week ending Nov 24

Fed's Balance Sheet Edges Down in Latest Week - The Fed's asset holdings in the week ended Wednesday declined slightly to $2.873 trillion, from $2.879 trillion a week earlier, it said in a weekly report released Friday. The Fed's holdings of U.S. Treasury securities decreased to $1.65 trillion on Wednesday from $1.657 trillion a week earlier. The central bank's holdings of mortgage-backed securities rose to $900.58 billion from $889.02 billion a week ago. In September the Fed began buying $40 billion a month of additional mortgage-backed securities on an open-ended basis. Fed officials have said that they plan to continue buying bonds until the labor market improves significantly. Friday's report showed total borrowing from the Fed's discount lending window was $981 million Wednesday, down from $ 1.02 billion a week earlier. Commercial banks didn't borrow any money Wednesday, down from the $12 million they borrowed a week earlier. U.S. government securities held in custody on behalf of foreign official accounts edged up to $3.193 trillion, up from $3.192 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.837 trillion, up from $2.834 trillion in the previous week. Holdings of agency securities fell to $319.4 billion from the prior week's $322.62 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances - November 23, 2012

 Fed Stands on the Edge of 'Monetary Cliff' - The Federal Reserve's growing balance sheet isn't merely a concern because it contains a few more zeros than the sums now being haggled over in Washington. Getting it back to normal will provide unique challenges. The Fed's balance sheet has mushroomed to $2.88 trillion, from less than $900 billion in early 2008. After holding steady since mid-2011, it began growing again recently, after the Fed said it would begin buying $40 billion of mortgage bonds each month. That could be supplemented by another $45 billion of monthly Treasury purchases starting in January in place of the expiring "Operation Twist," which simply swapped short-term Treasurys for long-term ones. How big will the Fed's balance sheet get? The recent minutes of the Federal Open Market Committee suggest that an economic target such as unemployment going below 7% may be a prerequisite for throttling back the Fed's extraordinary stimulus efforts. By the Fed's own forecast, that might be in mid-2014, by which time it could be sitting on $4 trillion of assets if Treasury purchases resume. Others project monetary stimulus persisting well into 2015. The larger the balance sheet, the steeper short-term interest rates must be to soak up excess reserves. And the more sluggish the recovery, the more reluctant the Fed will be to stop buying, much less to sell. That creates the remote possibility of a different problem—that the market stops believing the Fed will ever make a clean exit. Stuck between depression and high inflation, the Fed may be forced to consider a drastic remedy: Call it the bonfire of the Treasurys.

Fed's Williams: Fed Not Near Limit on Bond Buying - The Federal Reserve isn't near a limit on how many Treasury or mortgage-backed securities it can purchase, Federal Reserve President John Williams said in an interview with The Wall Street Journal. Some Fed officials have been concerned that if the central bank buys too many bonds in these markets it could become such a big player that these markets become illiquid and stop functioning properly. Mr. Williams said the Fed isn't close to causing those kinds of problems. He said he wants to keep buying $85 billiong per month of long-term securities in 2013. He is in a camp of policy activists at the Fed who want the central bank to keep buying mortgage and Treasury bonds next year to push down long-term interest rates in hopes of boosting the economy.  The Fed next meets Dec. 11-12. It is widely expected to continue its $40 billion-per-month mortgage-bond-buying program. It must decide what to do about its Treasury purchase program, known as Operation Twist. Under the program, which expires at year-end, the Fed is buying $45 billion per month of long-term Treasurys.  Mr. Williams said he wanted to keep buying both classes of securities at the present pace. Stopping or scaling back, he said, would be "counterproductive" for the economy.  One complication for the Fed is that it is running out of short-term Treasury securities to sell to fund the long-term purchases. To keep buying them in 2013 it would likely need to fund the purchases by creating new bank reserves, thus expanding the amount of cash in the financial system and the overall size of its balance sheet. Below are excerpts from the interview:

Fed’s Lockhart Offers Support for Policy Thresholds - Federal Reserve Bank of Atlanta President Dennis Lockhart could support setting an employment level that would trigger central bank discussions about whether to move interest rates, he told reporters. Fed officials are mulling over changes to how they communicate to the public where they expect interest rates to be in the future. Federal Reserve Vice Chairman Janet Yellen said last week she supported an approach backed by some other policymakers in which the Fed would state how high inflation would have to rise or how low unemployment would have to fall before it would move rates, which have been near zero since late 2008.

Fed’s Lacker Is Skeptical of More Explicit Policy Thresholds - More explicitly stating what would prompt a change in monetary policy could risk a breakdown in the Federal Reserve‘s inflation fighting credibility, a veteran policy maker said Tuesday. “Crisp numerical thresholds may work well in the classroom models used to illustrate policy principles, but one or two economic statistics do not always capture the rich array of policy-relevant information about the state of the economy,” Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech given to a gathering of the Shadow Open Market Committee in New York. Placing “great weight” on a single indicator of labor market conditions like the unemployment rate “can easily lead you astray,” Mr. Lacker said. “It’s important to avoid spurious precision,” he said.

Bernanke: Cutting Interest Rate on Reserves to Zero Would Provide Little Stimulus - Cutting to zero the interest rate the Federal Reserve pays banks to park excess reserves on its books wouldn’t add much stimulus to the economy, Chairman Ben Bernanke said Tuesday.  Cutting this rate is “something we’ve considered, and continue to consider, and I don’t rule it out as an action in the future,” Mr. Bernanke said in response to a question at a gathering of the Economic Club of New York.  But as a new avenue of stimulus, Mr. Bernanke said it is unlikely that lowering this rate, which currently stands at 0.25%, to zero would do all that much.

Higher Rates Would Boost Growth, Paper Argues - The Federal Reserve believes aggressively easy monetary policy is the key to lowering unemployment. A new paper argues increasing rates may be the only thing that can get the economy moving again. The research, written by Columbia University‘s Stephanie Schmitt-Grohe and Martin Uribe and  released by the National Bureau for Economic Research, is an attempt to take stock of why the Fed’s super easy policy of recent years has at best delivered modest growth. Despite historic Fed action, unemployment, while off its peak, remains very high. Central bankers have long argued that as moribund as the current environment may be, a less easy path would have almost certainly resulted in even greater woe. They believe higher rates would depress whatever growth the economy managed to generate. That would leave a significant amount of slack in the economy, in turn generating inflationary pressures well under the 2% price rise level officials want to see.

A Simple Rule for Monetary Policy After 20 Years – John Taylor - It was 20 years ago today at a conference in Pittsburgh that I first presented what is now called the Taylor rule. Here’s the November 1992 Stanford working paper. I certainly didn’t predict in 1992 that the Fed and other central bankers would still be referring to the idea in 2012. Last week, for example, the Taylor rule served as a reference point for two very different talks by two members of the FOMC. In a speech in Berkeley, Vice Chair Janet Yellen talked about forward guidance. She argued that the federal funds rate should stay below the Taylor rule for a while longer and even below a “Modified Taylor rule” with a higher response to the output gap. She said that “times are by no means normal now, and the simple rules that perform well under ordinary circumstances just won’t perform well with persistently strong headwinds restraining recovery and with the federal funds rate constrained by the zero bound.” So that means more discretion, and, in my view, more drag on the economy. Philadelphia Fed President Charles Plosser also spoke about forward guidance last week, but he saw no reason not to use a policy rule under current circumstances, and he recommended setting interest rates according to one of those policy rules. That would bring a more rules-based policy, which experience over the past 30 years shows would be better for the economy, as I argued in a talk at the same conference where Charlie spoke.

Fed's actions so far have not impacted the monetary base - So far the Fed's securities purchases have not had a material impact on bank reserve balances. As discussed earlier (see post) reserve balances will be the key indicator to watch in order to assess the level of monetary expansion.  In fact the St. Louis Fed's measure of the US monetary base has not budged. We are yet to see the rate of expansion we had witnessed during QE2 (left side of the chart below).

"The Fed, Having Used Its Bazookas, Is Now Down To Firecrackers" - Austerity is coming our way, it's just a matter in what manner and by how much, and whether it becomes an orderly or disorderly process. The fiscal cliff is really a bit of a ruse in that respect, but the key here is that years of fiscal profligacy is coming to an end and the Fed at this point, having used its bazookas, is now down to firecrackers. The economic outlook as such is completely muddled and along with that the prospect for any turnaround in corporate earnings... Once we get past the Fiscal Cliff we will confront the inherent inability of the Democrats and the GOP to embark on any grand bargain to blaze the trail for true fiscal reforms. The U.S. has not had a rewrite of its tax code since 1986, which was the year Microsoft went public and a decade prior to Al Gore's invention of the Internet. The tax system is massively inefficient and leads to a gross misallocation of resources that impedes economic progress — rewarding conspicuous consumption at the expense of savings and investment. It is the lingering uncertainty over the road to meaningful fiscal reform that is really the mot cause of the angst — the fiscal cliff is really a side show because who doesn't know that we are going to have a Khrushchev moment?

The Future of Federal Reserve Policy - If the rumors are correct, Ben Bernanke is likely to leave his post when his term ends on January 31, 2014. Bernanke's likely successor is Janet Yellen, who is currently Vice-Chairman (official title - not sure why they haven't dropped the "man") of the Federal Reserve Board, and former President of the San Francisco Fed. How does Janet Yellen think? We can get some ideas about that from her most recent speech.Yellen's speech is primarily a defense of mainstream views on the FOMC, and I find some of those views troubling. Yellen argues that, in contrast to the bad old days of central bank secrecy, we are now in an age of Fed transparency. What the Fed says matters, and she is on board with policies that use Fed statements about its future policy actions - forward guidance - to influence the behavior of private economic agents. With regard to policy goals, Yellen favors a "balanced approach," whereby unemployment matters as much as inflation to Fed decision-makers. But what would that mean for policy decisions? This gives you an idea: Put differently, the purpose of providing greater clarity about the FOMC's longer-run inflation goal is to anchor inflation expectations more firmly. These more firmly anchored expectations in turn free the Committee's hand to more actively and effectively stabilize short-run fluctuations in economic activity. The Committee can act in this way because the FOMC can tolerate transitory deviations of inflation from its objective in order to more forcefully stabilize employment without needing to worry that the public will mistake these actions as the pursuit of a higher or lower long-run inflation objective.

Shifting expectations of the Fed's first rate hike - Discussions on the first tightening move by the Fed are taking place once again, as investors become a bit more optimistic about the US economy. The tightening action timing was brought into spotlight by the latest speech by Bernanke. The Chairman did not discuss further QE in 2013, which was somewhat unexpected (and disappointing to some).  WSJ: - Interest-rate futures nudged forward monetary tightening expectations Tuesday after remarks from the head of the Federal Reserve didn't offer hints of more Treasurys buying next year.  With a current Treasury buying and selling program due to end this year, bond investors have increasingly expected the Fed to announce it will continue the purchasing-end of those efforts in 2013. Though he maintained that the labor market is still far from healthy, Fed Chairman Ben Bernanke didn't tip his hand on future stimulus measures in a speech Tuesday, causing some disappointment. The thinly traded July 2015 Fed Funds futures contract reflected a 50% chance for a 0.25 percentage point policy-rate increase at the mid-2015 Fed meeting. That's up from 44% late Monday. As the Fed has stated, it doesn't intend to lift its policy rate from near-zero through at least mid-2015. The latest survey of primary dealers is showing only 41% expecting action by mid 2015, while the futures are now pointing to a 50% probability.

The Biggest Myth About the Fed - There many myths about Fed policy over the past few years, but the biggest one has to be that the Fed has been monetizing the national debt.  This simply is not true, but it does not stop some folks from making this claim.  For example, at last week's Cato Monetary Conference we find former Fed officials pounding the Fed-is-monetizing-the-debt drums Mr Warsh and Mr Poole made a sharp distinction between the “legitimate” efforts to fight the crisis and the subsequent easing actions that were, allegedly, unjustified by the economic fundamentals. According to them, the interventions of 2007-2009 were required to ensure that “the markets could clear”, as Mr Warsh put it, while the second round of easing was done to satisfy “political masters” by monetising the debt. In fact, Mr Warsh said that the Fed was being actively unhelpful by “crowding in” Congress’s supposedly poor policy choices. My first response is how can they can say this with historically-low U.S. treasury yields and muted inflation expectations? Surely, if the Fed were truly monetizing the debt we would be seeing a 1970s-repeat in the bond market, but we are not.  And this is happening, in part, because the Fed is not that big of a treasury purchaser.  Consider the figure below.  It shows the Fed's stock of treasuries by remaining maturity compared to the total stock of marketable treasuries as of the end of October, 2012.  Though the Fed's share of treasuries increases by remaining maturity, at most it hits 32% of the total for 10-30 years category. That means that after many months of Operation Twist that roughly 68% of long-term treasuries are still held outside the Fed. Overall, the Fed holds about 15% of marketable treasuries as seen in the "All Years" category.  It is hard to square these numbers with the allegations that the Fed is monetizing the debt.

The Real Reason the Fed Won't Touch Treasuries Again... and Is Tapped Out - Over the last week I’ve introduced the concept of collateral: the basis for the entire financial system. We’ve also addressed why any EU sovereign default would bring about an epic meltdown as EU bonds, particularly those of Spain and Italy are the collateral underlying hundreds of trillions of Euros worth of trades for EU banks. Again, the most important issue for the financial system is the search for high quality collateral. Indeed, it is the search for high grade collateral that has caused such periodic spikes in Treasuries, German Bunds, French sovereign bonds, and Japanese bonds (all of these have yielded 0% or even negative yields in the last five years). Big banks are moving away from PIIGS bonds into safer havens. This is also why the Fed isn’t touching Treasuries with QE3 and why it won’t touch short-term Treasuries with Operation Twist 2 (this program sees the Fed selling short-term Treasuries to buy long-term Treasuries): the Fed wants to keep as much good quality collateral in the system as possible (long-term Treasuries are problematic because institutions know it’s highly likely the US will default within the next 30 years). However, even this move is problematic because much of the Treasury market is locked up with governments both foreign and domestic.

More QE could distort rather than deliver - FT.com: When it comes to stimulus, can we have too much of a good thing? Given the depressed state of the western world, this might seem an odd question. There is, supposedly, plenty of spare capacity. This, after all, is the claim of those who demand more in the way of tax cuts, spending increases and quantitative easing. Yet the evidence suggests that perhaps we should not be quite so cavalier. Following a big drop in sterling in 2008 – in anticipation of quantitative easing – and the QE that subsequently followed, the UK found itself in a rather odd position. Growth surprised on the downside. Inflation, in contrast, surprised on the upside. If the amount of spare capacity – the so-called output gap – was so big, why was it that looser policy led not to higher levels of activity but, instead, to higher inflation? The UK is not the only one. Since 2003, US economic growth has come in persistently lower than consensus expectations while inflation – at least of the headline variety – has been higher. Those who predict stimulus will bring benefits but no costs may be suffering from an output gap “delusion”.

Why We Can't Take Inflation Hawks Seriously. by Tim Duy: Peter Coy at Bloomberg reports on the Shadow Open Market Committee. Not surprisingly, the SOMC fears an outbreak of inflation is just around the corner. Conservative economists are paying attention to the man behind the curtain and not liking what they see. At a meeting, the so-called Shadow Open Market Committee criticized Federal Reserve Chairman Ben Bernanke for an ultra-easy monetary policy that will, in their opinion, lead ultimately to dangerously higher inflation. It is almost comical that those who profess to be experts on monetary policy appear to almost never listen to what Federal Reserve officials say. Case in point: Marvin Goodfriend said the Federal Reserve “appears to be walking away” from a commitment it made last January to keep the inflation rate at or near 2 percent. In September, when it announced a new round of bond buying to bring down unemployment, the Fed made no mention of the 2 percent target, merely saying it would pursue its growth target “in a context of price stability.” Made no mention of the 2 percent target? Really? Let's go to the tape: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. I think they were pretty clear about the 2 percent target, which is the Fed's definition of price stability. If Goodfriend can't remember this, he should bookmark the appropriate page on the Board's website:

The Fed Will Keep Printing Until the Dollar Gets Weaker: Jim Rickards - When it was released a year ago this month, James Rickards' Currency Wars: The Making of the Next Global Crisis was widely hailed and quickly adopted as a guidebook of sorts for economic conservatives, Fed critics and gold bugs -- especially gold bugs given Rickards' support for a return to the gold standard. Since the book's release, the Federal Reserve has tripled-down on its policy of quantitative easing, effectively pledging to keep rates at zero indefinitely — or until the job market dramatically improves. Nevertheless, predictions of the dollar's demise have proven unwarranted, or certainly premature. Among other issues, concerns about Europe's debt crisis have driven global investors into the greenback, rather than fleeing from it as Rickards (among others) predicts. The dollar may strengthen further in the near-to-intermediate term if Israel's clash with Hamas proves to be a prelude to war with Iran next year, Rickards predicts.

Gold standard bullet points - Under a gold standard, the government promises to exchange its money for gold at a set price. For example, through much of the 19th and early 20th centuries, the U.S. Treasury stood ready to redeem its dollar notes for gold at a set exchange rate of 20.67 dollar bills per ounce of gold. In other words, the price of one dollar was fixed to be worth roughly 1/20 ounces of gold.  For a gold standard to combine the convenience of paper money with the security of gold, people must feel confident in the government's willingness and ability to redeem paper at the specified exchange rate. One way to build confidence in the ability to meet its commitment is to acquire a reserve of gold, promising to meet all redemptions from its reserve. Under such a policy, the supply of paper money can be expected to move roughly in proportion to the government's gold reserve. The practical significance of such a policy is to limit the government's ability to finance its expenditures by printing money. That is, because new money can only be issued against a corresponding purchase of gold, no money is left over for other purposes.In a world connected by international trade and finance, the price of gold is determined largely by world supply and demand conditions. While it may be easy to peg the U.S. dollar to gold, this in no way determines the domestic purchasing power of gold (inversely related to the domestic price-level). In the 19th Century, a world wide shortage of gold caused the U.S. price-level to fall, until major gold discoveries in Australia and the U.S. in the 1890s reversed the trend. Most of the world's supply of gold today is generated outside the U.S.

CBO: Slower Growth is Baked in the Cake…(But it shouldn’t outta stay that way) - In a new analysis of the slow growth of the US economy post the Great Recession, the Congressional Budget Office produced a result that might surprise you: the underlying growth rate of the economy has significantly slowed. If you have an historical perspective on this sort of thing, you know that in past recoveries we’ve grown a lot faster than we’ve been growing of late, and you may have concluded that we’re just stuck in a period where weak demand is preventing us from a faster bounce-back.  But the CBO says that’s the least of it—two-thirds of the difference between real GDP growth now and the average for past recoveries is due to “sluggish growth in potential GDP” meaning the underlying, or structural, growth rate of the economy consistent with potential employment growth, capital investment, and our productive capacity, extracting the effects of the business cycle, shocks, and recessions. That leaves one-third of the growth in recent years attributable to weak demand—that’s the cyclical part. To be clear, no one’s saying that we’ve closed the GDP or unemployment gaps that opened up over the recession.  In fact, the cumulative gap between actual GDP and CBO’s potential GDP since the recession began is almost $4 trillion, and the jobless rate is about three percentage points above full employment.  So we’ve still got a lot of slack to absorb. But as the first figure below shows, the year-over-year growth rate of real GDP is now tracking the potential growth rate, if not beating it a bit (the latter of which would explain the decline in unemployment over the past year).  The second figure shows quite clearly how potential GDP has slowed over the past decade, which begs the question, why and what does this mean?

Bernanke: "The Economic Recovery and Economic Policy" - From Fed Chairman Ben Bernanke: The Economic Recovery and Economic Policy. A few excerpts:  A third headwind to the recovery--and one that may intensify in force in coming quarters--is U.S. fiscal policy. Although fiscal policy at the federal level was quite expansionary during the recession and early in the recovery, as the recovery proceeded, the support provided for the economy by federal fiscal actions was increasingly offset by the adverse effects of tight budget conditions for state and local governments. In response to a large and sustained decline in their tax revenues, state and local governments have cut about 600,000 jobs on net since the third quarter of 2008 while reducing real expenditures for infrastructure projects by 20 percent. More recently, the situation has to some extent reversed: The drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. In contrast, the phasing-out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining GDP growth. Indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on GDP growth will outweigh the positive effects on growth from fiscal expansion at the state and local level. However, the overall effect of federal fiscal policy on the economy, both in the near term and in the longer run, remains quite uncertain and depends on how policymakers meet two daunting fiscal challenges--one by the start of the new year and the other no later than the spring. What are these looming challenges? First, the Congress and the Administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law--the so-called fiscal cliff. ...

Ben Bernanke pessimistic on potential GDP growth -  Ben Bernanke’s speech to the New York Economic Club on Tuesday ... seems to have accepted that the rate of growth in potential GDP has fallen sharply in recent years, which is not something he has emphasized in the past. If he persists with this more pessimistic interpretation of potential GDP growth, it would imply that there is a speed limit on the pace at which the economy can recover in the next few years, and that the Fed might need to tighten policy earlier than previously assumed.Ever since the financial crash, Mr Bernanke has consistently emphasised that US GDP is well below its potential... The implication has been that a shortage of demand is responsible for most of the output loss... Fix the shortage of demand as quickly as possible, and you minimize the total losses of output that will be incurred during the recession. This has resulted in the assumption that the Fed would remain extremely accommodating...What changed in this week’s speech? Importantly, the chairman did not change his view of the natural rate of unemployment. He continues to suggest that this is about 5.5 per cent to 6 per cent.. However, he now says that the potential growth of GDP is lower than the 2.5 per cent that was in place before the crisis. ...Mr Bernanke offered three reasons why the growth in potential GDP might have declined since 2009: a decline in fixed investment, reducing the capital stock; a mismatch between the skills of unemployed workers and the needs of the industries that are expanding; and tight credit conditions, along with higher risk aversion...

Gloomy Ben: Bernanke Says Great Recession Reduced U.S. Potential Growth Rate - Federal Reserve Chairman Ben Bernanke covers a lot of ground in a speech “The Economic Recovery and Economic Policy” he delivers Tuesday to the New York Economic Club — from the fiscal cliff (avoid it!) to Europe (policy makers are moving in right direction, follow through) to monetary policy (foot on the gas until Fed is “sure that the recovery is established.) One passage stands out because of its long-lived implications. Before the Great Recession of 2007-2009, the U.S. economy was capable of growing at 2.5% a year at full employment without generating inflation. That’s what economists call “the potential growth rate.” It’s basically the rate of growth in the labor force plus the rate of growth in output per hour, or productivity. To the Fed, it’s the speed limit for growth once the economy returns, as it expects will happen a few years from now, to full employment.

US Capital Spending Plummets To Recession Levels - Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty."

Q3 GDP: Here come the upward revisions - Next Thursday, the BEA will release the second estimate of Q3 GDP. The consensus is GDP will be revised up to 2.8% annualized growth, from the advance estimate of 2.0%.  This would be a pretty sharp upward revision. As an example, from Nomura analysts today:  "We believe real GDP growth will be revised significantly upward to an annualized pace of 3.0% versus the originally reported 2.0%, supported by greater inventory building and better net trade statistics than previously estimated." It is important to remember that the "advance" estimate is based on incomplete source data, or data subject to revisions. It appears the missing data (mostly for September) was better than expected, and that revisions have been favorable for GDP. 

Q4:2012 U.S. GDP Nowcast Update | 11.23.2012 - The post-Hurricane Sandy economic updates have taken a slight toll on the GDP outlook for the fourth quarter. Since our previous Q4:2012 nowcast on November 5, the average estimate for real GDP growth has slipped to 1.2% from 1.7% previously, based on five econometric methodologies (see list below). That compares with the actual 2.0% increase for Q3, according to the government’s announcement last month. (All percentage changes cited based on quarter-over-quarter data in annualized terms). Keep in mind that there’s still a long way to go until the release of the initial estimate of Q4 GDP on January 30, 2013 from the Bureau of Economic Analysis. Meantime, if the data favors us with a degree of post-hurricane bounce back, the nowcasts will rise in the weeks ahead. Turning back to the present, let's take a closer look at how The Capital Spectator’s current nowcasts stack up. Today's estimates of Q4 GDP growth rates are below those in recent survey forecasts from The Wall Street Journal (WSJ) and the Philadelphia Fed’s Survey of Professional Forecasters (SPF). Our average 1.2% nowcast is well under the 1.8% predictions published by WSJ and SPF earlier this month.

Bernanke Says Fiscal Cliff Fix May Bring ‘Very Good’ Year - Federal Reserve Chairman Ben S. Bernanke said an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery. .“There’s important potential for the economy to strengthen significantly if there’s a greater level of security and confidence about where we’re going,” he said today to the Economic Club of New York. “A plan for resolving the nation’s longer-term budgetary issues without harming the recovery could help make the new year a very good one for the American economy.” Bernanke, 58, identified the threat of $607 billion in automatic tax increases and spending cuts set to take effect next year as one of the impediments to a faster expansion as companies hold back on hiring and investment. The Fed chief repeated his warning a failure to reach an agreement could send the economy “toppling back into recession.” “We’re going to do what we can to support ongoing recovery in growth and jobs and create the demand for output, the demand for firms’ products that will remove that uncertainty about the future sustainability of the recovery,” Bernanke said.

Bernanke: Congress Must Raise Debt Limit To Prevent US From Defaulting - Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress and the Obama administration to strike a budget deal to avert tax increases and spending cuts that could trigger a recession next year. Without a deal, the measures known as the “fiscal cliff” will take effect in January. Bernanke also said Congress must raise the federal debt limit to prevent the government from defaulting on Treasurys debt. Failure to do so would impose heavy costs on the economy, he said. Bernanke said Congress also needs to reduce the federal debt over the long run to ensure economic growth and stability. Uncertainty about all these issues is likely holding back spending and investment and troubling investors, the Fed chairman said in a speech to the Economic Club of New York. Resolving the fiscal crisis would prevent a sudden and severe shock to the economy, help reduce unemployment and strengthen growth, he said. “A stronger economy will, in turn, reduce the deficit and contribute to achieving long-term fiscal sustainability,” Bernanke told the group. When asked during a question and answer session after the speech whether the Fed could soften the impact of the fiscal cliff, Bernanke was firm in his warning. “If the economy goes off the broad fiscal cliff, I don’t think the Fed has the tools to offset that,” Bernanke said.

Greenspan’s Switch to Debt Scaremongering -  Yves Smith - Stephanie Kelton provides two video clips to underscore the point that until quite recently, Greenspan made the point that MMT types do: that the US as a currency issuer, can always pay its debts (it might incur too much inflation, but with the economy having as much slack as it does, that’s far from a pressing worry). What I found striking was the clip of Paul Ryan pressing the man formerly known as Maestro when he was still the Fed chairman to agree that private retirement accounts would be more stable than a government sponsored program. That’s such a Big Lie I’m amazed anyone can peddle it with a straight face.And Greenspan reiterated his position that the US can always meet its obligations late last year: After 20 years of demonizing government debt and pushing for government in miniature, billionaire Pete Peterson and his allies have managed to get the public fixated on their message rather than their motives, and the Ryan con job serves as a useful reminder.  One long-standing effort has been to “privatize” Social Security, so that Wall Street could charge fees for managing the money. And even if they don’t get a mandated contributions regime, merely reducing Social Security payments will force people to save and invest more, and will similarly enrich the brokerage and investment management industries.

It's No Wonder People Don't Understand the "Public" Debt - A friend of mine posted this on Facebook: The problem is that even in standard economists’ usage, “public” is used in two different ways:
1. “Public” debt: debt owed by the government. In this usage, “public” means “government.” It’s sort of metaphorical: the government r us. As in “the public [versus the private] sector.” “Public debt” is often called “gross public debt.” That includes money “owed” to Social Security, etc.
Note that these debts to trust funds don’t in any way represent the liabilities of those programs; they’re pretty much arbitrary numbers, accidents of the moment, bookkeeping artifacts of a political/ideological construct, that are best ignored if true understanding is the goal. “Gross public debt” a.k.a. “public debt” — the $14.3 trillion shown in this graphic — is not an even vaguely useful figure in understanding the fiscal position of the country or the federal government.
2. “Debt held by the public” (not the public as described in this graphic): in this usage, the public is exactly not the government. It refers to debt held by non government — including other governments, and private holders in other countries. This is often called “net public debt.”
Watch: two (contradictory) usages of the same word, in one equation! Net public [government] debt = debt held by the public [non government]

Dear Lloyd Blankfein: The Actual Market Is Not Concerned About US Debt - With the “fiscal cliff” negotiations underway, Wall Street CEOs have decided now is the perfect time for some concern trolling. They are using the deficit issue as an excuse to push for cutting the social safety net while also reforming (i.e. lowering) the corporate tax rate. From their perspective the smaller the government, the less likely their taxes will be increased. The latest example is Goldman Sachs CEO Lloyd Blankfein calling for Social Security and Medicare spending to be “contained.” From CBS:[Scott] PELLEY: Social Security, Medicare, Medicaid?BLANKFEIN: You can look at history of these things, and Social Security wasn’t devised to be a system that supported you for a 30-year retirement after a 25-year career. … So there will be things that, you know, the retirement age has to be changed, maybe some of the benefits have to be affected, maybe some of the inflation adjustments have to be revised. But in general, entitlements have to be slowed down and contained. Looking at where Wall Street is actually putting its money instead of its mouth tells a very different story. Long term Treasury rates are historically low. Investors are practically paying the United States government to keep their money safe. The actual market seems completely unconcerned about our deficit at this point.Given that our economic growth rate is still extremely slow, our unemployment levels are high, poverty is increasing among many groups and our borrowing cost are so low this an idiotic time to focus on reducing the deficit and cutting benefits.

How to Balance the Budget - We shouldn't balance the budget most years. During recessions we almost have to run a deficit due to higher unemployment benefits and lower income taxes, plus we need someone to borrow the money that households and businesses save (otherwise the economy continues to shrink). In the boom times the government should run a surplus in order to pay down the debt from earlier recessions, slow down an overheating economy, and reduce competition with private investors for savings. We need to raise taxes back to something around what they were during the Clinton administration. Everyone hates to pay higher taxes, and the ones with the most money are invariably the ones going to be tapped, yet they have the most lobbying power. Here are tit-for-tat tax ideas that may be more palatable:

• Tax capital gains as ordinary income, but allow capital gains to be reduced by an inflation index and eliminate the AMT.
• Tax dividends as ordinary income, but allow corporations to deduct dividend payments to US taxpayers as a business expense.
• Tax inheritance over 10 times the median income as ordinary income, but eliminate the estate tax.
• Implement a carbon tax and eliminate alternative energy credits, but reduce top corporate tax rate to 28% and make R&D tax credits permanent.
• Eliminate most itemized personal deductions, but replace them with non-refundable tax credits @ 15% of expense (regardless of tax bracket).

U.S. Deficit Shrinking At Fastest Pace Since WWII, Before Fiscal Cliff - Believe it or not, the federal deficit has fallen faster over the past three years than it has in any such stretch since demobilization from World War II.  In fact, outside of that post-WWII era, the only time the deficit has fallen faster was when the economy relapsed in 1937, turning the Great Depression into a decade-long affair.  If U.S. history offers any guide, we are already testing the speed limits of a fiscal consolidation that doesn't risk backfiring. That's why the best way to address the fiscal cliff likely is to postpone it.  While long-term deficit reduction is important and deficits remain very large by historical standards, the reality is that the government already has its foot on the brakes.  In this sense, the "fiscal cliff" metaphor is especially poor. The government doesn't need to apply the brakes with more force to avoid disaster. Rather the "cliff" is an artificial one that has sprung up because the two parties are able to agree on so little. Hopefully, they will agree, as they did at the end of 2010, to embrace their disagreement for a bit longer. That seems a reasonably likely outcome of negotiations because the most likely alternative to a punt is a compromise (expiration of the Bush tax cuts for the top and the payroll tax cut, along with modest spending cuts) that could still push the economy into recession.

Can Borrowing From Abroad Avoid The Debt Ceiling? - No, but Allan Sloan in the Washington Post today thinks it can, or maybe it can. He proposes that Treasury borrow $200 billion in US government securities from China to use to continue to pay bills if we hit the ceiling, thereby supposedly overcoming dumb gridlocks that should not be happening and have led to such stupidities as the current "fiscal cliff." Sloan modestly calls this the "Sloan Strategem" (Ahem, rule against people naming things for themselves holds here, ahem!) But the answer is no. Treasury already has a bunch of delaying mechanisms that hold off the moment of truth for several weeks. We saw that in 2011, when we breezed past technical bankruptcy in June only to fact it in early Augusst when the fiscal cliff got cooked up. This device would only add some other arbitrary amount of time that would simply delay the moment of blackmail reckoning. The answer is to abolish the debt ceiling. People ranging from Bill Clinton through Bruce Bartlett to me and a lot of others have argued that the debt ceiling is unconstitutional on multiple grounds, quite aside from being bizarre and self-contradictory, actually incoherent. Obama should bite the bullet when it next comes really due, and declare it unconstitutional. I bet the markets will go up if he does so, although there will of course be a Supreme Court case on the matter. But better to fight that fight than to be set up to constantly have to deal with these blackmail threats that the House Tea Partiers have made it clear they will continue to impose repeatedly, no matter what comes out of the current fiscal cliff negotiations, which may well be things that voters most definitely did not vote for in this recent election and should not be put into place.

 China Persists In Refusing To Buy US Paper As Foreign LTM Purchases Of Treasurys Plunge To Three Year Lows - Yesterday's TIC data held two important pieces of data. The first is that in September, the month that Bernanke launched QEternity, for the first time in 2012, foreigners were net sellers of US Treasurys, dumping a total of $17.3 billion in paper, with foreign official institutions selling $919 million and non-official "Other Foreigners" offloading a whopping $18.3 billion: a record amount for this data series! The combined outflow was a dramatic reversal from the August $42.9 billion in purchases, from the $341.8 billion in foreign purchases Year To Date, was the first outflow of 2012, the first since the $13.1 billion sold in December 2011, and finally was the biggest sale in US paper since May 2009, or the month Greece had its first (of many) bailouts... The second, and even more troubling observation, is that in September China "added" another token $300 million in US paper, keeping its total holdings at $1155.5 billion, or a number that has remained unchanged since December 2011, when the Chinese selloff of US Treasurys concluded, which in turn took down its total from a high of $1315 billion in July 2011. So who has taken China's place as America's best oriental friend? Why that supreme basket case of all debt monetization, both foreign and domestic, Japan, which added another $8 billion in US Treasurys in September, bringing its total to $1131 billion, and just $25 billion shy of overtaking China as the biggest holder of US paper.

Contrary to Conventional Wisdom, Fiscal Cliff Is Good for the Dollar - The U.S. fiscal cliff, which the IMF says could cut growth by five percentage points and force a 15% plummet in stock prices, is a serious downer for the greenback, right? Wrong. Markets are turning conventional wisdom — that the bigger the risk politicians can’t reach a deal to avert the $700 billion in combined tax increases and budget cuts, the weaker the dollar value — on its head. “The risk of the U.S. falling off the fiscal cliff is dollar-positive,” says Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman. “That’s perverse, but the dollar’s still a haven,” he said.

The fiscal cliff and downgrading U.S. debt - Last Friday, the Peter G. Peterson Foundation held an event called “The Fiscal Cliff and Beyond.” The event both highlighted the results of the Solutions Initiative II (in which EPI took part) and convened discussion panels around the topic of the fiscal cliff as well as longer-term fiscal and economic issues. I found a few comments from two different panels interesting. In one panel, Erskine Bowles, who co-chaired the 2010 fiscal commission and now is a big supporter of the Fix the Debt campaign,  said that if we go over the fiscal cliff, U.S. credit will be downgraded by rating agencies—for example Moody’s or Fitch. On a different panel, Douglas Holtz-Eakin, former John McCain adviser, CBO head, and now director of the American Action Forum, said that if we go over the fiscal cliff (a terrible metaphor), financial market reactions will be severe. Since “financial market reaction” to fiscal developments is going to be a big theme in coming months, it’s worth thinking a little more carefully about statements like these.

Bernanke to Congress: Don’t flub the austerity crisis - Federal Reserve Chairman Ben Bernanke delivered a stark warning to lawmakers in a high-profile speech Tuesday, saying that the U.S. economy is at risk if they bungle negotiations over the looming austerity crisis. Bernanke’s remarks are notable less for their substance than for their tone and timing. In his most prominent public speech in almost three months, Bernanke made clear that he sees grave risks should the bargaining over the “fiscal cliff” — a phrase he coined — lead to either steep, immediate fiscal austerity or prolonged, confidence-rattling brinksmanship. And he suggested that 2013 could be a good year for the U.S. economy if lawmakers reach a deal quickly and amicably.

Stephanie Kelton appears on Majority Report - Stephanie appeared on Majority Report with Sam Seder on 11/20/2012. The image as well as this link will take you to the Majority Report web site. The podcast can be downloaded or listened to by clicking this link (opens in new window).

Why We Should Stop Obsessing About The Federal Budget Deficit, by Robert Reich: I wish President Obama and the Democrats would explain to the nation that the federal budget deficit isn’t the nation’s major economic problem and deficit reduction shouldn’t be our major goal. Our problem is lack of good jobs and sufficient growth, and our goal must be to revive both. ... Why don’t our politicians and media get this? Because an entire deficit-cutting political industry has grown up in recent years embracing the eat-your-spinach deficit hawk crowd in the Democratic Party, and culminating in the Simpson-Bowles Commission that President Obama created in order to appease the hawks but which only legitimized them further. Most of the media have bought into the narrative that our economic problems stem from an out-of-control budget deficit. They’re repeating this hokum even now, when we’re staring at a fiscal cliff that illustrates just how dangerous deficit reduction can be. In fact, if there was ever a time for America to borrow more in order to put our people back to work repairing our crumbling infrastructure and rebuilding our schools, it’s now.Public investments ... are justifiable as long as the return on those investments – a more educated and productive workforce, and a more efficient infrastructure, both generating more and better goods and services with fewer scarce resources – is higher than the cost of those investments. In fact, we’d be nuts not to make these investments under these circumstances.

Even a deal on the budget is bad for the American economy - Looking at the latest US data, business sentiment and capital spending have been eroding, and given the lagged impact of capex, that trend looks set to continue for the next few months. Against that, a number of consumer sentiment indicators remain upbeat and housing looks like it is in a firmly established uptrend, after a 5 year bear market.  In fact, the existing home inventory to sales ratio is as low as it ever gets, and that is with still very depressed sales. If sales pick up further, given low inventories and with new housing starts still below the replacement rate, home prices could lurch forward. That said, the markets have been fairly upbeat given the rising perception of a deal to avert the US falling off the ‘fiscal cliff’. But even a deal that drains, say, 1-1.5% of GDP will have negative consequences for the US economy.  Bear in mind that the U.S. still has a very high ratio of private debt to GDP. Therefore any such fiscal restriction as contemplated by the two parties may result in a significantly lower economic growth rate than the average 3% rate of the last five quarters (which is what the revised economic data of the past few quarters will eventually show). Of course, if there is no compromise, the impact could be calamitous.  The IMF projects as much as a 4% decline in GDP if there is a full fiscal cliff. In 1936-37 there was a fiscal cliff of almost 6% of GDP. It was followed by a 36% non annualized decline in industrial production in a mere eight months in late 1937/early 1938. More recently, all of the European countries fiscal restriction has had a more negative impact on GDP than had initially been forecast. So the range of likely outcomes ranges from slowdown to outright recession and the silly thing is that it is all so unnecessary.

