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

Saturday, September 29, 2012

week ending Sept 29

Fed balance sheet contracts in latest week (Reuters) - The U.S. Federal Reserve's balance sheet shrank in the latest week with reduced holdings of agency and mortgage-backed securities despite the central bank's increased bond purchases, Fed data released on Thursday showed. The Fed's balance sheet - a broad gauge of its lending to the financial system - stood at $2.787 trillion on September 26, down from $2.804 trillion on September 19. The Fed's holdings of Treasuries totaled $1.648 trillion as of Wednesday versus $1.646 trillion the previous week. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $834.98 billion, down from $850.14 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $83.41 billion, down from $87.10 billion the previous week. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $43 million a day during the week compared with a $13 million a day average rate the prior week.

H.4.1 Release--Factors Affecting Reserve Balances - September 27, 2012

Goldman Estimate: QE3 could be $1.2 to $2.0 Trillion - A few excerpts from a research note by Goldman Sachs chief economist Jan Hatzius:

• ... We now view the Fed as following a looser version of the “threshold rule” championed by Chicago Fed President Charles Evans.
• What are the thresholds? We read the committee as signaling that the federal funds rate will not rise until the unemployment rate has fallen to the 6½%-7% range. The corresponding threshold for the end of QE3 may be in the 7%-7½% range.
•These implicit commitments are undoubtedly subject to an inflation ceiling ... may be a year-on-year core PCE reading of 2½%-2¾%.
• All this is subject to change ... The flexibility to respond to such changes is a key advantage of keeping the thresholds implicit rather than explicit.
• ... Under the committee’s economic forecasts, we estimate that the funds rate would stay near zero until mid-2015, while QE3 would run through mid-2014 and total $1.2trn.
• Under our own economic forecasts, we estimate that the funds rate would stay near zero until mid-2016, while QE3 would run through mid-2015 and total just under $2trn.
• If the recovery continues to disappoint, additional steps are possible. 

The Fed Has Another $3.9 Trillion In QE To Go (At Least) - Some wonder why we have been so convinced that no matter what happens, that the Fed will have no choice but to continue pushing the monetary easing pedal to the metal. It is actually no secret: we explained the logic for the first time back in March of this year with "Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The logic, in a nutshell, is simple: everyone who looks at modern monetary practice (as opposed to theory) through the prism of a 1980s textbook is woefully unprepared for the modern capital markets reality for one simple reason: shadow banking; and when accounting for the ongoing melt of shadow banking credit intermediates, which continues to accelerate, the Fed has a Herculean task ahead of it in restoring consolidated credit growth. Shadow banking, as we have explained many times most recently here, is merely an unregulated, inflationary-buffer (as it has no matched deposits) which provides the conventional banking credit transformations such as maturity, credit and liquidity, in the process generating term liabilities. In yet other words, shadow banking creates credit money which can then flow into monetary conduits such as economic "growth" or capital markets, however without creating the threat of inflation - if anything shadow banks are the biggest systemic deflationary threat, as due to the relatively short-term nature of their duration exposure, they tend to lock up at the first sing of trouble (see Money Markets breaking the buck within hours of the Lehman failure) and lead to utter economic mayhem unless preempted. Well, preempting the collapse in the shadow banking system is precisely what the Fed's primary role has so far been, even more so than pushing the S&P to new all time highs. The problem, however, as we will show today, is that even with the Fed's balance sheet at $2.8 trillion and set to rise to $5 trillion in 2 years, it will not be enough.

Michael Hudson: QE3 – Another Fed Giveaway to the Banks - In this Real News Network interview, Michael Hudson gives a high level discussion of why the Fed’s claim that QE3 will help employment needs to be taken with a fistful of salt. Hudson highlights an issue that warrants more attention: that the Fed’s action, at this juncture, is clearly political, when the Fed continues to make the empty claim that it is “independent” meaning apolitical. Hogwash. The Fed quit being apolitical under Greenspan, as former Fed economist Richard Alford pointed out in 2008: Compare the behavior of the Chairmen of the 1950s and Volcker to that of Greenspan. Chairman Eccles and McCabe both lost their Chairmanships because they wouldn’t compromise Fed independence. They stood their ground even after being summoned to the White House. Martin, appointed by Truman, was in later life referred to by Truman as “the traitor” presumably for taking the punch bowl away. The public image of Volcker is that of a man who twice a year endured public Congressional assaults, resisted political pressure, and enabled the Fed to stay the course.

Fed joins ECB in a high-risk move -The Federal Reserve has now embarked on a very dangerous strategy, buying $40bn of mortgage-backed securities each month for an indefinite number of years. That could lead to high inflation, to destabilising asset bubbles and to legislative changes that limit the Fed’s future powers. The Federal Open Market Committee has announced that it will continue those purchases for as long as “the labour market does not improve substantially” and will maintain “a highly accommodative stance of monetary policy ... for a considerable time after the economic recovery strengthens”. It specifically noted that its highly accommodative stance would continue at least until mid-2015, implying nearly $1.5tn of increased bank liquidity. Although economic weakness now prevents inflationary price increases, these conditions will not last forever. At some point, demand will increase and companies will recover the ability to raise prices. Such price inflation has historically been associated with tight labour markets and rising wages. But this time the unprecedented high level of long-term unemployment could cause the unemployment rate to remain high even when product markets tighten.  The Fed has locked itself into a policy of monetary ease for as long as the unemployment rate remains high. Although the FOMC said that its policy would be conducted “in the context of price stability”, it is clear that its real focus will be on unemployment.

Fed’s Williams Calls QE3 ‘Essential’ - Saying the Federal Reserve‘s recent decision to add more stimulus to the economy was essential, a top U.S. central-bank official said Monday his institution could do even more if necessary. “We will continue buying mortgage-backed securities until the job market looks substantially healthier,” Federal Reserve Bank of San Francisco President John Williams said. “We might even expand our purchases to include other assets,” the policy maker said in the text of a speech prepared for delivery before the City Club of San Francisco. Mr. Williams, a voting member of the monetary-policy setting Federal Open Market Committee, spoke in the wake of the Fed’s recent decision to launch an open-ended, mortgage-bond-buying program aimed at pushing growth higher. The Fed also extended until mid-2015 its conditional pledge to keep interest rates effectively near zero. In his speech Monday, Mr. Williams expressed his strong support for the action, and said it should help engineer better growth in an environment where uncertainty, as well as worries over U.S. and European government finance, continue to create headwinds. Mr. Williams noted the Fed’s new effort seeks to exploit a bright spot in the economy.

Fed’s Williams: QE3 asset buying may be expanded — The Federal Reserve could expand its stimulus package to include assets other than mortgage-backed securities if the U.S. economy fails to respond to its latest effort to jump-start the economy. “Unlike our past asset-purchase programs, this one doesn’t have a preset expiration date,” said San Francisco Fed President John Williams at a speech at the City Club on Monday. “Instead, it is explicitly linked to what happens with the economy.” At its monetary-policy meeting on Sept. 13, the U.S. central bank said it would buy $40 billion worth of mortgage-backed securities per month as part of a stimulus plan colloquially known as QE3 — for Round 3 of quantitative easing. “We might even expand our purchases to include other assets,” he said. While the Fed is limited to what it can hold on its books, it can increase purchases of U.S. Treasurys, mortgage-backed securities, and debt issued by agencies such as Freddie Mac and Fannie Mac, Williams said. He also suggested that the Fed could extend Operation Twist beyond the end of the year, when it is due to expire, and continue buying longer-term Treasurys if the economic recovery does not make substantial progress.

Fed’s Evans Wants Central Bank to Do Even More - The Federal Reserve should take additional steps to further strengthen its positive effects on the economy, a central bank official said Wednesday, mounting a strong defense of the Fed’s latest bond-buying program. “This was the time to act. With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy of the economy,” said Federal Reserve Bank of Chicago President Charles Evans. Mr. Evans was addressing the Lakeshore Chamber of Commerce Business Expo in Hammond, Ind. He isn’t a voting member of the monetary-policy-setting Federal Open Market Committee this year. The FOMC decided earlier this month to launch an open-ended program to buy $40 billion of additional mortgage-backed securities each month and also extended its guidance to keep short-term interest rates low until mid-2015, a revision from the previously announced late 2014.

Under Ben Bernanke, a more open and forceful Federal Reserve - In what might be his final years as chairman of the Federal Reserve, Ben S. Bernanke is transforming the U.S. central bank, seeking to shed its reclusive habits and make it a constant presence in bolstering the economy.The new approach would make the Fed’s policies more responsive to the needs of the economy — and likely more forceful, because what the Fed is planning to do would be much clearer. A key feature of the strategy could be producing a set of scenarios for when and how the Fed would intervene, which would mark a dramatic shift for an organization that throughout its history has been famously opaque. Bernanke has already pushed the Fed far along this path. The central bank this month pledged to stimulate the economy until it no longer needs the help, an unprecedented promise to intervene for years. That’s a big change from the Fed’s usual role as a curb on inflation and buffer against financial crises. “It’s a re-imagining of Fed policy,” said John E. Silvia, chief economist at Wells Fargo. “It’s a much more explicit commitment than people had thought about in the past. It’s a much stronger commitment to focus on unemployment.”

New Article on QE3, Plus the Kocherlakota Move -- I have a new article on understanding QE3 at The American Prospect which I hope you check out.  I want to note that Narayana Kocherlakota is now in favor of more monetary action. To put this in perspective, here's the September 21st 2011 FOMC statement: "Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time." Kocherlakota also voted against this action in August. A month later, in the November 2nd, 2011 FOMC statement, there was the first dissent on behalf of the unemployed and in favor of more easing during the entire Great Recession. "Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time." Now, almost a year later, Kocherlakota is arguing a version of the Evans rule: "As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent." He explicitly credits Evans with this rule, noting "President Charles Evans of the Federal Reserve Bank of Chicago has also proposed what I’m calling a liftoff plan...Those familiar with his plan will see that my thinking has been greatly influenced by his. This is perhaps hardly surprising, since he sits next to me at every FOMC meeting!"

Another Reason Kocherlakota Changed His Mind - Mr. Kocherlakota cited a paper by Mr. Werning in his speech last week in which he called for strong new commitments by the Fed to keep interest rates low until unemployment has dropped substantially. In an interview, Mr. Kocherlakota said Mr. Werning is a “brilliant economist” and that this paper is “really important.”In the paper, Mr. Werning comes up with some twists on popular academic views about how central banks should behave during a period of economic malaise when short-term interest rates have been pushed to zero. Some economists — going back to Princeton professor and New York Times columnist Paul Krugman in the late 1990s — have argued that in such circumstances central banks should promise to keep interest rates low for a long time in order to promote inflation and prevent deflation. Promoting inflation, they believe, would also prompt people to spend more and support recovery.Mr. Werning agrees with the prescription of low rates for a long time, but has a different view on the reasoning. The point of such a policy isn’t to promote inflation, he says. “The sole purpose is to stimulate a consumption boom,” he says in the paper, arguing that a promise of low rates can spur spending without causing inflation. “Promising zero interest rates can be a good thing even if you are not ready to tolerate higher inflation for some reason,” he elaborated in a follow-up email exchange.

Self-contradictory Fed Bashing - Paul Krugman -- David Glasner continues to be unhappy with the Bernanke/QE bashers, this time going after claims that the Fed’s monetary policy was too easy before the crisis. Much of this discussion is couched in terms of the Taylor Rule, which John Taylor originally suggested — a rule that sets the Fed funds rate based on inflation and either unemployment or some measure of the output gap. This was a clever idea, and has proved useful as a rule of thumb for both description and prediction. But a funny thing happened on the way to the crisis: Taylor and others have elevated this rule to sacred status — and not only that: they have insisted that the original coefficients Taylor suggested, which he basically pulled out of, um, thin air, are sacrosanct. Surely this is silly. The right question should be whether, given the actual state of the economy in the naughties, the Fed should — given what it knew at the time — have raised rates faster. Inflation wasn’t out of control:

Mr. Mental Recession - Paul Krugman - Brad DeLong is upset by the illogic of John Taylor and Phil Gramm’s attack on the Fed. Indeed: it boggles the mind that they believe that a downside of expansionary policy now is that it will require contractionary policy once the economy has recovered. Um, isn’t that exactly what you want monetary policy to do — boost the economy when it’s weak, take away the punchbowl when the party gets going?  But what really boggles my mind is the Romney campaign’s evident belief that it gains credibility by rolling out Phil “Mental Recession” Gramm as a spokesman. Gramm is best known these days for dismissing the risks to the economy when a recession was already underway and a catastrophic crisis was just around the corner, meanwhile denouncing us as a “nation of whiners”. And the Romney people think that putting him out in front makes them more persuasive?

Fed Watch: Gramm and Taylor Don't Get It - Brad DeLong forced it on all of us this weekend, drawing attention to another anti-QE article, this time penned by Phil Gramm and John Taylor. DeLong gets to the heart of the problem. Gramm and Taylor don't seem to realize that the stock of Treasuries is the same regardless of who owns them. What GT see as higher future interest rates would simply be higher current interest rates if the Fed was not temporarily substituting some cash for bonds. DeLong summarizes: So why are Taylor and Gramm arguing that returning interest rates in 2016 and after to what they would have been anyway is a cost to QE III? It's a zero. It's not a change. It simply does not compute. Yet there is still room to build upon DeLong's critique. GT get off to a bad start: That kind of monetary expansion would normally be a harbinger of inflation. However, with banks holding excess reserves rather than lending them out—and with velocity (the rate at which money turns over generating national income) at a 50-year low and falling—the inflation rate has stayed close to the Fed's 2% target..Inflation is not, however, the only cost of these unconventional monetary interventions.

Fed’s Plosser Blasts QE3 - The Federal Reserve‘s new mortgage bond-buying program is unlikely to boost economic growth and risks hurting the central bank’s credibility, Federal Reserve Bank of Philadelphia President Charles Plosser said Tuesday. In his first speech since the Fed’s last policy meeting, Mr. Plosser said he opposed the Federal Open Market Committee’s decision earlier this month to start an open-ended program of buying $40 billion of additional mortgage-backed securities each month. With households still rebuilding their savings, the Fed’s latest effort to lower interest rates even further is unlikely to spur growth or consumer spending, Mr. Plosser said in a speech before the CFA Society of Philadelphia and the Bond Club of Philadelphia. Mr. Plosser believes that the slow growth in the labor market is due to long-term problems that Fed action can’t ease.

Fed’s Plosser: Economy Immune to Fed Stimulus Right Now - A veteran Federal Reserve official argued Thursday that new central bank stimulus efforts are unlikely to spur the growth supporters want, as those same policies further complicate the Fed’s eventual exit strategy. The economy “is not doing as well as anybody would like” and “I think the case is pretty clear we are in a funk” as households cut debt and companies hunker down in the face of pervasive uncertainty about the future, Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with Dow Jones Newswires. Given what ails the nation, “I am really dubious” stimulus now being provided by the Fed is “really going to have very much effect on the real aspects of our economy, mostly employment and real growth,” Plosser said.

Fed’s Fisher says U.S. “drowning in unemployment” (Reuters) - The United States is "drowning in unemployment," its economy is running at stall speed and inflation is "not a problem," but easier monetary policy is not the answer, one of the Federal Reserve's most hawkish policymakers said on Friday. "We've had a recovery that is quite disappointing," Dallas Fed President Richard Fisher told a group at the University of Texas at Dallas. But without more certainty on tax policy and regulation, he said, "all the monetary accommodation in the world" will not get businesses hiring again. The Fed this month said it would buy $40 billion in mortgage-backed securities each month to in an effort to boost employment, and pledged not to stop buying until the labor market improves substantially, as long as inflation remains under control. The idea behind the program, known as quantitative easing, is to push down borrowing costs for home purchases and other investments, freeing up household cash. With consumers spending more, businesses are expected to boost hiring to meet the demand. The trouble with that logic, Fisher said on Friday, is that businesses cannot make decisions about hiring as long as tax policy is in the air. Of particular concern is a raft of spending cuts and tax increases dubbed the 'fiscal cliff' that looms at the end of the year. "A short-term fix to the fiscal cliff will do nothing but push out the envelope of indecision and we will continue to be plagued by high unemployment," Fisher said. Unemployment has been above 8 percent for more than three years; inflation is currently below the Fed's goal of 2 percent.

Bernanke declares war on Canadian economy - Did you smile or cheer when U.S. Federal Reserve Chairman Ben Bernanke announced Quantitative Easing III (and the markets went up)? He just declared war on your job, and the whole Canadian economy. Of course, so did the European Central Bank, the central bank of the Peoples' Republic of China and others. All of them are engaged in the same practice. They're printing money. Gobs of it, in programs that have no end point. For a country like Canada, with an economy in reasonably good shape, a government that's not out of control, banks that are healthy and dependent on exports, it's a declaration of war. The game everyone else is playing is "beggar thy neighbour." All this excess cash, whatever its stated purpose, is designed to bring their currencies down. Well, we could play the game: Mark Carney could drop our interest rates to zero, and print money like it's going out of style. The government could launch a larger Economic Action Plan II and rack up the deficits. Both would lower the Canadian dollar. It would also send the price of a litre of gasoline and a week's groceries through the roof - food and fuel have gone up 35 to 40 per cent in the countries that are playing the "print and hope" game -- and anyone living on a fixed income, or anyone planning to collect their pension, would be in deep trouble. It's hard to live on zero interest.

 When Central Bankers Attack: Why Ben & Co. Can’t Save the Global Economy -With the global economy still struggling to emerge from the Great Recession, the world’s central bankers have stepped in yet again in an attempt to spur growth and strengthen the recovery. In mid-September, the Federal Reserve announced it would extend its bond-buying program to bring down long-term interest rates and stimulate investment and employment. Federal Reserve Chairman Ben Bernanke said the effort, being called QE3, will “employ our policy tools as appropriate” until the U.S. finally sees a jobs recovery. In Europe a few days before, European Central Bank President Mario Draghi inserted himself to ease the eurozone’s debt crisis. He announced a potentially unlimited program to buy one-to-three year sovereign bonds from debt-burdened eurozone governments which agree to a European Union budget-cutting conditionality program.. In Japan, the central bank surprised markets and followed the Fed by expanding its asset-purchasing scheme to boost a sagging Japanese economy. “The BOJ deemed it necessary to act so that Japan’s economy will not be derailed from a track toward sustainable growth,” Bank of Japan Governor Masaaki Shirakawa said.  Give Ben, Mario and Masaaki credit where it is due: At least they are trying to do something to help the global economy. Markets have cheered their perseverance. Yet this good feeling is unlikely to last for very long. The reality is that central banks cannot on their own solve the problems of the world economy – stamp out unemployment, restore healthy growth or rescue the euro – with the tools available in their toolbox. Not even the bankers themselves believe they can. Bernanke himself admitted that the Fed lacks “tools that are strong enough to solve the unemployment problem.” In Europe, the difficulties facing the monetary union are so deep that Draghi can do little more than smooth them over, not actually resolve them.

Central Banks on the Offensive? - It looks like a coordinated offensive: on September 6, the European Central Bank outlined a new bond-buying program, letting markets know that there were no pre-set limits to its purchases. On September 13, the United States Federal Reserve announced that in the coming months it would purchase some $85 billion of long-term securities per month, with the aim of putting downward pressure on long-term interest rates and supporting growth. Finally, on September 19, the Bank of Japan declared that it was adding another ¥10 trillion ($128 billion) to its government securities purchase program, and that it expected its total holdings of such paper to reach about $1 trillion by end-2013. There is, indeed, room for such concerted action, as the outlook for all three economies has deteriorated significantly. In the eurozone, GDP will certainly decline in 2012, and forecasts for next year are mediocre at best. In the US, output continues to expand, but at a moderate 2% pace; and, even leaving aside the fiscal cliff looming at the end of the year, when Congress will be forced to impose spending cuts and allow tax cuts enacted in 2001 to expire, recovery remains at risk. In Japan, the global slowdown and a stronger yen are hitting the export sector, growth is flagging, and inflation is close to zero again. The reality, however, is that there is no common stance, let alone a common plan. In the strongest of the three economies, the Fed is willingly risking inflation by pre-announcing its intention to keep the federal funds rate at exceptionally low levels “at least through mid-2015.” In the weakest of the three, by contrast, the ECB has no intention of boosting growth through quantitative easing or interest-rate pre-commitments. On the contrary, the ECB is adamant that the only aim of its “outright monetary transactions” (OMT) program is to contain the currency-redenomination risk that contributes to elevated interest rates in southern European economies.

Let’s not get ‘carried away’ by Bernanke’s latest twist - Ben Bernanke. chairman of the US Federal Reserve, should be applauded for boldly putting employment over price stability in his latest move to keep interest rates low and to purchase mortgage-backed securities. Bernanke’s critics (and Bernanke himself) have rightly said that monetary policy is not enough, however. To truly generate employment-led growth in the US, those critics say more fiscal policy is needed. There is also a need for stronger financial regulation in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries—speculation that can wreak havoc on developing countries’ financial systems and growth prospects. Such was the case during previous rounds of interest rate declines and quantitative easing in the US, and could occur again. Investors may choose not to go down Bernanke’s path but rather to use the carry trade to speculate on foreign currencies. The carry trade is a strategy where investors borrow in low interest rate countries and invest in higher interest rate countries with the “carry” being the difference between the two rates. Profits can increase by orders of magnitude if investors are significantly leveraged and bet against the funding country and on the target country currency. Earlier this year, the IMF reported that lower interest rates in the US and higher economic growth in emerging markets were associated with a higher probability of a capital inflow “surge”.  The IMF’s 2011 World Economic Outlook report documents how a “sudden stop” in capital flows can unwind emerging markets and developing economies as well. They show that a 5 basis point increase in US rates could cause capital flight worth 0.5-1.25 per cent of GDP out of the developing world.

A Layman's Guide To QE And ZeroP - Let us first examine the unequivocal effects of QE and zero percent interest rates (QE and ZeroP).

1. QE and ZeroP forces people out of savings accounts and CD's, and into riskier assets, thus driving up asset prices, making bank balance sheets look better, and enriching those with assets. This is particularly problematic for people who are retired or are close to retirement and for people who are risk-averse.
2. QE and ZeroP will ultimately produce some measure of inflation, which will induce people into spending money now because tomorrow goods will cost more.
3. QE and ZeroP enables banks to borrow for free so they can buy treasuries and earn risk-free money – thereby facilitating their eventual return to some measure of solvency.
4. Equity prices move up every time Ben Bernanke announces a QE… regardless of whether it has any positive effect on the real economy. At a minimum this makes Americans feel more secure about their future and the future of the country. And it provides Ben Bernanke with a shot at continuing to occupy his position as one of the most powerful men in the world.
5. Inflation and currency debasement means that our international debt is diminishing in real terms; a 10% decline in the value of the US dollar means that China is going to get paid back 10% less of what they are owed.

6. QE and ZeroP rewards speculators and penalizes savers.

Facts for James Bullard - St. Louis Fed President James Bullard just delivered a speech where he claims that U.S. monetary policy has been stellar over the past four years.  In fact, he says monetary policy was "close to optimal." Yes, I about chocked too after reading that line.  His view is that (1) the Fed kept the price level on its long run trend and that (2) there was a reduction in U.S. potential output that undermines that case for looking at NGDP being below trend.   Consequently, there is nothing to the claims of insufficient aggregate demand.  It is all structural, end of the story.   This is not the first time Bullard has made claim (2), but it is the first time he has combined it with the claim that the Fed has been doing a fine job since 2008.  Scott Sumner has already responded and I am sure others will too.  My response to Bullard is that your theory cannot explain an important development that have been ongoing since 2008: the elevated demand for liquidity.  If we are simply on a new growth path and the Fed has done a fine job with monetary conditions, then why is the demand for safe assets still so pronounced?  Below are five facts about this ongoing demand for liquidity:

Fed Watch: Why I Agonize About The Zero Bound. - It's really no secret that I believe that the faster we normalize interest rates, the better. Such a goal should appeal to those who believe current monetary policy is reckless. To be sure, the Fed's forecast that the US economy will be stuck at the zero bound into 2015 does not leave me filled with confidence; the risks are all too high that the economy will experience a recession before then. But I very much doubt the Fed can simply raise interest rates to normalize the yield curve. That would simply invert the yield curve, and such inversion is a harbinger of recession. As long as the economy is operating at sub-optimal levels, monetary policy will be constrained by the zero bound. To lift the economy well clear of the lower bound, we need greater cooperation between fiscal and monetary authorities. I suspect this will require making explicit what is often viewed as crazy but many would argue is already implicit in recent policy, the monetization of some fiscal spending.Japan serves as a role model for the zero bound problem. As Paul Krugman notes, fiscal policy has been effective in staving off the worst consequences of the Japanese financial crisis. But the associated fiscal deficits appear never ending; the Japanese economy never gained enough strength to eliminate the dependency on fiscal stimulus, leading to what looks like an excessive build-up of government debt that now exceeds 200% of GDP. We frequently see concerns that a build-up of government debt will lead to a new Japanese financial crisis. Peter Boone and Simon Johnson are the latest addition to that long line of thought.

The Fed Is Systematically Destroying Social Security And The Retirement Plans Of Millions - Last week the mainstream media hailed QE3 as the "quick fix" that the U.S. economy desperately needs, but the truth is that the policies that the Federal Reserve is pursuing are going to be absolutely devastating for our senior citizens. By keeping interest rates at exceptionally low levels, the Federal Reserve is absolutely crushing savers and is systematically destroying Social Security.  Meanwhile, the inflation that QE3 will cause is going to be absolutely crippling for the millions upon millions of retired Americans that are on a fixed income. Sadly, most elderly Americans have no idea what the Federal Reserve is doing to their financial futures. Most Americans that are approaching retirement age have not adequately saved for retirement, and the Social Security system that they are depending on is going to completely and totally collapse in the coming years.  Right now, approximately 56 million Americans are collecting Social Security benefits.  By 2035, that number is projected to grow to a whopping 91 million.  By law, the Social Security trust fund must be invested in U.S. government securities.  But thanks to the low interest rate policies of the Federal Reserve, the average interest rate on those securities just keeps dropping and dropping.

The Greatest Trick The Devil Ever Pulled -  Never try to teach a pig to sing, advised Robert Heinlein. It wastes your time and it annoys the pig. Similarly, never try to convince a central banker that his policies are destructive. After five years of enduring crisis, market prices are no longer determined by the considered assessment of independent investors acting rationally (if indeed they ever were), but simply by expectations of further monetary stimulus. So far, those expectations have not been disappointed. The Fed, the ECB and lately even the BoJ have gone “all- in” in their fight to ensure that after a grotesque explosion in credit, insolvent governments and private sector banks will be defended to the very last taxpayer. Conventional wisdom is that such moves are justified during this period of economic slowdown, as everyone agrees that the market is ’deleveraging’. But as the consistently excellent Doug Noland points out, this idea of deleveraging (i.e. reduction of available credit) in the US is a myth. In the second quarter of this year:

  • - Consumer credit in the US grew by 6.2%, the highest pace in nearly five years;
    - US non-financial credit market debt grew by 5%, the highest pace in nearly four years;
    - Total household debt increased 1.2%, the highest pace in over four years;
    - US Treasury debt has increased 110% in four years;
    - After contracting by 1.2% in the first quarter, state and local borrowing is now up 0.8%

Is QE3 working? What the markets are telling us about the Fed’s move. - The Federal Reserve’s decision Sept. 13 to intervene in markets on an unlimited scale until the economy gets on track has drawn plenty of debate and analysis. But what do we know now about whether it is working? The ultimate goal of the “QE3” policy, as the third round of “quantitative easing” has become widely known, is to bring joblessness down to more reasonable levels without allowing inflation to get out of control. Only with time will we know whether Fed Chairman Ben S. Bernanke and the Fed’s policy committee have threaded that needle correctly.  But the new Fed policy tools work through some very specific mechanisms, many of which can be measured by what is happening in financial markets. In that sense, we can get some early returns on how QE3 is affecting the economy, for good or ill. I’ll give each one a letter grade, depending on how well that measure is fulfilling the Fed’s goals so far.

Counterparties: Is QE3 working? - Last week, noted inflation hawk and Minneapolis Fed President Narayana Kocherlakota changed his tune and spoke out strongly in favor of keeping interest rates extraordinarily low until at least mid-2015. Now, the president of the Philadelphia Federal Reserve, Charles Plosser, has joined his Dallas counterpart in criticizing the Fed’s latest round of monetary stimulus. Adam Davidson joins Plosser in diagnosing rising savings and a lack of household spending as a key dynamic holding back the economy. Ultimately, though, he comes down on the side of monetary action, despite the risks of unintended consequences. Similarly, Tim Duy doesn’t believe the severity of the crisis should be an excuse for inaction. “Bottom line,” he writes, “policy is effective even in the aftermath of a financial crisis. Don’t let policymakers fool you into believing otherwise”.The Washington Post’s Neil Irwin plays QE3 professor and gives Dr Bernanke an A- on inflation expectations but only a C+ on mortgage rates. The problem, Irwin writes, is that markets had already priced QE3 into mortgages rates. Now banks are “cutting the mortgage rates they charge customers only gradually; if the banks slashed rates too fast, they would be overwhelmed by the demand from Americans looking to refinance or buy a home and would not be able to handle the load”.QE3 is also weakening the dollar relative to the euro, according to Barclays’ research team. But that’s not necessarily a bad thing: It makes US products more attractive on the global market.

Credit markets reversing post-QE3 euphoria - In a sharp correction during the past couple of days the HY bond market erased most of the post-QE3 announcement gains. As discussed before (see post), it was clear that the HY marked was frothy going into the Fed meeting, and now asset allocators are starting to come to grips with the fact that it's gotten even richer. HY CDX and HY ETFs (HYG, JNK) sold off sharply (HY CDX is down 2% in the past 2 days). The realization is setting in that the Fed bringing mortgage rates to new lows (national average is now at an all-time low of 3.46%) is going to do little to improve the US economy (see discussion) and corporate profits. And some of the Fed members agree with this assessment.MarketWatch: - “We are unlikely to see much benefit to growth or employment from further asset purchases,” said Charles Plosser, the president of the Philadelphia Fed Bank, in a speech to financial market trade groups in Philadelphia. The reversal in the credit markets is also visible in the investment grade space. IG CDX has reversed most of the QE3-driven tightening.

Traders Have A New Fear About How QE Won't 'Work - Given that the market has given up nearly all of its post-QE gains, this is a really interesting comment from Dan Greenhaus at BTIG: ...several clients have expressed a “fear” of sorts that this round of QE will fail to impact asset prices in the way it is perceived to have done in the past. This echoes something we wrote about last weekend, in suggesting that the market's moves were much more about fundamentals than QE: If you think that this market is fundamentals driven, then it means that if the data turns sour (certainly possible) the market could easily tumble in spite of the loose Fed policy. Not only that, it's easy to imagine a downturn in the data accompanied by a feeling that the Fed had already fired bazooka, leading to the conclusion that there was no ammo left anywhere to address the economy, thus causing market panic. We're not saying this will happen, but it would not be a total surprise. Ultimately, it's probably way premature to start declaring verdicts on QE's effects on the market or the economy. Greenhaus points to this chart showing the performance of markets 70 sessions prior to QE2 and QE3, showing that basically the behavior of the market has been the same.

Fed Buys $20 Billion In QE3 Mortgages; Jobs Created: Zero - Yesterday, the Fed reported the first $20.1 billion in net, non-rolling purchases of MBS eligible under QE3 (consisting of FHLMC, FNMA, GNMA and GNMA2, most likely the bulk of them coming out of a certain office in Newport Beach which has decided to start locking in its monster profits for the year after getting QEternity spot on). End result: jobs created or saved zero. But at least we got the first recessionary PMI print, and an employment component that was the lowest since March 2010. When in doubt who can destroy the economy the best, just leave it to Benver.

Mortgage-Bond Selling Shows Anxieties Despite Fed Support - Two weeks ago, the Federal Reserve‘s brash new quantitative easing program left its primary target, the $5 trillion market for mortgage-backed securities, brimming with enthusiasm. But the optimism–following some estimates for nearly $1 trillion of MBS purchases over an open-ended period–has bowed to new anxieties that promise to make what seemed an obvious trade a rocky ride. After posting its biggest rally in more than four years directly following the QE announcement, the market since Tuesday has given back a chunk of those gains as money managers unwound trades put on months ago in anticipation of the Fed’s move. To be bullish makes sense with such a big buyer showing up each trading day. On Thursday, the Fed reported a net $20.1 billion in purchases for the past week, signaling a monthly pace that may exceed the $65 billion to $70 billion estimated by analysts after the Fed announced its program on Sept. 13.

Tiresome QE III and bond rates update -- I decided to graph the 3 year Tresury constant maturity interest rate.  The logic is that I don't believe the current FOMC can plausibly precommit to policy more than around three years from now.  Most members' terms end in January 2016. Bernanke's term ends 2014 and there is no way Republicans will allow an up or down vote on reconfirmation (I guess he will be acting Fed chairman for a while).  So I made a graph from Sept 1 2012 on.  I didn't remember that QE III was announced on September 13th.  I looked at the graph.  I had no idea whenthe huge signal about future monetary policy became public. To make the graph less boring and more like my older discussion, I added the 5 year constant maturity rate.  This shows a modest decline on the 13th entirely reversed on the 14th.   I am trying to assess the forward guidance effect of QE III and not at all the portfolio balance effects.  This means that I absolutely am not claiming QE III was a flop.  I don't think that, I think it is working very well.  I try to explain myself after the jump

Fed Watch: Excuses Not To Do More - Josh Lehner (via CR) reviews some of his earlier work on the Reinhart and Rogoff results and concludes: ...when the Great Recession is compared not to other U.S. cycles but to the Big 5 financial crises and the U.S. Great Depression (thanks to U.S. Treasury for adding that to the graph), the current cycle actually compares pretty favorably. This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009. While the initial path of both the global and U.S. economies in 2008 and 2009 effectively matched the early years of the Great Depression – or worse – the strong policy response employed by nearly all major economies – both monetary and fiscal – helped stop the economic free fall. This is worth highlighting because of the eagerness of policymakers to embrace Reinhart and Rogoff as an excuse to avoid fiscal and monetary policy. For instance, see St. Louis Federal Reserve President James Bullard in the Financial Times: Some may argue that real output and employment in the US have not returned to the pre-crisis, bubble-induced path that seemed to prevail in the mid-2000s. Indeed, US employment is about 4.7m lower than at its peak in January 2008. But this is to be expected. Recoveries in the aftermath of financial crises tend to be especially protracted, as the work of Carmen Reinhart and Kenneth Rogoff has documented.  Bullard sees Reinhart and Rogoff as an excuse to do nothing. After all, why even try when history has proved the long-lasting impact of financial crises? Bullard completely misses the alternative argument - that if financial crises are long-lasting, then the policy response needs to be more aggressive.

How Is Quantitative Easing Going To Get People Borrowing? - A lot of people have already weighed in on the Fed's latest course of action, QE3. I'm going to throw my two cents in as well, because I don't think some things are being taken into account with respect to monetary policy that need to be. Honestly, I didn't want to have to write this, but given the nature of the discussion taking place, there are some things that need to be considered, even though we should already know how this story goes. Here's the key snippet from the Fed's announcement where they do their level best to take the Foo Fighters' lyrics and apply it to monetary policy: If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. Based on that statement, it's obvious the money and bond markets will be subjected to QE beatings until morale improves. Time horizons and exit strategies be damned. How will the Fed know when they've done their job and won't need to do more? They're using the old definition applied to pornography: They'll know it when they see it. It's ironic -- and hilarious -- that for all the Fed's models and their data-intensive approach to understanding the economy, they're going to eyeball the success of this program. What strange times we live in.

Democracy’s Burning Ships - Since the late 1970’s, the academic diffusion of game theory has led macroeconomists to emphasize the importance of “commitment,” a strategy that aims to enhance long-term economic outcomes by restricting policymakers’ discretion. One of the earliest applications of this strategy to economic policy is in the design of central banks. Monetary policymakers, the argument goes, should be independent from the political system, because, when elections near, politicians will likely pressure them to “buy” temporarily higher employment at the cost of permanently higher inflation. To prevent this inefficient trade off, governments should tie central bankers’ hands by insulating them from political influence.Many macroeconomists attribute the sustained decline in inflation since the early 1980’s to the widespread use of this strategy. And, encouraged by its success, policymakers started applying it elsewhere. Financial liberalization was sold as a commitment to follow market-friendly policies. If a future government deviated from the policy, capital flight would bring it to its knees. The same applies to extensive government borrowing from abroad, to currency boards, even to currency unions. The creation of the euro is nothing but an extreme form of commitment: European governments tried to lash themselves to the German mast of fiscal discipline.

When Would Bernanke’s Successor Raise Rates? -- Larry Meyer, a former Federal Reserve governor, makes his living these days forecasting the economy — and predicting what and when the Fed will do next. With Ben Bernanke’s term as Fed chairman ending in January 2014, he and other Fed watchers are pondering who is likely to succeed him, assuming Mr. Bernanke isn’t offered or doesn’t accept a third four-year term. That choice, of course, turns on the outcome of the November election. Although no one really knows whom Mitt Romney would actually consider, his list is widely regarded to include economists Glenn Hubbard of Columbia University, Greg Mankiw of Harvard University and John Taylor of Stanford University, all of whom have had jobs in Republican administrations. Barack Obama’s list is widely regarded to include Janet Yellen, the Fed’s current vice chairman, as well as Lawrence Summers, who is now back at Harvard University after a stint in the Obama White House, and Roger Ferguson, a former Fed vice chairman now head of TIAA CREF. Three of these — Mr. Taylor, Mr. Mankiw and Ms. Yellen — have been specific enough about rules for setting interest rates that Mr. Meyer thinks he can predict when they would raise interest rates, if the economy performs at the latest Federal Open Market Committee forecasts. The Fed has said it doesn’t plan to raise rates until mid-2015. But, according to Mr. Meyer’s calculations, Mr. Taylor — author of a famous Taylor Rule for monetary policy — already would have raised rates: He would have boosted them in the first quarter of 2012

The Macroeconomic Effects of Interest on Reserves - NBER - This paper uses a New Keynesian model with banks and deposits to study the macroeconomic effects of policies that pay interest on reserves. While their effects on output and inflation are small, these policies require major adjustments in the way that the monetary authority manages the supply of reserves, as liquidity effects vanish in the short run. In the long run, however, the additional degree of freedom the monetary authority acquires by paying interest on reserves is best described as affecting the real quantity of reserves: policy actions that change prices must still change the nominal quantity of reserves proportionally.

Former NY FED President McDonough is worried about your $4 million - At my table was William F. McDonough, president of the New York Fed from 1993 to 2003. That meant he was vice chairman and a permanent member of the Federal Open Market Committee (FOMC), which formulates U.S. monetary policy.Earlier he spent 22 years at First Chicago Corporation and its bank, First National Bank of Chicago, retiring in 1989 as vice-chairman of the board and a director of the corporation. McDonough is a banker’s banker. In the course of the lunch conversation, I mentioned that I’d heard a lecture from some new breed economists who said that the political issue of the deficit was not real because the U.S. could print as much money as it needed. The only problem might become one of inflation. But in the meantime, without sufficient government spending to deal with the economic crisis, people’s lives were being ruined because they didn’t have jobs.McDonough’s reaction was that inflation was indeed a serious problem. Obviously more so than I realized. He explained, “If you had $4 million, inflation might reduce that to $1 million.”To me that said everything. $4 million? Where in the world would I get $4 million? Or $1 million? And how would any struggling unemployed worker ever have seen that kind of money?It said to me that people like McDonough care a lot about the people with $4 million (the 1%) and are relatively uninterested in the problems of the rest of us, including the long-term unemployed.

Why QE Won't Create Inflation Quite As ExpectedThe Fed can create money but if it doesn't end up as household income it is "dead money." In the consensus view, the Federal Reserve's unlimited quantitative easing (QE3) programs will do two things: 1) boost stocks and other "risk on" assets and 2) generate inflation. The two follow-on effects are related, of course; gold and other hard assets are rising in anticipation of higher inflation. But all is not quite as it seems when it comes to the inflationary effect of creating money. Add all this up and here's what we get: money is not just being created by the Fed, it's being destroyed by declines in asset valuations and writedowns of impaired debt. Money velocity is plummeting and banks are hoarding Treasuries as much-needed collateral. As for the "wealth effect," it only affects the 5% who own enough equities to make a difference. That narrows the whole "wealth effect" to 7 million people out of 142 million workers.

Moody’s: Don’t Blame the Fed for Commodity Prices - The tendency of industrial commodity prices to be bid higher in immediate response to actual or prospective monetary stimulus is a relatively new phenomenon, says Moody’s Analytics. Speculators respond to monetary stimulus by purchasing industrial commodities on the premise that it will succeed at boosting both expenditures and price inflation in general, Moody’s says. Once it becomes apparent such assumptions aren’t being realized, commodity prices sink. “There is no guarantee that Fed stimulus will rouse expenditures by enough to support elevated commodity prices,” Moody’s says. “Regardless of how elegant the theoretical underpinnings might be, speculation is just that.”

 Fed's Williams: Economic Outlook - From San Francisco Fed President John Williams: The Economic Outlook and Challenges to Monetary Policy. A few excerpts:  I anticipate the economy will gain momentum over the next few years. I expect real gross domestic product to expand at a modest pace of about 1¾ percent this year, but to improve to 2½ percent growth next year and 3¼ percent in 2014. With economic growth trending upward, I see the unemployment rate gradually declining to about 7¼ percent by the end of 2014. Despite improvement in the job market, I expect inflation to remain slightly below 2 percent for the next few years as increases in labor costs remain subdued and public inflation expectations stay at low levels. Of course, my projections, like any forecast, may turn out to be wrong. That’s something we kept in mind when we designed our new policy measures. Specifically, an important new element is that our recently announced purchase program is intended to be flexible and adjust to changing circumstances. Unlike our past asset purchase programs, this one doesn’t have a preset expiration date. Instead, it is explicitly linked to what happens with the economy.  This approach serves as a kind of automatic stabilizer for the economy. If conditions improve faster than expected, we will end the program sooner, cutting back the degree of monetary stimulus. But, if the economy stumbles, we will keep the program in place as long as needed for the job market to improve substantially, in the context of price stability. Similarly, if we find that our policies aren’t doing what we want or are causing significant problems for the economy, we will adjust or end them as appropriate.

The Financial Crisis and Inflation Expectations - - SF Fed - Beyond keeping current inflation low, successful monetary policy is also able to manage expectations about the future rate of inflation. A major financial crisis, such as that of 2008–09, can be considered a natural test of this anchoring. This Economic Letter examines how household inflation expectations have evolved since the beginning of the financial crisis in the United States and the United Kingdom. In the United States, long-term expectations have been well behaved relative to short-term expectations since the crisis began. By contrast, in Britain, both short- and long-term inflation expectations have been elevated.

After Brief QE3 Fever, Inflation Expectations Cool - Longer-term inflation expectations are pulling back again after a brief run-up driven by the Federal Reserve‘s latest bond-buying program. The 10-year break-even rate, the yield difference between a 10-year Treasury note and 10-year TIPS, jumped to 267 basis points, or 2.76 percentage points, — the highest since May 2006 — after the QE3 announcement. That suggested investors expected the U.S. inflation rate to average 2.67% on an annualized basis within a decade. Yet the rate has since pulled back to 244 basis points Wednesday as doubts have mounted over whether the Fed’s stimulus will be effective. The 10-year break-even rate is now close to the 238 basis points where it stood before the Fed’s QE3 release.

 Questions about TIPS - The 10 treasury bond is yielding around 1.7% (none of what follows relies on the exact values of the numbers). The 10 year TIPS yield is around  -.7%.  So a common calculation of inflation expectations, so called break-even inflation is at 2.4%. From this information, I arrive at two important (at least to me) questions: (1) Is this a reasonable measure of inflation expectations and (2) If so, what does it mean about the economy? I question (1) because of concerns about the lack of liquidity in the TIPS market, the old issues of market segmentation, and just generally because equilibrium conditions in financial markets that aren’t enforced by pure arbitrage don’t actually seem to hold in the data. I did a bit of research and found a couple Fed branch bank papers on the topic (see here and here).  Both papers conclude (if I am reading them correctly) that the break-even inflation calculation of inflation expectations probably understates expected inflation! So that leads to question 2. If Inflation expectations are above 2.4%, but the 10 year treasury is yielding 1.7%, why are people holding 10 year treasuries? Because the equilibrium real interest rate on safe securities is negative, like around -1.0%? 4 years after the crisis, risk aversion is so high that people are willing to accept a negative return for in exchange for safety? So either the supply of safe assets is very small, or the demand for safe assets is overwhelmingly high?

Personal Consumption Expenditures: Price Index Update - The monthly Personal Income and Outlays report for August was published today by the Bureau of Economic Analysis. The first chart shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. The latest Headline PCE price index year-over-year (YoY) rate of 1.49% is an increase from last month's 1.29%. The Core PCE index of 1.58% is a decrease from the previous month's 1.64%. I've calculated the index data to two decimal points to highlight the change more accurately. It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision and the annual revision reaches back three years). But PCE is a key measure of inflation for the Federal Reserve, and the price increase in oil and gasoline, although now well off their interim highs, puts consumer behavior in the spotlight.  In the past, a core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve's price-stability mandate. However, the Fed has now explicitly identified 2% as the long-term target: (See the January Press Release here.)  For a long-term perspective, here are the same two metrics spanning five decades.

Two Measures of Inflation: New Update - The BEA's Personal Consumption Expenditures Chain-type Price Index for August, released today, shows core inflation below the Federal Reserve's 2% target at 1.49%. The Core Consumer Price Index, also data through August, is closer to the target at 1.91%. The Fed, of course, is on record as using PCE as its primary inflation gauge.The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate.. [Source]   The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 1.08% was an all-time low. However, we have seen a significant divergence between the headline and core numbers for both indicators, especially the CPI, at least until a few months ago, when energy prices began moderating. The latest headline CPI and PCE are both well off their respective interim highs set in September. This close-up comparison gives us a clue as to why the Federal Reserve prefers Core PCE over Core CPI as an indicator of its success in managing inflation: Core PCE is lower than Core CPI and less volatile. Given the Fed's twin mandates of price stability and maximizing employment, it's not surprising that the less volatile Core PCE is their metric of choice.

The Money Confusion - The always-brilliant J. W. Mason’s response to what in my opinion is a quite befuddled Mike Beggs review in Jacobin of David Graeber’s Debt: The First Five Thousand Years prompts me to tackle a subject that I’ve been worrying at for a long time: Money. I’ve been worrying at it despite (or because of) endless reading spanning centuries of money thinkers, reading that has brought me to the conclusion that economists don’t have an even-vaguely coherent or agreed-upon definition of what money is. No: saying that it “serves three purposes” — store of value, means of exchange, and unit of account — does not a definition make. Not even close. In my opinion, that fumbling tripartite stab at something vaguely definition-like actually takes us farther from, and obfuscates, any useful definition. It’s not uncommon to find leading economists of all stripes — even deep money thinkers like Randall Wray — using vague, quasi-technical terms like “moneyness” and “money-like.” They don’t seem to have a tight technical definition that they can rely upon others to understand and use synonymously. cf., Decades, centuries of inconclusive argument on the proper definition(s) of “the money supply,” and the various definitions thereof. What is arguably the most important word in economics remains undefined or at best variously and inconsistently defined — and used.

How Big Is the Output Gap? More Perspectives from Our Business Inflation Expectations Survey - Atlanta Fed's macroblog -- Opinions vary widely about how much slack there is in the economy these days. Some say a lot—some say not so much. Last month, we reached out to members of our Business Inflation Expectations (BIE) panel for their take on the issue. The panel indicated they had more pricing power in August than they did last October. OK, that doesn't exactly gauge the amount of slack businesses think they have, but it does suggest that, however much slack there is, it's been shrinking. Another detail revealed by our August inquiry was that retailers think they have more pricing power compared with manufacturers—a pretty good sign the latter is experiencing more slack than the former. In this month's BIE survey we went fishing in the same murky waters, but this time we took a more direct approach. We asked our panel to provide a percentage estimate of how far their sales levels are above/below "normal." Here's what we found: On a gross domestic product (GDP)–weighted basis, the panel estimates that current sales are about 7.5 percent below normal. That's more slack than the conventional estimates, like the Congressional Budget Office's (CBO) measure of the GDP gap, which puts the economy about 6 percent under its potential.

Chicago Fed: Economic Activity Weakened in August - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Weakened in August Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to –0.87 in August from –0.12 in July. All four broad categories of indicators that make up the index deteriorated from July, with each making a negative contribution to the index in August.  The index’s three-month moving average, CFNAI-MA3, decreased from –0.26 in July to –0.47 in August—its lowest level since June 2011 and its sixth consecutive reading below zero. August’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.  This suggests growth was below trend in August.

Chicago Fed: Economic Activity Weakened in August - According to the Chicago Fed's National Activity Index, August economic activity weakened from the previous month. The indicator and its 3-month moving average have been negative (meaning below-trend growth) for the past six months, and the data revisions have worsened the all-important 3-month moving average from last month's -0.26 to -0.47. Here are the opening paragraphs from the report: Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) decreased to -0.87 in August from -0.12 in July. All four broad categories of indicators that make up the index deteriorated from July, with each making a negative contribution to the index in August.  The index's three-month moving average, CFNAI-MA3, decreased from -0.26 in July to -0.47 in August—its lowest level since June 2011 and its sixth consecutive reading below zero. August's CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

Understanding the CFNAI Components - The Chicago Fed's National Activity Index, which I reported on earlier today, is based on 85 economic indicators drawn from four broad categories of data:

  • Production and Income
  • Employment, Unemployment and Hours
  • Personal Consumption and Housing
  • Sales, Orders, and Inventories

The complete list is available here in PDF format. A chart overlay of the complete 45-year span of all four categories, even if we use the three-month moving averages, is a bit challenging for visual clarity:  So here is a close-up view since 2000:  But a snapshot of the 21st century contains only two recessions, so it's unclear how the individual components have behaved in during the seven recessions since the 1967 starting point for this data series. Here is a set of charts showing each of the four components since 1967. Because of the highly volatile nature of the data, the charts are based on three-month moving averages, a smoothing strategy favored by the Chicago Fed economists:

The Optimism Cure, by Paul Krugman - Mitt Romney is optimistic about optimism. In fact, it’s pretty much all he’s got. And that fact should make you very pessimistic about his chances of leading an economic recovery. ... Mr. Romney’s five-point “economic plan” is very nearly substance-free. It vaguely suggests that he will pursue the same goals Republicans always pursue... But it offers neither specifics nor any indication why returning to George W. Bush’s policies would cure a slump that began on Mr. Bush’s watch.  In his Boca Raton meeting with donors, however, Mr. Romney revealed his real plan, which is to rely on magic. “My own view is,” he declared, “if we win on November 6, there will be a great deal of optimism about the future of this country. We’ll see capital come back, and we’ll see — without actually doing anything — we’ll actually get a boost in the economy.”  Are you feeling reassured?

