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

Saturday, July 21, 2012

week ending July 21

US Fed balance sheet shrinks in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week, Fed data released on Thursday showed. The Fed's balance sheet stood at $2.842 trillion on July 18, down from $2.849 trillion the previous week. The Fed's holdings of Treasuries totaled $1.649 trillion as of July 18, versus $1.663 trillion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $65 million a day during the week versus $8 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 $863.02 billion versus $855.05 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $91.03 billion on July 18 versus $91.48 billion the prior week.

FRB: H.4.1 Release--Factors Affecting Reserve Balances -- July 19, 2012

Fed's Lockhart on Monetary Policy - On Friday afternoon, one of the undecided FOMC members, Atlanta Fed President Dennis Lockhart appeared to move closer to voting for QE3 now. Back in June, Lockhart said he viewed the current "policy stance as appropriate". But, based on incoming data, his views are changing. From Lockhart: The Debate Over Further Monetary Action. Excerpt:  I think the output gap—the amount of slack in the economy—is neither as sizeable as the high-end estimates, nor is it zero. ... I do not think a compelling case has yet been made that structural adjustment has played a dominant role in slowing growth and progress against unemployment.  in my judgment, some further use of the balance sheet to promote continued recovery and/or financial stability brings with it manageable risks. I think reversal of the cumulative balance sheet scale and maturity structure can be accomplished in an orderly manner. But the step of additional balance sheet expansion should be undertaken very judiciously. Such a step would take us further into uncharted territory. On the likely effectiveness of further monetary stimulus—a policy that would necessarily be brought to bear at least in part through credit channels—I think we should have modest expectations about what further action can accomplish. I do not think this means monetary policy is impotent or has reached its limit. But I don't see more quantitative easing or similar policy action as a miracle cure, especially absent fixes in policy areas outside the central bank's purview.

Is QE3 coming? - Conditions have changed since January, and we might expect some additional stimulus from the Fed at the next FOMC meeting. Many observers have wondered why the Fed seems to be completely disregarding its objective to try to maintain full employment. If the Fed's long-run targets call for an inflation rate of 2% and an unemployment rate below 6%, then any balancing of the tradeoff between the two objectives would imply we'd want to see an inflation rate above 2% as long as unemployment remains as high as it presently is. Part of the answer, as noted on Friday by Federal Reserve Bank of Atlanta President Dennis Lockhart, may be concerns that the stimulus options currently available to the Fed raise their own set of risks. Lockhart also discussed the conclusion of some observers that if the U.S. economy were as far below its current potential as some observers claim, it's puzzling why we've continued to see a low but persistently positive rate of inflation over the last 3 years. Insofar as this has been a concern, the abatement in inflation over the last few months gives a renewed reason for the Fed to act. The most recently reported year-over-year change in the PCE deflator, the Fed's favored measure of inflation, came in at only 1.5% in the latest release. Thus, even if the Fed didn't care at all about unemployment, its announced objective in terms of inflation would suggest the desirability of further easing on grounds of that objective alone.

Cautious on Growth, Bernanke Offers No Hint of New Action – The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that the Fed was seeking greater clarity about the health of the recovery as it weighs the need for a new round of economic stimulus. In testimony before the Senate Banking Committee, Mr. Bernanke also strongly defended the Fed’s actions after it learned of problems in 2008 with the London interbank offered rate, or Libor. And he renewed his warnings that Congressional inaction on fiscal policy threatens to upend the recovery and tip the economy into recession. Repeating a formula he first articulated earlier this summer, Mr. Bernanke told the committee that the Fed’s decision about additional economic stimulus would turn on its judgment about the likely pace of job growth in coming months. The crucial issue, he said, is “Whether or not there is in fact a sustained recovery going on in the labor market or are we stuck in the mud.” Mr. Bernanke also added a new wrinkle, saying the central bank “would certainly want to react against any increase in deflation risk.” With the rate of unemployment stalled above 8 percent, and some measures of inflation expectations falling, Mr. Bernanke’s remarks were read by some analysts as pointing toward probable action in the coming months. But Mr. Bernanke himself avoided commitments, saying that Fed officials were continuing to review the data and to consider their options.

Bernanke offers downbeat view of economy, but no action - Federal Reserve Chairman Ben Bernanke painted a somewhat darker picture of the economy Tuesday but gave no hint the central bank is poised to act to provide further stimulus. Still, the recent signs of a weakening recovery have many economists saying the Fed is likely to move by year's end to buy more Treasury bonds in an effort to lower long-term interest rates. Bernanke also reminded the Senate Banking Committee that the nation is at risk of slipping back into a recession if Congress doesn't reach a compromise to avoid a "fiscal cliff" — a confluence of tax increases and spending cuts that are slated to take effect at year's end that would stymie growth."The reduction in the unemployment rate seems likely to be frustratingly slow," Bernanke told the Senate Banking Committee in his semiannual report to Congress on monetary policy. Bernanke added that surveys of business conditions and capital spending plans "suggest further weakness ahead." And he said warm winter weather that pulled forward construction and manufacturing activity and dampened spring sales accounts for "only part" of the recent slump in job growth. 

Bernanke Outlines Growth, Easing Options - Federal Reserve Chairman Ben S. Bernanke outlined options to ease policy further in case the flagging economic recovery fails to lower unemployment. Easing tools include further purchases of Treasuries and mortgage-backed securities, and altering the Fed’s language on the outlook for interest rates, Bernanke told the Senate Banking Committee in Washington yesterday. Another option is to use the so-called discount window for direct lending to banks. “That’s a range of things that we could do,” Bernanke said. “Each one of them has costs and benefits, and that’s an important part of the calculation.” Bernanke and his colleagues on the Federal Open Market Committee meet in two weeks to continue debating whether further action is needed to reduce joblessness stuck above 8 percent since February 2009. Recent economic data shows the recovery is cooling, with consumer retail sales in June falling for a third consecutive month when economists had forecast an increase.

Bernanke gives little indication QE3 on the way - Anyone looking for signs of further monetary easing from the Federal Reserve will be disappointed by Chairman Ben Bernanke's testimony today before the Senate Banking Committee. Although the central bank is missing both its inflation and unemployment targets -- inflation is running lower than the 2 percent rate Fed would prefer and unemployment is too high -- Bernanke did not advance the discussion past what the Federal Open Market Committee laid out at its June meeting. However, Bernanke's assessment of the economy is bleak. Promising that the Fed will do its job, he sounded concern about the trajectory for fiscal policy and acknowledged the risks from Europe.  All of that points to the Fed leaning toward further economic stimulus. In the question and answer session with lawmakers that followed his formal remarks, Bernanke did say that the Fed is examining its options for further easing should it be needed. That statement is quite different from the internal discussions the Fed was having not  long ago about how to remove the easing that was already in place. So all hope is not lost for those looking for the Fed to take action to spur growth. For now, however, Bernanke is holding his cards close to his chest.

The Feckless Fed - Krugman - When I published a critique of Ben Bernanke’s recent performance, suggesting that he should reread his own critiques of the Bank of Japan, there were a fair number of people saying that I was just a big meanie. But my sense is that his latest testimony, in which he declared that the Fed has the power to take action, that the economy is in really bad shape, but declined to, you know, actually take action, has left even his usual defenders more or less speechless. It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.

Boston Fed Wants to Cut Discount Rate, Kansas City Fed to Raise It - Federal Reserve officials discussed possible monetary policy action last month amid concerns about recent signs of weakness in the U.S. economic recovery, but kept the discount rate unchanged as expectations continued for moderate growth, according to minutes of discount-rate meetings held last month and released Tuesday. Ten of the Fed’s 12 district banks recommended keeping the discount rate unchanged at 0.75%, according to the minutes of June meetings held on the rate charged to banks on short-term emergency loans. Two district banks continued to push for opposing policy moves. As they have since late last year, directors from the Boston Fed called for a decrease in the discount rate to 0.50%, while directors of the Kansas City Fed voted for an increase to 1.00%. Overall, directors of the Fed’s regional banks “noted relative weakness in recent economic data but generally expected moderate economic growth to continue over the coming quarters,” according to the minutes. After voting to keep the discount rate unchanged, the officials discussed “economic and financial developments and issues related to possible policy actions took place,” the minutes said, without elaborating on policy options under discussion.

Another Fed Official Looks to Be Leaning Toward More Action - Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, has downgraded her forecasts for the economy, when compared to May. She kept her inflation forecast unchanged, but also plays down the upside risks. And she offers a bleak outlook for unemployment. She laid out the changes in a speech today. All-in-all, it sounds like another official leaning toward more action. Key passages and comparisons with her last speech in May:  I am expecting growth to come in for 2012 just around 2 percent, and I would add that reaching this level of moderate growth is going to require some acceleration in growth in the second half of this year. : I am projecting the economy to grow at a moderate rate, slightly above 2-1/2 percent this year and around 3 percent in 2013 and 2014.  For several years running, our highly accommodative monetary policy has prompted some observers to worry that a major inflation problem is just around the corner. That has not been the case over the past three years, as PCE (personal consumption expenditures) inflation has averaged just 1.7 percent. This is a bit below, but still close to, the 2 percent rate that the FOMC has designated as our inflation objective over the longer run. Given my outlook for slow economic growth and slow wage growth, I

Fed’s Pianalto: More Action Warranted if Weakness Persists - If the economy’s performance gets worse, the Federal Reserve may have to take additional action to get growth and hiring back on track, a central bank official said Tuesday. “If recent weak economic data persist and cause my outlook for economic growth and inflation to become weaker than I currently anticipate, additional policy actions could be warranted,” Federal Reserve Bank of Cleveland President Sandra Pianalto said Tuesday.

Fed Governor Duke Says Coordinated Policy Usually Not Optimal Federal Reserve Governor Elizabeth Duke said monetary policy coordination among central banks is usually not ideal and each central bank must have tools to carry out objectives independent of its counterparts.  “While central banks may benefit from coordination and cooperation, taking the same policy stance at the same time typically will not be the best choice for all central banks,” Duke said today in remarks prepared for a speech in Mexico City.  The Fed and five other major central banks reduced interest rates in October 2008 in response to economic weakness and have cooperated on financial regulation, including raising international bank capital standards, Duke said. Since then, the economies of the various nations have rebounded at different rates, prompting different monetary policies.

Path to Fed Ease Clear if Data Weak --- Sen. Charles Schumer, the New York Democrat, certainly seems ready for more action from the Federal Reserve to try to spur the U.S. economy. Sen. Schumer preceded his charge by telling Mr. Bernanke that the Fed “was the only game in town” to help the decelerating economy, given a stalemated Congress in a presidential election year. He talked of a recession that was deeper, “stickier” and more prolonged than anyone thought. Mr. Bernanke, of course, didn’t salute, say “will do,” and snap into action. He played his quantitative easing cards and other monetary easing options close to the vest. One would expect nothing else. Regardless of the views of Sen. Schumer and some other Senate Democrats, who think the economy needs new Fed help now, or their Republican counterparts on the panel who raised caution flags about the extraordinary efforts taken to date by the central bank, the data are going to decide Mr. Bernanke’s and the Fed’s next moves. And if the data on jobs creation and other signs of U.S. economic growth keep coming the way they have been the past several months, it likely becomes a question of when, not if, for more Fed action. Then there’s the important detail of which method is used by the Fed since the short interest rate the Fed controls has been fixed essentially at zero since late 2008.

FOMC's new tools -- FOMC Minutes (of the Meeting of June 19–20, 2012): - Several participants commented that it would be desirable to explore the possibility of developing new tools to promote moreaccommodative financial conditions and thereby support a stronger economic recovery.  This got a great deal of speculation going. What could be the "new tools"? Here are some possibilities:
1. Sterilized securities purchases: see item #2 in this post.
2. Sterilized securities purchases involving MBS: see this post for more detail.
3. Cutting rates on banks' excess reserves to zero. This is essentially what the ECB just did, resulting in negative yields for much of the stronger Eurozone government short term paper. It certainly has the potential of pushing the short end of the US curve deep into negative territory as well. Such a move may also have some unintended consequences such as weakening of the dollar, damaging the repo markets, and negatively impacting US money market funds.
4. Some have suggested that the Fed could potentially introduce a scheme similar to the UK’s cheap-funding-for-lending program.  In the US however there are legal restrictions that limit collateral types for any long-term lending by the Fed to residential (and some multifamily) mortgages. This program would therefore only work for banks who want to do more mortgage lending.
5. A commitment to hold the Fed Funds rate near zero for a defined (longer term) period. The current low rate statement is not a "pledge", just a forecast. An actual term pledge would involve a new approach. It's an interesting but a bit dangerous idea because it takes away the Fed's ability to raise rates in the near future in case of unexpected inflationary pressures.
6. An all-out "unsterilized" QE3: see item #3 in this post as to why such policy decision is unlikely at this juncture.

August 1st QE3 Departure Date? - There is quite a bit of discussion on when (not if) the Fed will embark on QE3. As an example, from Goldman Sachs yesterday: While we think that a modest easing step is a strong possibility at the August or September meeting, we suspect that a large move is more likely to come after the election or in early 2013, barring rapid further deterioration in the already-cautious near term Fed economic outlook. And from Merrill Lynch this morning: We expect that, as the data continue to soften, the Fed will undershoot its own forecasts and thus respond with further easing. We expect the Fed to push out its forward guidance until at least mid-2015, perhaps at the August 1 FOMC meeting, and to launch a $500bn QE3 asset purchase plan by the September 13 meeting. Although the date is uncertain, I think there is a strong possibility that the Fed will launch QE3 on August 1st. I think Bernanke paved the way1 for QE3 at the press conference on June 20th. Before embarking on previous rounds of QE, Bernanke always outlined the reasons - and I thought he made it clear that if the economy didn't improve, more accommodation was coming. And, if anything, the data has been worse since the last meeting.

Does QE Really Work? The Evidence To Date -- The market's hopes and dreams for the next LSAP remain high. As gold inches higher, tail-risks priced out (expectations for extreme FX moves are considerably lower than sentiment would suggest), and US equity vol expectations (and put skews) are crushed; the equity market clearly remains 'at a premium' in its notional indices given what is sheer lunacy in earnings expectations going forward. The question every investor should be asking is not when QE or even if QE, but so-what-QE? As Credit Suisse notes, given the deterioration in US economic activity (and the extension of Operation Twist) the FOMC will probably wait until its September meeting (and remember the trigger for further pure QE is a long way off for now). The most critical question remains, will additional QE work? After all, few would argue that US interest rates are too high or that banks in the US need still more excess reserves. Two things stand out in their analysis of how QE is supposed to work (transmission mechanisms) and its results to date: QE1 was more effective than QE2, and it's easier to find QE's effect on Treasury yields than on real economic performance. Perhaps more concerning is that the potential negative effects of such unconventional monetary policy has received little attention (aside from at fringe blogs here and here).

Monetary Policy and Long-Term Real Rates - Changes in monetary policy have surprisingly strong effects on forward real rates in the distant future. A 100 basis-point increase in the 2-year nominal yield on an FOMC announcement day is associated with a 42 basis-point increase in the 10-year forward real rate. This finding is at odds with standard macro models based on sticky nominal prices, which imply that monetary policy cannot move real rates over a horizon longer than that over which all prices in the economy can readjust. Rather, the responsiveness of long-term real rates to monetary shocks appears to reflect changes in term premia. One mechanism that may generate such variation in term premia is based on demand effects coming from "yield-oriented" investors. We find some evidence supportive of this channel.  Full paper (264 KB PDF)

Fed Watch: A Slap in The Face - The retail sales number should be a slap in the face for any FOMC members sitting on the fence. Stripping out autos and gas gives us this picture: Clearly, sales growth has rolled over. But what is more startling is the pace of the deceleration. The three-month change: The three-month change is severe, to say the least, and since 1992 unseen in the absence of recession with the exception of the deceleration in June and July of 2010. The deceleration also lends credence to the theory that the jobs slowdown this summer is not entirely an artifact of seasonal variation but also reflects a general softness in economic activity. The rapid downgrades of Q2GDP estimates reflects that softness. Note, however, that the 2010 slowdown in sales did not foreshadow a recession. But it did foreshadow the Jackson Hole speech and QE2. With that in mind, I would expect Federal Reserve Chairman Ben Bernanke to acknowledge the deceleration of activity when he marches up to Capitol Hill this week. And such acknowledgement would be a signal that more easing is on its way. Moreover, given the pace of deterioration in the data, the Fed may not have time to find any new tricks, and thus be forced to deliver that easing in the form of additional balance sheet action.

Bernanke Warns Against Opening Up Policy Deliberations to Audit - Government audits of monetary-policy decisions could open the Federal Reserve up to political pressures, Fed Chairman Ben Bernanke said Wednesday. The Fed is already audited, but eliminating an exemption for the central bank’s monetary-policy deliberations would imperil the Fed’s independence, Mr. Bernanke said Wednesday, speaking before the House Financial Services Committee. The central bank’s operations are reviewed by an outside, independent audit firm and the Government Accountability Office also audits the Fed’s financials, including those of its monetary-policy operations, but it does not evaluate the policy decisions behind them. A bill introduced by Rep. Ron Paul (R., Texas) would get rid of that exemption and increase government oversight of the Fed. “I do feel it’s a mistake to eliminate the exemption from monetary-policy deliberations, which would effectively create a political influence or a political dampening effect on the Federal Reserve’s policy deliberations,” Mr. Bernanke said.

Number of the Week: Could Inflation Revive the Recovery? - 4.2%: How high inflation would be if the Fed allowed prices to stray as far from its target as unemployment has. The Federal Reserve has a dual mandate to promote both price stability and maximum employment. It’s a delicate balancing act: Focus too much on keeping inflation in check and the Fed runs the risk of strangling growth, driving up unemployment; focus too much on promoting hiring and inflation can quickly spin out of control. Fed Chairman Ben Bernanke was on Capitol Hill this week to explain how the Fed is striking that balance. To judge by the questions they asked, most of Mr. Bernanke’s critics in Congress think the Fed’s easy-money policies are raising the risk of runaway inflation in the future. But outside of Congress, much of the criticism of Mr. Bernanke argues that he’s strayed too far in the opposite direction, worrying too much about inflation — which might be a problem in the future, but doesn’t appear to be right now — and too little about the unemployment rate, which pretty much everyone agrees is too high. In a speech last fall, Chicago Fed President Charles Evans laid out the argument this way: The Fed’s implicit inflation target is 2%. The Fed doesn’t have a widely cited numerical target for unemployment, but a conservative estimate of the “natural,” or underlying, rate of unemployment is 6%. “So, if 5% inflation would have our hair on fire,” Mr. Evans said in September, “so should 9% unemployment.”

Key Measures show slowing inflation in June - Earlier today the BLS reported:  The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment. ... The index for all items less food and energy rose 0.2 percent in June, the fourth consecutive such increase. The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning: According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.5% annualized rate) in June. The 16% trimmed-mean Consumer Price Index increased 0.2% (1.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. This graph shows the year-over-year change for these four key measures of inflation. On a year-over-year basis, the median CPI rose 2.3%, the trimmed-mean CPI rose 2.2%, and core CPI rose 2.2%. Core PCE is for May and increased 1.8% year-over-year. Most of these measures show inflation on a year-over-year basis are still above the Fed's 2% target, but it appears the inflation rate is slowing. On a monthly basis (annualized), most of these measure were below the Fed's target; median CPI was at 1.5%, trimmed-mean CPI was at 1.9%, and Core PCE for May was at 1.4% - although core CPI was at 2.5%.

Is Our Economists Learning? - Paul Krugman -- David Glasner is unhappy with Allan Meltzer, who wrote an absurd op-ed in the WSJ in which Meltzer, among other things, just makes stuff up — claiming that markets are signaling fear of inflation when they are in fact doing no such thing. In fact, the most sophisticated gauge we have of market inflation expectations, from the Cleveland Fed, looks like this: But it’s actually much worse than Glasner acknowledges. Meltzer has been banging the same drum for more than three years; I debunked a very similar scare op-ed on his part way back in May 2009. You might think that the complete failure of the predicted inflation takeoff to materialize would at least give him pause. But no: his dogmatism is completely unshaken. And the thing is, he’s typical. I wrote about this a few weeks ago: Actually, has even one prominent economist or economic prognosticator who got everything wrong admitted it, or shown even a hint of humility? Has anyone perhaps hinted that the policy recommendations he was making might not be right, given the total failure of events to go the way he predicted? I can’t think of one.

On The Curious Persistence Of Inflationary Obsession - Paul Krugman - I just got to this Joe Weisenthal piece, The World Is Experiencing the Opposite of a Sovereign Debt Crisis. The piece itself was, I thought at first, just saying the obvious; but then I looked at the comments. Joe makes the well-known point that aside from certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it.   And there’s also a lot of discussion, which I’m ambivalent about, concerning the supposed shortage of safe assets; this is coming from bank research departments as well as academics, it’s a frequent topic on FT Alphaville, and so on. So Joe didn’t seem to me to be saying anything radical. But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner. It’s an interesting phenomenon. I don’t think it’s just a product of the usual propaganda efforts from the right. There’s something about the deficits! inflation! story that evidently resonates with a lot of people no matter how often and how badly the worldview fails in practice — and is also completely resistant to attempts to point out that things must add up, that everyone can’t simultaneously spend less than their income.

High Inflation at the Gates? - The Federal Reserve needs to raise interest rates to stave off inflation, says Rep. Paul Ryan, R-Wis. "I'm worried they're not going to pre-empt inflation," the House Budget Committee Chairman tells CNBC. .."I'm worried they're going to see it too late and we're going to have a problem." That's a quote from February 2011. It's useful, I think, to consider what has happened since then (or since October 2009). Figure 1 depicts three measures of three month annualized inflation, while Figure 2 depicts three measures of corresponding core inflation. Note that three month headline inflation is negative, while m/m is zero. Three month core rates are slightly higher, although there is some dispersion.While current inflation is moderate, one could argue -- as Representative Ryan has -- that future inflation is the concern. Survey based measures indicate little movement.The five and ten year expected inflation rates are similarly unbudged. Finally, the Cleveland Fed's measure of expected ten year inflation is near all-time lows. All of this is just further confirmation of The Curious Persistence Of Inflationary Obsession.

Why I Still Fear Inflation - The Fed is caught between a rock and a hard place. If they inflate, they risk the danger of initiating a damaging and deleterious trade war with creditors who do not want to take an inflationary haircut. If they don’t inflate, they remain stuck in a deleveraging trap resulting in weak fundamentals, and large increases in government debt, also rattling creditors.  The likeliest route from here remains that the Fed will continue to baffle the Krugmanites by pursuing relatively restrained inflationism (i.e. Operation Twist, restrained QE, no NGDP targeting, no debt jubilee, etc) to keep the economy ticking along while minimising creditor irritation. The problem with this is that the economy remains caught in the deleveraging trap. And while the economy is depressed tax revenues remain depressed, meaning that deficits will grow, further irritating creditors (who unlike bond-flipping hedge funds must eat the very low yields instead of passing off treasuries to a greater fool for a profit), who may pursue trade war and currency war strategies and gradually (or suddenly) desert US treasuries and dollars. Geopolitical tension would spike commodity prices. And as more dollars end up back in the United States (there are currently $5+ trillion floating around Asia), there will be more inflation still. The reduced global demand for dollar-denominated assets would put pressure on the Fed to print to buy more treasuries.

Why Falling Interest Rates Destroy Capital  I have written other pieces on the topic of fractional reserve banking duration mismatch, which is when someone borrows short-term money to lend long-term and how falling interest rates actually encourages duration mismatch. Falling interest rates are a feature of our current monetary regime, so central that any look at a graph of 10-year Treasury yields shows that it is a ratchet (and a racket). There are corrections, but over 31 years the rate of interest has been falling too steadily and for too long to be the product of random chance.  I place the blame for Sudden Capital Death Syndrome on falling interest rates. The key to understanding this is to look at a bond as a security. This security has a market price that can go up and down. It is not controversial to say that when the rate of interest falls, the price of a bond rises. This is a simple and rigid mathematical relationship, like a teeter-totter. It is a salient, if not the central fact, of life in the irredeemable US dollar system, as I have written. A bond issuer is short a bond. Unlike a homeowner who takes out a mortgage on his house, a bond issuer cannot simply “refinance”. If it wants to pay off the debt, it must buy the bonds back in the market, at the current market price. Let’s repeat that. Anyone who issues a bond is short a security and that security can go up in price as well as go down in price.

Savings versus Investment - During the boom our investment exceeded savings. During the bust our savings exceeded our investment. Economic models usually assume that Savings=Investment. But during the boom we had leverage built upon leverage due to low down payments and low capital ratios of non-banks. When the bust hit, savings surged as the private sector tried to regain solvency, and investment fell due to fear of not being repaid. Savings were so plentiful relative to investment demand that they reaped negative yields (real or nominal). Many people think the negative yields are irrational. They explain that it is due to the manipulation of central banks, even though the low yields persist globally in every investment without default risk. Or they believe there is a speculative bond bubble, even though I don't think speculative bubbles in bonds are even possible since the principal repayment amount is contractually fixed and the possible appreciation due to market interest rates approaches zero as the YTM approaches zero. Negative yields are rational when a) there is more risk of deflation than inflation, b) the world's second largest currency is in danger of breaking apart, c) the second and third largest economies are in a recession, and d) no major economy is doing well. In a deflationary environment, why wouldn't you want to hold cash with a zero yield, since it is worth more in the future and everything else is worth less? It isn't feasible to hold billions of currency, so you hold the next safest and liquid instrument you can find. If you can hold a foreign currency likely to appreciate versus your domestic currency, then a negative yield makes even more sense (i.e. you are in the Eurozone).

Bernanke Predicts ‘Frustratingly Slow’ Progress on Joblessness-- Federal Reserve Chairman Ben S. Bernanke said progress in reducing unemployment is likely to be “frustratingly slow” and repeated the Fed is ready to take further action to boost the recovery, while refraining from discussing specific steps. “The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year,” Bernanke said today in testimony for delivery to the Senate Banking Committee in Washington. The Fed is “prepared to take further action as appropriate to promote a stronger economic recovery,” he said. Bernanke said growth is slowing as business investment cools in response to the European crisis and the prospect of fiscal tightening in the U.S. At the same time, households are restraining spending as unemployment remains elevated and credit is hard to get. Bernanke and his colleagues on the Federal Open Market Committee are considering whether the economy will need additional stimulus to reduce a jobless rate stuck above 8 percent since February 2009. Minutes of their June meeting show that a few participants believed the Fed will need to do more, while several others said new easing would be warranted if growth slows, risks intensify or inflation seems likely to fall persistently below the Fed’s 2 percent target.

Bernanke “Prepared” to Do More for Jobs - After three months of ugly job growth, poor retail sales, missed inflation targets and forecasts of minimal economic growth (most analysts reduced their estimate to around 1.1% for the second quarter of 2012), Ben Bernanke finally announced his willingness to “be prepared” for further steps to boost the economy. The Federal Reserve stands ready to offer additional monetary support to a U.S. economy that has slowed significantly in recent months, Fed Chairman Ben Bernanke told lawmakers on Tuesday. He told the Senate Banking Committee the recovery was being held back by tighter financial conditions due to Europe’s debt crisis and uncertainty surrounding U.S. fiscal policy. This is classic buck-passing. The problem is not Bernanke’s fault, not the lid he has clamped at 2% inflation. It’s everyone else ruining it for him, you see. But the “future action,” even if we see it coming out of the next Fed meeting in early August, would only mimic previous actions on quantitative easing, in all likelihood. And there has been little indication that this has materially improved economic circumstances. It’s been difficult to get the lower interest rates into the hands of those who need them, and that credit clog has limited Federal Reserve policy. The Fed could and should, if they want to make a difference, undertake more unconventional measures, like saying they could tolerate a higher inflation target

Ben Bernanke headed toward a cliff as US politics and markets collide - Regular watchers of Federal Reserve chairman Ben Bernanke could be forgiven a sense of déjà vu as he appeared before the Senate banking committee Tuesday. Once again Bernanke fenced off questions about whether the US central bank will offer a fresh round of monetary stimulus. And yet again he warned that Europe's woes and political rows in Washington threatened the economic recovery. But his latest appearance came as he faces a difficult balancing act – weighing increasing pressure to act as the US's fragile economic recovery wobbles against the political backlash that could come if he does move. Economists are blaming slowing jobs growth and consumer spending on anxiety over Europe's debt crisis and the so-called "fiscal cliff" – the expiration of Bush-era tax cuts and the imposition of $1tn in spending cuts set to occur on 31 December unless a political compromise can be reached. Bernanke is concerned too and told the Senate the Fed had "made clear at its June meeting that it is prepared to take further action".

Fed fiddles as America slides back into recession - The Economic Cycle Research Institute in America has doubled down on its recession call. A fresh US slump is not just a risk any longer. It has already begun. Output slowed to stall speed over the winter. The US economy tipped into outright contraction in the second quarter, even before facing the "fiscal cliff" later this year – tightening of $600bn or 4pc of GDP unless action is taken to stop it. Nothing serious is yet being done to head off the downward slide. If ECRI is right, the implications for the global system are ugly. It is never easy to read the signals at inflexion points. Washington is always caught off guard. As ECRI’s Lakshman Achuthan says, it took the Lehman collapse ten months into recession in September 2008 to "wake people up". What we know is that retail sales rolled over in February and broader trade sales peaked in December. Industrial output peaked in April. The nationwide ISM index of manufacturing crashed through the break-even line of 50 in June, just as it did at the onset of the Great Recession in late 2007, but this time at a faster pace. Job growth has slumped to 75,000 a month over the last three months, too low to stop unemployment rising again to 8.2pc, or 14.9pc on the wider U6 measure.

Fed has little room left to revive growth - Maybe Ben Bernanke should be asking the questions of Congress, not the other way around. While central bankers are considering ways to ease monetary policy even further, they can do little more than watch as Congress heads for a potentially ruinous year-end "fiscal cliff" of tax hikes and automatic spending cuts. Bernanke might better use his time asking Congress what it will take to break the logjam. Some budget analysts say the answer is pretty simple. Advertise | AdChoices“The framework is no mystery,” said Brookings Institution economist Alice Rivlin, a former White House budget director in the Clinton administration. “Everybody who has worked on this problem has come up with the same thing, and so everybody knows what the parameters are. It's just a question of saying, let's hold hands and jump together.” With economic indicators around the world pointing to a widening slowdown, pressure has increased on the Fed to embark on a third round of easy-money policies to spur growth. Central bank forecasters recently cut their growth projections but still expect the slowly growing U.S. economy to avert recession. 

Fed's Beige Book: Economic activity increased at "modest to moderate" pace, Residential real estate "largely positive" - Fed's Beige BookReports from most of the twelve Federal Reserve Districts indicated that overall economic activity continued to expand at a modest to moderate pace in June and early July. This is a downgrade from the previous beige book that reported "moderate" growth. And on real estate: Reports on residential housing markets remained largely positive. Sales were characterized as improving in Philadelphia, New York, Richmond, Chicago, St. Louis, and Minneapolis, while home sales increased in Boston, Cleveland, Atlanta, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. ... Most Districts reported declines in home inventories. Homes prices have begun to stabilize in some markets and price increases were noted in select markets. Boston and Atlanta noted that appraisals were coming in below market prices. ... Rental markets continued to strengthen by most accounts. ... Recent activity in commercial real estate markets has been mixed. Modest improvements were noted in Boston, Atlanta, and St. Louis and demand strengthened in the San Francisco District. Softer conditions were reported in the New York and Richmond Districts, while demand held steady in the Philadelphia and Dallas Districts. Nonresidential construction activity varied as well. 

Beige Book: District-By-District Summary of Conditions - The Federal Reserve‘s latest “beige book” report states that the economy expanded moderately across the U.S., but the pace of growth slowed in some regions. The following is a district-by-district summary of economic conditions in the 12 Fed districts for June through early July:

Richard Alford: Why Economists Have No Shame – Undue Confidence, False Precision, Risk and Monetary Policy  - Economic policymakers, pundits and academics continue to forecast the future course of the economy and predict the effects of possible policy initiatives with an air of scientific certainty. The high degree of confidence expressed in their forecasts, predictions and commentary continues unabated despite:

1. Only a small minority of economists and none of the central banks and treasury/finance ministries anticipated the financial crisis and the recession, and
2. At most only one of the currently competing macroeconomic models (which embody significantly different structures and implications for economic policy) can serve as a sound basis for policy.

The confidence and false precision in these forecasts and policy prescriptions reflect a continuing unwarranted faith in the models. With Greenspan’s defense, “no one saw it coming” and Bernanke’s admission that monetary policy is no panacea still fresh, some economists, including Brad DeLong, are now asserting that they “have reason to be proud of our analyses over the last five years.” This assertion flies in the face of the fact that macroeconomic policymakers and both “freshwater” and “saltwater” economists had embraced a model (Dynamic Stochastic General Equilibrium) that assumed away the importance/existence of a financial sector. This recasting of recent history would make Orwell proud.

American Pie in the Sky – Roubini - The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending. Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves. Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing. Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability. A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.

Weakness in recent ISI company survey - The ISI Company Survey (conducted by the ISI Group) is a weekly corporate activity indicator, covering some 300 firms. See this document for information on the index methodology.  The overall ISI Index had a significant drop this week from 50.4 to 49.3, the largest one week drop in 18 months. This does not bode well for earnings going forward. One of the weakest spots has been IT spending. The weakness is seen across the board, particularly in businesses that concentrate on Europe and China. The tech index is now at the lows not seen since 2009.Related to this, the ISI survey component that measures US companies' exports to China as well as sales within China hit a new a recent low.  If this continues, the third quarter corporate earnings may be quite weak, particularly across cyclical sectors. It also does not bode well for job growth in the US.

Economists less bullish as early 2012 gains wither - Economists say the sales and profit gains of early this year are disappearing, and they are increasingly pessimistic about short-term growth. They also are gloomy because of the potential impact in the U.S. from Europe's financial crisis, the possible expiration of the Bush tax cuts in December, and the prospect of major cuts in federal spending. A survey by the National Association for Business Economics released Monday also found less evidence of hiring, confirming the trend in recent monthly jobs reports from the government. In the quarterly survey of 67 economists who work for companies or industry trade groups, 22 percent reported rising employment in July, down from about 30 percent in the last three surveys and 42 percent a year ago. On the positive side, only 9 percent said employment was falling. The rest said it was unchanged. Just 39 percent of the economists surveyed reported rising sales at their companies in July, down from 60 percent in April. There was a similar trend on corporate profit margins, with 29 percent reporting rising margins in July, compared with 40 percent in April. "The survey results suggest worsening economic conditions,"

Growth Forecasts Revised Down Near Slow Speed - On Monday, the government reported a 0.5% drop in retail sales, which thwarted economists’ expectation sales would rise by 0.2% for the month. With auto sales stripped out of the June number, things were only marginally better last month, with sales down an unwelcome 0.4%. The last time retail sales took a quarter-long skid was in 2008, as the financial crisis was in full swing and the economy was in a recession that spanned from December 2007 to June 2009. Economists reacted to the retail-spending report by cutting their estimates of the second-quarter gross domestic product. “I have been near the bottom of the range of estimates on Q2 GDP for the last month or two and it seems like we are all chasing the data lower,” Ahead of the retail spending report, the economist said he had growth pegged at an anemic 1%, but now “the awful retail sales figures coupled with somewhat higher-than-expected inventories tally” has pushed the estimate to a 0.6% rise, he said. Others weren’t as pessimistic, but that doesn’t mean they were forecasting anything great. Goldman Sachs told clients their estimate for the period has been lowered by two tenths of a percent to 1.1%. Deutsche Bank pushed their estimate for the period from 1.4% to 1%. Many economists believe the economy has to grow at or above 2.5% to generate much in the way of meaningful job growth. The weaker the pace, the more anemic the rate of job creation, and that increases the odds the Federal Reserve will have to act to provide more stimulus to the economy.

Downward Revisions: Q2 GDP Tracking around 1.1% -- From Merrill Lynch:  Today’s weak retail sales report leaves Q2 GDP tracking a meager 1.1%. We expect the economy to remain weak through the rest of the year with growth of only 1.3% in Q3 and 1.0% in Q4. This translates to GDP growth of only 1.3% Q4/Q4, significantly below the Fed’s forecast of 1.9-2.4%. Via Ezra Klein: Macro advisers: Q2 GDP tracking 1% Nouriel Roubini: US Q2 GDP growth looks like 1.2% at best ... Q3 growth could be well below 1% given June sales report and unintended inventory build up. US at stall speed Goldman has lowered their forecast to 1.1% for Q2.

The Sucking Sound of Air Leaving the Economy -  Yves Smith  - What seems to have happened in the last week is that enough “unexpected” data releases, accompanied by a “recession is on” call by the widely-read ECRI, have led some analysts who were on the recovery side of the fence to rethink their view. The ISM manufacturing index went into contractionary territory in June. Some commentators tried arguing that the weak jobs release of last week really wasn’t so bad, since it showed an increase in hours worked and more temp hiring, which they argued would be converted to permanent jobs. But a report by the National Association for Business Economics undermined that hope. Its survey showed that companies had cut their hiring plans. 39% of the respondents intended to add staff in the next six months back in March; as of June, that’s fallen to 23%. continuing bad manufacturing results out of Europe, an “unexpected” 0.5% fall in retail sales (the third monthly decline in a row, and April’s negative result was revised downward) show a broader picture of serious weakness (note Michael Shedlock’s early warning on a sharp falloff in auto sales). Some analysts expected spending to get a boost as gas prices fell, but the one-two punch of a mild winter (less snow) and a scorcher summer means higher food prices, which may substantially offset the relief provided by lower fuel costs. This grim news comes as the IMF trimmed its growth outlook a tad, but warned that “rapid policy action” was needed to keep things on track. Of course, some of the increased willingness to use the “R” word is the usual suspects, like Bill Gross, trying to increase pressure on the Fed to Do Something.  Nouriel Roubini is predicting 1.2% growth at best for the second quarter. Ed Harrison pointed out on his Credit Writedowns Pro service that manufacturing ex autos is already in recession and that inventory building on the basis of the expectation of continued demand is the only thing that is keeping the US out of an actual recession. We’ve had falling disposable income with households initially treated as a blip (they went into savings and/or increased credit card debt). But as Ed also points out, without a change in incomes, you eventually see the decline translate into a fall in retail sales. And that’s where we seem to be now.

More Signs Of Weakness In The Economy - On top of yesterday’s disappointing Retail Sales report comes a new estimate of economic growth from J.P. Morgan Chase that suggests that the economy is going to incredibly sluggish at best for the rest of the year: This morning we lowered our tracking of Q2 GDP growth from 1.7% to 1.4%. For some time now we have noted that our Q3 GDP call — which was already below consensus at 2.0% — had risks that were skewed to the downside. After the latest round of data we have decided to lower our projection for Q3 to 1.5%. The strength in inventories reported this morning suggests that businesses may have got caught offsides when final demand weakened this past spring. That inventory build should weigh on production growth in the third quarter as already-cautious businesses seek to work down stockpiles. Added to this downside, the weakness in June real consumer spending will make the arithmetic for Q3 consumption a little more challenging. Finally, the decline in gasoline prices — which had been seen as an important support to the economy — has partly reversed itself in recent weeks, thereby lessening the impetus to growth from that source. For 2012 as a whole, we are now looking for growth of around 1.7% on a Q4/Q4 basis, about the same as last year and 0.2%-point below our tracking last week. On a year-ago basis real GDP has been growing at a below-trend pace since early last year. If our forecast is anywhere near correct, that pattern will persist for at least another year, and perhaps even longer.

Index of US Leading Indicators Falls More Than Forecast - The index of U.S. leading economic indicators fell more than forecast in June, a sign the U.S. economic expansion is slowing.  The Conferences Board’s gauge of the outlook for the next three to six months decreased 0.3 percent after a revised 0.4 percent increase in May, the New York-based group said today. Economists projected the gauge would drop by 0.1 percent, according to the median estimate in a Bloomberg News survey.  Retail sales unexpectedly declined in June for a third straight month, indicating that slow progress in job creation is holding back consumer spending, which accounts for about 70 percent of the economy. Federal Reserve Chairman Ben S. Bernanke said July 17 that progress in reducing unemployment is likely to be “frustratingly slow.” “This is consistent with a stall-speed expansion,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who correctly forecast the decline. “We’ve certainly lost momentum in the last month whether you’re looking at employment, retail sales, industrial production -- all these major components have deteriorated.”

Conference Board LEI: ''Sustained Weak Growth Through the Fall'' -  The index declined 0.3 percent to 95.6 (2004 = 100), following a 0.4 percent increase in May, and a 0.1 percent decline in April. The consensus had been for a 0.2 percent change. Particularly striking was the subtitle to today's press release: "Indicators Point to Sustained Weak Growth Through the Fall". Here is the overview of today's release from the LEI technical notes:The Conference Board LEI for the U.S. declined for a second time this year in June. Weakness in new orders, consumer expectations and building permits contributed to this month's decline. In the six-month period ending June 2012, the leading economic index increased 1.0 percent (about a 1.9 percent annual rate), faster than the growth of 0.5 percent (about a 1.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become less widespread in recent months.  [Full notes in PDF format] Here a chart of the LEI series with documented recessions as identified by the NBER.For a more details on the latest data, here is an excerpt from the press release: "The U.S. LEI declined in two of the last six months, and its six-month growth rate has eased in the last three months. The strengths among the leading indicators have become less widespread as consumer expectations and manufacturing new orders offset gains in the financial, labor, and construction-related components. Meanwhile, the coincident economic index, a measure of current economic conditions, has risen slowly but steadily in the last three months."

Gross Says U.S. Nearing Recession as BlackRock Sees Fed Step - Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said the U.S. is approaching a recession as BlackRock Inc. (BLK) expects the Federal Reserve to take more steps to support growth.  Five-year Treasury yields slid to a record 0.577 percent yesterday after an unexpected drop in U.S. retail sales rekindled speculation Fed Chairman Ben S. Bernanke will use testimony today to hint at further monetary easing. That followed data earlier this month showing American employers added fewer-than-estimated workers to payrolls. Goldman Sachs Group Inc. (GS) and Deutsche Bank AG cut forecasts for U.S. growth.

Home Sales to Factories Signal Second-Half Weakness: Economy - Sales of existing U.S. homes unexpectedly dropped and manufacturing in the Philadelphia region contracted for a third month, showing economic weakness is extending into the second half of the year.  Home purchases slid 5.4 percent in June to a 4.37 million annual rate, an eight-month low, figures from the National Association of Realtors showed today in Washington. The Federal Reserve Bank of Philadelphia’s general economic index was minus 12.9 in July after minus 16.6 the month before. Readings of less than zero signal contraction.  The figures underscore Fed Chairman Ben S. Bernanke’s concerns that growth may be too feeble to reduce unemployment stuck above 8 percent since February 2009. Other reports today showed consumer confidence weakened, claims for unemployment benefits rose and an index of leading economic indicators declined more than forecast.

Across Industries and Indexes, Signs of a Slowing U.S. Economy - Americans bought fewer homes in June than in May, manufacturing in the Federal Reserve’s Philadelphia region contracted for a third consecutive month, and the number of Americans seeking unemployment benefits rose last week.  The National Association of Realtors said on Thursday that sales of previously occupied homes fell 5.4 percent from May to June to a seasonally adjusted annual rate of 4.37 million homes — the fewest since October. Compared with a year ago, sales are up 4.5 percent. But the annual sales pace is well below the six million that economists consider healthy. The few pieces of good economic news lately have been confined mainly to housing. On Wednesday, for example, the government said builders broke ground last month on the most homes in nearly four years.  Manufacturing in the Philadelphia region contracted for the third consecutive month in July, a sign of further feebleness in the economy. But some analysts say the report mostly reflects a regional slowdown. The Federal Reserve Bank of Philadelphia says its index of regional manufacturing activity rose to minus 12.9, up from minus 16.6 in June. Any reading below zero indicates a contraction. Some parts of the report improved. New orders and shipments rose, though both remained negative. An index measuring employment dropped sharply from 1.8 to minus 8.4.

Economists Expect Growth in Second Quarter Was Weak 1.2% - Monthly data indicate economic activity was weak last quarter. Just how weak will be known when the first look at gross domestic product is released next Friday. Economists surveyed by Dow Jones Newswires expect real GDP to have grown at an annual rate of just 1.2% last quarter, down from the tepid 1.9% in the first quarter. The expected rate would be the slowest growth since 0.4% posted in the first quarter of 2011. Data available so far suggest most major sectors–including consumer and business spending, exports, and inventories–grew sluggishly or not at all last quarter. The only bright spot may be residential construction, but that accounts for a very small share of GDP.

Why the bright spot in housing won't save the economy - As economic recessions go, it was widely believed that once the housing market recovered, new construction, home sales, and the like would drive growth across the broader economy. This happened in the U.S. during economic downturns in the 1970s, 80s, and 90s. This time around, don't hold your breath. "The recovery is going to work in reverse," says Paul Edelstein, financial economics director at IHS Global Insight. "The rest of the economy is going to have to pick up before housing does." Over the last few months, the U.S. housing market, though still fragile, has outperformed expectations: Home prices have risen; spending on home construction and home improvements has picked up; in July, home builders' confidence took its biggest jump in nearly a decade, according to the National Association of Homebuilders. Following most previous recessions, a rebound in the housing market signaled stronger economic growth ahead. Admittedly, home construction makes up only roughly 2% of the nation's economy, but it has typically been among the first sectors to pick up following a recession. An average of roughly 50 jobs are created for every home that goes up, says Edelstein, adding that construction stimulates other industries, from lumber to metals to retail. But as Federal Reserve Chairman Ben Bernanke testified before Congress this week, the economy hasn't gotten any better. And it likely won't for a while, even if the housing market shows signs of a turnaround.

U.S. economic fears shift from Europe toward ‘fiscal cliff’ - The main threat to the economy is shifting from what others may do to us to what we are doing to ourselves. For much of the year, economists worried about the impact of the slowdown in Europe on the U.S. economy. Now, analysts say anxiety about the impact of the fast-approaching fiscal cliff — the series of federal spending cuts and tax hikes set to take effect at the beginning of 2013 if Congress and the Obama administration do not act — is displacing Europe as the primary threat to the nation’s sputtering economy.Morgan Stanley said this week that concerns about the fiscal cliff are reaching new heights across a wide range of industries. It is already seeing reductions in business orders and hiring, among other areas. “While our analysts are somewhat less worried about the impact of European bank strains,” a Morgan Stanley report said Monday, “the negative impact of fiscal cliff uncertainty is becoming more widespread.” The potential economic impact could smother the flickering recovery and further stifle job creation, analysts warn.

From Eurozone to US "fiscal cliff" - a shift in sentiment  --- Google Insights for Search continues to be a good tool to track trends in issues that concern the public. Here are two key recent trends:
1. The number of searches for the term "euro" spiked in June but had since declined.
2. The term "fiscal cliff" (discussed here) on the other hand certainly caught the public's attention recently.
Other similar search terms that show a "breakout" (spike) in search are:  This demonstrates a clear shift from concerns over the Eurozone crisis toward the situation in the US. And US-based issues will have a larger impact on the US economy. This new uncertainty over the fiscal cliff's impact may already be feeding through into consumer confidence (chart below).  And analysts are now seeing this shift feed through into the US corporate sector. Washington Post: - For much of the year, economists worried about the impact of the slowdown in Europe on the U.S. economy. Now, analysts say anxiety about the impact of the fast-approaching fiscal cliff — the series of federal spending cuts and tax hikes set to take effect at the beginning of 2013 if Congress and the Obama administration do not act — is displacing Europe as the primary threat to the nation’s sputtering economy.  Morgan Stanley said this week that concerns about the fiscal cliff are reaching new heights across a wide range of industries. It is already seeing reductions in business orders and hiring, among other areas.

Government Spending and the Economy - In a recent post, my colleague Casey Mulligan, who has been a critic of federal stimulus spending, made an important point about that spending – whether it is stimulative or not depends vitally on its composition. Government purchases – consumption and investment spending – add to growth, he said, but transfer payments do not. I wish to examine this point further. To begin with, all data on economic growth come from something called the National Income and Product Accounts, a large, complex and interconnected accounting of everything we can measure that affects growth. The summary statistic that comes from this data is the gross domestic product. It has its faults, to be sure, but it is the best single figure we have to tell us how well we are doing, economically. The principal categories that constitute G.D.P. are personal consumption expenditures, gross private domestic investment, government consumption and investment (federal, state and local), and net exports (exports minus imports). A change in any one of these categories has the same effect on G.D.P. as a change in any other. Thus, $1 of spending by individuals is the same as $1 of investment by businesses, $1 of exports or $1 less of imports, or $1 of either consumption or investment at any level of government.

Will Cutting Back on Government Help the American People? -- Chief Executive Magazine annually surveys CEOs about the best and worst American states for doing business. America's CEOs consider: Texas, Florida, North Carolina, Tennessee and Indiana the Five Best for Business States (BfB); and Michigan, Massachusetts, Illinois, New York and California the Five Worst for Business States (WfB). The survey's rankings have been stable over long periods. Massachusetts, for example, has been known as a high tax, heavily-regulated state for at least the last forty years. According to the survey, America's BfB have what America's CEOs want -- smaller government, low taxes and business-friendly regulations. The BfB clearly have lower taxes and smaller government with an average per capita state tax of $1,843, compared to the WfB at $2,520. So, let's examine whether smaller government is better for Americans.  CEOs, paradoxically, prefer to live and work in the high tax, heavily-regulated WfB. Of the Fortune 500 companies, 165 are headquartered in the WfB, while only about 100 are headquartered in the BfB. Among America's 50 fastest growing corporations, about twice as many have headquarters in the WfB, as in the BfB. Even CEO Romney selected Massachusetts (ranked 47th on the survey) for Bain Capital's headquarters, and it's where he's lived (on and off) for the last 30ish years.

The Problem In A Nutshell: Annualized GDP Growth Of 1%; Annualized US Debt Growth of 21% - While economists may waste lots of hot air debating this, that and the other about the future growth trajectory of the US economy, in the aftermath of Goldman's cut of US GDP to just a 1.1% annualized rate of growth. And with the fiscal cliff, debt ceiling, Europe, China, and a plethora of other unknowns up ahead, this number will certainly decline further. Now here lies the rub: as the chart below shows total US marketable debt has doubled in the past 4 years, or an annualized growth rate of just above 21%. And as Zero Hedge has shown before, total US Debt/GDP is on the verge of crossing 102%, the highest since WWII. Simply said, the divergence between the two data series will only accelerate as every incremental dollar of debt generates ever less bank for the GDP buck. And that, from a "sustainability" perspective, is what the problem is in a nutshell

Foreign holdings of US debt hit record high - Foreign demand for U.S. Treasury securities rose to a record level in May. China, the largest buyer of Treasury debt, increased its holdings for the second straight month. The Treasury Department says total foreign holdings rose 1 percent to $5.26 trillion. It was the fifth straight monthly increase. Demand for U.S. debt is rising largely because investors are worried about Europe's worsening debt crisis and its impact on the global economy. U.S. government debt is considered one of the safest investments. The report suggests that foreign investors and governments, which are big buyers of U.S. debt, aren't worried about large U.S. budget deficits. Nor do they appear concerned about last year's downgrading of U.S. long-term credit by rating agency Standard & Poor's. China increased its holdings 0.4 percent in May to $1.17 trillion. That followed a 1.8 percent rise in April and 1 percent drop in March. Japan, the second-largest buyer of Treasury debt, boosted its holdings 1.4 percent to $1.1 trillion. Brazil, the third-largest holder, cut its holdings 1 percent to $243.4 billion. And Britain increased its ownership of U.S. debt 18.6 percent to $161.1 billion.

The 5yr treasury yield hits a record low - The recent compression in US treasury yields has been nothing short of extraordinary. Driven by the full realization that we are in a global slowdown, the 5-year hit a record low today of just under 0.6%, following a decline that has been ongoing for decades. WSJ: - U.S. Treasury yields fell to the brink of new all-time lows [the 5-year is in fact at an all-time low today, but the WSJ reporter seems to only track the 10yr] as concerns about a U.S. economic slowdown spurred demand for financial safety, extending the market's rally this month.  The benchmark 10-year note yielded as little as 1.440% midday, a hair away from its 1.437% record low set on June 1 after a weak employment report. The yield on five-year notes sank as low as 0.577%, a new record for that maturity. Bond yields fall when prices rise. A retail industry report early Monday showed sales falling for the third consecutive month in June, stoking fears about a snag in the U.S. recovery. Consumer spending, a crux of the U.S. economy, remains constrained by high unemployment and households' efforts to work off debt. "Clearly things are slowing down, more so than most had expected," . "For a while, everyone was focused just on Europe. Now we're seeing the slowdown here and in China—major drivers of global growth."

What to Say About the Low Yields? - Correlation is not causation, of course, but I’m beginning to suspect that there might be some operational relationship between the frequency with which you hear people complaining about the crippling burden of government debt, and a fall in the cost of government borrowing. Last week the Financial Times reported that investors had accepted “the lowest yields ever for 10-year paper in a US Treasury auction.”  Right on schedule, the Washington Post announced yesterday that a shiny new campaign, organized by former politicians and business leaders, has been put together to tackle the clear and present dangers of government debt, advocating “a far-reaching plan to raise taxes, cut popular retirement programs and tame the national debt.” To be fair, it seems there is always a new campaign being announced for taming the national debt (this particular initiative features some plucky newcomers named Erskine Bowles and Alan Simpson).  But there are problems with the projections underlying these arguments about the long-term unsustainability of federal debt.  And in the short run, it’s becoming increasingly difficult to understand what problem is supposed to be solved by decreasing government borrowing.

Treasury Auctions 10-Year TIPS at Record Low Negative Yield - The Treasury sold $15 billion in 10- year inflation-indexed notes at a record negative yield as investors sought a hedge against rising consumer prices amid speculation the Federal Reserve will add more stimulus.  The Treasury Inflation Protected Securities, or TIPS, were sold at a so-called high yield of negative 0.637 percent, the fourth consecutive auction of the securities where investors were willing to pay the U.S. to hold their principal. Five-year TIPS have also been sold at negative yields at the past five auctions of the securities.  The securities pay interest at lower rates than regular Treasuries on a principal amount that’s adjusted based on the Labor Department’s consumer price index.

Implied US real long-term rates moving deeper into negative territory - The chart below compares the 10-year zero coupon US treasury yield with the 10-year zero coupon inflation swap rate. The difference is the implied 10-year zero coupon real rate (h/t Greg Trotter who will be writing a guest post on the topic) - which is becoming increasingly negative. We are not in a stagflation environment yet, but this indicator is certainly starting to point in that direction. Just to put things on perspective, the CRB Commodity Index broke through 300 today and is now up 14% from the lows. As inflation expectations pick up (due to increasing rents and rising commodity prices), this push into the negative real rate territory is only going to get worse.

Treasuries Update: More Historic Low Yields - The eurozone debt crisis is back on the front burner. European indexes plunged today as Spanish yields soared back above 7%. US markets also retreated, but more dramatic was the drop in US Treasury yields to new or near new lows. The 5-year closed at an all-time low of 0.59 and the 3-year tied its all-time low of 0.29. The 10- and 30-year instruments are both two basis points above its record closing low, and the 20-year is four basis points above its low. As for the Fed's, Operation Twist, here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of program. The 30-year fixed mortgage, according to the latest Freddie Mac weekly survey, is at 3.53, another all-time low. That probably suits the Fed just fine. But, as for loans to small businesses, the Fed strategy is a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report: Ninety-three (93) percent of all owners reported that all their credit needs were met or that they were not interested in borrowing.  The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed's website for the FFR.

Debt Doomsday 4 Years Away for Biggest Treasuries Owner Vanguard -- Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of U.S. debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates. “In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough,”’  The U.S. has avoided the turmoil rocking Europe, where five nations have sought bailouts as their borrowing costs soared because investors boycotted their bonds. Instead, they have sought U.S. assets as a haven because of the dollar’s status as the world’s primary reserve currency, pushing note yields to record lows even though the amount of public debt outstanding has grown to $15.9 trillion from less than $9 trillion in 2007. Demand for U.S. bonds and the dollar has bolstered President Barack Obama’s ability to fund a budget deficit forecast to exceed $1 trillion for the fourth straight year, and helped Federal Reserve Chairman Ben S. Bernanke’s efforts to keep borrowing cost low. The greenback makes up 62.2 percent of all currency reserves, compared with 24.9 percent for the euro, according to the International Monetary Fund in Washington.

OMB's Stockman: "We're At The Fiscal Endgame" - To those on the hill and elsewhere who suggest this growing 'fiscal cliff' and 'debt ceiling' crisis will all get solved, former Office of Management and Budget (OMB) Director David Stockman tells Bloomberg TV that "they will punt, punt, punt and kick the can with partial solutions driven by eleventh hour crisis-based extensions that will go on for the whole of the next term!" When asked whether this economy will be mired in the doldrums, he rather ominously states "it will be worse, because we will be in recession" and notes that when the lame ducks re-look at the budget numbers with a realistic recession (instead of the current assumption of no recession within 12 years) it will be far worse and in a political environment where 'we cannot possibly raise taxes - and we cannot possibly cut spending'. With a 78% disapproval rating for the 'do nothing' Congress, Stockman is surprised that 16% somehow approve - approve of what? His warning is that unlike in past periods, today "we are completely paralyzed, there is an ideological divide on taxes and entitlement like we've never had before" and while he realizes that "the debt problem doesn't become a debt problem until the market suddenly have a wake up call and realize that if the Fed doesn't keep printing, it's game over."

Deficit Scolds Form New Rock Supergroup - All the uncertainty around fiscal issues has convinced the group of Washington mandarins who have been trying to undermine the social safety net in service to reducing the deficit that this is the moment to strike. Practically everyone affiliated with a commission that could earn the appellation “cat food” over the past several years has joined forces, rock-supergroup style, with broad support from Georgetown to slightly east of Georgetown, to “fix the debt.” America faces a pivotal moment in its history.  For several years, the federal government has relied on a series of temporary patches and one-year extensions in lieu of a thoughtful economic policy—while amassing trillion dollar annual deficits for the first time ever.  Washington now borrows 40 cents of every dollar spent.And Americans are increasingly dismayed at the seeming inability of our elected leaders to put aside party divisions and do what needs to be done to get our fiscal house in order. The Committee for a Repsonsible Federal Budget is the nominal sponsor of this campaign, but supporters include Erskine Bowles, Judd Gregg (who has magically replaced Alan Simpson, like a new Darren on Bewitched, as the right-leaning deficit scold leading the campaign), Ed Rendell, Honeywell CEO David Cote, CRFB President Maya MacGuineas, former Senator Sam Nunn, longtime deficit scold and funder of multiple catfood commissions Pete Peterson, Steve Rattner, Alice Rivlin, former World Bank President Robert Zoellick, and more. You get your “serious” badge on Foursquare when you sign up to be part of this group. This campaign posits a terrifying future that doesn’t exist. The US can currently borrow at a negative interest rate.  The number one necessity of any policymaker right now should be to put people back to work, not obsess over the debt/GDP ratio two decades from now. What’s more, there’s no constituency in the country for deficit obsession and safety-net reduction

The five serious flaws of Bowles-Simpson - Yesterday, a selection of past members of the Bowles-Simpson commission, anti-deficit groups like the Peterson Foundation and the Committee for a Responsible Federal Budget, and a handful of retired politicians launched the Fix the Debt Campaign in order to push a deficit reduction package in line with the original Bowles-Simpson framework (full disclosure: I served on the Bowles-Simpson commission staff in fall 2010). The event was characterized by high-minded rhetoric about coming together and solving problems and little in the way of specific policies, a reflection of the fact that in the year-and-a-half since its initial release, the Bowles-Simpson proposal has become more a symbol of seriousness and bipartisanship than an actual set of discrete recommendations that can be analyzed. This is unfortunate because the proposal itself is pretty detailed, and although it has some good components, it also has some major flaws that—without serious revision—should render it an inappropriate template for deficit reduction.