America’s Fiscal Cliff Dwellers, by Simon Johnson - In early 2012, Federal Reserve Chairman Ben Bernanke used the term “fiscal cliff” to grab the attention of lawmakers and the broader public. Bernanke’s point was that Americans should worry about the combination of federal tax increases and spending cuts that are currently scheduled to begin at the end of this year.But there is not really any kind of “cliff” in the sense that if you stepped over the edge, you would fall fast, land on something hard, and not get up for a long time. In the modern US economy, the scheduled changes constitute more of a fiscal “slope” – meaning that the full effect of the tax increases would not be felt immediately (income withholding takes time to adjust), while the spending cuts would also be phased in (the government has some discretion regarding implementation). This slope offers President Barack Obama a real opportunity to restore the federal government’s revenue base to what it was in the mid-1990’s. The choice of words to describe America’s fiscal situation matters, given the hysteria that has been whipped up in recent months, primarily by people who want to make big cuts in the country’s two main entitlement programs, Social Security and Medicare. Their logic is that if we are about to rush off a cliff, we need to take extreme measures. And cutting pensions and health care for the elderly certainly qualifies as extreme – as well as completely inappropriate and unnecessary. If, instead, the US faces a fiscal slope, then people who refuse to consider raising taxes – namely, Republicans in the US Congress’s House of Representatives – have a very weak hand indeed

There Is No Fiscal Slope - Households and firms make economic decisions based on how they expect the future to unfold.  If households expect higher future incomes they are more likely to increase consumption spending today. Likewise, if firms expect higher future sales they are more likely to increase investment spending today. Economic expectations are therefore key to understanding current decisions about aggregate nominal spending. They are also why I think it is is a mistake to talk about a "fiscal slope" like this: But there is not really any kind of “cliff” in the sense that if you stepped over the edge, you would fall fast, land on something hard, and not get up for a long time. In the modern US economy, the scheduled changes constitute more of a fiscal “slope” – meaning that the full effect of the tax increases would not be felt immediately (income withholding takes time to adjust), while the spending cuts would also be phased in (the government has some discretion regarding implementation).  If households and firms expect the economy to get much worse because of this fiscal tightening--and they have no reason not to given all of media coverage--it does not matter that it is will unfold slowly over next year. They will change their behavior today in anticipation of this fiscal cliff and make it a self-fulfilling outcome.  So unless the Fed offsets the fiscal tightening, there is no fiscal slope.  It is a pipe dream.

Video: Fed’s Fisher Calls for Resolution of Fiscal Cliff - How much of a threat to the U.S. economy is the fiscal cliff? Dallas Federal Reserve President Richard Fisher joins us on The News Hub to discuss that question as well as his outlook for the U.S. economy.

Putting the fiscal cliff in perspective- graphs 
1. Major components of the "fiscal cliff":
2. Some major recent "unplanned" expenditures of the federal government:
The fiscal cliff numbers pale in comparison. Clearly this is not a fair comparison because these other expenses are spread over a number of years. Nevertheless it is important to keep the relative magnitude of these expenses in perspective.

Fiscal Madness, by Tim Duy: What is it about fiscal policy that brings out the crazy? Because it all seems pretty simple. Joe Weisenthal hits the nail on the head: The U.S. recovery has been remarkable on a comparative basis precisely for one reason: Because despite all of the rhetoric, the U.S. has completely avoided the austerity madness that's gripped much of the world.  Weisenthal points us to Ryan Avent and Josh Lehner, both showing in different ways the better post-recession outcomes experienced by the US compared to other economies. Paul Krugman extends the argument by comparing the divergent path of Eurozone and US unemployment rates. The key difference in policy - the US pursued a more aggressive fiscal policy and didn't pull back too quickly. I don't think you can emphasize this point enough. Which brings us to the fiscal cliff (or slope, which is more accurate and avoids creating the false impression that all is lost come January 1). The tax increases and spending cuts in place promise to repeat the mistakes of the UK and the Eurozone by pivoting too fast and too hard into the realm of fiscal austerity. A solution to the fiscal cliff means smoothing the path to fiscal consolidation (optimally, with no austerity in the near term, but I don't see that as an outcome). The proximate cause of Weisenthal's ire is former Federal Reserve Chairman Alan Greenspan, who says: All of the simple low hanging fruits have been picked and the presumption that we are going to resolve the big issue on spending by making a few little twitches here and there I think is a little naive. If we get out of this with a moderate recession, I would say that the price is very cheap. The presumption that we will solve this problem without paying I think is grossly inappropriate...I think the markets are getting very shaky. And they are getting shaky because I think fiscal policy is out of control. And I think the markets will crater if we run into any evidence that we cannot solve this problem.As Weisenthal notes, this is a completely backwards analysis. Let's make this clear: If you think fiscal policy is out of control, you should welcome the fiscal cliff.

Trigger Mechanisms To Avoid the Fiscal Cliff? You’re Kidding, Right? - Robert Reich has been writing a series on “the Grand Bargain” and the “fiscal cliff.” In this post, I’ll do a commentary on his “The President’s Opening Bid on a Grand Bargain (II): Put a Trigger Mechanism in the Legislation”, because I think it’s a good example of self-defeating progressivism or “loser liberalism”. Take your choice of epithet.Reich begins: the President should make crystal clear that America faces two big economic challenges ahead: getting the economy back on track, and getting the budget deficit under control. But the two require opposite strategies. We get the economy back on track by boosting demand through low taxes on the middle class and more government spending. We get the budget deficit under control by raising taxes and reducing government spending. So, the good “progressive” defines the problem pretty much the same way as the rest of the Washington mainstream does. And he just assumes everyone agrees on that, especially on the idea that the budget deficit is out of control and that we need to reduce deficits by raising taxes and reducing government spending. So he gives away half the game by agreeing on essentials with the deficit hawks. But why does he agree that the deficit has to be brought “under control,” implying that the deficit is a problem? Why are WE just expected to accept that? Why isn’t there an explanation? When are we going to make these “progressives” explain exactly why the deficit, debt, debt-to-GDP ratio is such a problem for them? After all, Robert Reich has been around long enough to know that the Government of the United States is a currency issuer and that no deficit it may incur is beyond its power just to make more money? So why do they think it’s a problem?

Since when do we congratulate ourselves just for not going over a cliff? - Washington is fixated with the so-called “fiscal cliff” of legislated spending reductions and expiring tax cuts scheduled for 2013, which are projected to induce a recession if they materialize. As my colleague Josh Bivens and I have repeatedly explained in a series of recent papers and blog posts, this “cliff” simply represents the macroeconomic reality that budget deficits closing too quickly—thus public debt accumulating too slowly—will, if left unaddressed deep into 2013, push the U.S. economy into an austerity-induced recession. Last week, we released a paper, Navigating the fiscal obstacle course, offering our policy recommendations for moderating the pace of deficit reduction and sustaining recovery by reshuffling various components of the fiscal obstacle course (cliff is a terrible metaphor as it implies a false dichotomy). Now it’s worth zooming out and placing this debate in its proper context: in a depression.

Is Wall Street Really This Clueless About The Fiscal Cliff? - The Dow Jones Industrials Average was in negative territory on Friday morning when congressional leaders emerged from their first fiscal cliff meeting at the White House. At that point the Dow was down 59 points. But based on the totally innocuous and meaningless statements from the leaders that the meeting had been "constructive," the Dow rallied significantly. Within an hour, the Dow rose by 104 points from its pre-statement low. It ended up almost 46 points for the day. Here's what ABC News reported was said by three of the congressional leaders who attended the meeting: "I believe that we can do this and avert the fiscal cliff that's in front of us today," said (House Speaker John) Boehner. (Senate Majority Leader Harry) Reid said he felt "very good" about the tenor of the talks. "We have a cornerstones of being able to work something out," he said. "We're both going to have to give up some of the things that we know are a problem." How is it possible that statements that said nothing, almost certainly were drafted before the meeting began, and were noteworthy only for their polite tone rather than any indication of any substantive progress made such a positive impression on investors and convinced people to buy rather than sell?

Top Nomura Economist Is Skeptical Of Fiscal Cliff Progress — And There’s Good Reason To Take Him Seriously - The market has been rallying since Friday afternoon, when politicians gave off noises that there was a nice thaw in the Fiscal Cliff negotiations. But not everyone is buying into the "easy deal" hype. Among them: top Nomura US economist Lewis Alexander. There are two reasons why you should listen to him, and maybe take him more seriously than the typical Wall Street economist. One is that he was just down in Washington talking to contacts. The other, and this is more importantly, is that he used to be part of Tim Geithner's Treasury Department, so it's safe to assume he's very well sourced (and prior to that he was at Citi). He identifies four key points where the two sides remain far apart:

Still no actual agreement on tax rates.
Still no sign that Democrats will give any ground on entitlements.
Still not clear that the Democrats and Republicans are close to a number on revenues.
Other spending cuts not agreed to.

Those might sound obvious, but he adds some more meat to his argument: At this point it does not appear that the two sides have exchanged specific proposals. Consequently, it is not clear whether these differences can be bridged.

Fiscal Cliff? Obama Urged Not To Panic - Republicans and deficit hawks are raising unnecessary alarm over the so-called "fiscal cliff" to pressure President Barack Obama into a "grand bargain" he shouldn't make, progressive economists and scholars said Tuesday at a symposium.  "My professional and personal message at this moment is: Don’t panic," said James Galbraith, a University of Texas economist who organized the event. "This is not a moment for high drama. This is a moment for no drama."Automatic tax hikes and spending cuts that Congress previously agreed to -- some of them only because they were so extreme, the idea was they would force the two parties to find a better alternative -- are due to take effect starting in the new year.The so-called bargain being discussed in Washington parlors would involve massive government spending cuts, including to social insurance programs, in return for modest tax increases.  Progressives are urging Obama to make a "mini deal" in the short term instead, and postpone serious bargaining until the massive tax hikes kick in and motivate Republicans to make concessions. They also want him to push for additional spending on infrastructure and other job-creating initiatives -- and leave safety net programs like Social Security out of the negotiations entirely.

Democrats want to go over the fiscal cliff first, bargain later - Some Democrats are pushing an unorthodox idea for coping with the "fiscal cliff": Let the government go over, temporarily at least, to give their party more bargaining leverage for changes later on. The idea has plenty of skeptics, and the White House regards it frostily. But it illustrates the wide range of early negotiating positions being staked out by Republicans and Democrats as lawmakers gathered Tuesday for their first postelection talks on how to avoid the looming package of steep tax hikes and program cuts. Just as brazen, in the eyes of many Democrats, is the GOP leaders' continued insistence on protectingtax cuts for the rich. President Barack Obama just won re-election, campaigning on a vow to end those breaks. Democrats and Republicans appear heading toward another round of brinkmanship that will test who blinks first on questions of major importance. It's a dance that has infuriated many Americans, shaken financial markets and drawn ridicule from foreign commentators.

Rough start for fiscal cliff talks -- The opening round of negotiations this week between White House and senior GOP congressional staffers left both sides pessimistic about their ability to reach a quick deal on averting the fiscal cliff, according to sources familiar with the talks. Hill Democrats say Republicans aren’t serious about crafting a deal that President Barack Obama can accept. The GOP’s opening offer, the sources said, would freeze the Bush-era tax rates, change the inflation calculator for entitlement programs, keep the estate tax at 2012 levels and authorize a major overhaul of the Tax Code — although they did not provide a revenue target. The behind-the-scenes clash in negotiations stands in contrast to the more conciliatory rhetoric both sides have used in public statements, casting doubt on the coming four weeks of talks before Christmas. In addition to wanting to keep the Bush tax rates, Republicans also want to postpone the sequester, or tens of billions of dollars in automatic spending cuts for the Pentagon and domestic programs set to kick in on Jan. 2.

Karl Rove on the so-called "fiscal cliff" - Linda Beale - In a video interview available from Dow Jones/Wall Street Journal, "Karl Rove Doubts a Fiscal Cliff Deal Will Get Done" (Nov. 20, 2012),  Karl Rove's pre-Thanksgiving news to the world is exactly what one would expect from one of the most successful GOP strategists.  He urges Repubicans to do everything possible to find "reasonable compromises without sacrificing principles", which means entitlement reform coupled with offsetting revenues without increasing tax rates. This is nothing new.   Rove doesn't want the GOP to accept any rate increases and he does want the GOP to play the obstructionist role to the hilt unless they get their longed-for undermining of the New Deal Social Security, Medicare, and Medicaid programs.  The flawed argument is the same as Romney's arrogant economic message in the presidential campaign--that increased revenues will come from economic growth gained from running the country's economy to support Big Business.  And the GOP insists that it will only happen if they can get the purported bad-guy Democrats to accede to the Republican policy demands of continued preferential taxation of the wealthy and corporate America, increased spending for the military, continued regulatory inattention to the financialization of the economy, combined with spending cuts to safety net programs. 

The U.S. Does Not Have a Spending Problem, We Have a Distribution Problem - In this season of fiscal silliness, many people are saying that we cannot afford our current entitlement programs. They shake their heads solemnly and say that Social Security and Medicare were well-intentioned ideas, but we simply do not have the money to pay for them and there is no escaping the need for "structural changes." Hogwash. Yes, federal government spending on Social Security and particularly Medicare is projected to grow, as a share of the economy, over the next several decades. That's because our population is aging and health care is becoming more expensive. As a result, spending on entitlement programs is growing faster than tax revenues. This creates the perceived need to cut spending, most notably in Paul Ryan's plan to convert Medicare into a voucher program--whose vouchers are designed not to keep up with actual health insurance costs. This kind of cost-cutting doesn't do Americans any good. Health care is something people need. If the government pays for less of it, then either seniors will pay for it directly, and we'll simply have shifted costs from taxpayers as a whole to the elderly--or seniors won't be able to afford it, and we'll have balanced our budget on their backs. More fundamentally, it's a mistake to fixate on the federal government's budget and ignore the aggregate budget of the American people. The federal government exists to serve the American people, not the other way around. The real question is whether we as a society can afford our current level of entitlement spending. The answer is obviously yes.

Rise Above, CNBC’s move into advocacy - Any time you see Wall Street CEOs and CNBC campaigning for what they call the common good, it’s worth raising an eyebrow or two. So it is with CNBC’s “Rise Above” crusade, which has blanketed its airwaves and adorned its lapels since the day after the election with pleas for a solution to the so-called “fiscal cliff.” You’ll note that CNBC has not Risen Above for the common good on issues like stimulating a depressed economy, ameliorating the housing catastrophe, or prosecuting its Wall Street sources/dinner partners for the subprime fiasco. But make no mistake: even if it had, it would have been stepping outside the boundaries of traditional American journalism practice into political advocacy. And that’s precisely what it’s doing here, at further cost to its credibility as a mainstream news organization instead of some HD version of Wall Street CCTV. The big question: Why is a news organization running what’s effectively a political campaign for Simpson-Bowles, complete with thirty-second spots and campaign buttons? Look, kids. You can get your very own Rise Above pin, wrapped in the flag, just like your favorite business-news personalities! Roger Ailes himself must blush at this kind of grandstanding, but I have a hard time believing the business class and CNBC would be so worked up over this austerity program if it weren’t for the major tax increases contained therein.

Stop Using Obama for America Against the People! - Obama for America, the campaign apparatus with the very large e-mailing list and great segmentation techniques that exploited Romney’s weaknesses to help the President to eke out (yes, I know the electoral vote involved no “eking out,” but the popular vote was something else again) his re-election victory, is now trying to mobilize people who voted for the President to work against their own interests by supporting his deficit/debt cutting activities. So, I couldn’t resist the following commentary on their mobilization e-mail.From the graphic:Right now, President Obama is working with leaders of both parties in Washington to reduce the deficit in a balanced way so we can lay the foundation for long-term middle-class job growth and prevent your taxes from going up.This is just one sentence. But it has more errors in it than a whole book written by some economists. First, it assumes that we should “reduce the deficit.” But: – It’s fiscally irresponsible to frame and follow a long – term deficit reduction plan (limited austerity) when, as now, both a trade deficit and an output gap between the economy’s potential and its actual results exist. Such a plan is one that must remove more net financial assets, specifically reserves, from the private sector than would otherwise be the case, every year the plan is pursued. Banks can compensate for these reserves by creating new ones when they make loans. But, loans create both assets and liabilities in equal measure and no new net financial assets.

More Affirmative Action for Deficit Hawks: USA Today Prints Column by Koch Institute Policy Analyst Who Is Way Over His Head -Arguments that would never appear in a serious media outlet based on their merits, fill the pages of newspapers and fill the airspace of leading television and radio news shows. In keeping with this spirit, USA Today gave us a column from Evan Feinberg, a policy analyst at the Charles Koch Institute. The main thesis of the column is that the United States government is like a subprime borrower who is about see interest rates rise and throw the country into bankruptcy. Here's the key paragraph: "Say by 2015 rates rise to 3.5 percent. Our projected debt of $20 trillion will cost Americans $700 billion in annual interest payments. At 5 percent — still a low number in historical terms — we'll pay $1 trillion. And if rates return to 1990 levels, we'll have to pay more than $1.5 trillion in interest before we can even begin paying down our actual debt." Wow, are we all really scared? There a couple of big problems with Feinberg's story. First, much of our debt is long-term debt. We issue bonds that have durations of 10 years, 15 years, and even 30 years. The interest rate we pay on these bonds is not affected by increases in market interest rates in future years. In fact, if we want to make the deficit hawk cultists happy, when interest rates rise we can even buy back these bonds back at sharp discounts, thereby reducing our debt burden. Second, much of the debt in his story is held by the Social Security, Medicare, and federal employee retirement trust funds. Higher interest payments on the bonds held by these funds is a burden to the general budget, but improves the finances of these trust funds.

Obama to Deploy Campaign Apparatus to Persuade Americans to Look Forward to More and Better Catfood - Yves Smith - This story from the Guardian is both sufficiently important and true to Obama’s form as to merit posting. Our Fearless Great Betrayer is about to repurpose his campaign sales machine to persuasion of the American public of the necessity of making do with less to appease the Bond Gods. The bizarre part, as many have noted, is the Bond Gods actually don’t seem to want the human sacrifice involved (old people dying faster) but their Wall Street soothsayers would have you believe otherwise.  On the one hand, propaganda generally works, so we sadly can expect Obama’s “grassroots” effort to have an impact. But the flip side is that Pete Peterson and the many deficit scaremongering allies he has recruited over the past two decades have failed to make much of a dent in the public’s overwhelming support for Social Security and Medicare, which are prime objects of the budget-cutting exercise. Even though the Team Obama has made much of its microsegmentation and messaging prowess, Romney had so many warts that it wasn’t hard to find something bad about him to play up to particular target audiences. By contrast, most Americans have a simple response to the notion of “reforming” these popular programs: cut military budgets and raise taxes on upper income groups.  The fact is that unless enough Senators decide to oppose Obama, the middle class is going to take a hit out of a budget deal. But it’s now clear that ordinary citizens will also be subjected to a full bore messaging campaign to persuade them that they should regard this counterproductive sacrifice as good for them.

Fitch: ‘Fiscal Cliff’ Would Stress Transportation Infrastructure -The so-called ‘fiscal cliff’ could trigger a second recession, a 2% decline in gross domestic product, and increased unemployment, all which would dramatically affect demand for U.S. transportation assets, according to a new report by Fitch Ratings. “Given the far-reaching effects of the fiscal cliff, it is not expected that Congress will allow these tax and spending cuts to take effect,” Michel McDermott, Fitch managing director and head of the U.S. transportation team. “But were it to occur, the effect on airports, roads, tunnels and bridges could be significant and could pressure ratings.”

A Public Service Reminder: Paul Ryan is a Con Man - Paul Krugman - The fact is that Ryan is and always was a fraud. His plan never added up; it was never, contrary to what people who should know better asserted, “scored” by the CBO. What he actually offered was a plan to hurt the poor and reward the rich, actually increasing the deficit along the way, plus magic asterisks that supposedly reduced the debt by means unspecified. His genius, if you can all it that, was in realizing that there was a role — as I said, that of Honest, Serious Conservative — that self-proclaimed centrists desperately wanted to see filled, so that they could demonstrate their bipartisanship by lavishing praise on the holder of that position. So Ryan did his best to impersonate a budget wonk. It wasn’t a very good impersonation — in fact, he’s pretty bad at budget math. But the “centrists” saw what they wanted to see. Ryan can’t be ignored, since his party does retain blocking power, and he chairs an important committee. But if he must be dealt with, it should be with no illusions.

Inequality and Budget Deficits: Why is Only the Latter an Emergency? - I just read two sweeping reports on the state of income inequality in the US (the second link focuses on state-level inequality) and other advanced economies.  Perhaps it’s because I’ve been so ensconced in fiscal cliff discussions, but I was struck by how much more alarmed policy makers are by the budget deficit than by the inequality situation.

• The first link above finds the indispensable inequality researchers Piketty and Saez reflecting on the long income inequality time series data they and others have developed for the advanced economies.  Their key findings are:
• –the decline in income concentration in the US over the great recession was due to cyclical capital losses, not a structural change in the underlying factors driving the trend.  This can be seen quite clearly by a) taking capital gains out of the income data, revealing a steady upward trend, or b) by noting the increase in inequality (share of income going to the top 10% of households) in 2010, a return to trend.
• –The fact that different countries hit by the same globalization and technology advances show different inequality trends suggests an important role for political economy—policies that affect the distribution of market incomes—in these outcomes.  In France and Germany, for example, the top 10% holds about 35% of national income; in the US, it’s about 50% (see figure below).
• –As I’ve suggested in various posts, the authors agree that higher inequality may be associated with the debt bubble and bust from which we’re still recovering, though they’re not sure as to what’s causation and what’s correlation (they take solace in the Minsky-esque conclusion that “modern financial are very fragile and can probably crash by themselves—even without rising inequality”).

Year-End Fiscal Debate Is Chance to Address Inequality - To judge by the newfound bipartisan chumminess exhibited last week, it seems suddenly possible that the president and Republican leaders will reach a deal before the end of the year to cut spending, raise taxes and prevent They may even achieve the long-sought Grand Bargain to trim $4 trillion from the budget deficit over the next decade, a surprisingly positive outcome to the long standoff between the White House and Congressional Republicans. But as our leaders begin to bargain, they may want to stop and reflect on what’s missing from their conversation. Consumed by the question of how big a government we can afford, they might want to give some thought to a more relevant consideration: How big a government do we need? To a large extent, our future well-being will depend on how the government responds, to what extent it cushions the blow for the most vulnerable and whether it helps workers adapt or leaves them to their own devices. Two related numbers capture the nature of our economic challenge: one is $3,837, which is how much the annual income of the typical middle-class family shrank from 2000 to 2010. The other is 17.42 percent, the slice of national income captured in 2010 by the richest 1 percent of the population. That is more than twice the share they reaped 30 years before.

The Next Chapters in the Republican War on Math: Tax Cuts and Austerity - While election outcomes lay bare whose hopes got in the way of their math, on a host of other issues, understanding math-denial requires more digging. There are two math fallacies affecting the current economic debate. First, Republicans continue to argue that tax cuts for the wealthy are key to growing the economy, despite solid evidence to the contrary. This argument is their primary objection to allowing President George W. Bush's tax cuts on the wealthy expire at the end of the year. The facts fly in the face of their argument. We know what happened in the 2000s after the Bush tax cuts: Despite the supposedly job-creating tax breaks, our economy experienced its worst record for growth in investment, employment, and incomes in half a century, an outcome devastating to our middle class. Yet Republican leaders are working to make sure that the math fits their version of reality, rather than actual reality. As the New York Times has reported, the Congressional Research Service, a non-partisan arm of Congress, was forced by Republican leaders in the Senate to withdraw an economic report showing "no correlation between top tax rates and economic growth."

Tax Talks Raise Bar for Richest Americans  - Ms. Zimmerman runs an accounting business and a cloud-based Internet service company with combined annual profit of $250,000 to $500,000 in recent years. Mr. Ellison made nearly $15 million in salary, bonuses and perks in 2011, even without the $62 million he received in stock options from Oracle. In the deficit reduction debate now consuming Washington, however, both Mr. Ellison and Ms. Zimmerman are grouped in the same, sprawling category: wealthy Americans targeted for tax increases. President Obama has focused efforts on raising revenue from the wealthiest 2 percent of taxpayers — individuals earning more than $200,000 a year and families with adjusted gross incomes above $250,000 — calling them “millionaires and billionaires who can afford to pay a little more.” Republicans have thus far resisted those efforts, countering that the high earners are job creators and that increasing their taxes would discourage hiring. But for all the broad brush rhetoric of political debate, the rate increases and limits on deductions now being discussed by the president and Congressional Republicans are calibrated to take the biggest bite out of the highest earners. They would lead to a smaller increase for those who earn less than $500,000 a year. The figures are all adjusted gross incomes, and since some deductions would be preserved, a household would probably have more than $250,000 in total income, perhaps $300,000, before it would fall into the wealthy definition used by the president.

Politics Complicates the Math in Ending Tax Breaks for Rich— Whether to raise revenue through increasing tax rates or cutting loopholes has become a central sticking point in the negotiations on a major debt deal. The White House has drawn one line in the sand: it argues that tax rates must go up on income above $250,000 a year, because reducing tax breaks for the affluent cannot on its own raise the $1.6 trillion in additional revenue it seeks. Congressional Republicans have drawn another line: they might accept higher revenue, but only through the reduction of tax breaks. But is it even possible to raise $1.6 trillion from wealthy households without changing tax rates? Experts say it is. But doing so might be politically infeasible and hugely unpopular, because it would involve wiping out nearly every deduction, credit and preferential rate those affluent households claim. “Getting $1.6 trillion on the individual side, only through rolling back tax expenditures?” said Donald Marron, the director of the Tax Policy Center, a Washington-based research group. “It’s a heavy lift.” Wiping out all tax expenditures — the official name for the deductions, credits and other loopholes addling the tax code — for the top 2 percent of earners would raise about $2 trillion over 10 years. (Tax expenditures for all households cost the government about $1 trillion a year, because middle-class and low-income families also benefit.)

Rich People Who Don't Understand Taxes Should Be Told So - Meet Kristina Collins ... a chiropractor in McLean, Va*., [who] said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples. Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998. "If we're really close and it's near the end-year, maybe we'll just close down for a while and go on vacation," she said. When President Obama says he's going to raise the top marginal tax rate, the key words there are "top" and "marginal." According to the president's plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He's only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn't go up by $12,000. It would go up by $50. A steak dinner, not a small car. Basically, Kristina Collins is making a miscalculation that's probably worth tens of thousands of dollars. No wonder she doesn't want to expand her company.

Let’s Talk Specifics on Itemized Deductions Limitations in Fiscal Cliff Negotiations - During the upcoming fiscal cliff negotiations, most of the attention is likely to be paid to two threshold questions: (1) whether or not Congress should agree to new tax revenue, period; and (2) what magnitude of spending cuts should be required for Congress to accept new revenue. Nearly as important, however, is how the revenue is to be collected. In this case, it is quite obvious that revenue should come from limitation on deductions rather than increases to marginal tax rates. However, there are key differences between the various approaches to limiting deductions. If revenue is necessary to avoid the fiscal cliff or achieve sizeable debt reduction, Congress should ensure that deductions are limited in the way that creates the fewest distortions. It is generally agreed that existing deductions would be only limited for “the rich,” whatever income threshold is used to define that category of households. Yet, if current deductions are eliminated in a manner similar to existing income phase-outs for tax preferences, the results would be large increases in marginal tax rates. The economic literature is quite clear that increases in marginal tax rates cause households to reduce their supply of investment and labor and result in a smaller economy, with most of the adjustment borne by second earners who scale back work or drop out of the labor force entirely. These economic effects do not recede simply because the marginal rate increase arises due to the phase-out of subsidies rather than an increase in statutory rates. Indeed, as Greg Mankiw writes, the Affordable Care Act amounts to one of the largest marginal tax increases in history precisely because each additional dollar earned between 100% and 400% of the poverty line leads to a proportional reduction in insurance coverage subsidies.

Republicans’ Leverage Against Tax Hikes for the Rich = There are at least three ways the standoff over the “fiscal cliff” -- the automatic spending cuts and tax increases set to start in January -- could play out. The first scenario is a Republican surrender. The tax cuts enacted under President George W. Bush expire at the end of the year. Republicans want to extend all of them, while Democrats say only the ones that directly benefit the middle class should continue. After the start of the year, Democrats will propose re-enacting the middle-class tax cuts and Republicans will agree.. They will agree, on this theory, in order to avoid the second scenario: Republicans insist on extending tax cuts for everyone, the parties deadlock, and taxes stay high for everyone. Many liberals think that Republicans would get the blame for that result -- and that Republicans know it and will therefore try to avoid it. Republicans may, however, find this scenario more bearable than Democrats think. They may decide that even if middle-class taxes go up, they will be able to say that they tried to prevent it, and it was only Democrats’ insistence on higher taxes for the rich that got in the way. . Republicans will also be able to point to a long list of news stories quoting Democrats to the effect that going over the cliff, and raising taxes on the middle class, would be fine because it would help them get their way. Republicans may thus have some leverage after all. House Speaker John Boehner certainly seems to think they do. He has said he is willing to let the federal government raise more revenue from rich people by scaling back tax breaks. He is holding out for two conditions: He doesn’t want tax rates to go up, and he wants to reduce the growth of spending on Social Security and Medicare.

The Heritage Foundation Said The Bush Tax Cuts Would Pay Off The National Debt By 2010: Did you hear the one about the Heritage Foundation predicting the Bush tax cuts paying off the national debt? It happened, in 2001. A link from Travis Thornton Tweeted by Reason magazine editor Matt Welch has prompted us to revisit their idea. A decade ago, the nation's debt stood at $3.1 trillion. According to Foundation analysts D. Mark Wilson and William W. Beach, the cuts would achieve the following results (among others): "Significantly increase economic growth" by 0.2 percentage points per year through 2010. "Substantially increase family income" by $4,544 through 2010. "Increase family savings" to $1,017 by 2010. And in a manner left unexplained, the above phenomena will wipe out the debt: The Bush plan would decrease federal debt to the lowest possible level at which it could be redeemed--$818 billion in FY 2011 (see Chart 4).25 From FY 2001 to FY 2011, federal debt as a percentage of GDP would decline from 30.5 percent to just 4.7 percent under the plan

Grover Norquist, Author of Antitax Pledge, Faces Big Test - Next to the oath of office, it has been perhaps the most important commitment that Republicans in Congress can make. It is called simply “the Pledge,” and its enforcer is such a fixture in the party that he is known simply by his first name, Grover. Signing it means a promise never, ever to vote for a tax increase. But the pledge and its creator, Grover Norquist, a 56-year-old conservative lobbyist, have never before faced a test as they do now. The federal deficit stands at $1 trillion. The social safety net continues to grow — and, in the case of Medicare and Social Security, remains hugely popular. And unless the two parties can agree on a fiscal plan before Jan. 1, hundreds of billions of dollars of tax increases will go into effect automatically, meaning that Congress does not even need to act for taxes to rise. The combination means that Mr. Norquist, whose long record of success is a rarity in Washington, finds himself in a tricky spot. Some top Republicans, including Speaker John A. Boehner, are saying they now agree with Democrats that the government must collect more tax revenue. Others have gone so far as to break with Mr. Norquist publicly. By Mr. Norquist’s count, 219 House members — enough for a majority — and 39 senators have committed to the pledge. But some of those members who signed on, many of them years ago, have started to back away, apparently leaving him several votes shy of the majority he would need to block any tax increase.

What Happens if Congress Extends Tax Cuts for Those Making $500,000? - What would happen if Congress extends the 2001-2010 tax cuts for couples making $500,000 or $1 million-a-year instead of $250,000 or less, as President Obama proposed? According to a new analysis by the Tax Policy Center, Obama could agree to such a deal without adding much more to the deficit than a Senate bill that extends for a year most of the 2001-2010 tax cuts for those making $250,000.TPC figures that preserving the tax cuts for those making between $200,000 and $500,000 for just one year (2013) would cost Treasury an additional $7 billion over a decade (of course, nearly all of it would come in that first year). Raising the threshold to $1 million would reduce revenues by an extra $14 billion, relative to that Senate bill. If the Senate measure included a one-year extension of the Alternative Minimum Tax patch, raising the threshold to $500,000 would lose just a bit more. The total added cost:  $7.3 billion.The reality is only about 760,000 households (out of 157 million) make between $500,000 and $1 million. Fewer than 5 million make between $250,000 and $500,000. Even though each of these individual households makes a lot of money and pays a lot of tax, letting them keep their tax cuts of the last decade for one more year isn’t that big a deal. Keep in mind that the basic Senate bill would slash tax revenues by about $250 billion over 10 years. Adding the AMT fix for 2013 only would reduce revenues by an additional $96 billion for a total cost of about $350 billion. Thus, raising the thresholds to $500,000 or $1 million would further reduce tax revenues.Still, a number of key congressional Democrats have tossed out the idea of changing the definition of “high income.” So far, the White House has expressed little public interest but the idea remains on the table.

Screw the Rich to Protect Super-Rich Campaign Contributors? - This item raised my eyebrows when I saw it. Joshua Tucker at The Monkey Cage points out that the Republicans are proposing we do exactly that. The idea (NYT):…tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula. This to avoid the inevitably apocalyptic increase of the top marginal tax rate by 4.6%, from 35% to 39.6%. As Tucker points out, this proposal increases the taxes for everybody making >$400K by the same amount – whether their income is $500K or $50 million. Holding up my thumb and squinting, I’m thinking the extra taxes for those folks would be $50-100K. This would be a massive percentage increase for $400K earners, but a drop in the bucket even for $4-million earners, much less the $40-million crowd. Avoiding that 4.6% top marginal tax rate increase saves a $20-million earner almost a $1 million a year. As Tucker also points out, this is a stupendous gift to those who have the means to really give back to elected officials — the donors who can make or break a campaign by signing a single check. But I’m sure the Republicans haven’t considered that. They’re just trying to do What’s Best for America.

Marginal Rates and Economic Growth: They Go Up Together - With Republicans frantically clinging to discredited ideology and digging in their heels on raising top marginal tax rates, I thought it would be worth revisiting a post from a couple of years ago, showing some excellent long-term evidence that higher marginal tax rates are not associated with slower growth. Quite the contrary, in fact. Here you go: Mike Kimel once again does yeoman’s duty to compare the two: Tax Rates v. Real GDP Growth Rates, a Scatter Plot | Angry Bear. In this post commenter Kaleberg adds a very cool scatterplot. Each dot is a year (t), compared to another year one to four years later (t+1, t+2, etc.).Bottom axis is the top marginal tax rate in the starting year. Left axis is annual GDP growth over the ensuing one to four years.

Ten Numbers The Rich Would Like Fudged - The numbers reveal the deadening effects of inequality in our country, and confirm that tax avoidance, rather than a lack of middle-class initiative, is the cause.
1. Only THREE PERCENT of the very rich are entrepreneurs.
2. Only FOUR OUT OF 150 countries have more wealth inequality than us.
3. An amount equal to ONE-HALF the GDP is held untaxed overseas by rich Americans.
4. Corporations stopped paying HALF OF THEIR TAXES after the recession.
5. Just TEN Americans made a total of FIFTY BILLION DOLLARS in one year, enough to pay the salaries of over a million nurses or teachers or emergency responders.
6. Tax deductions for the rich could pay off 100 PERCENT of the deficit.
7. The average single black or Hispanic woman has about $100 IN NET WORTH.
8. Elderly and disabled food stamp recipients get $4.30 A DAY FOR FOOD.
9. Young adults have lost TWO-THIRDS OF THEIR NET WORTH since 1984.
10. The American public paid about FOUR TRILLION DOLLARS to bail out the banks.

Hating The Rich - Western culture is presently defined by many things; one of which being an instilled sense of extreme jaundice toward wealth. Before the twentieth century and the ascendance of the all-intrusive state, sumptuous living was typically seen as something to aspire to. No doubt Karl Marx would beam with pleasure in seeing how the contemporary bourgeoisie is regarded with hateful suspicion. His plan of crippling class warfare is slowly taking hold. This isn’t for the reasons Marx envisioned however. The so-called “people” have been indoctrinated to see wealth as something to take by government force. A great deal of this can be attributed to the government granting of privilege to the well-connected. As long as the state exists, there will be a class of people who use political means to acquire vast swaths of riches. Coercive egalitarianism based on ill feelings of Schadenfreud is a cancer. There is no conceivable benefit in everyone being equal. There is only one moral social system and that is free, unadulterated capitalism which gives everyone the chance to improve their own standing. Anything less represents the triumph of the idiotic masses over good sense.

Inequality is Killing Capitalism -But one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver. After all, banks are bound to lend on adequate collateral; and, in the run-up to the crisis, rising house prices provided it. The supply of credit, in other words, resulted from the demand for credit. This puts the question of the origins of the crisis in a somewhat different light. It was not so much predatory lenders as it was imprudent, or deluded, borrowers, who bear the blame. So the question arises: Why did people want to borrow so much? Why did the ratio of household debt to income4 soar to unprecedented heights in the pre-recession days? Let us agree that people are greedy, and that they always want more than they can afford. Why, then, did this “greed” manifest itself so manically? To answer that, we must look at what was happening to the distribution of income. The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal. Median incomes have been stagnant or even falling for the last 30 years, even as per capita GDP has grown. This means that the rich have been creaming off a giant share of productivity growth. And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt. In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies. And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt.

To Reduce Inequality, Tax Wealth, Not Income - WHETHER you’re in the 99 percent, the 47 percent or the 1 percent, inequality in America may threaten your future. Often decried for moral or social reasons, inequality imperils the economy, too; the International Monetary Fund recently warned that high income inequality could damage a country’s long-term growth. But the real menace for our long-term prosperity is not income inequality — it’s wealth inequality, which distorts access to economic opportunities. Wealth inequality has worsened for two decades and is now at an extreme level. Replacing the income, estate and gift taxes with a progressive wealth tax would do much more to reduce it than any other tax plan being considered in Washington. When economists try to measure inequality, they typically focus on income, because the data are most readily accessible. But income is not always a good gauge of economic power.Trends in the distribution of wealth can look very different from trends in incomes, because wealth is a measure of accumulated assets, not a flow over time. High earners add much more to their wealth every year than low earners. Over time, wealth inequality rises even as income inequality stays the same, and wealth inequality eventually becomes much more severe.