Rising Home Prices Brighten Economic Outlook - Two reports out Tuesday confirm an uptrend in home prices. The S&P/Case-Shiller home price index of 20 major cities increased 1.2% in the 12 months ended in July, beating expectations. Later in the day, the Federal Housing Finance Agency reported its measure of U.S. home prices increased 0.2% in July over June. That rise capped off seventh consecutive monthly gains. To be sure, real estate values aren’t soaring as they did during the housing boom, and the level of prices remains about 30% below their 2006 highs, according to S&P data.  The news has to bring joy in the hallways of the Federal Reserve. That’s because rising home prices bring a hat trick of benefits to the economic outlook. First and most obviously, rising prices indicate the housing market is in better balance. The supply of homes has shrunk considerably since the worst of the housing recession, while low rates and somewhat better job markets have lured in more buyers. A relatively low level of inventory coupled with rising demand will support greater homebuilding in the future, a plus for real gross domestic product. Second, better values mean fewer homeowners remain underwater on their mortgages. Positive equity makes defaults less likely. That’s a plus for banks’ balance sheets. Lastly, consumers feel more confident and wealthier if their homes aren’t losing value like a sieve leaking water.

How High Oil Prices Will Permanently Cap Economic Growth - For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies. The countries guzzling the most oil are taking the biggest hits to potential economic growth. That’s sobering news for the U.S., which consumes almost a fifth of the oil used in the world every day. Not long ago, when oil was $20 a barrel, the U.S. was the locomotive of global economic growth; the federal government was running budget surpluses; the jobless rate at the beginning of the last decade was at a 40-year low. Now, growth is stalled, the deficit is more than $1 trillion and almost 13 million Americans are unemployed. And the U.S. isn’t the only country getting squeezed. From Europe to Japan, governments are struggling to restore growth. But the economic remedies being used are doing more harm than good, based as they are on a fundamental belief that economic growth can return to its former strength. Central bankers and policy makers have failed to fully recognize the suffocating impact of $100-a-barrel oil. Running huge budget deficits and keeping borrowing costs at record lows are only compounding current problems. These policies cannot be long-term substitutes for cheap oil because an economy can’t grow if it can no longer afford to burn the fuel on which it runs. The end of growth means governments will need to radically change how economies are managed. Fiscal and monetary policies need to be recalibrated to account for slower potential growth rates.

Second-quarter U.S. growth cut to 1.3%  — The government chopped its estimate of U.S. growth in the second quarter, as consumers and businesses spent and invested less than initially believed. Gross domestic product in the April-to-June period increased by 1.3% instead of 1.7% as previously reported, the Commerce Department said Thursday in its third and final review of second-quarter growth. A severe drought in the Midwest, which reduced crop yields, resulted in lower farm inventories. That accounted for much of the downward revision. Economists surveyed by MarketWatch had expected second-quarter growth to be left unchanged at 1.7%. The economy grew at a 2.0% pace in the first three months of the year. “The magnitude of the downward revision to GDP for the second quarter was a surprise, but clearly reaffirmed the fact that the economy remains mired in a protracted period of slower growth,”

U.S. Economy Grew 1.3% in Second Quarter — The U.S. economy grew at an even more sluggish pace in the April-June quarter than previously believed as farm production in the Midwest was reduced by a severe drought. The Commerce Department says that the overall economy grew at an annual rate of 1.3 percent in the spring, down from its previous estimate of 1.7 percent growth. The big revision reflected that the government slashed its estimate of crop production by $12 billion. About half of the downward revision to growth came from the decline in farm inventories. But other areas were weaker as well including slower consumer spending and less growth in exports. The 1.3 percent growth in the spring followed a sluggish 2 percent growth rate in the first quarter, rates too slow to lower unemployment.

Slow growth just got slower: third estimate of Q2 Real GDP - The third estimate of Q2 Real GDP, released on September 27 shows that previously reported slow growth was even slower. The previous estimate of 1.7% was revised down to an anemic 1.3%. Note, however that the annual benchmark revisions in July increased both 2011 Q4 (was  3.0% now 4.1%) and 2012 Q1 (was 1.9% now 2.0%). Personal consumption was revised down somewhat, 1.5% from 1.7%, after increasing 2.4% in Q1. Secvojnd quarter growth is approaching stall speed and early indications about the third quarter are not encouraging.

GDP Q2 Third Estimate at 1.3%, A Surprising Drop from the 1.7% Second Estimate - The Third Estimate for Q2 GDP came in at 1.3%, an downward adjustment from the 1.7% Second Estimate and below the consensus forecast of an unchanged 1.7%. Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2012 according to the "third" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.0 percent.  The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.  [Full Release] Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite.  Here is a close-up of GDP alone with a line to illustrate the 3.2 average (arithmetic mean) for the quarterly series since the 1947, with the latest GDP revisions, this number had been at 3.3 for 14 quarters, but slipped to 3.2 as of the current quarter. I've also plotted the 10-year moving average, currently at 1.7. The current GDP now has us below the moving average. Here is the same chart with a linear regression that illustrates the gradual decline in GDP over this timeframe. The latest GDP number is well below the approximate 2.1 of the regression at the same position on the horizontal axis. In summary, the Q2 GDP Third Estimate of 1.3% underscores the trend of a weak post-recession recovery -- now in its twelfth quarter after the end of the last recession.

Final Q2 GDP Disaster: 1.25% Growth Comes Below Lowest Estimate - So much for the US recovery (we will never tire of saying that). After the first Q2 GDP revision bubbled up from 1.5% to 1.7%, the sellside brigade was confident that the rate of growth would continue and final Q2 GDP would be in line. Instead, we got an absolute shock of a print, with the final Q2 GDP print coming in at a ridiculously low 1.25% (rounded up to 1.3%), below the lowest Wall Street estimate of 1.4%, and the lowest number since the revised 0.1% reported in January 2011. Here is the final GDP trendline: Q4 2011: 4.1%; Q1 2012: 2.0%; Q2 2012: 1.25%. Luckily, at least "housing has bottomed." The reason for the major contraction in the final print: a downward revision to all favorable components except Government which detracted the least from growth in years at just -0.14%. Of note - Personal Consumption was 1.06%, down from the 1.20% per the second revision. If nothing, we now know just what data Bernanke was looking at on an advance basis to come up with QEternity, and we also know the reason for the media and administration's all in gamble to reflate housing yet again. If the housing market does not go up courtesy of infinite cheap leverage, it could be curtains for the Bernanke reflation experiment.

GDP: Drought knocked 0.2 points off growth in second quarter: The U.S. economy grew even more slowly than originally thought in the second quarter of 2012, according to new data from the Commerce Department. One culprit? The severe heat and drought that has dented crop production in the Midwest this summer. The overall economy grew at a disappointing 1.3 percent annual pace in the April through June period, down from the government’s previous estimate of 1.7 percent growth. Roughly half of that decline came from a sharp fall in farm inventories. Crop production declined $12 billion over the quarter, data showed, “due to this summer’s severe heat and drought.” Farms weren’t the only soft spot in the economy, which is struggling on multiple fronts. Consumer spending grew more sluggishly than expected. Business investment has been modest. Spending on residential housing also slowed. Yet the historic dry season appeared to play the largest role in the government’s downward revision, as farm inventories — the crops and grain and cattle that are stored on farms — dropped by $5.3 billion in the quarter.

US farm drought hits growth - The devastating effects of drought across the US farm belt were on display as estimates of annualised economic growth for the second quarter were revised down from 1.7 per cent to 1.3 per cent. A decline in farm inventories contributed 0.2 percentage points of the cut to growth reflecting the damage to crops in states such as Kansas and Missouri. The lower estimate confirms the weakness of the economy earlier in the year but does not suggest a broader loss of momentum, because the damage from the drought will not continue in future quarters. With the presidential campaign in full swing even a revision was enough to draw political attention. Mitt Romney compared US growth with that of large developing countries. He said Russia was expanding at 4 per cent and China at 7-8 per cent. “This is unacceptable,” he said. The figures came on the same day as the biggest drop in durable goods orders since 2009. They were down a seasonally adjusted 13.2 per cent in August compared with July. That fall was mainly due to a drop in commercial aircraft orders – a volatile, big ticket category – but demand also declined for motor vehicles and other transport equipment. Analysts had forecast a 5 per cent decline in the headline number. After receiving orders for 260 aircraft in July, Boeing booked orders for only one in August. In addition, Qantas cancelled an existing order for 35 Dreamliners, worth $8.5bn, last month.

How Drought Dragged Down Spring GDP -- America’s worst drought in decades was hurting the nation’s economy in the spring — and things could get worse. Earlier this month, the Journal reported that despite some soothing rain from the remnants of Hurricane Isaac, some of the drought’s economic damage had already been done.  Turns out the U.S.’s GDP is already suffering. The Commerce Department on Thursday said the economy grew at an annualized rate of 1.3% in the second quarter, a steep drop from the first quarter’s 2% and the fourth quarter’s 4.1% — and significantly lower than the government’s earlier estimates of 1.7% and 1.5%. (This is the Bureau of Economic Analysis’s third and final take on second-quarter GDP — the one that usually doesn’t yield big revisions.) One factor in the 0.4 percentage point revision: Government statisticians factored in a drop in June in farmers’ inventories, revising these down by some $8 billion. Basically, 2012’s hot, dry weather has decimated corn and soybean crops, along with hay, making feed for cattle, hogs and chickens prohibitively expensive and pushing farmers to take livestock to slaughter early to avoid feed costs — a trend that diminishes their animal inventories and technically detracts from the nation’s GDP growth rate. The drop in farm inventories in the second quarter accounts for about 0.2 percentage point of the 0.7 percentage point drop in GDP between the second and first quarters. Falling nonfarm inventories account for another 0.3 percentage point. The government’s latest revisions to farm and nonfarm inventories account for about half of the 0.4 percentage point revision to second-quarter GDP from 1.7% to 1.3%.

Counterparties: The state of the economy, restated - Are you better off than you were 24 hours ago? The US labor market is, according to the Bureau of Labor Statistics. The BLS released revised employment data that shows the US added 386,000 more jobs from January to March than previously thought. That variation, 0.3% of total nonfarm jobs, is exactly average: “the annual benchmark revisions over the last 10 years have averaged plus or minus three-tenths of one percent of total nonfarm employment”. This revision won’t be the last: another will be released in February 2013, covering all of 2012. But as Bill McBride at Calculated Risk notes, the preliminary revision we got today is usually “pretty close to the final benchmark estimate”. US GDP for the second quarter of 2012 was also restated today. The Commerce Department announced the economy grew at a rate of 1.3% in the second quarter, a downward revision from the previously announced 1.7%, and below the first quarter’s 2%. The single biggest revision was in drought-hit farm inventories, and economists at Morgan Stanley expect agricultural output to “continue to be a drag on growth in the second half” of the year. The bad news, says the WSJ’s Paul Vigna, with a stall-speed economy, ”is that it’s exposed, and liable to be knocked over by any sort of exogenous shock” like the euro crisis, or a diplomatic crisis with Iran or China.

Econ Indicators: Good News and Bad News - Two reports worthy of your attention out this AM. First, the preliminary benchmark revision to the payroll jobs survey showed that as of March of this year, employers added 386,000 more jobs than we thought (453K in the private sector). This is a preliminary estimate of the BLSs annual benchmark revision to the jobs data, and will likely change a bit before it becomes the official plug-in. But it is based on more complete data and will remain a sizable positive addition. I plotted what the revised series should look like relative to the original. You wedge the difference into the previous 12 months, starting in April 2011, one-twelve at a time so you hit the level difference of 386K in March 2012. After that, you just grow the series as it has since then.There’s another revision out today and this one is far less appealing. Real GDP growth for the second quarter was revised down from an annual rate of 1.7% to 1.3%. Downward revisions in consumer spending and business investment largely explain the drop, along with weaker exports. The quarterly numbers jump around and I prefer to look year-over-year—real GDP is up 2.1% over the past year. But that’s still a slog. We remain a 70% consumer spending economy, and with high unemployment and weak wage growth, there’s just not enough income generation to break the deleveraging cycle and achieve escape velocity from the residual grasp of the great recession. We should also expect exports to continue to weaken, given slower growth in both advanced and emerging economies abroad.

United States Economy Still Weak, but More Feel Secure - Despite months of disappointing-to-dismal economic reports — capped by a Commerce Department release Thursday showing the economy had expanded at an annual pace of just 1.3 percent in the second quarter, barely above stall speed — a closely watched measure of consumer confidence surged to its highest level since February. Economic experts pointed to several trends to explain how Americans were feeling better about the economy even though growth in jobs and the overall economy had weakened. First, the election is having a strong effect on economic perceptions. Second, though the recovery is weak, it has persisted, with employment and wages rising and some households feeling more secure. Though the unemployment rate has been stuck between 8.1 and 8.3 percent all year, employers have continued to add workers to their payrolls. Wages and consumer spending have strengthened. The housing sector’s nascent recovery foretells rising employment in the construction, real estate and mortgage finance sectors, as well as rising household wealth. “There is a recovery. There are jobs. There is more income. There is some improvement,” said Lawrence Mishel, a labor market expert at and president of the liberal Economic Policy Institute. “But the improvement is obviously disappointing,” he added, a sentiment that many economists echoed.

GDP And Durable Goods Figures Spell Bad News For The Economy - The Commerce Department came out with its final revision for Gross Domestic Product Growth in the second quarter, and the numbers were not good at all: The government said the overall economy grew at an annual rate of 1.3 percent in the spring, down from its previous estimate of 1.7 percent growth. The big revision reflected that the government slashed its estimate of crop production by $12 billion. About half of the downward revision to growth came from the decline in farm inventories. But other areas were weaker as well, including slower consumer spending and less growth in exports. The economy received another piece of bad news this morning when it was reported that Durable Goods orders had dropped sharply: New durable goods orders in August fell by the most since the recession and a separate reading on the broader U.S. economy came in much weaker than expected.  New orders for long-lasting U.S. manufactured goods in August fell by the most in 3 1/2 years, pointing to a sharp slowdown in factory activity even as a gauge of planned business spending rebounded. The Commerce Department said on Thursday durable goods orders dived 13.2 percent, the largest drop since January 2009, when the economy was in the throes of a recession. Orders for July were revised down to show a 3.3 percent increase instead of the previously reported 4.1 percent gain.

GDP And Durable Goods - Heading To Recession?-  The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested. While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The problem is that there is little historical precedent in the U.S. as to whether maintaining ultra-low interest rate policies, and inducing liquidity, during a balance sheet deleveraging cycle, actually leads to an economic recovery.  This is particularly troublesome when looking at a large portion of the population rapidly heading towards retirement whom will become net drawers versus net contributors to the economic system. The important point for investors, who have a limited amount of time to plan and save for retirement, is that "hope" and "getting back to even" are not successful investment strategies.

Cue Stagflationary Recession: Chicago PMI Huge Sub-50 Miss, Back To September 2009 Levels; Prices Paid Spikes - QE1, QE2, Operation Twist 1, Operation Twist 2, a Fed balance sheet that is now expected to be $5 trillion in 2 years, and all we get is a lousy manufacturing economy that according to the Chicago PMI just dipped into contraction, or for all intents and purposes, recession, printing its first sub-50 print, 49.7 specifically, on expectations of a 52.8, and down from 53. This was the lowest since September 2009 and the biggest miss in 4 months. Specifically, the employment index came at a two and a half year low, New Orders, Backlogs and Deliveries had their 3 month moving averages at the lowest since Mid 2009, and Capital Equipment printed at a 17 month low. But not all hope is lost: at least prices paid soared for the third consecutive month to 63.2 from 57. Cue not just recession, but stagflationary recession. It also means that both the Manufacturing ISM and Q3 GDP will be a total disaster. Time to start pricing in QE X to be followed 24 hours later by QE X+1. The central bank cartel is starting to lose

The Big Four Economic Indicators: Updated Real Personal Income Less Transfer Payments - Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method. There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are: 

  • Industrial Production
  • Real Income
        (excluding transfer payments)
  • Employment
  • Real Retail Sales

The latest updates to the Big Four was today's release of the August Personal Income data (the red line in the chart below), which dropped 0.9 percent over the previous month. As the average of the Big Four indicates (the gray line), economic expansion since the last recession was flat or contracted during three of the eight months in 2012. The average for August, down 0.4 percent, is the sharpest month-over-month decline of the 2012. The data, of course, are subject to revision, so we must view these numbers accordingly. When ECRI's Achuthan made his July assertion that the indicators were rolling over, the data didn't appear to support the claim. However the latest numbers are showing some troubling signs of reversal.

Two Reasons to expect Economic Growth to Increase - There is plenty of focus on the downside risks to the US economy - the European crisis and recession, the slowdown in China, the US fiscal cliff and more - but there are at least two reasons to expect an increase in US economic activity. The first reason is a little addition by subtraction. Over the last 3+ years, state and local governments have lost over 700 thousand payroll jobs (including the preliminary estimate of the benchmark revision - assuming most of the additional government jobs lost were state and local). The following graph is for state and local government employment. So far in 2012 - through August (and using the Benchmark estate) - state and local governments have lost about 78,000 jobs (61,000 not counting the revision). In 2012, state and local governments lost about 280,000 jobs (230,000 not counting revision). So the layoffs are ongoing, but have slowed. This graph shows total state and government payroll employment since January 2007. State and local governments lost 129,000 jobs in 2009, 262,000 in 2010, and 280,000 in 2011. It looks like the layoffs are mostly over, although I don't expect much hiring over the next year. Just ending the drag from state and local governments will give a boost to GDP and employment growth The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005 (including the Q2 GDP revision today). The blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 5 quarters (through Q2 2012).

Goldman Cuts Q3 GDP Forecast To Stall Speed 1.9% - There was a time when Goldman, which recently went full retard with its bull thesis, seeing only upside in everything from stocks (and a once in a lifetime opportunity to sell bonds... just like in March, and then back in the summer of last year, and so on), to EURUSD, to housing, just like it did in December 2010, only to be humiliated a few short months later, had its Q3 GDP forecast at 2.3%. In fact the latest Q3 annualized forecast of 2.3% economic growth as recently as September 11. How much has changed in two short weeks. Apparently, out of leftfield, so many things have gotten worse that a whopping 0.4% or 20% of the growth in the quarter has bee eliminated in under three weeks. Just out from Goldman: "While nominal personal spending and core PCE prices rose in line with expectations in August, real spending gains were modest and income grew less than expected. We reduced our Q3 tracking estimate for real GDP growth from 2% to 1.9%." And that's why Jan Hatzius gets paid the big bucks. Only problem is now that Goldman has gotten the QEternity it lobbied for so long and hard, where will the upside growth come from?

Rebalancing the Economy in Response to Fiscal Consolidation -New York Fed - According to the Congressional Budget Office (CBO), under current policies the ratio of federal debt held by the public over gross domestic product—the debt-to-GDP ratio—will rise rapidly over the next decade. This unsustainable fiscal position presents the nation with two significant challenges. First, it requires fiscal consolidation that will, at a minimum, cause the ratio to level off in the not-too-distant future. Second, fiscal consolidation has to occur in a way that will keep the U.S. economy operating at as close to full employment as possible—a process known as rebalancing. While these challenges are very daunting, we’ve faced them before, and met them quite successfully in the mid-1980s through the mid-1990s. Using federal budget accounting and national income accounting, this post describes how fiscal consolidation and rebalancing were accomplished in the previous episode. By doing so, we can put our current fiscal position in perspective while shedding light on what needs to happen if we’re to be successful this time.

Fed’s Evans Expects U.S. Credit Rating to Be Maintained - Federal Reserve Bank of Chicago President Charles Evans said Wednesday he doesn’t agree with concerns that the Fed’s accommodative monetary policy could pressure the dollar and lead to a credit downgrade. “I don’t really see those fears,” Mr. Evans, who isn’t currently a voting member of the policy-setting Federal Open Market Committee, said in response to an audience member’s question. Mr. Evans added he’s optimistic U.S. economic growth will be strong enough for the country’s credit ratings to be “at least” maintained. In response to another audience member’s question, Mr. Evans also refuted the concern that accommodative policies could fuel a risk to the housing sector from excessive activity. A necessary part of that process would be banks lending much more than they currently are, he said. “At the moment we’re not anywhere near that.”

QE For the People - What Else Could We Buy With $29 Trillion? - In a system that depends on lies and the credulity of the citizenry, the greatest lie is that the Federal Reserve's "quantitative easing" bailouts of the banks somehow help our citizens and communities. To clarify this, ask yourself this question: what else could we have bought with the $29 trillion the Fed loaned or backstopped to the banks?  If you enjoy quibbling about the total sum of Fed support, be my guest; the Levy Institute came up with $29 trillion after poring over all the data, while the Government Accountability Office’s (GAO) tally topped $16 trillion. That's 100% of the nation's GDP and roughly 100% of the $16 trillion national debt. While we're asking about opportunity costs, let's ask what else we could have bought with the $10 trillion that the Federal government has borrowed and blown in the past 11.7 years.

Treasuries Recoup Most QE3 Losses Amid Growth Skepticism - Treasuries rose, recovering most of the losses sustained after the Federal Reserve said it would add more stimulus, as traders wagered a slowing global economy will pose challenges to policy makers seeking to lower unemployment.  Benchmark 10-year note yields fell for the first week this month as reports showed manufacturing shrank in the New York area, Europe and China. Atlanta Fed President Dennis Lockhart said yesterday the central bank may take further action if the labor market doesn’t show signs of greater strength. The U.S. will auction $99 billion of notes next week.

Treasury Yields/Mortgage Update: 30-year Fixed Drops to 3.40% - I've updated the charts through Thursday's close. Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing.  The 30-year fixed mortgage at the current level no doubt suits the Fed just fine, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from their recent historic lows). But, as for loans to small businesses, the Fed strategy appears to be a solution to a non-problem. Here's a snippet from a recent NFIB Small Business Economic Trends report: Seven (7) percent of the owners reported that all their credit needs were not met (unchanged), 31% reported all credit needs met, and 53% explicitly said they did not want a loan. 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.  Now let's see the 10-year against the S&P 500 with some notes on Fed intervention.

With $1.6 Trillion In FDIC Deposit Insurance Expiring, Are Negative Bill Rates Set To Become The New Normal? - As we noted on several occasions in the past ten days, as a result of QE3 and its imminent transformation to QE4, which will merely be the current monetization configuration but without the sterilization of new long-term bond purchases, the Fed's balance sheet is expected to grow by over $2 trillion in the next two years. This also means that the matched liability on the Fed's balance sheet, reserves and deposits, will grow by a like amount. So far so good. However, as Bank of America points out today, there may be a small glitch: as a reminder on December 31, 2012 expires the FDIC's unlimited insurance on noninterest-bearing transaction accounts at which point it will revert back to $250,000. Currently there is about $1.6 trillion in deposits that fall under this umbrella, or essentially the entire amount in new deposit liabilities that will have to be created as a result of QEternity. The question is what those account holders will do, and how will the exit of deposits, once those holding them realize they no longer are government credit risk and instead are unsecured bank credit risk, impact the need to ramp up deposit building. One very possible consequence: negative bill rates as far as the eye can see.

Debt Is a Drug (And So Is Austerity) - Paul Krugman  - A commenter tells me that there is a term of art in the substance use literature, “generational forgetting”, that seems relevant to our economic troubles. That’s perfect: as memory of bad things fades, a new generation is tempted to repeat an earlier generation’s mistakes.An economic crisis alerts both officials and the private sector to the dangers of excessive leverage; the resulting regime of public regulation and private caution brings a long era of stability. But eventually the personal and institutional memory of the dangers of debt fades, leading to deregulation and leveraging up — setting the stage for the next deleveraging crisis. But the same thing applies to public policy in response to depression, in the seemingly opposite direction. The Great Depression taught policy makers the hard way that tight money and fiscal austerity were really bad ideas in the face of a deeply depressed economy; but several generations on all that was forgotten except by the economic historians, and policy makers were ready to resurrect the Treasury View, get all worked up about the dangers of inflation despite the absence of actual inflation, and in general to repeat their grandfathers’ mistakes in full.There have been a fair number of finance types saying things like “government stimulus is heroin”. Actually, they’re wrong; it’s austerity in the face of depression that’s just like heroin, a dangerous drug that resurfaces at intervals because the next generation has forgotten the damage it does.

Breaking Down The Fiscal Cliff In 12 Charts -  Investors remain convinced, it would seem, that the fiscal cliff will not happen because our great-and-good politicians in Washington know full-well that the economic repercussions will be too great. Even though Ben's foot is to the floor, he has stated that monetary policy will be unable to offset the negative economic impact of the tax hikes and spending cuts. The prospect of agreement among a deeply polarized politik and just as Goldman expects, we worry that the S&P 500 will fall sharply following the election once investors finally recognize the serious possibility that the 'fiscal-cliff-problem' will not be solved in a smooth manner. In order to clarify that thinking, Bloomberg Brief has provided 12 charts on the timelines, impact, uncertainty, and possibilities surrounding this most obvious of risk events.

Nation’s Choices Needn’t Be Painful - REFERRING to the host of painful economic choices the nation is said to confront, President Obama recently said, “I won’t pretend the path I’m offering is quick or easy.” The Romney-Ryan ticket has also repeatedly stressed that it won’t duck the tough issues.  Well and good, except for one thing: The nation doesn’t actually face difficult economic choices. Many problems will be expensive to solve, yet we can solve them without requiring painful sacrifices from anyone.  Let’s begin with unemployment. Millions of Americans remain out of work only because employers can already produce more than enough to meet depressed demand. The obvious remedy is to increase total spending. Although economic stimulus has become a controversial topic in the abstract, a few simple observations should persuade every sensible legislator — perhaps even a majority! — to support a specific type of higher spending: accelerated refurbishment of our crumbling infrastructure.  Some in Congress have consistently opposed the president’s infrastructure proposals, citing the huge national debt. But that’s an incoherent objection. If repairs to the Capitol dome or a tattered stretch of interstate highway are postponed, they will just become more costly. Many job seekers have the skills for this work. If we wait, we’ll have to bid them away from other tasks. The required materials are cheaper now than they will ever be. And interest rates are at record lows.

Boehner May Have To Let The Fiscal Cliff Happen To Stay Speaker -I've come to the conclusion that House Speaker John Boehner (R-OH) is going to have a very difficult time making any deal with the Democrats during the lame duck session on taxes and spending – that is, on preventing the fiscal cliff – and still remain as speaker in the next Congress. That means that avoiding the fiscal cliff will be far harder than any analysis of the situation has dared to conclude. But just consider what would happen if the following occurs.

  • 1. No matter who wins the presidency and is in the majority in the Senate, the GOP retains control in the House.
  • 2. Boehner wants to stay as speaker even if House Republicans lose some seats and their majority gets smaller. 
  • 3. The smaller GOP majority will prompt some to insist that Boehner should not be speaker in the next Congress. (Given the tea party wing’s distrust of Boehner.)
  • 4. In other words, Boehner will be on a very short leash during the lame duck and will have to continually prove to his tea party wing that he merits its support.
  • 5. But Boehner isn’t likely to get tea party support if he shows any willingness to compromise with congressional Democrats or  the Obama White House on extending the tax cuts and preventing the military spending portion of the sequester.
  • 6. This means there can’t be a quick deal of any kind on fiscal cliff-related policies because of the tea party’s mantra that concluding a deal long before the deadline means that you are probably leaving something on the table.

Fiscal Confrontation Undermines the U.S. -- Simon Johnson - It is axiomatic among most of our Washington elite that the United States cannot lose its pre-eminent global role, at least not in the foreseeable future. This assumption is implicit in all our economic policy discussions, including how politicians on both sides regard the leading international role of the United States dollar. In this view, the United States is likely to remain the world’s financial safe haven for international investors, irrespective of what we say and do. Expressing concerns about the trajectory of our federal government debt has of course become fashionable during this election cycle; this is a signature item for both the Tea Party movement in general and the vice-presidential candidate Paul D. Ryan in particular. But the tactics of fiscal confrontation – primarily from the right of the political spectrum – make sense only if the relevant politicians, advisers and donors firmly believe that the American financial position in the world is unassailable. Threatening to shut down the government or refusing to budge on taxes is seen by many Republicans as a legitimate maneuver in their campaign to shrink the state, rather than as something that could undermine the United States’ economic recovery and destabilize the world. This approach is more than unfortunate, because the perception of our indefinite pre-eminence – irrespective of how we act – is at completely odds with the historical record.

These Folks are Soooo Clever . . .Last week the stalwarts of the Congressional Progressive Caucus (CPC) begged for mercy from “the Gang of Eight” in a letter. Here’s what they said and my commentary on their “loser liberalism.””Thank you for your work – past and present – towards solving one of the greatest policy challenges facing us today: the unsustainable path of our national debt. We appreciate the bipartisan and collaborative spirit with which you’ve approached your negotiations. . . .” Thanks vanguard progressives for embracing the major premise of the austerity ideology, namely that the national debt is on an unsustainable path. I’m here to tell you that this idea is false and also terribly harmful to progressive aspirations to end economic stagnation and get everyone, who wants to be, employed at a living wage. You can’t win an argument if you start by agreeing with your opponent’s false premise.  The US has a non-convertible fiat currency which it allows to freely float on international markets. It also has no debts in any currency not its own. It also has the constitutional authority to issue currency and coins in unlimited amounts to pay any debt obligations when they fall due. It also has a central bank, the Fed, that can determine the interest rates paid on new debt issuance unilaterally and in spite of any desire on the part of private markets to raise those rates. So, it should be obvious to you and everyone else that it doesn’t matter how high our national debt, or our debt-to-GDP ratio is, the US always has the capacity to deficit spend what it needs to in order to buy any goods and services for sale in USD, including the services of all the currently unemployed or under-employed who would like full-time jobs at a living wage.

What Does It Mean When the Farm Bill Expires? - This Sunday, the deadline will expire on the current farm bill. Many programs will revert back to the 1949 permanent legislation. However, provisions in the continuing resolution will keep food stamps, crop insurance, farmer subsidy programs and other funding streams moving through the system. That continuing resolution sets the USDA budget and will allow full funding for most current programs. That’s not true across the board, however. In particular, dairy farmers could feel a pinch: One program that will suffer on Sept. 30 is the Milk Income Loss Contract program, which compensates dairy farmers during times of low milk prices, according to the American Farm Bureau Federation. Dairy price support and export incentives expire on Dec. 31. A few other programs, including export market promotion and support, do stand to expire on Sunday. The larger issue concerns federal price supports. Those prices, the rates at which the government pays for certain commodities, would revert back to 1949 levels. For the most part, those were much higher, especially in areas like wheat ($13.58 per bushel in 1949, more like $6 today) and dairy products ($38.63 per hundredweight in 1949, closer to $10 today). The government would pay much more for those commodities, though not all of them; federal price supports for things like soybeans didn’t exist in 1949. This will absolutely drive up the price that businesses will have to pay for the same commodities, and that will factor into your monthly food bill.

Finding the Keys to National Prosperity - Jeffrey D. Sachs - In many of history’s most successful economic reforms, clever countries have learned from the policy successes of others, adapting them to local conditions. For example, while many countries are facing a jobs crisis, one part of the capitalist world is doing just fine: northern Europe, including Germany, the Netherlands, and Scandinavia. Germany’s unemployment rate this past summer was around 5.5%, and its youth unemployment rate was around 8% – remarkably low compared with many other high-income economies. How do northern Europeans do it? All of them use active labor market policies, including flex time, school-to-work apprenticeships (especially Germany), and extensive job training and matching.   Likewise, in an age of chronic budget crises, Germany, Sweden, and Switzerland run near-balanced budgets. All three rely on budget rules that call for cyclically adjusted budget balance. And all three take a basic precaution to keep their entitlement spending under control: a retirement age of at least 65. In an age of rising health-care costs, most high-income countries – Canada, the European Union’s Western economies, and Japan – manage to keep their total health-care costs below 12% of GDP, with excellent health outcomes, while the US spends nearly 18% of GDP, yet with decidedly mediocre health outcomes.A new report by the US Institute of Medicine has found that America’s for-profit system squanders around $750 billion, or 5% of GDP, on waste, fraud, duplication, and bureaucracy.    

Multipliers, yet again - In a recent paper assessing the likely impact of President Obama and Mitt Romney’s budget plans if they became law, we applied standard macroeconomic multipliers to estimates of each plan’s fiscal impulse. As always, the very term “multipliers” brings out critics, and the ones we used for this study (and have used often in the past)—those from Moody’s—seem to bring out even more. This is all very odd. We often use the Moody’s multipliers because they’re transparent and slightly more detailed than many others that have been published. But, what drives our results in determining whose budget plans provide a bigger economic boost is simply the relative ranking of these multipliers; specifically the estimate that tax cuts (particularly for high-income households) provide less dollar-for-dollar economic support than do spending increases. This is not controversial at all. Both the Congressional Budget Office and the Council of Economic Advisers make similar relative judgments (see the tables here), and the general view that government purchases’ multipliers will lie above tax multipliers during economic circumstances like the present is buttressed by a number of academic papers in recent years, as well as by models used by central bankers and international economic  institutions (see table below from a Congressional Research Service report that summarizes the results of a recent paper surveying a number of macroeconomic models used by such central banks and institutions).

Delusions of Wonkhood - Krugman Dave Weigel has some fun with credulous journalists who are sure that Paul Ryan must be a Very Serious Wonk because — wait for it — he uses PowerPoint. With pie charts! This is really amazing. Look, I know wonks. Ryan is not a wonk. Yes, he likes charts and slides. But he very clearly doesn’t know what his numbers actually mean. When the famous plan was unveiled, it was quite clear that he never even realized that the Heritage projection of his plan’s impact made a completely ridiculous assertion about what would happen to unemployment. Nor did he realize that his assumptions about discretionary spending would require cutting such spending — including defense! — to levels not seen since Calvin Coolidge. One question one might ask is whether Ryan is aware that he isn’t actually a wonk, that he just plays one on TV. Maybe not; some of what he says suggests the Dunning-Kruger effect at work,: he may be so innumerate that he doesn’t realize that he has no idea what the numbers he throws around mean. And after all, why would he, given all the praise he’s received for putting up a line graph or pie chart here and there?

"Report: Carbon tax could halve deficit" - A simple idea: Taxing carbon emissions could raise enough money to eventually cut the deficit in half, but policymakers would face tough questions about whether to use the cash to brighten the fiscal outlook or tackle other needs, a report finds. Carbon tax proposals to help battle climate change are politically dead in Congress right now. But the Congressional Research Service overview nonetheless arrives at a time of renewed interest in the idea from some policy wonks, Democrats, and former GOP lawmakers.The report finds that imposing an escalating fee that starts at $20 per metric ton could reduce the projected 10-year budget deficit by more than 50 percent, from $2.3 trillion to $1.1 trillion.That estimate relies on the Congressional Budget Office’s (CBO) “baseline” deficit projection.But the report notes that the same carbon tax would have a much smaller impact on the deficit — cutting it about 12 percent — under CBO’s “alternative” scenario that forecasts a much bigger shortfall.The report, relying on CBO analysis of carbon costs under a hypothetical cap-and-trade program, estimates that the escalating $20-per-ton tax could raise $88 billion in 2012, rising to $154 billion in 2021.

Pelosi Confirms that Payroll Tax Cut Will Expire at End of the Year -  On her way out the door at the end of Congress’ last session before the elections, House Minority Leader Nancy Pelosi sealed the fate of the payroll tax cut, if it wasn’t sealed already, ensuring that fiscal policy will snap back in 2013 by at least $125 billion. “I would hope that we would not extend it,” Pelosi said of the tax cut, during a Friday sit-down with reporters. The whole point of extending the payroll tax cut was to only do it for a year or two to ensure economic stability, she said. Now that things have stabilized, she continued, it’s time to get moving on bigger changes.“Let’s deal with the budget issues. Let’s put the tax code on the table, simplify, make more fair and close a lot of the special interest loopholes that are in there,” Pelosi said. “I would not be among those advocating” to extend the cut, she said.Many progressives agree with rolling back the payroll tax cut on the grounds that it threatens the Social Security Trust Fund by taking money out of it. Even though that money gets replaced with General Fund revenue, it adds to the burden of the trust fund, and makes it easier for politicians with designs on cutting Social Security to make the case that it has a budgetary impact.

Number of the Week: Expect Higher Tax Bill in 2013 - $1,001.08: How much more someone making the median household income in 2011 is likely to spend on payroll taxes next year. No matter which party comes out on top in the November elections, nearly every working American is likely to pay higher taxes in 2013 than 2012. Lost in the debate over the fiscal cliff and whether the Bush tax cuts should be extended for all Americans or just those who make more than $250,000 is the expiration of a tax holiday both parties quietly support. In an effort to stimulate demand and put more money into consumers’ pockets, Congress temporarily lowered the Social Security tax withholding rate to 4.2% from 6.2% for 2011 and  earlier this year extended it into 2012. The holiday in the so-called payroll tax is set to expire at the end of this year, and so far neither party has expressed much interest in another extension. The two percentage point reduction in the payroll tax would reduce government revenue by about $110 billion per year,, according to an analysis by PIMCO. That’s not a huge amount in a $3.8 trillion budget, but both parties have lately been trying to find ways to trim deficits. The tax cut was always meant to be temporary, and letting it expire as expected is a quiet way to increase revenue as bigger tax issues are negotiated.

Economists Say U.S. Needs More Taxes, Spending Cuts — The best way to reduce the federal deficit is through a combination of higher taxes and spending cuts, according to a group of economists. The 236 members of the National Association for Business Economics recently surveyed say the country needs more fiscal stimulus through 2013, but by 2014 it should be time to throttle back. The reason for the delay: the sluggish nature of the country’s economic recovery. A majority of the economists favor extending payroll tax cuts, current marginal income tax rates and current tax rates for dividends and capital gains for most or all taxpayers through 2013. Deep tax cuts that were passed under President George W. Bush expire at the end of December unless Congress takes action. At the center of debate: extending the cuts for everybody. or just households earning less than $250,000 a year. When it comes to making those cuts permanent, the group is more split. Nearly three quarters think the payroll tax cut should not be made permanent. The group is almost evenly split about whether to make the tax cuts on income, dividends and capital gains permanent. The biggest economic worry for the group was not how much to raise taxes or how to trim the budget. The problem cited was indecision: 87 percent of the economists believe that uncertainty about what direction Washington will take is holding back the economic recovery.

Most Economists Say Government Should Avoid Spending Cuts in 2013 - The vast majority of economists responding to a new survey believe the federal government should maintain or increase spending levels next year — a shared opinion that stands in contrast to steep budget cuts set to take place in 2013.Nearly half of the economists said the government should add more stimulus to the economy and three-quarters said the planned sequestration shouldn’t go into effect, according to the National Association of Business Economics policy survey released Monday. “A good consensus of economists for 2013 don’t think policies should be tighten,” said Jay Bryson, global economist for Wells Fargo Securities and one of the survey’s authors. “They are looking for tightening later, rather than sooner.” Only 33% of the 236 economists surveyed said fiscal policy should be more restrictive next year, but 54% said tightening should take place in 2014. “There is a recognition that economy remains very, very sluggish and the unemployment rate remains unacceptably high,” Bryson said.

Temporary Spending Increases Do Not Drive Long-Term Deficits - In a WSJ editorial today, they go after  the President for the increase in the budget deficit over his watch.  When the President correctly points to the actual factors behind the increase in deficit, they accuse President Obama of “…conveniently forget[ing] a little event in February 2009 known as the “stimulus” that increased spending by a mere $830 billion above the normal baseline.” It’s of course true that the stimulus (no quotes necessary, WSJ–it was real…and it worked) led to higher deficit spending when it was in place.  That’s the point.  In order to offset the private sector contraction, the public sector needs to TEMPORARILY ramp up economic activity, and it must do so with borrowed money (to raise taxes or cut spending to pay for stimulus would be to reverse its impact). But the key word is “temporary.”  As seen in the figure below (or figure 1 in the link above), it’s not the stuff that gets in and out of the system that hurts you, deficit-wise.  It’s the stuff that stays in and isn’t paid for, like the Bush tax cuts, which continue to be the big story re what’s driving the medium-term budget deficit.The figure shows Recovery Act spending as a share of GDP, 2009-2019.  It doesn’t go to zero because there are interest costs in the out years.  I’m not claiming that stimulus is a free lunch.  But I’m very much claiming it’s not what’s driving the budget deficit going forward.

 Conservatives and the Zombie Apocalypse - At first glance, Mitt Romney’s now-famous assertion that all those who don’t pay federal income taxes are dependent moochers seems like a dumb mistake. Why would he lump recipients of Social Security, veterans, students and low-wage earners — many of whom have voted Republican in the past — in with welfare recipients? . Perhaps Mr. Romney was confident that his remarks were private, or perhaps he was pandering to his audience of potential donors. But he did follow a well-established conservative script, one of two competing horror-show narratives that increasingly dominate political discourse in this country. The basic right-wing story line evokes zombie apocalypse: The shambling, diseased living dead — Obama Zombies — are threatening human civilization. A self-described neoconservative Web site features a parody of Shepard Fairey’s Obama campaign poster featuring the zombie in chief. A forthcoming book by Nicholas Eberstadt is titled “A Nation of Takers: America’s Entitlement Epidemic.” Charles Sykes contends that we have become “A Nation of Moochers.” The effort to elicit revulsion and moral outrage may be intended to counter the left-wing narrative of vampire threat, which warns of a small group of powerful, almost immortal beings who invest in blood funds, suck out the profits and stash them in Transylvanian tax shelters.

Romney's "revenue neutral" 20% rate cut may not be achievable, Hassett admits - For months, many tax experts have been saying that even what is known about Romney's plan--skimpy as it is on any real information--shows that it is unworkable.  One of Romney's sometimes advisers finally sort of acknowledged that.  Kevin Hassett (an American Enterprise Institute propaganda tank "expert" who coughs out Friedmania economic assumptions as though they were clearly settled laws of nature) admits that unless there is a "broadening of the tax base" Romney couldn't reduce rates by 20% across the board in a revenue-neutral way. Now, "broadening of the tax base" in connection with reduced rates was possible back inn 1986 when we had maximum rates much higher than today.  But most broadening that should be done won't be done, because there is no political will for it in Washington either because Romney won't favor it or because the Tea Party crazies won't.  (We won't be eliminating the capital gains preference under a Romney administration, for example, or eliminating the tax subsidies that we give to Big Oil and other extractive industries that make oilmen billionaires--like letting them get the "domestic manufacturing deduction", which they currently are able to use to reduce their US taxes even more.)  Hassett admitted that "if you think the base broadeners don't add up, if you think that he can't get [top rates down] to 28%, well then the right thing that would happen, as you know if you're going to have revenue neutral reform, is that they would have a different change in rates.

Repeat After Me: Low Taxes (on Rich People) and Economic Growth Are Not Correlated - Jared Bernstein tells us yet again what the data has been telling us forever: I agree with Chye-Ching Huang, who agrees with the Congressional Research Service, Len Burman, and me: over the long, historical record of special tax treatment for investment incomes and tax cuts to the top marginal tax rates, one simply doesn’t find significant correlations with greater investment, savings, productivity, or income growth. Everything he cites here is about U.S. tax and growth rates — a single sample point though a long-term one — all of which is subject to the big secular thing: growth was faster pre-Reagan, and Dems were in power pre-Reagan, so the numbers just represent that secular decline (the great innovation stagnation?), not the effect of policies. It’s amazing that Republicans never make this argument, which is pretty tough to counter. But that’s mainly because they don’t even know, much less acknowledge, that growth has declined since Reagan took office. This argument ignores the boom and surplus under Clinton, of course but besides that it’s a tough argument to disprove. The far more convincing demonstration, in my opinion, is this: comparing the U.S. to Europe over forty years. Difference in growth rates: nonexistent.

Wealthy Americans Gain Even as Republicans Decry Redistribution - Republican Mitt Romney has attacked the president for supporting the use of government programs to redistribute income and for a free-spending response to the 2008 financial crisis.Yet since Obama took office in January 2009, wealthy Americans have continued to pull away from the rest of society. In the aftermath of the recession, income inequality in the U.S. reached a new high in 2011, Census Bureau data show. Even as the president has decried the hollowing out of the middle class, the fortunes of labor and capital have diverged on his watch. Quarterly corporate profits of $1.9 trillion have almost doubled since the end of 2008, while workers’ inflation- adjusted average hourly earnings have declined. “At the very high end, people got a whole lot wealthier whereas income stagnated at other levels,”

We Are the 96 Percent - WHEN Mitt Romney told the guests at a fund-raiser in Florida in May that America is divided between people who pay no income taxes and depend on government and pretty much everyone else, he missed the deeper truth. It is not just that most of the 47 percent Mr. Romney talked about do pay payroll taxes and that many of them have paid income taxes in the past. The reality he glossed over is that nearly all Americans have used government social policies at some point in their lives. The beneficiaries include the rich and the poor, Democrats and Republicans. Almost everyone is both a maker and a taker. We have unique data from a 2008 national survey by the Cornell Survey Research Institute that asked Americans whether they had ever taken advantage of any of 21 social policies provided by the federal government, from student loans to Medicare. These policies do not include government activity that benefits everyone — national defense, the interstate highway system, food safety regulations — but only tangible benefits that accrue to specific households. Oliver Munday The survey asked about people’s policy usage throughout their lives, not just at a moment in time, and it included questions about social policies embedded in the tax code, which are usually overlooked. What the data reveal is striking: nearly all Americans — 96 percent — have relied on the federal government to assist them. Young adults, who are not yet eligible for many policies, account for most of the remaining 4 percent.

What Would Happen If The 47 Percent Had To Pay Federal Income Taxes - The complaint Romney and others raise isn’t that some people make such small amounts of money that they’re exempt from income taxes. Their beef is with people who — thanks to tax credits and deductions targeted at poor and middle-class workers — pay no taxes on net. Many of those people actually end up paying a negative tax rate — when tax season comes around, they get a cash transfer from the government.  A tax calculator provided by the Tax Policy Center produces tax burden estimates for people and families at different income levels. According to TPC, a typical poor family — two kids, $33,479 in income — has a negative income tax liability of $5,147. Such a family receives over $5,000 a year back from the IRS in what looks just like a tax refund, except they’re getting back more than they ever paid in income taxes. More than half of that comes from the Earned Income Tax Credit. Another $2,000 comes from the Child Tax Credit — both originally conservative ideas that, at least until recently, enjoyed bipartisan support.

Reducing the Tax Favoritism for Housing - In a pure income tax, what is the appropriate way to tax owned housing? Jack Grigg and Thornton Matheson of the IMF explain in Chapter V of the "United States: Selected Issues" report published as IMF Country Report 12/214"Neutral taxation of owner-occupied housing would call for taxing its imputed rental value, but allowing a full mortgage interest deduction." For those not indoctrinated into the jargon, the idea here is that when you live in a house that you own, you are--in a way--renting that house to yourself.  Thus, you are in effect paying rent to yourself, and paying mortgage expenses. In a pure income tax, you would pay income tax on the income you receive from your owned-and-rented-to-yourself property ("imputed rental value"), but you would be able to deduct from taxation the costs of that property--namely, the interest payed on the mortgage. This logic may seem counterintuitive to many homeowners! But another way to think about it is that a pure income tax should not favor owning over renting. (That is, the decision to favor owning is a political policy decision that has costs and benefits, but it's not part of a pure income tax.) Thus, if I buy a house and rent it out, or if I buy the same house and live in that house, my income tax bill should look the same.

Republicans Champion 'Voluntary Taxes' - The Republican-controlled House of Representatives took a break last week from doing nothing to pass a bill to facilitate voluntary taxation. Almost simultaneously, Mitt Romney released his final tax return for 2011, showing that he voluntarily overpaid his taxes by taking less of a deduction for his charitable contributions than he was permitted. The legislation was H.R. 6410, “The Buffett Rule Act of 2012.” Those not acquainted with the misleading titles often given to Congressional bills might at first glance think this one has something to do with raising taxes on the ultrawealthy. Of course, Republicans would never actually raise taxes on the ultrawealthy; they think, or at least assert publicly, that the deficit results from too many poor people not paying taxes. But it would be very helpful to them to have a fig leaf that looks as if they had found a way of getting the rich to pay more. That is by encouraging them to voluntarily pay more, as Mr. Romney did.

Taxes & Cheating: The Other 47 Percent - In August, the IRS issued yet another Tax Gap report.  The IRS estimates that in 2006 alone, the Treasury missed out on $385 billion in revenue due under the current tax law from a combination of underreporting of income, overstatement of deductions or other benefits, or non-payment of taxes owed.  To put that in perspective,  increased revenue of $385 billion annually likely would be enough to make the Bush tax cuts permanent and to permanently patch the Alternative Minimum Tax.  There can be good reasons for making a mistake in filing taxes under our complex code.  It is easy to get confused with some of the rules ad records can be lost or mistaken.   But most of the tax gap reflects a more sinister reality.  It is the results when individuals fail to take responsibility for filing their returns accurately or, worse, when they feel entitled to ask other taxpayers to carry a burden for them by deliberately failing to pay the share of the tax burden assigned to them by the law.   So who are these freeloaders?  The IRS estimates a $450 billion shortfall in tax payments in 2006, which it reduced to $385 through enforcement and receipts from late payments.  Of this $450 billion, 40 percent ($179 billion) related to underreporting of business income by individuals as well as underpayment of self-employment taxes.    Tax lost to other unreported individual income added another $68 billion to the tax gap while individual non-filers and non-payment added another $25 billion and $36 billion respectively.  Add all that up, and you have nearly 70 percent of the tax gap arising with respect to business and personal income reported in individual tax returns.