  • 1) It would weaken the economy by cutting way too fast
  • 2) It had an unbalanced ratio of spending cuts to revenue increases
  • 3) A completely counterproductive and politically-driven revenue cap
  • 4) Inexorable cuts to public investments
  • 5) It would undermine retirement security by cutting Social Security

IMF: Deal with fiscal cliff and debt ceiling soon -- Hit the brakes on the fiscal cliff and hit the gas on raising the debt ceiling. That was the message to Congress from the International Monetary Fund on Monday. The IMF and others have often advised that the United States come up with a serious plan to reduce its debt over time. But the so-called fiscal cliff1 - a series of expiring tax cuts and the onset of a record amount of spending cuts - would be anything but gradual when it comes to deficit reduction. The fiscal cliff includes the expiration of the Bush tax cuts,2 the onset of $1 trillion in blunt spending cuts3, and a reduction in Medicare doctors' pay. If all the provisions go into effect, they would take more than $500 billion out of the economy in 2013 alone. Such an abrupt shift risks pushing the economy into recession4, according to many economists.

The Stunning Political Reality Of The Fiscal Cliff Debate - In his testimony over the last two days, Bernanke has listed the 'fiscal cliff' as one of the two greatest risks to the US economy, along with the situation in Europe, and urged Congress to enact 'earlier rather than later' a plan that achieves 'short-term and long-term objectives,' with the primary short-term objective to adjust the timing of the near-term fiscal contraction "to allow the recovery a little more space to continue." . However, like us, Goldman believes that resolving the two key issues - the fiscal cliff and the need to raise the debt limit - will be more difficult than it was last year, for three reasons: (1) the "easiest" options to lower the deficit have already been adopted, so the remaining options touch more controversial areas than those enacted last year; (2) some members of both parties have indicated that they regret the agreements reached in 2010 and 2011, implying less willingness to compromise this year, and (3) both parties appear to be contemplating strategies that involve allowing most or all of the policies to change at year end, as a means to achieving their ultimate policy goal. Stunning! Sure enough, as debate on the fiscal cliff gets underway in earnest, the tone of rhetoric has predictably worsened. We suspect the only way they will ever agree is after the market makes it clear that any other path is unacceptable.

Large Coalition Fights Trigger Cuts to Discretionary Budget - In the first sign that the battle is being joined against the automatic trigger cuts on the discretionary and not just the defense side of the ledger, 3,000 organizations have banded together in a giant coalition to oppose the measures. “There is bipartisan agreement that sequestration would be devastating to the nation,” the alliance writes in a letter to members of Congress. “The nearly 3,000 undersigned national, state, and local organizations — representing the hundreds of millions of Americans who support and benefit from nondefense discretionary (NDD) programs — couldn’t agree more. Congress and the President must work together to ensure sequestration does not take effect. We strongly urge a balanced approach to deficit reduction that does not include further cuts to NDD programs, which have already done their part to reduce the deficit.” [...] “NDD programs are not the reason behind our growing debt,” the group added. “In fact, even completely eliminating all NDD programs would still not balance the budget. Yet NDD programs have borne the brunt of deficit reduction efforts.”

3000 Organizations Warn Congress: Don’t Roll Us OVer The Fiscal Cliff | TPMDC: When debate in Washington turns to the year-end “fiscal cliff,” it invariably centers on looming cuts to defense programs, and the Bush tax cuts. But billions of dollars in annual funding to domestic programs is also on the line. And because it routinely gets short shrift from the majority of lawmakers, nearly 3,000 organizations that benefit from non-defense discretionary spending, including heavy hitters like AARP, have aligned to push Congress to sort out not just the tax and defense issues, but across the board cuts that threaten medical research, border security and everything in between. “There is bipartisan agreement that sequestration would be devastating to the nation,” the alliance writes in a letter to members of Congress. “The nearly 3,000 undersigned national, state, and local organizations — representing the hundreds of millions of Americans who support and benefit from nondefense discretionary (NDD) programs — couldn’t agree more. Congress and the President must work together to ensure sequestration does not take effect. We strongly urge a balanced approach to deficit reduction that does not include further cuts to NDD programs, which have already done their part to reduce the deficit.” Last year’s debt limit deal created the sequester as a mechanism to force Congress to cut $1.2 trillion from the deficit. But that came on top of nearly $1 trillion in locked-in cuts to domestic programs over the coming decade. The groups say its time for other parts of the budget to take a hit.

Holtz-Eakin: Leap Off Fiscal Cliff = ‘Calamity’ - A new report from a conservative think tank says that jumping off the fiscal cliff would be a “calamity” for the economy, costing as many as 3 million jobs. As concerns about the end-of-year fiscal cliff proliferate, Republicans are likely to seize on the latest numbers to counter Democrats, who are threatening to let Bush-era tax cuts expire if Republicans don’t agree to raise taxes on the wealthy. “This is a 4% of GDP shock, it’s just not something you can play with,” said  Doug Holtz-Eakin, one of the report’s authors. Mr. Holtz-Eakin is president of the American Action Forum and a former director of the nonpartisan Congressional Budget Office and was the top economic adviser to Sen. John McCain during the 2008 presidential campaign.  The report is expected to be released on Wednesday. Some liberals say the concerns are overblown. They argue that the effects of allowing the tax cuts to expire and automatic spending cuts to kick in, while negative, would be gradual.  See, for example, a Center on Budget and Policy Priorities report,  “Failure to Extend Tax Cuts Before January Will Not Plunge Economy into Immediate Recession.” But Mr. Holtz-Eakin says the effects could begin to be felt this year

Democrats threaten to go over ‘fiscal cliff’ if GOP fails to raise taxes - Democrats are making increasingly explicit threats about their willingness to let nearly $600 billion worth of tax hikes and spending cuts take effect in January unless Republicans drop their opposition to higher taxes for the nation’s wealthiest households. Emboldened by signs that GOP resistance to new taxes may be weakening, senior Democrats say they are prepared to weather a fiscal event that could plunge the nation back into recession if the new year arrives without an acceptable compromise. In a speech Monday, Sen. Patty Murray (Wash.), the Senate’s No. 4 Democrat and the leader of the caucus’s campaign arm, plans to make the clearest case yet for going over what some have called the “fiscal cliff.”  “If we can’t get a good deal, a balanced deal that calls on the wealthy to pay their fair share, then I will absolutely continue this debate into 2013,” Murray plans to say, according to excerpts of the speech provided to The Washington Post.  If the tax cuts from the George W. Bush era expire and taxes go up for everyone, the debate will be reset, “Every proposal will be a tax-cut proposal,” according to the excerpts, and Republicans would no longer be “boxed in” by their pledge not to raise taxes.

Report: 2M jobs lost if automatic cuts kick in   -- Automatic cuts in federal spending will cost the economy more than 2 million jobs, from defense contracting to border security to education, if Congress fails to resolve the looming budget crisis, according to an analysis released Tuesday. The study, obtained by The Associated Press, was conducted for the Aerospace Industries Association, but it examined the shared pain for defense and domestic programs from the across-the-board reductions slated to kick in Jan. 2. The cuts would reduce the nation's gross domestic product by $215 billion next year while consumer confidence would plummet, said the report by Dr. Stephen Fuller of George Mason University and Chmura Economics and Analytics. "If they are allowed to occur as currently scheduled, the long-term consequences will permanently alter the course of the U.S. economy's performance, changing its competitive position in the global economy," said the report. The analysis is similar to other cautionary reports that have emerged in recent months from independent organizations that analyze federal spending and the process known in Washington as sequestration. All the reports carry a degree of uncertainty as the government hasn't spelled out where it would make the cuts.

Defense Jobs Disappearing Even Before the Cuts - The House Armed Services Committee on Wednesday provided major defense contractors with another venue to warn that the sequestration budget cuts will cost jobs.  An Aerospace Industries Association-commissioned study released Tuesday claimed more than 1 million defense-related jobs would be lost in the first year alone with states like California, Virginia and Texas absorbing the biggest blows.  But a Fiscal Times survey of Securities and Exchange Commission filings by the largest defense contractors reveals that the government’s massive investment in new weapons systems over the past decade led to only small increases in industry employment. The data suggest the employment effects of reduced budgets may not be as large as predicted by the AIA study. Moreover, while spending on major weapons systems only recently began its post-Iraq and Afghanistan decline, employment at the largest firms in the industry began falling in 2009 or before. That is at least three years before the current round of budget cuts dictated by the Budget Control Act and long before concern about the impact of sequestration.

GOP fears shutdown showdown - Top congressional Republicans are plotting ways to avoid a government shutdown fight when the fiscal year ends Sept. 30, believing the partisan brinkmanship that defined last year’s budget battles would be devastating to their party heading into the November elections. In early September, House Republican leaders want to pass a three-month temporary funding measure that sticks to last year’s debt-limit agreement, according to aides involved with the planning. But that could spark a fight with some House and Senate conservatives who yearn for the lower funding numbers in Rep. Paul Ryan’s budget. “I think somebody does need to stand up and bring it all to a screeching halt,” said Sen. Rand Paul (R-Ky.). “I’m not talking about shutting down the government but having a real debate over spending cuts.” But while higher spending levels might irk conservatives who are itching for a funding fight, it’s aimed at comforting Republicans in both chambers who see political peril in drawing attention away from the economy with a battle that could shut down the government. They’d like for the fight to end quietly this year in the hopes a Republican sweep in November would allow them to freely rewrite spending bills in early 2013.

Republicans May Have Trouble Getting Continuing Resolution for Budget Passed - Stan Collender, one of Washington’s major budget guru, reports that even getting the basic business of Congress done by pre-election deadlines could prove impossible. The basic issue here is that the current budget runs out on September 30. Given the election year, nobody expects a new budget deal by that deadline. However, to keep the basic functions of government running, Congress will need to pass a continuing resolution to push the budget past the election. Collender thinks even a six-week CR, to push into the lame duck session, will be a challenge: Until very recently that date wasn’t considered to be much of an issue. The thinking was that, after the way the GOP took it on the chin politically after the 1995 and 1996 shutdowns and after the drop in Congress’ approval rating after last year’s fight over raising the debt ceiling, House Republicans wouldn’t dare prevent a continuing resolution from being adopted just a month before the elections. They might huff and puff, but blowing the House down and in the process reminding voters only weeks before they go to the polls how unhappy they were last August wasn’t thought of as an especially smart — and, therefore, likely — strategy. That prevailing opinion has begun to change as the political realities of the CR fight become clearer. In particular, there are growing doubts about the House GOP leadership’s ability to control the situation. The issue concerns the level of spending. Democrats want to create a continuing resolution at the level of the spending cap (around $1.047 trillion) agreed to in the debt limit deal of 2011. But conservative Republicans have consistently demanded spending below that cap, arguing that it represented a ceiling for spending, not a floor.

Is Romney The Reason The Tea Party Won't Fight Over A CR in October? - Patrick Caldwell, a writing fellow from American Prospect, sent several interesting questions in response to my post yesterday about how the need for a continuing resolution by October 1 is causing serious angst for Republicans:Caldwell asks:

  • 1. Wouldn't it be a nightmare for the Romney campaign if House Republicans shut down the government the same week as the first presidential debate?
  • 2. Wouldn't a fight over a CR provide an opportunity for Obama to tie Romney with a Republican Party controlled by extremists willing to toy with a precarious economy.
  • 3. Won't Romney's folks promise the tea partiers that, if they just maintain the status quo through January, they'll have free reign and can make further changes under a President Romney?

Yes to all three, but that doesn't mean it won't happen or isn't causing chronic heartburn for the GOP leadership...and the Romney campaign. As I point out in my post, the tea partiers have demonstrated repeatedly that they are not as susceptible to the pressures that previous generations of House and Senate members have been and are more than willing to buck their leadership when they see it as necessary.

A Bill of Goods? Assessing the Transportation Legislation - At a time when the two parties cannot agree on the menu at the Congressional cafeteria, the Republicans and Democrats have found something they can agree on. After three years of debate and nine temporary stopgap extensions, Congress and the President have enacted new transportation authorization legislation. This bill divvies up the gas tax money, plus some miscellaneous revenue from other sources (more on this later), and funds and regulates the federal surface transportation program for the next 27 months.  In many respects, this is a pretty remarkable achievement. Things could have been worse: on the same day that the transportation agreement was announced, the Supreme Court handed down its ruling on healthcare. Compared to the stark partisanship surrounding that issue, when it came to transportation, John Boehner and Harry Reid held hands around the campfire and sang Kumbaya. I won’t go into all the details of this complex legislative compromise. However, one high point is the liberalization of the regulations surrounding tolling on the Interstates, as long as tolls are levied only on new capacity or underused carpool lanes. I’ve made the case for such tolls here and here. If done correctly, they will be a win all-around: for government, for taxpayers, and for drivers—even, believe it or not, for drivers who never choose to use the new tolled lanes. Also, more private sector participation in roads is encouraged, which in principle is a good thing though it is fraught with pitfalls in practice.

How Congress is killing the Post Office - The Post Office’s problems are the same today as they were back in September: the long-term secular decline of postal mail, on the one hand, combined with all manner of Congressionally-mandated restrictions which make a bad situation much, much worse. And now the inevitable has happened: we’re going to have a $5.5 billion default. A default of that magnitude sounds scarier than it actually is. Congress requires the Post Office to make inordinately huge pension-plan payments, for reasons which nobody can really understand. But in the final analysis, USPS pensions are a government obligation, and it doesn’t make a huge amount of difference whether they come out of a well-funded pension plan, a badly-funded pension plan, or just out of US government revenues. What does make a lot of difference is the degree to which the Post Office is hamstrung by Congress. There’s still room for the Postal Service to reorient itself and become a successful 21st-century utility — but the Post Office is broken, in large part thanks to unhelpful meddling by Congress. And it won’t get fixed unless and until Congress gets out of the way and stops forcing it into the corporate equivalent of ketosis, essentially consuming its own flesh in order to survive.

Four Issues with Miles Kimball's “Federal Lines of Credit” Policy Proposal -Economics professor Miles Kimball has a new blog, Confessions of a Supply-Side Liberal. In one of his first posts, he outlines a plan for stimulus that he calls “Federal Lines of Credit” (FLOC). It's presented in a longer policy paper, “Getting the Biggest Bang for the Buck in Fiscal Policy." This has gotten interest across the political spectrum. Bill Greider has written about it in The Nation, as has Reihan Salam in the National Review. What's the idea? Under normal fiscal stimulus policy in a recession, we often send people checks so that they'll spend money and boost aggregate demand. Let's say we are going to, as a result of this current recession, send everyone $200. Kimball writes, "What if instead of giving each taxpayer a $200 tax rebate, each taxpayer is mailed a government-issued credit card with a $2,000 line of credit?" What's the advantage here, especially over, say, giving people $2,000? "[B]ecause taxpayers have to pay back whatever they borrow in their monthly withholding taxes, the cost to the government in the end—and therefore the ultimate addition to the national debt—should be smaller. Since the main thing holding back the size of fiscal stimulus in our current situation has been concerns about adding to the national debt, getting more stimulus per dollar added to the national debt is getting more bang for the buck." Let's kick the tires of this policy. There's a lot to like about the proposal, particularly how it could be used after a recession is over to provide high-quality government services to the under-banked or those who find financial services yet another way in which it is expensive to be poor (modified, it turns right into Steve Waldman's Treasury Express idea).

Tax Loopholes Block Efforts to Close U.S. Deficit - As a member of the “Gang of Six,” Senator Mike Crapo of Idaho has emerged as something of a hero among advocates of bipartisanship, one of three conservative Republicans working with three Democrats to cut the deficit by closing loopholes that allow businesses and households to avoid paying taxes. Yet earlier this year, the senator made sure that a $3 billion loophole — protecting “black liquor,” an alcoholic sludge used as fuel in timber mills and factories — remained open in the negotiations over the highway bill that President Obama signed this month. Many budget experts criticize the loophole as a tax dodge because it allows the sludge to qualify for an energy subsidy created to wean the country off imported oil for vehicles, which black liquor does not do.  On Capitol Hill, lawmakers casually point to closing loopholes as the answer to much that ails the country. Negotiations to avoid automatic military spending cuts in January, to enact sweeping deficit reduction and to lower corporate and personal income tax rates all hinge on closing unidentified loopholes.  But the back-room actions on black liquor point to just how difficult it will be to lower the budget deficit through painless changes in the tax code. Even for a self-proclaimed deficit hawk like Mr. Crapo, one man’s loophole can be another’s vital constituent interest.

How Washington Can Turn a Tax Increase into a Tax Cut by Leaping Off the Fiscal Cliff - In the strange alchemy of Washington, Congress can magically turn a tax increase into a tax cut.  And to make it happen, all it has to do is…nothing.   Yesterday, Senator Patty Murray (D-WA) told an audience at the Brookings Institution that she would prefer to let the government tumble over the fiscal cliff at the end of the year rather than accept a deficit reduction plan built on spending cuts only. Murray—a senior Senate Democrat who speaks for her party’s leadership — argued it would be better to allow the 2001/2003/2010 tax cuts to expire and let automatic spending increases kick in as scheduled rather than extend those tax cuts for the highest income households.    No doubt, much of this is political posturing. With Republicans increasingly worried about the impact of those end-of-the year reductions in defense spending, and with the GOP’s presumptive presidential nominee Mitt Romney suffering through a rough patch, Democrats such as Murray may feel emboldened to raise the fiscal threat level to DEFCON 2. But this is also about the arcana of budget baselines–where by waiting a few minutes on New Year’s Eve, Congress can entirely reframe the fiscal debate.

Karl Smith: Why Is The US Government Still Collecting Taxes? THE DEFICIT EARNS A PROFIT!!! - I hesitate to excerpt from this because it says it all so well and so briefly. But: …the more taxes the US government collects, the more money it loses. When the US government declines to sell a 10 year Treasury bill at a real rate interest rate of –0.57 percent it is agreeing to pay, to the bond market a fixed rate of 0.57 percent over the next ten years. … Now you say, sure but interest rates can turn [on] you. And, they absolutely can. But, at minimum you must recognize that you are arguing that the US government enter into an interest rate swap with the Global Financial system because [you that] your intuition about the path of interest rates is superior to that of the Global Bond Market. … And, be aware, the Counterparty in this swap is folks like Goldman Sachs, JP Morgan, Morgan Stanley, and yes Barclay Capital. Are you sure that you want to buy this swap?

Full Text: Business Roundtable Calls for Extension of Tax Rates -- Congress and the White House must begin now to resolve fundamental fiscal and tax issues confronting America. The current political paralysis hindering principled compromise has fueled needless economic uncertainty that impedes a more robust economic recovery. Without effective action soon, this uncertainty will spawn a dangerous crisis, threatening our economy, businesses and workers. We are seeing already the negative effects from this situation. In June, Business Roundtable (BRT) released its quarterly CEO Economic Outlook Survey, which for the second straight quarter showed lower CEO expectations for sales, capital spending and U.S. hiring over the next six months. The responses of the 164 CEOs underlined our message: Washington inaction is generating uncertainty that is dampening U.S. economic growth and job creation.

Top 2% Not Job Creators or Millionaires in Tax Debate - President Barack Obama describes them as “millionaires and billionaires” who can afford to pay higher taxes. Republicans call them “job creators” who need to keep their money so they can hire more workers.As the Democratic president and his Republican opponents debate whether to extend the George W. Bush-era tax cuts for the top 2 percent of U.S. taxpayers -- individuals earning more than $200,000 a year and married couples making more than $250,000 -- their poll-tested phrases obscure the truth about who would be affected. They are two-earner professional couples living on the East and West Coasts, doctors, lawyers, engineers and Wall Street executives. Few are billionaires or earn more than $1 million a year, and most are not employers. “The 2 percent, they’re people who are successful in their professions, but they’re not the absolute rock stars,” said Leonard Burman, an economist at Syracuse University in New York. “There’s a big difference between the 99th percentile and the 99.9th.”

Credits for Children - Unless Congress takes action before the end of the year, the child tax credit (currently $1,000 a child) will be cut in half when other Bush-era tax policies formally lapse. Like the earned-income tax credit, which offers considerably more assistance to parents than other earners, the child tax credit enjoys fairly strong bipartisan support, and some conservatives have proposed increases to it. Yet both tax credits show scars of partisan sparring over what kinds of behavior deserve public support and send mixed signals regarding the value of parental contributions. Debate over family tax reform should be part of a larger effort to reconsider family policy in the United States. Currently, the federal tax code subsidizes home ownership about as much as parenting. According to the Joint Committee on Taxation, the total cost of lost revenues from the mortgage interest tax deduction and the exclusion of capital gains on principal residences is estimated at about $110 billion for 2011. The combined cost of the child tax credit and the earned-income tax credit comes to about $77 billion. Add in an estimate of the cost of the dependent exemption and the total comes to about $107 billion.

Why the Mortgage Interest Deduction is Terrible - There are few tax breaks more beloved than the mortgage interest deduction. It's the IRS's way of paying you to buy a house -- by letting you deduct your mortgage interest payments from your taxable income. There are also few tax breaks more wasteful than the mortgage interest deduction. The chart below, numbers courtesy of the Tax Policy Center, puts the mortgage-interest deduction into nice pictorial perspective. It shows what percent of the total dollar value of the deduction goes to different income groups. Although it's debatable how many "different" groups really benefit. A whopping 75 percent of this 12-figure deduction goes to the top 20 percent of earners. (Note: I calculated which income groups fit into which percentile with this handy calculator from Phil Izzo of the Wall Street Journal. In dollar figures, the bottom 56 percent make $50,000 and less; the 57-80 percent make between $50,000-$100,000; the 81-94 percent make $100,000-$200,000; the 95-98 percent make $200,000-$500,000; and the 1 percent make $500,000 and up.)

Is the Noose Closing Around Romney's Tax Returns? - Calls have mounted from Republicans for Romney to release his tax returns, yet as of last night Romney was standing firm that he would not release any besides 2010 and (so-far estimated) 2011. The most interesting development to me is that speculation on what could possibly be so bad in the returns is narrowing down to one year, 2009. Dan Shaviro (via TaxProf Blog) makes three points:

1) We know from the 2010 tax return, in which he had a net capital loss carryforward from 2009, that he zeroed out his net capital gains - including from carried interest Bain income - in 2009.
2) 2009 was the last year in which he received certain Bain payments as the playout of his "retroactive retirement."
3) It's been hard to understand what benefit he thought he was getting from the Swiss bank account, and there was an IRS amnesty program in 2009 for fraudulent nondisclosure of offshore income.  If he had to come clean in 2009, this might be embarrassing, especially given that there was an iron fist inside the IRS leniency offer (i.e., if you held out, they might get you without any amnesty).

So it is possible that Romney had a high income, but an even lower tax rate in 2009 than 2010--maybe even zero. The other possibility is that he got caught up in having an undeclared offshore account and took the IRS amnesty in 2009. Matthew Yglesias also thinks the IRS amnesty program could be the answer:

The Class-Warfare Election - Krugman - Just a reminder of what the two candidates are, in fact, advocating. From Ezra Klein: Now, this is only for the specifics Romney has announced; he claims that he will make up for the large revenue losses under his plan (Obama gains revenue) by closing loopholes. But he refuses to say which, and the clear reality is that he’s talking through his hat. Meanwhile, Romney also proposes severe cuts in Medicaid, and his party wants big cuts in other safety-net programs. So like it or not, we have an election in which one candidate is proposing a redistribution from the top — which is currently paying lower taxes than it has in 80 years — downward, mainly to lower-income workers, while the other is proposing a large redistribution from the poor and the middle class to the top. So the next time someone tut-tuts about “class warfare”, remember that the class war is already happening, in real policy — with the top .01 percent on offense.

America’s grand tax lie - For all the superheated rhetoric of yet another election cycle, it's as clear as ever that the Republican and Democratic parties in Washington pretty much support the same economic policies. Indeed, any honest perusal of congressional votes proves that the party establishments are roughly the same when it comes to financial deregulation (less of it), job-killing free trade (more of it), bailouts (more of them) and corporate taxes (less of them).  Politicians and partisan media outlets deny this obvious reality, of course. But they do so because they have a vested interest in the red-versus-blue “polarization” narrative from which they generate campaign contributions and ratings, respectively. This is why their hysterical attacks on their foes — and their refusal to acknowledge the political duopoly — has such a grating “doth protest too much” quality. It’s also why more Americans are wholly tuning out of politics — we’re less and less interested in gazing at two heads of the same economic monster. That said, if you are still gullible enough to believe the illusion of huge differences on economics, behold the “debate” over taxes that is now roiling the presidential race.

U.S. Speeds Its Selloff of Bailout Securities - The U.S. government is speeding up efforts to sell billions of dollars of remaining assets that were acquired in the controversial bailout of the financial system four years ago, according to investors and government officials. The Treasury Department and Federal Reserve are planning to sell assets ranging from bank shares to troubled mortgage securities as part of a final push to extricate the government from the aid doled out in the financial meltdown. Some of the biggest names on Wall Street—including Blackstone Group LP, Allianz SE's Pacific Investment Management Co., Fortress Investment Group LLC and Oaktree Capital Management LP—are eyeing some of the assets..

FOIA docs reveal Treasury officials cited for soliciting prostitutes, accepting gifts - Treasury Department officials have been cited for soliciting prostitutes, breaking conflict-of-interest rules and accepting gifts from corporate executives, according to the findings of official government investigations.  The revelations of unethical behavior at Treasury are detailed in little-noticed documents posted this month on, which publishes agency responses to Freedom of Information Act (FOIA) requests.  While it is not uncommon for departments within the executive branch to have personnel issues, it is unusual for these types of documents to become public. They provide a rare glimpse of internal probes within the Treasury Department, exposing different episodes of misconduct.  Investigators at the Treasury's Office of Inspector General (OIG), which responds to tips and official referrals from within the department, found that employees had engaged in unethical, and perhaps criminal, conduct.

Letter to the Editor: Deputy General Counsel Responds to Reports on Isolated Incidents of Misconduct at Treasury -  Here are the facts.  The Office of the Inspector General (OIG) recently released 11 investigative reports covering conduct that occurred as early as 2000.  In four cases, the OIG concluded that there was no evidence to support the allegations.  In one case, the misconduct was committed by a private citizen (a Treasury office was burglarized).  That leaves six cases in question.  Although any misconduct is unacceptable, this is a small number that does not fairly reflect a Department with tens of thousands of employees. None of the employees at issue were political appointees or senior officials, and there is absolutely no evidence of any pattern or trend.

Treasury Responds, Says Very Few Of Its Officials Use Taxpayer Money To Solicit Hookers So You Must Acquit - From the Treasury: "Here are the facts.  The Office of the Inspector General (OIG) recently released 11 investigative reports covering conduct that occurred as early as 2000.  In four cases, the OIG concluded that there was no evidence to support the allegations.  In one case, the misconduct was committed by a private citizen (a Treasury office was burglarized).  That leaves six cases in question.  Although any misconduct is unacceptable, this is a small number that does not fairly reflect a Department with tens of thousands of employees. None of the employees at issue were political appointees or senior officials, and there is absolutely no evidence of any pattern or trend."

US regulators warn of tri-party repo risk - US financial regulators have taken aim at a key bank funding market, warning of “structural vulnerabilities” that could aggravate systemic risk.The so-called tri-party repo market, in which banks pledge securities as collateral for mostly overnight loans from investors, has concerned regulators for years. The Federal Reserve Bank of New York has been working to reform the system. But in a new report, a panel of US regulators, called the Financial Stability Oversight Council and chaired by the Treasury secretary Tim Geithner, said on Wednesday that industry pledges to reform the system were “unacceptable” and called for greater government involvement. Officials are worried because the market is dependant on two banks to clear the transactions. JPMorgan Chase and Bank of New York Mellon provide temporary credit to help market participants roll these loans over on a daily basis and replace them with new ones. The New York Fed had commissioned an industry taskforce to fix the issues that concerned policy makers the most.  Earlier this year, the taskforce delivered recommendations that failed to deal with the issues effectively and asked for several more years to improve tri-party repo market. FSOC “views this proposed timeline as unacceptable”, the regulators said in their latest annual report on the US financial system.

Sheila Bair on Dodd-Frank and financial reform - (interview & transcript) Sheila Bair was chair of the FDIC during the bailout and the crafting of Dodd-Frank. She later founded the Systemic Risk Council to pressure the government and the financial industry to live up to the goals of financial reform. As the anniversary approaches, we invited her to Marketplace for a check-in.

Visualizing TBTF: The Hub And Spoke Representation Of Modern "Scale Free" Banking - In a few moments we will post a critical analysis by David Korowicz, titled Trade-Off: Financial System Supply-Chain Cross- Contagion: a study in global systemic collapse, arguably one of the best big picture overviews of the New Normal in systemic complexity, which considers the "relationship between a global systemic banking, monetary and solvency crisis and its implications for the real-time flow of goods and services in the globalised economy" and specifically looks at how various "what if" scenarios can propagate through a Just In Time world in which virtually everything is connected, and in which even a modest breakdown in one daisy-chain can lead to uncontrolled systemic collapse via the trade pathways more than ever reliant on solvency, sound money and bank intermediation.To wit: "For example, when the Federal Reserve Bank of New York commissioned a study of the structure of the inter-bank payment flows within the US Fedwire system they found remarkable levels of concentration. Looking at 7,000 transfers between 5,000 banks on an average day, they found 75% of payment flows involved less than 0.1% of the banks and 0.3% of linkages."

Jeff Faux: "The Servant Economy" - Jeff Faux of the Economic Policy Institute argues Americans are in denial. Everyone knows, he says, but no one faces up to the fact that the United States can no longer afford to have subsidized unregulated markets, be the world’s global power and provide a steadily rising standard of living. One of these is possible, maybe two, but not all three, according to Faux. No group -- and certainly no politician of either party -- is addressing this new reality, he contends. Despite public posturing to the contrary, it’s America's middle class that will be sacrificed on this current path. Please join us for a conversation with Jeff Faux on why he believes we’re moving from a service to a servant economy.

Sheila Bair on Bill Moyers: “Libor Always Troubled Me” - Bill Moyers starts with the Libor scandal as a way to get Sheila Bair’s perspective on the failure to get meaningful bank reforms. It’s refreshing to see how direct she is in saying the fixes aren’t hard, the problem is lack of will. She also discusses the death of moderate Republicans, and “free for all markets”.

U.S. Is Building Criminal Cases in Rate-Fixing - The [Justice Department]’s criminal division is building cases against several financial institutions and their employees, including traders at Barclays ... The prospect of criminal cases is expected to rattle the banking world and provide a new impetus for financial institutions to settle with the authorities. The Justice Department investigation comes on top of private investor lawsuits and a sweeping regulatory inquiry led by the Commodity Futures Trading Commission. The multiyear investigation has ensnared more than 10 big banks in the United States and abroad. With the prospects of criminal action, several firms, including at least two European institutions, are scrambling to arrange deals ... According to people briefed on the matter, the Swiss bank UBS is among the next targets for regulatory action. ... in April 2008, a senior enforcement official at the Commodity Futures Trading Commission, Vincent McGonagle, opened an investigation. ... At first the case stalled as the agency waited months to receive millions of pages of documents when Barclays pushed back ... By the fall of 2009, the trading commission received a trove of information, providing a broad view into the wrongdoing.

The Real Libor Scandal - We think we can conclude that Libor rates were manipulated lower as a means to bolster the prices of bonds and asset-backed securities. In the UK, as in the US, the interest rate on government bonds is less than the rate of inflation. The question is, why do investors purchase long term bonds, which pay less than the rate of inflation, from governments whose debt is rising as a share of GDP? One might think that investors would understand that they are losing money and sell the bonds, thus lowering their price and raising the interest rate. Why isn’t this happening? PCR explained that despite the negative interest rate, investors were making capital gains from their Treasury bond holdings, because the prices were rising as interest rates were pushed lower. What was pushing the interest rates lower? The answer is even clearer now. First, as PCR noted, Wall Street has been selling huge amounts of interest rate swaps, essentially a way of shorting interest rates and driving them down. Thus, causing bond prices to rise. Secondly, fixing Libor at lower rates has the same effect. Lower UK interest rates on government bonds drive up their prices. In other words, we would argue that the bailed-out banks in the US and UK are returning the favor that they received from the bailouts and from the Fed and Bank of England’s low rate policy by rigging government bond prices, thus propping up a government bond market that would otherwise, one would think, be driven down by the abundance of new debt and monetization of this debt, or some part of it. How long can the government bond bubble be sustained? How negative can interest rates be driven? Can a declining economy offset the impact on inflation of debt creation and its monetization, with the result that inflation falls to zero, thus making the low interest rates on government bonds positive?

Libor Scandal Highlights Regulatory Failure - I said yesterday that I could actually envision a few criminal prosecutions on Libor rate-rigging in the coming months. We know that plenty of banks are involved. So the Justice Department will have plenty of banks to choose from – Deutsche Bank, cooperating with EU and Swiss regulators, is just an example – and can round up a couple low-level bankers for the perp walk photo-op. But this would be a classic deflection strategy. Because the more you learn about Libor, the more you must reserve some of your fury for the regulators: British regulators will face further scrutiny for their role in a rate-manipulation scandal when top officials at the Financial Services Authority testify on Monday before Parliament. Lawmakers in London and Washington have been pressing regulators over what they view as a failure to address problems with the process for setting benchmark interest rates. British politicians are expected to ask regulatory officials when they were first notified about potential issues, and why they did not stop the activities.And regulators in the US face the same problem. We have documentary evidence that the New York Fed was informed of rate-rigging in Libor in April 2008, and the only tangible action taken was Tim Geithner assembling a bunch of big bank recommendations and forwarding them over to the Bank of England. This is classic buck-passing, and it did not stop the activities that ripped off numerous municipalities and investors for at least a year longer.

Tim Geithner’s Libor: Where Was the Barking Dog? - It has occurred to members of the Congress of the United States that this Libor bid rigging thing might be a good opportunity to remind the banking industry that it’s election time.  So the House Banking Committee, whose members are placed there to assure privileged access to Wall Street campaign donations, will hold a hearing to ask Tim Geithner what he knew, when he knew it, and what he did about it. When all this stuff was going down, Mr. Geithner was the head of the New York Federal Reserve, and from that position of Wall Street oversight responsibility, the New York Times tells us today, he was privy to reports and rumors of bid rigging to affect the Libor rates.    The Times tells us it has obtained documents and e-mails from that period and those documents assure us that when Mr. Geithner found out about those illegal bidding schemes back in 2007-2008, he expressed his concerns to counterparts at the UK Bank of England and others and suggested ways to “improve” the reporting of rates that go into the Libor composite.  The Times DealBook headlines this story as ” Geithner tried to curb rate rigging in 2008.”   How reassuring. We seem to be missing a barking dog or two in this story.  The thing that has apparently shocked so many people in the last few weeks since the story broke on Barclays’ bid rigging settlement with US and UK regulators is that no one seems to have warned the victims that the entire structure for setting interest rates on consumer loans, mortgages, municipal bonds, insurance swaps and everything else in the economy — literally trillions of dollars in transactions — was rigged.  It’s 2012, and they (the victims) just found out, so now there are hundreds of entities lining up to sue the worlds largest banksters for one the largest frauds in history.

Twelve Senate Democrats Turn to Geithner for Libor Probe Despite His Sitting Mum on the Crime for Four Years - Let me see if I have this straight: 12 outraged Senators are demanding “prompt and thorough investigations” into the rigging of a global interest rate benchmark, Libor, and they want U.S. Treasury Secretary Timothy Geithner to oversee the investigations — despite the fact that Geithner has been keeping the rigging under wraps for the past four years. Five of the Senators who signed the letter sit on the powerful Senate Banking committee which has an abundance of knowledge about Wall Street’s ongoing cartels.  (See letter below.)  U.S. Treasury Secretary Geithner was the President of the Federal Reserve Bank of New York when Barclays, the first bank to be charged with rigging Libor, made at least 12 contacts with the New York Fed to blow the whistle on itself and other banks during 2007 and 2008.  Geithner has conceded that he was aware of the allegations in 2008 and relayed recommendations to Mervyn King, Governor of the Bank of England, to deal with the situation in June of that year.  And then he apparently went on his merry way.  And is that now what these Senators plan to do?  Report it to the man implicated in the coverup and go on their merry way?

Tim Geithner's Libor Recommendations Came Straight From Banks, Documents Show: Treasury Secretary Timothy Geithner has so far escaped responsibility for the spreading Libor fixing scandal by releasing documents showing that when he became aware of the problem in 2008, as head of the Federal Reserve Bank of New York, he made recommendations to address it.  "The New York Fed analysis culminated in a set of recommendations to reform LIBOR, which was finalized in late May. On June 1, 2008, Mr. Geithner emailed Mervyn King, the Governor of the Bank of England, a report, entitled 'Recommendations for Enhancing the Credibility of LIBOR,'" a Fed statement released Friday reads. "As is clear from the work culminating in the report to Mr. King of the Bank of England, the New York Fed helped to identify problems related to LIBOR and press the relevant authorities in the UK to reform this London-based rate." With that, Geithner earned a rash of headlines focused on his foresight, as well as criticism for the cozy relationship between regulators and bankers that had led to the controversy.  But the Fed, along with its statement, also released the staff work that led to the recommendations. Those documents reveal that the recommendations Geithner sent to London did not come from staff, but rather were proposed by major banks and more or less forwarded on verbatim.

Counterparties: King vs Geithner vs Barclays - Testifying before Members of Parliament today, governor of the Bank of England Mervyn King added another layer of uncertainty to the “Liebor” scandal. King hit back at Del Messier’s interpretation of events, saying Barclays execs were in a “state of denial” about the true nature of their conversations with regulators. King then went further, addressing documents released by the New York Fed last week showing that Tim Geithner, then President of the NY Fed, had been aware of potentially improper Libor submissions and emailed a set of reform recommendations to King in 2008. (And it turns out that these were basically carbon copies of banking industry recommendations.) The NYT’s Mark Scott writes that King rejected the notion that the BoE had been tipped off to rate rigging: Mr King said the correspondence with Mr. Geithner, who is now the United States Treasury secretary, did not represent a warning about potential illegal activity related to Libor. “At no stage did he or anyone else at the New York Fed raise any concerns with the Bank that they had seen any wrongdoing,” Mr King told the parliamentary committee on Tuesday. “There was no suggestion of fraudulent behavior”.

Timmy! claims that he and the FRBNY were “very forceful from the beginning” in dealing with LIBOR manipulation.  This is an example of why Timmy! (AKA Rodney Dangerfield) gets no respect.  His letter to the BOE was a classic example of bureaucratic CYA and buck passing: the BOE then exchanged the buck and passed the pound to the BBA which did . . . nothing.  More nothing happened for over three years, and it wasn’t the FRBNY that drove the process.  The scary thought is that is what passes for forceful in Timmy!’s world: the scary alternative is that Geithner is just BSing about his past forcefulness.  The thought that Geithner’s 2008 actions were forceful is Pythonesque, really:

Global financial crisis live: Bernanke and King quizzed on Libor – as it happened Guardian. Both Mervyn King and Bernanke said Libor manipulation was fraud.

Epic Santelli Rant On 'Un-American' Federal Reserve/Treasury Incompetence -  Stunned at the sheer ineptness and lack of due diligence in the Libor-rigging details that are being uncovered specific to Geithner's Treasury and Bernanke's Fed, CNBC's Rick Santelli reflects on just how unbelievable TARP was in this context. "Hurry up, let's spend three quarters of a trillion dollars; how much due diligence did they do for our role as taxpayers in basically bailing out the banking system? Obviously zero!" and this as they knew these very-same banks were manipulating rates. Opining on the un-Americanism of jet-skis and outsourcing, Rick states unequivocally "what's un-American is we now have the Federal Reserve Bank of New York and Treasury taking heightened importance in regulating us in the future through Dodd/Frank. Shame on their legislation!" Meanwhile, those very same un-American Treasury staff (who we are supposed to trust with the future of our banking system and implicitly the economy we pre-suppose) have just been caught soliciting prostitutes and breaking conflict-of-interest rules.

The Federal Reserve and the Libor Scandal - Simon Johnson - On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London interbank offered rate. The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches. This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged. At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now. These activities were widespread, representing – depending on your reading of the details – some combination of a complete breakdown of compliance and control at Barclays and presumably other banks (mentioned but not yet named by C.F.T.C.) and a pattern of apparent criminal fraud. The New York Fed was apparently aware of Libor-rigging at some level in 2007 and serious concerns – although presumably not the full details of what the C.F.T.C. later established – had reached the most senior levels of the Federal Reserve System by early 2008.

LIBOR Rigging: What the Regulators Saw (but Didn’t Shut Down) Thanks to the New York Federal Reserve, we now know that both the Fed and the Bank of England could see and were being told that something was awry with the London interbank offered rate already in late 2007. Yet it was several months before any regulator began an official inquiry into alleged manipulation of this key money-market rate, which is used as the basis for trillions of dollars of financial transactions around the world — and there appears to have been no serious attempt made to stamp out the practice at the time. That in turn begs the question: Why weren’t the first signs taken more seriously? Has there been a serious failure of regulation, or are there strong mitigating circumstances that could explain and justify the lack of resolute action? Lawmakers on both sides of the Atlantic are now trying to answer those questions, with investigations taking place both in Britain, where the Treasury Select Committee has been probing the affair, and in the U.S., where the House of Representatives’ Committee on Financial Services’ Oversight Subcommittee and the Senate Banking Committee are investigating.

Libor Scandal The Latest Front In War On Reality - The Libor scandal looks and smells like an old-fashioned financial fraud, but it also presents the latest example of a more modern phenomenon: the war against reality being waged with ferocity by special interests that profit from limited public awareness of what's actually taking place. This campaign has proven remarkably effective -- not in altering reality, but in muddying perceptions, corrupting our basic understanding of matters both critical and mundane, from the risks of financial crisis or of climate change to our expanding waistlines. For those who have grown too inured to financial shenanigans to bother keeping up, Libor is an interest rate that captures the costs that banks in London charge one another for short-term loans. Much of global finance is pegged to this rate, from ordinary mortgages to trillions of dollars' worth of credit derivatives, the exotic instruments that played a leading role in the financial crisis of 2008. Libor plays such an outsized role in shaping the terms of global commerce that it is more than a benchmark. It is essentially a barometer for the health of the global financial system. People who manage money -- not just at investment banks, but at pension funds as well -- use Libor as a gauge of confidence. When Libor is seen to be low, this is taken as a sign that money is changing hands freely, without undue concern that borrowers will stumble or fail to pay back their loans. When Libor is rising, this is an indication that concerns are mounting, generating reluctance to lend money. In short, it is a signal to proceed with caution.

The Lying Bankers Scandal as Bailout Theater--  The Lying Bankers Scandal should be called the Bailout Theater scandal. I don’t mean the perhaps decades-long part where traders manipulated LIBOR by 0.01% or so, up and down, for personal profit. I mean the part that started in 2007 when the bankers lied by much more so they’d look healthier than they in fact were. That part is bailout theater because Friday’s data dump by the New York Fed proves the Fed and other “regulators” knew what was happening and effectively approved. Why? Apparently the Fed decided that allowing criminal fraud was necessary to calm markets, even though the fraud did nothing to actually make the banks safer or sounder: Bailout Theater. And for that, the top guy at the NY Fed at the time, our current Treasury Secretary Timothy Geithner, needs to be fired by President Obama and indicted if possible by Eric Holder. Not that I’m holding my breath on either point. The documents also show that the focus on the LIBOR 1 and 3 month is misplaced. The lying happened at those maturities, sure. But the lying was much worse at 1 year, for example. Why? Well think about it–banks were worried that the entity they were loaning to wouldn’t be around much longer. To take the risk of loaning money a long time in the future, the bankers wanted huge premiums. The victim class of arbitrary winners and losers can be much larger than people have been focused on.

Elizabeth Warren: Libor fraud exposes a rotten financial system - - The Libor scandal is more than just the latest financial deception to come to light. It exposes a fraud that runs to the heart of our financial system. The London interbank offered rate is a benchmark for a range of interest rates, and the misdeeds making headlines have to do with how those rates are set. If insiders can manipulate the basic measurement of a loan — the interest rate — there is rot at the core of the financial system.The British financial giant Barclays has admitted to manipulating the rate from 2005 to at least 2009. When the bank made a bet on the direction in which interest rates would turn, the Barclays employees who submit data for calculating interest rates would fake their numbers to help Barclays traders win the bet. Day after day, year after year, bet after bet, Barclays made money by fixing bets for its own traders. We don’t know who else was fixing bets. Other big banks, including some of the largest in the United States, are under investigation. Barclays doesn’t appear to have acted alone, and it is clear that its fixes weren’t secret deals by rogue traders. Traders put requests to manipulate the rates in writing and even joked about delivering champagne to those who helped them. It is also clear that many of those who didn’t have a fixer — including consumers, community banks and credit unions — lost money. Barclays padded its bottom line by taking money from everyone else. It won when it shouldn’t have won — and others lost when they shouldn’t have lost. The amount of money involved is staggering. On any given day, $800 trillion worth of credit-related transactions are linked to Libor rates.

Libor rate-fixing amplified CDO losses, experts say -(IFR) - The manipulation of Libor rates increased losses for investors saddled with toxic assets in the financial crisis, say lawyers and analysts evaluating the prospects for litigation over the scandal. Many collateralized debt obligations (CDOs) were hedged with interest rate swaps, they say, and inflated payments on those swaps siphoned away money that should have gone back to investors. Moreover, many CDOs are structured so that counterparties to those swaps are paid first, even ahead of investors in the most senior tranches of the structures -- many of which were already performing badly in the throes of the financial crisis. "Especially for CDOs whose underlying pool of securities had to be 100% hedged, lower Libor meant ridiculously large payouts each quarter to bank counterparties -- up to $8 million to $10 million per year for some deals," "The burden of having this payment is essentially like having an extra senior tranche in the CDO. We are already engaged on a CDO-related Libor case with a law firm, trying to quantify how much the manipulation in the rate increased losses,"

Libor Case Documents Show Timid Regulators - As the interest rate manipulation scandal grips the banking industry, regulators have defended their actions and trumpeted their efforts to overhaul the flawed system during the financial crisis. But documents released on Friday show that regulators balked at playing a more public role in reform efforts during 2008, and some British officials resisted certain fixes. Although the Federal Reserve Bank of New York and the Bank of England advocated changes to the rate-setting process, they demanded anonymity. In shunning the spotlight, the regulators deferred to the British Bankers’ Association, a private industry group that oversees the rate-setting process. They will obviously have to remove the references to us and Fed,” a Bank of England official said in a June 2008 e-mail, referring to a draft of the trade group’s proposal. The documents, released by the Bank of England, shed new light on the inconsistent regulatory response to problems with the London interbank offered rate, or Libor. The crucial benchmark affects the cost of trillions of dollars in mortgages and other loans.

Taibbi on Democracy Now LIBOR and More | Matt Taibbi (video) Visited with old friends Amy Goodman and Juan Gonzalez on Democracy Now! this morning. The topic was LiBOR, although there is a second segment that will be appearing online that covers the muni bid-rigging case as well.

Libor Manipulating Banks Used Baltimore’s Tax Dollars To Help Pay Off Your Mortgage, Or Something - There is a line forming to the left for people to beat up on Libor-manipulating banks, and it’s a long line so your beating time is limited and you have to make the most of it if you want anyone to care. Today’s the day for U.S. municipal borrowers. How’d they do? The municipalities are important because they are the unusual case of a large class of politically sympathetic customers who would have been systematically disadvantaged by low Libor rates, as opposed to you and that mortgage that you won’t shut up about, on which Liborgate probably saved you money. Stephen Gandel nicely sums up the situation here: the problem was that, in astonishing droves, U.S. cities and counties borrowed at variable rates, paying their own idiosyncratic floating SIFMA rate, but they then swapped to fixed, receiving a floating rate based on Libor. This led to badness, as muni credit blew up and SIFMA spiked, while bank credit blew up and Libor mysteriously didn’t, because of the manipulating. So cities who had expected to pay a fixed 5% or whatever a year ended up paying 5% plus the suddenly widening gap between SIFMA and Libor. Here is a graph I made you, comparing the SIFMA rate that munis paid to their bondholders versus a proxy for the Libor-based rate that they received from their banks*:

More on LIBOR: Plus, Spitzer takes on Bartiromo in Japanese Monster-Movie Epic | Matt Taibbi - I advise everyone to check out the Godzilla-v.-Mothra death-battle between Spitzer and Maria Bartiromo from last Friday on her show on CNBC. Maria's always been a little nuts, but this latest crusade to rewrite history and cleanse ex-AIG chief Hank Greenberg of culpability in a fraud scandal that at the time led to the biggest financial settlement ever paid is an absolute head-scratcher. The confrontation between the two of them on air is epic. In it, Bartiromo blasts Spitzer for going after Greenberg and accuses him of only targeting Greenberg for personal reasons. Spitzer counters by asking her if she's read a judge's opinion ruling that Greenberg had participated in a conspiracy to defraud. "Have you read this opinion?" he asks. She hedges, pauses, and here's the funny part: Clearly she hasn't read it. Spitzer asks her again, have you read the opinion? This time she decides to go all in, and immediately says she has read it. "I've read much more than I want to read on this case!" she shouts. Spitzer then gets so hot that he appears to have a prosecutorial flashback on live TV, saying: "You are under oath right now. I'm going to be very serious with you!" He again demands that she answer the question: Was it not true that a judge ruled that Greenberg had committed fraud? Humorously, Bartiromo explodes here and then retreats into the unfamiliar/uncomfortable territory of the truth: "I'm not under oath and I am not in your courtroom! You are on my television show!" Crazy stuff -- see for yourself:

Libor Scandal Apologist Avinash Persaud Displays Inability to Do Math – Yves Smith - Nothing like putting your foot in mouth in public and chewing. Avinash Persaud, who is listed at VoxEU as “Chairman, Intelligence Capital Limited; Emeritus Professor, Gresham College; Senior Fellow, London Business School,” put up a “nothing to see here” post on the Libor scandal. It’s clear from this piece that Persaud hasn’t deigned to do basic homework, like reading the FSA’s letter to Barclays, which describes its findings from its investigation and recounts the regulatory violations. For instance, Persaud describes the scandal as having “two phases”, June 2007 to June 2008, and after the collapse of Lehman. The FSA also described two phases of manipulation, but the first was 2005 to 2007, in which Barclays derivatives traders were seeking to move specific Libor indexes, most often the one month or three month Libor, apparently by small amounts (targets of single basis point moves were mentioned), to improve the value of trades they had on. The later phase was in 2007 to 2009, when banks were lowering Libor in an effort to signal that they were healthier than they were. (Within this period, Persaud makes a case that immediately post Lehman, there was no interbank lending market, so it made sense to have the banks keep posting Libor, given all the instruments priced off of it). And his air-brushing out the 2005-7 manipulation also means he does not have to deal with charges made by many and recounted by the Economist, that the gaming of Libor goes back 15 years or more before that 2005 date.

Mainstream Media's Demise as a Check on Corruption: Tom Cruise and Katie Holmes' Divorce Crushes LIBOR Scandal Coverage - If one were to judge the importance of news items based on the amount of mainstream media coverage they attract, one would end up concluding the following: By far the most important event of the past few weeks has been the divorce of Tom Cruise and Katie Holmes. Based on the time spent on that story relative to say, the coverage of the Libor scandal, one would have to conclude that the Cruise/Holmes divorce is about 750% more important than the biggest rigging of financial markets in history. One would also have to conclude that shark sightings are 530% more important than the Libor scandal.

Royal Bank of Scotland Fighting Bid for Data in Libor Case - Even as lawmakers in London hammered a top Barclays executive over the bank’s role in a rate-rigging scandal, another financial firm that is largely owned by the British government is fighting an investigation into the vast scheme. The Royal Bank of Scotland, one of more than 10 banks under scrutiny from authorities around the globe, is refusing to turn over crucial information to Canadian regulators, court documents from Ottawa show. The bank, in which the British government holds an 82 percent stake, is an unlikely foe.British lawmakers have taken the lead in publicly shaming executives and regulators who failed to curb interest rate manipulation before and after the 2008 financial crisis. And the pushback comes in contrast to the more conciliatory approach of several institutions ensnared by the global investigation.

Libor scandal – the net widens - Parliament's banking inquiry is to examine claims that former Barclays employees were involved in rigging interest rates at other institutions. MPs and peers are understood to be concerned about revelations from the Financial Services Authority that many of those involved in fixing the Libor rate used to work at Barclays, which was fined £291m for its involvement and saw its chief executive, Bob Diamond, quit earlier this month. Traders were found to have put pressure on the Libor "submitters" to change the Libor rate to help mask losses and help improve their own financial positions. Barclays has been the focus so far, but it is known that banks across the City and Wall Street, from Lloyds Banking Group to JP Morgan, are likely to be pulled into the scandal.

Rate probe turns to four major banks - Regulators are focusing on at least four of Europe’s biggest banks as they investigate the attempted manipulation of the region’s benchmark interest rate, suspecting that Barclays’ traders were the ringleaders of a circle that included Crédit Agricole, HSBC, Deutsche Bank and Société Générale. Evidence of links between traders at all four banks and Barclays’ former euroswaps trader Philippe Moryoussef is under scrutiny, people involved in the process have told the Financial Times. The news comes in the wake of the clear-out of senior management at Barclays, after the bank paid a £290m fine to settle probes in the US and UK into its involvement in the attempted manipulation of the London interbank offered rate (Libor) and its European equivalent, Euribor. The furore over the attempts to rig lending benchmarks has led to calls from policy makers around the world for an overhaul of the system that underpins $500tn of contracts globally – everything from arcane derivatives to standard home loans. In its settlement with Barclays, the Commodity Futures Trading Commission, the US futures regulator, described an unnamed trader as having “orchestrated an effort to align trading strategies among traders at multiple banks […] in order to profit from their futures trading positions”.

Scrutiny Intensifies on Collusion in Rate Manipulation Inquiry - While much of the scrutiny surrounding interest rate manipulation has centered on Barclays, regulators have said that traders at the big British bank colluded with rivals to influence a key benchmark. As part of a three-year scheme, a senior Barclays trader in Europe worked with counterparts at Crédit Agricole, HSBC, Deutsche Bank and Société Générale, according to people with knowledge of the matter who could not speak publicly because of the investigation. Regulators are examining whether at least one other bank was involved, one of the people said. In an effort to bolster their profits, the traders collaborated to push interest rates up or down, according to regulatory documents. By doing so, they aimed to eke out extra gains on their trades or limit losses. In its complaint against Barclays, the Commodity Futures Trading Commission described the bank’s trader as having “orchestrated an effort to align trading strategies among traders at multiple banks” to profit on their portfolios. As the rate-manipulation scandal spreads to other banks, the fallout could have major ramifications for the financial industry. Civil and criminal authorities around the world are investigating, and lawmakers in the United States have started their own inquiries. The civil and criminal actions, as well as private lawsuits, could cost the banks tens of billions of dollars.

U.S. Banks Ignored in Congressional Libor-Rigging Probe - None of the three U.S. banks—Bank of America, Citigroup, or JPMorgan Chase—involved in establishing the London interbank offered rate, which remains under investigation for alleged rigging, have been asked by Congress to answer questions about what they knew about manipulation in the market or if they were involved, National Journal has learned. The revelation comes as members of Congress intensify their scrutiny of U.S. regulators and lament concerns about growing public distrust in the banking sector fueled by the financial crisis and reinforced by repeated controversies since, such as the recent trading losses at JPMorgan and the Halloween collapse of MF Global. As it stands, the House Financial Services and Senate Banking committees are preparing to grill Treasury Secretary Timothy Geithner next week about whether his response to the Libor rigging was adequate. Geithner became aware of a potential problem while he was running the Federal Reserve Bank of New York in 2007 and suggested recommendations to the Bank of England in 2008, but the British regulator claims he did not sound the alarm bells about misconduct. The Treasury secretary's testimony will come after two days of aggressive questioning of Federal Reserve Board Chairman Ben Bernanke by members of the two committees who pressed him on whether U.S. regulators dropped the ball on Libor.

Exclusive: Banks in Libor probe consider group settlement - A group of banks being investigated in an interest rate rigging scandal are looking to pursue a group settlement with regulators rather than face a Barclays-style backlash by going it alone, people familiar with the banks' thinking said. Such discussions are preliminary, and it is unclear if regulators will enter these talks, aimed at resolving allegations that banks attempted to manipulate the London interbank offered rate, or Libor, a benchmark that underpins hundreds of trillions of dollars in contracts. Still, there are powerful incentives for the banks to enter joint negotiations. Barclays Plc was the first to settle with U.S. and British regulators, paying a $453 million penalty and admitting to its role in a deal announced June 27. Its chief executive, Bob Diamond, abruptly quit the next week, bowing to public pressure and erosion of the bank's reputation. The sources told Reuters that none of the banks involved now want to be second in line for fear that they will get similarly hostile treatment from politicians and the public.

‘CIO Risk Management was ineffective in dealing with Synthetic Credit Portfolio’ -- It’s JPM’s CIO Task Force update and it’s a fun read. Click through the pic for the full document and then get on to ML:

How Jamie Dimon and ‘Flexible Accounting’ Hid JPM’s London Whale Loss -  Here is perhaps the most amazing thing about JPMorgan Chase's (JPM) $5.8 billion trading loss: Take a look at the firm's overall results, and it's like the London Whale's misstep, one of the largest flubs in the history of Wall Street, never happened. Back in mid-April, about two weeks before talk of the trading losses emerged, JPMorgan was expected to earn $1.21 a share in its second quarter. On Friday, JPMorgan reported that it had, Whale and all, earned exactly that. How the bank appears to have offset the huge trading loss is a prime example of how complex and malleable bank profits actually are, and how much they should be believed. JPMorgan's quarter should give fodder for accountants to talk about for some time. "Yes, I have seen these results, but I have also seen how the sausage is made and I am worried that I might get food poisoning in the future,"

JPMorgan Blaming Marks On Traders Baffles Ex-Employees - JPMorgan Chase assertion that traders at its London chief investment office may have intentionally mismarked trades, masking losses that total at least $5.8 billion, makes little sense, according to former executives with direct knowledge of the unit’s operation.  The bank restated first-quarter results, paring profit by $459 million, in part because an internal review revealed that U.K. traders had priced their books “aggressively,” . The mispricing made losses on a portfolio of credit derivatives look smaller than they were, and executives concluded that traders may have sought to hide the “full amount of losses,” JPMorgan said in a presentation.  JPMorgan requires traders to mark their positions daily so the firm can track their profits, losses and risk. An internal control group double-checks the marks against market prices monthly and at the end of each quarter, said three former executives from the CIO and a senior executive in market risk. The firm uses the control group’s prices, not what individual traders submit, to calculate earnings, making it difficult for one trader or trading desk to rig prices, the people said.  “We just have questions about whether the traders were doing what they need to do for accounting, which is put a mark on their positions where they think they can exit,”  “Instead, it felt more like they were pricing their marks a little bit more aggressively, but generally inside the bid-ask spread.”