The US Senate wonders about tax policy for the American Dream: Do parents act in the best interests of their children? -  How should programs intended to support children in low-income families be designed if parents don’t always act in the best interests of their children? This question, among others, was posed to me in response to my July 10th testimony to the Senate Committee on Finance hearing on “Helping Young People Achieve the American Dream.”  You can review all of the questions on my November 11th post. In one way or another they address the fundamental drivers of the extent to which children grow up to be adults having the same socio-economic status as their parents. Family background matters for life chances because of three related forces: inequalities originating in the labour market, the capacity of families to invest in the skills and aptitudes of their children, and the degree to which public policy levels the playing field.Senator Baucus asks: The tax code has a number of provisions aimed at enhancing mobility. I mentioned a few in my opening statement, such as the Earned Income Tax Credit. Most of our programs to help mobility are targeted towards parents. Does it make sense to provide tax benefits to low-income families, which are claimed by parents, in order to increase opportunities for children? Or should we limit such help to in-kind benefits that can only be claimed by children? How can we make sure that programs intended to create opportunity are benefitting children?

Taxes: Why tinkering beats wholesale overhaul - The fiscal debate which is just beginning in Washington is the political equivalent of trench warfare: the two sides have strongly-held positions, and the confrontations are going to be held on a thousand different fronts. In the end, there will be some tax-code changes here, some spending cuts there — but the baseline is the status quo, and the further that a plan deviates from the status quo, the less likely it is to get adopted. Fiscal policy, in other words, is like healthcare policy: it’s path-dependent. There are lots of things that in an ideal world virtually everybody would like to see the end of; the mortgage-interest tax deduction is only the most obvious. But you can’t get there from here. What’s more, it’s incredibly difficult to get anything brand-new into the mix. I would love to see a carbon tax, and a financial-transactions tax, and a wealth tax — all of them are more attractive than an income tax, and some combination of them would be much better. But the point is that we’re not starting from scratch, which means that according to the rules of politics, we basically have to go to work only with the tools we have.

Taxation: US offshore crackdown brings planning worries - One of the most important and draconian pieces of tax legislation to come out of the US in generations continues to cause anxiety and uncertainty among the world’s biggest financial services groups. A final draft of the Foreign Account Tax Compliance Act – or Fatca – billed as the first time a country will impose an overtly extraterritorial tax regime, was due out last month but is now not expected until next month and probably later. Capco, the financial services consultancy, says the scope of Fatca is not yet fully defined and “keeps evolving”. “Until the regulations are out, we have nothing set in stone to work with,” the head of one of the world’s biggest fund managers says. Fatca was drafted after the revelation in 2009 that UBS, the Swiss bank, had been helping thousands of US citizens avoid tax. UBS was forced to pay $780m and disclose information on some 5,000 account holders in settlement. In 2010 the US government announced Fatca. The goal was to force non-US financial institutions – banks, fund managers, trusts, fiduciaries, custodians and depositaries – to provide it with data on US citizens with assets outside the US. Under the original terms, all these institutions would have to identify and review the accounts of any US client on their books and report in the next three years. Accountants estimate the scheme as originally devised could raise up to $8bn in tax revenues by the next decade. But it could also cost institutions more than $100m to set up the systems needed for compliance.

Occupy Wall Street’s Debt Jubilee: A Gimmick with Tax Risk - Yves Smith - It’s not exactly pleasant being a nay-sayer about a popular Occupy Wall Street initiative launched by a working group called Strike Debt, that of buying consumer debt at a discount and forgiving it, particularly when the movement generally is demonstrating its effectiveness and relevance. Recent accomplishments include Occupy Sandy proving more competent at disaster relief than either the Red Cross or FEMA, and Strike Debt publishing , the Debt Resistors’ Operations Manual. If you stand far enough away, the Strike Debt debt cancellation initiative, called Rolling Jubilee, looks like a simple and clever way to beat banks at their own game. So it’s not surprising that it has attracted a roster of celebrity supporters. But like most things in finance, the devil lies in the details, and the Rolling Jubilee plan, on closer inspection, is wanting. It suffers from three flaws: it enriches the participants in a seedy backwater and may wind up leading banks to try to foist clearly unenforceable debt onto the new chump buyer, OWS. Second, the OWS effort is likely to be trivial relative to the scale of the problem, thus diverting energy and attention from broader scale remedies. Third, tax risks in the plan mean it could wind up doing far more harm than good. The first two problems seem obvious, yet have been ignored by many. Debt collection is a shakedown operation. And I’m puzzled at the lack of instinctive revulsion to a plan that perpetuates and enriches the participants in abusive practices.  The effect of Occupy Wall Street entering as a buyer if they operate on any scale (which remains to be seen) would be to increase the price of this junk debt. Given that banks like Chase have been found to knowingly sell clearly invalid debt to debt collectors, the presence of another bidder in the market is almost certain to raise the price of debt sent to collection. And it has the potential to increase gaming via banks selling more debt that they know is invalid but would take work for a third party to ascertain that (such as debt discharged in bankruptcy).

Yes, Virginia, the IRS Does Not Treat the Connected Like the Rest of Us (REMIC Edition) - Yves Smith - We’ve written at some length about the failure of the IRS to go after what look like slam-dunk violations of the rules governing the tax treatment of mortgage-backed securities. Apparently the noise has been made about the failure to pursue REMIC violations, the latest by two law professors in a journal article, has roused the IRS from its official somnolence (we posted on the piece when it was made public). I happened to be vastly amused by the pointedness of article by Bradley T. Borden and David J. Reiss. Its synopsis: Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business. The IRS supposedly started a review of REMICs in April of last year, but the comments we got on its views were in 2010, long before the “review.” That suggests this is merely an official ass-covering exercise a formality. It must be about to come to fruition, since an article in Dealbook by Victor Fleischer (aha, another tax prof to take issue with the Borden/Reiss position!), which looks awfully consistent with the IRS position, was published today (hat tip AKS). The article makes no bones about its position: “Why a Tax Crackdown Is Not Needed on Mortgage-Backed Securities.” Gee, if necessity is the standard, the IRS doesn’t need my late fee while I miss a filing deadline. Can I get a free pass too? This piece is priceless.

The monumental folly of rent-seeking - FT.com: The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people. Both are routes to personal enrichment and the tension between them has been a dominant theme of economic history. Whenever the balance shifts too far in favour of appropriation over creation, we see entrepreneurial talent diverted to unproductive activity, an accelerating cycle in which political power and economic power reinforce each other – until others become envious of the proceeds of appropriation, and the resentment of the oppressed undermines the legitimacy of the regime. Political and economic instability are an inevitable consequence. In modern India, rent-seeking takes the form of endemic corruption and the crony capitalism that describes too-close relationships between big business and the state. Western economies are afflicted with their own versions of crony capitalism. Instinctive corporatism is characteristic of many European states. The US demonstrates an unhealthy affinity between politicians and leaders of finance and business, facilitated by lobbyists and lubricated with campaign finance. . The primary locus of modern rent-seeking is the overblown financial sector, where burgeoning trade in existing assets has overwhelmed the creation of new wealth, attracting scarce talent from elsewhere and creating instability. One needs only a little imagination to see parallels with the court of Shah Jahan.

Parking Basel: A Case Study of How Banks Stymie Regulatory Reform - Back in September 2010, Tim Geithner gave this testimony to the House Financial Services Committee, about the newly-agreed Basel III capital requirements: Last week the Federal Reserve, the OCC, and the FDIC reached agreement with their principal foreign counterparts to substantially increase the levels of capital that major banks will be required to hold.   As a result of this agreement, banks will have to hold substantially more capital.  The new standards are designed to ensure that major banks hold enough capital to withstand losses as large as what we saw in the depths of this recession and still have the ability to operate without turning to the taxpayer for extraordinary help.This agreement will make our financial system more stable and more resilient. By forcing financial institutions to hold more capital, we will both constrain excessive risk-taking and strengthen banks’ abilities to absorb losses.  By moving quickly to recapitalize our financial system, we have been in a strong position to insist on tough standards abroad.Well, that’s all looking pretty empty now: Federal banking regulators on Friday took a step back from efforts to meet the international standards and capital rules promoted by the international Basel Committee on Banking Supervision (Basel III), delaying new rules that were set to begin at the start of the year. No alternative timeline was suggested.

US banks in rush to plug capital shortfall - FT.com: US banks are racing to fill a little-noticed capital shortfall by issuing billions of dollars of preferred shares, taking advantage of low interest rates and investors’ need for yield. After four years shoring up their balance sheets, most large US banks are closing in on a tougher target to hold more common equity as a buffer to absorb losses at times of crisis.  By 2019, banks will have to hold common equity equivalent to 7 per cent of their so-called risk-weighted assets. These are an estimate of the value of assets adjusted to a bank’s real-world exposure to potential losses. On top of this requirement, the largest banks are facing an equity surcharge as part of the Basel III accord agreed by international regulators. By this measure, most US banks are doing well. Bank of America recently surpassed the new common equity quota years ahead of schedule. Shares in BofA are up 70 per cent this year, partly because investors are reassured about the bank’s capital levels. However, the Basel III agreement has other capital targets that have attracted less attention. Banks have to hold an additional 1.5 percentage points of “tier one” capital, which is not restricted to common equity and can contain other instruments such as preferred shares. Preferred shares pay a fixed dividend but do not have voting rights.

The Bigger They Are, The Harder They Fall on the Rest of Us - I was pleasantly surprised to hear Federal Reserve Bank of New York President William Dudley say in a recent speech that solving the too big to fail problem may require breaking up big banks. He is in favor of trying the resolution authority granted in the Dodd-Frank legislation first, but this is an untested solution to the too big to fail problem that attempts to isolate and dismantle large, troubled institutions while protecting the rest of the economy. If this solution doesn’t work, then he would be in favor of breaking large banks into smaller pieces. That wouldn’t fully solve the financial meltdown problem – we still had banking collapses in times when banks were much smaller – but it would reduce the economic and political power of individual institutions and lower the chance that the problems of a single firm will cause widespread harm to the economy. Why not break the banks into smaller pieces as a precautionary measure? The main worry is that very large banks are needed to fully exploit economies of scope and scale, and that breaking them up would reduce efficiency and increase the cost of some types of financial transactions. But the evidence on the size that a bank must attain to fully realize these efficiencies is not conclusive, and we don’t really know what the minimum size needs to be. My reading of the admittedly shaky evidence is that we could reduce bank size without losing efficiency, but that is not the approach that those in charge of the banking system have decided to take.

Shadow Banking -To make sense of phenomena like money, liquidity, and collateral, we need to model the "frictions" that make intertemporal trade difficult. Frictions like private information, limited commitment, and limited communication. Absent such frictions, debtors could spend their promises easily. Creditors would not not have to worry about promises being broken. Such a world is not likely be free of the business cycle. But business cycles would likely be muted (small shocks would not be magnified as much, or propagated throughout the economy to the same extent).  Of course, economists throughout the ages have thought about these sort of frictions. And there is a substantial body of modern macroeconomic theory that attempts to formalize these notions. A heretofore neglected area of research, however, is what economists have come to call the "shadow banking" sector (see here, here and here). Some recent theoretical work can be found here: 
A Model of Shadow Banking, Gennaioli, Shleifer, Vishny
Shadow Banks and Macroeconomic Instability, Meeks, Nelson, Allesandri
The shadow banking sector is still very large--take a look at this recent news story: Shadow Banking Still Thrives. According to Gary Gorton (Shadow Banking Must not be Left in the Shadows) the shadow banking sector needs to be regulated...somehow. It seems like we're still not exactly sure how this should be done or, indeed, if it is even feasible.

Banking must not be left in the shadows - FT.com: The financial crisis again showed that in market economies bank runs recur, over and over. Even when new legislation succeeds in preventing them, crises return because market economies morph due to innovation. During the crisis, much of this innovation was found in the “shadow banking” system. On Monday, regulators on the Financial Stability Board issued recommendations to reduce risks in shadow banking. It is a belated yet welcome sign of its importance to finance. However, there is much more to learn.Much of this remaining lesson concerns how to get the banking system back on its feet as fast as possible after a crisis. Just to emphasise the significance of this: non-mortgage asset-backed securitisation was the size of the entire US corporate bond market by issuance. That securitisation system is now moribund. Can we re-create confidence? Can we design financial regulation so that bank runs do not recur? I wish the answer were a resounding yes but, for several reasons, I am worried it is no.

Citigroup: Portrait of Why Too Big Has Failed - Pam Martens - As we reported in August, the law firm Kirby McInerney agreed to settle a lawsuit against Citigroup on behalf of shareholders for $590 million over allegations that the firm issued materially false and misleading statements concerning Citigroup’s exposure to losses from collateralized debt obligations and other off-balance-sheet accounting tricks.  A careful reading of the 547-page amended complaint reveals a major U.S. financial institution that used every contrivance imaginable to inflate its earnings by gaming the system with high risk leverage, off-balance-sheet gambles it inevitably lost and dysfunctional checks and balances — all while its regulators were asleep at the switch. The deeply researched document, unfortunately, leaves serious questions unanswered: where were the company’s auditors during all of these machinations?  Who were the lawyers writing the prospectuses for these dodgy assets? How did Citigroup’s two chief regulators, the New York Fed and the Office of the Controller of the Currency, fail to rein in the myriad financial abuses that left the company teetering and needing a large-scale government bailout? And, most importantly, where are the criminal prosecutions by the Department of Justice?Below are some of the most disturbing aspects of how this too-big-to-fail institution conducted its business:

Citi ends its decade-long ill-fated love affair with hedge funds - Some years ago Citigroup built a massive internal hedge fund platform called Tribeca. It was managed by Tanya Beder who became famous in advising Orange County on its derivatives fiasco in the 90s. Citi later bought Old Lane (Pandit's fund - that wasn't too successful on its own in terms of performance) for $800mm. As is typical of these large banks, it decided to build up Old Lane and shut down/replace Tribeca. Out with the old and in with the new. The firm later tried to rebuild the business once again under the name of Citi Capital Advisors. Now, years later, Citi has a $6bn hedge fund platform which consists of Tribeca, Old Lane, and other pieces (including people and technology) of hedge fund ventures and acquisitions the firm undertook (more money was spent along the way to keep the funds going). The bulk of the platform consists of fixed income funds including mortgages, credit, (part of the AUM are some CLO assets - a low margin business) etc. - all involving heavy infrastructure expenditures. Citi has about $2.5bn-$3bn invested in these funds, which of course puts the bank at odds with the Volcker Rule. So the firm recently decided to simply give the hedge fund platform to the managers - effectively for free - and spin them out into a separate firm. Of course Citi will have to pull its money out before the Volcker Rule comes into effect in 2014, forcing the new fund to replace the assets via an institutional fund raise. That's a difficult undertaking in this environment - even for Citi.

New Twists In MF Global Scandal Focus On the CFTC - A Bastille of Deceit - Mark Melin has been doing an excellent job of covering the MF Global scandal and cover up. With a few notable exceptions like Forbes, the mainstream media has been silently complicit. Investigative journalism is far less safely profitable than staged debates amongst commercially endorsed opinionators. The news gives way to spectacle. This is an excellent example of the credibility trap. That blatant theft occurred and no indictments and prosecutions have resulted seems so unbelievable that most tend to ignore it. You don't understand, it takes time, it takes time. Yes, to cover things up, to kick the can down the road, and hope that the people lose interest. And yet this is just one instance of the distortions that are plaguing the global commodity and financial assets markets. The long delayed investigation into the silver market is most likely another. The most urgent problem facing the US and the Western nations is not a 'fiscal cliff.' It is the pernicious corruption in the financial system that has captured the politicians of both parties, and distorted the public conversation through influence in the media and directing the opinions and buying the research of 'experts' through the power of big money. The people are held hostage in a Bastille of deceit.

Special Report: How gaming Libor became business as usual (Reuters) - In late 1996, Marcy Engel, then a lawyer for Wall Street heavyweight Salomon Brothers Inc, fired off a warning letter to U.S. regulators: If they approved a Chicago Mercantile Exchange plan to change how a popular futures contract was priced, they would put at risk the integrity of a key interest rate in the global financial system. The CME was already doing big business in its Eurodollar futures contract - a derivative product that lets traders bet on the direction of short-term interest rates - and it had long set the price for these contracts using a benchmark rate it tabulated itself. Now, it wanted to adopt a more commonly used rate published by the British Bankers' Association, known as the London interbank offered rate, or Libor. Using this benchmark, the CME said at the time, "will make our Eurodollar futures an even more attractive risk management tool." The problem with the CME's plan, as Engel saw it: The banks that set the rates in London daily were also able to take positions in the CME's Eurodollar contract. In her letter to the U.S. Commodity Futures Trading Commission, she said tethering the futures contract to Libor "might provide an opportunity for manipulation" of the interest rate. A "bank might be tempted to adjust its bids and offers ... to benefit its own positions." That was saying a lot. Libor is the average of what a group of international banks in London say it costs to borrow from each other for durations ranging from overnight to one year. It was, and still is, a global benchmark, the basis for all sorts of interest rates - everything from corporate and student loans to financial contracts. Moving it by mere fractions of a percentage point would affect borrowing costs around the world.

William Black appears on Majority Report - William Black appeared on Majority Report with Sam Seder on 11/23/2012. The image as well as this link will take you to the Majority Report web site. The podcast can be downloaded or listened to by clicking this link (opens in new window).

JPMorgan Has 3-Year Litigation Expense of $16.1 Billion (Enough to Buy 80,500 Families a Home for $200,000) -  Is JPMorgan actually a cartel of lawyers in drag as a bank? You’d think so reading the fine print buried in the firm’s 2011 annual report and the legal disclosures in its hair-raising third quarter report filed with the Securities and Exchange Commission (SEC) on November 5.  According to its own figures, JPMorgan has paid the following sums for litigation expense: $3.8 billion for the nine months of 2012 ending September 30; $4.9 billion in 2011; and $7.4 billion in 2010 for the whopping total of $16.1 billion in 33 months.  There are more than a dozen small countries that have less than that in annual GDP.  How many times have we heard the now enshrined gospel that JPMorgan escaped the 2008 crisis unscathed.  Reading the mountain of lawsuits now filed against the firm, it’s clear why: JPMorgan’s role in the housing collapse has been significantly shielded from public view – until recently.  The SEC, continuing a long standing practice of dumping news of toothless settlements against Wall Street firms on Friday afternoons when, hopefully, no one is paying close attention, announced the settlement of charges against JPMorgan Chase & Co. and Credit Suisse Group AG this past Friday.  The settlement related to charges that the firms misled investors in the sale of securitized residential home loans.  JPMorgan agreed to pay $296.9 million, while Credit Suisse will pony up $120 million.  (Included in the JPMorgan payment were separate claims against a Bear Stearns unit, which JPMorgan acquired during the financial crisis of 2008.)

JPMorgan Bought Itself a Boatload of Trouble With Bear Stearns - Pam Martens - If only JPMorgan had been privy to those titillating emails from the Bear Stearns guys packaging the residential mortgage backed securities (RMBS) – the emails calling the bombs they were preparing to unload on investors a “sack of shit,” or “a shit breather,” and urging colleagues to “close this dog.” JPMorgan might not have been so willing to step up to the plate at the beckoning of the New York Fed and acquire Bear Stearns as it teetered toward bankruptcy in March of 2008. But packaging toxic mortgage backed securities and internally calling them disparaging names while failing to share that view with investors is becoming very old news on Wall Street. What is shocking news, even to veterans on Wall Street, is that Bear Stearns is alleged, by both the Securities and Exchange Commission and the New York State Attorney General, Eric Schneiderman, to have engaged in an extensive multi-year, pre-meditated plan to steal tens of millions of dollars that belonged to trusts set up for investors. Even on Wall Street, outright theft used to mean something. But in the SEC complaint and settlement announced last Friday and the lawsuit filed by the New York State Attorney General on October 1 of this year, the individuals who participated in this theft and fraud are not named; only the Bear Stearns firms, which now carry a JPMorgan moniker, were named as defendants. The SEC press release expresses this grand larceny as casually as though one were reading about an adolescent shop-lifting a candy bar at the corner deli: “ J.P. Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.”

Credit Suisse faces NY lawsuit -- The New York attorney-general is preparing to file a lawsuit against Credit Suisse, alleging the Swiss bank misled investors who lost more than $11bn on mortgage-backed securities. In the lawsuit, which is expected to be filed this week, Credit Suisse faces claims that it misled investors regarding its due diligence practices on home loans it packaged into bonds, people familiar with the matter said. The bank also allegedly misled investors over the lending practices of the loan originators it worked with, the lawsuit is to claim. Eric Schneiderman, the New York attorney-general, has been investigating several banks and last month sued JPMorgan, alleging it misled investors who lost more than $20bn on mortgage-backed securities. His activities have been seen as part of a last push by state and federal authorities to call banks to account for alleged wrongdoing in the run-up to the financial crisis. His state's powerful Martin Act allows Mr Schneiderman to bring cases without having to show that the accused intended to commit fraud. It also allows him to operate across state lines, essentially acting on behalf of investors across the US. Mr Schneiderman's claims concern mortgages that Credit Suisse packaged into more than 60 mortgage-backed securities and sold to investors. In some securitisations, about 30 per cent of the loans ultimately went into default. Overall, investors have incurred losses on about 12 per cent of $93bn in loans.

Insider Trading Scandal: Are the Feds Closing In on Billionaire Hedge Fund Mogul Steven Cohen? - Billionaire hedge fund titan Steven A. Cohen, one of the most high-profile and controversial Wall Street figures of the last decade, has been implicated in what federal officials are calling “the largest insider trading case ever charged by the SEC,” according to The Wall Street Journal. Cohen, the founder of SAC Capital Advisors, wasn’t charged or mentioned by name in the federal criminal complaint unsealed Tuesday. But according to the Journal, which cited people familiar with the matter, Cohen is referred to as “Portfolio Manager A” in a parallel civil complaint filed by the Securities and Exchange Commission, also released Tuesday. In the criminal complaint, federal prosecutors charged Mathew Martoma, a former portfolio manager at SAC Capital hedge fund affiliate CR Intrinsic Investors, with receiving and acting upon confidential information gleaned from a neurology professor who played a key role in a major pharmaceutical trial. The SEC complaint alleges that “Portfolio Manager A” — who was not named — “collaborated closely with Martoma in making the trading decisions” at the center of the alleged $276 million insider-trading scheme. The plot allegedly involved a clinical trial for an Alzheimer’s disease drug called bapineuzumab that was being jointly developed by two pharmaceutical companies, Elan Corp. and Wyeth, which were both subsequently bought by Pfizer. According to federal regulators, “the illicit gains generated in this scheme make it the largest insider trading case ever charged by the SEC.”

Wall Street’s Great Scapegoat Hunt - Wall Street has increasingly taken up its old habit of blaming junior bankers and traders for what goes wrong. This is particularly troubling because Wall Street is similar to the military: There is no upside for anyone working in finance to do anything but to follow the orders given by the bosses. The idea of a “rogue trader” is really a myth. The goal at every firm is always to make more money in any way that is legally defensible -- by selling more mortgage-backed securities, by doing bigger and bigger mergers-and-acquisition deals or by making a larger and larger bet on the direction of an obscure debt index.When things go well -- the firm lands a big underwriting or a high-profile merger or executes a profitable trade -- there is no shortage of people around to claim credit. Of course, when something goes terribly wrong -- see “Whale, London” or “Synthetic CDO, Abacus” -- the senior executives disappear from the scene faster than cockroaches when the light is turned on. In return, employees get paid more working on Wall Street -- without putting any personal capital at risk -- than they can at almost any other job on the planet. This is not a subject open to debate on Wall Street. This is the way it is. If you don’t like that bargain, you leave. (Sorry, Greg Smith.) And yet, we are now supposed to believe that many things that went wrong leading up to the financial crisis were caused by a handful of junior bankers and traders supposedly acting on their own

Counterparties: SEC vs SAC, episode 6 -- Steve Cohen has never appreciated the implication that his hedge fund, SAC Capital, made some part of its stellar returns from inside information. Now that the SEC has brought what it says is the largest insider trading case in history against one of Cohen’s former employees, that reputation is becoming harder to shake. The NYT’s Peter Lattman and Peter Henning write that Cohen is in a precarious legal position: For the first time, the evidence suggests that Mr. Cohen participated in trades that the government says illegally used insider information — though prosecutors have not said that Mr. Cohen himself knew the information was confidential.Any prosecution of Mr. Cohen would most likely hinge on the cooperation of Mathew Martoma, the former SAC employee charged in the case. The WSJ’s Michael Rothfeld and Chad Bray report that the FBI tried unsuccessfully to flip Martoma against Cohen a year ago. It may have been fruitless thus far with respect to Cohen, but the same tactic does appear to have worked in building the case against Martoma (aka “the Elan guy”). Bess Levin points out that the doctor who divulged Elan’s trial results, Sid Gilman, is prepared to testify and has a non-prosecution agreement.Martoma’s position at SAC was well within Cohen’s orbit. He worked for the CR Intrinsic fund, which Reuters’ Svea Herbst-Bayliss and Katya Wachtel note is the unit that manages most of Cohen’s billions in wealth. The FT’s Kara Scannell and Sam Jones add further color to SAC’s structure, highlighting how Cohen puts himself at the center of a complex constellation of individual traders and separate funds.

SEC Rocked By Lurid Sex-and-Corruption Lawsuit - Matt Taibbi - In a salacious 77-page complaint that reads like Penthouse Forum meets The Insider meets the Keystone Kops, one David Weber, the former chief investigator for the SEC Inspector General's office, accuses the SEC of retaliating against Weber for coming forward as a whistleblower. According to this lawsuit, Weber was made a target of intramural intrigues at the agency (which has a history of such retaliation) after he came forward with concerns that his bosses may have been spending more time copulating than they were investigating the SEC.  Weber claims that in recent years, while the SEC Inspector General's office has been attempting to investigate the agency's seemingly-negligent responses in such matters as the Bernie Madoff case and the less-well-known (but nearly as disturbing) Stanford Financial Ponzi scandal, two of the IG office's senior officials – former Inspector General David Kotz and his successor, Noelle Maloney – were sleeping together.  Weber also claims that Kotz was also having an affair with a lawyer representing a key group of Stanford victims, a Dr. Gaytri Kachroo. Where the story gets really strange is where Weber claims that Maloney last year refused to meet with Kachroo as part of the Stanford investigation. By then, Kotz had stepped down as SEC IG and Maloney had replaced him as Acting IG. The complaint describes Weber confronting Maloney over the issue, asking why she wouldn't meet with the lawyer representing a key group of Stanford victims.

US ‘dark pool’ trades up 50% - FT.com: Trading of US equities on “dark pools” has grown by almost a half in the past three years to account for nearly a third of total market volume, according to research that underscores the challenge facing international regulators. The shift from transparent public exchanges has highlighted growing concern among asset managers and global regulators about off-exchange trading, where prices are reported only after deals are executed. Such venues allow investors to trade large blocks of shares anonymously, with prices posted publicly only after trades are done. They have grown popular with asset managers as they minimise the risk of the market moving against them when executing a large order, or of seeing their order sliced up by high-frequency traders. However authorities in the US, Europe and Australia are considering tighter regulation of such alternative trading venues amid fears that they could further fragment trading and dent the integrity of public markets.

A Change in Carrots, Without a Stick -  SHAREHOLDERS get little say on executive pay. Yes, they can get angry. But they can rarely get even. One big investor, the Louisiana Municipal Police Employees’ Retirement System, wants to change that. Its target is the Simon Property Group of Indianapolis. Last year, that company granted its chief executive, David Simon, a stock award worth $120 million. The folks down in Baton Rouge aren’t very happy about that. The Louisiana pension fund argues that Mr. Simon’s award should have been put to a shareholder vote, and it has sued Simon Property’s board. The suit raises questions not only about Simon Property but also about the New York Stock Exchange, where Simon’s shares are traded. The Big Board has rules that are supposed to protect shareholders from questionable pay practices. Now, many companies give their executives what are known as incentive awards, which are supposed to provide some, you know, incentive. This type of pay is usually tied to some measure of the company’s performance. Hit the targets, and you get paid. Miss them, and you don’t. But at Simon Property, an owner and operator of shopping malls, the only requirement to receive this bounty was that Mr. Simon show up for work.

US cash piles built on more than anxiety - FT.com: Why are US companies sitting on so much cash rather than spending it? Given the number of corporate bigwigs President Barack Obama has consulted in recent days – from Honeywell’s David Cote to Apple’s Tim Cook – the oft-mooted explanation of anxiety over the looming “fiscal cliff”, not to mention the still shaky global economy, seems credible. But a closer look at the numbers tells a rather different story. It’s not clear, for a start, that companies are cutting back much on spending. True, business investment fell slightly in the third quarter. And the latest Business Roundtable Survey of US chief executives – which gathered views from 138 of the country’s leading company heads – found them to be gloomier about the economic outlook. But it also found that, although nearly a fifth of CEOs expected their US capital expenditure to fall in the next six months, over half expected it be unchanged, and 30 per cent expected it to rise. Meanwhile, a National Federation of Independent Business survey in October found that small businesses were actually spending more, and planned to continue doing so over the next six months. It is true that some large US corporates have announced they will be cutting back on capex. But these decisions tend to be for quite sector-specific reasons. The biggest 1,500 companies had $1.62tn of net debt in March 2012, almost the same absolute amount as in March 2006. This is not cause for concern – companies have refinanced their debt at lower interest rates, as well as extending its maturity. The proportion of companies with current assets greater than their short-term debt, says Morgan Stanley, is over 98 per cent, very high by historical standards. But the data certainly don’t suggest that companies are unusually flush with cash.

CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection - The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be. In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’” The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.  Second, we shouldn't oppose new, smarter regulation because “developed law” does not define it.  But to get real, the CFPB's anti-abuse authority is actually well defined in a data-driven way, the signature method of the CFPB. The abuse concept is based on a wealth of social science literature documenting the credit industry’s science of exploiting consumer error stemming from standard human cognitive biases. Will also seems to have missed out on the more than 20-year-old conversation about responsive regulation, meaning a dialogue between regulators and industry about acceptable practices.   He just shows a crude hatred of any regulation, no matter what the need. Have we learned nothing about the need for better consumer financial protection since the housing bubble of 2004-2007, which produced a worldwide recession due to exploitation of hapless US consumers?

Executive pay limits narrowed scope of TARP banking rescue - The executive pay provisions of the TARP – the Troubled Asset Relief Program – stoked controversy. Bankers claimed the rules would thwart their efforts to attract and retain the best executives. But the pay rules may have had an unintended benefit of reducing the scope of the program, researchers say. A newly published report in the Journal of Banking, Finance & Accounting finds that pay provisions did discourage some banks from participating in TARP, which was intended to help banks weather the 2008-2009 financial crisis, Examining 263 publicly traded banks that were approved for TARP, the new study found that 35 banks rejected the funds and that this decision was related to higher levels of CEO pay. But this decision didn't seem to hurt them – they fared just as well as their peers that did take TARP money. As a result, the pay provisions in TARP may have deterred banks that didn't really need the money from taking it.The study also suggests that from a personal standpoint bankers may have been right to worry about TARP's pay limits: banks that took the funds did see higher executive turnover than those that didn't. But their performance didn't suffer. Banks that turned down TARP money—often derisively referred to as "bailouts"— did just as much lending afterwards and had just as much financial strength, measured in terms of capital ratios, as those that accepted it.

Pot legalisation puts U.S. bankers in a pickle - Colorado and Washington may have voted to legalize recreational marijuana, but it is far from a green light for banks to provide accounts or other services to the pot industry in those states. Financial institutions across the country still face legal risks if they do business with marijuana shops because pot remains illegal under federal law. "If financial institutions are federally licensed or insured, they must comply with federal regulations, and those regulations are clear about conducting financial transactions with money generated by the sale of narcotics," said Jim Dowling, a former Internal Revenue Service special agent who also acted as an anti-money laundering advisor to the Office of National Drug Control Policy. The ballot measures on Tuesday made Colorado and Washington the first states to permit recreational marijuana sale and use. Medical-marijuana laws have been around in some states for more than a decade. California was the first state to legalize medical marijuana in 1996. With the addition of Massachusetts, which passed a medical-marijuana ballot initiative on Tuesday, 18 states and the District of Columbia now have such laws on their books.

Unofficial Problem Bank list declines to 857 Institutions - CR Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining recently. This is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Nov 16, 2012. (table is sortable by assets, state, etc.)  Changes and comments from surferdude808:  As anticipated, the OCC released its latest actions this Friday, which contributed to many changes to the Unofficial Problem Bank List. This week, there were seven removals and four additions that leave the list at 857 institutions with assets of $329.2 billion. A year ago, the list held 903 institutions with assets of $419.6 billion.

Economists, Obama administration at odds over role of mortgage debt in recovery - One year and one month before President Obama won reelection, he invited seven of the world’s top economists to a private meeting in the Oval Office to hear their advice on what do to fix the ailing economy.  There was a former Federal Reserve vice chairman, a Nobel laureate, one of the world’s foremost experts on financial crises and the chief economist of the International Monetary Fund , among others. Nearly all said Obama should introduce a much bigger plan to forgive part of the mortgage debt owed by millions of homeowners who are underwater on their properties. Obama was reserved in response, but Treasury Secretary Timothy F. Geithner interjected that he didn’t think anything of such ambition was possible. The meeting highlighted what today is the biggest disagreement between some of the world’s top economists and the Obama administration. The economists say the president could have significantly accelerated the slow economic recovery if he had better addressed the overhang of mortgage debt left when housing prices collapsed. Obama’s advisers say that they did all they could on the housing front and that other factors better explain why the recovery has been sluggish. The question is relevant because although Obama won reelection this month, the vast majority of voters still say the economy is weak and not getting better. Policymakers in Washington are now focused on another type of debt — the public debt all taxpayers owe — but the slow economic recovery, which depresses tax revenue, makes that problem harder to solve.Nearly 11 million Americans, or more than a fifth of homeowners, are buried in debt, owing more than their properties are worth after piling their life savings into their properties — a persistent and largely unaddressed problem that represents the missing link in what many economists consider the administration’s overall strong response to the recession.

How to Govern America in 2013 II: Mortgages, Housing, and the Recovery » What Tim Geithner ought to be saying:

• "I should have pressed hard for a Director of the FHFA who would understand the importance of refinancing mortgages to keep foreclosures from dragging down housing construction and employment.
• "I should have pressed for Federal Reserve governors who would have adopted in late 2009 the open-ended quantitative-easing policies adopted three years later.
• "I should have pressed hard to set up the Reconciliation process so that it could have been used for another round of expansionary fiscal policy.
• "I should have pressed hard for new federal agencies to boost our insufficient infrastructure spending.
• "I should have put long-term budget balance issues on the back burner--because the employment deficit was a much bigger problem than the budget deficit.
• "It is still the case that rebalancing housing and aggressive monetary expansion are needed policies. It is still the case that the employment deficit is a much bigger problem than the budget deficit.
• "I did not use FHFA to rebalance the housing market, and did not push leaders to the Federal Reserve who would properly push for more aggressive policies. Instead, I talked about 'green shoots' and 'recovery summer'.
• "I did not serve the country as well as I could have. I am sorry."

Bernanke Wants Looser Lending Standards in Bubble Reinflation Effort  - I don’t know why I felt so insulted by Ben Bernanke’s housing speech yesterday, but it really stuck with me. Probably because he managed to give an entire speech on housing – one that at points implicitly blamed homeowners for their predicaments – without mentioning the word “fraud.” Or saying “I’m sorry.” It was very much a forward-looking rather than backward-looking speech. But he describes the foreclosure crisis as the prime contributor to the Great Recession without bothering to mention that his agency had oversight responsibility over the mortgage market throughout the inflation of the housing bubble. The Greenspan Fed rejected consumer protection or regulation of any kind as a matter of ideology. And Bernanke wasn’t about to let that fact be known to the Operation HOPE audience. In fact, his message was that originators aren’t writing ENOUGH loans at this point: So Bernanke here is scolding mortgage brokers for employing tight credit standards. He even cites the lack of use of FHA loans. This came on the same day that an audit showed the FHA hitting $16.3 billion in losses, which will lead to the agency seeking taxpayer funds for the first time in history. And Bernanke’s complaint is that lenders won’t write ENOUGH FHA loans!

Lorraine Brown, Former Head of DOCX (LPS), Pleads GUILTY to CRIMINAL Conspiracy, Faces up to 5 Yrs in Prison - A former executive of Lender Processing Services, Inc. (LPS) – a publicly traded company based in Jacksonville, Fla. – pleaded guilty today, admitting her participation in a six-year scheme to prepare and file more than 1 million fraudulently signed and notarized mortgage-related documents with property recorders’ offices throughout the United States. he guilty plea of Lorraine Brown, 56, of Alpharetta, Ga., was announced by Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney for the Middle District of Florida, Robert E. O’Neill; and Michael Steinbach, Special Agent in Charge of the FBI’s Jacksonville Field Office.The plea, to conspiracy to commit mail and wire fraud, was entered before U.S. Magistrate Judge Monte C. R chardson in Jacksonville federal court. Brown faces a maximum potential penalty of five years in prison and a $250,000 fine, or twice the gross gain or loss from the crime. The date for sentencing has not yet been set.“Lorraine Brown participated in a scheme to fabricate mortgage-related documents at the height of the financial crisis,” said AAG Breuer. “She was responsible for more than a million fraudulent documents entering the system, directing company employees to forge and falsify documents relied on by property recorders, title insurers, and others. Appropriately, she now faces the prospect of prison time.”

Justice in America: Systematic Document Forgery and Fabrication Yields One Criminal Plea Bargain - Yves Smith - The Department of Justice and the state of Missouri have each announced criminal plea bargains with one Lorraine Brown, former chief executive of DocX, the Lender Processing subsidiary best known for its price sheet for fabricating the mortgage documents a servicer, or frankly, anyone would need to claim they had standing to foreclose on your home. Funny how that particular DocX product was mentioned no where in the plea deals. This admission of guilt by Brown for wire and mail fraud on the federal level and fraudulent and forged document filings in Missouri now allows the Obama Administration to claim it has sent another “executive” to jail. And the bizarre progress of this case was that the Missouri attorney general had sued both Brown and LPS, and you’d expect them to cut a deal with Brown to go after the bigger target, LPS. But it’s likely Brown was not very sophisticated; she apparently went to an interview with the FBI without the advice of counsel. Rule number one is don’t lie to the FBI, and the document release Tuesday show that Brown did. And her attorneys let LPS get in front of her. The firm paid $2 million in fines to Missouri and “cooperated” in going after small fry Brown (rather than the bigger fry of LPS’ clients). Nicely played. Brown admitted guilt to perpetrating a six-year scheme, from 2003 to 2009 to forge and falsify over a million signatures, including now-infamous practices such as “surrogate signing”, in which other employees, typically temps, would forge the signatures of robosigners. The federal penalties are up to five years in prison plus $250,000 in fines; the Missouri penalties re two to three years in prison.