Here’s what’s missing in the Romney tax reports - As pundits, political partisans, and amateur CPA’s pore over the numbers, what’s missing from Romney’s report seems most provocative. The full returns for 2010 and 2011 have been released, but only a statement on the overall federal tax rate paid for the previous 20 years. What’s missing, tax experts say, are the details of Romney’s retirement account from the Bain Capital investment firm he started and ran for years. Much has been made of Romney’s investments in offshore accounts in Bermuda and the Cayman Islands. Isn’t that a way of avoiding taxes, critics ask? No, says the Romney campaign in a “frequently asked questions” site about the 2011 return released Friday: “The investments by the blind trusts in funds established in the Cayman Islands or other jurisdictions are taxed in the very same way they would be if the shares were held in the US rather than through a Cayman fund. No taxes are evaded or reduced. These funds are all registered with the IRS and report all income to investors and the IRS, just like domestic funds. Whether in Bermuda or Boston or elsewhere, there is no difference in how they are taxed.” Well, maybe

All Economists Do Not Agree on Low Capital Tax Rates - Dean Baker - Any time you hear anyone tell you that "all economists agree," get out your gun. Unless the question pertains to the shape of the earth, this is almost certainly not true. It is most definitely not the case that economists agree that Mitt Romney should be paying his current 14.1 percent tax rate or less as Washington Post readers were told by Dylan Matthews today. Matthews rests his case on some arguments in the literature concerning scenarios in which we both look to an infinite future horizon and we have identically situated individuals, meaning that we all have the same wealth and the same opportunity to gain income. When these assumptions are relaxed, the case for preferntial treatment of capital income becomes considerably weaker, as argued in a recent Journal of Economic Perspectives article by Peter Diamond and Emmanuel Saez, two of the most prominent public finance economists in the world. The second point here is probably the more important. If we have some individuals who inherit immense wealth so that they can live entirely off their capital income and other individuals who must work for their income, a policy that subjects capital income tax to a lower rate of taxation than labor income means that we are taxing the rich at a lower rate than the middle class and poor. It is difficult to see how this is either efficient (we are giving disincentives to work for middle class people as a result of a higher than necessary tax rate) or fair. Furthermore, as a result of having a lower tax rate on capital income than labor income we are giving people an incentive to game the tax code by concealing labor income as capital income.  This is both unfair and leads to a waste of resources as these people employ accountants to rig their books.

The Effect of Capital Gains Tax on Investment - Matt Yglesias, servitor to our corporate overlords, suggests that the reduced capital gains tax rate paid by rentiers like Willard Romney is really a very, very good thing.  To wit: The main reason Romney's effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. . . . But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream. . . . That's the theory, at any rate. It's a pretty solid theory, it's in most of the textbooks I've seen, and it shapes public policy in basically every country I'm familiar with. Empirically, it's a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy. Scott Lemieux at LGM demurs.Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in productive infrastructure investments rather than worthless accounting tricks, 2)ignore the economic benefits created by consumption, 3)assume that significant numbers of people will forgo money for doing nothing just because the profits will be taxed , and 4)ignore the fact that in most jurisdictions consumption is also “double taxed,” then reducing capital gains taxes looks good. But since all of these assumptions are (to put it mildly) highly contestable, it’s just question-begging.

Is Taxing Capital Income Fair? - In light of Mitt Romney's recent tax returns, the economic blogosphere has been kicking around the issue of capital taxation. Ryan Chittum at Columbia Journalism Review has an excellent overview of what people have been writing with "The capital gains preference." This is a response to Dylan Matthews and Matt Yglesias, who each present arguments from economists that capital gains taxes should be lower than other taxes, even potentially set at zero percent. Many economic arguments are about tradeoffs, but the argument for the zero tax rate of savings, also similar to the arguments for a consumption tax, is usually phrased as an argument about fairness. In order to frame the fairness argument, economists bring up a story of two similar individuals with one as a saver and one as a spender.Yglesias leans on the idea that we'll be a richer world without taxing savings, because people will respond to the incentives against savings here. I don't believe the research bears this out. I'm not an expert, but I believe the impact, if any, is small. In their excellent summary book on taxation, Taxing Ourselves (2004, 3rd edition), Joel Slemrod and Jon Bakija conclude that a "large number of studies have attempted to address these problems to some degree, and they generally come to the conclusion that saving is not very responsive to incentives."

So You Think You Can Fix the Corporate Tax System? - Almost everyone in Washington wants to lower the corporate tax rate. President Obama wants to go from today’s 35 percent down to 28 percent. Governor Romney and Ways and Means Chairman Camp want to get to 25 percent. There’s just one problem: paying for it. To offset the costs of cutting rates, policymakers will need to roll back tax preferences, each of which has powerful defenders.  To illustrate the challenges, the Committee for a Responsible Federal Budget just released a nifty corporate tax reform calculator that shows how your revenue goals and willingness to cut tax preferences affect what tax rate you have to accept. Bottom line: going low is harder than it sounds.

Pastors Take on the IRS - In light of the ever-increasing influence on National and local politics by churches and clergy, I was interested in the recent news that over 1,000 churches will be challenging the IRS by telling their parishioners who they want them to vote for in the upcoming national elections.  The event is dubbed “Pulpit Freedom Sunday” by its organizers and it is designed to challenge the IRS on its prohibition of churches from intertwining politics and religion, as a requirement of maintaining their tax-free status.  ‘ “It is a head-on constitutional challenge.”  The Johnson amendment in Section 501(c)(3) of the Internal Revenue Code prohibits tax-exempt charities and churches from intervening in political campaigns on behalf of or in opposition to any candidate. The IRS has been reluctant to revoke churches’ tax-exempt status for violating the more than 50-year-old IRS rule, but the agency has issued written warnings to dozens of churches.”

The Better Bargain: Transaction Tax, Not Austerity - As I’ve often argued, a financial transaction tax is deeply pragmatic, broadly popular and sorely needed. At a time when budget slashing is a bipartisan obsession, it offers vital revenue. As we struggle to escape the recession wrought by the 1 percent, it presents a simple solution to discourage speculation. As progressives fight too many defensive battles, the financial transaction tax presents an urgent opportunity to go on offense. Victory won’t come easy. Sarah Anderson, who directs the Global Economy Project at the Institute for Policy Studies, notes that “Obama’s communications director was asked about this at a press event during the convention and didn’t get an enthusiastic response. So that was a disappointing moment.” But the FTT would never have made it thus far without sustained and savvy organizing. Groups like National Nurses United, National People’s Action, and Health GAP have been tenacious in forcing the FTT onto the agenda. Their European counterparts have forged a critical mass of support within the EU. And they’re backed on both sides of the pond by a slew of economists and financial professionals who wield common sense against Chicken Little lobbyists.

Beyond Wall St., Curbs on High-Speed Trades Proceed - After years of emulating the flashy United States stock markets, countries around the globe are now using America as a model for what they don’t want to look like.  Industry leaders and regulators in several countries including Canada, Australia and Germany have adopted or proposed limits on high-speed trading and other technological developments that have come to define United States markets.  The flurry of international activity is particularly striking because regulators have been slow to act in the United States, where trading firms and investors have been hardest hit by a series of market disruptions, including the flash crash of 2010 and the runaway trading in August by Knight Capital that cost it $440 million in just hours. While the Securities and Exchange Commission is hosting a round table on the topic on Tuesday, the agency has not proposed any major new rules this year.

Distortion in Tax Code Makes Debt More Attractive to Banks - Thanks to a leaked video, we know that Mitt Romney divides the country into those who pay taxes and those who don’t, the makers and the moochers. There is one perhaps surprising group you can put in the latter category: the nation’s banks. Sure, banks pay taxes, but they pay a lot less thanks to a giant and underappreciated distortion in our nation’s tax code. Moreover, this tax code distortion makes the financial system and the economy more fragile, prone to bankruptcies and runs. Banks profit, and the economy teeters. Great bargain, huh? It’s the tax code’s favoring of debt over equity. For businesses, debt interest payments are tax deductible; equity payments, like when a company pays out a dividend, are not. At the margin, this encourages entities to take on more debt than they otherwise would, as Steven M. Davidoff noted in a Deal Professor column earlier this year. More debt not only makes companies more vulnerable to bankruptcy but also makes investors more susceptible to panics, when they withdraw their capital en masse. More equity would make the world more stable.

Quadrillion Dollar Derivatives Market 20 Times Global GDP - Real News Network video - Derivative bets not a zero sum game, have far reaching real world consequences

Ex-Regulator Has Harsh Words for Bankers and Geithner -- Sheila C. Bair, who tormented Wall Street and its Washington allies as a banking regulator, is taking a fresh swipe at her foes in retelling the dark days of the financial crisis. In a book to be released on Tuesday, the former chairwoman of the Federal Deposit Insurance Corporation takes aim at the bankers she blamed for the crisis. She also criticized fellow regulators, including current Treasury Secretary Timothy F. Geithner, for their response to the problems. Ms. Bair painted Mr. Geithner, the former head of the Federal Reserve Bank of New York, as an apologist for Wall Street, opposing some postcrisis reforms. She questioned whether his effort to inject billions of dollars into nine big banks masked a rescue intended solely for Citigroup, a theory that other government officials have rejected.

Sheila Bair Gives Her Account of the Crisis, and (Quelle Surprise!) the Bailouts and Geithner Do Not Look Pretty – Yves Smith - Sheila Bair’s new book Bull by the Horns is out and based on early reports, it looks like it skewers the bailouts in general and Tim Geithner in particular. But it also gets a lot into the weeds in what still needs to be fixed in bank-land, which is a part of these crisis post-mortems and retrospectives that too often get short shrift. Rolfe Winkler at the Wall Street Journal has an informative chat with her about the book and her experience during the crisis. Despite her understated demeanor, she says some pretty eye-opening stuff, for instance, that Geithner was on the phone all the time during the worst of the crisis with Citigroup chief Pandit, with the aim of end running her. She similarly gets in an adept dig at Geithner’s lack of oversight while at the NY Fed and his relationship with his mentor Bob Rubin who was then on Citi’s board, fiddling while the bank burned pulling down over $10 million a year during his time with the bank. As William Cohan noted: On his watch, the federal government was forced to inject $45 billion of taxpayer money into the company and guarantee some $300 billion of illiquid assets. Taxpayers ended up with a 27 percent stake in Citigroup, which was sold in 2010 at a cumulative profit of $12 billion. She also says that Andrew Ross Sorkin didn’t speak to her at all in his research on his book Too Big to Fail, which tried to depict Bair as “not a team player” (a kiss of death in big government jobs) and a grandstander.

Sheila Bair against the world - American Banker’s Donna Borak has found the juiciest bits of Sheila Bair’s book yet — and it turns out to be buried in, of all places, the chapter on Basel III. Bair’s backstory to the September 2010 Basel III announcement is full of insider gossip and score-settling, and from reading Borak’s account I’d definitely class Bair as a dubiously reliable narrator. But her story is fascinating, all the same.  For one thing, Bair reveals, Tim Geithner involved himself quite deeply in Basel III negotiations. Bair can’t stand Geithner, and ascribes malign intent to everything he does. Geithner asks questions about Basel III without explicitly saying what his own opinion is? “It wasn’t clear whether Tim was trying to build consensus among the U.S. regulators or trying to stir the pot.” Geithner agrees to push for higher capital standards — exactly what Bair wanted all along? Well, that’s just his way of trying to marginalize her: Bair sees the entire episode as a power play by Geithner. She argues he was trying to blow up the meeting between international regulators so that the issue would be kicked higher to the Group of 20 finance ministers who were set to meet in November. If the G-20 took over negotiations, Geithner would be leading the U.S., not Bernanke. The FDIC would have little say in the final number.

US regulator calls for faster Libor reform - The top US regulator overseeing the derivatives market has questioned the accuracy of a benchmark interest rate and has argued for quicker reforms, potentially putting him at odds with fellow regulators in the US and Europe.  Gary Gensler, Commodity Futures Trading Commission chairman, told the European parliament on Monday that data compiled by his agency suggested the London interbank offered rate continued to be flawed and needed either radical reform or abolition.  Libor is a set of rates used to price hundreds of trillions of dollars of financial instruments worldwide. It is based on self-reported borrowing costs for unsecured loans between banks.  Barclays Bank agreed in June to pay US and UK authorities $450m to settle allegations that it had tried to manipulate Libor over several years. Scrutiny has since increased as government investigations threaten up to 20 banks and inter-broker dealers.  While regulators in Europe and the US concur that the system used to determine Libor is flawed, there is little agreement on how quickly it should be replaced.  Officials at the Federal Reserve and US Treasury have argued that it would be difficult to find an alternative to Libor without disrupting financial markets, as the rate is embedded in existing contracts and loans. Regulators in the UK have said banks under their jurisdiction have strengthened their internal controls and are reporting the most accurate rate they can, given the lack of unsecured lending between banks.

Counterparties: How to fix libor - The Wheatley Review is out. No, that’s not an obscure literary magazine – it’s a British regulator’s proposal to overhaul Libor, everyone’s favorite manipulated benchmark interest rate. In June, Barclays agreed to pay a $470 million fine for manipulating Libor. Libor is calculated daily based on banks’ own reporting of their borrowing costs, which, of course, left it open for manipulation. If banks report high borrowing costs, the markets can get spooked and think they’re in trouble; report artificially low borrowing costs, like Barclays did, and your traders could make millions. Enter Martin Wheatley, who’s the managing director of the UK’s Financial Services Authority and wants to push “the reset button on Libor”. The new Libor will no longer be overseen by the inherently conflicted British Bankers’ Association. Say goodbye, in other words, to that secret Libor committee of bankers meeting in undisclosed locations. Manipulating Libor will now also be a criminal offense, and Libor will be simplified to 20 rates from 150. Also, Libor will be more closely tied to real lending transactions whenever possible. All of this seems perfectly sensible and drew praise from Bloomberg and Breakingviews’ George Hay. Simone Foxman likes the proposal because it restores Libor to its original state of a “high-brow measure of interbank lending”. To Matt Levine, who’s done terrific work on the subject, the guidelines for what counts as a real transaction are vague enough that it’s still a matter of “ehhh, figure out the right Libor and write it down.” But Wheatley does get the incentives right:

The Myth of Fixing the Libor - Sometimes modern finance has a great need for something, and so bankers invent products that appear to fill that need. When it turns out that the invention was actually something else entirely, people are shocked. So it was a few years ago with senior tranches of asset-backed securities. Investors perceived a need for risk-free assets with floating rates, and Wall Street banks served up trillions of dollars worth of such paper — or at least they said they did. So it is now with Libor — the London interbank offered rate — which not coincidentally was an important component of that other folly. That there was fraud based on made-up numbers is clear. That the system can be fixed is not. But Martin Wheatley, Britain’s top financial regulator, has concluded Libor can be saved. “Although the current system is broken, it is not beyond repair,” he said in remarks prepared for delivery on Friday. He may turn out to be overly optimistic. Libor is, and is likely to remain, a fiction. You can maintain the fiction, or you can embrace a much less palatable reality.

Did JPMorgan Host a Secret Meeting on Libor, With 7 Members of the NY Fed - JPMorgan Chase, the Wall Street mega bank now under criminal probes for losing billions of FDIC insured deposits in risky derivative trades, for years has been one of the dinner hosts of an unseemly industry trade and lobby group established by none other than the Federal Reserve Bank of New York, its own regulator.  On the evening of October 8, 2009, representatives of the largest Wall Street banks enjoyed cocktails and dinner at 270 Park Avenue in Manhattan, the headquarters of JPMorgan Chase.  Bill Hirschberg of Barclays was there; Jeff Feig of Citigroup; Troy Rohrbaugh of JPMorgan; Fabian Shey of UBS and numerous others.   Also  enjoying the food and conversation were seven officials from their regulator, the New York Fed.  The group is called the Foreign Exchange Committee and its sponsor is the New York Fed, the same body tasked with policing these firms to root out illegal conduct. On this particular evening, there is the suggestion that more than foreign exchange may have been discussed.  In attendance was Michael Cross, a high ranking official from the Bank of England who has been centrally involved in the Libor matter.

Wall Street Rolling Back Another Key Piece of Financial Reform - Taibbi - Wall Street lobbyists are awesome. I’m beginning to develop a begrudging respect not just for their body of work as a whole, but also for their sense of humor. They always go right to the edge of outrageous, and then wittily take one baby-step beyond it. And they did so again last night, with the passage of a new House bill (HR 2827), which rolls back a portion of Dodd-Frank designed to protect cities and towns from the next Jefferson County disaster. So what did Wall Street lobbyists and trade groups like SIFMA (the Securities Industry and Financial Markets Association) do? Well, they did what they’ve been doing to Dodd-Frank generally: they Swiss-cheesed the law with a string of exemptions. The industry proposal that ended up being HR 2827 created several new loopholes for purveyors of swaps and other such financial products to cities and towns. Here’s how the pro-reform group Americans for Financial Reform described the loopholes (emphasis mine): For example, any advice provided by a broker, dealer, bank, or accountant that is any way “related to or connected with” a municipal underwriting would be exempted from the fiduciary requirement. A similar exemption would be created for all advice provided by banks or swap dealers that is in any way “related to or connected with” the sale to municipalities of financial derivatives, loan participation agreements, deposit products, foreign exchange, or a variety of other financial products.

What's Up With the Dodd-Frank Legislation? - Back in July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The difficulty with the law has always been that while it was fairly clear on its goals, it did not specify how to reach those goals--instead turning over that task to current and newly-created regulatory agencies.  If you're looking for an update on how the law is proceeding, a good starting point is the Third Quarter 2012 issue of Economic Perspectives1, published by the Federal Reserve Bank of Chicago, which has six articles on the Dodd-Frank legislation. Douglas D. Evanoff and William F. Moeller offer an overview of the goals and approach of the law in their opening piece2 (footnotes and citations omitted):"The stated goals of the act were to provide for financial regulatory reform, to protect consumers and investors, to put an end to too-big-to-fail, to regulate the over-the-counter (OTC) derivatives markets, to prevent another financial crisis, and for other purposes. ... Implementation of Dodd–Frank requires the development of some 250 new regulatory rules and various mandated studies. There is also the need to introduce and staff a number of new entities (bureaus, offices, and councils) with responsibility to study, evaluate, and  promote consumer protection and financial stability. Additionally, there is a mandate for regulators to identify and increase regulatory scrutiny of systemically important institutions.  ... Two years into the implementation of the act, much has been done, but much remains to be done."

A Review of Occupy the SEC on the One Year Anniversary of OWS – One Working Group’s Effort to Serve the Interests of the 99% - Contrary to critics, who seem to think that the only way for Occupy Wall Street to have an impact is by taking to the streets, the movement continues to focus on developing novel ways to reduce the power of a deeply entrenched, abusive financial services industry. One way is by serving as a people’s lobbyist to shine light on the way critical aspects of financial services regulation are negotiated, usually out of sight of the public.Occupy the SEC’s participation in the Volcker Rule rulemaking comment process is a reminder that opportunities exist to fight industry lobbyists on their own turf by exercising rights available to all citizens. The Administrative Procedures Act requires that the regulators solicit public comment on proposed rules and enter those comments into the public record. It also requires the regulators to defend or refute the comments received in their final rulemaking. Press coverage of this publically available information should help to bring pro-regulatory pressure and support to a regulatory community used to hearing from only one side. When the rules are finalized we will have another opportunity to evaluate whose interests have been served by the regulators. We would prefer that the regulators take a stronger stand against the financial services lobby on their own. Apparently we are not alone, or even in the minority. Last week Reuters reported on a new opinion survey on corporate misconduct prepared by law firm Labaton Sucharow. Key findings from the report:

    • - 64% believe corporate misconduct was a driver of the crisis
    • - 81% want more government involvement in controlling misconduct
    • - 63% want more government funding for regulators and law enforcement

The Bank of England busts myths on equity capital requirements -- YVES SMITH helpfully points us to a recent speech by Robert Jenkins, a member of the Bank of England’s Financial Policy Committee. Mr Jenkins busts three myths about the impact of higher equity capital requirements peddled by apologists for “Too Big to Fail” banks: they will decrease systemic fragility while curbing new lending, they will destroy shareholder value, and they will hurt domestic banks. The first myth is the easiest to bust: Take a minute to do the math. Bank “A” has a trillion euro balance sheet supported by 50 billion of equity. Now, let’s double the equity required to 100 billion and retire 50 billion of bank debt. Has the balance sheet shrunk? No. Has the bank had to cut credit? No. Does more capital necessarily lead to less lending? No. So does society have to choose between safety and growth? No. So much for myth number one. Equity and debt are simply two different types of liabilities that a bank can issue to finance its assets (loans, securities, etc.) Credit availability is determined by the quantity of assets and the willingness of the bank to create more assets. The composition of the bank’s liabilities has little to do with this. You could easily have banks that fund themselves exclusively by issuing equity, like bond mutual funds. TBTF bankers retort that this is not practical because any increase in the ratio of equity to assets will necessarily dilute existing shareholders. This will reduce their return on equity (RoE), thereby leading to higher funding costs and ultimately less lending. At this point, it is worth looking at the academic evidence. Studies of investment and commercial bank balance sheets show that these financial firms are extremely reluctant to alter the absolute amount of equity outstanding

Thomas Hoenig Read All of Basel III . . .. . and doesn’t like what he sees. In a post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, the former president of the Kansas City Federal Reserve Bank echoes some of the issues raised by Andrew Haldane, which I discussed earlier. The core problem, for Hoenig, is that Basel III “promises precision far beyond what can be achieved for a system as complex and varied as that of U.S. banking.” Banks were able to arbitrage the risk-weighted capital requirements of Basel II? Well, we’ll close all of those loopholes, one by one. But this cannot be done, given the incentives and power imbalances at work: “Directors and managers . . . will delegate the task of compliance to technical experts, and the most brazen and connected banks with the smartest experts will game the system.” How do we know this will happen? Just look at history:  large banks increased their leverage (measured simply) while keeping their risk-weighted capital ratios constant. Conceptually speaking, this can only happen if their asset portfolios were becoming less risky over the period (1999–2007). Does anyone think this was actually happening? In the long term, Hoenig ascribes the decline of capital levels in U.S. banks to the replacement of market forces by deposit insurance and regulators as guarantors of banks. Even if we shouldn’t go back to the unregulated days of the nineteenth century, he argues that we should go back to the capital levels that applied then. Otherwise, lower capital levels reflect a subsidy from the federal government to bank shareholders, who can take on greater risk because of the government safety net.

Why Basel III won’t work - After the Ferbruary post on the flaws of Basel III regulation (see discussion) we got a number of emails pointing to the importance of uniform global banking rules. "By criticizing Basel III you support these banksters" was one of the comments. Of course the wrongs of banking could be set right by new rules - even if they are a messy modification of an earlier set of regulations that got large banks (like Citi) into trouble to begin with (see discussion from 2009). But many professionals in the financial services industry continue to support Basel III, in part because it benefits them. Most people don't fully appreciate how much business the major international accounting/consulting firms for example get from engagements to implement new capital rules at banks. That's why it's no surprise that many advocates of (and experts on) this "enhanced" regulation just happen to be consultants from the Big 4 and other large accounting firms. Nothing wrong with consulting, but there is a bit of a conflict here. Clearly some of the new rules are important - particularly those dealing with adequate liquidity. But the prescriptive methods used to solve every possible concern dealing with capital and liquidity will push financial organizations to focus on the "letter of the law" instead of the "spirit of the law". And loopholes will inevitably arise (as they did with Basel I) creating more systemic risks. Some of the problems with Basel III are laid out in this excerpt from a well written article on Bloomberg Brief. The implementation issues emerging from the new regulatory framework are troubling indeed.

The shrinking corporate CDS market - The Dodd–Frank financial reform is killing the single name corporate CDS market. Liquidity in this market is drying up quickly. This is due mostly to dealers' inability to take positions when they make markets (Volcker Rule) and a cumbersome clearing process that will impose higher margin on corporate CDS for end-users (in some cases higher than the equivalent positions in corporate bonds via repo). In fact the business of basis trades - bonds vs. CDS - is no longer viable in many cases because of the margin requirements on both sides and no ability to offset. The fact that dealers who clear CDS are not expecting this business to be profitable (see discussion) is not helping either. And single name CDS regulated by the SEC while indices such as CDX regulated by the CFTC adds to the uncertainty. At the same time margin and clearing rules differ materially among the clearinghouses (ICE, CME) and trades are not fungible between them (a trade cleared on the CME can not be offset with the opposite trade cleared via ICE). This uncertainty is adding to this decline in liquidity. The situation is so bad that an index of 100 CDS doesn't have enough liquid CDS for the index to be formed. FT: - Indices that track the price of credit default swaps (CDS), contracts which act as insurance against a default on corporate bond payments, have become a popular way for banks and hedge funds to speculate on the creditworthiness of American companies and for bond fund managers to hedge risks in their portfolio.  But underlying CDS trading has shrivelled to such an extent that there are not enough actively traded names to make up a 100-company index.

Wall St engineering revival of CDS - Wall Street financial engineers have devised a new way to combat declining trading in the credit derivatives market – they are revamping an index to add financial instruments that do not exist. Indices that track the price of credit default swaps (CDS), contracts which act as insurance against a default on corporate bond payments, have become a popular way for banks and hedge funds to speculate on the creditworthiness of American companies and for bond fund managers to hedge risks in their portfolio. But underlying CDS trading has shrivelled to such an extent that there are not enough actively traded names to make up a 100-company index. This week, the index provider, Markit, will cross a Rubicon and begin to include three companies in its North American high-yield CDX index for which no bank is offering a CDS. Markit and derivatives traders hope the addition of CIT Group, Charter Communications and Calpine Corp will force banks to launch CDS on the three companies. Global trading in individual corporate CDS is down 23 per cent by volume this year, according to the Depository Trust & Clearing Corp.

A massive short squeeze in gasoline futures is the explanation for the latest spike - As discussed earlier (see post), a large spike in gasoline prices could do a great deal of damage. Unlike many emerging markets nations, Americans can in fact afford higher gas prices (as painful as it is for the consumer), but the psychology of having to shell out 30-50% more than they paid just a few months ago will clearly inhibit spending across the board. Gasoline price is one economic indicator that most Americans track daily. And the shock to gasoline futures today will do a great deal of damage if it propagates to the gas pump. The explanation for the spike this time is that someone was covering a large short position. It's almost as good an explanation as the hurricane Isaac causing prices to climb long after the hurricane was gone (see discussion). WSJ: - gasoline futures soared 6.3% Friday--a jump some traders attributed to investors covering bets on lower prices as the current futures contract expired.  Reformulated gasoline for October delivery rose 19.8 cents to settle at $3.3420 a gallon, as the front-month contract came to an end on the New York Mercantile Exchange. By contrast, the next contract, November, finished the session at only $2.9167 a gallon. 

What Business is Wall Street In ? - Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in. The only people who know what business Wall Street is in are the high frequency and automated traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible. The best analogy for traders ? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, high frequency traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade or the rebate they are getting from the exchange because they provide liquidity to the market.

The Value of the Revolving Door: Political Appointees and the Stock Market - The presidential election campaign is in full swing in the US. Whoever wins the presidential race in November will face the challenge of filling top positions in the federal administration with political appointees. Inevitably, he will tap the reservoir of private-sector experts. And with that, allegations of conflicts of interest will emerge since some appointees come from firms that fall under the regulatory jurisdiction of the respective agency or from firms that may hope to win procurement contract awards. For example, on the very same day that President Obama tightened anti-lobbyist rules, he nominated Raytheon executive William J Lynn III as Deputy Secretary of Defense. The revolving door between industry and government is an old phenomenon but evidence on its consequences is surprisingly scarce. Whether and to what extent firms benefit from the political appointment of one its members largely remains a matter of speculations and anecdotes. This column sheds light on this issue.

Insight: U.S. probe of HSBC tangled up in bureaucracy, infighting - At least 11 different U.S. departments, offices and regulators - largely comprising the two competing groups - as well as the U.S. Senate have probed HSBC for money-laundering lapses in investigations that date back to at least 2007. Ihlenfeld's letter, other Department of Justice documents, regulatory filings and interviews with those close to the HSBC prosecution show how multiple - and sometimes overlapping - inquiries have slowed the prosecution and added to costs, as well as led to rancor within the department and between different government agencies.They also underscore the problems the government faces in policing global banks such as HSBC that can enable a wide range of illicit transactions -- from small-time fraud to laundering of tens of billions of dollars for drug cartels and countries that are the subject of U.S. sanctions, such as Iran.

BofA pays $2.4 billion to settle claims over Merrill (Reuters) - Bank of America Corp agreed on Friday to pay $2.43 billion to settle claims it hid crucial information from shareholders when it bought investment bank Merrill Lynch & Co at the height of the financial crisis. The settlement, among the biggest of its kind to stem from the 2008 meltdown, underscores how Bank of America is still suffering from decisions it made during the crisis, even as competitors are moving on. The second largest U.S. bank likely lost money in the third quarter in large part because of the agreement, while other major banks, including JPMorgan Chase & Co and Wells Fargo & Co are expected to earn billions of dollars each. As Lehman Brothers failed in September 2008, Bank of America agreed to buy Merrill Lynch. But in the weeks after that agreement, the bank tried unsuccessfully to scrap the deal. Merrill Lynch generated more than $15 billion of losses and its executives agreed to award employees up to $5.8 billion of bonuses.

Cyber Attacks on U.S. Banks Expose Computer Vulnerability -- Cyber attacks on the biggest U.S. banks, including JPMorgan Chase & Co. and Wells Fargo & Co., have breached some of the nation’s most advanced computer defenses and exposed the vulnerability of its infrastructure, said cybersecurity specialists tracking the assaults. The attack, which a U.S. official yesterday said was waged by a still-unidentified group outside the country, flooded bank websites with traffic, rendering them unavailable to consumers and disrupting transactions for hours at a time. Such a sustained network attack ranks among the worst-case scenarios envisioned by the National Security Agency, according to the U.S. official, who asked not to be identified because he isn’t authorized to speak publicly. The extent of the damage may not be known for weeks or months, said the official, who has access to classified information. “The nature of this attack is sophisticated enough or large enough that even the largest of the financial institutions would find it difficult to defend against,” Rodney Joffe, senior vice president at Sterling, Virginia-based security firm Neustar Inc., said in a phone interview. While the group is using a method known as distributed denial-of-service, or DDoS, to overwhelm financial-industry websites with traffic from hijacked computers, the attacks have taken control of commercial servers that have much more power, according to the specialists.

 C.E.O.’s and the Pay-’Em-or-Lose-’Em Myth - CORPORATIONS are forever defending b executive paydays. If we don’t pay up, the argument goes, our sharpest minds will jump to our rivals.  Now, there are good reasons for rewarding top executives. The decisions they make are so crucial to their companies that the priority should be to hire competent people rather than scrimp on pay.  But a study released last week pretty much drives a stake through that old “pay ’em or lose ’em” line — what you might call the brain-drain defense. It also debunks the idea that companies must keep up with the Joneses by constantly comparing their executives’ compensation with that of similar companies. New research by Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance concludes, contrary to the prevailing line, that chief executives can’t readily transfer their skills from one company to another.

Vital Signs Chart: Falling Corporate Borrowing Rates - Rates on high-yield corporate bonds are near record lows. The rate on high-yield, or junk, bonds was 5.42 percentage points above comparable Treasurys last week, down from 9.1 points in October 2011. Corporate borrowing rates have fallen as the Federal Reserve’s plan to buy more mortgage-backed securities has steered investors seeking higher yields into other fixed-income assets.

Feds Order Discover to Refund $200M to Cardholders - Discover Bank is paying $214 million to settle charges that it pressured credit card customers to buy costly add-on services like payment protection and credit monitoring. Federal regulators said Monday that Discover call-center workers enrolled customers in the programs without their consent, misled them about the benefits and left customers thinking the products were free. Discover will pay a $14 million fine and refund $200 million directly to more than 3.5 million customers. The action was taken by the new Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. Discover said this summer that it expected an enforcement action about add-on products.

CFPB finds discrepancies in credit scores provided by credit bureaus - Credit bureaus sometimes provide Americans with credit scores that are different from those that lenders use in deciding whether to offer a loan and at what interest rate, the government’s consumer watchdog found in a study released Tuesday.. Researchers at the Consumer Financial Protection Bureau found that the discrepancy happens for as many as one in four people.The consumer agency issued the study five days before it will begin supervising credit-reporting firms. That will give the bureau oversight of about 30 companies that make up the majority of the $4 billion industry. Credit agencies have come under greater scrutiny as consumer advocates question the accuracy of the scores, which affect the ability to get a mortgage, car loan, credit card and sometimes even a job. The scores aim to measure the likelihood that a consumer would repay a debt based on his or her record. Given the widespread use of the scores, even small variations can have huge consequences. Discrepancies could lead some lenders to deny applicants student loans or mortgages, or offer terms that are worse than warranted, the study concluded. 

On FICO’s Dubious Explanation of Why it Treats Short Sales the Same as Foreclosures -- April Charney sent me a link to a post which had a condescending explanation of a recent piece by FICO that warrants further discussion. The FICO article attempted to justify its position that someone who enters into a short sale gets his credit score dinged as badly as for a foreclosure. Yes, you read that correctly. One of the reasons many borrowers go to the effort to arrange a short sale, as opposed to the faster and easier process of “jingle mail” is that they assume that the damage to their credit score will be lower. Here is the rationale, per FICO’s Banking Analytics blog (emphasis theirs): One of the questions we get asked most often is whether it remains appropriate for the scoring model to treat a short sale in a manner similar to a foreclosure….we conducted a study isolating more recent occurrences of mortgage stress events. By studying the subsequent performance of these borrowers on all accounts, we determined the credit risk associated with their mortgage events. As the graph below shows, short sales remain extremely risky. However, foreclosures have a bad rate of 72.0% while short sales have a better bad rate of 55.1%. Should that lead to less punitive treatment for short sales?While it is true that short sales represent slightly better risk than foreclosures, they do not perform well enough to merit a more positive treatment in the FICO® Score. Here’s why. In the population we studied, one out of every two borrowers who experienced a short sale went on to default on another account within two years. That is exceptionally high risk. Additionally, the overwhelming majority of consumers with short sales have some other evidence of mortgage delinquency.

Unofficial Problem Bank list declines to 878 Institutions - This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Sept 21, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  As anticipated, the OCC released its actions through mid-August 2012 that led to many changes in the Unofficial Problem Bank List. This week there 13 removals and five additions leaving the list with 878 institutions with assets of $327.4 billion. A year ago, the list held 986 institutions with assets of $400.4 billion.

Foreclosure Crisis Year Six - While industry and government news releases emphasize the declining rates of delinquency and foreclosure, the declines remain agonizingly slow.  Yes, serious defaults on mortgages are down from their peak in 2010.  On the other hand, there have been 4.5 million completed foreclosure sales since 2007 and there are still between 4 and 5 million mortgages delinquent or in foreclosure now.  Defaulted mortgages are still considerably more than 10% of all mortgages, at least double the rate in normal times, and the foreclosure inventory is still at about quadruple the pre-crisis rate.  There are many ways to extrapolate the trends, depending on whether you use quarter-over-quarter changes or year-over-year changes, but we undoubtedly have years to go before the foreclosure crisis can be declared over. The good news is that the performance of modifications continues to improve, according to the latest OCC mortgage metrics.  As more and more modifications reduce interest rates and payments, and even principal, the number of re-defaults steadily and continually goes down.  Only 22% of 2011 modifications later went seriously delinquent or were foreclosed.   Principal reductions were included in 10% of all modifications in the 2nd quarter of 2012.  The 10% number masks some interesting variations.  Principal write-downs were featured in 20% of HAMP mods versus about 7% of in-house mods.  Bank regulators and FHFA clearly have different views on the soundness of principal reductions; banks are writing down principal on 28% of their portfolio loan mods and 16% for private securitized loan mods, while principal reduction for Fannie and Freddie mortgage mods remain at 0%. 

LPS: Mortgage delinquencies decreased in August - LPS released their First Look report for August today. LPS reported that the percent of loans delinquent decreased in August from July, and declined about 10% year-over-year. The percent of loans in the foreclosure process also decreased in August, but remain at a very high level. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.87% from 7.03% in July. The percent of delinquent loans is still significantly above the normal rate of around 4.5% to 5%. The percent of delinquent loans peaked at 10.57%, so delinquencies have fallen over half way back to normal. The percent of loans in the foreclosure process declined to 4.04%. The table below shows the LPS numbers for August 2012, and also for last month (July 2012) and one year ago (August 2011). The number of delinquent properties, but not in foreclosure, is down about 10% year-over-year (530,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 5% or 100,000 year-over-year.  The percent of loans less than 90 days delinquent is close to normal, but the percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high.

Fannie Mae and Freddie Mac Serious Delinquency rates declined in August - Fannie Mae reported that the Single-Family Serious Delinquency rate declined in August to 3.44% from 3.50% July. The serious delinquency rate is down from 4.03% in August last year, and this is the lowest level since April 2009. The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%. Freddie Mac reported that the Single-Family serious delinquency rate declined in August to 3.36%, from 3.42% in July. Freddie's rate is down from 3.49% in August 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%. This is the lowest level for Freddie since August 2009. These are loans that are "three monthly payments or more past due or in foreclosure". In 2009, Fannie's serious delinquency rate increased faster than Freddie's rate. Since then, Fannie's rate has been falling faster - and now the rates are at about the same level.  Although this indicates some progress, the "normal" serious delinquency rate is under 1% - and it looks like it will be several years until the rates back to normal.

FHFA punishes states - FHFA, the bizarre federal agency running our nationalized mortgage funders Fannie and Freddie, announced a proposal last week that would surcharge mortgages in five states – New York, New Jersey, Florida, Illinois and Connecticut, with a 30 basis point (0.3%) fee.  The ostensible reason? It claims Fannie and Freddie loses money in those states due to long foreclosure delays.  New York and Connecticut, not coincidentally, have two of the most successful foreclosure mediation programs going. FHFA’s move is clearly political, and a product of its foreclose-above-all ideology.  FHFA makes two incorrect assumptions – that foreclosure delays are caused by state laws, and that foreclosure delays in the current environment increase Fannie and Freddie losses.  First, the causes of foreclosure timelines in various states are complex, and often the result of mortgage servicer failures, not legal system failures.  Some have suggested that the delays in Florida are a simple consequence of the fact that servicers don't want to dump more unsold foreclosure properties on the market, so they are holding off on pushing cases through the pipeline. Why current borrowers should pay for these problems is not clear. Second, the effects of foreclosure delays on losses are not obvious.  Certainly, foreclosure delays will increase losses on a home if it is eventually sold at a foreclosure sale.  However, most loans in foreclosure do not result in a foreclosure sale.  Loans that end up with almost any other outcome will usually result in lower losses to the investor.  For example, a short sale at today’s market value will normally produce a smaller loss than a foreclosure sale.

Analysis: Housing regulators loosen rules, but at what cost? (Reuters) - Just four years after toxic U.S. mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a U.S. housing regulator may be making it easier for banks to make bad loans without suffering losses. The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae and Freddie Mac - the government-owned companies that guarantee home loans made by banks - to hold lenders accountable when mortgages go bad. Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle. At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad. Under the current rules, the two U.S. government-backed companies can push banks to buy back mortgages that were fraudulent, or not properly underwritten. Under the new regulations, starting with loans sold to Fannie Mae and Freddie Mac in January, if the borrower makes payments for 36 consecutive months, banks cannot be asked to buy them back due to underwriting or appraisal problems. So if the borrower did not have enough income to qualify for a loan to begin with but Fannie Mae or Freddie Mac did not notice for three years, the bank could not be pressed to buy back the loan.

Quelle Surprise! Mortgage Settlement Monitor Advocates Going Easy on Servicers Since We Don’t Dare Ask Them to Spend Money to Meet Their Contractual Obligations -  Yves Smith - The mortgage settlement looks to be every bit as bad as cynics predicted. The most exacting and detailed reporting on the settlement terms came from attorney Abigail Field, who undertook the painful process of reading the entire agreement and making sense of what the detailed terms meant. And the latest word from the settlement monitor Joseph Smith is yet another confirmation of the settlement process as enforcement theater. One of her important finds was that the servicing standards, touted as one of the key victories in the deal, were worse than a joke. They didn’t simply call on servicers to obey existing law; they put in place supposedly new standards which in the fine print allowed for such large error rates as to weaken rather than strengthen regulators’ hands. For instance, if you believe in the rule of law, a wrongful foreclosure should be absolutely impermissible. But the regulators have now decided that banks can screw up 1% of the time and they’ll let it slide, the poor wronged homeowner will have to fight that uphill battle all on his own. To put that in practical terms, that means the authorities deem 33,000 wrongful foreclosures since 2008 to be a perfectly acceptable level of theft. Read her post “The Mortgage Settlement Lets Banks Systematically Overcharge You and Wrongly Take Your Home. for more ugly details” The settlement also does squat to stop document fraud. Her bottom line: The mortgage settlement signed by 49 states and every Federal law enforcer allows the rampant foreclosure fraud currently choking our courts to continue unabated.

Foreclosure Fraud Settlement Update: Checks to Victims, Servicing Standards, Ongoing Lawsuits - A number of states have announced that they are sending out claim forms to foreclosure victims who are eligible for a one-time cash payment under the foreclosure fraud settlement. $1.5 billion has been earmarked for roughly 750,000 homeowners (depending on takeup) who were foreclosed upon between Jan. 1, 2008, and Dec. 31, 2011, by one of the Big Five servicers in the settlement (Bank of America, JPMorgan Chase, Wells Fargo, Citi and GMAC/Ally). The plan is to pay out the claims in mid-2013. If this works and they get the target of 750,000 responses, then the payout will amount to $2,000 “sorry your home was stolen” checks. However, the challenge will come in actually finding these homeowners, who after all lost their home and experienced an upheaval in their lives. They may have left a forwarding address, and presumably that’s where these claim forms are being sent, but that doesn’t necessarily mean that the families still live there. Moreover, foreclosure victims may be wary of anything through the mail that has their old bank’s name on it and references their past foreclosure. Hopefully the packet doesn’t look like the bank going after them for a deficiency judgment. Another element of the foreclosure fraud settlement kicking off in the next several weeks are the servicing standards

Did Scott Brown Facilitate Predatory Loans? - There's no question that we at the Slips take a particular interest in the Massachusetts Senate race. But usually we don't have much to say about it. Still, something Scott Brown said today struck me as rather significant--much more so than a lot of the things that have been covered in the media about the Senate race.  It turns out that Senator Scott Brown (R-Mass.) is a real estate attorney among other things. (Beats modeling, I guess.) Brown apparently did real estate closings and title work.  His clients included local banks as well as some "mortgage companies," including some that are no longer in business, as well as Fidelity National and First American. If you're not familiar with Fidelity National, it's the former parent of LPS, which owned DocX, the document forgery firm featured on 60 Minutes and home of the Robosign. LPS is under a consent order with the Federal Reserve Board for its servicing activities, and DocX was criminally indicted by Missouri (and subsequently settled). Brown was doing work for Fidelity National when it still owned LPS.

Did Scott Brown Have Patient Zero of the Foreclosure Fraud/Robosigning Scandal, Lender Processing Services, as a Client? -  Yves Smith - Established Naked Capitalism readers may have noticed that I’ve avoided commenting on the Elizabeth Warren/Scott Brown race in Massachusetts. That’s largely because this is a finance and economics blog, and aside from the fact that the Warren candidacy has led lots of out of state financial firms to pour money into the Brown campaign, the discussion of issues in that particular race hasn’t entered into terrain that would merit a stand-alone post. But in a new post, Adam Levitin raises an issue that warrants more disclosure from Brown. Admittedly, Levitin is an ally of Warren’s, but that does not invalidate the fact set he raises (And before people who have wandered in from Breibart land try talking up the son of Dijongate faux scandal about Warren not having a Massachusetts law license, please read this debunking). Brown is a real estate attorney, and his clients included area bank and “mortgage companies,” including Fidelity National. Fidelity National was the parent of Lender Processing Services, which was spun off in 2008. We’ve written at length about LPS’s questionable business model. LPS operates the software platform for over 60% of the servicing in the US. This discussion, from a March 2011 post, will give you a feel for what is not right (plenty) about LPS:Lender Processing Services has played a singularly destructive role in the mortgage servicing industry. The firm not only offered document fabrication services through DocX, a company it acquired and was forced to shut down after the Department of Justice started sniffing about, but is being revealed to be involved in more abuses as far as borrower records and legal process are concerned. Readers may recall that it is also the target of two national class action suits on illegal legal fee sharing which if successful will produce multi-billion-dollar damages.

How Much Can Refinancing Reduce the Risk of Mortgage Defaults? -NY Fed -  Improving the ability of homeowners to take advantage of prevailing low mortgage rates by refinancing has remained an active topic of discussion. In a speech in January, New York Fed President Bill Dudley advocated for efforts “to see refinancing made more broadly available on a streamlined basis and with moderate fees to all prime conforming borrowers who are current on their payments.” In an earlier post, we argued that such a refinancing program would not represent a zero sum game between borrowers and investors; rather, it would yield net macroeconomic benefits.   In this post, we argue, based on new research from 2012, that an additional benefit would be a lower risk of default for households that refinance their mortgages. This would result in savings for taxpayers, who are exposed to the credit losses by Fannie Mae and Freddie Mac. Our research uses the novel approach of investigating the impact of refinancing by studying payment reductions in adjustable-rate mortgages (ARMs). While ARMs are significantly less common than fixed-rate mortgages and differ in some ways, this methodology provides some advantages for estimating the impact of refinancing on fixed-rate borrowers, which is a difficult topic to address for several reasons.

The Rental Alternative to Foreclosure -FOR homeowners who have been buffeted about by the foreclosure process, the suggestion that they willingly hand their deed to the lender and rent the home instead may only add insult to injury.  But such an alternative to foreclosure — variously called “deed for lease” or “mortgage to lease” — is an option for a select few. Fannie Mae introduced a rent-back program in 2009, and this year, both Bank of America and CitiMortgage announced that they would try a similar approach in a handful of markets.  The programs are basically an extension of what’s known as “deed in lieu of foreclosure.” In this process, the lender agrees not to foreclose if the homeowners simply hand over the deed to their property.  The new element is a rental option: after relinquishing the deed, homeowners who meet certain requirements may sign a lease to stay on as renters for one to three years (depending on the lender).  This alternative may be ideal for families seeking to weather the unpredictability of the foreclosure process, and who want to keep their children in the same school district, said Dean Baker, a co-director of the Center for Economic and Policy Research.  Mr. Baker says he began pushing for this approach when the market first collapsed five years ago because he views it as both simpler and less politically controversial than loan modifications and write-downs. “It doesn’t cost the government anything, it doesn’t require a lot of bureaucracy, and it doesn’t raise some of the moral-hazard issues that come up with other programs,” he said.

Fed Helps Lenders’ Profit More Than Homebuyers:Mortgages - The Federal Reserve’s latest mortgage bond purchases so far are helping profit margins at lenders including Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM) more than homebuyers and property owners looking to refinance.Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30- year loans have fallen by just 0.13 percentage point, compared with a drop of about 0.7 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and The gap between the two, which typically signals increasing lender revenue when it widens, has reached a record of more than 1.7 percentage point. Fed Chairman Ben S. Bernanke’s stated goal of helping boost the housing market is being undercut by lenders’ inability to keep up with consumer demand, even as investors drive up bond prices. Banks have been slow to lower rates after being overwhelmed this year by applications to refinance mortgages. Margins on sales of mortgages have widened by about 50 percent since the Fed’s announcement from the average level this year, which already was elevated

Yes, "it’s good to be a mortgage originator right now" - Looks like Bloomberg reporters just figured out there is a transmission problem from the ultra low MBS yields to mortgage rates (discussed here). Bloomberg (Sep 26th): - Since the Fed’s Sept. 13 announcement that it would buy $40 billion more securities per month, the rates offered for new 30- year loans have fallen by just 0.13 percentage point, compared with a drop of about 0.7 percentage point for yields on the bonds into which the loans get packaged, according to data compiled by Bloomberg and The gap between the two, which typically signals increasing lender revenue when it widens, has reached a record of more than 1.7 percentage point.  The national average 30y mortgage rate has dropped to 3.38%, a new record low. The on-the-run FNMA 30y MBS yield however is not only much lower, but has declined faster (in part due to a sharp decrease in implied duration). Banks continue to be overwhelmed by mortgage applications, and therefore not in a great hurry to improve pricing - although declines in mortgage rates are picking up (hopefully due to increased competition). Bloomberg: -  Fed Chairman Ben S. Bernanke’s stated goal of helping boost the housing market is being undercut by lenders’ inability to keep up with consumer demand, even as investors drive up bond prices. Banks have been slow to lower rates after being overwhelmed this year by applications to refinance mortgages.

Mitt Romney’s housing policy: GOP candidate offers lame ideas on mortgages and foreclosures. - Mitt Romney’s presidential campaign made the odd decision to release a new policy document about housing issues last Friday in the late afternoon. The Friday afternoon “news dump” is when you put things out that you think will reflect poorly on you, knowing that reporters will give them scant attention. The housing paper was doubly-obscured, first by the weekend and second by release of Romney’s tax documents the same day. Burying housing policy was a strange choice for the Romney campaign, because housing policy (foreclosures, mortgage disasters, etc.) has been a giant failure for the Obama administration, and one where Romney could easily score substantive points. Having spent my weekend perusing the Romney position paper, I’m prepared to offer an explanation for why they buried it: It sucks. Faced with the opportunity to take a nice big swing at the piñata of Obama-era foreclosures, Romney whiffed, offering a “plan” chock of platitudes, bromides, and non sequiturs. Why the campaign preferred dumping it out when they thought nobody would notice to simply not releasing it is a mystery. But perhaps the greater mystery is why they couldn’t stir themselves to write a policy that made sense.

Knock, Knock: Mitt Romney's Housing Plan Is a Joke - Romney had a big opening to go big on housing. Maybe he would come out for a massive refinancing program, like his top adviser Glenn Hubbard wants. Or maybe he would come out for privatizing the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. Something. Well, the Romney housing plan certainly is something -- something "laughably vacuous" that is, as Matt Yglesias of Slate justifiably lampoons it. The Romney housing plan comes in two parts: embarrassing, and more embarrassing. Consider this section about fixing the financial system and the GSEs -- and all, as Brad DeLong points out, in 85 words or less! End "Too-Big-To-Fail" And Reform Fannie Mae And Freddie Mac. The Romney-Ryan plan will completely end "too-big-to-fail" by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country. There are so many problems crammed into so few words. For starters, too-big-to-fail is not about the GSEs; too-big-too-fail is about Wall Street. In other words, it's about the heads-we-win; tails-taxpayers-lose calculus behind big bank bets. Taking the GSEs off government life support does nothing to fix this.