Why Hasn’t Jamie Dimon Been Fired by His Board Yet? - JP Morgan’s jawdropping revelations in its Friday earnings call don’t seem to be attracting the attention they deserve. The market may have shrugged off the size of the losses and the corporate governance modifications plans, but the announcement opens the door wide for the next phase of this scandal. The biggest question is whether Jamie Dimon should keep his job. The first stunner, that JP Morgan was restating the first quarter financials, should have caused a deafening ringing of alarm bells. For a company of JP Morgan’s stature to be compelled to restate prior period financials is a very clear signal of bigger problems with their overall financial reporting. In isolation we would normally expect to see a massive selloff with an event of that seriousness. Analysts and reporters may have missed the significance since it was dropped into a footnote and overshadowed by the other disclosures. But the real cause for alarm is the reason for the restatement. JPM was forced to disclose that it relied on its traders to provide honest and accurate valuations for its financial statement disclosures. That’s like putting the foxes in charge of not just the henhouse, but the entire farm. Much to its chagrin that was a costly choice. Note that was not a mistake, but a conscious choice.

That Stench You Smell Is the Rotten Financial System - It’s getting harder for politicians to ignore the stench of the financial system anymore, even with the anesthetic of campaign contributions they suck from the rot. On Tuesday, HSBC will appear before the House Banking Committee to discuss a different kind of corruption. It’s not conspiracies to fix LIBOR, while bank regulators, including the New York Fed led by our Secretary of the Treasury, don’t bother warning regular people.  And it’s not the corruption of the fail whale trade from JPMorgan Chase, currently expected to clock in at a $7.5 billion loss, and a much bigger hit to shareholder value, now featuring what amounts to an admission that the financial statements were phony.  One facet of that case leads us to the HSBC hearing. The money used in the Wall Street Casino was “excess deposits”. JPMorgan has about $463 billion in excess deposits, of which $310 billion or so was used for gambling. Even for a really big bank, that’s a lot of checking accounts. I doubt that that kind of money just walked up to a teller window asking to be held. I’m thinking that there are a bunch of sweet-smelling Armani-clad bankers with the proper socialization and knowledge of the finest Vodkas out there asking rich people and mammoth corporations and sovereign wealth funds and less well-known handlers of big pots of money to drop a few billion into the loving embrace of JPMorgan, all of it no doubt legally obtained. Sadly, some of HSBC’s excess deposits were derived from illegal sources, because the point of Tuesday’s hearing is to look at money-laundering.

Senate Throws The Book At HSBC Accusing It Of Massive "Money Laundering And Terrorist Financing", No Comment On NAR Money Laundering Yet -- Just because there is already an overflow of confidence in the financial system, here comes the Senate's Permanent Subcommittee On Investigations with a 340 page report detailing how HSBC "exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls." Of course, since HSBC is one of the world's largest banks, what it did was not in any way unique, and it is quite fair to say that every other bank has the same loose anti-money "laundering" provisions. What HSBC was likely most at fault for was not providing sufficient hush money to the appropriate powers in the highest US legislative administration. But at least tomorrow we will have yet another dog and pony show, accusing that HSBC did what the NAR does every single day. Because let's not forget that the National Association of Realtors lobbied for and received a waiver for anti-money laundering provision regulations: after all how else will US real estate remain at its current elevated levels if not for the drug, blood, and fraud money from various Russian, Chinese, and petrodollar kingpins, mafia bosses and otherwise rich people who need to launder their money in the US, in the process keeping Manhattan real estate in the stratosphere?

OCC Let HSBC Money Laundering Problems 'Fester' For Years: Senate Report - One of the top U.S. bank regulators drew stinging criticism in a Senate report on Monday for its inability to police widespread and long-term lapses in halting money laundering at HSBC Holdings Plc's U.S. operations. The report said the Office of the Comptroller of the Currency allowed compliance problems to "fester" at the bank for years and that the agency failed to take strong action to correct the problems until it learned that two U.S. law-enforcement agencies were investigating money laundering through HSBC accounts. The OCC's failure to force HSBC to fix a broken anti-money laundering system "identified by its examiners over a six-year period indicates that systemic weaknesses in the OCC's (anti-money laundering) oversight model require correction," the U.S. Senate Permanent Subcommittee on Investigations said in its report. Thomas Curry, who took over as comptroller less than four months ago, will appear at a subcommittee hearing on Tuesday to answer questions from lawmakers on why the OCC failed to take stronger action against HSBC. In a statement on Monday, Curry said anti-money laundering compliance "is crucial to our nation's efforts to combat criminal activity and terrorism, and the OCC expects national banks and federal thrifts to have programs in place to effectively comply with these laws."

Senate report: HSBC concealed £10 billion in transactions to Iran -  Global banking giant HSBC and its US affiliate concealed more than £10 billion in sensitive transactions to Iran, violating US transparency rules over a six-year period, a Senate panel said Tuesday. HSBC executives were aware of the “concealed Iranian transactions” — which stripped all identifying Iranian information from documentation — as early as 2001 but allowed thousands of transactions to continue until 2007, according to a Senate report on HSBC shortcomings in stopping money laundering. A review of HSBC’s use of so-called U-turn transactions, in which funds are sent into and then out of the United States through non-Iranian foreign banks, showed the bank conducted almost £16,000 transactions with Iran, amounting to £12.4 billion.

HSBC Executive Resigns During Senate Hearing - We got something that looks suspiciously like accountability today in a Senate Permanent Subcommittee on Investigations hearing. Earlier today I previewed this hearing, based on a damning report detailing HSBC’s propensity to allow money laundering to occur on its watch on a mass scale. The report showed pretty clearly that HSBC enabled Mexican drug lords and terrorist financiers to gain access to the sophisticated US finance system, created all sorts of ways for tax dodgers and seedy individuals to avoid anti-money laundering statutes, and concealed numerous violations of prohibitions against doing business with Iran. Six HSBC executives testified in the hearing, including the chief compliance officer, David Bagley. And Bagley took an unusual stance for members of this industry: he took the blame. HSBC Holdings Plc (HSBA)’s head of group compliance, David Bagley, told a Senate hearing he will step down amid charges the bank gave terrorists, drug cartels and criminals access to the U.S. financial system by failing to guard against money laundering [...] “As I have thought about the structural transformation of the bank’s compliance function, I recommended to the group that now is the appropriate time for me and for the bank for someone new to serve as the head of group compliance,” Bagley said. “I have agreed to work with the bank’s senior management towards an orderly transition of this important role.”

Does Not Compute: PFG Head Says Spent Stolen Client Money To Comply With Regulator Demands - The head of now bankrupt futures brokerage PFG may not have been very successful when it comes to executing succesful suicide attempts, but when it comes to spending stolen client money over a period of two decades he had few equals. From the WSJ: "Peregrine Financial Services Inc.'s founder said he spent most of the money allegedly embezzled from customers to cushion his futures brokerage's capital, fund a new corporate headquarters—and to pay regulatory fines and fees, according to previously undisclosed parts of a suicide note and signed statement." It also appears that it was all the regulators' fault: "Most of the misappropriated funds went to maintain the increasing levels of Regulatory Capital to keep [Peregrine] in business and to pay business [losses]," said the signed statement, which was reviewed by The Wall Street Journal. The statement says the misappropriated customer funds also were used to build Peregrine's headquarters in Cedar Falls, Iowa, and to "pay Fines and Fees charged by the regulators." So... to summarize... the guy who stole money for twenty years, stole it only to comply with regulators requirements for compliance...

SEC Charges Mizuho Securities USA with Misleading Investors by Obtaining False Credit Ratings for CDO - The Securities and Exchange Commission today charged the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) by using “dummy assets” to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.

Quelle Surprise! New York Times’ “Deal Professor” Ignores Facts and Law to Defend Citi Employee Stoker in SEC Toxic CDO Case Rakoff Highlighted - Yves Smith -  While the New York Times’ DealBook section generally hews to a financial-services-industry-friendly line, presumably as a Faustian bargain for being a preferred leakee, there’s not even a weak defense for the article by the New York Times’ so called “Deal Professor” Steven Davidoff, “If Little Else, Banker’s Trial May Show Wall St. Foolishness.” It’s yet another brazen effort to diminish the seriousness of rampant fraud by arguing it was just carelessness. But to make his case, Davidoff misrepresents both the facts of the situation as well as the law. Since Davidoff’s lawyer union card is an explicit part of his brand at the Times, this story amounts to another credentialed effort to run the “nothing to see here, it’s too hard to get these guys” line that has become the Administration’s pet excuse for not going after one of its biggest sources of campaign funds. But in this whitewashing by Davidoff plays so fast and loose with the underlying material, one is forced to one of two conclusions: either he didn’t even remotely do his homework or he decided (or was encouraged) to engage in baldfaced misrepresentation.

Why is the SEC investigating the Amish?- As it polices the seedy underbelly of Wall Street, the Securities and Exchange Commission is taking on financial wrongdoers of all sorts, including the Amish. The SEC announced a deferred prosecution agreement Wednesday with the Amish Helping Fund, a not-for-profit organization that provides home loans to Amish families in Ohio.The Amish financiers allegedly misled investors by failing to update the fund's offering memorandum, which was drafted when it was founded by a group of "elders" in 1995. While neglecting to update financial documents for 15 years is a violation of securities law, the SEC said it did not find any evidence that investors were harmed or lost money. Under the terms of the deferred prosecution agreement, the SEC will not seek an enforcement action against the Amish, who agreed to update the fund's documents.

Wall Street banks step up oil trade role -Wall Street banks are wading deeper into the business of supplying oil as they increasingly compete with oil traders and merchants selling crude to refineries. JPMorgan Chase, Morgan Stanley and Goldman Sachs have all recently struck deals to supply US refiners. Goldman Sachs is now the largest supplier of crude and the largest customer of refined products for refineries owned by Alon USA in California, Louisiana and Texas. The banks’ growing profile in the market highlights the effect of persistently high oil prices on cash-strapped independent refiners who have been forced to turn to banks to finance their stocks. “With prices as high as they are, it takes a great deal of money for refineries to carry inventories,” said James Dyer, vice-president at Vitol, the world’s largest independent oil-trading house. “That opens the door for the banks to intermediate the refiners’ working capital requirements.”

Was the petrol price rigged too? - Motorists may have been paying too much for their petrol because banks and other traders are likely to have tried to manipulate oil prices in the same way they rigged interest rates, an official report has warned. Concerns are growing about the reliability of oil prices, after a report for the G20 found the market is wide open to “manipulation or distortion”. Traders from banks, oil companies or hedge funds have an “incentive” to distort the market and are likely to try to report false prices, it said. Politicians and fuel campaigners last night urged the Government to expand its inquiry into the Libor scandal to see whether oil prices have also been falsely pushed up. They warned any efforts to rig the oil price would affect how much drivers pay at the pump, which soared to a record high of 137p per litre of unleaded earlier this year.

Chris Cook: Libor and Oil Market Manipulation – Rage Against the Dying of the Light - We now see a wave of popular rage against the freshly revealed manipulation by banks of LIBOR, the London Interbank Offered Rate benchmark for interest rates which is the cornerstone of the money market. This manipulation in the financial world is being augmented by a groundswell of protest against manipulation taking place in the real world. Here, the allegation is that the Brent/BFOE (Brent, Forties, Oseberg, Ekofisk) crude oil benchmark price, against which global crude oil prices are set, is the subject of routine manipulation by market participants, particularly investment banks and traders of physical oil. . The good news in the oil market at least is that the manipulation which is being revealed is nowhere near as serious in its effects on the general public as is believed. The bad news is that the true manipulation, as yet still concealed, is far more serious than anyone has yet conceived. The current LIBOR pogroms are the regulatory equivalent of flogging a dead horse. The Interbank money market in wholesale lending had a heart attack in 2007 and essentially died in October 2008 with the collapse of Lehman Brothers. The money market is now on life support directly to central banks and to all intents and purposes there is no independent Interbank Market in money and there never will be again.  LIBOR is dead, and the markets are moving on. The Brent/BFOE crude oil market benchmark, on the other hand, has been in failing health for a long time as the North Sea oil production upon which it is based has been in secular decline. Despite the best efforts of Platts – the Price Reporting Agency who are getting most of the flak – the market is at the point where if it were a horse it would be put down.

Are Big Banks Criminal Enterprises? - Here are some recent improprieties by the big banks:

Banking Is a Criminal Industry Because Its Crimes Go Unpunished: First, Barclay's has been manipulating the Libor, the main interest rate upon which most other interest rates and financial transactions are based, since 2005. Moreover, Barclay's traders were colluding with traders in many other banks to assist them in manipulating the Libor too, so that they could all profit from their bets on it. Second, JP Morgan Chase is having a really great month. Recent reports describe how it is resisting Federal subpoenas related to price-fixing in U.S. electricity markets. It is also accused (by former employees among others) of deliberately inflating the performance of its investment funds to obtain business. And finally, JP Morgan's failed "London whale" trade, which has now cost over $5 billion, is being investigated to determine whether the loss was initially concealed from regulators and the public.Third, HSBC is paying a fine because it allowed hundreds of millions, perhaps billions, of dollars of money laundering by rogue states and sanctioned firms, including some related to terrorist activities and Iran's nuclear efforts. But HSBC is only one of at least 12 banks now known to have tolerated, and in some cases aggressively courted, money laundering by rogue states, terrorist organizations, corrupt dictators, and major drug cartels over the last decade. Fourth, a new private lawsuit cites documents indicating that Morgan Stanley successfully pressured rating agencies into inflating the ratings of mortgage-backed securities it issued during the housing bubble. Fifth, Visa and Mastercard have just agreed to pay $7 billion to settle a private antitrust case filed by thousands of merchants, who alleged that Visa and Mastercard colluded to fix fees and terms of service 

Organized Financial Crime Is Now The New Normal - It's up to us to refuse to participate in a criminal financial system: we should not be doing business with businesses that are repeat offenders. We could expand this example of vested interests suppressing prosecution of white collar crime to the financial system, more particularly, the stock and bond markets. The majority of the adults in our country are invested either directly or indirectly in the stock market via trading accounts, pension funds, 401Ks, etc. and have a vested interest in making sure that it rises higher and higher. How many people would be willing to get rid of all of the drug money in the stock market, if they knew their 401K would decrease by 10%? How many people would get rid of all of the various types of fraud in our system, if they knew their pension fund would lose half or more of its value or the interest rate on their Aadjustable rate mortgage (ARM) skyrocketed? How many politicians are going to refuse bailouts of the banksters or call for their prosecution if the banksters can take down the stock market?

Divorce Finance From Commerce -There are growing signs that an intellectual edifice that has dominated economics and finance for about a quarter of a century is starting to crack. Let’s call it the Market-Finance Myth (MFM). It should be self evident, at least for those of us who bother defining our terms, that financial markets need to be considered differently from commercial markets. Commercial markets have essentially three components: price, output of a product, and the rules that govern the market. Trying to keep regulation to a minimum makes sense — that is, letting price be the main organising principle — because it allows the system to self organise according to the collective knowledge and interests of the participants. Regulation should be cautious and always be done with an eye to unintended consequences. At the same time, of course, it should set boundary conditions and also ensure against oligopolistic behaviours (such as those in Australia’s ridiculously concentrated supermarkets sector). That is a precondition to having price be the main organising principle. This model starts to break down when price is problematic. It is fine in consumer product markets, but in areas like health (where there is really no price for pain and death), education (where the supplier, not the consumer, defines value) or, say, defence (where pricing of national security is highly problematic) we start to enter greyer areas. I would argue that the model collapses completely when it comes to finance. To repeat, in commercial markets there are basically three elements. But in financial markets price and rules fuse into one. Because price is a rule: a rule that something is worth so much and has such and such obligations attached to it. There are, in other words, only two elements: rules and output (or activity) based on those rules. It is a binary, not a tertiary system.

Business ethics need to move beyond what’s illegal - Business school professor Luigi Zingales, with the full agreement of fellow business-school professor Justin Wolfers, has an important op-ed under a provocative headline: “Do Business Schools Incubate Criminals?” Zingales’s point is a good one: that the way business-school students study ethics is much like the way that entomologists study ants. Quite aside from the fact that ethics courses are generally taught by relatively junior professors, they also tend to shy away from actually telling students to be ethical: Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take. Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals…

Consumer Watchdog Fines Capital One for Deceptive Credit Card Practices - Capital One, one of the nation’s biggest banks, will reimburse $150 million to more than two million customers for selling them credit card products they could not use or did not want, as the nation’s new consumer watchdog leveled its first enforcement action against the financial industry. The Consumer Financial Protection Bureau on Wednesday hit Capital One with findings that a vendor working for the bank had pressured and deceived card holders into buying products presented as a way to protect them from identity theft and hardships like unemployment or disability. The regulatory actions, totaling $210 million including fines to authorities, take aim at one of the financial industry’s growing profit centers and increasingly controversial practices. Several other banks, including Bank of America, JPMorgan Chase and HSBC, were sued in June by the Hawaii attorney general, accused of improperly selling similar so-called add-on products, which consumer advocates typically regard as costly and ineffective.

Idle corporate cash piles up - IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash. The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure. Why the huge gap? The Fed gets its data from the IRS, but only measures the flow of funds in the domestic economy. The IRS reports the worldwide holdings of U.S. companies, which I think is the more revealing measure.  Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows.That is nearly $1 trillion of increased profits over two years, while actual taxes paid rose less than a tenth as much, BEA reports show. Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose.

Report Cites Threats to Market Stability - The biggest threats to American financial markets’ stability include uncertainty about the euro zone nations, the “fiscal cliff” that the United States faces at year-end, and continued weakness in housing, a panel of federal regulators said Wednesday.  The Financial Stability Oversight Council — created as part of the Dodd-Frank regulatory act and made up of regulatory chiefs from the Treasury Department, the Federal Reserve, the Securities and Exchange Commission and other agencies — included the assessment in its annual report to Congress.  Cybersecurity is still a threat, the council said, as is the possibility that large financial institutions might have concentrated exposures or complex trading strategies that could result in big losses because of a change in short-term interest rates.  “Thanks in part to progress on financial reform, the U.S. financial system is stronger and better able to absorb shocks than was the case even a year ago,” the report said. But “threats to financial stability, like threats to national security, are always present even if they are not always easy to discern in advance.”  The council also designated eight financial market utilities as “systemically important,” subjecting them to stricter oversight.

When is the Financial Industry Too Big? -It's a standard lesson in development economics that "financial deepening," which refers to growth and sophistication of the financial sector, helps economic growth. But in looking at the events leading up the Great Recession, it certainly looks at first glance (and second and third glance, too) that the financial sector ran amok. Is there a point where the financial sector gets too big? Stephen Cecchetti asks this question in a provocative short paper1 that kicked off the the 11th Annual BIS Conference  on the theme "The Future of Financial Globalization."  Here's Cecchetti laying out the basic theme that finance is useful in building growth--until it isn't.  "We teach that, because it allocates scarce resources to their most efficient uses, one of the best ways to promote long-run growth is to promote financial development. And, a sufficiently well-developed financial system provides the opportunity for everyone – households, corporations and governments – to reduce the volatility of their consumption and investment.  "It sure sounds like finance is great. But experience shows that a growing financial system is great for a while – until it isn’t. Look at how, by encouraging borrowing, the financial system encourages an excessive amount of residential construction in some locations. The results, empty three-car garages in the desert, do not suggest a more efficient use of capital!

NY Fed Report Advocates Limiting Some Money-Market Fund Withdrawals - The Federal Reserve Bank of New York released a report Thursday that advocates limiting some types of withdrawals from money-market funds in a bid to protect those funds from suffering the equivalent of a bank run. New York Fed President William Dudley said in a press release accompanying the report that he “strongly” endorses the ideas put forth by authors Patrick McCabe, Marco Cipriani, Michael Holscher and Antoine Martin. “Further reform of money funds is essential for our nation’s financial stability,” Mr. Dudley said.

Time and interest are not so interesting - I wanted to add a quick follow-up to the previous post, inspired by its very excellent comment thread. Cribbing Minsky, I defined the core of what a bank does as providing a guarantee. Bill Woolsey and Brito wonder whatever happened to maturity transformation, the traditional account of banks’ purpose? Nemo and Alex ask about interest, which I rather oddly left out of my story. Banks do a great many things. They certainly do charge interest, as well as a wide variety of fees, both related and unrelated to time. Banks do borrow short and lend long, and so might be expected to bear and be compensated for liquidity, duration, and refinancing risk. Banks also purchase office supplies, manage real estate, and buy advertising spots. Banks do a lot of things. But none of those are things that banks do uniquely. Banks compete with nonbank finance companies and bond markets for the business of lending at interest, and nearly every sort of firm can and occasionally does borrow short to finance long-lived assets. There is no obvious reason why any special sort of intermediary is needed to mediate exchanges across time of the right to use real resources. As Ashwin Parameswaran points out, there is no great mismatch between individuals’ willingness to save long-term and requirements by households and firms for long-term funds. Banks themselves largely hedge the maturity mismatch in their portfolios, outsourcing much of the whatever risks arise from any aggregate mismatch to other parties.

Unofficial Problem Bank list declines to 912 Institutions -- This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for July 13, 2012. (table is sortable by assets, state, etc.) Changes and comments from surferdude808: We will have to wait until next week for the OCC to release its enforcement actions through mid-June 2012. As such, it was a quiet week for the Unofficial Problem Bank List with two removals and one addition. The changes leave the list with 912 institutions with assets of $352.9 billion. A year ago, the list held 995 institutions with assets of $416.2 billion.

The Role of Bank Credit Enhancements in Securitization - NY Fed - As Nicola Cetorelli observes in his introductory post, securitization is a key element of the evolution from banking to shadow banking. Recognizing that raises the central question in this series: Does the rise of securitization (and shadow banking) signal the decline of traditional banking? Not necessarily, because banks can play a variety of background (or foreground) roles in the securitization process. In our published contribution to the series, we look at the role of banks in providing credit enhancements. Credit enhancements are protection in the form of financial support against losses on securitized assets in adverse circumstances. They’re the “magic elixir” that enables bankers to convert pools of possibly high-risk loans or mortgages into highly rated securities. This post highlights some findings from our article. One key finding: Banks are not being eclipsed by insurance companies (which are part of the shadow banking system) in the provision of credit enhancements.

The Dominant Role of Banks in Asset Securitization - NY Fed - As the previous posts have discussed, financial intermediation has evolved over the last few decades toward shadow banking. With that evolution, the traditional roles of banks as intermediaries between savers and borrowers are increasingly performed by more specialized entities involved in asset securitization. In this post, we summarize our published contribution to the series, in which we provide a comprehensive quantitative mapping of the primary roles in securitization. We document that banks were responsible for the majority of these activities. Their dominance indicates that the modern securitization-based system of financial intermediation is less “shadowy” than previously considered.  As discussed in the introductory post published on July 16, asset securitization redistributes the traditional role of a bank into several specialized functions, as shown in the role-based map below. Using a comprehensive securitization database that includes all nonagency asset-backed securities (ABS) from 1978 to 2008, we examine the magnitude of bank participation in four of the primary securitization roles: issuer, underwriter, servicer, and trustee.

Peeling the Onion: A Structural View of U.S. Bank Holding Companies - NY Fed - When market observers talk about a “bank,” they are generally not referring to a single legal entity. Instead, large domestic banking organizations are almost always organized according to a bank holding company (BHC) structure, in which a U.S. parent holding company controls up to several thousand separate subsidiaries. This hierarchy of controlled entities generally includes domestic commercial banks primarily focused on lending and deposit-taking as well as a range of nonbanking and foreign firms engaged in a diverse set of business activities, such as securities dealing and underwriting, insurance, real estate, private equity, leasing and trust services, asset management, and so on. In this post, we present some results of our article and contribution to the special EPR banking volume, “A Structural View of U.S. Bank Holding Companies,” which uses public regulatory data to document trends and stylized facts about the size, organizational complexity, and scope of large U.S. BHCs.

Big-four mortgage originations climb 37% -  Mortgage originations at the big-four banks increased 37% in the second quarter from last year because of the expanded Home Affordable Refinance Program. Wells Fargo, JPMorgan Chase, Bank of America and Citigroup wrote $205.8 billion in new mortgages in the three months ending June 30, according their combined financial filings. Originations also increased 7% from the first quarter. Wells continued to dominate. The San Francisco bank wrote $131.9 billion in new loans during the quarter, more than double originations from the same period last year. Wells said 16% of those new loans came through the Home Affordable Refinancing Program. The Federal Housing Finance Agency expanded HARP last year to eliminate upfront costs, negative equity caps and some repurchase risk on the original loan – pushing more business to the largest banks.Wells said 69% of its record $208 billion in mortgage applications were from borrowers looking to refi under HARP.Legislation lingers in a grid-locked Congress to expand competition in the program by eliminating repurchase risk on the new loan as well. But analysts predict the HARP boom could begin to fade into autumn, well before any new legislation is expected to pass.

U.S. banks haunted by mortgage demons that won't go away (Reuters) - Lenders like Bank of America Corp and Wells Fargo & Co say they are facing mounting pressure to buy back bad mortgages they sold to investors, signaling that banks' home-loan headaches could continue for years. Investors like Fannie Mae and Freddie Mac have been pressing banks to buy back bad mortgages for years, but in recent months those requests have intensified, the banks have said in recent second-quarter earnings reports. These comments from banks provide a fresh reminder of the loose ends that remain from the housing bust that started five years ago. The threat of new expenses and litigation is dampening bank share prices, and the problem could linger for some time, analysts and experts said. "This is not done yet," said Paul Miller, analyst with FBR Capital Markets. "There will be continued surprises in the industry." The most pain will likely be felt by Bank of America, which said on Wednesday its total outstanding claims from investors surged more than 40 percent to about $22 billion in the second quarter.

CMBS Leverage Most Since ’07 as Standards Loosen - Landlords are piling the most debt onto commercial properties in five years as Wall Street banks bundle the loans into bonds to meet rising demand from investors seeking high yields amid record-low interest rates. The size of mortgages bundled into bonds will surpass 100 percent of building values for the first time since 2007, before the market shut down amid the worst financial crisis in seven decades, according to Moody’s Investors Service. That measure of leverage on loans tied to everything from skyscrapers to strip malls is poised to climb 4.3 percentage points this quarter, the New York-based ratings company said in a July 11 report. Lenders are offering larger loans to win business as borrowers look to pay off a wave of debt taken out during the real estate bubble and as yield-starved investors are pushed toward riskier assets. More generous mortgages, a boon for landlords who need to refinance debt, may fuel concern that banks are reverting to practices that led to record defaults as late payments rise above 10 percent.

Catastrophic Economic Collapse- This is what it looks like..... Like we’ve all been saying for years…fraudclosure and robo signing and the fundamental breakdown of the Rule of Law. Proof that the fascists are in control everywhere is, well….everywhere. How is it that bankers and traders can brazenly steal hundreds of millions of dollars from “segregated” accounts and suffer no consequences for doing so? How is it that the bankers can violently batter down the doors of American’s homes, surreptitiously change their locks and leave behind locks that can be opened by tends of thousands of other contractors, workers, thugs? Well we’ve watched for years now as the Rule of Law has not just yielded, but has advanced to powerfully support such things. The phrase that always comes to mind is….”First They Came”…

  • First they came with forged documents, submitted them in court and threw my neighbor out of his home.
  • But I did nothing, because I was not in foreclosure.
  • Then they came with forged trades and stole hundreds of millions from farmers in the midwest.
  • But I did nothing, because I was not a farmer in the midwest.
  • Then they came with forged bank statements and stole hundreds of millions from brokerage accounts.
  • But I did nothing, because I didn’t have a brokerage account.
  • Then they came with a crowbar and an impact drill to drill out and pry down my neighbor’s door.
  • But I did nothing, because it was not my door.
  • And so when they came and cleaned out my retirement account and wiped clean my bank account leaving me no means to feed myself or fend for my family, there was nothing I could do, there was no one to fight for me.

Oregon Court of Appeals rules against banks, MERS in foreclosure case - The Oregon Court of Appeals struck a blow to the mortgage industry in Oregon Wednesday, ruling that its controversial document-registry system could not be used to skirt state recording law in out-of-court foreclosures. In a decision with implications beyond the Mortgage Electronic Registration Systems Inc., the state's second-highest court also held Wednesday that a lender must ensure a complete ownership history of the mortgage is filed in county records before it can foreclose outside a courtroom. MERS was created by the mortgage industry to bundle and sell loans to investors without having to record every assignment with county clerks. It is involved in most mortgages across the country.But the court found that the Oregon Trust Deed Act requires the party that receives loan payments to publicly record all changes in mortgage ownership before starting a so-called nonjudicial foreclosure.  MERS does not take loan payments and does not qualify as a “beneficiary” of a trust deed, so the digital registry cannot be used to avoid the recording requirement, the court ruled.“A beneficiary that uses MERS to avoid publicly recording assignments of a trust deed cannot avail itself of a nonjudicial foreclosure process that requires that very thing--publicly recorded assignments," the court ruled.

Delaware AG Biden Settlement with MERS Promises Reforms Already Pledged -- Delaware Attorney General Beau Biden has settled his lawsuit with Mortgage Electronic Registration Systems, or MERS. This is one of the lawsuits that was preserved in the aftermath of the foreclosure fraud settlement. To date, none of those lawsuits which were preserved have produced very much in the way of tangible success. Biden announced today that MERS agreed to implement “important reforms” as part of the settlement, which would reduce the likelihood of illegal foreclosures. “MERS’ inaccurate and unreliable records raised serious questions about who owns what in America. The steps MERS will now take will help answer those questions,” Biden said in a press release. So here’s what Biden got out of MERS:

  • • A new online database, which can also be accessed via phone, which homeowners with mortgages on MERS can easily access to find out who owns their mortgage.
    • A new assignment system. “MERS members now must record assignments of mortgages with the county Recorder of Deeds Office before a foreclosure can proceed,” according to the release. This has the effect of bringing the mortgage registry back to the local level, though it’s possible that MERS could withhold the recording of those assignments on performing loans, and then just dump a bunch of assignments on the county recorder if the servicer chooses to foreclose.

Bank Camo-Washing Not Leading to Actual Payouts for Servicemembers - As much as the banking industry has been revealed as corroded and broken over the past few weeks, the regulatory apparatus hasn’t fared much better. They’ve shown themselves to be asleep at the wheel on Libor, unable to stop money laundering at HSBC, and captured by the industry they’re supposed to regulate. And the latest discovery may be the worst yet.  I’ve gone on and on about camo-washing, the initiative by big banks to announce major compensation and debt relief for those victimized by violations of the Servicemembers Civil Relief Act, compared to the paltry relief (or outright abuse) for other homeowners. We’re talking about violations concerning banks foreclosing on members of the military while they served overseas, and illegal ratcheting up of their interest rates. These carry jail time in addition to fines. But to pre-empt this, banks have offered hundreds of thousands of dollars, free homes, and all sorts of other incentives to servicemembers. But the key word there is apparently “offered.” A new report from the Government Accountability Office shows that federal regulators aren’t diligently monitoring banks for violations of the SCRA. In other words, even though banks have offered this restitution, the regulators haven’t done a good job of finding the violations that would spark such restitution. This places the burden on the individual servicemembers, and there are lots of indications that they are not getting the restitution that banks have announced.

Foreclosure review program befuddles borrowers - Nothing about the letter that Keturah Miller received late last year indicated it could be worth as much as $125,000 to her. So she put it aside, forgetting about it for months until she stumbled across it while cleaning. Miller, 34, a family liaison worker with the New York City Department of Education, read it over four times. It still made no sense to her. The letter was one of 4.3 million forms sent under a flagship U .S. program to try to help people who may have experienced financial injury due to errors in their mortgage servicing. An estimated 4 million families lost their homes due to foreclosure from 2007 to 2012. So far, fewer than 5 percent of the potential beneficiaries - 214,000 - have requested a review of their cases, a number critics say confirms their suspicion that the process was designed to protect banks, not help consumers.  San Francisco County officials found that about 84 percent of the 400 foreclosures they examined contained irregularities. Tens of thousands of homeowners were victims of the "robo-signing" scandal in which employees of mortgage servicing firms generated bogus documents to speed foreclosure. The Office of the Comptroller of the Currency, a bank regulator, the Federal Reserve Board, and the now-defunct Office of Thrift Supervision issued consent orders in April 2011 mandating the review

‘Underwater’ Refis Grow; Critics Not Satisfied - The number of homeowners refinancing their mortgages under a revamped federal program grew in May, but critics are still pressing a federal regulator to do more. For the first five months of 2012, more than 78,000 homeowners who owe more than 105% of their property’s value have refinanced using the government’s Home Affordable Refinance Program, or HARP. That was up from about 60,000 in all of 2011, the Federal Housing Finance Agency said in a report Monday. In May alone, 21,605 homeowners who owe more than 105% of their home’s current value completed refinances through HARP. That was up from 15,371 in April and only 4,168 in May 2011. The Obama administration and the housing regulator rolled out several changes last fall designed to make more refinances happen. Before those changes, Fannie Mae and Freddie Mac borrowers were blocked from refinancing if they owed more than 125% of their home’s value. In addition, the housing regulator reduced the risk that banks will have to “buy back” defaulted mortgages from Fannie and Freddie if the loans are discovered to run afoul of underwriting rules. The revamped program “is accomplishing the goals set forth to provide relief to borrowers who might otherwise be unable to refinance due to house-price declines,” said Edward DeMarco, the agency’s acting director.

California County Weighs Drastic Plan to Aid Homeowners - Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County, where Fontana is one of the largest cities, are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater. Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property. Although the county has a long way to go before it could put the policy in place, the mere idea has already rankled the banking community, whose leaders say it would set a dangerous precedent of allowing a government entity to act as a lender and would discourage banks from granting loans in the area. A decade ago, Fontana and other cities here in the Inland Empire — the vast suburban sprawl east of Los Angeles — were just beginning to boom, with new subdivisions opening seemingly every weekend. Now, San Bernardino County, the largest county in the country, has cities with some of the nation’s highest foreclosure rates.

A Debt Jubilee via Eminent Domain? - Local government officials in San Bernardino county have apparently heard enough about how the overhang of mortgage debt is holding back the recovery, and they’re considering taking matters into their own hands.  Reuters‘ Matthew Goldstein and Jennifer Ablan report on the background discussions leading up to a proposal that is being considered by officials in San Bernardino, California—a county where almost half of all homes are in foreclosure.  The general idea is to use eminent domain as a kind of mortgage debt forgiveness program:  principal reduction would be achieved by forcing the sale of mortgages that have been packaged into securities; the mortgages would then be restructured on more favorable terms.  Homeowners with “underwater” mortgages who are current on their payments would be able to participate. Randall Wray and Paul McCulley are quoted in the piece, with the latter describing the program as “[a] legal system-midwifed, modern-day jubilee.”  Read the article here.

Obama Administration Raises Red Flags on Donor’s Mortgage Initiative - The Obama administration has concerns with a proposal—backed by a one-time major fundraiser to President Barack Obama—that would use eminent domain to seize and restructure mortgages, according to a White House official. Our colleague Nick Timiraos at’s Developments blog reports that the eminent-domain gambit is being advocated by Steven Gluckstern, chairman of Mortgage Resolution Partners, a San Francisco-based venture capital firm that has been the guiding force behind three California municipalities that are considering the approach. Mr. Gluckstern, an entrepreneur and former insurance executive, took an early role as a major fundraiser for Mr. Obama during the 2008 election, but aside from making the maximum $2,500 personal donation to the Obama campaign has largely been sitting out this one. The White House official said that while the administration believes the issue is a local one, it nonetheless has concerns with the  approach. (Treasury Secretary Timothy Geithner had dismissed calls from congressional Democrats for such an initiative two years ago).

Seizures May Be Cities’ Last Hope in Mortgage Crisis - The failure to address crippling household-debt burdens is leading local governments to embrace the radical idea of using eminent domain to seize and write down mortgages. Over the past month, two cities in California -- Stockton and San Bernardino -- have made moves to file for bankruptcy. ... The San Bernardino and Stockton episodes are representative of a national crisis: Crippling household-debt burdens and foreclosures have been dragging down the economy for the past five years. Renegotiation of underwater mortgages by the private sector has been almost nonexistent. Despite strong evidence that frictions related to securitized mortgages are preventing the efficient restructuring of household-debt burdens, policy makers have largely sat on the sidelines. With local governments feeling directly threatened, some cities have put forth a bold solution: Governments should use eminent-domain powers to buy mortgages, impose losses on bondholders, and write down principal amounts owed by the borrower. The argument is pretty simple: Debt burdens and foreclosures are crushing our cities; private lenders are showing no willingness to renegotiate; and there are no meaningful attempts at the federal level to help.  Using eminent domain to impose losses on bondholders is unquestionably a radical idea. ... There comes a point, however, when it becomes impossible to impose further losses on debtors. And when that happens, creditors are expected to take losses on their positions. This is exactly why restructuring debt contracts is a valuable and important part of the financial system. In corporations and commercial real estate, such restructuring happens every day.

From an Unlikely Source, a Serious Challenge to Wall Street | Matt Taibbi - There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all. But there’s something brewing that looks like it might be a blueprint to effectively take on Wall Street: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can't speak for how well the program will work, but it's certaily been effective in scaring the hell out of Wall Street. Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of "That’s so crazy, it just might work!" One of the plan’s originators described it to me as a "four-bank pool shot." Here’s how the New York Times described it in an article from earlier this week entitled, "California County Weighs Drastic Plan to Aid Homeowners": Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County … are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater. Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

While Eminent Domain Proposal Discussed, LA Tries to Make Foreclosure Cost-Prohibitive -- Dean Baker has a generally positive story out about the proposal in San Bernardino County, California to use eminent domain to condemn, write down and return to the owner a lower-cost mortgage that is no longer underwater. I have discussed with Rep. Brad Miller the concept of an eminent domain-based mortgage debt relief plan and the specifics of the Mortgage Resolution Partners proposal. Baker is much more credulous about MRP’s plans: MRP’s plan is to have the county condemn underwater mortgages in private mortgage pools. The logic is that these underwater mortgages are causing serious harm to the community. The case for focusing on mortgages in private mortgage pools is that it is generally quite difficult to sell these mortgages out of the pool. This means that even if, in principle, it might be advantageous for both the investors and the homeowners to have pools sell underwater mortgages to third parties like MRP who would rewrite the terms, the rules of the mortgage pools makes it unlikely that the mortgage will be sold. A sounder concept that Los Angeles has taken the lead on putting into practice is to make the post-foreclosure process so harrowing that lenders will think twice about the financial incentives. The city attorney, Carmen Trutanich, has sued another mortgage trustee over blighted and abandoned homes and the costs of them, typically borne by the local taxpayer.On Monday, Los Angeles officials accused US Bank of illegally allowing the Abner Street home and many others to deteriorate into slums. The civil allegations found problems in the way US Bank handled 1,500 home foreclosures and cited more than 150 homes that had fallen into disrepair. The city is demanding that the bank clean up vacant properties and improve conditions for families living in others.

SIFMA Fires Shot, Excludes Mortgages in Localities that Adopt Condemnation From To-Be-Announced Market - Yves Smith - On Monday, the financial services industry association (aka lobbying group) SIFMA said that it would exclude mortgages in localities that had condemned mortgages from the to-be-announced market, which is an important source of liquidity for new Fannie and Freddie loans. The promoters of the program, Mortgage Resolution Partners, issued a wounded-sounding response. So what does this all mean? The short answer is that on the surface, this looks like a clever bit of banker thuggery. Despite MRP’s complaints, SIFMA has excluded other types of mortgages from TBA pools for similar-enough sounding reasons that it looks to be within its rights to do so here. But while this change is an effort at intimidation, its economic impact is trivial, although local homeowner/voters fooled into thinking otherwise. Ironically, Mortgage Resolution Partners is playing right into the SIFMA scare tactic via its close to hysterical response.  This is an interesting case of geekery meets gamesmanship. As much as I’d rather see the condemnation scheme move to the legal foodfight stage, the bankers have made it clear they are pulling out all stops to halt this plan before it gets that far.

Democrats Join Bid to Provide Safe Harbor For Mortgage Brokers - The Consumer Financial Protection Bureau proved today it can engage in some fairly strong enforcement. Lawmakers in both parties want CFPB to ensure that individual homeowners cannot do the same thing. At issue are CFPB rules on mortgages, the first of many that will set new standards in the industry. A group of House Republicans and Democrats, 108 strong, have expressed in a letter that the new rules on “qualified residential mortgages,” among the first on the industry for CFPB, include a “safe harbor” provision that would shield mortgage brokers and originators from borrower lawsuits. If expressed broadly, this would give borrowers no legal recourse on new loans to contest the terms of their mortgages. The qualified residential mortgage provision, from the Dodd-Frank law, forces banks that issue mortgage-backed securities to retain at least 5% of the value of the portfolio on their own books. Loans issued with large down payments and favorable terms would be exempt from the QRM provision, giving an incentive to banks to issue plain vanilla loans, where they would not have to retain any risk. CFPB will get a crack at defining what constitutes a qualified residential mortgage. And these bipartisan lawmakers want to graft on this safe harbor provision. Brad Sherman is leading this effort for Democrats: “We want better loans, not bigger lawsuits,” The letter was signed by 16 Democrats and 92 Republicans

Bank of America has one million customers who missed at least two payments - Banks are slowing foreclosure rates yet again, and it isn’t because they are out of borrowers to foreclose on. With the settlement earlier this year, banks began to clear out their existing REO inventory, and they slowed foreclosures in the Southwest in order to modify mortgages to meet their requirements under the settlement (note the uptick in cancellations last month). Ideally, the banks would like to modify loans to keep borrowers in place and complete short sales for those who want to leave. They don’t want to resolve there legacy toxic loans by foreclosure. Unfortunately, borrowers are not cooperating. Borrowers benefit more by squatting until a foreclosure. BofA Give-Away Has Few Takers Among Homeowners: Mortgages When Bank of America Corp. sent letters to 60,000 struggling homeowners offering to slice an average $150,000 off their loans, the lender got an unusual response from most of them: silence. I think most people recognize these are bait-and-switch tactics of the banks. Lenders generate big headlines about giving away free money, but when the borrowers apply, they are offered something far less palatable. However, the lack of response goes beyond a basic distrust of the bank’s motives.

Obama Campaign Struggles to Find Voters Hit by Foreclosures - I remember talking with candidates in hard-hit foreclosure areas in 2010 about the impact of that on their campaign strategies. Simply put, many of the traditional Democratic voters in those areas, who came out in large numbers in 2008, had scattered, victims of the foreclosure crisis. Even if they could be found, they may no longer be in the district, and they certainly aren’t focused on politics so much as survival. The other problem is that it’s hard to schedule an effective precinct walk when you go to a neighborhood and half of the homes are vacant. The Obama campaign, after four years of ineffective programs to deal with the foreclosure crisis, now has to deal with these problems first-hand. By day, Lynnette Acosta, a 34-year- old mother of two, is an information-technology manager in Orlando, Florida. By night, she’s a sleuth for President Barack Obama’s re-election campaign, scouring for potential voters. In central Florida, that means knocking on doors in Hispanic neighborhoods with foreclosure rates as high as 30 percent, where once-registered Democrats have been evicted, their homes now owned by the bank. Volunteers walk house-to- house to determine the number of empty homes per precinct, then look for contact information for voters who once lived in them [...]

Facing Foreclosure After 50 - Roy Johnson fell so far behind on his $1,000-per-month mortgage payments that last year he allowed the redbrick, three-bedroom ranch he had owned since 1963 to lapse into foreclosure. That decision swept Mr. Johnson, 79, into a rapidly expanding demographic: older Americans who have lost their homes in the Great Recession. As he hauled his belongings by pickup truck from this Atlanta suburb and moved into his daughter’s basement, Mr. Johnson became one of the one and a half million Americans over the age of 50 who lost their houses to foreclosure between 2007 and 2011. Of those, the highest foreclosure rate was for homeowners over 75.  Once viewed as the most fiscally stable age group, older people are flailing. On Wednesday, AARP released what it described as the most comprehensive analysis yet of why the foreclosure crisis struck so many Americans in their retirement years. The report found that while people under 50 are the group most likely to face foreclosure, the risk of “serious delinquency” on mortgages has grown fastest for people over 50.  While the study classified even baby boomers as “older Americans,” its most dire findings were for the oldest group. Among people over 75, the foreclosure rate grew more than eightfold from 2007 to 2011, to 3 percent of that group of homeowners, the report found.

Retirees hit hard by foreclosures - Golden years? Not for an increasing number of older Americans who are losing their homes to foreclosure. One of the hardest hit groups: Those aged 75 and older, according to a report by AARP based on mortgage data from 2007 through 2011. All told, more than 1.5 million Americans aged 50 and older lost their homes in the five years from 2007 through 2011. While the percentage of foreclosures was higher among younger Americans, the rate for homeowners age 50 and older grew faster in recent years. And in that over-50 group, the 75+ crowd had the highest foreclosure rate in 2011, according to the AARP report, which cited data from CoreLogic, a provider of mortgage-loan data, and other sources. Among homeowners age 75 and older, 3.2% lost their house to foreclosure in 2011, up from the 0.33% in that age group who faced foreclosure in 2007. That compares to 3.5% among homeowners under age 50 in 2011, up from 0.42% in 2007

Foreclosures dominance of housing market projected to end in 2015 or 2016 -- At some point, the dodgy loans of the housing bubble will be recycled, delinquency rates will fall back to normal, the shadow inventory will be processed, and foreclosure rates will decline to the point they no longer dominate market sales and keep prices from rising. But when will that happen? Based on the most recent data from Lender Processing Services, I have extrapolated recent trends to attempt to answer that question. But first, we need to understand where we are in the process. In early 2012, lenders halted processing shadow inventory of long-term delinquent loans to attempt one more round of loan modifications to comply with the national settlement agreement. They have taken advantage of this to greatly reduce their standing inventory, particularly in non-judicial foreclosure states like California. As a result of this shift in processing, the ratio of aged loans to the total pipeline of foreclosures has been rising abruptly (see chart below).

MBA: "Record Low Mortgage Rates Lead to Jump in Refinance Activity" From the MBA: Record Low Mortgage Rates Lead to Jump in Refinance Activity The Refinance Index increased 22 percent from the previous week and is at the highest level since mid-June. The seasonally adjusted Purchase Index decreased 0.1 percent from one week earlier. “Refinance application volume increased last week to near peak levels for the year as mortgage rates dropped to a new low, driven down by growing concerns about the health of the US economy,” “Applications for HARP refinance loans accounted for 24 percent of refinance activity last week, in line with the HARP share for the past few weeks.” The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.74 percent, the lowest rate in the history of the survey, from 3.79 percent, with points increasing to 0.45 from 0.36 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the purchase index, and the purchase index is mostly moving sideways over the last two years - but has been moving a little recently. The second graph shows the refinance index.

Report: Housing Inventory declines 19.4% year-over-year in June - From June 2012 Real Estate Data The total US for-sale inventory of single family homes, condos, townhomes and co-ops (SFH/CTHCOPS) remained at historic lows with 1.88 million units for sale in June, down -19% compared to a year ago, and -39% below its peak of 3.10 million units in September, 2007 when began monitoring these markets. The median age of the inventory dropped to 84 days, which is down -9.67% on an annual basis. . On a year-over-year basis, the for-sale inventory declined in all but 2 (Shreveport, LA and Philadelphia, PA) of the 146 markets covered by, while list prices increased in 101 markets, held steady in 26 markets, and declined in just 19 markets. This pattern is in stark contrast to trends observed in June 2011, when median list prices were down -1% or more on an annual basis in 79 of the 146 markets covered by also reports that inventory was up 0.5% from the May level.

'Shadow REO': As Many as 90% of Foreclosed Properties Held Off the Market - The bank-owned house has been vacant for 18 months, according to Faranda, a Realtor specializing in distressed properties. Just two notices taped to a window are the only indications that the home is unoccupied. It might seem curious that such a well-maintained home doesn't have a For Sale sign on its front yard. But it's certainly not unusual. This home is part of what's known as the "shadow REO" inventory: repossessed homes across the country that banks or investors often purposely keep off the market. The practice isn't a secret, and refraining from dumping a large inventory of foreclosures on the market helps to keep home prices from crashing. But the extent to which lenders keep their stock of REOs -- industry parlance for "real estate owned" properties -- off the market may be much larger than most people think. As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms.

The Great Housing Swindle: Shadow REO Artificially Boosting Prices - Analysts have shown a propensity to announce that the country has hit a bottom on housing, throwing a host of facts and figures together to prove it. Many of these analysts benefit financially from the appearance of a housing recovery, and certainly banks benefit greatly as well. Earnings reports from JPMorgan Chase and Wells Fargo have highlighted the improving housing market, and this has boosted their stock price. And there are growing indications that this is all based on a convenient fiction around artificially reduced supply. A little-noticed item at AOL Real Estate, based on the same industry data banks and analysts use to tout a recovery, introduce us to the scam in “shadow REO”: 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.

OC Shadow inventory: What it really is and how large it really is - CoreLogic has the most widely accepted definition of shadow inventory, but it’s wrong, and their numbers under report the actual figures. CoreLogic, counts visible bank-owned inventory and borrowers who have been served notice. These properties are visible, and although they may not be on the MLS yet, they are not hiding in the shadows. The real shadow inventory is the total number of delinquent mortgage holders who haven’t been served notice. These people aren’t picked up on any foreclosure reports because they haven’t entered the system yet. CoreLogic’s estimate of this number is based on self-reported databases, and lenders are not making a full and accurate accounting to CoreLogic. Keith Jurow noted that New York has significantly more shadow inventory than is widely reported: Through sheer persistence, I obtained accurate statistics on serious delinquencies from the New York State Division of Banking. Let me explain. In late 2009, the NYS legislature passed a law requiring all servicing banks in the state to send a “pre-foreclosure” notice to all delinquent owner occupants. It warned them of possible foreclosure and explained steps they could take to prevent this. These servicing banks were also required to report to the Banking Division all notices that were sent.

What The Bulls Believe - The bulls believe the housing market is getting better because demand is outpacing supply. But as AOL’s Real Estate blog reports in "‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest", the lion's share of REOs are being withheld from sale, according to estimates provided to AOL Real Estate by two analytics firms. The bulls believe that our nation's financial condition is improving because private sector debt has declined since 2008. But as Forbes contributor Rob Clarfeld reveals in "What Deleveraging? Financial Relativism and the U.S. Economy," (which I highlighted in "'We Have Barely Moved the Needle'") total credit market debt has actually increased since the ostensible end of The Great Recession. The bulls believe that strong demand for Treasurys means that investors are not concerned about our government's spending-and-borrowing policies. But as Economics Fanatic points out in a Seeking Alpha post, "Why The Treasury Bond Bull Market Is Already Over," the Federal Reserve has been the biggest buyer of U.S. government securities over the last three years, and is the second largest holder (after Social Security and other government trust funds). The bulls believe that rising share prices means investors see economic recovery on the horizon. But as Business Insider details in "Almost All Of The Money In The Market Can Be Made Using This Simple Fed Frontrunning Strategy," citing data from the New York Fed's Liberty Street Economics blog, "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)

Here Comes the Catch in Home Equity Loans - IS the housing market finally coming back from the dead? Recent data suggests as much.  But the fact is, even a strong recovery is unlikely to rescue many homeowners who are groaning under the weight of multiple mortgages. That’s because of the nature of home equity lines of credit, which require low payments in the early years followed by hefty payments later on. For many borrowers, those later years are fast approaching. During the initial years of home equity credit lines, borrowers must pay only interest. Borrowers can also pay down principal if they wish, but many homeowners, short on cash, haven’t done so. At Wells Fargo, for example, in the quarter ended March 31, some 44 percent of the bank’s home equity borrowers paid only the minimum amount due. Being required to pay only the interest on these loans has made them easier for troubled borrowers to carry. But these easy terms are about to get tougher. What’s known as the initial draw period for home equity lines of credit is coming to an end for many borrowers. Soon, they will have to pay principal as well.  Ten days ago, the Office of the Comptroller of the Currency published some frightening figures about the looming payments. In its spring 2012 “Semiannual Risk Perspective,” it said that almost 60 percent of all home equity line balances would start requiring payments of both principal and interest between 2014 and 2017.

Wealthy homeowners brace for 'fiscal cliff' - Realtors to the rich have started getting a strange new kind of phone call. Wealthy homeowners with properties for sale are suddenly demanding that the brokers get them a deal in the next five months. The reason, they say, is the fiscal cliff. If the Bush tax cuts expire and capital-gains tax rates go up on Jan. 1, sellers in the high-end real-estate market could owe millions more in taxes on their sales. As a result, many wealthy sellers are racing to close before 2013. Others who were thinking of putting their homes on the market next year or later are listing them this summer. Call it “The Mansion Cliff.” Real-estate experts say that as more of the wealthy sell out of fear of a tax increase, they could drive up inventory and lower prices in the top of the real estate market, which has been one of the few bright spots in the economy. Any softening at the high end, or a spike in inventory, could ripple through the housing market and add new pressure to prices, although it could also increase sales volume.

Just Released: Housing Checkup - Has the Market Finally Bottomed Out? - In this post, we examine a number of important housing market “vital signs” that collectively help to indicate the health status of local markets at the county level. The post also serves as an introduction to a set of interactive maps, based on home price index data from CoreLogic, that we will regularly update on the New York Fed's website for readers interested in continuing to track the convalescence of the U.S. housing markets. The maps show the year-over-year change in home prices for nearly 1,200 counties through May and include a video sequence tracking these price changes since 2003. Over the past few months, some national housing market indicators have begun to look a bit brighter. As of May, the CoreLogic national home price index had risen three months in a row. While still at a relatively low level, housing starts now have a clear upward trend. These developments have led some analysts to declare that, after five years of generally declining prices and activity, the housing market has finally bottomed out. While the national statistics are encouraging, whether or not the housing market has bottomed out is actually a much more difficult question to address for a couple of reasons. First, the United States is not a single housing market but rather a collection of numerous local housing markets. Second, the health of a local housing market is determined by a variety of indicators in addition to prices.

Housing Recovery Gains Momentum, June Sales and Prices Rise Higher - -- The June RE/MAX National Housing Report shows that the housing recovery is real. On a year-to-year basis, home sales have now risen for twelve straight months and prices have inched higher for the past five months. Of the 53 metro areas included in the survey, 31 report increases in both sales and prices. It appears that the recovery is broad based, occurring in all geographic regions. Increased consumer confidence, historically low mortgage rates and attractive pricing are some of the factors that are drawing buyers and sellers back into the real estate market. Available homes for sale dropped 5.0% from May and 27.4% from June 2011. This declining inventory has created a seller's market in many areas with multiple bids and offers occurring frequently. An Average Days on Market of 84 in June is the lowest since August 2010.

FNC: Residential Property Values increased 0.6% in May - FNC released their May index data today. FNC reported that their Residential Price Index™ (RPI) indicates that U.S. residential property values increased 0.6% in May (Composite 100 index). The other RPIs (10-MSA, 20-MSA, 30-MSA) increased between 0.5% and 0.8% in May. These indexes are not seasonally adjusted (NSA), and are for non-distressed home sales (excluding foreclosure auction sales, REO sales, and short sales). The year-over-year trends continued to show improvement in May, with all four composite indexes down 1.8% to 2.1% compared to May 2011. For all the indexes, this is the smallest year-over-year decline in the FNC index since year-over-year prices started falling in 2007 (five years ago). This graph is based on the FNC index (four composites) through May 2012. The FNC indexes are hedonic price indexes using a blend of sold homes and real-time appraisals. Some of the month-to-month gain is seasonal since this index is NSA. The key is the indexes are showing less of a year-over-year decline in May. If house prices have bottomed, the year-over-year decline should turn positive later this year or early in 2013.

Rates Update: 30-Year Fixed at Historic Low  - Today the 5-year Note closed at 0.62, two basis points off its historic closing low set Monday and repeated yesterday. The news today is the weekly update on mortgage rates from Freddie Mac, which shows the average 30-year fixed at a new all-time low of 3.53 percent, three basis points lower than last week. The 30-year fixed hit its all-time high about a year after we bought our dream home in 1980. The weekly average peaked 18.63 percent in October 1981. That was about four months into the second (and much worse) second half of the double dip recession that clobbered the US economy.Here is an updated snapshot of Treasury yields and the 30-year fixed since the onset of Operation Twist.

Artificial Lack of Supply Helps Housing Prices - I’m on record as not buying the idea that the housing market is recovering.  Indeed, I don’t really believe that the market has even bottomed out, I think we will see another 5-10% decline in values before it is all said and done.  I see very little in the fundamental underlying economic conditions in this country that would cause me to feel otherwise.  Unemployment is still high, which depresses the demand for homes.  A low rate of household formation, which is tied into joblessness and the country’s massive student debt burden is at the lowest point in decades, and isn’t showing signs of recovery (further depressing demand for homes).  The economy appears to be slowing, as does hiring, which will also serve to keep demand for homes low. In addition to factors depressing demand, there are factors that should cause the supply of homes on the market to increase.  According to Laurie Goodman of Amherst Securities, there are 2.8 million Americans who are 12 months or more behind on these mortgages.  The vast majority of these homes will eventually find their way to market as repossessions or short sales.

Existing Home Sales in June: 4.37 million SAAR, 6.6 months of supply - The NAR reports: June Existing-Home Prices Rise Again, Sales Down with Constrained Supply - Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, declined 5.4 percent to a seasonally adjusted annual rate of 4.37 million in June from an upwardly revised 4.62 million in May, but are 4.5 percent higher than the 4.18 million-unit level in June 2011. ... Total housing inventory at the end June fell another 3.2 percent to 2.39 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace, up from a 6.4-month supply in May. Listed inventory is 24.4 percent below a year ago when there was a 9.1-month supply. This graph shows existinghomesales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales3 in June 2012 (4.37 million SAAR) were 5.4% lower than last month, and were 4.5% above the June 2011 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory declined to 2.39 million in June from the downwardly revised 2.47 million in May (revised down from 2.49 million). Inventory is not seasonally adjusted, and usually inventory increases from the seasonal lows in December and January to the seasonal high in mid-summer. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply.

Existing Home Sales Fall - Existing home sales fell in June, a blow to the continuing narrative of a comeback in the housing market. The decrease comes at the outset of the peak buying season. Bloomberg believes that this fits in line with a weakening US economy: Home purchases slid 5.4 percent in June to a 4.37 million annual rate, an eight-month low, figures from the National Association of Realtors showed today in Washington. The Federal Reserve Bank of Philadelphia’s general economic index was minus 12.9 in July after minus 16.6 the month before. Readings of less than zero signal contraction.The figures underscore Fed Chairman Ben S. Bernanke’s concerns that growth may be too feeble to reduce unemployment stuck above 8 percent since February 2009. Other reports today showed consumer confidence weakened, claims for unemployment benefits rose and an index of leading economic indicators declined more than forecast. Calculated Risk, the blog that has been at the forefront of predicting a bottom for housing over the past several months, insisted that everyone was looking at the wrong number, and that what matters in terms of a housing recovery is inventory, which fell again year-over-year. However, Bill McBride often fails to address the fact that housing inventory, especially on existing homes, is being artificially constrained by servicers keeping up to 90% of their REO off the market, propping up the market.

Oops! Existing Home Sales Fall - The National Association of Realtors reported Thursday that sales of previously owned homes fell 5.4 percent in June to an eight-month low, interrupting a string of favorable reports on the housing market. It’s bad news, all right, and does somewhat undermine the case for a housing recovery. But it does not mean that all the positive reports on housing, detailed by my colleague Matthew Phillips in a story called “Is Housing Back from the Dead?,” are wrong. Two things to keep in mind: Existing-home sales numbers are volatile, so it’s risky to read too much into one data point. For example, one reason the June number was down so much is that the May number against which it was compared was revised upward. Second, the drop is partly a function of lack of supply rather than weak demand from buyers. The National Association of Realtors says there was a big drop in the number of units put on the market via foreclosures and short sales. The problem, it says, is that “inventory continues to shrink and that is limiting buying opportunities.”