Hey Fannie and Freddie, Pay Us Back! : WHO says Democrats and Republicans can’t agree on anything? When it comes to fixing the government’s troubled and costly relationship with the private mortgage market, bipartisanship is very much alive. Politicians in both parties have reached consensus over the past four years to simply do nothing.Consider the elephant in the room: Fannie Mae and Freddie Mac owe American taxpayers nearly $140 billion — and there seems to be no plan on any front to pay it back. Though many Americans aren’t aware of it, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are publicly traded companies — like I.B.M. or General Electric. Except these two giant housing lenders were created by Congress and, as a result, have a relationship, albeit an awkward one, with Uncle Sam. As so-called government-sponsored enterprises, or G.S.E.’s, they have long played an important role in the development of the nation, helping to channel credit to millions of Americans who might otherwise not be able to get home mortgages. The trouble now is that the debt owed by Fannie and Freddie, both of which have been in government conservatorship since 2008, is being ignored. That year, in the midst of the housing crisis and the Great Recession, Washington agreed to spend $600 billion in public money to rescue major American banks, insurers, automakers and, yes, the G.S.E.’s — fearing an even deeper and longer recession if these companies failed. Since then, most of these bailed-out firms have paid taxpayers back. Not Fannie or Freddie.

mREITs still under pressure - Mortgage REITs (mREITs) margins continue to be squeezed from both sides. Agency MBS yields are still near record lows, while cost of funding is elevated. mREITs fund their leverage through term repo, which is near the highs. JPMorgan: - REITs have been squeezed by both narrower asset spreads since QE3 as well as by higher funding costs via repo. This has caused their equity to plunge, with NLY and MFA down roughly 12% over the past six weeks. Forward demand from these investors will be weaker since their price/book ratios are largely below par, and there have been some concerns of actual REIT selling of MBS. We believe it’s more an issue of a lack of MBS demand, rather than selling, but it’s been another source of pressure.Of course back in September after this post on mREITs, we got numerous e-mails arguing that these are still superb investments that provide stable income and one should not be concerned about the leverage. Perhaps, but September was certainly not a great time to get in.

Mortgage Settlement Monitor “Progress” Report Gooses Numbers to Hide Lack of Real Relief to Homeowners – Yves Smith - As we and others have written at considerable length, the mortgage settlement was a big exercise in optics. The $26.1 billion number sounds impressive until you compare it to the size of the housing market and the damage done to homeowners. 40% of the value of the settlement can come from junk credits, things the banks would have done anyhow or should be doing in the normal course of business, like razing vacant homes, short sales, and giving homes to charities. And of the remaining part, which was a relatively small amount of actual cash payment ($5.8 billion, but that included over a billion of fines federal regulators rolled into that total), the rest is supposed to be reduction of mortgage principal. Oh, but wait, they can take credit for modifying OTHER PEOPLE’S MORTGAGES, meaning those owned by investors. And they’ve been doing that in more than half the cases. As the Financial Times reported last week: Investors in US mortgage securities have been forced to absorb large writedowns in response to a deal between leading financial groups and government agencies over the “robosigning” scandal…. The banks – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial – agreed to forgive billions of dollars worth of distressed borrowers’ mortgage principal in exchange for waivers from potential liability. On Wednesday, BofA said that 60 per cent of the $4.75bn in first-lien mortgage principal it has thus far agreed to forgive would come from non-government guaranteed loans that were packaged into bonds and sold to investors.Of JPMorgan’s $3bn in forgiven mortgage debt, slightly less than half has come from investors’ holdings, a person familiar with the matter said. The other three banks either declined to provide numbers or did not respond to requests for comment.

LA Times: "Most aid from mortgage settlement in California going to short sales" - Update: Here is the national report: Continued Progress: A Report from the National Mortgage Settlement.  From the LA Times: Most aid from mortgage settlement in [California] going to short sales - Short sales, which allow underwater borrowers to sell their homes for less than they owe, have become the dominant type of relief offered in California by the big banks, according to a report on the settlement expected to be made public Monday. Under the settlement, banks were required to give homeowners aid in the form of principal reduction, short sales and other modifications. Banks get credit for both principal reductions and short sales under the agreement, but must give 60% of the relief nationally through principal reduction to families who keep their homes. ... Through Sept. 30, the three banks had provided $8.4 billion, according to data from [UC Irvine law professor Katherine Porter's] office, putting them well on track to fulfill their obligations. About 68% of that money went toward providing short sales for homeowners. Principal reductions on first and second mortgages made up the rest of the California aid.Short sales were becoming more frequent prior to the mortgage settlement, but this is probably why short sales now out number foreclosures in many areas.

The National Mortgage Settlement….REPORT YOUR CONCERNS NOW!  --I will remain critical of the National Mortgage Sellout until consumers get treated fairly…which is to say that I will always be critical of this deal that sold out consumers and was a gift to the banks…a reward for their wrongdoing. It drives me nuts that reporters fail to report that the settlement was primarily a slap on the wrist for engaging in billions of dollars in insurance fraud. Our children will be paying for the fraud for decades…the banks giving a few dollars back will not change that disgusting fact. I was recently quoted in the St. Petersburg Times as saying that the settlement remained a failure as long as families are still being thrown into the street. I am told that this should no longer be happening as much under the terms of the settlement. And so, like an abused spouse, I return to the abuser hopeful again that it will stop. I am advised that the Mortgage Settlement Monitor wants to hear from consumers who are not receiving proper treatment…. http://nationalmortgagesettlement.com/

Serious Mortgage Delinquencies and In-Foreclosure by State - Last week the MBA released the results of their Q3 National Delinquency Survey. One of the key points was the difference in the number of mortgages in the foreclosure process between judicial and non-judicial foreclosure states. The first graph below (repeat) is from the MBA and shows the percent of loans in the foreclosure process by state. The second graph shows all stages of delinquency (and in-foreclosure) by states, sorted by the percent seriously delinquent (90+ days plus in-foreclosure).This graph is from the MBA and shows the percent of loans in the foreclosure process by state. .The top states are Florida (13.04% in foreclosure down from 13.70% in Q2), New Jersey (8.87% up from 7.65%), Illinois (6.83% down from 7.11%), New York (6.46% down from 6.47%) and Nevada (the only non-judicial state in the top 13 at 5.93% down from 6.09%)California (2.63% down from 3.07%) and Arizona (2.51% down from 3.24%) are now well below the national average. The second graph includes all delinquent loans (sorted by percent seriously delinquent). Florida and New Jersey have the highest percentage of serious delinquent loans, followed by Nevada, Illinois, New York, Maine and Maryland. Nevada still leads with the highest percent of loans 90+ days delinquent.

Percent of Mortgage Seriously Delinquent over time, Selected States - A key question is: What has happened to the mortgage delinquency rate over time by state? For the graph below I plotted the serious delinquency rate for several states over time (states selected by serious delinquency rate in Q1 2010 - at the national peak). Although the national delinquency rate has been steadily declining, the state level data shows different patterns. There has been dramatic improvement in some non-judicial states, like Arizona and California - and some judicial foreclosure states are still seeing the seriously delinquent rate increase, like New Jersey and New York.  I picked the states with the highest serious delinquency rate in Q1 2010 (Serious delinquencies peaked nationally in Q1 2010).The red column for each state is the Q1 2010 data.The light blue column was for Q2 2007. This was just as the serious delinquency rate started to increase nationally. Even then, the serious delinquency rate was elevated in some states like Michigan, Ohio and Indiana. The states that have seen the most improvement - Arizona, California, Michigan, Nevada - are all non-judicial states. Florida is a judicial state that has seen some decline in the seriously delinquent rate. However the serious delinquency rate in New Jersey and New York has increased since Q1 2010. The national data is useful, but with the different foreclosure processes, we also need to look at state and local data. Some states will be back to a "normal" delinquency rate soon - other states will take years.

Table of Short Sales and Foreclosures for Selected Cities in October - Economist Tom Lawler sent me the table below of short sales and foreclosures for a few selected cities in October. Keep this table in mind when the NAR releases existing home sales tomorrow. The NAR headline number will probably be close to the 4.75 million SAAR in September, but there are other signs of significant change in the housing market. First, inventory has declined sharply, and there is very little inventory in many areas. Second, it appears that the share of conventional sales in certain markets has increased significantly (these are normal sales - not foreclosures or short sales). Both the decline in inventory, and the increase in conventional sales, are signs of moving towards a more normal housing market. Look at the right two columns in the table below (Total "Distressed" Share for Oct 2012 compared to Oct 2011). In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in most areas. The NAR will release some distressed sales measurements tomorrow from an unscientific survey of Realtors - and I have little confidence in the survey results - but these local reports suggest distressed sales have fallen sharply in many areas. Also there has been a decline in foreclosure sales just about everywhere. Look at the middle two columns comparing foreclosure sales for Oct 2012 to Oct 2011. Foreclosure sales have declined in all these areas, and some of the declines have been stunning (the Nevada sales were impacted by a new foreclosure law).Also there has been a shift from foreclosures to short sales. In most areas, short sales now far out number foreclosures, although Minneapolis is an exception with more foreclosures than short sales.

Cops say RI man killed himself after foreclosure -- Police believe a Warwick man barricaded himself in his home and then killed himself after being served with foreclosure papers. Authorities responded to a report of gunshots and a possible fire at home on Greylawn Avenue on Monday morning. Police say a constable attempting to serve the foreclosure papers heard the shots after 58-year-old Richard Dodd locked the door and refused to allow anyone in. Police say Dodd threw a package addressed to police through a basement window, prompting authorities to evacuate nearby homes and call in bomb technicians. The package contained two binders of material. Firefighters later found Dodd’s body inside the home.

Borrowers with modified mortgages re-default as homes re-enter shadow inventory - According to the Fed, banks had a visible increase in resi mortgage charge-offs in the third quarter. This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America). But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults? Is Kyle Bass going to feel the pain from this increase by having half his book in sub-prime (see story from Bloomberg)? Here is what the data is telling us. The chart below compares two populations of subprime mortgages:
1. "Always Current to 30" = % of subborrowers who missed payment for the first time (30 days overdue)
2. "All Current to 30" = % of all borrowers who missed payment (30 days overdue)
The pool of first-time delinquencies is clearly less impacted. Furthermore according to JPM, prime and Alt-A mortgage delinquencies for the "first-timers" did not go up at all. We are therefore seeing a sharp rise in re-defaults from modified mortgages. This is telling us that mortgage modification programs have not been very successful, as the probability of re-default rises. By modifying mortgages, banks in many cases are simply kicking the can down the road - and now some are writing down these mortgages (which may be what is driving the higher charge-off numbers). We are therefore seeing an increase in delinquencies, but mostly among modified mortgages and concentrated in sub-prime portfolios. This in turn is having an impact on another important housing metric.

Private-market mortgage delinquencies reverse course and increase - Most loan types increased in default rates during October, with a surge in first mortgage default rates, according to S&P Dow Jones/Experian Consumer Credit Default Indices. The national composite increased to 1.55% in October, the first time in nine consecutive months, compared to 1.46% from September. The first mortgage default rate increased 1.47% compared to 1.36% from the previous month. Second mortgage default rates also rose to .65% compared to .64% last month. "The second mortgage is marginally up by 1 basis point from its September rate of 0.64%, the lowest rate in its eight-plus year history," said managing director and chairman David M. Blitzer of the Index Committee for S&P Dow Jones Indices. New York, Chicago, Dallas, Los Angeles and Miami are the five cities covered in the Metropolitan Statistical Area in regards to default rates. Chicago and Los Angeles hit post-recession lows. Chicago’s default rate was 1.78%, down from 1.82% a month prior. Los Angeles also saw a decrease in default rate for the third month in a row, down to 1.44% compared to 1.45% in September. Dallas’ default rate increased 23 basis points from September to 1.26% in October. The city still remains the lowest default rate of any of the cities published, according to the report.

Struggling Homeowners Confront a 'Mortgage Fiscal Cliff' - While Congress wrangles over a debt deal, struggling homeowners may be facing a cliff of their own. That’s because a tax break aimed at helping distressed borrowers—set to expire at the end of the year—is caught up in the taxes vs. spending debate paralyzing Washington. In the early days of the housing crisis, Congress passed the Mortgage Debt Relief Act of 2007, which waives taxes on up to $2 million in loan forgiveness. Normally, forgiven debt is taxed as income. The bill shields borrowers from taxes in three situations: when a bank modifies a mortgage to reduce the principal; when a borrower sells her home in a short sale and the purchase price is less than the outstanding balance on the mortgage; and when a bank waives the portion of the mortgage balance it couldn’t recoup in a foreclosure. The bill was extended in 2008 and now expires on Dec. 31. In a note to clients earlier this month, Deutsche Bank’s Steven Abrahams called the expiration a “mortgage fiscal cliff” that could drag down the economy and cause more struggling homeowners to file for bankruptcy rather than work out an agreement with their lender. On Nov. 20, 43 state attorneys general sent a letter (pdf) to Congress, asking that the tax exclusion be extended. They said they were particularly concerned that the bill’s expiration would hurt the $25 billion robo-signing settlement they negotiated with the largest mortgage servicers to help borrowers largely through short sales and principal reduction. “Failure to extend this tax exclusion will result in $1.3 billion in tax increases on the very families who can least afford it,” they said, referring to an estimate by the Congressional Budget Office.

MBA: Purchase Mortgage Applications increase, Refinance Applications decrease - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly SurveyThe Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index increased 3 percent from one week earlier.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.54 percent from 3.52 percent, with points decreasing to 0.40 from 0.41 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week.  This graph shows the MBA mortgage purchase index.  The purchase index has been mostly moving sideways over the last two years, however the purchase index has increased 7 of the last 9 weeks and is now near the high for the year - but this index still isn't showing an increase like other housing reports.

Rate on US 30-Year Mortgage Rates Hits Record Low — Average U.S. rates on fixed mortgages fell to fresh record lows this week, a trend that is boosting home sales and aiding the housing recovery. Mortgage buyer Freddie Mac says the average rate on the 30-year loan dipped to 3.31 percent, the lowest on records dating back to 1971. That’s down from 3.34 percent last week, the previous record low. The average on the 15-year fixed mortgage also dropped to 2.63 percent. That’s down from 2.65 percent last week and also a new record. The average rate on the 30-year loan has been below 4 percent all year. It has fallen further since the Federal Reserve started buying mortgage bonds in September to encourage more borrowing and spending.

New Historic Low for the 30-year Fixed Mortgage - I've updated the charts below through today's close.  The 10-year note closed today at 1.69, which is 19 basis points off its interim high of 1.88, also set the day after QE3 was announced. The historic closing low was 1.43 on July 25th. The big news today is Freddie Mac's Weekly Primary Mortgage Market Survey. The 30-year fixed has set another all-time low, now at 3.31 percent. Here is a snapshot of selected yields and the 30-year fixed mortgage starting one week after the Fed announced its the previous round of Quantitative Easing (QE2). For a eye-opening context on the 30-year fixed, here is the complete Freddie Mac survey data from the Fed's repository. Many first-wave boomers (my household included) were buying homes in the early 1980s. At its peak in October 1981, the 30-year fixed was at 18.63 percent.The 30-year fixed mortgage at the current level is a confirmation of a key aspect of the Fed's QE success, and the low yields have certainly reduced the pain of Uncle Sam's interest payments on Treasuries (although the yields are up from recent historic lows of this summer). But, as for loans to small businesses, the Fed strategy is a solution to a non-problem.

Record-low mortgage rates may lift housing - The lowest mortgage rates on record probably helped keep sales of previously owned U.S. homes close to a two-year high in October and underpinned construction of new residences, economists said before two reports this week. Economists expect purchases of existing dwellings held at a 4.75 million annual rate last month, according to a Bloomberg survey before Monday’s report from the National Association of Realtors. Also, housing starts probably eased in October to an 840,000 pace from a four-year high of 872,000 units in September, Commerce Department figures may show Tuesday. Demand for residential real estate is also being propelled by more affordable properties, progress in the labor market and improving consumer sentiment. The data underscore what Federal Reserve Chairman Ben Bernanke called “signs of improvement” in the market, which is helping fuel the expansion as manufacturing cools. “Housing has definitely become a bright spot in the economy, while all the international-facing sectors are doing much worse,”

Steady US housing recovery is boosting economy(AP) — From purchases and prices to builder sentiment and construction, the U.S. housing market is making consistent gains. The latest evidence came in reports Monday that sales of previously occupied homes rose solidly in October and that builders are more confident than at any other time in 6½ years. New-home sales and home-price indexes have reached multi-year highs. And Lowe’s Cos. on Monday reported a surge in net income, a sign that home-improvement retailers are benefiting. The housing market’s recovery still has a long way to go. But for now, it’s helping prop up an economy that’s being squeezed by a global slowdown and looming spending cuts and tax increases. Joseph LaVorgna, an economist at Deutsche Bank, estimates that the housing recovery could boost U.S. economic growth by a full percentage point next year. That’s because a stronger housing market would mean more jobs, especially in industries like construction, and more consumer spending. ‘‘Housing could provide a meaningful — and critical — lift to overall economic activity when other growth drivers, like exports, are slowing,’’ LaVorgna said.

Housing recovery gains traction (Reuters) - Home resales rose in October and a gauge of homebuilder sentiment climbed to a six-year high in November, signs of surprising vigor in the country's still-struggling housing market. The National Association of Realtors said on Monday that existing home sales climbed 2.1 percent last month to a seasonally adjusted annual rate of 4.79 million units, beating forecasts by Wall Street economists. Separately, strengthening demand for new homes drove an increase in a monthly measure of home builder sentiment, which hit a more than six-year high in November, topping even the most optimistic forecast in a Reuters poll of analysts. Rising home prices and a faster pace of sales have shown the housing market has finally turned the corner this year. The market collapsed when a mortgage debt bubble burst in 2006, helping trigger the 2007-09 recession. The data on Monday suggested the recovery in housing is advancing even faster than many analysts had expected. "The housing market is continuing to improve. It's probably improving more than most economists were projecting earlier this year," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. The reports also support the view that the broader economic recovery is becoming increasingly self-sustaining, with job creation helping drive home sales, which in turn are supporting economic growth. Home building is expected to add to economic growth this year for the first time since 2005.

US Home Sales Rise 2.1 Percent in October - U.S. sales of previously occupied homes rose solidly in October, helped by improvement in the job market and cheap mortgages. The National Association of Realtors says sales rose 2.1 percent to a seasonally adjusted annual rate of 4.79 million. That’s up from 4.69 million in September, which was revised lower. The sales pace is roughly 11 percent higher than a year ago. But it remains below the more than 5.5 million that economists consider consistent with a healthy market. Superstorm Sandy delayed some sales in the Northeast, the Realtors’ group said. Sales fell 1.7 percent, the only region to show a decline. Most of the drop was due to the storm, but those sales will likely be completed in future months, the group said.

U.S. existing home sales jump as supply tightens - US existing home sales picked up in October despite the market in the northeast being shut down in the last days of the month by Hurricane Sandy, a realtors group said Monday. Existing home sales rose 2.1 percent over September, hitting an annual pace of 4.79 million units, pulled up by a 4.4 percent rise in the West, according to the National Association of Realtors. Sales in the South gained 2.1 percent, and the Midwest 1.8 percent, while the Northeast saw a 1.7 percent decline, in part due to the superstorm which wreaked havoc on the densely populated eastern New York-New Jersey region in the final days of the month. Year-on-year sales nationally were up 10.9 percent from a year earlier, and the national median price, $178,600, was 11.1 percent higher.

Existing Home Sales in October: 4.79 million SAAR, 5.4 months of supply - The NAR reports: Existing-Home Sales Rise in October with Ongoing Price and Equity Gains:Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 2.1 percent to a seasonally adjusted annual rate of 4.79 million in October from a downwardly revised 4.69 million in September, and are 10.9 percent above the 4.32 million-unit level in October 2011. Total housing inventory at the end of October fell 1.4 percent to 2.14 million existing homes available for sale, which represents a 5.4-month supply at the current sales pace, down from 5.6 months in September, and is the lowest housing supply since February of 2006 when it was 5.2 months. Listed inventory is 21.9 percent below a year ago when there was a 7.6-month supply.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in October 2012 (4.79 million SAAR) were 2.1% higher than last month, and were 10.9% above the October 2011 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory declined to 2.14 million in October down from 2.17 million in September. Inventory is not seasonally adjusted, and usually inventory decreases from the seasonal high in mid-summer to the seasonal lows in December and January. The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales Increase 10.9% In October, Median Price By 11.1%, Boosting Home Equity $760B Over Last Year - National Realtors Association reported today on existing-homes sales for the month of October, here are some highlights: Total existing-home sales in November for single-family homes, townhomes, condominiums and co-ops, rose 2.1% from October to a seasonally adjusted annual rate of 4.79 million units, and are 10.9% above sales in October 2011. November marked the 16th consecutive month of year-over-year increases in existing-home sales (starting in July 2011), which last occurred in 2004-2005. The median sales price for existing-homes was $178,600 in October (see blue line in top chart above), a gain of 11.1% over the same month last year (see bottom chart above), and the eighth consecutive month of annual increases in home prices, which last occurred in 2005-2006. The 11.1% year-over-year increase in median home price in October follows a 11.25% annual gain in September. The last time there were two consecutive monthly double-digit increases in existing home prices was in late 2005, almost seven years ago. On a seasonally adjusted basis, the median home price in October was about $180,000, slightly below the $182,800 median price in September. The last time the seasonally-adjusted median home price was above $180,000 for two straight months was four years ago in late 2008. After adjusting for seasonal variations, it’s pretty clear that home prices reached a bottom during the 2009-2011 period (see red line in top chart), and have moved off that bottom over the last year. Existing homes available for sale at the end of last month was down to 2.14 million units, which represents only a 5.4-month supply of homes at the current sales pace, which is the lowest inventory of homes since February of 2006 when there was a 5.2 months' supply. The inventory of homes for sale at the end of October was 21.9% below a year ago.

Existing Home Sales: A Solid Report - First, this report is a reminder that we have to be careful with the NAR data. The NAR revised down inventory for September from 2.32 million to 2.17 million (a downward revision of 6.5%). And the months-of-supply for September was revised down to 5.6 months from 5.9 months. These are very large revisions. The percent distressed share (foreclosures and short sales) is also questionable. The NAR reported:  Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 24 percent of October sales (12 percent were foreclosures and 12 percent were short sales), unchanged from September; they were 28 percent in October 2011. However this percentage is from an unscientific survey of Realtors, and other data suggests a larger decline in the share of distressed sales. Oh well, I wish we had better data for the existing home market. However, overall, this was a solid report. Based on historical turnover rates, I think "normal" sales would be in the 4.5 to 5.0 million range. So, existing home sales at 4.79 million are in the normal range. Of course a "normal" market would have very few distressed sales, so there is still a long ways to go, but the market is headed in the right direction. The key to returning to "normal" are more conventional sales and fewer distressed sales. Not all areas report the percentage of distressed sales - that is why the NAR uses an unscientific survey - but the areas that do have shown a sharp decline in distressed sales, and a sharp increase in conventional sales.

Zillow: House Prices increased 4.7% Year-over-year in October - From Zillow: October Marks 12th Consecutive Month of National Home Value Increases Zillow’s October Real Estate Market Reports, released today, show that national home values rose 1.1% from September to October to $155,400. This is the largest monthly increase since August 2005 when home values rose 1.2% month-over-month. October 2012 marks the 12th consecutive month of home value appreciation, further evidence of a durable housing market recovery. On a year-over-year basis, home values were up by 4.7% in October 2012 – a rate of annual appreciation we haven’t seen since September of 2006 ...  In October, 276 (75%) of the 366 markets showed monthly home value appreciation, and 228 (62%) of the 366 markets saw annual home value appreciation. Among the top 30 metros, 29 experienced monthly home value appreciation and 26 saw annual increases.The graph from Zillow shows both the year-over-year and month-over-month change for the Zillow HPI. This is a very strong month-over-month increase, and the largest year-over-year increase since 2006.

Uneven housing forecast for next year The housing market recovery is driven by an improving industry and credit fundamentals, which will continue through 2013, according to Barclays Securitized Products Research. However, there are major concerns including the fiscal cliff and shadow inventory. The fiscal cliff has the potential of knocking the market back onto unstable grounds, which could lead investors to shed risk and pullback on risk-premium tightening. Shadow inventory — properties not visible such as real-estate owned properties not in the open market and homes entering foreclosure — is also a concern that could potentially affect the housing recovery process. The gap between judicial and non-judicial states continues to widen, which could lead to disruption in the market, according to DBRS. While home prices reached bottom during the first quarter of the year, the prices have rose throughout the year and will continue to do so. Barclays predicts prices to by 5.5% for the year and 4% by 2013.

Blackstone Sees Two-Year Window to Buy Houses - Investors buying foreclosed U.S. homes might have less than two years to accumulate properties as competition and rising prices shrink the pool of cheap assets, according to Blackstone Group LP (BX), the largest buyer. “Prices are starting to move faster,” said Jonathan Gray, global head of real estate for Blackstone, which has invested about $1.5 billion this year in foreclosed homes. “That’s one of the risks that emerge as more people like us get into the space and as individual homeowner confidence grows. Frankly, buying a home today is pretty compelling.” The opportunity for funds to buy homes at discounts could last less than two or three years, Gray said yesterday at the Bloomberg Commercial Real Estate Conference in New York as record-low mortgage rates and home prices down 40 percent from the peak entice individuals back into real estate. Atlanta, Phoenix, Las Vegas and other markets hit hard by the worst housing crisis since the Great Depression are rebounding as the economy improves and the supply of homes for sale shrinks.

Zillow forecasts Case-Shiller House Price index to increase 3.0% Year-over-year for September -- Zillow Forecast: September Case-Shiller Composite-20 Expected to Show 3% Increase from One Year Ago On Tuesday November 27th, the Case-Shiller Composite Home Price Indices for September will be released. Zillow predicts that the 20-City Composite Home Price Index (non-seasonally adjusted [NSA]) will be up by 3 percent on a year-over-year basis, while the 10-City Composite Home Price Index (NSA) will be up 2.3 percent on a year-over-year basis. The seasonally adjusted (SA) month-over-month change from August to September will be 0.4 percent for the 20-City Composite, as well as for the 10-City Composite Home Price Index (SA). All forecasts are ... are based on a model incorporating the previous data points of the Case-Shiller series, the September Zillow Home Value Index data and national foreclosure re-sales. Zillow's forecasts for Case-Shiller have been pretty close. CR Note: It looks like house prices will be up about 5% this year based on the Case-Shiller indexes.

Why Atlanta, New York, and Chicago are poised to drive a housing recovery - A good way to look at which housing markets are potentially overvalued and which are undervalued—and where the market seems to be begging for new home construction and where there is still a surplus of unneeded houses—is to look at the relationship between rents and home prices. Over long periods of time, the price to rent a given house should rise at about the same rate as the price to buy one. But over shorter periods of time, the two can diverge. And when they do, it is usually a sign that something curious is up in that market. For example, from 2000 to 2005, prices in the Miami metro area rose by 136 percentage points more than did rents, a sure sign that it was one of the nation’s most bubbly housing markets. The best news out of this analysis, though, may be this: Most of the largest U.S. cities have housing markets that have been in pretty good balance over the last year, with prices rising at about the same rate as rents. That’s true of the Washington metro area ( where prices are up 4.3 percent, rents up 2.4 percent), and also of San Francisco, Los Angeles, Boston, Dallas, Seattle, and Cleveland. And that may be the best sign for the housing market of all. After all these years of bubbles and busts, ups and downs, there finally is a measure of stability.

NAHB Builder Confidence increases in November, Highest since May 2006 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) increased 5 points in November to 46. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Rises Five Points in November Builder confidence in the market for newly built, single-family homes posted a solid, five-point gain to 46 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for November, released today. This marks the seventh consecutive monthly gain in the confidence gauge and brings it to its highest point since May of 2006.This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the November release for the HMI and the September data for starts (October housing starts will be released tomorrow). This was above the consensus estimate of a reading of 41.

US Homebuilder Confidence at 6-Year High - Confidence among U.S. homebuilders rose this month to its highest level in six and a half years, driven by strong demand for newly built homes and growing optimism that the housing recovery will strengthen next year. The National Association of Home Builders/Wells Fargo builder sentiment index increased to 46, up from 41 in October. That’s the highest reading since May 2006, just before the housing bubble burst. Readings below 50 suggest negative sentiment about the housing market. The index last reached that level in April 2006. Still it has been trending higher since October 2011, when it stood at 17. A measure of current sales conditions rose this month by 8 points to 49, the highest level since May 2006.

Housing Starts increased to 894 thousand SAAR in October - From the Census Bureau: Permits, Starts and Completions - Privately-owned housing starts in October were at a seasonally adjusted annual rate of 894,000. This is 3.6 percent above the revised September estimate of 863,000 and is 41.9 percent above the October 2011 rate of 630,000. Single-family housing starts in October were at a rate of 594,000; this is 0.2 percent below the revised September figure of 595,000. The October rate for units in buildings with five units or more was 285,000.  Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 866,000. This is 2.7 percent below the revised September rate of 890,000, but is 29.8 percent above the October 2011 estimate of 667,000. Single-family authorizations in October were at a rate of 562,000; this is 2.2 percent above the revised September figure of 550,000. Authorizations of units in buildings with five units or more were at a rate of 280,000 in October. The first graph shows single and multi-family housing starts for the last several years. Total housing starts were at 894 thousand (SAAR) in October, up 3.6% from the revised September rate of 863 thousand (SAAR). Note that September was revised down from 872 thousand. Single-family starts decreased slightly to 594 thousand in October. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that total housing starts have been increasing lately after moving sideways for about two years and a half years. Total starts are up about 87% from the bottom start rate, and single family starts are up about 70% from the low. This was above expectations of 840 thousand starts in October. This was mostly because of the volatile multi-family sector that increased sharply in October.

U.S. New Home Starts Jump to Fastest Pace in 4 Years - U.S. builders started construction last month on the most homes and apartments since July 2008, more evidence that the housing recovery is gaining momentum. The Commerce Department said Tuesday that builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000. That’s a 3.6 percent gain from September. Single-family home construction dipped 0.2 percent to an annual rate of 594,000, down from a four-year high in the previous month. Apartment construction, which is more volatile from month to month, rose 10 percent to an annual rate of 285,000. Applications for building permits, a sign of future construction, fell 2.7 percent to 866,000, after jumping 12 percent in September to a four-year high. Still, permit applications to build single-family homes rose to their highest level since July 2008.

Housing Starts Print At 4 Year High, As Sandy Effect Mysteriously Avoided - With everyone throwing the kitchen sink into creating the illusion that this time housing has bottomed, seriously, this morning's report on housing starts and permits was set to be quite awkward: on one hand, realistic data accounting for weakness due to Sandy would have broken the housing momentum - many were expecting a far weaker than expected print precisely due to the Hurricane. On the other, the Census Bureau could have gone hog wild and completely ignored the same reality that apparently is impacting all other data points, and said housing starts soared to their highest number in 4 years, or a seasonally adjusted 894,000 in October, up 3.6% from a downward revised 863,000 in September, and well above expectations of a Sandy-driven decline of 3.7% to 840K. The CB opted for the latter, while adding a solid pinch of seasonal adjustment to the data, which not annualized and not seasonally adjusted rose from 77.8K to 77.9K sales. In this number was the drop in Northeast housing starts from 4K to 3.5K, the lowest since February. The mystery boost came in the West, where annualized starts rose from 198K to 232K, even as they dropped in the South and Northeast. Finally, and more irrelevant, housing permits dropped from 890K to 866K seasonally adjusted, even as the NSA number rose from 71.4K to 75.0K.

New Residential Construction Increases 3.6% for October 2012 - The October 2012 Residential construction report showed Housing starts increased, 3.6%, from September's revised 863,000, to a level of 894,000 Housing starts have increased +41.9% from a year ago, outside the ±15.9% margin of error. For the month, single family housing starts decreased -0.2%. Apartments, Townhouses & Condos or 5 units or more of one building structure, increased +10.0%, yet this monthly percentage change has a whopping ±31.6% error margin. Home construction statistics have massive error margins, so don't bet the farm on the monthly percentage changes. The annual change is significantly outside the margin of error so clearly new construction is coming back alive. Housing starts are defined as when construction has broke ground, or started the excavation. One can see how badly the bubble burst on residential real estate in the below housing start graph going back all the way to 1960. New Residential Construction housing starts has a margin of error way above the monthly percentage increases. This month has a error margin of ±13.1% percentage points on housing starts. That's why one should not get too excited on the monthly percentage change. Single family housing is 75% of all residential housing starts. Below is the yearly graph of single family housing starts going back to 1960. Housing starts of 5 or more units, or apartments, condos and townhouses, has increased +62.9% from a year ago, also way outside the margin of error of ±47.4%.  Building permits decreased -2.7% to 890,000 and are up 29.8% from this time last year. The monthly change for building permits has a ±0.8% margin of error. In other words, building permits are much more accurate. Single family building permits increased +2.2% from last month. The below graph shows building permits are not always a smooth line from month to month. Building permits are local jurisdictions giving approval, or authority to build.

The Housing Recovery Rolls On - The housing sector continues to revive, according to this morning's update on housing starts and newly issued residential building permits. Residential construction increased 3.6% in October over the previous month, the Census Bureau advises. Last month's permits total total slipped 2.7%, but that's not a worry at this point because this metric, which offers a clue about future construction activity, is still advancing at a robust pace generally. Improvement is also the message in the latest read on existing home sales, which rose 2.1% last month and are higher by nearly 11% vs. a year ago, according to the National Association of Realtors. Home builders are feeling more optimistic about their industry as well: confidence in this sector rose this month rose to its highest level in six years, the National Association of Home Builders reported yesterday. Improving conditions are also reflected in today's update on starts and permits, even though permits backtracked a bit. The crucial perspective on starts and permits as it relates to the business cycle analysis is watching how these indicators perform on a year-over-year basis, and on that front the trend remains convincingly positive. Both series are rising at well over 20% a year, a strong signal that the housing sector is expanding at a healthy pace. In absolute terms the rate of construction is still well below the levels reached before the housing bust circa 2006. But at this stage the most important factor is the growth rate. An expanding housing sector, even from a low base, is critical on a number of levels for the macro picture these days. The good news is that the trend continues to be our friend.

Starts and Completions: Multi-family and Single Family - Ten months of the way through 2012, single family starts are on pace for about 530 thousand this year, and total starts are on pace for about 770 thousand. That is an increase of over 20% from 2011. The following table shows annual starts (total and single family) since 2005 and an estimate for 2012. And the growth in housing starts should continue over the next few years.   Even with the significant increase this year, starts in 2012 will still be the 4th lowest year since the Census Bureau started tracking starts in 1959 (the three lowest years were 2009 through 2011).   My estimate is the US will probably add around 12 million households this decade, and if there was no excess supply, total housing starts would be 1.2 million per year, plus demolitions, plus 2nd home purchases. So housing starts could come close to doubling the 2012 level over the next several years - and that is one of the key reasons I think the US economy will continue to grow.These graphs use a 12 month rolling total for NSA starts and completions. Click on graph for larger image. The blue line is for multifamily starts and the red line is for multifamily completions. The rolling 12 month total for starts (blue line) has been increasing steadily, and completions (red line) is lagging behind - but completions will follow starts up (completions lag starts by about 12 months). This means there will be an increase in multi-family deliveries next year, but still well below the 1997 through 2007 level of multi-family completions. The second graph shows single family starts and completions. It usually only takes about 6 months between starting a single family home and completion - so the lines are much closer. The blue line is for single family starts and the red line is for single family completions.

Vital Signs Chart: More Strength in Housing -  Builders broke ground on more homes in October, the latest sign of strength in housing. Residential construction rose 3.6% last month from September to a seasonally adjusted annual rate of 894,000 starts. October’s rate was the highest in more than four years and driven by apartment buildings. Permits for new construction, an indication of future activity, were 30% above those seen a year ago.

Quarterly Housing Starts by Intent compared to New Home Sales - In addition to housing starts for October, the Census Bureau released Housing Starts by Intent for Q3.  First, we can't directly compare single family housing starts to new home sales. For starts of single family structures, the Census Bureau includes owner built units and units built for rent that are not included in the new home sales report. For an explanation, see from the Census Bureau: Comparing New Home Sales and New Residential Construction. However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report released this morning showed there were 104,000 single family starts, built for sale, in Q3 2012, and that was above the 96,000 new homes sold for the same quarter, so inventory increased a little (Using Not Seasonally Adjusted data for both starts and sales). This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale.Single family starts built for sale were up about 33% compared to Q3 2011. This is still very low, and only back to 2008 levels.  Owner built starts were unchanged from Q3 2011. And condos built for sale are just above the record low. The 'units built for rent' has increased significantly and is up about 33% year-over-year.  The second graph shows quarterly single family starts, built for sale and new home sales (NSA).  In 2005, and most of 2006, starts were higher than sales, and inventories of new homes increased. In 2008 and 2009, the home builders started far fewer homes than they sold as they worked off the excess inventory that they had built up in 2005 and 2006. Now it looks like builders are starting a few more homes than they are selling, and the inventory of under construction and completed new home sales increased slightly to 122,000 in Q3 (this is still near record lows).

Vital Signs Chart: Home Builders Feeling Better - Builders are feeling better about the housing recovery. An index of confidence among home builders rose five points to 46 in November, a six-year high. Confidence has risen for seven straight months, but remains weak. Residential construction is picking up as more consumers take advantage of low interest rates that can make buying a home cheaper than renting.

AIA: Architecture Billings Index increases in October, Highest in Two Years - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Positive for Third Straight Month Billings at architecture firms accelerated to their strongest pace of growth since December 2010. As a leading economic indicator of construction activity, the Architecture Billings Index (ABI) reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 52.8, up from the mark of 51.6 in September. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 59.4, compared to a mark of 57.3 the previous month.This graph shows the Architecture Billings Index since 1996. The index was at 52.8 in October, up from 51.6 in September. Anything above 50 indicates expansion in demand for architects' services. This increase is mostly being driven by demand for design of multi-family residential buildings - and this suggests there are more apartments coming (there are already quite a few apartments under construction). New project inquiries are also increasing. Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

Housing wealth effect, Baker, Goldfarb and Waldmann - Everything is possible and I think that Dean Baker just lost a debate with a Washington Post reporter. Post reporter Zachary A. Goldfarb  wrote The two economists compared what happened in U.S. counties where people had amassed huge debts with those where people had borrowed little. It had long been thought that when property values declined in value, homeowners would spend less because they would feel less wealthy. But Mian and Sufi’s research showed something more specific and powerful at work: People who owed huge debts when their home values declined cut back dramatically on buying cars, appliances, furniture and groceries. The more they owed, the less they spent. People with little debt hardly slowed spending at all. among other things.  Dean Baker wrote The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand. among other things  Again the link is his. Baker's main point is that low consumption by underwater home owners is not a plausible explanation of the sluggish recovery.  However, he also confidently asserts that the housing wealth effect is linear based on "google it".  I think that he has decided that new empirical research is irrelevant, because he already knew how economies work.