Bank of America Offers Mods with a Gag Order to Buy Silence -  Yves Smith It’s hard to tell whether the situation described in an article from the New Haven Register is very unusual, or just under the radar by design. But either way, it does not pass the smell test. The story is not as detailed as one would like, but in short form, a couple in West Haven, the Mandells, are facing foreclosure on a home they bought in 2000. George Mandell lost his job in 2010 and the couple tried getting a mod. They article report that they didn’t qualify for “certain modifications” yet later quotes Bank of America (their servicer; it’s not clear whether their loan is bank owned or securitized) saying that they made “several attempts” to assist them and they defaulted on past mods. Yet the article also says the Mandells haven’t made a payment since 2010 yet Bank of America says they have too much income to qualify for mods for customers “in need of assistance”. So it sounds as if basic facts are in dispute and the writer didn’t get to the bottom of it (for instance, did BofA offer past mods that the Mundells rejected, such as a catch-up mod that would have them paying more than their old mortgage amount for a period of time? That might square this circle). The real nugget of this situation is that the Mundells have taken to criticizing Bank of America on all sorts of social media, and it appears they’ve become enough of a nuisance that the bank offered a mod, with a gag order attached, or more accurately, the bank wants them to sign a gag order, with a mod provided as inducement.

2.4mm delinquent loans to be resolved in 2012; shadow inventory declining rapidly - E-mails and comments about the shadow housing inventory overhang continue to come in. The US housing market is doomed, delinquencies are out of control, etc. etc. It has almost become a religion - drummed into people's heads by the relentless beat of doomsday bloggers and the mainstream media. But if one simply looks at the data - without some of these preconceived notions - a considerably different picture emerges. In the first half of 2012 alone, 1.2mm of delinquent mortgages were resolved. By all accounts this pace of shadow inventory clearing is continuing going forward, with a total of 2.4mm delinquent mortgages resolved this year alone. JPMorgan: - Some activity will increase due to forgiveness arising from the AG settlement, which should have its largest impact in 2H12. There we think 100,000 loans could see forgiveness of about $100,000 each, fulfilling settlement obligations. Overall, we estimate 800,000 modifications will be done this year. Combined with 670,000 short sales and 950,000 REO liquidations, we think 2.4mn loans will be removed from inventory.

Blackstone to acquire Tampa Bay rental homes valued at $1B - The Blackstone Group plans to buy homes impacted by the slumping housing market at a total value of $1 billion in the Tampa Bay area. Blackstone, a private equity group, will use the homes as rental properties, the Tampa Bay Times said. The entrance of the firm will likely tighten competition on the housing market, the Times said. Blackstone Group aims to purchase about 15,000 homes in the Tampa Bay area in the coming three years in order to take advantage of foreclosed homes’ lowered prices and increasing rents, the Times said.

Should Home-Ownership be Discouraged? -Richard Green, in a debate at The Economist on home ownership:The opposition's closing remarks: In his comments, Ed Glaeser makes a point that I wholeheartedly agree with: the American system of housing subsidies makes little sense. The largest housing subsidy, the mortgage interest deduction,... does little to help those at the margin of home-owning...Nevertheless, I think Mr Glaeser sells his own study short when he argues that the civic connections established through home-owning are not very important. Home-owning can help countries overcome legacies in which property owners have exploited property users—legacies that include the hacienda system in Latin America and the Philippines, and sharecropping and company towns in America. One could argue that we in America engaged in an experiment in discouraging home-ownership for ... minorities in general and African-Americans in particular. For many years, real-estate agents and lenders in America discriminated against minorities who tried to purchase houses, and American housing finance policy discriminated against African-American and central city neighborhoods. ... Hence the inability of African-Americans to own homes was very much the result of policies that targeted African-Americans.The entire debate is here.

MBA: Mortgage Refinance Activity increases as mortgage rates fall to new survey lows -- From the MBA: Mortgage Rates Drop to New Survey Lows: The Refinance Index increased 3 percent from the previous week to the highest level in six weeks. The seasonally adjusted Purchase Index increased 1 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.63 percent, the lowest rate in the history of the survey, from 3.72 percent, with points decreasing to 0.41 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.  The first graph shows the MBA mortgage purchase index. The purchase index has been mostly moving sideways over the last two years. So far the purchase index has not indicated an increase in purchase activity, although the recent Fed survey of loan officers suggested there has been some increase. The second graph shows the refinance index.The refinance activity is at the highest level in six weeks and has been generally moving up over the last year.

Rate on 30-Year Mortgage Hits Record Low 3.40 Pct. - Average U.S. rates on fixed mortgages fell again to new record lows. The decline suggests the Federal Reserve’s stimulus efforts may be having an impact on mortgage rates. Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan dropped to 3.40 percent. That’s down from last week’s rate of 3.49 percent, which was the lowest since long-term mortgages began in the 1950s. The average on the 15-year fixed mortgage, a popular refinancing option, fell to 2.73 percent, down from the record low of 2.77 percent last week. The Fed is spending $40 billion a month to buy mortgage-backed securities. The goal is to lower mortgage rates and help the housing recovery. Fed Chairman Ben Bernanke says the program will continue until there is substantial improvement in the job market. Some economists expect mortgage rates to fall even further because of the Fed’s bond purchases.

Freddie Mac: Record Low Mortgage Rates - From Freddie Mac today: All-Time Low: 30-Year Fixed-Rate Mortgage Averages 3.40 Percent - All mortgage products, except the 5-year ARM, averaged new all-time record lows. 30-year fixed-rate mortgage (FRM) averaged 3.40 percent with an average 0.6 point for the week ending September 27, 2012, down from last week when it averaged 3.49 percent. Last year at this time, the 30-year FRM averaged 4.01 percent. "Fixed mortgage rates continued to decline this week, largely due to the Federal Reserve's purchases of mortgage securities, and should support an already improving housing market." This graph shows the 15 and 30 year fixed rates from the Freddie Mac survey. The Primary Mortgage Market Survey® started in 1971 (15 year in 1991). Both rates are at record lows for the Freddie Mac survey. Rates for 15 year fixed loans are now at 2.73%.

Case-Shiller: House Prices increased 1.2% year-over-year in July - S&P/Case-Shiller released the monthly Home Price Indices for July (a 3 month average of May, June and July). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). Case-Shiller reports NSA, I use the SA data.  From S&P: Home Prices Increase Again in July 2012 According to the S&P/Case-Shiller Home Price Indices Data through July 2012... showed average home prices increased by 1.5% for the 10-City Composite and by 1.6% for the 20-City Composite in July versus June 2012. For the third consecutive month, all 20 cities and both Composites recorded positive monthly changes. It would have been a fourth had prices not fallen by 0.6% in Detroit back in April.  The 10- and 20-City Composites posted annual returns of +0.6% and +1.2% in July 2012, up from their unchanged and +0.6% annual rates posted for June 2012. Fifteen of the 20 MSAs and both Composites posted better annual returns in July as compared to June 2012.

Home Prices Rise Again, This Time on the Low End - The housing market continues to gather strength, and the biggest gains in price now appear to be among the least expensive homes, whose values fell the most in the downturn and have weighed against any would-be recovery. Over all, the Standard & Poor’s Case-Shiller index showed an annual gain of 1.2 percent in the price of single-family homes across 20 cities in July, according to data released Tuesday. In addition, all 20 cities showed price increases from the previous month, the third monthly gain in a row, supporting the idea that the nation’s housing market has bottomed out and, some analysts said, contributing to an unexpected bump in consumer confidence.  Luxury homes lost less value in the housing crisis and began to rebound more quickly, but lower-price homes are catching up, rising slightly faster in value than homes in the middle and upper tiers, according to an analysis of the Case-Shiller data. The typical lower-price home rose at an annualized rate of 1 percent from June to July on a seasonally adjusted basis. The middle tier posted a one-month gain of 0.4 percent, and the highest tier inched up by 0.1 percent.  In the last three months the lowest tier has been rising in value more than twice as fast as the other two categories. For the least expensive homes, “prices just shot up too fast on the way up and then went down more sharply,” he said. “We’re seeing the correction from that.”

Home Prices Rose in July in 20 Major Cities - Home prices kept rising in July across the United States, buoyed by greater sales and fewer foreclosures. National home prices increased 1.2 percent in July, compared to the same month last year, according to the Standard & Poor’s/Case Shiller index released Tuesday. That’s the second straight year-over-year gain after two years without one. The report also says prices rose in July from June in all 20 cities tracked by the index. That’s the third straight month in which prices rose in every city. Steady price increases and record-low mortgage rates are helping drive a housing recovery. In the 12 months ending in July, prices have risen in 16 of 20 cities. In Phoenix, one of the cities hardest hit by the housing bust, prices are up 16.6 percent in that stretch. Prices in Minneapolis and Detroit have risen more than 6 percent. “We are more optimistic about housing,” David Blitzer, chairman of the S&P’s index committee. “Stronger housing numbers are a positive factor for other measures, including consumer confidence.” Prices fell from a year earlier in Atlanta, Chicago, New York and Las Vegas. The S&P/Case-Shiller index covers roughly half of U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The July figures are the latest available. Home prices are still 30 percent below their peak in June 2006, according to Case-Shiller. That was the height of the housing boom.

A Look at Case-Shiller, by Metro Area - interactive table - Home prices posted their first six month winning streak in three years, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 1.6% in July from the previous month and increased 1.2% from a year earlier. Sixteen of the 20 cities posted annual increases in July. Atlanta, Chicago, Las Vegas and New York notched annual declines. Every city posted a monthly increase compared to June. “While the index, and prices more generally, remain well below pre crisis levels, the improvement in the last few months has been noticeable and perhaps more importantly, more rapid than previous episodes of fleeting improvement,” said economists. But they added some caveats: “While we have been ‘housing enthusiasts,’ we want to stop short of sounding too encouraged. There is almost no doubt that some of the improvement seen of late has to do with less short and foreclosure sales which in turn helps boos aggregate pricing data.” Read the full S&P/Case-Shiller release.

The Recovery in Housing Prices - Housing prices in the U.S. appear to have stabilized, at least in the short term, at a level of affordability about 14-16% above the typical levels recorded in the ten years preceding the U.S. housing bubble:  To achieve that level of stability, the U.S. Federal Reserve had to push long-term interest rates below the levels the market would otherwise set to all-time low levels, which it has primarily done using its quantitative easing programs of the last several years. Since the beginning of the long-anticipated new round, QE 3.0 (or "QE Infinity" since the program would appear to not have a planned termination date), 30 year mortgage rates have fallen to 3.49%, an all-time low.  The following chart shows the relationship between U.S. median new house prices and median household income, which provides the basis by which we can measure the relative affordability of houses over time:  In a sense, U.S. housing prices are being stabilized by one of the main factors that enabled the formation of the bubble in U.S. real estate markets in the first place: the Fed's policies of holding interest rates below the levels that the market would otherwise support. Should that artificial support be removed, we would anticipate that U.S. housing prices would fall sharply in response to the higher interest rates that would follow.

House Price Comments, Real House Prices, Price-to-Rent Ratio - Case-Shiller reported the second consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006.  On a Not Seasonally Adjusted (NSA) basis, the Case-Shiller 10-City composite is up 7.4% from the post-bubble low earlier this year, and the 20-City is up 7.8% from the post-bubble low. That is a significant increase, and even when NSA prices start to decline month-over-month in the September or October reports, I expect that house prices will remain above the recent low. Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index. The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through July) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q4 2010), and the Case-Shiller Composite 20 Index (SA) is back to July 2003 levels, and the CoreLogic index (NSA) is back to December 2003. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to February 2001. On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to February 2001

FHFA home price index now equals 2004 levels: U.S. home prices rose 3.7% for the 12-month period ending in July when compared to year earlier levels, the Federal Housing Finance Agency said Tuesday. The index edged up 0.2% from June to July, and June's reported 0.7% increase was revised down to 0.6%. The U.S. home price index is still 16.4% below the peak reached in April 2007, but is now at roughly the same level obtained in June 2004, according to the FHFA index. The FHA obtains its data by studying the purchase prices on mortgages owned or guaranteed by Fannie Mae and Freddie Mac.

U.S. Government Home Price Index Edges Higher - Home prices rose 0.2% on a seasonally adjusted basis in July from a month earlier, according to the Federal Housing Finance Agency's monthly home-price index released Tuesday. Compared with a year earlier, home prices were up 3.7%. June's results were revised to a 0.6% monthly increase from May, compared with an originally reported 0.7% increase. The index is 16.4% below its peak in April 2007 and is around the same level as in June 2004. The results were below forecasts. Economists surveyed by Dow Jones Newswires had expected a 0.7% monthly increase in July. The FHFA's index is calculated by using the prices of houses purchased with mortgages backed by government-controlled mortgage companies Fannie Mae (FNMA) and Freddie Mac (FMCC). A reading of 100 is equal to the price of homes in January 1991. July's index value was 190.1.

The FHFA Home Price Index Misses Expectations Rising 0.2% - The FHFA house price index climbed just 0.2 percent in the month of July. And the index was up 3.7 percent on the year. Last month's reading was revised down to a 0.6 percent gain, from 0.7 percent. But the national index is 16.4 percent below its April 2007 peak. This chart from the FHFA shows the trajectory of the house price index since February 2011: And this chart shows how prices have changed across the different regions in the U.S.:

Update on the Goldman housing index - Back in April, we discussed a very simple US housing market index developed by Goldman. The index basically looks at the percentage of US zipcodes that have experienced housing price appreciation (see discussion). Here is an update. Currently roughly 50% of zipcodes in the US are reporting price appreciation - which is still below the lows of the 1982 and the 1992 recessions. However as a comparison, the index was at 20% at the end of Q1. Note that the temporary spike in 2010 has to do with First-Time Homebuyer Credit program.  As expected, housing price appreciation is held back by distressed sales. The bifurcation of the distressed and the non-distressed markets (discussed here) is slowing the overall market improvement. Those areas with the largest declines in distressed sales saw the largest increases in prices. This tells us that as we work through the distressed home inventory - which is happening fairly quickly (see discussion), prices should stabilize further.

New Home Sales at 373,000 SAAR in August -The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 373 thousand. This was down slightly from a revised 374 thousand SAAR in July (revised up from 372 thousand). Sales in June were revised up. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.The second graph shows New Home Months of Supply. The months of supply was unchanged in August at 4.5 months. July was revised down from 4.6 months. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal).Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at a record low 38,000 units in August. The combined total of completed and under construction is at the lowest level since this series started. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In August 2012 (red column), 31 thousand new homes were sold (NSA). Last year only 25 thousand homes were sold in August. This was the third weakest August since this data has been tracked. The high for August was 110 thousand in 2005.

Less Than Expected 31,000 New Homes Sold In August; Dent "Recovery" Meme - Moments ago, the Census Bureau released the August new single-family house sales number: at 373,000 on an annualized basis, it missed expectations of a rise to 380,000, and was down from a revised 374,000. This is only the second miss in 2012, and confirms that all talk of a housing recovery is misguided, and merely represents one particular segment of the housing market: that of existing home sales where buyers have all cash, are price indiscriminate, and are willing to take advantage of the NAR's exemptions from anti-money laundering provisions. I.e., US real estate is merely a place to park cash for those who have obtained it using questionable means. Looking at the number on a non-SAAR basis reveals that only 31,000 actual houses sold in August, of which 3,000 in the Northeast: surely a reason to keep on bidding up the builders into the stratosphere: fear not, actual sales will come. Eventually. Finally, and demonstrating that rich buyers focus primarily on dumping money into existing mansions, was the distribution of purchases by price bucket, which showed a (Z), or under 500 houses sold, in the $750,000+ category. This was the first time there was a (Z) in this bucket since February.

New Home Sales Decline -0.3%, Prices Pop for August 2012 - August New Residential Single Family Home Sales declined by -0.3%, or 373,000 annualized sales. July's single family new home sales were not revised from their 3.6% increase. The August monthly percentage change has a ±9.3% error margin and this is why we see large revisions to new home sales figures. In other words, don't get too attached to the monthly percentage changes for odds are they will be revised.  New single family home sales are now 27.7% above August 2011 levels, but this figure has a ±18.8% margin of error. A year ago new home sales were 292,000. Sales figures are annualized and represent what the yearly volume would be if just that month's rate were applied to the entire year. These figures are seasonally adjusted as well.  The regional South is why new home sales declined with those regional sales dropping -4.9%. The Northeast region climbed 20.0%, but has a ±43.6% error margin for the monthly change. This just tells us the data on new home sales is not so reliable and it's best to look at the yearly percentage changes.  Prices really jumped in August. The average home sale price was $295,300, a 9.1% increase from last month's $270,600 average price. That said, home prices were significantly revised lower for the last three previous months.

New Home Sales and Distressing Gap - New home sales have averaged 362,000 on an annual rate basis through August. That means sales are on pace to increase 18% from last year (and based on the last few months, sales will probably increase more than 20% this year). Here is a table showing sales and the change from the previous year since the peak in 2005:But even with a 20%+ increase this year, 2012 will be the 3rd lowest year since the Census Bureau started tracking new home sales in 1963. This year will be above 2010 and 2011, and it is possible - with a fairly strong last four months - that sales will be close to the level in 2009. Given the current low level of sales, and current market conditions (supply and demand), sales will probably continue to increase over the next few years. I don't expect sales to increase to 2005 levels, but something close to 800,000 is possible once the number of distressed sales declines to more normal levels. Here is an update to the distressing gap graph. This "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through August. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Vital Signs Chart: Smaller Backlog of New Homes - The number of new homes on the market has fallen. There were 141,000 new residences for sale at the end of August, down 12% from the tally a year ago. The decline in inventory reflects higher sales during the past year, a slowdown in the pace of foreclosures and reluctance among many homeowners to sell their properties at depressed values. The dwindling supply is helping to push up home prices.

New Home Prices: Average Highest since 2008 - As part of the new home sales report, the Census Bureau reported that the average price for new homes increased to the highest level since August 2008. From the Census Bureau: "The median sales price of new houses sold in August 2012 was $256,900; the average sales price was $295,300." The following graph shows the median and average new home prices. During the bust, the builders had to build smaller and less expensive homes to compete with all the distressed sales. With fewer foreclosures now, it appears the builders are moving to slightly higher price points. The second graph shows the percent of new home sales by price. At the peak of the housing bubble, almost 40% of new homes were sold for more than $300K - and over 20% were sold for over $400K.  The percent of home over $300K declined to 20% in January 2009. Now it has rebounded to around 35%. And less than 10% were under $150K.

NAR: Pending home sales index declined 2.6% in August - From the NAR: Pending Home Sales Decline in August The Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.6 percent to 99.2 in August from an upwardly revised 101.9 in July but is 10.7 percent above August 2011 when it was 89.6. The data reflect contracts but not closings. The PHSI in the Northeast rose 0.9 percent to 78.2 in August and is 19.9 percent above August 2011. In the Midwest the index declined 2.6 percent to 95.0 in August but is also 19.9 percent higher than a year ago. Pending home sales in the South slipped 1.1 percent to an index of 110.4 in August but are 13.2 percent above August 2011. With broad inventory shortages in the West, the index fell 7.2 percent in August to 102.5 and is 4.2 percent below a year ago.  This was below the consensus forecast of a slight increase. Contract signings usually lead sales by about 45 to 60 days, so this is for sales in September and October.

Update: House Prices will decline month-to-month Seasonally later in 2012 - I've mentioned this before, but it is probably worth repeating ...The Not Seasonally Adjusted (NSA) house price indexes will show month-to-month declines later this year. This should come as no surprise and will not be a sign of impending doom.
• There is a seasonal pattern for house prices. Prices tend to be stronger in the spring and early summer, and then weaker in the fall and winter.
• Currently there is a stronger than normal seasonal pattern. This is because conventional sales are following the normal pattern (more sales in the spring and summer), but distressed sales (foreclosures and short sales) happen all year. So distressed sales have a larger negative impact on prices in the fall and winter.
• Two of the most followed house price indexes are three month averages. This means the indexes lag the month-to-month change.  Prices have probably started declining month-to-month seasonally in August or September, but this will not show up in the indexes for several months.

• The key is to watch the year-over-year change and to compare to the NSA lows earlier this year. I think house prices have already bottomed, and will be up slightly year-over-year when prices reach the usual seasonal bottom in early 2013.

 Q2 2012 Flow of Funds Overview - Household Net Worth Declined, Corporate Cash Still High - The Q2 2012 Federal Reserve's flow of funds report was released last Thursday. Household wealth decreased $321.9 billion to $62.67 trillion in Q2 2012. The losses were in stocks, mutual funds while real estate values increased. Below is a graph of annual household net worth and notice the Great Recession wealth wipe out in the below graph. Household net worth—the difference between the value of households’ assets and liabilities—was $62.7 trillion at the end of the second quarter of 2012, about $300 billion less than at the end of the first quarter. In the second quarter, the value of corporate equities and mutual funds owned by households declined close to $600 billion, more than offsetting a $355 billion increase in the value of real estate owned by households.  Home equity was $7.28 trillion, an increase of $406 billion from Q1. As a percentage of total real estate holdings owner equity increased to 43.1%. Below is the graph of homeowner's equity. Household debt jumped 1.25% and was the largest increase since 2008. Consumer credit increased 6.25%. This figures are annualized. Household debt has been declining since Q2 2008 and from Q1 2012 dropped another 2%. This quarter means, oh yea, we can all go into more debt once again. Believe this or not, increases in household debt are taken as a positive economic sign, except for those of us who have to make the payments. Below are home mortgages. Less mortgage debt doesn't mean people paid off their loans, it means people lost their homes in foreclosure or sold them, short. It can mean people nowadays potentially cannot afford a mortgage. It also can mean people are waiting to buy a home.

Personal Income increased 0.1% in August, Spending increased 0.5% - The BEA released the Personal Income and Outlays report for August:  Personal income increased $15.0 billion, or 0.1 percent ... in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $57.2 billion, or 0.5 percent. ..Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in August, compared with an increase of 0.4 percent in July. ... The price index for PCE increased 0.4 percent in August, compared with an increase of less than 0.1 percent in July. The PCE price index, excluding food and energy, increased 0.1 percent in August, the same increase as in July.  Personal saving -- DPI less personal outlays -- was $444.8 billion in August, compared with $492.2 billion in July. Personal saving as a percentage of disposable personal income was 3.7 percent in August, compared with 4.1 percent in July  The following graph shows real Personal Consumption Expenditures (PCE) through August (2005 dollars).  This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.  Using the two-month method, it appears real PCE will increase around 1.3% annualized in Q3 - another weak quarter for GDP growth (June PCE was weak, so maybe PCE will increase 1.6%).

Real Disposable Income Per Capita: The Recent Positive Trend Is Broken - Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. Now let's take a look at a major component of today's PCE report for an update on a key driver of the U.S. economy: "Real" Disposable Income Per Capita. Adjusted for inflation, per-capita disposable incomes had been struggling for the past two years and are currently at about the level first achieved in February of 2007. Most of 2011 saw a slow decline in incomes, a trend that began reversing in November of last year. Income growth continued for eight consecutive months. However, in August real DPI per capita growth went negative at -0.40% MoM and the YoY change is only 1.02%. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. Nominal disposable income is up 50.0% since then. But the real purchasing power of those dollars is up a mere 14.8%.  Here is a closer look at the real series since 2006. Now let's overlay the pre-revision data in red.Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level. The impact of the changes makes possible a bit more optimistic view of growth over the past eight months, as I mentioned at the opening.

Real Disposable Income Has First Drop Since November 2011, Savings Rate Tumbles - There were no surprises in the August Personal Income and Spending numbers, which came at 0.1% and 0.5%, respectively, on expectations of a 0.2% and 0.5% rise. Summarized: less income, more spending. This however, did not make the consumer income statement data any better: the bottom line is that adjusted for inflation, Real Disposable Income slid 0.3% in August, after a tiny 0.1% increase in July, the first such decline since November 2011, and as Bloomberg's Joseph Brusuelas says this is "another rough report for the consumer which doesn’t bode well for household spending going forward." Which means Bernanke knew precisely what he was doing when he launched QE3, which all advocated of QE3 will now say was fully justified. There is one problem with that logic however: for QE3 to be justified, it would mean QE1 and 2 were. Well, last we checked the US is still in a major depression, and neither QE1, 2, nor Twist 1 or 2 have done anything to prevent today's ugly data. Surely, this time it will be different. Finally, and as a result of the ongoing contraction in income, as expected the savings rate dropped from 4.1% to 3.7%: the lowest since May

Spending & Income Increased In August - Personal income and spending rose in August, the U.S. Bureau of Economic Analysis reports, although the increase on the income side of the ledger was sluggish in nominal terms (and actually fell last month after adjusting for inflation). Personal consumption expenditures, on the other hand, had a much stronger month, rising the most since February. Some of the higher spending was due to rising gasoline prices. Nonetheless, consumers were willing to spend more on durable goods, which suggests that there's still some capacity to open the wallet for discretionary items. Overall, today’s income and spending numbers suggest that the economy still has forward momentum. If you’re looking for a clear sign that a recession is near (or recently started), you won’t find it here. Here’s how income and spending compare on a monthly basis. Notably, consumption has been picking up in the last two months. Income, on the other hand, is growing weakly relative to earlier this year.  Month-to-month comparisons can be misleading, however, and so looking at year-over-year changes cuts through the noise a bit. What we find is a relatively encouraging sign: the annual pace of growth for income and spending is no longer decelerating. Both series are rising vs. their year-earlier levels and, more importantly, at slightly faster rates. The growth is hardly stellar, but the trend certainly looks favorable, if only on the margins.

U.S. Consumer Spending Rose 0.5 Percent in August - Americans boosted their spending in August even though their income barely grew. Much of the spending increase went to pay higher gas prices, which may have forced consumers to cut back elsewhere. The Commerce Department said Friday that consumer spending rose 0.5 percent in August from July. It was the biggest jump since February. Still, the increase was driven by a 1.7 percent surge in purchases of nondurable goods. That largely reflected a sharp rise in gas prices during the month. Spending on durable goods rose 0.3 percent, helped by gains in auto sales. Spending on services rose just 0.2 percent. Income rose just 0.1 percent in August, reflecting the weak job growth. Taking into account inflation, after-tax incomes actually fell 0.3 percent in August — the poorest performance since November.

Analysis: Incomes Take Hit From Government Pullback - U.S. consumer spending posted its biggest rise in six months in August, though the increase reflects higher prices more than a willingness to splurge on other goods and services. Meanwhile, incomes didn’t keep pace with inflation. Wells Fargo Senior Economist Eugenio Aleman breaks down the numbers with The Wall Street Journal Online’s Tom Ortuso.

Where Americans Are Spending - Americans ramped up spending on everything from restaurants to entertainment last year, though much of the increase was due to rising prices, according to a new report from the Labor Department.The Labor Department said all major areas of spending rose last year, with the biggest jump, 8%, seen in transportation. Spending on gasoline and motor oil rose 25% in 2011, partly because the price of gasoline climbed 26.4%. But spending on entertainment — a better gauge of consumer optimism — also rose 2.7%, while outlays on apparel and services edged up 2.4%. In 2010, by contrast, the only areas to see spending growth were health care — which has risen for more than a decade — and transportation. Spending on housing — the biggest expense for most Americans — continued to rise but shrank as a proportion of overall spending for the first time in three years. Housing spending was only 33.8% of overall spending compared with 34.4% in 2010 — the lowest level since 2005. Americans’ spending on food averaged $6,458, the highest level since at least 1984. Food now accounts for 13% of overall spending, up from 2010’s 12.7% level. However, the proportion of spending Americans devote to food has been relatively stable for the past decade. Spending on groceries and other food at home rose 27% between 2000 and 2011, while spending on restaurants and take-out food climbed 22.6%. By contrast, over the same period spending on personal insurance and pensions and health care soared 61.2% and 60.4%, respectively. Spending on apparel and other services actually fell 6.3% between 2000 and 2011.

US Consumer Confidence Jumps to 7-Month High. - A private group says U.S. consumer confidence jumped this month to the highest level since February, bolstered by a brighter hiring outlook. The Conference Board says its Consumer Confidence Index rose to 70.3. That’s up from 61.3 in August, which was revised higher. And it’s the highest reading since February, when the economy added 259,000 jobs. The indicator is watched closely because consumer spending drives nearly 70 percent of economic activity. The reading is still below 90, a level that indicates a healthy economy. Since the beginning of the year, the index has fluctuated sharply. The survey was conducted from Sept. 1 through Sept. 13. It showed consumers were more optimistic about the current availability of jobs and their outlook over the next six months.

September Consumer Confidence Surprises to the Upside - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through September 13. The 70.3 reading was substantially above the consensus estimate of 63.0 reported by This is an increase from last month's 61.3, which is a slight upward revision from the Conference Board's previously reported 60.6. Here is an excerpt from the Conference Board report. "The Consumer Confidence Index rebounded in September and is back to levels seen earlier this year (71.6 in February 2012). Consumers' appraisal of present-day conditions improved in September. Those claiming business conditions are "good" edged up to 15.5 percent from 15.3 percent, while those saying business conditions are "bad" declined to 33.3 percent from 34.3 percent. Consumers' assessment of the labor market was also more upbeat. Those stating jobs are "plentiful" rose to 8.3 percent from 7.2 percent, while those claiming jobs are "hard to get" edged down to 39.9 percent from 40.6 percent.  The table here shows the average consumer confidence levels for each of the five recessions during the history of this monthly data series, which dates from June 1977. The latest number is well above the bottom of the unprecedented trough in 2008, and it once again risen fractionally above the 69.4 average confidence of recessionary months over three years after the end of the Great Recession. The chart below is another attempt to evaluate the historical context for this index as a coincident indicator of the economy. Toward this end I have highlighted recessions and included GDP. The linear regression through the index data shows the long-term trend and highlights the extreme volatility of this indicator.

Consumer Confidence Soars As Richest And Poorest Feel Better; Middle Class Worse Off - The NY Fed is not the only place where Hopium grows anew. Moments ago the conference board reported its September confidence print, which soared by nearly 10 points to 70.3, from 60.6 in August, and expectations of a 63.1 print: this was the highest print since February when hopes that the European LTRO may work (it didn't), and the largest beat in seven months. Ironically, the February beat was driven by 6 month forward hope as well, hope which have been dashed by today's current conditions number as the spread between hope and reality once again collapses. Naturally, the driver for today's miraculous pre-election beat: 6 month outlook soared from 71.1 to 83.7. In other words, if the present did not quite work out as had been hoped, one can just defer hope one more time - surely this time the future will certainly be different. Finally, and as was to be expected, the "confidence" when broken down by income buckets: those with $50k and more in income feel better, those with $35k and less in income feel better. Who is worse off? Why the middle class of course, or those with incomes between $35-$50k.

Michigan Consumer Sentiment: Final Number Shows Some Slippage - The University of Michigan Consumer Sentiment Index final number for September came in at 78.3, down from the preliminary level of 79.2. The consensus was for 79.0. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy.The Michigan average since its inception is 85.4. During non-recessionary years the average is 87.9. The average during the five recessions is 69.3. So the latest sentiment number of 78.3 puts us just below the midpoint (78.6) between recessionary and non-recessionary sentiment averages

Consumer Sentiment Cools During September - U.S. consumers toned down slightly their upbeat feelings about the economy at the end of September compared with earlier in the month, but they are hopeful about hiring in the future, according to data released Friday. The Thomson-Reuters/University of Michigan consumer sentiment index slipped to 78.3 in the final September reading from 79.2 early this month, but was up from the 74.3 final reading for August, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the final September reading to come in at 79.5. Despite the decline, the end-September index is the highest reading in four months. The report noted consumers expect the economy to create more jobs in the year ahead. Confidence was also helped by rising asset prices. “Consumers reported some small gains in their financial situation. The improvement was due to a reduction in their debt levels and an increase in the value of their assets, primarily because of rising stock prices and home values,”

U.S. Consumers More Confident in September - Higher stock prices and rising home values boosted a measure of consumer confidence in September to its second-highest level in nearly five years. The University of Michigan’s index of consumer sentiment rose to 78.3 this month from 74.3 in August. That’s just below May’s reading of 79.3, which was the highest since January 2008. Americans were also more optimistic about future jobs prospects, the survey found. And the number of consumers who expect the economy to keep growing is double the number of those who expect a decline. The report echoes a survey released Tuesday by the Conference Board that also found a jump in confidence.

Restaurant Performance Index increases in August - From the National Restaurant Association: Stronger Sales, Traffic Bolster Restaurant Performance Index in August The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.6 in August, up 0.4 percent from July and the first increase in five months. August represented the tenth consecutive month that the RPI stood above 100, which signifies continued expansion in the index of key industry indicators.  “Growth in the RPI was driven largely by improving same-store sales and customer traffic results in August,” “Six out of 10 restaurant operators reported positive same-store sales in August, while customer traffic readings bounced back from July’s net decline.” “In contrast, the Expectations Index remained dampened compared to recent stronger levels, with restaurant operators retaining a cautious outlook for sales growth and the economy. (graph)

Weekly Gasoline Update: Prices Drop ... Finally! - Here is my weekly gasoline chart update from the Energy Information Administration (EIA) data. Gasoline prices at the pump, rounded to the penny, finally dropped after eleven consecutive weeks of increases. The average for Regular fell by a nickel and premium declined by four cents over the past week. They are both up 60 and 61 cents, respectively, from their interim weekly lows in the December 19, 2011 EIA report.  As I write this, shows five states (Hawaii, California, Connecticut, New York, and Illinois) plus DC with the average price of gasoline above $4. That's down from seven states last week. Another 8 states have prices above $3.90 (last week it was 13 states in the $3.90-to-$4.00 range).

DOT: Vehicle Miles Driven decreased 0.3% in July - The Department of Transportation (DOT) reported today: Travel on all roads and streets changed by -0.3% (-0.8 billion vehicle miles) for July 2012 as compared with July 2011. Travel for the month is estimated to be 258.3 billion vehicle miles. Cumulative Travel for 2012 changed by +0.9% (14.8 billion vehicle miles). The following graph shows the rolling 12 month total vehicle miles driven. The rolling 12 month total is still mostly moving sideways. The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices peaked in April at close to $4.00 per gallon, and then started falling. Gasoline prices were down in July to an average of $3.50 per gallon according to the EIA. Last year, prices in July averaged $3.70 per gallon - and even with the decline in gasoline prices, miles driven declined year-over-year in July. Just looking at gasoline prices suggest miles driven will be down in August too.

Vehicle Miles Driven: Population-Adjusted Sets Another Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through July. Travel on all roads and streets changed by -0.3% (-0.8 billion vehicle miles) for July 2012 as compared with July 2011. The 12-month moving average of miles driven declined a tiny 0.03% from July a year ago (PDF report). And the total population-adjusted data has set a new post-crisis trough. Here is a chart that illustrates this data series from its inception in 1970. The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The most recent dip has lasted for 54 months and counting — a new record, but the trough to date was in November 2011, 48 months from the all-time high. Total Miles Driven, however, is one of those metrics that must be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

What Happens When We Reach ‘Peak Car’? -- Despite several strong months of new-car sales in a row, the average American is driving less and less each year. Drivers have been hitting the road less for years in countries such as France, Spain, Belgium, Australia, New Zealand, and Japan as well. Could it be that car usage has peaked?  An article published over the summer by Scientific American discussed the possibility that the U.S. may have reached “peak car,” the term academics have used to describe the point at which car ownership and miles driven per vehicle level off, and then decline. For a variety of reasons, including a rise in unemployment, telecommuting, and online shopping, vehicle miles traveled (or VMT) has dropped during the Great Recession years. A recent story in the Economist points out that, in fact, the average amount driven by Americans actually began to plateau in the early ’00s. In other developed countries, such as Britain, Japan, and Germany, the average miles (or “kilometers,” for the Economist’s European readers) driven per vehicle have been dropping at least since 1990

Dallas Fed: Texas factory activity increased in September - From the Dallas Fed: Texas Manufacturing Growth Picks Up: Texas factory activity increased in September, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 6.4 to 10, suggesting stronger output growth. Other measures of current manufacturing activity also indicated growth in September. The new orders index rose to 5.3 following a reading of zero last month, suggesting a pickup in demand. The capacity utilization index advanced from 1.7 to 9.3, largely due to fewer manufacturers noting a decrease. The shipments index rose to 4.5, bouncing back into positive territory after falling to -2.3 in August. Indexes reflecting broader business conditions were mixed. The general business activity index remained slightly negative but edged up from -1.6 to -0.9. The company outlook index was positive for the fifth month in a row but fell slightly to 2.4 from a reading of 4.1 in August. Labor market indicators reflected slower labor demand growth and slightly longer workweeks. The employment index remained positive but fell to 5.9, its lowest reading in more than a year. Sixteen percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index moved up from -0.9 to 2.8.

Texas-Area Manufacturing Still Contracting - Business activity among Texas-area manufacturers remains slightly contractionary this month, according to a report released Monday by the Federal Reserve Bank of Dallas. The bank said its general business activity index rose to -0.9 in September from -1.6 in August. In July, the index plunged to -13.2 from 5.8 in June. Readings below 0 indicate contraction, and positive numbers indicate expanding activity. The Dallas Fed survey is the first of three regional Fed factory reports due out this week. Last week, the more widely watched reports from the New York and Philadelphia Feds showed factory conditions in those districts remain contractionary this month, although optimism about the future improved.

Manufacturing Activity Ticked Up in September; New Orders Turned Positive – Richmond Fed - Manufacturing activity in the central Atlantic region firmed somewhat in September, following three months of contraction, according to the Richmond Fed's latest survey. The seasonally adjusted index of overall activity edged higher as positive readings for shipments and new orders offset the negative reading for employment. Modest improvement was also evident in most other indicators. Capacity utilization turned positive, while backlogs and delivery times remained negative but improved from their August readings. Moreover, raw materials inventories grew at a slightly slower pace, while growth in finished goods was unchanged. Looking ahead, assessments of business prospects for the next six months were more optimistic in September. Contacts at more firms anticipated that shipments, new orders, backlogs, capacity utilization, and vendor lead-times would grow more quickly in the months ahead. Survey assessments of current prices revealed that growth in raw material prices grew more quickly, while finished goods prices grew more slowly. Over the next six months, respondents expected growth in both raw materials and finished goods prices to grow at a much slower pace than they had anticipated a month earlier

Mid-Atlantic Manufacturing Posts Expansion, Bucking Contractionary Trend -- Economic activity among manufacturers in the central Atlantic region is bucking the contractionary trends seen elsewhere and is expanding this month, the Federal Reserve Bank of Richmond said Tuesday. The service sector posted improved revenue but falling employment this month. The Richmond Fed’s manufacturing current business conditions index increased to 4 in September from -9 in August. Numbers above zero indicate expanding activity.

Richmond Fed Manufacturing Composite: Looking Less Grim - This particular Fed region represents Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia. The complete data series behind today's Richmond Fed manufacturing report (available here), which dates from November 1993. The chart below illustrates the 21st century behavior of this diffusion index. Today the manufacturing composite eased into expansion territory at 4 following July's 16 point plunge to -17. Through July the trend over the previous six months has been especially concerning. Outside of recessions, the only comparable drop was December 2010 - May 2011, and that six-month series appears to have been skewed by the December 2010 optimistic outlier, hence the value of 3-month moving average. The improvement over the past two months is most welcome, although the 3-month moving average for this highly volatile indicator remains in contraction territory at -7.4.How representative is this mid-Atlantic region to the larger economy? I calculated the correlation between the Richmond Fed Manufacturing Composite and the ISM PMI Composite Index, which I reported on earlier this month here. It is an impressive 0.84. Here is a snapshot of the complete series.

Kansas City Fed: Regional Manufacturing Activity "slowed somewhat" in September - From the Kansas City Fed: Growth in Tenth District Manufacturing Activity Slowed Somewhat The month-over-month composite index was 2 in September, down from 8 in August and 5 in July, and the lowest in nine months. The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. ... The production index dropped from 7 to -4, and the shipments, new orders, and order backlog indexes also moved into negative territory. The employment index eased from 2 to 1, while the new orders for export index inched higher but remained below zero. Both inventory indexes eased but were still in positive territory. Despite the overall slowdown, most future factory indexes were little changed and remained at generally favorable levels. The future composite index was unchanged at 16, while the future shipments, new orders, and order backlog indexes increased slightly. The future employment index was stable at 16, while the future production index eased somewhat from 31 to 29. This was below expectations of a 5 reading for the composite index. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Chicago Business Barometer Falls Below 50 for First Time Since 2009 - U.S. manufacturers suffered a slide in new orders during September, sending the keenly watched Chicago Business Barometer down to a seasonally adjusted 49.7 from 53.0 in August, the first contraction in three years. Order backlogs also retreated to their lowest level in two years in the latest downbeat signal from a manufacturing sector still concerned with the pace of China’s economic recovery and the ongoing euro-zone crisis. While other regions have factory surveys from private groups or regional Fed banks, economists point out the Chicago PMI has among the highest correlations with the national Institute for Supply Management survey. Firm says the Chicago PMI’s unexpectedly bad September report suggests this month’s reading for the ISM — out Monday — will be the fourth month in a row in which the index is below 50. And a reading below 50 means factory sector is contracting.

Chicago PMI Now Running at Recession Levels - The report for September's Chicago purchasing managers is a huge disappointment, and the report is sending stocks further south. The adjusted index fell to a recessionary/contraction level of 49.7 from 53.0 in August. This is a recessionary number and it echoes the cautious stance seen from CFO and CEO outlooks that came out this week from other sources. Bloomberg had a consensus report all the way up at 53.0 for September, making this just that much more of a disappointment. It was also worse than all of the estimates out there, as Bloomberg listed a range of 50.2 to 54.0 from its economists. The price paid component rose to 63.2 in September from 57.0 in August. Supplier deliveries managed to rise to an expansionary level of 52.1 in September from 49.9 in August. A huge disappointment came from the employment reading as the September reading fell to 52.0 from 57.1 in August. Perhaps the biggest disappointment was the New Orders component, falling to a very weak 47.4 from 54.8 in August. With a higher prices paid and with a weak new orders component, the implication is that orders are simply costing more money and total unit orders are on the decline.

U.S. Durable Goods Orders Tumble More Than Expected In August: New orders for U.S. manufactured durable goods showed a substantial decrease in the month of August, according to a report released by the Commerce Department on Thursday, with the steep drop largely due to a sharp decline in orders for transportation equipment. The Commerce Department said durable goods orders fell by 13.2 percent in August following a revised 3.3 percent increase in July. Economists had been expecting durable goods orders to drop by a more modest 5.0 percent. Excluding a 34.9 percent drop in orders for transportation equipment, durable goods orders fell by a much more modest 1.6 percent in August compared to a 1.3 percent drop in July. However, economists had expected ex-transportation orders to rise by 0.2 percent.

Over the cliff: Durable goods orders drop 13.2% in August; Update: Q2 GDP downgraded from 1.7% to 1.3% - A key measure of the economy, especially in manufacturing, just had the bottom fall out. Orders for durable goods dropped 13.2% in August, the worst decrease in almost four years, and a large signal that the American economy is diving into a recession: New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, was the largest decrease since January 2009 and followed a 3.3 percent July increase. Excluding transportation, new orders decreased 1.6 percent. Excluding defense, new orders decreased 12.4 percent. Transportation equipment, down following four consecutive monthly increases, had the largest decrease, $27.8 billion or 34.9 percent to $51.9 billion.The news was even worse for capital goods, indicating that businesses have stopped investing in themselves:  Nondefense new orders for capital goods in August decreased $18.5 billion or 24.3 percent to $57.7 billion. Shipments decreased $1.2 billion or 1.7 percent to $69.5 billion. Unfilled orders decreased $11.9 billion or 2.0 percent to $580.5 billion. Inventories increased $1.5 billion or 0.9 percent to $171.9 billion. Defense new orders for capital goods in August decreased $4.1 billion or 40.1 percent to $6.1 billion. Shipments decreased $0.1 billion or 1.7 percent to $8.1 billion. Unfilled orders decreased $2.0 billion or 1.2 percent to $165.6 billion. Inventories increased $0.4 billion or 1.8 percent to $21.4 billion.Unfilled orders — the “backlog” on which every manufacturer relies for continuity and security — also dropped by 1.7%, the largest drop since December 2009:

Orders for U.S. Goods Excluding Transportation Unexpectedly Drop - Orders for goods meant to last at least three years, excluding volatile demand for such things as airplanes and automobiles, fell 1.6 percent last month after a greater-than- previously estimated 1.3 percent decrease in July, the Commerce Department reported today in Washington. Total bookings plunged 13 percent, the most since January 2009, paced by a decline in demand for civilian aircraft. “There was broad-based weakness,”  “What this now means is that capital expenditures are now going to probably fall for the first time since the recovery started. It remains a terribly challenging backdrop in the U.S.” The median forecast of 53 economists surveyed by Bloomberg projected a 0.2 percent gain in ex-transportation orders. The Commerce Department revised July data down from a previously reported 0.6 percent decrease. The decline in total orders was more than twice as large as the 5 percent drop median estimate in the Bloomberg survey. Other reports today showed the economy grew less than previously forecast in the second quarter and claims for jobless benefits dropped last week to a two-month low.

Durable Goods Orders Do a Cliff Dive, Down 13.2% - The September Advance Report on August Durable Goods was released this morning by the Census Bureau. Here is the summary on new orders:  New orders for manufactured durable goods in August decreased $30.1 billion or 13.2 percent to $198.5 billion, the U.S. Census Bureau announced today. This decrease, down following three consecutive monthly increases, was the largest decrease since January 2009 and followed a 3.3 percent July increase. Excluding transportation, new orders decreased 1.6 percent. Excluding defense, new orders decreased 12.4 percent.  Transportation equipment, down following four consecutive monthly increases, had the largest decrease, $27.8 billion or 34.9 percent to $51.9 billion. Download full PDF  New orders at -13.2 percent was far worse than the consensus estimate of -5.0 percent, and the ex-transportation -1.6 percent was below the consensus forecast of -0.2 percent. If we exclude both transportation and defense, "core" durable goods orders rose 0.8 percent, up from the previous month's 0.4 percent. The first chart is an overlay of durable goods new orders and the S&P 500. An overlay with unemployment (inverted) also shows some correlation. An overlay with GDP shows some disconnect in recent quarters between the recovery in new orders and the slowdown in GDP — another comparison we'll want to watch closely.

The ''Real'' Goods on Today's Ugly Durable Goods Data - Earlier this morning I posted an update on the September Advance Report on August Durable Goods Orders. This Census Bureau series dates from 1992 and is not adjusted for either population growth or inflation. Let's now review the same data with two adjustments. In the charts below the red line shows the goods orders divided by the Census Bureau's monthly population data, giving us durable goods orders per capita. The blue line goes a step further and adjusts for inflation based on the Producer Price Index, chained in today's dollar value. This gives us the "real" durable goods orders per capita. The snapshots below offer a sobering alternative to the standard reports on the nominal monthly data. Economists frequently study this indicator excluding Transportation or Defense or both. Just how big are these two subcomponents? Here is a stacked area chart to illustrate the relative sizes over time. Here is the first chart, repeated this time ex Transportation.  Now we'll exclude Defense orders.   And now we'll exclude both Transportation and Defense for a better look at "core" durable goods orders.

Vital Signs: Volatile Sectors Pull Down Orders -  Demand for long-lasting goods collapsed in August. New orders for items expected to last at least three years fell $30.1 billion, or 13%, the biggest drop since January 2009. The decline was largely due to volatile areas like transportation and defense. Yet excluding transportation, orders still dropped 1.6%, suggesting American businesses are wary of big investments.

Will The Recent Weakness In Capital Goods Orders Roll On? - If I had to choose one economic indicator that worries me the most, today, in the context of the business cycle, I’d probably choose the sharp decline in new orders tied to business investment—non-military capital goods excluding aircraft, as reported by the Census Bureau each month. Economists generally look to this series as a valuable clue for future economic activity. If so, the data is worrisome, given the recent weakness in demand for capital goods. But is spending on capital goods really a reliable indicator for estimating the business cycle?  “Shipments of nondefense capitals goods excluding aircraft can serve as a proxy for the level of total nonresidential business investment in the GDP report,” writes Bloomberg economist Richard Yamarone in the new edition of his book The Trader's Guide to Key Economic Indicators. Investment in capital “drives economic activity,” he explains. “Only when businesses are confident about the economic outlook and future demand will they make costly investments in new machinery and innovative processes. In other words, weakness in capital spending may be a sign of trouble brewing for the overall economy down the road. With that in mind, here’s how new orders for capital investment (and orders for durable goods broadly defined) compare on a year-over-year basis for the last two decades:

Prospects brighten for ‘reshoring’ of America - The Boston Consulting Group is leading the way in trumpeting the “reshoring” of factory production in the United States. Surely part of the motivation is to drum up some new clients. If the phone isn’t ringing off the hook already, it soon will be. For a year or so, Boston Consulting has been publishing research under the banner “Made in America, Again.” The hypothesis is that the United States is in the early stages of recapturing a significant piece of the manufacturing production that fled to Asia over the previous couple of decades. One reason: wage rates in the U.S. are depressed, while labour costs in China are rising. Another: the surge in oil prices is making it more expensive to move stuff across oceans. Third: the shale gas boom in the U.S. has dramatically lowered the cost of powering a plant. And finally: U.S. productivity rates are among the best in the world.With each report, Boston Consulting is becoming more confident in its analysis. The firm’s latest research, which it released to reporters Friday, attempts to quantify the U.S. advantage in manufacturing relative to other developed countries. The number that will get the most attention is this one: five million. As in, the U.S. economy is poised to add between 2.5 million and five million jobs over the next decade as result of increased factory production (700,000 to 1.3 million actual factory workers and the rest from supporting services).

Employment Losses: Comparing Financial Crises - Last year economist Josh Lerner posted a number of charts and graphs as an update to work by Carmen Reinhart and Kenneth Rogoff: This Time is Different, An Update Today, Lerner updated a few graphs again (through August, 2012). See: Checking in on Financial Crises Recoveries. Here is one graph and an excerpt: From Lerner: [W]hen the Great Recession is compared ... to the Big 5 financial crises and the U.S. Great Depression ... the current cycle actually compares pretty favorably. This is likely due to the coordinated global response to the immediate crises in late 2008 and early 2009. While the initial path of both the global and U.S. economies in 2008 and 2009 effectively matched the early years of the Great Depression – or worse – the strong policy response employed by nearly all major economies – both monetary and fiscal – helped stop the economic free fall.