Existing Home Sales “Unexpectedly” Fall - Yves Smith - This Bloomberg story is consistent our current thesis: that despite the buoyancy of the stock market, conventional wisdom has it that a “recovery” is on and that the economy is on firmer footing than it really is. Note that the existing homes sale release fell below the low end of forecasts among the economists that Bloomberg surveyed earlier in the week. And this occurred despite the fact that some commentators though there was risk that warm weather early in the year led to an acceleration of the peak selling season, and strong looking performance in the spring would come at the expense of activity over the summer.  From Bloomberg: Home purchases slid 5.4 percent in June to a 4.37 million annual rate, an eight-month low, figures from the National Association of Realtors showed today in Washington…. The median forecast of 76 economists surveyed by Bloomberg News called for a 4.62 million pace of existing home sales. Estimates ranged from 4.42 million to 4.75 million. Slower job growth, stricter lending standards and competition from cheaper distressed properties may be impeding the market even with mortgage rates at all-time lows. The drop in home values since the last recession has also left many owners owing more than their property is worth, limiting their ability to relocate.

Existing Home Sales: Inventory and NSA Sales Graph -- I can't emphasize enough - what matters the most in the NAR's existing home sales report is inventory; what matters the most in the new home sales report next week is sales. It is active inventory that impacts prices (although the "shadow" inventory will keep prices from rising). Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. For existing home sales, look at inventory first. Although there are always questions about the NAR data, the report this morning was another positive housing report. The NAR reported inventory decreased to 2.39 million units in June, down 3.2% from the downwardly revised 2.47 million in May (revised down from 2.49 million). This is down 24.4% from June 2011, and down 10.8% from the inventory level in June 2005 (mid-2005 was when inventory started increasing sharply). This is the lowest level for a June since 2002. The following graph shows inventory by month since 2004. In 2005 (dark blue columns), inventory kept rising all year - and that was a clear sign that the housing bubble was ending. This year (dark red for 2012) inventory is at the lowest level for the month of June since 2002, and inventory is below the level in June 2005 (not counting contingent sales). However inventory is still elevated using months-of-supply, but I expect months-of-supply to be below 6 later this year. The following graph shows existing home sales Not Seasonally Adjusted (NSA). Sales NSA (red column) are above the sales for the 2009 and 2011 (2010 was higher because of the tax credit).

Breaking Down Drop in Home Resales --’s Steve Berkowitz talks with Jim Chesko about a surprising 5.4% drop in sales of previously occupied homes in June

Vital Signs: Existing Home Sales Dip - Sales of previously occupied homes tumbled in June, a disappointing development given recent flickers of life in the long-suffering housing market. Existing-home sales fell 5.4% from May to a seasonally adjusted annual rate of 4.37 million, the lowest level in eight months. While that is a notable decline, sales remain 4.5% higher than in June last year.

A Four-Year High For Housing Starts In June -- Today’s update on housing starts and new building permits for June delivers another day of upbeat economic news, following yesterday’s encouraging report on industrial production for last month. June overall is still a mixed bag of economic data (retail sales, ISM Manufacturing Index, and payrolls in particular were disappointing). But it’s hardly trivial that the housing market continues to grow—a trend that appears intact, based on today's news for permits and starts. As the first chart below shows, new housing starts rose last month to a new post-recession high of an annualized 760,000. The last time starts were this high was October 2008. Permits retreated slightly in June, but this isn't cause for alarm since the year-over-year trend continues to look quite healthy for both of these leading indicators.Indeed, as the second chart illustrates, the revival in starts and permits still looks encouraging on an annual basis. Both indicators are advancing at roughly 20% a year. That's a sign that the housing sector has a fair amount of growth momentum. Yes, it could all disappear tomorrow, but let's remember that the rebound in housing didn't suddenly drop out of the sky.

Housing Starts increased to 760 thousand in June, Highest since October 2008 - From the Census Bureau: Permits, Starts and Completions: Privately-owned housing starts in June were at a seasonally adjusted annual rate of 760,000. This is 6.9 percent above the revised May estimate of 711,000 and is 23.6 percent above the June 2011 rate of 615,000. Single-family housing starts in June were at a rate of 539,000; this is 4.7 percent above the revised May figure of 515,000. The June rate for units in buildings with five units or more was 213,000. Building Permits: Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 755,000. This is 3.7 percent below the revised May rate of 784,000, but is 19.3 percent above the June 2011 estimate of 633,000. Single-family authorizations in June were at a rate of 493,000; this is 0.6 percent above the revised May figure of 490,000. Authorizations of units in buildings with five units or more were at a rate of 241,000 in June. Total housing starts were at 760 thousand (SAAR) in June, up 6.9% from the revised May rate of 711 thousand (SAAR). Note that May was revised up from 708 thousand. April was revised up slightly too. Single-family starts increased 4.7% to 539 thousand in June. The second graph shows total and single unit starts since 1968.

Starts and Completions: Multi-family and Single Family - Halfway through 2012, single family starts are on pace for over 500 thousand this year, and total starts are on pace for about 730 thousand. That is above the forecasts for most analysts (however Lawler and the NAHB were close). Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). These graphs use a 12 month rolling total for NSA starts and completions. The blue line is for multifamily starts and the red line is for multifamily completions.   The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up over the course of the year (completions lag starts by about 12 months).  This means there will be an increase in multi-family deliveries next year. The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Rent increases pushing up housing starts but will also impact CPI -The only positive news coming out of the US economy seems to be the housing market. Housing starts had a nice increase in spite of a slowdown across most sectors.Here are some facts to consider:
1. According to some analysts, housing starts would need to double to keep up with the demand from long-term US demographics.
2. Because of the demographics, rising rents in some areas are encouraging both renters and landlords into buying property, pushing up housing starts.
3. Residential (apartment) rents in the US have increased 3.5% YoY according to Reis. This is considerably higher than the current overall CPI. Rental increases take some six months to feed through the official CPI number. Expect a pop in the CPI (from the rental market as well as rising commodity prices) in the coming months.

Home Builder Confidence Takes Biggest Jump in Nearly 10 Years - U.S. home builders’ confidence took the biggest monthly jump in nearly a decade this month, another sign that a troubled part of the economy has become a source of strength. The National Association of Home Builders said Tuesday its housing market index soared to 35 this month, the highest level since March 2007 and up six points from a month earlier. It was the largest monthly increase since September 2002.

NAHB Builder Confidence increases strongly in July, Highest since March 2007 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 6 points in July to 35. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises Six Points in July Builder confidence in the market for newly built, single-family homes rose six points to 35 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today. This is the largest one-month gain recorded by the index in nearly a decade, and brings the HMI to its highest point since March of 2007.  This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the July release for the HMI and the May data for starts (June housing starts will be released tomorrow). A reading of 35 was well above the consensus.

Builder Confidence Rises to a 5-Year High in June, with the Largest Monthly Increase Since 2002 -- The National Association of Home Builders reports today that: "Builder confidence in the market for newly built, single-family homes rose six points to 35 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today (see chart above). This is the largest one-month gain recorded by the index in nearly a decade (since September 2002), and brings the HMI to its highest point since March of 2007. “Builder confidence increased by solid margins in every region of the country in July as views of current sales conditions, prospects for future sales and traffic of prospective buyers all improved,”  “Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” Every HMI component recorded gains in July. The components gauging current sales conditions and traffic of prospective buyers each rose six points, to 37 and 29, respectively, while the component gauging sales expectations for the next six months rose 11 points to 44. Likewise, every region posted HMI gains in July.

Job Gains Need to Be Wind Under Housing’s Wings - Housing–long the intensive-care patient of the U.S. economic recovery–is finally showing life just as other sectors look winded. But the progress might be short-lived if the labor markets don’t pick up steam.Housing starts rose a better-than-expected 6.9% in June from the previous month to reach 760,000, the highest level since October 2008. Permits fell 3.7%, but that followed an 8.4% spike in May. The level of permits at 755,000 suggests builders have a good amount of demand in the pipeline. That could be why builders feel better about their industry, according to a survey released Tuesday by the National Association of Home Builders. The NAHB’s housing market index jumped to 35 in July, its highest reading since March 2007.  Even Federal Reserve Chairman Ben Bernanke acknowledged in this week’s congressional testimony, “We have seen modest signs of improvement in housing,” helped in part by cheap mortgage rates engineered by the Fed. But let’s be real: Housing is not about to soar. But even a bottoming out means the sector is no longer cutting into gross domestic product growth. Additionally, even in recovery, housing is a shadow of its former self. Starts remain about 60% below their boom levels of the mid-2000s and are only about half of their 1990s average of 1.37 million. Home building accounts for about 2% of nominal GDP, compared with 6.1% in 2005.

AIA: Architecture Billings Index shows "drop in design activity" in June - This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Weak Market Conditions Persist According to Architecture Billings Index The Architecture Billings Index (ABI) saw more poor conditions last month, indicating a drop in design activity at U.S. architecture firms, and suggesting upcoming weakness in spending on nonresidential construction projects. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the June ABI score was 45.9, nearly identical to the mark of 45.8 in May. This score reflects a decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 54.4, up slightly from mark of 54.0 the previous month. This graph shows the Architecture Billings Index since 1996. The index was at 45.9 in June, up slightly from May. Anything below 50 indicates contraction in demand for architects' services. This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

U.S. Retail Sales Fell 0.5 Percent in June — Americans cut their spending at retail businesses for a third straight month, as a weak job market has made consumers more cautious.  Retail sales fell 0.5 percent in June from May, the Commerce Department said Monday. Consumers spent less on autos, furniture, appliances, on building and garden supplies and at department stores. The drop in sales followed declines in the previous two months. Retail sales haven’t fallen for three straight months since the fall of 2008, at the height of the financial crisis. Some of the weakness in recent months reflects falling gas prices. But even excluding sales at gas stations, retail spending fell 0.3 percent in June from May. Consumers are growing less confident in the economy and have pulled back sharply on spending this spring. Consumer spending drives 70 percent of economic activity. The economy is expanding too slowly to lower the unemployment rate, which stayed at 8.2 percent in June.

Retail Sales decline 0.5% in June - On a monthly basis, retail sales were down 0.5% from May to June (seasonally adjusted), and sales were up 3.8% from June 2011. From the Census Bureau report: The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for June, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $401.5 billion, a decrease of 0.5 percent (±0.5%) from the previous month, but 3.8 percent (±0.7%) above June 2011. Ex-autos, retail sales declined 0.4% in June. Sales for May were unchanged at a 0.2% decrease. This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline). Retail sales are up 21.2% from the bottom, and now 6.0% above the pre-recession peak (not inflation adjusted) The second graph shows the same data, but just since 2006 (to show the recent changes). Excluding gasoline, retail sales are up 18.1% from the bottom, and now 6.1% above the pre-recession peak (not inflation adjusted). The third graph shows the year-over-year change in retail sales and food service (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 4.2% on a YoY basis (3.8% for all retail sales). Retail sales ex-gasoline decreased 0.3% in June.

Retail Sales Retreat In June For 3rd Straight Month - Retail sales unexpectedly fell 0.5% last month, the Census Bureau reports. Economists had generally predicted an increase for the month. In contrast, the revised numbers now show that June’s retreat was the third monthly loss in a row—the first trio of consecutive decreases since 2008. Not an encouraging sign, but not a smoking gun either. The standard caveat applies, namely, monthly data is volatile and not necessarily indicative of the broader trend. Then again, it’s not often that volatility on the downside persists for three months running if the economy has a head of steam. For a clearer look at the trend, let’s consider the year-over-year percentage change. The good news is that retail sales are still growing at a healthy pace on this score. The bad news is that the deceleration in the annual rate of growth rolls on, posting a 4% rise for the year through last month—the slowest increase since August 2010.

Retail Sales: Third Month of Contraction - The Retail Sales Report released this morning shows that retail sales in June came in at -0.5% month-over-month following declines of -0.2% in May and -0.5% in April. Today's number came in below the consensus forecast of 0.2%. The year-over-year change is 3.8%, the weakest since August 2010. This is the longest string of MoM declines since the six (July-Dec 2008) during the Great Recession. Now let's dig a bit deeper into the "real" data, adjusted for inflation and against the backdrop of our growing population. The first chart shows the complete series from 1992, when the U.S. Census Bureau began tracking the data. I've highlighted recessions and the approximate range of two major economic episodes. The Tech Crash that began in the spring of 2000 had relatively little impact on consumption. The Financial Crisis of 2008 has had a major impact. After . Here is the same chart with two trendlines added. These are linear regressions computed with the Excel Growth function. How much insight into the US economy does the nominal retail sales report offer? The next chart gives us a perspective on the extent to which this indicator is skewed by inflation and population growth. The nominal sales number shows a cumulative growth of 144.7% since the beginning of this series. Adjust for population growth and the cumulative number drops to 98.9%. And when we adjust for both population growth and inflation, retail sales are up only 20.7% over the past two decades.

Breaking Down Decline in Retail Sales - LPL Financial economist Jon Canally talks with Jim Chesko about news that U.S. retail sales fell in June by 0.5%, the third-straight monthly decline and the latest sign of a slowing economy.

Big Retail Sales Miss In Longest Collapse Streak Since 2008 Recession, Confirms US Consumer Zombification -- Today's advance retail sales for June was simply abysmal, printing at -0.5% on the headline, and -0.4% ex autos. Expectations were for a print of +0.2% on the headline and unchanged less autos. Gas was not the culprit either as ex autos and gas the miss was -0.2%, on expectations of a +0.2% print. This was the third consecutive drop in a row: the longest since December 2008, when the US economy was flat out imploding. Expect furious Q2 GDP revisions imminently once the sellside community plugs this number into bean counter abaci. Goldman will likely cut its recently downgraded Q2 GDP from 1.3% to 1.1% or even sub 1.0%, which is essentially stall speed. Finally, today's number confirms our biggest worry: the spike in May consumer credit was not for discretionary purchases: it was for staples. Do the math. Finally, building material & garden eq. & supplies dealers down 1.6%, the biggest sequential drop aside from gas stations. At least housing has "bottomed." Of course, EURUSD spiking on expectations of more imminent NEW QE.

Troubling Data on Retail Sales Suggests Economic Slowdown - Retail sales fell for the third straight month in June, a rare event that usually happens during recessions. With 70% of the US economy coming from consumer spending, it’s almost axiomatic that slower retail sales correlates with economic contraction.  Chart is from Calculated Risk. U.S. retail sales fell for a third straight month in June as demand slumped for everything from cars and electronics to building materials, a sign the economic recovery is flagging. Retail sales slipped 0.5 percent, the Commerce Department said on Monday. It was the first time sales had dropped in three consecutive months since late 2008, when the economy was still mired in a deep recession. Analysts polled by Reuters had expected retail sales to rise 0.2 percent. As Doug Henwood points out, this almost always happens during a recession.  Analysts gave different takes on the drop in retail sales, from fears over the European debt crisis (Americans are going to restaurants less because of Spanish borrowing costs?) to lackluster hiring to lower gas prices from higher supply (that accounts for only a portion of it) to a general uncertainty about the economic outlook. Whatever the reason, the sales slowdown pretty much explains itself as far as the economy is concerned. Slow sales will lead to slow hiring which will lead to slow economic growth. You cannot really disassociate one from the other.

Consumer Price Index in US Was Unchanged, Core Up 0.2%  The cost of living in the U.S. was little changed in June, a sign inflation may stay subdued as Federal Reserve officials have predicted.  No change in the consumer-price index followed a 0.3 percent drop in May, a Labor Department report showed today in Washington. The measure matched the median forecast of economists in a Bloomberg News survey. The so-called core measure that excludes volatile food and fuel costs rose 0.2 percent for a fourth month.  Companies from Supervalu to Chrysler are offering incentives to boost sales as weak job gains squeeze households, underscoring limited pricing power among businesses. With inflation less of a concern, Fed policy makers have room to take additional steps to ensure the world’s largest economy keeps expanding.

Inflation Watch: Headline CPI Unchanged, Core Up Fractionally - The Bureau of Labor Statistics released the CPI data for last month this morning. Year-over-year Headline CPI came in at 1.66%, which the BLS rounds to 1.7%, essentially unchanged from 1.70% (not rounded) last month. Year-over year-Core CPI (ex Food and Energy) came in at 2.22%, which the BLS rounds to 2.0%, down fractionally from 2.26% (rounded to 2.3%) last month. Here is the introduction from the BLS summary: The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in June on a seasonally adjusted basis. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.  The energy index continued to fall in June, but its decline was offset by increases in the indexes for food and all items less food and energy. The energy index fell 1.4 percent as the gasoline index declined for the third month in a row; other energy indexes were mixed. The food index rose 0.2 percent after being unchanged last month as the index for food at home turned up in June.  The index for all items less food and energy rose 0.2 percent in June, the fourth consecutive such increase. The shelter index posted its smallest increase since September, the index for used cars and trucks was unchanged after a series of increases, and the index for airline fares declined. However, the index for medical care posted its largest increase since 2010 and the indexes for apparel and recreation both rose substantially in June.  The 12-month change in the index for all items was 1.7 percent in June, the same figure as in May. The energy index declined 3.9 percent over the last 12 months, while the food index rose 2.7 percent. The index for all items less food and energy rose 2.2 percent for the 12 months ending June, a slight decline from the 2.3 percent figure in May.  More... The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since 1957. The second chart gives a close-up of the two since 2000.

No Inflationary Pressures Based on the BPP@MIT Index and Two Measures of Expected Inflation - The Billion Prices Project @ MIT just released daily online price index data through June 30, and the annual inflation rates from that price index are displayed in the chart above going back to late 2009 (red line in chart). According to this real-time measure of major inflation trends in the U.S., inflationary pressures have been subsiding for the last year, and annual inflation has fallen from almost 4% last July to the current level of about 1.25%, the lowest rate since late 2009.  In contrast to the MIT-BPP inflation, annual inflation based on the CPI is running higher, at about 1.75% through June (blue line in chart). In one of several other related releases this week, the Federal Reserve Bank of Cleveland reported that its latest estimate of expected inflation over the next ten years was 1.26% in June, the lowest level in the 30-year history of the Cleveland Fed's series going back to 1982, except for a slightly lower estimate in May. Further, Bloomberg is reporting that the breakeven rate on regular 10-year Treasury notes versus 10-year indexed-Treasuries, a market-based measure of expected future inflation, has been trending downward for the last three months.   The current breakeven rate is about 2.1%, indicating that the bond market expects future inflation to continue to remain low.

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

Gasoline Update: Second Week of Price Increases -- 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 second week after 13 weeks of decline: regular and premium both increased 2 cents. Regular is now up 29 cents and premium 19 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. Connecticut has the highest mainland prices, averaging around $3.72 a gallon with California as the second highest at $3.70. The next chart is an overlay of WTIC, Brent Crude and unleaded gasoline end-of-day spot prices (GASO). All three are up over the past week. GASO hit its intraday high at 3.43 on April 3rd. It closed today at 2.85, a 10 cent increase from last week.

Gasoline Prices: "Comparative stability" -- From Reuters: Gasoline prices fall more, but slide may be over: survey The Lundberg Survey said the national average price of self-serve, regular gas was $3.41 on July 13, down from $3.478 on June 22, and from $3.615 a year ago.  Gasoline prices have fallen 14 percent from a recent peak of $3.967 a gallon set on April 6. Trilby Lundberg ...said prices may soon enter a period of "comparative stability,"...  Oil prices have rebounded some. Brent is back up to $102.62 per barrel (after falling to $89 per barrel on June 25th), and WTI is up to $87.10.  Professor Hamilton recently presented a calculator from Political Calculations that estimates the cost of gasoline based on Brent oil prices. Currently this suggests a price of around $3.40 per gallon - about the current price.  The following graph shows the decline in gasoline prices. Gasoline prices are down significantly from the peak in early April, but up a few cents over the last two weeks.  Note: If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Gas prices may go up too because of drought - The slim silver lining to the global economic malaise has been low prices at the gas pump. That’s about to change. Economists are already predicting price increases for staples like milk and beef as scorching heat and drought wreak havoc on America’s corn crop. Now, beleaguered consumers can add gasoline to that list. “We’re pretty well hooked on ethanol,” said Bruce Babcock, professor of economics at Iowa State University. “It’s 10 percent of our gasoline supply.” The complexity of the market makes it hard to predict exactly what this will mean for drivers, but Babcock estimated the impact of ethanol, which is derived from corn, among other grains, could be as high as 15 cents a gallon. A 46-cent per gallon subsidy to ethanol producers expired at the end of last year, which means the product is exposed to market gyrations. One-month corn futures already are trading at record highs, said Dan Flynn, an analyst at Price Futures Group. “We are definitely at all-time highs and right now, with the drought, there’s no end in sight. Expect higher prices at the pump.”

Merchants Considering Credit Card Surcharges - Starting this week, prices are 2 percent lower on At the grocer Kroger, executives are contemplating charging two prices for groceries — a lower price when shoppers pay with cash, and a higher one when they use a credit card. And at restaurants across the country, owners are weighing the wisdom — or lack of it — of a surcharge on bills paid with credit cards.  Businesses on Monday sorted through the repercussions of a multibillion-dollar settlement late last week with Visa and MasterCard, and there was little consensus about how things would settle out. The tentative deal allows merchants to offer discounts to customers paying with cash or checks, and to impose fees when they pay with credit cards. Businesses can also negotiate directly with Visa and MasterCard over the rates they pay for credit card transactions.  In a symbolic move,, one of the plaintiffs in the class action that led to the settlement, dropped its prices to demonstrate “that cardholders benefit” from the deal, not just people who pay with cash,  Mr. Goldstone reckoned that merchants and Web sites like his, which accepts only credit card payments, will now be able to negotiate with the credit card companies for lower transaction fees.

LA area Port Traffic: Imports and Exports up YoY in June - The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for June. LA area ports handle about 40% of the nation's container port traffic. To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic is up about 0.4%, and outbound traffic is up about 0.5% compared to May. In general, inbound and outbound traffic has been moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of June, loaded outbound traffic was up 4.8% compared to June 2011, and loaded inbound traffic was up 6.3% compared to June 2011. This suggests imports from Asia might be up in June, and exports to Asia up too.

Ports of Los Angeles and Long Beach building at furious pace - At the edge of San Pedro Bay, home of North America's largest cargo complex, they're building new piers, wharves and rail yards at a furious pace to further dwarf the competition. So much construction is underway that the new facilities by themselves would move more freight than the entire port of Savannah, Ga., which ranks No. 4 among the continent's ports. The ports of Los Angeles and Long Beach, first and second in the cargo-movement hierarchy, respectively, are hauling in so much dirt, they would have enough land to build a twin of Universal Studios Hollywood with enough left over to fill 100 football stadiums with 20 inches of muck. Long Beach alone expects to use 6,000 truckloads of concrete. The most expensive and extensive upgrades in the history of both ports will cost nearly $6 billion. The improvements are getting underway as international trade rebuilds ever so slowly from the devastating global recession, but experts say the building binge is necessary to keep the roughly 40% share of Asian imports that the two ports handle.

Business Inventories Rise as Consumers Pull Back - U.S. business inventories rose in May, as companies were left holding more goods in warehouses and stockrooms while shoppers trimmed their spending. Inventories increased by 0.3% to a seasonally adjusted $1.578 trillion, the Commerce Department said Monday. The gain was slightly above expectations for a 0.2% rise among economists surveyed by Dow Jones Newswires. Sales dropped slightly by 0.1% to a seasonally adjusted $1.245 trillion.

Vital Signs: Businesses Hold More Inventory - Business inventories have expanded as sales have slowed down. The value of goods held in inventories by U.S. businesses was $1.578 trillion in May, or 0.3% higher than it was a month earlier. While inventories continue to grow, they have been rising at a slower pace than earlier in the year. Many businesses have become wary of overstocking.

Empire State Survey shows modest expansion in July -- This was released earlier ... from the NY Fed: Empire State Manufacturing SurveyThe general business conditions index rose five points to 7.4. New orders, however, declined, as that index slipped into negative territory for the first time since November 2011, falling five points to -2.7....Employment levels climbed higher, with the employment index rising six points to 18.5, while the average workweek index fell three points to zero. ...Indexes for the six-month outlook generally remained favorable, but held at levels below those seen earlier this year. The future general business conditions index fell three points to 20.2, with 37 percent of respondents expecting improved conditions in the months ahead and 17 percent anticipating a worsening.This was the first regional manufacturing surveys released for July. The general business conditions index was slightly better than expected although new orders were down. The employment index was the highest since March.

Philly Fed Index Shows Manufacturing Contraction Again in July - Mid-Atlantic factory activity contracted, albeit at a slower pace, for a third straight month in July, amid falling employment and other signs of weakness. The Federal Reserve Bank of Philadelphia said Thursday that its index of manufacturing activity moved to -12.9 in July from -16.6 in June. The index had been expected to hit -9.0. In the survey, readings above zero indicate growth and negative readings indicate contraction.

Philly Fed Business Outlook Survey: Philly Fed Business Outlook Survey: Third Negative Month - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows the third consecutive negative reading in General Activity after eight months of positive data. The July -12.9 follows the -16.6 in June and -5.8 in May. Here is the introduction from the Business Outlook Survey released today: Although the survey's indicators for general activity, new orders, and shipments improved from June, they remained negative this month, suggesting overall declines in business. Firms also reported declines in employment this month and shorter work hours. The manufacturers reported near-steady input and output prices this month. The survey's indicators of activity over the next six months remained positive but moderated somewhat from June. (Full PDF ReportThe first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as a indicator of coincident economic activity. In the next chart we see the complete series, which dates from May 1960.  The next chart is an overlay starting in 2000 of the General Activity Index and the Future General Activity Index — the outlook six months ahead. The latest Future reading is virtually unchanged from last month, 19.3 in July versus 19.5 in June.

Another Double Digit Negative Philly Fed Print Means Fourth Miss In A Row - Every single economic data point keeps coming worse than expected, and the S&P is just shy of 2012 and probably all time (for those who still care about such things) highs. The Philly Fed just posted its July index print which was as usual abysmal, posting its third negative month in a row, coming in at -12.9, and missing expectations of -8.0 for the fourth month in a row. And while the bulk of index subcomponents were more or less in line, the biggest and most notable change by far was the Number of Employees which tumbled from 1.8 to -8.4. Sadly, which the economic contraction accelerates and print after print is horrible, once again they are not nearly bad enough to usher in New QE any second, even as the market has priced in not only QE 4, but 5, 6, and so on.

Industrial Production Rebounds In June - Several of the June updates on the economy to date have brought discouraging news (retail sales, the ISM Manufacturing Index, and payrolls). Today’s report on industrial production offers a refreshing change for the better. The Federal Reserve advises that industrial production rose 0.4% last month, a respectable rebound from May’s 0.2% decline. Even better, the year-over-year change through June perked up slightly to 4.7% vs. 4.4% through May. Is the moderately better news for industrial production enough to blow away the worries dispatched by less-encouraging news from elsewhere in the economy? No, but it’s enough to keep the debate open about what happens next. Nonetheless, reviewing the last several months reminds that industrial production activity has turned choppy lately. The June report, which is subject to revision, is certainly welcome after May’s slump. But it’s unclear if the economy has hit a temporary rough patch, or if there are more ominous clouds on the cyclical horizon.This much, however, is obvious: the trend in industrial production, as defined by the annual pace, offers no clear sign of trouble. The 4.7% rise for June vs. the year-earlier month is near the best levels over the past 12 months. That's a healthy pace and it seems to be holding.

Industrial Production increased 0.4% in June, Capacity Utilization increased -- From the Fed: Industrial production and Capacity Utilization Industrial production increased 0.4 percent in June after having declined 0.2 percent in May. In the manufacturing sector, output advanced 0.7 percent in June and reversed a decrease of 0.7 percent in May. In the second quarter of 2012, manufacturing output rose at an annual rate of 1.4 percent, a marked deceleration from its strong gain of 9.8 percent in the first quarter. The largest contribution to the increase in the second quarter came from motor vehicles and parts, which climbed 18.2 percent; excluding motor vehicles and parts, manufacturing output edged up 0.1 percent. Capacity utilization for total industry moved up 0.2 percentage point in June to 78.9 percent, a rate 1.4 percentage points below its long-run (1972--2011) average. This graph shows Capacity Utilization. This series is up 12.1 percentage points from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 78.9% is still 1.4 percentage points below its average from 1972 to 2010 and below the pre-recession levels of 80.6% in December 2007. Note: y-axis doesn't start at zero to better show the change. The second graph shows industrial production since 1967. Industrial production increased in June to 97.4. This is 16.7% above the recession low, but still 3.3% below the pre-recession peak. The consensus is for Industrial Production to increase 0.3% in June, and for Capacity Utilization to increase to 79.2%. The increase IP was slightly above expectations, but Capacity Utilization was below expectations.

Capacity Utilization Plateaus Despite Ongoing Record Inventory Stocking - While there was little surprise in today's Industrial Production report, which rose 0.4%, on expectations of a 0.3% rise, however offset by last months' revision from -0.1% to -0.2%, it was the critical Capacity Utilization data that has some analysts concerned. But first, and continuing with the theme of "housing has bottomed", it is worth noting that of all the major market groups contributing to the overall index, only Construction saw a decline in June industrial production, dropping by 0.3%, following another drop of 1.4% in May. As for Capacity Utilization, it missed expectations materially, printing at 78.9% on expectations of the first 79%+ print (post revision) in 2012. In other words, the June number is the same as February's, following full year revisions that have taken down the maximum to 78.9 reached in February and April, and now June. In yet other words, even as the US continues stocking up on record amounts of inventory month after month, the business verticals are simply unable to expand. So with Cap Utilization having plateaued, will all the excess LIFO inventory be remarked to fair value? And what happens to corporate equities when a valuation allowance is taken to finally reflect reality?

Vital Signs: Up and Down Manufacturing - U.S. factories are getting whipsawed by global turmoil. Factory output rose 0.7% in June from May, after slumping 0.7% the previous month. The same pattern — a bounce, after a slump — occurred in April and March. But the ups and downs are taking a toll on manufacturing: Output grew at an annual rate of 1.4% in the second quarter, down sharply from 9.8% in the first.

Auto companies to add jobs, expand plants: survey (Reuters) - Auto companies will hire more people and expand plants over the next year to keep up with increasing consumer demand for vehicles to replace aging cars and trucks, according to a report released on Friday. Despite worries about declining demand in Europe caused by the debt crisis and pressures on vehicle pricing, U.S. auto executives surveyed by advisory firm KPMG are bullish about their companies' prospects. "The survey results clearly demonstrate a U.S. automotive industry that is regaining confidence," "Even though the overall economic recovery remains weak, that is not the case in automotive where pent-up demand for vehicles in the U.S. is expected to carry over for years," he added. "As a result, auto companies and suppliers are ramping up their hiring and production activities, and investing heavily in new products and facility expansion."

WAPO's Major Article on the Future of Manufacturing Never Once Mentions the Value of the Dollar -  Wow, you just have to sit back in awe at something like this in a front page business section piece on the future of manufacturing in the United States. If the Post noted the value of the dollar, which is the prime determinant of the relative cost of good produced in other countries and good produced in the United States, then it could have worked through some simple logic. The United States as a country will continue to consume manufactured goods. It is likely that thirty or forty years in the future we will still have cars, computer-like objects, houses made of manufactured materials, etc. If we don't manufacture these items here then we will have to import them. If we will import them, we will either have to export something else to pay for these imports or the rest of the world will have to give us manufactured goods for free. Something like the latter is happening now as China and other developing countries are buying up dollar denominated assets to keep up the value of the dollar against their currencies. Essentially they are paying us to buy their stuff by making their products cheaper than they would otherwise be. However, it is unlikely that situation will exist forever. China and other developing countries can pay their own people to buy their stuff, so it is not essential for them to indefinitely maintain huge export markets in the United States. Also, at some point they will presumably have enough reserves to get them through an conceivable financial crisis.

The Problem Isn't Outsourcing. It's that the Prosperity of Big Business Has Become Disconnected from the Well-Being of Most Americans - Robert Reich - These are the dog days of summer and the silly season of presidential campaigns. But can we get real, please? The American economy has moved way beyond outsourcing abroad or even “in-sourcing.” Most big companies headquartered in America don’t send jobs overseas and don’t bring jobs here from abroad. That’s because most are no longer really “American” companies. They’ve become global networks that design, make, buy, and sell things wherever around the world it’s most profitable for them to do so. As an Apple executive told the New York Times, “we don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” He might have added “and showing profits big enough to continually increase our share price.” Forget the debate over outsourcing. The real question is how to make Americans so competitive that all global companies — whether or not headquartered in the United States — will create good jobs in America.

Some U.S. Firms Move to 'Reshore' - About 14% of U.S. companies surveyed by a Massachusetts Institute of Technology professor definitely plan to move some of their manufacturing back home—the latest sign of growing interest among executives in a strategy known as "reshoring."David Simchi-Levi, an engineering professor at MIT who runs a program for supply-chain executives, said he surveyed 108 U.S.-based manufacturing companies with multinational operations over the past two months. The companies range in size from annual sales of about $20 million to more than $25 billion, and most of them are over $1 billion, Dr. Simchi-Levi said. Among the main reasons cited for reshoring: a desire to get products to market faster and respond rapidly to customer orders; savings from reduced transportation and warehousing; improved quality and protection of intellectual property. About 21% listed "pressure to increase U.S. jobs," a hot political issue this year, as a factor in reshoring. Dr. Simchi-Levi said the survey didn't specify where that pressure was coming from. But some companies appear to feel both political and market heat to show they make things in the U.S.

Poll Shows Fewer U.S. Companies Planning to Hire - Only 23 percent of the firms polled in June plan to add to staff in the next six months, the National Association for Business Economics said on Monday. NABE's prior survey, conducted in late March and early April, had shown 39 percent of companies planning to add workers. A July 6 Labor Department report, showed companies asked employees to work longer hours last month, even though they slowed the pace of hiring.Among companies that produce goods rather than provide services, the impact was even greater, with nearly four in five reporting a Europe-driven decline in revenues. Three months earlier, only about a quarter of total firms polled thought sales had fallen

Fewer U.S. companies planning to hire; Europe looms: poll  (Reuters) - American companies are scaling back plans to hire workers and a rising share of firms feel the European debt crisis is taking a bite out of their sales, a survey showed on Monday. Only 23 percent of the firms polled in June plan to add to staff in the next six months, the National Association for Business Economics said on Monday. NABE's prior survey, conducted in late March and early April, had shown 39 percent of companies planning to add workers. Already, hiring by U.S. companies has slowed dramatically in recent months as employers worry about a sagging global economy hurt by Europe's snowballing debt crisis. Some economic data has suggested at least some of the hiring slowdown has been due to caution rather than a decline in business. A July 6 Labor Department report, for example, showed companies asked employees to work longer hours last month, even though they slowed the pace of hiring. The NABE survey suggests such caution on hiring could continue. The poll showed 47 percent of companies polled felt their sales have dropped due to Europe's woes. Among companies that produce goods rather than provide services, the impact was even greater, with nearly four in five reporting a Europe-driven decline in revenues.

Longer Hours Hint at Talent Shortages for Some Jobs -- What’s a company to do when it can’t find workers with needed skills? Work its current employees for longer hours. That’s the conclusion by economists at the Conference Board. The trend suggests a further split in consumer confidence about the labor markets: offering job security to some while most workers still worry about layoffs. The board analysts–Gad Levanon, director of macroeconomic research, and Ben Cheng, an economic researcher–wanted to gauge whether a talent shortage exists in the U.S. They first looked at unemployment rates to identify pockets of tight labor markets. But in all the occupations studied, the current jobless rates were above where they were before the recession. Mr. Levanon and Mr. Cheng next considered pay scales. After all, in-demand workers should be able to command higher incomes. But the economists point out it can take several years for average wages to rise in occupations with talent shortages because higher compensation can sometimes be determined by merit, seniority and location rather than labor-market conditions. Then, the pair turned to weekly hours. “As employers experience talent shortages they are likely to shift the workload to existing workers,” they write. The economists compared the average workweek from 2005-2007 with that in the year ended in April 2012. On average, all occupations experienced a 1.4% drop in the length of the workweek. Some jobs, however, experienced significant increases in hours worked. Those include oil- and gas-extraction workers, communications-equipment operators and science- and math-related occupations.

Jobs Gap  »  The Hamilton Project - interactive - This chart shows how the jobs gap has evolved since the start of the Great Recession in December 2007, and how long it will take to close under different assumptions for job growth. If the economy adds about 208,000 jobs per month, which was the average monthly rate for the best year of job creation in the 2000s, then it will take until June 2020—or 8 years—to close the jobs gap. Given a more optimistic rate of 321,000 jobs per month, which was the average monthly rate for the best year of job creation in the 1990s, the economy will reach pre-recession employment levels by August 2016—not for another 4 years.

The Improving U.S. Labor Market - The headline measure of U.S. labor markets, the unemployment rate, remains dismally high. It rose above 8% in February 2009, and so as of June 2012, it has now been above 8% for 41 months. The unemployment rate had been tiptoeing downward from its peak of 10.0% in October 2009 to 8.3% in January 2012. However, under the headline unemployment rate, more detailed labor market data from the Bureau of Labor Statistics shows signs of improvement. Here are three examples from the July 2012 data on the Job Openings and Labor Turnover Survey). One measure of the tightness of the labor market is how many unemployed people there are for each job opening. Back in the mid-2000s, the number of unemployed people per job opening hovered around 2. At the worst of the recession, it spiked above 6 unemployed people for every job opening. By May 2012, the ratio had fallen to about 3.5--certainly not a healthy labor market yet, but improving.  Another way to look at the labor market is to look at those getting jobs, which is the blue line showing"hires," and those losing jobs, which is the red line showing "total separations." Notice that in the mid-2000s, the blue line for hires is mostly above the separations line, and so the green line showing total employment is rising. During the recession, hires drop very quickly, and even those separations are declining as well, the red line is higher than the blue line, and total employment falls.  More recently, the blue line showing hires has been mostly above the red line showing separations, and so total employment has been growing again.

Weekly Unemployment Claims: Up a Stunning 34,000 - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 386,000 new claims was a substantial 34,000 rise from the previous week's relatively small upward revision of 2,000. The less volatile and closely watched four-week moving average dropped to 375,500. The big decline posted for the previous week apparently was, as many suspected, a July 4th holiday anomaly. Today's number more than erases last week's decline. Here is the official statement from the Department of Labor:  In the week ending July 14, the advance figure for seasonally adjusted initial claims was 386,000, an increase of 34,000 from the previous week's revised figure of 352,000. The 4-week moving average was 375,500, a decrease of 1,500 from the previous week's revised average of 377,000.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending July 7, unchanged from the prior week's unrevised rate.  The advance number for seasonally adjusted insured unemployment during the week ending July 7 was 3,314,000, an increase of 1,000 from the preceding week's revised level of 3,313,000. The 4-week moving average was 3,311,750, an increase of 1,000 from the preceding week's revised average of 3,310,750.  Today's seasonally adjusted was a surprising 21,000 above the consensus estimate of 365K. Here is a close look at the data since 2005 (with a callout for 2012), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

U.S. Jobless Claims Surge, Seasonal Issues a Factor - A measure of the number of Americans seeking unemployment benefits surged last week, although the figures may have been distorted by seasonal factors. The Labor Department says applications rose by 34,000 to a seasonally adjusted 386,000. The increase reversed a big drop from the previous week. Economists view the recent numbers with skepticism, noting that the government struggles to adjust claims figures to reflect temporary summertime layoffs in the auto industry. Many automakers are foregoing the typical shutdowns because stronger sales have kept plants busier. The less volatile four-week average fell by 1,500 to 375,500. Economists say the seasonal distortions may last a few weeks, making the figures difficult to analyze.

Seasonal Distortion In Jobless Claims: The Sequel - Last week’s sharp rise in new jobless claims looks ominous, but there’s a good reason to reserve judgment at this point. Recall that the previous weekly update in new filings for unemployment benefits tumbled dramatically to a new four-year low. But as several analysts warned, the fall was probably due to a seasonal factor linked to summer shutdowns of auto plants. Fast forward a week and it appears that the seasonal distortion has been effectively corrected. In sum: the latest reading on jobless claims (for the week through July 14) is more or less unchanged from the late-June figures, which implies that the roller coaster ride in the interim was a lot of noise about nothing. As the first chart below shows, weekly claims have been unusually volatile lately—even by the standards of what is inherently a volatile data series. Taken at face value, new claims on a seasonally adjusted basis have generally remained flat through last week’s tally of 386,000. In other words, there’s not much progress to report on this leading indicator for the labor market. That’s bad.  On the other hand, if we look for deeper clarity in the raw figures, and compare the numbers on a year-over-year basis, the trend looks brighter. As the second chart reminds, the annual pace of unadjusted claims continues to decline relative to its year-earlier level. That’s good.

Tech sector layoffs surge to three-year high - During the first half of the year, 51,529 planned job cuts were announced across the tech sector, representing a 260 percent increase over the 14,308 layoffs planned during the first half of 2011. Things are so bad so far this year that the figure is 39 percent higher than all the job cuts recorded in the tech sector last year. Hewlett-Packard proved to be the major force behind this year's uptick in planned layoffs, after the company announced in May that it would cut 30,000 jobs. Those layoffs will be completed by the end of fiscal 2014, and shave off 8 percent of HP's entire workforce. It was also a tough beginning of the year for Sony and Nokia, both of which said they would lay off 10,000 employees. Panasonic and Olympus are also eyeing layoffs to make their operations more nimble. The issue in the tech sector, according to the outplacement firm, is that success is increasingly finding its way to a short list of companies. All others are hoping they can stay afloat or revive their operations around new ideas. And all of that could lead to more cuts across the industry in the coming months. "While consumers and businesses are spending more on technology, the spending appears to favor a handful of companies. Those that are struggling to keep up with the rapidly changing trends and consumer tastes are shuffling workers to new projects or laying them off altogether."

Slight Decline in the Jobs Outlook - The economic data was just weak enough this week to cause a slight decline in The Times’s weekly election-year job tracker. The economists at Moody’s Analytics now forecast average monthly job growth of 129,000 in the six months leading up to election, down from a forecast of 131,000 a week ago. The economists write: Good news on the economy is scarce; our estimate of second-quarter GDP has been lowered several times, and now is close to 1% annualized. This pace of growth is unlikely to spur faster business hiring, thus the job market will not improve significantly in the third quarter. Not only is spending on a weak trajectory, but it is increasingly difficult to see what would spark stronger growth over the remainder of 2012. Uncertainty about the economy and U.S. fiscal situation is leading us to lower our forecast for job growth leading up to the election. This was an underlying theme of the Fed’s latest Beige Book, which noted that firms are delaying adding full-time workers. We are also unlikely to get clarity on the U.S. fiscal situation until after the presidential election, keeping the job market recovery in low gear.

What Explains High Unemployment? The Aggregate Demand Channel - Abstract: A drop in aggregate demand driven by shocks to household balance sheets is responsible for a large fraction of the decline in U.S. employment from 2007 to 2009. The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in the tradable sector are distributed uniformly across all counties. We find exactly this pattern from 2007 to 2009. Alternative hypotheses for job losses based on uncertainty shocks or structural unemployment related to construction do not explain our results. Using the relation between non-tradable sector job losses and demand shocks and assuming Cobb-Douglas preferences over tradable and non-tradable goods, we quantify the effect of aggregate demand channel on total employment. Our estimates suggest that the decline in aggregate demand driven by household balance sheet shocks accounts for almost 4 million of the lost jobs from 2007 to 2009, or 65% of the lost jobs in our data.

Vital Signs: Weekly Earnings - Workers’ weekly earnings are rising as the job market slowly mends. In 2012’s second quarter, full-time workers had median weekly earnings of $338 in inflation-adjusted 1982-1984 dollars. That was up $1 from a year ago. Weekly earnings also jumped during the recession, in part because lower-wage workers are often the first let go and others can collect overtime.

Compensation, Too - Paul Krugman - I see from some of the comments that there’s a widespread belief that the wage stagnation we’ve experienced under “modern capitalism” is some kind of illusion, that it would go away if we took benefits into account. Nope: (graph) Meta: if you think I’ve overlooked some crushingly obvious point, you might be right — but the odds are that you aren’t. I do know my way around these numbers. And the same goes for intellectual stuff. I keep running into people who know, just know, that I’m an ignoramus who hasn’t thought through basic logical points, like how I can simultaneously say that we’re in a liquidity trap (conventional monetary policy has no effect) and call on Bernanke to do more (unconventional monetary policy may still have traction). But do try reading some of the links at the sidebar first.

Can We Afford the Usual? -- With yesterday’s quarterly BLS data release on “usual weekly earnings” out, I have once again constructed some “alternative” measures of real wages, based on price indexes for food commodities at the wholesale level. The commodity-based indexes are depicted in the figure above with lines in various colors. Compared to the more typical measure of real, or inflation-adjusted, earnings, which is seen in black, the food-commodity wages may be of interest in different contexts: for consumers who spend relatively large portions of their budgets on food, for example, or to those following the debate over the unfortunate SNAP (food stamp) cuts in the farm bills recently passed by the Senate and the House Agriculture Committee (see this earlier post). Inflation at the wholesale level is sometimes a harbinger of similar trends in prices paid by consumers at retail stores, so the series shown above may be most helpful as indicators of possible future trends in the standard of living.  Along these lines, the Financial Times reports that prices for food commodities will be higher this decade than last, according to two major forecasters.  The cited reasons for the expected rise in food-commodity prices include an expected upward trend in the price of oil, climate-related crop failures, and demand from emerging economies.

"Everyone Only Wants Temps" - The office opens at 5:30 a.m., but job seekers start appearing an hour early, hoping to snag a top spot on the sign-in sheet. By the time I arrive, 20 people, all but one of them men, are already inside—the space is essentially a waiting room with a long counter—standing or slouching in white plastic chairs. Behind the counter sits an African American woman with short hair and a bearing that suggests a low tolerance for bullshit. After signing in, I grab a chair from a stack in the corner and take a seat, studying a sign that implores me to be "true" and "passionate" and "creative." In reality, passion and creativity have nothing to do with it. Labor Ready provides warm bodies for grunt work that pays minimum wage or thereabouts. "Here's a sledgehammer, there's the wall," is how Stacey Burke, the company's vice-president of communications, characterized the work to Businessweek back in 2006. It's not a pretty formula, but it works. With 600 offices and a workforce of 400,000—more employees than Target or Home Depot—Labor Ready is the undisputed king of the blue-collar temp industry. Specializing in "tough-to-fill, high-turnover positions," the company dispatches people to dig ditches, demolish buildings, remove debris, stock giant fulfillment warehouses—jobs that take their toll on a body. (See "I Was a Warehouse Wage Slave.") And business is booming. Labor Ready's parent company, TrueBlue, saw its profits soar 55 percent last year, to $31 million, on $1.3 billion in sales. The Bureau of Labor Statistics predicts that "employment services," which includes temporary labor, will remain among the fastest growing sectors through 2020.

Nominally Legal - Krugman - Catherine Rampell has a fascinating post on salaries for new legal hires. Partly the interest lies in just how much these jobs, too, are suffering from our ongoing weak economy. But for macroeconomcs, the really amazing thing is the evidence of downward nominal wage rigidity. Starting salaries at elite law firms have been stuck at $160,000 — no more, no less — for years: Because it’s such a specific case, she gets people to talk about why the number stays fixed even though clearly the law firms could get the same people for less:Instead law firms have been reluctant to lower their starting pay for these first-year associate slots, partly because they worry they’ll miss out on the best talent (even though that seems to be abundant) and partly because they are afraid of losing face. Not paying the standard top-tier salary is a tacit admission that you’re no longer top-tier.

We Live in the Biggest Company Town on Earth - It is an old and cruel tactic in any company town. Reduce wages and benefits to subsistence level. Break unions. Gut social assistance programs. Buy and sell elected officials and judges. Fill the airwaves with mindless diversion and corporate propaganda. Pay off the press. Poison the soil, the air and the water to extract natural resources and leave behind a devastated wasteland. Plunge workers into debt. Leave them owing more on their houses than the structures are worth. Make sure the children will be burdened by tens of thousands of dollars lent to them for an education and will be unable to find decent jobs. Make sure that everything from hospital bills to car payments to credit card fees exact increasing pounds of flesh. And when workers stumble, when they cannot pay soaring interest rates, jack up rates further and deploy predators from debt collection agencies to harass the debtors and seize their assets. Then toss them away. Company towns all look the same. And we live in the biggest one on earth.

Unions’ Past May Hold Key to Their Future -Today, fewer than one in 14 private sector workers belongs to a union, half the portion of 15 years ago. Where unions matter most — fighting for workers’ share of the spoils of economic growth — they lost the battle long ago. Despite soaring worker productivity, the typical American worker takes home today only 2 percent more than a quarter of a century ago, after adjusting for inflation.  Yet while union leaders have spent the last decade fretting, they have been unable to reverse the downward trend.  Partly, this has to do with the diagnosis of the problem. Many union leaders still like to believe that an ideological shift spun the labor movement into a death spiral. Elected in the 1980s, President Ronald Reagan set out to destroy obstacles to unfettered markets — including organized labor — with ideological assistance from Prime Minister Margaret Thatcher of Britain.  The ideological assault on unions changed workplace norms. In the United States, company executives who had tolerated unions as standard features of the workplace started spending billions to fight them off. Losing control of the factory floor, unions lost touch with society, too. In the 1950s and ’60s, union contracts set a standard that was followed across the economy. Today, they are too weak to be standard-setters. And nonunion workers tend to resent rather than applaud the better pay and benefits of their unionized brethren.

U.S. Trails at Least 15 OECD Countries in Median Wealth - Via @exiledonline, I learned today (July 18) that Canadians are richer than Americans. This is rather surprising, since GDP per capita is higher in the U.S than in Canada.: $48,100 vs. $40,300 (at purchasing power parity or PPP), according to the CIA World Factbook. But in fact things are much worse than that, as 15 OECD countries (plus Singapore and Taiwan) have higher median wealth than the U.S. does. There may even be more, as the Credit Suisse report I discuss below does not give median wealth data for several countries with higher mean wealth than the U.S.  Most reporting has been based on a story that was run in the June 30th Globe and Mail claiming that average (mean) Canadian household wealth had reached $363,202 vs. just under $320,000 in the U.S. This is not a particularly informative statistic, however, since wealth is even more unevenly distributed than income, and income in the U.S. is already highly unequally distributed. What we really need is median net worth, i.e. the level at the exact middle of the net worth distribution in a country. G&M commenter "TJMone" picks up that point, receiving an answer from "porkbarrel pundit": a Credit Suisse report that the median net worth per adult in Canada was $89,014, compared to just $52,752 in the U.S. (all figures in U.S. dollars).  It turns out that lots of OECD countries, including economic basket cases Italy, Spain, and Ireland, have higher median wealth than we do. See the chart below:It is mind boggling that median Australian net wealth per adult is four times that of the U.S., and Italy is three times as high. Ireland and Spain, meanwhile, are also higher despite having housing busts similar to that in the United States.

Two Classes in America, Divided by ‘I Do’ - The economic storms of recent years have raised concerns about growing inequality and questions about a core national faith, that even Americans of humble backgrounds have a good chance of getting ahead. Most of the discussion has focused on labor market forces like falling blue-collar wages and lavish Wall Street pay. But striking changes in family structure have also broadened income gaps and posed new barriers to upward mobility. College-educated Americans like the Faulkners are increasingly likely to marry one another, compounding their growing advantages in pay. Less-educated women like Ms. Schairer, who left college without finishing her degree, are growing less likely to marry at all, raising children on pinched paychecks that come in ones, not twos. Estimates vary widely, but scholars have said that changes in marriage patterns — as opposed to changes in individual earnings — may account for as much as 40 percent of the growth in certain measures of inequality. Long a nation of economic extremes, the United States is also becoming a society of family haves and family have-nots, with marriage and its rewards evermore confined to the fortunate classes.

Economic Inequality and the Changing Family - As my article this weekend about two families in Ann Arbor, Mich., points out, the widening in many measures of inequality can be traced in part to changes in marriage patterns, rather than just changes in individual earnings. A number of scholars have looked at the varied dimensions of this thesis — growing inequality, changes in family structure, and the connection between the two. Here is a look at some of their findings. On inequality: An interesting pattern over the last four decades is that inequality has grown much faster for households with children than it has for households over all — an indication that changes in family structure (as opposed to wages and employment alone) have increased inequality. Harvard sociology dcompared households at the 90th percentile and the 10th percentile. In 1970, the top households had 8.9 times the income of the bottom. By 2011 they had nearly 11.7 times as much — inequality between them grew 31 percent. But among households with children it grew 121 percent. (The ratio went from 4.8 in 1970 to 10.6 last year.). Decades ago, single parenthood was largely limited to poor people and minorities. Now it is increasingly common across middle America. While the decline of two-parent families is most striking in the bottom quarter, that is a familiar story and had largely occurred by 1990. Much of the recent growth has occurred in the second-lowest quarter, sometimes called the working class. In that group, the share of households with children headed by unmarried parents has soared to nearly 40 percent and the growth has continued in recent years:

REPORT: Bottom Half Of American Households Have Just 1 Percent Of Nation's Wealth - The bottom 50 percent of American households hold just 1.1 percent of the nation’s wealth, after its share declined steadily following the financial crisis, a report from the nonpartisan Congressional Research Service found. The richest one percent, meanwhile, hold 34.5 percent of the wealth, as the chart below shows. The top 10 percent’s share of wealth has risen over the last two decades, the report found, but it has fallen for households in every group below that.

Technology doesn't cause inequality – deliberate policy change does | Dean Baker - The people who have been the winners in the massive upward redistribution of income over the last three decades have a happy story that they like to tell themselves and the rest of us: technology did it. The reason why this is a happy story is that technology develops to a large extent beyond our control. . There is another story that can be told. In this story the upward redistribution of income was a conscious policy by those in power. This story points to a number of different policies that had the effect of redistributing income upward. For example, exposing manufacturing workers to direct competition with low-paid workers in the developing world, while protecting highly educated professionals (e.g. doctors and lawyers), would be expected to lower the wages of both manufacturing workers and the large number of workers who will compete for jobs with displaced manufacturing workers.  Central banks that target low inflation even at the cost of higher unemployment will also increase inequality. When a central bank like the Fed raises interest rates to slow the economy and reduce inflationary pressures it is factory workers and retail clerks who lose their jobs, not doctors and lawyers. Even an economist can figure out that this will depress the wages of the former to benefit the latter.

Changing focus to inequalities in opportunity, by Lawrence Summers - Even if the process proves protracted, the U.S. economy will eventually recover. When it does, issues relating to inequality are likely to replace cyclical issues at the forefront of our economic conversation. The global track record of populist policies motivated by inequality concerns is hardly encouraging. However, passivity in the face of dramatic economic change is equally unlikely to be viable. Perhaps the debate and policy focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity.By far the most important step that can be taken to enhance opportunity is strengthening public education. ... Over the past 40 years, with the strong support of the federal government, the nation’s leading universities have made a major effort to recruit, admit, support and graduate minority students. These efforts will and should continue. But as things stand, a minority youth with strong test scores is considerably more likely to apply and be admitted to a top school than a low-income student. The leading U.S. institutions must make the kind of focused commitment to economic diversity that they have long mounted toward racial diversity. It is unrealistic to expect that schools that depend on charitable contributions will not be attentive to offspring of their supporters.  What about the perpetuation of privilege? Parents always seek to help their children. But there is no reason the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should we continue to permit tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth.

More Pain for the Working Poor - The House Agriculture Committee has approved an unconscionable farm bill that protects grossly generous subsidies for the agriculture industry by cutting food stamps by a staggering $16.5 billion over the next decade.  The cuts — more than triple the $4.5 billion approved in the Senate — would deny two million to three million people food assistance of $90 a month per family, end free school meals for 280,000 children and compound recession hardships for the working poor.  House Republicans drove the cuts with complaints that the food stamp program is swollen with people taking advantage of overly generous standards. This is a canard — the Congressional Budget Office has found that nearly 99 percent of food stamp participants live in poverty.  The committee’s Republican majority attracted some farm-state Democrats in approving a $969 billion farm bill over 10 years. They bragged of reining in farm expenditures by $35 billion, but about 45 percent of this savings was taken out of food stamps; indefensible subsidies bolstering corn, wheat, soybeans and other powerful industry lobbies were largely spared. If Senate Democrats aim to split the difference in food stamp cuts, rather than fighting the House, the poor will be seriously hurt.

Hello From the Underclass: Unemployment Stories, Vol. One - Near-suicidal despair. That is what many Americans have earned from this recession. Yesterday, we asked for stories from those of you who are or have been unemployed. We've been flooded with responses. Today, ten stories from economy's bad side.  Unemployment in America touches young and old, educated and uneducated, poor and privileged, men and women. We heard from all of them. This first batch of ten stories (there will be more) represents a mere cross-section of the unemployed. They are lengthy, but worth your time. This is not a contest for most heartstring-tugging tale, nor an invitation for judgment. This is just what's happening out there.

Many use payday loans to cover food, rent - Many people think of payday loans as a way to cover an unexpected emergency – such as a car repair or medical expense – until your next paycheck comes in. But nearly seven in 10 people who use the short-term, high-fee loans rely on them for recurring, everyday expenses such as rent, food, utilities or car payments, according to a report published Wednesday. And instead of using them for one quick fix, many are either seeking extensions or borrowing similar amounts again and again. That’s putting many people in debt to payday lenders for months at a time, at very high cost. “It’s not because of some unusual need that people are turning to payday loans. It’s because of some regular need,” said Nick Bourke of the Pew Center on the States, which published the report. Payday lenders defend their industry, saying today's economic  reality is that many people regularly need a financial bridge to their next paycheck. “Of course there’s recurring use for this product. It’s often the best option for millions of Americans that are looking to manage their financial obligations,” said Amy Cantu, spokeswoman for the Community Financial Services Association of America, a trade group for payday lenders.

State Unemployment Rates little changed in June - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in June. Twenty-seven states recorded unemployment rate increases, 11 states and the District of Columbia posted rate decreases, and 12 states had no change, the U.S. Bureau of Labor Statistics reported today.  Nevada continued to record the highest unemployment rate among the states, 11.6 percent in June. North Dakota again registered the lowest jobless rate, 2.9 percent, followed by Nebraska, 3.8 percent. This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). New York is at the maximum unemployment rate for the recession - every other state has some blue indicating some improvement.  The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. This is the fewest since January 2009. In early 2010, 18 states and D.C. had double digit unemployment rates.

State Data Highlight Limp Job Market - The labor market continued to limp along across most of the country after a winter of solid growth, according state-by-state data on unemployment. The national unemployment rate stood at 8.2% in June, the same as the prior month, the Labor Department said earlier this month. Friday, the agency released further details showing that the jobless rate rose in more than half the states, dropped in 11 states and Washington, D.C., and held steady in a dozen states. Though rates were up in 27 states, just Alabama, New Jersey, Alaska, New York, Pennsylvania and Wisconsin posted statistically significant increases in jobless rates in June from the previous month. Fourteen states and Washington D.C. had unemployment rates above the national average. Nevada, still reeling from the housing bust, registered the highest rate again at 11.6%, followed by Rhode Island (10.9%) and California (10.7%). States in the middle of the country with rich natural resources continued to fare the best, with North Dakota (2.9%) and Nebraska (3.8%) posting the lowest rates. Job gains were mixed. Twenty-nine states and D.C. added jobs, while 21 states lost jobs. California led the way with 38,300 new jobs, followed by Ohio and North Carolina, the agency said. Wisconsin lost the most jobs (13,200), followed by Tennessee and Maryland.  See the full interactive graphic.