Number of Families Struggling to Afford Rent Rises Sharply - The number of low-income families struggling to afford housing has grown dramatically in recent years, according to CBPP analysis of new Department of Housing and Urban Development (HUD) data.  That’s one reason why so many poor children live in households that face major hardships such as falling behind on the rent or mortgage, as my colleague Arloc Sherman recently noted.About 8.5 million households with very low incomes faced “worst case housing needs” last year, meaning that they had no housing assistance and either paid more than half of their income for rent and utilities or lived in severely substandard housing.  That’s 2.6 million (43 percent) more households than in 2007. Families that pay large shares of their income for rent are much more likely to move frequently or go through periods of homelessness — experiences that can seriously harm children’s health and development. Many more families would face severe housing problems without federal rental assistance programs like “Section 8” vouchers and public housing, which help close to 5 million households afford decent housing.  But, due to funding limitations, rental assistance has expanded only modestly as needs have grown (see graph), and families in much of the country face long waiting lists.  If policymakers cut rental assistance programs as part of a major budget deal, even more families could face unaffordably high rents.

Multi-Generational Living: Real Estate's Next Big Thing as More Families Share a Space - Being roommates with your parents after age 21 sounds like a nightmare for most, but Jessica Bruno wouldn't have it any other way. Bruno, a 40-year-old mom, wife and DIY blogger, lives with her 62-year-old parents, Connie and Fred, in their Sutton, Mass., home. Oh, and there's Bruno's husband, Tony, and their 6-year-old son, Tony Jr. There's more. Bruno's grandparents, Grace, 80, and Fred, 82, live in the house, too. That's seven people from four generations living together in one home. Actually, make that nine: Bruno's two stepdaughters, 12-year-old twins Alexia and Gabriella -- Tony's kids from another marriage -- stay with them on weekends. It might sound like a crowded living situation, but it's not uncommon. The Bruno family is one of 4.4 million American households who have three generations or more living under one roof. There are also an estimated 51.4 million Americans that currently live in homes with more than two generations. According to the U.S. Census Bureau, multigenerational households are a growing trend, up 30 percent between 2000 and 2010, a figure that will only continue to grow, experts say.

Irwin: "Five economic trends to be thankful for" - Neil Irwin at the WaPo looked for a few positives: Five economic trends to be thankful for. Some excerpts a few comments: Household debt is way down. ... The good news is that in the past three years, Americans have made remarkable progress cleaning up their balance sheets and paying down those debts. After peaking at nearly 98 percent of economic output at the start of 2009, the household debt was down to 83 percent of GDP in the spring of 2012. ...This level is still fairly high, but households have made progress. We will have more data next week when the NY Fed releases their Q3 Report on Household Debt and Credit. This graph is from the Q2 NY Fed Report on Household Debt and Credit and shows that aggregate consumer debt has been decreasing. From the NY Fed: "Household indebtedness declined to $11.38 trillion [in Q2], a $53 billion decline from the first quarter of 2012. Outstanding household debt has decreased $1.3 trillion since its peak in Q3 2008."Note: Irwin uses a different starting point, and also looks at household debt as percent of GDP (a good way to look at debt), and clearly household is debt is down significantly.

Is it time to ban Christmas presents?  - Is it time to ban Christmas presents? Across the country people are growling at the enforced obligation to waste money on that they can't afford, for people who won't use it. Festive gift-giving has lost its point, risks doing more harm than good, misteaches our children about values and kills the joy of anticipation of what should be a joyous time. Before you think this is just curmudgeonly bah humbug, this rant isn't about presents under the spruce from parents or grandparents to children or spouses. It's about the ever growing creep of gifts to extended family, colleagues, children's teachers and more.  The next year, I polled 10,000 people on whether we should ban presents. Seven per cent said ditch all of them, 30 per cent said to all but children, and a further 46 per cent said limit it to the immediate family. Fewer than one in five supported giving beyond that.  Social convention says give a gift to someone, or their children, and you usually create an obligation on the recipient to buy back, whether they can afford it or not. If that obligation is something they will struggle to fulfill, you actually let them down. Gift giving misprioritizes people's finances.

Here We Go Again — Subprime Auto Loans! -- References to "the recovery" continue to proliferate in mainstream media stories about the economy, but the details are always a  little hazy. Today we've got something we can sink our teeth into. I'll quote from Bloomberg's Credit-Fueled U.S. Car Sales May Need Help From Incomes, but before I do, I want to reiterate yesterday's complaint.  As with the Census Bureau's 2011 Supplemental Poverty report, this story about auto loans received hardly any coverage by the Usual Suspects. A rebound in U.S. auto sales has been buoyed by the return of easy lending, even to borrowers with flawed credit histories. Some economists question whether the gains can be sustained without a boost in hiring.  Auto loans were up 5.5 percent in the second quarter from the same time last year, with riskier buyers accounting for 43.9 percent of the total, up from 42 percent in 2008, according to Experian Plc.  By contrast, hourly wages for non-managers climbed 1.1 percent on average over the past 12 months, the least since records began in 1965, Labor Department figures show.

Two-Month Spike in CPI Appears to have Run its Course; Deflation Risk Nosedives on Election Outcome - U.S. inflation data released yesterday by the Bureau of Labor Statistics show that a two-month spike in headline inflation seems to have run its course. Both headline and core inflation measures are now close to or below the Fed’s 2 percent target. In a related development, the Atlanta Fed reports that deflation probabilities have nosedived since President Obama won re-election earlier this month. The headline all-items CPI increased at an annual rate of just 1.81 percent in October, down from 7.48 percent in August and 7.06 percent in September. Most of the decrease came from a drop in energy prices, which had soared in the previous two months. New and used car prices also fell. Increases in the prices of food and apparel partly offset the decreases in energy and vehicles. Measures of underlying inflation, which had not followed the late-summer spike of the all-items CPI, remained moderate. The BLS core CPI, which excludes food and energy prices, increased at a 2.18 annual rate in October. The Cleveland Fed’s 16-percent trimmed mean inflation rate increased at annual rate of 1.69 percent. The trimmed mean measure of underlying inflation excludes the 8 percent of prices that increase the most in a given month and also the 8 percent of prices that increase least (or decrease most), whether they are energy, food, or anything else. The following chart shows all three measures.

Is The Largest Weekly Inflow Into Bank Savings Accounts On Record, A Flashing Red Alarm? - When one thinks of America, the word "savings" is likely the last thing to come into a person's head, for the simple reason that the vast majority of Americans don't save: recall that in September the personal savings rate dipped to 3.3%, the lowest since 2009 save for one month.  This is usually as far as most contemplations on savings go. And this is a mistake, because at least according to official Fed data reported weekly as part of the H.6, which lists the data on the various components of M1 and, more importantly, M2, the real story with US savings is something totally different.  It is the Savings Deposits component that is of most interest. Recall that the primary definition of a savings account is, naturally, an amount of cash parked with an institution for a longer period of time, in exchange for receiving interest (or no interest in the era of The Great Chairman), which also have a limitation on the number of withdrawals: six per month at last check.  At first blush one would balk at the concept of a Savings Account in the New Normal: after all who in their right mind would face the counterparty risk associated with having money in a bank, especially money that has withdrawal limitations, if there is nothing to be gained in exchange, because under ZIRP nobody collects any interest, and won't until the system finally collapses.  Well prepare to be surprised.  The chart below shows the time progression of the largest Savings Component: total Savings Deposits at Commercial Banks, which at $5.6 trillion in the week ended November 5, 2012, is also the largest single component of M2, and thus broader money stock of the US (accessible source data via the St Louis Fed).

Michigan Consumer Sentiment: Up Fractionally from Last Month - The University of Michigan Consumer Sentiment final number for November came in at 82.7, a fractional gain from the October final of 82.6 but off the 84.9 of the November preliminary report. Today's number was below the Briefing.com consensus of 84.5. In the preliminary update I said it would be particularly interesting to see if the November final confirms the significant uptick at that time. It did not. See the chart below for a long-term perspective on this widely watched index. I've highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. To put today's report into the larger historical context since its beginning in 1978, consumer sentiment is 3% below the average reading (arithmetic mean) and 2% below the geometric mean. The current index level is at the 39th percentile of the 419 monthly data points in this series. The Michigan average since its inception is 85.3. During non-recessionary years the average is 87.8. The average during the five recessions is 69.3. So the latest sentiment number of 82.7 moves us closer to the non-recession sentiment averages. It's important to understand that this indicator can be somewhat volatile. For a visual sense of the volatility here is a chart with the monthly data and a three-month moving average.

Biggest UMich Miss In 4 Years Follows Biggest UMich Beat In 5 Years - If you aren't thoroughly confused, confounded and outright disgusted by the news flow supposed to represent the US economy, you aren't paying attention. Because two weeks after the preliminary UMich print was supposed to come at 82.2, instead soaring to 84.9, or the biggest beat of expectations in 5 years, we get the final UMich number, which missed expectations of a 84.5 read and plunged to 82.7, the biggest miss of expectations in 4 years. Of course, this makes sense: two weeks ago we had the euphoria associated with a new old president, and hope that 4 more years may fix this country. Two weeks, and the biggest market drop in one year later, enthusiasm has been doused just a tad. And adding insult to injury, 1 Year inflation expectations rose from 3.0% to 3.1% - just as the spectre of declining asset prices has reared its ugly head, yet this is well below the 2.8% expected for 5 year inflation -  as a reminder, in 5 years the Fed's balance sheet will be between $6 and 10 trillion. Boy is everyone in for a surprise...

Consumer Sentiment Slips - U.S. consumers were less confident than expected at the end of November, according to data released Wednesday. The Thomson-Reuters/University of Michigan consumer sentiment index’s final reading for November fell to 82.7 from the early November reading of 84.9, according to an economist who has seen the report. Economists surveyed by Dow Jones Newswires had expected the final November index to fall to 83.5.

Consumers Shrug Off November’s Negatives - November saw the economic and human fallout from one of the worst natural disasters in the U.S., election results that displeased about half the voters and nonresolution of the fiscal cliff. It’s amazing consumer sentiment is holding up as well as it is. That’s one way to read Wednesday’s report from Thomson-Reuters/University of Michigan. The Michigan consumer sentiment index fell to 82.7 at the end of November, from 84.9 in early November. But it was just above the 82.6 final read in October, which puts the latest measure of economic optimism at its highest reading since September 2007 before the Great Recession. Sentiment might be even higher if not for the continuing fiscal cliff drama. “When asked to identify any recent economic news, consumers more frequently made unfavorable references to potential changes in future federal tax and spending programs as well as the inability of the political parties to reach a timely settlement,” the report said. Past research has suggested a link between consumer spending and expectations about the economy. In the Michigan report, expectations fell to 77.6 from a final October reading of 79.0. That should raise fears among retailers hoping for a solid holiday selling season. But this may be a case in which the link doesn’t hold, especially when it comes to holiday shopping. Consumers are unlikely to cross Uncle Bob off this year’s gift list just because they are uncertain about next year’s fiscal policy.

Upper-Income Consumers Report Less Spending - Upper-income Americans may already be responding to the higher tax rates scheduled to kick in at the end of this year by curbing their spending, according to new data from Gallup. Every day, Gallup polls Americans about how much money they spent “yesterday,” not counting the purchase of a home or a motor vehicle or payment of normal household bills. The average self-reported amount spent by upper-income Americans (those earning more than $90,000) has been falling since the first few weeks of September through at least mid-November. There was a spike around Halloween, but otherwise the trend has been downward. “This implies that because upper-income consumers have, relatively speaking, more discretionary income than other Americans, they may decide to open up their pocketbooks for Black Friday, but then spend less as the holidays continue,” writes Dennis Jacobe, Gallup’s chief economist. The numbers are not adjusted for seasonality, but the slide in upper-income spending does not seem to be explained by seasonal patterns. Here are the numbers for this time period last year and this year, shown side by side:

DOT: Vehicle Miles Driven decreased 1.5% in September - I first started tracking monthly vehicle miles to see the impact of the recession on driving. Since then we've seen the impact of demographics and changing preferences ... very interesting. The Department of Transportation (DOT) reported today: Travel on all roads and streets changed by -1.5% (-3.6 billion vehicle miles) for September 2012 as compared with September 2011. ◦Travel for the month is estimated to be 237.1 billion vehicle miles. Cumulative Travel for 2012 changed by 0.6% (14.2 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.Currently miles driven has been below the previous peak for 58 months - and still counting.  The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were up in September compared to September 2011. In September 2012, gasoline averaged of $3.91 per gallon according to the EIA. Last year, prices in September averaged $3.67 per gallon, so - just looking at gasoline prices - it is no surprise that miles driven decreased year-over-year in September

Vehicle Miles Driven: Population-Adjusted at a New Post-Crisis Low - The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through September. Travel on all roads and streets changed by -1.5% (-3.6 billion vehicle miles) for September 2012 as compared with September 2011. The 12-month moving average of miles driven increased a tiny 0.27% from September a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) has set a new post-financial crisis low. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. 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 55 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 should 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.

Final November Consumer Sentiment at 82.7, MarkIt Flash PMI shows Improvement in Manufacturing - The final Reuters / University of Michigan consumer sentiment index for November declined to 82.7 from the preliminary reading of 84.9, and was up from the October reading of 82.6. This was below the consensus forecast of 84.0. Overall, consumer sentiment has been improving; the recent decline in sentiment might be related to the stock market decline (the consumer sentiment index is impacted by employment, gasoline prices, the stock market and more). From MarkIt: Manufacturing growth strengthens to five-month high in November: The Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 signalled the strongest improvement in U.S. manufacturing business conditions for five months in November. The preliminary ‘flash’ PMI reading, which is based on around 85% of usual monthly replies, rose to 52.4 from 51.0 in October to indicate a moderate manufacturing expansion overall.

Early Reading on Factory Sector Sees November Expansion - U.S factory sector is expanding better this month than in October, according to an early reading of November activity released Wednesday. The flash purchasing managers’ index compiled by data provider Markit for this month increased to a five-month high of 52.4 from the final reading of 51.0 in October. Markit said the PMI indicates “a moderate manufacturing expansion overall.” The Markit report follows very negative factory surveys put out last week by the Federal Reserve Banks of New York and Philadelphia. However, those reports covered regions severely hurt by hurricane Sandy and the Markit PMI measures nationwide factory activity.

US Manufacturing stabilizing; margins may be at risk -US Manufacturing PMI (flash) is showing some stabilization, although manufacturing expansion remains slow.  MarketWatch: - Markit said its preliminary flash manufacturing purchasing managers index, which is based on around 85% of usual monthly replies, rose to 52.4 in November from 51.0 in October to indicate a moderate manufacturing expansion overall. Output, new orders and employment each accelerated and stayed above the 50 level indicating growth.There is one troubling sign however. Manufacturing input prices seem to be rising faster than the output prices. The table below shows the full breakdown of the index.This may indicate that manufacturers don't have the pricing power to fully compensate themselves for rising costs. Markit: - The sharpest rise in input costs for eight months was indicated by November PMI data. Greater demand for raw materials such as metals and limited supplies for some goods due to unseasonably bad weather had both contributed to higher input prices in the latest survey period. The relative moves of the two indicators will be important to watch going forward because this could be a sign of declining manufacturing margins.

ATA Trucking Index declines sharply in October, Impacted by Hurricane Sandy - Clearly truck tonnage was impacted by Hurricane Sandy in October, and we will probably see a bounce back in November and December. From ATA: ATA Truck Tonnage Index Fell 3.8% in October The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 3.8% in October after falling 0.4% in September. (The 0.4% decrease in September was revised from a 0.1% gain ATA reported on October 23, 2012.) October’s drop was the third consecutive totaling 4.7%. As a result, the SA index equaled 113.7 (2000=100) in October, the lowest level since May 2011. Compared with October 2011, the SA index was off 2.1%, the first year-over-year decrease since November 2009. Year-to-date, compared with the same period last year, tonnage was up 2.9%. Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index.  Even with the sharp decline in October, the index is at the pre-recession level. However, even before the hurricane, the index was mostly moving sideways this year due to the slowdown in manufacturing.

LA area Port Traffic: Inbound Traffic up in October -  Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for October. LA area ports handle about 40% of the nation's container port traffic. This data suggests trade with Asia will be fairly steady in October. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container).  To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, both inbound and outbound traffic are up slightly compared to the 12 months ending in September. In general, inbound and outbound traffic has been mostly moving sideways recently. The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of October, loaded outbound traffic was up slightly compared to October 2011, and loaded inbound traffic was up 5% compared to October 2011.

How transient is the "Sandy effect" on US economic data? - The great "Sandy debate" is on. US economic data is coming in weaker than expected and some argue that it can't all be explained by the hurricane. Case in point is the initial jobless claims report from last week - see chart. Econoday: - Hurricane or not, it's hard to ignore an incredible 78,000 surge in initial jobless claims for the November 10 week to 439,000. Adding to the pressure is a 6,000 upward revision to the prior week to 361,000. The four-week average is up a very sizable 11,750 to a 383,750 level that is more than 15,000 above month-ago levels which does not point to improvement for November payroll growth or the unemployment rate. Another example is the US industrial production, which clearly looks like it has stalled (chart below). So far the explanation has been that Hurricane Sandy disrupted production in late October, causing this decline. NYTimes: - Industrial production fell unexpectedly in October because of Hurricane Sandy, the Federal Reserve reported on Friday, but factory growth appeared at a standstill even aside from the storm.  Production at the nation’s mines, factories and refineries contracted 0.4 percent last month, after a 0.2 percent increase in September, the Fed said. It said the storm, which hit the East Coast at the end of October, cut output by nearly 1 percentage point. Utilities and producers of chemicals, food, transportation equipment, and computers and electronic products were the most affected, it said.Does that mean we should dismiss these results as temporary? Some suspect that the US industrial output would have been weak event without the hurricane. DB economists also think that the weakness will persist through November, dramatically lowering the US GDP (below 1.3% annualized). According to DB the quarter-over-quarter changes in industrial production (IP) have an 83% correlation to the GDP. And the bank is forecasting a material Q4 decline in IP. The recent weakness may not be as transient as some expect.

Industrial Production Stalls, by Tim Duy: Sober Look is questioning just how temporary will be the impact of Hurricane Sandy on the data. I tend to think about this in somewhat different terms. I am fairly confident that the impact of Sandy on the national data will be almost entirely transient. I am less confident that we are identifying underlying trends in the data as we dismiss any weaker than expected numbers as artifacts of Sandy. At the moment, however, I think this issue is largely confined to manufacturing data. As is well known at this point, industrial production slipped 0.4% in October, but the Federal Reserve estimated that Sandy contributed to a 1 percentage point decline in production. The manufacturing side of the ledger, almost three-quarters of the index, was flat after accounting for Sandy, which is pretty much par for the course of the last year: Obviously, the flat trend in manufacturing was in place well before Sandy, and could get much worse if the core durable goods new orders data is any indicator: Seeing the trend in place makes me a little less comforted by the fact that the October slide can be attributed to Sandy. What if we see another slide in November? Will that too be attributed to Sandy, or is there something more than meets the eye? Should we be worried about recession? I think that answer depends on whether or not you view the manufacturing drag as largely caused by domestic or international factors. If it is largely external, I think it slows the US economy but does not tip us into recession. We experience something closer to 2007/8, with the housing rebound taking the place (albeit weakly) of the tech boom. A domestic event, would be more significant.

More on the Economic Effects of Superstorm Sandy - Superstorm Sandy's economic effects are popping up like the dark clouds of a hurricane. In The Perfect Storm we predicted Sandy would negatively impact Q4 GDP by 0.5 percentage points. The Philadelphia Federal Reserve's survey of professional forecasters recently downgraded their Q4 GDP estimates by 0.4 percentage points to 1.8% annualized Q4 GDP growth. There are some estimates which are as low as 0.5% Q4 GDP, much of the downgrades due to superstorm Sandy.  Now the data is rolling in, like the storm surge itself. Sandy hit the New Jersey coast on October 29th. Even while the damage, loss of power, business closings and economic activity would seem to go negative after that date, October industrial production was hit with a full percentage point of Hurricane Sandy related contraction.  Initial unemployment claims are simply getting hammered by Sandy's effects. Some of the highest population densities in the country were hit by Sandy. The BLS has put up an awesome graphical display of regional labor data as well as storm maps for the areas hit. Below is their tally of 2011 averages in potential payrolls affected by the storm. October retail sales showed a -0.3% decline. The Census couldn't separate out the effects of Sandy due to the reporting methodology, yet on an informal basis they noted a significant drop in sales due to stores being closed and people not being able to get out and shop. On the other hand, some stores saw a huge uptick in sales due to people preparing for the storm itself. Consumer spending isn't even available for November. Right now all we have is Black Friday hype versus real estimates.

Holidays, Cliff and Sandy Will Skew Inventory Cycle - Where did 2012 go? The fourth quarter has just six weeks left, but big economic events are still to come: resolving the fiscal cliff, holiday shopping and rebuilding from Sandy. All three will skew the final demand part of the economy, but also look for impacts on the inventory sector, a volatile but often overlooked part of the gross domestic product equation. Gauging current stockpiling is difficult: Nationwide data for October aren’t even available, and the negative readings on November inventories from the regional factory surveys done by the Philadelphia and New York Feds were likely skewed by superstorm Sandy. While rebuilding what was lost in warehouses, stores and offices will eventually boost stockpiling, the timing of that accumulation is uncertain since some structures have to be repaired or rebuilt before new inventories can be laid in. But even before Sandy, businesses were probably keeping a tight rein on inventories in response to the uncertainty over future tax and spending policies. Surveys suggest the fiscal cliff already caused large companies to hold back on capital spending this summer. So, it isn’t a stretch to think businesses are also curtailing inventory accumulation in the face of cliff uncertainty. Weak stockpiling or outright cuts could slow real GDP growth even below the lackluster 1.8% rate now expected by economists surveyed by WSJ.com. (Bear in mind, the inventory sector was already cutting into GDP because the drought has drawn down farm stockpiles.)

American manufacturing is coming back. Manufacturing jobs aren’t. - The discussion of American manufacturing is often a muddled one, steeped in nostalgia for a bygone era and accompanied by a certain misty-eyed conviction that it is a sector in ceaseless decline. A new study from the McKinsey Global Institute published Monday morning adds some welcome clarity. In 184 pages, the in-house think tank of the global consulting giant presents a picture of manufacturing as among the most dynamic sectors of the U.S. and global economies, driving higher productivity and standards of living. But it also shows that what we usually think of as a traditional manufacturing job isn’t coming back. Manufacturing contributed 20 percent of the growth in global economic output in the decade ending in 2010, the McKinsey researchers estimate, and 37 percent of global productivity growth from 1995 to 2005. Yet the sector actually subtracted 24 percent from employment in advanced nations. “Manufacturing makes outsized contributions to GDP. It makes outsized contributions to overall productivity growth. It drives prosperity,” said James Manyika, one of the authors of the report. “But purely on employment, it has been declining over time.”

Skills Don’t Pay the Bills - Earlier this month, hoping to understand the future of the moribund manufacturing job market, I visited the engineering technology program at Queensborough Community College. I knew that advanced manufacturing had become reliant on computers, yet the classroom I visited had nothing but computers. As the instructor Joseph Goldenberg explained, today’s skilled factory worker is really a hybrid of an old-school machinist and a computer programmer. Goldenberg’s intro class starts with the basics of how to use cutting tools to shape a raw piece of metal. Then the real work begins: students learn to write the computer code that tells a machine how to do it much faster. Nearly six million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry’s future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs — the ones that require people who know how to run the computer that runs the machine.  This is partly because advanced manufacturing is really complicated. Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly. And aspiring workers often need to spend a considerable amount of time and money taking classes like Goldenberg’s to even be considered.

Onwards and upwards - FT.com: What do you need to make democracy work in the modern world? That is something many Americans might be asking as they digest the results of the latest $6bn election. From Plato on, there has been no shortage of ideas: an educated population, rule of law and civil society are all key ingredients – and, of course, a reliable system to count votes (ie no hanging chads). But is another ingredient also required: namely, a healthy pace of economic growth? That is the issue I have been pondering after I attended a debate in Oxford earlier this month with Peter Thiel, the American entrepreneur-turned-investor. In the past decade, Thiel has shot to fame and fortune by creating companies such as PayPal and cannily investing in Facebook. As such, he epitomises the sunnily optimistic, wheatgrass-juice-fuelled culture of Silicon Valley. But these days Thiel-the-entrepreneur is worried. In particular – and as he wrote in a recent column for the Financial Times, co-authored with Garry Kasparov, the former chess champion – he fears that the pace of innovation in America is slowing down. To be sure, he asserts, the country produced plenty of innovative ideas after the second world war; but in the past 30 years, this creativity has withered, sapped by the financial boom, and the rise of a newly risk-averse culture. “You cannot compare the iPhone 5 with Apollo 5,” he laments. “Innovation has declined.”

House Republicans release watershed copyright reform paper - Three Myths about Copyright Law and Where to Start to Fix it (PDF) is a position paper just released by House Republicans, advocating for a raft of eminently sensible reforms to copyright law, including expanding and clarifying fair use; reaffirming that copyright's purpose is to serve the public interest (not to enrich investors); to limit statutory damages for copyright infringement; to punish false copyright claims; and to limit copyright terms.  This is pretty close to the full raft of reforms that progressive types on both sides of the US political spectrum have been pushing for. It'll be interesting to see whether the Dems (who have a much closer relationship to Hollywood and rely on it for funding) are able to muster any support for this. ...

Curtailing Intellectual Monopoly - I never thought I'd see an RSC policy brief referring to mash-ups and mix-tapes, but I was clearly mistaken. The document deals in an unusually frank manner with the dismal state of US copyright law. Perhaps too frankly: it was quickly disavowed and taken down on the grounds that publication had occurred "without adequate review." Copies continue to circulate, of course (the link above is to one I posted on Scribd). Although lightly peppered with ideological boilerplate, the brief makes a number of timely and sensible points and is worth reading in full. Aside from extolling the virtues of "a robust culture of DJ’s and remixing" free from the stranglehold of copyright protection, the authors of the report make the following claims. First, the purpose of copyright law, according to the constitution, is to "promote the progress of science and useful arts" and not to "compensate the creator of the content." Copyright law should therefore be evaluated by the degree to which it facilitates innovation and creative expression. Second, unlike conventional tort law, statutory damages for infringement are "vastly disproportionate from the actual damage to the copyright producer." Third, the duration of coverage has been expanding, seemingly without limit. In 1790 a 14 year term could be renewed once if the the author remained alive; current coverage is for the life of the author plus 70 years. This stifles rather than promotes creative activity.

US small business never recovered from the last recession - US small business optimism continues to improve gradually, but still remains at recessionary levels. One of the big problems for small businesses remains the uncertainty in future economic conditions. 23% of survey respondents say they have no clue what to expect from the economy going forward. That's the highest level of uncertainty since the Jimmy Carter administration (see video below). And as discussed earlier (see post), uncertainty can materially inhibit economic growth.Credit conditions don't seem to be a problem in part due to the lack of demand. With uncertainty at such high levels, the last thing a number of small businesses want to do is increase debt levels. Weak sales are the number one single issue cited in the survey, but regulation and taxes are still a major concern for US small business - which of course contributes to more uncertainty. DB: - Together, government requirements and taxes are cited by 39% of small businesses as their biggest problem among the eight remaining components.While this is down from 42% in September, it is clearly an elevated reading that likely needs to fall substantially further for small business confidence to ultimately trend higher.

Weekly Initial Unemployment Claims decline to 410,000 - The DOL reports: In the week ending November 17, the advance figure for seasonally adjusted initial claims was 410,000, a decrease of 41,000 from the previous week's revised figure of 451,000. The 4-week moving average was 396,250, an increase of 9,500 from the previous week's revised average of 386,750. [New York] +43,956 Increase in initial claims due to Hurricane Sandy. These separations were primarily in the construction, food service, and transportation industries. [New Jersey] +31,094 Increase in initial claims due to Hurricane Sandy. These separation were primarily in the accommodation and food services, manufacturing, transportation and warehousing, administrative service, healthcare and social assistance,construction, retail, professional, trade, educational service, and public administration industries. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 396,250. This sharp increase in the 4 week average is due to Hurricane Sandy as claims increased significantly in the impacted areas. Note the spike in 2005 related to hurricane Katrina - we are seeing a similar impact, although on a smaller scale.

Weekly Unemployment Claims at 410K: The Sandy Effect Continues - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 410,000 new claims number was a 41,000 decrease from a 12,000 upward adjustment of the previous week as the Sandy Effect continues to skew the data. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, rose to 396,250. Given the impact of Hurricane Sandy, the four-week MA will be less reliable for the next few weeks. Here is the official statement from the Department of Labor:  In the week ending November 17, the advance figure for seasonally adjusted initial claims was 410,000, a decrease of 41,000 from the previous week's revised figure of 451,000. The 4-week moving average was 396,250, an increase of 9,500 from the previous week's revised average of 386,750.  The advance seasonally adjusted insured unemployment rate was 2.6 percent for the week ending November 10, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending November 10 was 3,337,000, a decrease of 30,000 from the preceding week's revised level of 3,367,000. The 4-week moving average was 3,285,000, an increase of 19,500 from the preceding week's revised average of 3,265,500.  Here is a close look at the data over the past few years (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. In the callout, note the red dots for the past four weeks. These clearly illustrate the data anomaly from Sandy.

Judge Convinces Union to Mediate with Hostess - Twinkies won’t die that easily after all. Hostess Brands Inc. and its second largest union will go into mediation to try and resolve their differences, meaning the company won’t go out of business just yet. The news came Monday after Hostess moved to liquidate and sell off its assets in bankruptcy court citing a crippling strike last week. The bankruptcy judge hearing the case said Monday that the parties haven’t gone through the critical step of mediation and asked the lawyer for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, which has been on strike since Nov. 9, to ask his client, who wasn’t present, if the union would agree to participate.The judge noted that the bakery union, which represents about 30 percent of Hostess workers, went on strike after rejecting the company’s latest contract offer, even though it never filed an objection to it.

Walmart Black Friday Strike: HuffPost Live Discusses Action As A 'Social Movement' (VIDEO): Walmart workers are planning to strike at 1,000 stores nationwide on Black Friday, the biggest shopping day of the year. And the campaign has gathered considerable support online -- with over $50,000 raised for striking workers and support from groups ranging from MoveOn.org to the National Organization of Women to various Latino, African American and interfaith groups. "I think the plight of the Walmart workers has turned into a social movement of itself," Patrick O'Neill, executive vice president of the United Food and Commercial Workers (UFCW) union, said on HuffPost Live Tuesday. In the last 10 to 15 years, he said, "with workers going backwards and the top one percent getting fatter and fatter, workers -- whether work at Walmart or not -- they can relate to Walmart workers."  OUR Walmart, a group that like a union for Walmart workers and that is funded by the UFCW, is coordinating the strikes Friday. All Walmart workers in the U.S. remain without an official union.

Walmart rattled by growing unrest ahead of Black Friday's strike | Sarah Jaffe - On Friday, Americans by the millions will crowd into big-box retail shops to take advantage of bargains on wide-screen TVs and other electronics – necessities, as well as luxuries – all marked down in order to draw them in and have them line up outside in advance of the doors opening. And now, as we've learned, several chains plan to open at 8pm on Thanksgiving day itself. The greatest irony of "Black Friday", as it's known, is that it's seen as a celebration of consumerism, instead of a sign of desperation: when a Walmart worker was crushed to death by a Black Friday crowd in 2008, the news was accompanied with moralizing about American greed, rather than any discussion about low wages in the US. Would people be so desperate for bargain shopping at already dirt-cheap places like Walmart if they themselves were making a decent living? This year, Black Friday at Walmarts around the country will be marked by something other than just ultra-low prices. Workers, members of a labor union-backed organization called Organization United for Respect at Walmart (Our Walmart) will be striking and, along with their allies, holding rallies and actions to support the effort. Walmart has managed to go 50 years without a strike; many unions have tried and failed to organize workers. But in just a month and a half, the strikes have spread to stores across 12 cities, and Walmart is worried: the company has filed an unfair labor practices charge with the National Labor Relations Board.

Worker Group Alleges Walmart 'Told Store-Level Management to Threaten Workers' About Strikes | The Nation: As planned Black Friday strikes draw increasing media attention, Walmart continues to publicly dismiss the actions as stunts and the workers involved as an unrepresentative fringe. But workers charge that behind closed doors, the company is waging a stepped-up campaign to to intimidate them out of striking. That includes both alleged illegal threats and punishments, and likely legal mandatory meetings designed to discourage workers from joining the Black Friday rebellion. Today, OUR Walmart filed the latest of dozens of National Labor Relations Board charges against Walmart. The charge, announced this evening, alleges that Walmart's national headquarters has "told store-level management to threaten workers with termination, discipline, and/or a lawsuit if they strike or engage in other concerted job actions on Black Friday" and that managers in cities including San Leandro, California, Fairfield, Connecticut, and Dallas have done exactly that. It also alleges that Walmart Vice President of Communications David Tovar "threatened employees" with his statements. OUR Walmart says it is seeking "immediate intervention" to remedy the alleged crimes. In an e-mailed statement, American Rights at Work Research Director Erin Johansson said, "Walmart appears to be issuing serious threats to employees to stop them from exercising their rights under law."

The truth about Walmart wages - Walmart has been on something of a charm offensive where the public is concerned (and an intimidation offensive where its workers are concerned), hoping to blunt the impact of the Black Friday rebellion. Walmart's big claim is that its wages are really quite good, if you happen to be a full-time worker there, anyway. The reality? A 2005 study from New York University found that Walmart employees earn 28 percent less, on average, than workers employed by other large retailers. At the same time, Walmart’s sheer size and competitive influence exert a downward pressure on wages at other retailers. A study from the University of California Berkeley finds that Walmart store openings in communities lead to the replacement of better paying jobs with jobs that pay less. As a result of this dynamic, average wages for retail workers were 10 percent lower, and their job-based health coverage rate was 5 percentage points less in an area than it would be if Walmart did not exist. The study concludes that in 2000, retail employees nationwide would have taken home $4.5 billion more in their total paycheck if Walmart had not been around. So Walmart isn't just lousy for its own workers, it makes it worse for all retail workers.

Why Big U.S. Retailers Can Afford To Increase Wages... By 2020, more than one-quarter of U.S. workers will be working low-wage jobs, not making enough money to keep a family of four out of poverty. The corporations that employ the most low-wage workers, meanwhile, “have largely recovered from the recession and most are in strong financial positions.” 92 percent of them were profitable last year, while three-quarters are making more in revenues than they were before the recession. The retail industry is one of those that employs the most low-wage workers. (About 36 percent of low-wage workers work in retail.) And according to a new report from Demos, big retailers could afford to boost their workers’ income to $25,000 per year without eating into their bottom line: The cost of increasing the living standards of more than 5 million Americans, adding $11.8 to $15.2 billion to GDP, and creating no less than 100,000 jobs amounts to just a small portion of total earnings among the biggest firms. The retail sector takes in more than $4 trillion annually and firms with 1000 or more employees account for more than half of that. At the same time labor compensation in the sector contributes only 12 percent of the total value of production, making payroll just a fraction of total costs. Large retailers could pay full-time, year-round workers $25,000 per year and still make a profit – satisfying shareholders while rewarding their workers for the value they bring to the firm. A raise at large retailers adds $20.8 billion to payroll for the year, or less than 1 percent of total sales in the sector.

Wages, prices, "profit", and productivity...and Black Friday too - Black Friday around here in New England begins tonight in stores about 8 P.M. Stores have responded with aggressive discounts, especially visible is Walmart. This post is relevant to the issue of wages at Walmart, and points to deeper economic issues one has to keep in mind when reading about the economics overall versus a company policy.  This becomes especially poignant as some Walmart workers attempt to draw attention to wages, benefits, and hours the company paints as necessary. Demos has some figures for thought in How Raising Wages Would Benefit Workers, the Industry and the Overall Economy.   Here's a summary of the study from Demos: This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation's largest retail companies, those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families. This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status.“There is a flaw in the conventional thinking that profits, low prices and decent wages cannot co-exist,” says Catherine Ruetschlin, study author and Demos Policy Analyst. “The findings in the study prove the country’s largest retailers are in an ideal position to launch a private sector stimulus, leading the way towards a new model for American prosperity.”

Failure of the American Conscience: Walmart Reports Record Black Friday Sales Despite 100-City Worker Strike - I guess we have the answer — even from those who should care — as the big box retailer had nothing to fear as workers and supporters picketed outside many Walmarts today. This is depressing. “Walmart cuts hours and benefits to push people out,” said Tammy [who toiled for 12 years as a Walgreens cashier], using her phone to capture video of the protest. “It’s the same thing at Walgreens. The workers are suffering while billionaires make all the money.” But despite her professed anger at corporate greed, Tammy — who declined to provide her last name lest she jeopardize her job — was not deterred from entering Walmart to purchase a TV on a layaway plan. Her own low wages made her feel a sense of community with the striking Walmart workers, but those same wages also generated pressure to find and buy goods at low prices — precisely the demand that Walmart has fed to turn itself into the world’s largest retailer. “You gotta go where the sales are,” Tammy said. “Today at Walgreens every toy was half off. I had to work a 12-hour shift, and they didn’t pay me enough. But I can’t tell shoppers, ‘Don’t come in.’ I’d lose my job.” The company has posted record Black Friday sales.

Local police disperse, arrest Black Friday protesters on behalf of Walmart - The treatment of peaceful protesters compared to the unruly and sometimes violent crowds of stampeding Black Friday shoppers couldn’t be more different. While the former is ostracized and forcibly removed by police, the latter is encouraged to come out for a competitive brawl over marked off goods. Nowhere is this contrast more clearly defined than in the police treatment of Walmart protesters over the last 24 hours. On Black Friday, the biggest shopping day of the year, at least 1,000 Walmart employees throughout the country have walked off the job to protest Walmart’s poor labor practices. While these historic developments are exciting, local police departments have been happy to disperse and even arrest strikers and their supporters on behalf of the world’s largest retailer.

