a field day with this crap” (not unlike many emails I get). So, off to the link I go to read the story. What I assume incensed the sender is essentially the same thing that has really been incensing me for the past several years: that we apparently now live in a relatively fact-free environment where folks are comfortable spinning whatever tales fit their agenda, reality be damned. This seems to be especially true when it comes to genuflecting before our deified “job creators.” Let’s look at the crux of the author’s piece:  However hostile Democrats like me may be to the excesses of Wall Street, and however much everybody admires the small, independent businesses in our neighborhoods and communities, big business remains the primary driver of economic growth and job creation. Really? What does ADP data tell us about that going back to the end of the recession?  What does the SBA tell us (PDF) about small business? Small firms (defined as those with fewer than 500 employees):
• Have generated 65 percent of net new jobs over the past 17 years.
• Create more than half of the nonfarm private GDP.

Analysts Optimistic About Equipment Investment in 2nd Half - Analysts are expecting overall equipment investment to stabilize or improve for the remaining year, buoyed largely in part by lower oil prices, according to the latest economic outlook by the Equipment Leasing & Finance Foundation. “Clearly things have slowed down in the past six months and our primary view is that high oil prices played a significant role in the slowdown,” While Karson doesn’t underestimate the effects of the euro crisis and the slowdown in emerging markets like China, he said that dropping oil prices will remove a major obstacle to growth in the coming months as consumers regain confidence and increase spending. The report points out that job creation slowed significantly when oil prices hit a peak in March and Karson said that he expects jobs to pick up eventually as prices remain low. The authors expect an 8% growth in equipment and software investment for 2013 despite investment slowing down to 3.5% in the first quarter of 2012 from 7.5% in late 2011.

Manufacturing: Been down so long, it looks like up? -- Chicago Fed - Those having keen interests in the U.S. manufacturing sector are somewhat encouraged by its performance over the past three years. The sector has bounced back sharply since the end of the severe 2008–09 recession. Job growth in manufacturing is running up 2 percent on a year-over-year basis, and the sector has recovered three-quarters of the output lost during the 2008-09 recession. Encouragement about manufacturing prospects derives not only from the recent bounce, but also from the possibility that the change in direction may represent a turnaround in manufacturing’s fortunes that will be sustained over the longer term. The previous peak in manufacturing jobs took place as far back as the 1990s, so this new direction, particularly if it holds up over a long horizon, would be a welcome change.  To put recent events into proper perspective, it is useful to examine the manufacturing sector’s long-term experience in the United States. The chart below shows the sector’s climbing real output, with the nation experiencing a five-fold growth in real manufacturing output since the early 1950s through today. Output growth here reflects both the increase in the quantity of goods produced and the improvements in the goods’ quality, such as durability and performance. In contrast with this hearty performance of real output growth in manufacturing, the sector’s levels of employment have remained steady over the latter half of the twentieth century—in the range of 17–19 million workers—and then moved much lower until very recently.

Labor Market Indicators Sour -- A compilation of U.S. labor indicators fell in June, a month when U.S. economic activity slowed sharply, according to a report released Monday by the Conference Board. The board said that its June employment trends index dropped to 107.47 from a revised 108.23 in May, first reported as 108.34. The June index is up 5.6% from a year earlier. The report said the index has been relatively flat since February, “suggesting that slow employment growth is likely to continue through the summer,” said Gad Levanon, director of macroeconomic research at the board. “Since there is little hope of acceleration in the pace of economic activity any time soon, these weak labor market conditions are likely to persist for the coming months,” he said.. In June, four of the eight components within the ETI declined. The indicators that brought down the ETI included the percentage of firms with hard-to-fill positions and the ratio of involuntarily part-time workers to all part-time workers.

Employers not rattled yet by "fiscal cliff" (Reuters) - American employers are keeping their fingers crossed that politicians will steer away from a "fiscal cliff" of major tax hikes and spending cuts in early 2013, and, so far at least, have not gone back to a defensive recession-mode. Executives are prepared to reduce hiring or staffing if need be, but they say they are counting on the U.S. Congress to strike a last-minute deal. "If they do go off the fiscal cliff, I'll immediately see my (sales) pipeline turn, and that's what we base our hiring decisions on," said Stephen Gray, chief executive officer at Gray Construction, an engineering, design and construction firm in Kentucky with 437 employees. "But I don't see that bothering me until after it happens," Gray said in an interview from Lexington. "That may be a problem on January 2nd." Less than six months away, the threat of big tax rises and spending cuts scheduled for January poses a new risk to the economy and struggling U.S. labor market. In Washington and on Wall Street, warnings about a potentially huge hit to growth are growing louder as election campaigning effectively blocks any new legislation until after the November 6 poll. The prospects for jobs growth in the rest of this year could hinge on how seriously employers take the threat of Congress failing to find a deal. Hiring was dismal for a fourth straight month in June, with non-farm payrolls expanding by just 80,000.

More Weak Job Data: Have we Reached the Natural Rate? Is this as Good as it Gets? - The June report from the Bureau of Labor Statistics shows continued weak growth of payroll jobs. Just 80,000 new jobs were reported for the month, while an upward revision to the May data was cancelled by a downward revision for April. The unemployment rate remains stuck at 8.2 percent. What is more, the broad measure of unemployment, U-6, is actually climbing again, after three years of decline. The broad measure includes discouraged workers and those involuntarily working part time. Is this as good as it is going to get? The answer depends on which of two different stories of stalling job growth turns out to be true. The pessimistic view is that the recession has caused lasting structural damage to the labor market, so that the skills of some unemployed workers have become obsolete and they are unlikely ever to find work. In technical terms, that would mean that the natural rate of unemployment has risen. The natural rate is the lowest rate of unemployment that the economy can reach without risk of an unsustainable inflationary boom. Alternatively, it may be that we are still well below the natural rate of unemployment, but something is holding back the expansion—overly cautious monetary policy, fiscal drag, a weak global economy, or some combination of the three. In that view, we can expect employment eventually to recover to historical levels once the expansion accelerates again.

Latest Jobs Report Underscores Unemployment Crisis: As the government on Friday released its latest official snapshot of the American labor market -- finding that the economy in June added a paltry 80,000 net new jobs, while the unemployment rate held steady at 8.2 percent -- most commentators seized on the data as generic fodder for the unceasing campaign story. How will Republican nominee Mitt Romney exploit these fresh indications of distress for his own political benefit? Can President Barack Obama survive a weak economy to claim reelection? These are predictable questions, the sorts of reactions we can play for ourselves in our heads without bothering to turn on the television. Their ubiquity testifies to the degree to which too many professional observers are inured to the real human experiences behind the data. The horrendous job market is not a political story. It is a national emergency playing out in slow motion, a catastrophe that has come to dominate life in millions of American homes. The persistent shortage of paychecks has seeped into our aspirations and made them smaller. It has eroded the basic American understanding about the supposed rewards of trying hard, getting educated and looking for work -- a formula too many people have been following only to wind up destitute, discouraged and dispossessed.  Will the president survive the most punishing job market since the Depression? That's backwards. The real question is whether people like Yvonne Smith can survive the job market.

Disappointing Jobs Report: One More Sign of a Recovery Leaving Women Behind - Today’s jobs report was pretty much summed up in one word: “unchanged.” In other words, pretty disappointing. 80,000 jobs were added last month, less than analysts had predicted, leaving the unemployment rate untouched at 8.2 percent. While job creation seemed to be picking up steam at the beginning of the year, it’s now looking to be sputtering out. How did women fare in this report? There was some good news: they made solid private sector gains, picking up 49,000 jobs there, far more than men’s 35,000 gain in the sector. But that was offset by the fact that they lost 17,000 jobs in the public sector, while men actually picked up 13,000 there. This follows a trend begun when the recovery officially started. Last month marked three years since the beginning of the recovery, and women have not fared well in that time period. They’ve gained 512,000 net jobs, but men have far outpaced them, gaining over 2 million jobs. Some of this is making up for the disproportionate number of jobs that men lost during the recession itself as construction and manufacturing collapsed. But given that men have experienced over four times the job gains made by women, that can’t account for all of it.What does account for the disparity, in large part, is public sector job loss. As analysis from the National Women’s Law Center showed today, for every ten jobs women have gained in the private sector during the recovery, they’ve lost more than four public sector jobs. That’s a big reason why their jobs gains continue to be depressed.

Why Is Job Growth Tepid?—Posner - The unemployment rate has been 8.2 percent for three months now, creating concern that we are in a high-unemployment equilibrium. The unemployment rate is not a very good measure of the employment situation, because it excludes discouraged workers—persons who are not looking for a job. The number of discouraged workers actually dropped slightly in June. On the other hand, the number of underemployed workers rose slightly, causing the total of un- and underemployed to rise from 14.8 to 14.9 percent. Yet there has been a net increase, though a small one, in the number of new hires and in average wages. The safest observation is that no significant trend is visible in the data for the past quarter.  In another six weeks it will be four years since the financial crash that set off the steep economic downturn in which the nation and the world still find themselves. The downturn stopped years ago but the economy has stalled. Apart from the high unemployment rate, it is noteworthy that personal consumption expenditures per capita, corrected for inflation, are exactly where they were in 2007, before the crash, even though the savings rate, which soared in the immediate aftermath of the financial collapse, has receded to the low pre-collapse level, in part because of very low interest rates, which make saving money unattractive. It is noteworthy as well that inflation expectations are very low, implying that demand for products and services is not expected to increase significantly.

Hidden Good News in Bad Jobs Report - No question about it, Friday’s jobs report was a disappointment. The 80,000 jobs added in June fell short even of economists’ already lousy expectations. The second quarter of the year goes down as the worst quarter of job creation since the labor market recovery began in 2010. But beneath the dreary headline lay some encouraging signs: Demand for labor was relatively strong: Sure, the net payroll number was weak. But there were signs companies were seeing demand for their products, and needed more labor to meet it. Companies asked employees to work more hours and more overtime, and paid them higher hourly wages in June than in May. They also added 25,000 temporary workers, often an indicator of future hiring. All of that may be a sign that companies are reluctant to hire permanent workers. But it also means they’re seeing enough new business to justify spending more on payroll.  Job growth may not be robust, but it’s fairly evenly spread across the economy. Manufacturing added 11,000 jobs. Health care added 11,400. Leisure and hospitality added 13,000. Construction added 2,000, although that was dwarfed by the 35,000 jobs lost the month before. Retailers cut 5,400 jobs, but wholesalers added 8,800. The Labor Department’s diffusion index, a measure of how many industries are adding jobs, ticked down just slightly to 57.9, still solidly above the 50 mark that indicates more industries are expanding than contracting. That means the economy isn’t dependent on just one or two growing industries, which may mean it’s more buffered against a shock.

Worst. Recession. Jobs. Recovery. Ever. Updated. -- Today's post is an update of a chart we originally featured back on 5 January 2011. It speaks for itself:  In the chart, we're measuring the strength of all the post World War II recession recoveries as measured from the very bottom of payroll jobs lost. The last time we featured it, the recovery from the 2007 recession was just barely the worst ever.  And today, it is definitively the worst recession jobs recovery ever.

Is 8% the New Normal for Unemployment? - This decade is shaping up to be the worst for unemployment since the Great Depression. The U.S. unemployment rate has been above 8% for more than three long years, far above the 5.4% average of the seven full decades since the Great Depression.Job growth, as measured by the household survey that calculates the jobless rate, has averaged 125,000 a month since household employment bottomed out in late 2009. At that job pace, when will the U.S. see the unemployment rate fall to 7%? Possibly not until the end of this decade. In forecasts released earlier this year, the Labor Department expects the labor force to grow to 164.4 million by 2020. The forecasts are based on long-run population growth and a declining labor force participation rate as the baby boomers retire. If the current recovery’s pace of household employment growth held on, the jobless rate would fall below 8% in 2014, but it would not reach 7.0% until late 2019. That means this decade’s jobless rate would be about 7.9%, the highest for a decade since the Great Depression, beating out the reigning champ of the 1980s.

America’s Broken Jobs Engine - Yves Smith - There was rending of garments and wearing of sackcloth last week when the jobs report came in at only 80,000 new jobs created in June, the third disappointing report in a row. Pundits looked to find cheer despite the disappointing outcome. For instance, the number of hours worked rose, and 25,000 temps were added, which the optimists used to contend that employers saw more demand, but weren’t quite confident enough to make permanent hires. Citigroup’s Tobias Levkovich argued that more firms are planning to add jobs. The gloomsters pointed out that global manufacturing output is weakening, and new orders in particular are signaling contraction. And John Hussman noted (hat tip Scott): As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.” But as much as analysts desperately pour over the entrails of new data to make prognostications, it seems that many forecasters keep making comparisons to past recoveries, when typical recessions are inventory-driven (more than 100% of the change in GDP is change in inventories). As we are often reminded, the aftermath of a financial crisis, particularly a global financial crisis with a concerted effort to protect banks, is a very different beast. Some analysts do incorporate that perspective, but they still seem to be in the minority. “This time it’s different” is much more popular on the upside than downside.

Percent Job Losses: Great Recession and Great Depression - The causes of the Great Recession were similar to the Great Depression - as opposed to most post war recessions that were caused by Fed tightening to slow inflation - and I'm frequently asked if we could compare the percent job losses during the two periods. Unfortunately there is very little data for the Great Depression. Back in February I posted a graph based on some rough annual data.  In April, Treasury released a slide deck titled Financial Crisis Response In Charts. One of the charts shows the percentage jobs lost in the current recession compared to the Great Depression. Here is that graph (I've added a couple of dots to update the current recession). This graph compares the job losses from the start of the employment recession, in percentage terms for the Great Depression, the 2007 recession, and the average for several recent recession following financial crisis. Although the 2007 recession is much worse than any other post-war recession, the employment impact was much less than during the Depression. Note the second dip during the Depression - that was in 1937 and the result of austerity measures.

Employment Report Graphs: Participation Rate, Duration of Unemployment and Diffusion Indexes - Below are three more graphs based on the June employment report. The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for women increased significantly from the mid 30s to the mid 70s. This rate was at 75.5% prior to the recession, and declined to a post-recession low of 74.3%. There has been almost no recovery in the participation rate for prime working age women. This rate has mostly flattened out this year, and was still near the low in June at 74.4%. The participation rate for men has decreased from the high 90s a few decades ago, to a low of 88.3% after the recession. This rate has increased a little and was at 88.8% in June. This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. Diffusion indexes are a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. If there are employment gains, the more widespread, the better - even if job growth is slow.  The BLS diffusion index for total private employment was at 57.9 in June, down from 59.8 in May. For manufacturing, the diffusion index declined to 51.2 from 53.7 in May. Even though job growth was weak in June, job growth was still somewhat widespread across industries (a small positive). For more employment graphs and analysis, see:
June Employment Report: 80,000 Jobs, 8.2% Unemployment Rate
Employment: Another Weak Report (more graphs)
Percent Job Losses: Great Recession and Great Depression
All Employment Graphs

Trends in Duration of U.S. Unemployment - Duration of Unemployment by Percentage: 5 Weeks and Under, 15 Weeks and Over, 27 Weeks and Over (chart) In June of 1983, the percentage of those unemployed 27 weeks or longer peaked at 26%. That is the only month prior to April of 2009 above the 25% mark.

  • Starting April of 2009, every month has been above the 25% mark.
    Starting July of 2009, every month has been above the 30% mark.
    Starting December of 2009, every month has been above the 40% mark.

The trends paint a grim picture. With each recession the duration of unemployment has increased. Note that prior to 1990, shortly after recessions ended, the percentage of people unemployed 15 weeks and over, and 27 weeks and over dropped quickly. The last three recessions did not follow that pattern and the recession starting in 2007 is unprecedented in obvious ways. I believe a major reason the 27 weeks and over percentage is dropping now is people have exhausted all their benefits and have claimed disability or gone on "forced retirement" to collect social security benefits.

When the going gets tough, the tough get temps -- Almost a third of the US non-farm payroll increase for June came from temporary workers. This demonstrates an ongoing unease across the corporate sector. As firms get spooked by the mess in Europe, the global slowdown, the US fiscal cliff, and risks of US consumer retrenchment (related to all of the above), they increasingly rely on temporary workers. The uncertainty around healthcare expenses is not making the situation any easier. Since the financial crisis, the growth in temporary employees has outpaced the overall payroll increases.

"The Use Of Temps Is Outpacing Outright New Hirings By A 10-To-1 Ratio" - For many months, if not years, we have been beating the drum on what we believe is the most hushed, but significant story in the metamorphosis of the US labor pool under the New Normal, one which has nothing to with quantity considerations, which can easily be fudged using seasonal and birth death adjustments, and other statistical "smoothing" but with quality of jobs: namely America's transformation to a part-time worker society. Today, one of the very few economists we respect, David Rosenberg, pick up on this theme when he says in his daily letter that "the use of temps is outpacing outright new hirings by a 10-to-1 ratio." And unlike in the old normal, or even as recently as 2011, temp hires are no longer a full-time gateway position: "Moreover, according to a Manpower survey, 30% of temporary staffing this year has led to permanent jobs, down from 45% in 2011.... In today's world, the reliance on temp agencies is akin to "just in time" employment strategies." Everyone's skillset is now a la carte in the form of self-employed mini S-Corps, for reason that Charles Hugh Smith explained perfectly well in "Dear Person Seeking a Job: Why I Can't Hire You." Sadly, that statistic summarizes about everything there is to know about the three years of "recovery" since the recession "ended" some time in 2009.

U.S. Jobless Claims Plunge to Lowest in 4 Years -- The number of people seeking unemployment benefits plunged last week to the lowest level in four years, a hopeful sign for the job market. But the decline was partly due to temporary factors. The Labor Department says weekly applications dropped 26,000 to a seasonally adjusted 350,000, the lowest level since March 2008. The four-week average fell to 376,500. Still, special factors affected the report. Automakers have traditionally closed their plants for the first two weeks in July to prepare them to build new car models. But this year they are limiting the shutdowns to boost production. That resulted in fewer temporary layoffs than is normally the case in early July.

Weekly Initial Unemployment Claims decline to 350,000 due to onetime factors - The DOL reports: In the week ending July 7, the advance figure for seasonally adjusted initial claims was 350,000, a decrease of 26,000 from the previous week's revised figure of 376,000. The 4-week moving average was 376,500, a decrease of 9,750 from the previous week's revised average of 386,250.  The previous week was revised up from 374,000 to 376,000. From MarketWatch: "onetime factors such as fewer auto-sector layoffs than normal likely caused the sharp decline, the Labor Department said Thursday". The following graph shows the 4-week moving average of weekly claims since January 2000. Click on graph for larger image. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined to 376,500. The sharp decline was probably due to onetime factors, plus this included the holiday week. And here is a long term graph of weekly claims: This was well below the consensus forecast of 375,000. With the holiday week and onetime factors, it is difficult to tell if there is any improvement - but this is the lowest level for the four week average since May.

BLS: Job Openings increased in May - From the BLS: Job Openings and Labor Turnover Summary There were 3.6 million job openings on the last business day of May, little changed from 3.4 million in April, the U.S. Bureau of Labor Statistics reported today.  The level of total nonfarm job openings in May was up from 2.4 million at the end of the recession in June 2009.  The number of quits was 2.1 million in May, up from 1.8 million at the end of the recession in June 2009.  The following graph shows job openings (yellow line), hires (dark blue), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for May, the most recent employment report was for June.Notice that hires (dark blue) and total separations (red and light blue columns stacked) are pretty close each month. When the blue line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. According to JOLTS, the economy lost a few jobs in May (more separations than hires). Jobs openings increased in May to 3.642 million, up from 3.447 million in April. The number of job openings (yellow) has generally been trending up, and openings are up about 18% year-over-year compared to May 2011.

Job JOLTS - There are 3.5 Unemployed People Per Job Opening for May 2012 - The BLS JOLTS, or Job Openings and Labor Turnover Survey reports the never ceasing abysmal jobs market. The May 2012 statistics show there were 3.5 official unemployed persons for every position available*. There were 3,642,000 job openings for May 2012, a 5.7% increase from the previous month of 3,447,000. Openings are still way below pre-recession levels of 4.7 million. Job openings have increased 67% from their July 2009 trough, yet opportunities are miles away from the 1.8 persons per job opening ratio at the start of the recession, December 2007. Below is the graph of May official unemployed, 12.72 million, per job opening. Job openings are all types of jobs, temporary, part-time, seasonal and full-time. Hires are U.S. citizens, permanent residents, illegals and foreign guest workers. If one takes the official broader definition of unemployment, or U-6, the ratio becomes 6.4** unemployed people per each job opening for February. The May U-6 unemployment rate was 14.8%. Below is the graph of number of unemployed, using the broader U-6 unemployment definition, per job opening. If you do not like the use of U-6 to look at the real number of people looking for a job to actual opportunities, consider this number, of those not in the labor force, thus not counted, 6,291,000 were actually wanting a job. The alternative U-6 unemployment rate only includes 2,423,000 of these people. Also bear in mind U-6 contains people forced into part-time work who need full-time. In May, that was 8,098,000 people. We have no idea the quality of these job openings as a whole.

Vital Signs: Increasing Job Openings - Prospects for job seekers in the U.S. improved in May. Job openings rose to 3.6 million from 3.4 million in April. Also, the number of unemployed people per job opening fell to 3.53 from 3.68, suggesting those seeking work gained an edge. But that doesn’t necessarily mean companies are hiring: Layoffs and other firings jumped in May to 1.9 million from 1.7 million.

Good News: More People Are Quitting - The good news for the job market: More people are quitting their jobs. The bad news: More are getting laid off, too. That’s the basic takeaway from the Labor Department’s monthly Job Openings and Labor Turnover Summary, otherwise known as JOLTS. The survey doesn’t get as much attention as the monthly jobs report because it isn’t as timely — today’s numbers are from May, whereas last week’s report was from June. But for those willing to wait, JOLTS gives a remarkably detailed look at the state of the job market. Today’s report is a mixed bag. On the plus side, the number of people quitting private-sector jobs rebounded in May after falling in April for the first time in five months. The less-volatile three-month average hit a post-recession high of just under 2 million. That’s good news, because quits are a vital part of the “churn” that marks a healthy job market — when people leave their jobs, they open up opportunities for others. Quits are also a sign of confidence: Workers are much less likely to quit their jobs if they don’t think they can find a new one.

38 Million Missing Quits, the Battle to Quit and Replacing Government with a UBI: Three Points on Workplace Coercion - If we view individuals quitting their job as a check on private coercion, which I believe the BHL crew thinks, then there's been a massive increase in private forms of coercion in the past several years. Here's JOLTS data from the Bureau of Labor Statistics on the number of quits that are happening in the labor force: There are, roughly, 38.4 million quits that should have occurred that didn't since the economy went into recession. I'm assuming nobody believes that employers decided to become very nice all of a sudden in December 2007, but that instead the economy went into a deep recession. As a result of this recession, where the number of unemployed versus job openings has skyrocketed (because both the unemployed have increased and job openings shrunk), it is very difficult to find a job. This translates into declining labor share of income, as workers are left with little bargaining power in the Great Recession. If one assumes that labor management techniques are sticky, or that hysteresis creates the conditions where people who have lived through bad economic times have weaker bargaining power, this coercion is likely to cement and be long-lasting.

Hollowing Out  - Tom Edsall does a nice job summarizing the increasing hollowing out of the job market in his New York Times column today.  The employment/population ratio has fallen drastically since 1999 even as Real GDP hit an all time high this month.  Edsall quotes Andy McAfee and me arguing that technological progress is part of the story for both these trends. Fewer people are working in America today than in the late 1990s, even though overall income is higher.  James Hamilton and Amar Bhide are quoted by Edsall as being skeptical that the restructuring of the economy contributed to job losses.  While Andy and I agree that the Great Recession is undoubtedly the biggest driver of the job losses since 2007, we also see a longer-term forces at work.  In fact, employment growth was sluggish well before 2007. Digital technologies have advanced very rapidly in recent years.  This can and does create enormous wealth. That’s the good news.  But there’s no economic law that everyone will share in this wealth.  In fact, as David Autor has noted, in recent years, the demand for middle skill jobs, involving routine cognitive and/or physical skills has plummeted. This is reflected both in wages and in employment. At the same time, those in the top 1% have seen their incomes soar.  The median family actually has less income today than 15 years ago, even though the nation is producing more goods and services than ever before.

Middle Class? Here's What's Destroying Your Future - According to the conventional account, the Great American Middle Class has been eroded by rising energy costs, globalization, and the declining purchasing power of the U.S. dollar in the four decades since 1973. While these trends have certainly undermined middle-class wealth and income, there are five other less politically acceptable dynamics at work:

  1. The divergence of State/private vested interests and the interests of the middle class
  2. The emergence of financialization as the key driver of profits and political power
  3. The neofeudal “colonization” of the “home market” by ascendant financial Elites
  4. The increasing burden of indirect “taxes” as productive enterprises and people involuntarily subsidize unproductive, parasitic, corrupt, but politically dominant vested interests
  5. The emergence of crony capitalism as the lowest-risk, highest-profit business model in the U.S. economy

Let’s start with the conventional forces of higher energy costs.

Downward Spiral - We've heard a lot about jobs in this presidential election cycle. The idea being, I suppose, that once people have a job, regardless of the wages or the hours, they can bootstrap their way to the top. Probably for similar reasons, we don't hear much about poverty. So long as there are jobs around, political rhetoric seems to say, being poor is a choice. While both campaigns will spend many many millions on ads telling you about jobs, I doubt we'll hear much about economic mobility in America or pathways to escaping poverty. Just because there's little talk, however, doesn't mean there isn't a terrifying problem. The latest report from Pew Charitable Trusts looks at economic mobility across generations, using real child-parent pairings. As I wrote yesterday, the findings are bleak. While children earn more than their parents did at their age, adjusted for inflation, the rich are getting richer faster than everyone else. That means that while you may be making more than your parents, you're likely still stuck near the same socioeconomic ranking. The trends are even worse among African Americans, who are more likely to fall on the socio-economic ladder. I called Pew to talk about the report and what findings were particularly notable. I spoke to two researchers with the Economic Mobility Project, project manager Erin Currier and research manager Diana Elliott. They highlighted two particularly disturbing trends. First, Elliott explained that middle class and poor Americans were actually losing wealth:

Restoring Trust in the American Economy: The Real World v. The Confidence Fairy - Recently I went to a well-known restaurant in Evanston, Illinois. This restaurant has a reputation for providing excellent food and service. But the night I was there, it was less than half full. I asked the manager if he would he hire more waiters and chefs if his taxes were reduced and/or government removed the existing regulations controlling the way his restaurant could operate. His answer was that even if his taxes were reduced and regulations eliminated, he would only hire more staff if more customers came in for dinner. On the other hand, if there were twice as many customers for dinners than there were on this night (and there were many more customers before the recession began in 2007) he would gladly double the number of workers he employed even if his taxes were not reduced or regulations changed. That’'s how things work in the Real World. This simple case illustrates clearly that entrepreneurs will have confidence to expand and hire more workers only if they find the market demand for their products and services strong and growing. There are plenty of other things that would do wonders just now to help restore trust and confidence in the American economy: a well-regulated financial sector; smart government investment in the things we need, like jobs and infrastructure; and fair taxation that asks the rich to pay their share. You wouldn't know this listening to conservative economists stuck in Neverland –– a place where the government must never function and corporations must never be regulated.

Manufactured quotes -Take one of the Times’s main anecdotes, Drew Greenblatt, who owns a small manufacturing firm in Baltimore called Marlin Steel Wire and who gets his picture in the Times. This was his third NYT hit in three months. Here are Mr. Greenblatt’s other press hits in June: The NBC Nightly News, PBS Newshour (twice), NPR’s Morning Edition, The Hamilton Spectator. So far this year he’s also been on CNN Newsroom and Fox Business (four times), and in the Financial Times, Reuters, and the Associated Press, plus a number of smaller publications. Two years ago, Greenblatt and his company were the focus of a flattering 2,300 word Atlantic profile and a couple of WaPo profiles in 2001 and 2007. This guy is like the Greg Packer of small manufacturers.Last month, Tim Geithner popped in for a visit. All this ain’t bad for a company with revenues of $5 million. You’d think it was IBM.  Undisclosed in any of these stories is the fact that Greenblatt is an executive-committee member of the board of the National Association of Manufacturers, the powerful DC trade lobby. NAM not only pushes Congress for anti-labor policies (like banning picketing), it lobbies for government-funded workforce training programs (“to be led by the business community,” naturally). Back in October NAM partnered with Deloitte to put out a report that used sketchy methodology to claim that 600,000 jobs are going unfilled because manufacturers “can’t find people with the right skills.”

The problem with ‘structural’ explanations for unemployment - It’s an arcane economics debate with all-too-real implications for U.S. monetary policy: Is high unemployment primarily the result of “structural” factors like skills mismatches and difficulties relocating, or is it largely due to insufficient consumer demand in a weak economic recovery? The answer to that question may help determine how much further the Federal Reserve is willing to push its unconventional measures to bring down the jobless rate, currently stuck at 8.2 percent. If unemployment is cyclical, economists say, it would be more likely to respond to looser monetary conditions.Research from Berkeley professor Jesse Rothstein, published earlier this year and featured recently on the National Bureau of Economic Research’s website, represents one of the most thorough academic efforts to date to discredit the structuralist version of events. Four years after the beginning of the Great Recession, the labor market remains historically weak. Many observers have concluded that “structural” impediments to recovery bear some of the blame. This paper reviews such structural explanations. I find that there is little evidence supporting these hypotheses, and that the bulk of the evidence is more consistent with  the hypothesis that continued poor performance is primarily attributable to shortfalls in the aggregate demand for labor.

The Vanishing Entrepreneur - We’ve all heard it so many times the words have practically lost meaning: small businesses are the source of most new jobs, entrepreneurship is the secret sauce that makes America special, “creative destruction” and economic dynamism require a constant flow of new business start-ups, most of them very small. Republicans in particular like to justify all their attacks on big government as attacks on small business, as though Fortune 500 companies and their executives and shareholders don’t matter to them at all. But the idea that entrepreneurship is a steadily recurring or even rising phenomenon is rarely examined. That’s what makes an article from the Washington Monthly’s July/August issue, “The Slow-Motion Collapse of American Entrepreneurship,” by New America Foundation’s Barry Lynn and Lina Khan, particularly valuable (it’s available now as a Sneak Preview). By using more careful definitions than those often deployed, Lynn and Khan establish that we are actually in a period of significant and steady decline in the formation of new enterprises:In 1977, Americans created more than thirty-five new employer businesses for every 10,000 citizens age sixteen and over. By 2009, however, Americans were annually creating fewer than eighteen such businesses, a 50 percent drop. While the Great Recession clearly cut into new business creation, the decline was clear well before 2007. The averages across decades capture that decline: between 1977 and 1989 Americans created more than twenty-seven new businesses for every 10,000 working-age citizens. This compares to fewer than twenty-five in the 1990s and around twenty-two in the 2000s.

Take this job and ship it -- THE hive mind behind the Modeled Behavior twitter feed has been trying to goad economic types into defending outsourcing, now the subject of intense political debate thanks to Mitt Romney's career at Bain Capital. The direct provocation of MB's ire is, I think, a series of posts from Paul Krugman. In one, he writes: [R]ecently the Washington Post added a further piece of information: Bain invested in companies that specialized in helping other companies get rid of employees, either in the United States or overall, by outsourcing work to outside suppliers and offshoring work to other countries. The Romney camp went ballistic, accusing the Post of confusing outsourcing and offshoring, but this is a pretty pathetic defense. For one thing, there weren’t any actual errors in the article. For another, it’s simply not true, as the Romney people would have you believe, that domestic outsourcing is entirely innocuous. On the contrary, it’s often a way to replace well-paid employees who receive decent health and retirement benefits with low-wage, low-benefit employees at subcontracting firms. That is, it’s still about redistribution from middle-class Americans to a small minority at the top.

Alabama's Airbus Subsidy Eerily Reminiscent of Auto "Transplants" - The July 2 announcement that Airbus would begin assembly of its A-320 airliner in Mobile, Alabama, may be good for Alabama, but whether it's good for the country as a whole is dubious. Indeed, it most reminds me of the subsidized arrival of foreign auto "transplants" that helped undermine Detroit's Big 3 as well as the unionization of the auto industry. The new $600 million facility is projected to create 1000 jobs. Initial reports put subsidies to the company as $158.5 million from the state and various local governments (thanks to @varnergreg for pointing out this article). Remember, though, that initial reports are more likely to underestimate subsidies than overestimate them, as in the case of Electrolux in Memphis. However, if this is remotely near accurate, Alabama got a much better deal for Airbus than did Washington state for the Boeing 787 Dreamliner, which was 220% of the investment and $1.65 million per job, more than 10 times the per job cost in Alabama.  Unfortunately, this development could repeat the example of the subsidization of foreign automakers that hastened the decline of Detroit's Big Three. According to economic geographer James Rubenstein (1992, Table 1.1), from 1979 to 1991 there was a 1 to 1 correspondence in the opening and closing of new automobile and truck assembly plants in the U.S. and Canada: 20 new ones were built, 20 old ones were closed. Every one of the new facilities received subsidies from state and local (or federal and provincial, in Canada) governments.

Most Urban Jobs Are Near Transit, but Most Workers Aren’t - Most urban jobs are near some sort of mass transit stop but most workers face impractically difficult commutes via public transportation, a consequence of the suburbanization of both jobs and people, according to this report by the Brookings Institution.Some three quarters of all jobs in the nation’s 100 largest metropolitan areas are in neighborhoods with transit service, but only about a quarter of the workforce is able to get to their jobs in less than 90 minutes via mass transit. Why the disconnect? Despite the popular image of office workers in tall downtown buildings, most Americans both live and work in the suburbs. Any honest accounting of transit coverage has to take this into account, as Brookings does.On average, the nation’s 100 largest metropolitan areas have 63% of their jobs — 64.6 million total positions — located outside the central city. And while most of those jobs are in near some sort of bus or rail line, the patchwork of suburban transportation systems makes it hard for their workers — most of which also live in the suburbs — to get there without driving.

About 2.7 Million Jobs for Youth Are Missing - More than two and a half million jobs for young people aged 16 to 24 are currently missing from the American economy, according to a new report that paints a depressing picture of the economic outlook for that age group. “The new status quo runs counter to our expectations about the American Dream — rather than opportunity, young Americans can anticipate unemployment and underemployment through much of their 20s, resulting in lower earnings for years to come,” the report said.  Using numbers from the Bureau of Labor Statistics, the authors calculate that 2.7 million jobs are missing for young people. “High youth joblessness combined with lower incomes may lead to weaker economic growth. Persistent youth unemployment could not only alter what it means to be young in America, but also stifle future opportunities for succeeding generations,” the report warns. While the national unemployment rate is 8.2%, the figure for Americans aged 16 to 24 is more than double at 16.5%. For Latino youth, the number rises to 20.5% and for African-Americans, the figure is an astounding 30.2%.