Public Sector Jobs Beget Private Sector Ones (i.e., There’s a Multiplier!) - This is a very rigorous and useful bit of analysis on our jobs situation from a couple of my former EPI colleagues, Heidi Shierholz and Josh Bivens. One of their key points is that what’s uniquely tough about the current job market is not so much the private sector pace of job creation — it’s too slow, but it’s actually pretty close to the pace of the early 90s recovery, and well above that of the 2000s (see EPI’s figure 2).  Not that those early expansions were great shakes either, but, at least in unemployment terms, they were better than this one. No, the big difference this time, as shown below, is the public sector job losses.  This is very much a policy variable — i.e., something we could do something about — but conservatives continue to block the policies that could help offset these losses.

How Public Sector Layoffs Killed 750,000 Private Sector Jobs - As ThinkProgress has noted time and again, the unemployment rate would be up to a percentage point lower if all levels of government hadn’t engaged in severe austerity, shedding hundreds of thousands of jobs. The last three years have been the worst for public employment on record. As a recent study by the Economic Policy Institute showed, these job cuts ripple through the economy, also harming private sector job creation. In fact, EPI estimates that public sector job cuts have likely cost the private sector 750,000 jobs: The economic “multiplier” of state and local spending (not including transfer payments) is large – around 1.24. This means that for every dollar cut in salary and supplies of public-sector workers, another $0.24 is lost in purchasing power throughout the rest of the economy. Teachers and firefighters stop going to restaurants and buying cars if they’re laid off, which reduces demand for waitstaff and autoworkers and so on. Add these two influences together (supplier jobs and jobs supported by this multiplier impact) and roughly 0.67 private sector jobs are lost for every public sector job cut. This means that the public sector being down 1.1 million jobs has likely cost the private sector 751,000 jobs. For comparison’s sake, here is the level of public sector employment during the three most recent recessions:

Gloomy Forecast for States, Even if Economy Rebounds -  The fiscal crisis for states will persist long after the economy rebounds as they confront rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts, according to a report issued here Tuesday by a task force of respected budget experts. The problems facing states are often masked by lax budget laws and opaque accounting practices, according to the report, an independent analysis of six large states released by the State Budget Crisis Task Force.  It said that the financial collapse of 2008, which caused the most serious fiscal crisis for states since the Great Depression, exposed deep-set financial challenges that will worsen if no action is taken.  The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” warned the chairmen of the task force, Richard Ravitch, a former lieutenant governor of New York, and Paul A. Volcker, a former chairman of the Federal Reserve. The report added a strong dose of fiscal pessimism just as many states have seen their immediate budget pressures begin to ease. And it called into question how states will restore the services they have cut during the downturn, saying that the loss of jobs in prisons, hospitals, courts and agencies have been more severe than in any of the past nine recessions.

US state governments face dire outlook - US state governments are in desperate need of reform to solve structural challenges that extend well beyond the cyclical woes of the financial crisis and the recession, including $4tn in unfunded pension and healthcare liabilities, according to a new report. A high-profile taskforce chaired by Paul Volcker, the former chairman of the Federal Reserve, and Richard Ravitch, former lieutenant-governor of New York, warned that deep, long-term budgetary problems are threatening the ability of US states to meet their obligations to retirees, creditors and citizens who rely on local governments for education, public infrastructure, healthcare and safety.  The taskforce said that pension funds for state and local governments were underfunded by about $3tn using conservative investment assumptions, and healthcare liabilities for public-sector retirees exceeded $1tn.  “Our essential goal is to inform the public of the gravity of the issues and the consequences of continuing to postpone actions to achieve structural balance,” said Mr Volcker.  Yields on municipal debt have fallen to record lows, but Mr Volcker warned that the issues raised in the report could eventually trigger a negative reaction. “It is characteristic of markets that they don’t react until there is a crisis and they don’t perceive this as a crisis. We don’t want to stir that up but that is why you have to deal with it now,” he said.

Top 6 States Facing Major Financial Stress - A new report by the respected State Budget Crisis Task Force paints a chilling picture of what's ahead for U.S. states, even long after the 2008 recession officially ended. The pessimistic analysis identifies major threats to fiscal sustainability, including: out-of-control Medicaid spending; reductions in federal state-aid; underfunded state retirement plans; an eroding tax base; and laws that allow states to use gimmicks to hide their fiscal troubles. The co-chairs of the Task Force—former Fed chairman Paul Volker and former New York State lieutenant governor Richard Ravitch—say state governments are coping with the "unprecedented challenges" in their attempt to keep providing "established levels of service with uncertain and constrained resources." States' ability to continue to meet their obligations to their own employees, to their creditors and to their citizens, says the chairmen, "is threatened."

Seventh District Economy Update - Chicago Fed - A summary of economic conditions in the Seventh District from the latest release of the Beige Book and from other indicators of regional business activity:

  • Overall conditions: Economic activity in the Seventh District continued to expand at a moderate pace in June and early July, although the pace of growth slowed.
    • Consumer spending: Growth in consumer spending further moderated. Retailers cited lower consumer confidence, a weaker customer response to promotions, and extreme summer heat as the main contributors to the lower sales pace.
    • Business Spending: Business spending continued at a steady pace. However, many contacts had become more cautious about future spending decisions, pointing to the heightened uncertainty surrounding the federal fiscal environment and the upcoming November elections.
    • Construction and Real Estate: Construction activity increased. Demand continued to be strong for multi-family construction, especially apartments, but also increased for single-family homes. Contacts also noted an increase in commercial construction projects.
    • Manufacturing: Manufacturing production increased at a slower pace. The auto industry remained a source of strength, but activity softened in the steel and heavy equipment sectors. Exports to Canada and Mexico continued to increase, but exporters noted a decline in demand from Europe and China.
    • Banking and finance: Credit conditions improved slightly on balance. Refinancing and lending for capital replacement expanded, but with little loan growth for other purposes.
    • Prices and Costs: Cost pressures weakened as energy prices were noticeably lower while other commodity prices also decreased. Wage pressures continued to be moderate.
    • Agriculture: Extreme heat and drought conditions spread across most of the District, stressing both crops and livestock. Corn and soybean prices moved sharply higher, and wheat prices also rose.

Which States Have Best Income Growth? - The U.S. recovery from the recession has been more sluggish than past economic comebacks. It’s also been uneven. A look at two key gauges of the economy’s health – personal income and unemployment rates — shows that the country’s Great Plains and Midwest regions have fared much better than the West and East coasts in the wake of the recession. States like North Dakota and Nebraska — which are big in oil and crops like corn — have some of the lowest unemployment rates in the country, while California, a massive chunk of the total U.S. economy, has one of the highest. Below see which states had the biggest gains in personal income since the recession ended in June 2009, and how much of their income comes from growth sectors like manufacturing, farming and mining.

What will federal budget cuts mean for local economies? - Former Vice President Dick Cheney told Republican lawmakers on Tuesday that looming defense cuts could have a serious impact on the U.S. military, even as a new analysis predicted the budget reductions that begin in January could cost 2 million jobs. Lawmakers on Capitol Hill fretted over how to resolve the issue but remained dug into their longstanding positions. Democrats are calling for increased revenues as well as further budget cuts and Republicans are insisting on spending reductions alone and no new taxes.Cheney's visit to the Capitol came as mayors of two major U.S. cities warned that the looming $1.2 trillion federal budget cut is the biggest threat to their local economic recoveries. The 10-year, across-the-board cut is due to go into force on Jan. 2 under a process known as sequestration.  Phoenix Mayor Greg Stanton, speaking at a defense industry event, said Arizona stood to lose 50,000 high paying aerospace and defense jobs as a result of "Congress's failure to deal with looming indiscriminate cuts" to the defense budget.

Red-State Debt in One Picture and One Video - Nothing really new here, for some reason I ended up wandering back to this old post of mine, and -- partially because the video at the end so kicks ass -- can't resist re-posting it over here for those who haven't seen it. Just a reminder for all those red-state debt-ceiling hawks out there. Here’s where the debt came from:How do you think state budgets would look if all those in-the-red red states had to pay back all the federal money they’ve gotten from the prosperous blue states? Look at Mississippi. Oh, I mean Greece. Oh no, I mean Mississippi.

Report: Budget cuts to cost New York 70,000 jobs - New York state stands to be one of the hardest hit when the majority of $900 billion in federal budget cuts takes effect in 2013. A new report to be released tomorrow says that New York could lose 29,000 defense jobs next year, and more than 41,000 other non-defense jobs, as part of anticipated budget cuts from the Budget Control Act of 2011. The act, signed into law on Aug. 2, 2011, concluded the debt ceiling debate by forcing Congress to cut $917 billion over 10 years, with only about $25 billion coming from 2012’s budget.

Illinois began new budget year owing $7.5 billion - Illinois began its new budget year staring at a huge stack of old bills. State Comptroller Judy Baar Topinka said Monday that Illinois had between $7.5 billion and $8 billion worth of old bills still left to pay when the new fiscal year began this month. That's slightly better than the total for the two previous years, when Illinois started out with about $8.5 billion in overdue bills. When Illinois pays bills late, it means delays for the businesses and community groups that provide services to the state. They sometimes have to borrow money or cut staff to make ends meet. It also means money from the new budget goes to paying old bills, leaving less cash for the future.

Lawmakers give raises to aides before cutting other workers' pay - Lawmakers gave raises worth $4.6 million annually to more than 1,000 of their aides before cutting the pay of most other state workers, newly released records show. The lawmakers said they were trying to make up for several years without staff pay increases. "Modest adjustments based on individual performance were appropriate," after pay and hiring freezes during the previous four years, Senate President Pro Tem Darrell Steinberg (D-Sacramento) said in a statement. But the raises, at least 10% for some top staffers in the last 11 months, have been disclosed at an awkward time for Steinberg and his fellow Democrats, who control the Legislature. They are gearing up to help Gov. Jerry Brown to convince the public that the state is desperate for money in the aftermath of a deep recession and should pass billions of dollars in tax hikes in November. Opponents of the governor's tax plan wasted no time in painting the Democrats as hypocrites. And state workers hit with a 4.62% pay cut to help balance California's budget were enraged by news of the raises.

S&P Revises Pennsylvania's Outlook to Negative - Standard & Poor's Ratings Services changed its outlook to 'negative' from 'stable' for Pennsylvania's general obligation debt because of growing spending pressures, particularly for public pensions, and a slow-growing state economy, the agency said on Thursday.  S&P affirmed the 'AA' credit rating on the state's general-obligation debt, but said it could lower that rating a notch in the next two years if Pennsylvania does not enact pension reform. Earlier this week, another credit rating agency, Moody's Investors Service, cut the state's credit rating to 'Aa2' from 'Aa1' and put its higher education system on review for a possible downgrade.

How Much Could States Benefit From Online Sales Tax? -- Tax-free sales on the Internet may be coming to an end, and in some states that could mean a big boost in revenue. Nationally taxes on online sales could translate into $23 billion in new annual revenue, according to the National Conference of State Legislatures. Of course, the largest states would benefit most from sales taxes. Estimates from the NCSL show California could take in $4.16 billion, followed by Texas and New York at $1.78 billion and $1.77 billion, respectively. But even though the numbers may be smaller in some states, the impact could be greater. NCSL notes that Arkansas and Missouri could have made up their entire 2010 budget gaps just with the projected uncollected revenue from online sales taxes. California, on the other hand, though it would take in the most revenue would make just 8.9% progress in closing its budget deficit.

Is Public Ownership A Solution? - - Yves Smith (2 videos) Real News Network presented a two part interview with Gar Alperovitz, professor of political economy at the University of Maryland, on why and where public provision of services might be preferable to private sector solutions. Alperovitz pointed out how the growth expectations for public companies are at odds with resource conservation and how their rampant short-termism stunts investment. Some economists have recently taken a systematic look at the latter problem. From a 2011 post: Andrew Haldane and Richard Davies of the Bank of England have released a very useful new paper on short-termism in the investment arena. They contend that this problem real and getting worse. This may at first blush seem to be mere official confirmation of most people’s gut instinct. However, the authors take the critical step of developing some estimates of the severity of the phenomenon, since past efforts to do so are surprisingly scarce.  A short-term perspective is tantamount to applying an overly high discount rate to an investment project or similarly, requiring an excessively rapid payback. In corporate capital budgeting settings, the distortions are pronounced: The Real News Network discussions start from more basic premises. For a longer form treatment of major, successful long term investments by the government, see Felix Rohatyn’s Bold Endeavors.

For Transit Relief, Congested Atlanta Ponders a Penny Tax —  For more than a decade, Atlanta has been among the fastest-growing regions in the country, but the road and rail system in a state that ranks 49th in per capita transportation spending just could not keep up. Hourlong commutes are common, and more than 80 percent of commuters drive alone. Only 5 percent make use of the region’s limited train and bus systems, according to research by the Brookings Institution. This month, Atlanta-area voters are being asked to approve an ambitious fix that would raise $8.5 billion by adding a penny to the sales tax for 10 years. The proposal, which bundles 157 projects in 10 counties, is part of a July 31 referendum that will allow voters across the state to decide whether they want a new tax for transportation specific to their region. Voters in the Savannah area, for example, will decide on a $1.6 billion regional package of road and transit improvements, of which $229 million would be spent in Savannah. The complex regional voting scheme could bring in more than $18.6 billion in new tax money, plus additional federal money, making it one of the largest packages of its kind in the country, transportation experts said.

Nearly $90M Spent On Thousands Of Abandoned Properties Caused By Katrina - More than 3,000 lots flooded by Hurricane Katrina and bought with federal money in an emergency bailout sit idle across this city — a multimillion-dollar drain on federal, state and city coffers that lends itself to no easy solution.An Associated Press examination of the properties sold to the government by homeowners abandoning New Orleans after the catastrophic 2005 flood has found that about $86 million has been spent on handling a total of 5,100 abandoned parcels. And there’s no end in sight to maintenance costs for perhaps most of the 3,100 properties that remain unsold.

In Scranton, firefighting pays $7.25 an hour - Firefighters here have been running into burning buildings for $7.25 an hour. "That can inhibit how you perform," said firefighter Bob Zoltewicz, 32, the married father of two, ages 2 and 5 months. "You have to try to keep that salary out of your mental state." Since the mayor of this financially distressed city decided to deal with budget woes by paring the paychecks of all 400 city workers to minimum wage a week ago, it has been difficult for people to think about much else. And that kind of distraction, which has made national news, is tough to handle when you labor at life-and-death jobs. "We come to work regardless of what's happening politically," said Zoltewicz, who was called to a two-alarm blaze at an abandoned property on the city's west side last week. "But $7.25 an hour is crippling." For police officers, it's the same problem, as they must reconcile the head-spinning fact that there are local high school students with summer jobs scooping ice cream in town who are making $1.25 an hour more.

Scranton could join national trend of bankrupt cities, despite officials’ opposition - Lewis said he thinks the city of Scranton — where he was born, went to college and now lives — should look to bankruptcy as a way to get out from under about $300 million in debt. That includes $90 million in unfunded pension obligations, $150 million in debt held directly by the city or the Scranton Parking Authority, and a $15 million mandatory arbitration settlement due to the city’s firefighters’ union. The Pennsylvania Paper & Supply Company tower is a landmark in downtown Scranton. The city is facing $300 million in debt. The annual budget this year is about $86 million. “The numbers just don’t make sense. They’re not sustainable,” said Lewis, a freelance accountant with experience in managing failing banks. He writes a blog on the city’s finances, appropriately titled “Scranton Is Broke.” Lewis is advocating openly for the city to declare Chapter 9 bankruptcy. It’s is the only way for Scranton to sort out its financial problems, he says. City officials have so far opposed the prospect of bankruptcy, but that hasn’t kept Scranton off the front pages. Two weeks ago, Scranton Mayor Chris Doherty made headlines with the decision to cut all city workers’ pay — including his own — to the minimum wage of $7.25 per hour to make payroll. The lawsuit from the unions representing city employees was upheld in court and requires the city to pay the full amount, $15 million.

California Bankruptcies Show Willingness Waning, Moody’s Says - Bankruptcy decisions by Stockton and San Bernardino in California signal more cities may be losing their willingness to pay debt obligations, Moody’s Investors Service said. “The looming defaults by Stockton and San Bernardino raise the possibility that distressed municipalities -- in California and, perhaps, elsewhere -- will begin to view debt service as a discretionary budget item, and that defaults will increase,” Anne Van Praagh, a managing director at the ratings company, said in a report today. San Bernardino will become the latest municipality in California to seek court protection from creditors after the City Council voted for an emergency bankruptcy yesterday. It would join Stockton, an agricultural center of 292,000 east of San Francisco, and Mammoth Lakes, a mountain resort town of 8,200, by entering bankruptcy proceedings. Stockton is the largest U.S. city to take the step.

Buffett Says Muni Bankruptcies Set to Climb as Stigma Lifts - Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.  The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.

Defaulted California cities share much in common; muni investors don't care - We now have a sample of four California municipalities that have or are about to default.  NYTimes: - As San Bernardino, Calif., moved toward bankruptcy this week, municipal bond analysts were questioning how widespread the fiscal distress may prove to be, but were not predicting a wave of defaults.  San Bernardino’s vote to authorize a bankruptcy filing came after filings this summer by the California cities of Stockton and Mammoth Lakes. Those cities were following Vallejo, which emerged from bankruptcy in 2011, after a three-year struggle to reduce its debts to investors, retirees and others. Are there common trends shared by these areas that made them more vulnerable? Let's take a look at some demographics compiled by JPMorgan. (8 graphs) It seems that population growth, unemployment, poverty, and the housing crisis (all reducing tax revenues via declines in sales and property taxes) make these cities/areas stand out.  Other issues JPM analysts point to include unusually high personnel and pension costs. There are clearly multiple other municipalities across the US with these sorts of demographics. Does that mean we are going to see more defaults? The muni debt markets are simply shrugging these off as a set of isolated cases - a tiny portion of the massive municipal bond market.

Compton Will Run Out Of Funds By September 1  - Compton, Calif. could be the fourth city in the Golden State to seek bankruptcy protection. At a city council meeting Tuesday, officials announced that Compton is set to run out of funds by Sept. 1. Compton, which has only 93,000 residents, faces a deficit of $43 million after having depleted a $22 million reserve, reports Reuters. "I have $3 million in the bank and $5 million in warrants due in the next 10 to 12 days," said city treasurer Doug Sanders during the live-streamed city council meeting. "By then, the council will have a decision to make: don't pay the bonds, default on them, or have a serious talk about bankruptcy."Standard & Poor's put Compton's revenue bonds on a negative credit watch last Friday, citing concern over allegations of "abuse of public moneys" and fraud, reports the Los Angeles Times. S&P also warned that unless they receive independently audited financial information from Compton, the city's ratings -- already at BB, or "junk" status -- could be withdrawn or suspended.

Compton on brink of bankruptcy - City officials announced that Compton could run out of money by summer's end, with $3 million in the bank and more than $5 million in bills due. A longer-term problem is a $43-million deficit that the city amassed after years of improperly using money from water, sewer and retirement funds to balance its general fund. Compton will have to pay the money back at a time when it has no reserves and has been frantically cutting costs. The state of these cities underscores the complexity of the fiscal crisis roiling California municipalities this year, with Stockton and Mammoth Lakes already in Chapter 9 bankruptcy. While ballooning public pensions and falling property tax revenues have hit many cities hard, bad accounting practices and improper use of funds have also taken a toll. In many cases cities resorted to these measures because they could not balance their books or raise revenues but were loath to make cuts.

Infinite democracy in SF brings projects to a halt - SFGate: It is not your imagination. It really is more difficult to get anything done in San Francisco. Nothing is too small for a lawsuit - soccer fields in Golden Gate Park, shadows cast by skyscrapers, or bike lanes on city streets. And don't get us started on trying to build something. Whatever it is, somebody doesn't like it. And if they object, the city provides plenty of tools to hold it back. "It's delay, delay, delay," said "They challenge it every step of the way." Johnston isn't exactly unbiased. He's represented some of the biggest recent building projects in the city. But city Planning Director John Rahaim, who arrived from Seattle three years ago, sees the challenges first hand. "I haven't done a scientific study," he said. "But I would say that there are more projects being reviewed by the planning department here than any other city, including New York." It is the great irony that San Francisco, which prides itself on being open, free-thinking and innovative, is so restrictive. It's as if the city of progressive values has defined itself with a single word - no.

Detroit Core Thrives as Criminals Prey on 'Hoods - As small, safe enclaves attract residents -- midtown’s population grew 33 percent in 10 years as Detroit as a whole lost 25 percent -- cuts in police protection threaten to unleash more crime in outer neighborhoods that already lead the nation in violence. Spreading the core’s vitality may decide the fate of the near-bankrupt city. Last year, Detroit’s 2,137 violent crimes per 100,000 people, including 344 homicides, led U.S. cities with populations of 300,000 or more, according to an FBI report. St. Louis was second, with 1,857 crimes per 100,000. It’s a different tale in Detroit’s midtown, a hotspot for art and socializing. Midtown’s population grew to 14,550 from 10,900 from 2000 to 2010, according to the Southeast Michigan Council of Governments. The area’s 5,884 housing units in 127 buildings are 95 percent occupied, and more are being built, according to Midtown Detroit Inc., a nonprofit planning and economic development organization. The city’s first Whole Foods supermarket is being built in midtown. Vacant land is being prepared for redevelopment and old buildings have been restored for housing, such as Wallace’s loft. The district includes the Detroit Institute of Arts, Detroit Symphony Orchestra, Detroit Medical Center and Detroit Public Library. 

Camden parks go dark because of metal thieves - The lights are out in a growing number of Camden, N.J. city parks. Officials are finding that metal thieves have taken copper wires used to electrify the parks. Officials also say school buildings have been stripped of air conditioning units by scavengers. Last year, the fire department of the cash strapped city had to pump water from a river several blocks away from a huge warehouse blaze because hydrants had been stripped. Selling scrap metal and wires is a major source of income for the homeless and others.

More older Texans seek food stamp aid — More older Texans apparently struggling to make ends meet have been turning to food stamps. The Houston Chronicle reported Monday that the state’s fastest-growing group receiving food stamps is those ages 60 to 64. That age range getting food assistance has reached nearly 85,000 this month, compared to about 41,000 in 2007. The Health and Human Services Commission says the total number of recipients from all age groups has increased 58 percent in the same time period. The agency says the Supplemental Nutrition Assistance Program, or SNAP, currently has about 3.6 million participants. Spokeswoman Stephanie Goodman says the growth of the senior group has been outstripping all other ages since 2007.

Judge Shuts Down Debtor’s Prison in Alabama - A couple weeks back, the New York Times shed some light on a growing trend of private probation companies ramping up fees on indigents who violate misdemeanors, kicking off a process that sends these people to jail for owing money. Meanwhile the fees would get layered on top of one another. It’s a 21st-century form of debtor’s prison and it violates federal statutes against the practice as it shocks the conscience.One judge in Alabama, the state profiled in the story, has had enough. In an order against the city of Harpersville, AL, Judge Hub Harrington wrote: Defendants’ depositions present virtually undisputed evidence that criminal defendants appearing before the Harpersville Municipal Court have been subjected to repeated and ongoing violations of almost every safeguard afforded by the United States Constitution, the laws of the State of Alabama, and the Rules of Criminal Procedure. The admitted violations are so numerous as to defy a detailed chronicling in this short space.This is a harsh ruling. Judge Harrington granted a preliminary injunction hearing to the plaintiff, a victims of the debtor’s prison, and ordered the mayor and every member of the Harpersville City Council to be present at the trial. The judge also said that the city could not incarcerate ANYONE in the county jail or corrections facility without written approval from him. Harrington called the scheme a “judicially sanctioned extortion racket.”

Obama Wants $1 Billion for “Master Teachers Corps” - The White House on Wednesday unveiled a proposal to create a national elite teachers corps that would celebrate the achievements of the nation’s top educators in science, technology, engineering, and math, Bloomberg reports. The 50 top teachers in each field selected for the Master Teacher Corps would receive a stipend of $20,000 added on to their salaries and must commit for multiple years. The Obama administration plans to expand the corps to 10,000 over the next four years, with the ultimate goal that the elite group of teachers will pass their knowledge and skills on to their colleagues to help bolster the quality of teaching nationwide.  On the campaign trail, President Obama has pledged to protect and expand funding for education programs, particularly in science and math, and charges that Mitt Romney’s tax and spending plan would mean inevitable cuts in the field, the Associated Press notes. Already, the administration has earmarked $100,000 for the program out of an existing fund to incentivize quality teaching, and plans to include $1 billion for funding the initiative in the 2013 annual budget request to Congress.

CSU: Higher fees, fewer students if tax hike fails - CSU trustees will hear about their options at Tuesday's board meeting in Long Beach. But the university system's finance officials told reporters Monday morning that all of the options look bad if Prop 30 -- the governor's temporary income and sales tax increase -- fails on November 6. They also say the CSU system needs to take preemptive action, just in case. "We don't have the luxury of just sitting back and waiting to see what happens in November," said Robert Turnage, CSU's top budget analyst. Staff have come up with two scenarios for trustees to begin pondering this week, and on which to take action at their meeting in September. The first scenario, says Turnage, is to "preserve access" to a CSU education for as many students as possible by a $150 per student fee increase in spring 2013 and a 2.5-percent pay cut for university workers. The second option, described as a way to "preserve price" promises already made to students and their families, would be to reduce enrollment by some 6,000 students across the CSU 23 campus system, lay off 750 university employees systemwide, and make a 5.25-percent cut in worker pay.

Colleges Awakening to the Opportunities of Data Mining - As Katye Allisone, a freshman at Arizona State University, hunkers down in a computer lab for an 8:35 a.m. math class, the Web-based course watches her back. Answers, scores, pace, click paths — it hoovers up information, like Google. But rather than personalizing search results, data shape Ms. Allisone’s class according to her understanding of the material. With 72,000 students, A.S.U. is both the country’s largest public university and a hotbed of data-driven experiments. One core effort is a degree-monitoring system that keeps tabs on how students are doing in their majors. Stray off-course and a student may have to switch fields. And while not exactly matchmaking, Arizona State takes an interest in students’ social lives, too. Its Facebook app mines profiles to suggest friends. One classmate shares eight things in common with Ms. Allisone, who “likes” education, photography and tattoos. Researchers are even trying to figure out social ties based on anonymized data culled from swipes of ID cards around the Tempe campus. This is college life, quantified.

“Do Business Schools Incubate Criminals?” - - Yves Smith  -- Luigi Zinglaes, who teaches at the University of Chicago’s business school, had an op-ed in Bloomberg provocatively titled “Do Business Schools Incubate Criminals?” He argues that business schools are “partly to blame” for the decline in ethical standards in the business world, and urges that ethics not be taught as a separate course by lightweight profs, but integrated into all courses.   This piece is so backwards I don’t quite know where to begin. It’s telling that it blames former McKinsey partner, now convicted insider traders Rajat Gupta’s and Anil Kumar’s crimes on the failure get ethical training in business school. I’m not making this up: “Where did Gupta, Kumar and others get the idea that this kind of behavior might be OK? Most business schools do offer ethics classes” but contends they are unserious. No other possible explanation is explored. Gee, they both went to the Indian Institute of Technology. Why isn’t their education at a more formative stage under scrutiny as well?

More Indications of Rising Student Debt - Sallie Mae, the private student loan company, finds in a survey the unsurprising information that students are bearing more and more of the burden of higher education costs. While wages have largely stagnated over the past decade, college and university costs have soared. So there’s simply no other way this could go. In its annual survey, the nation’s largest private student lender found that undergraduates covered 30 percent of the cost of college themselves during the most recent academic year — the largest share in four years. They spent an average of $2,555 from their income and savings and took out $3,719 in loans, the report showed. Meanwhile, parents struggled to maintain their level of financial support. Though they still paid for more than a third of their children’s college costs, they relied more heavily on borrowing, according to the study. The portion covered by parents’ out-of-pocket contribution fell to 28 percent, down nine percentage points from its peak two years ago. The report called the changes a “major shift in spending” that occurred across all income levels. It comes amid a national debate over the $1 trillion student debt burden and the rising number of borrowers who have fallen behind on those loans. The Sallie Mae study provides a window into how families are factoring those costs into their college choices

College costs shifting to students, Sallie Mae survey finds - Students are shouldering more of the burden of paying for college, increasing their borrowing and out-of-pocket contributions, according to a study from Sallie Mae to be released Monday. In its annual survey, the nation’s largest private student lender found that undergraduates covered 30 percent of the cost of college themselves during the most recent academic year — the largest share in four years. They spent an average of $2,555 from their income and savings and took out $3,719 in loans, the report showed. Meanwhile, parents struggled to maintain their level of financial support. Though they still paid for more than a third of their children’s college costs, they relied more heavily on borrowing, according to the study. The portion covered by parents’ out-of-pocket contribution fell to 28 percent, down nine percentage points from its peak two years ago.  The report called the changes a “major shift in spending” that occurred across all income levels. It comes amid a national debate over the $1 trillion student debt burden and the rising number of borrowers who have fallen behind on those loans. The Sallie Mae study provides a window into how families are factoring those costs into their college choices.

Cost Tops Quality for Students Seeking Web Courses - Online education is touted as a convenient option for busy students, but e-learners may actually care more about cost than about schedule. According to a new study by the education practice at The Parthenon Group, a consulting firm, tuition cost ranks higher among factors that prospective online students weigh than do convenience, quality of education or even the ability to find a job after graduation. The survey included more than 1,500 prospective students with family income below $80,000 and was commissioned by Penn Foster, which operates online high school, college and vocational programs. Tuition cost rose to the top spot in 2012 from the No. 5 criteria in school selection back in 2007. The main factor for students five years ago was education quality. With price tags ballooning, jobs hard to come by, schools cutting back on grants and scholarships and families increasingly worried about saddling graduates with long-lasting debt, it’s no surprise that cost is top of mind.

Repaying Debt for Law School: Federal Programs Make It Doable, Not Easy -- The Association for Legal Career Professionals has released data on starting salaries of 2011 law school graduates, reporting a median salary of $60,000.  So how can these recent graduates afford to repay their student loans? The N.Y. Times says law schools are facing an existential crisis over rising tuition, debt, and underemployment, but this may be just a teeny bit overwrought. For example, as will be detailed below, a graduate making $50,000 a year in a public service job can pay under $420 a month on federal student loans for ten years and have the rest forgiven.  Also, many law graduates have long had modest incomes.  The law school world is adjusting back to that longterm reality in the aftermath of a bubble that burst.  Several classes got caught in the middle of it, but even for them, there are some ways to cope. Don’t get me wrong. Law schools in general need to keep tuition down by sticking to the core curriculum and avoiding frills, while reducing the number of seats to get the supply of lawyers more in line with demand.  Unless applicants can get into the top five or so schools, they should be bargain hunting to minimize debt.  At least in the short term, until law schools can reduce capacity, many are filling empty seats at deep discounts.  This year in particular, it’s a buyers’ market.  But for those graduates who don’t make big salaries and already took out big federal student loans, there are solutions, thanks to U.S. Department of Education repayment options.  The calculations below are based on the DOE federal student loan repayment calculators.

Private student loan debt reaches $150 billion -Americans have racked up $150 billion in private student loan debt, with many graduates owing more than they can afford, according to a new report from the Consumer Financial Protection Bureau. While these loans represent a small slice of the total outstanding student loan debt in the country -- which topped $1 trillion in 2011 -- they have caused big financial problems for borrowers, the CFPB and the Department of Education found after analyzing data from nine of the biggest private student lenders on roughly 5 million loans.Private student loans were aggressively marketed to students before the financial crisis and typically came with fewer protections and higher interest rates than federal loans, the report found. "Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed," CFPB director Richard Cordray said on a call with reporters. "They are now overwhelmed by debt and regret the decisions they made." Defaulted private loans currently total more than $8.1 billion, representing 850,000 individual loans, according to the report.

Middle-Aged Americans Struggle Most With Student Debt - Student debt is rising sharply among all age groups, but middle-aged Americans appear to be struggling the most with payments, according to new data released Tuesday by the Federal Reserve Bank of New York. The delinquency rate—or the percentage of debt on which no payment has been made for 90 days—was 11.9% for debt held by borrowers aged 40 to 49 as of March. That compares with a rate of 8.7% for borrowers of all ages.  The New York Fed, which based its data on a sampling of consumer credit reports, said delinquency rates for all groups are much higher if one excludes loans in deferment for reasons such as a borrower still being in school. High delinquency rates on student debt are causing concerns among economists because delinquencies damage a person's credit, making it harder for consumers to borrow in the future, while causing the total debt to grow as interest and penalties accrue.Two-thirds of the nation's $900 billion in student debt is held by Americans under 40, the Fed estimates. But borrowers over 40 are having a particularly tough time with student debt, consumer and higher-education experts say.

Organizing around student debt - Occupy raised the profile of debt as a collective personal problem, that is to say, it showed people that they’re not alone.  The second mass movements were back on the agenda, the problem of debt took center stage.  Prior to this, getting people to take any action around debt was like beating your head against a wall.  For years organizing around my college campus against tuition hikes, I felt like Sisyphus.  You’d hand somebody a leaflet about stopping tuition hikes to a student taking out loans, and you couldn’t tell if they were confused or if they just thought you were confused, or both.  Even during Occupy it was hard to actually organize anything specifically around student debt.  The problem is one of lowered expectations.  Most students don’t expect higher education to be cheap, and they don’t expect to not have to take out loans.  That’s just what you do, right?  The movement around higher education at the University of California system was so explosive precisely because the incredible costs of higher education at the UC was a newphenomenon.  So what you see there is the potential that raised expectations have to act as a mobilizing force.

Pension hike could bankrupt northeast Pa. school districts - In five years, pension contributions for area school districts are projected to increase by $172.9 million. With reduced levels of state funding and limits on how much districts can raise local property taxes, superintendents fear there will be one option: bankruptcy. The recently passed 2012-13 state budget did nothing to address what many call the upcoming "pension crisis." From fiscal 2011-12 to 2015-16, contributions are set to triple. Area districts have already furloughed teachers, cut tutoring programs and increased class sizes. It may only be the beginning. The projected five-year increase for the 37 school districts in Lackawanna, Luzerne, Monroe, Pike, Susquehanna, Wayne and Wyoming counties is more than three times the $51.5 million that the districts saw slashed in the 2011-12 state budget and not restored for 2012-13. "It seems almost that if we ignore it, it will go away. Well, it's not," Scranton Superintendent William King said. "It doesn't seem like it's a priority on the state level, and quite frankly it needs to be. ... If this is not addressed at the state level, school districts are going to go bankrupt."

Calpers earns 1 per cent annual return - The California Public Employees’ Retirement System, the largest US public pension fund, reported that it made an investment return of just 1 per cent in the year to June 30, underperforming its benchmark. In a sign of the problems facing the cash-strapped state as its pension funds mature, preliminary results indicate that assets managed by Calpers dropped from $239bn a year ago to $233bn, meaning that the pension fund paid out more in benefits than it received in contributions and investment returns in the last year. California will increase its contribution to the fund by $213m this year, from $3.5bn in 2011-12, but the amount will still be lower than the $3.9bn the state paid in two years ago. Calpers said that the final figure for assets under management could still rise, as it does not include the most up to date investment returns from illiquid assets such as private equity. However, assets are expected to drop from 74 per cent of liabilities at the end of last year towards 70 per cent. In April, a report prepared for California’s second largest pension fund, the $151bn California State Teachers’ Retirement System, said that the hole represented by its 69 per cent funding ratio was too great to be filled by better investment performance and that on current trends it would run out of money entirely in about 30 years. On Friday Calstrs reported a 1.8 per cent investment return for its fiscal year. Both pension funds assume returns will average 7.5 per cent annually, in line with their investment performance over the past two decades.

Calpers Generates 1% Return, Misses Discount Rate Target By 87% - "Thank you ZIRP, may we have another." This is what the 1.6 million workers who have invested their retirement money with America's largest pension fund, California's CALPERS, may want to ask Chairman Ben following the firm's just announced results for Fiscal 2012 (ended June 30). The end result: +1% nominal return, which means a negative real return. And this is even including the now traditional end of June ramp which this year came courtesy of the now largely irrelevant European summit, which nonetheless ramped stocks and likely meant the difference for Calpers between positive and negative on the year! Sadly just one "another" year would not be enough, but a whopping 7 more would be needed, because as is well known, for all actuarial purposes Calpers, as well as the bulk of US pension funds, use a 7.5% discount rate. In other words, Calpers missed the minimum return it needs to not require overfunding by, oh... 87%. Here is Calper's Mea Culpa: "CalPERS 1 percent return is below the fund’s discount rate of 7.5 percent, a long-term hurdle lowered recently in response to a steady decline in inflation and as part of CalPERS routine evaluation of economic assumptions."

Calpers Pension Plan Reports 1% Return; Stunning "What If" Charts at Various Compound Annualized Rates-of-Return Going Forward - The California Public Employees' Retirement System (CalPERS) manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families. Its pension plan assumes 7.5% annual growth. For fiscal year ending 2012 CalPERS Reports Preliminary Performance of 1 Percent. Bear in mind that CalPERS was massively underfunded before this report. How underfunded?  Good question. Please consider CalPERS Lies About Equity Returns CalPERS is both corrupt and incompetent.  If it were a private firm, the lies about return on investments would send executives to jail and billions in lawsuits filed. “The California Public Employees’ Retirement System (CalPERS) is the biggest public pension in the country. It is also deeply underfunded. Depending on the measure used, they have just 55-75% of money needed for future expenses while 80% is considered the minimum to be safe. Their return is currently less than 99% of big pension funds. On March 12, CalPERS voted to lower their expected return from 7.75% to 7.5%, ignoring the advice of their own chief actuary that it should be 7.25%. More than a few investment professionals consider a projected rate of 7.75% to be unrealistically high in these times and question whether 7.25% is realistic.”

Fitch says other pensions likely to follow Calpers low returns (Reuters) - More public pension funds will likely report poor investment returns, after the California pensions system, or Calpers, said earlier this week that its return for the year ending June 30 was 1 percent, Fitch Ratings forecast on Wednesday. Investments provide most of public retirement systems' revenues, and low returns could force state and local governments to make up for any shortfall with taxpayer dollars, Fitch said. "Many pension systems are still absorbing the losses of 2008-2009 ... and now the disappointing returns for fiscal 2012 will further weigh down funded ratios and pressure annual contributions," Fitch said. "It is important to note that numerous pension systems have taken steps toward reforming their pensions, including by lowering their investment return assumptions." Calpers, or the California Public Employees' Retirement System, had been one of the funds that lowered its projected rate of return, dropping it to 7.5 percent in March from its longstanding rate of 7.75 percent.

California’s Bad Bet Makes JPMorgan’s Look Minor - Bloomberg: Congress ordered JPMorgan Chase & Co. (JPM)’s chief executive officer, Jamie Dimon, to testify about $2 billion that his bank lost on an investment bet. Worrisome as that gamble was -- after all, the banking crisis was largely due to bad bets by banks -- it is unfortunate that Congress has never called hearings on a far bigger bet, one that has had more catastrophic consequences for millions of taxpayers. The one I’m referring to was made by California legislators on Sept. 10, 1999. They decided that investment gains would cover 100 percent of the cost of retroactive pension increases they granted that day to hundreds of thousands of state workers. The politicians made the wrong bet -- and the result has been a penalty to California’s budget that has averaged $2 billion a year ever since and that will cost the state billions more for decades to come. Promising that “no increase over current employer contributions is needed for these benefit improvements,” and that the state pension fund would “remain fully funded,” the proposal, known as SB 400, claimed that enhanced pensions wouldn’t cost taxpayers “a dime” because of healthy investment returns. The proposal went on to assert that it “fully expects” the state’s pension costs to remain below $766 million a year for “at least the next decade.” 

Pension funds seriously underfunded, studies find — Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies. In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices. Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low. The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

More Bad News for Public Pensions -- Three recently released data points bring new worry to a long-standing if not always front-of-mind U.S. economic problem, underfunded public pensions.

  • Fact one: On July 13, CalSTRS, the California State Teachers’ Retirement System, reported a 1.8% return on its investments in the 2011-12 fiscal year. Its actuarial assumed rate of return is 7.5 %. Its chief executive officer, Jack Ehnes, said in a press release, “Investment returns alone cannot place CalSTRS on a solid financial footing. “
  • Fact Two: On July 16, the largest public pension plan in the U.S., the California Public Employees’ Retirement System (CalPERS) said it earned 1% on its investments in the fiscal year ended June 30. Its so-called discount rate also is 7.5%.
  • Fact Three: Earlier this week, a State Budget Crisis Task Force, headed by public policy veterans Paul Volcker (who once helmed the Fed) and Richard Ravitch (who once was lieutenant governor of New York), cited “underfunded retirement promises” as one of six major threats to states’ “fiscal sustainability.”

U.S. Public-Pension Shortfall $4.6 Trillion, Group Says - U.S. public pensions are $4.6 trillion short of the amount of assets needed to cover projected liabilities, an advocacy group said. That’s more than twice what Moody’s Investors Service estimated this month. The average plan is 41 percent funded, State Budget Solutions said in a report today. The Alexandria, Virginia, group’s partners include the American Legislative Exchange Council, which advocates “conservative public policy solutions,” the Freedom Foundation and the State Policy Network, which is composed of “free-market think tanks.” State Budget Solutions said that taxpayers must make up the difference between investment performance and promised benefits. The group, using its report to advocate pension cuts, called the gap “a hole that will overtake local and state governments.” “Without government actions, states, counties, cities and towns all over America will go bankrupt,” Bob Williams, president of State Budget Solutions, said in the release. “Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future.”

Low rates pushing pensions deeper into underfunded territory; liability "smoothing" goes global  - The corporate pension lobby is increasingly energized to have the US Congress approve the 25-year "smoothing" for pensions. With interest rates falling, defined benefits corporate pensions are once again becoming severely underfunded. Increasing the discount rate would lower the net present value of pension liabilities making them look less underfunded. The assets however will be growing at the current extremely low rate of return and will likely be insufficient to meet pension obligations in the future. NCPA- Private corporations are asking Congress to change how they calculate their annual pension contributions, which could create a huge unfunded liability for taxpayers, say Jason J. Fichtner and Eileen Norcross, senior research fellows with the Mercatus Center. The law requires corporate plans to measure their liabilities, and determine annual contributions to fund them, using the rate of return on corporate bonds -- the discount rate. Now, corporations are lobbying for Congress to allow them to increase the discount rate. This allows accountants to assume better investment performance, setting aside fewer dollars for future pension obligations.

Defaults on 401(k) loans reach $37 billion a year -- Americans are borrowing huge amounts of money from their 401(k) retirement plans -- and then having big trouble paying off their debt, according to a new study. Defaults on 401(k) loans have totaled as much as $37 billion a year in recent years, far higher than previously estimated, according to the analysis Monday by two researchers. The default rate was estimated to be 17.4 percent in the 12 months through May. That's down slightly from the 19.8 percent peak in mid-2010, but up dramatically from 9.7 percent in mid-2008 prior to the global financial crisis.

Are 401(k) Loan Defaults Set To Resurge? - Since the financial crisis hit and exposed the reality of a credit-fueled economic growth strategy, Americans have tried to maintain any kind of quality of life. With the HELOC ATM empty, they switched to Credit Cards and once limits were full, there was only one place left - their retirement plans. As the LA Times reports today, Americans are borrowing huge amounts of money from their 401(k) retirement plans - and then having big trouble paying off their debt. Stunningly, in recent years 20% to 28% of people eligible to borrow from their 401(k) accounts have an outstanding loan at any given time, the Navigant Economics study said, having borrowed a collective $105 billion from their 401(k) accounts as of 2009 - and likely considerably more since. Estimating the 'leakage' from these retirement funds, they see loan-loss rates typically double that of the average unemployment and estimate up to $37 billion of loan defaults per year. In the 12 months through May 2012, they estimate the 401(k) default rate hit 17.4% - more than double its pre-crisis average and only marginally lower than its peak in 2009. As they note, many people use the money to pay off other debt or to meet day-to-day expenses, and "Of course, participants are not deliberately defaulting," the study said. "They only do so when they have no other option."

Cost of Living Adjustments for Retirees - When discussions about whether a pension should include a cost-of-living adjustment come up, the arguments often focus on what is "fair." That argument has force: the high inflation rates of the 1970s taught U.S. workers a tough lesson: if you retire on a fixed nominal income, inflation will nibble or gobble away at its purchasing power. Thus, Social Security benefits began to receive an automatic cost-of-living adjustment in 1975.  Today, almost all state and local government pensions have some form of built-in cost-of-living adjustments, too. But making a promise about future payments is, ultimately, all about what you are able and willing to pay when the bills come due. In an otherwise completely forgettable song about 20 years ago, a group called Stetsasonic sang: "[J]ust like my mother used to say in the past/ Don't let your mouth write a check that your ass can't cash." A lot of state and local pension funds let their mouths write checks that they are no longer willing to cash. At some point, Social Security may make a similar decision.

First Look at 2013 Cost-Of-Living Adjustments and Maximum Contribution Base - The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.6 percent over the last 12 months to an index level of 226.036 (1982-84=100). For the month, the index decreased 0.2 percent prior to seasonal adjustment." CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation, The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U, and not seasonally adjusted. Since the highest Q3 average was in 2011, at 223.233, we only have to compare to last year. Note: The last few years we needed to compare to Q3 2008 since that was the previous highest Q3 average.  This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year. Currently CPI-W is above the Q3 2011 average. If the current level holds, COLA would be around 1.3% for next year (the current 226.036 divided by the Q3 2011 level of 223.233).

Note to Laurence Kotlikoff on Social Security - Laurence Kotlikoff has a post in Bloomberg opinion section on the current status of the Social Security. This is lifted from Dale Coberly's note back to him: Your analysis that SS is desperately broke ignores the fact that the projected shortfall can be made up by raising the payroll tax one half of one tenth of one percent per year, while incomes are projected to go up over one full percent per year. This would result ultimately in an increase in the payroll tax of about 4% of income (which you misleadingly call a 33% increase in the tax, which it is, but which is likely to mislead the average reader). A 4% increase in the tax really amounts to a 4% increase in the savings protected by Social Security, which is properly understood as insurance against the potential failure of other modes of saving for retirement. The 4% increase is a very fair price to pay for the longer life expectancy that the workers paying the tax will enjoy.They really won't want to work any longer, and since they are paying for their own benefits, there is no reason they should have to. Further, while the tax increase does represent a higher percent of their income going to their own longer retirement, the projected increases in their wages would leave them at least twice as well off "after the tax" (that is, in terms of money left in their pockets each month after putting away the extra for their longer retirement) as they are today.

Medicaid’s New Tug of War – - THE new health care law’s individual mandate — the provision pushing people to buy insurance, and upheld last month by the Supreme Court — has garnered huge attention. But about half the planned expansion of insurance coverage under the new law comes from another source entirely: growth of the Medicaid program.Yet Medicaid has never been especially popular, and when its expanded role becomes more widely understood, it is likely to become less popular still. Medicaid beneficiaries have limited means, and their low incomes usually translate into below-average political influence. The joint federal-state financing of Medicaid reflects its lack of broad support among the more affluent. Neither the federal government nor the states wish to pick up the entire tab, and many state governments — and not just Republican administrations — would prefer to spend more on education, roads and other programs. Yet the federal subsidy for Medicaid expenditures keeps many states locked in — the Feds usually pick up at least half the cost — at levels they would not have chosen on their own. Those are signs of a program ripe for cuts, and yet the law is bringing a major Medicaid expansion. Will it stick? The additional federal subsidy is probably high enough to induce most states to expand Medicaid in the short run.The greater likelihood is that, over time, American voters will rebel against Medicaid and dismantle the subsidies that keep the states locked in, and will prefer instead to spend the money on other programs.

The new tug of war over Medicaid - My New York Times column is here, it has two parts, a prediction and a proposal.  The prediction: Medicaid has never been especially popular, and when its expanded role becomes more widely understood, it is likely to become less popular still. I am not expecting that governors will turn away nearly-free federal dollars outright.  (Though probably some will, here is an update on how the governors are reacting, which as I see it involves lots of bargaining.)  I am predicting that the extreme subsidies for states to hop on to the expansion will at some point weaken or go away. Change might come soon. If Mitt Romney wins the presidential election, and if Republicans control both houses of Congress, they could turn Medicaid into a block grant program, where states can spend the money as they wish. Even if President Obama is re-elected, some state governments will work hard to reduce the number of people covered by Medicaid. State officials know that limiting Medicaid will place more individuals in the new, subsidized health care exchanges, and that those bills will be paid by the federal government. The basic dynamic is that state and federal governments have opposite incentives as to how many people should be kept in Medicaid.

Let’s try to stick to the real world when we talk about Medicaid, by Aaron Carroll: Tyler Cowen had a piece in the NYT this weekend on Medicaid. He doesn’t seem too thrilled with its use in the ACA’s coverage expansion. ... I have to admit that his article set me off a bit. It could be that he didn’t have space in the NYT for more nuance. Perhaps he’ll provide it on his blog. In particular, I’d love him to address some of the points below… I get a bit  annoyed when people claim that we can’t “afford” more government intervention or, god-forbid, single-payer. That kind of statement willfully ignores the fact that every country that has MORE government intervention spends LESS. I get a bit annoyed by the claim that an expansion of government insurance leads to lines and waiting when lots of countries have universal access and less of a wait-time problem than we do. Moreover, almost no one makes this argument when we expand private insurance, only government. I get a bit annoyed by blanket claims that doctors won’t accept Medicaid. Such statements often ignore the fact that the majority of Medicaid beneficiaries are children and pregnant women. We don’t need all types of doctors to accept Medicaid patients in equal numbers. ... I get a bit annoyed when people just claim government programs are “unpopular”. Like Medicare? I don’t think so..., polling shows the opposite of what Tyler (and lots of others) suggest. I get a bit annoyed at the blanket acceptance of the awesomeness of the free market in health care, when there is no phenomenal evidence of its success. And again, those countries with less free market are cheaper, universal, and often just as good. ...

Governors Maneuver on Medicaid Expansion - The National Governors Association meeting came and went this weekend without any definitive answers on Medicaid expansion – from both sides of the political divide. Republicans continue to be either adamantly opposed to expanding Medicaid for their populations or undecided about the matter. And Democratic governors, for that matter, have not lined up in total support, either. Of the country’s 20 Democratic governors (plus Independent Rhode Island Gov. Lincoln Chafee), 13 — and Chafee — plan to fully implement the national health-care law’s Medicaid expansion, while seven have yet to make up their minds, USA Today reported earlier this week. “Every governor has a unique set of challenges; some have greater political challenges to overcome than others,” DGA chairman and Maryland Gov. Martin O’Malley told reporters  Governors of both parties are still studying the potential impact of the provision and have cited a long list of questions they have about how the expansion will be carried out, which many reiterated in interviews at the leaders’ annual summit in colonial Williamsburg. The topic was also front and center at a breakfast of Democratic governors Saturday morning and at a separate roundtable of Republican governors.

Why not expand Medicaid? - Last week former Michigan Governor Jennifer Granholm (D) argued that any Governor who rejected the Affordable Care Act’s new Medicaid expansion was either stupid or evil.  This is a common refrain from the law’s defenders, that only an irrational or uncaring Governor would reject the ACA’s new Medicaid subsidies to provide health insurance to poor adults without kids. This question is now relevant thanks to the Supreme Court’s recent ruling.  The Roberts Court ruled that the federal government may not deny the federal share of funds for a state’s existing Medicaid program if that state refuses to avail itself of the new subsidies offered for expanding program eligibility.  In the wake of this ruling several Governors have said they will not, or may not, expand their Medicaid programs, notwithstanding the ACA’s offer of generous matching federal funds. How generous?  Under the ACA the Feds will pay all benefit costs for this new population through 2016, and then phase down to a 90 percent federal share from 2020 on.  That compares to an average federal share of 57 cents of each dollar spent on Medicaid benefits for existing populations.  The exact federal share varies by state and ranges from 50 cents federal to 78 cents federal for basic Medicaid benefits.

Medicaid as if the people in the system mattered - Tyler Cowen wrote about the future of Medicaid in last Sunday's New York Times. He pointed out several problems -- albeit some are arguable -- with Medicaid. He warned that Medicaid is likely to be heading for trouble because as the Medicaid expansion [built into the Affordable Care Act] receives more publicity, voters may realize that they want to spend less money on it. There is a vital message here. The progressive elements of the Affordable Care Act can be undone by legislation or regulations interpreting that legislation. The left has comforted itself with the idea that once the legislation is in place, the ACA will become more popular, like Social Security and Medicare did. Time is supposedly on our side.  But it is not. I am confident that many elements of the ACA will become popular when they are in place, such as the prohibition on insurance companies considering pre-existing conditions in issuing policies. However, Medicaid is fundamentally redistributive: it is a program for low income children, low income people in long term care, and people with disabilities, all of whom are unable to finance their own care. These funds come from taxes on more affluent people. There are significant groups in the US that, for reasons that seem good by their lights, do not want to pay for the care of the indigent. They have defeated many previous attempts to achieve a more egalitarian health insurance system, and they are not leaving the field after one defeat. Cowen's piece games out several paths future health care conflicts might take.

Will ObamaCare Make Us Fat? - - Miles Kimball reports on a paper co-authored by Isaac Ehrlich entitled The Problem of the Uninsured—Implications for Health Insurance:  Sam Peltzman’s argument that requiring people to wear seat belts would make them feel safer, and therefore lead them to drive faster. This is now called the Peltzman effect, and I will refer you to Greg Mankiw’s post on “The Peltzman Effect” for a discussion of it. In his presentation, Isaac points out that there will be the same kind of effect if you require people to have health insurance. They will feel safer in relation to their health, and so will take more risks. For example, a young person who has to pay full price for the visit to the doctor for antiobiotics to treat an STD may be more careful to use or insist on a condom. He and his coauthor Yong Yin have a theoretical model showing that such effects can be substantial in size. Notice that it should be possible to get good empirical evidence on such effects. In other words, Ehrlich is claiming now that the poor have health insurance, they will work out less and will eat more junk food. Isaac Ehrlich – where have we heard this name before? His 1975 publication The Deterrent Effect of Capital Punishment is often cited by advocates of capital punishment but be mindful of the various critiques of Ehrlich’s alleged evidence, which we noted here.

The Affordable Care Act’s Mixed Reviews - A new poll from Gallup asking people who they think will be helped and hurt by the new law demonstrates why it is unlikely to become popular in the near future. Most Americans think the law will benefit some groups of people. Given that one of the main stated purposes of the law was to expand coverage to the uninsured, it is to be expected that a majority of people think it will help those currently without insurance. From Gallup: The problem for the law, then, is that its perceived benefits are countered by the fact that a plurality think the law will hurt a large number of other groups. Most importantly the poll found a majority think the law will hurt taxpayers, and a plurality think it will hurt people with insurance. Since most voters are taxpayers who currently have insurance, it is not surprising that the poll also found that a plurality of people think the law will hurt them personally. A law that a plurality of Americans think will make them personally worse off is simply never going to very popular as long as they believe that.

Health Care Thoughts: Employer Responses -- The Urban Institute and the Robert Woods Johnson Foundation published a paper (October 2011) about the potential responses of employers and employees. The paper tends to take an optimistic view on the responses of employers, although warning of possible short term thinking by some employers. Now the SCOTUS uproar is resolved, it was worth rereading.  My own view is slightly different, focusing on:
1) Employers with high value employees will continue to provide benefits.
2) Employers with lower value employees will scrutinize the options.
3) Employer slightly below the 50 cutoff will not be hiring.
4) Employers slightly above the 50 cutoff will look to cut employees.
5) Some employers will try to build networks of independent contractors.
Read the UI paper, it is well written for a technical work.

Why Obamacare Should Be Redesigned, But Not Repealed - Last week’s vote by the House of Representatives to repeal President Obama’s health care plan was the 33rd such attempt – and just as unlikely to have any real effect as the previous 32 votes. In fact, repealing the entire law and replacing it with something completely different will be quite difficult politically. Nonetheless, over the long term, financial pressures are likely to force substantial alterations in the law as it currently stands. If those changes are made intelligently, they could lower costs and increase consumer choice, while preserving universal coverage.Experts argue over every aspect of the Affordable Care Act, including its financial implications. But as even some of Obamacare’s greatest supporters admit, the goal was to craft a plan for universal health care coverage that could pass Congress and be signed into law. If there were flaws and awkward compromises, they could be fixed later. In my view, there are in fact two big flaws – Obamacare does not sufficiently control costs and its standards are too restrictive when it comes to determining what types of health care coverage are allowed. Both those flaws could be addressed by recognizing that the standards for catastrophic health coverage – protection against serious illnesses that are hideously expensive to treat – should be different from those for everyday medical expenses. Over the long term, I believe, financial realities and consumer preferences will encourage changes in just such a direction.

What You Don't Know Can't Heal You - Paul Krugman - Austin Frakt looks at the Republican health legislation, and finds (quoting a report from AcademyHealth) that [I]t completely eliminates the Agency for Healthcare Research and Quality (Sec. 227), and prohibits any patient-centered outcomes research (Sec. 217) and all economic research within the National Institutes of Health (Page 57, line 19). And remember the hatred aimed at comparative effectiveness research. So let’s see: the conservative vision is that we can achieve low-cost, quality health care via the magic of the marketplace. This would almost certainly be wrong even under the best conditions. But the actual policy is not just to privatize Medicare and all that, but also to eliminate funding for all research into what actually works. You sometimes hear conservatives saying that the role of government should be limited to the provision of public goods; obviously I don’t agree. But it turns out that they hate providing public goods, like research, too.

Troubled New York Hospitals Forgo Coverage for Malpractice - Several of the city’s most troubled hospitals are partially or completely uninsured for malpractice, state records show, forgoing what is considered a standard safeguard across the country. Some have saved money to cover their liabilities, but others have used up their malpractice reserves, meaning that any future awards or settlements could come at the expense of patients’ care, and one hospital has closed its obstetric practice, in part out of fear of lawsuits. Executives of these hospitals, most of which are in poor neighborhoods, say their dire financial circumstances and high premiums make it impractical to pay millions of dollars a year for insurance. But insurance experts say that though dropping coverage may make economic sense in the short term, it is hardly in the best interest of patients, and in the long term it may be costly to hospitals and their bondholders, including some bonds backed by the state, should large judgments force them into bankruptcy. “From a kind of self-interest of the hospital, it seems if you’re a marginally capitalized hospital barely making it, it would be perfectly rational not to buy insurance,”  “From a social perspective, it’s very irresponsible. They’re taking in these people knowing they’re not able to make good on the harm they caused. Even a really good hospital is going to have a certain amount of medical malpractice. It’s inevitable.”