A Foreign Supply Chain Threat Opening on Walmart Labor Protests? - Yves Smith - It’s too early to tell how effective the Black Friday against Walmart’s low pay and abusive working conditions were. The early reports from management and the organizers are wildly at odds with each other. However, a new front may open up in the Walmart disputes: that of disruption to its international shipments. It’s too early to tell if this is serious or merely sympathetic window dressing, but the four and a half million strong International Transport Workers’ Federation had cleared its throat. From the Guardian: Now the International Transport Workers’ Federation (ITF) has written to shipping owners and ship captains who carry Walmart goods and asked them to contact the gigantic global company and express support for the protesting workers. “Walmart workers taking industrial action know that their jobs are at risk. The least we can do to help is use our expertise at sea and relations with the shipping industry to back them in any way we can.” ITF acting general secretary Steve Cotton told the Guardian: “We’re talking to captains and the ship operators moving Walmart goods, and asking them to register their concerns with the company about its treatment of staff – and the impact that could have on trade.” As readers no doubt know, Walmart’s business model depends on being able to import cheap goods from overseas. It also uses the “just in time” inventory practices first developed by Japanese automakers, so it does not typically carry large inventory buffers. If international transport workers were to start interfering with or delaying Walmart shipments, it could prove to be disruptive.

Compensation Growth and Slack in the Current Economic Environment - NY Fed - Following a significant slowing during the recent recession, growth in various labor compensation measures has stabilized during the past two to three years. This stabilization is puzzling because it’s widely held that a significant amount of slack remains in the economy. Accordingly, this large amount of slack should result in a further slowing in compensation (wage) growth. In this post, we show that there’s a very mild trade-off between compensation growth and resource slack, even though slack is sizable. Consequently, the observation that there’s slow but steady growth in labor compensation measures is consistent with a large amount of slack in the current economic environment.    Our analysis is based on the estimation of a nonlinear wage-inflation Phillips curve that draws upon the modeling approach outlined in a Boston Fed paper by Fuhrer, Olivei, and Tootell. The key feature of the nonlinear Phillips curve is that the impact of a change in slack depends on the level of slack. These features are illustrated in the chart below, where the slope of the Phillips curve becomes steeper as the unemployment rate moves further below the natural rate of unemployment (higher resource utilization), while the slope becomes flatter as the unemployment rate moves further above it (lower resource utilization).

What Are Conservatives Getting Wrong About the Economy? -- Ross Douthat argues in his recent New York Times editorial, The Liberal Gloat, that the coalition that elected President Obama was "created by social disintegration and unified by economic fear." Douthat argues that "single life is generally more insecure and chaotic than married life, and single life with children." The implicit argument is that marriage is an important part of handling the economic fears of the business cycle, and if there were more married couples there'd be less call for economic policy. Krugman notes that "insecurity is on the rise for everyone, driven by changes in the economy" and that "[y]our church and your traditional marriage won’t guarantee the value of your 401(k)." For fun, how well has the income of couples with children held up in the Great Recession when compared to single households with children? Let's look at the Federal Reserve's recent Survey of Consumer Finance. This comes out every three years, with the last version covering 2010. Here's net income for single households with a child versus couple households ("families in which the family head was either married or living with a partner") with a child: In the Great Recession, single households with a child lost 2.3 percent of their income, while couple households with a child lost 9.4 percent of their income. Now obviously having $67K is better than having $29K. And the 2.3 percent loss of income for people with less could sting a lot harder than the 9.4 percent loss for those with more.

Why this recovery is more jobless for black Americans than others - When pressed about whether or not he feels an obligation to address the crisis of black unemployment, President Obama has supplied a reliably consistent answer over the past four years: a rising tide lifts all boats. That is to say, he is of the belief that as the economy gets better overall, it would certainly get better for black people, as well. And the economy has done better. Recovery has been slow and growth modest, but the answer to "are we better-off than we were four years ago?" is definitely "yes". That is, if you're talking overall. For black people, the answer may be, "eh, not really". The national unemployment rate has gone down to 7.9%, but for black people, it remains stuck in the teens – having gone up in the last jobs report before the election from 13.4% to 14.3%. This is because black job-seekers have to contend with something that does not come up in the Bureau of Labor Statistics monthly jobs report: racism.

Immigration and Efficiency - To restate the overstated, there’s a real opening for comprehensive reform coming off of the election. The politics are, of course, the sine qua non here—there will be no reform absent some alignment of political stars that has eluded thus far.   But I’m here to talk about the economics. These can be divided into a few bins: the impact of immigration on the incomes of domestic workers who compete with immigrants; the fiscal impact; the macro impact (I’ll get back to this soon in the context of this post).  And along with these big questions, there are distinctions like undocumented immigrants and their kids who are here already versus those who want to come to America.I plan to write numerous posts on these topics in coming weeks, but for this first one, I’d like to focus on one: undocumented workers already here within our borders. My motivation grows out of a discussion I had with a friend in the food industry.  He is clearly a good, ethical employer who abides by the law.  But he also lives in some measure of fear that he’s unknowingly hiring illegal workers.  He runs the required checks but is aware of their fallibility.  He doesn’t use E-Verify much (it’s not required in VA in the private sector), in part because he’s heard about the false positives, but in no small part because he doesn’t want to be at a competitive disadvantage against other employers who don’t bother with it. He told me of many cases of excellent employees—some who’d been with him for a while—disappearing when a check came back with a question mark or when ICE authorities came around. This is highly inefficient and I really don’t see the upside..

Defending the Right to Treat Your Employees Like Dirt - Getting tired of eating at Chick-Fil-A every day to express your hatred of liberals? Well, now you have a couple more options. You can chow down at Applebee's, where the CEO of their New York franchises went on TV to declare that he won't be doing more hiring because of the costs Obamacare would impose. Or you can head over to Papa John's, whose CEO, John Schnatter, has said that Obamacare could add as much as—brace yourself—10 cents to the cost of a pizza, and since obviously customers would never tolerate such price gouging, he'll just have to cut back employees' hours. In our new era of corporate political activism, we're goin to be seeing a lot more of this kind of thing. So let's make sure we all understand exactly what it is these chieftains are complaining about: They don't want to give their employees health insurance. That's it. They'd prefer to talk about "regulation" in some general sense, so you might get the impression that Obamacare is making them needlessly remodel their bathrooms or something, but the provision in question mandates that health coverage be offered in any company that has over 50 employees. And there's something else to keep in mind: Nearly all companies with over 50 employees already offer health coverage to their employees, even though this provision of Obamacare doesn't take effect until January 2014. According to the Kaiser Family Foundation, 98 percent of companies with over 200 employees offer coverage, as do 94 percent of companies with between 50 and 199 employees. That means when you see some CEO come out and decry the costs of Obamacare, the person you're looking at is one of the jerks, the guy who treats his employees like crap and is angry that the law is going to force him to be a little more humane.

Even More Invisible Poor - As the meaningless 2012 election farce segued into the meaningless Fiscal Cliff farce, lots of news has flown under the radar. Last week the Census Bureau released their 2011 Supplemental Poverty Measure, which is designed to make up for some defects in the traditional way the government counts The Poor. The Census data revealed that some 50 million citizens, 16.1% of all Americans, live in poverty, about 600,000 more than there were in 2010. Outside of a short Bloomberg story and a short Business Insider story, reporting of this happy statistic was rare in the mainstream media. I'll quote from both, starting with Bloomberg— The ranks of poor Americans remained at a record high number last year, even after government-aid programs such as food stamps, housing vouchers and heating subsidies were included, the U.S. Census Bureau said today.  The bureau said 49.7 million Americans, or 16.1 percent, are in poverty, up from 49.1 million, or 16 percent, in 2010, according to a new measure the government is using to supplement the official figures released in September. The new method, designed to offer a more comprehensive measure of poverty, includes government aid as income, while subtracting child-care costs, work-related expenses and medical out-of-pocket fees.  The official measure, which includes only pretax cash income and is used to determine eligibility for aid programs, put the poverty rate at 15.1 percent, the bureau said.  The government safety net prevents many Americans from falling below the official poverty line. How many? Consider this Census Bureau chart, which was duplicated by the Business Insider with an explanation:

U.S. food banks raise alarm as drought dents government supplies : (Reuters) - The worst U.S. drought in more than half a century has weakened the safety net for the 50 million Americans who struggle to get enough to eat, and the nation's food banks are raising the alarm as the holiday season gets into full swing. Demand for food assistance - unrelenting as the U.S. economy slowly recovers from the worst recession since the Great Depression - ticks higher during the winter holidays. This summer's crop-damaging weather in the U.S. farm belt has driven up costs for everything from grain to beef. That means higher prices at the grocery store, but it also means the U.S. government has less need to buy key staples like meat, peanut butter, rice and canned fruits and vegetables to support agricultural prices and remove surpluses. Most of the products from those government purchases are sent to U.S. food banks, which then distribute them to food pantries, soup kitchens and emergency shelters that are a lifeline for people who struggle with hunger - including low-income families, senior citizens and people with disabilities. The decline in government donations is exacerbating the pain inflicted by stubbornly high unemployment and a lack of income growth for many low-wage workers. "People have been coping with economic distress for a really, really, really long time ... After several years of tapping all the resources we have, we're starting to see that we're coming up short," said Carrie Calvert, director of tax and commodity policy at Feeding America, the nation's largest hunger relief organization.

Food Banks in the U.S. Running Low on Supplies... Ominous Sign for 2013 - This is a very interesting yet ominous article from Reuters about the current food bank situation in these United States.  As a result of the drought this summer the Federal government ended up buying less food than normal, and because this excess food is used to provide assistance to the poor in many cases, there simply may not be enough to go around.  This sets up a potentially tragic situation as we head into 2013, and is likely to bring heightened social unrest to our shores as I outlined in my recent article The Global Spring. From Reuters: The worst U.S. drought in more than half a century has weakened the safety net for the 50 million Americans who struggle to get enough to eat, and the nation’s food banks are raising the alarm as the holiday season gets into full swing. Executives at major food banks across the United States worry they will not be able to keep pace with demand, which they don’t expect to ease until more Americans find better paying jobs. In a sign of how stressed the budgets of many Americans are, a record 47.1 million people used food stamps in August 2012, up from 45.8 million the year earlier

Jobless Benefits as an Antipoverty Program - In addition to the tax increases and broad federal spending cuts (known as “sequestration”) scheduled to take effect at the end of this year, the emergency unemployment benefits system is also expected to come to an end. It doesn’t get as much attention as the defense cuts or the tax increases, but the end of these extended unemployment benefits is expected to affect millions of Americans. More than two million workers now collecting federal unemployment benefits will lose the lifeline after the week ending Dec. 29. By the end of the first quarter of 2013, another one million will run out of state benefits without ever benefiting from Emergency Unemployment Compensation, according to the National Employment Law Project, a liberal advocacy group. There seems to be a widely held view — at least judging from the e-mail I get on the day of each month’s unemployment report — that idle workers don’t have jobs because they’ve gotten used to being paid not to work and would prefer to continue collecting unemployment rather than go out and earn an honest living. But given that so many unemployed workers will have exhausted their benefits or were never eligible for benefits in the first place, more than two out of every three unemployed workers will enter 2013 without receiving any form of unemployment insurance (for example, those whose benefits lapsed or who didn’t qualify, because of self-employment or insufficient hours).

Surprise! Report says income inequality still getting worse in most states - A report from the Center for Budget and Policy Priorities confirms what has been happening in the realm of income inequality: In most regions of the nation, Americans at the top end of the scale are widening the gap between what they earn and what their fellow citizens at the other end do: During the recession of 2007 through 2009, households at all income levels, including the wealthiest, saw declines in real income due to widespread job losses and the loss of realized capital gains.  But the incomes of the richest households have begun to grow again while the incomes of those at the bottom and middle continue to stagnate and wide gaps remain between high-income households and poor and middle-income households. [...]

• • In the United States as a whole, the poorest fifth of households had an average income of $20,510, while the top fifth had an average income of $164,490—eight times as much.  In 15 states, this top-to-bottom ratio exceeded 8.0. In the late 1970s, in contrast, no state had a top-to-bottom ratio exceeding 8.0.
• • The average income of the top 5 percent of households was 13.3 times the average income of the bottom fifth. The states with the largest such gaps were Arizona, New Mexico, California, Georgia, and New York, where the ratio exceeded 15.0.[...]

Similarly, income gaps between high- and middle-income households remain large. Nationally, the average income of the richest fifth of households was 2.7 times that of the middle fifth. 

• • The five states with the largest such gaps are New Mexico, California, Georgia, Mississippi, and Arizona. [...]
• • In these 11 large states, the average income of the top 5 percent rose between the late 1970s and mid-2000s by more than $100,000, after adjusting for inflation . (In New Jersey and Massachusetts, the increase exceeded $200,000.) By contrast, the largest increase in average income for the bottom fifth of households in these states was only $5,620.

Most States Added Jobs Last Month - Most states added jobs in October, though the gains were generally meager, Labor Department data released Tuesday showed. Thirty-five states saw payrolls rise last month from September, while 15 states posted declines. California led the way with a seasonally adjusted 45,800 new jobs. Over the year, the Golden state has added 295,300 jobs, in a range of industries including transportation, professional and business services, and leisure and hospitality. Still, the state has a long way to go in recovering from the housing bust: The state’s unemployment rate dipped a tenth of a point in October but still remained at an elevated 10.1%, third-highest in the nation. Only Nevada, at 11.5%, and Rhode Island, at 10.4%, had higher jobless rates last month. Other states adding jobs last month included Texas, which saw payrolls rise by 36,600, and Georgia, which saw payrolls increase 16,100. States that lost jobs included Michigan, at a negative 16,500 from September; New Jersey, at minus 11,700; and Minnesota, which lost 8,100 positions. The jobless rate fell in 37 states and the nation’s capital last month, while unemployment rose in seven states. The rate was unchanged in six states. Nationally, the jobless rate ticked up a tenth of a point to 7.9% in October. See the full interactive graphic.

State Unemployment Rates decreased in 37 States in October - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in October. Thirty-seven states and the District of Columbia recorded unemployment rate decreases, seven states posted rate increases, and six states had no change, the U.S. Bureau of Labor Statistics reported today. ... Nevada continued to record the highest unemployment rate among the states, 11.5 percent in October. Rhode Island and California posted the next highest rates, 10.4 and 10.1 percent, respectively. North Dakota again registered the lowest jobless rate, 3.1 percent.This graph shows the current unemployment rate for each state (red), and the max during the recession (blue). All states are below the maximum unemployment rate for the recession. The size of the blue bar indicates the amount of improvement - Michigan and Ohio have seen the most improvement - New Jersey, Connecticut and New York are the laggards. The states are ranked by the highest current unemployment rate. Only three states still have double digit unemployment rates: Nevada, Rhode Island, and California. In early 2010, 18 states and D.C. had double digit unemployment rates.

State Unemployment and Payrolls for October 2012 - The mantra for the October state employment statistics is little change from September. Over and over we see dropping unemployment rates yet too little significant growth in actual jobs. Only seven states had unemployment increases, six had no change and 35 plus the District of Columbia showed declines. Below is the BLS map of state's unemployment rates for October 2012.  There are now only three states with unemployment rates above 10%, Nevada at 11.5%, Rhode Island, at 10.4% and California with a 10.1% unemployment rate. Four other states have unemployment rates above 9%, New Jersey at 9.7%, North Carolina at 9.3%. Michigan has a 9.1% unemployment rate and Connecticut is 9.0%. The states with the lowest unemployment rates are North Dakota at 3.1%, Nebraska at 3.8% and South Dakota with a 4.5% unemployment rate.  Payrolls on the other hand are another story. While jobs increased in 35 states plus the District of Columbia, payrolls actually shrank in 15. From the report are the most significant percentage changes per state from last month in jobs.  Utah experienced the largest over-the-month percentage increase in employment (+0.7 percent), followed by Louisiana and Montana (+0.6 percent each). Alaska and Rhode Island experienced the largest over-the-month percentage declines in employment (-0.5 percent each), followed by Kentucky and Michigan (-0.4 percent each). Below is the BLS report table of significant changes in employment and the thing to notice is how small the changes are in comparison to the total payrolls of each state. California has 12% of the U.S. population and Texas is the next largest state. Michigan, on the other hand, with low population lost a significant number of jobs in October.

Unemployment Falls in 75 Percent of U.S. States - An increase in hiring helped lower unemployment rates in 37 U.S. states last month, the latest indication that the job market is slowly healing. Unemployment rates are now below 7 percent in 23 of the 50 states. The Labor Department says rates rose in seven states in October and were unchanged in six. South Carolina’s rate fell from 9.1 percent to 8.6 percent, the biggest drop among states. It has fallen a full percentage point in just two months. The state gained 7,300 jobs in October, mostly in hotels, restaurants, education and health care, and government. Alaska and Wisconsin recorded the next biggest declines. Nationwide, the unemployment rate ticked up to 7.9 percent in October. But it has declined a full point in the past year. Employers added 171,000 jobs in October. Job gains in September and August were also much stronger than initially estimated. That raised the average job growth from July through September to 174,000 a month, up from 67,000 a month in the April-June quarter. The biggest job gains among states in October were in California and Texas. California employers added 45,800 positions. Texas gained 36,600 jobs.

California: Unemployment Rate falls to 10.1% in October, Payroll jobs increase 45,800 - Recently I've been talking to a few friends from around the country, and they all seemed unaware that the California economy is clearly improving. California is seeing a pickup in employment, the delinquency rate is falling, and I wouldn't be surprised if California reports a balanced budget soon.  Note: when the MBA quarterly delinquency data was released earlier this week,  Mike Fratantoni, MBA’s Vice President of Research and Economics, said there has been "dramatic" improvement in California and Arizona.  From California's Employment Development Department: California’s unemployment rate decreases to 10.1 percent, Nonfarm payroll jobs increase by 45,800 California’s unemployment rate decreased to 10.1 percent in October, and nonfarm payroll jobs increased by 45,800 during the month for a total gain of 574,900 jobs since the recovery began in February 2010, according to data released today by the California Employment Development Department (EDD) from two separate surveys. This is the lowest unemployment rate for California since Jan 2009. There are only three states still with double digit unemployment: Nevada, Rhode Island, and California.

Ore. faces $700 million budget gap next year — More painful state budget cuts are in store next year as the lethargic economic recovery fails to keep pace with the growth in costs for state services. A quarterly revenue forecast delivered to state lawmakers Tuesday projects that the Oregon general fund and lottery will be nearly $700 million short of maintaining government services at their already-slimmed down level for another two years. Still, the deficit is far less ominous than the $3.5 billion gap that lawmakers filled in 2011. For the two-year budget cycle that begins July 1, economists project Oregon will collect $16.5 billion in taxes. That's more than the $15 billion the state is expected to collect by the end of the current budget cycle, but it's not enough to keep pace with the $17.2 billion cost of continuing all services at their current levels. The spike in costs is driven by rising health care costs, expanded caseloads for government assistance and rising personnel costs, among many other factors.

‘Fiscal cliff’ could mean $22 billion more in taxes for Pa. residents -Pennsylvanians will face billions of dollars in higher taxes unless Congress acts by the end of the year to defuse a threatening combination of tax increases and spending cuts contained in the so-called “fiscal cliff.” A recent report by the state’s Independent Fiscal Office, Pennsylvania’s version of the federal Congressional Budget Office, suggests the fiscal cliff would drain billions from Pennsylvania’s economy, putting a strain on state tax revenues and the state budget. Based on estimates from the Tax Policy Center, a nonpartisan think tank in Washington, D.C., the IFO projects the fiscal cliff will raise federal taxes by $536 billion — with about 4.1 percent of that total, or $22 billion, coming from the pockets of Pennsylvania taxpayers.  Nationally, analysts believe the fiscal cliff will substantially reduce economic growth and may tip the nation into another recession in 2013.

Hurricane Sandy Destroys Jobs, Brings Threat Of Poverty To Thousands Of Unemployed: Johnson lost her job after Hurricane Sandy lashed the mid-Atlantic states three weeks ago. The superstorm destroyed the Staten Island offices of the marketing firm where she worked as an account executive for the past three years. After more than a decade of continuous employment, the storm has put the 54-year-old single mother in a position she never imagined she'd be: Collecting unemployment and applying for nearly any job for which she is remotely qualified. Johnson represents one of the thousands of new faces in the unemployment line following the hurricane. Last week, the Labor Department reported that initial claims for state unemployment rose by 78,000 to a seasonally adjusted 439,000. That is the highest level since April 2011, and the biggest one-week increase in new claims since 2005. An analyst from the Labor Department said much of the claims’ increase came from states in the mid-Atlantic region, where the storm flooded thousand of homes and businesses, according to Reuters. The damage from the storm is estimated to be as much as $50 billion. Deutsche Bank's chief U.S. economist, Joseph LaVorgna, said he anticipated the storm's impact would weigh heavily on the overall jobs picture. "The data reported last week showed preliminary evidence of Hurricane Sandy disrupting economic activity," LaVorgna told CNBC on Monday. "We are concerned there may be an acute hurricane impact on November payrolls."

The Land That Time and Money Forgot - My visit to the Linden Houses was part of a self-guided tour of what I’d come to call “Nychaland.” As in NYCHA, the New York City Housing Authority, a.k.a. the projects. New York might be a city of neighborhoods, but Nychaland is a zone of its own. It is almost unthinkably huge: 334 “developments” spread from Staten Island’s Berry Houses to Throgs Neck in the Bronx—178,895 apartments in 2,602 buildings situated on an aggregate 2,486 acres, an area three times the size of Central Park. The population of Nychaland is usually cited at 400,000, but this number is universally regarded as too low, since most everyone knows someone living “off lease.” One NYCHA employee says that “600,000 is more like it.” That’s about 8 percent of New York—with 160,000 families on the waiting list. If Nychaland was a city unto itself, it would be the 21st most populous in the U.S., bigger than Boston or Seattle, twice the size of Cincinnati. Despite these prodigious stats, the projects remain a mystery to most New Yorkers, a shadow city within the city, out of sight and mind, except when someone gets shot or falls down an elevator shaft—just these bad-news redbrick piles to whiz by on the BQE. Indeed, perhaps Nychaland’s most compelling attribute is the fact that it exists at all. Across the U.S., public housing, condemned as a tax-draining vector of institutionalized mayhem and poverty, whipping-boy symbol of supposedly foolhardy urban policy, has largely disappeared. Chicago knocked down Cabrini-Green, St. Louis imploded Pruitt-Igoe, New Orleans flattened Lafitte after Katrina. Only in New York does public housing remain on a large scale, remnants of the days when the developments were considered a bulwark of social liberalism, a way to move up.

When Law and Order Break Down: “People Are Afraid Right Now. You Can See It In Their Faces.” - Cities from coast-to-coast are facing unprecedented budget deficits that have left government officials with no choice but to strip police forces to a bare minimum. We now regularly hear about new ‘records’ being broken in the resulting crime waves that follow. Law enforcement officials in Chicago, for example, have said that their city has deteriorated into a domestic war zone with gang violence leaving scores of people dead on a regular basis. Murder, rape, robbery and assault have skyrocketed in bankrupt Stockton, California, suggesting that local governments are quickly losing control. In New Jersey, the city of Camden may soon be granted the dubious distinction of being the poorest and most violent city in America. On a walkway 20 feet away, a middle-aged man lies dead, shot in the throat and head, sprawled on his back beside a battered 10-speed bicycle. His face is masked in blood that gleams bright red in the crime scene photographer’s flash. Johnson watches tight-lipped as investigators comb the grass for shell casings. “Kids play out here. Average people live here,” he says. “I’m shaking. It’s getting too close.” Gunfire rings out often in the neighborhood, he says, a regular reminder of the crime wave that has this city of 77,000 on pace to double its homicides in just three years, and has already shattered a nearly 20-year record for killings.

Are Roads Public Goods? - For many "surface" roads, in rural areas, there is no congestion, or at least none unless you get behind a tractor or school bus.  And the cost of collecting fees would be prohibitive, particularly in the era before transponders when you would have need a toll booth at the end of every driveway or building entrance to measure when a car gets on and when it gets off.  So, roads in that kind of setting are pretty close to public goods.  Further, we can charge an excise tax on gasoline, which is close to being a linear fee on intensity of use.  Heavier cars, and trucks, use more gas and so pay higher fees, and even smaller cars use twice as much gas to travel twice as far.  So weight and distance travelled determine how much you pay in fees (gas taxes).  Let's say rural roads look like they could be public goods. Rural interstate, or limited access, highways are a closer call.  The limited access part means that there are relatively few on/off ramps, and the development of transponders and licese plate cameras with computerized billing reduces the costs of collecting fees.  Still, the use of the highway is generally not subject to congestion in rural areas.  But urban, limited access highways?  Please, chile, get out my face.  That's NOT a public good, not even close.  Urban highways are notoriously subject to extreme crowding.  Consequently, the marginal cost of being on the highway is positive.  And it is cheap now to use electronic means to detect and collect road use fees.  These fees can have different levels for different times of day generally, and even be "live," with different charges for different traffic conditions.

Exclusive: New Jersey railway put trains in Sandy flood zone despite warnings (Reuters) - New Jersey Transit's struggle to recover from Superstorm Sandy is being compounded by a pre-storm decision to park much of its equipment in two rail yards that forecasters predicted would flood, a move that resulted in damage to one-third of its locomotives and a quarter of its passenger cars. That damage is likely to cost tens of millions of dollars and take many months to repair, a Reuters examination has found. The Garden State's commuter railway parked critical equipment - including much of its newest and most expensive stock - at its low-lying main rail yard in Kearny just before the hurricane. It did so even though forecasters had released maps showing the wetland-surrounded area likely would be under water when Sandy's expected record storm surge hit. Other equipment was parked at its Hoboken terminal and rail yard, where flooding also was predicted and which has flooded before. Among the damaged equipment: nine dual-powered locomotive engines and 84 multi-level rail cars purchased over the past six years at a cost of about $385 million. "If there's a predicted 13-foot or 10-foot storm surge, you don't leave your equipment in a low-lying area," said David Schanoes, a railroad consultant and former deputy chief of field operations for Metro North Railroad, a sister railway serving New York State. "It's just basic railroading. You don't leave your equipment where it can be damaged." After Reuters made numerous inquiries to state and local officials this week about the decision to store equipment in the yards, an unidentified senior transportation official told the New York Post that NJ Transit had launched an internal probe, the Post reported on Saturday.

Superstorm Sandy: interactive before and after images -- Use our interactive images to see parts of the north-eastern coastline of the United States before and after the damage caused by Hurricane Sandy.  Hover over each satellite photo to view the before and after comparison.

A Beachfront Retreat - AS ocean waters warm, the Northeast is likely to face more Sandy-like storms. And as sea levels continue to rise, the surges of these future storms will be higher and even more deadly. We can’t stop these powerful storms. Hurricane Sandy’s immense power, which destroyed or damaged thousands of homes, actually pushed the footprints of the barrier islands along the South Shore of Long Island and the Jersey Shore landward as the storm carried precious beach sand out to deep waters or swept it across the islands. This process of barrier-island migration toward the mainland has gone on for 10,000 years. Yet there is already a push to rebuild homes close to the beach and bring back the shorelines to where they were. The federal government encourages this: there will be billions available to replace roads, pipelines and other infrastructure and to clean up storm debris, provide security and emergency housing. Claims to the National Flood Insurance Program could reach $7 billion. And the Army Corps of Engineers will be ready to mobilize its sand-pumping dredges, dump trucks and bulldozers to rebuild beaches washed away time and again.But this “let’s come back stronger and better” attitude, though empowering, is the wrong approach to the increasing hazard of living close to the rising sea. Disaster will strike again. We should not simply replace all lost property and infrastructure. Instead, we need to take account of rising sea levels, intensifying storms and continuing shoreline erosion.

Study: NJ beaches 30-40 feet narrower after storm - — The average New Jersey beach is 30 to 40 feet narrower after Superstorm Sandy, according to a survey that is sure to intensify a long-running debate on whether federal dollars should be used to replenish stretches of sand that only a fraction of U.S. taxpayers use. Some of New Jersey's famous beaches lost half their sand when Sandy slammed ashore in late October. The shore town of Mantoloking, one of the hardest-hit communities, lost 150 feet of beach, said Stewart Farrell, director of Stockton College's Coastal Research Center and a leading expert on beach erosion. Routine storms tear up beaches in any season, and one prescription for protecting communities from storm surge has been to replenish beaches with sand pumped from offshore. Places with recently beefed-up beaches saw comparatively little damage, said Farrell, whose study's findings were made available to The Associated Press. "It really, really works," Farrell said. "Where there was a federal beach fill in place, there was no major damage — no homes destroyed, no sand piles in the streets. Where there was no beach fill, water broke through the dunes." The beach-replenishment projects have been controversial both for their expense and because waves continually wash away the new sand. The federal government picks up 65 percent of the cost, with the rest coming from state and local coffers.

As Coasts Rebuild and U.S. Pays, Repeatedly, the Critics Ask Why - The western end of this Gulf Coast island has proved to be one of the most hazardous places in the country for waterfront property. Since 1979, nearly a dozen hurricanes and large storms have rolled in and knocked down houses, chewed up sewers and water pipes and hurled sand onto the roads. Yet time and again, checks from Washington have allowed the town to put itself back together. Across the nation, tens of billions of tax dollars have been spent on subsidizing coastal reconstruction in the aftermath of storms, usually with little consideration of whether it actually makes sense to keep rebuilding in disaster-prone areas. If history is any guide, a large fraction of the federal money allotted to New York, New Jersey and other states recovering from Hurricane Sandy — an amount that could exceed $30 billion — will be used the same way. Tax money will go toward putting things back as they were, essentially duplicating the vulnerability that existed before the hurricane. “We’re Americans, damn it,” said Robert S. Young, a North Carolina geologist who has studied the way communities like Dauphin Island respond to storms. “Retreat is a dirty word.”

Holding Back Floodwaters With a Balloon - The idea is a simple one: rather than retrofitting tunnels with metal floodgates or other expensive structures, the project aims to use a relatively cheap inflatable plug to hold back floodwaters. In theory, it would be like blowing up a balloon inside a tube. But in practice, developing a plug that is strong, durable, quick to install and foolproof to deploy is a difficult engineering task, one made even more challenging because of the pliable, relatively lightweight materials required. “Water is heavy, there’s a lot of pressure,” said Greg Holter, an engineer with Pacific Northwest National Laboratory who helps manage the project. “So it’s not as simple as just inflating and filling the space. The plug has to be able to withstand the pressure of the water behind it.”

Solar Companies Seek Ways to Build an Oasis of Electricity - Despite the popular perception that installing solar panels takes a home “off the grid,” most of those systems are actually part of it, sending excess power to the utility grid during the day and pulling electricity back to run the house at night. So when the storm took down power lines and substations across the Northeast, safety systems cut the power in solar homes just like everywhere else. “Here’s a $70,000 system sitting idle,” said Ed Antonio, who lives in the Rockaways in Queens and has watched his 42 panels as well as those on several other houses in the area go unused since the power went out Oct. 29. “That’s a lot of power sitting. Just sitting.”  In the Rockaways, where nearly 14,000 customers still had no power as of Monday morning, volunteers set up a makeshift solar charging station between a car roof and a shopping cart. A multipanel, battery-tied system is helping fuel a relief center’s operations. In the storm’s wake, solar companies have been donating equipment across New York and other stricken areas to function as emergency power systems now and backups in the longer term. It is important, executives say, to create smaller, more decentralized ways of generating and storing electricity to help ease strain on the grid in times of high demand or failure.

Urgently Needed: A Dumber, Tougher Grid - Since the hurricane and “nor’easter” that devastated the New Jersey and New York coasts two weeks ago, leaving millions without heat, gasoline and electricity, there has been a lot of loose talk about how a smarter grid might moderate the effects of such catastrophes in the future. The smart grid will indeed have a role to play—especially in speeding recovery. As Massoud Amin of the University of Minnesota recently put it, “a more resilient, secure and smarter infrastructure…would localize impacts and enable a speedier restoration of the services.” However, what we need even more urgently than a more agile and interactive grid incorporating advanced computing and communications in all dimensions is a grid that’s basically old-fashioned, stupid and really, really tough. What was made clear by the “Frankenstorm,” the second costliest such event in U.S. history, after Katrina, is that as the world warms, waters rise, and turbulent storms become more violent and unpredictable, grids will have to be physically hardened. This will be an immensely complicated and expensive undertaking, considering that such an undertaking must include the grid’s natural extensions: electrified railways, subways, and light rail.

New Yorkers Challenge LIPA, FEMA over Power Outages - Hurricane Sandy isn’t done with New York. Having revealed the unaccountable weakness of the local authorities to deal with the disaster, now she’s rolling heads. The past week has seen the resignation of the chief of the Long Island Power Authority (LIPA), the news that some in the Rockaways and Long Island may be without power until Christmas, and questions that are making things uncomfortable for Governor Mario Cuomo.  While Cuomo has promised to hold utility companies and their management accountable for poor performance, he won’t be able to deflect blame entirely.   For one thing, LIPA is Cuomo’s father’s creation, and he gets to make nine of the 15 appointments to the board of trustees. The necessity of a massive restructuring of LIPA is Cuomo’s responsibility and the removal of Hervey will not make much of a difference. It will not go unnoticed that Cuomo allowed LIPA to continue with necessary changes and to build debt that was hidden from the public.  As for LIPA itself, this might be the beginning of the end. It was never intended to be a permanent operation—only a transition. In the meantime, some say the disgraceful performance of LIPA is the result of a cumbersome bureaucracy. And if bureaucracy is the problem, then it’s only going to get worse. As of 2014, another layer will be added when the Public Service Enterprise Group, Inc. (PSEG) takes over the day-to-day operation of LIPA’s electric utility business. New Yorkers want action now, or preferably, yesterday. But even trying to get ahold of LIPA these days is challenging, and most calls will end with an automated response along the lines of “try again later”.

OccupySandy feeds FEMA workers: Government incompetence at its peak - What happens when federally-hired emergency workers can’t handle a federal emergency? FEMA staffers found out the answer firsthand this week when Occupy activists had to lend a hand. In the aftermath of Hurricane Sandy and an intense nor’easter that impacted the East Coast in recent weeks, the Federal Emergency Management Agency (FEMA) sent employees to the greater New York City area to aid the millions of residents ravaged by Mother Nature. As RT reported earlier, however, FEMA put their efforts on hold when rough weather became a nuisance for the government workers dispatched to the scene. “It’s just annoying when many people here need help, and they just didn’t do what they’re supposed to do,” a Queens resident told DNAinfo.com. “It’s emergency, and they should be open by now.” Residents of the region were once again out of luck over the weekend, but activists aligned with the Occupy Wall Street movement — specifically those assisting with relief efforts under the umbrella of Occupy Sandy — came to the rescue. It wasn’t the citizens of Staten Island or New Jersey that were lining up for aid, either — it was federal FEMA workers

Occupy Sandy: From protest group to storm recovery - BBC - The group behind Occupy Wall Street is now turning its attention - and its assets - towards helping those hit by "Superstorm" Sandy. The Episcopalian church at 520 Clinton Avenue in Brooklyn, New York, is packed - not with parishioners, but with supplies. Boxes of nappies and baby wipes stand 10-boxes high, stacked underneath a stained-glass window depicting The Virgin Mary and the Christ Child. The transept is filled with empty plastic fuel canisters and industrial-sized mop buckets. These items were all donated to Occupy Sandy, the latest iteration of the Occupy Wall Street movement. The group is also one of the leading providers of storm relief for beleaguered areas in New York and New Jersey still suffering the effects of Sandy, the weather system which came ashore in October. When the storm hit, some members of the original Occupy protests who had kept in touch suggested organising a relief effort. "Everyone seemed really interested, so we created a Facebook account, a Twitter account, a WePay account and it took off,"

Homeless in New Jersey - Up here you get to a time in late November when you want winter to start. You know it’s coming. It’s dark and barren outside. The ground is frozen. Let it start. Let the snow come. Something down inside you wants to feel the sting of cold air on your face so you know that winter’s here.  In Alberta and on the Prairies, winter started early this year. It has already made its mark with snow and cold. But here in the east, we are getting tropical storms instead. Around here, record high temperatures followed the hurricane. You can prepare for winter. Change the tires, buy a new coat, make sure the utility bills are paid up. You do the normal things to prepare for the cold. But hurricanes on the eastern seaboard in November aren’t normal. People in New Jersey could not have expected what they got, and prepared for that. The new normal is storm surges in Manhattan that will turn everything south of Times Square into an aquarium. The new normal is barrier islands that took thousands of years to build up being ripped apart in one day. There is no way to prove that Hurricane Sandy was the direct result of global warming caused by greenhouse gases. There are only statistics. The sea level around New York is now a foot higher than it was 50 years ago. If the rate of ice melting in Greenland and Antarctica increases, sea levels will rise further and coastal cities around the world will face the possibility of becoming Venice. And Venice could become Atlantis. It’s easy to dismiss global warming, if it doesn’t affect you directly. But a couple of days prior to the election, Mayor Michael Bloomberg of New York City took some time away from hurricane repair duties to endorse Barak Obama for President. It appeared that his decision to endorse was precipitated by Sandy and Irene. In his estimation it was a bit too much of a coincidence to have two late autumn hurricanes in the Northeast in consecutive years. Bloomberg stated that to deny that climate change was a serious problem was to be “on the wrong side of history.”

Responding to Illnesses Manifesting Amid Recovery From Storm - Day and night, victims of Hurricane Sandy have been streaming into ad hoc emergency rooms and relief centers, like the MASH-type medical unit on an athletic field in Long Beach, and the warming tent in the Rockaways the size of a small high school gym. They complain of rashes, asthma and coughing. They need tetanus shots because — house-proud and armed with survivalist instincts — they have been ripping out waterlogged boards and getting poked by rusty nails. Those with back pain from sifting through debris receive muscle relaxants; those with chest pain from overexertion are hooked up to cardiac monitors. It is impossible to say how many people have been sickened by what Hurricane Sandy left behind: mold from damp drywall; spills from oil tanks; sewage from floodwater and unflushable toilets; tons upon tons of debris and dust. But interviews with hurricane victims, recovery workers, health officials and medical experts over the last week reveal that some of the illnesses that they feared would occur, based on the toxic substances unleashed by the storm and the experience of other disasters, notably Hurricane Katrina, have begun to manifest themselves. Emergency rooms and poison control centers have reported cases of carbon monoxide exposure — and in New Jersey, several deaths have been attributed to it — from the misuse of generators to provide power and stoves to provide heat.

Mapping Hurricane Sandy’s Deadly Toll - Interactive Feature - At last count, officials were attributing more than 100 deaths to Hurricane Sandy. Some patterns emerged in mapping the deaths in the region. Elderly residents were hit especially hard, with close to half of the people who died age 65 or older. In New York City, the majority of deaths occurred in Queens and on Staten Island, and most people perished at the height of the storm, drowned by the surge. In more inland areas, downed trees were more often the cause of death. The days after the storm were also deadly, as people tried to clear away storm damage or used poorly ventilated generators to ward off the dark and the cold.  Some victims’ names have not been released, as the authorities seek to reach their families.