Make way, pops - Younger workers do suffer higher rates of unemployment; among those 20-24 years old the figure is 13.7%, much higher than the 8.2% national average. Even more worrying, a worker entering the labour force during a recession may suffer lower wages for decades. This could result in delayed homeownership and slow wealth accumulation. But baby boomers are also in trouble. Their lower unemployment rates may be partially attributable to the decision by some laid off workers to take early retirement. That choice will leave them poorer for the duration of their retirement. Others are in the final stretch of work and saving before retirement. But current low interest rates are bad for savers. Normally, as ones approaches retirement one invests more in safe assets and less in risky equities. But with yields so low on safe assets, what can soon-to-be retirees do? In this respect low rates could have a contractionary effect. Low rates are supposed to spur investment and demand. But in a society of net creditors, lower interest rates could cause a wealth effect (people realise they have less money than they thought and realise they need to save more), which depresses consumption. Boomers with less in savings than they'd counted on may also work longer than they expected. That might seem likely to depress employment further as fewer older workers create new openings for young workers by retiring. But that is the lump-of-labour fallacy: the erroneous assumption that there's a fixed amount of work in the economy.

The Politics of Getting a Life - Work in a capitalist society is a conflicted and contradictory phenomenon, never more so than in hard times. We simultaneously work not enough and too much; a labor famine for some means feast for others. The United States has allegedly been in economic “recovery” for over two years, and yet 15 million people cannot find work, or cannot find as much work as they say they would like. At the same time, up to two thirds of workers report in surveys that they would like to work fewer hours than they do now, even if doing so would require a loss of income. The pain of unemployment is well-documented, but the pain of the employed only occasionally sees the light, whether it’s Amazon warehouse employees working at a breakneck pace in sweltering heat, or Foxconn workers risking injury and death to build hip electronics for Apple. When work is scarce, political horizons tend to narrow, as critiques of the quality of work give way to the desperate search for work of any kind. And work, of any kind, seems to be all that politicians can offer; right and left differ only on who is to blame for the scarcity of it. Go to the web site of the Barack Obama campaign, and you will be told at the top of the “Issues” page that “The President is taking aggressive steps to put Americans back to work and create an economy where hard work pays and responsibility is rewarded.” Likewise the site of the AFL-CIO labor federation, where a man in overalls grins behind the words “work connects us all”. This is how the virtuous working class appears in the liberal imagination: hard-working, responsible, defined, and redeemed by work, but failed by an economy that cannot create the necessary wage labor into which this responsibility can be invested.

To Achieve Work-Family Balance, Americans Have to Work Less - It seems the summer heat is making us think about how to escape work. Tim Kreider’s New York Timesop-ed on our overly busy lives made a huge splash, while Mitt Romney himself came out (sort of) for vacations for all. Meanwhile, the controversy continues to swirl over Anne-Marie Slaughter’s article about why women “can’t have it all,” meaning that they still struggle to balance family and career. What do these topics have to do with each other? Everything. If we truly want improved work-family balance for American families—mothers and fathers alike—then we have to address the fact that Americans are overworked. We have to work less. Period. Kreider thinks many workers are “addicted to busyness.” He calls for more idleness in order to allow us to make “unexpected connections” and find more inspiration. Mitt Romney might agree. When asked if his lavish vacation was hypocritical given the state of the economy and his bashing of Obama over the head with it, he repliedI hope that more Americans are able to take vacations. And if I’m president of the United States, I’m going to work very hard to make sure we have good jobs for all Americans who want good jobs. And part of a good job is the capacity to take a vacation now and then with their loved ones.

Pay for Oppression: Do Workers in Fairer or Safer Jobs Make Less Money? - The debate over worker rights on the job has taken an interesting turn with Tyler Cowen’s defense of the compensating wage differential argument. This, for those who have not run into it before, says that workers, whether through bargaining or the labor market, get a certain amount of utility. They can take that utility in money or in better working conditions, but the sum has to add up the same. This means that workers in safe jobs, all other things being equal, will make less than workers in dangerous ones; workers subject to bosses’ sexual advances will make more than those in more respectful organizations; and so on. There are four conclusions you would draw from this if it were true:

    • 1. Dangerous or demeaning work is not a problem per se. The workers in those jobs are just as well off as they would be in a better setting. Don’t worry about them.
    • 2. Employers have a financial incentive to make jobs better—safer, fairer, etc. That way they have to shell out less cash.
    • 3. Regulation can’t make anything better, but it can make things worse by taking away an option that would otherwise be available to workers. Some workers would rather have the money and put up with the dangers and indignities of a crummy workplace.
    • 4. You can measure the monetary value of such intangibles as the value of life, the value of not being harassed, of being able to pee when you want, etc.

Fifty Shades of Capitalism: Pain and Bondage in the American Workplace - How did this happen? Economists known as “free-market fundamentalists” who claim Adam Smith as their forefather like to paint a picture of the economy as a voluntary system magically guided by an “invisible hand” toward outcomes that are good for most people. They tell us that our economy is a system of equal exchanges between workers and employers in which everybody who does her part is respected and comes out ahead. Something has obviously gone horribly wrong with the contract. Thieving CEOs get mega-yachts while hard-working Americans get stagnant wages, crappy healthcare, climate change, and unrelenting insecurity. Human potential is wasted, initiative punished and creativity starved. Much of the evil stems from the fact that free-market economists who still dominate the Ivy League and the policy circles have focused on markets at the expense of those inconvenient encumbrances known as "people." Their fancy mathematical models make calculations about buying and selling, but they tend to leave out one important thing: production. In other words, they don't give a hoot about the labor of those who sustain the economy. Their perverted religion may have something to say about unemployment or wages – keeping the former high and the latter low — but the conditions workers face receive nary a footnote.

Is this the beginning of the end for federal unemployment benefits? - States typically provide 26 weeks of unemployment benefits. But four years ago, as the economy began taking a nose dive, Congress began providing additional federal support to pay for more weeks of unemployment insurance after state benefits run out. Since then, it’s reauthorized versions of two federal UI programs — the Emergency Unemployment Compensation (EUC) program and the Extended Benefits program — on 10 separate occasions, according to George Wentworth, a staff attorney for the National Employment Law Project. The most recent extension happened in February as part of the bipartisan deal on payroll tax cuts. But now both of those federal programs are scheduled to phase out, as NELP explains in a new analysis paper. As of July 1, anyone who has lost their job won’t benefit from the additional weeks of federal unemployment insurance if they still haven’t found a job by Dec. 31 — when their 26 weeks of state unemployment benefits run out. Meanwhile, those who receive the extended federal aid will be cut off at various points throughout the year. The Extended Benefits program will be phased out entirely by August, “with more than 500,000 workers having been cut off benefits since the beginning of the year,” NELP says in the analysis. The EUC program is scheduled to expire by December, taking two million more Americans off the federal unemployment rolls between Christmas and New Year’s unless Congress acts.

Some unemployment benefits may need to be paid back - If you have been receiving unemployment benefits, you could be asked to pay some of it back. The government overpaid $14 billion in benefits last year. That's 11 percent of all the unemployment checks sent out last year, and now they want it back. Here's a break down of who is receiving that money: Most end up in the hands of three types of people. --Those who aren't actively searching for a job. --People who quit their jobs or were fired. --And those who continue to file claims even though they've found a job. All of those circumstances make a person ineligible for benefits. But they can still get checks if there is some sort of an administrative error made by the government, employer, or worker. When the government finds an error -- they typically send a letter asking for the money back. Although, some people could get out of repayment if they're in financial distress. Despite those efforts, the government fails to recoup most of the money.

Gaming the System... Disability Edition - In my post outlining the decline in employment (excluding teens), reader Mike pointed out another interesting phenomenon: One of the stories I read about this month's BLS report dealt with the rise in people on disability. I thought charting this over a few dozen years and several recessions might tell an interesting story. Unfortunately, the BLS only reports this data going back to 2008, but the most recent data shows an interesting trend. From the looks of it, we have what appears to be a not-so-coincidental mirror image between the decline in those unemployed with the rise in the number of people not working via claims of disability. I know next to nothing about disability, but my guess is individuals whose employment benefits have run out, have been increasingly taken advantage of disability (or tried to) as a replacement.

Participation in Government Programs Soared in Recession - The percentage of people getting some kind of means-tested government assistance jumped to 18.6% of the population in 2009 from 17.4% in 2007, according to this Census report released today. The largest percentage increase, by far, was in the Supplemental Nutrition Assistance Program — commonly called food stamps. In 2009 — the last year of the recession — some 10.5% of the nation’s noninstitutionalized civilian population was receiving food stamps, up from 7.9% in 2007 before the recession started (the recession technically began in December 2007). Separate data indicate that the jump in government help shown by the Census report has increased further as the sluggish recovery and still-high unemployment has lead to stark increases in long-term unemployment. (Read more: Nearly half of people live in household getting government benefits)

More on Austerity: Fiscal Threats to the Food Safety Net - As the Center on Budget and Policy Priorities (CBPP) has reported in several recent postings, cuts to SNAP—formerly known as the food stamp program—now being considered in Washington would impose severe hardship on millions of people who use SNAP benefits to buy groceries in retail stores. For example, the Center released a report a few days ago on cuts to the program contained in the farm bill recently proposed by House Agriculture Committee leaders. These three points, quoted from the report, summarize the impact of the proposed cuts:

  • The bill would terminate SNAP eligibility to several million people.  By eliminating categorical eligibility, which over 40 states have adopted, the bill would cut 2 to 3 million low-income people off food assistance.
  • Several hundred thousand low-income children would lose access to free school meals.  According to the Congressional Budget Office (CBO), 280,000 children in low-income families whose eligibility for free school meals is tied to their receipt of SNAP would lose free meals when their families lost SNAP benefits.
  • Some working families would lose access to SNAP because they own a modest car, which they often need to commute to their jobs.  Eliminating categorical eligibility would cause some low-income working households to lose benefits simply because of the value of a modest car they own.  These families would be forced to choose between owning a reliable car and receiving food assistance to help feed their families.

Hunger Games: Are We Watching America in the 21st Century? - When I first saw the movie Hunger Games a couple months back, I was mesmerized by the story for the first two hours but then shocked in the last five minutes. That’s when I realized that it was headed towards a totally preposterous ending. What seemed preposterous was that any civilization of otherwise thinking, feeling human beings could tolerate a society in which it defined as heroic and patriotic a set of games requiring that representatives of its children literally kill each other.  How could any regime that fostered such horror retain any political or moral legitimacy?   This week, I’ve finally understood the obvious.  America has become Hunger Games. On Thursday, House Committee, virtually every GOP member voting “aye,” showed how this is possible.  Along with a handful of stupid, cowardly and evil Democrats, the Republicans voted to subject several million people, including several hundred thousand children, to the certainty of malnutrition and heightened risk of actual starvation, for no other reason than they regarded slashing the budgets for food stamps to be a moral, patriotic thing to do, or worse, something the victims fully deserved.

Nearly one in five people in Alabama are getting food stamps. - Nearly one in five people in Alabama are getting food stamps. In Madison County, 35 percent of food stamp recipients are under age 11. Workers at the Department of Human Resources in Madison County said most applicants are working, but it's not making enough to live on and feed their families. The economy and gas prices are two big reasons for the additional applications. "A lot of people who didn't want to apply found that now they are forced and in a position to feed their families and they have to do them,"

Food Pantries Struggling to Meet Increased Demand -- While electricity has been restored to the majority of central Ohioans after recent power outages -- food banks are struggling to keep up with demand. The pantry at Last Call Outreach Ministries has been a destination for many Licking County residents, after massive blackouts ruined the contents of thousands of refrigerators. Last Call's operators are happy to help those in need, but say the increased demand is cleaning out its supplies. "We have had a lot of new clients, people who have never used a pantry before, and they are just here trying to get something until payday." The strain is being felt at food pantries all across central Ohio, so donations are greatly appreciated. Mid-Ohio Food Bank is doing its part to help, pledging a donation of 400 cases of lunch meat to Licking County pantries. AEP officials also plan to contribute to the area's pantries, promising to donate any remaining food and water from their Newark headquarters.

Nearly 4 million Californians struggled to put food on table - An estimated 3.8 million California adults — particularly those in households with children, as well as low-income Latinos — could not afford to put adequate food on the table during the recent recession, according to a new policy brief by the UCLA Center for Health Policy Research.  In 2009, about one in six low-income Californians had "very low food security," which describes multiple instances in which people had to cut their food intake and experienced hunger, according to the study, which is based on data from the California Health Interview Survey. This is double the one-in-12 figure from 2001.  Food insecurity skyrocketed during the "Great Recession" of 2007, when California's unemployment rate increased from 5 percent in 2007 to 11 percent in 2009. In addition, inflation-adjusted median household income decreased by nearly 5 percent from 2009 to 2010, the largest decline on record, the study's authors noted.  As California continues to struggle with a lethargic economic recovery, the authors noted that many families may still be struggling.

Richer Rich, and Poorer Poor - A while back I wrote about how there was greater inequality in wealth than there was in income. Now a new report from the Pew Economic Mobility Project shows that across the income distribution, every income class is earning more than it used to, even if the raises are uneven. But when it comes to the wealth distribution, the rich are getting richer and the poor are getting poorer. The report is based on data from the Panel Study of Income Dynamics, or P.S.I.D., a longitudinal data set that has followed families from 1968 to the present. First Pew looked at the earnings of today’s adults compared to those of their parents’ generation, and found that the typical American in each income quintile earned more than his counterpart from a generation earlier. The median person in the panel today earns a family income of $51,177, whereas the comparable figure from a generation ago was $27,036 after adjusting for inflation. You can see similar bumps upward for the typical family in other quintiles, and that the very highest earners got the biggest raises. The median family in the top quintile earned $49,075 a generation ago, and $111,115 today, an increase of 126 percent in inflation-adjusted terms. That’s a much bigger raise, no doubt, but at least every income strata saw its earnings rise. The trend for the distribution of wealth looks somewhat different.

Only Half of Americans Exceed Parents' Wealth -- On Tuesday I wrote about the income and wealth distribution of today’s workers versus those of a generation earlier, based on a new report from the Pew Economic Mobility Project. In the report, Pew researchers also examined mobility trends within individual families: That is, regardless of what the generations as a whole look like, are today’s Americans better off than their own parents? The answer depends on how you define “better off.” Pew uses two different metrics for intergenerational economic mobility: absolute mobility, and relative mobility. For incomes, “absolute” mobility refers to whether an individual earns more money than his parents did, in inflation-adjusted terms. For example, your parents earned $30,000, and you now earn $50,000. “Relative” mobility refers to whether an individual has been able to move into a different socioeconomic class from the one he was born into; for example, a child born into the bottom income quintile manages to make it to the very top of the income distribution as an adult. In absolute terms, intergenerational income mobility looks pretty good. Five out of every six Americans have family incomes that are higher than their own respective parents’ incomes were: The country looks far less mobile when you look at relative income classes, though. Americans born into the very top or bottom quintiles were likely to remain there as adults:

David Brooks Blames Women for Income Inequality -- Leave it to David Brooks to figure out a way to blame the ladies for income inequality. In his most recent New York Times column, Brooks decided to take a look at the most recent research of Robert Putnam, the Harvard University political science professor best known for writing Bowling Alone, the modern treatise on why many of us feel so isolated. Putnam has now moved on to class distinctions in child-rearing, and discovered what many others, including most famously sociologist Annette Lareau, have found: the upper middle classes parent very differently from everyone else. They spend more time with their children, and they emphasize achievement and vaguely salutary extracurricular activities ranging from soccer to singing classes for their progeny over after-school jobs and familial responsibility. All of this, in the view of Brooks, is responsible for our nation’s stunning lack of income mobility.

This Week in Poverty: The Soul Sisters - Like millions of other Americans, I’ve followed the Nuns on the Bus over the last couple of weeks as they went on an inspiring 2,700 mile drive across the country to educate people on the House Republican-passed Ryan budget and the damaging effects it would have on poor, vulnerable and struggling people throughout America. I was in Washington, DC, where the tour ended—right at the United Methodist Building where The Nation ’s DC bureau is located, in fact. There were about 400 people there—mostly boisterous fans, religious and non-religious alike—and a nice turnout by the press too. The nuns made their way from the bus to a stage backed by a huge American flag. Eye of the Tiger blared from the speakers. It was a bit funny to hear the theme song from Rocky III accompanying an entrance by seven nuns. But it was also fitting. At a time when our politics is marked by canned speech, rehearsed talking points, and predictable rhetoric, the sisters are dedicated to something that is as courageous as it is unusual: “Sister tells the truth,” Sister Simone Campbell, executive director of NETWORK, a national Catholic social justice lobby, said to a cheering crowd. I had the opportunity to speak to Sister Simone about the tour, what inspired it, and what’s next for the Nuns on the Bus.

For black Americans, financial damage from subprime implosion is likely to last - The implosion of the subprime lending market has left a scar on the finances of black Americans — one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades. At issue are the largely invisible but profoundly influential three-digit credit scores that help determine who can buy a car, finance a college education or own a home. The scores are based on consumers’ financial history and suffer when they fall behind on their bills.  For blacks, the picture since the recession has been particularly grim. They disproportionately held subprime mortgages during the housing boom and are facing foreclosure in outsize numbers. That is raising fears among consumer advocates, academics and federal regulators that the credit scores of black Americans have been systematically damaged, haunting their financial futures. The private companies that calculate credit scores say they do not consider race in their formulas. Lenders also say it is not a factor when deciding who qualifies for a loan; federal laws prohibit the practice. Still, studies have shown a persistent gap between the credit scores of white and black Americans, and many worry that it is only getting wider.

Is a New “Take No Prisoners” a Model for Social Change? -- Yves Smith - Lambert pointed to a blog post that posited the question of whether it would be possible to engineer a mirror image of the Stanford Prison experiment, in which subjects were put in a mock prison setting, cast either as guards or inmates. The experiment had to be aborted within days as the guards quickly became sadistic. But could a setting be created in which good behavior would be fostered? The pitch from the post: For years, the Royal Canadian Mounted Police (RCMP) detachment in Richmond, Canada ran like any other law enforcement bureaucracy and experienced similar results: recidivism or reoffending rates ran at around 60%, and they were experiencing spiraling rates of youth crime. This forward-thinking Canadian detachment, led by a young, new superintendent, Ward Clapham, challenged the core assumptions of the policing system itself. He noticed that the vast majority of police work was reactive. He asked: “Could we design a system that encouraged people to not commit crime in the first place?” Indeed, their strategic intent was a clever play on words: “Take No Prisoners.” Their approach was to try to catch youth doing the right things and give them a Positive Ticket. The ticket granted the recipient free entry to the movies or to a local youth center. They gave out an average of 40,000 tickets per year. That is three times the number of negative tickets over the same period. As it turns out, and unbeknownst to Clapham, that ratio (2.9 positive affects to 1 negative affect, to be precise) is called the Losada Line. It is the minimum ratio of positive to negatives that has to exist for a team to flourish. On higher-performing teams (and marriages for that matter) the ratio jumps to 5:1. But does it hold true in policing? According to Clapham, youth recidivism was reduced from 60% to 8%. Overall crime was reduced by 40%. Youth crime was cut in half. And it cost one-tenth of the traditional judicial system.

Cut Taxes or Restore Services? Maryland and Kansas Differ on Path - As state governments begin to emerge from the long downturn, many are grappling with a difficult choice: should they restore some of the services and jobs they were forced to eliminate in the recession or cut taxes in the hopes of bolstering their local economies? The debate over the proper balance between taxing and spending has been raging in Congress, on the presidential campaign trail and in statehouses around the country, and no two states have settled it more differently this year than Maryland and Kansas, whose fiscal years began July 1. Maryland, a state controlled by Democrats that has a pristine credit rating, raised income taxes on its top earners this year to preserve services and spending on its well-regarded schools — leading some business groups to warn that the state might become less competitive. Kansas, controlled by Republicans, decided to try to spur its economy with an income tax cut — which Moody’s Investors Service, the ratings agency, recently warned would lead to “dramatic revenue loss” and deficits that would probably require more spending cuts in the coming years.

NYC mayor challenges apartment builders to think smaller - Could apartments in New York City get any smaller? Mayor Michael Bloomberg hopes so. On Monday he announced a competition for architects to submit designs for apartments measuring just 275 to 300 square feet (25.5 to 28 square meters) to address the shortage of homes suitable and affordable for the city's growing population of one- and two-person households. "People from all over the world want to live in New York City, and we must develop a new, scalable housing model that is safe, affordable and innovative to meet their needs," the mayor said in a statement announcing the "adAPT NYC" competition. Advertise | AdChoicesBloomberg said the city plans to waive zoning requirements at a city-owned lot in the Kips Bay neighborhood of Manhattan to allow the construction of a building filled with the "micro-units." They will be about four times the size of a typical prison cell and about one-fortieth the size of the mayor's Upper East Side townhouse.

Mayor of Scranton cuts city workers' pay to minimum wage - The city does not have sufficient money to pay its employees so the mayor reduced the wages of all employees, including police, firefighters, and his own, to Pennsylvania's minimum wage—$7.25 an hour. The government of the city of 76,000 has a $16.8 million deficit and does not have enough money to pay its workers their regular salaries. So on June 27, Mayor Chris Doherty announced that beginning on July 6, all 400 city employees would be paid the minimum wage. The city's unions took the city to court. The International Business Times reports that on July 6, a judge ruled the city had to pay its employees their regular wages even though the city has no money. The judge found the city was breaking the law by paying only the minimum wage. Doherty concedes he broke the law after issuing the minimum wage cheques right after the judge's ruling. But he said he had no other choice. Doherty told NPR, "I'm trying to do the best I can with the limited amount of funds that I have. I want the employees to get paid. Our people work hard—our police and fire—I just don't have enough money and I can't print it in the basement." After paying everyone the minimum wage, the city only had $5,000 remaining in its coffers.

Scranton's Public Workers Now Paid Minimum Wage - The city of Scranton, Pa., sent out paychecks to its employees Friday, like it does every two weeks. But this time the checks were much smaller than usual. Mayor Chris Doherty has reduced everyone's pay — including his own — to the state's minimum wage: $7.25 an hour. Doherty says his city has run out of money. Doherty wants to raise taxes to fill a $16.8-million gap. The city council wants to take a different approach and borrow money.  After paying workers Friday, the city had only about $5,000 left in the bank. More money flowed into city accounts that day, but it was still not enough to pay the $1 million the city still owes to its nearly 400 employees. The firefighters' union, along with the police and public works unions, have taken the city to court. Lackawanna County Judge Michael Barrasse issued an injunction, essentially agreeing with the unions that the city was breaking the law, but Doherty says he doesn't have another choice. Despite the injunction, he had the city send out paychecks based on minimum wage. The unions plan to be back in court first thing Monday morning to ask the judge to hold Doherty in contempt.

Scranton Mayor: Minimum Wage For All Or Become Stockton - The infamous city of Scanton, PA has had financial troubles for a couple of decades - losing population since the end of WWII - but as NPR reported this weekend, the $16.8 million budget gap that Mayor Chris Doherty is trying to fill (and the disagreements between his taxation proposal and the city council's borrow-more-money view) has driven the mayor to an incredible action. Doherty has reduced everyone's pay - including his own - to the state's minimum wage of $7.25 per hour. In an ironic choice of words, the desperate mayor noted: "I'm trying to do the best I can with the limited amount of funds that I have," Doherty says, "I want the employees to get paid. Our people work hard — our police and fire — I just don't have enough money and I can't print it in the basement." NPR continues, After paying workers Friday, the city had only about $5,000 left in the bank. More money flowed into city accounts that day, but it was still not enough to pay the $1 million the city still owes to its nearly 400 employees.

Sunday Late Night: Can he DO that? -- Scranton (PA) Mayor Chris Doherty defied a judge’s order on Friday and paid city workers only the minimum wage. The Mayor claims the city has no money to pay their actual salaries and will make it up “when cash flow improves.” In defiance of an injunction issued in Lackawanna County Court, hundreds of city employees will open their checks today to find they were paid only minimum wage for their work. Amid Scranton’s ever-deepening financial crisis, Mayor Chris Doherty said his administration is going forward with a plan to unilaterally slash the pay of 398 workers to the federal minimum of $7.25 an hour with today’s payroll, insisting it is all the city can afford. Without a bankruptcy filing (which might be the correct way for a city to try to get out of its contracted pay obligations) Scranton is in uncharted territory here: unilateral contract modification is one thing (certainly illegal) but defying a court order is quite another. Setting to one side, of course, the burning issue of for how long police, firefighters, and other public works employees will show up at work for minimum wage. So far, folks are coming to work. “The judge was pretty clear about it. The employees are not part of the fight between the mayor and council. It’s a quandary. All I know is I need protection for my people,” said Det. Sgt. Bob Martin, president of the police union. “We’re coming to work. We’ll be there to protect the citizens until these people figure this out.”

San Bernardino facing bankruptcy if deep cuts aren't made - The city must immediately make substantial cuts to its budget or prepare for bankruptcy, the interim city manager and the finance director have warned the City Council. Spending is projected to be $45 million more than revenues for the fiscal year that began July 1, and the city's reserve fund is empty, Interim City Manager Andrea Travis-Miller and Finance Director Jason Simpson wrote in a budget plan sent to the mayor and council on June 26. More than 250 workers - 20 percent of the city's work force - have been laid off and employee unions have given $10 million in concessions over the past four years, they noted in the budget plan. "Yet, the city is still facing the possibility of insolvency due to a variety of issues including accounting errors, deficit spending, lack of revenue growth and increases in pension and debt costs," they wrote. "The city has reached a breaking point and faces the reality of deficient cash on hand to meet its contractual and debt obligations due in July 2012."

San Bernardino, California, Weighs Chapter 9 Bankruptcy - San Bernardino may become the third California city in two weeks to file for municipal bankruptcy protection, as it struggles with declining tax revenue, growing employee costs and ill-timed public-works projects. The City Council is to consider authorizing the city attorney to file a Chapter 9 petition at a meeting late today, said Gwendolyn Waters, a spokeswoman. A decision was possible tonight, though unlikely, she said. A San Bernardino bankruptcy would follow Stockton, a community of 292,000 east of San Francisco, which on June 28 became the biggest U.S. city to file for bankruptcy. Mammoth Lakes, a mountain resort of 8,200, filed for protection from creditors on July 3 saying it can’t afford to pay a $43 million judgment, more than twice its general-fund spending for the year. San Bernardino, a city of 209,000 east of Los Angeles, faces a $45 million deficit this fiscal year, according to a June 26 budget analysis posted on its website. The city has declared fiscal emergencies, negotiated for concessions from employees and reduced its workforce by 20 percent in four years, according to the report.

San Bernardino is 3rd California city to file for bankruptcy - The City Council in San Bernardino voted Tuesday night to seek Chapter 9 bankruptcy protection, making it the third California city in less than two weeks to make the rare move. The Southern California city of about 210,000 people will also become among the second largest in the nation ever to file for bankruptcy. Stockton, the Northern California city of nearly 300,000, became the biggest when it filed for Chapter 9 on June 28. The City Council directed the city attorney to make the move during a meeting where administrators explained the dire fiscal circumstances and urged them to choose the bankruptcy option. "We have an immediate cash flow issue," Interim City Manager Andrea Miller told Mayor Patrick Morris and the seven-member City Council, according to the Los Angeles Times.Miller said the city faces a budget shortfall of $45.8-million. It has already stopped paying some vendors and may not be able to make payroll over the next three months.

Stockton Retirees Sue in U.S. Bankruptcy Court Over Benefits - Some retirees from the bankrupt City of Stockton, California, filed a lawsuit asking a federal judge for an injunction to stop the city from cutting off their health benefits. Shelley Green, Patricia Hernandez and other members of the Association of Retired Employees of Stockton claim the city has traditionally paid employees’ health-care premiums and extended benefits to supplement Medicare for those over 65. “Despite this promise,” Stockton officials plan “to immediately terminate payment of health insurance premiums” for many retirees, lawyers for the group said in a complaint filed July 10 in U.S. Bankruptcy Court in Sacramento, California.

California Bankruptcies Are Only The Beginning - San Bernardino became the third California city to file for bankruptcy in the past few weeks ... but it won't be the last. Many municipalities in the Golden State and around the nation are struggling to cover their costs as the economic malaise continues to hurt tax revenue streams, experts said. This will lead to more municipal bankruptcies, which have been rare until now. "This is not the end. This is the beginning," said Peter Navarro, business professor at University of California, Irvine. "As cities see it can be done and is being done, it will give them the idea to do it." The San Bernardino City Council voted Tuesday to file for Chapter 9 bankruptcy after the interim city manager issued a report that outlined its dire straits. Some $10 million to $16 million in annual revenue has evaporated in recent years as taxable sales dried up and property values plummeted. Despite negotiating tens of millions of dollars in concessions and reducing its workforce by 20 percent over the past four years, San Bernardino was facing insolvency and would not have enough cash on hand to meet its obligations, according to the report

Will LA be the next city to go bankrupt? - The San Bernardino City Council decided to file for Chapter 9 bankruptcy protection Tuesday, making it the second largest city in the nation to ever file for bankruptcy. Two weeks ago Stockton, in Northern California, became the largest city in the country to ever file for bankruptcy. And the tiny town of Mammoth Lakes voted for bankruptcy last week. The city of Los Angeles has serious money problems. Mayor Antonio Villaraigosa says the city has cut a third of the general fund civilian workforce. But Villaraigosa says the city will never declare bankruptcy as long as he's mayor. Term limits force him out of office next summer. "I can't guarantee that they won't happen under somebody else's watch, but I can tell you under mine, I will make the tough decisions," said Villaraigosa. Those decisions, he said, include layoffs of more civilian employees if necessary to balance the budget and avoid bankruptcy. "Which is why I've said, if necessary, I will lay off as many people as we need. But let's be clear, we're not there yet," he said.

Oakland City Council Demands Debt-Swap Renegotiation With Goldman Sachs - If the Libor scandal did end up hurting local governments to a large degree, you can just add that to the list. Local governments have been easy marks for the financial industry during the last decade, engaging in all kinds of interest rate-swap deals and other vehicles for financing operations. When they turn sour, the locals, not the banks, end up holding the bag. One city is trying to flip that script. The Oakland City Council unanimously voted to break off a deal with Goldman Sachs, using the city’s leverage to try and get out of the deal that is hurting their taxpayers. The issue concerns a familiar interest rate-swap deal, which financial institutions sell to cities as a way to hedge against higher interest rates, but which have cost cities millions by locking in higher borrowing costs. The council voted to demand Goldman Sachs to negotiate with the city to get out of a 1998 interest rate-swap deal without having to pay a $15 million penalty. Currently, because of the locked-in rates, the deal is costing the city $4 million a year. Oakland estimates they have lost $17.5 million on the deal so far, and even though the underlying bonds were sold back four years ago, because of that $15 million penalty, the city will have to continue losing money on the deal until 2021. So the City Council simply voted to terminate the deal. And if Goldman Sachs won’t let Oakland out, the city will stop doing any business with the bank, per the resolution.

Are the Mice Starting to Roar? Municipalities Turn Defiant with Wall Street - Municipal finance has long been a cesspool. States, towns, hospitals, transit authorities, all have long been ripe for the picking. Sometimes local officials are paid off (anything from cold hard cash to gifts to skybox tickets), but much of the time, there’s no need to go to such lengths, since preying on their ignorance will do. As we’ve pointed out, even though these bodies often hire consultants, those advisors are often either not up to the task (how can people who don’t know finance vet an expert?) and/or have bad incentives (more complicated deals, which are generally more breakage prone, tend to produce higher consulting fees). Dave Dayen highlighted one example yesterday: the city of Oakland has decided rather than pay $15 million in termination fees to get out of an interest rate swap deal gone bad: The council voted to demand Goldman Sachs to negotiate with the city to get out of a 1998 interest rate-swap deal without having to pay a $15 million penalty. Currently, because of the locked-in rates, the deal is costing the city $4 million a year. Oakland estimates they have lost $17.5 million on the deal so far, and even though the underlying bonds were sold back four years ago, because of that $15 million penalty, the city will have to continue losing money on the deal until 2021. In other words, the headline is: “Oakland to Goldman: Drop Dead.” But the case I like best so far is wee Moberly, Missouri. The New York Times got up in arms last month that a town of 14,000 is repudiating a bond guarantee that it was rushed into by a state authority: When the city’s guarantee was called, the Moberly City Council issued a statement saying: “The city’s taxpayers, under these circumstances, should not bear the burden of Mamtek’s failures or be asked to ‘bail out’ their shareholders or investors.”

Moodys' downgrades Chicago Schools to A1 - (Reuters) - Moodys' Investors service downgraded on Tuesday the rating on Chicago Board of Education's general obligation debt to A1 from Aa3 and revised the outlook to negative from stable. The downgrade, which affects $5.9 billion of debt, reflected "a financial profile marked by mounting budgetary pressures and the expectation of a substantial reduction in reserves and liquidity in fiscal 2013," said the rating agency. On Friday the Chicago Public Schools unveiled a $5.16 billion fiscal 2013 budget that cut spending and levied property taxes to a maximum rate to tackle a $665 million deficit. Moodys said the Chicago board has an estimated $1 billion budget shortfall for fiscal 2014 and faces a declining trend of "pension funding levels with dramatic increases in required contribution levels in coming years." It also mentioned "some uncertainty regarding outcome of labor contract negotiations." Among the factors that may induce further ratings cuts, Moody's mentioned continuing delays or reductions in state aid payments, as well as the possibility of jumps in such costs as pensions.

Texas GOP Declares: "No More Teaching of 'Critical Thinking Skills' in Texas Public Schools": The Republican Party of Texas has issued their 2012 political platform and has come out and blatantly opposed critical thinking in public schools throughout the state. If you wonder what took them so long to actually state that publicly, it is really a matter of timing. With irrationality now the norm and an election hovering over the 2012 horizon, the timing of the Republican GOP announcement against "critical thinking" instruction couldn't be better. It helps gin up their anti-intellectual base, The Texas GOP's declarative position against critical thinking in public schools, or any schools, for that matter, is now an official part of their political platform. It is public record in the Republican Party of Texas 2012 platform. With regard to critical thinking, the Republican Party of Texas document states: "Knowledge-Based Education - We oppose the teaching of Higher Order Thinking Skills (HOTS) (values clarification), critical thinking skills and similar programs that are simply a relabeling of Outcome-Based Education (OBE) (mastery learning) which focus on behavior modification and have the purpose of challenging the student's fixed beliefs and undermining parental authority."

Does the American Elite Want Real Public Education? - This Real News Network segment tackles the ugly topic of whether the deterioration of public education in the US is by design. You might also want to see the earlier shows in this series, the first on Obama’s educational policies, the second on Romney’s.