Florida health officials deny cover-up in TB outbreak (Reuters) - Florida state health officials have denied they covered up a sharp spike in tuberculosis infections among the homeless in Jacksonville and said the public was not at risk from what is believed to be the worst TB outbreak in the nation in 20 years. At least 13 people have died and another 99 have contracted TB in the outbreak in Jacksonville, the state's largest city with a population of 825,000. The Florida Department of Health said local, state and federal officials were working to contain the infections and that there was no need for a highly publicized alert even though up to 3,000 people may be at risk of contracting TB. State health officials also defended their decision not to raise a general alarm because the population of infected homeless persons appeared isolated and contained. "In this particular cluster, the general public was not at risk, because the cluster affected a defined sub-population,"

In Vast Effort, F.D.A. Spied on E-Mails of Its Own Scientists - A wide-ranging surveillance operation by the Food and Drug Administration against a group of its own scientists used an enemies list of sorts as it secretly captured thousands of e-mails that the disgruntled scientists sent privately to members of Congress, lawyers, labor officials, journalists and even President Obama, previously undisclosed records show.  What began as a narrow investigation into the possible leaking of confidential agency information by five scientists quickly grew in mid-2010 into a much broader campaign to counter outside critics of the agency’s medical review process, according to the cache of more than 80,000 pages of computer documents generated by the surveillance effort.  Moving to quell what one memorandum called the “collaboration” of the F.D.A.’s opponents, the surveillance operation identified 21 agency employees, Congressional officials, outside medical researchers and journalists thought to be working together to put out negative and “defamatory” information about the agency.  F.D.A. officials defended the surveillance operation, saying that the computer monitoring was limited to the five scientists suspected of leaking confidential information about the safety and design of medical devices.

FDA spied extensively on its scientists’ private emails - The Food and Drug Administration carried out a broad spying operation on some of its own scientists’ private emails, creating something akin to an enemies list of employees who had complained to Congress, journalists and others, according to documents uncovered by the New York Times. According to the Times, the agency began the clandestine surveillance operation in an attempt to find the source of leaks of confidential information from the agency. Yet what began as a probe into a handful of scientists quickly grew into a wider investigation that snared thousands of emails between those outside parties who, the agency feared, were collaborating with staffers to smear the FDA. Using simple spying software, the agency captured screenshots of five scientists’ computers, ultimately creating a repository of some 80,000 pages of documents, which the Times exposed Saturday. The documents include emails from scientists to Congressional staffers, outside researchers, journalists and even President Obama, as well as some personal emails. According to the Times, the documents came to light after they were apparently placed on a public website by mistake.

Will these Genetically Modified Babies Alter Human Species?: When I first read that genetically modified humans have already been born, I could hardly believe it. However, further research into this story featured in the UK's Daily Mail1 proved it to be true. They've really done it... they've created humans that nature could never allow for, and it's anyone's guess as to what will happen next. Even more shocking was the discovery that this is actually old news! The Daily Mail article was not dated, and upon investigation, the experiments cited actually took place over a decade ago; the study announcing their successful birth was published in 20012.Today, these children are in their early teens, and while the original study claims that this was "the first case of human germline genetic modification resulting in normal healthy children," later reports put such claims of absolute success in dispute. Still, back in 2001, the authors seemed to think they had it all under control, stating: "These are the first reported cases of germline mtDNA genetic modification which have led to the inheritance of two mtDNA populations in the children resulting from ooplasmic transplantation. These mtDNA fingerprints demonstrate that the transferred mitochondria can be replicated and maintained in the offspring, therefore being a genetic modification without potentially altering mitochondrial function." It's relevant to understand that these children have inherited extra genes—that of TWO women and one man—and will be able to pass this extra set of genetic traits to their own offspring. One of the most shocking considerations here is that this was done—repeatedly—even though no one knows what the ramifications of having the genetic traits of three parents might be for the individual, or for their subsequent offspring. Based on what I've learned about the genetic engineering of plants, I'm inclined to say the ramifications could potentially be vast, dire, and completely unexpected.

Oxytocin: the hype hormone - The Guardian has run a woeful ad interview about oxytocin, featuring Paul Zak who has a book to sell about the topic. This follows on from their woeful ad interview about oxytocin last August, featuring Paul Zak who has a book to sell about the topic. (In the middle, there was a decent piece by Gareth Leng, who does not have a book to sell about the topic – a momentary lapse, I’m sure.)You may have heard of oxytocin as the “moral molecule” or the “hug hormone” or the “cuddle chemical”. Unleashed by hugs, available in a handy nasal spray, and possessed with the ability to boost trust, empathy and a laundry list of virtues, it is apparently the cure to all the world’s social ills. Except it’s not.As per usual, it’s a little more complicated than that. I had a bit of a rant about oxytocin hype this morning on Twitter, which Rachel Feltman kindly collected into a Storify. It’s below, or you can search for the hashtag #schmoxytocin. Alternatively, a link to the actual page on Storify. Also, here’s a link to my New Scientist feature about oxytocin (PDF) where I talk about why it’s much more than a simple “hug hormone” and why hype about oxytocins has the potential to do some real damage to vulnerable people.

Anti-AIDS Pill Out Of Sex-Worker Reach In Push For Cure  The 23-year-old sex worker says she’d like the chance to use Gilead Sciences Inc. (GILD)’s pill Truvada to help protect her from becoming one of the 530,000 people in Thailand with HIV.  Truvada, a staple of treatment for patients with HIV, was approved today in the U.S. to lessen the risk of infection in healthy people by as much as 94 percent when taken regularly. As researchers struggle to develop an AIDS vaccine, having a daily pill to block the virus could be a crucial interim step to rein in the disease. Yet rather than celebrating Truvada’s effectiveness, global health planners are now facing a difficult moment of soul searching over how to allocate limited resources.  “On the surface it’s something amazing, you can prevent HIV with a pill,” said Kevin Robert Frost, chief executive officer of amfAR, The Foundation for AIDS Research. “But then you start to dig deeper and it gets really complicated. When I get to the question of who pays for this I am completely dumbfounded. In developing countries, most of them can’t afford to give pills to those who are HIV positive.”

Deadly Poultry Virus Caused By Gene-Swapping Vaccines - Australian scientists looking to vaccinate chicken populations against a respiratory disease may have accidentally unleashed a disease far more deadly than the one they hoped to prevent. According to a report published this week in Science, the genomes from two different strains of the herpesvirus infectious laryngotracheitis (ILT) virus that were used in vaccines have recombined to produce more virulent ILT viruses near Sydney and Melbourne.  “These new strains were formed by recombination from the different vaccine strains and that they were actually more virulent than the vaccine strains that gave rise to them,” said lead author Joanne Devlin from The University of Melbourne, Parkville. “This is something we’ve never before seen before in the field.”

How Your Chicken Dinner Is Creating a Drug-Resistant Superbug - Adrienne LeBeouf recognized the symptoms when they started. The burning and the urge to head to the bathroom signaled a urinary tract infection, a painful but everyday annoyance that afflicts up to 8 million U.S. women a year. LeBeouf, who is 29 and works as a medical assistant, headed to her doctor, assuming that a quick course of antibiotics would send the UTI on its way.  That was two years ago, and LeBeouf has suffered recurring bouts of cystitis ever since. She is one of a growing number of women, and some men, who have unknowingly become infected with antibiotic-resistant versions of E. coli, the ubiquitous intestinal bacterium that is the usual cause of UTIs.  There is no national registry for drug-resistant infections, and so no one can say for sure how many resistant UTIs there are. But they have become so common that last year the specialty society for infectious-disease physicians had to revise its recommendations for which drugs to prescribe for cystitis -- and many infectious-disease physicians and gynecologists say informally that they see such infections every week.

House Farm Bill Guts Key Food Safety Protections -  King’s amendment to the latest farm bill — introduced very shortly before its near-literal midnight passage — doesn’t only affect California. It threatens to destroy state regulations on food safety altogether, according to an analysis by the nonpartisan Environmental Working Group’s legal expert Heather White: [T]he amendment would “prohibit any state or local government” from “impos[ing] a standard or condition on the production or manufacture of any agricultural product sold or offered for sale in interstate commerce” if 1) production of the agricultural product also occurs in another state; and 2) the standard is in addition to the production or manufacture to federal law and the laws of the state is which such production occurs.”  This impenetrable language simply means that states would be prevented from regulating just about any agricultural product in commerce – contrary to the well-grounded constitutional principles of state police power to protect the health and safety of its citizens within the state.

The Evolution of Bird Flu, and the Race to Keep Up - On May 20, a 10-year-old girl in rural Cambodia got a fever. Five days later, she was admitted to a hospital, and after two days of intensive care she was dead. The girl was the most recent documented victim of the influenza virus H5N1, a strain that has caused 606 known human cases and 357 deaths since it re-emerged in 2003 after a six-year absence. H5N1 can race through bird populations, and the World Health Organization suspects the girl was infected while preparing chicken for a meal. While humans are not ideal hosts for H5N1, bird flu viruses do sometimes manage to adapt for easy transmission from human to human, and the results can be devastating. In 1918, one such transformation led to the Spanish flu pandemic, a global outbreak that claimed an estimated 50 million people. To better understand the possibility of H5N1 making a similar transformation, two teams of scientists recently manipulated the virus until it could spread through the air from one ferret to another. If a flu virus can infect a ferret, then it could theoretically infect other mammals, including humans. Last fall, the scientific community became embroiled in a debate about whether the details of this research should be published; security experts, among others, feared that the information could be used to develop a biological weapon.

Destroying Nature Unleashes Infectious Diseases - THERE’S a term biologists and economists use these days — ecosystem services — which refers to the many ways nature supports the human endeavor. Forests filter the water we drink, for example, and birds and bees pollinate crops, both of which have substantial economic as well as biological value.  If we fail to understand and take care of the natural world, it can cause a breakdown of these systems and come back to haunt us in ways we know little about. A critical example is a developing model of infectious disease that shows that most epidemics — AIDS, Ebola, West Nile, SARS, Lyme disease and hundreds more that have occurred over the last several decades — don’t just happen. They are a result of things people do to nature.  Disease, it turns out, is largely an environmental issue. Sixty percent of emerging infectious diseases that affect humans are zoonotic — they originate in animals. And more than two-thirds of those originate in wildlife.  Teams of veterinarians and conservation biologists are in the midst of a global effort with medical doctors and epidemiologists to understand the “ecology of disease.”  Experts are trying to figure out, based on how people alter the landscape — with a new farm or road, for example — where the next diseases are likely to spill over into humans and how to spot them when they do emerge, before they can spread.

Industry Group Loses Challenge to Nitrogen Dioxide Rules -The first new U.S. standard for nitrogen dioxide in at least 35 years was upheld by a federal appeals court, which said the Environmental Protection Agency had the authority to attempt to improve air quality around the nation’s busiest roadways. A three-judge panel of the U.S. Court of Appeals in Washington today threw out a challenge by the American Petroleum Institute to regulations restricting the peak amount of nitrogen dioxide, or NO2, from tailpipes and smokestacks that can be present in the air during a one-hour period. Levels of the toxic gas are limited to a one-hour standard of 100 parts per billion. “Because the record adequately supports the EPA’s conclusion that material negative effects result from ambient air concentrations as low as the 100 ppb level, we cannot conclude that the agency was arbitrary and capricious” in adopting that standard, U.S. Circuit Judge Douglas Ginsburg wrote for the court. Nitrogen dioxide, a contributor to smog, has been tied to respiratory problems, especially in people with asthma, according to the EPA. There had been no one-hour rule for nitrogen dioxide, unlike the time-based restrictions on carbon monoxide and ozone.

White House weakened EPA soot proposal, documents show -- The White House recently modified an Environmental Protection Agency proposal to limit soot emissions, according to documents obtained by The Washington Post, inviting public comment on a slightly weaker standard than the agency had originally sought. The behind-the-scenes tweaking of the proposed soot standards, which affect particles measuring less than 2.5 micrometers in diameter, sparked criticism that the White House was interfering with science-based decisions. Fine particles, which come from oil refineries, factories and other operations, rank among the most deadly widespread air pollutants. The EPA had originally wanted to tighten the annual exposure to fine-particle soot from 15 micrograms per cubic meter of air to 12 micrograms per cubic meter, according to an e-mail between Office of Management and Budget and EPA officials. But the OMB directed the EPA to make the limit between 12 and 13 micrograms per cubic meter of air.

Pakistan puts 240,000 children at risk with polio vaccine ban - Pakistani tribesmen endorsed a Taliban ban on polio vaccinations Wednesday, closing the door to the prospect of any child being vaccinated in North Waziristan as part of a nationwide campaign. Officials had pinned their last hopes of inoculating children in the northwestern district on talks with tribesmen, which were successively delayed until Wednesday, the last day of the nationwide campaign. “Polio vaccination will be banned until drone attacks are stopped,” tribal elder Qadir Khan told a gathering of more than 200 elders and Islamic scholars in Miranshah, the main town of North Waziristan.

Mouse Plague Hits Central Germany - Under normal circumstances, you might think the 12-centimeter (5-inch) long field mouse looks innocent, or even cute. But farmers in the central German states of Thuringia and Saxony-Anhalt wouldn't agree at the moment. The furry rodents are currently wreaking havoc in the states, which are suffering the worst field mouse plague in over 30 years.  Farmers in Thuringia and Saxony-Anhalt are complaining that millions of field mice are devastating their food crops, including corn, barley and winter wheat. "They are eating everything," said Matthias Krieg, who manages an agricultural firm near the town of Zeitz in Saxony-Anhalt. "Not even the sugar beets are safe." Farmers estimate that they may have to write off an average of 10 percent of their crops as a result of mouse damage, and up to 50 percent in extreme cases. Farmers already noticed an increase in the field mouse population in 2011 and began to take counter measures. According to Reinhard Kopp, a spokesman for the Thuringian Farmers' Association, agriculturalists set up hundreds of perches in their fields to lure birds of prey to kill the mice. But the operation was only moderately successful. "The birds got so fat from eating all the mice that they almost couldn't fly any more,"

Japanese Consumers Reconsidering Rice Loyalty — In the four months that Walmart has been selling low-cost Chinese rice here, the big American retailer has struggled to keep shelves stocked at some stores. A Japanese chain, Beisia, also sold Chinese-grown rice for the first time this year but quickly ran out. Kappa Create’s sushi restaurants have started to serve rice grown in California, while Matsuya, one of Japan’s biggest beef and rice bowl chains, has introduced a blend of Japanese and Australian rice. Daikokuten Bussan, which runs discount stores across the country, says it would carry foreign rice if it could get a stable supply. Prompted by declining incomes, as well as fears about radiation from last year’s nuclear disaster in Fukushima, a major rice-producing region, a small but growing number of Japanese consumers and businesses are doing the unthinkable: openly abandoning their loyalty to expensive, premium-grade homegrown rice and seeking out the trickle of cheaper alternatives from China, Australia and the United States that make it into Japan’s heavily protected market.

Weakest Monsoon Since 2009 To Shrink India Rice Harvest - The rice harvest in India, the world’s second-biggest producer, is set to drop from an all-time high as the weakest monsoon in three years slows planting, potentially boosting global prices. Futures climbed for the first time in four days. “It will be difficult to match last year’s record rice production,” said Samarendu Mohanty, a senior economist at the International Rice Research Institute in Manila. Output was 104.3 million tons in the year ended June 30. A 22 percent shortfall in monsoon rains delayed sowing of crops from rice to cotton, stoking a rally in commodity prices and threatening to accelerate India’s inflation that exceeded 7 percent for a fifth straight month in June. Dry weather from the U.S. to Australia has parched fields, pushing up corn, wheat and soybean prices on concern global supplies will be curbed. Costly rice, staple for half the world, may increase global food prices forecast by the United Nations to advance this month.  “The whole grains complex of wheat, corns, soybeans are forcing rice prices higher as well.

Monsoon Worst in Three Years Threatens India Food Harvests - India, the world’s second-biggest rice, wheat and sugar producer, faces challenges in sustaining record food grain harvests as a 22 percent deficit in monsoon rain threatens planting, Agriculture Minister Sharad Pawar said. “With the monsoon playing hide and seek, it is a challenge for our farmers and scientists to maintain the food-grain output achieved in last two years,” Pawar said in New Delhi. Rainfall in July, the wettest month in India’s June-September rainy season, will be less than a 50-year average of 98 percent predicted in June, L.S. Rathore, director general of the India Meteorological Department, said in a phone interview. Dry weather from the U.S. to Australia has parched fields, pushing up corn, wheat and soybean prices in Chicago on concern global supplies will be curbed. Prime Minister Manmohan Singh is counting on growth in farm output, which accounts for about 15 percent of gross domestic product, to curb inflation in India, where the World Bank says more than 75 percent of the people live on less than $2 a day.

World wheat production down sharply this month - World wheat production for 2012/13 is projected to decline by 6.7 million tons this month because of a 6.5-million-ton drop in foreign production and a slight decrease in U.S. wheat production. The projection for foreign wheat output for 2012/13 is reduced this month to 604.8 million tons. This leaves foreign wheat production 35.5 million tons lower than estimated for the previous year.FSU-12 dominates in this month’s decline, as wheat production in this region is projected down 6.2 million tons: down 4.0 million tons to 49.0 million for Russia, down 2.0 million tons to 13.0 million for Kazakhstan, and down 0.2 million tons to 0.5 million (about a 30 percent decline) for Moldova. From Moldova in the west to the south of Russia and the Volga Valley to the spring wheat areas of Siberia and parts of northern Kazakhstan in the east of the continent, growing conditions continued to deteriorate in June.  Expectations that key wheat areas in the South District of Russia would partly recover in June, helped by rains in the beginning of the month, did not materialize because of unrelenting, stressful heat of 35 C (95 F) that quickly wiped out accumulated moisture. Winter wheat harvesting in Russia started 10 days earlier than usual with accelerated maturation of the wheat crop, and harvest reports show about a 30-percent decline in wheat yields compared to last year, when approximately the same size of area was harvested

World braced for new food crisis - The world is facing a new food crisis as the worst US drought in more than 50 years pushes agricultural commodity prices to record highs. Corn and soyabean prices surged to record highs on Thursday, surpassing the peaks of the 2007-08 crisis that sparked food riots in more than 30 countries. Wheat prices are not yet at record levels but have rallied more than 50 per cent in five weeks, exceeding prices reached in the wake of Russia’s 2010 export ban. The drought in the US, which supplies nearly half the world’s exports of corn and much of its soyabeans and wheat, will reverberate well beyond its borders, affecting consumers from Egypt to China. “I’ve been in the business more than 30 years and this is by far and away the most serious weather issue and supply and demand problem that I have seen by a mile,” said a senior executive at a trading house. “It’s not even comparable to 2007-08.”

Worldwide food production: no collapse yet - This is a result of some number crunching I did, comparing the amount of cereal grains produced to world population level: I chose a three year average because the original had huge yearly swings while this gives a reasonably good idea of where things have been heading. It also takes into consideration the fact that cereals can be stored over the long term, which means that high production one year can help service demand the following year. I chose cereal grains since these are a staple food and indicates generally the potential for future famines (as production decreases). What it shows is that, so far, there have been no significant negative impacts on world food production in the past 50 years. There was a marked decline between 1985 and 2003 that needs to be explained, but production since 2003 has risen quickly. The reason for looking at per capita figures (tonnes of grain produced divided by world population) is to see whether or not production levels are exceeding population: It's all well and good for cereal production to increase but it is another thing altogether if population is increasing faster than cereal production.

Massive corporate welfare for big ag means taxpayer are buying low-quality food - This news item caught my attention because Congress is currently putting the finishing touches on the new 5-Year Farm Bill, which most likely will be passed this year. This latest version is again loaded with massive corporate welfare for big agriculture and subsidies for growing the usual – wheat, corn and sugar. These commodities -- while not inherently lacking in good nutrition (except for the worthless sugar beets) -- tend to end up being highly processed into low-value foods, and this in turn contributes to the ever spreading fat arse of America’s obesity epidemic. Under the new Farm Bill being considered, billions of dollars will flow into bigger and bigger farms. This taxpayer money also goes toward paying for more chemical farming, more pesticides, more herbicides, more soil erosion, more ground water pollution, more river and lake pollution – all portending even more future taxpayer-funded efforts to clean up, maintain and reclaim the environment.

New invasive, swarming insect found in the US for the first time - An invasive insect commonly found in south-central Europe has been detected in southwestern Idaho, marking the first time the elm seed bug has been spotted in the US, according to federal officials. A US Agriculture Department specialist has confirmed the discovery of the pests that officials say don't pose a threat to trees, despite their name — but do tend to enter houses and buildings in huge swarms. The Idaho Department of Agriculture issued a statement Wednesday warning that the bugs recently found in Ada and Canyon counties can prove to be a "significant nuisance" for homeowners. Elm seed bugs invade homes during the summer to escape heat, and then stick around through the winter, the department said.

USDA Prepares to Green-Light Gnarliest GMO Soy Yet - In early July, on the sleepy Friday after Independence Day, the USDA quietly signaled its intention to green-light a new genetically engineered soybean seed from Dow AgroSciences. The product is designed to produce soy plants that withstand 2,4-D, a highly toxic herbicide (and, famously, the less toxic component in the notorious Vietnam War-era defoliant Agent Orange). Readers may remember that during an even-sleepier period—the week between Christmas and the New Year—the USDA made a similar move on Dow's 2,4-D-ready corn. If the USDA deregulates the two products—as it has telegraphed its intention to do—Dow will enjoy a massive profit opportunity. Every year, about half of all US farmland is planted in corn and soy. Currently, Dow's rival Monsanto has a tight grip on weed management in corn-and-soy country. Upward of 90 percent of soy and 70 percent of corn is engineered to withstand another herbicide called glyphosate through highly profitable Monsanto's Roundup Ready seed lines. And after so many years of lashing so much land with the same herbicide, glyphosate-resistant superweeds are now vexing farmers and "alarming" weed control experts throughout the Midwest.

May Temperatures, Economic Implications - From NOAA: The United States reported its warmest spring since records began in 1895,... ... with 31 states in the eastern two-thirds of the country observing record warmth. The national temperature was 2.9°C (5.2°F) above its long-term average, surpassing the previous record by 1.1°C (2.0°F).Here's the May Global Mean Surface Temperature Anomaly: Note in particular the land temperatures. Well, not to panic. We can easily adjust to the temperature changes. Just change what we're planting and where. And crank up the air conditioning. Or will it be so easy? From WSJ: A year after historic flooding brought the Mississippi River up to record levels, the severe drought hitting the central U.S. has caused water levels along parts of the waterway to plummet, disrupting barge traffic from Cairo, Ill., to Natchez, Miss. ... Barge operators have sharply reduced their loads to get through tightening river passages. They say major rain is needed soon or they would have to reduce commerce even more, causing shipment delays and driving up transportation costs. With forecasts showing little prospect of significant rain, hydrologists see no relief in sight for the giant inland waterway that also includes the Ohio River.

Drought stretches across America, threatens crops - Where there should have been tall, dark green, leafy plants, there now stand corn stalks that are waist high or, at best, chest high. They are pale in color and spindly. Fragile. Tired. Pull back an ear's husk and you find no kernels, he says. With temperatures rising above 95 degrees, the pollen starts to die. "It's emotionally draining," he said. "The crop got out of the ground very well. We were so optimistic. But maybe a few of us were counting our eggs before they were hatched." The costs of America's worst drought in 24 years is obvious to Villwock, who has been farming for four decades. They are not so apparent to American consumers -- at least, not yet. But down the line, people are certain to be paying more for food this year. Authorities have declared more than 1,000 counties in 26 states as natural disaster areas. A county is generally qualified as a natural disaster area if it has suffered severe drought for eight consecutive weeks. Farmers are then eligible for low-interest emergency loans from the Department of Agriculture's Farm Service Agency.

Agriculture News July 16, 2012 -  As many places around the globe flooded last week, the U.S. drought continued to cause crops here to deteriorate. This is the map that I’ve been checking daily to see where and how much it rained during the prior 24 hours. Believe me, it’s been a daily disappointment.  The largest corn acreage ever planted in the history of this nation is now rated only 40% good to excellent with an expected average yield of 146 bushels per acre according the the USDA’s recent report. This puts the 2012/13 U.S. corn stocks-to-use ratio at 9.3%, compared to a 2011/12 ratio of 7.2%. Even today, there are some Ag economists more worried about today’s higher corn price retreating than advancing. It was predicted earlier this year that outside of the U.S. there would be a 2% increase in corn production area. Other than the poor corn crop in the U.S., Argentina has also experienced a reduced crop because of weather.   Where might reduced corn demand come from? Surely exports will be affected, especially in view of our higher dollar. Ethanol is no longer profitable and production is at a two year low. This drought could present an opportunity to change the mandate. We can certainly stop exporting ethanol and DDGS product. (According to my calculation, approximately 7% of the ethanol that we produced in 2011 was exported.)

June Corn-Belt PDSI - The drought in the US west/midwest is starting to have severe effects on the US corn crop.  For example, Sober Look posts this chart of corn prices: and Reuters reports that: The worst drought in the Midwest since 1988 has done considerable damage to this year's corn crop. The USDA slashed its corn yield estimate for the world's top grower and exporter by an unprecedented 20 bushels, to 146 bushels per acre. Half of the U.S. corn crop began pollinating in late June under triple-digit temperatures and severe rain deficits, conditions which damaged yield potential beyond repair. Drought conditions in the Midwest worsened over the past week. A weekly U.S. drought monitor showed about a third of the nine-state region in severe to exceptional drought in the week ended July 10, up from about a quarter of the region a week ago. Against this background, I was interested to see what the PDSI data are telling us.  It turns out that NOAA maintains a PDSI for the "Corn Belt" of the US, and I plotted the June value for it here: The last data point is for June 2012 and you can see that indeed it's at -2: a significant drought, though nowhere near dustbowl levels yet.  However, the situation has continued into July and may yet become apocalyptic. The relationship to climate change is clearly complicated by the fact that the data show a generally upward trend (ie wetter): that linear trend is 1.1/century, with a standard error of 0.4 - a statistically significant result.  This is consistent with the fact that the US midwest is generally trending wet in the global PDSI trend map, despite the fact that most of the planet is drying:

Food crisis fears as US corn soars - Is the world on the brink of another food crisis? It has become a distressingly familiar question. With the price of agricultural staples such as corn, soyabeans and wheat soaring for the third summer in five years, the prospect of another price shock is once again becoming a prominent concern for investors and politicians alike. The debate marks a dramatic shift from just a few weeks ago, when traders were expecting bumper crops and policy makers were comforting themselves that – if nothing else – falling commodity prices would offer some relief to the troubled global economy. But since then, scorching heat and a paucity of rain across the US has withered the country’s corn and soyabean crops, with the US Department of Agriculture this week making the largest downward revision to its estimate for a corn crop in a quarter of a century.  The US is crucial to supplying the world with food: the country is the largest exporter of corn, soyabeans and wheat, accounting for one in every three tonnes of the staple grains traded on the global market. Prices for this year’s corn crop, deliverable in December, have jumped 44 per cent in a month, wheat has rallied 45 per cent, and soyabeans 17 per cent. The rise in grain prices has inspired comparisons with 2007-08, when a price surge triggered a wave of food riots in more than 30 countries from Bangladesh to Haiti, and 2010, when Russia banned grain exports, setting off a price jump that some have argued helped to cause unrest across the Arab world last year.

Drought could hit livestock producers much harder than grain farmers - While federal crop insurance will help Iowa grain farmers survive the drought, many livestock producers, who lack such protection, will not, according to Bill Tentinger of LeMars, president of the Iowa Pork Producers Association. High corn prices – now approaching $8 a bushel — will force many pork producers out of business, Tentinger said Tuesday at a drought status meeting called by Gov. Terry Branstad. “I know how grain farmers will benefit. I do both (row crops and hogs),” Tentinger said. Farmer Wayne Humphreys of Columbus Junction called federal crop insurance “wonderful” and “absolutely critical” for grain farmers this year. “I think this year’s drought is worse than the one in 1988, but we will come out a lot better because of crop insurance,” which was not widely available until 1994, he said.

Heat Leaves Ranchers a Stark Option: Sell  - As a relentless drought bakes prairie soil to dust and dries up streams across the country, ranchers struggling to feed their cattle are unloading them by the thousands, a wrenching decision likely to ripple from the Plains to supermarket shelves over the next year.  Ranchers say they are reducing their herds and selling their cattle months ahead of schedule to avoid the mounting losses of a drought that now stretches across a record-breaking 1,016 American counties. Irrigation ponds are shriveling to scummy puddles. Their pastures are brown and barren. And they say the prices of hay and other feed are soaring beyond their reach.  “If we’re running out of grass and we’re not growing enough feed crops to feed them the other six months of the year, what do you do?” asked R. Scott Barrows, director of Kansas State University’s Golden Prairie District extension office. “You liquidate.”

Widespread drought threatens U.S. crops -The drought gripping the Midwest and about 80% of the country is the most widespread since 1956, stoking massive wildfires and decimating the nation's breadbasket crops, according to a report released Monday by the National Drought Mitigation Center. Drought conditions led the Department of Agriculture recently to declare natural disasters in more than 1,000 counties in 26 states. Last year, crop insurers paid record claims of about $11 billion for weather-related losses, including major losses in corn and soybeans, said David Graves of the Washington-based American Assn. of Crop Insurers. This year's losses could surpass that "easily, given that the drought is developing in corn-growing regions" including Illinois and Indiana, he said. Because Midwestern farmers rely more on rain than irrigation compared with counterparts in California, the drought hurt them more, said Nathan Fields, director of biotechnology and economic analysis at the St. Louis-based National Corn Growers Assn.

In pictures: U.S. drought devastates Midwestern crops

How droughts will reshape the United States: More than half of the continental United States is currently suffering through the worst drought in 50 years, with heat and a lack of rain rippling through the middle of the country. Crops are wilting, soils are cracked, and some dried-out forests are catching fire. U.S. corn production in particular is dwindling. So is this a glimpse at our hotter, drier future? It appears so. While severe dry spells can (and do) occur naturally, a few recent U.S. droughts have been linked to the broad-scale warming of the planet. And if greenhouse gas emissions keep rising and temperatures keep ticking upward, scientists say, we can expect more serious and persistent droughts in the years ahead. Here’s what we know about our potentially parched future: 1) The current drought isn’t at Dust Bowl levels, though it’s very large from a historical standpoint. The worst drought month in recorded U.S. history came in July of 1934, the dessicated peak of the Dust Bowl, when 79.9 percent of the country experienced drought conditions (and 63 percent of the country was suffering from extreme drought). Last month’s drought isn’t nearly at that level—and it hasn’t persisted for years the way the multi-year Dust Bowl droughts did. But it’s still in the top 10 for the past century, according to a Weather Channel analysis of the Palmer Drought Severity Index:

State orders irrigators to stop pumping water: More than 1,000 irrigators across Nebraska have been ordered by the state to stop pumping from rivers and streams until drought conditions improve. As of Friday, the Nebraska Department of Natural Resources issued 1,106 shut-off notices to farmers and ranchers in every river basin in the state with the exception of the Little Blue in southeast Nebraska and smaller tributaries along the Missouri River. "Water administration is occurring everywhere across the state to some degree," Natural Resources Director Brian Dunnigan said. "We're mostly closing for irrigation." Moderate drought or worse conditions are plaguing 99.81 percent of Nebraska, according to the High Plains Regional Climate Center based at the University of Nebraska-Lincoln. Dry weather has been exacerbated by temperatures in the 90s to 100s and very little rainfall since late June. The Natural Resources Department has jurisdiction over all surface water rights in the state, including those held by the U.S. Bureau of Reclamation, irrigation districts and individual irrigators.

Drought pushes hay shortage -Persistent hot, dry conditions have ignited an overwhelming number of wildfires in the western United States this summer. These conditions aren't simply the concerns of Smokey the Bear, though. Ranchers all across the Western United States have been hit hard by prevailing drought conditions this summer — they're dealing with hay shortages, water shortages, bad water, and more. The story is the same in the Northern Hills. But hay shortages here may have a heavier effect. Hay was abundant in the area last summer thanks to frequent heavy spring precipitation. This motivated many ranchers to sell much of their extra hay off to those in dryer southern states, like Texas, leaving little holdover for this summer. Hay prices, accordingly, have more than doubled in the Northern Hills. “I've heard (of hay prices) delivered from $200 to $250 per ton,” said Dean Strong, owner of the Belle Fourche Livestock Auction. “Last year you could get it delivered for $75 to $95 per ton.” Strong has seen a similarly massive increase in livestock sales at his auction house. This time last year he said he'd normally see 300 to 500 head sold per week; now he's seeing 1,000 to 1,500.

More than half of Kan. corn crop in poor condition — A new government report is painting a grim snapshot of the drought's effects on farms across Kansas. Kansas Agricultural Statistics Service reported Monday that more than half of the state's corn crop is in poor to very poor condition. Soybean and sorghum crops are faring only slightly better with more than 40 percent of both those Kansas crops also in poor to very poor condition. The misery extends beyond the field crops as livestock producers struggle with dried up pastures and shrinking hay and stock water supplies. The agency estimates 78 percent of the range and pasture land in Kansas is in poor to very poor shape. Hay and forage supplies are 57 percent short. Stock water is short to very short across 55 percent of Kansas.

U.S. Declares Drought-Stricken States to Be Largest Natural Disaster Ever - On Thursday the United States Department of Agriculture (USDA) declared over 1,000 counties across 26 states to be natural disaster areas. This year has been the one of the worst years since the 1930s for drought in America. Drought, along with extreme heat, has prompted the USDA to declare these territories the largest natural disaster area in American history. The declaration gives nearly half the country accesses to federal aid, including farmers and ranchers who have been adversely impacted by the weather. According to the U.S. Drought Monitor, about 56 percent of the country is experiencing drought conditions, which is the largest percentage recorded in the agency’s existence. Adding to the drought is the extreme heat, which according to National Oceanic and Atmospheric Administration (NOAA) has been the hottest on record for the so far in 2012. These conditions are adversely impacting our nation’s farming and ranching activities, but what about outdoors activities? The extreme weather has impacted hunters and anglers especially in southern states. Lakes and reservoirs are at all-time lows in many parts of the country. These low water levels and high heat have already caused fish die-offs and it has made spawning more difficult for many species of fish. Hunter’s prey is are also being adversely affected (dying off and reproducing less) by the drought and high temperatures. This means that there will likely be fewer animals during hunting season.

Worst-in-Generation Drought Dims U.S. Farm Economy Hopes - A worst-in-a-generation drought from Indiana to Arkansas to California is damaging crops and rural economies and threatening to drive food prices to record levels. Agriculture, though a small part of the $15.5 trillion U.S. economy, had been one of the most resilient industries in the past three years as the country struggled to recover from the recession. “It might be a $50 billion event for the economy as it blends into everything over the next four quarters,” said Michael Swanson, agricultural economist at Wells Fargo & Co. (WFC) in Minneapolis, the largest commercial agriculture lender. “Instead of retreating from record highs, food prices will advance.” The U.S. Department of Agriculture declared July 11 that more than 1,000 counties in 26 states are natural-disaster areas, the biggest such declaration ever. The designation makes farmers and ranchers in affected counties -- about a third of those in the entire country -- eligible for low-interest loans to help manage the drought, wildfires or other disasters. Corn rose today to the highest in 10 months while soybeans increased to the costliest since 2008. “The drought will have regional, national and even international impacts,” Ernie Goss, a professor of economics at Creighton University in Omaha, Nebraska, said in an e-mail. Farm income, which has underpinned the growth of many rural states, will be under “significant downward pressure,

Bank of America: Drought Is A Positive For Farmers - While the drought has generally been looked at as extremely devastating, Bank of America's Andrew Obin sees the drought as a positive for farmers, according the bank's most recent recent report. Our view is that that the drought conditions as of the latest WASDE report on July 11th are actually a positive for farmers as soft commodity price increases more than offset production decline. Although Obin sees this as a positive, he believes if yields drop below 130bu/acre, that farmers in the affected regions will find themselves with lower cash receipts. Along with their positive view in regards to farming, Obin also sees the current drought as a positive for for farming equipment. Our key takeaway is that so far the company has seen very limited impact from the weather and the drought is more likely to be a positive going into 2013 extending the ag cycle. Ag remains our favorite theme and we reiterate our Buy on Deere

USDA: Corn condition drops 9 percentage points - The current weather pattern is repeating a destructive cycle of excessive heat and few chances at any precipitation, and the USDA showed the impact of the drought in its weekly Crop Progress report. According to the report, corn conditions dropped by 9 percentage points this week, marking the sixth consecutive week of deteriorating conditions. Soybeans weren’t far behind, dropping by 6 percentage points. Specifically, the percentage of corn in "good" or "excellent condition is now 31 percent, compared to 40 percent last week. The report showed that corn silking is now 71 percent complete, well above last year’s pace of 28 percent and up by 21 percentage points from last week’s report. Corn has also been reported in the dough stage in 12 percent of the crops, compared to the five-year average of 4 percent. The drought has already taken a heavy toll in some states. Three states reported at least 70 percent of their corn in poor to very poor condition: Indiana (71 percent), Kentucky (77 percent) and Missouri (72 percent). These states also struggled in the 1988 drought:  

Sober Look: Crop situation getting worse - Crop conditions in the US, particularly corn, continue to worsen. The latest data from the USDA puts the percentage of corn crops in "good or excellent" condition at just above 30%. The only time we've been lower on crop conditions in recent decades was during the 1988 drought (see this link for more background on droughts). However the current drought is by no means over and we may be going considerably below 30% on the chart above. The chart below compares conditions to crop yields over time (with 2012/13 added). Based on the current situation, crop yields could easily be down 25% or more.  As the markets recognize this potential size of the supply disruption, prices continue to march higher, with corn hitting another record today.

U.S. corn crop shrinking by the hour - Corn yield seen down 6 pct from USDA at 137.2 bu/acre * Production down nearly 7 pct at 12.1 bln bu * More declines likely in days ahead * Soybean yields also down 3.6 pct vs USDA at 39.1 bu/acre (Adds details, analyst table, byline) By Sam Nelson CHICAGO, July 17 (Reuters) - U.S. corn production has shrunk 7 percent versus the government's downgraded estimate a week ago, a Reuters poll found on Tuesday, with a worsening drought likely to cause more damage before the month is out. As the worst drought since 1956 begins to expand to the northern and western Midwest, areas that had previously been spared, analysts are slashing corn yield estimates by the hour. Some analysts are also starting to cut their forecasts on the number of acres that will be harvested as farmers opt to plough under their fields to claim insurance. What began the season as a potentially record corn crop as farmers planted the biggest area since 1937, may now be the smallest in at least five years. Soybeans, which enter their key pod-setting phase later then corn, are increasingly at risk. The poll of 13 analysts pegged the average estimated corn yield at 137.2 bushels per acre, down 6 percent from USDA's current forecast of 146 bushels. The USDA dropped its yield estimate by an unprecedented 20 bushels per acre in its report on July 11. Corn production was pegged at 12.077 billion bushels, the smallest in 5 years, down 6.9 percent from USDA's outlook. "We're losing more yield with the additional stress now in the northern areas which up until now had been pretty good,"

As Drought Kills Corn, Farmers Fight Over Ethanol - We often talk about the "farm lobby" as though farmers spoke with a unified voice. But an unusually bitter and public fight is breaking out right now between the farmers who grow corn and other farmers who need to buy that corn. There are two reasons. The first is the drought that's killing corn and soybean fields across the Midwest, sending feed prices are soaring and fraying the nerves of livestock producers, who are wondering whether they'll even manage to stay in business. The second reason is ethanol. Farmers who raise America's cattle, hogs, and chickens never appreciated Washington's infatuation with biofuels — especially ethanol that's produced from corn. After all, when the government nudges more corn toward ethanol factories, it means that there's less available for animals. Last year, in fact, 40 percent of the country's corn harvest went to ethanol production. In good years, when corn is plentiful and prices stay low, no one complains too much. In bad years, though .... well, this morning, a coalition of groups representing America's livestock and chicken farmers delivered an angry attack on the "Renewable Fuel Standard," which requires gasoline companies to buy a minimum amount of ethanol — 13 billion gallons this year — and blend it into gasoline supplies.

2012 Drought Photos from U.S. Midwest - Big Picture Agriculture -

Morgan Stanley: Prepare For The Largest-Ever Drop Off In Livestock Herds - Morgan Stanley's Hussein Allidina is out with his latest agricultural commodities update. The news: We are in for a big burn on prices, as record heat and drought roasts corn and soybean crops into oblivion. "We are raising our 2012/2013 corn and soy forecasts to account for tighter-than-expected balances. Our new price deck implies 3% and 4% upside to the corn and bean curves, respectively. While we expect that corn and soybean prices to average $7.85/bu and $16.00/bu, respectively, in the coming year, we expect that the inelastic nature of demand for these products, and the prospect of record tight inventories could send prices significantly higher for short periods of time in 2H12. Indeed, we anticipate periods of time in the coming months where corn trades in double-digits." And we haven't begun talking about what the effect will be for livestock. The feed reduction implied by the crop yield drop will translate into the largest-ever decline in livestock herds. "Even assuming an incremental 46 mln bu (23%) of US wheat feeding YoY in 12/13, our feed demand model suggests that this degree of corn feed rationing would require a nearly 10.17 mln unit decline in the USDA’s grain consuming animal unit (GCAU) index from its current estimate of 92.93 mln. "While these cuts will have to be spread across the entire livestock industry, this decline in GCAU, if taken in one sector alone would translate into a 5.09 bln head (60%) YoY reduction in chicken production, a 6.6 mln head (48%) reduction in cattle on feed YoY or a 44 mln head (40%) reduction in the US pig crop. "It would also represent the largest single-year reduction in the livestock herd (from a grain-demand perspective) in history. To achieve the magnitude of rationing needed, in the limited amount of time available, corn and and bean prices will need to move higher yet, in our view."

2012 Drought Rivals Dust Bowl - This year's drought ranks among the 10 largest drought areas of the past century, the National Climatic Data Center is expected to announce today. Preliminary data computed from the Palmer Drought Severity Index shows that 54.6 percent of the contiguous 48 states was in drought at the end of June, the highest percentage since December 1956, and the sixth-highest peak percentage on record. Monday's State of the Climate drought report from NCDC is expected to show that since 1895, only the extraordinary droughts of the 1930s and 1950s have covered more land area than the current drought. And by a slight margin, the current drought actually covers more area than the famous 1936 drought, though other droughts in the Dust Bowl years – particularly the extreme drought of 1934 – still rank higher. However, when excluding areas in "moderate" drought, the historical rankings change a bit. Some historical droughts were extremely intense, but more focused on specific regions rather than sprawling across large swaths of the country. For example, infamous droughts in 1988, 2000, and 2002 each included over 35% of the country in the "severe" to "extreme" drought categories on the Palmer drought scale. By comparison, severe to extreme drought covers 32.7% in June 2012.

Severe Drought Expected to Worsen Across the Nation - The drought that has settled over more than half of the continental United States this summer is the most widespread in more than half a century. And it is likely to grow worse. The latest outlook released by the National Weather Service on Thursday forecasts increasingly dry conditions over much of the nation’s breadbasket, a development that could lead to higher food prices and shipping costs as well as reduced revenues in areas that count on summer tourism. About the only relief in sight was tropical activity in the Gulf of Mexico and the Southeast that could bring rain to parts of the South. The unsettling prospects come at a time of growing uncertainty for the country’s economy. With evidence mounting of a slowdown in the economic recovery, this new blow from the weather is particularly ill-timed. Already some farmers are watching their cash crops burn to the point of no return. Others have been cutting their corn early to use for feed, a much less profitable venture. The government has declared one-third of the nation’s counties — 1,297 of them across 29 states — federal disaster areas as a result of the drought, which will allow farmers to apply for low-interest loans to get them through the disappointing growing season.  What is particularly striking about this dry spell is its breadth. Fifty-five percent of the continental United States — from California to Arkansas, Texas to North Dakota — is under moderate to extreme drought, according to the government, the largest such area since December 1956.

Worst US drought raises world food fears - Corn and soybeans in the US Midwest baked in an unrelenting heat wave on Monday with fears rising of big crop losses that will boost food and fuel prices and cut exports and aid from the world's top shipper of the key crops. The condition of the nation's corn and soybeans as of Sunday deteriorated even more than grain traders had feared, and the US Agriculture Department cuts its weekly corn crop condition rating by the biggest amount in nearly a decade. After weeks of growing drought some lucky farms have been doused by scattered thunderstorms in the past few days. But weather forecasters warned the heat and dryness would only intensify through the end of July and possibly beyond. "We're moving from a crisis to a horror story," said Purdue University agronomist Tony Vyn. "I see an increasing number of fields that will produce zero grain." The drought scorching the US Midwest is the worst since 1956, the National Oceanic and Atmospheric Administration said in a report posted on its website on Monday. Drought is affecting 55 percent of the land mass in the lower 48 states.

How extreme will it get?The U.S. Drought Monitor has declared 80% of the Contiguous U.S. to be abnormally dry or worse, with 61% experiencing drought conditions ranging from moderate to exceptional—the largest percentage in the 12-year history of the service.  In the 18 primary corn-growing states, 30% of the crop is in poor or very poor condition. In addition, fully half of the nation’s pastures and ranges are in poor or very poor condition. The year-to-date acreage burned by wildfires has increased to 3.1 million.  NOAA reports record temperatures in many places; in Mc Cook, Neb., it was 115°F (46°C) on June 26, while in Norton Dam, Kan., it was 118°F (48°C) on June 28. Meanwhile, it was 126°F (52°C) in Death Valley National Park on July 10, 2012. Lake Michigan surface water temperatures recently reached temperatures of up to 83.9°F (29°C), as shown on the image right. Lake Michigan has a surface area of 22,400 square miles (58,000 square kilometers). The lake's average depth is 279 ft (85 m), while its greatest depth is 923 ft (281 m). The image below compares 2012 surface water temperature with the average for 1992-2011.

Drought in U.S. reaching levels not seen in 50 years, pushing up corn prices - A drought gripping the Corn Belt and more than half the United States has reached proportions not seen in more than 50 years, the government reported Monday, jacking up crop prices and threatening to drive up the cost of food. Though agriculture is a small part of the U.S. economy, the shortfall comes as the nation struggles to regain its economic footing. Last week, the Agriculture Department declared more than 1,000 counties in 26 states as natural-disaster areas. About 55 percent of the continental United States is now designated as in moderate drought or worse, the largest percentage since December 1956, according to the National Climatic Data Center, and the outlook is grim.“The drought could get a lot worse before it gets better,” said Joe Glauber, chief economist at the Agriculture Department.  Corn is among the most valuable of U.S. crops, and its price has multiple economic ripple effects, reaching into food and energy markets. Rising corn prices mean higher costs for beef producers that use it to feed their livestock. The increase also means that some fields planted with other crops will be shifted into corn production. And a corn price spike can put upward pressure on the price of ethanol, which consumes more than a third of the U.S. harvest.

Dry Weather Boosts Odds of Extreme Heat, Study Finds -  Droughts such as the one currently gripping a majority of the U.S. may dramatically increase the odds of extremely hot days, a new study found. The study, published in Proceedings of the National Academy of Sciences, explores a dynamic that is playing out right now across the country, particularly in the Great Plains, where the severe drought is priming the atmosphere in favor of an above-average number of extremely hot days.This occurs because of feedbacks between the ground and the air: as the soil and vegetation dry, more of the sun’s energy is able to go into heating the air directly, rather than going into evaporating moisture from plants and the soil. With drought conditions intensifying during mid-summer, the study suggests that the U.S. may be in for particularly brutal Dog Days of August. The study is the first to take a global look at the potential for weather forecasters to use precipitation data to help predict the likelihood for heat extremes. The study looked at the relationship between dry periods and heat extremes that occur during the following month. They found that for much of the U.S., when precipitation falls below a certain threshold, there is a 70 percent likelihood of an above-average number of hot days during the following month.

That Sinking Feeling About Groundwater In Texas - In case we need another example of the disturbing ramifications of extreme drought for our future water security, we can look to recent news out of northwest Texas. The High Plains Water District, based in Lubbock, recently reported that the 2011-12 drought drove groundwater levels in its sixteen-county service area to drop an average of 2.56 feet (0.78 meters) – the largest annual decline recorded in the last 25 years and more than triple the annual average for the last decade. The lesson: as droughts intensify, our depletion of groundwater will pick up speed. The recent Texas drought was indeed severe. Lubbock’s rainfall for 2011 amounted to a meager 5.86 inches compared to its long-term annual average of 18 inches. Besides setting the stage for a record-breaking fire season, the drought forced farmers to pump more groundwater to make up for the rainfall deficit. Without the extra pumping, the drought would have decimated their crops. Farmers in the District draw from the Ogallala Aquifer, a vast underground water reserve that supplies portions of eight states and waters 27 percent of the nation’s irrigated cropland. Since much of the aquifer gets little recharge from rainfall today, rising rates of pumping have led to steady depletion. According to the U.S. Geological Survey, a volume of groundwater equivalent to two-thirds of the water held in Lake Erie has been depleted from the Ogallala since 1940.

US Climate Update: Warmest 12 Months On Record - The Northern Hemisphere just experienced the all-time warmest June on record, at 2.34°F above average. The average temperature for the contiguous U.S. during June was 71.2°F, which is 2.0°F above the 20th century average, contributing to a record-warm first half of the year and the warmest 12-month period the nation has experienced since record-keeping began in 1895. Scorching temperatures during the second half of the month led many cities to set all-time temperature records. The nation, as a whole, experienced its tenth driest June on record. Record and near-record dry conditions were present across the Intermountain West. Over 170 all-time warm temperature records were broken or tied during the month. Temperatures in South Carolina (113°F) and Georgia (112°F) are currently under review by the U.S. State Climate Extremes Committee as possible all-time statewide temperature records. According to the U.S. Drought Monitor, as of July 3, 56.0 percent of the contiguous U.S. experienced drought conditions, the most since records began.

Graph of the Day: Heat Records Exceed Cold by Increasing Margins - As the climate has warmed during the past several decades, there has been a growing imbalance between record daily high temperatures in the contiguous U.S. and record daily lows. A study published in 2009 found that rather than a 1-to-1 ratio, as would be expected if the climate were not warming, the ratio has been closer to 2-to-1 in favor of warm temperature records during the past decade (2000-2009). This finding cannot be explained by natural climate variability alone, the study found, and is instead consistent with global warming. When you look at individual years, the imbalance can be more stark. For example, through late June 2012, daily record highs were outnumbering record daily lows by a ratio of 9-to-1.The study used computer models to project how the records ratios might shift in future decades as the amount of greenhouse gases in the air continues to increase. The results showed that the ratio of daily record highs to daily record lows in the lower 48 states could soar to 20-to-1 by mid-century, and 50-to-1 by 2100.

Death Valley records a low of 107°F (41.7°C): a world record -- On Thursday morning, July 12, 2012 the low temperature at Death Valley, California dropped to just 107°F (41.7°C), after hitting a high of 128° (53.3°C) the previous day. Not only does the morning low temperature tie a record for the world's warmest low temperature ever recorded, the average temperature of 117.5°F is the world's warmest 24-hour temperature on record. According to weather records researcher Maximiliano Herrera, the only other place in the world to record a 107°F low temperature was Khasab Airport in the desert nation of Oman on June 27, 2012.

Is the Heat Wave of 2012 What Climate Change Looks Like? : The New Yorker: Corn sex is complicated. Corn’s female organs are sheathed in a sort of vegetable chastity belt—surrounded by a tough, virtually impenetrable husk. The only way in is by means of a silk thread that each flower extends, Rapunzel-like, through a small opening. For fertilization to take place, a grain of pollen must land on the tip of the silk, then shimmy its way six to eight inches through a microscopic tube, a journey that requires several hours. The result of a successfully completed passage is a single kernel. When everything is going well, the process is repeated something like eight hundred times per ear, or roughly eighty thousand times per bushel. It is now corn-sex season across the Midwest, and everything is not going well. High commodity prices spurred farmers to sow more acres this year, and unseasonable warmth in March prompted many to plant corn early. Just a few months ago, the United States Department of Agriculture was projecting a record corn crop of 14.79 billion bushels. But then, in June and July, came broilingly high temperatures, combined with a persistent drought across much of the midsection of the country.

Global madness - Television anchor Edward R. Murrow understood the power of television to misinform the masses. This strategy has worked brilliantly on every front, but none more pronounced than the all-important issue of global climate change. Seeking “balance” on the idiot box means presenting two sides to a one-sided issue until it’s too late to address the crisis. It’s too late. By the end of June 2012, the U.S. had witnessed its hottest 12 months and hottest half year on record. Extreme events have arrived: “The kind of blistering heat we used to experience once every 20 years, will now occur every two.” Even as the sun cools, record high temperatures exceeded record low temperatures by a ratio of 2:1 in the last decade, relative to an expected ratio of 1:1. The ratio hit 9:1 in 2012. Even mainstream scientists writing in Science have finally noticed that ocean acidification threatens all marine life with near-term extinction. In the very near future, coral reefs will disappear. Think of the deprivation we’ve brought to the world as we rape, pillage, and plunder Earth’s glorious bounty for a few extra dollars with which to purchase food high fructose corn syrup that’s killing us and toys that titillate. Deniers take note: “Recent warming of the top 2300 feet of the ocean alone corresponds to an energy content of more than one Hiroshima atomic bomb detonation every second over the past 40 years.” This “remarkable warming can only be explained with man-made greenhouse gas emissions.”

Low Water Levels On The Mississippi River A Major Threat To Commerce: ‘This Is Absolutely Not Normal’ - Companies operating along the Mississippi River are seeing a drastic cut in business as severe drought lowers water levels and makes shipping increasingly difficult. The drought, which now covers more than 1,000 counties across the US, has dropped water levels 50 feet below last year’s levels in some places. Last winter’s lack of snow, the absence of any major tropical storms from the Gulf of Mexico, sweltering temperatures, and the lack of rain this spring and summer are to blame for the shallow water. The Mississippi is a major trade conduit through the central U.S. Barges, which are often cheaper to operate than trains or trucks, carry goods such as grain, corn, soybeans, steel, rubber, coffee, fertilizer, coal, and petroleum products in and out of the interior of the country. As the water levels fall, barges have run aground near Vicksburg, Mississippi, where the water is already less than 5 feet deep, and shipping companies have been forced to curtail their business. The Wall Street Journal reports:

Trade Dries Up Along With Mississippi - A year after historic flooding brought the Mississippi River up to record levels, the severe drought hitting the central U.S. has caused water levels along parts of the waterway to plummet, disrupting barge traffic from Cairo, Ill., to Natchez, Miss. In some places, the water level is about 50 feet below what it was during the flood's peak. At one bend of the river between Vicksburg, Miss., and Memphis, Tenn., barges ran aground several weeks ago because of low water and had to be rescued, according to Cmdr. Tim Wendt, chief of the waterways-management branch for U.S. Coast Guard operations. Barge operators have sharply reduced their loads to get through tightening river passages. They say major rain is needed soon or they would have to reduce commerce even more, causing shipment delays and driving up transportation costs. With forecasts showing little prospect of significant rain, hydrologists see no relief in sight for the giant inland waterway that also includes the Ohio River. ... Some river ports have been forced to close temporarily or shut down parts of their operations because of the low water levels.  If the water falls any lower, there was a "high likelihood" he would have to close, he said. One of the port's public loading docks is inoperable, with equipment normally in the water now hanging the air. The Army Corps of Engineers is supposed to come this week to dredge, where heavy equipment is used to dig out sediment from waterways to make them passable for shipping. 

The Dust Bowl of 2012′: Drought Covers Majority Of U.S. And ‘Might Be A $50 Billion Event For The Economy’ - This year’s drought ranks as one of the top 10 worst U.S. droughts for the last century. With more than half the country (54 percent) experiencing drought conditions, it’s the single worst drought since the 1950s. It is hot all over. NOAA said in its June “State of the Climate Global Analysis“: This is the second month in a row that the global land temperature was the warmest on record for that month. While it has been hotter than the 1930s in many places in this country, the drought hasn’t been quite as bad as the worst of the original Dust Bowl. Climate Progress has documented how unrestrained fossil fuel pollution is leading to worsening droughts. Texas’ severe drought of the past memory was made 20 times more likely from global warming, as one study explained. The Nature article last year, “The Next Dust Bowl,” explained, “warming causes greater evaporation and, once the ground is dry, the Sun’s energy goes into baking the soil.” This drought is hitting farmers hard — and ranchers, too. As Reuters put it: … recent wildfires in states such as Idaho, Montana, Nevada, Utah and Wyoming have displaced thousands of cows from federal rangelands which may not be fit for grazing for years. Where range has not been destroyed, drought has lessened forage. “We’re going to run out of grass. It’s shaping up to be scary,”  The next to be hit is the American consumer.The Agriculture Department has declared the largest federal disaster zone in its history for 26 states, as corn and grain crops dry up, particularly in the midwest where 63 percent of the midwest has moderate to extreme drought. Corn production shrunk 7 percent in the last week, according to a Reuters poll: “What began the season as a potentially record corn crop as farmers planted the biggest area since 1937, may now be the smallest in at least five years.”

The Burning Land - Krugman - I’ve been searching for something useful to say about the epic heat wave and drought afflicting U.S. agriculture, other than that this is the shape of things to come. Of course it’s about climate change: a rising number of temperature records is exactly what you’d expect given an underlying upward trend in global temperatures. And the economic consequences will be large: maybe 1 percent on U.S. consumer prices, but suffering and food riots in poorer nations that spend more of their income on food. Yet with so much of the American political spectrum in fierce denial over the issue, there is no prospect whatsoever of getting action. So what do you say?

Gas from pollutants, forest fires at potentially toxic levels: Forest fires and emission of air pollutants, which include fumes from vehicles running on diesel and slow burning of coal and charcoal, release isocyanic acid in the troposphere. In 2011, scientists first detected isocyanic acid in the ambient atmosphere at levels that are toxic to human populations; at concentrations exceeding 1 parts-per-billion by volume (ppbv), human beings could experience tissue decay when exposed to the toxin.Their research shows that regions that experience large forest fires, such as tropical Africa, Southeast Asia, Siberia, Canada, and the Amazon, or are heavily polluted, like China, are particularly vulnerable. In these regions, concentrations of isocyanic acid in the atmosphere exceeded the 1 ppbv limit for about 7-90 days per year. Their model also predicts that doubling the rate of air pollutant emission, particularly in heavily polluted regions of China, could increase the exposure of humans in the region to more than 170 days per year to isocyanic acid levels exceeding 1 ppbv.

Korean Drought Worst In A Century For North And South Korea: — North Korea dispatched soldiers to pour buckets of water on parched fields and South Korean officials scrambled to save a rare mollusk threatened by the heat as the worst dry spell in a century gripped the Korean Peninsula. Parts of both countries are experiencing the most severe drought since record-keeping began nearly 105 years ago, meteorological officials in Pyongyang and Seoul said Tuesday. The protracted drought is heightening worries about North Korea's ability to feed its people. Two-thirds of North Korea's 24 million people faced chronic food shortages, the United Nations said earlier this month while asking donors for $198 million in humanitarian aid for the country. Even in South Phyongan and North and South Hwanghae provinces, which are traditionally North Korea's "breadbasket," thousands of hectares (acres) of crops are withering away despite good irrigation systems, local officials said. Reservoirs are drying up, creating irrigation problems for farmers, A group of female soldiers with yellow towels tied around their heads fanned out across a farm in Kohyon-ri, Hwangju county, North Hwanghae province, with buckets to help water the fields.

Vast African water source found - A newly discovered water source in Namibia could have a major impact on development in the driest country in sub-Saharan Africa. Estimates suggest the aquifer could supply the north of the country for 400 years at current rates of consumption. Scientists say the water is up to 10,000 years old but is cleaner to drink than many modern sources. However, there are concerns that unauthorised drilling could threaten the new supply.The 800,000 people who live in the area depend for their drinking water on a 40-year-old canal that brings the scarce resource across the border from Angola.