Employment: Preliminary annual benchmark revision shows 386,000 additional jobs - This morning the BLS released the preliminary annual benchmark revision showing an additional 386,000 payroll jobs as of March 2012. The final revision will be published next February when the January 2012 employment report is released on February 1, 2013. Usually the preliminary estimate is pretty close to the final benchmark estimate. The annual revision is benchmarked to state tax records. From the BLS:  Establishment survey benchmarking is done on an annual basis to a population derived primarily from the administrative file of employees covered by unemployment insurance (UI). The time required to complete the revision process—from the full collection of the UI population data to publication of the revised industry estimates—is about 10 months. The benchmark adjustment procedure replaces the March sample-based employment estimates with UI-based population counts for March. The benchmark therefore determines the final employment levels ...Using the preliminary benchmark estimate, this means that payroll employment in March 2012 was 386,000 higher than originally estimated. In February 2013, the payroll numbers will be revised up to reflect this estimate. The number is then "wedged back" to the previous revision (March 2011). This means the BLS under counted payroll jobs by 386,000 as of March 2012. This preliminary estimate showed an additional 453,000 private sector jobs, but 67,000 fewer government jobs (as of March 2012).

Nearly 400,000 More Jobs Added Than First Thought - About 400,000 more Americans have jobs than we thought. The Bureau of Labor Statistics on Thursday released an early look at its annual “benchmark revision” of its payroll data. When the preliminary revisions become final early next year, the official data should show that there were 386,000 more jobs in March than previously believed. The private sector did even better, adding 453,000 jobs versus previous estimates. No, companies didn’t go on a previously undetected hiring spree. The Labor Department just got access to better data. When the government releases its monthly payroll figures, it bases the numbers on a survey of some 160,000 employers across the country. Once a year, the government revises the figures based on tax records, providing a more accurate — but much less timely — count. The revisions are big compared to the month-to-month payroll changes, but spread over a full year, they aren’t particularly dramatic. They suggest that between April 2011 and March 2012, the economy added about 32,000 more jobs per month than previously believed — enough to make some bad months look slightly less bad, and some good months look even better, but not enough to represent a dramatic change. All told, the jobs added by the revision represent three tenths of one percent of the total working population, exactly the size of the average annual revision over the past 10 years.

More Jobs Than We Knew - The government’s estimates of job creation are not particularly accurate, a point that is often made and often ignored. On Thursday morning, the Bureau of Labor Statistics provided another reminder. The agency said it probably undercounted the extent of job creation between April 2011 and March 2012 by 20 percent. The agency, which issues a much-discussed monthly estimate, also issues regular revisions of those estimates, which regularly receive much less attention. One of the most important revisions uses state unemployment insurance tax records – records filed by nearly all employers, which include actual counts of the numbers of people they employ — to check the accuracy of a full year of its monthly estimates. In that revision, published Thursday, the agency concluded that an additional 386,000 jobs were created during the 12-month period, a 20 percent jump over its previous estimate that employment increased by about 1.94 million jobs. The revision is preliminary; a final version will not be published until February. The new numbers would increase the monthly pace of job creation during that period to about 194,000 a month, up from a pace of 162,000 jobs a month.

Benchmark Revisions and Nonfarm Payroll Employment since January 2009 - The BLS released preliminary annual benchmark revisions for March 2012. Nonfarm payroll series and private nonfarm payroll series, in logs, normalized to 2009M01, are shown below; adding on the revised levels for March 2012 yields the series shown in red.  This benchmark revision occurs each year. The calculations I've implemented in the graphs assume a constant upward shift equal to the March 2012 amount. If, as is typically the case in upswings, subsequent benchmark revisions further shift up the March 2013 figures, then the red lines will represent an undercount of job growth throughout 2012.

O Frabjous Day! Callooh! Callay! A Jobs Story - The Bureau of Labor Statistics announced a 386,000 adjustment to its 2012 jobs figures, putting Obama in positive (+125,000) jobs territory for the first time in his Administration. This will no doubt make for good cheering material for the Obama campaign, but it rather misses the larger and far more important point that we still have a jobs deficit since the January 2008 jobs peak of nearly 11 million. That positive 125,000 is achieved by ignoring two major factors: job losses in 2008 before Obama became President (recessions are impolitic and don’t wait for Presidential Inaugurations to begin) and 4 1/2 years of population growth in the labor age population. When Obama took office in January 2009, employment (jobs) stood at 133.561 million. Job numbers fell 4.317 million to a low of 129.244 million in February 2010. Since then they recovered to 133.300 million in August. Add in the 386,000 from the latest announced adjustment (which won’t be officially added to this year’s tally until February of next year) and you get 133.686 million. That gives us the 125,000 jobs more than when he started, or 4.442 million from the February 2010 trough. As we are 30 months out from the trough, that yields a job creation rate of 148,000/month. It’s a good story as far as it goes, but that isn’t very far. Indeed it is so incomplete as to be meaningless. Obama came to office halfway down the cliff of job losses. Between January 2008 (with jobs peaking at 138.023 million) and January 2009 (133.561 million) when Obama assumed office, the economy lost 4.462 million jobs. From January 2008 to August 2012, the last month for which we have data, the non-institutional population over 16 increased by 10.950 million. Multiplying this by the average of the employment-population ratio over this period (59.4) gives us our estimate of jobs needed to keep up with population growth: 6.504 million. Add the uncounted 2008 part of the cliff and jobs needed just for population growth and credit Obama with his net 125,000 jobs and you arrive at a jobs deficit from January 2008 through August 2012 of 10.837 million. This is the size of the story that the BLS announcement doesn’t tell.

Weekly Initial Unemployment Claims decline to 359,000 - The DOL reports: In the week ending September 22, the advance figure for seasonally adjusted initial claims was 359,000, a decrease of 26,000 from the previous week's revised figure of 385,000. The 4-week moving average was 374,000, a decrease of 4,500 from the previous week's revised average of 378,500. The previous week was revised up from 382,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 374,000. This was below the consensus forecast of 376,000. And here is a long term graph of weekly claims: Mostly moving sideways this year, but moving up

Weekly Unemployment Claims at 359K, Much Better Than Forecast -  The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 359,000 new claims number was a striking 26,000 drop from the previous week's upward revision of 3,000. The less volatile and closely watched four-week moving average, which is a better indicator of the recent trend, declined to 374,000. Here is the official statement from the Department of Labor:  In the week ending September 22, the advance figure for seasonally adjusted initial claims was 359,000, a decrease of 26,000 from the previous week's revised figure of 385,000. The 4-week moving average was 374,000, a decrease of 4,500 from the previous week's revised average of 378,500.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending September 15, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 15 was 3,271,000, a decrease of 4,000 from the preceding week's revised level of 3,275,000. The 4-week moving average was 3,295,500, a decrease of 15,000 from the preceding week's revised average of 3,310,500.  Here is a close look at the data since 2006 (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.

Contradiction Du Jour: Durable Goods Orders vs. Jobless Claims - There’s good news and bad news in today’s economic reports. In the labor market, initial jobless claims dropped a hefty 26,000 last week—the biggest weekly decline since July—to a seasonally adjusted 359,000. That leaves new filings for unemployment benefits close to the post-recession low of 352,000 from the week ending July 7. But this encouraging news is marred by a steep drop in durable goods order for August. Does one data set trump the other? That’s to be determined in the weeks ahead as more numbers roll in. Meantime, there are two newly minted data points to consider, each one contradicting the other in rather stark terms. The macro truth will out, and probably quite soon. Meantime, today's menu of statistics offer a choice: darkness or light. Choose wisely, grasshopper... or perhaps not at all, at least not just yet. For perspective, let’s review how jobless claims stack up in recent history. As the first chart shows, last week’s substantial decline in new claims looks fairly decisive in terms of breaking the recent trend of moving sideways or inching higher. One week of data for this series doesn’t mean much, of course, but for the moment the case for optimism is a bit stronger.

Philly Fed: State Coincident Indexes in August show weakness - From the Philly Fed:  The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for August 2012. In the past month, the indexes increased in 25 states, decreased in 12 states, and remained stable in 13 states, for a one-month diffusion index of 26. Over the past three months, the indexes increased in 28 states, decreased in 16 states, and remained stable in six states, for a three-month diffusion index of 24. Note: These are coincident indexes constructed from state employment data. This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In August, 32 states had increasing activity, up from 26 in July. The last four months have been weak following eight months of widespread growth geographically. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession. And the map was all green just earlier this year. Now there are a number of red states again.

Getting Real on Jobs and the Environment - President Obama’s 2009 economic stimulus program—the American Recovery and Reinvestment Act (ARRA)—represented a dramatic forward advance on the issue of jobs and the environment. The ARRA included roughly $100 billion in clean energy investments as part of the overall $787 billion two-year measure. The ARRA also embraced the concept that green investments could serve as a significant new engine of job opportunities throughout the economy. Over the past two years, and especially since the 2012 election season began, the level of mainstream political support for the green investment agenda has eroded substantially, while the traditional position—that economic policies can protect the environment or expand job opportunities but can’t do both at once—has regained traction. According to the revived traditional view, the government has wasted tens of billions of taxpayers’ dollars on dubious “green jobs” programs, and it is now time to return to what we know works—that is, generating energy by burning oil, coal, and natural gas, supplemented by nuclear power. This means tearing down the existing barriers, environmental or otherwise, that have been stifling the traditional energy sectors. Three main factors are driving this reversal on jobs and the environment. The most important is the perception that the $100 billion green stimulus program failed to deliver the jobs it promised. If the green jobs agenda was successful, why is the unemployment rate stuck so high?

Longer Unemployment, Fewer Interviews - I’ve written before about about how the longer you’re unemployed, the less likely you are to find a job. That’s probably because of some combination of several factors: skill deterioration; better workers are more likely to get hired faster, leaving a pool of less qualified workers as the ones who disproportionately make it to long-term unemployment in the first place; and the stigma of unemployment, or at least the assumption by employers that the longer-term unemployed will be lower quality because of the previous two factors. A new study tries to measure how big a factor that stigma is. In the fall of 2009, the authors sent out 12,054 fake résumés for 3,040 jobs posted online, with most showing that the (fictional) applicant had been unemployed somewhere from one to 36 months. The résumés were all variations on a few standard templates that the researchers came up with. The duration of unemployment was randomly assigned to candidates of otherwise equal qualifications. Over all, 4.7 percent of résumés resulted in the candidate’s being invited for an interview. But a candidate’s chances of being called back depended on how long he or she had been looking for work.

America's hidden unemployed: too discouraged to count - Economists, analyzing government data, estimate about 4 million fewer people are in the labor force than in December 2007, primarily due to a lack of jobs rather than the normal aging of America's population. The size of the shift underscores the severity of the jobs crisis. If all those so-called discouraged jobseekers had remained in the labor force, August's jobless rate of 8.1 percent would have been 10.5 percent. The jobs crisis spurred the Federal Reserve last week to launch a new bond-buying program and promise to keep it running until the labor market improves. It also poses a challenge to President Barack Obama's re-election bid. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one has fallen by an unprecedented 2.5 percentage points since December 2007, slumping to a 31-year low of 63.5 percent.

The Disheartening State of American Incomes - Yves Smith -  Doug Short at Global Economic Intersection has a must-read post that pulls together some Census Report data on US incomes since 1967 and draws some conclusions. He looks first at real, rather than nominal, incomes, and shows how income in the top 5% and top quintile have grown faster than for the rest of the population:  And he includes an analysis that shows that people in all these cohorts are on average worse off than they were: He also provides an analysis of income trends by age cohort, and captures one of the things I’ve commented on, how many people in their 40s and 50s take a big dive income-wise when they lose their jobs. Remember, 45-54 is historically the peak earning years for household heads: I suggest you read his post pronto. He has more good, if depressing, charts and accompanying discussion. Bottom line: anyone who gets optimistic about growth trend in the US needs to confront the fact that the seeming prosperity before the global crisis was fueled by rising household debt, not growing incomes. And even if the powers that be prevent further deleveraging by lowering borrowing costs on outstanding debt, that still fails to set the foundation for anything other than lackluster growth. Expecting consumers to lever up even further is not a way out of the stagnant incomes box.

Labor's Declining Share of Income and Rising Inequality - Cleveland Fed - Labor income has declined as a share of total income earned in the United States. This decline was caused by several factors, including a change in the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies. One consequence of the labor share decline has raised concerns. Since labor income is more evenly distributed across U.S. households than capital income, the decline made total income less evenly distributed and more concentrated at the top of the distribution, and this contributed to increase income inequality. In this Commentary, we look at how the labor share decline has affected income inequality in the past, and we study the likely future path of the labor share and its implications for inequality.

Chart of the day: The long decline of labor - This chart comes from Margaret Jacobson and Filippo Occhino at the Cleveland Fed, and it’s reasonably terrifying — yet another one of those charts where the trend is down and to the right, and where it’s only gotten worse since the end of the recession. What you’re looking at here is the share of total national income which is accounted for by labor — a measure that includes wages, salaries, bonuses and things like pension and insurance benefits. Everything else is capital income: interest, dividends, capital gains. There are two ways of measuring this, which is why there are two lines; both of them are telling the same story.The fascinating thing to me, here, is what has happened since the crisis. Over the past three years or so, wages and salaries have been rising steadily, while interest rates have been stuck at zero. It’s never been harder to make income from capital, while incomes for people with jobs have actually kept on rising. And unemployment, while still high, has been coming down.Given all that, it would stand to reason that the share of national income going to labor should be rising, not falling.  And yet! It turns out that people with capital are so rich, and getting so much richer, that it’s not even close.  Of course, as the Cleveland Fed paper shows, a lot of the story here is about rising inequality. But the more powerful, if less obvious, story, is just how entrenched capital income has become in the US economy.

What Will Obama Do about Income Inequality? Not Much - New data from the Census Bureau shows that the tepid recovery is exacerbating income inequality and pushing ordinary Americans into tougher economic circumstances. Here is the Los Angeles Times with more detail:  The median household income, after adjusting for inflation, dropped 1.5% in 2011 from the previous year to $50,054. That is now 8.1% lower than in 2007, when the recession began late that year. […] The share of people falling below the poverty line—$11,702 for a single person under age 65 and $23,201 for a family of four—had increased steadily since 2006, when the rate was 12.3%. The census report said there were about 46 million poor people in the U.S. last year, essentially the same as in 2010. […] The latest census report showed that households with incomes in the 20th to 60th percentile saw their share of overall incomes fall last year to 23.8% of total income. Meanwhile, households in the top 20% saw their share of the total pie climb to an all-time high of 50%. With the all-consuming focus on taxes and “paying your fair share,” one of the things lost in this election is the fact that neither candidate has a concrete plan for improving the short-term economic picture. At most, we can hope that the Obama administration continues to push for more robust income support—through food stamps, unemployment insurance and various tax credits—and that a President Romney would sign massive, across-the-board tax cuts but disregard his promise to cut spending and balance the budget, thus giving us a form of Keynesian stimulus.

Half Of Americans Making Under $30K Have Less Than $100 In Savings - As we noted earlier, the main reason for the surge in consumer "confidence" in September was the near record surge in sentiment for those making $15,000-$25,000, which soared from 43.5 to 62.4 in the month, the most since April 2009. And whether this was due to their forecast of the future, and expectation that things will get much better, or not, we don't know, what we do know is that half all of those people whose sentiment defined the market tone today, and who may be quite instrumental in the outcome of the upcoming election (per Mitt Romney), have less than $100 in cash savings. Other findings: both males and females reported similar savings patterns, however, 55 percent of Americans with children under the age of 18 reported having less than $800 in emergency savings compared to 42 percent of those without. Findings also reflect disparities across geographic regions, with 60 percent of individuals living in both the Northeast and the West having $800 or more in savings, yet 31 percent of those living in the North Central region reported that they had less than $100. Most importantly, 23% of all Americans have less than $100 in savings to cover any emergency expenses, and 46% have less than $800. One can see why when it comes to the discussion of whether or not financial assets should be taxes, soon 46% may be the new 47%.

Five Myths about the 47 Percent - The full version is here. Here is the Cliff Notes version:

  • Myth #1: Forty-seven percent of Americans don’t pay taxes. “This oft-heard claim ignores the many other taxes Americans encounter in their daily lives.”
  • Myth #2: Members of the 47 percent will never pay federal income taxes. In fact, households often move in and out of the 47 percent, primarily because of changes in their income.
  • Myth #3: Many high-income people game the system to pay no income tax. Gaming certainly happens, but “it has essentially nothing to do with who does and doesn’t pay income taxes … the vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home.”
  • Myth #4: The 47 percent vote Democratic. Many low-income folks don’t vote at all; many seniors vote Republican.
  • Myth #5: Tax increases are the only way to bring more of these households onto the [income] tax rolls. Rolling back tax breaks like the child credit would, of course, be one way to reduce the ranks of the 47 percent, if one were so inclined. But don’t forget economic growth. Faster job creation and growing incomes would help move some households up the income scale and out of the 47 percent.

The Geography of the 47% - Following the big Mother Jones release of Republican presidential candidate Mitt Romney's hidden-camera comment on the "47 percent" of Americans "who will vote for the president no matter what," my colleague at The Atlantic, David Graham, posted an article Monday looking at the real "47 percent." Using the Tax Foundation's data on 2008's income tax non-payers (people who filed a tax return but did not actually owe federal income taxes), he found that the states with the highest rates tended to be traditionally Republican states. Graham writes: Romney's statements are a little unclear, but it appears that the 47 percent figure represents all of those who pay no income tax, rather than the Democratic base. His problem is that those people are disproportionately in red states -- that is, states that tend to vote Republican... Derek Thompson, another Atlantic colleague, followed up on Graham's post with this analysis: In 2011, 47% of Americans paid no federal income taxes. Within that group, two-thirds still pay payroll taxes. The rest are almost all either (a) old and retired folks collecting Social Security or (b) households earning less than $20,000. Overall, four out of five households not owing federal income tax earn less than $30,000, according to the Tax Policy Center. I thought it might be useful to update the map and do a bit more statistical analysis.

The Changing Geography of Metropolitan Poverty - The Great Recession may have officially ended in June 2009, but the weak and sluggish recovery has left many Americans struggling with the effects of a down economy years later, as evidenced by today’s release of 2011 American Community Survey data on poverty and income. Even as the economy achieved a net job growth of 1.9 million private-sector jobs in 2011, the upward pressure on poverty in the nation’s largest metro areas continued. After jumping from 11.6 to 14.4 percent in the span of a decade, the poverty rate for the country’s 100 most populous metro areas climbed further still between 2010 and 2011, to reach 15.1 percent. However, there are signs of easing. The increase in 2011 was the smallest uptick in the 100 metro area poverty rate since the Great Recession began—0.7 percent compared to a 1.1 percent increase the year before and a 1.4 percentage point rise the year before that. The number of individual metro areas where the poverty rate increased significantly also dropped. Between 2010 and 2011, just over one-quarter (26) of the nation’s 100 largest metro areas registered a significant rise in the poverty rate, compared to 47 regions in the previous year. Increases generally persisted in Southwestern and inland California metro areas where the housing market is struggling to regain its footing, and in Midwestern and Northeastern metro areas still shaking off the effects of steep manufacturing job losses during the recession.

Redistribution of Wealth in America - The fact is that redistributive government policy — mainly through benefits-in-kind programs, agricultural policy and the like — has been very much a characteristic of American life, just as it has been in every economically developed nation, albeit at different levels. Start at the local level. Through property taxes, local governments all over the United States routinely take from high-income Americans living in expensive houses to subsidize the education of children from lower-income families. It is the American way, based on the widespread belief that doing so will make society as a whole better off. Is there a significantly large constituency for abolishing this form of redistribution at the local level and instead letting every family fend for itself, with its own budget, in a private market for education? The same can be said, at the local level, for fire and police protection. One could imagine a world in which every family cuts a deal with private contractors to provide fire and police protection — leaving poor neighborhoods to fend for themselves — but that is just not an American characteristic. Is there a sizable constituency in America for completely privatizing local fire and police protection? At the state level, consider Medicaid. By design, Medicaid is purely redistributive. It takes from higher-income people at the state and federal levels and pays fully for the health care of low-income people. Is there a strong constituency for abolishing Medicaid and letting the poor, when they are ill, fend for themselves in the market for health care?

Expensive to Be Poor: Expenses Twice as Much as Income for Bottom 20% of US Households - A new study from the Bureau of Labor Statistics out today probably won’t get as much notice as their other report showing the US gained 386,000 jobs more than expected. However, this one shows a persistent problem in America, that it’s actually expensive to be poor. The average individual in the lowest 20% of the income ladder had take-home pay of $10,074 and average expenses of $22,011. That’s more than double, and it makes being poor nearly impossible to manage. The story for the second and third quintiles weren’t much better, with their expenses roughly commensurate to their income, meaning they live paycheck-to-paycheck and save next to nothing. But the expenses-versus-income report for the poorest Americans is almost unreal. The Huffington Post puts some of these numbers in context: This percentage of households includes many retirees, who are presumably living off savings. Many of these households may be spending more than they earn through some combination of loans from family and friends, credit cards, savings, and payday loans. The government helps a bit with an income tax credit: The average bottom-fifth household’s after-tax income is $269 higher than its before-tax income. The income accounted for includes welfare and Social Security benefits. Many are also taking on debt. In 2010, roughly one-quarter of the poorest fifth of households held a high debt burden, or had debt service payments exceeding 40 percent of their income, according to the Economic Policy Institute. These households mainly are spending on necessities such as food, shelter, utilities, clothing and transportation. The average bottom-fifth household spent 87 percent of its after-tax income on housing alone last year.

Ignoring the nation’s poor: A political peril in 2012? - The campaign rhetoric and the media coverage of an election focused on our economy have largely overlooked a major national economic shift: the number of working families living under the poverty line grew by over 25% since 2007. A recent study found national media has devoted a mere 0.2% of its election coverage to the challenge of poverty. Maybe candidates can look away from more working mothers bringing home checks that place their families below the poverty line or one job loss or medical bill away from financial disaster. Maybe they can brush aside the impact of public policy helping struggling families find better opportunity in reducing costs to taxpayers and the economy. But even if you can ignore all this, how can you ignore the politics? The official poverty rate rose to 15.9% this month. Since 2007, 10.4 million more Americans have seen their incomes fall below the federal poverty mark, $23,500 for a family of four. Now over one in four Americans live either in poverty or near poverty, a number that has grown by 22.6% since 2007, far outpacing the growth even of the nation’s Latino population (14.3%), a demographic shift with significant electoral implications. But even as unemployment begins to go down slowly, and economic growth improves, the amount of workers and families in poverty continues to rise, a trend economists believe may continue. Research shows that many of the few jobs being created so far in the economic recovery are low and poverty wage jobs, highlighting that job growth alone will not address the plight of hard-working poor families.

A Flood of Applications, With a Trickle of Approvals - Mr. Mora is one of the first immigrants nationwide to receive approval for a two-year deferral of deportation under the program, which President Obama announced in June. As of Thursday the agency, United States Citizenship and Immigration Services, had received more than 100,000 applications, officials said, with more than 63,000 in the last stages of review. But so far the agency has confirmed only 29 approvals.  Some of those people have chosen to remain under the radar, not wanting to publicize that they had been in this country illegally for years. But Mr. Mora is not reluctant. As it happens, he is a leader of the California Dream Network, a movement of young illegal immigrants who had been staging very visible protests to pressure Mr. Obama to offer some relief from the high numbers of deportations during his term.

There Aren’t That Many Takers in America, - Mitt Romney said...:“... there are 47%  who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it.”The discussion of dependence on government is at the heart of the Republican case against Democrats...Creating a working definition of takers is tricky.  It’s not a sliding scale. Either you’re a maker or you’re a taker. Since the rhetoric is dichotomous, my strategy for identifying takers will be dichotomous as well.So who should we count as a pure taker? ... Of the 24.7% of Americans who did not work and received government benefits in 2010, more than 70% are either disabled or retired. 7.7% are not working in order to care for home or family – not a group that family values conservatives typically malign. 12.8% are going to school, which likely indicates at least a degree of taking responsibility for oneself. ... The bottom line here is that there aren’t that many takers in America. The most restrictive definition pegs the percentage of takers at 2.4%. If we’re willing to include people in households with at least one earner, that number increases to 5.2%. ... But these numbers simply don’t line up with the rhetoric of a massive class of lazy people taking advantage of the rest of us while eating solely at the trough of government.

Taking Responsibility on Welfare - Almost 40 years ago, working two jobs, with an ex-husband who was doing little to help, I came home late one night to my parents’ house, where I was living at the time. My mother was sitting at the card table, furiously filling out forms. It was my application for readmission to college, and she’d done nearly everything. She said she’d write the essay, too, if I wouldn’t. You have to get back on track, she told me. And so, eight years after I’d flunked out, gotten pregnant, eloped, had a child, divorced and then fumbled my first few do-overs of jobs and relationships, I was readmitted to the University of New Hampshire as a full-time undergraduate. I received a Basic Educational Opportunity Grant, a work-study grant and the first in a series of college loans. I found an apartment — subsidized, Section 8 — about two miles from campus. By the end of the first semester, I knew that my savings and work-study earnings wouldn’t be enough. My parents could help a little, but at that point they had big life problems of their own. If I dropped to a part-time schedule, I’d lose my work-study job and grants; if I dropped out, I’d be back to zero, with student-loan debt. That’s when a friend suggested food stamps and A.F.D.C. — Aid to Families With Dependent Children.  Me, a welfare mother? I’d been earning paychecks since the seventh grade. My parents were Great Depression children, both ex-Marines. They’d always taught self-reliance. And I had grown up hearing that anyone “on the dole” was scum. But my friend pointed out I was below the poverty line and sliding. I had a small child. Tuition was due.

Asshole Idiot Nation: Grocery Store Clerk Humiliates Food Stamp Recipient - You really have to hand it to asshole conservatives and the doctrinaire libertarians for how successful they have been in turning us plebes against one another so that we don't turn around and see that it's the face of the oligarchs that is connected to the big red, white a blue dick they are shoving up our asses on a daily basis. The brillance of their campaign to demonize poverty even as they strive hard to drive even more members of the former working and middle classes into poverty was on display again this week, as reported by Digital Journal: Cindy Nerger of Warner Robins, Ga., who has been on a waiting list for kidney transplant for five years, was brought to tears at a supermarket last week when a clerk ridiculed her in the presence of other customers for using food stamps. She said she went shopping last week Tuesday at the Kroger off Watson Boulevard. When she got to the register, the clerk insisted wrongly that $10 worth of items were not covered. She said: "He told me I owed him 10 dollars and some change. I am not exactly sure what it was, but I told him, I said I am sorry sir, but there is nothing in my cart that is not covered by food stamps." According to Nerger, Kroger employees kept her on the line for half an hour.

Mixed-Race America - That map is from a new Census Bureau report about the population of mixed-race Americans, which grew 32 percent from 2000 to 2010. The population of single-race Americans, by contrast, grew 9.2 percent. As a share of the total population, mixed-race Americans are still a tiny minority, just 2.9 percent, or about nine million people. As you can see in the map, the states with the highest share of residents who report being of more than one race are Hawaii (23.6 percent), Alaska (7.3 percent), Oklahoma (5.9 percent) and California (4.9 percent). Four distinct mixed-race combinations represented about 92 percent of all mixed-race people: people who reported being both white and black totaled 1.8 million; white and “some other race,” 1.7 million; white and Asian, 1.6 million; and white and American Indian and Alaska native, 1.4 million.

Every State's State/Local Tax System Taxes the Poor More than the Wealthy--And All Exceed Federal Taxes - A new report from the Institute on Taxation and Economic Policy (ITEP) shows that in every state in the country, the bottom 20% of households pay more of their income in state and local taxes than does the top 1%. Washington state was the worst, where the bottom 20% pay a whopping 17.3% of their income in state and local taxes. This was followed by Florida at 13.5% and Illinois at 13.0%. Though the report hints at an exception, a reading of their appendix shows that the only one is the District of Columbia. As the report points out, such high taxation increases the burden of poverty on the people who, by definition, can least afford it. Moreover, this runs counter to the federal tax system, which in its overall effect (see table below) is progressive. On average, the top 1% pay federal taxes equal to 30% of their income, compared to 1.1% for the lowest 20%. Between these two reports, we can see that the bottom 20% of taxpayers pays a much higher portion of their income in state and local taxes than they do in federal taxes. ITEP therefore recommends four major policies to make state and local taxation less regressive.
1) Enact a refundable earned income tax credit for state income tax;
2) Enact property tax circuit-breaker caps for all low-income taxpayers, including renters;
3) Enact other refundable income tax credits for childless households below the poverty level;
4) Enact or increase child tax credits, and make them refundable.

Fix a Bond, Build a Bridge, Help Taxpayers and Investors - Bloomberg editors - In 2009, with the U.S. roiled by recession and investors fleeing the municipal-bond market, President Barack Obama started a program that allowed cities and states to sell taxable bonds on which the federal government would offer an interest subsidy of 35 percent.  These Build America Bonds, created as part of the stimulus package, were a response to an emergency, but they proved successful in providing much-needed funding for infrastructure, and were a boon for investors, too. In 2010, they fell prey to partisanship, cynicism and an understandable concern about their cost to taxpayers.  Now, with bridges, roads, tunnels and ports in need of shoring up, and with many state and local budgets still in dire shape, the bonds should be brought back to life, but with a few updates to fix the original program’s flaws. And the Obama administration must make clear that it won’t use the bonds as a political tool.

Just Released: August Indexes of Coincident Economic Indicators Show Uneven Growth across the Region - New York Fed -The August Indexes of Coincident Economic Indicators (CEIs) for New York State, New York City, and New Jersey, released today, give a mixed picture of current economic performance across the region. Economic activity in August expanded at a robust pace in New York City while activity in New York State and New Jersey grew at a more modest pace, continuing the pattern seen since the spring.    The monthly CEIs reported here are single composite measures designed to provide a current reading of economic activity. They are constructed from four data series: payroll employment, the unemployment rate, average weekly hours worked in manufacturing, and real (inflation-adjusted) earnings. The CEIs indicate that economic growth has varied considerably across the region. In New York State, activity has grown in fits and starts thus far in 2012. After expanding at a brisk pace during the first quarter, activity leveled off in April and May. Since then, New York State’s economy has expanded at an annual rate of a little less than 2 percent, on average. Despite the modest growth of late, the state’s economy has, at this point, reversed more than two-thirds of the decline during the Empire State’s last downturn, which is estimated to have ended in November 2009.

America's deadliest city disbands police force and fires 270 cops over budget crisis - This city, long among the nation's poorest and most crime-ridden, is on the verge of dismantling its police department and starting anew with a force run by the county government. City officials are making the move to increase the number of officers while keeping the cost the same by averting rules negotiated with a union that city officials have seen as unwilling to compromise. Unless the union - which is skeptical of the stated motivations for the change - reaches a deal with the county, no more than 49 per cent of the city's current officers could join the new force and those that do will get pay cuts. Officials say there are about 170 drug markets operating in this city of 77,000 near Philadelphia, more than 700 people on parole and 600 registered sex offenders. The murder rate is unthinkably high. In 2007, Newark attracted national attention for a record number of homicides.

Homeless children in shelters on the rise in NYC but many are turned away - Almost 20,000 children are spending the night in homeless shelters in New York City, according to new data, an increase of 24% since July 2011. The Coalition for the Homeless, which published the figures, said the number of children in shelters would be even higher were it not for the fact that 65% of homeless families seeking admission to shelters are being turned away. The homeless charity places some of the blame on the closure of the Advantage housing program in the summer of 2011. Since then there has been no rent-subsidy program in place for accommodating homeless families.The number of homeless children in NYC shelters rose from an average of 15,704 in July 2011 to an average of 18,489 in July 2012, the most recent month for which average statistics are available. A freedom of information request by the Coalition for the Homeless found that 19,537 children were in shelters on 23 September – the most recent information available – which it described as “an all-time record high”.

Chicago Public Schools’ Bond Rating Downgraded Again - One of the nation’s bond rating agencies is out with another warning about the Chicago Public Schools system’s financial future. Moody’s Investors Service has downgraded the school system’s debt status, warning that the Chicago School Board, because of various provisions of the new teachers’ contract, will be hard-pressed to make the budget adjustments needed to close an estimated $1 billion gap for fiscal 2014. Moody’s says the downgrade from A1 to A2 reflects a weakened financial picture brought about not only by the contract, but also by a depletion of financial reserves, a future increase in pension payments and the slow pace of state aid. And Moody’s warns further rating downgrades would be likely unless the problems are addressed.

Good and Bad Teachers: How to Tell the Difference-Becker - Although the recent Chicago teachers’ strike of seven school days was their first strike in 25 years, the main disagreement with the city was not over the traditional bread and butter issue of pay and benefits. Rather it was centered on the criteria to be used in evaluating teachers to distinguish good teachers from bad ones. It might seem surprising that teacher evaluations were so contentious since the union had already forced Mayor Rahm Emanuel to take merit pay for good teachers off the negotiating table. However, being deemed a good teacher still has advantages, including that better-rated unemployed teachers receive higher priority when teaching positions become available.Moreover, the union is aware that merit pay will become more of an issue in the future.  Teacher unions have long argued that the main criteria to be used in determining whether teachers are effective or not should be variables like teaching experience and teaching credentials rather than subjective evaluations of principals and other administrators. Unions and their supporters have also argued that teacher evaluations by administrators or parents are not worth a lot because it is difficult to get agreement on who are the good and bad teachers. I would challenge that claim: most of the time students as well as teachers agree on who are the good and bad teachers.

Rating Teachers—Posner - I know from my own educational experience that teachers differ in quality and that a good teacher improves the life prospects of his or her students, and that, as Becker says, usually it’s easy to distinguish good from bad teachers ex ante, that is, before the actual impact of the teachers on their students’ lives can be assessed. Everyone knows all this; the question is what to do with this knowledge in order to improve life prospects.  At the risk of sounding retrograde and unimaginative, I suggest that the only worthwhile reforms of teacher compensation are raising teacher wages uniformly, providing recognition and modest bonuses for outstanding teachers, and increasing hiring standards. The first two suggested reforms are essential because without them the third will have little or no effect on teacher quality. Per-pupil costs in American schools are high by international standards, it is true, seemingly without much to show for the high costs; but teacher salaries have to be raised in order to attract more good teachers because American women today have so much better alternative job opportunities than they used to have.

The How and the Why of Cheating - The night before one of the “5 to 10” times he has cheated on a test, a senior at Stuyvesant High School said, he copied a table of chemical reactions onto a scrap of paper he would peek at in his chemistry exam. He had decided that memorizing the table was a waste of time — time he could spend completing other assignments or catching up on sleep. “It’s like, ‘I’ll keep my integrity and fail this test’ — no. No one wants to fail a test,” he said, explaining how he and others persuaded themselves to cheat. “You could study for two hours and get an 80, or you could take a risk and get a 90.” A recent alumnus said that by the time he took his French final exam one year, he, along with his classmates, had lost all respect for the teacher. He framed the decision to cheat as a choice between pursuing the computer science and politics projects he loved or studying for a class he believed was a joke. “When it came to French class, where the teacher had literally taught me nothing all year, and during the final the students around me were openly discussing the answers, should I not listen?” he said. These are the sorts of calculations many students learn to make by the middle of their freshman year: weighing two classes against each other, the possibility of getting an A against the possibility of getting caught, keeping their integrity against making it to a dream college. By the time they graduate, many have internalized a moral and academic math: Copying homework is fine, but cheating on a test is less so; cheating to get by in a required class is more acceptable than cheating on an Advanced Placement exam; anything less than a grade of 85 is “failing”; achieve anything more than a grade-point average of 95, and you might be bound for the Massachusetts Institute of Technology or Yale.

Confirming US Dumbification, Verbal SAT Scores Just Hit Record Low - All we can say is that the need for the Derek Zoolander Center For Kids Who Can't Read Good And Wanna Learn To Do Other Stuff Good Too has never been greater. At least the data below explains why the Chairsatan will soon monetize SAT scores and his infatuation with morer, greaterest QEternity+1...

Bad Math: MIT Miscounts Its Newest B-School Class - The Sloan School of Management's full-time M.B.A. program, usually about 400 students, was oversubscribed by an unusually high number of students this year. Rather than expand the class size, the school asked for volunteers willing to wait a year to enroll, sending out an e-mail just a couple of weeks before the Aug. 23 kickoff barbecue. By that point, many expectant students had quit jobs and secured housing in the Boston area.  After realizing they had a student surplus, school officials emailed the incoming class on Aug. 7, offering "guaranteed admission to the class of 2015 for the first 20 admitted students who request it." The school gave them until Aug. 13 to respond, according to one student's copy of the letter, which was reviewed by The Wall Street Journal. But it didn't get enough takers.  So, like an airline offering vouchers to travelers willing to hop off oversold flights, the school put money on the table, offering students who expressed an interest a $15,000 scholarship to be applied to next year's tuition. Students still balked, and on Aug. 21, a day after pre-term refresher courses began, Sloan raised the offer to $20,000 for the first 10 respondents. (Tuition for the 2012-2013 academic year is $58,200, with total expenses--including books, housing and food--estimated at just under $89,000.)

CLASSE sets sights on free tuition in latest student protest: One Quebec student group says that with tuition hikes officially off the table, it will now champion the idea of free education. The new Parti Québécois government scrapped a controversial increase in post-secondary tuition fees this week and a hardline student group is now turning to free education as its long-term goal. CLASSE, which speaks for 100,000 Quebec students, says free education is entirely achievable and used a march attended by several hundred people on Saturday to highlight the issue. “Our struggle for accessibility to higher education is not yet over,” said Jeremie Bedard-Wien, a spokesperson for CLASSE. Free education is not a position that is shared by the province’s two other major student associations and with the proposed hike by the former Liberal government formally cancelled, Quebec has the lowest tuition in the country again. But CLASSE says it wants education to be completely accessible by being entirely free.

Young U.S. Adults Flock to Parents’ Homes Amid Economy -The Class of 2008, born during the historic bull market that closed the past century, reached a dubious distinction last year: More than a million of the college graduates have gone back home.The number of 26-year-olds living with parents has jumped almost 46 percent since 2007, according to Census Bureau data compiled by the University of Minnesota Population Center. Last year, the number of 18- to 30-year-olds living with their parents grew to 20.7 million, a 3.9 percent gain from 2010. The figures underscore the difficulty that millions of young people have had in finding jobs and starting careers in the U.S. following the longest recession since the Great Depression. About a quarter of American adults between the ages of 18 and 30 now live with parents, while intergenerational households have reached the highest level in more than 50 years.

Student Loan Debt Weighing Down the Young and Poor -- Millions who've gone to college say they owe a lot to their education. Unfortunately, millions still owe a lot for their education, with close to 20 percent of all U.S. households saddled with student loan debt as of 2010. That's over double of what it was 20 years earlier, with most of the crushing burden of debt having fallen on the backs of those who are young, poor or both. In 2010, the Pew Research Center computed that the average outstanding debt was nearly $26,700 and the total owed nationally as of earlier this year was $914 billion. These mountains of IOUs are based predominantly on two factors: college tuition that easily outpaces the annual rate of inflation and federal government borrowing limits now exceeding $30,000, compared to a ceiling of $7,500 during the 1960s.

One in Five Households Owe Student Debt - It’s no secret that student debt has risen rapidly in recent years. But a new report by the Pew Research Center has some eye-opening numbers:

  • –Nearly one in five households, or 19%, owed student debt as of 2010, Pew found. That’s up from 15% in 2007. Among households headed by someone younger than 35 years old, 40% owed student debt in 2010.
  • –Between 2007 and 2010, the average balance of student debt rose 14% to $26,682, after adjusting for inflation.
  • –Since 2007, student debt has risen the most among the poorest and wealthiest households, as opposed to those in the middle, while the share held by those in the middle three-fifths of earners declined, according to the analysis, conducted by Pew senior economist Richard Fry using Federal Reserve data. The last point is particularly interesting, because Pew found that while student debt has risen for both poor and wealthy, it’s a much bigger burden for the poor when taking into account their incomes and other debts owed. Among all households in the bottom fifth of earners—including those with student debt and those without—the student-loan balance was, on average, equivalent to 24% of annual income, up from 15% in 2007. Across all households in all income brackets, the student-debt-to-income ratio was 6% in 2010.

The Student Loan Bubble In 19 Simple Charts - A picture paints a thousand words but in the case of the world of college education (and its surrounding income, unemployment, debt burden, and pricing implications), we decided 19 charts was the simplest way to explain the path to debt servitude that an increasing share of the US population is taking - despite record delinquencies, falling real incomes for graduates, stagnant graduate employment, and rising college costs. As BofAML notes, the cost of higher education has continued to climb, fueled by debt and government aid. Over the past twenty years, tuition growth exceeded the average rate of inflation by nearly 3% annually, while both grant aid and Federal loans per full-time undergraduate exceeded by about 5% annually. This trend is not sustainable, in our view. The challenging labor market, which has left the youth population underemployed and underpaid, has put the spotlight on the burden of student debt. We expect a correction in the price of tuition and reduction in debt. There will likely be lasting effects on the economy from the high cost of education and large debt burden. Graduating during a recession leads to permanently lower earnings growth, making it that much harder to service the debt burden.

How Bad Is America’s Pension Funding Problem? - No sooner had the Chicago teachers’ strike been settled than a new crisis emerged last week in the Windy City. The Chicago Teachers’ Pension Fund was reported to be on the brink of collapse. That fund is not alone. Although the troubles that plague the Social Security system get the most attention, similar dangers now threaten many other kinds of retirement funds. Some plans are being inadequately funded, some have earned unexpectedly low returns, and some suffer from a Baby Boom bulge in the number of retirees. Moreover, the problems facing these funds will in many cases be harder to fix than those for Social Security. So-called defined-benefit plans promise to pay benefits to retirees based on the length of time they worked and their former salaries. If these plans run short of money, they not only leave retirees unsure that their benefits are safe, they also create a potential cost for whoever has to bail them out (often taxpayers). Such plans can slide along for years hiding their growing internal deficits with accounting tricks. But at some point, the funding gap becomes too big to disguise – which is what is happening now.  How bad is the total problem? Let’s add it all up

Romney's Misleading Attack on Social Insurance - Republicans have made it very clear that if they take power in November, they intend to cut government social insurance programs. In their view, these programs sap the incentive to work and create a nation of moochers who live off of the taxes paid by productive members of society. Mitt Romney’s comment about the 47 percent who have supposedly become "dependent on government" reflects this line of thought. However, Republicans have unwittingly provided a strong argument against cutting social insurance with their “maker-taker” rhetoric.  One argument for social insurance is based upon the benefit of sharing the risks we all face in a capitalist society. Capitalism is better than any other economic system at promoting economic growth and providing us with the goods and services that we need – it certainly dominates socialism. But capitalism is also subject to turbulent fluctuations.  There are boom times and recessions, and sometimes the recessions are deep, prolonged downturns that impose large costs on workers who have done nothing at all to deserve such a fate. They do their jobs diligently day after day to support their families, then suddenly find themselves without a job and without a secure future when their place of employment fails because of a recession, structural change, or bad decisions by owners and managers. The purpose of social insurance is to spread these costs widely across the population instead of having them concentrated on the families of the unlucky duckies who lose their jobs or experience other misfortunes they had no hand in creating.

Obama May Do Social Security Reform During Lame Duck Session, Senate Democrats Worry: -- Concern is mounting among some Senate Democrats that President Barack Obama will make a deal with Senate Republicans during the lame-duck session that would result in changes to the benefit structure of Social Security. One of the most progressive voices in the caucus, Sen. Bernie Sanders (I-VT), said he was heartened to hear Obama tell the AARP last week that he'd be open to raising the cap on income that's taxed for purposes of paying into the Social Security trust fund. Sanders also applauded the president for taking off of the table any reform language that resulted in the "slashing" of benefits (several Social Security advocates, disagreeing with Sanders, said they were worried such language was counterproductive, as it opens the door for cuts that could be deemed minor). But the Vermont Independent worried that all of this could be posturing for the lame-duck session immediately after the election, when lawmakers are expected to rush to find another "grand bargain" on tax and entitlement reform to stave off the so-called fiscal cliff. "That's exactly what's going to happen," Sanders said of Social Security being on the proverbial table, "Unless someone of us stops it -- and a number of us are working very hard on this -- that's exactly what will happen. Everything being equal, unless we stop it, what will happen is there will be a quote-unquote grand bargain after the election in which the White House, some Democrats will sit down with Republicans, they will move to a chained CPI."

Social Security: Solidarity, Not Investment - Recently the Associated Press (AP) published a four-part series of stories examining “the state of Social Security and its long-term health.”  The AP said that “Few things affect more Americans than the future of Social Security, and yet it’s an issue mostly invisible during the current campaign.”  True, it’s not talked about much, but perhaps more important is the fundamental misunderstanding of the nature of the program that is revealed when people do talk about it. This misunderstanding was revealed in the very first installment of the AP series, which appeared on August 5th.  The headline on this kick-off piece read, “Social Security Not Deal it Once Was for Workers.”  Asked the AP, “How can you get a better return on your Social Security taxes?” A large and growing number of people share the misunderstanding revealed in that headline:  They think that Social Security is a program of Individual Investment.  It’s not, and was never meant to be.  Instead, it is a program of Social Insurance.  Understanding the difference between these two types of systems is the key to having even a glimmer of understanding about what is at stake in this huge public debate. Here’s how insurance works:  With insurance, one only gets something back if one loses something.  I hope I never collect anything on my home insurance, for example, since that would mean my house has burned down, or some other horrible thing has happened.  And, if I lose something, and DO get back some of what I paid in, what I get back is related to what I lost, not to what I paid in.  And that, too, is a good thing.  That’s the nature of insurance.  That is not the nature of investment.

When Parents Can't Enroll in Medicaid, Children Stay Uninsured - The Census Bureau just released new data on poverty, income and health insurance for last year, and the numbers aren’t pretty. Overall poverty remained at the highs we’ve seen for the past three years, with the picture still particularly bleak for children: 15 percent of Americans and 1 in 5 children live in poverty. Lack of insurance is closely tied to that number. Nearly 14 percent of children living in poverty lacked health insurance last year, compared with under 10 percent for children overall, a number that stayed flat despite the decrease in the rate for everyone under 65. How could this be? In theory, our country’s low-income children should all have access to health care through Medicaid and CHIP (Children’s Health Insurance Program). Yet 22.3 million kids living in poverty remain uninsured – the biggest group of children without coverage. This is in large part thanks to the fact that enrolling in these programs can be like clearing a jungle of red tape with a weed wacker. But failing to insure children for any reason can have serious consequences for their health. One study found that increased Medicaid coverage leads to fewer deaths, and another shows that new insurance for some low-income children made them 60 percent more likely to have an annual checkup. Merely being “eligible” for insurance doesn’t equate with being insured.

The economy depends on the welfare state - It is more than 30 years since I first attended a conference on the global welfare crisis. Rarely have a few months passed without an invitation to another. Last week, Tom Palmer, the American libertarian, came to London to denounce the “world-straddling engine of theft, degradation, manipulation and social control we call the welfare state”.The content of these rants is familiar. Levels of welfare provision are unaffordable; government finance is a huge Ponzi scheme. A common conclusion is to provide an estimate of the discounted value of the cost of some hated item of expenditure if its current provision were continued into the indefinite future. Mr Palmer reported that the present value of unfunded liabilities of US medicine and social security is $137tn.  Social security is a means of inter-generational transfer..., but why should we look after old people, who can no longer do anything for us?  We feed the generations of our parents and grandparents in the expectation future generations will come along and do the same for us. But the consequences of this arrangement do have the character of a Ponzi scheme.  The value of these obligations is offset by the implied commitments of future generations. ... Exaggeration can sometimes be forgiven when it is used to draw attention to a problem that has received insufficient attention. It is less easy to excuse when it threatens the fragile social arrangements on which economic security depends.

Postal Service to move closer to insolvency-- At the end of this month, the U.S. Postal Service takes another step toward insolvency. On Sunday, the service is required by law to pay the federal government $5.6 billion to fund health care benefits for retirees. But it won't do it, because it doesn't have the money. It will be the second time that the service has defaulted on a payment, the first occurring on Aug. 1. For the time being, the default means little. "This default will have no effect on the processing or delivery of mail, and employees and suppliers will continue to be paid," said David Partenheimer, a spokesman for the Postal Service. But if Congress does nothing, come next spring, the Postal Service will truly start running out of cash. That means the agency may not have enough to pay mail carriers and subcontractors, which could mean drastic cuts to the mail delivery system -- postal service Armageddon. The financial crunch is due to a law passed in 2007 that only Congress can fix. Congress ordered the prefunding of retiree benefits, as a way of easing federal deficits. Neither of the bills moving through Congress completely undo that mandate -- they just prolong or delay it.

U.S. Postal Service to miss $5.6 bln payment -- The United States Postal Service will miss a $5.6 billion payment due Sunday to the U.S. Treasury, according to a report by the Associated Press. Postmaster General Patrick Donahoe said services won't be disrupted, but he sounded a cautionary note that the mail delivery specialist has squeezed all of the cost savings within its power, according to the report. The Postal Service has been pushing for legislation to allow it to eliminate Saturday mail delivery and reduce its $5 billion annual payment for future retiree health benefits. Congress has wrapped up its session until after the November elections with no postal fix approved.

Romney Medicare plan: Key details still in flux -— Medicare is the one health insurance plan that will cover virtually every American at some point in life, and Republican Mitt Romney is proposing the biggest changes since its creation nearly 50 years ago. With important details still hazy, The Associated Press asked the Romney campaign five questions about how his Medicare plan would affect consumers on critical matters of costs and benefits. Some of the questions remained unresolved after the campaign's responses. It may take electing Romney to find out how his plan would work. "One of the things that concerns me about both campaigns is that they tend to use jargon terms like 'competition' or 'protection for benefits' without spelling out how they would deal with the challenges that come up," said economist Marilyn Moon, a former trustee overseeing Medicare finances. "Their answer is to attack the other side, or simply reinforce the same jargon, rather than explaining how things would work." Broadly speaking, Romney calls for shifting people now age 54 and younger into a different sort of Medicare. Once eligible, these people would get a fixed payment from the government, adjusted for inflation, to pay for either private insurance or a government plan modeled on Medicare. Current beneficiaries and those nearing retirement could stay in the traditional program.

30 Issues: Getting Real On Medicare and Social Security - Brian Lehrer show, WNYC - Key Questions

  • What do taxpayers owe their grandparents, and what do grandparents owe the future?
  • What is the distribution of government spending between the elderly and the young?
  • How do the Obama and Romney/Ryan plans differ?