Children of Immigrants Study More - Whether because of Tiger Moms or otherwise, the children of immigrants really do study more than the children of native-born Americans. That chart is based on data from the Labor Department’s American Time Use Surveys from 2003 to 2010. It shows that teenagers whose parents were immigrants spent an average of 26 minutes more per day on education-related activities than their counterparts with native-born parents.  That means that over the course of a week, children of immigrants spend about 27.7 hours in educational activities, whereas children of native-born Americans spend about 24.6 hours. This gap in time spent on educational activities reflects both more time spent in school (181 minutes for immigrants’ children versus 167 minutes for children of the native-born) and more time spent studying (50 minutes versus 38 minutes). By contrast, children of native-born parents spend more time in paid work activities. Given the economic mobility benefits of education, this contrast does seem to fit the stereotype of immigrants’ working long hours to help their children rise to a higher socioeconomic class in adulthood.

What lies behind the battle over the New York Public Library - The NYPL wants to 'replace books with people', but do we have to turn our beaux-arts research library into a giant internet cafe? Libraries across America are facing swingeing budget cuts and uncertain futures. But here in New York, home to the second-largest library in the country, the future is now. The hottest cultural controversy of this already hot summer concerns the New York Public Library (NYPL), and a plan to disembowel its main building – a plan that will slice open the stacks and "replace books with people", in the words of the NYPL system's CEO, Tony Marx. It's enraged writers and professors, demoralized a staff already coping with layoffs, and called the entire purpose of the system into question. And the debate is getting bitter. Hundreds of writers, from Peter Carey to Mario Vargas Llosa, have gone on record against the plan. An exhaustive exposé in the literary magazine n+1 raised the temperature, and the current issue of the New York Review of Books contains page after page of tetchy point v counterpoint. Whatever the fate of our library, a lot of people are going to be very angry when this is all over.

Language in Books Reflects Increasingly Individualistic Culture - See Dick. See Dick look in the mirror. See Dick admire his reflection. Researchers who have scanned books published over the past 50 years report an increasing use of words and phrases that reflect an ethos of self-absorption and self-satisfaction. “Language in American books has become increasingly focused on the self and uniqueness in the decades since 1960,” a research team led by San Diego State University psychologist Jean Twenge writes in the online journal PLoS One. “We believe these data provide further evidence that American culture has become increasingly focused on individualistic concerns.” Their results are consistent with those of a 2011 study which found that lyrics of best-selling pop songs have grown increasingly narcissistic since 1980. Twenge’s study encompasses a longer period of time—1960 through 2008—and a much larger set of data.

5 Percent of Job Programs Fail Test on Graduates’ Success - The Department of Education is issuing data on Tuesday showing that 5 percent of career-training programs — all of them at for-profit institutions — failed all three requirements of the department’s new gainful-employment regulations. Under the new rules, intended to protect students from taking on high debt for worthless job credentials, at least 35 percent of graduates must be repaying their loans, and the typical graduate’s estimated annual loan payments must not exceed 12 percent of earnings, or 30 percent of discretionary income. Starting next fall, schools that fail all three tests for three of four consecutive years will lose their access to federal aid.

"No payment — no access code — no participation — lower final grade." - Now the use of textbooks and the sharing of a new textbook can be stopped with the sale of a yearly access code to engage in discussion boards by students with instructors. The Publishing Industry with the help of one Economics Professor has found a way to stop the sharing of text books amongst students and the sales of old text books to the next incoming classes. New students will be forced to buy a new text book or buy a special code allowing them to use the book new or old. The press release describing the new invention put it in this manner: "In the case of a used book or pirated download, the student pays for the access code," according to the press release. "No payment — no access code — no participation — lower final grade." Professor Patents way . .. Grades of Students Who Pirate Would be Docked Under Prof's Plan. Maybe it is just me, but an education which is increasingly  expensive and restrictive as the ways to shave a few dollars off of it are closed to those who only wish to achieve it  from using old text of which more times than naught are out of date after one year. The world and its knowledge turn much faster leaving students to beg for the obsolete education resources paid for by a hefty tuition.

U.S. pushes for more scientists, but the jobs aren’t there - Michelle Amaral wanted to be a brain scientist to help cure diseases. She planned a traditional academic science career: PhD, university professorship and, eventually, her own lab. But three years after earning a doctorate in neuroscience, she gave up trying to find a permanent job in her field. Dropping her dream, she took an administrative position at her university, experiencing firsthand an economic reality that, at first look, is counterintuitive: There are too many laboratory scientists for too few jobs. That reality runs counter to messages sent by President Obama and the National Science Foundation and other influential groups, who in recent years have called for U.S. universities to churn out more scientists. Obama has made science education a priority, launching a White House science fair to get young people interested in the field. But it’s questionable whether those youths will be able to find work when they get a PhD.

Orphan Ideas, by Luigi Zingales - Since the United States Supreme Court’s “Citizens United” decision,... concern about business interests’ influence over US elections has been growing. But political contributions are only one reason why business interests have so much power.  ideas play a big role, too. Unfortunately, rather than leveling the playing field, the battle of ideas may skew US politics even further in favor of big business.  Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account the demand for ideas. And, if funding is not a major issue, the mechanism of amplification of an idea (and thus its ultimate diffusion) nonetheless depends upon how appealing it is to some lobbying effort.Consider a great researcher in my field, Michael Jensen. Business loved his first paper, because it  ended up justifying an increase in pay. There was no similar love for the second paper, which languishes almost unknown, despite its important insights, the two papers’ asymmetric citation payoff is a warning for young scholars: if they want to get ahead professionally, the position that they should take is clear.

The rising credit risks in US student loans - The spectacular growth in student loan balances has been driven by college tuition increases as well as...higher overall college enrollment. But the problem is not only the size and the rapid expansion of the student loan amounts outstanding, but also the increasing credit risk. Barclays Capital: - The Federal Reserve, with the help of Equifax, created an extensive data set providing a snapshot of student debt in Q3 2011 that was released in March 2012. According to this study, 14% of all borrowers had past-due balances, and 27% of those who had entered the repayment cycle had past-due balances. Almost half of all student borrowers were not making payments; 47% were either still in school or in deferral, forbearance, or grace periods as of Q3 2011. This means that a significant number of borrowers who are not currently in repayment are set to enter the payment cycle in the next few years. Given the weak labor market and increasing dropout rates, there is little reason to think that their delinquency rates will lower the current national average. Another worrying sign is that delinquencies in the 40-49 age group are disproportionately high. Seems some borrowers basically give up on this debt during the years of their prime earning potential. Clearly the weakness in the labor market is not helping.

Indentured Students Rise As Loans Corrode College Ticket - David, 38, owes about $85,000 in loans for a master’s degree in education at New York University. He can’t find full-time work, lives with his parents in White Plains, New York, and has deferred paying his debt for three years.  The financial-aid odyssey of two generations of Brezlers tracks the history of U.S. student loans, which, like the home mortgage, helped define the American dream. In the early years, the loan program let ambitious teens take on a small debt that could pay off with a lifetime of higher earnings. Now, the $1 trillion in outstanding student debt has become a drag on the economic recovery, a flashpoint in the presidential election and a threat to the egalitarian ideals of U.S. higher education.  How did a once-modest federal program spiral out of control, weighing down low- and middle-income families like the Brezlers that it was designed to help?  The answer echoes both the health-care and mortgage crises. As college costs have soared faster than the rate of inflation over the past four decades -- reaching $60,000 a year at the most expensive private schools -- Republicans and Democrats alike postponed a reckoning. They encouraged borrowing and ignored surging tuition, leaving loans to balloon to the size of mortgages, shocking even the system’s own architects.  “No one ever conceived this was a way to create a debtor class of former students, the indentured student,”

Calif. teacher pension posts low investment return -- California's teacher pension fund earned just a 1.8 percent return from investments this year, a rate that fell well short of expectations and could add to the system's shortfall, officials revealed Thursday. The expected return for the nation's second-largest public pension system had been 7.5 percent, which was lowered earlier this year from 7.75 percent. The fund earned the return for the fiscal year that ended June 30, said Christopher Ailman, chief investment officer of the California State Teachers' Retirement System. The pension fund manages retirement money for more than 600,000 active and retired teachers and has about $64.5 billion in unfunded liabilities. Ailman said the $150 billion fund has been impacted by economic uncertainties worldwide and the swings of the stock market.

San Bernardino at Brink Awaits Calpers Pension Tab - The Southern California city of San Bernardino has seen its workers’ pension costs more than double since 2006, adding to the fiscal stress that led it to the brink of bankruptcy. Next week, the city of 209,000 will learn annual returns of the California Public Employees’ Retirement System, which may say it failed to meet its investment target. When the nation’s biggest public pension underperforms, the most-populous state and its municipalities may have to help make up the difference, straining budgets that are still rebounding from the recession that ended in 2009. “Pension funds lose money every time they don’t earn as much as they assume they will earn,” said David Crane, a Democrat who was an economic adviser to former Governor Arnold Schwarzenegger, a Republican. “When they don’t earn that, they need the governments who are on the hook for all these liabilities to put up more money.” San Bernardino on July 10 became the state’s third municipality to decide to seek bankruptcy protection in as many weeks. Calpers, as the $234 billion pension is known, is already the biggest unsecured creditor of Stockton because the city owes the fund money for worker pensions. The community of 292,000 east of San Francisco on June 28 became the biggest U.S. city to enter bankruptcy after talks with bondholders and labor unions failed.

Moody's pension calculation changes could hit Illinois hard - Wall Street is turning up the heat on Illinois and Chicago for pension reform, turning a chasm of unfunded liabilities into a Grand Canyon-size problem. Moody's plans a massive recalculation of the nation's public pension balance sheet, based in part on an investment outlook that's far more conservative than most such plans assume. At a time when many governments are struggling to meet existing pension obligations, the prospect of lower returns means they would have to come up with even more money to pay future benefits — debts that ultimately could fall on taxpayers. The proposed shift would swell pension shortfalls by more than half for five major Illinois plans, taking the state's staggering $83 billion pension debt to nearly $135 billion. Unfunded liabilities would jump to nearly $47 billion at the 10 biggest Chicago-area public pension plans, from $27 billion in fiscal 2010, the latest data available for the plans.

New law gives US companies a break on pensions - A new law will let companies contribute billions of dollars less to their workers’ pension funds, raising concerns about weakening the plans that millions of Americans count on for retirement. But with many companies already freezing or getting rid of pension plans, many critics are reluctant to force the issue. Some expect the changes, passed by Congress last month and signed Friday by President Barack Obama, to have little impact on the nation’s enormous $1.9 trillion in estimated pension fund assets. And it is more important, they suggest, to avoid giving employers a new reason to limit or jettison remaining pension benefits by forcing them to contribute more than they say they can manage. The equation underscores a harsh reality for unions, consumer advocates and others who normally go to the mat for workers and retirees: When it comes to battling over pensions, the fragile economy of 2012 gives the business community a lot of leverage.

Milliman analysis: Corporate pensions see $186 billion deficit increase during 2nd quarter of 2012 - Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its latest Pension Funding Index, which consists of 100 of the nation's largest defined benefit pension plans. In June, these pensions experienced a $57 billion decrease in funded status based on a $77 billion increase in the pension benefit obligation (PBO) and a $20 billion increase in asset value. The $57 billion decrease in funded status pairs with the combined April and May decreases of $129 billion, increasing the funding deficit by $186 billion during the second quarter.  "With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase to a near-record $415 billion," "This is the second worst deficit we've seen."  In June, the discount rate used to calculate pension liabilities fell from 4.56% to 4.32%, pushing the PBO up to $1.698 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.263 trillion to $1.283 trillion. Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.32% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 75.6% to 77.4% by the end of 2012 and to 82.0% by the end of 2013.

Pension deficits deepen in corporate Britain and U.S (Reuters) - Chronically weak stock markets and record low bond yields have pushed company pension deficits in the United States and Britain sharply higher, adding to the burden of retirees living longer than ever before, reports said on Tuesday. In the United States the aggregate deficit of S&P 1500 companies grew $59 billion in the first half of the year to $543 billion, consultancy Mercer said. Corporate America is sitting on total liabilities of $2.09 trillion against total assets of $1.55 trillion, Mercer added. The picture is no less bleak in Britain, where the combined deficit of FTSE 100 companies more than doubled over the past year to 41 billion pounds ($64 billion), actuarial firm Lane, Clark & Peacock (LCP) said in a separate report. This is despite companies having poured 11 billion pounds into schemes over the last year in an attempt to plug the deficit, LCP said.

Counterparties: America attempts to retire -- Back in the spring of 2008, Roger Lowenstein came out with While America Aged, warning that the fragility of America’s pension plans “loom[s] as the next financial crisis”. Thanks to Lehman Brothers, his timing was a bit off. As Phillip Longman explains in a great piece in the Washington Monthly, now might be the time to start worrying: According to a recent study by the Employee Benefits Research Institute, fully 44 percent of Baby Boomers and Gen-Xers lack the savings and pension coverage needed to meet basic retirement-age expenses, even assuming no future cuts in Social Security or Medicare, employer-provided benefits, or home prices. Most Americans approaching retirement age don’t have a 401(k) or other retirement account. Among the minority who do, the median balance in 2009 was just $69,127. Among the litany of factors Longman cites that are coming to a head this decade: the “demographic deficit” that’s leaving the US with fewer working young people supporting more retired folks; the increase in household debt of all varieties over the last five decades; and the decline in median family net worth over the past 20 years. There’s also the mostly undelivered promise of 401(k)s. As Jia Lynn Yang wrote recently, in 2009, 51% of Americans were “at risk” of not being able to maintain their current standard of living into retirement. That’s up from 31% in 1983. It’s looking more and more like Teresa Ghilarducci was right to argue: The 401(k) “is a failed experiment of how well individuals can save for their retirement”.

Social Security and the Stork - The proverbial stork, bringer of babies and emblem of fertility, has been driven off course by the socialist welfare state. Now that people can rely on the state for income security in old age, they no longer need children. Social Security is undermining parenthood. This conservative argument, flapping recently through the news media, leads to the distinctly unconservative argument that we should provide more public support for parents – a policy that many liberals and feminists (including me) also advocate. A closer look at this political paradox helps explain some basic points of disagreement about the impact of the welfare state. The economist Ed Yardeni makes a simplistic case for “crowding out” on his blog, with a graph showing that countries with the largest public pension programs also have the lowest fertility. This is hardly persuasive, given considerable evidence offered by the economist Peter Lindert and others that public pensions, like other forms of social spending, are strongly associated with economic development, which, in turn, promotes fertility decline. Changes in the economic and political position of women have a huge impact on family-size decisions.  The historical panorama is long and complicated. In the United States, the total fertility rate among whites declined from about 7 children per woman in 1800 to about 2.5 children per woman in 1930, long before the Social Security Act of 1935 was passed. A small baby boom became apparent in the 1950s, and the total fertility rate reached about 3.5 in 1960, before declining to about 2.1 in 2000, about where it remains today.

The NYT Decides to Square With Its Readers About Medicare and Social Security - In the middle of an article that is largely devoted to discussing the absurdity of Republicans attacks on the Affordable Care Act's cost controls for Medicare, given their repeated efforts to slash funding for the program, the NYT told readers: "such talk underscores how far Republicans and Democrats are from truly squaring with the public about curbing the growth of the major entitlement programs: Medicare, Medicaid and, to a lesser extent, Social Security." While the NYT might want to see the growth of Social Security spending curbed, there is no obvious reason that it is necessary. In fact, given the loss of savings among older workers due to the collapse of the housing bubble and the downturn, there are strong arguments for increasing the generosity of benefits. According to the Congressional Budget Office the program is full funded until 2038 with no changes whatsoever. The increased revenue needed to keep the program fully funded for the rest of the century is a bit more than 5 percent of projected wage growth over the next three decades.

New York Times Editors Mangle Story on False GOP Medicare Claims - Jackie Calmes is a decent reporter, and except for two disconnected paragraphs added, I suspect, by her dishonest editors, she wrote a worthwhile story for today’s New York Times. Calmes reports on the numerous misleading and outright false GOP claims about the changes to Medicare enacted in the Affordable Care Act. If you read the story through, it’s a straight forward dismantling of the GOP’s numerous lies — and how they conflict with their own actions — and the lies are still being repeated by GOP leaders, including Mitt Romney. They lied about “death panels,” and Sarah Palin is still lying about that. No one in the GOP has ever disowned this lie. During the 2010 campaign, the GOP misled voters about Medicare cuts and framed them as though the ACA’s efforts at provider cost containment, which everyone knows are necessary to get private health care costs under control, were instead cuts to Medicare benefits. As Ms. Calmes correctly reports, that was a lie (aka, a “flat untruth”). . They also voted for the Paul Ryan budget that would eliminate Medicare as we know it and replace it with a voucher (“premium support”) program that would, over time, reduce Medicare support and shift more health costs onto seniors. In short, the GOP descriptions of the Medicare provisions of the ACA have been nothing short of a massive disinformation campaign, lying to seniors to frighten them, and hiding their own positions; and it worked.

 Perry ‘proudly’ refuses health care to 1.2 million low-income Texans - In a statement published Monday morning, Texas Governor Rick Perry (R) “proudly” declared that he will decline to implement key tenets of the Affordable Care Act — a move that will see his state forgo an estimated $164 billion dollars in federal aid and leave over 1.2 million low-income Texans, who would have finally been eligible for health care, helpless and uninsured. “This is a fiscally stupid decision on the part of Rick Perry,” Texas Democratic Party spokesperson Rebecca Acuña told Raw Story. “Texas would be one of the states that gets the most money from the federal government and the Medicaid expansion would have provided health care to more than a million Texans. It’s… It’s very sad that Rick Perry is willing to play politics with the health of Texans, and that’s exactly what this decision is.” With his announcement, Perry becomes the sixth governor to refuse implementing a key aspect of the Affordable Care Act: the Medicaid expansion and the state-based health care exchanges. Republican governors in Florida, South Carolina, Mississippi, Louisiana and Wisconsin have made similar decisions, but Texas is by far the biggest.

Perry: Medicaid expansion is like ‘adding 1,000 people to the Titanic’ - Texas Gov. Rick Perry (R) on Monday said that his state would refuse to implement President Barack Obama’s health care reform law because it was “like adding 1,000 people to the Titanic.” In a statement released on Monday, Perry said that he would not set up state health care exchanges and he would reject federal funds to expand Medicaid. “If anyone had any doubt, we wanted to put it to bed that Texas wasn’t going to be a part of expanding socializing of our medicine,” the governor told Fox News host Jenna Lee. “So, we’re not going to participate in exchanges, we’re not going to expand Medicaid.”“The bottom line here is that Medicaid is a failed program,” Perry opined. “To expand this program is not unlike adding 1,000 people to the Titanic. You’re going to further drive this country into debt. … We don’t trust this administration and we don’t trust Washington, D.C. to be able to deliver health care in our state. If they trusted us, they would basically block grant it back to the states and we would do a substantially better job than what you’re going to see with these exchanges and with the expansion of Medicaid.”

Feds rank Texas worst healthcare provider - Texas ranked dead last in the federal government's latest report card on the delivery of health services, falling short in areas ranging from acute hospital care to home treatment of the chronically ill. Texas scored 31.61 - less than half of top-ranked Minnesota's 67.31 - out of a possible 100 points in the Agency for Healthcare Research and Quality annual rankings. Rated "weak" or "very weak" in nine of 12 health delivery categories, Texas dropped from 47th place in 2010 to 51st in 2011, behind all other states and Washington, D.C. "There are a lot of places Texas can make improvements," said Dr. Ernest Moy, the federal agency's medical officer and the scorecard's lead author. "We're not comparing it to some fantasy world, we're comparing it to other states around the nation." Moy downplayed Texas' fall from 2010, noting that Texas, Louisiana, Oklahoma and Arkansas tend to fluctuate near the bottom of the annual scorecard.

MAP: The state of the Medicaid expansion - Texas Gov. Rick Perry announced Monday morning his intention to opt out of the Affordable Care Act’s Medicaid expansion. That adds Texas to the five dark-red states, mapped out below, that have already made simple promises: Six governors may not seem like a lot, but consider this: A full quarter of the 15.8 million Americans expected to gain Medicaid under the Affordable Care Act live in these states. These six governors, if they follow through on their pledges, can single-handedly shrink the Medicaid expansion by 3.89 million people. Some of those people would find coverage on the health insurance exchange: Those who live above the poverty line would be eligible for subsidized coverage. Most of those eligible for the Medicaid expansion, however, aren’t in that situation. Three-quarters live below the federal poverty line. The law assumed these individuals would end up on Medicaid, and did not include any provisions to provide private insurance.

Alan Grayson: Gov. Rick Scott will have blood on his hands - Democratic candidate Alan Grayson said Wednesday that people in Florida would suffer because Gov. Rick Scott (R) refused to implement parts of the Affordable Care Act. “There’s literally thousands of people who will live if Medicaid is expanded in Florida, and die if it isn’t,” he told Current TV host Eliot Spitzer. “And their blood will be on Rick Scott’s hands.” After the Affordable Care Act was upheld by the Supreme Court, Scott told Fox News that he would fight its implementation in Florida. Specifically, he said he opposed creating insurance exchanges and the expansion of the Medicaid program, which provides health care to the poor.Scott said the Medicaid expansion would be too expensive for the state, even though the federal government will pay for 93 percent of the costs over the next nine years. Grayson accused Scott of corruption, claiming he was trying to force poor people to use his health care chain Solantic. “It is just naked cruelty and corruption,” he said.

Medicaid expansion a tough sell to governors of both parties - While the resistance of Republican governors has dominated the debate over the health-care law following last month’s Supreme Court decision to uphold it, a number of Democratic governors are also quietly voicing concerns about a key provision to expand coverage. At least seven Democratic governors have been noncommittal about their willingness to go along with expanding their states’ Medicaid programs, the chief means by which the law would extend coverage to millions of Americans with incomes below or near the poverty line. “Unlike the federal government, Montana can’t just print money,” Gov. Brian Schweitzer (D) said in a statement Wednesday. “We have a budget surplus, and we’re going to keep it that way.” The law would add an estimated 84,000 people to Montana’s Medicaid program, doubling its size, the governor said. Although the federal government would pay the vast majority of the additional costs, Montana’s health department estimates the state’s share would reach $71 million in 2019. Outside groups say the costs would be far lower than that.

Medicaid’s stimulative effect: Here’s one factor governors may want to weigh as they consider participating in the health law’s Medicaid expansion: Study after study has found that federal Medicaid dollars spur economic activity beyond the initial investment. Researchers find that a dollar of Medicaid spending increases spending both in the health-care sector and in other industries. “For every dollar that a state spends, federal funding filters through the state economies,” says Robin Rudowitz, associate director for the Kaiser Commission on Medicaid and the Uninsured. “That tends to go both into health service vendors as well as other sectors.” Medicaid acts as a stimulus in two ways. First, increased federal spending on health care can, in tough budget times, free up state dollars for other spending. Medicaid spending can also ripple through the private sector, stimulating increased employment that leads to higher household spending. Rudowitiz recently reviewed 29 state-level studies of Medicaid’s stimulative impact. Across the board, she says, “it was pretty consistent that Medicaid spending did generate economic activity.” Much of the research has focused on the recent stimulus law, which increased Medicaid spending by about $88 billion between 2008 and 2010. For those three years, the federal government picked up a larger share of state Medicaid bills, freeing up state dollars to spend on other services.

SCOTUS Rules, Cal Responds: UC Berkeley Experts Assess Impacts of the Supreme Court’s Landmark Decision on the Affordable Care Act - UCTV - University of California Television: UC Berkeley convenes panel of experts to analyze the impacts of the Supreme Court's decision to uphold the Affordable Care Act, or "Obamacare." Professors of law, economics, and public health look at what the decision means for future health reform, constitutional law, medical care, health insurance, public policy and politics.

Brawling Over Health Care Moves to Rules on Exchanges— Critics of the new health care law, having lost one battle in the Supreme Court, are mounting a challenge to President Obama’s interpretation of another important provision, under which the federal government will subsidize health insurance for millions of low- and middle-income people. Starting in 2014, the law requires most Americans to have health insurance. It also offers subsidies to help people pay for insurance bought through markets known as insurance exchanges. At issue is whether the subsidies will be available in exchanges set up and run by the federal government in states that fail or refuse to establish their own exchanges. Critics say the law allows subsidies only for people who obtain coverage through state-run exchanges. The White House says the law can be read to allow subsidies for people who get coverage in federal exchanges as well. The law says that “each state shall” establish an exchange. But Washington could be running the exchanges in one-third to half of states, where local officials have been moving slowly or openly resisting the idea. The dispute has huge practical implications. The Congressional Budget Office predicts that 23 million uninsured people will gain coverage through exchanges and that all but five million of them will qualify for subsidies, averaging more than $6,000 a year per person. Subsidies, in the form of tax credits, will be available to people with incomes from the poverty level up to four times that amount ($23,050 to $92,200 for a family of four).

Conservatives Raise Court Challenge on Allowing Insurance Subsidies on Federally-Run Exchanges - Robert Pear today writes about an emerging lawsuit over the health care law that I touched on Thursday. The language around the insurance exchanges and whether the state or federal government runs them is sufficiently vague that conservative legal functionaries think they can exploit it: Starting in 2014, the law requires most Americans to have health insurance. It also offers subsidies to help people pay for insurance bought through markets known as insurance exchanges. At issue is whether the subsidies will be available in exchanges set up and run by the federal government in states that fail or refuse to establish their own exchanges. Critics say the law allows subsidies only for people who obtain coverage through state-run exchanges. The White House says the law can be read to allow subsidies for people who get coverage in federal exchanges as well. If courts rule that individuals seeking coverage on federally administered exchanges cannot receive coverage subsidies, then it gives every right-leaning state a reason to refuse to run the exchanges and collapse the law. The lack of subsidies would make health insurance unaffordable to almost everyone eligible to receive them. And it would put many of them on the hook for the mandate penalty if they cannot afford coverage (the subsidies will be worth on average $6,000 per person). This would make large groups of people angrier and angrier about Obamacare and put more and more pressure on to change the law. It would “prove” to people that the health care law merely forced people to buy coverage they can’t afford or else they would have to pay a tax. The reality is more like that they are forced to buy cheap, subsidized coverage they may not end up being able to use in all cases, or pay a small and easily avoided tax. But a ruling saying that you can’t get subsidies for federal exchanges would deny people the opportunity to experience the law as it was written, and really ruin it before it has a chance.

Health Care Thoughts: Crazy like Foxes - Several governors are announcing they will not begin building the state health exchanges required by PPACA (Obamacare). Some of this is pure partisan, and some a stall until November. Failure to comply will result in the feds installing exchanges in those states. The states can apparently opt in to the exchange at a later date. Could this be a means of allowing the feds to do all of the heavy lifting, and then jumping in at a convenient time later? Is there more than partisan thinking here? Interesting?

Believe What You're Saying  - I don't get the sense that people paid enough attention to a really excellent Jackie Calmes story in Saturday's NYT about the continuing farce that is the GOP position on Medicare. Perhaps because the Times gave it a bland headline ("Delicate Pivot as Republicans Blast Rivals on Medicare Cuts") instead of something more accurate, such as "Republicans Are Shockingly Hypocritical, Irresponsible, and Flat-Out Full of Crap on Medicare Cuts To review:
1. Medicare cuts were the main specific complaint about health care reform that Republicans used in the 2010 campaign, and are still using today. At least in GOP ads, medicare cuts were probably a more common attack than general complaints about "liberty" or even the mandate. Opposing the ACA Medicare cuts was what Republicans ran on in 2010, and are running on today.
2. Republicans support the cuts that they ran, and are running, against. Soon after arriving in Washington, that Tea Party class of 2011 voted for the Ryan budget which contained the very Medicare cuts they campaigned against.
3. While also voting to repeal Obamacare, and thus eliminate the significant benefits for Medicare recipients in the ACA, including closing the donut hole and free preventative measures.
4. And while supporting the Ryan plan to transform Medicare into a new program that would certainly cut benefits far more than would be the case under the ACA.

Does Uncompensated Care Raise Prices for the Insured? - Matthew Yglesias asks  (Does Uncompensated Care Raise Prices for the Insured?)  OK first I have to note that a philosophy concentrator half my age is doing pretty well to make me think about economics. Yglesias's willingness to think and write about technical subjects is a valuable national resource. This is also true of field specialists can respond to his arguments.  His argument Think about the CVS downstairs from my office. It charges prices that it believes are profit-maximizing. Now suppose some indigent person comes in and burns all the magazines on their magazine rack for fun. The guy's got no money, so CVS can't recoup its losses. Does this force CVS to raise prices on Diet Coke to make up for the cost? No—CVS was already charging profit-maximizing prices, and past losses are irrelevant to determining optimal forward-looking pricing strategy. Hmm logically this implies that people who live in high crime neighborhoods in which people do stuff like that don't pay more for goods. But they do. So what is missing ? Well first the thought experiment considers an unanticipateable cost and one repetition of which is not likely. Uncompensated health care isn't like that at all.

The Same as MA Healthcare Premiums, the ACA Premiums are too Costly . . .I have listened to many  stating the MA subsidies do not go far enough in alleviating the costs of healthcare for a family not covered by an Employer Subsidized Healthcare plan. Even with my pointing out the subsidies in the ACA exceed that of the MA plan, there still has been quite a bit of doubt. Maggie Mahar at the resurrected Health Beat Blog pointed to a new Kaiser Family Foundation subsidy calculator in her article as well as other informative points; "What Will the Supreme Court Decision Mean In November?" The ACA Premium Calculator is found here: Healthcare Reform Subsidy Calculator. Using the KFF Calculator, a person can calculate what they will pay in premiums under the ACA in 2014. Further on down this post, there is a short discussion of the Mandate and a link to another KFF site to determine what the mandated penalty might be per year for an individual and a family. The last chart by "The Incidental Economist" touches upon the relative size of the Mandate in comparison to taxes historically. As a mandated penalty, Obamacare is a middle of the pack tax.  With the KFF calculator, assuming we are discussing Median Household Income, and making an addition assumption Household Median Income increases from the ~$51,000 in 2011 to ~$55,000 in 2013, this is what a family of 4 might pay in 2014: Maximum Out of Pocket Expenses: $6,250

Number of the Week: Public Workers More Likely to Have Health Benefits - 51%: Percent of private-sector workers who receive health benefits from their employers. For state and local government employees, the figure is 73%. It’s no secret that public employees tend to get better benefits than their private-sector counterparts. But a new report from the Labor Department this week is still striking in just how wide the gap is. As of March of this year, 89% of state and local government employees get offered some sort of retirement benefit, compared to 65% in private industry. 79% of public workers can get life insurance through work, versus 57% of private workers. 89% of government workers get paid sick leave, versus 61% in the private sector. (Private-sector employees are more likely to get paid vacation time, but that’s because teachers make up a big chunk of local government employees, and summer break isn’t considered vacation in the government data.)The starkest contrast, though, is in health care. 73% of state and local government workers—including 83% of full-time workers—receive health benefits through their jobs. In the private sector, barely over half, 51%, of all workers get health benefits, and just under two-thirds, 64%, of full-time workers do.  Statistically speaking, there are two major reasons for the discrepancy. First, public employees are much more likely to be offered benefits than their private-sector counterparts: 99% vs. 86% for full-time employees. Second, public employees are much more likely to accept benefits when given the opportunity. The “take-up rate”—the share of workers who accept benefits if they’re offered them—is 84% in the public sector, versus 74% in the private sector (again, for full-time workers).

Disclosure? Not Good Enough. - In compliance with a federal integrity agreement, pharmaceutical giant Pfizer released details of its financial involvement with the medical community. According to the New York Times, the drug maker disclosed that it paid $20 million in consulting and speaking fees to 4,500 doctors in the second half of 2009. The company also shelled out $15.3 million to U.S. academic medical centers for their clinical trials. A few other drug makers have disclosed their payments to physicians in the past, but this is the first time a company has disclosed its payments for clinical trials. As such, some may see this as a good deed on Pfizer’s part, a noble step towards eliminating or reducing some of the conflicts of interest in medicine. Only, disclosure doesn’t seem to help. Several studies have shown that when professionals disclose their conflicts of interest, this only makes the problem worse. This is because two things happen after disclosure: first, those hearing the disclosure don’t entirely know what to make of it — we’re not good at weighing the various factors that influence complex situations — and second, the discloser feels morally liberated and free to act even more in his self-interest.

Insurers Pay Big Markups as Doctors Dispense Drugs - When a pharmacy sells the heartburn drug Zantac, each pill costs about 35 cents. But doctors dispensing it to patients in their offices have charged nearly 10 times that price, or $3.25 a pill.  The same goes for a popular muscle relaxant known as Soma, insurers say. From a pharmacy, the per-pill price is 60 cents. Sold by a doctor, it can cost more than five times that, or $3.33.  At a time of soaring health care bills, experts say that doctors, middlemen and drug distributors are adding hundreds of millions of dollars annually to the costs borne by taxpayers, insurance companies and employers through the practice of physician dispensing.  Most common among physicians who treat injured workers, it is a twist on a typical doctor’s visit. Instead of sending patients to drugstores to get prescriptions filled, doctors dispense the drugs in their offices to patients, with the bills going to insurers. Doctors can make tens of thousands of dollars a year operating their own in-office pharmacies. The practice has become so profitable that private equity firms are buying stakes in the businesses, and political lobbying over the issue is fierce.

Harnessing Gene Codes as Sleuths of Food Ills - A new public database aims to catalog the genetic codes of 100,000 types of bacteria found in food, vastly increasing the amount of data that scientists can use to trace the causes of food-borne illness.  The free database, being set up at the University of California, Davis, will enable scientists to pinpoint not only what food carries the bacteria responsible for a given outbreak — raw tuna in sushi, for example — but also what country it came from. And while responses to such outbreaks have typically taken weeks, the new database is expected to reduce that to days.  “It’s actually a big deal from a scientific standpoint,” said Steven M. Musser, the Food and Drug Administration official who announced plans for the database on Thursday.  Genetic sequencing is new. To date scientists have identified as many as 3,000 sequences, and only about 1,000 are related to food.  The Centers for Disease Control and Prevention has the largest such database, but the gene maps it contains are only partial, not enough to determine which food the illness came from or its geographic origin, said Dr. Musser. Cataloging gene codes is time-consuming. Salmonella alone has about 2,700 different strains, almost three times as many as all the sequences for food-borne bacteria that have been cataloged to date.