Northern Hemisphere warmest on record, Arctic ice has biggest melt in June - Globally, June was 4th warmest on record, NOAA announced today. And over the Northern Hemisphere, for the second consecutive month, temperatures were as warm as they’ve been in 133 years of records. Notably, the Arctic experienced its largest June sea ice loss since the start of satellite records in 1979. June state of the climate report. It was the 36th consecutive June and 328th consecutive month with temperatures warmer than the 20th century average, NOAA said. Across the globe, land areas were relatively warm compared to the oceans - in the midst of a transition from their cool (La Nina) to warm (El Nino) phase.  In the Northern Hemisphere, land areas were warmest on record for the third month in row - more than 2.34 degrees F above average. While not at record high levels, the global average ocean temperature still ranked 10th warmest out of a pool of 133 years.  Arctic sea ice extent in June ranked 2nd lowest on record (NOAA) The decline of Arctic sea ice is one of the more telling indicators of recent warmth in the Northern Hemisphere. The Arctic lost the equivalent of 1.1 million square miles of ice in June (most on record), its extent falling to 9.8 percent below average, second lowest on record (since 1979). Snow cover in the Northern Hemisphere, another indicator of temperature, reached its lowest extent in 45 years of June records (hat tip, Climate Central).

Ideology clouds how we perceive the temperatures - If you graphed the predictive power of people's perceptions against the actual temperatures, the resulting line was flat—it showed no trend at all. In the statistical model, the actual weather had little impact on people's perception of recent temperatures. Education continued to have a positive impact on whether they got it right, but its magnitude was dwarfed by the influences of political affiliation and cultural beliefs. And those cultural affiliations had about the effect you'd expect. Individualists, who often object to environmental regulations as an infringement on their freedoms, tended to think the temperatures hadn't gone up in their area, regardless of whether they had. Strong egalitarians, in contrast, tended to believe the temperatures had gone up.The authors conclude that climate change has become perceived as a form of cultural affiliation for most people: their acceptance of it is mostly a way of reinforcing their ties to the political and ideological communities they belong to. And, since temperatures have become the primary thing the public associates with climate change, people now interpret the temperatures through a filter based on their affiliations, a process termed "cultural cognition." In other words, we tend to interpret the temperatures in a way that reinforces our identity, and our connections with others who share similar political persuasions.

Poll: Generation X dismissive about climate change – Significant decrease in concern since 2009 - Amid a summer of record-setting heat, most of Generation X 's young adults are uninformed and unconcerned about climate change, says a survey today. Only about 5% of GenXers, born between 1961 and 1981 and now 32 to 52 years old, are "alarmed" and 18% "concerned" about climate change, reports the University of Michigan's Institute for Social Research. Two-thirds, or 66%, of those surveyed last year said they aren't sure global warming is happening and 10% said they don't believe it's occurring. "Most Generation Xers are surprisingly disengaged, dismissive or doubtful about whether global climate change is happening and they don't spend much time worrying about it," said author Jon D. Miller.

Global CO2 Emissions Continued to Increase in 2011, With Per Capita Emissions in China Reaching European Levels - Global emissions of carbon dioxide (CO2) -- the main cause of global warming -- increased by 3% last year, reaching an all-time high of 34 billion tonnes in 2011. In China, the world's most populous country, average emissions of CO2 increased by 9% to 7.2 tonnes per capita. China is now within the range of 6 to 19 tonnes per capita emissions of the major industrialised countries. In the European Union, CO2 emissions dropped by 3% to 7.5 tonnes per capita. The United States remains one of the largest emitters of CO2, with 17.3 tones per capita, despite a decline due to the recession in 2008-2009, high oil prices and an increased share of natural gas. The 3% increase in global CO2 emissions in 2011 is above the past decade's average annual increase of 2.7%, with a decrease in 2008 and a surge of 5% in 2010. The top emitters contributing to the 34 billion tonnes of CO2 emitted globally in 2011 are: China (29%), the United States (16%), the European Union (11%), India (6%), the Russian Federation (5%) and Japan (4%). An estimated cumulative global total of 420 billion tonnes of CO2 were emitted between 2000 and 2011 due to human activities, including deforestation. Scientific literature suggests that limiting the rise in average global temperature to 2°C above pre-industrial levels -- the target internationally adopted in UN climate negotiations -- is possible only if cumulative CO2 emissions in the period 2000-2050 do not exceed 1 000 to 1 500 billion tonnes. If the current global trend of increasing CO2 emissions continues, cumulative emissions will surpass this limit within the next two decades.

Dicing With The Climate - Krugman  - Via Michael Roberts, a new paper (pdf) by James Hansen and associates that helps clear up a couple of points about climate change. The first is the relationship between extreme weather events and climate change. The normal, cautious thing is to say that there’s no way to attribute any particular event, like a heat wave in the Ukraine, to global warming — and news media have basically been bullied by this argument into rarely mentioning climate change even when reporting on extreme weather. But Hansen et al make an important point: this argument is much weaker when we’re talking about really extreme events, like temperatures more than 3 standard deviations above historical norms. Such events would almost never happen if there weren’t a rising trend in global temperatures; so when they become quite common, as they have, it’s fair to call them evidence of warming. The second point is how we know that climate change is a bad thing — a question I sometimes get asked.  My first-pass answer is that we have a global economy that is adapted to historically normal climate — not just in terms of what is grown where, but in terms of where we locate our cities. In the long run, after a couple of centuries’ worth of urban development and infrastructure has been drowned by rising sea levels and/or made useless because previously habitable regions need to be abandoned, we might be able to reconstruct an equally productive economy; but in the long run …

Sea Level Rise: It Could Be Worse Than We Think - A new analysis released Thursday in the journal Science implies that the seas could rise dramatically higher over the next few centuries than scientists previously thought — somewhere between 18-to-29 feet above current levels, rather than the 13-to-20 feet they were talking about just a few years ago. The increase in sea level would largely come from the partial melting of giant ice caps in Greenland and Antarctica, which have remained largely intact since the end of the last ice age, nearly 20,000 years ago. But rising global temperatures, thanks to human greenhouse-gas emissions, have already begun to melt that ancient ice, sending sea level up 8 inches since 1880 alone, with as much as 6 feet or so of additional increase projected by 2100. That’s not enough to inundate major population centers by itself, but coupled with storm surges, it could threaten millions of Americans long before the century ends. Around the world, sea level rise will put trillions in property at risk within the next few decades. Twenty-nine feet of sea-level rise, by contrast, or even 18, would put hundreds coastal cities around the globe entirely under water, displacing many hundreds of millions of people and destroying untold trillions in property. It would, in short, be a disaster of unimaginable proportions.

Global warming affecting world's lakes - Global warming, a concern for its effects on the world's oceans, is also causing harm to the globe's freshwater lakes, researchers in Switzerland say. Researchers from the University of Zurich said a study of Lake Zurich showed that because of global warming, there is insufficient water turnover in the lake following the winter and harmful algae known as Burgundy blood algae are increasingly thriving. Many large lakes in Central Europe became heavily overfertilized in the 20th century through sewage, and as a result algal blooms form, reducing oxygen content in the water and threatening fish stocks, they said. "The problem today is that mankind is changing two sensitive lake properties at the same time, namely the nutrient ratios and, with global warming, water temperature," Historical data on Lake Zurich reveals the cyanobacteria Planktothrix rubescens, more commonly known as Burgundy blood algae, has developed increasingly denser blooms in the last 40 years. The most important natural control of the cyanobacteria blooms occurs in the spring after the entire lake has cooled down during the winter, as intensive winds trigger the turnover of the surface and deep water. But with global warming the winters are increasingly too warm and the lake water is not able to turn over fully as the temperature difference between the surface and depths poses a physical barrier, the researchers said.

Collapse of coral reefs could last thousands of years – Coral reefs might be undergoing a total collapse that could last thousands of years, a situation made worse by man-made greenhouse gases, according to a Florida Tech study published in Science.But reefs rebounded from previous climate extremes, so they can still be saved, the researchers say, as long as greenhouse-gas trends are reversed or stopped. "It's one of these good news-bad news sort of scenarios," said co-author Richard Aronson, a biology professor at Florida Tech. "The hopeful news is that if we can get serious about controlling greenhouse gas emissions and controlling climate change, we have a good chance of saving reefs. But it has to be combined with management of local issues as well." Coral reefs are crucial nurseries for fish and other marine life. Their demise could collapse global fisheries that support the food web, including humans. Mass coral die-off also could render extinct yet-to-be-discovered biological substances that hold cures for human diseases.

The wet side of Greenland - When writing The dark side of Greenland, a recent blog post on decreasing reflectivity of the Greenland ice sheet with images comparing the southwest of Greenland with satellite images from previous years, I of course realized that when that ice sheet becomes less reflective, it will soak up more solar energy and thus melt faster. But the practical aspect of this theory never really dawned on me, until I saw this video: Levels in the Akuliarusiarsuup Kuua river, also knows as the Watson river, have reached such heights that they have smashed the two bridges connecting the north and south of Kangerlussuaq, a small settlement in southwestern Greenland, located at the head of the fjord of the same name. The river water stems from different meltwater outflow streams from Russell Glacier (an outflow of the Greenland ice sheet), and is a tributary of Qinnguata Kuussua, the main river in the Kangerlussuaq area. Of course the local media are covering the story. Here are a few excerpts from different news articles from Sermitsiaq (via Google translate): What has happened in detail over the inland ice, which caused this incident, is not yet known, but the fierce heat has certainly been an important player. And unfortunately it looks like the weather will not come to the Greenlanders' rescue, as the air temperatures over the ice sheet are expected to remain warmer than normal at least the next 7-10 days, However, it's not only hot on the icecap at Kangerlussuaq. Deep in the ice, there are also plus degrees:

Ice island twice as big as Manhattan breaks off Greenland's Petermann Glacier - A chunk of ice 46 square miles in area has parted from the Petermann glacier, which feeds into Nares straight along the northwest coast of Greenland. It split off July 16 according to researchers at the University of Delaware and Canadian Ice Service. This is the second major calving event for the Petermann glacier in the last three years. In August 2010, an ice island four times the size of Manhattan (an area of roughly 97 square miles) separated from the glacier.  Satellite image showing ice island which broke off Petermann glacier in 2010 (NASA) Polar researcher Jason Box of Ohio State University noted the 2010 calving was “the largest in the observational record for Greenland.” He correctly predicted last summer that the piece which just broke off, about half the size, was on the brink. While this latest piece of ice is smaller than the 2010 version, it “brings the glacier’s terminus [end point] to a location where it has not been for at least 150 years,” said Andreas Muenchow, a researcher at the University of Delaware. “The Greenland ice sheet as a whole is shrinking, melting and reducing in size as the result of globally changing air and ocean temperatures and associated changes in circulation patterns in both the ocean and atmosphere,” he said.

Glacier in north Greenland breaks off huge iceberg  An iceberg twice the size of Manhattan tore off one of Greenland's largest glaciers, illustrating another dramatic change to the warming island. For several years, scientists had been watching a long crack near the tip of the northerly Petermann Glacier. On Monday, NASA satellites showed it had broken completely, freeing an iceberg measuring 46 square miles. A massive ice sheet covers about four-fifths of Greenland. Petermann Glacier is mostly on land, but a segment sticks out over water like a frozen tongue, and that's where the break occurred. The same glacier spawned an iceberg twice that size two years ago. Together, the breaks made a large change that's got the attention of researchers.  The Petermann break brings large ice loss much farther north than in the past, said Ted Scambos, lead scientist at the National Snow and Ice Data Center in Boulder, Colo. If it continues, and more of the Petermann is lost, the melting would push up sea levels, he said. The ice lost so far was already floating, so the breaks don't add to global sea levels.

Japan's JAXA Shizuku satellite detects Greenland melting extensively - Greenland's ice sheets are melting extensively, even in some inland areas, according to an image generated from data obtained by a Japanese climate-observation satellite. Data from the Japan Aerospace Exploration Agency's Shizuku satellite shows the ice has been in retreat most noticeably in the southern part of the vast island. "In the south, ice is melting in many locations, even in inland areas at high altitudes," said Kazuhiro Naoki, who analyzed the satellite data. In the image, the different hues of blue represent how many days the ice melted. Darker blue indicates where ice melted for longer periods. The Shizuku satellite, which was carried into space on an H-2A rocket in May, observed the ice sheets between July 3 and 9. The data was analyzed at JAXA's Earth Observation Research Center. Greenland's ice sheets have been surveyed since 2002. The extent of melting found in the satellite survey was similar to those seen in 2002 and 2007, when widespread melting was observed.

Jeff Masters: Record warmth at the top of Greenland Ice Sheet - The coldest place in Greenland, and often the entire Northern Hemisphere, is commonly the Summit Station. Located at the top of the Greenland Ice Sheet, 10,552 feet (3,207 meters) above sea level, and 415 miles (670 km) north of the Arctic Circle, Summit rarely sees temperatures that rise above the freezing mark. In the 12-year span 2000-2011, Summit temperatures rose above freezing only four times, according to weather records researcher Maximiliano Herrera. But remarkably, over the past week, temperatures at Summit have eclipsed the freezing mark on five days, including four days in a row from July 11 to 14. There are actually three weather stations located at the location -- Summit, Summit-US, and Summit AWS. The highest reliable temperature measured at any of the three stations is now the 3.6 °C (38.5 °F) measured on Monday, July 16, 2012, at Summit-US. A 4.4 °C reading at Summit in May 2010 is bogus, as can be seen by looking at the adjacent station. Similarly, a 3.3 °C reading from June 2004 is also bad. Records at Summit began in 1996. The record heat has triggered significant melting of Greenland's Ice Sheet. According to the Arctic Sea Ice Blog, on July 11, glacier melt water from the Russell Glacier flooded the Watson River, smashing two bridges connecting the north and south of Kangerlussuaq (Sønder Strømfjord), a small settlement in southwestern Greenland. The flow rate of 3.5 million liters/sec was almost double the previous record flow rate.The latest forecast for Summit calls for cooler conditions over the coming week, with no more above-freezing temperatures at Summit.

Gobsmacking albedo change on Greenland Ice Sheet, July 20, 2012 - graphic at Climate Change: The Next Generation

U.S. missing out on Arctic land grab - There's an international race to divvy up the Arctic Ocean's oil and mineral bounty, but the United States could lose out on a big chunk of it because it hasn't signed a United Nations treaty governing the area. Earlier this week two key U.S. senators announced they would not support ratifying the Law of the Sea Treaty. The treaty codifies a whole host of maritime laws and customs which could help smooth tensions simmering in the Arctic. Print CommentThe U.S. has refused to participate before, and this latest rejection means that there probably won't be enough votes to ratify the agreement 161 other nations have signed. One provision in the treaty allows countries to extend their territorial claims beyond the 200-mile limit currently allowed -- if they can prove the continental shelf extends 200 miles beyond its shores. That provision has allowed four of the five high Arctic maritime countries -- Russia, Canada, Denmark (via Greenland), and Norway to lay claim to a vast swath of the central Arctic ocean.

Average Chinese person's carbon footprint now equals European's - The average Chinese person's carbon footprint is now almost on a par with the average European's, figures released on Wednesday reveal. China became the largest national emitter of CO2 in 2006, though its emissions per person have always been lower than those in developed countries such as Europe.But today's report, which only covers emissions from energy, by the PBL Netherlands Environmental Assessment Agency and the European commission's Joint Research Centre (JRC) show that per capita emissions in China increased by 9% in 2011 to reach 7.2 tonnes per person, only a fraction lower than the EU average of 7.5 tonnes. The figure for the US is still much higher – at 17.3 tonnes – though total Chinese CO2 emissions are now around 80% higher than those of America. This widening gap reflects a 9% increase in total emissions in China in 2011, driven mainly by rising coal use, compared with a 2% decline in the US. Total emissions in Europe and Japan also fell last year, by 3% and 2% respectively. But emissions rose across much of the developing world, including India, which saw a 6% increase. As a result, OECD nations now account for only around a third of the global total.

Merkel warns of global warming if no climate accord - Chancellor Angela Merkel warned on Monday that global warming will accelerate at a dramatic rate unless leaders reach a deal on limiting greenhouse gas emissions as soon as possible. After marathon talks in Durban last December, countries agreed to forge a new deal by 2015 that would for the first time force all the biggest polluters to limit greenhouse gas emissions. Critics said at the time, however, the plan was too timid to slow global warming. "Time is of the essence," Merkel told an international conference in Berlin, where delegates from more than 30 countries are preparing for a major UN climate conference at the end of the year in Qatar. Attendees are discussing how to prevent global temperatures from rising more than 2 degrees Celsius. Merkel's comments came a day after Germany's Environment Minister questioned the country's ability to reach its own climate goals, in an interview with newspaper Bild am Sonntag.

Climate models question the potential of geoengineering - Deploying giant space mirrors and spraying particles from stadium-sized balloons may sound like an engineer's wild fantasy, but climate models suggest that the potential of geoengineering to offset rising atmospheric carbon dioxide may be significantly overstated. Through a variety of computer simulations used for reporting to the Intergovernmental Panel on Climate Change (IPCC), the team investigated a scenario where an increase in the world's atmospheric carbon dioxide levels was balanced by a "dimming" of the sun. Across all four models tested, the researchers showed that geoengineering could lead to adverse effects on the Earth's climate, including a reduction in global rainfall. They therefore concluded that geoengineering could not be a substitute for the reduction of greenhouse gas emissions. However, in a field with divided opinion on geoengineering's potential role in addressing climate change, some doubt the significance of this conclusion. "From a policy standpoint, this doesn't provide very helpful guidance to decision-makers," . "No serious player in this field suggests that [geoengineering] could ever be a substitute for mitigation and adaptation."

Could we block heat waves with artificial volcanoes? -- Scientists have long known that it’s possible to artificially cool the planet by injecting tiny sulfur particles into the air to reflect sunlight. When Mount Pinatubo erupted in 1991, the large volcano injected so much sulfur-dioxide into the air that it cooled the Northern Hemisphere by as much as 2°C the following summer. The catch, unfortunately, is that this sort of geoengineering could have all sorts of unexpected side effects, like mucking up the world’s rainfall patterns. But what if people tried to do this locally? Imagine if — to throw out a wild hypothetical — certain regions of the United States were suffering from a severe heat wave. Would it be possible for a state or local community to inject sulfate aerosols into the air just to cool these areas down? In theory, yes. But it’s a very risky move. Four UCLA scientists recently wrote a paper on this exact topic and have just submitted it to the journal Atmospheric Chemistry and Physics. The researchers looked at the July 2006 heat wave in California, which lasted for 17 days and killed at least 140 people. In theory, the scientists found, it would have been possible to artificially cool California by injecting sulfate aerosols into the atmosphere, some seven miles up. Computer modeling suggests that temperatures in the Central Valley would have dropped by as much as 7°C in the hottest part of the afternoons, with smaller heat relief in Los Angeles and other coastal areas.

Geoengineers to release planet-cooling gas into New Mexico atmosphere - Two Harvard engineers are planning to spray thousands of tonnes of sun-reflecting chemical particles into the atmosphere to artificially cool the planet, using a balloon flying 80,000 feet over Fort Sumner, New Mexico.The field experiment in solar geoengineering aims to ultimately create a technology to replicate the observed effects of volcanoes that spew sulphates into the stratosphere, using sulphate aerosols to bounce sunlight back to space and decrease the temperature of the Earth. David Keith, one of the investigators, has argued that solar geoengineering could be an inexpensive method to slow down global warming, but other scientists warn that it could have unpredictable, disastrous consequences for the Earth’s weather systems and food supplies. Environmental groups fear that the push to make geoengineering a “plan B” for climate change will undermine efforts to reduce carbon emissions.

Could plankton help us tackle climate change?: As carbon emissions keep rising each year, with no end in sight, scientists have begun dreaming up all sorts of zany geoengineering schemes for slowing down the rate at which the planet’s heating up. Artificial volcanoes to cool the air! Giant mirrors in space to deflect sunlight! Fertilizing the ocean with iron to mop up that carbon! As it turns out, that last idea might actually work. A team of researchers has published a new study in Nature showing that, under the right conditions, it’s possible to lace the ocean with iron in order to stimulate the growth of phytoplankton. The tiny algae absorb carbon from the air during the course of photosynthesis, and when they die, the carbon gets buried deep down on the ocean floor. It’s a potentially promising technique. Yet other scientists warn that even if this plankton scheme could work, it could likely only play a small part of any effort to tackle climate change.

Dumping iron at sea does sink carbon - In the search for methods to limit global warming, it seems that stimulating the growth of algae in the oceans might be an efficient way of removing excess carbon dioxide from the atmosphere after all. Despite other studies suggesting that this approach was ineffective, a recent analysis of an ocean-fertilization experiment eight years ago in the Southern Ocean indicates that encouraging algal blooms to grow can soak up carbon that is then deposited in the deep ocean as the algae die. In February 2004, researchers involved in the European Iron Fertilization Experiment (EIFEX) fertilized 167 square kilometres of the Southern Ocean with several tonnes of iron sulphate. For 37 days, the team on board the German research vessel Polarstern monitored the bloom and demise of single-cell algae (phytoplankton) in the iron-limited but otherwise nutrient-rich ocean region. Each atom of added iron pulled at least 13,000 atoms of carbon out of the atmosphere by encouraging algal growth which, through photosynthesis, captures carbon. In a paper in Nature today, the team reports that much of the captured carbon was transported to the deep ocean, where it will remain sequestered for centuries1 — a 'carbon sink'.“At least half of the bloom was exported to depths greater than 1,000 metres,” says Victor Smetacek, a marine biologist at the Alfred Wegener Institute for Polar and Marine Research in Bremerhaven, Germany, who led the study.

Using Bacteria to Increase Efficiency of Biofuel Production - A new way of making biofuel produces 20 times more energy than existing methods by adding bacteria that turn by products into electricity. The results of a new study, published in the current issue of Environmental Science and Technology, showcase a novel way to use microbes to produce biofuel and hydrogen, all while consuming agricultural wastes. Gemma Reguera, a Michigan State University microbiologist, has developed bioelectrochemical systems known as microbial electrolysis cells, or MECs, using bacteria to breakdown and ferment agricultural waste into ethanol. Reguera’s platform is unique because it employs a second bacterium, which, when added to the mix, removes all the waste fermentation by-products or non-ethanol materials while generating electricity.

Environmental concerns raised over Georgia dredging - Three Lowcountry state senators voiced concern last week that mud polluted with a toxic chemical will be dumped at the future Jasper County port site, which could make developing the property more difficult. When the Savannah port is dredged, Georgia plans to dump the mud from that project on property it owns jointly with the Palmetto State in South Carolina. That tract is where South Carolina officials want to develop another port near Jasper. "You're telling me the cadmium-laden sludge is up the river, that it's going to get dumped on the South Carolina side, and it's going to get dumped on the site where we can build a port or get private enterprise to come in and build a port?" McConnell, R-Charleston, asked during a discussion with Grooms and Davis.

New Report: Coal Exports Overseas Are Increasing From Appalachian Mines -  Yesterday, Congressman Ed Markey’s (D-MA) Natural Resources Committee staff released a report called “Our Pain, Their Gain:  Mountains Destroyed for Coal Shipped Overseas.”  It outlines how coal exports from Appalachia have been growing over the past few years. And, quite surprisingly, how some of the companies in the region export up to 100 percent of the coal that they mine. As the report details:Coal exports have nearly doubled since 2009 to 107 million tons last year, now accounting for almost 12 percent of U.S. production.  Three out of every four tons that are exported come from the Appalachian region. Some these exports are from mountaintop removal mines — one of the most destructive types of mining that destroys mountains in order to access the coal underneath. Already, mountaintop removal has flattened an area the size of Delaware and polluted more than 2,000 miles of streams. As Markey’s report concludes:While mountaintop removal mines are happy to sell to the highest foreign bidder, it’s the Appalachian people who are paying the steepest price for this coal that America no longer uses.

The Power Grid: From Rickety to Resilient - August 14, 2003 was a brutally hot day in much of the northeastern U.S. The high temperatures prompted people in cities like Pittsburgh and New York to crank up the fans and the air conditioning. The electricity those appliances consumed put unusually high demands on the transmission grid, forcing power plants to work overtime. The summer heat also caused local power lines in northern Ohio to expand and physically sag, which brought them into contact with nearby trees. Sparks ensued, and the resulting short circuit shut down power locally.  An alarm should have gone off at a local utility, leading the operator to reroute the flow of power around the affected area until a repair crew could be dispatched to fix the downed wires. But that didn't happen. The alarm never sounded, and utilities across the regional grid kept sending power through the weakened area, stressing the transmission lines further. Within two hours of the short circuit, all of the power lines in Ohio cut out, triggering a chain reaction that led other regional grids to fail before operators could do anything to respond. The resulting blackout — the biggest in American history — affected 55 million people in the northeastern U.S. and Canada. Darkness fell across Times Square because the aging snarl of wires and transformers that is the U.S. electrical grid couldn't handle a hot day and a few overgrown trees.

Bill Clinton: The Economy Would Recover Quicker If We Used Less Energy - Bill Clinton has warned that the US needs to cut its consumption of natural resources if it is to stave off the threats of climate change and rising prices. The former president said the economy of the world's biggest consumer would recover faster from the recession and financial crises if more effort was made to use resources sustainably. "We can grow even faster if we use less energy," said Clinton in a conversation with the Guardian at the Resource 2012 conference in Oxford on Friday evening. "We have studies that show this. All that we need to do is find ways to finance this." He said the current financial system favored the building of major projects such as coal-fired power stations, despite their energy intensity, because the value of energy efficiency was underrated. Big financial backers are used to weighing up the finances of major infrastructure works, because they have long developed the financial models to work out the payback on their investment over the project's lifetime.

James Howard Kunstler: It's Too Late for Solutions - The wishful thinking dominant today is that "with a little more growth, a little more energy, a little more technology -- a little more magic -- we'll somehow sail past our current tribulations without having to change our behavior." Such self-delusion is particularly dangerous because it is preventing us from taking intelligent, constructive action at the national level when the clock is fast ticking out of our favor. In fact, we are past the state where solutions are possible - instead, we need a response plan to help us best brace for the impact of the coming consequences. And we need it fast. One of the lessons that used to be at the center of a liberal education, and no longer is, is that life is tragic. And by that we do not mean that happy endings are impossible or that bad outcomes are guaranteed. What we mean is that there are consequences to the things that you do and that everything has a beginning and a middle and an end. And we have to get real with those. We are discovering more and more is that the world is comprehensively broke in every sphere, and in every dimension and in every way. The governments in every level are all broke, the households are going broke, the banks are insolvent, the money really is not there. And the pretense that the money is there has been kept going simply with accounting fraud.

Fukushima Radiation May Cause 1,300 Cancer Deaths, Study Finds  Radiation from the Fukushima nuclear plant may cause as many as 1,300 cancer deaths globally, according to a study that showed fallout from Tokyo Electric Power Co.’s (9501) crippled reactors may be deadlier than predicted.  The March 2011 nuclear disaster may cause as many as 2,500 cases of cancer, mostly in Japan, Stanford University scientists said. They incorporated emission estimates into 3-D global atmospheric modeling to predict the effects of radiation exposure, which was detected as far away as the U.S. and Europe.  Cancer cases may have been at least 10 times greater if the radiation hadn’t mostly fallen in the sea, said Mark Z. Jacobson, co-author of the first detailed analysis of the event’s global health effects. Identical emissions from a hypothetical accident at California’s Diablo Canyon Power Plant would be 25 percent deadlier because of differing weather patterns, according to the study published yesterday in the journal Energy & Environmental Science.

Beach reopens near Fukushima, epicenter of Japan's post-tsunami nuclear crisis - Fukushima prefecture (state) has opened its first beach to swimmers since last year's nuclear disaster after judging the water to be safe. About 1,000 people on Monday descended on Nakoso beach, about 40 miles south of the Fukushima Dai-ichi nuclear plant, where three reactors melted down after the March 11, 2011, earthquake and tsunami.The opening was celebrated with beach volleyball games and hula dancers from a nearby spa.

Study Proves Natural Gas Can Bridge the Gap to a Clean Energy Economy - Natural gas is a good transition step on the road to greener energy sources like wind, solar, and nuclear power, says a new study. Lawrence M. Cathles, Cornell University professor of earth and atmospheric sciences, says natural gas is a smart move in the battle against global climate change. Published in the most recent edition of the journal Geochemistry, Geophysics and Geosystems, Cathles’ study reviews the most recent government and industry data on natural gas “leakage rates” during extraction, as well as recently developed climate models. He concludes that regardless of the time frame considered, substituting natural gas energy for all coal and some oil production provides about 40 percent of the global warming benefit that a complete switch to low-carbon sources would deliver. “From a greenhouse point of view, it would be better to replace coal electrical facilities with nuclear plants, wind farms, and solar panels, but replacing them with natural gas stations will be faster, cheaper, and achieve 40 percent of the low-carbon-fast benefit,” Cathles writes in the study. “Gas is a natural transition fuel that could represent the biggest stabilization wedge available to us.”

Texan Shale Boom Leads to Increase in Drug Trafficking - Texas is experiencing great economic benefit from the fracking boom that has seen thousands of jobs created in the southern state; however it has also seen an increase in drug trafficking. Shale plays, such as the Eagle Ford formation, have led to the development of hundreds of miles of private back roads, crisscrossing the once remote ranchlands, stretching all the way from the Mexican border to Eastern Texas. Before the US Border Patrol could set up check points along the few major roadways, and check all traffic, quite effectively controlling the smuggling of narcotics. Now however, the network of service roads created by oil companies to deliver drilling equipment and supplies, as well as tankers, make avoiding these checkpoints an easy job. Traffickers attempt to corrupt truck drivers legally travelling the roads, to carry loads for them. They also look to bribe contractors and gate personnel, and have even started to create replicas of the legitimate vehicles used in order to travel the roads unnoticed.

Analysis: Shale oil bonanza to cost refiners billions (Reuters) - America's shale oil boom is great news for U.S. industry, jobs and consumers, but it could cost global refiners billions. Banking on rising demand for transport fuels, oil companies around the world have committed as much as $100 billion over the last decade on equipment to turn heavy oil into valuable refined products such as gasoline, jet fuel and petrochemicals. But the investment has coincided with the discovery of vast reserves of high quality oil and gas held in tight rock formations beneath Texas, North Dakota and other U.S. states, which has changed the market -- probably forever. The world's average crude oil barrel is becoming lighter as new hydraulic fracturing or "fracking" technology and deep horizontal drilling extracts very high quality hydrocarbons. New U.S. shale provinces are now pumping more than a million barrels per day (bpd) of some of the lightest oil available that is much "sweeter" -- containing less of the contaminant sulfur. And the same technology is soon to be deployed elsewhere in the world, producing more and more light oil. As supplies increase, the value of light crude oil relative to heavy oil is collapsing and profits from equipment to upgrade heavy crude, such as expensive fluid catalytic crackers (FCCs) and coking units, are falling.

Nebraska has concerns about Keystone XL - The government of Nebraska said there were concerns about a proposed reroute of the Keystone XL oil pipeline through the state. Nebraska legislators objected to the original proposal by TransCanada to build the Keystone XL pipeline through the state. The company proposed an alternative route that avoids Nebraska's Sand Hills area, which includes a major aquifer. The Nebraska Department of Environmental Quality, in a 68-page report, found the alternative route meets state requirements in avoiding the Sand Hills area. The DEQ, however, said "there are areas along the proposed corridor where fragile soils and aquifer protection are concerns." The department said the new Keystone XL corridor crosses areas that are technically outside the Sand Hills region but contain fragile soil structures that have "surface features very similar to the Sand Hills."

Shell Loses Control Of Arctic Drilling Rig, "Noble Discoverer," in Dutch Harbor, Alaska  - Royal Dutch Shell’s preparedness to drill offshore in the harsh and remote Arctic Ocean this summer has been called into question by a series of recent events. Over the weekend, the company’s drilling rig, the Noble Discoverer, appears to have come dangerously close to running aground near Dutch Harbor, where Shell’s fleet has been assembled.  The Noble Discoverer is one of two dozen ships Shell plans to send into some of the most challenging conditions on the planet.  According to the US Coast Guard, the vessel slipped anchor and drifted within 100 yards off shore before being pulled back into deeper water by a Shell tugboat.

Shell Seeks to Weaken Air Rules for Arctic Drilling - Shell has asked the Environmental Protection Agency to loosen air pollution requirements for its Discoverer drill rig, which is planning to begin exploratory drilling operations off the North Slope of Alaska early next month. In its application to the agency, dated June 28, Shell said the Discoverer cannot meet the requirements for emissions of nitrogen oxide and ammonia of an air permit granted by the E.P.A. in January. The company also asked for a minor air permit modification for its Kulluk drill ship, which is also supposed to begin work in the Arctic in the coming weeks. An E.P.A. spokeswoman said the agency was reviewing the applications. Curtis Smith, a Shell spokesman, said he did not expect the permit changes to affect the drilling schedule, which has been set back several weeks because of unusually heavy sea ice. Greenpeace and other groups opposed to oil and gas exploration in the Arctic said that Shell was trying at the 11th hour to change the terms under which it was granted permission to drill.

Navy uses biofuels on major training as foreign oil becomes topic in defense spending debate - Navy officials say using the alternative fuel helps the military address weaknesses. Operations that use more than 50 million gallons of fuel each month rely on petroleum, making the U.S. military heavily dependent upon foreign oil. Market volatility causes Navy spending to swing by tens of millions of dollars each time the price of a barrel goes up or down $1. “We’re not doing it to be faddish, we’re not doing it to be green,” Navy Secretary Ray Mabus said aboard the U.S.S. Nimitz on Wednesday. “We’re not doing it for any other reason except it takes care of a military vulnerability that we have.” But the plan to use a 50-50 blend of alternative and petroleum-based fuel has hit a snag — Congressional lawmakers who bristle at spending time and money chasing alternative energy at a time when defense spending is being cut and traditional oil is cheaper. The House voted 326-90 Thursday on its version of the $608 billion defense spending bill, which cuts $70 million from the Obama administration’s request for domestic development of biofuels production, while adding millions for submarines and Navy destroyers that the Pentagon didn’t request. The Senate Armed Services Committee last month narrowly passed an amendment to its version of the measure. The provision, pushed by Republican Sens. John McCain of Arizona and Jim Inhofe of Oklahoma, would prohibit military spending on alternative fuels if their costs exceed the cost of traditional fossil fuels.

Abu Dhabi Exports First Pipeline Oil Bypassing Hormuz Strait -- Abu Dhabi started exporting its first crude from a pipeline that bypasses the Strait of Hormuz, shipping the fuel from the neighboring sheikhdom of Fujairah to a refinery in Pakistan. The link, stretching from Abu Dhabi to Fujairah on the Gulf of Oman, began loading a shipment of about 500,000 barrels. International Petroleum Investment Co. spent $4.2 billion building the 423- kilometer (263-mile) link. Abu Dhabi, the U.A.E.’s capital and holder of more than 90 percent of its oil, built the export route for crude to avoid Hormuz, a narrow waterway carrying a fifth of the world’s traded oil that Iran has threatened to block in retaliation for sanctions targeting the country’s nuclear program. Construction costs were 27 percent higher than the $3.3 billion contract awarded to China Petroleum Engineering & Construction Corp. in 2008 and was delayed by 11 months.

Pipelines bypassing Hormuz route open - Saudi Arabia and the United Arab Emirates have opened new pipelines bypassing the Strait of Hormuz, the shipping lane that Iran has repeatedly threatened to close, in a move that will reduce Tehran’s power over oil markets. The quiet opening of the pipelines comes amid heightened diplomatic tensions over Tehran’s nuclear program. Iran’s oil production has fallen to its lowest in more than 20 years due to the impact of US and European sanctions, prompting Tehran to repeat its threats to shut down the strait, the conduit for a third of the world’s seaborne oil trade. The new links will more than double the total pipeline capacity bypassing the strait to 6.5m barrels per day, or about 40 percent of the 17 million bpd that transits Hormuz. The geopolitical importance of the strait is such that Cyrus Vance, former US secretary of state, called it “the jugular vein of the West”. Over the weekend Ali Fadavi, naval commander in Iran’s elite Revolutionary Guard Corps, said Tehran had the ability to “not allow even a single drop of oil to pass” the strait. Abu Dhabi and Riyadh say the pipelines are not a direct response to Tehran’s threats. But oil traders and scholars say they are clear counterweight.

Oil prices could be rigged by traders warns G20 report - A report commissioned by the G20 group of the world's biggest economies has warned oil prices could be vulnerable to a Libor-style rigging scandal. According to the International Organization of Securities Commissions (IOSCO), the current system of oil price reporting is "susceptible to manipulation or distortion." Benchmark prices are compiled by price reporting agencies. The biggest, Platts, says "there is absolutely no similarity" between Libor and oil. Trillions of dollars of securities and contracts are based on these oil and gasoline prices. System of trust Both the Libor inter-bank lending rate at the heart of a global rate-rigging scandal and spot oil prices are based on a system of trust. They are, effectively, unregulated. Traders at various banks voluntarily report the prices they pay for oil contracts to Platts, Argus or one of their competitors. The price reporting agency use a number of trades to decide what the benchmark price, quoted to the outside world, should be. IOSCO said that "this creates opportunity for a trader to submit a partial picture, i.e. an incomplete set of its trades in order to influence the assessment to the trader's advantage."

Tight Oil could not Render OPEC Irrelevant - Steve Levine has a blog post discussing the idea that the "unfolding new age of fossil fuel abundance" will have profound effects on various things, including OPEC: With prices dropping and competing supplies flowing from numerous new producers, OPEC will lose much relative influence, and may simply cease to be a pivotal economic player. "OPEC will descend into chaos as an organization," "They don't know now how much they are hated by the entire world. But they will find out as things unfold."  The key factor behind this kind of thinking is the rapid rise of production of oil from tight rocks like the Bakken in North Dakota and the Eagle Ford in Texas.  I haven't taken a strong position on what the limits of production are from these sources - it just isn't clear to me yet from the data that I have available.  But we could certainly place some limits on how much geopolitical impact this could have on OPEC. Let's posit, for the sake of argument, that tight oil plays in the western world could eventually produce 20mpd of oil.  This is a much larger number than I've heard from any analyst, so should presumably allow us to explore maximal benefits from this type of play.  However, let's also posit that this 20mbd of potential supply is only profitable at oil prices better than $75 (since these plays are very input intensive and require a high oil price to work), and let's also posit that the individual wells decline rapidly - say 50% y-over-y - as this is also a characteristic of these plays; they require constant new fracking of new wells to squeeze oil out of rocks in which it won't naturally flow very far.   Now, what is implied by this picture?

What the Future Holds for Saudi Arabia's Oil - Saudi Aramco has stated that it designs the well layouts and extraction patterns from its oil fields so that they effectively decline at a rate of 2% per year.* If one divides 100 by 2 it yields 50. If one subtracts 50 from 2012, one gets the year 1962. Even to those with poor math skills, these are not difficult operations, and they lead to the conclusion that those fields that came into production in the early 1960’s and earlier are now reaching the end of their productive lives. They are not there yet, since production took time to ramp up, and some fields have been rested over the years, when production was cut back, or even mothballed. But it gives you some perspective on the overall scope of the situation, without the need for complex mathematical modelling.  In earlier production practices, where companies “stepped out” production wells away from the original producers, and in this way gradually extended the knowledge of the size of the field, reserve growth over time was a normal development. However, with the large size of the fields in Saudi Arabia, and the need to maintain operational pressure during production, Aramco (as JoulesBurn has clearly shown) rings their fields with water injection wells that drive oil to the central high point of the reservoir and slowly migrates the producing and injection wells towards that centre as the field is drawn down. This practice precludes the incremental increase in reserves over time, since the field boundaries are constrained and as the wells reach the central part of the reservoir (the crest of the anticline) a clear definition of the closing days of the field becomes more evident.

Maugeri on peak oil -- Carpe Diem, Reuters, FTalphaville, and WhaleOil are among those calling attention to a new paper by Leonardo Maugeri, senior manager for the Italian oil company Eni, and Senior Fellow at Harvard University, which concluded: Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices. Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd. [After factoring in risk factors and depletion rates of currently producing oilfields], the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date.Here I take a look at some of the details of Maugeri's analysis.

Afghan Optimism Ignores History -- International oil companies from the likes of Exxon Mobil and India's ONGC Videsh are among the majors setting their sights on an October deadline to submit bids to the Afghan government for oil and natural gas blocks in the country's north. Last year, regional powerhouse China National Petroleum Co. won a tender for contracts in the region. If reserve expectations prove commercially viable, the country could get more than $9 billion a year from future oil production. Historically, however, Afghanistan has featured large in a regional battleground where geopolitics, war and energy prove to be a volatile mix. Exxon Mobil was one of the eight international companies expressing interest in six blocks in northern Afghanistan. CNPC already won a tender there last year in an area that the country's Mining Ministry estimates holds millions of barrels of oil equivalent. The U.S. Geological Survey estimates the country holds as much as 1.9 billion barrels of undiscovered technically recoverable crude oil reserves. If oil prices stay where they are, that means Afghanistan could eventually earn more than $9 billion per year -- half of the country's 2011 GDP -- from oil.Violence, however, has overshadowed any significant development in the country.

If the Strait of Hormuz Closed, Which Oil Importing Region Would Suffer the Greatest Loss? - The interviewee posited that Iran could drop a few mines in the Strait of Hormuz to cause the passageway to close down for a few weeks while the US military located and disabled the mines, and thereby cause the market price of oil to spike upwards for a time. This started me to wonder: if Iran could actually succeed in continuously place a few mines in the Strait every few weeks, maybe even a mixture of real and fake mines, which importing regions would be most affected by a subsequent extended closing of the Strait of Hormuz with respect to oil tanker flow? That is, which region would actually suffer the most oil import losses: North America, Europe, Japan, China, the other Asia Pacific countries, or, some other region? What about the Middle East exporters?   For the most part, I limit my analysis to considering export destinations. But, my hunch is that it would be the Middle East itself that would suffer the most economic hardship, due to the loss of income from selling oil on the global market.

State Department Rep.: US sorry for damaging Iran oil reserves, but no other choice - Trend: U.S know that sanctions imposed on Iran's oil export has forced Iran to shut off some oil wells which would damage the Iranian citizens' national energy assets in long term, but the current situation is caused by Iran's avoidance to engage its international commitments in the nuclear issue, Persian language spokesperson of the U.S State Department Alan Eyre told Trend on July 16. The United States sanctions over the Iranian Central Bank came to force on 28 June whereby a new US law penalises countries that do business with the Central Bank of Iran (CBI) by denying their banks access to the United States financial markets. Blacklisting the CBI which involves transferring payments for exported Iranian crude oil is leading to a decrease in Iran's oil exports by 50 per cent to 1.1 million barrels per day, costing more than $3 billion which the Iranian government lost per month. Its 50 per cent of revenues relies on oil exports.

Ukraine, China sign $3.7 bil loan deal to move power plants from gas to coal -  Ukraine's energy and coal industry ministry on Friday signed an agreement with China Development Bank securing a $3.656 billion credit line to help the country switch its power plants over to coal from gas, the ministry said. As part of the agreement China will offer its technological expertise for the work to be carried out, the ministry said in a statement Friday. "We are grateful to [our Chinese] colleagues, who...identified the most efficient [upgrade] projects to be implemented using Chinese technologies," Ukrainian energy minister Yuriy Boyko Boyko said in the statement. As part of the program to fuel its power plants with coal, Ukraine will also build gasification facilities in Ukraine, it said.

Iron ore inventories at China's ports hit a record - The decline in industrial demand in China is once again showing up in overbuilt inventories at the ports. This time we are seeing it in iron ore stock. China Daily: - Iron ore inventories in China reached a record high of about 100 million metric tons due to shrinking downstream demand, but major global suppliers are still increasing output. The 30 major ports in China have total iron ore stocks of 97.92 million tons, according to figures from, a steel industry information provider. High stocks and declining prices have increased the risks for iron ore traders, who are facing increasing financial pressure to repay loans. Meanwhile, steel factories are more cautious when purchasing raw materials.

Premier Wen Jiabao Warns On China Growth - Premier Wen Jiabao warned about China’s near-term growth prospects. China’s PMI and Q2 GDP already show an economy that has at the very least dropped below traditional annual improvement. “The economic growth rate is still within the government target range set early this year, and stabilization policies are working,” Wen said, according to government news site Xinhua. The site added: Dragged down by lackluster external demand and government efforts to cool the property sector, the country’s GDP growth slowed to a three-year low of 7.6 percent in the second quarter. Wen said China’s economic fundamentals remain sound and the country still enjoys huge growth potential, citing the bumper summer harvest, cooling inflation and rising incomes. However, the country’s economic rebound is not yet stable and economic hardship may continue for a period of time, the premier warned at a conference on Saturday

China's Growth Slows Again – Is the Worst Over? - China's growth rate slowed for a sixth successive quarter to its slackest pace in more than three years, highlighting the need for more policy vigilance from Beijing even as signs emerge that action taken so far is beginning to stabilize the economy. Year-on-year growth of 7.6 percent in the second quarter was a whisker above the government's official 7.5 percent full year target and dragged the first half average down to 7.8 percent. That's below the 8 percent level that in previous downturns has triggered a robust response from policymakers. The GDP number, released in a flurry of Chinese data on Friday, was roughly in line with investor expectations. The trajectory of the economy is crucial for money managers facing a slowdown not only in China, the world's second-largest economy, but anemic growth across the BRIC grouping of major emerging economies – Brazil, Russia, India and China – which combine as the biggest marginal generators of global growth.

Whither China? -- Recent economic reports from China are, at the least, mixed. The responses to Friday’s GDP report are illustrative.  From IHS-Global Insight (Xianfeng Ren): China has reported the worst quarterly GDP growth, 7.6%, in almost three years. This is a less vicious downslide compared with the Global Financial Crisis if measured by peak-to-trough deceleration, but nearly as bad as in the Asian Financial Crisis. The length of consecutive quarterly GDP growth deceleration is even longer than in the slide following the Asian Financial Crisis—six straight quarters of deceleration, vs. five in the Asian Financial Crisis. A 7.8% growth in the first half already feels quite hard in terms of impact, inflicting huge pain: a downward spiral of producer prices, surging manufacturers’ inventories, plunging profits, bankruptcies and pay cuts.  From Deutsche Bank, “China: decelerating trend in Q2 GDP”: China’s Q2 real GDP growth slowed to 7.6% yoy (1.8% qoq, sa) after 8.1% yoy in Q1 – the slowest rate since Q1 09 – putting H1 12 growth at 7.8%. Q2 growth was in line with market expectations. . . . The most likely scenario is marginal easing of property market curbs, further easing in monetary policy to support liquidity and targeted stimulus measures to bring forward some infrastructure projects, with a view to preserving jobs and supporting consumption. This should help to contain systemic risk arising from bankruptcies and defaults. The rebound in H2 is not yet assured, as suggested by leading indicators such as PMI.

China's Economy: Apocalypse Soon? - Talk of an economic slowdown in China has become so loud and persistent that it now has its own slang: ghost cities, ghost fleets, rocket eggs, naked officials. The downturn has even led to the invention of a new financial algorithm, something called the China Stress Index — and the index remains high. Some of the stresses were mentioned over the weekend by Prime Minister Wen Jiabao as he spoke of “huge downward pressure” on the world’s No. 2 economy, due principally, he averred, to slackening consumer demand in Europe and real estate speculation at home. As my colleague Keith Bradsher reports, housing construction has nearly stopped. Work sites that had recently been going round the clock seven days a week are now down to one shift — and just on weekdays. Analysts and government planners are now resigned to the fact that the growth rate in 2012 will slip under the once-magic (and numerologically auspicious) figure of 8 percent.  Nomura, the Japanese financial services firm, has launched the China Stress Index, and the Nomura analyst Rob Subbaraman affirmed Monday that the company sees “a one-in-three probability” that China will experience “a hard economic landing commencing before the end of 2014.”

"China Rebalancing Has Begun"; What are the Global Implications? Michael Pettis on China Rebalancing, Chinese Price Deflation, and Spain Exit from Euro; Target 2 Revisited - Michael Pettis at China Financial Markets has some interesting comments via email regarding much needed China rebalancing and a timeframe for a possible Spain exit from euro.  Pettis On China Price Deflation...China’s official GDP growth rate has fallen sharply – on Friday Beijing announced that GDP growth for the second quarter of 2012 was a lower-than-expected 7.6% year on year, the lowest level since 2009 and well below the 8.1% generated in the first quarter. This implies of course that quarterly growth is substantially below 7.6%. Industrial production was also much lower than expected, at 9.5% year on year. In fact China’s real GDP growth may have been even lower than the official numbers. This is certainly what electricity consumption numbers, which have been flat, imply, and there have been rumors all year of businesses being advised by local governments to exaggerate their revenue growth numbers in order to provide a better picture of the economy. Some economists are arguing that flat electricity consumption is consistent with 7.6% GDP growth because of pressure on Chinese businesses to improve energy efficiency, but this is a little hard to believe. That “pressure” has been there almost as long as I have been in China (over ten years) and it would be startling if only now did it have an impact, especially with such a huge impact occurring so suddenly.

China’s Wen Warns Of Severe Job Outlook As Growth Yet To Rebound Premier Wen Jiabao said China’s labor situation will become more “severe,” underscoring concern that the weakest economic growth since 2009 will lead to increasing job losses. The government will continue to implement a more “proactive” labor policy, Wen said yesterday at a government meeting on employment, according to a statement posted on the central government’s website. The job situation will become more “complex,” Wen said. The comments build on the premier’s warning published three days ago that the nation’s economic rebound lacks momentum and difficulties may persist for a while. Authorities are intensifying efforts to halt a slowdown in expansion as the ruling Communist Party prepares for a once-a-decade leadership handover later this year.

IMF Lowers China Growth Forecasts, Warns of Risks - The International Monetary Fund on Monday lowered its estimates for China’s economic growth this year and next, and warned of the possibility of a hard landing there in the medium term. The IMF dropped its forecast for this year’s gross domestic product growth in China to 8.0% from its previous forecast of 8.2% in April. It also lowered its estimate of next year’s growth rate, to 8.5% from 8.8% previously. China’s GDP growth slowed to 7.6% from a year earlier in the second quarter, down from 8.1% growth in the first quarter. The slowdown in China, as well as in other major developing markets like Brazil and India, is being driven both by external and internal factors, the IMF said in its latest World Economic Outlook. “In the medium term, there are tail risks of a hard landing in China, where investment spending could slow more sharply given overcapacity in a number of sectors,” the report said.

AIMF cuts China forecast, `hard landing' possible - The International Monetary Fund cut its growth forecast for China's slowing economy Monday and said a "hard landing" was still possible.The IMF reduced its China growth outlook for 2012 by 0.2 percentage point to 8 percent and for 2013 by 0.3 point to 8.5 percent. That is far stronger than the United States and Europe, but China's slowdown has dampened hopes it might make up for weak Western demand and drive global growth.China's second-quarter growth fell to a three-year low of 7.6 percent as exports, consumer spending and factory output weakened. Analysts say a rebound might begin in the second half but could take longer and be weaker than previously expected.On Sunday, Premier Wen Jiabao warned a recovery was not stable and trouble may continue for some time. He promised tax breaks and other aid to companies hurt by slowing exports."There are tail risks of a hard landing in China, where investment spending could slow more sharply, given overcapacity in a number of sectors," the IMF said in its latest World Economic Outlook.

China Echoes 2009 Stimulus With Railway Spending Boost - China’s railway infrastructure investment may double in the second half of this year from the first six months, aiding efforts to reverse a slowdown in the world’s second-biggest economy.  Full-year spending will be 448.3 billion yuan ($70.3 billion), according to a statement dated July 6 on the website of the National Development and Reform Commission’s Anhui branch. The document indicates a 9 percent increase from a previous plan of 411.3 billion yuan. Spending was 148.7 billion yuan in the first half.  China’s fixed-asset investment has already started to pick up and a jump in spending on railway construction would echo the expenditure on rail lines and bridges that was part of stimulus during the global financial crisis. A decline in foreign direct investment reported by the government today underscored the toll that Europe’s debt woes and austerity measures are taking on Asia’s largest economy. “China’s stimulus may be stronger than the market has expected,” said Zhang Zhiwei, a Hong Kong-based economist for Nomura Holdings Inc. who formerly worked for the International Monetary Fund. “There will be more positive signs in the coming months to confirm that China’s pro-growth policies are taking effect.”

China strengthens Africa ties with $20 billion in loans - Chinese President Hu Jintao on Thursday offered $20 billion (12.7 billion pounds) in loans to African countries over the next three years, boosting a relationship that has been criticised by the West and given Beijing growing access to the resource-rich continent. The loans offered were double the amount China pledged for the previous three-year period in 2009 and is the latest in a string of aid and credit provided to Africa's many poverty-stricken nations. The pledge is likely to boost China's good relations with Africa, a supplier of oil and raw materials like copper and uranium to the world's most populous country and second-largest economy. But the loans could add to discomfort in the West, which criticises China for overlooking human rights abuses in its business dealings with Africa, especially in Beijing's desire to feed its booming resource-hungry economy.

Fitch downgrades three major Japanese banks - Fitch said Friday it cut the credit rating of three of Japan's biggest banks over concerns about Tokyo's ability to support the financial sector after the nation's sovereign debt rating was also cut. The global ratings agency said it lowered its rating to 'A-' from 'A' -- the seventh best score on a scale of 22 -- for Mitsubishi UFJ Financial Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group. In the same statement, Fitch said it also lowered its rating for Sumitomo Mitsui Trust Bank to the same level as the major banks. "The downgrade...reflects the government's weakened financial ability to support the banking system as indicated by the downgrade of (Japan's sovereign rating)," Fitch said in a statement.

Early Indications of Weak June Global Trade  - I updated my series for global trade (above - imports and exports should match but don't due to measurement error).  The monthly data (with partial data through June) come from the WTO and I seasonally adjust them.  At this point, May is a pretty solid data point but June is based on a sample of only 11 out of 70 countries, so is preliminary. However, imports and exports (which are essentially independent samples for this purpose) agree on the direction of change in June, if not the magnitude. After growing from early 2009 to mid 2011, global trade appears to have roughly stagnated for most of the last 12 months.  In particular, it appears to have had a bump up in February of this year, but then to have fallen back in March and April.  A small bump in May has now been, it seems, offset by a larger fall in June.  This continues to suggest that the global economy is either contracting, or at best growing very slowly.

The shifting geography of global value chains: Implications for developing countries and trade policy = Two contradictory trends are at work in the global economy.

  • First, globalisation through multinational corporation production networks continues apace. This promotes convergence and integration. The global value chains they operate have become the world economy’s backbone.
  • The second trend pertaining to economic crisis policy responses is one of divergence. Associated with this is the threat of a spiral of protectionism and consequent disintegration, affecting the most vulnerable and trade-dependent states in particular. This highlights the role the WTO has played in stemming the tide of protectionism. Unfortunately, WTO members remain unable to conclude the Doha Development Round, throwing the WTO’s centrality to the trading system into sharp relief. Fortunately, most governments realised the futility of discriminatory stimuli and the cost of raising barriers on intermediate goods on which whole segments of domestic industries depend

Antidumping as cooperation - The rules-based World Trade Organization (WTO) system has no externally binding enforcement mechanism. There are no prison sentences, coordinated boycotts, or fines that outsiders can impose so as to discourage countries from engaging in bad trade policy behaviour. If one country violates the agreement that promises (relatively) free trade, the adversely affected trading partner is responsible for enforcement. Enforcement only takes place when a trading partner initiates formal dispute settlement proceedings and receives permission from the WTO to retaliate unilaterally, usually through selected tariff increases. Thus the WTO agreement has each country enforce its trading partners’ promises to maintain low tariffs.Antidumping tends to get no respect from economists. Many view the most popular import restriction among industrialised and middle-income economies today as politically-biased protectionism hiding behind the rhetoric of fair trade. This column challenges long-held perceptions by reinterpreting antidumping import restrictions as the grease that keeps the wheels of the liberal world trading system turning.

IMF cuts global growth forecast; warns on euro zone (Reuters) - The International Monetary Fund on Monday cut its forecast for global economic growth and warned that the outlook could dim further if policymakers in Europe do not act with enough force and speed to quell their region's debt crisis. In a mid-year health check of the world economy, the IMF said emerging market nations, long a global bright spot, were now being dragged down by Europe. It said a drop in exports in these countries would combine with earlier policies meant to prevent overheating and slow growth more sharply than hoped. The IMF shaved its 2013 forecast for global growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent. "Downside risks to this weaker global outlook continue to loom large," the IMF said. "The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis." The global lender said advanced economies would only grow 1.4 percent this year and 1.9 percent in 2013.

World Faces Weak Economic Recovery -- IMF Direct - Olivier Blanchard - The global recovery continues, but the recovery is weak; indeed a bit weaker than we forecast in April. In the Euro zone, growth is close to zero, reflecting positive but low growth in the core countries, and negative growth in most periphery countries.  In the United States, growth is positive, but too low to make a serious dent to unemployment. Growth has also slowed in major emerging economies, from China to India and Brazil. Downside risks, coming primarily from Europe, have increased. . Putting everything together, our forecast for world growth is 3.5% for 2012, 3.9% for 2013, down .1% and .2% respectively.  More worrisome than these revisions to the baseline forecast is the increase in downside risks.The main risk is obvious: the vicious cycles in Spain or Italy become stronger, output falls even more, and one of these countries loses access to financial markets. The implications could easily derail the world recovery.   Our baseline forecasts are based on the assumption that policies will be implemented to slowly decrease the spreads on Spanish and Italian bonds from their current high to a still high, but lower level in 2013.  This however requires that the right policies be adopted and implemented

A global slowdown - THE IMF released new economic forecasts today, updating its April projections. In a nutshell, things aren't shaping up quite as well as they'd hoped: The big worries in advanced economies are all policy oriented. Europe, obviously, is a concern, but the IMF is growing increasingly nervous about the possibility that American politicians will let the country hurdle off the year-end fiscal cliff. If gridlock is such that all projected tax rises and spending cuts take effect, America's economy could take a hit equal to 4% of GDP, enough to seriously harm the world economy.  On emerging markets, by contrast, the IMF suggests that growth prospects have been overstated. Here's chief economist Olivier Blanchard: In each country you see a slowdown. There’s one explanation per country. I think there’s probably something underneath which is common. Emerging-market countries had a great decade and it may well be that their potential growth rate is really lower than the actual growth rate was, and maybe even their potential growth rate was before. All of them, in different modes, have had to slow down either in exports or investments and so on. My sense is we may well be in a regime in which these growth rates will be a bit lower than they were.

IMF Says Japan And Spain Are Done, "Debt Ratio Will Never Stabilize" - The IMF believes that advanced economy deficits will decline by about 0.75 percentage points of GDP this year which 'strikes a compromise between restoring fiscal sustainability and supporting growth". However, continued focus on nominal deficit targets runs the risk of compelling excessive fiscal tightening if growth weakens. In addition, there is a risk in the United States of political gridlock that puts fiscal policy on autopilot and results in a sharp and sudden decline in deficits—the “fiscal cliff.” What is more troubling is the significant upward revision to all of the peripheral European nations (with Greece now at 171% Debt/GDP in 2013 versus 160.9% forecast only 3 months ago). While the average debt-to-GDP ratio among advanced economies is projected to continue to rise over the next two years, surpassing 110 percent of GDP on average in 2013, debt ratios will by then have peaked in several advanced economies - though rather explosively they do not see debt ratios for Spain and Japan stabilizing.