Living With Risk and Learning from Disaster Post-Sandy -Hurricane Sandy certainly got our attention. Billions of dollars (and counting) in damages. Communities crippled and left in the cold without electricity. Nearly 200 lives lost.  Sadly, with the stark realities of climate change and frequency of extreme weather events, this likely won't be the last natural disaster we experience or witness in our lifetime or even this decade. So, what are we to do about that? For humanitarian agencies, confronting disasters is our way of life. We respond immediately when disasters strike with food, water, shelter, medicines and other means of support needed to save and protect human life.  These efforts are made all the more possible when news headlines and pictures of ravaged communities or hungry children become a catalyst for hundreds, thousands, and millions of dollars in donations to support relief efforts. There is no question about it -- this generous outpouring of support does indeed save lives. But what about the work that needs to happen in communities before a disaster occurs in order to reduce -- or even prevent -- its devastating effects?

Preparing For The Next Sandy - The fallout from Hurricane Sandy will be with us for years, and it will extend far beyond the devastation in New York City, New Jersey and other parts of the East Coast. The immediate cleanup costs and economic losses are alarming. Current estimates are $33 billion in New York alone. But a far bigger challenge lies ahead: preparing for a future in which storms like Sandy and Irene are likely to occur more frequently. It is gargantuan task with no parallels, and there are millions of people and trillions of dollars worth of property sitting in harm’s way. As a result of rising sea levels from warming global temperatures, coastal communities will require vastly expensive upgrades to key infrastructure such as subways, power grids and hospitals to boost their resiliency to stronger storms. It will require tough decisions on whether building and rebuilding should be encouraged in flood-prone areas. Above all, there’s the daunting task of curbing the pollution that creates these risks in the first place. To adapt, we need bold action from governments, policymakers and the business community alike. Their efforts to date have proven to be grossly insufficient. Let’s start with the business community – specifically, the insurance industry, the sector most vulnerable to skyrocketing storm losses.

Report: Insolvency looms for NY school districts — More than 40 percent of New York school superintendents say they will be unable to balance their budgets within four years if obligations and income continue on the current path, and even more say they won't be able to keep up with student instruction and services mandates. A membership survey by the New York State Council of School Superintendents shows that amid a statewide push for improved student performance, districts are depleting reserve funds and cutting staff and programs to remain afloat, even with increases in state aid. "The challenge school district leaders face is not just balancing budgets, but improving educational outcomes and providing students with the learning needed to excel in the real world," Robert Reidy, the council's executive director, said. "But under current state educational policies, it's becoming increasingly difficult to do both." Gov. Andrew Cuomo this year increased the state's spending for its 700 school districts by 4 percent, or $805 million after three years of cuts or flat funding. The state spends about $21 billion on schools. Even with the increase, about 80 percent of districts are receiving less help from the state than they were four years ago, the council said.

Teachers Unions: Scourge of the Nation? - Let me start by stating that I, myself am somewhat agnostic when it comes to the questions around whether I believe teachers unions are generally good or bad for the overall quality of our education system and for educational equity. In my personal experiences as a young teacher in the early 1990s, I had my issues with my local teachers unions (in New York State in particular), resulting in some pretty heated battles with local and regional union officials [and some pretty nasty internal politics in my own school]. As a young teacher, I was anything but a fan of the teachers union. But unlike many of my TFA pals [I was a few years too early for TFA, but had friends & later colleagues in the first few waves] who only stuck it out in teaching for a year or two and may have developed similar negative feelings toward their local union, I did outgrow that initial reaction – which in my view- was somewhat isolated – and partly a function of my own youthful ignorance. I didn’t stick it out in public school teaching much longer than that [the local union actually ran me out!], but did have the unique experience of working in an elite private school that had a union, and I worked in that school during a contract renegotiation. The idea for this post first came about when I read the following quote in an article in the Economist. This has to be among the most utterly stupid statements I think I’ve ever read in my life: …no Wall Street financier has done as much damage to American social mobility as the teachers’ unions have.

More on Online Education - At Cato Unbound I respond to some of the critics of my article Why Online Education Works. Here is one bit: We do need more studies of offline, online, and blended education models, but the evidence that we do have is supportive of the online model. In 2009, The Department of Education conducted a meta-analysis and review of online learning studies and found:

• Students in online conditions performed modestly better, on average, than those learning the same material through traditional face-to-face instruction.
• Instruction combining online and face-to-face elements had a larger advantage relative to purely face-to-face instruction than did purely online instruction.
• Effect sizes were larger for studies in which the online instruction was collaborative or instructor-directed than in those studies where online learners worked independently.
• The effectiveness of online learning approaches appears quite broad across different content and learner types. Online learning appeared to be an effective option for both undergraduates (mean effect of +0.30, p < .001) and for graduate students and professionals (+0.10, p < .05) in a wide range of academic and professional studies

Law School Admission Testing Plunges - The number of people taking the Law School Admission Test, known as the LSAT, offered in October fell sharply, down 16.4 percent from the year before, reaching its lowest level since 1999. October is usually the most popular time to take the test, too:  No wonder, then, that law schools are cutting the size of their entering classes. Perhaps this means it’ll still be easier to get into the top schools, though, depending on how much the most elite schools decide to shrink their class sizes. There was a huge surge in law school applications during the recession and its immediate aftermath as people displaced by the poor economy sought the “safety” of a legal career. But now potential students seem to have wised up to the huge debt burden and poor job placement prospects.

Federal Judge Announces Wageless Job Opening, Calls Working for Free a ‘Moral Commitment’ - Traditionally, the most prestigious job a law school graduate can get straight out of school is a federal judicial clerkship. Holders of these one-year positions are usually much sought-after by big law firms and other desirable employers, and the competition among law students for federal clerkships is ferocious. Even at elite law schools, only students at or near the top of class have a reasonable shot at a federal clerkship. In addition, now many young lawyers with sterling resumes have begun applying for clerkships. The result is that any federal judge will be deluged with hundreds of highly qualified candidates for an open position. In response, the government has created an online application site for judicial clerks, featuring strict rules about when candidates can apply and when clerkship offers can be made. William Martinez, a federal judge in Denver, is currently using the site to solicit applications for a standard year-long clerkship in his chambers. While the requirements for the job look quite ordinary – excellent academic credentials required, two or more years of legal practice experience preferred – the position’s salary is not. More precisely, this job features a salary of zero: “This position is a gratuitous service appointment,” the posting announces, while going on to make clear that the successful candidate will waive any claim to salary, benefits or any other compensation, and that he or she can be fired at any time, for any reason, or no reason, during the course of the year-long appointment.

Sources of funding for higher education - Here is an interesting chart from Merrill showing sources of higher education funding over time. As parents' savings and income (as well as grants) become insufficient to cover the ever-increasing college costs, debt becomes the only option.

The Cost of Dropping Out - The rising cost of a college education is hitting one group especially hard: the millions of students who drop out without earning a degree. A bachelor's degree remains by far the clearest path to the American middle class. Even today, amid mounting concerns about the rising cost of higher education and questions about the relevance of many college degrees, recent graduates have lower rates of unemployment, higher earnings and better career prospects than their less educated peers. But as more Americans than ever before attend college, more too are dropping out before they ever don a cap and gown. That means millions of Americans are taking on the debt of college without getting the earnings boost that comes from a degree. Dropouts are more than four times as likely as graduates to default on their student loans."Graduating with a lot of debt can be daunting," says Lauren Asher, president of the Institute for College Access and Success, an advocacy organization promoting access to higher education. "Having a lot of debt and not graduating is even more daunting." The complexity of the student-loan system—a web of public, private and subsidized loans that together add up to more than $1 trillion—makes it difficult to know exactly how much debt is held by dropouts. But the scale is massive. According to a 2011 study by the Institute for Higher Education Policy, a Washington, D.C.-based research firm, 58% of the 1.8 million borrowers whose student loans were began to be due in 2005 hadn't received a degree. Some 59% of them were delinquent on their loans or had already defaulted, compared with 38% of college graduates. The problem has almost certainly worsened since, as the recession wiped out job opportunities for less-educated workers.

More Debt May Be Answer for Students Struggling Financially - The Wall Street Journal today reported on how the rising cost of college is especially bad news for drop-outs, who end up with the burden of student loans without the benefits of a degree. So what is a struggling college student to do? In some cases, the answer is to borrow more, not less. That may sound counter-intuitive. But the conclusion is based on two key facts: College graduates make significantly more money than drop-outs, and students are much more likely to earn their degrees if they attend college full-time.

Pomp and Exceptional Circumstance: How Students Are Forced to Prop Up the Education Bubble - If there was going to be major action to reduce the $1 trillion in student debt—or at least the rate at which it’s increasing—it probably should have happened by now. The conventional wisdom going into the election was that President Obama and the Democrats would have to galvanize the youth vote if they wanted a repeat of 2008. With nearly 20 percent of families, and 40 percent of young families, owing a slice of the education debt, the issue affects a large and growing constituency. And because existing student loan policy is so anti-student and pro-bank, Democrats could have proposed a number of commonsense, deficit-neutral reforms, even reforms that would have saved the government money. The stars were aligned for a major push. Remarkably, it didn’t happen. Instead we saw dithering, half-measures, and compromises meant to reassure voters that politicians were aware of their suffering and that something was going to be done. The moves that were implemented did not address the core problem: the amount of money debtors will have to pay. For example, President Obama claimed credit for delaying a doubling of interest rates on federal loans from 3.4 to 6.8 percent, while, at the same time, ending interest grace periods for graduate and undergraduate students. The first measure is temporary and is expected to cost the government $6 billion; the second is permanent and will cost debtors an estimated $20 billion in the next decade alone. Despite his campaign rhetoric, President Obama has overseen an unparalleled growth of student debt, with around a third of the outstanding total accruing under his watch

Mayor: Suburban pension mess a looming 'nuclear winter' - As Illinois lawmakers prepare to wrestle with the task of righting the state’s woefully underfunded pension systems, a coalition of suburban and downstate municipalities is likening their own pension problems to a coming fiscal “nuclear winter.” Representatives of the Pension Fairness for Illinois Communities Coalition, which comprises about 200 suburban and downstate local governments, said at a Chicago forum on Monday they are staring down a total of at least $7.6 billion in unfunded pension obligations for their police and firefighters. They blame much of the problem of benefit increases passed by the General Assembly that local governments have to pay for. “Every day we put off this problem, we continue to increase the burden on our municipalities, making further service cuts inevitable, making tax increases larger and shifting this crushing burden to our children,”

Extremely Rich Wall Street CEO Wants Americans To Work Longer: Lloyd Blankfein — evidently taking a break from doing “god’s work” as the CEO of Wall Street behemoth Goldman Sachs — told CBS News’ Scott Pelley that he believes the retirement age needs to be raised because “in general, entitlements have to be slowed down and contained“: ----- Maybe working until a later age is fine for a Wall Street CEO whose net worth is $450 million. But it’s simply nonsense to assert that the retirement age needs to go up because Social Security is no longer affordable. For starters, Social Security can pay full benefits for decades without any changes at all. (Imagine the accolades that would received if any other federal program had guaranteed funding for that stretch of time.) One simple change, raising the cap on the payroll tax, can guarantee that the program will pay nearly full benefits for three-quarters of a century. In the meantime, Social Security is statutorily barred from adding one dime to the federal deficit, so cutting it doesn’t change the nation’s deficit or debt picture. Raising the retirement age, meanwhile, adversely impacts those workers most in need of a robust social safety net. While a year or two of extra work may not seem like much to a Wall Street CEO with his cushy corner office, for a factory worker or janitor, it can mean real problems. Life expectancy is only increasing for wealthier workers in non-physical jobs. Poorer workers doing physical labor have not seen the same gains.

Wall Street Group Behind Poll Supporting Social Security Cuts -  The anti-Social Security propagandists should’ve thought this one through a little more carefully: On the same day that Goldman Sach’s CEO issued his “balanced” demand for Social Security and Medicare cuts, the Wall Street-funded group called “Third Way” published the results of a poll which precisely reflected the wishes of Goldman Sach’s CEO. Coincidence? We report, you decide. It certainly doesn’t look good when the poll in question contains misleading questions, is deceptively presented, and includes sentences like “Questions 50 to 55 held for future release.” Any remaining shred of credibility disappears in the face of numerous other polls which directly contradicts Third Way’s claims about these results. Oh, and we almost forgot: Two of that group’s board members worked for that CEO.

The Giant Lie Trotted Out by Fiscal Conservatives Trying to Shred Social Security - Lynn Parramore -Trying to convince the public to cut America’s best-loved and most successful program requires a lot of creativity and persistence. Social Security is fiscally fit, prudently managed and does not add to the deficit because by law it must be completely detached from the federal operating budget. Obviously, it is needed more than ever in a time of increasing job insecurity and disappearing pensions. It helps our economy thrive and boosts the productivity of working Americans. And yet the sharks are in a frenzy to shred it in the upcoming “fiscal cliff” discussions. The most popular red herring Social Security hustlers have unleashed into the waters of public discourse has grown into such a massive whale of a lie that liberals frequently subscribe to it. The idea goes like this: We need to somehow “fix” Social Security because people are living longer – “fix” in this context being code for “cut.” Two groups stand to benefit in the short-term from such a scheme: the greedy rich, who do not want to pay their share in taxes, and financiers, who want to move towards privatizing retirement accounts so they can collect fees. As for the masses of hard-working people who have rightfully earned their retirement, the only “fix” is the fix they will be in if already modest benefits are further reduced.

The Great Society's Next Frontier: As The Washington Post’s Ezra Klein declared shortly after voters re-elected President Barack Obama, one of the major winners last week was health-care reform. With Democrats holding on to the Senate and the White House, Republicans will be unable to repeal the law before all of its provisions go into effect in 2014—after which, the theory goes, the public will come to accept that government has the responsibility to ensure health care is available for all. This is the end of a long battle for progressives: Health care has been the major missing piece of our welfare state for nearly a century, and for decades making it part of our system of social insurance has been a primary goal of politicians, think tanks, and activists. With this piece of the progressive puzzle in place, the natural question to ask is, What’s next for the welfare state?One useful way of thinking broadly about what the welfare state should provide comes from Lane Kenworthy, a sociologist and political scientist at Arizona State University. According to Kenworthy, the welfare state should accomplish three things: It should act as a safety net, providing a basic level of security for the poor and protecting citizens from sharp declines in income or unanticipated expenses; like a springboard, it should create opportunities for upward mobility; and, like an escalator, it should ensure that living standards rise across the board as the economy grows. Below are ways that liberals could fix the holes in the current safety net, expand opportunity, and make sure a growing economy benefits everyone.

Administration Defines Benefits Under Health Law - NYTimes.com: The Obama administration took a big step on Tuesday to carry out the new health care law by defining “essential health benefits” that must be offered to most Americans and by allowing employers to offer much bigger financial rewards to employees who quit smoking or adopt other healthy behaviors. The proposed rules, issued more than two and a half years after President Obama signed the Affordable Care Act, had been delayed as the administration tried to avoid stirring criticism from lobbyists and interest groups in the final weeks of the presidential campaign. Insurance companies are rushing to devise health benefit plans that comply with the federal standards. Starting in October, people can enroll in the new plans, for coverage that begins on Jan. 1, 2014. The rules translate the broad promises of the 2010 law into detailed standards that can be enforced by state and federal officials. Under the rules, insurers cannot deny coverage or charge higher premiums to people because they are sick or have been ill. They also cannot charge women more than men, as many now do.

Administration unveils health care regulations - The Obama administration released new health care regulations Tuesday that preclude insurers from adjusting premiums based on pre-existing or chronic health conditions, tell states what benefits must be included in health exchange plans, and allow employers to reward employees who work to remain healthy. The rules released so far aim to:

• -- Stop insurers, starting in January, from charging more for insurance or refusing service to people who have pre-existing or chronic health conditions. Insurers may not charge seniors more than three times the amount they charge young people. Now, insurers in 42 states charge seniors five or more times the amount they charge young adults.
• -- Allow insurers to charge smokers more, as well as adjust premiums based on family size and geography.
• -- Prohibit insurers from using claims history, health status, gender and occupation to increase premiums
• -- Require states to have 10 essential benefits, such as prescription drug coverage or hospital care, provided in the new health care exchanges -- websites set up so consumers can quickly and easily see what plans are available in their states.
• -- Allow employers to use wellness programs to promote health and try to control health care costs.
• -- Propose implementing and expanding employment-based wellness programs to promote health and help control health care spending, while ensuring that individuals are protected from unfair underwriting practices that could otherwise reduce benefits based on health status.

Insurers’ duties under health care law taking shape - The nation’s health care overhaul took another step forward Tuesday when the Obama administration proposed new rules that clarify insurers’ duties and legal responsibilities under key provisions of the Affordable Care Act.  The law, which critics have long referred to as “Obamacare,” makes it illegal for insurance companies to deny coverage to people with pre-existing conditions, beginning in 2014. The first proposed rule is a series of five market revisions that will help implement that part of the law. The proposal first requires private insurers to sell policies to all consumers regardless of their health status or history, while also banning these insurers from charging more for coverage based on a person’s health, gender or where he or she works. The proposal allows insurers to adjust premiums based only on a person’s age, history of tobacco use, family size and geographic location.  The new rule also reinforces current federal guidelines that forbid insurance companies from canceling or refusing to renew coverage just because a person becomes sick.

Health Insurance Exchanges May Be Too Small to Succeed - With the re-election of President Obama, the Affordable Care Act is back on track for being carried out in 2014. Central to its success will be the creation of health-insurance exchanges in each state. Beneficiaries will be able to go a Web site and shop for health insurance, with the government subsidizing the premiums of those whose qualify. By encouraging competition among insurers in an open marketplace, the health care law aims to wring some savings out of the insurance industry to keep premiums affordable. Certainly, it is hard to be against competition. Economic theory is clear about its indispensable benefits. But not all health care markets are composed of rational, well-informed buyers and sellers engaged in commerce. Some have a limited number of service providers; in others, patients are not well informed about the services they are buying; and in still others, the quality of the service offerings vary from provider to provider. So the question is: What effect does insurer competition have in a marketplace with so many imperfections? The evidence is mixed, but some of it points to a counterintuitive result: more competition among insurers may lead to higher reimbursements and health care spending, particularly when the provider market – physicians, hospitals, pharmaceuticals and medical device suppliers – is not very competitive.

Millions will qualify for new options under the health care law. Most have no idea - After surviving a Supreme Court decision and a presidential election, the Obama administration’s health-care law faces another challenge: a public largely unaware of major changes that will roll out in the coming months. States are rushing to decide whether to build their own health exchanges and the administration is readying final regulations, but a growing body of research suggests that most low-income Americans who will become eligible for subsidized insurance have no idea what’s coming. Part of the problem, experts say, is that people who will be affected don’t realize the urgency because the subsidies won’t begin for another year. But policy decisions are being made now that will affect tens of millions of Americans, and the lack of public awareness could jeopardize a system that depends on having many people involved. Low enrollment could lead to higher premiums, health policy experts say. Hospitals worry that, without widespread participation, they will continue getting stuck with patients’ unpaid medical bills. And advocates say the major purpose of the Affordable Care Act – extending health insurance to more Americans – will go unmet if large numbers of vulnerable people don’t take advantage of it.

Here Are The New Obamacare Taxes - Well, Obamacare is now official, which means that a lot more people in the United States will have health insurance. And it also means a lot more people will be paying more taxes. (You didn't think Obamacare was free, did you?) Here are some of the new taxes you're going to have to pay to pay for Obamacare:
A 3.8% surtax on "investment income" when your adjusted gross income is more than $200,000 ($250,000 for joint-filers).
A 0.9% surtax on Medicare taxes for those making $200,000 or more ($250,000 joint). You already pay Medicare tax of 1.45%, and your employer pays another 1.45% for you
Flexible Spending Account contributions will be capped at $2,500.
The itemized-deduction hurdle for medical expenses is going up to 10% of adjusted gross income.
The penalty on non-medical withdrawals from Healthcare Savings Accounts is now 20% instead of 10%.

Uninsured patients undergoing craniotomy for brain tumor have higher in-hospital mortality - Compared to insured patients, uninsured patients have higher in-hospital mortality following surgery for brain tumors, according to a report published in the November issue of Archives of Surgery, a JAMA Network publication. "Among patients with brain tumors with no other major medical condition, uninsured patients (but not necessarily Medicaid recipients) have higher in-hospital mortality than privately insured patients, a disparity that was pronounced in teaching hospitals. These findings further reinforce prior data indicating insurance-related disparities in medical and surgical settings," the authors comment. The mortality rate for privately insured patients was 1.3 percent compared with 2.6 percent for uninsured patients and 2.3 percent for Medicaid recipients in an unadjusted statistical analysis. After adjusting for patient characteristics and stratifying (classifying) by hospital in patients with no co-existing illnesses, uninsured patients still had a higher risk of in-hospital death (hazard ratio, 2.62) compared with privately insured patients. In the adjusted analysis, being a Medicaid recipient was "not definitively" associated with higher in-hospital mortality compared with private insurance, according to the study results.

Companies send workers far afield for bargain surgery "bundles" Carol and Ed Vogel enjoyed a weeklong all-expenses-paid trip to a Newport Beach, Calif., resort last month, and they’re scheduled to return in a couple of weeks. The Nevada couple didn’t need frequent-flier miles or credit card rewards to get free airfare and hotel stay as well as $1,000 in spending money. It was all because of Carol Vogel’s ailing hips and an employer’s frustration with the high cost of U.S. health care. Her husband’s employer, newspaper publisher Stephens Media, sends employees and their family members needing hip and knee replacements to a handful of hospitals across the country that agreed to a low, fixed rate for surgery and scored well on quality of care. This year, grocery giant Kroger Co. has flown nearly two dozen workers to hospitals across the U.S. for hip, knee or spinal-fusion surgeries in an effort to save money and improve care. Starting in January, Wal-Mart Stores Inc. will offer employees and dependents heart, spine and transplant surgeries at no cost at six major hospital systems across the nation, with free travel and lodging. It’s all part of a growing movement by employers fed up with wildly different price tags for routine operations. In response, businesses are showering workers with generous incentives — including waiving deductibles or handing out $2,500 bonuses — to steer them to these top-performing providers offering bargain prices.

Video: Documentary: Why Does U.S. Health Care Cost So Much? -  PBS Video

How Drug Company Money is Undermining Science - In the past few years the pharmaceutical industry has come up with many ways to funnel large sums of money—enough sometimes to put a child through college—into the pockets of independent medical researchers who are doing work that bears, directly or indirectly, on the drugs these firms are making and marketing. The problem is not just with the drug companies and the researchers but with the whole system—the granting institutions, the research labs, the journals, the professional societies, and so forth. No one is providing the checks and balances necessary to avoid conflicts. Instead organizations seem to shift responsibility from one to the other, leaving gaps in enforcement that researchers and drug companies navigate with ease, and then shroud their deliberations in secrecy. The entanglements between researchers and pharmaceutical companies take many forms. There are speakers bureaus: a drugmaker gives a researcher money to travel—often first class—to gigs around the country, where the researcher sometimes gives a company-written speech and presents company-drafted slides. There is ghostwriting: a pharmaceutical manufacturer has an article drafted and pays a scientist (the “guest author”) an honorarium to put his or her name on it and submit it to a peer-reviewed journal. And then there is consulting: a company hires a researcher to render advice

Air pollution in towns and cities ages brains of over-50s by three years -  The higher level of air pollution in towns and cities is ageing the brains of over-50s by up to three years, research suggests.Scientists have found that exposure to higher levels of air pollution can lead to decreased brain power in over-50s. Earlier research has also linked bad air to an increased risk of heart and breathing problems.In a study of almost 15,000 older adults, researchers at the US-based National Institute on Aging found fine air particulate matter may be an important environmental risk factor for reduced thought power.If inhaled, it is small enough to deposit in the lungs and possibly the brain. Air pollution is already estimated to reduce the life expectancy of everyone in the UK by an average of seven to eight months, probably by affecting the heart and lungs.

EPA Testing Dangerous Pollutants on Human Beings - Want to know how dangerous pollutants are to your health? For $12 an hour, you can find out directly. Over the past decade, the EPA has apparently been paying hundreds of people $12 an hour for the privilege of exposing them to high levels of air pollutants like diesel exhaust and PM2.5 particulate matter in an operation run at the University of North Carolina’s School of Medicine. A lawsuit has been filed in the federal court, charging the EPA with conducting illegal and potentially lethal experiments of hundreds of financially vulnerable people.  According to an EPA testimony before Congress in 2011, particulate matter—a key component of diesel exhaust fumes–causes premature death. “It doesn’t make you sick. It’s directly causal to dying sooner than you should.” In addition: “If we could reduce particulate matter to levels that are healthy we would have an identical impact to finding a cure for cancer.” Apparently, however, test subjects were not apprised of the exact risk involved. While the EPA has dramatized the dangers of PM2.5 exposure before Congress, with its test subjects, the message has been toned down to warn of the potential of airway irritation, coughing or shortness of breath. The courts will have to determine whether test subjects were sufficiently briefed on the risks. This is how the EPA gathers the research it needs to support the implementation of strict regulations. Two major new regulations that have actually been rejected by the D.C. District Circuit Appeals court are the Cross-State Air Pollution Rule and the Mercury Air Toxics Standard—both based on the dangers of PM2.5. The EPA is now reportedly evaluating its research on human subjects, in accordance with a Congressional request.

"Draft Sequence" of Pig Genome Could Benefit Agriculture and Medicine: Scientific American: Scientists are salivating. For the past couple of decades they have been slowly teasing information from the pig genome, applying it to breed healthier and meatier pigs, and to try to create more faithful models of human disease. This week’s draft sequence of T. J.’s genome (see page 393), with its detailed annotation — a ‘reference genome’ — will speed progress on both fronts, and perhaps even allow pigs to be engineered to provide organs for transplant into human patients. “Agriculture in particular will benefit fast,” “The pig industry has an excellent track record for rapid adoption of new technologies and knowledge.” T. J., a domestic Duroc pig , was born in Illinois in 2001. The next year, Schook and his colleagues generated a fibroblast cell line from a small piece of skin from her ear and commissioned clones to be created from it, so that they could work on animals all with the same genome. One set of clones was created at the National Swine Resource and Research Center (NSRRC) in Columbia, Missouri, along with genetically engineered pigs with genes added or deleted to mimic human diseases.“Making such pigs has got increasingly easier as knowledge of the genome increases,” The NIH launched the NSRRC in 2003 to encourage research in pig disease models. Pigs are more expensive to keep than rodents, and they reproduce more slowly. But the similarities between pig and human anatomy and physiology can trump the drawbacks. For example, their eyes are a similar size, with photoreceptors similarly distributed in the retina. So the pig became the first model for retinitis pigmentosa, a cause of blindness. And four years ago, researchers created a pig model of cystic fibrosis that, unlike mouse models, developed symptoms resembling those in humans.

Yes, Farmland Prices are a Bubble -- The following eye-opening chart is from the American Enterprise Institute for Public Policy Research’s article, “A Bubble to Remember — And Anticipate?”  Farmland returned almost 8% a year on average between 2000 and 2011 according to the U.S. Department of Agriculture. The Federal Reserve Bank of Kansas City came out with its quarterly “Agricultural Credit Conditions” survey report last week. Farm profits are affected by required input costs and the comments related to input costs are concerning out of this district report. Tenth District bankers issued an earnings warning, “Farm incomes fell sharply during the quarter as escalating feed and fuel prices pushed production costs higher. … Rising input costs and lower income led to stronger loan demand for all sectors of the District’s agricultural economy.” One Eastern Oklahoma banker put it this way, “Gross income looks good for agriculture but the margins are continually being squeezed by the increasing costs of the inputs.”  Tenth district bankers reported that the severe drought had little effect on the demand for farmland. “Nonirrigated cropland prices rose nearly 25 percent above year-ago levels in the third quarter, and irrigated land values remained more than 20 percent higher than 2011 levels. In addition, ranchland values appreciated an average of 14 percent during the past year.”

Sixteen Percent of the U.S. Soybean Crop is Used for Biodiesel - Do you know what percent of the U.S. soybean crop is used for biodiesel? The biodiesel use of soybeans is to be about 16 percent of the total soybean crop this coming year (as a % of total U.S. soybean acres – used for biodiesel). Both the biodiesel and ethanol plants are having difficulty with profitability since the drought has driven up prices for their feedstocks. The increase in mandated use of both corn ethanol and biodiesel, plus this year’s drought, means reduced exports of corn and soybeans from the U.S., growing competition in production of these commodities abroad, and ailing livestock, poultry, and dairy industries. Ecologically, these policies have meant less crop rotation, greater intensive farming on marginal lands, and greater acreage devoted to these two industrial crops. Land prices have increased due to policy support of growing these monoculture crops, making them profitable even in a severe drought year such as this. Biodiesel RINS credits have fallen in price recently because the mandate for this year was met in production by early November. The price of RINS is indicative of the demand for biodiesel. Because RINS were sold on secondary markets, they have been exploited fraudulently.

Ethanol industry struggling; saved by the Obama administration - Ethanol producers got a reprieve from the Obama administration, as the requests to halt ethanol blending were denied. Businessweek: - Ethanol’s discount to gasoline narrowed after the Obama administration rejected requests to waive requirements for blending the fuels.  Ethanol rose 1.6 cents, or 0.7 percent, to $2.351 a gallon on the Chicago Board of Trade, contracting the additive’s discount to gasoline to 35.91 cents a gallon from 36.12 cents yesterday, based on December futures prices. Gasoline’s premium was 99.8 cents on Sept. 28. As it is, ethanol producers are losing money this year due to elevated corn prices (see discussion). Production is down 14% from last year, which is showing up in declining ethanol inventories. Without this support from the Obama administration, ethanol firms would have been decimated. But regulation is keeping this industry alive - for now. Businessweek - Based on December contracts for corn and ethanol, producers are losing 29 cents on each gallon of the fuel made, up from 28 cents yesterday, excluding the revenue that can be made from the sale of dried distillers’ grains, a byproduct of ethanol production that can be fed to livestock, data compiled by Bloomberg show. Ethanol companies would have been decimated if the EPA granted the waiver request, Kitt said.

In sign of growing clout, Brazil’s corn helps hold up U.S. market - — As U.S. cornfields withered under drought conditions last summer, Brazil’s once-empty Cerrado region produced a bumper crop of the grain, helping feed livestock on U.S. farms and ease a drought-related spike in prices. The U.S. imports of Brazilian corn were small by world standards. But they are rising fast, and they mark just one element of the increasingly complex and sometimes contentious relations between the world’s agricultural superpower and its fast-growing competitor amid shifts in the global economy.Starting at zero in 2010, Brazilian corn exports to the United States are on pace to exceed $10 million this year and are bound to rise as farmers here expand planting and more corn is funneled to nonfood uses, such as ethanol production. Brazil is expected next year to dethrone the United States as the world’s largest producer of soybeans. With so much land available for cultivation, that status will probably become permanent.

Why Hungry Indians Need Skinnier Politicians - India is caught in an ugly societal whodunit: Although the per capita gross domestic product for the country’s 1.2 billion people has almost doubled over the past decade, to $838, malnutrition and hunger are still rampant, especially among children. A months-long series of investigative reports by Bloomberg News highlights that India’s failure to adequately feed its people is a crisis born not from want of money but, more damningly, from lack of political will to confront pervasive corruption and incompetence.Death by starvation is increasingly uncommon. Yet in 2005, when the most recent edition of India’s National Family Health Survey was published, 21 percent of all adults were malnourished, compared with 17 percent a decade earlier. India still has, by a large margin, the greatest number of malnourished children -- in India’s case, 46 percent of all children under 5. Half of all children under 3 are underweight, and eight in 10 are anemic -- a dismal distinction that puts India near the bottom of this particular global health scorecard. India spends a growing amount of money to feed its poor. Since 1965, with the creation of the Food Corporation of India, it has operated the world’s largest public food distribution system. This year’s budget will allocate almost $14 billion to purchases of wheat, rice and other foods that the poor, who are issued Below Poverty Line ration cards, can purchase at cut-rate prices from almost half a million Fair Price Shops. The Food Corporation of India is required to stockpile 32 million metric tons of rice and wheat, and it now has more than twice that amount on hand, thanks to record harvests.

Lessons from 2012: Droughts, not Hurricanes, are the Greater Danger - The colossal devastation and loss of life wrought by Hurricane Sandy makes the storm one of the greatest disasters in U.S. history. The storm and its aftermath have rightfully dominated the weather headlines this year, and Sandy will undoubtedly be remembered as the most notable global weather event of 2012. But shockingly, Sandy is probably not even the deadliest or most expensive weather disaster this year in the United States--Sandy's damages of perhaps $50 billion will likely be overshadowed by the huge costs of the great drought of 2012. While it will be several months before the costs of America's worst drought since 1954 are known, the 2012 drought is expected to cut America's GDP by 0.5 - 1 percentage points, said Deutsche Bank Securities this week. “If the U.S. were growing at 4 percent, it wouldn’t be as big an issue, but at 2 percent, it’s noticed,” said Joseph LaVorgna, the chief U.S. economist at Deutsche. Since the U.S. GDP is approximately $15 trillion, the drought of 2012 represents a $75 - $150 billion hit to the U.S. economy. This is in the same range as the estimate of $77 billion in costs for the drought, made by Purdue University economist Chris Hurt in August. While Sandy's death toll of 113 in the U.S. is the second highest death toll from a U.S. hurricane since 1972, it is likely to be exceeded by the death toll from the heat waves that accompanied this year's drought. The heat waves associated with the U.S. droughts of 1980 and 1988 had death tolls of 10,000 and 7,500 respectively, according to NOAA's National Climatic Data Center, and the heat wave associated with the $12 billion 2011 Texas drought killed 95 Americans. With July 2012 the hottest month in U.S. history, I expect the final heat death toll in the U.S. this year will be much higher than Sandy's death toll.

AP: Drought Worsens For More Than Half Of Country — But Only Because It Didn’t Rain! - “The worst U.S. drought in decades has deepened again,” reports the AP. “Scientists struggled for an explanation other than a simple lack of rain.” Over half of the continguous U.S. has been in a drought since summer. The latest U.S. Drought Monitor report showed a rise in the extent and increases in the severity of drought. The report showed that 60.1 percent of the lower 48 states were in some form of drought as of Tuesday, up from 58.8 percent the previous week. The amount of land in extreme or exceptional drought — the two worst classifications — increased from 18.3 percent to 19.04 percent. The AP has a bizarre form of balance in the story, I guess so those suffering in the drought won’t feel as bad: A federal meteorologist cautioned that Wednesday’s numbers shouldn’t be alarming, saying that while drought usually subsides heading into winter, the Drought Monitor report merely reflects a week without rain in a large chunk of the country.

Drought No Obstacle to Record Income for U.S. Farms - Even after the worst drought in a half century shriveled crops from Ohio to Nebraska, U.S. farmers are having their most-profitable year ever because of record- high prices and insurance claims.Farmer income probably will jump 6.9 percent to $144 billion, exceeding the government’s August estimate of $139.3 billion, said Neil Harl, an economist at Iowa State University. Parched fields that drove corn, soybean and wheat futures as much as 68 percent higher since mid-June mean insurance payouts may more than double to $28 billion, according to Doane Advisory Services Co., a farm and food-company researcher in St. Louis. Farming accounted for 0.9 percent of the U.S. economy last year, Bureau of Economic Analysis data show. Midwest farmland values rose by 13 percent to a record in the third quarter, and spurred sales of Monsanto Co. seeds, Deere & Co. (DE) tractors and CF Industries Holdings Inc. fertilizer. Costlier grain eroded profit for pork producer Smithfield Foods Inc. and restaurant owners including Texas Roadhouse Inc. The government is predicting food inflation will accelerate next year, led by meat, dairy and baked goods.

Trees worldwide a sip away from dehydration -Trees in most forests, even wet ones, live perilously close to the limits of their inner plumbing systems, a global survey of forests finds.  Seventy percent of the 226 tree species in forests around the world routinely function near the point where a serious drought would stop water transport from their roots to their leaves, says plant physiologist Brendan Choat of the University of Western Sydney in Richmond, Australia. Trees even in moist, lush places operate with only a slim safety margin between them and a thirsty death. “This is the first time that we’ve looked across all forest [types] and seen that there’s a convergence on risky behavior,” Choat says. Instead of looking at the balance of water gains and losses for whole forests, he and his colleagues mined existing data to assess the dangers for individual tree species in forests from wet tropics to arid shrublands. They report their findings online November 21 in Nature. “I think this is a really big deal,” says David Breshears of the University of Arizona in Tucson. As forest ecologists and plant physiologists confronting climate change, “we’ve been trying to be careful as a community not to be alarmist,” he says. But the new paper adds yet another perspective that’s worrisome. “They all keep pointing to: ‘Whoa, our forests are really vulnerable.’ ”

U.S. Drought May Curtail Mississippi River Grain-Barge Shipping - Water levels on the Mississippi River may drop to historic lows next month in the Midwest, delaying barges carrying everything from grains and coal to steel and petroleum, after the worst U.S. drought in 56 years. The waterway, the busiest in the U.S., may be too shallow to navigate by Dec. 10 from St. Louis south about 180 miles (290 kilometers) to Cairo, Illinois, where the Mississippi meets the Ohio River, the American Waterways Operators and Waterways Council Inc. said in a Nov. 16 statement. The drought that dried out farmland from Ohio to Nebraska is expected to persist at least through February in most areas and spread to Texas, according to the U.S. Climate Prediction Center in College Park, Maryland. Barges on the Mississippi handle about 60 percent of grain exports that enter the Gulf of Mexico through New Orleans. The U.S. is the world’s largest shipper of corn, wheat and soybeans. “The Mississippi River is especially critical for the agricultural community,” “Closure of the Mississippi next month would mean that about 300 million bushels of agricultural product worth $2.3 billion will be delayed reaching its destination.”

Low Mississippi River water levels may halt barges: The gentle whir of passing barges is as much a part of life in St. Louis as the Gateway Arch. But next month, those barges packing such necessities as coal, farm products and petroleum could instead be parked along the river's banks. The stubborn drought that has gripped the Midwest for much of the year has left the Mighty Mississippi critically low – and it will get even lower if the Army Corps of Engineers presses ahead with plans to reduce the flow from a Missouri River dam. Mississippi River interests fear the reduced flow will force a halt to barge traffic at the river's midpoint. They warn the economic fallout will be enormous, potentially forcing job cuts, raising fuel costs and pinching the nation's food supply. "This could be a major, major impact at crisis level," said Debra Colbert, senior vice president of the Waterways Council, a public policy organization representing ports and shipping companies. "It is an economic crisis that is going to ripple across the nation at a time when we're trying to focus on recovery." At issue is a plan by the corps to significantly reduce the amount of water released from the Gavins Point Dam near Yankton, S.D., a move to conserve water in the upper Missouri River basin also stung by the drought. The outflow, currently at 36,500 cubic feet per second, is expected to be cut to 12,000 cubic feet per second over several days, starting Friday.