July is National Minority Mental Health Awareness Month - About 25 percent of U.S. adults have a mental illness, according to the Centers for Disease Control and Prevention. Almost two-thirds of those adults with a diagnosable mental illness do not seek treatment, and racial and ethnic minorities are even less likely to get help, according to the National Alliance on Mental Illness (NAMI). July is National Minority Mental Health Awareness Month, and Allsup, a nationwide provider of Social Security Disability Insurance (SSDI) representation, is offering a free poster download to promote awareness and help dispel stigma associated with mental illness.According to NAMI’s Multicultural Action Center, in many racially and ethnically diverse communities, there is a stigma surrounding mental illness, often caused by cultural differences and lack of information. This not only can lead to the avoidance of mental health treatment, but often results in a lack of knowledge regarding financial options, such as Social Security disability benefits

Worst TB outbreak in 20 years kept secret - The CDC officer had a serious warning for Florida health officials in April: A tuberculosis outbreak in Jacksonville was one of the worst his group had investigated in 20 years. Linked to 13 deaths and 99 illnesses, including six children, it would require concerted action to stop. That report had been penned on April 5, exactly nine days after Florida Gov. Rick Scott signed the bill that shrank the Department of Health and required the closure of the A.G. Holley State Hospital in Lantana, where tough tuberculosis cases have been treated for more than 60 years. As health officials in Tallahassee turned their focus to restructuring, Dr. Robert Luo’s 25-page report describing Jacksonville’s outbreak — and the measures needed to contain it – went unseen by key decision makers around the state. At the health agency, an order went out that the TB hospital must be closed six months ahead of schedule. …“Meanwhile the champion of the health agency consolidation, Rep. Matt Hudson, R-Naples, said he had not been informed of the Jacksonville outbreak and the CDC’s role as of Friday. Told the details, the chairman of the House Health Care Appropriations Committee vowed that there would be money for TB treatment. “There is every bit of understanding that we cannot not take care of people who have a difficult case of TB,” Hudson said.”

Florida accused of concealing worst tuberculosis outbreak in 20 years - The state of Florida has been struggling for months with what the Centers for Disease Control describe as the worst tuberculosis outbreak in the United States in twenty years. Although a CDC report went out to state health officials in April encouraging them to take concerted action, the warning went largely unnoticed and nothing has been done. The public did not even learn of the outbreak until June, after a man with an active case of TB was spotted in a Jacksonville soup kitchen. The Palm Beach Post has managed to obtain records on the outbreak and the CDC report, though only after weeks of repeated requests. These documents should have been freely available under Florida’s Sunshine Law.According to the Post, the coverup began as early as last February, “when Duval County Health Department officials felt so overwhelmed by the sudden spike in tuberculosis that they asked the U.S. Centers for Disease Control and Prevention to become involved. Believing the outbreak affected only their underclass, the health officials made a conscious decision not to not tell the public, repeating a decision they had made in 2008, when the same strain had appeared in an assisted living home for people with schizophrenia.”

The Palm Beach Post exposes a hidden menace : CJR - A powerful expose by Stacey Singer, the health reporter for The Palm Beach Post, has revealed a serious outbreak of TB in Jacksonville—the worst the Centers for Disease Control and Prevention has investigated in 20 years. Thirteen deaths and 99 illnesses are linked to the outbreak so far, which Singer reports, “was, and is far from contained.”  Beyond the scary numbers, what makes Singer’s piece so intriguing is that it is a tale for our time. It touches on the current narrative about cutting government spending, which inevitably involves trade-offs between public health and public dollars. And it touches on the trend toward government secrecy at all levels, which made it hard for Singer to do her job. Over the past two years, 3,000 people may have had close contact with contagious people—residents of Jacksonville’s homeless shelters, jail inmates, and patients at a mental health clinic. “Other health officials throughout the state and nation have reason to be concerned,” the Post said. Only a fraction of the sick people’s contacts had been reached. And a third of those who were reached tested positive for TB. In April, Gov. Rick Scott, a Republican, signed a bill shrinking the state Department of Health. As it happens, nine days later a federal Centers for Disease Control and Prevention investigator wrote a 25-page report describing the outbreak and what was needed to contain it, a report that, as we’ll see, wasn’t made public until Singer’s relentless push for it was successful last week.

Black Lung on the Rise; Excessive Mining and Corporate Malfeasance to Blame - For decades—at least until the big economic crash of 2008—the country has grown increasingly fond of the conservative narrative that claims that the only reason the majority of government regulation exists is because liberals are all secret communists who want to regulate corporations out of business just to do so. Regulations are seen as unnecessary for any purpose other than to clip profits, and the actual reasons behind most regulation—safety, human rights, environment—are minimized or outright denied with claims liberals are making it up as part of an anti-corporate agenda. There are a handful of leftists who reject any kind of regulation, no matter how useful otherwise, that doesn’t serve the purpose of clipping corporate profits (they’ve been loud in the aftermath of the ACA decision), but they’re a tiny minority. The reality is that most of us want government regulation not because we love “Big Government” or have some secret agenda, but simply because we think that corporations’ right to do business ends where the rest of our noses begin. Unfortunately, this big-government-is-out-to-get-us narrative seems to go a long way towards explaining why, as reported by NPR and the Center for Public Integrity, black lung is rapidly on the rise amongst coal miners, a generation after it was optimistically believed it could be stomped out completely.

The case of the missing wheat - Global demand for agricultural products continues to rise as population grows and people get richer. As they get richer, people have fewer babies but eat more. And they use a lot more energy, which is increasingly derived from agricultural products. Crop technologies have to move incredibly fast just to keep up. Remarkably, over the past 50 years they have, with yields (production per hectare of land) for most crops more than doubling since 1960, and real prices of food falling for most of the period. In many ways we have come to take continued yield growth for granted. But, as Lin and Huybers show [1] elsewhere in this issue, there is increasing evidence that this growth has stalled in many regions. The question is not new – people have worried about the pace of yield growth since at least the days of Malthus [2, 3]. But Lin and Huybers [1] use updated data and bring a new rigor to identifying where stagnation is statistically significant, for example by taking care to account for year-to-year correlation in yields. They report that for slightly more than half of the regions that they inspected, it is likely (80% chance) that yield growth has already flattened out. For many of these countries, responsible for about one quarter of global wheat production, the stagnation has very likely occurred (95% chance).  Why are yields of wheat stagnating in so many areas? At least four suspects seem plausible.

Rootworms have developed resistance to genetically engineered corn - Last fall, the Environmental Protection Agency warned that Monsanto’s Bt corn, which was genetically engineered a decade ago to ward off rootworms, is now falling prey to worms that have developed resistance to the plants’ built-in insecticide. The EPA also expressed concern that Monstanto’s monitoring was “inadequate and likely to miss early resistance events.” At the time, a company spokesperson denied there was a problem, telling Bloomberg News, “Monsanto continues to believe there’s no scientific confirmation of resistance to its Bt corn.” However, this year’s corn-growing season is now well under way in the United States, and in some places the crops are suffering severe damage. Scientists have identitied the culprit as Bt-resistant rootworms.

Is help from corporate agriculture beneficial? - The Des Moines Register - Iowans are regularly reminded of our role in helping to feed the world’s hungry, and from a technological perspective, we have certainly played an important role. So it may be hard to contemplate the paradox that even as we have helped block world hunger, we might also inadvertently be contributing to it. There is growing evidence around the world that high-yield technologies that require costly and potentially harmful chemical fertilizers and other inputs squeeze small farmers out in favor of large conglomerates, resulting in impoverishment or suicides.Recent weeks have brought a few occasions to think about this. Members of the Des Moines Occupy movement announced plans to protest the World Food Prize events this fall. Instead of “pro-corporate agribusiness recipients who support GMO crops and the use of harmful pesticides and chemicals,” the prize should honor people “who advocate sustainable, safe, local agriculture in the U.S. and abroad,” the group said in a statement. Occupy also noted that corporate agribusiness has gone beyond controlling food supplies to also controlling “governments, laws, and patents.”

Corn Belt heat wave breaks, but rains to miss driest areas (Reuters) - Sizzling temperatures abated in the Midwest Corn Belt over the weekend, but light, scattered rains this week were expected to miss the areas that need it most, agricultural forecasters said on Monday. Midday weather updates indicated little to no change for this week's forecast, with milder temperatures blanketing the Corn Belt, but rains will be limited. "We got a break in the temperatures over the weekend but no rain of significance is in sight for next seven days," said Jim Keeney, a meteorologist for the National Weather Service the US central region based in Kansas City, Missouri. High temperatures cooled into the 80s Fahrenheit over the weekend, and were forecast to remain there this week, following record-setting readings last week that topped 100 degrees, scorching corn and soybeans. In the top U.S. crop state of Iowa, the southern town of Rathbun Dam notched an all-time of 105 Fahrenheit this weekend. The extreme heat and drought conditions are hitting the core of the U.S. Midwest just as the region's big corn crop pollinates, the key yield-determining growth phase for corn. Drought conditions intensified the past week across the central United States, causing irrevocable damage to crops in Missouri, Indiana and even southern Illinois, where farmers are cutting stunted corn for silage, a low grade feed for cattle.

U.S. Corn Growers Farming in Hell as Midwest Heat Spreads - The worst U.S. drought since Ronald Reagan was president is withering the world’s largest corn crop, and the speed of the damage may spur the government to make a record cut in its July estimate for domestic inventories. Tumbling yields will combine with the greatest-ever global demand to leave U.S. stockpiles on Sept. 1, 2013, at 1.216 billion bushels (30.89 million metric tons), according to the average of 31 analyst estimates compiled by Bloomberg. That’s 35 percent below the U.S. Department of Agriculture’s June 12 forecast, implying the biggest reduction since at least 1973. The USDA updates its harvest and inventory estimates July 11. Crops on July 1 were in the worst condition since 1988, and a Midwest heat wave last week set or tied 1,067 temperature records, government data show. Prices surged 37 percent in three weeks, and Rabobank International said June 28 that corn may rise 9.9 percent more by December to near a record $8 a bushel. The gain is threatening to boost food costs the United Nations says fell 15 percent from a record in February 2011 and feed prices for meat producers including Smithfield Foods Inc. (SFD) “The drought is much worse than last year and approaching the 1988 disaster,

Corn Prices Soar as Midwest Bakes - Corn prices soared toward new highs on Monday amid growing fears that the drought scorching the U.S. Midwest will prove to be the harshest in decades. Corn futures for July delivery jumped 4% to $7.7525 a bushel on the Chicago Board of Trade, extending gains to 29% in the past three weeks, as intense heat and a dearth of rainfall punish parts of big corn-growing states like Illinois, Indiana, Iowa and Ohio. Corn prices are just cents away from the nominal record $7.9975 a bushel reached in June 2011, when prices were rising because of worries about flood damage. The hot, dry weather could cut the U.S. harvest this autumn by more than 1 billion bushels below the federal government's forecast of two months ago, leaving domestic supplies relatively tight, analysts say.A higher cost of corn likely would drive up the cost of feed for livestock producers, which could lead in turn to higher meat prices, and also spill into the prices consumers pay for cereal, sodas and other packaged foods. Rising corn prices already are squeezing profits for U.S. ethanol companies.

Farmers "thinking of chopping their corn up and feeding it to cows" -- The drought conditions in the US are continuing to create havoc for crops. Corn in particular has been hit hard.  Reuters: - "There are a lot of people thinking of chopping their corn up and feeding it to cows," The condition of the U.S. corn crop has deteriorated quickly after a record-fast planting buoyed hopes of a bumper crop this fall in the world's largest exporter of grains. Crop ratings have fallen to their lowest level in 24 years, with the U.S. Agriculture Department's most recent estimate pegging the crop as just 40 percent good to excellent. The government sharply reduced its expectations for the crop on Wednesday, cutting its yield forecast by 20 bushels per acre, or 12 percent in its monthly crop report. If realized, the yield estimate of 146 bushels per acre would be the lowest since 2003.It is important to note that elevated corn prices will impact numerous other agricultural and even non-agricultural commodities. Food inflation could be a serious issue. The Kansas City Star: - A punishing Midwest drought may lead to food inflation as the cost of corn soars and the price of a key feedstock for ranchers rises. Experts warn it could mean higher costs for everything from a hamburger to a gallon of milk in the months ahead.

Eastern Iowa in 'severe drought' - An eastern Iowa triangle from the Quad Cities and Dubuque extending west to Cedar Rapids and near Waterloo has joined Illinois, Indiana and Missouri as places in “severe drought.” The updated U.S. Drought Monitor map issued Thursday by the U.S. Department of Agriculture, the National Weather Service and the University of Nebraska returned western Iowa to abnormally dry status after a week of virtually no rainfall. The weather service forecasts what it calls a “slight chance” of thunderstorms for today and Saturday, with temperatures returning to the mid-90s by Monday. Midwest drought is severe or extreme in most of Missouri, Illinois and Indiana. The western half of Nebraska is now in severe drought and parts of western Kansas are experiencing extreme drought, according to the updated map.

Drought leads to declaration of natural disaster in 26 US states - America declared a natural disaster in more than 1,000 drought-stricken counties in 26 states on Thursday. It was the largest declaration of a national disaster and was intended to speed relief to about a third of the country's farmers and ranchers who are suffering in drought conditions. The declaration from the US department of agriculture includes most of the south-west, which has been scorched by wildfires, parts of the midwestern corn belt, and the south-east. It was intended to free up funds for farmers whose crops have withered in extreme heatwave conditions linked by scientists to climate change. According to the US drought monitor, 56% of the country is experiencing drought conditions – the most expansive drought in more than a decade.

Drought Covers One-Third Of U.S. Counties, The Largest Agricultural Disaster Area Ever Declared - The U.S. Agriculture Department has issued a natural disaster declaration for more than 1,000 U.S. counties facing severe drought. This disaster declaration is the largest ever from the Agriculture Department and includes one-third of counties and spans 26 states. Some 53 percent of the Midwest is facing moderate or severe drought, but areas beyond the drought’s borders could pay higher world grain prices, due to a poor harvest.This disaster declaration makes farmers eligible for disaster assistance, but lawmakers will continue to remain silent on the root cause: Climate change. The year of record heat isn’t a chance occurrence, but comes from a climate system on steroids, “juiced” by manmade greenhouse gas emissions.

U.S. Declares the Largest Natural Disaster Area Ever Due to Drought  - The blistering summer and ongoing drought conditions have the prompted the U.S. Agriculture Department to declare a federal disaster area in more than 1,000 counties covering 26 states. That's almost one-third of all the counties in the United States, making it the largest distaster declaration ever made by the USDA.  The declaration covers almost every state in the southern half of the continental U.S., from South Carolina in the East to California in the West. It's also includes Colorado and Wyoming (which have been hit by devatasting wildfires) and Illinois, Indiana, Kansas and Nebraska in the Midwest. However, it does not include Iowa, which is the largest grain and corn producer in the U.S. This map show the counties affected: The USDA's latest crop report is projecting a 12 percent decrease in the corn harvest this year, which would still be the third-largest haul on record. Despite the negative outlook, grain prices remains quite low, according to CNBC. The ruling allows farmers in those affected counties to apply for low-interest loans and face reduced penalties for grazing on protected lands. The USDA says the loans will only amount to around $4 million, but is one of the few "limited tools" the department has available to help farmers.

Drought Worsens for Farmers and Ranchers - Scattered rain fell in parts of the Midwest on Friday, but it was not enough to provide relief to farmers struggling to salvage crops scorched by worsening drought conditions and ranchers worried about feeding livestock. More than 1,000 counties in 26 states across the country were named natural-disaster areas on Thursday in a statement from the U.S. Department of Agriculture. It was the single largest designation in the program’s history and the worst drought since 1988, government officials said. Nearly 61 percent of the contiguous U.S. was listed in drought this week, up from 56 percent for the previous week, according to the National Weather Service’s Drought Monitor, a weekly government report. The report found that nearly two-thirds of the states in the Midwest are facing drought conditions, up from 50 percent a week earlier, prompting deep concerns about the deteriorating crop conditions in the Corn Belt.

Food Price Spike Dead Ahead: US Cuts Corn Crop Forecast By 12% As 56% Of America Is Under Drought Conditions - Who knew the next black swan would be deep fried? The biggest piece of imminent food inflation news over the past months, coupled with what is shaping up to be another record hot summer (for the best tracking of real-time electricity consumption primarily for cooling news we recommend the following PJM RT tracker of power load), has been the collapse in the corn harvest due to the worst drought since 1988 as 56% of America is in drought conditions. Today, the US just added some burning oil to the popcorn by cutting the corn-crop forecast by 12% to 13 billion bushels on expectations of a 13.5 billion harvest. Then again, who needs corn, when you can have cake?

The Corn Identity: The US Will Make Ethanol Out Of Enough Corn To Feed 412 Million People --- The US corn crop, in the in the height of its vulnerable pollination phase, is already under siege from intense heat and devastating drought.  Experts are continuously revising predicted crop yield lower and lower. In fact, as of July 11th, this year’s corn crop is no longer projected to be history’s largest. At the same time, almost 1 billion people world wide are going hungry. However, plans remain in place to use about 40% of America’s corn crop, the world’s largest, for biofuel purposes.The nearly 5 billion bushels of corn that will be cordoned off for to create ethanol could feed about 412 million people for an entire year. Instead, it will be turned into 13.5 billion gallons of corn ethanol. This is a problem because:

  1. Life cycle studies show that corn ethanol ranges from barely better than petroleum fuels to significantly worse, especially if you take into account land and water use issues, increased deforestation, and increased fertilizer use.
  2. Corn ethanol contributes to rises in food prices because of competition for arable land to grow food. With more corn for biofuels taking up that space, the price of grains and other agricultural products increases.
  3. For many in the developing world, rising prices mean they don’t eat. People in poor countries, especially in import-heavy sub-Saharan Africa, feel the impact of rising food prices far worse than in developed countries.
  4. Climate change mitigation from biofuels will be “very limited” before 2050.
  5. By focusing our national investments on corn ethanol, we prevent other technologies, including other biofuels such as cellulosic ethanol and micro algae biodiesel, which are low greenhouse gas emitters, from competing with corn ethanol.

U.S. ethanol output drops to lowest in nearly two years (Reuters) - U.S. ethanol output plunged to its lowest level in nearly two years last week as soaring corn prices pushed many biofuel refineries into the red, government data showed on Wednesday. At least three U.S. ethanol plants -- two in Nebraska and one in Indiana -- are idling as the highest corn prices in more than a year squeeze margins in the worst spell since a string of bankruptcies in 2007 and 2008. Ethanol production last week fell 4 percent, or 36,000 barrels per day to 821,000 bpd, the lowest since the week ending July 23, 2010, according to the Energy Information Administration. Stocks of the biofuel fell 761,000 barrels to 19.53 million barrels, the lowest since January. "It's high corn prices and not-so-high ethanol prices," said Wally Tyner, an energy economist at Purdue University. "If we continue to have drought and corn continues to go up, there will be others that suspend production." Ethanol plants are losing money, with the average margin in Illinois at a negative 32 cents per gallon of fuel produced, according to Reuters data. And margins could get worse, with the existing corn stockpile dwindling and the conditions of the developing crop the worst in 24 years due to sizzling temperatures and drought conditions in the U.S. Midwest.

Bad weather causes 90 percent Michigan apple loss - — Michigan's apple crop will be about 90 percent smaller than usual this year because of spring weather damage. The Michigan Apple Committee said Thursday that growers, shippers and other industry insiders predict about 3 million bushels will be harvested. In a typical year, the state produces 20 million to 23 million bushels, pumping up to $900 million into the economy.The committee says it's the biggest apple crop loss since the 1940s. Apple trees bloomed early because of an extraordinary heat wave in March. Then came a series of frosts and freezes that killed most of the blossoms. Some areas suffered more than others. Gov. Rick Snyder has requested federal disaster assistance for Michigan's fruit growers. The Legislature has passed a bill offering low-interest loans for farmers with ruined crops.

That Fresh Look, Genetically Buffed - A small company is trying to bring to market a genetically engineered apple that does not turn brown when sliced or bruised. But it has much of the rest of the apple industry seeing red. The company, Okanagan Specialty Fruits, says the nonbrowning apple will prove popular with consumers and food service companies and help increase sales of apples, in part by making sliced apples more attractive to serve or sell. While Americans have been eating genetically engineered foods since the 1990s, those have been mainly processed foods. The Arctic Apple, as it is being called, could become one of the first genetically engineered versions of a fruit that people directly bite into. But the U.S. Apple Association, which represents the American apple industry, opposes introduction of the product, as do some other industry organizations. They say that, while they do not believe that the genetic engineering is dangerous, it could undermine the fruit’s image as a healthy and natural food, the one that keeps the doctor away and is as American as, well, apple pie. “We don’t think it’s in the best interest of the apple industry of the United States to have that product in the marketplace at this time,”

Rain, Pests Imperil India’s Wheat Crop as Warehouses Full - India, the world’s second-biggest wheat producer, risks losing more than 6 million metric tons of grain to rain and pests as the country lacks warehouses to stockpile crops that have risen to records for six years. Wheat is kept in the open across markets in north India as state granaries are overflowing with about 82 million tons of rice and wheat, Food Minister K.V. Thomas said in an interview in New Delhi. A group of ministers will soon consider the sale of about 13 million tons of wheat and rice to the poor and in the open market at subsidized rates, and discuss steps to boost exports to create room for newly harvested crops, he said.Efforts to draw down stockpiles may boost shipments from India, adding to global supplies and extending the biggest slide in food prices in two years as measured by the United Nations’ Food & Agriculture Organization. Overflowing granaries may hasten a plan to enact a law to guarantee food grain to 64 percent of India’s 1.2 billion people, where the World Bank says more than 75 percent of the people live on less than $2 a day.

Obama’s Fantastic Boring Idea - The farm fields here are cemeteries of cornstalks: a severe drought has left them brown, withered and dead. Normally, a failed crop like that signifies starvation.  Then television cameras arrive and transmit images of famished children into American and European living rooms. Emergency food shipments are rushed in at huge expense.  Yet there is a better way, and it’s unfolding here in rural Malawi, in southern Africa. Instead of shipping food after the fact, the United States aid agency, U.S.A.I.D., has been working with local farmers to promote new crops and methods so that farmers don’t have to worry about starving in the first place.  Jonas Kabudula is a local farmer whose corn crop completely failed, and he said that normally he and his family would now be starving. But, with the help of a U.S.A.I.D. program, he and other farmers also planted chilies, a nontraditional crop that doesn’t need much rain. “Other crops wither, and the chilies survive,” Kabudula told me. What’s more, each bag of chilies is worth about five bags of corn, so he and other villagers have been able to sell the chilies and buy all the food they need.

Unrelenting Heat Wave Bakes All in Its Reach - More than 200 record highs were broken on Friday throughout the Midwest and along the East Coast. And more records fell on Saturday. In Washington, the high was 105, which was a record for the day and 1 degree shy of the hottest temperature ever recorded there.

How air conditioning transformed the U.S. - As anyone who’s sweating their way through the current U.S. heat wave can attest, high temperatures are no fun. People become sluggish and irritable. It becomes hard to work, hard to concentrate, hard to do anything. When temperatures scream past 100 degrees, the risk of heat-related death increases dramatically. In fact, there are even studies suggesting that extreme heat can strangle a country’s livelihood. A 2008 study by three economists, led by Northwestern’s Benjamin Jones, found that poorer countries experience a plunge in economic output during hotter-than-average years. It’s not just that drought kills off crops. Industrial output declines, and political unrest becomes more unlikely. What’s curious, however, is that this happens mainly in poorer countries — wealthy countries are far more immune to the heat penalty. One explanation for the difference, of course, is air conditioning. Today, most Americans can minimize their exposure to sweltering weather. We can wake up in our thermostat-tuned homes, hop into our AC-cranked cars, and drive to our cooled offices. Granted, not everyone’s so lucky — plenty of people don’t have office jobs, and blackouts have left thousands here in D.C. without power — but indoor climate control is a major feature of the industrialized West. And it appears to have large economic benefits.

Climate risks heat up as world switches on to air conditioning - The world is warming, incomes are rising, and smaller families are living in larger houses in hotter places. One result is a booming market for air conditioning — world sales in 2011 were up 13 percent over 2010, and that growth is expected to accelerate in coming decades. By my very rough estimate, residential, commercial, and industrial air conditioning worldwide consumes at least one trillion kilowatt-hours of electricity annually. Vehicle air conditioners in the United States alone use 7 to 10 billion gallons of gasoline annually. And thanks largely to demand in warmer regions, it is possible that world consumption of energy for cooling could explode tenfold by 2050, giving climate change an unwelcome dose of extra momentum. The United States has long consumed more energy each year for air conditioning than the rest of the world combined. In fact, we use more electricity for cooling than the entire continent of Africa, home to a billion people, consumes for all purposes. Between 1993 and 2005, with summers growing hotter and homes larger, energy consumed by residential air conditioning in the U.S. doubled, and it leaped another 20 percent by 2010. The climate impact of air conditioning our buildings and vehicles is now that of almost half a billion metric tons of carbon dioxide per year. Yet with other nations following our lead, America's century-long reign as the world cooling champion is coming to an end. And if global consumption for cooling grows as projected to 10 trillion kilowatt-hours per year — equal to half of the world's entire electricity supply today — the climate forecast will be grim indeed.

U.S. experiences warmest 12-month period on record--again -  Thanks in part to the historic heat wave that demolished thousands of high temperature records at the end of June, temperatures in the contiguous U.S. were the warmest on record over the past twelve months and for the year-to-date period of January - June, said NOAA's National Climatic Data Center (NCDC) on Monday. June 2012 was the 14th warmest June on record, so was not as extreme overall as March 2012 (first warmest March on record), April (third warmest April), or May (second warmest May.) However, temperatures were warm enough in June to set a new U.S. record for hottest 12-month period for the third straight month, narrowly eclipsing the record set just the previous month. The past thirteen months have featured America's 2nd warmest summer (in 2011), 4th warmest winter, and warmest spring on record. Twenty-six states were record warm for the 12-month period, and an additional sixteen states were top-ten warm. The year-to-date period of January - June was the warmest on record by an unusually large margin--1.2°F. Each of the 13 months from June 2011 through June 2012 ranked among the warmest third of their historical distribution for the first time in the 1895 - present record.

U.S. Sees Hottest 12 Months And Hottest Half Year On Record: NOAA Calls Record Heat A One-In-1.6-Million-Event - The National Oceanic and Atmospheric Administration (NOAA) has released its chart-filled “State of the Climate Global Analysis” for June 2012: The big stories are the heat and drought:

How off-the-charts has the last year been? NOAA has done the math: During the June 2011-June 2012 period, each of the 13 consecutive months ranked among the warmest third of their historical distribution for the first time in the 1895-present record. The odds of this occurring randomly is 1 in 1,594,323.

Freak storms, flash floods, record rain – and there's more to come - More than twice the average rainfall hit the UK in April. June was the wettest since records began, and the start of July has seen a month's rain fall in 24 hours in some parts of the south-west. The bad weather has stuck and shows little sign of shifting, according to Helen Chivers at the Met Office. "The jet stream can get bends in it, it can get distorted, which can move us into a blocked pattern, like the dry weather we saw in winter … and the wet weather we are seeing now." What is affecting these changes in the jet stream is the million-dollar question, said Chivers. Variations could be caused by temperature changes in the Pacific, but meteorologists are also studying how shifts in the Earth's temperature, caused by global warming, affect weather conditions. "A lot of work is being done into the decrease in Arctic sea ice," said Chivers. "Essentially, if you warm up a sea, you change the temperature differential between the poles and the tropics and that in turn influences the jet stream. Research has already shown the influence on north-west Europe winters, making them drier and colder, but what happens in the summer is still relatively unknown."

El Nino May Be On the Way, Altering Weather Patterns - If you thought the first six months of the year were chock full of weird weather events, just wait — according to climate scientists there is an increasing likelihood that El Niño conditions will soon develop in the tropical Pacific Ocean. El Niño events, which are characterized by an area of unusually warm sea surface temperatures in the tropical Pacific Ocean, can have a huge influence on global weather patterns. Its effects on the U.S. tend to peak during the winter. The U.S. has already had a record warm January-to-June period, and has already had two extremely rare heat waves this year, one in March and the other in mid-June to early July. Entering mid-summer, drought conditions are covering 56 percent of the lower 48 states, a record drought extent in the 21st century.Depending where you're located, the prospect of a new El Niño event may be good news. The drought-parched Texas Panhandle, for example, tends to be wetter during El Niño years. It could also be decidedly unwelcome news — just ask residents of California who dealt with El Niño-related flooding in 2010.

Delayed Rains Strain India Economy - Swaths of northern India are facing water shortages due to the late arrival of monsoon rains, deepening already acute power shortages and disrupting the sowing season of staple food crops at a time when India's economy is fragile. On Friday, Sharad Pawar, India's agriculture minister, acknowledged for the first time the weather's toll on crops. "June rainfall was not satisfactory for agriculture and water reservoirs," Mr. Pawar said. Heavy monsoon rains typically arrive in June, but some parts of northern India, an expansive agricultural belt on which millions of people rely for food, have yet to see a drop.

What Is Causing The Climate To Unravel? - 40,000 heat records have already been broken this year across the United States, according to the National Oceanic and Atmospheric Administration.   A few years ago, the term was “micro-bursts” (not quite tornadoes, but similar impact). Now it is “derecho” (not quite hurricanes, but similar impact). Whatever you call it, we need to face up to the fact that our weather has turned dangerous because our climate is breaking down.  Virginia has had 27 national disaster declarations due to storms in the past 20 years, three times as many as the prior 20 years. More than two million acres have burned in U.S. wildfires already this year. Global warming has created longer wildfire seasons in the West due to heat and drought (warmer winters has also allowed pests to floursih, killing large numbers of pine trees that add fuel to the fires). The current heat wave and climate disasters shouldn’t be catching us by surprise. Since the year 2000, we have witnessed nine of the ten hottest years ever recorded, according to NASA’s Goddard Institute for Space Studies, The first three months of this year has been the warmest first quarter ever in the United States, and March was an alarming 8 degrees warmer than average. As the planet heats, weather patterns are destabilized. Warm air sucks more water from the ground and holds more water (about 4% more for every 1 degree F increase in temperature). That’s one of the reasons our warming planet has been creating historic droughts out West and dumping torrential rains in the Midwest

Freak weather linked to global warming - After the US baked in a searing heatwave and as Russia mourns the deaths of more than 100 flood victims, scientists have produced what they say is groundbreaking research linking climate change to recent extreme weather. Global warming “significantly” increased the odds of some of last year’s most unusual weather, including the brutal Texas drought and the freakishly warm November in Britain, according to findings released Tuesday alongside the latest “state of the climate” report in the Bulletin of the American Meteorological Society. It probably also played a part in unusual temperatures across western Europe in 2011, a year that was almost 1.5°C warmer than what could be attributed to weather patterns alone. But the fingerprint of human-induced climate change was not evident in other weather disasters such as the devastating Bangkok floods late last year, says the peer-reviewed research, which found the rain that caused them was not that extreme. And it is still too early to be absolutely sure about a link between climate change and the latest US heatwave, which has shattered more than 2,000 temperature records in the space of a week, researchers said, nor the apparently endless stretch of rain behind the UK’s sodden summer. “We’re not necessarily seeing a clear human influence on every single event we’re looking at,” said the UK Met Office’s Dr Peter Stott, co-editor of the new research that attempts to explain what links, if any, can be made between climate change and volatile recent weather. Dr Stott said the findings were significant because they were being published within months of extreme weather – something that can sometimes take a decade – and because it allowed scientists to say more about the impact of climate on specific weather events, which most have been reluctant to do.

Scientists attribute extreme weather to man-made climate change -  Climate change researchers have been able to attribute recent examples of extreme weather to the effects of human activity on the planet's climate systems for the first time, marking a major step forward in climate research. The findings make it much more likely that we will soon – within the next few years – be able to discern whether the extremely wet and cold summer and spring so far experienced in the UK this year are attributable to human causes rather than luck, according to the researchers. Last year's record warm November in the UK – the second hottest since records began in 1659 – was at least 60 times more likely to happen because of climate change than owing to natural variations in the earth's weather systems, according to the peer-reviewed studies by the National Oceanic and Atmospheric Administration in the US, and the Met Office in the UK. The devastating heatwave that blighted farmers in Texas in the US last year, destroying crop yields in another record "extreme weather event", was about 20 times more likely to have happened owing to climate change than to natural variation. Attributing individual weather events, such as floods, droughts and heatwaves, to human-induced climate change – rather than natural variation in the planet's complex weather systems – has long been a goal of climate change scientists. But the difficulty of separating the causation of events from the background "noise" of the variability in the earth's climate systems has until now made such attribution an elusive goal.

Texas judge rules atmosphere, air to be protected like water, may aid climate change lawsuits - The Washington Post: A Texas judge has ruled that the atmosphere and air must be protected for public use, just like water, which could help attorneys tasked with arguing climate change lawsuits designed to force states to cut emissions. The written ruling, issued in a letter Monday by Texas District Court Judge Gisela Triana, shot down arguments by the Texas Commission on Environmental Quality that only water is a “public trust,” a doctrine that dates to the Roman Empire stating a government must protect certain resources — usually water, sometimes wildlife — for the common good.Adam Abrams, one of the attorneys arguing the case against TCEQ, said Triana’s ruling could be used as a persuasive argument in lawsuits pending in 11 other states. In Texas, though, a ruling to protect air and the atmosphere has added significance. Republican Gov. Rick Perry is one of the most vocal opponents against widely accepted scientific research that fossil fuel emissions are causing global warming. And the state has refused to regulate greenhouse gases, forcing the U.S. Environmental Protection Agency to work directly with industries to ensure they comply with federal law. “The commission’s conclusion that the public trust doctrine is exclusively limited to the conservation of water is legally invalid,”

Drought Caused Big Drop in Texas Portion of Ogallala — The historic Texas drought caused the Ogallala Aquifer to experience its largest decline in 25 years across a large swath of the Texas Panhandle, new numbers from a water district show. The 16-county High Plains Underground Water Conservation District reported this week that its monitoring wells showed an average decline last year of 2.56 feet — the third-largest in the district’s 61-year history, and three times the average rate over the past decade. Farmers pumped more water during the drought to compensate for the lack of rainfall, which was about two-thirds less than normal last year in Lubbock and Amarillo. Further north in the Panhandle, along the state's border with Oklahoma, a second water district also registered large declines in the Ogallala. Steve Walthour, the general manager of the eight-county North Plains Groundwater Conservation District, calculated on Monday that the average drop in the Ogallala reached 2.9 feet last year.