    • James Galbraith, professor of Government at University of Texas at Austin Inequality and Instability: A Study of the World Economy Just Before the Great Crisis (Oxford University Press, USA, 2012);
    • Jim Kessler, senior vice president for policy at Third Way;
    • James Capretta, visiting fellow at the American Enterprise Institute and a fellow at the Ethics and Public Policy Center

        Medicare Bills Rise as Records Turn Electronic - When the federal government began providing billions of dollars in incentives to push hospitals and physicians to use electronic medical and billing records, the goal was not only to improve efficiency and patient safety, but also to reduce health care costs.  But, in reality, the move to electronic health records may be contributing to billions of dollars in higher costs for Medicare, private insurers and patients by making it easier for hospitals and physicians to bill more for their services, whether or not they provide additional care.  Hospitals received $1 billion more in Medicare reimbursements in 2010 than they did five years earlier, at least in part by changing the billing codes they assign to patients in emergency rooms, according to a New York Times analysis of Medicare data from the American Hospital Directory.  The most aggressive billing — by just 1,700 of the more than 440,000 doctors in the country — cost Medicare as much as $100 million in 2010 alone, federal regulators said in a recent report, noting that the largest share of those doctors specialized in family practice, internal medicine and emergency care.

        Hospital Consolidation and ACO's - Jason Shafrin over at the Healthcare Economist points to this recent paper over at the RWJF. Interestingly the authors find that hospital consolidation increases prices and could decrease quality. Something that many of us have considered in the past. In concentrated markets, the effects were even more pronounced with price increases over 20% noted. Competition was noted to increase quality under an "administered" pricing system, ala the NHS in the UK. The evidence for competition increasing quality in a market system was much more mixed. When one examines the the health markets in Milwaukee and Chicago, which are both midwestern cities, and geographically close to each other, one finds higher prices in Milwaukee, with providers not accepting less than 200% of Medicare. Which does not seem intuitive, as there is far more market competition in the health insurance industry there. In Chicago, one insurer, BC-BS, is rather dominant and prices are lower, with providers accepting 112% of Medicare on average. It would seem to make sense that increasing the leverage of the hospitals and providers through the mechanism of consolidation will increase prices. The same thing happens in Milwaukee, which has no dominant insurer, and therefore is unable to exert leverage over the hospital systems in Milwaukee.

        Shocker stat of the day: life expectancy decreases by 4 years among poor white people in the U.S - Yesterday, the New York Times reported on an alarming new study: researchers have documented that the least educated white Americans are experiencing sharp declines in life expectancy. Between 1990 and 2008, white women without a high school diploma lost a full five years of their lives, while their male counterparts lost three years. Experts say that declines in life expectancy in developed countries are exceedingly rare, and that in the U.S., decreases on this scale “have not been seen in the U.S. since the Spanish influenza epidemic of 1918.” What are the reasons for the disturbing drop in life expectancy among poor white folks, and in particular for the unusually large magnitude of the decline? According to the Times, researchers are baffled: Undoubtedly, the increasing numbers of low-income Americans without health insurance is a major contributor factor. Researchers also say that lifestyle factors such as smoking, which has increased among low-income white women, play a role; poor folks tend to engage in more risky health behaviors than their more affluent counterparts. I will offer an alternative hypothesis, one which is not explicitly identified in the Times article: inequality. In the U.S., the period between 1990 and 2008, which is a period that saw such steep declines in life expectancy for the least well-off white people, is also a period during which economic inequality soared. Moreover, there is a compelling body of research that suggests that inequality itself — quite apart from low incomes, or lack of health insurance — is associated with more negative health outcomes for those at the bottom of the heap.

        Inequality Kills - Paul Krugman  -- Kathleen Geier makes a point I should have noticed. She points to the shocking story in yesterday’s Times about sharply declining life expectancies for less-educated whites, and points out that these declines took place at a time of rapidly rising income inequality. And we have lots of evidence that low socioeconomic status leads to higher mortality — even if you correct for things like availability of health insurance. Some of the effects may come through self-destructive behavior, some through simple increased stress; think about what it feels like in 21st-century America to be a worker without even a high school degree. In any case, Geier is surely right: what we’re looking at is a clear demonstration of the fact that high inequality isn’t just unfair, it kills.

        The emergency department is not health insurance: In a Sunday night interview with “60 Minutes,” Republican presidential candidate Mitt Romney suggested the emergency department as a place where those without coverage could seek treatment “Well, we do provide care for people who don’t have insurance,” Romney said. “If someone has a heart attack, they don’t sit in their apartment and die. We pick them up in an ambulance and take them to the hospital and give them care. And different states have different ways of providing for that care.” That’s how the federal system is supposed to work: A federal law called EMTALA, or the Emergency Medical Treatment Active and Labor Act, requires emergency rooms to stabilize a patient with a life-threatening condition. Since 1986, hospitals have had to comply with that provision to receive federal funding – thanks to Medicare, they play ball. A few recent studies, however, suggest that’s not exactly what happens on the ground. They underscore how hospitals can sometimes shirk this responsibility and why emergency care doesn’t work like a regular health insurance plan.

        Rise in Knee Replacements Boosts Federal Health Costs - The number of knee replacements paid for by Medicare has more than doubled over the past two decades, according to a study published Tuesday that suggests the popular procedure is emerging as an important driver of costs for the nation's health-care system.  Researchers examining Medicare insurance claims found that in 2010, people aged 65 and older—eligible for the federal insurance program for older Americans—underwent 243,802 operations to replace damaged knees or to "revise" previous replacements, up from 93,230 in 1991. Over the 20-year period, 3.6 million knee replacements were performed on Medicare enrollees, according to the study.  Medicare patients account for less than half of the estimated 600,000 knee replacements now performed each year. At about $15,000 each, the total annual tab for the operations performed on patients of any age is now about $9 billion, the researchers said. By comparison, Medicare spending for 2011 was estimated at $550 billion, according to the Kaiser Family Foundation.

        What’s the problem? Everything! - The Bipartisan Policy Center has released a report on factors that drive the high level of health care spending in the United States. Here are some:

        • Fee-for-service reimbursement;
        • Fragmentation in care delivery;
        • Administrative burden on providers, payers and patients;
        • Population aging, rising rates of chronic disease and co-morbidities, as well as lifestyle factors and personal health choices;
        • Advances in medical technology;
        • Tax treatment of health insurance;
        • Insurance benefit design;
        • Lack of transparency about cost and quality, compounded by limited data, to inform consumer choice;
        • Cultural biases that influence care utilization;
        • Changing trends in health care market consolidation and competition for providers and insurers;
        • High unit prices of medical services;
        • The health care legal and regulatory environment, including current medical malpractice and fraud and abuse laws; and...

        In other words… everything. The system is broken, huh?

        “The Drugs Don’t Work”: How the Medical-Industrial Complex Systematically Suppresses Negative Studies - Yves Smith - We’ve written a lot about the scientism of mainstream economics, both here and in ECONNED, and how these trappings have let the discipline continue to have a special seat at the policy table despite ample evidence of its failure. As bad as this is, it pales in comparison to the overt corruption of science at work in the drug arena. Although this issue comes to light from time to time, often in the context of litigation, the lay public is largely ignorant of how systematic and pervasive the efforts are to undermine good research practice in order to foist more, expensive, and sometimes dangerous drugs onto patients. Ben Goldacre, a British doctor and science writer, provides a short overview of one of the worst scams practiced by Big Pharma: that of suppressing negative research, in a new piece at the Guardian. This is the overview: Drugs are tested by the people who manufacture them, in poorly designed trials, on hopelessly small numbers of weird, unrepresentative patients, and analysed using techniques that are flawed by design, in such a way that they exaggerate the benefits of treatments. Unsurprisingly, these trials tend to produce results that favour the manufacturer. When trials throw up results that companies don’t like, they are perfectly entitled to hide them from doctors and patients, so we only ever see a distorted picture of any drug’s true effects. Regulators see most of the trial data, but only from early on in a drug’s life, and even then they don’t give this data to doctors or patients, or even to other parts of government. This distorted evidence is then communicated and applied in a distorted fashion. Sometimes whole academic journals are owned outright by one drug company. Aside from all this, for several of the most important and enduring problems in medicine, we have no idea what the best treatment is, because it’s not in anyone’s financial interest to conduct any trials at all. And the consequences are devastating....

        BPA harms human reproduction by damaging chromosomes, disrupting egg development - Writing in the journal Proceedings of the National Academy of Sciences, WSU geneticist Patricia Hunt and colleagues at WSU and the University of California, Davis, report seeing reproductive abnormalities in rhesus monkeys with BPA levels similar to those of humans. By using an animal with the most human-like reproductive system, the research bolsters earlier work by Hunt and others documenting widespread reproductive effects in rodents. "The concern is exposure to this chemical that we're all exposed to could increase the risk of miscarriages and the risk of babies born with birth defects like Down Syndrome," says Hunt. "The really stunning thing about the effect is we're dosing grandma, it's crossing the placenta and hitting her developing fetus, and if that fetus is a female, it's changing the likelihood that that female is going to ovulate normal eggs. It's a three-for-one hit." The research also adds to the number of organs affected by BPA, or bisphenol A, which is found in plastic bottles, the linings of aluminum cans and heat-activated cash register receipts. This May, Hunt was part of another paper in PNAS reporting that the additive altered mammary development in the primate, increasing the risk of cancer.

        “I’m Lovin’ It”: Fast-Food Logos ‘Imprinted’ in Children’s Brains, Study Says - Childhood obesity is a growing health concern in the public sphere, but for many of us, it also hits close to home. But while public health campaigns have singled in on parents providing children with unhealthy nutrition options and with poor examples of healthy eating, new research indicates that some of the problem may lie with fast food companies and their overly effective marketing campaigns. A study has found that fast-food logos are branded into the minds of children from an early age.When showed images of fast food companies, the parts of the brain that control pleasure and appetite lit up. The brains did not do the same when showed images from companies not associated with food.

        Finding of the Day: 8% of L.A. Childhood Asthma Cases Due to Freeway Proximity - A new study released today confirms what many have always suspected: children who live near busy roads are more likely to develop asthma. The research, conducted by researchers at the University of Southern California and published in Environmental Health Perspectives, attribute eight percent of Los Angeles' 300,000 cases of childhood asthma to proximity to a freeway. We have known for years that traffic exhaust is responsible for asthma, and a 2008 study made clear that high levels of traffic pollution near homes can increase the likelihood of breathing problems. But this new study is spatially precise. It finds increased asthma levels in children living within 250 feet of a freeway. The consequences of air pollution may affect Los Angeles, but they affect some Los Angelenos more than others.

        Air pollution still at dangerous levels in Europe, report finds - Microscopic particles, among the most harmful forms of air pollution, are still found at dangerous levels in Europe, although law has cut some toxins from exhaust fumes and chimneys, a European Environmental Agency (EEA) report said on Monday. On average, air pollution is cutting human lives by roughly eight months and by about two years in the worst affected regions, such as industrial parts of eastern Europe, because it causes diseases such as lung cancer and cardiovascular problems. "European Union policy has reduced emissions of many pollutants over the last decade, but we can go further," EEA executive director Jacqueline McGlade said in a statement, highlighting the risks before an upcoming review of relevant EU legislation. "In many countries, air pollutant concentrations are still above the legal and recommended limits that are set to protect the health of European citizens."

        Bacon, pork shortage 'now unavoidable,' industry group says -Might want to get your fill of ham this year, because "a world shortage of pork and bacon next year is now unavoidable," according to an industry trade group. Blame the drought conditions that blazed through the corn and soybean crop this year. Less feed led to herds declining across the European Union “at a significant rate,” according to the National Pig Assn. in Britain. And the trend “is being mirrored around the world,” according to a release (hat tip to the Financial Times). In the second half of next year, the number of slaughtered pigs could fall 10%, doubling the price of European pork, according to the release. The trade group urged supermarkets to pay pig farmers a fair price for the meat to help cover the drought-related losses. In U.S. warehouses, pork supply soared to a record last month, rising 31% to 580.8 million pounds at the end of August from a year earlier, according to the U.S. Department of Agriculture.

        Rice contains 'worrisome' arsenic levels, says Consumer Reports - All along the rice shelf at the grocery store, where brown and white rice sit alongside rice-based breakfast cereals, rice pastas, rice drinks and rice crackers, there’s arsenic, and often at troubling levels. The new findings from a Consumer Reports investigation show “significant” and “worrisome” amounts of inorganic arsenic in nearly every rice product tested. The watchdog group urged consumers to scale back ingestion of rice products and asked the Food and Drug Administration to set limits. Inorganic arsenic is a known carcinogen for humans, affecting the bladder, lungs, skin and possibly more, and is also considered a launch pad for children to future health woes. Organic arsenic is less toxic but still “of concern,” according to Consumer Reports.

        Agri-Chemicals and Infant Mortality in India - Using agrichemicals is directly correlated to infant mortality in India.  This is the central finding of research presented by Nidhiya Menon (Associate Professor of Economics, Brandeis University) at the International Growth Centre’s Growth Week 2012. The research, co-authored by Elizabeth Brainerd, entitled Seasonal Effects of Water Quality on Infant and Child Health in India, finds a 10% increase in the average level of fertiliser chemicals in water at the month of conception increases the likelihood of infant death by approximately 4.6%.  The research also finds that newborns are particularly at risk, with the same 10% increase significantly associated with an approximately 6% increase in death within the first month. Fertiliser use has increased over time in India, and this research also shows that the effects of increased levels of agrichemicals in water can be seen in both rice and wheat which are staple food crops in India. The effects of this contamination are most significant for the children of rural uneducated poor women in India. The findings of this research highlight the tension between greater use of fertiliser to increase yields and the negative child health effects that result from such use.  In order to guarantee greater security of child health, it may be necessary to focus on generating only reasonable yield amounts by curtailing the excessive use of synthetic additives.

        Pesticides not yet proven guilty of causing honeybee declines, experts say: The impact of crop pesticides on honeybee colonies is unlikely to cause colony collapse, according to a paper in the journal Science September 20, 2012. More research is now needed to predict the impact of widely-used agricultural insecticides, called neonicotinoids, on honeybee populations. UK scientists from the University of Exeter and Food and Environment Agency highlight flaws in previous research (published in Science, April 2012) that predicted that neonicotinoids could cause honeybee colony collapse. Neonicotinoids are among the most widely-used agricultural insecticides and honeybees ingest residues of the pesticides as they gather nectar and pollen from treated plants. The previous research has been cited by scientists, environmentalists and policy-makers as evidence of the future impact of these pesticides on honeybees. It is likely that the research was instrumental in the French government's recent decision to ban the use of thiamethoxam, a neonicotinoid that is the active ingredient of Cruiser OSR, a pesticide produced by the Swiss company Syngenta.

        Agent Orange chemical in GM war on resistant weeds: Farmers all over the US are facing a growing challenge from weeds that are resistant to chemical spraysContinue reading the main story A US biotechnology company is set to introduce a controversial new genetically modified corn to help farmers fight resistant weeds. Dow Agrosciences says its new GM product is based on a chemical that was once a component of the Vietnam war defoliant, Agent Orange. It is needed they say because so called "superweeds" are now affecting up to 15 million acres of American crops. Dow argues the new approach is safe and sustainable.

        Dioxin Causes Disease and Reproductive Problems Across Generations, Study Finds - Since the 1960s, when the defoliant Agent Orange was widely used in Vietnam, military, industry and environmental groups have debated the toxicity of one of its ingredients, the chemical dioxin, and how it should be regulated. But even if all the dioxin were eliminated from the planet, Washington State University researchers say its legacy would live on in the way it turns genes on and off in the descendants of people exposed over the past half century. Writing in the journal PLoS ONE, biologist Michael Skinner and members of his lab say dioxin administered to pregnant rats resulted in a variety of reproductive problems and disease in subsequent generations. The first generation of rats had prostate disease, polycystic ovarian disease and fewer ovarian follicles, the structures that contain eggs. To the surprise of Skinner and his colleagues, the third generation had even more dramatic incidences of ovarian disease and, in males, kidney disease. "Therefore, it is not just the individuals exposed, but potentially the great-grandchildren that may experience increased adult-onset disease susceptibility," says Skinner.

        Myths about industrial agriculture  - Reports trying to create doubts about organic agriculture are suddenly flooding the media. There are two reasons for this. Firstly, people are fed up of the corporate assault of toxics and GMOs. Secondly, people are turning to organic agriculture and organic food as a way to end the toxic war against the earth and our bodies. We are what we eat. We are our own barometers. Our farms and our bodies are our labs, and every farmer and every citizen is a scientist who knows best how bad farming and bad food hurts the land and our health, and how good farming and good food heals the planet and people. One example of an industrial agriculture myth is found in "The Great Organic Myths" by Rob Johnston, published in the August 8 issue of The Tribune. It tries to argue:"Organic foods are not healthier or better for the environment - and they're packed with pesticides. In an age of climate change and shortages, these foods are an indulgence the world can't afford." This article had been published in the Independent and rebutted, but was used by the Tribune without the rebuttal. Every argument in the article is fraudulent.

        Global grain production at record high - Global grain production is expected to reach a record high of 2.4 billion tons in 2012, an increase of 1 percent from 2011 levels, according to new research conducted by the Worldwatch Institute. According to the United Nations Food and Agriculture Organization (FAO), the production of grain for animal feed is growing the fastest - a 2.1 percent increase from 2011. Grain for direct human consumption grew 1.1 percent from 2011, write report authors Danielle Nierenberg and Katie Spoden. In 2011, the amount of grain used for food totaled 571 million tons, with India consuming 89 million tons, China 87 million tons, and the United States 28 million tons, according to the International Grains Council. The world relies heavily on wheat, maize (corn), and rice for daily sustenance: of the 50,000 edible plants in the world, these three grains account for two-thirds of global food energy intake. Grains provide the majority of calories in diets worldwide, ranging from a 23 percent share in the United States to 60 percent in Asia and 62 percent in North Africa. Maize production in the United States, the largest producer, was expected to reach a record 345 million tons in 2012; however, drought in the Great Plains has altered this estimate severely.

        Another Week Brings More Pessimistic Drought News - As has been the case throughout the month of September, the latest weekly drought update shows that drought conditions have tightened their grip on the Plains States and Western U.S., and the overall drought footprint expanded to encompass 65.45 percent of the lower 48 states, up from 64.8 percent on Sept. 18. This represents the highest areal coverage in the 12-year history of the Drought Monitor analysis, topping last week's record. As of Sept. 25, the worst categories of drought — extreme to exceptional drought conditions — encompassed nearly one quarter of the lower 48 states. Nearly all of Nebraska, with the exception of a sliver in the southeastern corner of the state, is suffering under extreme to exceptional drought conditions — 98 percent, to be exact.

        World on track for record food prices 'within a year' due to U.S. drought - Brace yourself for some painful "agflation". That is the shorthand for agricultural commodity inflation, otherwise known as rising food prices. They are being driven upwards by the climb in grain and oilseed prices as US crops weather the country's worst drought since 1936, while the farming belts of Russia and South America suffer through similar water shortages. What we are seeing represents the third major rally in global grain and oilseed prices in just half a decade. Worse is to come, new research warns. World food prices look set to hit an all-time high in the first quarter of next year – and then keep rising, according to the analysis from Rabobank, a specialist in agricultural commodities. By June 2013, the basket of food prices tracked by the United Nations could climb 15pc from current levels, according to the bank's analysts.

        Texas drought killed 300 million trees last year –An updated ground and aerial survey indicates about 301 million trees have died in rural Texas because of the 2011 drought. The Texas A&M Forest Service said Tuesday that the figure comes from an examination of hundreds of forested plots statewide. The Texas agency last December announced a preliminary estimate of up to 500 million trees killed by the drought. The three-month extended review used ground inspections and before-and-after satellite images. The findings represent trees in rural, forested areas that died from drought, insect infestation or disease due to drought stress. The 301 million figure does not include trees that died in cities and towns. Experts earlier this year determined another 5.6 million trees in urban areas died as a result of the devastating drought.

        Most biofuels are not ‘green’, researchers show - In recent years, the demand for supposedly environmentally friendly biofuels has increased significantly worldwide; on the one hand, this has resulted in the increased cultivation of so-called energy plants and, on the other hand, innovative production methods for the second generation of biofuels have been developed. Parallel to this, ecobalance experts have refined and developed methods for environmental assessment. Since biofuels stem predominantly from agricultural products, the, in part, controversial discussion about their environmental sustainability revolves principally around whether the production of biofuels is defensible from an ecological viewpoint or whether there are possible negative effects, for example on the supply of foodstuff in times of drought, or whether eutrophication of arable land occurs. In order to be able to give a well-informed response, Empa, on behalf of the Department of Energy (BFA) and in collaboration with the research institute Agroscope Reckenholz-Tänikon (ART), and the Paul Scherrer Institute (PSI), has updated the ecobalance of numerous biofuels, including their production chains. Compared with the first worldwide ecobalance study of its kind in 2007, also carried out by Empa, the team, led by Empa researcher Rainer Zah, included both innovative energy plants and manufacturing processes and also updated assessment methods.

        Key Weather Satellite Goes Offline, May Affect Forecasts - In the midst of the very active North Atlantic hurricane season, the main weather satellite scientists use for keeping tabs on the weather across eastern North America and the Atlantic Ocean has gone offline. The outage began late on Sept. 23, after a period when the satellite, known as GOES-13, had been experience increasing vibrations, or “noise,” in particular instruments that was degrading its performance. According to the Capital Weather Gang blog, the satellite was put in stand-by mode while engineers work to fix the problem from the ground.

        After Warmest 12-Months On Record, U.S. Poised To See Warmest Year Ever In 2012 - NOAA’s National Climatic Data Center reports today that this January to August is the warmest year-to-date on record for the contiguous United States. As Climate Central shows in this chart, the U.S. will easily beat the previous record warm year, 1998 — unless the rest of the year is unusually cold: Climate Central notes “according to The Weather Channel, taking only the years since World War II, the odds of not surpassing the warmest year are just 7 percent.” But that estimate, of course, downplays the effect on the odds of the recent manmade warming. Finally, January through December is a somewhat arbitrary demarcation. We already blew past the record for warmest 12-months period in August, as NCDC shows in this chart:

        USA's heavy rain events rising due to climate change -Nearly a year after the remnants of Hurricane Irene unleashed devastating floods in much of Vermont, a new report by an environmental group says extreme downpours and snowfalls are the new normal — up 85% in New England since 1948. Nationally, Environment America's report found that storms with extreme precipitation increased in frequency by 30% across the contiguous United States from 1948 to 2011. It said the largest annual storms produced 10% more precipitation, on average. It said New England was the region where the trend was most pronounced. Intense storms more than doubled in New Hampshire during the period studied while increasing 84 percent in Vermont. The report, which analyzed 80 million daily precipitation records from the contiguous U.S., attributed the increase in severity of the downpours in part to global warming.

        Record Ocean Temperatures Recorded Off New England Coast - Federal ocean scientists said this year’s sea surface temperatures along the northeast coast of the U.S. set all-time records, with as-yet unknown consequences for marine ecosystems. Above-average temperatures were found in all parts of the ecosystem, from the ocean bottom to the sea surface and across the region, and the above average temperatures extended beyond the shelf break front to the Gulf Stream, according to an ecosystem advisory issued by NOAA’s Northeast Fisheries Science Center. The warm waters led to the earliest, most intense and longest-lasting plankton bloom on record, with implications for marine life, from the smallest creatures to the largest marine mammals like whales. Atlantic cod continued to shift northeastward from its historic distribution center. “A pronounced warming event occurred on the Northeast Shelf this spring, and this will have a profound impact throughout the ecosystem,” “Changes in ocean temperatures and the timing of the spring plankton bloom could affect the biological clocks of many marine species, which spawn at specific times of the year based on environmental cues like water temperature.” Friedland said the average sea surface temperature exceeded 51 degrees during the first half of 2012, topping the previous record high set in 1951.The average sea surface temperature the past three decades has ranged around 48 degrees

        Climate change will shift marine predators’ habitat, study says - The top ocean predators in the North Pacific could lose as much as 35 percent of their habitat by the end of the century as a result of climate change , according to a study published Sunday in the journal Nature Climate Change. The analysis, conducted by a team of 11 American and Canadian researchers, took data compiled from tracking 4,300 open-ocean animals over a decade and looked at how predicted temperature changes would alter the areas they depend on for food and shelter. Some habitats could shift by as much as 600 miles while others will remain largely unchanged, the scientists found, and these changes could affect species in different ways.For some key species already facing threats — including blue whales and loggerhead turtles — this will make the food that sustains them more elusive. “They’ll have to travel farther and farther every year just to get to their food,” Some species with a relatively narrow temperature range — such as salmon, blue sharks and mako sharks — fared poorly as well. At the same time, some highly mobile species such as tuna and seabirds may benefit from the changes because they will be able to adjust more easily or have wider foraging opportunities

        How the world’s oceans could be running out of fish -  Last year, global fish consumption hit a record high of 17 kg (37 pounds) per person per year, even though global fish stocks have continued to decline. On average, people eat four times as much fish now than they did in 1950. Around 85% of global fish stocks are over-exploited, depleted, fully exploited or in recovery from exploitation. Only this week, a report suggested there may be fewer than 100 cod over the age of 13 years in the North Sea between the United Kingdom and Scandinavia. It’s a worrying sign that we are losing fish old enough to create offspring that replenish populations. Large areas of seabed in the Mediterranean and North Sea now resemble a desert – the seas have been expunged of fish using increasingly efficient methods such as bottom trawling. And now, these heavily subsidised industrial fleets are cleaning up tropical oceans too. One-quarter of the EU catch is now made outside European waters, much of it in previously rich West African seas, where each trawler can scoop up hundreds of thousands of kilos of fish in a day. All West African fisheries are now over-exploited, coastal fisheries have declined 50% in the past 30 years, according to the UN Food and Agriculture Organisation.

        Melting Greenland Weighs Perils Against Potential -  Vast new deposits of minerals and gems are being discovered as Greenland’s massive ice cap recedes, forming the basis of a potentially lucrative mining industry. One of the world’s largest deposits of rare earth metals — essential for manufacturing cellphones, wind turbines and electric cars — sits just outside Narsaq. This could be momentous for Greenland, which has long relied on half a billion dollars a year in welfare payments from Denmark, its parent state. Mining profits could help Greenland become economically self sufficient, and may someday even render it the first sovereign nation created by global warming. “One of our goals is to obtain independence,” said Vittus Qujaukitsoq, a prominent labor union leader. But the rapid transition from a society of individual fishermen and hunters to an economy supported by corporate mining raises difficult questions. How would Greenland’s insular settlements tolerate an influx of thousands of Polish or Chinese construction workers, as has been proposed? Will mining despoil a natural environment essential to Greenland’s national identity — the whales and seals, the silent icy fjords, and mythic polar bears? Can fishermen reinvent themselves as miners?

        Record Arctic Snow Loss May Be Prolonging North American Drought - Melting Arctic snow isn’t as dramatic as melting sea ice, but the snow may be vanishing just as rapidly, with potentially profound consequences for weather in the United States. Across the Arctic, snow melted earlier and more completely this year than any in recorded history. In the same way ice loss exposes dark water to the sun’s radiant heat, melting snow causes exposed ground to heat up, adding to the Arctic’s already super-sized warming. This extra heat retention appears to alter the polar jet stream, slowing it down and causing mid-latitude weather patterns to linger. It’s even possible that the ongoing North American drought, the worst since the Dust Bowl of the 1930s, was fueled in part by climate change in the Arctic, making it a preview of this new weather pattern’s ripple effects. “In the past, whatever happened in the Arctic stayed in the Arctic. But now it seems to be reaching down from time to time in the mid-latitudes,” “When you combine the new influence of the Arctic with other effects, such as El Niño, we’re seeing the more extreme weather events.” Over the last several weeks, public attention has been seized by the disappearance of ice in the Arctic Ocean, which in September covered a smaller area than at any other time in the climate record, a fitting exclamation point to its 50% decline since the late 1970s.

        High Arctic warming surpasses Viking era, study shows - Temperatures high in the Norwegian Arctic are above those in a natural warm period in Viking times, underscoring a thaw opening the region to everything from oil exploration to shipping, scientists said on Thursday. Last week, sea ice on the Arctic Ocean set a record low since satellite observations began in the 1970s. In recent years, mussels have been found off the Norwegian archipelago of Svalbard for the first time since the Viking era 1,000 years ago. The study showed that summertime temperatures on Svalbard were higher now than at any time in the past 1,800 years, including in the Medieval Warm Period from 950 to 1200, scientists wrote in the journal Geology. Summer temperatures were 2 to 2.5 degrees Celsius (3.6 to 4.5 F) higher since 1987 than during the Medieval Warm Period, lead author William D'Andrea, a climate scientist at Columbia University's Lamont-Doherty Earth Observatory, told Reuters. People sceptical that mankind is the main cause of global warming sometimes point to the Medieval spike in temperatures as evidence that natural variations can bring large climate swings, Columbia wrote in a statement. "The warming of the past 25 years or so is more than in this record for the Medieval period," D'Andrea said. The Medieval warming has been linked to shifts in solar output and volcanic eruptions.

        Arctic Sea Ice: What, Why, and What Next - When scientists and reporters talk about an ice-free Arctic, they’re usually speaking of the Arctic in summer, and especially in September, when ice coverage reaches its minimum. The amount of ice left at that minimum has indeed been plunging. In 1980, the ice shrank down to just under 8 million square kilometers before rebounding in the fall. This year’s minimum extent of 3.4 million kilometers is less than half of what we saw in 1980. Strikingly, two thirds of the loss of ice has happened in the 12 years since 2000. The ice is receding, and the process, if anything, appears to be accelerating. Figure 2 - Arctic sea ice coverage in September has dropped in half since 1980, and the drop appears to be accelerating.As recently as a few years ago, most models of the Arctic ice anticipated that summers would remain icy until the end of the 21st century, and well into the 22nd century. But the trend line above makes that look unlikely. The amount of ice remaining, this year, is about the same as the ice lost between the mid-1990s and today. If ice loss continued at that pace, we’d see an ice free summer sometime around 2030, give or take several years. Is that plausible? Opinions differ substantially, even among climate scientists.

        Arctic Ice “Rotten” to the North Pole, scientist says - When David Barber first headed to the Arctic in the 1980s, the ice would typically retreat just a few a kilometres offshore by summer’s end. Now he and his colleagues have to travel more than 1,000 kilometres north into the Beaufort Sea to even find the ice. And it’s nothing like the thick, impenetrable ice of Arctic lore. This year the ice is “rotten” practically all the way to the North Pole, says Barber, a veteran Arctic researcher and director of the Centre for Earth Observation Science at the University of Manitoba. “The multi-year ice, what’s left of it, is so heavily decayed that it’s really no longer a barrier to transportation,” he says, explaining how melt ponds have left much of the ice looking like Swiss cheese. “You could have taken a ship right across the North Pole this year,” says Barber, whose research team was involved in a 36-day research cruise in the Beaufort on a Canadian Coast Guard ship.

        Stratosphere targets deep sea to shape climate: North Atlantic 'Achilles heel' lets upper atmosphere affect the abyss: A University of Utah study suggests something amazing: Periodic changes in winds 15 to 30 miles high in the stratosphere influence the seas by striking a vulnerable "Achilles heel" in the North Atlantic and changing mile-deep ocean circulation patterns, which in turn affect Earth's climate."We found evidence that what happens in the stratosphere matters for the ocean circulation and therefore for climate," says Thomas Reichler, senior author of the study published online Sunday, Sept. 23 in the journal Nature Geoscience. Scientists already knew that events in the stratosphere, 6 miles to 30 miles above Earth, affect what happens below in the troposphere, the part of the atmosphere from Earth's surface up to 6 miles or about 32,800 feet. Weather occurs in the troposphere. Researchers also knew that global circulation patterns in the oceans -- patterns caused mostly by variations in water temperature and saltiness -- affect global climate.  But now we actually demonstrated an entire link between the stratosphere, the troposphere and the ocean.

        SciAm: What Will Ice-Free Arctic Summers Bring? - On Sunday, September 16, 2012, the sun did not rise above the horizon in the Arctic. Nevertheless enough of the sun's heat had poured over the North Pole during the summer months to cause the largest loss of Arctic sea ice cover since satellite records began in the 1970s. The record low 3.41 million square kilometers of ice shattered the previous low—4.17 million square kilometers—set in 2007. All told, since 1979, the Arctic sea ice minimum extent has shrunk by more than 50 percent—and even greater amounts of ice have been lost in the corresponding thinning of the ice, according to the U.S. National Snow and Ice Data Center (NSIDC). "There is much more open ocean than there used to be," says NSIDC research scientist Walt Meier. "The volume is decreasing even faster than the extent [of surface area] as best as we can tell," based on new satellite measurements and thickness estimates provided by submarines. Once sea ice becomes thin enough, most or all of it may melt in a single summer. Some ice scientists have begun to think that the Arctic might be ice-free in summer as soon as the end of this decade—leaving darker, heat-absorbing ocean waters to replace the bright white heat-reflecting sea ice. The question is: Then what happens? Although the nature and extent of these rapid changes are not yet fully understood by researchers, the impacts could range from regional weather-pattern changes to global climate feedbacks that exacerbate overall warming. As Meier says: "We expect there will be some effect…but we can't say exactly what the impacts have been or will be in future."On thin ice Arctic ice influences atmospheric circulation and, hence, weather and climate. Take away the ice and impacts seem sure to follow.

        Climate expert: Record loss of arctic ice could impact Wisconsin: Vavrus, an expert on the arctic climate, says the dramatic melting trend is due to rising concentrations of greenhouse gases in the atmosphere warming the planet. He says natural variability may have accelerated the loss of ice in recent years, and he adds that the far north has physical characteristics that make it more sensitive to warming than other parts of the globe. For one, he explains, snow and ice that normally cover the region reflect most incoming solar radiation back to space, but increased melting exposes land or ocean water that absorb more solar energy and accelerate any warming trend. In addition, the lowest layer of the atmosphere in the Arctic is thin and prone to temperature inversions that hold warmer air near the ground, promoting even more melting as the region warms. Vavrus says the Arctic is likely to continue to see pronounced downward trends in sea ice, snow cover, glacier extent, and permafrost. He says that will have major impacts on both natural ecosystems and human communities in the northernmost latitudes. But the impacts of a warming Arctic could also be felt far beyond the region, including in the Midwest, according to research conducted by Vavrus and his colleague Jennifer Francis at Rutgers University published in the journal Geophysical Research Letters last spring. "We believe that the winds aloft at the level of the jet stream will weaken and lead to slower-moving and 'wavier' atmospheric circulation patterns," he explains. "Such a change would favor more extreme weather events in middle latitudes, such as heat waves, droughts, floods, and—ironically—cold snaps." Vavrus sees a connection between the record Arctic melting and recent unusual weather across the country.

        North India, Himalayas to be worst hit by climate change: Report - Northern parts of the country and the Himalayan region will be the worst hit by climate change in India and warming will be greater over land than sea, according to a latest report. "In the 2020s, the projected warming is of the order of 0.5-1.5 degree Celsius , by the 2050s, 3 degree celsius and by the 2080s, around 4 degree Celsius. Warming will be greater over land than sea and it is projected over northern parts of the Indian landmass and over the Himalayas," says a joint India-UK report on potential impact of climate change and adaptation in India which was launched here on Thursday . The UK's Department of Energy and Climate Change (DECC) and the Indian Ministry of Environment and Forests worked together on a DECC-funded project to understand better the potential impacts of climate change in India and provide adaptation response options in Orissa and Madhya Pradesh. According to the report, the amount of rainfall from Indian monsoons is expected to be between 8.9-18.6 per cent higher than current levels by 2080. Wind speeds associated with monsoons may also increase by up to 23 per cent by 2050. "Frequency of monsoons is not expected to change much, but they may shift south of their normal location," it said. Rainfall outside of monsoon season is expected to increase by between 11.5 - 23.4 per cent above current levels, averaged across India, the report said. According to it, populations of Madhya Pradesh and Orissa are vulnerable to climate change, particularly as both have high dependency on agriculture for livelihoods.

        Next global warming worry: Thawing tundra - A week ago Sunday, Arctic sea ice cover reached its lowest extent ever recorded. For good reason, there has been significant media focus on how a warming sea gobbles up the ice that is polar bear habitat and reduces the area's capacity to reflect the sun's rays. This is roughly equivalent to unplugging one pole's worth of the Earth's central air conditioning system. But far less attention has been placed on what a naked Arctic Ocean means for its closest neighboring ecosystem: the Arctic tundra. Beyond the images of icebergs and stranded polar bears, I doubt many people picture the Arctic's vast carpet of lush green plants, chirping songbirds or highs in the mid-70s -- all of which are typical of summertime on the tundra. With climate changing at an alarming rate and sea ice extent slipping away, the tundra stands to change a lot, and this, too, will affect the rest of the planet. It is time to start familiarizing ourselves with the tundra, and here's why.

        Methane emission in the Arctic – a possible key to the global warming - Different examples of methane emissions in Arctic coastal regions and in the tundra systems have been observed over the last 20 or 30 years. There is really nothing surprising about this. Because, first of all, we are talking about frozen substances and cold conditions in the coastal area, in addition to the water pressure, all of which make perfect conditions for so called gas hydrates. That is a bond between methane and water, which looks like snow, and is fairly unstable. Gas hydrates can quite easily break and can cause, correspondingly, methane emissions. Methane emerges as a result of bacteria activity in an environment with little oxygen which decomposes organic substances. The tundra has a humid climate, meaning it has the perfect conditions for the methane-producing bacteria. In that sense tundra is the source of methane and these bacteria are active in this region. In other words the Arctic has many mechanisms for production of natural methane. There are many mechanisms that conserve methane, for example gas hydrates. Many of those mechanisms are broken at higher temperatures. Therefore, in some cases, mass emissions of methane can be observed.Scientists who study this, and there are quite a few of them, follow two opposing opinions. There is the view that it could lead to catastrophic consequences in the nearest future, because the process of methane emission will only grow. Methane is a potent greenhouse gas which will induce higher temperatures and will have the effect of a self-expanding wheel which is rolled down a hill, meaning that the process will go faster and faster. It will threaten our planet with countless disasters and horrible consequences. Yet another group of scientists believes that, because it is a natural process, there are both positive feedbacks that amplify methane emissions and negative feedbacks which lead to the increase of methane absorption.

        Arctic Methane Release: The End Of The World As We Know It? - Katey Walter Anthony draws upon her previous field findings that methane emissions from the Arctic landscape tend to be focused at the intersection between frozen and thawed, in particular in rings around a peripheries of lakes. She also knew what a methane seep looks like in that landscape, leaving visible bubbles frozen into the ice or maintaining an unfrozen hole in the ice. Now she takes to the skies to produce an aerial survey of the Alaskan landscape, data that is so much more voluminous than before that it becomes different in kind. The methane emission fluxes are higher than previous estimates, but that’s not really the most important point, because emissions from the Arctic are small relative to low-latitude wetlands, and doubling or even nearly quadrupling the Arctic fluxes (in one of their analyzed regions), they would still be small in terms of global climate forcing. And the lifetime of methane in the atmosphere is short, about 10 years, so methane doesn’t build up like CO2, SF6, and to a lesser extent N2O do.The really interesting take-away from the new paper is how it shows that the near-surface geology and freezing state conspire to control the venting of accumulated gas dribbling up from below, and the decompostion of frozen soil carbon. They have so many methane seep observations that they are able to correlate them with (1) currently melting permafrost, which allow fossil soil carbon deposits from the last ice age called Yedoma to decompose (Zimov et al 2006) and (2) melting ice sheets and glaciers “un-crunching” the landscape as they fade away, making cracks that vent methane from deep thermal sources. Glaciers that melted long ago no longer vent methane, showing that the methane is transiently venting from built-up pools of gas.

        Satellites trace sea level change - BBC - Scientists have reviewed almost two decades of satellite data to build a new map showing the trend in sea levels. Globally, the oceans are rising, but there have been major regional differences over the period. A major reassessment of 18 years of satellite observations has provided a new, more detailed view of sea-level change around the world. Incorporating the data from a number of spacecraft, the study re-affirms that ocean waters globally are rising by just over 3mm/yr. But that figure, according to the reassessment, hides some very big regional differences - up and down. The Philippine Sea, for example, has seen increases in excess of 10mm/yr. Part of that signal reflects the great fluctuation in winds and sea-surface temperature across the Pacific Ocean known as the El Nino/La Nina-Southern Oscillation. "The trend map is really a way of looking at average field changes over the 20 years," "The places where you see high trends probably won't have high trends in another 20 years. "A lot of this is decadal variability that will average out over the longer time series, which is why we need more missions to understand where this variability is."

        Climate change is already damaging global economy, report finds | - Climate change is already contributing to the deaths of nearly 400,000 people a year and costing the world more than $1.2 trillion, wiping 1.6% annually from global GDP, according to a new study. The impacts are being felt most keenly in developing countries, according to the research, where damage to agricultural production from extreme weather linked to climate change is contributing to deaths from malnutrition, poverty and their associated diseases. Air pollution caused by the use of fossil fuels is also separately contributing to the deaths of at least 4.5m people a year, the report found. The 331-page study, entitled Climate Vulnerability Monitor: A Guide to the Cold Calculus of A Hot Planet and published on Wednesday, was carried out by the DARA group, a non-governmental organisation based in Europe, and the Climate Vulnerable Forum. It was written by more than 50 scientists, economists and policy experts, and commissioned by 20 governments. By 2030, the researchers estimate, the cost of climate change and air pollution combined will rise to 3.2% of global GDP, with the world's least developed countries forecast to bear the brunt, suffering losses of up to 11% of their GDP.

        Is Climate Change Hell Now Inevitable? - Although I spent most of my career involved in climate change, in the last year, I’ve resolved to try not to think about it much. Too stark; too grim. But from time to time, I screw up my courage, stare into the Eye of Sauron and face the reality of global warming futures. When I do, I write about it, and the articles have become increasingly dire. Good friends, relatives, commenters, and colleagues have been telling me to focus on solutions: to accentuate the positive; to avoid doom and gloom.Of course, that advice assumes our actions will make a difference, that there is still a chance to avert catastrophe. Can we? If we depart from our present course will the ends change? Well, there’s a growing consensus that staying above atmospheric concentrations of 350 parts per million will permanently change our climate, and not for the better. We’re now at 392.41 ppm and rising. This year’s catastrophes are a mild preview of things to come. So regardless of what we do, we have already altered the climate in ways that will cost us a great deal of money, kill millions if not tens of millions, and create as many as a billion refugees by mid century. Bad as this sounds, there’s strong evidence it’s about to get a hell of a lot worse.

        Climate Change Already Causing $1.2 Trillion in Lost Economic Output, 4.5 Million Deaths Annually - Every time I write about climate change, it’s all I can do not to sigh and think about how doomed we are. Climate change represents one of the most impossible problems to solve purely for political reasons. It’s not a technological deficiency; even if it were, we can clear that hurdle. But this is an often imperceptible shift that occurs with the most force in the most uninhabited parts of the planet, which affects developing nations more than the developed ones, and whose greatest costs are borne far enough in the future for the current crop of politicians to safely ignore it. Not to mention the fact that solving it would eliminate the profits of some of the biggest corporations in the world. The very design of the problem resists consensus on solutions. But rather than look at those future costs from climate change – another particularly grim one one released today – let’s recognize the damage being created right now. A new study from the DARA group, an NGO out of Spain, is getting headlines for their 2030 forecast, when they predict 100 million deaths from climate change. But what about their 2012 forecast? Climate change is already contributing to the deaths of nearly 400,000 people a year and costing the world more than $1.2 trillion, wiping 1.6% annually from global GDP, according to a new study.The impacts are being felt most keenly in developing countries, according to the research, where damage to agricultural production from extreme weather linked to climate change is contributing to deaths from malnutrition, poverty and their associated diseases.

        100 million to die by 2030 if world fails to act on climate - (Reuters) - More than 100 million people will die and global economic growth will be cut by 3.2 percent of gross domestic product (GDP) by 2030 if the world fails to tackle climate change, a report commissioned by 20 governments said on Wednesday. As global average temperatures rise due to greenhouse gas emissions, the effects on the planet, such as melting ice caps, extreme weather, drought and rising sea levels, will threaten populations and livelihoods, said the report conducted by humanitarian organisation DARA. It calculated that five million deaths occur each year from air pollution, hunger and disease as a result of climate change and carbon-intensive economies, and that toll would likely rise to six million a year by 2030 if current patterns of fossil fuel use continue. More than 90 percent of those deaths will occur in developing countries, said the report that calculated the human and economic impact of climate change on 184 countries in 2010 and 2030.

        Duty - What a strange privilege it is to live in these perilous times. I don't mean privilege in the sense of the college humanities departments, with all their crybaby overtones of grievance and resentment. I mean in the sense of having lived through a thrilling turbo-powered climactic chapter of the human melodrama. Until a few decades ago nobody ever swooshed through these ancient hills in a motor car, on a magnificently engineered minor country highway, and in perhaps less than a decade no one ever will again, and at the collective level of a culture or a nation we have no sense of this whatsoever.  We have no sense of anything except the junk-cluttered moment, including our junk politics and the junk ceremony of the present election. When today is a long time ago we will wonder at the feckless cravens that modernity made of us, in particular the absence of any sense of duty to the project of being the only self-aware organisms (as far as anyone knows) in the universe. In this country, anything goes and nothing matters, and that's the simple sad truth of where we are right now.  In all the monumental yammer of the media sages surrounding the candidates they follow, and among the freighted legions of meticulously trained economists who try so hard to fit their equations and models over the spilled chicken guts of daily events, there is no sense of the transience of things.  Someone told all these clowns about fourteen months ago that we will be able to keep running WalMart on shale oil and shale gas virtually forever, and they swallowed the story whole, and then force-fed it down the distracted public's throat. In reality - that alternative universe to flat-screen America - all the mechanisms that allow us to keep running this wondrous show teeter on a razor's age of extreme fragility.  We're one bomb-vest or HFT keystroke away from a possible dark age, or at least a world made by hand. The true sense of entitlement extends light-years beyond the peevish carpings of the tea-bags-for-brains bunch.

        Data Centers Waste Vast Amounts of Energy, Belying Industry Image - A yearlong examination by The New York Times has revealed that this foundation of the information industry is sharply at odds with its image of sleek efficiency and environmental friendliness. Most data centers, by design, consume vast amounts of energy in an incongruously wasteful manner, interviews and documents show. Online companies typically run their facilities at maximum capacity around the clock, whatever the demand. As a result, data centers can waste 90 percent or more of the electricity they pull off the grid, The Times found. To guard against a power failure, they further rely on banks of generators that emit diesel exhaust. The pollution from data centers has increasingly been cited by the authorities for violating clean air regulations, documents show. In Silicon Valley, many data centers appear on the state government’s Toxic Air Contaminant Inventory, a roster of the area’s top stationary diesel polluters. Worldwide, the digital warehouses use about 30 billion watts of electricity, roughly equivalent to the output of 30 nuclear power plants, according to estimates industry experts compiled for The Times. Data centers in the United States account for one-quarter to one-third of that load, the estimates show.

        Data Centers in Rural Washington State Gobble Power -   Set in the dry hills and irrigated farmland of Central Washington, Grant County is known for its robust harvest of apples, potatoes, cherries and beans. But for Microsoft, a prime lure was the region’s other valuable resource: cheap electrical power.But for some in Quincy, the gee-whiz factor of such a prominent high-tech neighbor wore off quickly. First, a citizens group initiated a legal challenge over pollution from some of nearly 40 giant diesel generators that Microsoft’s facility — near an elementary school — is allowed to use for backup power. Then came a showdown late last year between the utility and Microsoft, whose hardball tactics shocked some local officials. In an attempt to erase a $210,000 penalty the utility said the company owed for overestimating its power use, Microsoft proceeded to simply waste millions of watts of electricity, records show. Then it threatened to continue burning power in what it acknowledged was an “unnecessarily wasteful” way until the fine was substantially cut, according to documents obtained by The New York Times.

        Fracking Regulations In States Leave Wells Without Inspection, Environmental Group Says: Hundreds of thousands of active oil and gas wells go without government inspection in any given year, and fines for regulatory violations are too small to change drilling company behavior, according to an energy watchdog group's review of regulation and enforcement activities in six states. The 124-page report, released Tuesday by the Oil & Gas Accountability Project at Earthworks, an environmental and public health advocacy group based in Washington, examined well inspection data, violations, enforcement actions and penalties in Colorado, New Mexico, New York, Ohio, Pennsylvania and Texas. The analysis suggested that state regulators are often understaffed, underfunded, or otherwise unable to keep pace with rapidly expanding oil and gas exploration and the attending risk of spills, leaks, contamination and accidents that might arise through negligence or deliberate shortcutting. The review lands amid a contentious presidential election that has been animated in part by starkly different views on energy development and the appropriate role of the federal government in ensuring that public health and the environment are protected from industrial activity.

        Coal exports make U.S. cleaner, EU more polluted - Shale gas has jolted traditional roles in the planet's climate drama, giving cleaner fuel to the United States, whose displaced coal has headed to Europe to pollute the old continent. It is an ironic twist for the European Union, whose energy policy is largely based on promoting renewables and a target to cut emissions b y 20 percent by 2020. The U.S. did not ratify the Kyoto Protocol to combat global emissions and its national goals are far less ambitious than Europe's. Analysts at Point Carbon, a Thomson Reuters company, estimate increased EU coal-use will drive a 2.2 percent rise in EU carbon emissions this year, after a 1.8 percent drop in 2011. U.S. emissions, meanwhile, are expected to fall by roughly the same amount - 2.4 percent - chiefly because of reduced coal use, according to estimates from the U.S. Energy Information Administration (EIA). Still the U.S. remains a bigger emitter than the EU as a whole, ranking second in the world after China, and the 2012 trend is not expected to last as U.S. coal burn will rebound and the share of renewable sources in Europe will rise, cutting carbon emissions. "The renewable energy sector is to a large extent politically-determined. EU member states have committed to legally-binding renewables 2020 targets and therefore, we expect to see renewable energy capacity grow,"

        Decades of federal dollars helped fuel gas boom - It sounds like a free-market success story: a natural gas boom created by drilling company innovation, delivering a vast new source of cheap energy without the government subsidies that solar and wind power demand. "The free market has worked its magic," The boom happened "away from the greedy grasp of Washington," the American Enterprise Institute, a think tank, wrote in an essay this year. If bureaucrats "had known this was going on," the essay went on, "surely Washington would have done something to slow it down, tax it more, or stop it altogether." But those who helped pioneer the technique known as hydraulic fracturing, or fracking, recall a different path. Over three decades, from the shale fields of Texas and Wyoming to the Marcellus in the Northeast, the federal government contributed more than $100 million in research to develop fracking, and billions more in tax breaks. Now, those industry pioneers say their own effort shows that the government should back research into future sources of energy — for decades, if need be — to promote breakthroughs. For all its success now, many people in the oil and gas industry itself once thought shale gas was a waste of time.