Stagflation risks rising in Asia; could impact global growth -- With many North American crops in trouble due to severe drought conditions, analysts will be looking at Asia for signs of food inflation. Food inflation may prevent Asian countries from lowering rates, potentially creating growth problems not just for Asia, but globally. Right now the focus has shifted to India and the rising risks of a poor monsoon season.  The Hindu Business Line: - Weak monsoon poses a challenge in maintaining the high food production, the Agriculture Minister, Mr Sharad Pawar, said here on Monday. The monsoon deficit continues to be at 23 per cent till date, but there is no drought-like situation, yet, he said.  Rueing that India’s agricultural growth is still influenced by monsoon and vagaries of nature, Mr Pawar said meeting the 4 per cent growth was a challenge this year. He said kharif sowing [planting for the autumn harvest] will go on till the first week of August even as farmers anxiously wait for rains. This is a dangerous development when combined with the US drought. Food accounts for almost a third of the CPI measure in a number of Asian countries.  Even prior to the increased upside risks to food prices, Asian nations had little room to lower rates in response to the global slowdown.

IMF Says Japan And Spain Are Done, "Debt Ratio Will Never Stabilize" - The IMF believes that advanced economy deficits will decline by about 0.75 percentage points of GDP this year which 'strikes a compromise between restoring fiscal sustainability and supporting growth". However, continued focus on nominal deficit targets runs the risk of compelling excessive fiscal tightening if growth weakens. In addition, there is a risk in the United States of political gridlock that puts fiscal policy on autopilot and results in a sharp and sudden decline in deficits—the “fiscal cliff.” What is more troubling is the significant upward revision to all of the peripheral European nations (with Greece now at 171% Debt/GDP in 2013 versus 160.9% forecast only 3 months ago). While the average debt-to-GDP ratio among advanced economies is projected to continue to rise over the next two years, surpassing 110 percent of GDP on average in 2013, debt ratios will by then have peaked in several advanced economies - though rather explosively they do not see debt ratios for Spain and Japan stabilizing.

The World Is Experiencing the Opposite of a Sovereign Debt Crisis. The problems of Spain, Italy, and Greece are often pointed to as being somehow bleeding-edge, canaries in the coalmine that serve as warnings to other governments of what might happen if they don't get their acts together. But the real story today is just the opposite. The world is experiencing whatever the reverse of a sovereign debt crisis is, as borrowing costs for government are plummeting EVERYWHERE. The most iconic chart is this one, which is the yield on the US 10-Year Treasury, which is once again within a few basis points of an all-time low. Here's a 5-year chart of the Australian 10-year, whose yield is also within a hair of its lows. France (which is thought of as a beautiful fiscal model) is seeing its 10-year borrowing costs at 2.228%. Here are the yields on some other 10-year Treasuries around the world. Japan: 0.778% Germany: 1.26% UK: 1.549% Sweden: 1.285% Finland: 1.501% Canada: 1.635% Israeli bonds are falling to multi-year lows. Here's the Mexican 10-year! None of this is actually "good" news. What this essentially means is that there's a lot of money out there that sees no productive investments in the real world, and thus people are willing to stick it with entities that promise them a very meager return. But it is a good reminder that the crisis is basically the exact opposite of what so many mainstream commenters say it is. It's not about governments reaching their endgame. It's about a growth-deficient world, governments being the one place that can absorb all this money.

ECB Shifts View on Bond Losses - The European Central Bank, in a sharp turnaround, has advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks, though finance ministers have for now rejected the approach, according to people familiar with discussions. The ECB's new position was made clear by its president, Mario Draghi, to a meeting of euro-zone finance ministers discussing a euro-zone rescue for Spain's struggling local lenders in Brussels the evening of July 9.  The ministers rejected the advice out of concern that financial markets would react badly to the decision. [Mish translation: Finance ministers want to screw the taxpayers to save the wealthy]. Imposing losses on bondholders reduces the amount of money taxpayers need to inject into struggling banks. One euro-zone official said the desire to avoid putting more public money at risk than necessary was one reason behind the ECB's change of heart since 2010. The ECB's new stance can also be explained by the different scenarios, including the existence of a bank-restructuring framework for Spain that didn't exist for Ireland, and the fact that the Irish government, unlike Spain's, guaranteed much of its banks' debts.

A massive drop in the ECB Deposit Facility balance is due to zero rate  -- As discussed in the earlier post, the zero rate in the ECB Deposit Facility means there is no need for banks to move excess reserves back and forth between the reserve account and the Deposit Facility just to capture some of that 25bp the ECB used to pay on deposits. Banks are now comfortable just leaving more funds in the reserve account ("current account") for operational ease. That's why we've had such a drastic drop in the ECB Deposit Facility in the last few days.

Italy economy minister sees 2012 GDP fall "little less" than 2 percent: paper -(Reuters) - Italy's GDP is expected to shrink "a little less" than 2 percent, the country's new economy minister Vittorio Grilli said in a newspaper interview published on Sunday. Grilli, who took over the economy portfolio from Prime Minister Mario Monti on Wednesday, made his comments in a long interview with the Corriere della Sera newspaper. The Bank of Italy governor has forecast that the economy will shrink by 2.0 percent and employers' lobby Confindustria has forecast a contraction of more than 2.4 percent. Grilli also said in the interview that he would like to see a multi-year plan to privatize state assets, bringing in 15-20 billion euros a year.

Loan Moratorium Approved in Italy - Small and medium-size Italian companies will be permitted to suspend payments on 3.6 billion euros ($4.4 billion) of debt for as long as a year, the Finance Ministry of Italy said on Saturday. Since a loan moratorium began on March 1, Italian companies have made 16,000 applications to postpone 5.5 billion euros of payments, the ministry said. About 10,000 applications were processed through May, and the rest are being addressed. The nation’s business associations and the Italian Banking Association agreed this year to extend an earlier moratorium to cope with the country’s fourth recession since 2001. The previous moratorium, begun in August 2009, allowed 260,000 companies to delay 15 billion euros of payments, the association said in February. On Friday, Moody’s Investors Service lowered Italy’s government bond rating two steps. Moody’s said Italy faced higher financing costs amid crises in Greece and Spain.

Italy's public debt rises to record high - Italy's public debt hit a record high in May despite Rome's recent efforts to ease the overstretched finances, showed a central bank report. The national debt stood at USD 2,405 billion in May, up from USD 2,385 billion a month earlier, according to the report released Monday. Also Monday, the International Monetary Fund predicted a negative growth of 1.9 percent for the recession-hit Italian economy in 2012, reported Xinhua. Meanwhile, a report by Promotor, an automotive research center, showed gasoline and diesel-fuel consumption fell by a combined average of 9.7 percent in the first half of the year, the biggest drop since 1955, when the center started to collect data.

Italy in Crisis: the rise of ‘Super Mario’ technocracy - The European debt crisis continues into its third year, with four government bailouts – of Greece, Ireland, Portugal, and Spain – and having imposed harsh austerity measures upon the people of Europe, forcing them to pay – through reduced standards of living and increased poverty – for the excesses of their political and financial rulers. Italy, as Europe’s third largest economy, with one of the largest debt-to-GDP ratios, plays a central role in the unfolding debt crisis across Europe. This is the story of Italy’s debt crisis. This is an unedited, rough draft excerpt from my upcoming book – the Preface to the People’s Book Project – which is due to be finished by the end of the summer, and covers the following subjects: the origins, evolution, and consequences of the global economic crisis; the expansion and effects of global imperialism and war; the elite-driven social engineering project of establishing an institutional structure of ‘global governance’; and the rising resistance of people around the world to this system, as well as the attempts of the imperial powers to co-opt, control, or destroy these socio-political movements – the embodiment of the ‘Global Political Awakening’ – from the Arab Spring, to the anti-austerity movements across Europe, the Indignados in Spain, the Occupy Movement, the Chilean Winter and the Maple Spring in Quebec, among others.

Italy’s Political Risk - Italy’s latest round of business data suggests that the short-t0-medium term outlook of the economy isn’t about to deliver a turn around: The latest Business Outlook survey conducted by Markit shows that confidence among Italian businesses has dropped since the start of the year, and is only slightly higher than at the height of the global financial crisis.  And the country’s PMI tells the same story: Overnight the Italian government added to its own woes with verification of previous economic estimates from the Bank of Italy: Italy’s government will revise down its forecast for the economy this year to a contraction of less than 2 percent when it updates its economic targets in September, The government had previously forecast the economy would shrink 1.2 percent this year. Its new forecast is close to the Bank of Italy’s estimate of a 2.0 percent contraction but more optimistic than the employers’ lobby Confindustria’s prediction of a contraction of more than 2.4 percent. However, although the economic story is a sorry tale, it may not be Italy’s largest short-term risk. As noted by Moody’s, Italy has the ability to use its large private sector wealth as a buffer and with a focussed and well managed transition towards greater production the country could potentially works its way out of its troubles while staying within the monetary union. That being the case, one of the most important assets Italy will require is a strong and stable leadership. This appears to be a bit of a problem: Italy’s unelected Prime Minister Mario Monti said he won’t serve in another government when his term ends next year.

European Union Working On $120 Billion Spanish Bailout: The European Union's bailout fund is working on a (EURO)100 billion ($120 billion) package to prop up Spanish banks, according to a report Saturday by German news weekly Der Spiegel. A confidential draft plan by senior officials at the European Financial Stability Facility proposes an initial (EURO)30 billion payment to Spain at the end of July, the magazine said. Of that, some (EURO)20 billion would go toward shoring up Spanish banks' short-term finances while another (EURO)10 billion would be reserved as a longer-term emergency buffer. Three further payments totaling (EURO)45 billion would be made in November and December of this year, and in June 2013, Der Spiegel said. A Spanish Economy Ministry spokeswoman declined to comment on the report. According to the report, up to (EURO)25 billion would also be made available to create a "bad bank" to buy up hard-to-sell debt. This would be in line with a draft memorandum of understanding agreed by finance ministers from the 17 eurozone countries, which suggests that part of Spain's bank bailout should involve the segregation of billions in problematic assets to an "external asset management agency" to clean up Spanish banks' balance sheets.

Madrid Region to Sell 100 Office Buildings Amid Austerity - Madrid’s regional government plans to sell 100 office buildings in the center of the Spanish capital over three years to cut its deficit and pay for services as the country makes its deepest budget cuts on record. “We’re not a real estate company,” said Jose Luis Moreno Casas, the government official who is overseeing the sales. “Our job is to ensure there is adequate health care, education and mobility for our people.” Sales proceeds will be used to provide for residents and trim the Madrid region’s budget shortfall, which reached 2.2 percent of regional gross domestic product in 2011, according to Moreno, director of policy for finance, treasury and assets. The goal is to reduce that to 1 percent of GDP by 2014, he said in an interview in Madrid.

IMF: Spain, Greece Face Bigger Deficits Than Previously Forecast --Spain and Greece, currently the two main epicenters of the euro zone debt crisis, are facing bigger deficits than previously forecast amid feeble European growth and political disorder in Athens, the International Monetary Fund said Monday. Higher government deficits should mobilize policymakers into action, the IMF said in a set of report called the World Economic Outlook and the Fiscal Monitor. Europe needs to move forward promptly to establish a banking union that would allow direct recapitalization of Spanish banks and insulate the region from a potential Greek default. Greek leaders, meanwhile, must scramble to salvage an emergency loan program that has gone badly off track, the IMF said. Europe's recession is taking a larger bite out of Spain's finances than the fund expected earlier this year, despite an ambitious budget belt-tightening program by Madrid. Weaker growth has meant lower revenues and higher spending on unemployment and social security. That has pushed the deficit closer to 7% of gross domestic product, around one percentage point more than the IMF said in April. That's not including newly-announced measures to cut the budget deficit.

Europe’s banks face tougher demands - The head of Europe’s top banking regulator has raised the bar for lenders’ capital requirements, insisting that the 9 per cent capital ratio they had to hit as a “temporary buffer” by June is to become permanent. Andrea Enria, chairman of the European Banking Authority, said “capital conservation” was his priority, with the eurozone crisis persisting and the six-year phase-in of Basel III global capital standards set to begin next year He was speaking after last week’s EBA announcement that 27 European banks had boosted capital by a combined €94bn to reach what it described last autumn as a “temporary” requirement for European banks to hold core tier one capital equivalent to at least 9 per cent of risk-weighted assets. “The key thing will be capital conservation,” Mr Enria told the Financial Times. “We don’t want the capital to be released. We want the banks maintaining this capital level and gradually moving to the Basel III full implementation. We will be asking the banks to develop capital plans to get there.” Basel III capital ratios rely on a tougher definition than current rules dictate, limiting the instruments that count as “core tier one capital”.

Investors Pay to Fund EFSF Aid With Bills at Negative Yield - Investors are paying the European Financial Stability Facility for the privilege of financing Europe’s temporary rescue fund, with demand to buy its debt increasing even as yields drop below zero.  The facility auctioned 1.49 billion euros ($1.8 billion) of six-month bills at a yield of minus 0.0113 percent today, Germany’s Bundesbank, which acts as agent for the sales, said in a statement. Participants bid for 2.97 times the amount of debt allocated, compared to a so-called bid-to-cover ratio of 2.06 when the fund sold 182-day bills at a yield of 0.1421 percent on June 19. A negative yield on EFSF bills means investors who hold them to maturity will receive less than they paid to buy them. “Investors are keen to snap up any kind of paper that can offer security and the EFSF, to some extent, has safe-haven status,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “You can call it a paradox, but that’s the reality of the market.”

Euro Leaders Sleepless Summits Seen Prone to Mistakes -  Of Europe’s last six summits, three ended no earlier than 4 a.m. The most recent, on June 29, ended at 5 a.m. And finance chiefs’ monthly gatherings routinely extend past midnight.  Those late hours haven’t served European leaders well and may be one reason why their next meeting, to hammer out a bailout for Spain’s banks on July 20, is scheduled to begin at noon. Lack of sleep, the evidence shows, has played a role in faulty decision-making that led to disasters at Three Mile Island, Chernobyl, and the Exxon Valdez oil spill as well as the ill-fated launch of the space shuttle Challenger.  “We’re not well designed to work well into the night,”. “It has to be one of the worst times to do negotiations.”  Remaining awake too long mimics the effects of being legally drunk, according to recent research. Staying up past your natural bedtime can make you more vulnerable to another’s influence and likelier to take risks. It can impair brain function and lead to misjudgments.

Euro Group President Juncker on the Euro Rescue - In a SPIEGEL interview, Euro Group president and Luxembourg Prime Minister Jean-Claude Juncker, 57, discusses the dispute between Germany and Italy at the recent EU summit, why he believes Merkel is wrong about euro bonds and his desire to have an elected president of the European Union.

Merkel Gives No Ground On Demands For Oversight In Debt Crisis - Chancellor Angela Merkel gave no ground on Germany’s demands for more central control over euro member states in return for joint burden-sharing as the region struggles to contain the debt crisis. The German leader said yesterday she hadn’t softened her stance at last month’s summit in Brussels and that a so-called banking union involving a bloc-wide financial overseer will have to include joint oversight on a “new level.” She chided member states who had sought to slow moves toward greater central control “since the first summit” in the 2 1/2-year-old crisis. “All of these attempts will have no chance with me or with Germany,” Merkel said

German Court Won’t Rule on Bailout Fund for 8 Weeks -- Germany’s top court will take more than eight weeks to decide whether to suspend the euro-area’s permanent bailout fund, leaving Europe’s anti-crisis coffer less than half full to respond to the debt crisis. The Federal Constitutional Court in Karlsruhe will issue a ruling on bids to halt Germany’s participation in the European Stability Mechanism and the fiscal pact on Sept. 12, it said today in an e-mailed statement. That’s more than two months after it held a hearing on the measures. “The court has held a comprehensive hearing on the issue and will now take the time it needs to reach a decision,” German government spokesman Steffen Seibert told reporters in Berlin today. Finance Minister Wolfgang Schaeuble warned the hearing last week that a delay in activating the ESM “could lead to a significant worsening” of the crisis. The delay could complicate efforts to resolve the 2 1/2- year-old crisis as European leaders squabble over the details of bailout conditions, bank rescues and burden sharing. In an interview yesterday, Chancellor Angela Merkel gave no ground on German demands for more centralized control over euro member states in return for joint liabilities.

Fund managers expect more trouble in Germany - The monthly survey of funds by Bank of America Merrill Lynch has picked up a sudden crumbling of confidence in the eurozone core, with France viewed as the country most likely to deliver a nasty surprise later this year. Europe’s debt crisis is by far the biggest worry worldwide, with the US “fiscal cliff” and China’s property slide well behind. A net 32 of money managers expect trouble in Germany, a dramatic reversal since May. The worries may be linked to the Bundesbank’s rocketing claims on eurozone central banks under the ECB’s “Target2” payment system, now €729bn (£572m). These reflect the scale of capital flight from the Club Med bloc, and may prove hard to collect if the euro blows apart.  A net 55pc expect a bad surprise from France, which has $710bn (£456bn) of bank exposure to Club Med. President François Hollande is courting fate by raising the minimum wage, employing 60,000 new teachers and clinging to a largely unreformed state that takes 56pc of GDP. Spain faces the worst of all worlds. The EU has imposed a highly-intrusive Greek-style “Memorandum” on the country, forcing drastic cuts as the country slides deeper into slump. This is leading to bitter street protests, with even police joining marches in Madrid on Tuesday.  Yet the promised bank recapitalistion is hostage to German politics. The rescue will be a sovereign loan for the foreseeable future, pushing public debt to 90.3pc of GDP this year.

Chart of the Day: Germany in breach of Maastricht Treaty in 8 of 10 years since 2002 - A recent story in German magazine Der Spiegel highlights the efforts in 2005 of German Chancellor Gerhard Schroeder to relax the penalties for deficits in breach of the euro zone’s stability and growth pact. It is a good review of the contemporaneous actions of the German government within a wider EU political context. However, I feel there is a lot missing to the article in giving the German context to the present European sovereign debt crisis. Therefore, I am giving you a few tidbits here. First, here’s the chart I want to focus on:Sovereign government debt as a percentage of gross domestic product in Germany, Ireland and Spain from 1995-2011As you can see, in the late 1990s, in the run-up to the euro, Germany had a sovereign government debt to GDP that was lower than either Ireland or Spain, both of which were technically in breach of the Maastricht 60% debt hurdle.  Once the euro was in place, Ireland and Spain prospered as interest rates declined and money from Germany and other eurozone countries with weak domestic economies piled in. Ireland’s sovereign debt levels plunged to 24.8% as a percent of GDP while Spain also saw an impressive decline to 36.3% in 2007. Germany, meanwhile, has been in breach of the Maastricht Treaty in every year from 2002 to present except in 2007 and 2011, the only years in which debt would "diminish sufficiently and approach the reference value" of 60%. However, Germany has been over the 60% hurdle in every single year.

Collapsing German yields impacting currency markets - With German government yields collapsing, the two-year rate just touched a new low today - negative 6bp. The 3-year yield is negative as well. This is now impacting the currency markets. As an example the Germany-Japan rate differential at the short end of the curve is widening - the 2-year differential (Japan rate minus Germany rate) is at a record. In fact some are looking at this as the new carry trade, long the yen short the euro - the reverse of the original carry trade. And that is pushing up the value of the yen, particularly against the euro. Euro-yen has touched a new multi-year low today. This currency move will help support German manufacturers at the expense of those in Japan. In that sense the ECB has accomplished something - making Germany more competitive using currency devaluation (though it's not clear that this was their intent). Welcome to the world of negative rates and currency wars.

Euro Weakens as Germany Says Spain Liable for Bailout Funding - The euro fell for a second day versus the dollar after German Finance Minister Wolfgang Schaeuble said Spain must take over guarantees for bailout funding, adding to concern European leaders will struggle to stem their sovereign-debt crisis. South Africa’s rand fell against most major currencies after the nation unexpectedly cut its benchmark interest rate to bolster its economy. Australia’s dollar climbed against 16 most- traded peers amid bets the Federal Reserve and the Chinese government will take further steps to encourage economic growth. “The market started moving off Schaeuble because he basically said, ‘We’re going to make the Spanish pay,’”

Bernanke: Europe Not Yet Close to Long-Term Solution - Europe’s leaders aren’t yet close to reaching a long-term solution to stabilize the region’s debt woes, Federal Reserve Chairman Ben Bernanke told U.S. lawmakers Wednesday. “I don’t think they’re close to having a long-term solution that will solve the problem and until they find those long-term solutions, we’re going to continue to see periods of financial market volatility,” Mr. Bernanke warned members of the House Financial Services Committee. In his second day of Capitol Hill testimony, the Fed chief faced a variety of questions from lawmakers, ranging from the effects of the gold standard to whether the federal government should be able to audit the central bank’s monetary policy deliberations.

Medicine is Killing the Patient; Increasing the Dose is Madness --(video)  Nigel Farage is once again making common sense arguments in European parliament while blasting the absence of European commission president Herman Van Rompuy and EC commissioner José Manuel Barroso, noting the medicine is killing the patient. Select Quotes

    • The medicine is killing the patient.
    • Increasing the dose is madness.
    • Greece outside the Eurozone may well provide an inspiration for Spain, Portugal, and many other countries.
    • We need to recognize that a terrible mistake has been made.
    • We've got to break up the euro
    • We've got to restore democracy
    • We've got to restore human dignity
    • We must ignore Barroso and Van Rumpoy.
    • We must provide people with hope

    Greece seeks bridge loan for Aug. bond redemption - Greece is seeking a bridge loan to cover an upcoming bond redemption next month, according to Dow Jones Newswires on Tuesday. The roughly 3.1 billion euro bond, worth roughly $3.79 billion, matures on Aug. 20, and is held entirely by the European Central Bank. Dow Jones added that euro-zone officials have indicated that Greece would be prevented from defaulting on the payment.

    Greek banks' ECB dependence rose in June from April - ECB funding to Greek banks rose by 11.64 billion euros ($14.25 billion) i n June f rom April, the previous comparable month, while emergency liquidity assistance from the Greek central bank also increased, by 2.7 billion euros over the same period, data from Greece's central bank showed on Tuesday. ECB lending to Greek banks rose to 73.66 billion euros at the end of J une from 62.02 billion in April, the Bank of Greece said. Greek banks had tapped a total of 61.94 billion euros in emergency liquidity assistance (ELA) from the Greek central bank at en d-June. Th e Bank of Greece did not provide details on each bank's use of the facility. Greek banks briefly boosted their use of ELA in May, when they had no access to European Central Bank liquidity because of a capital shortfall w hich resulted from a bond swap that wiped out much of their assets. E LA use in May rose to 124 billion euros while ECB funding dropped to 3.45 billion euros. Greek banks regained access to ECB funding in June when they received capital from the euro zone's EFSF rescue fund as part of the country's second EU/IMF bailout. Greek banks became dependent on the European Central Bank and the national central bank for liquidity amid the country's debilitating debt crisis.

    New Greek cuts "almost impossible" The head of a party in Greece's new coalition government says the country's recession makes it "almost impossible" for it to achieve the .5 billion ($14.1 billion) in cuts over the next two years demanded by its rescue creditors. Socialist party leader and former Finance Minister Evangelos Venizelos made the comment in a radio interview Tuesday, a day before he is to meet conservative Prime Minister Antonis Samaras to discuss the cuts. Samaras won a June 17 general election, promising to renegotiate Greece's bailout deals. But the idea has received a cool response from Greece's emergency creditors. Debt inspectors from the European Union, European Central Bank and International Monetary Fund are due to return to Athens next week to discuss the new round of proposed cuts.

    ECB: Greek-backed bonds ineligible as collateral -- The European Central Bank on Friday said debt issued or fully guaranteed by the Greek government will become "for the time being ineligible" for use as collateral in monetary policy operations due to the July 25 expiration of a buyback program. The ECB said that, "in line with established procedures," its Governing Council would assess the potential eligibility of Greek bonds at the conclusion of an ongoing review of Greece's compliance with its bailout terms by the European Commission, the ECB and International Monetary Fund. The ECB said liquidity needs may be addressed by the Greek central bank "in line with existing Eurosystem arrangements

    ECB turns screws on Greece, stops accepting collateral - The European Central Bank turned up the heat on Greece on Friday ahead of a review of its bailout programme, saying it would stop accepting Greek bonds and other collateral used by Greek banks to tap ECB funding, at least until after the review. The ECB move, which analysts said was aimed at stepping up pressure on Athens to adhere to the commitments of its EU/IMF bailout, will force Greek banks to turn to their national central bank for Emergency Liquidity Assistance (ELA) funds. Those funds will be more expensive than funds available in the ECB's regular liquidity operations. The ECB said the collateral exclusion was due to the expiration of a temporary 35 billion euro scheme agreed with Greece and euro zone leaders whereby the ECB would continue to accept Greek bonds after they went into default earlier this year. "The ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment programme," the central bank said in a statement.

    Ireland Bulldozes Ghost Estates In Life After Real Estate Bubble - About 1,850 housing developments, unfinished after the bubble burst in 2008, pockmark the Irish landscape, according to government figures. This week, Ireland’s National Asset Management Agency, the state agency set up in 2009 to purge banks of their most toxic commercial property loans, started the destruction of an apartment block for the first time.  “There’ll be some places where the most sensible decision that can be made will be to demolish,” Housing Minister Jan O’Sullivan said in an interview in her Dublin office on July 10. “If nobody wants to live in them, then the most practical thing to do possibly will be to demolish what is there.”  The so-called ghost estates are the most visible scar left by Western Europe’s worst real-estate crash, which led Ireland to follow Greece in seeking international financial help. In all, about 15 percent of Irish homes are vacant, the country’s statistics agency estimates.

    Ireland Plans $2.76 Billion Stimulus Package —The Irish government Tuesday said it has found over €2.25 billion euros ($2.76 billion) to salvage a number of delayed road, school and health-care construction projects, which it hopes will create jobs without increasing the debt burden of the troubled economy. Irish Prime Minister Enda Kenny, Deputy Leader Eamon Gilmore and Budget Minister Brendan Howlin insisted at a briefing that their infrastructure plans are fully funded and isn't a list of projects that will never get built. The announcement came as the European Central Bank signaled it is willing to support Ireland's request for easier terms on its government-funded bank

    EU, IMF warn of risk to Portuguese budget targets - Portugal can still reach its 2012 budget targets but the risk of failure has grown significantly, officials from the European Commission and International Monetary Fund said on Tuesday. The goal of reducing Portugal's public debt to 4.5 percent of gross domestic product this year is achievable but might be hampered by a large drop in tax revenues in the slowing economy, the European Union's executive arm said. It was reporting on progress made since Portugal was thrown a lifeline worth 78 billion euros ($96 billion) in May 2011 to prevent it from going under. The Commission acknowledged that Portugal was generally on track with respect to the terms of the bailout, which was a joint effort by the EU and the International Monetary Fund.

    Dire Signs for Spanish Economy - Spain's housing and banking sectors continue to deteriorate, grim new government data showed Wednesday, providing the latest indication that the country's economy remains caught in a protracted recession. House prices declined at the fastest pace since the start of the crisis in the second quarter, the public ministry said, while bank deposits saw a record decline in May from a year earlier, and bad loans increased for a 14th month in a row, the Bank of Spain reported. The withering economy is increasing pressure on Prime Minister Mariano Rajoy's government to shore up confidence in the country's public finances and establish a firm footing for a much needed recovery in hiring and wage growth. But Mr. Rajoy acknowledged Wednesday in a speech to parliament that the government's prescription of spending cuts and higher taxes probably won't produce benefits in the short term.

    Spain's banks face Ireland style recap; will include sub debt haircuts and triggering CDS - As discussed here in April (see this post), Spain's banking system needs Ireland-style bank recapitalization. And that's precisely what Spain's banks are going to get. The "bad bank" entity, unceremoniously named the Asset Management Company (AMC), will become the proud owner of bad property loans. This is the equivalent of the Irish Bank Resolution Corp.  EFSF bonds will be used instead of cash for recapitalization (discussed here back in June). The banks as well as AMC will be able to use the EFSF bonds as collateral at the ECB. The theory that somehow EFSF financing will not force haircuts on debt holders is nonsense. Haircuts are coming and they will be particularly painful for subordinated debt holders. The subordinated component of these banks' capital structures is quite large.  Barclays Capital: - ... the Spanish authorities will amend existing legislation by the end of August to ensure full participation in the liability management exercises. We expect the new legislation to give the Spanish authorities the power to alter the terms of existing subordinated debt in a way that is detrimental to bondholders...We expect these transactions to include a coercive element. For example, early stage transactions could be voluntary, but could contain a collective action clause (CAC). If activated, which usually occurs when voluntary participation in the transaction is above a certain threshold, the CAC would reduce the claims of the holdouts by modifying the terms of the instruments. If this fails, Spanish authorities would be able to invoke the powers granted to them under the new legislation to effectively reduce the bond principal through statutory means.

    Spanish savers must pay for bank rescue, says minister - Spanish bank customers must take a hit on their past savings under a deal to bail out the country’s troubled lenders, Finance Minister Luis de Guindos warned yesterday. Mr de Guindos told Parliament that a new law to regulate high-risk savings and investments will not protect savers who have already invested in the bank, including those who brought so-called “preference shares”. Troubled Spanish banks “will have to contribute to their restructuring as much as possible from their own resources”, Mr de Guindos said, citing the terms eurozone leaders have set for bailing them out. “This implies that the costs associated with the restructuring will be borne not only by the state but also by those who invested in the bank,” he added, including holders of preference shares. “We are going to modify the legislation to avoid this happening again... but unfortunately the changes will not apply retroactively.”

    Spanish Withdraw More Deposits From Banks -- Spanish banks saw a further reduction in their pool of deposits in May. According to new data, total deposits from the private sector shrank by 5.75% from a year earlier, to 1.327 trillion euros ($1.629 trillion). WSJ's Santiago Perez reports. (video)

    Spanish spreads hit a record  -- Spain's 5 and 10-year spreads to Germany hit an all-time record this morning. The driver for the widening today was a difficult auction of Spanish bonds, though yields have been moving up for the last few days. Reuters: - Spain's five-year borrowing costs hit new euro-era highs at an auction on Thursday, sending the euro lower, as it struggles to convince investors it can control its finances, while France sold bonds of similar maturities at yields below 1 percent.The yield on Spain's July 2017 bond rose to 6.459 percent, up from 6.072 percent when it was last sold just a month ago and the most Madrid has paid to borrow at that maturity for 16 years. Costs jumped on all three bonds offered, with the longest-dated, a seven-year, coming in near the 7 percent mark beyond which other euro zone countries have been forced to seek aid. These increasing yields will reduce the value of Spanish banks' portfolios of government bonds, making the bank bailout more expensive. At some point the feedback loop to the banking system and increasingly expensive auctions become unsustainable.

    Spanish Borrowing Costs Surge, Reviving Worries About Euro Zone -The Spanish government had to pay more to sell its medium-term debt Thursday, while yields on its 10-year bonds crept above the symbolically important 7 percent threshold — a worrying development for the euro zone, which had hoped that recent accords would help put a two-year-old sovereign debt crisis behind it. Spain’s Treasury sold 2.96 billion euros, or $3.6 billion, in bonds maturing in 2014, 2017 and 2019. The interest rate on the five-year debt rose sharply to 6.46 percent, from 5.54 percent at the last such auction on July 5. There were no comparable rates for the other maturities. Yields on 10-year Spanish government bonds rose to 7.03 percent. Many analysts believe that such rates would make Spain’s finances unsustainable in the medium term. “Demand for Spanish paper is collapsing, even for shorter-dated debt, which is very worrying and raises the specter of Spain losing market access,”

    Sicily in danger of default, says Italian PM - Italian PM Mario Monti says the region of Sicily is close to defaulting on its debts, and he is seeking confirmation that the governor will resign. In a statement, Mr Monti said there were "grave concerns" that the island would default following a growing financial crisis. He said he had written to Raffaele Lombardo asking him to confirm his stated intention to quit this month. Mr Monti's government is struggling to cope with a huge national debt crisis. "The solutions which could be considered, that involve action on the part of the government, cannot fail to take account of the situation of the administration at regional level," his statement said. Sicily, which has a special autonomous status, has debts of about 5bn euros (£3.9bn) and faces annual interest payments of between 500m and 600m euros, Reuters reported.

    Sicily Swap Losses Burden Debt Amid Liquidity Crunch - Sicily, Italy’s poorest region, faces increasing losses on about 860 million euros ($1.1 billion) of derivatives that are weighing on its debt as the local administration faces a liquidity crisis. Contracts with six banks led by Bank of America Corp. (BAC) (BAC), Deutsche Bank AG (DBK) and Nomura Holdings Inc. (8604) have lost money for the local government since 2008 and future losses will wipe out earlier gains, Italy’s state auditor warned in a June 29 report. The regulator urged Sicily to “seek protection” against losses on the contracts. Italian Prime Minister Mario Monti approved 400 million euros of funds for Sicily, which faced a liquidity shortage, a government official who asked not to be identified said yesterday. Monti July 17 warned that he had “serious concerns about the possibility Sicily could default.” Sicily’s 5.3 billion euros of debt increased last year as the region hired staff, and mark-to-market losses on its swaps may add to its future obligations. Sicily joins governments from Greece to Jefferson County, Alabama, that bought derivatives that offered the promise of cost savings while being stacked in the favor of banks.

    Monti plans ‘Greek-style’ takeover of Sicily to avert default --Italian premier Mario Monti is mulling emergency action to take direct control of Sicily’s regional government before the island spirals into a full-blown financial crisis, fearing contagion to the rest of Italy. Mr Monti held an “urgent” meeting with the country’s president Giorgio Napolitano on Wednesday to grapple with the constitutional issue after it emerged that the region faces a deficit of up to €7bn (£5.49bn) this year and is in danger of default without sweeping cuts. Sicily’s regional councillor Andrea Vecchio warned that the island has run out of money. “I’m afraid we will soon no longer be able to pay civil servants’ salaries,” he said. “The developments in Sicily are very serious,” “It is just the sort of negative shock we don’t want right now. Everything has to go perfectly for Italy to pull through.” The full extent of Sicily’s crisis came to light just before Moody’s downgraded a string of Italian regions, cutting many to levels even lower than Sicily. Piedmont, Abruzzo, Calabria, Lazio, and Campania were all slashed. The City of Naples fell to junk status, plagued by “systemic pressure” from a deep social and economic crisis.

    Spain Slides -- It was an all round horrible night for Spain, starting with a bond auction that went a little wrong: Spain’s government just sold a bunch of short-term debt this morning. But, demand was way down and borrowing costs were much higher than in an auction for similar debt a month ago.2-year bonds sold for 5.3%, up from 4.48% last month. 5-year bonds sold for 6.54%, up from 6.19% last month. 7-year bonds sold fo 6.798%, up from 6.19% last month. After the auction, the Spanish 10 year bond shot up above 7% where it stayed. Although, as I mentioned last week, my expectations are for the Spanish economy to get even worse over the coming year, so higher yields are likely, this particular auction probably wasn’t helped by some pre-bailout vote rhetoric from the Germans: German deputy finance minister Steffen Kampeter on Thursday reiterated that the Spanish state is liable for the 100 billion euros ($123 billion) in aid that other euro zone countries are injecting into the country’s ailing banking sector and that the aid does not amount to a blank check.

    Euro Zone Approves Spain Bank Bailout - Euro-area finance ministers Friday released €30 billion (about $37 billion) of the €100 billion loan package set up for Spain to shore up its ailing banks. Giving the final go-ahead to the fourth euro-zone bailout, the finance ministers stressed that Madrid will need to overhaul its financial sector and achieve deficit-reduction targets to continue receiving aid. "Spain will be expected…to correct its excessive deficit in a sustainable manner by 2014," European Economics Commissioner Olli Rehn said in a statement after a teleconference with the ministers."The explicit link between these obligations and the sectoral program is deliberate and pertinent," he said, adding that progress will be closely and regularly reviewed. Also Friday, Spain's government said it expects the economy to remain in recession next year as it steps up austerity measures. Speaking in a news conference, Budget Minister Cristobal Montoro said gross domestic product is now likely to contract by around 0.5% in 2013, compared with a previous forecast of 0.2% growth, presented earlier this year. Spain also downgraded its forecast for 2014 growth, to 1.2% from a previous 1.4%.

    Spain won't grow until 2014 as eurozone agrees bank bailout - Spain's stock market has plummeted more than 5pc after the country revealed it will not return to growth until 2014 and will have to pay an extra €9.1bn next year just to service its debt. Spanish 10-year bond yields hit a euro-era high of 7.3pc, a level widely believed to be unaffordable in the long term, while the spread between those bonds and the German benchmark Bunds widened to a record 600 basis points. Budget Minister Cristobal Montoro said that his country's recession would ease this year, with GDP contracting by 1.5pc, two percentage points lower than previous estimates. However, he revised next year's outlook down from 0.2pc growth to a 0.5pc contraction, before a rise of 1.2pc in 2014 and 1.9pc in 2015. He also expects Spain's unemployment level to continue its 12-month rise to hit 24.6pc this year, before falling marginally to 24.3pc next year and 23.3pc in 2014.

    Snapshot: Faith in Spanish Banks in Free Fall - Gallup - Eurozone finance ministers meet Friday to finalize a bailout deal for Spain's banks, which may help restore some of Spaniards' failing confidence in their financial sector. Fewer than one in five Spaniards (19%) surveyed earlier this year said they have confidence in their country's financial institutions or banks, down from just over half (52%) in 2008. Since 2008, the Spanish financial sector has been struggling to recover from the country's housing market collapse, after which Spain's regional banks were stuck with billions in bad debt. The bailout deal will immediately make available 30 billion euros of a credit line likely to total about 100 billion euros ($123 billion). The deal may help ease some investors' fears of a run on the banks, as a growing number of depositors have been transferring money out of Spain and into stronger eurozone countries such as Germany. It will take far more than an influx of cash to solve Spain's long-term economic woes, however. The country's official unemployment rate hit an 18-year high of 24.4% in the first quarter of 2012. Almost all Spanish adults (93%) now tell Gallup it is a bad time to find a job in the city or area where they live, and 30% of those in the workforce say they are actively looking for work.

    Demand for Spanish Bonds Collapses; "No Money Left to Pay Services" says Treasury Minister; Massive Protests Over Austerity; Two-Year Yield soars 60 Basis Points - On yet another Friday, Europe is overlooking a gigantic bond-market precipice. Yield on the Spanish two-year government bond is up a whopping 60 basis points to 5.76%. Yield on the Spanish 10-year bond is up 26 basis points to 7.27%.  Italy is participating in the bond debacle as well. Yield on the Italian 10-year bond is up 17 basis points to 6.17%. Yield on the Italian 2-year bond is up 39 basis points to 3.95% This action in the face of another "we are saved" moment less than two weeks ago tells a dramatic story elsewise. The Guardian reports Spanish take to streets in protest as MPs pass €65bn austerity package Protesters took to the streets of 80 Spanish cities on Thursday night after prime minister Mariano Rajoy's People's party (PP) pushed a €65bn (£51bn) austerity package through parliament and the country paid record prices to borrow money from sceptical markets. More than 100,000 people were estimated to have joined in demonstrations called by trades unions, with about 50,000 gathering in Madrid. Police fired rubber bullets to disperse the protesters in Madrid. Angry civil servants had blocked traffic in several main Madrid avenues earlier in the day, with protesters puncturing the tyres of dozens of riot police vans, amid growing upset at austerity, recession and 24% unemployment.

    Spanish Protests Escalate as Budget Cuts Draw Blood - It’s been fashionable to dismiss protests in austerity-victim countries as noise. And to date, that view has been correct. But Spain lurched relatively suddenly into the acute distress of 24% unemployment. Thursday, the Spanish bank bailout terms were clarified, and as we’d thought early on, and as Delusional Economics explained, the terms have the new bank bailout debt as being added to existing Spanish borrowing levels. Spanish bond yields rose, but Mr. Market shrugged that off all of one day. Valencia sought assistance Friday under the rescue package approved the day before. Investors freaked out at the proof that Spain was imploding faster than they thought.  The protests may constitute another crisis front. It’s one thing to drive Greece into penury and social decay pour décourager les autres. As horrific and deplorable as that is, the Eurozone can live with that. Having an economy as large as Spain come apart is not a viable outcome. Notice that this escalation in the number of people protesting comes before the officials start wiping out bank preference shares. As we’ve recounted, banks duped depositors into buying these instruments, presenting them as being completely safe but offering more yield. And it happened on a widespread basis: Reuters reported that 62% of the preference shares are held by depositors at the same banks. So if you aren’t convinced that the current level of Spanish protests are meaningful, be warned: you ain’t seen nuthin’ yet.

    Expect Strikes and Protests to Spread to Italy; Another Look at Why Italy Will Exit the Eurozone Before Spain - Anti-euro sentiment in Italy is already very strong and about to get stronger. Eurointelligence has come interesting comments today regarding Italy.  The demonstrations and protests [in Spain] are very likely now to spread  to Italy. The country’s largest union, CGIL, said there would be a public-sector strike in September to oppose the Italian government latest austerity plan, Il Fatto Quotidiano reports.  According to Susanna Camusso, CGIL head, its union will launch "a general strike of the public sector against the umpteenth measure." The cuts, to avert a 2% increase in VAT scheduled for September, include a 10% reduction of staff and 20% reduction of managers of public-sector.  In regards to factors that might lead to a eurozone exit, there are two major differences between Italy and Spain. The first difference is anti-euro sentiment in Italy is already at a convincing threshold. Please see Six Reasons Why Italy May Exit the Euro Before Spain The net difference between those who think the euro is a good thing minus those who think it is a bad things is -4 percentage points in Spain, but -14 points in Italy. That is the biggest negative spread in the eurozone.

    Europe Staggered by New Round of Debt Crisis - So much for the action “shifting” away from Europe. Today markets on the continent are melting down, particularly due to the increased Spanish borrowing costs. As I explained yesterday, the votes in Germany to approve the bailout of Spanish banks, which was reiterated by the Eurozone, effectively reversed the results of the EU Summit by making it explicit that the Spanish government would be on the hook for the bailout funds, rather than direct injections into the banks themselves. This has raised those borrowing rates, as it means that Spain, a country already suffering from a high amount of debt, just had €100 billion added onto that. Spain also approved their austerity program yesterday, which led to riots in Madrid, after tens of thousands participated in mostly peaceful protests throughout the day. Another austerity program in Spain, in a time of 24% unemployment, has no chance of succeeding, either in improving the economy or even reducing the debt. We have a test case of that today, in Britain: Chancellor George Osborne’s deficit-busting plans are struggling to keep up with full-year targets as official figures published today revealed another rise in Government borrowing. Public sector net borrowing, excluding financial interventions, such as bank bailouts, was £14.4 billion in June, up from a revised £13.9 billion the previous year..

    Six Spanish Regions May Seek Bailout After Valencia, Pais Says - The Balearic Islands and Catalonia are among six Spanish regions that may ask for aid from the central government after Valencia sought a bailout, El Pais reported. Castilla-La-Mancha, Murcia, the Canary Islands and possibly Andalusia are also having difficulty funding themselves and some of these regions are studying plans to tap the recently created emergency-loan fund that Valencia said it would use yesterday, the newspaper said, without citing anyone. Spain created the 18 billion-euro ($23 billion) bailout mechanism last week to help cash-strapped regions even as its own access to financial markets narrows.

    Geithner Lets the Cat Out of the Bag -- Speaking on CNBC’s “Delivering Alpha” conference, the Treasury Secretary argued: What is very important is that [Eurozone officials] not leave the Continent hanging on the edge of the abyss as a device for getting more leverage for reform, because that leaves the rest of the world much more exposed to financial pressure and slower growth from Europe. In essence, Geithner is letting the cat out of the bag. He is implying that Europe is hanging on the edge of the abyss. Only Germany can prevent it from falling in, and at the same time it appears that Berlin has now moved into a position where they cannot or will not prevent that disasterous scenario, either for economic or legal reasons.  The decision by Germany’s constitutional court to delay its approval of the German Parliament’s ratification of the ESM and fiscal compact may be a warning. The court could have moved to approve quickly. Instead, it will not rule on emergency appeals for an interim injunction against the parliamentary approvals until the end of this month. If the court rules in favor of an interim injunction, the final decision on the ESM and fiscal compact may not be made for several months.

    Level of bank reserves at a central bank not linked to loan growth  - Sir, Your editorial “Central banks miss another opening” (July 6) lauds the European Central Bank for lowering its deposit rate on bank reserves to zero while simultaneously criticising the Bank of England for failing to do so. You seem to see this as having missed an opportunity to prod banks to loosen their “purse strings” and engage in lending. However, as you well know, when banks lend they do not provide borrowers with gold and silver coins dug out from cash hoards, unlocked from vaults, brought in armoured cars from the central bank or found in purses sitting in tellers’ desks. Loans are made, in their simplest form, by crediting a borrower’s deposit account at the bank while simultaneously making another electronic entry reflecting the loan contract on the asset side of the balance sheet. Whether that deposit is transferred once to someone with an account at the same bank that day or transits the accounts of a dozen banks one thousand times through a real time gross settlement system, the aggregate quantity of bank reserves at the central bank at the end of the day will be exactly the same. In other words, in a fiat money floating exchange rate world, bank reserves held at the central bank are a closed system. They are never lent “out”, that is, outside the banking system. The only exception to this would be if the borrower requested the loan be paid in physical banknotes and that those physical banknotes continued to circulate in the economy. What role then, does the deposit interest rate play beyond the technical sense of setting a floor on a corridor interest rate system? Essentially, it determines the tax rate on required reserves. For at least 25 years, my former colleagues and I at the International Monetary Fund have argued that unremunerated required reserves are a tax on financial intermediation that drives a wedge between lending and deposit rates.

    Euro Area Imbalances are a Symptom of the Broader Global Imbalances - Rebecca Wilder - I’ve now mulled over a June 2012 NY Times opinion piece by Gunnar Beck. Beck displays an interesting medley of data in support of his view that Germany cannot afford to backstop the European Monetary Union (the single currency union referred to as the Euro area, or EA). Germany itself has been the loser, not the winner, of the single currency union. His comments are loosely based on the research of the Ifo Institute’s Hans-Werner Sinn. Based on the ideas of Beck and Sinn, I start a short series on the benefits of membership in the EA, ex-post and ex-ante. The conclusion from this initial post: Some call the EA a microcosm of the world imbalances, i.e., Germany is to China as Spain is to the US. I disagree. I’d argue that the EA imbalances are a function of, rather than a mirror of, the broader global imbalances. Let’s start by looking at the simple net trade statistics as rents derived by membership in the EA since 1999. I further Beck’s analysis on intra-EA trade (trade among the EA countries) for the original 1999 EA 11 economies. The 11 economies to meet the convergence criteria by 1999 were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

    Banks cut lending to troubled euro countries: BIS - -- Banks cut lending to troubled euro-zone countries in the first three months of 2012 and boosted lending to Germany, likely reflecting uncertainties about the credit-worthiness of a number of European governments and doubts about the solvency of major banks.  The Bank for International Settlements Wednesday said the total cross-border exposure of banks rose $59 billion in the three months to the end of March, adjusted for exchange rate moves.  But the BIS figures showed banks cut lending to Greece by $27.7 billion, to Portugal by $12.6 billion, to Spain by $27 billion, to Italy by $14.8 billion and to Ireland by $54.6 billion. The figures showed banks boosted their lending to Germany, perceived by investors to be a safe haven within the euro zone, by $239.2 billion.  The biggest drop in lending was to developed economies, down by $626 billion, with lending between banks falling by $499 billion. The BIS said the largest falls in lending to banks was recorded in Germany, the U.K. and the U.S.

    I.M.F. Urges Europe’s Central Bank to Buy More Government Debt - The International Monetary Fund, warning of “a sizable risk” that some euro zone countries could suffer a debilitating decline in prices, called on Wednesday for the European Central Bank to pump money into the region’s economy by buying huge volumes of government bonds.Such bond buying, which the Federal Reserve has undertaken in recent years to stimulate the United States economy, is a move the central bank has resisted, one that would probably outrage the fiscal disciplinarians of Germany. And it is unclear whether the I.M.F.’s public push for big spending by the central bank will make it more or less likely for the bank’s president, Mario Draghi, to act. He, like any central banker, wants to appear immune to outside pressure. But the I.M.F. is well respected, and its warning of deflation, a destructive plunge in prices, could help give the central bank the economic rationale to use the stimulus of buying billions of euros in government bonds. In a report critical of euro zone policy, the I.M.F. said that there was a 25 percent risk of consumer price deflation before 2014 and that the danger was greatest in countries, like Italy, where growth was slow and the government was counting on tax increases to reduce its huge debt.

    Euro zone in ‘critical’ danger: IMF - The euro zone is in “critical” danger but can restore credibility with urgent action for a banking union, with some form of euro bonds, and if the ECB ramps up injections of cash, the IMF said on Wednesday. The European Central Bank should pull harder on its levers of special measures to buy government debt and fund banks, and should be open about its targets, the IMF said. In a hard-hitting review of policies for the euro area, it warned: “The euro area crisis has reached a new and critical stage. “Despite major policy actions, financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself.“ A worsening of the crisis would have a big impact on neighbouring European countries “and the rest of the world.” It warned: “A determined move toward a more complete union is needed now.”

    Senior IMF Economist Resigns, Cites Suppression and Europe Bias - A senior International Monetary Fund economist is resigning from the Fund, writing a scathing letter to the board blaming management for suppressing staff warnings about the financial crisis and a pro-European bias that he says has exacerbated the euro-zone debt crisis. “The failure of the fund to issue [warnings] is a failing of the first order, even if such warnings may not have been heeded,” Peter Doyle said in a letter dated June 18 and copied to senior management. Doyle is formerly a division chief in the IMF’s European Department responsible for non-crisis countries. He currently acts as an adviser to the Fund but is expected to officially leave in the fall. “The consequences include suffering [and risk of worse to come] for many including Greece, that the second global reserve currency is on the brink, and that the Fund for the past two years has been playing catch-up and reactive roles in the last-ditch efforts to save it,” he said in the letter.

    Departing IMF Economist Blasts Fund - Yves Smith - Although the resignation letter of Peter Doyle, who was an advisor to the IMF’s European Departments, which is running the rescue programs for Greece, Ireland, and Portugal, is more terse that Greg Smith’s resignation from Goldman via a New York Times op ed, it is no less devastating.  Doyle, a 20 year veteran, excoriates the IMF for failing to provide warnings of the Eurocrisis despite its “long gestation period”. He slams the Fund for becoming more cautious and blinkered.  And the disconcerting thing about this letter is the IMF is the least bad member of the Troika, as least as far as the Euromess is concerned. The IMF was opposed to having the Irish people being saddled with debts incurred by banks that didn’t have state guarantees, but was end run by the ECB, Geither and head of Ireland’s central bank, who also happened to be on an ECB board and one might assume chose to sell out his countrymen in the hopes of improving his career standing outside Ireland. Note that contrary to what took place in Ireland, in which no bank bondholders took a hit, Spanish depositor-stuffees who were encouraged to buy preference shares, a form of equity, will see those holding wiped out, and bondholders will be crammed down. I suggest you read this short letter in full. Peter Doyle Resignation Letter

    It is Now Official – The Eurozone’s Monetary Transmission System is Broken - Under normal conditions, the interestrates that you and I must pay on a home loan, a car loan, our credit card, a business loan are pegged onto two crucial rates. One is the rate that banks charge one another in order to borrow from each other. The other is the Central Bank’s overnight rate. Alas, neither of these interest rates matter during this Crisis. While such ‘official’ rates are tending to zero (as Central Banks try to squeeze the costs of borrowing to nothing), the interest rates people and firms pay are much, much higher and track indices of fear and subjective estimates of the Eurozone’s disintegration.  Following the Crash of 2008, banks stopped lending to each other, fearful that they will never get their money back (as most banks became, in effect, insolvent). Thus, the interestrate at which they lend to one another simply ceased being a meaningful price (just like the prices of CDOs, following Lehman’s collapse, lost their meaning as no one bought or sold those pieces of paper). The truly scandalous aspect of the Libor scandal of recent weeks is that banks continued to use (and ‘fix’) an estimate of the interest rate at which they lent to each other (for the purposes of fixing all other interest rates; e.g. mortgage and credit card rates) when they did not lend to each other any more… The demise of Libor and other measures of inter-bank lending interest rates left us with the official interest rate of Central Banks, like the European Central Bank. Recently, in an acknowledgment of past errors and of the strength of the European austerity-induced recession, the ECB lowered its key interest rate to 0.75% – the lowest level since the euro’s inception. At the same time, the ECB did something else that is extraordinary by its own standards: it reduced to zero the interest rate it paid private banks for depositing money with the ECB.

    Deutsche Bank gets prosecution witness status in rate probe (Reuters) - Deutsche Bank (DBKGn.DE) may escape with a lighter penalty than other banks in Europe if investigators impose fines in the wake of an interest rate-rigging scandal, two sources familiar with the bank told Reuters on Sunday. They said Deutsche Bank has applied to cooperate with authorities in their investigation under the leniency programs of the European Union and in Switzerland, but that it did not mean the bank was admitting any guilt. "The bank last year obtained the status of being a witness for the prosecution in the EU and in Switzerland," one source said. "As a result of that, the bank could get a lighter penalty if a punishment is imposed," another said. German weekly magazine Der Spiegel reported on Sunday that Deutsche Bank's application under the leniency programme had been approved.

    Deutsche Bank Turns Sides, Becomes Rat For The Liebor Prosecution - Escalation. The inevitable collapse of the Prisoner's Dilemma that kept the LIBOR contributors together is occurring rapidly. After Barclays' forced admission and initial fine, the 'he-who-defects-first-wins' strategy has been trumped by Deutsche Bank as they turn all 'Donnie Brasco' on their oligopolistic peers. As Reuters reports this morning "The bank last year obtained the status of being a witness for the prosecution in the EU and in Switzerland," and "as a result of that, the bank could get a lighter penalty if a punishment is imposed," though of course this does not mean they are admitting guilt (sigh). Under the leniency programs of the EU, companies may get total immunity from fines or a reduction of fines which the anti-trust authorities would have otherwise imposed on them if they hand over evidence on anti-competitive agreements or those involved in a concerted practice. How quickly the worm turns when trust leaves the system - the warning the rest of the Liebor contributors - be afraid, be very afraid.

    No unsecured funding please, we’re French - The IMF Article IV report for the UK is as one would expect an interesting and data-packed read. But its messages were well-flagged in the concluding statement after the actual visit, and as the BBC’s Stephanie Flanders notes, the weight of its messages come more from the source than the content, which accords closely with the many critics of the Coalition austerity. So one has to look elsewhere for eye-openers in the report, to which we submit the above figure in Box 1, which shows US money market funding exposures to European banking systems. Note their almost complete disengagement from France over 8 months in 2011, a much sharper withdrawal than any other country (they were already out of the high debt countries before then) and on a scale that looks like Lehman proportions. How was this done without a huge recession in France? Mostly by overseas asset dumps by French banks, but still, this looks like an impressive feat of balance sheet management given its scale. “Headwinds” is a popular phrase, but here there are in real life. Nicolas Sarkozy might wonder about his electoral outcomes had the country bank’s not been navigating these headwinds last year.

    Tax to Double for French With 4 Million Euros Assets -- French residents with assets valued above 4 million euros ($4.9 million) will pay more than double what they had expected in wealth taxes this year, after the country’s parliament voted through an emergency measure to raise €2.3bn for the cash-strapped government. The increase – known as the contribution exceptionnelle sur la fortune – is a stop-gap measure introduced by François Hollande, the new Socialist president, to reverse his predecessor’s move to cut the wealth tax. It is part of a series of taxes being imposed on wealthy citizens and companies that some business leaders claim will drive entrepreneurs and investors abroad. France is also planning a 75 percent tax on salaries above 1 million euros, although Jérôme Cahuzac, budget minister, said this would be revised once the country cleared its debt.

    Wealthy Flee France Top Tax Rate of 75%; Cameron Lays Out Red Carpet - The higher the tax rate, the greater the length people will go to avoid it. France is a case in point. An 'Exodus' of Wealthy1 is underway even before French parliament has passed Hollande's proposed top tax rate of 75%.  The latest estate agency figures have shown large numbers of France's most well-heeled families selling up and moving to neighbouring countries.  Many are fleeing a proposed new higher tax rate of 75 per cent on all earnings over one million euros. (£780,000) The previous top tax bracket of 41 per cent on earnings over 72,000 euros is also set to increase to 45 per cent. Sotheby's Realty, the estate agent arm of the British auction house, said its French offices sold more than 100 properties over 1.7 million euros between April and June this year - a marked increase on the same period in 2011.

    The IMF explodes the myth of fiscal "credibility" - There is a huge amount of interesting material in the full IMF staff report on the UK, released today, in particular the lasting damage ("hysteresis" to economists) done by this prolonged period of very low growth.  But in this post I wanted to draw attention to one particular paragraph (it is para 43 on page 38).   I reproduce it here in full:  Further slowing consolidation would likely entail the government reneging on its net debt mandate. Would this trigger an adverse market reaction? Such hypotheticals are impossible to answer definitively, but there is little evidence that it would. In particular, fiscal indicators such as deficit and debt levels appear to be weakly related to government bond yields for advanced economies with monetary independence. Though such simple relationships are only suggestive, they indicate that a moderate increase in the UK’s debt-to-GDP ratio may have small effects on UK sovereign risk premia (though a slower pace of fiscal tightening may increase yields through expectations of higher near-term growth and tighter monetary policy).  This conclusion is further supported by the absence of a market response to the easing of the pace of structural adjustment in the 2011 Autumn Statement. Bond yields in the US and UK during the Great  Recession have also correlated positively with equity price movements, indicating that bond yields have been driven more by growth expectations than fears of a sovereign crisis.

    The IMF lays bare the dismal failures of Osbornomics - A non-technical summary of Thursday's International Monetary Fund report on the UK economy would be that we are up the creek – "recovery has stalled" – and that we should use any available paddle to head as fast as possible in the opposite direction. "Demand support is needed. Additional monetary stimulus … credit easing measures … increased government spending on public investment." Stop pretending we're on track, and throw the kitchen sink at the economy.Quite right, but not really news: most sensible UK economists have been saying this for some time [FT paywalled link]. It is also noticeable that the IMF refuses to blame everything on the international environment: "The tepid recovery reflects weak and inadequate rebalancing of domestic demand."There are, however, two much more interesting parts to the IMF report. The first is its demolition of the government's argument that this pain was necessary and the alternative would have been worse – that, as George Osborne says, without accelerated fiscal consolidation we would have had higher interest rates and maybe even a debt crisis. This is nonsense: low interest rates reflect not economic confidence but its opposite, and the IMF says so: "Bond yields have been driven more by growth expectations than fears of a sovereign crisis."

    The First World’s Fiscal Follies - The world’s advanced economies remain divided over whether to strengthen budget balances in the short term or to use fiscal policy to promote recovery. Those worried about the short-run contractionary effects on the economy call the first option “austerity”; those concerned about long-term sustainability and moral hazard call it “discipline.” Either way, the debate is akin to asking whether it is better for a driver to turn left or right; depending on where the car is, either choice might be appropriate. Likewise, when an economy is booming, the government should run a budget surplus; when it is in recession, the government should run a deficit. To be sure, Keynesian macroeconomic policy lost its luster mainly because politicians often failed to time countercyclical fiscal policy – “fine tuning” – properly. Sometimes fiscal stimulus would kick in after the recession was already over. But that is no reason to follow a destabilizing pro-cyclical fiscal policy, which piles spending increases and tax cuts on top of booms, and cuts spending and raises taxes in response to downturns. Pro-cyclical fiscal policy worsens the dangers of overheating, inflation, and asset bubbles during booms, and exacerbates output and employment losses during recessions, thereby magnifying the swings of the business cycle. Yet many politicians in the United States, the United Kingdom, and the eurozone seem to live by it. They argue against fiscal discipline when the economy is strong, only to become deficit hawks when the economy is weak.

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