How They Do Drought in Texas - When it doesn’t rain in Texas, and the crops wither and the surface reservoirs dry up, there is one alternative source of water. It’s the same source relied on by the people of New Mexico, Oklahoma, Kansas, Nebraska and South Dakota. It’s the Ogallala Aquifer, a vast underground repository of water that resembles a vast soaked sponge. Like the oil reserves of Saudi Arabia, the Ogallala contains fossil water, deposited by glaciers tens of thousands of years ago. That means there’s only so much of it. When it got really dry and the farmers more than doubled down on irrigation, dropping the surface of the aquifer under the Panhandle by 2.5 – 3 feet. One well recorded a 25-foot drop. But wait, it gets worse. According to the Texas Tribune, last year, in the worst of the drought so far, West Texas farmers continued to irrigate crops that were already dead  because they had to irrigate through the entire growing season in order to collect federally subsidized (and regulated) crop insurance. The High Plains Underground Water Conservation District understands if you only have so much stuff in a container, and you’re taking it out as fast as you can, pretty soon you won’t have any stuff left. So it has proposed placing a cap on water withdrawals from the Ogallala, putting meters on wells, that sort of thing.  Enter the Texas Supreme Court, which early this year announced a decision demonstrating once again that justice is blind. And deaf, and dumb. In Edwards Aquifer v. Day & McDaniel, the court upheld the Wild West tradition that you “own” the water beneath your land. So, presumably, if you own an acre of land, and you enjoy using the well on it to supply, let’s say, the city of Houston, thus sucking water from under three states, that presumably would be fine with the Honorable Court.

For those in the northeast, I would suggest moving to North Carolina where sea level rises of this magnitude will soon be against the law. -  Sea levels on the East Coast are rising three to four times faster than the global average, putting several major U.S. cities at increased risk of flooding and storm surges, according to a new study by the U.S. Geological Survey. The findings were published in the journal Nature Climate Change.  The dramatic acceleration in sea-level rise, which is driven by climate change, poses an enormous threat to Boston, New York and other urban centers, as well as to coastal wetlands, beaches and other vulnerable ecosystems, according to scientists with the Center for Biological Diversity. While scientific experts predict that global average sea levels will rise by 2 to 4 feet or more by 2100, sea levels along a 620-mile East Coast “hotspot” could increase by an additional foot, according to the USGS study. 

Top marine scientists warn reefs in rapid decline - More than 2,600 of the world’s top marine scientists Monday warned coral reefs around the world were in rapid decline and urged immediate global action on climate change to save what remains. The consensus statement at the International Coral Reef Symposium, being held in the northeastern Australian city of Cairns, stressed that the livelihoods of millions of people were at risk.Coral reefs provide food and work for countless coastal inhabitants globally, generate significant revenues through tourism and function as a natural breakwater for waves and storms, they said. The statement, endorsed by the forum attendees and other marine scientists, called for measures to head off escalating damage caused by rising sea temperatures, ocean acidification, overfishing and pollution from the land.

Rate of Climate Change's 'Evil Twin' Has Scientists Worried - Climate change's "evil twin" -- ocean acidification -- has been increasing at a rate unexpected by scientists, says Dr. Jane Lubchenco, head of the National Oceanic and Atmospheric Administration (NOAA).Lubchenco told he Associated Press that surface waters, where excess carbon dioxide from the atmosphere has been concentrating, "are changing much more rapidly than initial calculations have suggested." She warns, "It's yet another reason to be very seriously concerned about the amount of carbon dioxide that is in the atmosphere now and the additional amount we continue to put out."Lubchenco made the comments while at the 12th International Coral Reef Symposium in the Australian city of Cairns, where thousands of scientists are meeting and calling for action to save the world's coral reefs. "The carbon dioxide that we have put in the atmosphere will continue to be absorbed by oceans for decades," Lubchenco added. "It is going to be a long time before we can stabilize and turn around the direction of change simply because it's a big atmosphere and it's a big ocean."

NSIDC: Arctic Sea Ice Report, July 5, 2012: Rapid sea ice retreat in June - Arctic sea ice extent for June 2012 averaged 10.97 million square kilometers (4.24 million square miles). This was 1.18 million square kilometers (456,000 square miles) below the 1979 to 2000 average extent. The last three Junes (2010-2012) are the three lowest in the satellite record. June 2012 ice extent was 140,000 square kilometers (54,000 square miles) above the 2010 record low. Ice losses were notable in the Kara Sea, and in the Beaufort Sea, where a large polynya has formed. Retreat of ice in the Hudson and Baffin bays also contributed to the low June 2012 extent. The only area of the Arctic where sea ice extent is currently above average is along the eastern Greenland coast. The ice extent recorded for 30 June 2012 of 9.59 million square kilometers (3.70 million square miles) would not normally be expected until July 21, based on 1979-2000 averages. This puts extent decline three weeks ahead of schedule.In June, the Arctic lost a total of 2.86 million square kilometers (1.10 million square miles) of ice. This is the largest June ice loss in the satellite record.

Arctic News: Supplementary evidence to the EAC from John Nissen on behalf of AMEG What the committee may not know is that there was a whole assemblage of models used by the IPCC in 2007 for their AR4 report. Most of these models predicted the sea ice survival beyond the end of the century. None of the models showed the positive feedback from sea ice retreat that we refer to above. An excuse could be made that this feedback is difficult to quantify and to model, so was omitted on procedural grounds. However the resultant predictions bore no relation to reality. Even in the 1990s, the observations of sea ice extent were deviating from the most pessimistic of the models. Then in September 2007 the sea ice extent plummeted to a record low, about 40% below the level at start of satellite measurement. Nevertheless, IPCC, supported by models from the Hadley Centre, continued on the assumption that global warming predictions could be made for the whole century without taking into account possible sea ice disappearance and massive methane release. Even with the “wake-up call” of sea ice retreat in 2007, the Hadley Centre would not admit that their models were fundamentally flawed and they continue to ignore the evidence of sea ice volume, which is showing an exponential downward trend.   However the PIOMAS volume data clearly shows acceleration in decline, a close fit to the exponential trend curve, and a likely date for an ice-free September around 2015. (Note that as the volume approaches zero, so must the extent, implying a collapse in extent before 2015.)

Arctic Sea Ice Volume Anomaly, version 2: Sea Ice Volume is calculated using the Pan-Arctic Ice Ocean Modeling and Assimilation System (PIOMAS, Zhang and Rothrock, 2003) developed at APL/PSC.  Anomalies for each day are calculated relative to the average over the 1979 -2010 period for that day of the year to remove the annual cycle. The model mean annual cycle of sea ice volume over this period ranges from 28,700 km3 in April to 12,300 km3 in September.  The blue line represents the trend calculated from January 1 1979 to the most recent date indicated on the figure.  Monthly averaged ice volume for September 2011 was 4,200 km3. This value is 66% lower than the mean over this period, 75% lower than the maximum in 1979, and 2.0 standard deviations below the 1979-2011  trend.  Ice volume for March  2012 was 20,800 km3 the same as last year but 35% lower than the maximum in 1979, 24% below the mean and 1.7 standard deviations from the trend. Shaded areas represent one and two standard deviations of the residuals of the anomaly from the trend. Updates will be generated at approximately one-month intervals. Although PIOMAS  ice volume for September 2011 was 380 km3 lower than the previous record of 2010,  this difference is  within the estimated uncertainty of PIOMAS.

EU CO2 Market Has 950 Million Excess Permits, Hedegaard Says - The European Union emissions trading system is oversupplied by allowances equivalent to almost 50 percent of the annual pollution limit in the program, according to Climate Commissioner Connie Hedegaard. “The difficult macroeconomic circumstances have substantially altered the supply-demand balance in the European carbon market,” she told a conference in Brussels today. “Together with the increasing use of international credits this has been the key driver in the build-up of unused allowances to now more than 950 million.” The excess drove prices in the world’s biggest cap-and- trade program to a record low in April, triggering calls from companies including Royal Dutch Shell Plc (RDSA) for the EU to withhold a number of permits from the market as of next year. The surplus, equivalent to almost half the 2.04 billion-metric-ton average annual allocation in the 2008-2012 trading phase, can be carried over to the next period from 2013 to 2020.

From Arab Spring to American Summer: The Politics of Power Outages - Amidst record-high temperatures and a very anti-climactic 4th of July, power outages have left millions without air-conditioning and even water in rural areas where households rely on electric pumps.  At least 52 people have died from heat and three million people are still without power.  No it’s not Yemen, where power outages in the capital Sana’a have sparked a new round of protests. It’s the United States of America, where corruption converges with a moribund electricity distribution system to produce increasingly frequent blackouts across the Midwest and East Coast.   A thunderstorm that struck the East Coast early last week left millions without electricity and power companies took days to restore power to about half of their customers. Four days after the storm, power was restored to 67% in the Northern Virginia suburbs and 61% in Baltimore, but Montgomery County, Maryland and parts of Washington, D.C. only managed to restore 43%, leaving over a million without electricity as temperatures soared above 100 degrees.   In Michigan, an increasingly woebegone state, power outages are frequent.    Everyone would like to know why. The answer is simple, and three-fold: An outdated electricity distribution system, corruption and mismanagement.  Americans are now being told that keeping utility bills down means keeping maintenance of the country’s dismal electricity distribution system to a bare minimum. According to the American Society of Civil Engineers, the entire system could collapse by 2020 without an immediate investment of $673 billion. Furthermore, experts say that brownouts and blackouts will end up costing more in the end than re-hauling the entire system.  

Electricity Prices Rise Despite Cheaper Costs For Utility Companies: A plunge in the price of natural gas has made it cheaper for utilities to produce electricity. But the savings aren't translating to lower rates for customers. Instead, U.S. electricity prices are going up. Electricity prices are forecast to rise slightly this summer. But any increase is noteworthy because natural gas, which is used to produce nearly a third of the country's power, is 43 percent cheaper than a year ago. A long-term downward trend in power prices could be starting to reverse, analysts say. "It's caused us to scratch our heads," says Tyler Hodge, an analyst at the Energy Department who studies electricity prices. The recent heat wave that gripped much of the country increased demand for power as families cranked up their air conditioners. And that may boost some June utility bills. But the nationwide rise in electricity prices is attributable to other factors, analysts say: _ In many states, retail electricity rates are set by regulators every few years. As a result, lower power costs haven't yet made their way to customers. _ Utilities often lock in their costs for natural gas and other fuels years in advance. That helps protect customers when fuel prices spike, but it prevents customers from reaping the benefits of a price drop. _ The cost of actually delivering electricity, which accounts for 40 percent of a customer's bill on average, has been rising fast. That has eaten up any potential savings from the production of electricity.

ACEEE energy efficiency report finds that the U.S. lags behind China and Europe - In the U.S. – land of the gas-guzzler SUV and 24/7 air conditioning – energy efficiency isn’t known as a strong suit. The country’s power management efforts are so poor that a new report ranks it near the bottom of the pack of major economies. On a list of a dozen countries, which together account for 63% of global energy consumption, the U.S.' efficiency efforts are ranked in lowly ninth place. With a score of 47 out of 100, the U.S. outpaces only Brazil, Canada and Russia,  according to the report from the nonprofit American Council for an Energy-Efficient Economy, known as ACEEE. The United Kingdom ranks first with a 67 score, followed by countries such as Italy, Japan, France and China. In recent years, advocates for a greener lifestyle have pushed for the U.S. to adopt more eco-friendly cars, less destructive construction practices and an array of alternative energy projects. Still, Americans use more oil per capita than any other country except Canada – 4.7 tons a year per person, compared to roughly one ton in Brazil and China. The U.S. transportation sector, which focuses on road construction instead of on public transportation and has been slower to adopt fuel-efficient vehicles, is ranked dead last.

Grinding Energy Shortage Takes Toll on India's Growth - India is facing an energy crisis that is slowing economic growth in the world's largest democracy. At stake is India's ability to bring electricity to 400 million rural residents—a third of the population—as well as keep the lights on at corporate office towers and provide enough fuel for 1.5 million new vehicles added to the roads each month. Shortages of coal, oil and natural gas will require India to import increasing amounts of high-cost fossil fuels, say energy experts, risking inflation and putting the country in stepped-up competition with China, Japan and South Korea. Buying oil from Iran, one of India's biggest suppliers, is tougher because of U.S. and European sanctions aimed at curbing Tehran's nuclear ambitions.With annual demand expected to more than double in the next two decades to the equivalent of six billion barrels of oil, the energy crunch threatens to knock India off its growth path. The national economy has already slowed amid paltry business investment and stalled reforms. It tallied just 5.3% growth in the quarter that ended March 31, the lowest level in almost a decade and well shy of the country's 9% goal. Expensive imports have taken a toll on the nation's finances. Though global crude oil prices have eased in the past few months, India is seeing little benefit because its currency, the rupee, has been dropping against the dollar, the currency used to price oil.

Largest Hydroelectric Project in the World is Completed, but at What Cost? - On Wednesday the Three Gorges dam in China had its 32nd, 700-megawatt turbine installed, completing the mega-project and bringing its total capacity up to 22.5 gigawatts, making it the largest hydropower installation in the world. The Three Gorges project has been fully connected to the power grid where it generates 11 percent of China’s total hydroelectric output. Construction started in 1994, and first started generating power for the grid in 2003, since which time it has saved, on average, 200 million tonnes of coal a year. However, at a cost of over $38 billion, four times the original estimate, and resulting in at least 1.3 million people being relocated from their homes due to increased risk of earthquakes and landslides in the region, has the price for this particular renewable energy source been too much?

Gundersen: We just tested an air filter that has highest radioactivity seen in North America after Fukushima Daiichi — Found in Seattle HEPA filter used since 3/11 (VIDEO) -  We just got a filter that was in for a year and a half. It was put in in February of 2011 and the owner forgot to remove it and took it out just a couple weeks ago. And this is a doctor in Seattle, and it’s the highest concentrations we’ve seen in North America are in this guys HEPA filter. It would have been in the house if not for the HEPA filter.

Japan’s Nuke Report Undercuts Itself With Cultural Copout - By Japanese standards, the report released Thursday by the Fukushima Nuclear Accident Independent Investigation Commission could be considered remarkable.  Its 641 pages, drawing on town-hall meetings, household surveys, more than 900 hours of hearings and interviews with 1,167 people are the product of an unprecedented six-month inquiry -- the first independent investigation in Japan to have subpoena power.  Its account of the March 11, 2011, earthquake, tsunami and ensuing nuclear meltdown, which displaced about 160,000 people and left parts of Japan unlivable, differs in crucial ways from those of Japan’s nuclear regulatory agencies, the Tokyo Electric Power Co. (9501) that operated the plants and then-Prime Minister Naoto Kan. Most important, the report squarely blames the catastrophe on a pattern of human failure, not a freakish act of nature. Yet for all its detail and willingness to label the Fukushima disaster as “profoundly manmade,” the report does not identify which men (and this being Japan, there probably weren’t many women) failed. Instead, it sweepingly indicts “the ingrained conventions of Japanese culture,” effectively letting individual culprits off the hook. Its conclusions and recommendations avoid any discussion of prosecution or punishment.

IRA Analyst - Interview with Jim Lucier: The Bull Case for America in a Future of Energy Abundance: Welcome to a brave new world in which the United States is the new Saudi Arabia. We're on track to surpass both the Russians and the Saudis in oil production by around 2020. And by the way, we have the world's cheapest natural gas in close proximity to an industrial base that can use it. At the moment we have a 80% structural advantage in the price of gas versus our Asian and European competitors. We're paying under $3. They're paying over $14. Something like that price wedge is going to persist for at least the next ten years--which means that we are going to have a price advantage in electricity too unless the other guys use more coal.

New Study: Fluids From Marcellus Shale Likely Seeping Into PA Drinking Water - New research has concluded that salty, mineral-rich fluids deep beneath Pennsylvania's natural gas fields are likely seeping upward thousands of feet into drinking water supplies.  Though the fluids were natural and not the byproduct of drilling or hydraulic fracturing, the finding further stokes the red-hot controversy over fracking in the Marcellus Shale, suggesting that drilling waste and chemicals could migrate in ways previously thought to be impossible.  The study, conducted by scientists at Duke University and California State Polytechnic University at Pomona and released today in the Proceedings of the National Academy of Sciences [1], tested drinking water wells and aquifers across Northeastern Pennsylvania. Researchers found that, in some cases, the water had mixed with brine that closely matched brine thought to be from the Marcellus Shale or areas close to it.  No drilling chemicals were detected in the water, and there was no correlation between where the natural brine was detected and where drilling takes place.  Still, the brine's presence – and the finding that it moved over thousands of vertical feet -- contradicts the oft-repeated notion that deeply buried rock layers will always seal in material injected underground through drilling, mining, or underground disposal.

NTSB blames Enbridge, ‘weak’ regulations in Kalamazoo oil spill - The National Transportation Safety Board blamed multiple corrosion cracks and “pervasive organizational failures” at the Calgary-based Enbridge pipeline company for a more-than-20,000-barrel oil spill two years ago near Michigan’s Kalamazoo River. The cost of the spill has reached $800 million and is rising, the NTSB said, making the pipeline rupture the most expensive on-shore oil spill in U.S. history. The pipeline’s contents — heavy crude oil from Canada’s oil sands — have made the spill a closely watched case with implications for other pipelines carrying such crude.The NTSB also blamed “weak federal regulations” by the Pipeline and Hazardous Materials Safety Administration for the accident, which spilled at least 843,444 gallons of oil into a tributary of the Kalamazoo in Marshall, Mich. The oil spread into a 40-mile stretch of the Kalamazoo and a nearby wetlands area. The NTSB said Enbridge had noticed cracks as early as 2005 but had failed to repair them. “This accident is a wake-up call to the industry, the regulator, and the public,” NTSB Chairman Deborah A.P. Hersman said in a statement. “Enbridge knew for years that this section of the pipeline was vulnerable yet they didn’t act on that information.” She added that “for the regulator to delegate too much authority to the regulated to assess their own system risks and correct them is tantamount to the fox guarding the hen house.”

Shell's Arctic Oil Spill Recovery Barge Refused Coast Guard Certificates - In the event of an offshore oil spill in the Arctic, Shell has previously admitted it can only “encounter” most of the oil in the frigid, pristine waters — not clean it up. However, it may lack the resources to do even that. As Shell’s fleet sails north to prepare offshore drilling in Arctic waters, Shell’s oil spill recovery barge, the Arctic Challenger, remains docked in northern Washington after failing to receive Coast Guard certification. The Los Angeles Times reports: The delay in certification adds another notch of uncertainty to Shell’s narrow window for operations in the Arctic, which already is tight because drilling must halt by September in the Chukchi Sea and by October in the Beaufort Sea to avoid the dangerous advance of sea ice that comes with winter. Though drilling initially was scheduled to commence by mid-July, unusually heavy sea ice from the past winter has postponed that, probably until the first week of August.

BP abandons plan to develop Alaska field - BP PLC has decided not to proceed with a groundbreaking $1.5-billion (U.S.) offshore oil project in Alaska after concluding it would be too expensive. A review carried out in the wake of BP’s 2010 Gulf of Mexico oil spill found that the plan for the Liberty field did not meet BP’s new, higher safety standards. Putting it right would have driven up project costs and caused further delays to a development that is already well behind schedule.“At the moment we don’t feel it’s economically viable,” a spokesman said on Wednesday. The move shows how the cautious, conservative approach BP has adopted since the explosion and fire at the Deepwater Horizon rig that killed 11 men and triggered the world’s worst offshore oil spill is already having an impact on its production plans. Discovered in 1997, the Liberty field is about eight kilometres off Alaska’s northern coast in the shallow waters of the Beaufort Sea. It has estimated recoverable reserves of 100 million barrels, and was expected to produce 40,000 barrels a day. BP originally planned to build an artificial island out at sea to access the oil, but failed to win the necessary regulatory approvals.

Norway intervenes to avert oil industry closure -  Norway's government ordered on Monday a last-minute settlement in a dispute between striking oil workers and employers in a move to alleviate market fears over a full closure of its oil industry and a steep cut in Europe's supplies. The strike over pensions had kept crude prices on the boil with analysts expecting far quicker action by the government to stop the oil industry from locking out all offshore staff from their workplaces from midnight (2200 GMT) on Monday. Oil markets breathed a sigh of relief on news of the intervention and crude prices dropped in early Asian trade.  Under Norwegian law, the government can force the striking workers back to duty and has done so in the past to protect the industry on which much of the country's economy depends.

Oil Tanker Full of Crude Stranded Off Coast of Singapore for 150 Days - In 2005, after 22 years of conflict, Sudan split into two; the Republic of the Sudan, and the Republic of South Sudan. In the split South Sudan took 75 percent of the nation’s 470,000 barrels a day ouput of crude oil, whilst the North was left in control of the pipelines, the only manner of transporting the oil to the coast for export to other countries. Ever since the split the two young nations have been unable to agree as to how much South Sudan should pay Sudan for the privilege of using the oil pipes. Sudan announced that it will seize oil transported through the pipes as payment for the use, until such time as an agreement is actually made. Based on this illegal announcement, they have been stealing oil from their southern neighbour ever since. The latest victim to find itself caught in this feud is a black-and-red hulled tanker, the ETC Isis, which has been stranded 15 miles off the coast of Singapore for 150 days, carrying in its hold almost $60 million dollars’ worth of crude. South Sudan say the cargo was stolen, but Sudan still remain adamant that they have every right to seize and sell the oil.

Shale oil and tight oil - Since 2005, the "total oil supply" for the United States as reported by the Energy Information Administration increased by 2.2 million barrels per day. Of this, 1.3 mb/d, or 60%, has come from natural gas liquids and biofuels, which really shouldn't be added to conventional crude production for purposes of calculating the available supply. Of the 800,000 b/d increase in actual field production of crude oil, almost all of the gain has come from shale and other tight formations that horizontal fracturing methods have only recently opened up. Here I offer some thoughts on how these new production methods change the overall outlook for U.S. oil production. Let me begin by clarifying that "shale oil" and "oil shale" refer to two completely different resources. "Oil shale" is in fact not shale and does not contain oil, but is instead a rock that at great monetary and environmental cost can yield organic compounds that could eventually be made into oil. Although some people have long been optimistic about the potential amount of energy available in U.S. oil-shale deposits, I personally am pessimistic that oil shale will ever be a significant energy source. By contrast, the expression "shale oil", or the more accurate term "tight oil", is often used to refer to rock formations that do contain oil and that sometimes might actually be shale. The defining characteristic is that the rock is not sufficiently porose or permeable to allow oil to flow out if all you do is drill a hole into the formation ...that producers of North Dakota sweet are only offered $61 a barrel

Saudi production up with Opec oil price down - Saudi Arabia's oil production crept back above 10 million barrels per day (bpd) and Opec continued to pump well above its self-imposed ceiling last month, as the price for its crude dropped below US$100 a barrel for the first time in eight months. The Opec reference basket price slumped by 13 per cent to average $93.98 a barrel, the organisation said in its monthly oil report for June. "The sluggish OECD [Organisation for Economic Co-operation and Development] economy is suppressing the region's oil demand, except for in Japan, where the shut-down of most of the country's nuclear power plants has led to increased crude and fuel oil burning," said the report. The organisation's 12 members pumped a daily average of 31.36 million bpd last month, a decrease of about 100,000 bpd from May's levels, with Iran's production dropping by about 190,000 bpd.

"Our planet will truly be toast" - Jeremy Grantham, one of the world's most famous investors and environmentalists, is known for his blunt, often less-than-cheery views on the global economy. Speaking at a conference in Oxford, England on Thursday, he wasn't just pessimistic -- he was downright apocalyptic. "In 200 years, with the limited gains we're getting from business and government, our planet will truly be toast," said the investor, who introduced himself as a "glasses three-quarters empty person." Grantham spoke at the ReSource 2012 conference, a forum focused on the rising scarcity of natural resources such as food, water, and energy. The founder of Boston's GMO, a money management firm with more than $100 billion in assets, Grantham writes quarterly letters to shareholders that are widely read on Wall Street. His letters, which expand on issues ranging from politics to philosophy, frequently reference his concerns about the world's declining supply of natural resources. Before Grantham spoke on Thursday, he was preceded by several business leaders, many of whom offered solutions for the looming shortage in commodities. GMO's founder was less optimistic. "Yes, on paper we can do everything... but we won't," he said. "I'm bearish on human resources -- and, unfortunately, bullish on resources investments."

Peak theories 'trashed' - PEAK theories - peak phosphorus, peak oil, peak potassium - are, in the words of Mick Keogh, being "trashed by the cold, hard and ruthless rules of economics". In a blog post, the Australian Farm Institute's executive director argued that these peaks were projected on questionable statistics, "and ignore some some basic economics". "A number of these projected peaks have stubbornly refused to materialize - especially peak oil, and peak land. In fact, despite all projections, each time grain prices look like experiencing a sustained increase, more land is sown to crops and down go grain prices once again." Mr Keogh took on potassium and phosphorus, two elements essential to agriculture that in recent years have been the subject of reports suggesting the peak of their economic availability was looming or past. Price spikes for these inputs have triggered a predictable response, Mr Keogh said: reserves were reappraised, investors opened up new mines, supplies grew and prices dropped.

Peak Oil: A Dialogue with George Monbiot -- George Monbiot recently made a major about-face on his peak oil stance, on the grounds that unconventional oil represents a new reality. The basis of his u-turn is a recent report on unconventional oil by Leonardo Maugeri, (former) oil executive at Italy's Eni, published at Harvard University, where Maugeri's a Senior Fellow at the John Kennedy School, Belfer Center, which we discussed here at TAE in Unconventional Oil is NOT a Game Changer. George Monbiot: We were wrong on peak oil. There's enough to fry us all. I sent George a short response to his article, by way of opening a dialogue: What we are facing is a demand and price collapse that will render unconventional supplies uneconomic. Natural gas is leading the way over the next few years. The high cost and low EROEI are fatal flaws. And received this reply: If there's a collapse in demand, peak oil is not an issue, right? If there's a resurgence of demand, unconventionals become economic again. As for EROEI being a constraint, try telling that to the tar sands producers in Alberta.  With best wishes, George. The debate continues. Here is my next installment: A demand collapse will certainly put peak oil on the backburner for a number of years. The next few years will be remembered for financial crisis as we move into what will be at least as bad as the Great Depression (and very likely worse, since the bubble was much larger this time). Peak oil will not have gone away, however.

Ruthless Extrapolation - We humans owe much of our success to our ability to recognize patterns and extrapolate trends to anticipate a future state.  The danger with extrapolation is that it can’t work forever. Trends change. The picture I carry in my head is one I’ve shown before: the long-view history of fossil fuel energy use on Earth. We found a one-time resource in the ground—like an inheritance—and are doing everything within our means to promote the fastest practical use of this finite deposit. By this, I mean that we have engineered a world that rewards economic growth—thus far carrying a nearly one-to-one physical/energy aspect, requiring ever more energy to keep the growth engine running. The finite nature of the underlying energy resource is not seriously under question. The overall impression of the figure above therefore must be approximately correct. When we realize that this incredible surge—of planes, trains, and automobiles; of radio, television, and the internet; of industrialization, industrialized agriculture, and swelling population; of supersonic, nuclear, and space capabilities—in the past century or so are all reflections of the scale of surplus energy derived from fossil fuels, we come to understand that we need to stare the plot above directly in the face and recognize the peril of extrapolation.

IEA Sees Rise in Global Oil Demand in 2013 - Global oil demand is expected to rise by one million barrels a day next year, faster than growth this year, but "well below" the levels seen before the financial crisis as economic recovery remains muted, the International Energy Agency said Thursday. The IEA also said that demand from emerging economies will for the first time next year overtake demand in the world's most industrialized nations, or the OECD. This trend is unlikely to be reversed as non-OECD countries, mainly in Asia, will continue to lead oil demand growth next year, the agency said in its closely watched monthly report.

The Impending World Oil Shortage: Learning from the Past (pdf) Prediction: World oil production will go into decline at some future date. Anticipation: World oil production will go into decline in the next 1-4 years. Suggestion: Public reactions to the decline may be similar to 1973-1974.

Kenya Anchor to East African Oil Economy - Major international oil companies are taking a close look at the offshore oil potential in East African states. London-listed explorer Tullow Oil said it was interested in fast-tracking its developments in Kenya and Italian energy company Eni announced recently it signed three production sharing contracts awarded by the Kenyan government. Tullow said it envisions a potential export pipeline to service the region from neighbouring Uganda. With Kenya serving as a key negotiator in regional issues, including nearby South Sudan, frontier developments in the region may be more than a matter of exploration success. Kenya has no proven oil reserves though that may change given the pace at which Tullow expects developments to move forward. The company said it expected Kenya to overshadow the 2.5 billion barrels it imagines in nearby Uganda. With the success of its Ngamia-1 well, Tullow said there could be as much as 10 billion barrels of oil situated in its Kenyan acreage. Considering the optimism expressed over the Lake Albert region in Uganda, and given Tullow's proven track record in frontier developments, Kenya could emerge as a major player in the African energy sector.

Gulf OPEC States Oppose Prices Meeting -- Gulf OPEC members, including Saudi Arabia, oppose a call for the Organization of the Petroleum Exporting Countries to hold an emergency meeting to discuss prices, delegates said Sunday, two days after the group's president sent member countries a request by Iran to meet. "If we were to call for a meeting it would be to discuss oil prices, but right now prices are rebounding and will likely rise further due to the political tensions with Iran and the economic situation in Europe," a Gulf OPEC delegate said. "Right now we don't see any need or worry to hold an emergency meeting." OPEC president, Iraq's oil minister, Abdul Kareem Luaiby, has sent member states a request by Iran to hold an emergency meeting of the cartel to seek their opinions, Iraqi OPEC Governor Falah Alamri said Saturday. Iran's oil minister, Rostam Ghasemi, a week ago called for an emergency OPEC meeting to cut output after oil prices fell below $100 a barrel.

The Carter Doctrine: Is It Working? - ASPO 2012 presentations have come out on You Tube, and among them is this interesting presentation from Michael Klare entitled, The Geopolitics of Oil and Gas.  As part of his presentation (6:30-8:30 min) Klare talks about the Carter Doctrine: For all the reasons we have heard in earlier presentations today, oil is so critical to the economies and transportation systems of modern economies, so nations have determined...oil importing nations...must make this a center of their foreign policy, to ensure access to adequate supplies of oil. And this is the essence of the Carter Doctrine...When the Shah was overthrown and the threat to oil became so obvious the United States concluded that it was essential for the US to play a more direct military role. And this is the origin of the Carter Doctrine, which I believe, remains the dominant factor in American thinking in the Middle East today. It makes it very clear: oil is crucial to the western economy, and therefore, the flow of oil must be preserved at all costs, including the use of military power as needed.   The Carter Doctrine was articulated by Jimmy Carter in his January 23, 1980, state of the Union address, following the Iranian hostage crisis and Soviet Union’s invasion of Afghanistan, which included in part, the following warning, clearly aimed at the Soviet Union: Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.

Iran won’t crack - Let's start sledgehammer style. Iran won't crack. Iran won't crack. Iran won't crack. No sledgehammer, though, is likely to perforate the limitless fog of delusion hovering over a US elite that a relentless propaganda campaign tries to sell as "the international community". See, for instance, this bland op-ed, where we discover that "the international community is now on watch for cracks in Iran's defiant stance: Will increased sanctions compel Tehran to make real concessions and allow for a diplomatic solution to the standoff?" Here's your short answer: no. The piece goes on, noting that "the Iranians didn't seize the opportunity" to essentially submit to Washington's roll over and die brand of diplomacy on show at the nuclear negotiations. "Instead, they demanded recognition of their right to enrich". Of course they have the right to enrich uranium - as subscribers of the nuclear Non-Proliferation Treaty (NPT). What makes this op-ed noticeable is that it was not written by a rabid neocon. The author is "an international affairs professor at Harvard University's Kennedy School, a former deputy national security advisor and a fellow at the Council on Foreign Relations." If this is a measure of the level of intellectual debate prevalent in the revolving door between academia, punditry and policymaking, US elites can't help seeing the future as worse than the Black Death.

China Official: 2012 CPI To Below 4%, Small Risk Deflation - China's consumer price inflation will stay below 4% for 2012, a senior official with the powerful National Development and Reform Commission told state television, playing down worries about deflation. Headline consumer inflation rose at the slowest pace since January 2010 at 2.2% y/y in June, lower than the expected 2.3% in a median survey by MNI. CPI rose 3.3% y/y in the first half of the year. Zhou Wangjun, deputy chief of the NDRC's price department, said the CPI, though falling fast in June, has not exceeded expectations.   The performance of producer prices was even more dramatic, with the producer price index falling 2.1% y/y versus the expected 2.0% decline. The June figure was the highest rate of deflation since November 2009 and fueled concerns about deflation.

Chinese inflation slows to lowest in two years - China's inflation slowed in June to its lowest rate since January 2010, official data showed, giving the government more room to move in its efforts to reboot the world's second-biggest economy.  The country's consumer price index (CPI) rose by 2.2pc year-on-year in June, the National Bureau of Statistics said, down from 3pc in May and the lowest figure since the start of 2010. The inflation rate for the first half of 2012 was 3.3pc, the bureau said, well below the government's target of 4pc.  The inflation figures were the latest in a series of data in recent weeks showing China's economy is slowing, and analysts said they would allow the government to act more aggressively in trying to revive growth. "The softening CPI will give the central bank more room to stabilise the economy," Tang Jianwei, a Shanghai-based economist with the Bank of Communications, told AFP. "Before the central bank had to balance between inflationary pressures and softening demand."

China Inflation Falls, More Leeway for Stimulus -- China’s inflation rate fell further in June, giving Beijing leeway to continue stimulus measures to fight an economic slowdown. Consumer prices rose 2.2 percent over a year earlier, down from May’s 3 percent, government data showed Monday. Food costs rose by 3.8 percent. Lower inflation clears the way for Beijing to take more steps to reverse China’s deepest downturn since the 2008 global crisis without fear of igniting a new spike in politically sensitive living costs. The government tightened controls repeatedly last year to curb surging prices but reversed course after global demand plunged and growth slowed abruptly. Premier Wen Jiabao warned over the weekend that the economy still faces “huge pressure” to decelerate further. That suggested Beijing might roll out more stimulus measures following two rate cuts since the start of June, a reduction in gasoline prices and higher spending on public works.

Price Data Suggest Specter of Deflation in China - Prices are tumbling across the Chinese economy, according to government data released Monday, as a flood of goods pouring out of the country’s factories and farms exceeds anemic demand from Chinese households and businesses.  The downward trend makes it much harder for businesses to sell enough goods to repay loans that they took out, usually on the expectation of rising prices. Falling prices also discourage investment, which had slowed sharply this spring, and gave consumers an incentive to delay purchases until prices could fall further.  Consumer prices dropped 0.6 percent in June from May, the largest month-to-month drop in two years, the National Bureau of Statistics in Beijing announced Monday. Consumer prices were up 2.2 percent from a year earlier, but only because prices kept rising fairly briskly through January of this year before beginning what has now become an accelerating descent.  Producer prices, measured at the factory gate, were down 2.1 percent in June from a year earlier, and down 0.7 percent in June from May. Those prices had started to weaken late last summer, about six months before consumer prices began eroding.