        Big Oil Funding U.S. Politics - U.S. Rep. John Boehner, speaker of the House of Representatives, received nearly twice as much financial support from donors tied to the energy sector than did the next-closest recipient, a report from the National Wildlife Federation finds. The 20-page report highlights the role it says oil companies play in U.S. politics, stating energy companies are working behind the scenes on Capitol Hill to influence legislation in favour of oil, natural gas and coal policies.  On Friday, Boehner led the House of Representatives in passing the so-called Stop the War on Coal Act, a measure that would block the Environmental Protection Agency from regulating greenhouse gases.  The report from the NWF, released on the eve of the House vote, finds that Oxbow Corp., a private company focused on mining and marketing of coal, natural gas and petroleum, donated more than $80,000 to Boehner's campaign since 2010. The NWF explains that Oxbow was founded by William Koch, whose twin billionaire brothers are among the largest corporate financiers of the U.S. Congress. According to information NWF gathered from The Center for Responsive Politics, energy companies like Oxbow gave more than $814,000 to Boehner's campaign during the current Congress.

        Texas does not enforce oil and gas regulations. State enforcement data shows 296,000 active Texas wells go uninspected -- In association with twelve Texas groups, national resource extraction watchdog Earthworks today released an unprecedented study, Breaking All the Rules: The Crisis in Oil & Gas Regulation revealing that states across the country fail to enforce their oil and gas development regulations. The one-year, in-depth examination of enforcement data and practices -- in Texas, Pennsylvania, Ohio, New York, New Mexico and Colorado -- also includes interviews with ex-industry and state agency employees. "Texas's enforcement of state oil and gas rules is broken," said Earthworks' Senior Staff Attorney Bruce Baizel. He continued, "In Texas and across the country, public health and safety are at risk because states are failing to uphold the rule of law. Until Texas can guarantee they are adequately enforcing their own rules on an ongoing basis, the state must not permit new drilling." As recounted in the separate Texas-specific analysis, failure to enforce oil and gas regulations means that Texas is not seeking, documenting, sanctioning, deterring, and cleaning up problems associated with irresponsible oil and gas operations such as chemical spills, equipment failure, accidents, and discharges into drinking water supplies. Among the study’s findings --

        • 296,000 active oil and gas wells in Texas were uninspected in 2011.
        • Companies that are found in violation of regulations are rarely penalized: in 2012, only two percent of violations have been penalized to date.
        • Penalties are so weak that it is cheaper for violators to pay the penalty than comply with the law: the total value of financial penalties in Texas in 2009 was less than the value of the gas contained in a newly drilled gas well.

        Total warns against oil drilling in Arctic -- Total SA says energy companies should not drill for crude in Arctic waters, marking the first time an oil major has publicly spoken out against offshore oil exploration in the region.Christophe de Margerie, Total's chief executive, told the Financial Times the risk of an oil spill in such an environmentally sensitive area was simply too high. "Oil on Greenland would be a disaster," he said in an interview. "A leak would do too much damage to the image of the company". Last week, Royal Dutch Shell had to postpone until next year an attempt to drill into oil-bearing rock off the Alaskan coast after a piece of safety equipment was damaged during testing. It has spent $4.5bn and seven years preparing to drill. ExxonMobil, ENI of Italy and Norway's Statoil have also signed deals to explore for oil in Russia's Arctic waters, while others have secured licences to drill off Greenland.Mr de Margerie emphasised that he was not opposed to Arctic exploration in principle. Total has a number of natural gas ventures in the region, including a stake in the vast Shtokman field in Russia's Barents Sea. The Total chief executive said gas leaks were easier to deal with than oil spills.

        Criminal investigation at Chevron refinery - Federal authorities have opened a criminal investigation of Chevron after discovering that the company detoured pollutants around monitoring equipment at its Richmond refinery for four years and burned them off into the atmosphere, in possible violation of a federal court order, The Chronicle has learned. Air quality officials say Chevron fashioned a pipe inside its refinery that routed hydrocarbon gases around monitoring equipment and allowed them to be burned off without officials knowing about it. Some of the gases escaped into the air, but because the company didn't record them, investigators have no way of being certain of the level of pollution exposure to thousands of people who live downwind from the plant. "They were routing gas through that pipe to the flare that they were not monitoring," said Jack Broadbent, executive director of the Bay Area Air Quality Management District, whose inspectors uncovered what Chevron was doing and ordered the bypass pipe removed. The U.S. Environmental Protection Agency's criminal enforcement unit opened an investigation in early 2012, more than two years after the local inspectors made their discovery, according to air-quality officials and others familiar with the probe. The investigation is still open, and Chevron employees have been interviewed.

        Energy Independence in the US: Is the Impossible Possible? - The U.S. has become the world's second-biggest oil producer – having passed Russia, and trailing only Saudi Arabia. But can America's vast shale oil and gas reserves – combined with fracking and drilling technlogies – drive the U.S. to complete energy independence? According to a report from Credit Suisse, the answer is NO. But it does suggest that North America in its entirety could one day become energy self-sufficient. Credit Suisse (CS) bases their findings on these 4 factors:

        1. Flow rates from oil wells about 25% higher than now, based on future technology advances
        2. More wells that are on average 39% closer together than they are now (what is referred to as  "downspacing" in the oil industry)
        3. $95/barrel Brent pricing
        4. Increased use of natural gas in the economy?

        Brent-WTI crude oil spread remains wide in spite of Saudi action - Goldman's prediction of Brent-WTI spread collapsing to $5/barrel by the end of this year (see discussion) is clearly not materializing as the differential between the two crude oil indices remains elevated.This premium for Brent is driven by OPEC's tight spare production capacity and Middle East driven supply disruptions risks. OPEC capacity has been declining and is now mostly comprised of the Saudi Arabia's spare capacity. Moreover there have been questions about the veracity of the Saudi numbers.At the same time some temporary unplanned supply disruptions in the North Sea had pushed the Brent-WTI spread higher. EIA: - A combination of unplanned production outages and maintenance led the number of cargo loadings for Brent crude oil out of the North Sea scheduled for September to be at the lowest level in 5 years  The Saudis have become extremely concerned that high oil prices will trigger demand destruction by snuffing the fragile global economic growth. The latest action by the Fed made them particularly uneasy and they decided this past week to add crude (Brent equivalent) to the market. That sent oil prices lower.

        Fat fingers and the price of oil - Can the wild swings in the price of oil over the last few weeks have anything to do with supply and demand? The Wall Street Journal carried this account last week: Oil prices dropped more than $3 in less than a minute late in the trading day on Monday, just as trading volume spiked. . Some 12,500 contracts changed hands in a minute, compared with less than 500 a minute previously.  The move sparked talk of an erroneous trade—called a "fat-finger" error in industry parlance—or a computer algorithm gone awry.  Fat finger or no, there was an even bigger drop on Wednesday, leaving the price of West Texas Intermediate well below where it had been prior to Fed Chair Ben Bernanke's Jackson Hole speech on August 31 and the Fed's announcement of QE3 on September 13. Those who doubt that oil prices are determined solely by fundamentals would naturally ask, what aspect of the supply or demand for oil could have possibly changed in the course of less than a minute last Monday? The obvious and correct answer is, there was no change in either the supply or the demand for physical oil over the course of that minute. But since changes in the price of crude oil are the key determinant of the price consumers pay for gasoline, doesn't that establish pretty clearly that the whims or fat fingers of financial traders are ultimately determining the price we all pay at the pump?

        Oil Prices - The above shows oil prices (WTI and Brent on the left scale, and the spread between them on the right scale). Oil prices continue to seem driven a lot by news flow, with much of that being general economic optimism and pessimism.  For example the structure of prices in 2012 with a peak in March, a trough in June, and then rising prices since, is not that different from that of the S&P 500: In turn this probably mainly represents increasing pessimism about Europe in the late spring and early summer, followed by increasing optimism as the possibility of greater action by the ECB to back peripheral bonds made a catastrophic resolution of the European crisis appear less likely. At any rate, oil remains near $120 for Brent and $100 for WTI, despite a pretty weak global economy, suggesting that increasing the supply remains hard work.

        U.S. Oil Production Is At Highest Level Since 1997; Yet Gas Prices Remain ‘Stubbornly High’ - American crude oil production is at its highest level since 1997, according to government figures reported today. The increase is being driven by innovations in hydraulic fracturing, which have allowed producers to access previously inaccessible oil deposits in shale formations. This development is likely to be trumpeted by fossil fuel proponents as: a) the key to cheap gasoline prices; and b) a shining example of the free market working when government gets out of the way. Don’t believe the hype.Firstly, gas prices are still high, even with all this new crude output. Secondly, these hydraulic fracturing techniques driving the production boom didn’t just magically appear out of the free market — they were pioneered through many decades of government tax credits, loans, R&D programs, and mapping tools. Here’s the news on domestic production increases from Bloomberg:Crude output rose by 3.7 percent to 6.509 million barrels a day in the week ended Sept. 21, the Energy Department reported today. America met 83 percent of its energy needs in the first six months of the year, department data show. If the trend continues through 2012, it will be the highest level of self- sufficiency since 1991. Imports have declined 3.2 percent from the same period a year earlier.

        RBA: Bulletin September Quarter 2012-The Pricing of Crude Oil - Arguably no commodity is more important for the modern economy than oil. This is true in terms of both production and financial market activity. Yet its pricing is relatively complex. In part this reflects the fact that there are actually more than 300 types of crude oil, the characteristics of which can vary quite markedly. This article describes some of the key features of the oil market and then discusses the pricing of oil, highlighting the important role of the futures market. It also notes some related issues for the oil market.

        Exclusive: Output to slide further at BP's Azeri oil giant - BP will have to invest billions of dollars more than previously planned if it is to slow falling output at an Azeri oil project that is also that country's biggest cash cow, oil executives and diplomats say. The investments required to cut the decline at the Azeri-Chirag-Gunashli (ACG) fields are so large that it may not even be commercially viable for the companies to spend the money unless they receive sweeteners from the government, the sources told Reuters. The problems at ACG will affect international oil supplies and come as BP faces the possibility of paying out $17 billion more in fines related to the Gulf of Mexico oil spill than it has budgeted for, after the U.S. Department of Justice accused the company of gross negligence earlier this month. ACG was supposed to produce more than 1 million barrels per day (bpd), after a third phase was completed in 2008. The prospect of so much non-OPEC crude ensured considerable western diplomatic support for the project and industry kudos for BP.

        Global oil exports in decline since 2006: What will importing nations do? - It is with trepidation that independent petroleum geologist Jeffrey Brown has watched global oil exports decline since 2006. With all the controversy in the past several years over whether worldwide oil production can rise to quench the world's growing thirst for petroleum, almost no one thought to ask what was happening to the level of oil exports. And yet, each year a dwindling global pool of exports has been generating ever greater competition among importing nations and has become a largely unheralded force behind record high oil prices. Even though the trend in oil exports has been evident in the data for some time, the analyst community was caught by surprise when a Citigroup report released earlier this month forecast an end to oil exports in 2030 from Saudi Arabia, currently the world's largest oil exporter. Brown, as you might expect, wasn't surprised at all. His own forecasting model, which he calls the Export Land Model, has been predicting more or less the same thing for some time. He doesn't think the Saudis will actually let exports to go all the way to zero because they'll probably want at least some revenue from exports. But "one to two million barrels per day of exports [from Saudi Arabia] between 2030 and 2040 will not be a big deal in the world," said Brown.

        More overseas suitors eye oil sands - Private and state-owned foreign suitors are eyeing the oil-sands properties of ConocoPhillips Co., the latest sign that ownership in the costly northern Alberta industry is shifting to offshore buyers with deeper pockets and a greater tolerance for risk. According to people familiar with the sale process, Houston-based Conoco began accepting bids in July for up to half of its vast oil sands holding, and has entered into what one person described as a “very vigorous bidding process” with an unidentified group of top bidders. According to a number of media reports, one of the suitors is a consortium of three state-owned oil and gas companies from India: ONGC Videsh Ltd., Indian Oil Corp. and Oil India Ltd. One report from Dow Jones pegged the value of Conoco’s oil sands assets at $5-billion.

        China envoy warns Canada against politicizing Nexen deal - China's ambassador to Canada warned in remarks published on Saturday against letting domestic politics drive the Canadian government's decision on whether to approve a Chinese state-owned oil company's proposed $15.1 billion takeover of Calgary-based Nexen Inc. "Business is business. It should not be politicized," Ambassador Zhang Junsai said in an interview with Canada's Globe and Mail newspaper. "If we politicize all this, then we can't do business," he added, referring to the Canadian Industry Ministry's review of CNOOC Ltd's proposal to buy the Canadian oil and gas producer. The deal, if completed, would mark the first outright takeover of a large Canadian energy producer by a Chinese state-owned enterprise. The ambassador also said negotiating a full free-trade agreement within a decade would be the best way of assuring fair, two-way trade and investment between China and Canada.

        China and Afghanistan sign economic and security deals - China and Afghanistan have signed a range of security and economic agreements during a visit to Kabul by top Chinese official Zhou Yongkang. China's domestic security chief, is the most senior Chinese official to visit the country for almost 50 years. One of the agreements involves China helping train the Afghan police force. Afghan neighbours are seeking to expand their influence in the country ahead of the pullout of US-led troops from the country in 2014, analysts say. China wants to increase investments in Afghanistan's resources sector. In June this year, the two countries decided to upgrade their ties to the level of a strategic and co-operative partnership at a regional conference in the Chinese capital Beijing.  China has been investing in Afghanistan's mineral sector for several years, as it searches for mineral resources in different parts of the world.

        China in Revolt - Today, the Chinese working class is fighting. More than thirty years into the Communist Party’s project of market reform, China is undeniably the epicenter of global labor unrest. While there are no official statistics, it is certain that thousands, if not tens of thousands, of strikes take place each year. All of them are wildcat strikes – there is no such thing as a legal strike in China. So on a typical day anywhere from half a dozen to several dozen strikes are likely taking place. More importantly, workers are winning, with many strikers capturing large wage increases above and beyond any legal requirements. Worker resistance has been a serious problem for the Chinese state and capital and, as in the United States in the 1930s, the central government has found itself forced to pass a raft of labor legislation. Minimum wages are going up by double digits in cities around the country and many workers are receiving social insurance payments for the first time.

        Matt Yglesias’s China Syndrome - Commenting on the recent labor unrest in China, Matt Yglesias makes a comparison with the past and present of the United States. Conditions in contemporary China have much more in common, structurally speaking, with conditions during the heyday of western labor activism than does anything about the Chicago teachers strike or the apparent American Airlines sickout. The rapid pace of Chinese industrialization means the average wage in a Chinese factories has managed to lag behind the average productivity of a Chinese factory worker (roughly speaking because it’s dragged down by the absymal wages and productivity of Chinese agriculture) which creates a dynamic ripe for windfall profits but also for labor activism. The repressive nature of the Chinese state is an unpromising ground for union organizing, but by the same token Chinese labor organizations have much less to lose (in terms of union-managed pension funds, union-owned buildings, etc.) if they break the law with “wildcat” strikes and the like.Why are workers rioting in China? Because, says Matt, of the large gap between labor productivity and labor compensation there, which is similar to how things once were in the US and Western Europe but is unlike anything in the contemporary US.Oh really? Since 1973, labor productivity in the US has risen 80.4 percent. Yet median wages have increased only 4 percent, and median compensation as a whole—which includes benefits—has only increased 10.7 percent.

        When Growth Outpaces Happiness - CHINA’s new leaders, who will be anointed next month at the Communist Party’s 18th National Congress in Beijing, might want to rethink the Faustian bargain their predecessors embraced some 20 years ago: namely, that social stability could be bought by rapid economic growth.  As the recent riots at a Foxconn factory in northern China demonstrate, growth alone, even at sustained, spectacular rates, has not produced the kind of life satisfaction crucial to a stable society — an experience that shows how critically important good jobs and a strong social safety net are to people’s happiness.  Starting in 1990, as China moved to a free-market economy, real per-capita consumption and gross domestic product doubled, then doubled again. Most households now have at least one color TV. Refrigerators and washing machines — rare before 1990 — are common in cities.  Yet there is no evidence that the Chinese people are, on average, any happier, according to an analysis of survey data that colleagues and I conducted. If anything, they are less satisfied than in 1990, and the burden of decreasing satisfaction has fallen hardest on the bottom third of the population in wealth. Satisfaction among Chinese in even the upper third has risen only moderately.

        Pettis: How to be a China bull - In both of the “debates”, and in conversations I have had with other senior officials, my “opponents” (although that is too strong a word since there were many areas of agreement) largely constrained themselves to three arguments, which are the same three very unsatisfying arguments that we have heard many times before. First, they presented historical data showing rapid Chinese growth rates in the past three decades and proposed past growth rates as evidence of rapid Chinese growth rates in the next two decades. Second, they asserted (many times) that since past predictions of failure have all turned out to be wrong (a widespread misperception, by the way), future predictions must also be wrong. And third, they produced a number of what seem to me largely circular arguments – for example the claim that urbanization leads to growth and growth to urbanization, and so the process must continue, or the claim that since productivity has soared, past investments in the aggregate have been justified, even though the data “proving” the increase in productivity implicitly assumes that past investments have been economically justified. Except for reports of capital fleeing China, one could easily get the impression that even senior Chinese non-economists really don’t understand why the likes of Wen Jiabao, Li Keqiang, and now Xi Jinping seem so worried.

        Chinese “stimulus” evaporates - A few weeks ago, China’s projects approval spree triggered a lot of excitement. But we soon found out that it is uncommon for the NDRC to approve large numbers of projects within a period of a day or two. In fact, the spree happens every month. The chart below shows a more accurate picture of the pace of NDRC project approvals,  from Wei Yao of Société Générale.  For the month of September so far, there does not appear to be any real acceleration of project approvals in terms of number of projects compared with the previous months: Perhaps not surprisingly then, Yuan Gangming, an economist at the Chinese Academy of Social Sciences, told Bloomberg that the slowdown will persist, and growth could fall below 7% yoy in the first quarter of 2013. From Bloomberg: China’s economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said. Growth may slow for a ninth straight period to below 7 percent in the first quarter, Yuan Gangming said in an interview Sept. 19 in Beijing. Yuan forecast 7.4 percent expansion in the third quarter and 7.2 percent in the last period of the year.

        China to maintain prudent monetary policy - China's central bank said Tuesday it will maintain the prudent monetary policy while fine-tuning it at an appropriate time to promote a stable and relatively fast growth. "We will continue to implement the prudent monetary policy, make it more targeted, flexible and forward-looking, while fine-tuning it according to the economic situation development," the People's Bank of China said in a statement after its third-quarter monetary policy meeting. "The current economic and financial operations show signs of stabilizing at a slower pace and the consumer price situation is basically stable," the statement said. It said the central bank will employ various monetary tools to guide credit supply to grow at a steady and moderate pace and maintain reasonable social financing scale. "Global economic growth remains weak and we will closely watch the impact of recent rescue and stimulus policies taken by the European Union and the United States," it said.

        PBOC liquidity is not a fix - Despite the fact that People’s Bank of China has not eased policy in the traditional way since it last cut interest rates, it should be noted that the PBOC has tried a lot. The market has been hoping for a Reserve Ratio Requirement cut every weekend, only to be disappointed every week.  However, the PBOC has been trying to ease liquidity repeatedly through open market operations, tools that were not the focus. In the past 14 weeks (or about 3 months), PBOC has made about RMB1.031 trillion of net injection into the system. With China’s total deposit base close to RMB90 trillion, the liquidity being made available for the past 14 weeks is roughly equivalent to 2 regular reductions of reserve requirement ratios (RRR), 50bps each. Of course, communication is one of the greatest tools central banks have, and one can argue that the message conveyed by a reduction in RRR is much more aggressive as a reduction of RRR cut could be viewed as a somewhat more “permanent” than repeatedly conducting short-term reverse repo. Reductions in RRR perhaps convey a message that the PBOC is determined to ease, while repeated reverse repo convey a message that PBOC is so very determined at all.That, of course, happens to be the message I am reading, which is consistent to the view that the Chinese central bank and government will be slow to ease monetary policy given all the concern over the real estate market, as well as the view that the massive stimulus of 2008/09 was a great mistake.

        China's economic slowdown - As Niels Bohr (and others) observed, prediction is difficult, especially about the future. But if the challenge is predicting the number of 20-year-olds 5 years from now, you can get a pretty darn good start if you know the number of 15-year-olds right now. And China has more 45- to 50-year-olds today than it has 5- to 10-year olds. That means that in another decade or so, the number of people retiring will be greater than the number of new young people coming into the labor force. For the last ten years, the number of new 20-year-olds was greater in each succeeding year. For the next ten years, the number of new 20-year-olds is going to be fewer in each succeeding year. A slower growth rate and eventual outright decline in the number of people working has to translate into a slower growth rate for total GDP. It also will lead to a number of other changes, such as an increase in wages as compensation to the scarcer factor is bid up. That in turn will undermine the current basis for Chinese competitive advantage, and could mean lots of changes for Chinese society. A traditional challenge for economies in which a phenomenal economic boom comes to an end is an overhang of investments that were made when it seemed the rapid growth would continue forever but which end up with limited social value.

        Is China's Economy Really Imploding?  The consensus view of China is that the country is imploding due to the collapse of the export sector.  This view is widely held and considered almost obvious by experts ranging from Jim Chanos to Marc Faber to just about every private equity investor I know.  And all of the arguments make sense.  But they may also be dead wrong.  The China meltdown scenario is based on the idea that China’s economic activity is entirely based upon export sectors and that domestic demand is not sufficient to support the country.  But as my friend and colleague at Tangent Jim Rickards noted recently, if the economy slows the Chinese government will just build a few more cities. Or to put it another way, the Chinese could flush most of the banking sector and just start more banks.   After decades of socialist construction, what we think of as market mechanisms are still primitive and tightly controlled political constructs. 

        Stresses in China's manufacturing sector point to further economic slowdown - The latest Foxconn incident (see video below) is raising more questions about China's manufacturing sector's ability to grow. It is becoming difficult to see how China's overall economy can expand at projected rates with such uncertainties around manufacturing.WSJ: - The riot raises questions about the sustainability of China's vaunted manufacturing machine. And it poses a challenge to the government that is struggling to satisfy the soaring expectations of a new generation of Chinese workers who came of age in an era of double-digit economic growth and are less willing than their parents to make personal sacrifices for their country... We are now seeing clear signs of strain faced by China's high tech factories as they attempt to squeeze more production out of their thin margins (discussed here) - and hitting bottlenecks in the process. FT: - [Foxconn] is the sole assembler for the iPhone 5 this year, with 80-85 per cent of shipments next year as well, according to analysts at Barclays. At an estimated $8 a phone, that workload brings in revenue, but has also put the company under strain. To handle Apple’s demands, Citi analysts estimate, Hon Hai must increase headcount at its Zhengzhou iPhone factory from 150,000 workers in June to 250,000 in October. The relentless selloff in China's domestic stock market is reflecting this uncertainty in manufacturing growth (as well as the renewed volatility in Europe). The Shanghai Composite Index hit a new multi-year low this morning.

        Weapons of Mass Urban Destruction - In the last five years, China has built 20,000 miles of expressways, finishing the construction of 12 national highways a whopping 13 years ahead of schedule and at a pace four times faster than the United States built its interstate highway system. Over the last decade, Shanghai alone has built some 1,500 miles of road, the equivalent of three Manhattans. China's urban population is projected to grow by 350 million people by 2020, effectively adding today's entire U.S. population to its cities in less than a decade. China has already passed the United States as the world's largest car market, and by 2025, the country will need to pave up to an estimated 5 billion square meters of road just to keep moving. China's love affair with the car has blossomed into a torrid romance. In April, nearly a million people poured into the Beijing International Automotive Exhibition to coo over the latest Audis, BMWs, and Toyotas. But China is in danger of making the same mistakes the United States made on its way to superpower status -- mistakes that have left Americans reliant on foreign oil from unstable parts of the world, staggering under the cost of unhealthy patterns of living, and struggling to overcome the urban legacy of decades of inner-city decay.

        Faltering Chinese Demand Affecting a Broad Range of Industries - While sporting goods manufacturer Nike late yesterday blamed its disappointing results on weak Chinese demand for its apparel and other products, it's clear that faltering growth in that Asian nation is affecting a range of companies and industries. Here are just a few examples:

        • "Asia Fuel Oil-Weak On Cooling China Demand, Eye on Arb" (Reuters) Shrinking demand for fuel oil in China for fuel oil in China weighed heavily on the Asian fuel oil market on Friday, while heavy arbitrage supply flows into Asia were expected to further depress prices.
        • "China Diesel Imports Dry Up as Economy Slows" (Reuters) China is unlikely to import diesel for domestic use for the rest of the year due to a slowing economy, industry sources say, putting pressure on Asian diesel margins as well as potentially reversing high prices for the fuel in the West.
        • "Iron Ore Hit by Weak Chinese Demand, Poor Steel Outlook" (Reuters) Sellers of imported iron ore cargoes to top buyer China cut prices for a third day on Tuesday as weak demand pushed the benchmark rate to a one-week low, as the near-term outlook for the steel market remained weak despite recent gains.
        • "China Steelmaker, Miners Cut Output as Slowdown Bites" (Money News)— With China's slowing growth sapping demand for new ships and construction, an industry official said more than a third of the country's iron ore mines were idle due to depressed prices, and the top steel producer also forecast lower output this year.
        • "Chinese Slowdown Idles U.S. Coal Mines" (Wall Street Journal)Thanks to Chinese demand, the price for premium metallurgical coal, whose low-ash and low-sulfur content makes it ideal for steelmaking, hit a record $330 a metric ton in early 2011. Now, the Chinese economy is slowing and so is its steel industry. That has sent the price of coal used for steelmaking down nearly 50% to $170 a metric ton. Those coal producers who counted on Chinese sales are reeling.

        Obama blocks Chinese purchase of US wind farms - Citing national security risks, President Barack Obama on Friday blocked a Chinese company from owning four wind farm projects in northern Oregon near a Navy base where the U.S. military flies unmanned drones and electronic-warfare planes on training missions. It was the first time in 22 years that a U.S. president has blocked such a foreign business deal.Obama's decision was likely to be another irritant in the increasingly tense economic relationship between the U.S. and China. It also comes against an election-year backdrop of intense criticism from Republican presidential challenger Mitt Romney, who accuses Obama of not being tough enough with China.

        Meet China's Real Challenger, Mexico (No Kidding) -  It is true that more than a fair share of Mexico's law and order woes stem from being a gateway to the world's largest consumer market for drugs in the United States--ask Hillary Clinton. Yet, while lurid tales of drug-related violence at the US-Mexico border unfortunately feed stereotypes about the country, Mexico has actually been quite progressive in the economic realm and is even approaching North American standard-bearer Canada in many respects. Debt crises no more; it's time is now. Anyway, I was reminded to post about Mexico's burgeoning economy by two separate articles reiterating the idea that, while China's colossal trade surplus with the United States attracts the largest share of public attention worldwide, Mexico is actually gaining ground on the PRC and may realistically surpass the latter as the United States' second largest trading partner after Canada in the near future. And, thankfully, you don't have presidential candidates and others trying to outdo themselves in the "Mexico-bashing" sweepstakes alike they do over China: Trade between the United States and Mexico is surging, up 17 percent in 2011 to a record $461 billion, as Mexico vies with China to become America’s second-largest trading partner after Canada. China and the United States did $502 billion in trade last year...“We are obsessed with China when we ought to seriously focus, for our own benefit, on our neighbor Mexico,”

        Japan Heads for GDP Contraction as South Korea Weakens - Japanese and South Korean industrial production fell more than economists estimated last month as slowdowns in China and Europe weighed on exports, building the case for more monetary easing. Japan’s output fell 1.3 percent from July, the biggest decline in three months, a Trade Ministry report showed in Tokyo today. South Korean production slid 0.7 percent, partly on a strike at Hyundai Motor Co. An increasing risk that Japan’s economy will shrink this quarter and the failure of central bank loosening to dislodge deflation may increase pressure for officials to ease at either of two meetings next month. Today’s data add to China’s weakest industrial production growth in more than two years in highlighting the failure of policy support to reverse a slowdown across Asia. “I’m convinced we’ll see a contraction in Japan’s GDP this quarter because consumption, exports and private investment are falling,”

        Japan PMI: Output and New Orders Contract Further - The global economy continues to weaken most everywhere you look. The focus of this post is Japan where the Markit/JMMA Japan Manufacturing PMI™ shows Modest deterioration in operating conditions recorded in September. Key points:
        Output and new orders both down again, albeit at slower rates
        Weaker underlying demand and strong yen impact on export orders
        Charges cut at sharpest rate for over two years
        Summary:Operating conditions in Japan’s manufacturing sector continued to worsen at a modest pace in September. Output and new orders both fell amid reports of a general stagnation of economic activity in domestic and overseas markets. Manufacturers continued to deplete inventories, while they made further sharp inroads into their work outstanding. Payroll numbers were little changed.

        Time to Japanic? - The Atlantic has a big story on the impending Japanese crash; one of the authors is the brilliant Simon Johnson.  This prophecy is hardly unique; I have beaten this drum myself. If Japan doesn't change course, it will have a major crisis within the next decade. If. But what people need to understand is, the Japanese government does have the power to avert a crisis. It is not inevitable. There is one way that the crisis can definitely be averted: Raise taxes. Japan's fiscal woes can be boiled down to one sentence: Japan has European levels social spending and European levels of aging with American levels of taxation. But this could change; if Japan raised taxes to European levels, crisis would be instantly averted. According to analyses I've seen, this would require raising Japan's taxes from their current level of 32.5% of GDP to somewhere between 40% and 50% of GDP. That's comparable to France or Sweden. Painful, but not impossible. Now for the rumor (rumor always being a large component in Western analyses of Japan). My sources at the Bank of Japan and Ministry of Finance tell me that domestic Japanese investors are betting that, after all the grumbling and fighting and ending of political careers, Japan's government will suck it up and raise taxes. This, my shadowy sources say, is why pension funds are still willing to put the Japanese people's money into JGBs.

        BOJ ready to act boldly to support economy: deputy governor (Reuters) - The Bank of Japan will act boldly and flexibly when necessary to support the economy, its deputy governor said, signaling readiness to expand stimulus even after last week's monetary easing as the pain from China's slowdown and Europe's debt crisis persist. The central bank eased policy last week by boosting bond purchases because manufacturing activity in many countries had weakened more than expected, hitting Japanese exports and factory output, BOJ Deputy Governor Hirohide Yamaguchi said. "We've judged that the economy was undershooting our expectations. If so, there was no reason to delay taking policy action," he told a forum on Monday. Yamaguchi said that even after last week's monetary easing, the BOJ was ready to take further action if risks to the economy grow, including from yen rises that hurt exports. "As have been the case up till now, we'll take bold and flexible action when necessary, while scrutinizing the outlook for the economy and prices as well as risks," he said.

        Is There Hope for High-Debt Economies? -  Public debt in advanced economies is now at its highest level since World War II, exceeding 100% of GDP in Japan, the U.S. and several European nations. Are they doomed? Not based on history. The International Monetary Fund recently compiled data on debt-to-GDP ratios on almost all of its 188-nation membership back to 1875. Out of 22 advanced economies in the mix, 14 of them breached the 100% debt-to-GDP threshold at least once between 1875 and 1997. (The high debt came from nation-building and the railroad boom in the late 19th century, costs related to World War II and its aftermath, and the past few decades after the breakdown of the Bretton Woods system.) The good news: the nations that built up high debt still exist.

        Fed action triggers fear of new currency wars - Fear has crept into the foreign exchange markets: fear of central banks. Currency traders are rapidly shifting assets to countries seen as less likely to try to weaken their currencies, amid concern that the fresh round of US monetary easing could trigger another clash in the “currency wars”. Fund managers are rethinking their portfolios in the belief that “QE3” – the Federal Reserve’s third round of quantitative easing – will weaken the dollar and trigger sharp gains in emerging market currencies. Such moves would cause a headache for central banks worried about the domestic impact of a strengthening local currency, leading to possible intervention. Some investors are allocating money towards countries with beaten-up currencies, such as India or Russia, or those with more benign central banks, such as Mexico, that do not have a history of frequent forex intervention. Currencies whose central banks have either intervened or threatened to intervene since QE3 have been underperforming the US dollar as investors have steered clear. The Czech koruna is the worst-performing major currency against the dollar since QE3 was launched this month, according to a Bloomberg list of expanded major currencies. The governor of the Czech central bank last week raised the prospect of forex intervention as a tool to stimulate the economy. The Brazilian real is also weaker in the past two weeks after Guido Mantega, finance minister, made it clear that the government would defend the real from any fresh round of currency wars sparked by the Fed’s move.

        S&P lowers India's growth forecast to 5.5% for 2012 - Global ratings agency Standard & Poor's Monday said it has lowered India's economic growth forecast by one percentage point to 5.5% for 2012 due to deficient rainfall and lingering crisis in the Eurozone and weak recovery in the US. "The lack of monsoon rains has affected India, for which agriculture still forms a substantial part of the economy. Additionally, the more cautious investor sentiment globally has seen potential investors become more critical of India's policy and infrastructure shortcomings," S&P said. The Indian economy grew at a sluggish 5.5% in April-June 2012 period as compared to 8% in the corresponding quarter of previous year, according to the latest government data. In the first quarter of the current calendar year, India's GDP growth had slumped to nine year low of 5.3%.

        India likely to miss deficit target this fiscal, borrowings to mount - India will likely borrow an additional Rs 500 billion (USD 9.34 billion) for the year ending in March and miss its fiscal deficit target, a poll showed, raising doubt about the fiscal discipline of a country whose credit ratings are under threat. India's fiscal deficit is expected to rise to 5.8 percent of gross domestic product (GDP), higher than the government's target of 5.1 percent of GDP given in March, according to the poll of 24 economists taken over the past week. Estimates for the government's additional borrowing for the second half of the fiscal year which started in April ranged between Rs 150-750 billion.

        Poorer without aid programs - If there seems to be near unanimity among policymakers about the positive role of aid, the academic community has not found any robust evidence that aid contributes to development. This column presents a new empirical strategy that isolates the causal effect of aid on growth. The effect is found to be larger than previously estimated. The average developing country citizen would be about 15% poorer today had aid never been disbursed.

        Australia’s high household debt creates vulnerability: S&P - Australia’s household debt levels are among the highest in the developed world, adding urgency to the federal government’s achievement of its surplus pledge, warns the Standard & Poor’s analyst charged with keeping watch over our AAA credit rating. “It’s only really been in the last four years that Australia’s household savings rate has been rising,” analyst Kyran Curry told The Australian Financial Review from London. “[High household debt] creates a vulnerability because if there is a downturn in the labour market and people start losing their jobs, then given the banks’ exposure to households it could create problems if we see a lot higher levels of non-performing loans.” Final budget outcomes released for the 2012 financial year this week that showed the government’s quest to achieve surplus to be on track were “an endorsement” of the plans, Mr Curry said.

        Canada New Home Sales Plunge 64 Percent; Lowest August on Record -- New home sales in Canada plunged 64% in the wake of government's changes to insured mortgages (30yr to 25yr) and home equity line of credit restrictions (80% max to 65% max) which took effect in July.  Corey emailed the above comments and a news link from the Canada BILD Association: New Home Sales Slip in AugustAccording to RealNet Canada Inc., BILD's official source of new home market intelligence, the 1,242 homes sold in August 2012 add up to the lowest monthly sales since 2009 and the lowest August on record. Year-to-date sales have remained on par with 2010 but below its record-breaking 2011 predecessor. "The federal government has been working on reducing household debt levels and recently adjusted mortgage lending rules. August was the first full month with the new rules in place and it appears these regulations have affected consumer confidence, resulting in significantly reduced sales of new homes," explained BILD President and CEO Bryan Tuckey. "BILD will be carefully monitoring new home sales during the next three months to see if this decline becomes a trend."

        Lagarde of I.M.F. Warns of Economic Deterioration Ahead -  Christine Lagarde, the managing director of the International Monetary Fund, warned on Monday that the institution would probably cut its estimates of global growth yet again this year because of the tepid recovery in the United States, a slowdown in emerging economies and continued troubles in the euro zone. Still, she praised the world’s central banks for taking decisive action to ease financial conditions and aid the global recovery in recent months. “It may well be that central banks will have played and will be recognized to have played a significant role in pulling the global economy out of this great recession,” Ms. Lagarde said at a meeting at the Peterson Institute for International Economics, a Washington-based research group. “But we should not get ahead of ourselves.” Ms. Lagarde said that the fund would most likely trim its growth estimates in a periodic update to its economic forecasts, to be delivered at a joint meeting of the World Bank and the I.M.F. in Tokyo next month. In its last estimate, made in July, the fund forecast global economic growth of 3.5 percent in 2012 and 3.9 percent in 2013. The global economy grew about 4 percent in 2011.

        Fitch lowers forecasts for global growth - Fitch Ratings trimmed its forecasts for global gross-domestic product growth, citing "persistent weakness" in the global recovery. The global growth rate is now expected to be 2.1%, down from Fitch's June view of 2.2%. For 2013, the forecast was cut to 2.6%, from 2.8%. For 2014, the rate is expected to be 3%, down from 3.1%. Major advanced economies are seen posting weak or no growth in 2012. In the U.S., persistently high unemployment and the uncertainty surrounding fiscal policy will continue to challenge the economy. Against that background, Fitch lowered its 2013 GDP growth expectations to 2.3% for the U.S., but kept its 2012 forecast at 2.2%. Fitch predicts the euro-zone economy will contract 0.5% this year, followed by growth of only 0.3% and 1.4% in the next two years.

        WTO slashes global trade forecast - The World Trade Organisation has warned the outlook for global trade is deteriorating, citing the eurozone crisis as the main drag on growth. The WTO slashed its forecast for global trade growth this year from 3.7% to 2.5% on Friday, less than half the previous 20-year average. The WTO director general, Pascal Lamy, said there was more risk of things getting worse than better. The news came as Brazil's finance minister lambasted the US and Japan for their latest rounds of quantitative easing, which will devalue their currencies and, he said, trigger a global currency war. Next year the WTO expects trade to grow by 4.5%, compared with previous forecasts of 5.6% growth. That forecast is, however, based on the assumption that current policy measures will be enough to avoid a breakup of the euro and that US politicians will reach an agreement to stabilise public finances and avoid the "fiscal cliff". The WTO is targeting 1.5% growth in exports from developed economies, down from its previous forecast of 2% growth. The situation has deteriorated even more for developing countries, where the WTO cut its forecast from 5.6% growth to 3.5%. Lamy said: "The main reason for the growth slowdown is of course Europe. We also know US growth is lower than expected, [and] Japan is not in great shape."

        Eurozone crisis has eliminated the periphery trade deficit - The Eurozone recession is having a somewhat unexpected effect on the periphery nations' current accounts. As was the case with Portugal (see this discussion), the Eurozone periphery has eliminated its trade deficit. Domestic demand in these nations has collapsed, dramatically shrinking imports and improving the external balance. These nations just can't afford many of the goods they used to import. And as the periphery eliminated its trade deficit, the Eurozone as a whole went into a trade surplus. This improvement to the area's current account balance was at the expense of a massive GDP reduction, negatively impacting global economic growth. CS: - We think that sharp, crisis-induced, rise in the euro area’s current account balance – worth around two percentage points of euro area GDP in the past nine months – has generated a significant negative shock to the global economy. This is one of the reasons the UK for example is struggling with a rising trade deficit (see this discussion) and a double-dip recession. Spain, Italy, Portugal, Ireland, etc. are no longer in a position to be buying British and other nations' products and services as they did in the past.

        The case for euro deposit insurance - The European Commission (2012) has now presented its legislative proposal for a banking union whose key element is a ‘Single Supervisory Mechanism’ to be headed by the ECB, but it says nothing about deposit insurance at the national level. Is that viable?As the EZ takes its first steps towards banking union, this column warns that such an approach – with banking supervision first and resolution and deposit insurance postponed to some undefined later stage – will lead to an unstable banking union. It adds that a strong European supervisor and a credible European resolution and deposit insurance authority should be introduced as part of the package.

        Spain braced for further austerity as Madrid prepares for bailout - Recession-hit Spaniards will this week be told to swallow yet more austerity as the government prepares a fresh round of reforms and another budget filled with spending cuts and tax increases that will allow it to seek a bailout from eurozone partners. Pension freezes are also expected to form part of a raft measures to prepare the way for the European Central Bank (ECB) to give Spain support to control borrowing costs that will eat up a large chunk of next year's budget. The budget is to be announced on Thursday, alongside the reform programme. Neither seemed likely to contain measures to immediately ease Spain's chronic 25% unemployment, which some analysts expect will rise to 26.5% next year. On Friday Spaniards will learn just how big the hole in their banks really is, with an official report expected to say these must find an extra €60bn to cover damage wreaked by toxic real estate loans.

        Spain has staked its financial survival on cutting its bulging deficit - Madrid: Spain has staked its financial survival on cutting its bulging deficit, but analysts warn it will miss its key 2012 target, undermined by the very measures taken to try and meet it. Prime Minister Mariano Rajoy has promised Spain’s European neighbours to cut the public deficit — the shortfall of revenues to spending — to 6.3 per cent of output in 2012, after they let him relax an earlier 5.3 per cent goal. But a recession aggravated by budget tightening and widening holes in the finances of Spain’s big-spending regional governments have undermined his promise, as warnings have increased that Spain will need a full bailout. “Nobody now believes it will be able to fulfill the target,”

        Spain eyes pension reform with aid package in sight: (Reuters) - Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said. The measures would save at least 4 billion euros a year as well as fulfil European Union policy recommendations issued in May which senior euro zone sources said were being used as a blueprint for the terms of a sovereign aid programme. The accelerated raising of the retirement age to 67 from 65, currently scheduled to take place over 15 years, is a done deal, the sources said. The elimination of an inflation-linked annual pension hike is still being considered. Spain, the new epicentre of the euro zone debt crisis after Greece, Ireland and Portugal, is hesitating to apply for external aid to handle a high public deficit and soaring debt. Its borrowing costs fell on Thursday at an auction of a 10-year benchmark bond but relief may be short-lived. The new pensions steps, which could be announced as soon as next week along with the 2013 budget, would send a strong signal to investors that Spain is serious about implementing structural reforms it has delayed because of the political cost.

        Catalan official makes fresh warning to government over independence -: In the latest in a series of bold challenges to the Spanish government, a top Catalan administration official on Friday warned that the region’s parliament could put legal mechanisms in motion that would lead to a unilateral separatist drive for Catalonia. In a radio interview, Catalonia spokesman Francesc Homs said that a referendum within four years “was a possibility,” and that independence could also be “obtained by way of a parliamentary vote after an election.” Homs’ announcement comes on the back of a number of advisories issued by the Catalan nationalist CiU bloc and its leader, regional premier Artur Mas, who says that a process leading to eventual independence for the region is “unstoppable.” It also comes one day after a tense meeting was held between Prime Minister Mariano Rajoy and Mas, who has been demanding a new financing plan for his region.

        Greek bailout talks bogged down over cuts - Negotiations between Greece and its international lenders over a new austerity package seen pivotal to keeping the country afloat and in the eurozone have reached a crucial point over about €2.5bn in measures. The finance ministry says it can make the required savings from cuts in operational expenses and the restructuring of the public sector. But the troika of international lenders, especially the IMF, is unconvinced. It has asked for more wage and pension cuts, according to a person familiar with the talks. Talk of tension between finance minister Yannis Stournaras and a member of the troika as well as strains within the coalition have fuelled rumours that talks have reached stalemate. Fotis Kouvelis, the leader of the moderate Democratic Left party, said: “The troika must stop attacking Greek society. The troika must understand there are limits.”

        Nearly a third of businesses in central Athens closed due to recession - Greece's deep recession has forced almost a third of businesses in the capital's commercial district to close down as shrinking incomes and frequent strikes drive Athenians away. Tens of thousands of small businesses, which make up a big chunk of the struggling economy, have shut since Greece secured a 110-billion-euro bailout package in 2010 in exchange for promises of painful austerity measures. On the capital's cobbled pedestrian shopping streets, long lines of shops are boarded shut while others have «Everything must go» signs plastered across their windows. Some arcades, once bustling with activity, are empty and enclosed by derelict buildings. In the city's «commercial triangle», where generations of merchants had run successful businesses a stone's throw from the central Syntagma Square, an August census by retail lobby group ESEE found 31 percent of shops had closed. That was up 13 percent from August 2010, just months after the government secured the first of two multi-billion euro international rescue packages.

        Greece embarks on a firesale -  When you hit hard times, it is time to pawn or part with the family silver – and an unprecedented clearout is now under way in Athens. Greece has announced it will sell anything it can do without – and in the case of the debt-choked nation that means letting go of islands, royal palaces, prime real estate, marinas, airports, roads, the state-owned gas company, lottery and post office. Indeed anything, really, that can be sold. On Wednesday, the nation learned the downsizing would also include diplomatic residences abroad – starting with the Victorian townhouse that was once the Greek consul general's residence in London. "There is a decision to lease and sell properties that for various reasons are not being used," said Gregory Dalevekouras, spokesman at the foreign ministry. The foreign ministry's finance department, he said, was hard at work evaluating "market conditions". The sell-off emerged just a day after Athens's finance minister revealed what most Greeks feared but had never been officially told – that with national income projected to fall 25% by 2014 their economy is not just shrinking but slipping inexorably into a 1930s-style Depression. And officials are now working frantically to get the mother of all firesales off the ground.

        Greece budget shortfall almost double what was thought-reports - There could be more financial trouble ahead for the Greek Prime Minister Antonis Samaras and his conservative-led coalition according to a report in the German magazine Der Spiegel. The magazine says Athen’s budget shortfall is almost double previous estimates. Figures show the gap is around the 20 billion euros mark with Der Spiegel citing preliminary findings by the so called Troika – the European Commission, European Central Bank and International Monetary Fund. The country can only receive the next tranche of financial aid once its budget gap is closed. Eurozone officials admit the 173 billion euro bailout plan agreed with Athens in March is badly off track. The news comes as the results of a poll shows a majority of Greeks believe new austerity measures introduced by the government to meet conditions of the bailout are unfair and hurt the poorest sections of society.

        Greece Caught Underreporting Its Budget Deficit By Nearly 50% - There was a time about a year ago, before the second Greek bailout was formalized and the haircut on its domestic-law private sector bonds (first 50%, ultimately 80%, soon to be 100%) was yet to be documented, when it was in Greece's interest to misrepresent its economy as being worse than it was in reality.   A year later, the tables have turned, now that Germany is virtually convinced that Europe can pull a Lehman and let Greece leave the Eurozone, and is merely looking for a pretext to sever all ties with the country, So a year later we are back to a more normal data fudging dynamic, one in which Greece, whose July unemployment soared by one whole percentage point, will do everything in its power to underrepresent its soaring budget deficit.  Case in point, on Friday the Finance Ministry proudly announced its budget deficit for the first eight months was "just" €12.5 billion, versus a target of €15.2 billion, leading some to wonder how it was possible that a country that has suffered terminal economic collapse, and in which the tax collectors have now joined everyone in striking and thus not collecting any tax revenue, could have a better than expected budget deficit. Turns out the answer was quite simple. According to Spiegel, Greece was lying about everything all along, and instead of a €12.5 billion deficit, the real revenue shortfall is nearly double this, or €20 billion, a number which will hardly incentivize anyone in Germany to give Greece the benefit of another delay, let along a third bailout as is now speculated.

        Greece sees bailout extension costing up to 15 billion euros (Reuters) - Greece would need 13-15 billion euros more in funding if it were given a two-year extension to its bailout plan, its finance minister said on Tuesday, he first time Athens has put a price tag on its plea for more time to get its finances in order. The recession-battered country may also ask the European Central Bank to help it meet its goals by rolling over Greek bonds it holds rather than cashing them in. The new conservative-led government has drawn a cold public response from northern European countries for its request for more time to push through austerity cuts so that its economy has some room to recover. Athens has won the backing of France's government on the issue, but others are wary of an ever-rising bill to save twice-bailed out Greece. Many privately acknowledge such an extension may be unavoidable, however, "We estimate the funding gap that would be created if we get the two-year extension at 13-15 billion euros," Finance Minister Yannis Stournaras told Reuters at his office in central Athens, adding that the gap could be bridged without seeking more aid. Greek officials have previously said such a gap could be covered through issuing short-term debt or seeking lower interest rates - avoiding forcing euro zone governments to stump up more money for Greece.

        I.M.F.’s Call for More Cuts Irks Greece - As Greece enters a pivotal week in its economic crisis, tensions between the Greek government and the country’s international lenders have reached a boiling point. The government is resisting a push by the International Monetary Fund to impose additional austerity measures that Greek leaders fear could destabilize the shaky coalition government. Although those talks are expected to resume later this week, they have been suspended since an angry exchange last week between the Greek finance minister and the I.M.F.’s top negotiator for Greece. The impasse has elevated tensions here as Greece braces for a nationwide general strike planned on Wednesday that threatens to bring public services to a halt. The Greek people are increasingly angry over the prospect that public salaries and pensions will be cut again in a last-ditch bid to secure a new loan installment of 31.5 billion euros, or $40.7 billion, from Greece’s creditors. The Greek prime minister, Antonis Samaras, plans to address the nation this week to bolster support for the austerity package. He has already publicly warned his center-right party, New Democracy, that he will oust lawmakers of the party failing to back the package once it comes up for a vote, probably in early October.

        Europe Pushed by IMF’s Lagarde to Consider Greek Debt Write-Off -- The International Monetary Fund pushed European policy makers to consider writing off some aid to Greece, widening the fight to keep the 17-nation euro zone from splintering. “The Greek debt will have to be addressed,” IMF Managing Director Christine Lagarde said in Washington yesterday. The IMF has indicated that additional aid for Greece will have to come from Europe, suggesting that the euro area may need to consider losses on bonds held by the European Central Bank or loans extended by governments. Greece’s financing gap won’t be solved with the budget measures being discussed because its growth prospects are too weak, Lagarde said at the Peterson Institute for International Economics in Washington. She said efforts to find 11.5 billion euros ($15 billion) in additional savings won’t be enough to shore up the bailout jointly supervised by the IMF, the European Commission and the ECB. The comments by Lagarde, who is scheduled to meet German Chancellor Angela Merkel in Berlin tomorrow, put pressure on the euro zone to grant Greece further relief by restructuring its debts. Greece has received 240 billion euros in aid pledges in a pair of bailout packages. Investors took losses in a debt exchange this year, losing 53.5 percent of the face value of their holdings and reducing the country’s debt by about 100 billion euros.