China inflation signals demand falling as prices ease - China's annual consumer inflation cooled to a 29-month low of 2.2 percent in June versus May's 3.0 percent, data from the National Bureau of Statistics showed, with a month-on-month CPI fall of 0.6 percent twice the rate of decline expected. Producer prices eased even faster, falling 0.7 percent on the month and 2.1 percent on the year, marking the fourth straight month of outright deflation in factory gate prices and pushing the PPI to a 31-month trough. "The PPI figure last month further confirmed the economy continued to cool down, which means the industrial output and other economic activity data could not be upbeat," said Wang Jin, a Shanghai-based analyst with Guotai Junan Securities. China last suffered a bout of deflation between February and October of 2009. By the end of 2009, consumer prices had fallen 0.7 percent on the year.

China heads for a deflationary shock - China is on the cusp of a deflationary vortex. This was signalled late last year by the sharpest contraction in the (real) M1 money supply since modern records began. The hard data is now confirming the warnings. Consumer prices have been falling for the last three months, producer prices have been falling for four months. This is not a food cost story. It is systemic."While an economy-wide generalized deflation is yet to be seen, the deflationary spiral looks to have started in some industrial sectors, attesting to considerable stress with the economy. Persistent deflation can be poisonous," said Xianfang Ren from IHS Global Insight in Beijing.Indeed it can be poisonous, and China already has the twin-afflictions of the deflation malaise: a fast aging nation, and a surfeit of factories and industrial plant.Meanwhile, Japanese machine tool orders fell 14.8pc in May, the biggest drop since 2001 – when Japan’s deflation began in earnest. The post-Fukushima reconstruction boom has run its course. Asia is turning stone cold. All engines of the global economy are sputtering at the same time.

5 Signs of the Chinese Economic Apocalypse - Although China's outlook may still be positive by, say, European standards, the numbers show that the country's storied growth engine has slipped out of gear. Businesses are taking fewer loans. Manufacturing output has tanked. Interest rates have unexpectedly been cut. Imports are flat. GDP growth projections are down, with some arguing that China might already be in recession. In March, Premier Wen Jiabao put the 2012 growth target at 7.5 percent; then seen as conservative, it's now viewed as prescient. If realized, it would be China's lowest annual growth rate since 1990, when the country faced international isolation after the 1989 Tiananmen Square massacre.  What are the concrete indications that China is experiencing something more than just a spreadsheet slowdown? Here are five real-world signs of China's economic malaise.

Economic Slump Weakens China’s Trade Growth - China’s June trade growth decelerated sharply in a new sign of a deepening slowdown in the world’s second-largest economy. Import growth fell by half from May’s level to 6.3 percent, customs data showed Tuesday, reflecting weak consumer and industrial demand despite two interest rate cuts and other stimulus measures. Export growth declined to 11.3 percent from May’s 15.3 percent amid European and U.S. economic weakness. China’s economic growth has fallen to its lowest level since the 2008 global crisis due to anemic demand for its exports and government controls imposed last year to cool overheating and inflation. Premier Wen Jiabao warned last weekend the economy faces further pressure to slow, suggesting Beijing might be considering more stimulus. In addition to rate cuts, it has reduced state-set gasoline prices twice and is pumping money into the economy through higher spending on building low-cost housing, airports and other public works. Economic growth fell to 8.1 percent in the first quarter and data due out later this week are expected to show it fell as low as 7.3 percent in the second quarter. Analysts expect a rebound later this year. China’s slowing demand for oil, iron ore and other foreign goods is bad news for other economies that had been looking to relatively strong Chinese growth to help drive demand for their exports.

China’s Import Growth Misses Estimates for June - China’s imports rose less than anticipated in June, pushing the trade surplus to a three-year high and adding pressure on the government to support demand as the global economy slows. Inbound shipments increased 6.3 percent from a year earlier, the customs bureau said in a statement today in Beijing, compared with the 11 percent median estimate in a Bloomberg News survey of 32 economists. Export growth slowed to 11.3 percent and the trade surplus rose to $31.7 billion.  Rising surpluses may further strain trade relations with the U.S., which surpassed the European Union in the first half as China’s biggest foreign market and is in the midst of a presidential election marked by criticism of the Asian nation. The country’s trade surplus with the U.S. and lack of currency gains have been issues in the U.S. election campaign this year, as American job growth slowed last quarter. Mitt Romney, the Republican presidential candidate, has criticized President Barack Obama as too soft on China. At the same time, Obama has expanded trade complaints against the nation: Last week he accused it of imposing unfair taxes on American vehicles, mostly from General Motors Co. and Chrysler Group LLC.

China Is Going Down -- There is something perversely satisfying in watching humans screw up on a massive scale, and especially so if you've seen it coming for years. China's time has come. They're going down.  Late last week there was a "surprise" interest rate cut to spur borrowing and growth. And then today we found out that China’s Import Growth Misses Estimates for June. Inbound shipments increased 6.3 percent from a year earlier, the customs bureau said in a statement today in Beijing, compared with the 11 percent median estimate in a Bloomberg News survey of 32 economists.  It is hard to believe official growth numbers emanating from China, but if we can believe their customs data, oil imports have slowed dramatically. China's crude imports plunged in June to their lowest daily rate since December, coming off a record high in May, customs data showed, as refiners cut imports amid slowing oil demand in the world's second-largest oil consumer and crude buyer. June imports were 12 percent, or around 710,000 bpd, lower than the record 6.0 million bpd imports in May. So now we can add crude imports to the data which indicates that coal is piling up at Chinese import terminals. Energy consumption always provides a good proxy for real (inflation-adjusted) economic growth. (That rule applies to the United States, too.) The clincher is that China is cutting fuel prices to spur demand. China, the world's second-largest user of fuel, will cut retail prices by around 5 percent from Wednesday, its third reduction in just over two months and a move that leaves refiners in the red but may lure consumers back to the pumps.

Cheaper crude contributed to decline in China's import growth - There is a great deal of focus this morning on China's import growth in June. The expectations were 10.9% YOY growth, but the actual number came in at 6.3%. It is clearly an indication of a slowdown. NYT: - Chinese imports rose in June at only half the pace expected, government data showed Tuesday, suggesting the need for Beijing to do more to increase growth and stoking anxiety about the strength of domestic demand.  But there is another factor at play here. A big component of the decline came from crude oil imports. And since we are looking at the dollar price of imports, the recent price correction in crude oil lowered the overall amount of cash spent on fuel. The discount in crude prices for China was particularly steep as it bought Iranian oil. With China and India being the only major buyers of Iranian crude, the purchases were done below market levels. Clearly China bought less "stuff" last month, but buying it cheaper also contributed to the decline in import growth.

China Slams the Brakes on GM's Accelerating Car Sales -- General Motors had become the No. 1 automaker in the world's largest auto market -- China. GM's effort in China was one of its few bright spots in the last decade, and it has become a cornerstone of the new GM's global strategy. GM is still the leading automaker in China, and its market share continues to grow. However, new government rules could put a damper on the General's success. Despite complex laws designed to favor local Chinese interests, GM has made itself a big player in China, which has grown to become the largest automotive market in the world. GM -- working together with Chinese joint-venture partners, as required by Chinese law -- has seen big success for its familiar Buick and Chevrolet brands, as well as with a hot-selling line of inexpensive commercial vans sold under the local Wuling brand. Both China-only products like the Buick Excelle and familiar cars like the Chevy Cruze compact are regularly at the top of China's best-seller lists. In fact, GM and its joint-venture partners sold more vehicles in China last year than GM did here in the U.S.

Forget China's Goal-Seeked GDP Tonight; This Is The Chart That Keeps The PBOC Up At Night -- As we wait anxiously for the not-too-hot and not-too-cold but just right GDP data from China this evening, we thought it instructive to get some sense of the reality in China. From both the property bubble perspective (as Stratfor's analysis of the record high prices paid just this week for Beijing property - by an SOE no less - and its massive 'microcosm' insight into the bubbliciousness of the PBOC's attempts to stave off the inevitable 'landing'); to the rather shocking insight that Diapason Commodities' Sean Corrigan offers that 'Hot Money Flows' have left China at a rates exceeding that during the worst of the Lehman crisis; take a range of key indicators – from electricity usage, to Shanghai container throughput, to nationwide rail freight ton-miles, to steel output – and you will notice that none of these shows a rate of growth during the second quarter of more than 4% from 2011, and some are as low as 1%. Whatever fictive GDP number we are presented with this week, the message is clear: “Brace! Brace! Brace!”

Chinese GDP growth slows to 7.6% - China’s growth fell to 7.6 per cent in the second quarter, its slowest since early 2009, as a property market downturn and weak exports weighed on the world’s second-biggest economy. Over the past two months, as evidence of the slowdown has mounted, the government has shifted its policy to a pro-growth stance, which analysts say is likely to bring about a recovery in the second half of the year.  “The expectation for weakness in the second quarter was pretty strong. But the investment number is the surprise. There appears to have been a significant pick-up. That is policy beginning to work”, said Ken Peng, an economist with BNP Paribas in Beijing. “We are looking for a small rebound in the third quarter and a bigger rebound in the fourth quarter.”The year-to-date investment figure jumped from 20.1 per cent in May to 20.4 per cent last month, an indication that the increase in investment in June alone must have been considerably stronger, following on the heels of the government’s moves to stimulate the economy. The Chinese central bank cut interest rates last week, the second time in less than a month. Premier Wen Jiabao has also said that the government will look to increase public investment to stabilise the economy.

China’s Economic Growth Slows Despite Stimulus - China’s economic growth slowed to a new three-year low in the latest quarter as exports and consumer spending weakened. The world’s second-largest economy grew by 7.6 percent in the three months ending in June over a year earlier, down from the previous quarter’s 8.1 percent, data showed Friday. That was the lowest since the first quarter of 2009 during the depths of the global financial crisis. Export growth has fallen steadily amid anemic global demand and Chinese domestic consumer spending has weakened despite government stimulus measures that include two interest rate cuts since the start of June. The government also has boosted investment by state-owned industry and is pumping money into the economy through higher spending on low-cost housing and other public works. Analysts expect growth to rebound in the second half of the year but the slowdown raises the threat of job losses and tensions at a politically difficult time for the ruling Communist Party. It is trying to enforce calm ahead of a planned once-a-decade handover of power to younger leaders. June retail sales growth was 12.1 percent adjusted for price changes, down from the previous month’s 13.8 percent growth, the National Bureau of Statistics reported. Growth in factory output edged down to 9.5 percent from May’s 9.6 percent.

China’s Growth Rate Slowed in the 2nd Quarter— China’s growth slowed in the second quarter, adding to the worries about the ability of the world’s second-largest economy to offset low growth elsewhere. The country’s gross domestic product grew at an annual rate of 7.6 percent in the April to June period, down sharply from the 9.5 percent a year earlier, according to government figures released Friday morning. The second-quarter growth rate was half a point below the 8.1 percent for the first three months of this year. For the first half of the year, the economy grew 7.8 percent. “Even though the economy continued to decline, I think that compared to other countries it isn’t bad,” Sheng Laiyun of the National Bureau of Statistics told reporters. “The economy remains steady.” The decline is partly caused by a weak global economy. Europe, which until this year was China’s biggest trading partner, is in recession, while the United States economy remains weak. Even developing countries like India and Brazil have weakened considerably.

China's slowdown deepens, raises risks to global economy -- China is growing at its slowest pace since the recession -- a worrisome sign for the broader global economy. Compared to a year earlier, China's economy grew 7.6% in the second quarter, the National Bureau of Statistics said Friday, marking a deceleration from an 8.1% growth rate in the prior quarter and the slowest growth since early 2009.While the rate still sounds fast compared to paltry 2% growth in the United States, it marks an uncomfortable soft patch for China. Over the last three decades, the country has barreled ahead at an average of about 10% a year. The slowdown can be blamed on a variety of factors. China's government was aiming for a slight deceleration, as it tried to tame its real estate boom and rapid inflation.  Those measures have largely worked, with ongoing real estate regulations weakening property sales. Meanwhile, inflation recently fell to its lowest rate in two years. But the timing of those efforts has coincided with turmoil in the global economy. Weaker demand from foreign customers, especially in Europe and the United States, has hit Chinese exports hard, and its manufacturing sector has slowed..

'This time it's different': China edition - As China slips into a slowdown, a few people are piping up to claim that no, this time it's different, China has it all figured out, their culture is different, their government is better, and so forth. But so far, I haven't seen anyone do this routine as beautifully as James White, analyst at Colonial First State. In an article flagged by Izabella Kaminska of FT Alphaville, he writes: China’s rise confounds economic history, but not necessarily economic theory...[its] foundations seem brittle to western investors used to judging the health of an economy through the returns on capital. But the Chinese are comfortable with low capital returns if the pay-off is a stronger economy. This has been the case... The Chinese don’t play chess. They play wei qi [also known as Go]...The Chinese government views the economy as though it’s wei qi. Each piece has its own role in the economy, but each is no more important than another. This is an important observation. In the developed world...Falling or negative returns on capital are a sure sign of economic weakness reflecting the end of a period of over-investment...In China, capital is just one piece on the board where the aim is to raise living standards of all households...The government’s role is paramount. Despite claims of dramatic imbalances (investment spending has made up to 45% of GDP in recent years, compared to below 15% in some developed economies), investment is driving sustainably higher economic growth...

China rebalancing, my butt - China’s trade balance for June is out and the weakening trend continues. Year on year imports were up 6.3% and exports were up 11.3%. Exports beat expectations and imports missed by a wide margin. The declining trend for growth in both is very clear in the chart: The trade balance was a fat surplus of $31.7 billion, miles ahead of consensus at $24 billion. In short, China is quite happily riding out global weakness by leaning on external demand, while its domestic demand flags. Now where have I seen that before?

China’s shadow banking surfaces -  Wenzhou of Zhejiang province is one of the most, if not the most, entrepreneurial places in China.  It also happens to be the place where the shadow banking mess in China is concentrated.  Loan sharks, trusts, and mutual credit guarantees are some of the elements of the informal lending system in China which are all common in Wenzhou. What is often overlooked is that the shadow banking system and the formal banking system are intricately linked.  To cut a long story short, a lot of funds within the shadow banking system originated from the formal banking system either through banks selling wealth management products to customers or through banks’ off-balance sheet vehicles.  Because these shadow banking activities are not always legal, we knew little about them beyond the existence of formal banking linkage.  Because of these links, it is not hard at all to imagine that risks of a blow-up in the shadow banking system would spread to the formal banking sector.

OECD sees slowdowns deepening in China, India (Reuters) - China and India have entered more marked economic slowdowns while growth continues to moderate in most major industrial economies, the OECD said on Monday. The Paris-based economic think-tank said its composite leading indicator for China, which provides a measure of future economic activity, eased to 99.2 in May from 99.4 in April, slipping further away from the long-term average of 100. For India, the indicator fell to 97.8 from 98.0, also below the long-term average of 100. "Composite leading indicators ... point to an easing of economic activity in most major OECD economies and a more marked slowdown in most major non-OECD economies," the Organisation for Economic Cooperation and Development. The overall indicator for OECD countries, covering 33 countries, eased to 100.3 from 100.4, a level consistent with moderating growth. The index for the euro area held steady at 99.6 for the third month in a row, a level indicating a slowdown. The United States remained in growth territory with a reading of 100.9, though that was down from 101.1 in April. Japan saw its indicator ease to 100.7 from 100.8. Outside the OECD, Brazil was alone in seeing activity pick up with a rise to 99.2 from 99.0.

The New Global Economy’s (Relative) Winners - Dani Rodrik - Regardless of how they handle their current difficulties, Europe and America will emerge with high debt, low growth rates, and contentious domestic politics. Even in the best-case scenario, in which the euro remains intact, Europe will be bogged down with the demanding task of rebuilding its frayed union. And, in the US, ideological polarization between Democrats and Republicans will continue to paralyze economic policy.Indeed, in virtually all advanced economies, high levels of inequality, strains on the middle class, and aging populations will fuel political strife in a context of unemployment and scarce fiscal resources. As these old democracies increasingly turn inward, they will become less helpful partners internationally – less willing to sustain the multilateral trading system and more ready to respond unilaterally to economic policies elsewhere that they perceive as damaging to their interests.Meanwhile, large emerging markets such as China, India, and Brazil are unlikely to fill the void, as they will remain keen to protect their national sovereignty and room to maneuver. As a result, the possibilities for global cooperation on economic and other matters will recede further. This is the kind of global environment that diminishes every country’s potential growth. The safe bet is that we will not see a return to the kind of growth that the world – especially the developing world – experienced in the two decades before the financial crisis. It is an environment that will produce deep disparities in economic performance around the world.

Pervasive Gloom About the World Economy | Pew Global Attitudes Project: The economic mood is exceedingly glum all around the world. A median of just 27 percent think their national economy is doing well, according to a survey in 21 countries by the Pew Research Center’s Global Attitudes Project. Only in China (83%), Germany (73%), Brazil (65%) and Turkey (57%) do most people report that current national economic conditions are good. The public mood about the economy has worsened since 2008 in eight of 15 countries for which there is comparable data, while it is essentially unchanged in four others. The Chinese are the lone exception. They have been positive about their economy for the past decade. Less than a third of Americans (31%) say the U.S. economy is doing well. That figure is up 13 percentage points from 2011. (But it is down 19 points from 2007, the year before the financial crunch began.) A median of just 16% of Europeans surveyed think their economy is performing up to par. That includes just 2% of the Greeks and 6% of the Spanish and Italians. Among Europeans, only the Germans (73%) give their economy a thumbs up. And just 7% of Japanese believe their economy is doing well.

Things I think about and worry about but don't blog about - Nick Rowe - Here's a partial list:

  • 1. The Eurozone. It's not getting better. It could get much worse. I think it will get much worse. I don't see any way out that isn't bad. And probably bad for countries outside the Eurozone too. But I don't have anything to say on the subject I haven't already said. And a lot of other people are saying the same things as I would say anyway.
  • 2. The Canadian housing market. I have been worrying about the anecdotal evidence I read about people buying houses based on overoptimistic predictions of future house prices. And symptoms of herd-like behaviour where people join a queue to buy condos because the queue is already so long the condos must be a good deal. And buying with too small a downpayment. And recent signs it might all be coming to a head.
  • 3. The national debt in countries like Japan. When nominal interest rates are below the nominal growth rate of the economy, national debt is not only not a worry; it's a good thing. It's a sustainable Ponzi scheme, and the solution to a problem of dynamic inefficiency. Sure it's a bubble, but economies where the interest rate is below the growth rate need a bubble. The trouble is, what happens if and when the interest rate rises above the growth rate, and we re-enter the normal world where the long run government budget constraint is well-defined, if the debt/GDP ratio is very large?

Japan Machinery Orders, Current Account Surplus Slide - Japan's core machinery orders tumbled in May in a sign that lingering worries about Europe's debt crisis, a slowing Chinese economy and weak economic data from the United States are hindering the country's recovery from last year's devastating earthquake. Core machinery orders, which help to gauge the strength of capital spending, fell 14.8 percent in May, much more than the median forecast for a 3.3 percent decrease in a Reuters poll, as both manufacturers and service sector companies cut orders. Japan's current account surplus also slumped by 62.6 percent in May from the same period a year earlier, faster than the median estimate for a 14.5 percent annual decline, as rising energy imports weighed on Japan's trade balance. The weaker-than-expected data suggests that Japan's growth could lose momentum as companies scale back investment due to a weak global economy. The data also bolsters the case for the Bank of Japan to ease monetary policy to support growth. "There are increasing worries for the Japanese economy," "The BOJ looked like it would be on hold this week, but given weak U.S. economic data and monetary easing by central banks in China and Europe, there is now a 50 percent chance that the BOJ could ease this week."

Japan machinery orders slump but BOJ seen on hold - Japan's core machinery orders fell at a record pace in May in a sign that companies are feeling the pain from slowing global demand, but the data is not likely to be alarming enough to nudge the central bank into loosening monetary policy this week. Core machinery orders, which help to gauge the strength of capital spending, fell 14.8 percent in May, data showed on Monday, much worse than a median forecast for a 3.3 percent drop and the biggest decline since comparable data became available in April 2005. The government warned against reading too much into the highly volatile data series, saying the drop was exaggerated by seasonal factors and mostly a reaction to the previous month's rise, which was inflated by big, one-off orders from chemical and machinery makers. But the weaker-than-expected data suggests that any recovery in Japan's economy will be modest as Europe's debt crisis and slowing growth in big markets such as China could make companies less willing to increase capital spending.

Japan’s Current-Account Surplus Shrinks 63% As Machine Orders Drop - Japan’s current-account surplus was the smallest in May since at least 1985 and machinery orders fell the most in more than five years, adding to signs a slump in demand is threatening the nation’s rebound. The excess in the widest measure of the nation’s trade shrank 63 percent from a year earlier to 215.1 billion yen ($2.7 billion), the Ministry of Finance said in Tokyo today.Machinery orders, an indicator of capital spending, fell 14.8 percent in May from the previous month, the Cabinet Office said, the biggest drop since comparable data were made available in 2005.

Japan Machinery Orders Implode As Global Economy Grinds To A Halt |- Japan's core machinery orders were expected to post a modest -2.6% drop. Instead they had a worse collapse than anything seen in the aftermath of the Fukushima disaster, plunging by a stunning 14.8% . And the kick in the groin cherry on top was the current account surplus plunged by 62.6%: consensus forecast: -14.5%. The Japanese economy has once again ground to a halt, only this time it has no earthquake or nuclear explosion to blame. This time it is the entire world's fault, where demand has collapsed proportionately. As a reminder the BOJ expanded its QE yet again on April 27. Must be time for another QE because this time will certainly be different after more than 30 years of failures. It is time for those brilliant central planners Ph.D's to do engage in more of the same insanity that Einstein warned about decades ago. And incidentally this is not a joke: on Thursday the BOJ is expected to ease yet again. As a reminder, the BOJ already buys ETFs, Corporate Bonds, and REITs. What's left: gold?

Japan fighting deflation with an aggressive QE policy - Bank of Japan continues to pursue an aggressive and prolonged monetary easing via its QE program. The asset purchasing program has been in place since 2009 but has been accelerated this year. The latest JGB holdings are equivalent to about $1 trillion (excluding bills) vs. the Fed's portfolio of treasury notes and bonds of $1.6 trillion plus some $0.9 trillion of MBS. So the BOJ has "room" to catch up to the Fed.  The purchases are starting to have some impact, as Japan is slowly pulling out of its nasty deflationary hole. The latest CPI (ex food and energy) is still negative, but not nearly as bad as it was a couple of years ago. Given years of deflation, it may take much more easing before prices begin to stabilize.

Japanese pension assets fall as payouts exceed contributions - Japanese corporate and government pension assets managed by investment companies fell 4.5% to ¥79 trillion ($990 billion) last fiscal year as payouts exceeded contributions, said the Japan Pensions Industry Database. The assets were spread over 5,186 mandates held by 110 firms in the year ended March 31, with foreign managers making up 14 of the top 25 investment companies, according to the industry researcher. BlackRock (BLK) Japan managed the most money with ¥13.8 trillion, followed by Sumitomo Mitsui Trust Bank Holdings and Mizuho Trust & Banking Co., according to the report, which used filings with the Japan Securities Investment Advisers Association. Japanese pension plans oversee $3.36 trillion, the world’s second-largest pool of retirement assets after the U.S., with 98% of them employing defined benefit plans, according to Towers Watson. The funds, which have traditionally invested mainly in bonds, have been expanding their strategies to maintain steady returns and fund retiree benefits as the country faces a shrinking workforce, with 2012 marking the first year the nation’s baby boomers are set to retire.

IMF's Lagarde urges caution over protectionism - IMF Managing Director Christine Lagarde on Tuesday said the global economic situation was worrisome and urged countries to be cautious of protectionism. Lagarde described as "quite alarming" a report published by the World Trade Organization in June which said the world's trading nations were succumbing to protectionism in the wake of the global financial crisis. Lagarde was speaking during a visit to Indonesia, Southeast Asia's largest economy, which she said was doing well citing growth above 6 percent and low public debt.

Warren Buffett: US Economic Growth Slowing, Europe Slipping 'Pretty Fast' - In a live CNBC interview from Sun Valley with Becky Quick of "Squawk Box," Buffett says the general economy's growth has "tempered down" so that it is now "more or less flat." He does, however, see a "noticeable" pickup for residential housing from a "very low base" that "doesn't amount to a whole lot yet, but it's getting better." For months, Buffett had been seeing general U.S. economic growth held back by a weak residential housing market. Buffett also says things are beginning to "slip pretty fast" in Europe, especially over the past six weeks.He's confident "they'll get it worked out" by ten years from now, but right now there's no obvious answer. A big part of the problem: it's not clear who is in charge, if anyone, and Europe doesn't have its own "printing press." Buffett says he "doesn't know" if the euro will still be a currency ten years from now.  He thinks the euro zone can't exist as "originally designed."

EZ Banking Union: Who pays for past mistakes? - The EZ crisis – born as a debt crisis (Greece) – has grown up into a banking crisis (Ireland, Cyprus, Spain, …). This column argues that Spain is symptomatic of larger banking problems, so the EU Summit decisions on banking union are welcome and critical to any long-term solution. Yet someone must pay for Spanish bank losses. Spanish politics is shielding Spanish creditors, European politics is shielding EZ taxpayers, so the Spanish government will pay – and in doing so may go the way of Ireland. This crisis is far from over.

ECB Death Wish, Continued - Paul Krugman - At the end of last week, Spanish 10-year bond yields were close to 7 percent — actually higher than they were last fall, when the ECB stepped in with its big LTRO lending program, a program that bought time that European leaders proceeded to waste: The Spanish government is, understandably, sounding a bit desperate: Spanish Prime Minister Mariano Rajoy said euro-zone countries must urgently implement decisions including government bond purchases agreed to in June as the country can’t finance its deficit under current conditions. And the European Central Bank, which is the only entity really in a position to do what’s necessary, is, well: The ECB lowered its benchmark rate to a record low 0.75 percent on July 5, disappointing investors who had predicted it might restart its government-bond buying program to ease stress on Spain and Italy. The central bank will only buy government debt if it considers it necessary to keep inflation on track, Benoit Coeure, an executive board member, said yesterday. “That doesn’t mean the ECB can’t buy Italian and Spanish debt on the market, but they’ll do it if it needs to for reasons of monetary policy and not otherwise.” No sense of urgency. Amazing.The odds of euro crackup are rising by the day.

Doubts Emerge in Bloc’s Rescue Deal —Euro-zone countries would still have to guarantee the loans their banks receive from the region's permanent bailout fund, the European Stability Mechanism, even if it directly recapitalizes them, a senior European Union official with direct knowledge of the situation said. The remarks Friday cast doubt on what was seen as a breakthrough at a euro-zone leaders' meeting last week, where it was decided that once a central euro-zone bank supervisor was in place, the ESM would be able to directly recapitalize banks. "I need to make clear what the ESM can do: The ESM is able... to take an equity share in a bank. But only against full guarantee by the sovereign concerned," the official said. He added that while the member state's guarantee wouldn't directly show on the government's official debt burden, the loan "remains the risk of the sovereign." Allowing the ESM to directly recapitalize banks was meant to snap the link between sovereign-debt and bank woes. Each time a country receives bailout assistance to help prop up its banks, the government's debt burden rises, deepening investor worries about the sovereign's situation and lifting borrowing costs. That, in turn, hurts the banks whose portfolios are stuffed with domestic government bonds.

Tighter Control for Euro Banks - Senior euro-zone finance officials, moving ahead on a plan to create a single overarching bank supervisor for all the countries in the 17-nation currency bloc, are settling on a framework that would create a new agency reporting to the European Central Bank to police the largest banks in the currency union, people involved in the discussions said.  Euro-zone leaders mandated the regional supervisor's creation at a summit here in June, a significant step toward creating a future banking union among the countries that use the currency.  The establishment of a single authority, with a single set of rules for the region's banks, is seen by Germany and other strong economies as an essential condition before they will consider sharing resources with other euro-zone countries.  Disclosing the first details of how the discussions on setting up the entity were progressing, officials involved said the talks were coalescing around the idea of creating an agency under the ECB that would be charged with sole supervision of the top 25 or so largest banks.  They said smaller euro-zone banks would remain under the purview of their national financial-market regulators. But these national regulators would be brought under the control of the euro-zone supervisor, which could be based in Brussels rather than Frankfurt, the ECB's home.

Spain Braces for Renewed Austerity as Tax Take Hemorrhages -  Spanish Prime Minister Mariano Rajoy may unveil a third austerity round within days as his six-month- old government tries to avoid a second bailout amid hemorrhaging tax receipts.  Rajoy said on July 2 that the time has come to “press the accelerator pedal” as his government attempts to bring down near record borrowing costs. Government officials have said they are considering raising taxes on gas and products that currently have a reduced rate, such as food, water, public transportation, hotels and restaurants. Spain’s return to recession is undermining efforts to cut the euro area’s third-largest budget deficit as tax receipts shrivel. Ten-year bond yields climbed back above 7 percent today as European finance ministers meet to discuss the worsening debt crisis. Spain became the fourth euro-region country to seek a bailout in June to shore up banks burdened with bad loans.  “I have my doubts because it is very difficult to boost receipts amid austerity,”  “Citizens see they are paying more tax and public services cost more. That doesn’t incite them to spend at all.”

Debt crisis: Spain poised for further spending cuts - The Spanish prime minister Mariano Rajoy has urged the eurozone to quickly implement measures agreed in June and said he will unveil further austerity measures to reduce the country’s debt mountain. Speaking at a conference on Saturday, he said plans to assist the region’s banking system and troubled governments, made at a summit in Brussels at the end of June, must become reality. “It’s time to go from words to deeds. Europe must comply as quickly as possible with the agreements its leaders reached in Brussels. The European project is at stake.” Mr Rajoy is expected to unveil a rise in VAT and benefit cuts on Wednesday. His comments came as the Greek socialist leader Evangelos Venizelos said Greece would need more time to implement austerity cuts because it recession this year will be deeper than forecast. The coalition member pressed for concessions on the terms of Greece’s bailout package at a meeting with officials from the European Union, International Monetary Fund and European Central Bank, his office said.

In support of a European banking union, done properly: A manifesto by economists in Germany, Austria and Switzerland - The EU Summit decision on banking union is being questioned by some economists in Germany. This column argues that a banking union is a critical step in ending the EZ crisis and building a more stable EZ financial architecture. It is a translation by Michael Burda of the German-language manifesto drafted by the First Signatories listed below and signed by over 100 economists. The financial crisis has exposed a fatal flaw in the design of European monetary union which can be removed only by decisive policy action. Policymakers in Europe now have an opportunity to change the game. A central aspect of this problem is the conflation between debt of the private sector and that of European national governments. In the course of the crisis, fiscal budgets are being tapped to refinance systemically relevant financial institutions. At the same time, financial institutions continue to play a central role in financing national governments, lending money to them and holding their debt. An unavoidable consequence is that bank failures have led to sovereign debt crises and sovereign debt crises have led to banking crises, leading to growing mistrust of both national banking systems and government finance. The situation is aggravated by the fact that international investors, driven by fear of total collapse, have withdrawn funding to struggling countries, both for governments and for banks.

German Economists Denounce Summit Decisions - A group of German economists has denounced decisions made during last week's European Union summit, arguing Thursday that they risk increasing the exposure of taxpayers, retirees and savers to the debts of struggling banks. In an open letter published by the daily Frankfurter Allgemeine Zeitung, a group of 160 economists wrote that German Chancellor Angela Merkel found herself forced to make "wrong" decisions during the gathering. The economists said they "view the step toward a banking union, which means collective liability for the debts of the banks of the eurosystem, with great concern." "Banks' debts are nearly three times higher than government debts ... the taxpayers, retirees and savers in the so-far solid countries of Europe must not be made liable for backing these debts, particularly since gigantic losses are foreseeable from financing the southern countries' inflationary economic bubbles," they added. The economists include Hans-Werner Sinn, the head of the prominent Ifo think-tank and a vocal critic of European leaders' rescue policies. They argued that "banks must be allowed to fail," with creditors who knowingly took investment risks bearing the burden.

German anti-euro backlash gathers pace - — The backlash against Germany’s apparent readiness to dig still deeper into taxpayers’ pockets to stem the euro’s malaise is gathering momentum. As Finland fuels alarm over a possible unraveling of economic and monetary union (EMU), a protest action by 172 German economics professors slamming Chancellor Angela Merkel’s agreement on direct recapitalization for ailing European banks has sparked a furious war of words with the Berlin government. Wolfgang Schäuble, the German finance minister, says he’s “indignant” at the gauntlet laid down by the academics. Merkel claims that the summit move at the end of June changed nothing because the bank rescue measures have yet to be voted on by parliament. The problem is that few in Germany believe her.The economists say steps toward a “banking union” outlined at the Brussels summit threaten a mutualization of European debt for an amount that is three times larger than government borrowing. Total bank deposits that could come under the shield of mutual insurance add up to “several trillion euros” in the five worst-hit European countries, according to the academics, led by German’s most famous economist, Hans-Werner Sinn of the Munich-based IFO research institute, who has been a thorn in the side of Berlin’s euro rescuers for many months. Sinn has progressively stepped up complaints about the risks to the Bundesbank’s balance sheet of lending to the European Central Bank under the Target-2 automatic intra-euro-area payment system, under which funds are on-lent to peripheral central banks facing current account deficits and capital flight. According to the latest data, Bundesbank Target-2 claims on the ECB rose to 729 billion euros in June from €699 billion in May and €337 billion in June last year.

German president tells Angela Merkel to come clean on EU debt deal -- Joachim Gauck, the German president, has ordered Chancellor Angela Merkel to clarify exactly what she agreed behind closed doors at the EU crisis summit ten days ago. German president Joachim Gauck has ordered Chancellor Angela Merkel to clarify exactly what she agreed behind closed doors at the EU crisis summit ten days ago, lending a powerful voice to critics dismayed by the surging costs of euro bail-outs. "She has a duty to explain in great detail what it means, and what it means fiscally. There seems to be a lack of energy in telling the people what is really happening," he told ZDF television. President Gauck's broadside came as markets wait anxiously for a crucial hearing this Tuesday by Germany's constitutional court on the legality of the European Stability Mechanism (ESM), the EU's €500bn (£397bn) bail-out fund. A clear ruling against the ESM would throw into doubt Germany's ability to backstop the euro and risk a dramatic escalation of the debt crisis. Legal challenges to the ESM have been filed by a range of private citizens and lawmakers, mostly arguing that the fund violates the Bundestag's sovereign control over budgets, and eviscerates democracy. Mr Gauck will not sign the ESM into law until the court has ruled, probably later this month.

Draghi's zero deposit rate policy put an end to euro money market funds  - There has been some confusion as to why the biggest US mutual fund operators are closing euro denominated money market funds to additional investments. The decline in euro cash fund products is not a new trend (see this post for some background) since such products have been unprofitable for quite some time. The managers have been subsidizing these funds in order to service their clients in hopes of recouping losses from more profitable programs. But Draghi's recent and somewhat surprising move to set the deposit rate to zero had finally put an end to these offerings.  Here is how these funds were kept operational. As money funds shifted away from commercial paper and into secured lending (due to heightened credit risk aversion), they were only able to scrape 12-20bp annualized returns throughout much of this year. Not enough to cover expenses, but it was something. Of course most investors in the funds were receiving zero returns for the privilege of holding euros with say a JPMorgan money fund. The funds would lend (for 1-3 months) to Eurozone banks who had some excess collateral sitting around. These banks would post collateral, eliminating credit risk for the money funds. In turn banks would deposit this cash with the ECB and make a spread (about 13bp in the example below). Easy money if you have a few Bunds sitting around.

Nearly half of Germans favour eurozone without Greece - NEARLY half of Germans think the eurozone would be better off without Greece, according to a survey to be published in the German weekly news magazine Focus today. The poll by the Emnid institute found that 49 per cent of Germans would be in favour of a Greek exit while 43 per cent said they want Greece to stay in the single currency bloc. Eight per cent abstained from the poll, which was conducted on July 4 and 5 among 1000 people. Last month the same survey found that 46 per cent of Germans supported a Greek exit. Although Greece's new Prime Minister Antonis Samaris was expected to breeze through a confidence vote in his three-party coalition in parliament Sunday, he will then face the tricky task of asking to renegotiate the terms of the Greek bailout agreed by EU-IMF creditors.

German Exports Increased More Than Forecast in May: German exports rebounded more than economists forecast in May, helping Europe’s largest economy to weather the sovereign debt crisis. Exports, adjusted for work days and seasonal changes, jumped 3.9 percent from April, when they fell 1.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.2 percent increase, according to the median of 13 estimates in a Bloomberg News survey. Imports surged 6.3 percent. .The European Central Bank cut interest rates last week as the debt crisis threatens to tip the euro area, Germany’s largest export market, into recession. While German business and investor confidence have slumped amid signs growth is slowing, record-low unemployment and demand from outside the euro region have helped insulate the economy. Factory orders and industrial production both rose in May.

Greek deputy minister resigns over bailout stance - Greece's deputy labor minister resigned on Monday saying the government was not being aggressive enough in pushing for changes to an unpopular bailout, becoming the third cabinet member to quit the fledgling coalition in as many weeks. The resignation is a new setback for Prime Minister Antonis Samaras, whose government had already stumbled to a rocky start when his initial pick for finance minister stepped down over health problems. "The sole reason for my resignation is my personal conviction that the issue of renegotiating with the troika, as well as the correction of significant distortions in labor, pension, social security and welfare issues, should have been emphatically put on the table from the start," Nikos Nikolopoulos wrote in his resignation letter. Analysts said the resignation was far from a fatal blow to the government but suggested internal rifts were emerging over the coalition's stance on renegotiating the bailout with the three lenders - the European Union, the European Central Bank and the International Monetary Fund.

Greeks Hide Tens of Billions From Tax Man - If Greece’s government was as adept as its banks at figuring out what its citizens earn, the world might be a very different place. That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult. Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark. The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Neither Grexit, Nor Spexit, It’s Fixit or Fexit - Edward Hugh --The aftermath to last weeks EU summit has certainly proved to be a damn sight more perplexing than the actual summit itself. Contrary to earlier experiences, this time round the more the details have been “clarified” the more confused we have become. Just what exactly was approved? Will Spain’s banks really obtain capital directly from the ESM, and if so, how and when? Is Spain about to get a full bailout? Is Italy? Is there a commitment to bringing down sovereign borrowing costs. And just to top it all of what about Greece, what is the next move, is there any kind of plan? Little wonder then that Spain’s 10 year bond yields were once more back over 7% on Friday. Markets had taken the view that while agreement on the details of an ESM bond buying formula and full banking union would obviously take time, surely the ECB would be prepared to do something – another LTRO, reopen the Security Markets Programme – in the meantime. But no, Mario (Draghi this time) was not for turning, and sent the ball straight back into the politicians court. Really I think the markets have gotten a bit ahead of themselves here in expecting instant action, since European decision making works according to its own timeless laws. To reach my conclusions before I draw them, I think it is plain that Spain’s bank recapitalisation will be, kicking and screaming, an all Euro Group affair. That is to say the debt sharing the Finnish Finance Minister so desparately fears will take place, even if we take a while to get there.

PIIGS and European Unemployment - The above shows the latest available data for the unemployment rate in the PIIGS countries; these run through May except for Greece where they only go through March. In general, it appears that Spain and Greece continue to worsen at a healthy clip, but the "lesser PIIGS" are showing some sign of stabilization in recent months, though not actual recovery. The Europe wide graph looks like this: Things continue to get worse at a steady pace - no sign of relief in the data yet. All data are from Eurostat.

European austerity returns  - At the end of last week the IMF issued a warning that the world is heading for a weaker than predicted period of economic growth: The International Monetary Fund will reduce its estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said. “The global growth outlook will be somewhat less than we anticipated just three months ago,” Lagarde said in a speech in Tokyo today. “And even that lower projection will depend on the right policy actions being taken.” The new outlook will be announced in 10 days, after an April estimate of 3.5 percent, she said. It is very difficult to determine exactly what the IMF considers “the right policy action”.  The IMF were the main instigators of “expansionary fiscal contraction” in the European periphery which, even by their own admission, has failed. Last year I noted that the new IMF chief made some statements that appeared to set a new direction for the organisation and more recently she has been talking about the need for a “pro-growth” agenda for Europe. While that maybe the case, her organisation is still endorsing programs that deflate economies by lowering industrial production and increasing unemployment and at the same time  fail to deliver on promised growth targets. It is therefore unclear, at least to me, exactly what the IMF’s chief is actually endorsing.

The Eurozone: A Twenty Year Crisis? -  Yves Smith - As markets quickly shrugged off the news including that of further central bank rate cuts. Spanish bond yields rose over 7%, as Mr. Market clearly wanted a resumption of bond buying or some other decisive action, rather than a mere reduction of its benchmark rate to 0.75%. Some commentators, such as Edward Hugh, are a bit flummoxed, since the supposed clarification of key points of the deal, most importantly, how and when Spanish banks will get money, has not answered these basic questions. Wolfgang Munchau argues in his current column, “Eurozone crisis will last for 20 years” that the Europatchup of last week wasn’t simply underwhelming, but was a major step backwards. He confirmed something we took note of yesterday, that Germany insists that there be no bank bailouts until a banking union is in place. That’s putting the medium term before the short term. And Munchau says this is even worse than it sounds, since a banking union requires a political union.  Before we even get that far, Munchau points out that what Merkel is willing to do will not only be impossible to achieve in time to arrest the escalating crisis in Spain and Italy, but is also inadequate in scope: A group of 160 economists, led by Hans-Werner Sinn, president of the Ifo economics institute, last week published a manifesto against a banking union. It was full of sound and fury, but the importance of this document is that it reflects a consensus view. Angela Merkel’s answer was revealing. She told them that there is nothing to worry about. The banking union was about joint supervision, she said. There will be no joint deposit insurance. She has a very different understanding of a banking union than the European Central Bank. The banking union that is required is the one Germany will not accept: central regulation and supervision, a common restructuring fund and common deposit insurance. It would take years to create.

The Perfect Storm - Santelli Meets Farage -- The undisputed champion of European political ranting (UKIP's Nigel Farage) discussed the sad reality of Europe's inevitable demise with the reigning US chief of non-hype Rick Santelli in a no-holds-barred cage-match of like-minded skeptics. From Rajoy's incompetence to the 'genius of mutual indebtedness', Farage explains the problem is 'bedeviled with complexity' as, for example, the last summit left "the Finnish and Dutch finance ministers leaving with a very different perspective on what happened than the rest" and now even Merkel is arguing domestically what she has and has not agreed to. From the simple self-referential idiocy of Spain's EUR100 billion bailout - that creates vicious circles on all the peripheral 'bailing' nations; to "the same bundle of money going round and round in circles" leaving Nigel tempted to describe it as "a giant ponzi scheme"; Santelli, not to be outdone, explains how the US is just such a money-circulating ponzi scheme as "one part of the government issues debt as another part is buying".

Desperate Europeans Are Entering Sham Marriages To Get Brazilian Visas -  Being young and European right now can be pretty bleak, with the average EU youth unemployment rate standing at 22.4% — and rates in Spain verging on a Great Depression-like 51%.  Unsurprisingly, a lot of young Europeans want to move abroad, but moving abroad isn't always easy — or even legal. This report in Brazilian newspaper Fohla De S. Paulo shows the lengths young Europeans are going to to get a Visa — marriage, temporary apartment moves, a few thousand dollars payment to a bride. It's not easy but its the best option for many of those who want to get a permanent visa for Brazil, and it seems like a lot of people want to work in Brazil, where unemployment rates sit currently at 5.8%. "I’m a bit afraid, but I know three Germans in Rio and an American in São Paulo who did the same," 31-year-old Spanish student tells Fohla De S.Paulo. "I could look for a job in Germany, where I was before I lost my job. But Europe is getting worse and worse, while the situation here is just the opposite.”

Spanish Unemployment to Peak at 25.4% in 2013, OECD Says - Spain’s jobless rate will continue to rise to include more than a quarter of the workforce before it peaks early next year, the Organization for Economic Cooperation and Development said. The unemployment rate will climb to 25.4 percent in the first quarter of 2013 from 24.6 percent in May, the Paris-based OECD said today in a report. Joblessness will begin to decline in the second half of next year as the economy starts to recover, it said. The OECD urged its 34 member states to do more to combat unemployment in the face of a slowing world economy and recessions in European countries including Spain and Italy. The jobless rate in the euro area reached 11.1 percent in May and will probably stay there until the end of 2013, the OECD said.

Spain to get EU leeway on deficit targets - European Union finance ministers are likely to give Spain the green light to relax its budget deficit targets at a meeting Tuesday, according to people familiar with the matter, with a draft document saying the country’s 2012 budget deficit target will be changed to 6.3% of gross domestic product. The officials Monday said there was a last-minute push to add the issue of Spain’s deficit target to the agenda of a meeting of EU finance ministers Tuesday. One official said all but two member states had agreed. A draft set of conclusions on the Spanish fiscal situation, said that Spain “fulfils the conditions for the extension of the deadline” for returning its deficit to 3% of GDP and that it would therefore be given an extra year--until 2014--to meet the 3% goal. The draft says Spain’s new deficit target for 2012 should be 6.3% of GDP, compared with 5.3% of GDP previously. The new figure is in line with the European Commission’s spring forecast of the deficit. The 2013 deficit target would be 4.5% of GDP and the 2014 goal would be 2.8%.

Yields on Spanish bonds rise above 7% -- The yield on Spain's 10-year government bond pushed above the 7% level on Monday, continued a march higher that began last week. The yield last traded up 12 basis points to 7.04%, according to Tradeweb. Many analysts believe that borrowing costs that stay above that level are unsustainably high for governments. A Eurogroup meeting of finance ministers will gather in Brussels on Monday to discuss measures to combat the sovereign debt crisis that were decided just over a week ago. But yields have crept up again for Spain as investors worry leaders have lost momentum over the measures. The yield on Italy's 10-year government bond, also moving higher in step with Spain's, rose 12 basis points to 6.15%.

EU to Speed $123 Billion Aid for Spanish Banks -- European governments will jump-start as much as 100 billion euros ($123 billion) in emergency loans to shore up Spain’s banks and may move the costs off the Spanish government’s balance sheet to shield the euro region’s fourth- largest economy from the debt crisis. Spanish equities and bonds gained after finance chiefs agreed to make available 30 billion euros by the end of this month. The goal is to eventually use the euro-area bailout fund to recapitalize banks directly instead of saddling the government with the debts. The initial cash will “be mobilized as a contingency in case of urgent needs in the Spanish banking sector,” Luxembourg Prime Minister Jean-Claude Juncker said early today in Brussels after chairing a nine-hour meeting of euro-region finance ministers. The program “will succeed in addressing the remaining weakness in the Spanish banking sector.” European governments frontloaded the Spanish aid, held out the prospects of concessions to Ireland and promised to avert a cash crunch in Greece after last month’s summit-level pledge to calm markets failed to prevent a resurgence in the 2 1/2-year- old debt crisis.

Italian Industrial Production Unexpectedly Increased in May - Italian industrial output unexpectedly rose in May. Production gained 0.8 percent from April, when it dropped 1.9 percent, national statistics office Istat said in Rome today. Economists forecast a decline of 0.6 percent, according to the median of 20 estimates in a Bloomberg News survey. Production fell 6.9 percent from a year ago on a workday- adjusted basis. The economy entered its fourth recession since 2001 in the fourth quarter and will likely contract 2.4 percent in 2012, employer’ lobby Confindustria said last month. Prime Minister Mario Monti is implementing austerity measures passed last December aimed at containing the country’s financing cost and public debt, Europe’s second-biggest. His Cabinet also approved last week 26 billion euros ($32 billion) of spending cuts over the next three years.

Italy's Prime Minister Blames Finland and Netherlands for Spike in Yields - Italian Prime Minister Mario Monti denounced unnamed "northern" EU states on Sunday for taking positions that contributed to spikes in borrowing costs for Italy and Spain. In an apparent reference to Finland and The Netherlands, which cast doubt on the conclusions of last month's EU summit hailed as a watershed for the debt crisis, Monti said they undermined the eurozone's "credibility". Finland has said it has no intention of footing the bill to cover the debts of other eurozone countries. "Collective responsibility for other countries' debt, economics and risks; this is not what we should be prepared for," Finance Minister Jutta Urpilainen said in a newspaper interview.For his part Dutch Central Bank president Klaas Knot, a member of the European Central Bank's governing council, took a similar line, saying: "If somebody wants to help southern Europe, then it has to be other governments, not the ECB."

Negative Yields In France For First Time, Record Negative Rates in Germany; 10-Year Yield Back Above 7% in Spain, Above 6% in Italy - Add France to the list of eurozone countries with negative short-term interest rates. The Wall Street Journal reports France Joins Germany to Sell T-Bills At Negative Yield France joined a handful of euro-zone countries Monday in selling short-term debt at negative interest rates as investors seek alternatives to expensive German and Dutch debt. The negative yield at Monday's German auction, the lowest on record in this maturity segment, means that investors effectively pay the German state for the privilege of holding its debt. The Dutch State Treasury Agency had already sold Treasury Certificates, or short-term debt, at negative yields. Now the French government is doing so as well.  Select Yields From WSJ:

  • Germany: Germany sold 3.290 billion euros of six-month Treasury bills, known as Bubills, at an average yield of -0.0344%. The record lows was previously -0.0122% seen at an auction Jan. 9.  
  • France: France sold EUR 3.917 billion of 13-week Treasury bills at an average yield of -0.005%, down from 0.048% a week ago, and it sold EUR 1.993 billion of 24-week Treasury bills at an average yield of -0.006%, down from 0.096% last week.

Spain's deficit targets slip as economy double dips - Spain's budget deficit will only fall to 6.3 per cent of GDP this year as the eurozone's fourth largest economy shrinks faster than previously expected, the European Commission said yesterday. The Commission had previously told Spain to reduce its deficit to 5.3 per cent by the end of 2012. But it will instead propose today to EU finance ministers that the target be relaxed. The Commission has also raised its 2013 deficit target for Madrid to 4.5 per cent and for 2014 to 2.8 per cent. Spain has succumbed to a double-dip recession with output contracting by 0.4 per cent and 0.3 per cent respectively in the last two quarters. The European Commission expects the Spanish economy to contract by 1.8 per cent by the end of 2012. The move came as European finance ministers gathered in Brussels to hammer out an agreement on recapitalising Spain's banks.

Spanish borrowing costs above 7% as euro ministers meet: Spanish 10-year bond yields rose to dangerous levels earlier ahead of a summit of eurozone finance ministers. The yield on Spanish 10-year bonds, which are taken as a strong indicator of the interest rate the government would have to pay to borrow money, rose above 7%, while Italian bond yields rose to 6.1%. Yields above 7% are considered to be unsustainable in the long term. Details of a bailout of Spain's banks are expected from eurozone ministers. They are meeting in Brussels to discuss the terms of that bailout, as well as the creation of a single institution to consolidate all the toxic assets of the country's banking sector in one place. But, as BBC Europe correspondent Chris Morris says, by sending its borrowing costs higher, the markets are sending a message to the eurozone that plans to help Spain are not convincing. The high yields on Spanish and Italian bonds were in contrast to the rates at short-term German and French bond auctions on Monday. The yield on six-month German bonds fell to a record low of -0.03%, meaning that investors were paying the German government to hold their money.

Eurozone talks stuck on detail of bank rescue fund plan - Eurozone leaders are meeting in Brussels to try to build on a "breakthrough" summit 10 days ago that agreed to ease the pressure on highly indebted states by injecting rescue funds directly into troubled banks. But the meeting has been plagued by divisions over how to interpret the summit accord and how the decisions should be implemented. The Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable for the mooted direct recapitalisation of the country's financial sector. The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly, not via governments, to avoid pushing up debt levels. But since the summit, eurozone creditor governments have backtracked on the pledges over how the accord will be implemented. While the Germans and other north Europeans insist that direct bank injections can be contemplated only once a new regime of banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened. If the main bailout fund, the European Stability Mechanism, took equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials said.

Spanish banks secure $36-billion bailout - Euro area finance ministers agreed early Tuesday on the terms of a bailout for Spain's troubled banks, saying that 30 billion euros ($36.88 billion) can be ready by end of this month. The finance ministers for the 17 countries that use the euro as their official currency will return to Brussels on July 20 to finalize the agreement, having first obtained the approval of their governments or parliaments, eurozone chief Jean-Claude Juncker said early Tuesday morning. As part of the agreement with Spain, finance ministers from all 27 European Union countries are expected Tuesday to approve a one-year extension, until 2014, of Spain's deadline for achieving a budget deficit of 3 percent. There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened, Juncker said.

As Spain's 2012 funding requirements increase, the nation may need to finds other buyers for its debt -- On a relative basis Spain's government funding requirement for the remainder of the year is fairly modest - about €34bn (discussed in this post). Analysts at BNP Paribas were quite comfortable that Spain should be able to cover its 2012 funding needs. But there may be a problem.
1. The €34bn assumes target budget deficit for 2012 of -5.3%. The actual number could be considerably worse, requiring additional funds.
2. This funding requirement does not cover regional needs for funding. And the regions are no longer able to roll some of their own debt (due to their rising deficits and debt levels). Therefore the central government will have to step in to bail out the regions.
This tells us that Spain's funding requirements may be considerably larger than previously estimated. The table below from CS shows three possible scenarios.Spanish periodic government auctions have been quite small in recent months - about €2bn each. But as the last row of the table above shows, Spain will need to step these up dramatically  (double or triple the amount) in order to raise the funds it needs for the rest of the year.

A Quote From An Anonymous European Official Is Undermining The Entire EU Summit - This paragraph is really making the rounds.  “I need to make clear what the ESM can do: the ESM is able–if one were to decide ever on such an instrument–to take an equity share in a bank. But only against full guarantee by the sovereign concerned... What you have is that it cuts out the effect of that loan on the debt-to-GDP ratio of the sovereign. Does it still remain the risk of the sovereign or [does it go to] the ESM? It remains the risk of the sovereign.” That quote is attributed to an anonymous senior European official, and it was told to star reporter Matina Stevis at The Wall Street Journal. Both Edward Hugh at Economonitor and economist Karl Whelan writing at Forbes picked up on that paragraph and understood that it signified a devastating truth: The entire EU Summit was basically a joke.While in public all the talk was about how Spanish banks would get a bailout without it burdening the government debt, this anonymous senior European official is saying that the bailout to the banks really is just a loan to the government in disguise because "it remains the risk of the sovereign." So if you want to understand why things have gone kaput so fast, this is about half of the problem. Even the things said in public can't be trusted. And then when politicians get home from these summits, and they have to pander to the voters and so forth, the agreements deteriorate even more.

Euro zone fragmenting faster than EU can act (Reuters) - Signs are growing that Europe's economic and monetary union may be fragmenting faster than policymakers can repair it. Euro zone leaders agreed in principle on June 29 to establish a joint banking supervisor for the 17-nation single currency area, based on the European Central Bank, although most of the crucial details remain to be worked out. The proposal was a tentative first step towards a European banking union that could eventually feature a joint deposit guarantee and a bank resolution fund, to prevent bank runs or collapses sending shock waves around the continent. The leaders agreed that the euro zone's permanent bailout fund, the 500 billion euro ($620 billion) European Stability Mechanism, would be able to inject capital directly into banks on strict conditions once the joint supervisor is established. But the rush to put first elements of such a system in place by next year may come too late. Deposit flight from Spanish banks has been gaining pace and it is not clear a euro zone agreement to lend Madrid up to 100 billion euros in rescue funds will reverse the flows if investors fear Spain may face a full sovereign bailout.

Europe’s Divided Visionaries, by Barry Eichengreen - Europe’s leaders now agree on a vision of what the EU should become: an economic and monetary union complemented by a banking union, a fiscal union, and a political union. Vision aplenty. The problem is that there are two diametrically opposed approaches to implementing it. One strategy assumes that Europe cannot wait to inject capital into the banks. It must take immediate steps toward debt mutualization. It needs either the ECB or an expanded European Stability Mechanism to purchase distressed governments’ bonds today.   The other view is that to proceed with the new policies before the new institutions are in place would be reckless.Europe has been here before – in the 1990’s, when the decision was taken to establish the euro. At that time, there were two schools of thought. One camp argued that it would be reckless to create a monetary union before economic policies had converged and institutional reforms were complete. The other school, by contrast, worried that the existing monetary system was rigid, brittle, and prone to crisis. ... At the slight risk of overgeneralization, one can say that the first camp was made up mainly of northern Europeans, while the second was dominated by the south.

Eurozone's electorate becoming increasingly polarized - One of the threats that the Eruozone's leadership has to confront these days is an increasing radicalization of the member states' voting public. On average the percentage of "extreme" votes/poll results has nearly doubled since the beginning of the crisis. Greece of course has been a prime example of this, but other nations may be faced with polarized electorates as well. Ultimately this will make it increasingly difficult for politicians from the various states to reach consensus as they face domestic pressures. And the Eurozone urgently needs consensus and decisiveness to assure the union's survival.

China's central bank will have to cut rates further to avoid hard landing  -- As China's inflation rate moderates, the real lending rate is rising. In fact the ISI Group is predicting inflation of 1.8% (annualized) within the next couple of months. That would translate into a 4.5% real lending rate - the highest since 2009. But in 2009 China's economic growth was considerably stronger than it is now, justifying higher real rates. In the current environment however, real rates need to come down in order to avoid a "hard landing" scenario. That means PBoC should aggressively lower policy rate from the current 6% level. And that's exactly what the rate swap curve is forecasting. Within a week, not only did the SHIBOR swap curve move down considerably, but it also became more inverted, pointing to further PBoC easing.

German court hears arguments against euro pacts — Germany's finance minister urged the country's highest court Tuesday not to delay Europe's new permanent bailout fund and budget discipline pact, warning any postponement to the country signing up to the measures could lead to market turmoil. Wolfgang Schaeuble told the panel of eight judges, hearing arguments that the two pacts would limit Germany's power to say how its money should be spent, that the measures were "important steps toward a European stability union". He added that Germany's approval of them would send a "clear signal that solidity and solidarity belong together." The Federal Constitutional Court has typically been willing to approval measures deepening Germany's integration into the European Union, but has in the past imposed additional requirements to consult with Parliament on bailout measures. But even if it does decide in favor of the measures, Schaeuble warned that if the case drags out it could delay the implementation of the new European Stability Mechanism bailout fund and cause widespread difficulties.

German Constitutional Court May Take 3 Months to Rule on ESM; Finance Minister Wolfgang Schäuble Warns of "Uncertainty" - The "fast track" for constitutional review of the ESM in Germany just got a lot slower. Via Google Translate (further modified by me for clarity), Der Spiegel reports ESM Review Probably Longer Than Planned Karlsruhe - The Federal Constitutional Court fast track review of the euro rescue ESM and Fiscal Pact may take more time than previously thought. Chief Justice Andrew Voßkuhle announced at the hearing on Tuesday a "constitutionally reasonable inspection" of complaints could extend beyond a normal emergency procedures. This could, according to those involved take up to three months.  The fast track was originally expected to last up to three weeks. Finance Minister Wolfgang Schäuble (CDU), stated that in his opinion a clear shift of the July ESM also "could mean a considerable uncertainty in the markets."  A stop of the bailout could lead to "serious economic dislocation, with unforeseeable consequences" for the Federal Republic, said Schäuble.

German Constitutional Court Wants to Help Berlin - Who emerged as the winner after the court had spend all of Tuesday negotiating the future of the fiscal pact and the European Stability Mechanism (ESM) with top politicians, economists and constitutional lawyers? Have the plaintiffs, the citizens and parliamentarians, won in their attempt to get a temporary injunction halting the laws aimed at rescuing the euro? Or did things go in favor of the crisis managers in government and parliament, who had warned of market turmoil and a worsening of the euro crisis if the court were to side with the plaintiffs? For the time being, the plaintiffs won. But only for the time being. They wanted to halt the process while the court assessed the constitutionalilty of the laws, and they achieved that. The laws regarding the ESM and the fiscal pact will not go into effect and the German president will not sign them until he gets the signal from Karlsruhe. How long that will take remains unclear. The eight judges on the court's Second Senate have announced that they need time for a preliminary review of the complex issues. How exactly they are going to examine them, and whether or not it might take until the fall, remained undecided Tuesday. Still, everyone breathed a sigh of relief. For the time being, nothing will happen. The money from the temporary bailout fund, or EFSF, will be enough for a little while longer, even without the ESM. And the fiscal pact has time until next year.

Spain reveals further austerity measures - Spain has announced a fresh set of public spending cuts and tax increases amounting to €65bn over the next two-and-a-half years as the government of Mariano Rajoy struggles to achieve its budget deficit reduction targets with an economy mired in recession. As part of the measures, announced on Wednesday by Mr Rajoy in parliament, value added tax will be increased from 18 per cent to 21 per cent, unemployment benefits will be reduced and an attempt will be made to rationalise Spain’s sprawling local governments. “I know that the measures that I have announced are not pleasant but they are necessary,” Mr Rajoy said when announcing what is his government’s fourth set of austerity measures in the seven months it has held power. The announcement follows European officials agreeing to allow Spain an extra year to meet its budget deficit reduction targets and iron out further details of the €100bn of European aid to be pumped into the country’s banking sector. The increase in VAT is a volte-face for Mr Rajoy, who stood against tax increases made by the previous Socialist government of José Luis Rodríguez Zapatero when the now ruling Popular party was in opposition. “I said I would reduce taxes and I am increasing them ... the circumstances have changed and I have to adapt myself to them,” Mr Rajoy said.

Spain Imposes Further Austerity Measures — Spain’s government imposed further austerity measures on the country Wednesday as it unveiled sales tax hikes and spending cuts aimed at shaving €65 billion ($79.85 billion) off the state budget over the next two and a half years. A day after winning European Union approval for a huge bank bailout and breathing space on its deficit program, Prime Minister Mariano Rajoy warned Parliament that Spain’s future was at stake as it grapples with recession, a bloated deficit and investor wariness of its sovereign debt. “We are living in a crucial moment which will determine our future and that of our families, that of our youths, of our welfare state,” said Rajoy. “This is the reality. There is no other and we have to get out of this hole and we have to do it as soon as possible and there is no room for fantasies or off-the cuff improvisations because there is no choice.”

Pointless Pain In Spain - Krugman - It’s no fun being Prime Minister of a debtor nation without its own currency. Unlike the US or the UK, Spain has no easy options. That said, the new austerity measures just announced make no sense at all. According to news reports, Rajoy has announced 65 billion euros of tax increases and spending cuts; this will clearly deepen Spain’s depression. So what purpose will this serve? Think of Spain as facing a three-level problem. The topmost level is the problem of the banks; set that aside for now. Below that is the problem of sovereign debt. What makes the debt problem so serious, however, is the underlying problem of competitiveness: Spain needs to increase exports to make up for the jobs lost when its housing bubble burst. And it faces years of a highly depressed economy until costs have fallen enough relative to the rest of Europe to achieve the needed gain in competitiveness. So, what do the new austerity measures contribute to the solution of these problems? Well, Spain’s deficit will be smaller. Not 63 billion euros smaller, since the further depression of Spain’s economy will reduce revenues; say it’s 40 or 45 billion euros less debt, which is around 4 percent of Spanish GDP. Does anyone think this will make a big difference to the long-run fiscal outlook, or restore investor confidence? What about competitiveness? Let’s be frank and brutal: the European strategy is basically for debtor nations to achieve relative deflation via high unemployment.

Spain Forced To Impose Haircuts On Savers, Private Investors - Spain will be forced to impose losses on bank debt- and share-holders as part of the bailout agreement, according to a leaked memorandum of understanding outlining the terms of the deal.  The “burden sharing” condition imposed by the EU Commission would hit Spanish savers hard, as much of the approximately €67 billion in subordinated and hybrid debt outstanding was sold to retail investors as savings products, making the bailout an expensive political move by the administration of Mariano Rajoy. Before receiving any bailout money, “banks and their shareholders will take losses […] and ensure loss absorption of equity and hybrid capital instruments to the full extent possible,” according to the draft document, leaked by Spanish daily El Pais.  European authorities have imposed harsh terms on the Spanish banking system, in the context of a €100 billion banking sector bailout approved last month.  After allocating loses to equity holders, hybrid capital and subordinated debt will face “voluntary” or “necessary” subordinated liability exercises (SLEs), or haircuts. The move is reminiscent of the highly controversial private sector involvement (PSI) part of the Greek debt restructuring.  Institutions in need of money will have to impose haircuts on debt holders before gaining access to any taxpayer funds, meaning that up to €67 billion in debt could be written-off, according to the Financial Times. Citing numbers from the Bank of Spain, the British daily interpreted the leaked memorandum as saying that banks would be forced to fully write-off their preferred shares and subordinated bonds. 

Spanish Aid Draft Banks May Wipe Out Hybrid Holders - Investors holding any equity or hybrid capital instruments issued by Spanish banks that might need a euro-zone bailout could see their investments wiped out completely under the draft terms of a deal hammered out overnight in Europe, according to documents seen by Dow Jones Newswires. "Banks receiving State aid will contribute to the cost of restructuring as much as possible with their own resources," says the draft, which formulates the basic principles of the 100 billion-euro ($123 billion) assistance package aimed at recapitalizing Spain's stricken banks. The text, which is a draft memorandum of understanding between Spain and the euro zone, spells out that the current owners of any banks that receive aid, as well as holders of "hybrid" debt that has certain characteristics in common with equity, will be the first to have their investments written off completely.

Spain PM announces €65 billion in cuts, taxes - Rajoy performed a u turn on value added tax after promising he had no plan to boost the levy, and took an axe to state expenditure. "These are not pleasant measures but they are necessary," Rajoy said. He said new spending cuts and other measures including a rise in VAT would bring in €65 billion by the end of 2014 to help trim the annual deficit. The European Union had demanded a VAT rise along with a series of other tough measures even as it gave Spain an extra year to bring its bulging public deficit back to agreed limits. Among the new measures announced by Rajoy: - VAT goes up to 21% from 18%, and the reduced rate on some products such as food goes up to 10% from 8%. A special 4% rate on basic needs such as bread is untouched. - Public administration is reformed to save €3.5 billion, including a drastic cut in the number of publically owned enterprises and a 30% cut in the number of local councillors.

Spain steps up austerity amid protests - The Spanish government unveiled €65bn worth of tax increases and public spending cuts as part of a deal to secure European aid to rescue its banking system as thousands of miners marched on the centre of Madrid to protest against austerity measures. Facing heckles from opposition politicians Mariano Rajoy, prime minister, issued stark warnings about the risk to Spain’s future as he announced a rolling back of unemployment benefits, an increase in value added tax would rise from 18 to 21 per cent, and cuts to local government to achieve the savings over two and a half years.As he spoke, thousands of miners marched on the centre of Madrid, joined by other anti-austerity protesters, to bring the city’s main avenue to a near standstill, and sparking small skirmishes as police fired rubber bullets at parts of the crowds. By raising VAT, Mr Rajoy was forced to add to a growing list of policy reversals in his time in office, with the prime minister having stood against tax increases made by the previous government when in opposition.“I said I would reduce taxes and I am increasing them ... the circumstances have changed and I have to adapt myself to them,” Mr Rajoy said.

Syntagma Riotcam Resumes Broadcasting From Madrid Where Cops Use Rubber Bullets On Protesters -- First thing this morning when discussing the upcoming festivities in Europe in the aftermath of Spain's decision to hike sales tax from 18% to 21%, while making sure it is the common people who get hurt in the upcoming bank nationalization in which sub notes and hybrid debt is impaired, largely held by retail investors as the FT showed yesterday, we said that "Spain promised to crush its middle class even more by impairing retail held sub debt and hybrids, while forcing them to pay more taxes, a move which will lead to some spectacular Syntagma Square riotcam moments." Three hours later and the riotcam is now live.

Spain's austerity 'may extend recession to 2014' — Spain's new 65-billion-euro ($80-billion) austerity package will trim a bulging public deficit but the price could be a biting recession lasting up to 2014, analysts say. Fresh from winning European Union agreement on relaxed deficit-cutting goals, Prime Minister Mariano Rajoy revealed Wednesday a slew of tight-fisted measures demanded by Brussels. Among them: value added tax goes up to 21 percent from 18 percent, jobless benefits are being reduced, government workers' salaries trimmed, and a tax rebate for home buyers scrapped. Announcing the measures, Rajoy said the economy would shrink by nearly two percent this year, and he conceded that most analysts pointed to recession in 2013, too. Edward Hugh, economist based in Barcelona, said the measures would help Spain to meet its new relaxed targets of cutting the public deficit from 8.9 percent of economic output last year to 6.3 percent this year, 4.5 percent next year and 2.8 percent in 2014. "Can they comply with the deficit? It is more possible that they could comply with the deficit but it is not certain," Hugh said.