        European Leaders Struggle to Overcome Crisis Stalemate - European leaders are struggling to overcome a crisis-fighting stalemate as they face discord over a banking union, Greece’s ongoing debate on how to meet bailout commitments and foot-dragging by Spain on a possible aid bid.  Chancellor Angela Merkel and President Francois Hollande underlined Franco-German disagreement over the weekend as they clashed on a timetable to introduce joint oversight of the region’s banking sector, with Merkel rebuffing Hollande’s appeal to activate it “the earlier, the better.”  The squabbling is helping stem gains in European stocks and bonds of Spain and Italy that followed the European Central Bank’s rescue plan. Deadlock over the banking union could delay until next year a key building block in resolving the crisis, compounding turmoil that’s so far engulfed five of the euro area’s 17 nations.  “Complacency seems to have affected European policy- makers,”

        Germany Losing Patience With Spain on Crisis Action - Germany’s governing coalition showed growing exasperation with Spain, as a senior ally of Chancellor Angela Merkel said Prime Minister Mariano Rajoy must stop prevaricating and decide whether Spain needs a full rescue. “He must spell out what the situation is,” Michael Meister, finance spokesman for Merkel’s Christian Democratic Union, said in an interview in Berlin today. The fact he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help he must say so.” Meister’s comments underscore Europe’s crisis-fighting stalemate amid discord over a banking union, Greece’s ongoing debate on how to meet bailout commitments and foot-dragging by Spain on a possible aid bid. European Union President Herman Van Rompuy warned today against “a tendency of losing the sense of urgency” in fighting the debt crisis three years after it erupted in Greece. German patience is running out with Spain as it plays for time after European Central Bank President Mario Draghi offered help to lower borrowing costs in return for strict conditions.

        Bundesbank castigates IMF for saving Europe - Germany's central bank has launched a blistering attack on the International Monetary Fund, accusing officials of spraying around money like confetti and overstepping their legal mandate. “The IMF is evolving from a liquidity mechanism into a bank. This is neither in keeping with the legal and institutional role of the IMF or with its ability to handle risks,” said the Bundesbank in its monthly report. The bank said the Fund was right to help rescue Greece, Ireland and Portugal but said monitoring levels were slipping and there had been a “watering down” of standards. The scale of loans risks “overwhelming the IMF’s institutional structure”. The unprecedented attack came as the IMF’s chief,  Christine Lagarde, called for urgent measures across the world to head off a fresh global slump. While praising the latest emergency measures of central banks in the US, Europe and Japan, she said this was not enough to secure recovery. The Europeans must activate their new machinery, while the US must prevent a “dramatic tightening” of fiscal policy later this year. Failure to act “would effectively plunge the country off a 'fiscal cliff'", cutting US growth by up to 2pc. She said this would pose a “serious threat for the global economy”.

        You’re Dreaming If You Think The Euro Crisis Is Resolved - The German edition of Der Spiegel opens the new week on Monday morning with a series of articles on the European situation, which make clear, as if that were still necessary, that Europe is still an absolute mess. You know, just in case you thought it was not. That Mario Draghi's latest unlimited whatever it is had somehow chased away the demons. First, Der Spiegel writes that the Greek deficit is twice as high as previously thought,, at €20 billion, according to a preliminary version of the long awaited troika report. The gap has to be closed for the next tranche of bailout money to be paid. Second, eurozone countries plan to let the ESM balloon to over €2 trillion ($2.6 trillion) . Remember that the German Constitutional Court limited Berlin's part to about €190 billion recently. Creative accounting to infinity and beyond. The efforts to keep the union together will blow it apart. Third, former German FInance Minister Steinbrueck works on a banking plan that would split up investment and retail activities for Germany's banks (including Deutsche), think Glass Steagall. He wants to ban commodities speculation. And he wants a bank-ESM, a fund paid for by banks that can be used to bail them out, rather than taxpayer money. There's lot more going on, and going wrong, in Europe, no matter what Draghi does, and no matter what plans José Manuel Barroso unveils. When I saw that the latter was seriously talking about establishing a European army, I couldn't help thinking: will it bring all those translators to the battlefield too?

        ECB in ‘panic’, say former chief economist Juergen - The European Central Bank is in "panic" over the eurozone crisis and acting outside its mandate with its new bond-buying plans, the bank's former chief economist said in comments published Saturday. "The break came in 2010. Until then everything went well," Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview. "Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure ... pressure from outside Europe." Mr Stark said the ECB's new plan to buy up unlimited amounts of eurozone states' bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided. "Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally," Mr Stark said. "It can't be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously."

        Valencia: A Spanish city without medicine - The sign on the wall tells the story. "Important information. The government of Valencia owe this pharmacy for all the medicine we have dispensed to you in January, February, March, April and May". And not just this pharmacy. The government of Valencia - which runs the health system - owes a grand total of half a billion euros to the region's pharmacies. Paula, the pharmacist, guides me into that back room that exists in all pharmacies, where the prescription drugs are kept. The problem is, now, there are not many drugs left. "Look, this drawer is usually full," she says, pointing to where the suppositories are kept. Now there are only two packets." She opens the fridge. "Look," she says, "we are down to our last packs of insulin. We just have no money to buy the stock." The Spanish regions are heavily in debt. People rely on them for free health and education, but they can no longer pay their bills - and they can't expect much help from central government, as it too struggles under a huge financial burden. 

        Spain Recoils as Its Hungry Forage Trash Bins for a Next Meal— On a recent evening, a hip-looking young woman was sorting through a stack of crates outside a fruit and vegetable store here in the working-class neighborhood of Vallecas as it shut down for the night. At first glance, she looked as if she might be a store employee. But no. The young woman was looking through the day’s trash for her next meal. Already, she had found a dozen aging potatoes she deemed edible and loaded them onto a luggage cart parked nearby. “When you don’t have enough money,” she said, declining to give her name, “this is what there is.” The woman, 33, said that she had once worked at the post office but that her unemployment benefits had run out and she was living now on 400 euros a month, about $520. She was squatting with some friends in a building that still had water and electricity, while collecting “a little of everything” from the garbage after stores closed and the streets were dark and quiet. Such survival tactics are becoming increasingly commonplace here, with an unemployment rate over 50 percent among young people and more and more households having adults without jobs. So pervasive is the problem of scavenging that one Spanish city has resorted to installing locks on supermarket trash bins as a public health precaution.

        The New Great Dictators Are Gaining Momentum In Europe - As far as I can remember I’ve never been afraid of the government. When I was a young upstart protesting military parades with safety pins through my ears, I wasn’t afraid. Even if the place was swarming with soldiers. When I was the bass player in a punk band, the P.A. Splashing Tovs, screaming at all kinds of government injustice, I did not feel unsafe. And in protest rallies against nukes. I never wore a mask or helmet. We laughed at the secret service guys with their moustaches and long coats. It was 1980, not 1984. Also on the internet, I was never afraid. On, a provocative Dutch opinion blog, on, or writing for, a leading Dutch newspaper, I never even thought of watching my steps. My 97,000 tweets? I posted them without giving them a second thought. Even when it came to my attention that the Netherlands has the most telephone taps in the world, I did not lose any sleep over it. In Holland we have article 7. Freedom of the press. Freedom of speech. Censorship is forbidden. You can say and write, sing and film whatever you want. At least I cherish that illusion. You may protest and express whatever opinion you have. As long as you don’t threaten or slander anybody. But still my critical fingers hesitate more and more when I am writing stuff. How long will the Dutch government be in charge over its citizens? The power of the “new great dictators” in Brussels grows. And they are getting more threating towards freedom of speech all the time.

        Euro fund to rise to 2 trillion euros: report - Euro-area nations are readying to let the bloc's permanent rescue fund leverage its capital to hit a capacity of more than 2 trillion euros and help large members if needed, Reuters reported Sunday, citing the German magazine Der Spiegel. The plan would have the European Stability Mechanism operate in the same manner as its predecessor, the European Financial Stability Facility.

        German deputy minister says ESM leverage being discussed - German Deputy Finance Minister Steffen Kampeter said on Monday there is a discussion going on in Europe about leveraging the new permanent bailout scheme for the euro zone - and he promised that Germany's parliament would be consulted. "If Europe decided to leverage the ESM (European Stability Mechanism) - and this discussion is going on - we would of course involve the German Bundestag (parliament's lower house)," Kampeter told Reuters. Spiegel magazine reported in its latest edition that the euro zone wanted to leverage the ESM for a total capacity of more than 2 trillion euros, in a similar arrangement to that involving its predecessor, the European Financial Stability Facility (EFSF).

        Bailout fund boost to 2 trln euros not feasible-German spokesman (Reuters) - Germany's finance ministry said on Monday that talk of the euro zone's permanent bailout fund being leveraged to 2 trillion euros via private sector involvement was not realistic, adding that any discussion of precise figures was "purely abstract". Ministry spokesman Martin Kotthaus said there were talks going on in Brussels about leveraging the capacity of the European Stability Mechanism (ESM) in the same way as its predecessor, the European Financial Stability Fund (EFSF). But, asked about a report in Spiegel magazine that the ESM's capacity could be leveraged to 2 trillion euros, he said this was "illusory". "It is not feasible to talk about figures at present," he told reporters. "It is purely abstract." Kotthaus said Germany's government and parliament backed the idea of boosting ESM capacity via "private capital participation in loans or other instruments for states which require them" just as they had supported such instruments for the EFSF. The ESM is expected to come into force on Oct. 8 with a firepower of 500 billion euros.

        The ECB managed to increase broad money supply in the Eurozone but is unable to improve credit conditions - The ECB's massive balance sheet expansion during the past year succeeded in generating growth in the euro area's broad money supply. However the increase in money supply is yet to translate into material growth in credit. The two indicators have diverged. Part of the problem of course is the issue of "monetary transmission" (discussed here). Liquidity and therefore credit growth is not getting to where it's needed most. The chart below shows growth in loan balances to non-financial corporations (NFCs - lending by banks to companies.) As expected the trends by country diverge dramatically. Increasing money supply simply saturates "core" banks with deposits - to the point where lending is no longer limited by available liquidity. But due in part to capital flight (see post), liquidity is not making its way to the "periphery" banks, limiting credit expansion. The periphery banks therefore hold back credit growth in the Eurozone.

        Europe must take "deep breath" and enact reforms: Merkel - - Chancellor Angela Merkel said on Tuesday that Europe could only hope to come out of its crisis stronger and compete in a globalised world if its members pressed ahead with painful reforms and moved to more responsible budget policies. Speaking at a meeting of the Federation of German Industries (BDI), Merkel acknowledged that Germany was "not an island" that could disconnect from economic developments in Europe and the world economy. But she placed the onus on Berlin's struggling euro zone partners to fix their own economies, rejecting the idea that Germany should relax its own productivity drive in order to help its partners. "We need to take a deep breath to overcome this crisis," Merkel said. "We must make the efforts that will allow Europe to come out of this crisis stronger than it went in." "There is a lack of confidence on financial markets that some euro zone states can pay back their debts in the long term," she continued. "The world wonders how competitive euro zone countries are."

        Portugal mulls higher income tax in bid to control its deficit - PORTUGAL’S government yesterday threatened it would have to hike income taxes after bowing to increasing pressure from protesters to scrap increases in workers’ social security payments. Prime Minister Pedro Passos Coelho said his administration is forced to find ways to achieve budget targets that are conditions of the debt-burdened country’s ongoing bailout programme. “As long as Portugal maintains its level of fulfilment, we know that we will have the support of our external partners,” Coelho said. “If we do not, we put at risk our fulfilment, and these guarantee mechanisms will cease to exist.” Plans to increase social security contributions to 18 per cent from 11 per cent for all workers in 2013 sparked large protests, forcing the government into a U-turn. Yet workers may also be hit by new plans, which could see income tax rise as well as downward pressure on wages for government sector workers in the struggling Eurozone state. .

        Patience snaps in Portugal - The Portuguese people have put up with one draconian package after another – with longer working hours, 7pc pay cuts, tax rises, an erosion of pensions, etc – all amounting to a net fiscal squeeze of 10.4 of GDP so far in cyclically-adjusted terms. (It will ultimately be 15pc). They have protested peacefully, in marked contrast to the Greeks, even though the latest poll by the Catholic University shows that 87pc are losing faith in Portugal’s democracy. Yet Mr Passos Coelho’s rash decision to raise the Social Security tax on workers’ pay from 11pc to 18pc has at last brought the heavens down upon his head. He was hauled in front of the Council of State – a sort of Privy Council of elders and wise men – for a showdown over the weekend. Eight hours later he emerged battered and bruised to admit defeat. The measure will not go ahead. Francisco Louca from left-wing Bloco suggested that the prime minister cannot survive such a defeat. "The government is dead", he said. 

        France Set to Implode; Troika Soap Opera; Grappling with Neo-Nazis -- The soap opera in Greece continues with Germany and France tugging on opposite sides of the rope, and support for Golden Dawn, an alleged neo-Nazi party rising in the wake. French president François Hollande is on the sidelines, not wanting another battle with German chancellor Angela Merkel who has her own set of problems. However, the French Prime Minister says Give Greece More Time. Jean-Marc Ayrault, the prime minister, taking a clear swipe at those in Germany insisting on a hard line against Athens, warned that a Greek exit from the eurozone would be “unmanageable” and could be “the beginning of the end of the European project”. Speaking in an interview with the French news website Mediapart, Mr Ayrault said: “We can already offer [Greece] more time . . . on the condition that Greece is sincere in its commitment to reform, especially tax reform.”France’s chief fear is that a compounding of the eurozone crisis would turn the spotlight of the financial markets on itself and the country’s public debt, which is set to exceed 90 per cent of GDP.

        Bundesbank sees signs of German economic slowdown (Reuters) - Europe's powerhouse Germany is losing momentum as its economy is feeling the pain from a slowdown in the rest of the euro zone, the Bundesbank said on Monday. The Bundesbank said in its monthly report for September that it expects the German economy to continue on its upward trend after a solid start to the third quarter, but it added that signs of a slowdown were emerging. "Perspectives for the further economic development are still formed by great uncertainty," the Bundesbank said. "The domestic economic situation is so far robust, but signs of a weaker dynamics are noticeable." The Bundesbank pointed to Germany's labour market, where the rise in employment was slowing down, also as companies were less willing to hire. Germany's foreign trade especially could be hit stronger than before by developments in the euro area, the Bundesbank added. The Munich-based Ifo think tank showed on Monday that German business sentiment dropped for the fifth successive month in September after economic momentum eased in the third quarter as weaker foreign demand weighed on exports.

        S&P says new recession hitting euro zone - Standard & Poor's Rating Services on Tuesday pared down its economic forecast for the euro zone in 2012 and 2013 in response to indicators that "paint a bleak picture" for the region. "The data are confirming our view that the region is entering a new period of recession, after three quarters of negative or flat growth since the final quarter of 2010," according to Jean-Michel Six, the rating agency's chief economist for Europe, the Middle East and Africa. "But prospects continue to vary from country to country." S&P said it now expects a drop of 0.8% in euro-zone GDP in 2012 and flat growth in 2013, compared to its July projection of a 0.7% GDP dip in 2012 and 0.3% growth in 2013.

        Nobel Winner Stiglitz Says Time Is Running Out for Europe - European nations must share past debts to lift the burden of high interest rates on Spain and Greece and implement a banking union with deposit insurance to prevent capital flight, said Nobel Prize-winning economist Joseph Stiglitz. “If you don’t do that, you have this adverse dynamic: the weak countries get weaker and the whole system falls apart,” Stiglitz said today in an interview in Geneva. “And this has to be done fairly quickly” because in a couple of years, “there won’t be any money in Spanish banks.” Europe is facing a crisis-fighting stalemate amid discord over a banking union, Greece’s debate on how to meet bailout commitments and foot-dragging by Spain on a possible aid bid. European Union President Herman Van Rompuy warned today against “a tendency of losing the sense of urgency” in fighting the debt crisis three years after it erupted in Greece. “You have to have some form of mutualization of past debts,” said Stiglitz, 69, who served as chairman of President Bill Clinton’s Council of Economic Advisers from 1995 to 1997. Delaying the implementation of a banking framework will see the situation in Europe deteriorate, he said.

        Catalan assembly seeks consensus to approve right-to-decide text - The Catalan parliament is expected to approve a resolution this week in favor of giving citizens the right to decide on the region’s future. The text, which is set to be presented in the regional assembly on Thursday, has yet to secure consensus backing but it appears likely that its content will seek to lend a voice to the outpouring of secessionist sentiment displayed on September 11, the national day of Catalonia, when hundreds of thousands of people marched in favor of independence from Spain. The political groupings Convergència i Unió (CiU), Iniciativa per Catalunya (ICV-EUiA), Esquerra and Solidaritat Catalana, which together count on 86 of the regional assembly’s 135 deputies among their number, are set to endorse the referendum.

        Rajoy Defied as Catalan Head Seeking Autonomy Calls Vote - Spanish bond yields surged the most this month as a second night of violent protests loomed amid sparring over the police response to clashes in Madrid. Prime Minister Mariano Rajoy told the Wall Street Journal in comments confirmed by his office that he would “100 percent” seek a rescue if borrowing costs stayed “too high.” Rajoy’s efforts to restore investor confidence suffered a new setback yesterday when Catalan President Artur Mas called early elections to push for “self-determination” for the country’s largest region. The move adds a new front to Rajoy’s battles as he seeks to persuade voters to accept the deepest budget cuts on record. Thousands of protesters gathered around the Parliament in Madrid late yesterday to oppose budget cuts and tax increases Rajoy has pursued since coming to power in December in breach of his campaign pledges. The anarchist union CNT has called a demonstration for 7 p.m in Madrid today, coinciding with a general strike in Greece. Organizers urged allies today to join the march via Twitter and Facebook.

        Catalonia calls vote as Spain crisis deepens - The rich northeastern region's President Artur Mas added an extra headache for Spain's Prime Minister Mariano Rajoy, who has called for the country to stay united as its fights to secure its public finances. Mas called an early vote for November 25, a de facto referendum on his demands for greater independence for the big northeastern region, which is fiercely proud of its distinct language and culture. "It is time to take the risk," Mas told the regional parliament, after Rajoy last week rejected his proposals for greater powers of taxing and spending. "If Catalonia were a state we would be among the 50 biggest exporting countries in the world," he said. Last month, Catalonia was forced to reach out for 5.0 billion euros ($6.5 billion) from a central government fund to help it pay its 40-billion-euro debt, which is equal to a fifth of its total output. The region complains that it gets far less from Madrid than it pays in taxes.

        Rajoy Bets Italian Woes May Ease Spain Rescue Terms - Spanish Prime Minister Mariano Rajoy may be delaying a bailout request on a bet that renewed market tension will also force Italy to seek aid, strengthening his bargaining power and giving political cover. Spain will have more leverage if it can fend off a rescue until Italy joins it in needing European Central Bank help to bring down the cost of servicing its debt, said Raphael Gallardo, head of macroeconomics at Rothschild Asset Management in Paris. The gap between Italian and Spanish yields widened to 68 basis points at 9:30 a.m. in Madrid from 65 points yesterday. Spain “would be in better company and would suffer less stigma if it was to ask for a rescue at the same time as Italy,”

        Debt crisis: Spanish GDP falling at 'significant pace' - "The available data for the third quarter of the year suggest output continued to fall at a significant pace, in an environment in which financial stress remained at very high levels." the Bank said in its monthly report.  Spain's borrowing costs edged back past 6pc on Wednesday as investors sought safer havens. The yield on benchmark ten-year government bonds rose 26 basis points to 6.01pc, the biggest increase since August 31, while the IBEX 35 in Madrid slid 3pc to 7,926.20.  The eurozone's fourth largest economy tumbled into recession in the last quarter of 2011, less than two years after emerging from the previous crisis.  The economy posted a 0.4pc contraction in the three months to June, following declines of 0.3pc in the previous two quarters. Official forecasts that the economy will contract by 1.5pc this year, and 0.5pc in 2013 are considered optimistic by many analysts.  Standard & Poor's said on Tuesday that it now expects Spain to contract by 1.4pc next year, compared with previous forecasts of -0.6pc. Spain's unemployment rate, at 24.6pc, is the highest in the industrialised world.

        Euro Zone Deal Over Bank Bailout in Doubt - Germany and its two closest allies in the euro zone appeared to step back on Tuesday from a key agreement that would free Spain and Ireland of billions in debt incurred through bailing out their banks. After meeting in Helsinki, the German, Dutch and Finnish finance ministers said in a statement that a plan to move bad bank assets off the books of struggling euro zone governments would not apply to “legacy assets.” This was an apparent reference to banks shored up and wound down under Ireland’s 64 billion euro ($82 billion) bank bailout program. Although officials did not clarify how the new principles would apply to current cases, the statement also called into question whether the scheme would apply to Spain’s most troubled banks, which are scheduled to be bailed out with euro zone money in November. “The thorny question is how to distribute existing losses before moving towards a system that entails greater burden sharing,” said Mujtaba Rahman, a Europe analyst at the Eurasia Group risk consultancy.

        Spanish Bonds Fall as Governments Say Bailouts Should Be Limited- Spain’s government bonds fell, with 10-year yields rising to more than 6 percent, after top-rated European countries said national authorities should bear the cost of earlier losses in their banking industry. Irish and Italian securities also declined as Germany, the Netherlands and Finland said yesterday the region’s bailout fund, the European Stability Mechanism, should assume only a limited burden in bank recapitalizations. Spanish notes dropped for a second day after Catalan President Artur Mas called for early elections yesterday in a bid to seek greater regional autonomy. German bunds advanced even as the nation attracted fewer bids than its target as it sold 10-year debt. “There’s an ongoing drip feed of negative news,” The ESM announcement “appears to cast some doubt as to whether Spain will be able to disburden itself of the liabilities it will assume via its banking bailout.”

        Spanish yields break above 6 percent on aid doubts - Spanish government bond yields broke above 6 percent on Wednesday after developments in Spain dampened expectations that Madrid will be able to ask for a bailout soon and secure central bank support for its debt. Protests in Madrid on Tuesday, days before the 2013 budget is due to be announced, together with economically important Catalonia's decision to hold early elections and comments by Prime Minister Mariano Rajoy combined to hurt sentiment towards debt issued by lower-rated sovereigns. The request for aid is a prerequisite for the European Central Bank to activate its bond-buying programme and the Spanish government's reluctance has kept borrowing costs range-bound in recent weeks, with traders reluctant to take yields too high on the possibility of intervention. The sell-off in Spanish bonds coincided with a broader deterioration of sentiment towards riskier assets. Appetite for safety drove the German Bund future more than one point higher even as an auction of ten-year German bonds was technically uncovered.

        Riot police clash with anti-austerity demonstrators in Madrid after thousands take to the streets to protest against cuts - Anti-austerity demonstrators clashed with riot police in Madrid last night. More than 1,000 officers blocked off access to the parliament building after protesters vowed to ‘occupy Congress’ in the heart of the Spanish capital. Police baton-charged the crowd and there were reports that protesters were being beaten by officers. Scroll down for video. Thousands of protesters, enraged by cutbacks and tax hikes, had taken to the streets. The demonstration drew protesters weary of nine straight months of painful measures imposed by Prime Minister Mariano Rajoy. Thousands of angry marchers yelled toward parliament, 250 yards away, “Get out!, Get out! They don’t represent us! Fire them!” “The only solution is that we should put everyone in Parliament out on the street so they know what it’s like,” said one of the protesters.

        Spaniards rage against austerity near Parliament - Spain's government was hit hard by the country's financial crisis on multiple fronts Tuesday as protestors enraged with austerity cutbacks and tax hikes clashed with police near Parliament, a separatist-minded region set elections seen as an independence referendum and the nation's high borrowing costs rose again More than 1,000 riot police blocked off access to the Parliament building in the heart of Madrid, forcing most protesters to crowd nearby avenues and shutting down traffic at the height of the evening rush hour. Police used batons to push back some protesters at the front of the march attended by an estimated 6,000 people as tempers flared, and some demonstrators broke down barricades and threw rocks and bottles toward authorities. Television images showed officers beating protesters in response, and an Associated Press television producer saw five people dragged away by police and two protesters bloodied. Spanish state TV said at least 28 were injured, including two officers, and that 22 people were detained. Independent Spanish media reported higher numbers that could not immediately be confirmed.

        Spain is in Trouble - As I talked about yesterday the outcomes of the failing policies enacted by European leaders in the face of the economic crisis boil down to a lose-lose struggle between international creditors and national citizens. This struggle is increasing political and social tensions across the Eurozone and is likely to continue to break open old wounds. There is no better example of this than Spain where, as I mentioned two weeks ago, regional tensions are rising. Yesterday an anti-austerity rally outside the Spanish parliament building in Madrid became violent with 60+ people injured and in the last 24 hours the president of Catalonia has called a snap election in an endeavour to forward his agenda for regional independence: Artur Mas, the president of Catalonia in northeastern Spain defied calls from Spain’s government for unity in the face of the deepening economic crisis and announced elections for November 25. The vote is widely seen as a de facto referendum on his demands for greater independence for the region after Prime Minister Mariano Rajoy last week rejected proposals for a new fiscal pact which would grant Catalonia greater taxing and spending powers. In the face of 25% unemployment and what the Bank of Spain called overnight a “significant decline” in the economic activity Mariano Rajoy’s party is expected to announce further economic reforms today, although at this stage the exact details are a little vague:

        Pain in Spain - The European authorities seem determined to drive the continent into a repeat of the Great Depression. The European Central Bank keeps playing a cute game designed more to impress the Germans than the financial markets or to provide real relief. Mario Draghi, ECB president, offers to buy unlimited amounts of the bonds of states that are being pummeled by speculators, but then undercuts his own offer by conditioning it on punishing austerity. In Spain, in the days after Draghi’s latest pronouncement, the rate on government bonds briefly fell, but is now rising again as markets realize that Draghi’s conditions make it impossible for any elected government to accept the offer. Meanwhile, unemployment is rising to record levels and Spain’s depression keeps feeding on itself. Draghi’s game reminds me of a battery-operated novelty toy I had when I was a kid. It was a mysterious box with a switch. When you turned on the switch, the lid opened, a mechanical hand came out of the box, and turned off the switch. It was the opposite of a perpetual-motion machine: a perpetual stall machine. Draghi and Angela Merkel must have one of these machines.

        Portugal at flashpoint as austerity lights fires in mild-mannered populace -Sitting in a café in the northern industrial belt of Lisbon, she shrugs. "If there was some sort of hope you may see a decent future … the problem is they are not showing it to us." Her father, a retired lorry driver, says the evidence is on the streets. Out here – far from the capital's pretty, cobbled centre, which still attracts tourists – shops are closed up for good, or open only sporadically. Marina has been out of work for three years. In 2009, the insurance company she worked for said it would not renew her contract "because of the crisis", one month before she gave birth to her second child. "It was like taking the carpet from under my feet." The family now gets by on €600 a month, their diet supplemented by carrots, onions and fruit from her father's allotment. She is not the only one to have reached her limit. Two weeks ago, hundreds of thousands marched in the streets of Lisbon and other cities across the country, in the biggest protest since the end of the dictatorship in 1974. The demonstration forced the prime minister into an embarrassing U-turn over social security reform – one of the first times a government tied into austerity as part of a bailout programme responded so decisively to popular revolt.

        Greek Strike Sees Violence as Police Use Tear Gas by Parliament - Police fired tear gas near the Greek Parliament after protesters threw fire-bombs as thousands of people joined a strike opposing wage cuts and austerity that Prime Minister Antonis Samaras said are vital to keep the euro. Demonstrators streamed into the central Syntagma Square in Athens, opposite the Parliament House, shouting slogans such as “struggle, clash, overturn: history gets written by those who disobey.” Police spokesman Takis Papapetropoulos estimated the crowd at 35,000 people. Schools, hospitals, ferries and government services shut down in the first walkout since February. Shops will close from 3 p.m. today to let staff take part in demonstrations. Public transport is operating from 9 a.m. to 9 p.m. to allow protesters to attend rallies in Athens city center. A three-hour walkout by air traffic controllers will disrupt flights around the country. “The strike marks the beginning of what is likely to be a tough time for Samaras as demonstrations and industrial action heighten in the weeks ahead,”

        Greek Strike Sees Violence as Police Use Tear Gas by Parliament - Police fired tear gas near the Greek Parliament after protesters threw fire-bombs as thousands of people joined a strike opposing wage cuts and austerity that Prime Minister Antonis Samaras said are vital to keep the euro. Demonstrators streamed into the central Syntagma Square in Athens, opposite the Parliament House, shouting slogans such as “struggle, clash, overturn: history gets written by those who disobey.” Police spokesman Takis Papapetropoulos estimated the crowd at 35,000 people.  Schools, hospitals, ferries and government services shut down in the first walkout since February. Shops will close from 3 p.m. today to let staff take part in demonstrations. Public transport is operating from 9 a.m. to 9 p.m. to allow protesters to attend rallies in Athens city center. A three-hour walkout by air traffic controllers will disrupt flights around the country.  Athens, the capital, has been wracked with demonstrations by groups ranging from police officers to parents of three or more children in the past week as Finance Minister Yannis Stournaras remained locked in talks with officials from the European Union, the IMF and the European Central Bank. Hooded youths throwing fire-bombs at police were met with tear gas today, forcing some of the marchers to scatter. Teams of riot police guarded the Finance Ministry and surrounding streets.

        Greek protest turns violent as tens of thousands march - Police clashed with protesters hurling petrol bombs and bottles in central Athens Wednesday after an anti-government rally called as part of a general strike in Greece turned violent. Riot police used tear gas and pepper spray against several hundred demonstrators after the violence broke out near the country's parliament. Protesters also set fire to trees in the National Gardens and used hammers to smash paving stones and marble panels to use as missiles against the riot police. About 50,000 people joined the union-organized march in central Athens on Wednesday, held during a general strike against new austerity measures planned in the crisis-hit country. The action, the first large-scale walk-out since the country's coalition government was formed in June, closed schools and disrupted flights and most services.

        Greece nears boiling point in face of deeper austerity measures — As Greece enters a pivotal week in its economic crisis, tensions between the Greek government and the country's international lenders have reached a boiling point. The government is resisting a push by the International Monetary Fund to impose additional austerity measures that Greek leaders fear could destabilize the shaky coalition government. Although those talks are expected to resume later this week, they have been suspended since an angry exchange last week between the Greek finance minister and the IMF's top negotiator for Greece. The impasse has elevated tensions here as Greece braces for a nationwide general strike planned on Wednesday that threatens to bring public services to a halt. The Greek people are increasingly angry over the prospect that public salaries and pensions will be cut again in a last-ditch bid to secure a new loan installment of 31.5 billion euros, or $40.7 billion, from Greece's creditors. The Greek prime minister, Antonis Samaras, plans to address the nation this week to bolster support for the austerity package. He has already publicly warned his center-right party, New Democracy, that he will oust lawmakers of the party failing to back the package once it comes up for a vote, probably in early October.

        Greek Strike Marks First Test for Samaras’s Coalition -Police fired tear gas near the Greek Parliament after protesters threw fire-bombs as thousands of people joined a strike opposing wage cuts and austerity that Prime Minister Antonis Samaras said are vital to keep the euro. Demonstrators streamed into the central Syntagma Square in Athens, opposite the Parliament House, shouting slogans such as “struggle, clash, overturn: history gets written by those who disobey.” Police spokesman Takis Papapetropoulos estimated the crowd at 35,000 people.  “The strike marks the beginning of what is likely to be a tough time for Samaras as demonstrations and industrial action heighten in the weeks ahead,” said Wolfango Piccoli, an economist at Eurasia Group in London. “Samaras should be mainly concerned about how much time he has left to tackle all these interrelated challenges.” The shutdowns, called to protest the cuts to benefits, wages and pensions that will form the bulk of an 11.5 billion- euro ($14.8 billion) austerity package, comes as speculation swirls anew about Greece’s finances. International Monetary FundManaging Director Christine Lagarde said on Sept. 24 that the financing gap won’t be solved by the savings because a weak economy and delayed asset-sales worsened Greece’s finances.

        Europe gets that crisis feeling again - Angry street protests in Spain against fiscal austerity, strikes in Greece, political tension between northern and southern Europe over shoring up the continent’s banks; the eurozone crisis returned to haunt financial markets on Wednesday after a summer lull. Spain’s 10-year yields, which move inversely to prices, broke above the 6 per cent level for the first time in almost a month. The cost of insuring against a Spanish default through credit derivatives rose to a three-week high of 401 basis points, according to Markit. That meant it cost €401,000 annually to insure €10m of Spanish bonds against default for five years. The sell-off demonstrated one thing clearly. The eurozone has failed to break out of the “crisis, complacency, return-of-crisis” merry-go-round that has characterised the past three years. “We seem to go through this cycle time and time again,” notes Alan Wilde, head of fixed income at Baring Asset Management.  A pledge by Mario Draghi, European Central Bank president, at the end of July to do “whatever it takes” to preserve the euro triggered an impressive summer rally in Spanish and Italian bonds and equities. But that has now gone into reverse. The FTSE Eurofirst 300 share index ended 1.7 per cent lower, with Spanish and Italian stock markets seeing declines of 3.9 per cent and 3.3 per cent.

        Euro Update: The Perils of Pointless Pain - Paul Krugman -The basic story of the euro crisis remains the same: it’s essentially a balance of payments crisis, misinterpreted as a fiscal crisis, and the key question is whether internal devaluation is really workable. OK: the roots of the euro crisis lie not in government profligacy but in huge capital flows from the core (mainly Germany) to the periphery during the good years. These capital flows fueled a peripheral boom, and sharply rising wages and prices in the GIPSI countries relative to Germany: Then the music stopped.The combination of deeply depressed peripheral economies (which meant surging budget deficits) and fears of a euro crackup turned this into an attack on peripheral-government bonds. But the root remains the balance of payments/cost problem. And any resolution must involve getting costs and prices back in line.This is the context in which you have to see Mario Draghi’s actions. Twice now — first with the LTRO last fall, then with the plan to buy sovereign debt, he has stepped in to limit runaway bond yields, short-circuiting a possible financial “death spiral” of falling bond prices, collapsing banks, and high-speed capital flight. Here are bond yields (monthly averages, with the most recent data standing in for September):  Where does austerity fit in to this story? Mostly it doesn’t. Shaving an extra couple of points off the structural deficit will make very little difference to long-run solvency, nor will it do much to accelerate the pace of internal devaluation. It will, however, depress employment even further and inflict a lot of direct suffering too through cuts in social programs.

        How Capital Went Into the GIPSIs - Krugman - A correspondent asks a good question: when I say that lots of money flowed into Spain and other peripheral economies during the bubble years, what kind of capital flow are we talking about? In brief, you should think of it as largely taking the form of bank-to-bank lending. E.g., German Landesbanken buying covered bonds issued by Spanish cajas, with the cajas in turn using the money to finance real estate purchases. Other forms of cross-border investment, like direct investment by corporations, were a fairly minor feature. That’s also why the flip side of those capital flows was a sharp rise in Spanish private-sector debt. I’d like to post a good chart, but I haven’t found a clean presentation of the data.  But the basic story seems clear. And by the way, this makes it quite clear that to the extent that you want to talk about irresponsible behavior, it was really a collaborative, trans-European project. German bankers knew what the Spanish banks were doing, and in fact took on quite a bit of the risk directly by accepting real estate as collateral.

        Spain’s crisis flares again as AAA club scuppers bank rescue deal  - Spain's debt crisis has returned with a vengeance after Germany, Holland and Finland reneged on a crucial summit deal and scuppered hopes of direct eurozone help for Spanish banks. Yields on 10-year Spanish bonds punched back above the danger line of 6pc and spreads over German Bunds reached 450 basis points, intensifying pressure on Madrid as it continues to resist a sovereign bail-out. The alliance of hardline creditors said the European Stability Mechanism (ESM) – or bail-out fund – could not be used to cover “legacy assets” from past banking crises, even after the eurozone’s banking supervisor starts work next year. This prevents the ESM from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June. The burden will fall entirely on the Spanish state. The Spanish newspaper Expansion said the AAA trio had “dynamited” the EU accord. The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday. Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised. The European Commission appeared shocked by the German-led volte-face, saying the original summit deal was “quite clear”. All EMU leaders signed a pledge to break the “vicious cycle” between banks and states. The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain.

        Spanish banks need over 50 billion euros to clean up balance sheets - The independent audit carried out by consultant Oliver Wyman estimates the Spanish banking sector needs additional capital of 53.745 billion euros to shore up balance sheets because of its exposure to the ailing real estate sector if the consolidation currently taking place among lenders is taken into account, the Bank of Spain said Friday. The central bank says that without taking into account merger and acquisition processes that are under way and deferred taxes, the figure amounts to 59.3 billion euros, very close to the initial estimate in June by Oliver Wyman of 60 billion euros. The government has been granted a loan of up to 100 billion euros from its European partners to bail out the sector. The administration is hopeful that some of the banks that need more capital will be able to raise funds privately, reducing the final amount required to 40 billion euros. The consultant carried out stress tests on the country’s 14 main lenders that account for 90 percent of the Spanish banking sector’s assets under different adverse scenarios.

        Capital shortages, Basel III, and credit crunches - THE European Banking Authority (EBA) released its second report monitoring compliance with Basel III regulations on September 27. The big finding is that the aggregate European banking sector needs about 338 billion euros of additional equity capital to comply with the rules. While firms have several more years to adjust their balance sheets and raise funds, this seems like a tall order, especially given what has happened to bank share pricesBank apologists argue that the combination of depressed equity valuations and regulatory capital shortages will lead to asset sales and a credit crunch. After all, if you need to achieve a ratio of equity to assets and are incapable of increasing the numerator, you can always lower the denominator. But European bank debt costs are also very high, which suggests that financial intermediaries would be retrenching even without the new rules: The real problem is that these firms made too many bad bets during the 2000s, including U.S. subprime mortgages, Irish and Spanish real estate, and Greek sovereign debt. Lacking a sufficiently large equity cushion, many are now effectively insolvent if their assets were marked to market. They continue to operate thanks to a mix of regulatory forbearance (not enforcing the existing rules) and ECB liquidity operations. This explains the steep discounts imposed by the market. It also means that the banks are not in a position to extend new credit no matter what the regulators do.

        Counterparties: The never-ending story of the Euro crisis -- The pattern of Euro crisis flare-ups is getting very familiar:

        • Step 1: News of political turmoil in ailing European Country X raises questions about their dedication to austerity. This is often be accompanied by missing deficit targets, riots and/or burgeoning political change.
        • Step 2: The bond market freaks out, which raises borrowing costs for European Country X. Wonks, politicians and pundits quickly chime in.
        • Step 3: The can is thoroughly kicked down the road. Concessions are made for Country X, negotiations are held, quotes are given/intentions leaked.
        • Step 4: After some period of time, the crisis appears again. Spain, like Greece, is is back in the Euro crisis spotlight today, as the country is gripped by massive protests over budget cutbacks and rising borrowing costs. Greece, of course, has been through this process before; Spain has now proceeded to step 2. The world has been waiting for Spanish prime minister Mariano Rajoy to formally request an EU bailout. But, Rajoy appears to be in no particular hurry, even as analysts doubt Spain will meet its own deficit targets. Ahead of the release of Spain’s 2013 budget tomorrow, the FT cites uncertainty over whether Rajoy will impose harsh enough cuts to win the EU’s approval, using methods like freezing pensions and raising the retirement age. (Then there’s the minor worry that an entire region of Spain wants to secede). (See step 1)

        Stage Three for the Euro Crisis? - The first two components of the euro crisis – a banking crisis that resulted from excessive leverage in both the public and private sectors, followed by a sharp fall in confidence in eurozone governments – have been addressed successfully, or at least partly so. But that leaves the third, longest-term, and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s north and south. The process by which southern Europe became uncompetitive in the first place was driven by market price signals – by the incentives those signals created for entrepreneurs, and by how entrepreneurs’ individually rational responses played out in macroeconomic terms. Northern Europeans with money to invest were willing to lend on extraordinarily easy terms to those in the south who wanted to spend, and ample pre-2007 spending made employers there willing to raise wages rapidly. As a result, southern Europe adopted an economic configuration in which its wage, price, and productivity levels made sense only so long as it spent €13 for every €12 that it earned, with northern Europe financing the missing euro. Northern Europe, meanwhile, adopted wage and productivity levels that made sense only as long as it spent less than one euro for every euro that it earned.

        Europe’s Austerity Madness, by Paul Krugman - Just a few days ago, the conventional wisdom was that Europe finally had things under control. The European Central Bank, by promising to buy the bonds of troubled governments if necessary, had soothed markets. All that debtor nations had to do ... was agree to more and deeper austerity — the condition for central bank loans — and all would be well.  But the purveyors of conventional wisdom forgot that people were involved. Suddenly, Spain and Greece are being racked by strikes and huge demonstrations. The public in these countries is, in effect, saying that it has reached its limit: With unemployment at Great Depression levels, austerity has already gone too far. And this means that there may not be a deal after all.  Basically, Spain is suffering the hangover from a huge housing bubble... Spain didn’t get into trouble because its government was profligate.Spain actually had a budget surplus and low debt. Large deficits emerged when the economy tanked...  Spain doesn’t need more austerity, savage cuts to essential public services, to aid to the needy, and so on actually hurt the country’s prospects for successful adjustment. Why, then, are there demands for ever more pain?   Talk to German officials and they will portray the euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning. Worse yet, this is also what many German voters believe, largely because it’s what politicians have told them.  And it’s long past time to put an end to this cruel nonsense.

        The German Economy and the European Crisis -  Yves Smith - Even though most economic commentators focus on the deterioration of the periphery and are nervously taking note of how that is coming to impair the core countries, the strength of the German economy is nevertheless seldom questioned outside the Eurozone. This Real News Network segment focuses on a generally-overlooked issue: wage suppression and the increasingly precarious conditions that German workers face, and how that plays into Eurozone politics. In July, we provided readers with an important report by Josh Rosner on the state of the German economy. From its executive summary:  Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:

            • • Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;
            • • Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield,
            • • Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;

        Euro Can Bear Fewer Members as Czech Leader Calls Greeks Victims - The exit of one or more member states from the euro won’t destroy the monetary union or the project of European integration, Czech President Vaclav Klaus said. And a Greek departure from the currency would be a “victory” for that country, which has been a victim of the monetary system, Klaus said yesterday. The Czech Republic, which pledged to adopt the euro as part of its agreement to join the European Union in 2004, is under no official deadline to do so and the question of joining the common currency is a “non-issue” in the country, said Klaus, whose second term as president expires in March. “I don’t think the euro as a currency disappears,” Klaus, 71, said. “The issue is whether all of the 17 countries and potentially a few others should be or will be in this system or not.”

        French unemployment tops 3 million as economy struggles  The number of unemployed people in France has topped 3 million for the first time since 1999, according to latest labour ministry figures. Speaking before the data was officially announced, Labour Minister Michel Sapin said: "It's bad. It's clearly bad." However, the government blamed the previous regime of Nicolas Sarkozy. [Hollande] pledged to revive the eurozone's second largest economy, tackle rising unemployment, and reverse industrial decline. However his approval rating is now at its lowest since he assumed power, pollsters say. Since May, major companies have announced thousands of layoffs, including carmaker Peugeot, drugmaker Sanofi, airline Air France-KLM, and retailer Carrefour.  Mathieu Plane, economist at the French Economic Observatory, told the Reuters news agency: "There are almost one million more unemployed people compared with early 2008 and we can't yet say that we have reached the peak." The French economy has posted three consecutive quarters of zero growth, and forward-looking data suggests it may continue to flatline.

        France''s public debt rises above 90 pct of GDP - France's burgeoning public debt rose by 43.2 billion Euros (USD 55.5 billion) in the second quarter of 2012 and now stands at 1.83 trillion Euros (USD 2.35 trillion) or 91 percent of the country's Gross Domestic Product (GDP), according to data published Friday. The National Statistics Institute (INSEE) said that the latest figure could be revised but it nonetheless illustrates the difficulty the new Socialist government faces in bringing down debt at a time it needs to borrow to keep the economy on an even keel. With the economy stagnating and efforts underway to tackle deficits - with signs of some success there - borrowing seems inevitable, even if lenders accord extremely low rates to the French government in bond markets. The debt-to-GDP ratio has risen 1.7 percent from the first to second quarters this year and Prime Minister Jean-Marc Ayrault said as recently as Thursday evening that interest payments on this debt are the biggest budget item for his government, surpassing spending on health, education and defence. About 1.4 trillion Euros in the overall debt amount has been negotiated long-term and there is no immediate crisis, but the longer term trend is of concern given the high interest reimbursements overall. Under the temporarily-defunct rules of the Maastricht Treaty signed by European Union members in 1992, debt should not go above 60 percent of GDP, but the series of financial and economic crises since 2008 have given tacit latitude to countries in this area.

        France Piles €20 Billion in Tax Hikes on Businesses and Wealthy - It's now official. The top tax rate in France is now 75% for those who make over a million euros. Moreover, there is a new band of 45% for those who make over 150,000 euros. Don't forget existing the existing VAT on all purchases.  Europe is imploding and instead of fixing onerous work rules, France Hits Rich and Business to Slash Deficit. Socialist President Francois Hollande unveiled higher levies on business and a 75-percent tax for the super-rich on Friday in a 2013 budget aimed at showing France has the fiscal rigor to remain at the core of the euro zone.  Of the total 30 billion euros of savings, around 20 billion will come from tax increases on households and companies, with tax rises already approved this year to contribute some 4 billion euros to revenues in 2013. The freeze on spending will contribute around 10 billion euros.  To the dismay of business leaders who fear an exodus of top talent, the government confirmed a temporary 75 percent super-tax rate for earnings over one million euros and a new 45 percent band for revenues over 150,000 euros.

        Summary of tax rates in the Eurozone - Here is a good summary of key tax rates across the Eurozone as well as recent changes. As always it's a delicate balance between revenue and growth. In Spain (and Italy to some extent) tax increases have materially dampened economic activity.  Below are Goldman's observations on taxation in the Eurozone:Many countries implementing fiscal adjustment have increased their VAT rate. ... the three programme countries - Greece, Portugal, and Ireland - have the highest current VAT rate, at 23%. Italy raised its standard VAT by 1ppt to 21%, with another increase planned for next year. Spain also increased both its standard and reduced rates this month. This contrasts with France, which has not changed its VAT rate. Indeed, the newly elected parliament voted against a planned hike in VAT initiated by the previous government. The measure was intended to allow a reduction in French employers' contributions to the social security system. But the new government judged the measure ‘unfair’ for the French consumer. Finance minister Moscovici has moved away from any increase in VAT or CSG social taxes to cut the budget deficit, although they cannot be ruled out, in our view. ... Corporate tax rates have shown more stability. Since 2009, the corporate tax rate has changed in just two countries: Portugal has gradually raised it from 26.5% to 31.5%, while Greece has lowered its rate from 25% to 20%. Ireland in particular has a much lower rate than in the other countries.

        PIIGS Unemployment - (chart) Spain and Greece have continued to worsen, while nowhere on the periphery is improving yet.  There are very serious protests in at least Spain, Greece, and Portugal.  The European crisis remains very much unsolved.  The data run through July except for Greece where they only go through June.

        In Europe, it’s debt vs jobs - As the signs of social unrest continue to grow in the southern peripheries of Europe, highlighted again by the over night action in Spain, I thought it was timely to take a step back from the day-to-day and re-assess exactly what we are witnessing in the Eurozone from the longer macro-view. If you’ve been reading my near-daily pontifications about Europe for any length of time you should be aware that I consider the policy approach being taken in the Eurozone to be the makings of a real disaster. I have been accused by some of being anti-austerity but that isn’t my real issue with the policy at all. My major concerns has been that policy targets of internal devaluation and export driven recovery in the absence of debt forgiveness on a near-contintent wide scale will fail because:

        • a ) the initial outcome will be a rapid decline in industrial production and national incomes which mean existing debts will become unserviceable
        • b ) external surpluses require a counter-party external deficit
        • c ) structural adjustments require investment

        So basically, the three targeted outcomes for the existing policy a) service existing debts, b) lower government deficits c) become export competitive are incompatible because the expectation that falling internal demand will quickly be replaced export driven production is a form of utopian economic fantasy.

        Those silly Brits are concerned about inflation -The UK households are still pessimistic about their financial situation. But they are less pessimistic than they have been in the last 2.5 years according to Markit UK Household Finance Index (HFI). This is a positive development, given the UK's dreadfully slow economic recovery. But there is one negative development coming out of this survey however. It seems that in September the UK households became concerned about inflation. MarkIt: - The main negative development in September was a sharp increase in inflation perceptions, with the month-on-month acceleration the greatest since January 2011 (which followed a VAT rise). There was also a jump in inflation expectations, which reached their highest for four months. Inflation expectations? That's just silly. The BoE, the ECB, the BoJ, and now the Fed, all expanding their balance sheets in an unrestrained fashion shouldn't make the UK households concerned. And those pesky high food prices are only temporary. The central banks will rein in inflation just as soon as it becomes a problem.

        Predistribution – a bad idea whose time has come? - I foolishly promised a few people that I was going to write something about “Predistribution”, which would not normally have resulted in actually writing anything about it, except that Chris then wrote his piece and I felt I ought to enter into the lists on the somewhat more sceptical side. In as much as it isn’t just a bit of industrial policy combined with “all things bright and beautiful” (More education! More skills! But who will empty the bins in this hi-tech utopia[1] and how much will they be paid and why?), predistribution appears to be, as Chris says, an attempt to make all sorts of regulations and interventions in the economy do the work of a redistributive tax and benefit system. I don’t like this idea, basically for reasons to do with the fact that even after it all, I’m still an economist at heart. But the fact that I don’t like it doesn’t mean, in and of itself, that it might not be the best idea going in Britain today – after all, all the other politically live proposals might be worse. Read on, for a discussion of all these issues …

        Does economic growth make you happy? - The case against making increased GDP per capita the overriding policy objective is that it doesn’t deliver the increased happiness or welfare if promises. In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?”. The answer, he concluded, after correlating per capita incomes and self-reported happiness levels across a number of countries is probably “no”. In a refinement dating from 1995, Easterlin found no relationship between income and happiness above an average per capita income level of between $15,000 and $20,000. Other findings confirm Easterlin. Data from the UK show that from 1973 to 2009, there was a continuous rise in GDP per head, but no increase in reported life-satisfaction. What is more, some of the “happiest” countries are also the poorest. However, inequality within countries does matter for happiness: the rich in the UK are on the whole happier than the poor.

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