Is Spain Going the Way of Greece? - - Yves Smith - In the “great minds work alike” category, both some readers and some of my investor e-mail correspondents (Scott, Ed Harrison, Marshall Auerback) took notice of how things are looking bad on the way to worse. Despite an unemployment rate of 25% and rising social unrest, the government just increased sales taxes to 21%. Ed Harrison sent a note to his Credit Writedowns Pro customers describing how Spain’s problem isn’t its government debt levels per se, but its deficits and the way it is soon to be saddled by regional debts and bank bailout costs. And because some of the creditor nations are dead set against debt mutualization, Spain will need to find a way to deal with its banking system losses.  The logical path, and the one the Troika is pushing, would be to wipe out equity and haircut sub debt and if need be, the next senior layer of bondholders. But depositors were pressured into buying preference shares and subordinated debt. Reuters reported that62% of bank subordinated debt investors are depositors at the same institution. Hurting small savers will not only be a political disaster, it will generate lawsuits against the banks and will further crimp the economy. Spain is looking more like its contraction is accelerating, along with its social stresses. How close is it to a Greek style death spiral? Delusional Economics is worrying along the same lines, with his argument amplified by charts accompanying his current post. As he notes:Along the way I have warned that Spain suffered from significant macroeconomic challenges that, at the time, appeared unrecognised by the markets. I also provided some analysis that the country’s problems were far greater in magnitude than something than could be fixed by simply lowering government sector deficits:

Spanish Government Takes New Steps to Increase Unemployment -- That is the reality, it would have been an appropriate headline

Spanish Banks’ ECB Loans Leap to Record Amid Bailout: Economy - Spanish lenders’ net borrowings from the European Central Bank jumped to a record 337 billion euros ($411 billion) in June as the European bailout agreement failed to ease their access to funding. Net average ECB borrowings climbed from 288 billion euros in May, the Bank of Spain in Madrid said today. Gross borrowing was 365 billion euros, up from 325 billion euros in May, accounting for 30 percent of borrowing in the euro region. Spain asked for as much as 100 billion euros of European loans to bail out its banks on June 9 as the government’s access to financial markets narrowed and its bond yields rose to about 7 percent. Banks’ increased dependence on the ECB may reflect deposit flight from Spain, which is suffering the biggest slump in foreign investment since the start of the euro. “The fear is that this was triggered by a further deposit outflow,”

The Pain in Spain - Just when you think that things can get no worse in Spain, they do. Take a look at this chart, courtesy of Credit Suisse via FT’s Alphaville.  Yiagos Alexopoulos at Credit Suisse estimates that Spanish capital outflows are currently running at an annualised rate of 50 per cent of GDP. No question, the bank run is clearly accelerating, and one can easily understand why. The country is turning into a Little House of Economic Horrors. The alleged “rescue” of Madrid’s banks is a non-starter. 100 billion euros won’t begin to cover the scale of the problem on any honest accounting or “stress test” (and that’s before we get to the next phase of announced austerity measures). Chuck Davidson of Wexford Capital has completed a report where he looked at the Spanish banks, extrapolating to all of them from a close look at the big five.. He haircutted their assets by 25%, which hardly seems excessive. Moving from the big 5 to the entire banking system, he came up with 990 billion euros as the capital needed to get Spain’s banks to Basel 3 risk weighted capital standards. Madrid, we have a problem! That’s of course after these very same banks have ripped off thousands of depositors, who were strongly encouraged to buy preferred equity shares and subordinated debt, which were touted to them as higher yielding, low risk fixed income replacements instead of lower yielding deposits

Austerity Reaches the Hollande Government in France - With his first Bastille Day approaching on Saturday, François Hollande and his government have had a good start to his presidency, impressing the French with a down-to-earth style. Mr. Hollande, a Socialist, and his prime minister, Jean-Marc Ayrault, have ordered downgrades in official luxury that have set a tone self-consciously different from that of the supposedly “bling bling” presidency of Nicolas Sarkozy.  In politics, symbols are also substance, and the changes range from the large to the small. Mr. Hollande has actually taken the train to Brussels, without a state jet following him, and his ministers have been ordered to hit the rails when possible (with a free pass on the national railway system). When they fly, they are encouraged to travel in coach class on commercial airlines. Official cars have been diminished in size and in luxury. Mr. Hollande has given up the presidential Citroën C6 for a smaller but hardly shabby Citroën DS5 diesel hybrid. He has reduced the ranks of his official drivers to two from three, and they are now supposed to stop at red lights. Mr. Ayrault gave up his C6 for a cheaper Peugeot 508. Cabinet ministers have also traded down, and the housing minister, Cécile Duflot, an ecologist who was criticized for wearing jeans to an Élysée Palace meeting, has ordered four official bicycles.

Europe Automakers Brace for No Recovery From Crisis - High unemployment, especially among young people like Cervantes, has pushed many consumers out of the car market, making the slowdown stickier than if it were caused by shaky confidence. Sales in the European Union will probably fall to 12.2 million vehicles this year, the lowest level since 1995 and 21 percent below the 2007 peak, according to European auto industry group ACEA. A recovery to pre-crisis levels in the region isn’t likely until after the end of the decade, according to consulting company AlixPartners. In France, 22.5 percent of people under 25 are out of work, compared with 36 percent in Italy. In Spain, the rate for youth unemployment is 52 percent. With a generation of drivers lost, Europe-focused carmakers like Fiat SpA (F), PSA Peugeot Citroen (UG) and Renault SA (RNO) face a struggle to stem losses in the region. Those three companies have lost more than 9 billion euros ($11.3 billion) in combined market value over the past 12 months

24,000 Italian government employees to lose jobs - Around 24,000 government employees in Italy are due to lose their jobs because of spending cuts worth 26 billion euros ($32 billion). Around 11,000 of the workers are employed in government ministries and public bodies not related to economic functions, while the other 13,000 work for local administrations, according to a technical report of the Italian government's spending review. The report, however, said around 8,000 jobs will be created from early retirements. Prime Minister Mario Monti and his government of unelected technocrats last week approved the cuts that will be spread out over the next three years, in a move to delay implementing a rise in value-added taxes. The government came to power in November after Silvio Berlusconi resigned as a debt crisis threatened to cause Italy to default on interest payments for its 1.9 trillion euro debt.

Italy stats office threatens to stop issuing data (Reuters) - Italy's national statistics body ISTAT threatened on Thursday to cease issuing data on the economy, saying it had been crippled by government spending cuts aimed at reducing national debt and righting public finances. The euro zone's third biggest economy, whose statistics are closely watched as the country's huge state debts put it at the center of the bloc's financial crisis, would face stiff European Union fines if the flow of data is cut off, ISTAT President Enrico Giovannini was quoted as saying. "Spending cuts are putting ISTAT at risk. From January onwards we will not issue any statistics," Giovannini told daily La Repubblica in an interview. Prime Minister Mario Monti's government has unveiled plans to cut public spending by 4.4 billion euros in 2012, 10.6 billion euros in 2013 and over 11 billion euros in 2014, to be mainly achieved through a planned 10 percent reduction of public administration staff.

Italy’s Economic Gains No Shield Against Contagion, IMF Says - Prime Minister Mario Monti’s “ambitious” efforts to spur Italy’s economy won’t be enough to shield the country from fallout of the region’s debt crisis without Europe making progress in building a fiscal union, the International Monetary Fund said. The bearer of the euro’s second-biggest debt “has embarked on an ambitious agenda to secure sustainability and promote growth,” the Washington-based lender said today in a report on Italy. “Despite these strong efforts, Italy remains vulnerable to contagion from the euro area crisis, with spillover consequences for the region and globally.” While Italy is on track to bring its budget deficit within the European Union limit this year, its 10-year yield bond yield has risen above 6 percent in recent weeks after Spain sought a bailout, fueling concern that Italy might be next. Italy had enjoyed a respite from the crisis after Monti’s government took office in November and passed 20 billion euros ($24.6 billion) in austerity measures and overhauled the country’s pension system.

Italy eyes euro zone aid to ease debt pain (Reuters) - Italy said on Tuesday it may want to tap euro zone aid to ease its borrowing costs as finance ministers struggled to convince markets they are getting a grip on the bloc's debt crisis, which a top European Central Banker said could escalate. Prime Minister Mario Monti, who is under intense market pressure to shape up his economy and avoid being drawn into the center of the debt crisis, said Italy could be interested in tapping the euro zone's rescue fund for bond support. "It would be hazardous to say that Italy would never use (this mechanism)," he said after a meeting of European finance ministers in Brussels. "Italy may be interested." He is worried by a rise in Italian bond yields, which were slightly below 6 percent on Tuesday having bounced above the day before. A sustained period above that threshold could open the way to 7 percent, beyond which servicing costs are widely deemed unsustainable. Monti's comments show the 2-1/2 year-old euro zone crisis risks engulfing Italy, the bloc's third-largest economy and a member of the Group of Seven economic powers that is widely viewed as too big to bail out.

Bank of Portugal Says Economic Risks Persist - Portugal's economy should contract less than expected this year due to a pick-up in exports, the country's central bank said Tuesday. The impact of further austerity measures may, however, throw the latest projections off track, the bank said. Expectations that Prime Minister Pedro Passos Coelho will have to announce more ways to meet budget deficit targets have increased in recent weeks, after official figures showed the government is spending more than expected on benefits to the unemployed and receiving less in taxes. Economists say that's a symptom of wage cuts and raised taxes coming on top of higher energy and transport bills. Portuguese unemployment has risen above any forecast, to 15.2%. Without taking into consideration potential changes in the budget plan, the Bank of Portugal revised its forecast for the economy to a 3% contraction this year, from 3.4% it had in its spring bulletin. It kept a forecast of no growth in 2013. It now expects exports to grow 3.5% in 2012, from a previous forecast of 2.7%, as companies continued to switch exports to markets outside Europe, especially China. Finance Minister Vitor Gaspar has acknowledged the scale of fiscal challenges while rejecting opposition lawmakers' calls to ask for a renegotiation of budget targets set by the European Union and the International Monetary Fund under its 78 billion-euro ($96 billion) bailout.

Portugal Lurches Into Austerity Trap With Creditors: Euro Credit - Portugal’s international creditors may soon have to ease terms of the country’s bailout to prevent the plan from derailing as the government faces setbacks in attaining its deficit goals. Prime Minister Pedro Passos Coelho’s struggle to meet deficit pledges were further hampered last week when about 2 billion euros ($2.5 billion) of planned cuts to pensions and civil servants’ holiday pay were ruled unconstitutional. With Portugal’s 10-year bond yield above 10 percent, returning to the markets next year may be untenable, requiring more international aid despite the premier’s insistence he won’t seek concessions.

Greece's budget gap narrows in first half, revenues off track - (Reuters) - Greece's budget deficit narrowed by 6.2 percent in the first half of the year, helped by spending cuts, but tax revenues fell short of the country's fiscal targets, the finance ministry said on Tuesday. The budget gap narrowed to 12.31 billion euros ($15.1 billion) from 13.13 billion in the same period last year. But the country's deep recession caused net government revenue to stagnate at 21.8 billion euros, 987 million euros lower than an interim target set out under the country's bailout plan, the ministry added. The data refers to the central government budget deficit, which excludes local authorities and social security spending. The data does not coincide with the general government budget gap, the benchmark for the EU's assessment of Greece's fiscal performance.

Greece Pressed to Resume Austerity Program — European officials signaled on Tuesday that Greece would have to renew its austerity drive before its next bailout payment was approved but expressed confidence that the country’s new government would have the money to meet a debt payment due in August. The guarded optimism came after a meeting of European finance ministers at which Greece was told to come up with about 3 billion euros ($3.75 billion) in new savings “in the coming weeks” before its creditors consider easing the terms of its bailout, the country’s new finance minister said Tuesday. “They are asking that we implement the measures we have committed to for 2012,” the finance minister, Yannis Stournaras, told reporters in Brussels. Mr. Stournaras said the government could suggest alternatives to the measures it had agreed to, as long as the new proposals produced the same result. “We are considering the measures and we will push to be able to impose them in installments,” he added. The Eurogroup — the finance ministers of the 17 nations using the euro — on Monday night heard a preliminary debriefing from representatives of the so-called troika, who returned to Athens last month after being away for several weeks after the inconclusive elections in May.

Greek jobless rate hits record 22.5 per cent - Greece’s jobless rate scaled a new record high in April, data showed on Thursday, providing gloomy news for the hard-pressed coalition government that emerged from the country’s rerun election in June. Greece is suffering a fifth year of recession and depends on financial aid from the European Union and the International Monetary Fund, which have imposed budget cuts that have caused a wave of corporate closures and triggered job losses.Unemployment hit 22.5 per cent in April, up from an upwardly revised 22 per cent in March, with 1.109 million people out of work, ELSTAT, Greece’s statistics service said. It was a sharp rise from 16.2 per cent in April last year. “Some temporary support may be provided over the summer months, especially from the tourism sector,” “However, given the fact that the jobless rate is a lagging indicator of broader economic activity, unemployment may not have reached its peak yet.”

The Weaponization of Economic Theory - I have found that it is hard to explain to continental Europe just how different the English-speaking countries are in this respect. There is a prejudice here that central bank financing of a domestic spending deficit by government is inflationary. This is nonsense, as demonstrated by recent U.S. experience: the largest money creation in American history has gone hand in hand with debt deflation. It is the commercial banks that have created the Bubble Economy’s inflation, from North America to Europe. They have recklessly lent mortgage credit and other credit far beyond the ability of domestic economies to pay. A real central bank can create credit on its electronic keyboards just as easily as commercial banks can do. But central banks do not create credit for speculative purposes. They do not make junk mortgages based on “liars’ loans” (the liars are the banks, not the borrowers), based on fictitious evaluations by crooked appraisers, and sold fraudulently to investment banks to package and sell to gullible Europeans, pension funds and other customers. In short, there is no need for the present austerity. If Europe acted like the United States, it could bail out the banks.

Paul Krugman On The Euro Crisis - In an exclusive interview, Paul Krugman tells us how the Euro crisis will end. He basically sees two possible outcomes, both of which are "impossible." One possibility is that the ECB aggressively buys peripheral debt and caps the borrowing costs of Spain and Italy, while simultaneously making it clear that they're going to promote "expansionary monetary policies" that boost inflation in Germany and help restore competitiveness between Germany and the periphery. "That can work... it's still going to be extremely painful," he says. "Any solution is going to come out of Berlin and Frankfurt... Frankfurt will do the actual lifting, but has to have Berlin's permission." But would Berlin actually sign off on an ECB-based debt monetization, pro-inflation scheme? That's very un-German. That gets to Krugman's other possibility ... Basically, eventually the ECB stops propping up all the banks (as they are now), and you get bank runs, bank holidays, and currency redenominations. That would mean the end of the euro system, which would then bring "cataclysmic" effects, both economic and legal. You look at that scenario, says Krugman, and it seems impossible that the Germans would let the entire project disintegrate like this.

i-flation and negative money: Today something happened that TMM have only heard of happening in historical epoch pub stories of money market dealers of old. Negative cash rates in a major currency. Of course this has been the case with the Swiss Franc for some time, but TMM have coped with the logic of Swiss negative rates by confining all things Swiss to a little box that works in a parallel universe of finance on different laws of financial physics, where cuckoo clocks, expensive watches, hard cheese and mountain shaped chocolate bars operate in their own airport duty-free shop of unreality.At the moment negative yields sit firmly in electronic-money land with paper money immune from holding fees other than "wallatage", the cost of storage and security. In the case of Switzerland we have seen demand for highest denomination notes go up through the roof (we have posted the figures here in the past). We now expect the same to happen to Euro notes with "Wallatage" being replaced by "Mattressage" whereby wholesale cash moves out of banks, which is a shame as the last thing the European banks need is a run on deposits. Mattressage in bond land has already resulted in negative yields in the front end of Germany and Denmark and today's moves in the Bund are pushing it further up the curve, but a negative yield is not enough to spur core domestics from taking cross border asset risk, with the related volatility risk, so it stays parked in euro stuff. However for the speculator the Euro is now firmly a funding currency and so on an fx basis the Euro is going very yennish, which means eur/yen goes downish.

3 reasons Eurozone's investors love Danish bonds - Would you pay Denmark's government 0.6% to hold your money for two years? Sounds strange, but that's exactly what investors are now doing. Denmark's government paper yields just hit new lows. And it's not only the short-term bills with the negative yield (short term bills sometimes go negative when investors seek immediate liquidity). The 2 and 3-year notes are now also comfortably in the negative territory as Eurozone's investors simply can't get enough.Why do the Eurozone investors love Demark's bonds so much that they are willing to lock in negative yields for 2-3 years? Here are 3 key reasons:
1. Eurozone based investors are not taking much FX risk because Denmark keeps EUR-DKK exchange rate tightly pegged.
2. Investors love Denmark's economic fundamentals, particularly the relatively low government debt and deficit.
3. Keeping funds outside the Eurozone may provide a hedge against potential problems associated with the monetary union's stability.

Euro tumbles as Asian funds shun EU chaos --The euro has plunged to multi-year lows against a range of currencies on fears of a deepening slump in Italy and Spain, and ugly disputes between eurozone leaders. The single currency has been sliding relentlessly since the European Central Bank cut its discount rate to zero last week, triggering an exodus of money market funds, but has now broken key resistance levels watched by technical analysts. It tumbled to 0.7882 against sterling today, the lowest since late 2008, overpowering efforts by the Bank of England to weaken the pound with its latest £50bn burst of quantitative easing. Against the dollar it fell below $1.22. “We’re on the brink of a very bearish turn for the euro: if we break the 2010 low of $1.19, we’re going to see a big move down,”

Europe Is Sliding Back Into Its Own Past - The yields on Spanish and Italian 10 year bonds have been falling lately, though not by much (Update: they're rising again already, even with a "good“ Italian auction). Why? Mainly because the Eurozone promised to ship €30 billion to Spain's banks. And partly because Spain got another year's time to comply with EU budget demands. And also partly because Spain announced its (hard to keep count) fourth - restructured - austerity package in a year (?!). There is a problem with all this. A big problem. One thing is for sure: the ongoing and ever stricter austerity measures guarantee 100% that the economies of the austerity-hit countries will deteriorate. It might be possible to cut some costs here and there in a still relatively healthy economy without causing too much pain, but when you take a nation that already has 25% unemployment, with youth unemployment over twice that, measures such as raising sales taxes and cutting government jobs can only possibly lead to further trouble. And that means Spain (and Greece, Portugal) will need to ask for more aid down the line. The financial markets don't care about that, at least not today. They were fed another €30 billion, and that's what counts in the short term. They can - and will - put back on the pressure tomorrow or next week, and expect another €30 billion, rinse and repeat. The pattern has long been set: press on the sore spots and they will pay up. More money from the Eurozone for Spain's decrepit banking sector will mean more austerity for its people. Because that's how it works, step by hurtful and unjust grinding step: that is, despite recent EU summit "deals", there are still no direct bank bail-outs (and probably never will be), and the €30 million is still added to Madrid's sovereign debt.

Swiss Bank Crackdown Accelerates As Credit Suisse, UBS Clients Raided In Germany, France- While virtually every European risk indicator is now being gamed to underreport the true nature of the capital flow panic on the continent, one remains steadfast: Swiss nominal yields, which as we pointed out a month ago, have become the only true indicator of liquidity stress. And as noted this morning, Swiss 2 Year bond just hit a record nominal -0.37% (which coupled with record low yields in German yields explains everything about where money is sprinting to in Europe, and just how much "confidence" in the system is left). And while the SNB continues to suffer massive losses on its EURCHF peg, the reality is that it continues to offer a free put to all those who wish to move away from EUR exposure and into the relative safety of the CHF (the risk of cantonal disintegration is still relatively low). Which is why the only recourse authorities have in dealing with the now record flight to Swiss safety is brute force. Sure enough, as Reuters reports, clients of the two largest Swiss banks: Credit Suisse and UBS was raided in two independent, but likely linked, operations in Germany and France, respectively, in a show of force that moves beyond mere tax-evasion and has a goal of scaring anyone who still thinks of keeping their money in the relative safety of Geneva and Zurich bank vaults.

Finland finmin:oppose boosting bailout funds -Finnish TV (Reuters) - Finland is not willing to put more money into Europe's permanent or temporary bailout fund mechanisms, Finance Minister Jutta Urpilainen said on Wednesday. "We are not prepared to increase the size of these mechanisms," Urpilainen said in a television interview with public broadcaster YLE, adding that Finland's view was that the permanent European Stability Mechanism's size of 500 billion euros had to be enough. "Finland's policy is strict, but we as a country have followed all rules approved together with other countries," she added. Finland is one of few remaining euro zone members to retain a AAA credit rating and, conscious of public opinion at home, Helsinki has been wary of taking on more liabilities regarding weaker euro zone states. Finland has said it will not participate in the currency bloc's planned aid for Spanish banks unless it and Spain reach a deal on collateral to back up any debt Helsinki buys. It also opposes granting aid directly to Spain's banks from the temporary EFSF bailout fund.

Paying the Danegeld - Krugman - Last fall, when the first wave of speculative attacks on the euro system was underway, I noted the peculiar safe-haven status of Denmark, which was able to borrow at much lower rates than seemingly comparable euro countries like Finland, even though Denmark’s currency is pegged to the euro. I argued that this reflected the extra flexibility Denmark gains from having its own currency; even though it has no intention of printing money to finance the government, the fact that it could do that in the face of a liquidity squeeze is apparently worth a lot. And now we’re back in crisis — and Denmark’s safe haven status is even more extreme. How extreme? Nominal interest rates are now negative! The central bank charges private banks 0.2 percent to hold deposits, and the interest rate on 2-year government debt is -.23 percent. The first question to ask here is why everyone doesn’t just hold stacks of currency instead, to achieve at least a zero yield. I guess the answer must be storage costs — the cost of renting a vault to hold all that paper, plus I guess the risk of mice eating the stuff or something. Those costs can’t be very large, but I guess they’re enough to make a small negative yield possible.

A Bruised Iceland Heals Amid Europe's Malaise  — For a country that four years ago plunged into a financial abyss so deep it all but shut down overnight, Iceland seems to be doing surprisingly well.  It has repaid, early, many of the international loans that kept it afloat. Unemployment is hovering around 6 percent, and falling. And while much of Europe is struggling to pull itself out of the recessionary swamp, Iceland’s economy is expected to grow by 2.8 percent this year.  “Everything has turned around,”  “When we told the bank we wanted to make a new company, they said, ‘Do you want to borrow money?’ ” Analysts attribute the surprising turn of events to a combination of fortuitous decisions and good luck, and caution that the lessons of Iceland’s turnaround are not readily applicable to the larger and more complex economies of Europe.  But during the crisis, the country did many things different from its European counterparts. It let its three largest banks fail, instead of bailing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy.  “Taking down a company with positive cash flow but negative equity would in the given circumstances have a domino effect, causing otherwise sound companies to collapse,” said Thorolfur Matthiasson, an economics professor at the University of Iceland. “Forgiving debt under those circumstances can be profitable for the financial institutions and help the economy and reduce unemployment as well.”

Heat turned up on global Libor probes - The Libor fixing scandal is set to explode across the continent in the coming weeks as it emerged that German regulators have launched an intensive probe into Deutsche Bank – one of the City's biggest employers – over the affair. BaFin, the country's financial watchdog, is said to have moved its existing investigation into the bank to the status of a "special investigation process" – indicating potential serious breaches. The results are expected by the middle of this month, Reuters reported, citing multiple sources. While the UK's Financial Services Authority never names which London-based institutions it is investigating, news of the advanced BaFin probe could indicate a coordinated investigation. Deutsche is a big player in the City, to the extent that its new boss, Anshu Jain, was drawn from the London investment banking side of the business. While it is not known what the outcome of the Deutsche investigation will be, Barclays will be relieved when other banks begin to be named, shamed and fined. Its decision to go first with a settlement backfired with the political and media storm of the past week and a half.

Germany Investigates Morgan Stanley Executive - A former governor from Chancellor Angela Merkel’s party who is being investigated with the head of Morgan Stanley’s German branch in connection with the sale of shares in a local power company always acted in the interests of his state, his attorney said Thursday. Dirk Notheis, who has been on indefinite leave from Morgan Stanley since last month, and former Baden-Wuerttemberg governor Steffen Mappus are being investigated on suspicion of accessory to breach of trust and breach of trust, prosecutors said in a statement. Notheis in 2010 helped his long-time friend Mappus, then governor, buy a 45 percent stake in the local power company EnBW on behalf of the state. The state bought it from France’s government-owned utility EdF for €4.7 billion ($6 billion). The deal — organized by Morgan Stanley and Mappus without consulting lawmakers — was later found to be unconstitutional by a state court, and a Parliamentary inquiry is still under way.

Deutsche traders suspended in Libor inquiry - Deutsche Bank suspended two traders after it brought in external auditors to look at whether its staff were involved in manipulating Libor interbank lending rates.The German banking giant, which has extensive investment bank operations in London, admitted it had received subpoenas and requests for information about Libor from 2005 to as recently as last year from US and European regulators in its quarterly results in March. It declined to comment further yesterday after the German magazine Der Spiegel reported it had suspended two employees earlier this year. Investigators around the world are examining more than a dozen big banks over allegations that the Libor rates were manipulated. Traders have been suspended, fired or placed on leave at banks including JP Morgan Chase, Royal Bank of Scotland and Citigroup as well as Deutsche. At the end of last week, BaFin, the German market regulator, stepped up its investigation into Deutsche's role fixing Libor, designating it a "special investigation". The results of the inquiry are expected later this month, putting Deutsche in line to be the next major bank after Barclays in the spotlight over the Libor.Deutsche is a member of the 10 panels of banks that submit interbank lending rates for the daily fixes in currencies ranging from sterling to the Japanese yen and Swiss franc.

Brussels to act over Libor scandal - Brussels is wading into the interest rate-rigging scandal rocking the City of London with a proposal to outlaw attempts to manipulate market indices across the EU and a fundamental of the rules on how Libor is set. Michel Barnier, the EU commissioner overseeing financial services, will amend reforms to EU market abuse rules so that potential “loopholes” are closed and criminal sanctions specifically cover tampering with indices such as Libor and Euribor. Mr Barnier called the falsification of such benchmark rates a “betrayal” with potentially “systemic consequences”. His intervention comes amid the first signs of a political backlash in Washington over an affair that has already forced the resignation of Bob Diamond from Barclays.  Barney Frank called for hearings in the House and Senate that should “call the whole structure of Libor into account”.  His criticism echoes that of the Bundesbank, Germany’s central bank, which is pushing for a reforms to a system that is “too easy” to manipulate. “It is vulnerable to fraud,” said Andreas Dombret, a Bundesbank board member.

The British, at Least, Are Getting Tough - THE unfolding story of how Barclays — and, in all likelihood, other big banks — rigged interest rates is full of telling tidbits about the way Wall Street works. It also represents yet another teachable moment. By now the world knows that Barclays manipulated the most widely used benchmark rate, the London interbank offered rate. But Barclays is just one member of the cozy club that sets the Libor, which is supposed to be based on the average rate at which large banks can borrow money overnight. It’s not based on actual transactions, however — and that leaves room for mischief. And mischief there was, according to e-mails and other documents that Barclays has turned over to regulators in the United States and Britain. Manipulating the Libor is a big deal because it affects the cost of money for almost everyone. The Libor is used to set rates on mortgages, credit cards and all manner of loans, personal and commercial. The amount of money affected by the phony rates is at least $500 trillion, British regulators have estimated. Barclays is not the only bank under investigation for rigging the Libor. It was simply the first to own up to the behavior and settle with regulators, paying $450 million. Other banks will almost certainly follow, and the documents bound to bubble up in those cases will surely prove fascinating. One of the most revealing exchanges in the Barclays documents came when a bank official tried to describe why Barclays’s improper postings were not as problematic as those of other banks.  If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument.  

Barclays urge Diamond not to take full £17million payoff - Barclays’ bosses are to put pressure on Bob Diamond, the bank’s chief executive who last week stepped down over the Libor rate-fixing scandal, not to accept his full pay-off worth up to £17 million. The bank fears that a vast “golden parachute” payment could be a public relations disaster and enrage the company’s shareholders. Senior Barclays figures have already met the Association of British Insurers, a City group which represents investors, to discuss plans to reduce Mr Diamond’s exit package. Barclays will be desperate to avoid the public fury that surrounded the pay-off and pension of Sir Fred Goodwin, the disgraced former chief executive of Royal Bank of Scotland. However, it is understood that Barclays’ directors will have to tread carefully. There are robust legal agreements that lay down exactly what Mr Diamond is entitled to.

Counterparties: Barclays gets Tuckered - Five days after Bob Diamond testified before members of Parliament on the LIBOR scandal, Bank of England deputy governor Paul Tucker had his turn today. He took aim at Barclay’s less-than-subtle insinuation that in 2008 he all but asked the bank to submit artificially low rates. Tucker told the House of Commons that he was only warning Barclays not to spook the market by indicating it would borrow at elevated rates: “I was plainly talking about their money market activity”. That conversation, Tucker said, came the day after Barclays refused to accept fresh capital from the UK government and he wanted to understand what the bank’s plan to instill confidence was, exactly. Tucker went on to say that he had similar conversations with non-LIBOR submitting financial firms. “Absolutely not” was Tucker’s immediate reply when asked if he or any other government official ever pressured banks to lower their LIBOR submissions. (Tucker’s full testimony is available here.)

We’re powerless to get truth about bankers, says key MP - Politicians have been virtually "useless" so far at getting to the truth behind the banking scandal, one of the MPs responsible for investigating the affair has admitted. Andrea Leadsom, whose forensic questioning of the former chief executive of Barclays, Bob Diamond, led to his only uncomfortable moments during last week's cross-examination by the Commons Treasury Select Committee, said: "I don't think we felt we did a fantastic job. It's a fair criticism to say, 'You guys were useless'."We had great weaknesses in that we didn't have email trails. We didn't have recordings of the morning meetings where you could point to what had been said. All we really had were the regulators' reports, what we'd seen in the media." Her frank remarks, in an interview with The Independent, will raise doubts about whether the larger parliamentary inquiry being set up to investigate the banking scandal will be able to uncover the whole truth. David Cameron has rejected Labour's calls for a judge-led inquiry, arguing that it would take too long. Several of the MPs who questioned Mr Diamond last week are now considering calling him back for a second bout because they are dissatisfied with his answers.

Sir Mervyn left to flounder in a Libor can of worms - And the Bank of England Governor’s not the only one – top brass at the Financial Services Authority and the British Bankers’ Association are hardly doing much better.  The decision to release emails detailing how Tim Geithner warned the Bank in June 2008 about fears that Libor could be manipulated have opened a new can of worms.  Then head of the Federal Reserve Bank of New York, Geithner’s email recommended steps to “improve the integrity and transparency of the rate-setting process... including procedures designed to prevent accidental or deliberate misreporting”.  Those views were based upon conversations between US regulators and banks, including Barclays. The banks, it turns out, admitted as long ago as mid-2007 that they were low-balling Libor rates.  The message from Geithner’s email was crystal clear – integrity and transparency were not words easily associated with Libor setting.

Watching Behavior Before Writing the Rules - AS a general rule, the United States government is run by lawyers who occasionally take advice from economists. Others interested in helping the lawyers out need not apply. Economists teach us that monopolies are harmful, and this is no exception. Are they really the only social scientists with anything useful to contribute to the efficient running of a government? Imagine that along with the Council of Economic Advisers, a Council of Behavioral Scientist Advisers also provided counsel to the president. What might emerge from such a group?  Thanks to an initiative of the British government, we have some evidence about the benefits that might emerge. Shortly after his center-right coalition took office nearly two years ago, David Cameron, Britain’s Conservative prime minister, established a tiny branch of government called the Behavioral Insights Team. It is led by David Halpern, a social psychologist who has a deep understanding of the workings of government, having previously served in the Labor government of Tony Blair.

The UK employment picture dims -- The UK is now feeling the full impact of the Eurozone recession. The Recruitment and Employment Confederation (REC) and KPMG Report on Jobs, a leading indicator for the employment market in the UK is showing a rapid decline in placements - the worst since 2009.  Kevin Green (REC): - "The sharp drop in the number of people placed into work last month is really disappointing. A decrease in hiring activity means we could see a period of increased unemployment, especially as a new wave of school leavers and graduates will be entering the labour market over the summer. FT: - The data suggest unemployment may shortly start to rise, partially resolving the puzzle whereby the jobless total has recently been falling despite the UK being officially in a double-dip recession.  Bernard Brown, head of business services at KPMG, said if the acceleration of the hiring decline continued, there was a “very real chance” of unemployment, currently 2.61m, reaching 3m “in the not too distant future”.

U.K. Experience Casts Doubt on Viability of Keynesian Remedies -- The plight of the United Kingdom’s economy is a useful rejoinder to those who believe the fixed exchange rate is the main driver of the economic problems in the euro zone. The U.K. responded to the financial crisis by running large fiscal deficits, cutting interest rates to zero, and “printing money” through several rounds of quantitative easing. Over this period, the result has been worse macroeconomic performance in the U.K. than in Spain, a country “trapped” in the euro straightjacket. This outcome is fundamentally inconsistent with the Keynesian view that the key to recovery in peripheral Europe is devaluation and monetary-financed deficit spending. The weakness of the peripheral European economies – Spain, Greece, Italy, Portugal, and Ireland – is often attributed to an “uncompetitive” real exchange rate. The idea is that wages in these countries rose faster than productivity, which means that the cost of an hour of labor is too expensive relative to the value of its output. An extension of this logic train is that if the euro currency didn’t exist, it would be easy for these countries to solve their problems by simply devaluing their currency. Devaluation would allow the price of domestic labor to fall relative to an hour of labor in Germany, which would restore competitiveness by making it relatively less expensive to produce goods in peripheral economies to serve the common European Union market. The U.K. economy provides an interesting test case for this theory because it is inside the European Union but has retained its own currency.

We still have that sinking feeling - Martin Wolf - It is nearly five years since financial turmoil broke upon an unsuspecting world, in August 2007. So how are crisis-stricken high income countries doing? Badly, is the only answer. Of the six largest high income economies (plus the eurozone), only those of the US and Germany are above previous peaks. Since the US was the epicentre of the early shocks, its recovery has been relatively good. Yet none of these countries can be happy with its performance. While US gross domestic product has been more buoyant than that of these other countries, its unemployment rate more than doubled, from 4.7 per cent in July 2007 to 10 per cent in October 2009. Since then its unemployment has fallen only a little. But the US has still had a better performance than the eurozone, whose economy is stagnant and whose latest rate of unemployment is 11.1 per cent, against 8.2 per cent in the US. Economies stagnate, while policy is aggressive. The highest short-term interest rate offered by any of the central banks of the big high-income economies is the 0.75 per cent offered by the European Central Bank. Balance sheets of central banks have also doubled in the big high-income countries, relative to GDP, since 2007. Japan, the US and UK continue to run very large fiscal deficits for peacetime. Yet despite huge fiscal deficits, long-term interest rates on Japanese, US and UK government bonds are very low, at 0.8, 1.5 and 1.6 per cent, respectively.  The explanation is clear: a number of important economies are struggling with excessive leverage, particularly in their household and financial sectors. In the US, for example, total private sector debt rose from 112 per cent of GDP in 1976 to a peak of 296 per cent in 2008 (see chart). This ratio had fallen back to 250 per cent by the end of the first quarter of 2012, which is where it was in 2003. In 2007, US gross private borrowing was 29 per cent of GDP. In 2009, 2010 and 2011, however, it was negative.

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