U.S., Mexico Rewrite Rules on Sharing Colorado River - The United States and Mexico are rewriting rules on how to share water from the Colorado River, capping a five-year effort to form a united front against future drought in their western states. The far-reaching agreement to be signed Tuesday gives Mexico rights to put some of its river water in Lake Mead —which stretches across Nevada and Arizona — giving it badly needed storage capacity. Mexico will forfeit some of its share of the river during shortages, bringing itself in line with western U.S. states that already have agreed how much they will surrender in years when waters recede. Water agencies in California, Arizona and Nevada also will buy water from Mexico, which will use some of the money to upgrade its infrastructure. The agreement, coming in the final days of the administration of Mexican President Felipe Calderon, is a major amendment to a 1944 treaty that is considered sacred by many south of the border. The treaty grants Mexico 1.5 million acre-feet of river water of water each year — enough to supply about 3 million homes — making it the lifeblood of Tijuana and other cities in northwest Mexico.Mexico will surrender some of its allotment when the water level in Lake Mead drops to 1,075 feet and reap some of the surplus when it rises to 1,145 feet, according to a summary of the agreement prepared by the Metropolitan Water District of Southern California, which will buy some of Mexico’s water.

Water Industry Outlook: 'The Time Is Ripe' for Water Privatization - The privatization of the nation's water industry is set to explode in the next five years, according to the findings of a recent survey.WeiserMazars LLP, a New York-based tax and advisory services firm, detailed the findings in its first annual U.S. Water Industry Outlook (pdf), in which professionals from the industry, representing privately owned businesses and public utilities, shed light on the near future for the water industry. And what the next three to five years hold, according to the results, is a surge in privatization and public-private partnerships in a quest to capitalize on the resource. As Jerome Devillers, Head of Water Infrastructure/Project Financing at WeiserMazars stated bluntly in a release, "Our study shows the time is ripe" for water privatization. With water scarcity growing WeiserMazars sees water rights and access to water fees increasing as well -- and therefore attracting the interest of private equity and hedge funds, who can capitalize in the takeover of the public good.

Italy floods prompt fears for future of farming - Experts blame warming ocean and climate change for rash of storms that farmers fear risk Italian signature crops. The floods that have devastated Italy over the past week could become even more severe in the future, threatening food production and destroying the country's natural beauty, experts warn. Storms have battered ancient towns and left large swaths of farmland in Tuscany under water, prompting a warning from the region's governor, Enrico Rossi, that "climate change is making us get used to ever more violent flooding".

Stronger regional differences due to large-scale atmospheric flow = A new paper by Deser et al. (2012) (free access) is likely to have repercussions on discussions of local climate change adaptation. I think it caught some people by surprise, even if the results perhaps should not be so surprising. The range of possible local and regional climate outcomes may turn out to be larger than expected for regions such as North America and Europe.  Deser et al. imply that information about the future regional climate is more blurred than previously anticipated because of large-scale atmospheric flow responsible for variations in regional climates. They found that regional temperatures and precipitation for the next 50 years may be less predictable due to the chaotic nature of the large-scale atmospheric flow. This has implications for climate change downscaling and climate change adaptation, and suggests a need to anticipate a wider range of situations in climate risk analyses.  Although it has long been recognised that large-scale circulation regimes affect seasonal, inter-annual climate, and decadal variations, the expectations have been that anthropogenic climate changes will dominate on time scales longer than 50 years. For instance, an influential analysis by Hawking & Sutton (2009) (link to figures) has suggested that internal climate variability account for only about 20% of the variance over the British isles on a 50-year time scale.

Watch 131 Years of Global Warming in 26 Seconds - While temperatures soared for many this summer, this video takes the longer historical view. It comes to us from our friends at NASA and is an amazing 26-second animation depicting how temperatures around the globe have warmed since 1880. That year is what scientists call the beginning of the “modern record.” You’ll note an acceleration of those temperatures in the late 1970s as greenhouse gas emissions from energy production increased worldwide and clean air laws reduced emissions of pollutants that had a cooling effect on the climate, and thus were masking some of the global warming signal. The data come from NASA's Goddard Institute for Space Studies in New York, which monitors global surface temperatures. As NASA notes, “in this animation, reds indicate temperatures higher than the average during a baseline period of 1951-1980, while blues indicate lower temperatures than the baseline average.” 

Population shifts across U.S. regions affect overall heating and cooling needs - The National Oceanic and Atmospheric Administration (NOAA) estimates degree days for 344 climate divisions based on observed temperatures from representative weather stations within each division. NOAA calculates average heating degree days and cooling degree days for states, Census Bureau regions, and the contiguous United States by weighting with climate division populations. These populations are reset after each decennial census, and NOAA recalculates historical degree days based on the most recent population weights (currently using the 2000 Census). In order to more accurately reflect how regional shifts in the U.S. population affect weather-related energy consumption, the forecasting models used for EIA's Short-Term Energy Outlook and Annual Energy Outlook calculate degree days based on dynamic population weights instead of a static benchmark year for population weighting.  Observed winter temperatures have become milder over the past few decades. Estimates of average U.S. heating degree days based on static 2000 Census populations have declined an average of about 0.2% per year between 1960 and 2010.  If heating degree days are dynamically weighted by each state's annual population, instead of the population for a fixed year, U.S. heating degree days show an average annual decline of 0.4% between 1960 and 2010. This shift in the population toward warmer climates partially explains some of the flattening in per-capita residential energy consumption over the past few decades. Space heating accounts for more energy consumption than space cooling, and the decreased need for space heating as a result of population shifts to warmer areas of the country is only partially offset by increased energy consumed for space cooling.

Greenland becoming more green, thanks to Global Warming - I don't want to be told that thanks to Global Warming - now accepted by the majority (77%) of Americans and so therefore, in my opinion, a new Tipping Point - strawberry plants can now survive a Greenland winter. don't want to see neat little rows of budding lettuce plants growing outside a polytunnel. OUTSIDE a polytunnel; over-wintering under the snow but come the Spring, still alive and sprouting new shoots; cabbage and potatoes to follow. And I don't want to hear a Greenlander livestock farmer telling me that (once again, thanks to Global Warming) he now has enough newly ice-free pasture land to double the size of his 20,000-strong flock of sheep. None of this is what I want to hear or see. But if I thought that was bad, the worst moment in the whole 60-something minutes of the new CNN film Greenland: Secrets in the Ice was the moment when presenter, Fred Pleitgen tells me that after strawberries and lettuce and pasture fields bulging with ever more sheep, it will be the miners moving in - looking for the huge reserves of diamonds, gold, uranium, gas and oil they believe to be hiding under the ice. "Mining companies are hoping for a bonanza here, if the ice continues to retreat," Fred adds. Some are already drilling.

Sea Ice missing from Beaufort Sea in November for first time in recorded history - As is typical for this time of year, much of Alaska has already been plunged into winter conditions, with temperatures below 0°F in some locations. Yet Barrow, which from its perch on Alaska’s North Slope is the country’s northernmost town, has had a downright balmy start to the Alaskan winter. (Well, balmy for Barrow, at least.)  According to the National Weather Service, Barrow has seen “almost continuous above-normal temperatures” since September “due to a lack of sea ice” formation until last week. Along with the above-average temperatures has come above-average snowfall. Snowfall since July 1 has been more than a foot above average, the Weather Service said, with 31.4 inches of snow having fallen through Nov. 17. The record melt of Arctic sea ice this summer resulted in a broader expanse of open water in the Arctic Ocean. The darker ocean waters absorbed more incoming solar radiation, warming the sea and the lower atmosphere, thereby helping to warm lands that border the Arctic Ocean, such as Barrow. Open water also provides a ready moisture source for precipitation, be it in the form of rain or snow, and this accounts for much of Barrow’s recent snowy spell. As the Arctic climate has warmed in recent years, fall sea ice cover has often formed later in certain areas, and when it does form, it has tended to be thinner than average. After setting a record low in September, sea ice extent doubled during October but still only managed to recover to the second-lowest extent on record for October, ranking just above 2007. Studies show that sea ice loss can speed warming of parts of the Far North, thereby helping to melt permafrost and unlock the greenhouse gases currently locked in such frozen lands.

Collapsing Coastlines - Torre Jorgenson, a geomorphologist working near Kaktovik, watched the storm boil up, shaking homes and boats for nearly two days in July 2008. Dramatic erosion followed soon after. Blocks of graphite-colored earth, as much as 10 meters wide and several meters deep, toppled into the sea one by one like skyscrapers in a Japanese monster film. “The locals had never seen that type of erosion,” says Jorgenson, also president of the U.S. Permafrost Association. “It was something new, a regime change.” The erosion Jorgenson witnessed was a potent warning to Kaktovik’s residents of the instability of their coastal home. Seaside bluffs and beaches across the Arctic are inhabited by indigenous northerners — such as Inupiat living in Kaktovik — as well as clutches of plants and animals that thrive in the cold air. But these shores are mercurial, crumbling away bit by bit with each season. As human-driven climate change progresses, many fear that the Arctic’s coastlines will begin to break apart faster than ever. That’s bad news for the region’s human and other inhabitants. In 2009, the U.S. Army Corps of Engineers identified 178 communities struggling with erosion in Alaska, three of which have perhaps a decade before collapsing completely.

Himalayan glaciers will shrink even if temperatures hold steady, study says: Come rain or shine, or even snow, some glaciers of the Himalayas will continue shrinking for many years to come. The forecast by Brigham Young University geology professor Summer Rupper comes after her research on Bhutan, a region in the bull's-eye of the monsoonal Himalayas. Published in Geophysical Research Letters, Rupper's most conservative findings indicate that even if climate remained steady, almost 10 percent of Bhutan's glaciers would vanish within the next few decades. What's more, the amount of melt water coming off these glaciers could drop by 30 percent. Rupper says increasing temperatures are just one culprit behind glacier retreat. A number of climate factors such as wind, humidity, precipitation and evaporation can affect how glaciers behave. With some Bhutanese glaciers as long as 13 miles, an imbalance in any of these areas can take them decades to completely respond. "These particular glaciers have seen so much warming in the past few decades that they're currently playing lots of catch up," Rupper explains.

Global warming could lead to runaway ice cap meltdown - A new study confirms the strong links between global temperatures, melting ice and sea level and suggests that sea level responds more quickly that previously believed, probably because of the feedback warming effect of open water. Ice volume changes during ancient times can be reconstructed from sea-level records, but detailed assessments of the role of ice volume in climate change is hindered by inadequacies in sea-level records and/or their timescales. Now, a research team led by Eelco Rohling, Professor of Ocean and Climate Change at the University of Southampton, has developed a new way to date sea level rise and accurately link it with changes in ice volume. The scientists were able to apply the new dating method throughout the entire last glacial cycle (150,000 years), which resulted in an unprecedented continuous sea-level record with excellent independent age control.By comparing the ice-volume fluctuations with polar temperature reconstructions from the Greenland and Antarctica ice cores, the scientists found that changes in temperature and ice volume/sea level are closely coupled with a response time lag of only a few centuries. This timing relationship was previously unknown, and it reveals a very fast response between global temperature and ice volume and sea level

World Bank warns of ‘4-degree’ threshold - The World Bank is urging stepped-up efforts to meet world carbon-reduction goals after looking at what it says would be the catastrophic consequences if average world temperatures rise more than 4 degrees Celsius (7.2 degrees Fahrenheit) by the end of the century. In what World Bank President Jim Yong Kim acknowledged was a “doomsday scenario,” a new study by the organization  cited the 4-degree increase as a threshold that would be likely to trigger widespread crop failures and malnutrition and dislocate large numbers of people from land inundated by rising seas.World climate goals aim to hold the mean temperature increase to less than 2 degrees Celsius, by curbing emissions of greenhouse gases that trap heat — a phenomenon already thought to have boosted average temperatures nearly 1 degree from levels present before the start of the industrial age, Kim said in a briefing last week. That goal is unlikely to be met, he said, with an increase of 3 or 3.5 degrees Celsius now considered probable. The report noted that a drop in average temperature of around 4.5 degrees Celsius (8.1 degrees Fahrenheit) triggered the last ice age, and it predicted that a temperature increase of that magnitude would similarly reshape the planet.

World Bank Report Predicts Temperature Increase of 4 Degrees Celsius Will Trigger “Doomsday Scenario” - The World Bank’s report issued on November 18, 2012 predicts that a temperature change of just 4 degrees Celsius will trigger a “doomsday scenario.” The report highlighted the urgency to slow the global warming first noted by scientists during the 1980s and has grown to be an increasingly imminent and alarming threat than ever before. World Bank Group President Jim Young Kim offered: “Lack of action on climate change threatens to make the world our children inherit a completely different world than we are living in today. Climate change is one of the single biggest challenges facing development, and we need to assume the moral responsibility to take action on behalf of future generations, especially the poorest.” The combination of tremendous amounts of scientific research, comprehensive studies, observed climate changes, and the analysis of potential impacts, and projected risks are documented in the Bank’s “Turn Down The Heat” report. The combination of extreme weather events and incidence of heat waves as well as projections for rising sea levels, temperatures, and depleting ecosystems offers a realistic perspective on the debate of global warming.

World Bank: Leaders are Running out of Time on Climate Change - A report released from the World Bank warns that the consequences of warmer temperature trends are expected to grow severe even if governments stand by current emissions targets. A late October hurricane in the United States was attributed by some organizations to warmer ocean temperatures. The summer heat wave, meanwhile, brought criticism of renewable fuel mandates enforced by the U.S. Environmental Protection Agency. But if things continue as they have, the World Bank finds, the fallout from warmer temperature trends will affect "everything we do." The World Bank, in a 104-page report, warns that global average temperatures are on pace to climb by 4°C by the end of the century "even if countries fulfil current emissions-reduction pledges." In late October, the Union of Concerned Scientists stated that Hurricane Sandy, a Category 1 storm, tracked over an Atlantic Ocean that was about 5°C warmer than the seasonal average. The USC said higher temperatures mean the world's oceans are absorbing more heat, which may cause hurricanes to store more power as the atmosphere holds more precipitation. While the group said it wasn't clear if storms like Sandy may occur more frequently if warming trend continue, it was clear that "human-caused climate change is delivering a one-two punch."

The World Bank's Dire Climate Warning - It is perhaps the supreme irony among the many ironies of 21st century human life on Earth. The World Bank, which seeks to foster economic growth everywhere on our humble little planet, has issued a dire warning about global warming in its new report Turn Down The Heat (pdf). We get the take-away message from the Washington Post's World Bank warns of ‘4-degree’ threshold of global temperature increase. The World Bank is urging stepped-up efforts to meet world carbon-reduction goals after looking at what it says would be the catastrophic consequences if average world temperatures rise more than 4 degrees Celsius (7.2 degrees Fahrenheit) by the end of the century.  In what World Bank President Jim Yong Kim acknowledged was a “doomsday scenario,” a new study by the organization cited the 4-degree increase as a threshold that would be likely to trigger widespread crop failures and malnutrition and dislocate large numbers of people from land inundated by rising seas. The report was prepared for the World bank by the Potsdam Institute for Climate Impact Research and Climate Analytics. The supreme irony is that it is the very economic growth the World Bank seeks to foster that is causing the planet's surface to heat up. So it is almost impossible to know what they have in mind when they issues dire warnings about the climate. One assumes it is the usual delusional mush which asserts that increases in energy efficiency and widespread adoption of clean, "renewable" forms of energy (wind, solar, etc.) will support continued economic growth as we de-carbonize the energy supply to prevent the worst climate scenarios from occurring. Consider this figure from the report and the sample text accompanying it.

The 16 scariest maps from the E.U.’s massive new climate change report - The above map shows how the “tourism climate index” — a calculation of how amenable the climate in a location is to outdoor activity — will be affected by climate change during the summer in Europe. Blue areas will see climatic improvements; yellow, moderately worse climate; brown, significantly worse climate. So if you want to visit, say, Italy or Spain — book your flight.  Earlier today, the European Environment Agency walked into the room and, plunk, dropped a 300-page report on the anticipated effects of climate change on the continent. Three hundred pages, chock-a-block with maps far more terrifying than that one up there. It’s a road map on minute details of what Europe can expect on temperature, flooding, forest fires, soil quality, sea animals. It’s the Grays Sports Almanac of the continent through the year 2100.  Here are some of the more alarming maps and graphs, because terror is a dish best shared. (A blanket note: All images from the full report [PDF]; on most, click to embiggen.)

Contrary to Popular Belief Scientists are United on Climate Change - Polls show that many members of the public believe that scientists substantially disagree about human-caused global warming. The gold standard of science is the peer-reviewed literature. If there is disagreement among scientists, based not on opinion but on hard evidence, it will be found in the peer-reviewed literature. I searched the Web of Science, an online science publication tool, for peer-reviewed scientific articles published between January first 1991 and November 9th 2012 that have the keyword phrases “global warming” or “global climate change.” The search produced 13,950 articles. See methodology.

Greenhouse Gases Hit Record High - Greenhouse gases in the atmosphere hit a new record high in 2011, the World Meteorological Organization has said.In its annual Greenhouse Gas Bulletin released on Tuesday, the organisation said that carbon dioxide levels reached 391 parts per million in 2011.The report estimates that carbon dioxide accounts for 85% of the "radiative forcing" that leads to global temperature rises.Other potent greenhouse gases such as methane also reached record highs.The carbon dioxide levels appear to have been rising at a level of two parts per million each year for the last 10 years - with the latest measure being 40% higher than those at the start of the industrial revolution.The WMO estimates that 375 billion tonnes of carbon have been released into the atmosphere since 1750, and that about half of that amount is still present in the atmosphere.

CO2 Hits New High; World Could Warm 7°F by 2060 - The amount of heat-trapping carbon dioxide in the atmosphere reached a record 390.9 parts per million (ppm) in 2011, according to a report released Tuesday by the World Meteorological Organization (WMO). That’s a 40 percent increase over levels in 1750, before humans began burning fossil fuels in earnest. Although CO2 is still the most significant long-lived greenhouse gas, levels of other heat-trapping gases have also climbed to record levels, according to the report. Methane, for example hit 1813 parts per billion (ppb) in 2011, and nitrous oxide rose to 324.2 ppb. All told, the amount of excess heat prevented from escaping into outer space was 30 percent higher in 2011 than it was as recently as 1990.These are sobering numbers, not because they come as any sort of surprise, but rather because they don’t. Scientists have known about the heat-trapping properties of CO2 since the mid-1800s. They’ve been documenting the steady rise of CO2 pumped largely out of smokestacks and exhaust pipes since the 1950s. About half of the excess CO2 going into the atmosphere so far has been absorbed by plants and the oceans, but, said WMO Secretary-General Michel Jarraud in a press release, “ . . . this will not necessarily continue in the future” as these natural “sinks” for CO2 reach their capacity.The CO2 that remains in the atmosphere, meanwhile, takes centuries to dissipate, which is why the numbers continue to climb. As a result of all the extra CO2 pumped into the air, worldwide average temperatures have already risen by 1.8°F since 1900.

Cornucopia of Prosperity Can Flow From Carbon Tax - Right now the climate and energy community is stuck.  There is a growing consensus, including among conservatives, that it is finally time for a carbon tax.  Yet, no politician -- especially President Obama -- seems ready to advance the proposal. The previous proposal to do something about climate -- cap&trade -- failed to gain wildly popular public enthusiasm (and we need this level of support).  While economists thought cap&trade was the best way to address the carbon pollution that is causing extreme climate disruption, it wasn't seen as "giving back" enough to the public.  .  A recent American Enterprise Institute conference on a carbon tax showed broad support for the idea among both Republicans and Democrats.  Conservatives have long wanted to lower taxes on earnings, and many have called for taxing consumption or pollution to achieve this.  A properly structured carbon tax can also bring investment and jobs, and effective action on climate.   However, the conference showed how quickly the discussion can fall into a "wonky" technical morass of various ways to carry out a carbon tax.  There are a host of different and complex ways to assess a carbon tax -- but that is not where the discussion needs to begin.    To gain wildly enthusiastic public support, we must first discuss the economic prosperity that can flow from a carbon tax.

Would a carbon tax cut emissions drastically? Not on its own.: Lately, the White House and Congress have been talking up tax reform. And that’s given policy wonks an excuse to revisit one of their favorite environmental proposals — the carbon tax. The government would slap a fee on greenhouse-gas emissions to offset tax cuts elsewhere. It would boost the economy and address global warming. What’s not to love?. Is it a comprehensive solution to climate change? Or just a small first step? Many economists would argue that it could indeed be a comprehensive solution on its own. If you tax oil, coal, and natural gas and make them all more expensive, then people and companies will either use fewer fossil fuels or they’ll seek out alternatives. Markets will adjust to the change in price. That’s the standard theory: If you price the carbon externalities correctly, markets will adjust. But not everyone’s convinced. Over at the Brookings Institution, Mark Muro recently argued that a carbon tax, by itself, might not be enough to make a significant dent in U.S. global-warming emissions. Sure, in the near term people would cut back on fossil fuel use and companies would find innovative ways to reduce emissions. This is what appears to be happening in British Columbia, which levied a carbon fee in 2008. That’s a start. But modern economies are so heavily dependent on fossil fuels that there’s only so much we can reasonably cut back. Alternatives aren’t readily available yet.

Glacial-paced UN climate talks need overhaul-researchers - (Reuters) - Nations working on a deal to fight climate change should cap the size of delegations and use majority voting to overhaul negotiating rules that stifle progress and harm the interests of the poorest nations, researchers said on Sunday. Almost 200 nations will meet in Doha, Qatar, from Nov. 26 to Dec. 7 to try to extend the Kyoto Protocol, the existing plan for curbing greenhouse gas emissions by developed nations that runs to the end of 2012. They have been trying off and on since Kyoto was agreed in 1997 to widen limits on emissions but have been unable to find a formula acceptable to both rich and poor nations. The number of national delegates hit a peak of 10,591 at the Copenhagen summit in 2009, when governments failed to agree a global accord to slow climate change after opposition from a handful of countries, up from 757 at a first meeting in 1995 Limiting the delegates per country would be a step towards greater fairness, the researchers from the University of East Anglia, the University of Colorado and PricewaterhouseCoopers wrote in the journal Nature Climate Change.

Pollution Fight Fading as European Leaders Battle Crisis - The next victim of Europe’s economic crisis is becoming the global effort to restrain fossil fuel emissions and curb pollution now at record levels. The European Union, which led the fight by establishing the biggest market for carbon emissions, is letting the matter slip as a priority. EU leaders didn’t discuss climate strategy at their four summits this year, while France, Germany, Spain and Britain are focused on paring the region’s 10.5 percent unemployment rate and 10.8 trillion euros ($13.9 trillion) in debt. The matter didn’t emerge during U.S. presidential debates.“What scares me is that climate policy is sliding off the international policy agenda,” International Energy Agency Chief Economist Fatih Birol said in an interview in advance of the United Nation’s annual round of talks on the issue that start in three days in Doha, the capital of the Qatar.

Want to Be a True Leader, Obama? Take Climate Change Seriously - The race to become leader of the world's most powerful democracy often seemed disconnected from reality.   But the most bewildering disconnect was over the greatest threat the world faces: global warming. Republican candidate Mitt Romney only mentioned it mockingly, and President Barack Obama brought it up in passing toward the end of the campaign and in one line during his acceptance speech. We should probably be happy that the candidate who at least acknowledged the seriousness of climate change won. Obama has had more to say since being elected to his second term. "I am a firm believer that climate change is real, that it is impacted by human behaviour and carbon emissions, and as a consequence I think we have an obligation to future generations to do something about it," he told reporters at a post-election news conference. He should have done more. As investment strategist Jeremy Grantham recently wrote in Nature, "President Barack Obama missed the chance of a lifetime to get a climate bill passed, and his great environmental and energy scientists John Holdren and Steven Chu went missing in action."

Obama on Climate Policy: Not Just Now, Thanks - Environmental advocates have expressed frustration with the lack of discussion of climate change in the presidential race this year, a reticence that persisted even after the devastation of Hurricane Sandy. On Wednesday, in his first post-election news conference, President Obama offered his most extensive remarks on climate change in months. They did not particularly thrill environmentalists. The president said that it was impossible to attribute a specific weather event to global warming, but noted there have been an extraordinary number of severe weather events in North America and around the globe. “And I am a firm believer that climate change is real, that it is impacted by human behavior and carbon emissions,” he said. “And as a consequence, I think we’ve got an obligation to future generations to do something about it.” He said that in his first term he had ratcheted up fuel economy standards for vehicles and doubled the production of renewable energy. “But we haven’t done as much as we need to,” he said. Mr. Obama then said that the issue sharply divides Democrats and Republicans, and also different regions of the country, depending on their production and consumption of energy. But rather than propose a way to bridge those divides, the president seemed to punt. He said he would be listening to experts over the next several months and then conducting an “education process” about long-term steps to address the warming planet.

David Spratt: Serious talk about geo-engineering better than pious hand-wringing about 2 degrees - TV's Lateline programme is schedule to discuss climate geo-engineering tonight, a debate that is long overdue. Suggesting that climate geo-engineering – such as top-of-atmosphere sulfate injections to reduce incoming solar radiation as a temporary measure until the world gets its act together to avoid the big global warming tipping points – might be necessary is as popular in the environment and climate movements as farting in the middle of a slow movement at a concert. Almost everybody is keen to rail against it, such as Climate Authority member Clive Hamilton in The Philosophy of Geoengineering. I have yet to hear a climate or environment advocacy group in Australia even say that we should at least consider the issues on their merits. There's lots of reasons to be worried about the ideas – and reasons why we need to consider them – as has been canvassed recently in Nature, on the BBC, on NPR, in the Guardian, and in many scientific papers including here,  here, here and here, for example. Yet some of those most willing to consider it are those scientists who seem most aware and forthright about where global warming is heading and why, when all things are considered, geo-engineering appears to be the least-worst option.

C.I.A. Closes Its Climate Change Office - The Central Intelligence Agency has disbanded its Center on Climate Change and National Security, a unit formed in 2009 to monitor the interplay between a warming planet and intelligence and security challenges. The creation of the office drew fire at the time from some Republicans, who said it was an unnecessary expense and a distraction from the agency’s focus on terrorism and other more immediate threats. The agency did not say whether the closing was related to budget constraints or other political pressures. Todd Ebitz, a C.I.A. spokesman, said that the agency would continue to monitor the security and humanitarian challenges posed by climate change as part of its focus on economic security, but not in a stand-alone office. “The C.I.A. for several years has studied the national security implications of climate change,” Mr. Ebitz said in an e-mailed statement. “As part of a broader realignment of analytic resources, this work continues to be performed by a dedicated team in a new office that looks at economic and energy matters affecting America’s national security. The mission and the resources devoted to it remain essentially unchanged.”

Wind energy tax credit set to expire at the end of 2012 - Chart: Data for 2012 planned additions are based on industry data submissions and monthly updates on planned wind facilities. Left-hand axis plots current capacity of existing generators by their initial date of operation. Capacity may change over time as generators are altered. For recent years, these data are synonymous with capacity additions. Early in the time period, this data series may be missing generators that have since retired.  The wind energy production tax credit (PTC), along with state-level policies, has boosted the growth of the U.S. wind industry over the past decade, but the PTC is set to expire at year-end unless legislation extending its provisions is approved. This tax credit was first implemented in 1992, when the United States had less than 1.5 gigawatts (GW) of installed wind capacity. By the end of 2011, wind capacity stood at more than 45 GW, about 4% of U.S. power generating capacity, and provided 3% of total U.S. electricity generation in 2011. Wind's generation share is below its capacity share because wind's capacity utilization is limited to windy periods. Data reported to EIA for 2012 point to another year of significant wind capacity additions, following a trend of increasing capacity additions in anticipation of a PTC expiration.

Germany's Renewable Energy Problems Serve as a Warning to the UK - On the 14th of September 2012 the 3,500 wind turbines that exist around the UK managed to produce just over four gigawatts of power to the national grid; a record. The same day Germany also set its own production record, although its 23,000 turbines and millions of solar panels managed to create 31GW. It is interesting to note that the two records were received very differently. Maria McCaffery, the CEO of RenewableUK, said that “the record high shows that wind energy is providing a reliable, secure supply of electricity to an ever-growing number of British homes and businesses;” whereas the Germans dismayed at their surge in electricity production. Germany has a very advanced renewable energy sector, having invested billions over several years to try and encourage as many renewable energy installations as possible. It is a path that the UK government wants to take, and therefore they must quickly heed the warnings and note the problems that Germany is already experiencing. The problems generally stem from the fact that solar and wind is not a steady source of energy. This means that it is very difficult to maintain a steady supply to the grid, and as a result traditional fossil fuel plants must be kept on standby, ready to produce energy whenever the wind dies too much.

Solar storm as desert plan to power Europe falters - An ambitious plan to provide 15% of Europe's power needs from solar plants in North Africa has run into trouble. The Desertec initiative hoped to deliver electricity from a network of renewable energy sources to Europe via cables under the sea. But in recent weeks, two big industrial backers have pulled out. And the Spanish government has baulked at signing an agreement to build solar power plants in Morocco. Desertec was set up in 2009 with a projected budget of 400bn euros to tap the enormous potential of solar and other renewables in North Africa. The hope was that by 2050, around 125 gigawatts of electric power could be generated. This would meet all the local needs and also allow huge amounts of power to be exported to Europe via high-voltage direct current cables under the Mediterranean sea. But three years later, the project has little to show for its efforts. Two large industrial partners, Siemens and Bosch, have decided they will no longer be part of the initiative.

America’s Power Grid Vulnerable to Terrorist Attacks - Terrorists could black out large segments of the United States for weeks or months by attacking the power grid and damaging hard-to-replace components that are crucial to making it work, the National Academy of Sciences said in a report released last Wednesday. While the report is the most authoritative yet on the subject, the grid’s vulnerability has long been obvious to independent engineers and to the electric industry itself, which has intermittently tried, in collaboration with the Department of Homeland Security, to rehearse responses. Of particular concern are giant custom-built transformers that increase the voltage of electricity to levels suited for bulk transmission and then reduce voltage for distribution to customers. Very few of those transformers are manufactured in the United States, and replacing them can take many months.

Hamaoka reactor likely wrecked in seawater accident - A restart may be impossible at one of Japan's idled nuclear reactors without substantial repairs, after an accident during a shutdown procedure last year in which hundreds of tons of seawater flooded equipment including the central pressure vessel. Unrefined seawater contaminated sensitive appliances and subsequent inspections have found rust on many key components of the affected unit, the No. 5 reactor at the Hamaoka nuclear power plant in Shizuoka Prefecture. Damaged devices include those that regulate the rate of nuclear fission. The incident occurred while workers were shutting down the reactor on May 14, 2011. They were responding to a request, delivered eight days previously, by Prime Minister Naoto Kan for a shutdown of all reactors at Hamaoka on account of the plant's location--one of high seismic risk. An alarm sign lit up at 4:30 p.m., while the workers were lowering the pressure inside the reactor. The alarm indicated high salinity in the condenser, a device that uses seawater to cool the pure water vapor that drives the turbines. Later studies revealed a dislodged alloy cap that previously had been welded to the end of a pipe. A high-pressure jet of hot water had hit and broken 43 tubes that conduct seawater inside the condenser. As a result, about 400 tons of seawater flooded inside.

Nuclear Power's New Hope: Small Reactors -—U.S. makers of nuclear-power plants, battered by the rise of inexpensive natural gas, are turning to Washington for help bringing the next generation of reactors on line. This week, they won an endorsement from the U.S. Department of Energy for one of the industry's best hopes: going small. The department said it would help bring to market a small, modular nuclear-power reactor from Babcock & Wilcox Co., under a program in which the Obama administration wants to spend up to $452 million over five years on the technology. The small reactor could provide about 180 megawatts of power, about one-fifth the size of a typical nuclear reactor but still enough for tens of thousands of homes. It has an underground radiation-containment structure, meant to be safer and less expensive than those at larger plants. The small reactors are modular, meaning manufacturers hope to build them at a central location before shipping them and installing them, potentially reducing the costs of constructing a nuclear plant. The reactor is about 83 feet tall and 13 feet in diameter, allowing it to be shipped by rail as opposed to being assembled on site. The cost of building a conventional nuclear-power plant today tends to make it uncompetitive against power plants burning abundant natural gas.

Lowest US carbon emissions won't slow climate change - It looks like good news, but it's not. The US has recorded a sharp fall in its greenhouse gas emissions from energy use. Thanks to a rise in the use of natural gas, emissions are at their lowest since 1992. The fall will boost the natural gas industry, but in reality the emissions have simply been exported.According to the US Energy Information Administration (EIA), energy-related CO2 emissions in the first quarter of 2012 were the lowest in two decades. Emissions are normally high between January and March because people use more heating in the winter, but last winter was mild in the US.The EIA says that an increase in gas-fired power generation, and a corresponding decline in coal-fired, contributed to the fall in emissions. Burning natural gas produces fewer emissions than burning coal, and natural gas is currently unusually cheap in the US thanks to a glut of shale gas extracted by hydraulic fracturing or "fracking". if gas companies continue to expand their shale gas operations, the US could generate even more electricity from gas, and its emissions could fall for several years, says Kevin Anderson of the University of Manchester, UK. However, this will not slow down climate change. US coal consumption has fallen, but production is holding steady and the surplus is being sold to Asia. As a result, the US is effectively exporting the coal-related emissions.

The Road To Climate Disaster Is Paved With Coal: 1,200 New Coal Plants Planned Around The World - Some weeks, a few news stories come together to illustrate just how dire the situation is for the world’s climate. This week is one of them. This morning, new data from the World Meteorological Organization showed that carbon dioxide, methane, and nitrous oxide levels hit record highs in 2011. As of last year, concentrations of CO2 — one of the most abundant heat-trapping gases — hit 390.9 parts per million. (350 ppm is what many scientists say is the upper limit on “safe” levels of CO2). According to WMO, we’ve seen a 30 percent increase in “radiative forcing” — i.e. the amount of heat trapped on earth — since 1990. These record levels of greenhouse gas emissions aren’t a huge surprise considering that other organizations have reported similar findings. The real news is what the world intends to do about it. And according to a new report on the global pipeline for coal-fired power plants — a technology that accounted for 45 percent of CO2 in 2011 — there’s not much hope for slowing the record pace of global warming pollution. According to a new analysis released today by the World Resources Institute, there are nearly 1,200 new coal plants planned for construction around the world. Most of those plants will be built in China and India, but there are dozens planned for America, Australia, Europe, and Russia.

Coal Boom Unabated in Asia -  The Green Blog news roundup included this graph and summary today:  Some 1,200 new coal-fired power plants are being planned across the globe despite concerns about greenhouse gas emissions from such generating stations, the most polluting type, the World Resources Institute estimates. Two-thirds of them would operate in China and India, it says. [World Resources Institute] [Read on...] Two related reports have come out in recent days. One, the United Nations Environment Program Emissions Gap Report 2012, concludes:  Action on climate change needs to be scaled up and accelerated without delay if the world is to have a running chance of keeping a global average temperature rise below 2 degrees Celsius this century. The other was a new climate assessment produced for the World Bank. Here’s the summary: “Climate Change Report Warns of Dramatically Warmer World This Century.” After I read it the other day, I sent this question to the bank’s press office: I disagree with Climate Progress blogger Joe Romm on quite a few fronts, but he’s raised a very important point….  I’d greatly appreciate an answer from the bank on how it can put out such an urgent message on decarbonization while continuing to support coal-generated electricity (even if more efficient)?  Here’s the reply, attributed to a World Bank spokesman: The World Bank Group only invests in coal in very rare circumstances. We have moved away from funding coal and have moved toward the funding of renewable energy. When you talk about coal projects in the developing world, I think you need to put this in perspective.  We cannot deny developing countries their basic energy needs. We invest in coal only when poor countries have no other realistic options, including no short-term options to rapidly ramp up renewable energy alternatives.

Rail freight prices for coal rise; firms able to pass increasing costs - The US Department of Energy today released historical data on costs of transporting coal via rail to electric power plants. Price increases vary considerably across locations, but at the national level these costs are up 50% in the past decade. EIA: - The average cost of shipping coal by railroad to power plants increased almost 50% in the United States from 2001 to 2010. Railroad transport accounts for more than 70% of U.S. coal destined to the electric power sector, so changes in rail rates can have an important impact on the cost of coal delivered to power plants. Though they vary significantly, transportation costs accounted for 40% of the average overall cost of coal delivered at electric power plants in 2010.

Coal market to face dropping quality, rising costs - The quality of thermal coal for exports is dropping, prompting concern among utilities and mining companies that coal-fired power plants will become more expensive to run and will fall foul of stricter environmental laws. Coal has been the dominant fuel for electricity generation in developed countries since the 19th century, and emerging economies such as China and India have in recent decades ramped up coal use to account for more than half of global demand. Some investment analysts argue that this “golden age” of coal may be coming to an end, as large coal fields discovered in the last two decades, such as in Indonesia or Colombia, were easy to develop and the most economical reserves of the fossil fuel are fast being depleted, leading to a drop in the quality of what remains. “High-quality and cheap coal supply is under serious threat … (and) we believe the ’golden age’ of coal will end sooner than expected,” Axa Investment Managers said in a report. Energy research and consultancy Wood Mackenzie says the quality of coal from Indonesia, the world’s biggest exporter, is already low and will deteriorate further. This means that to get new supplies out of the ground could become increasingly uneconomical and many new projects may be shelved.

Locking in Dirty Energy Demand: GE Signs Deal With Clean Energy Fuels for Gas-Powered Vehicles -- On November 13, Clean Energy Fuels (CEF) signed a deal with General Electric (GE) to purchase its natural gas vehicle fueling assets in an effort to expand what it describes as “America’s Natural Gas Highway.” CEF is owned on a 20.8 percent basis by T. Boone Pickens, energy magnate and owner of the hedge fund, BP Capital. Andrew Littlefair, President and CEO of CEF, described the deal as one of the “most significant milestones in Clean Energy’s history.” The deal, “will enable trucks to operate [on natural gas] coast to coast and border to border.” Forbes dug into the nuts-and-bolts of the deal: In particular, Clean Energy has agreed to buy two MicroLNG plants from GE Oil and Gas (with up to $200 million in GE financing), to be operational by 2015. These modular units can quickly liquefy natural gas off of any pipeline, producing up to 250,000 gallons per day – enough to fuel 28,000 trucks – while minimizing the associated physical footprint.

How Big a Role Will Shale Gas Play in America’s Energy Future? - Some people herald it as the start of a new dawn, and others condemn it as a potential environmental disaster. I am talking of course about shale gas and shale oil, produced by hydraulic fracturing — known by its shorthand as “fracking.” With every new technology there are winners and losers, benefits and costs. But hydrocarbons from shale deposits are shaping up to cause as big a stir in the energy markets as nuclear power did back in the seventies. Maybe more so, as oil and gas are consumed across a wider range of applications than just the electricity produced by nuclear. This isn’t the place to delve into the environmental implications — there are dozens of sources that lay out their stall in rightly protecting the environment — but it should be said that the biggest threat to the future of shale resources will be environmental. If widespread contamination of ground water, for example, began to be linked to fracking, the industry could yet be stopped in its tracks. So far (although there have undoubtedly been instances), cases of contamination have been sufficiently isolated that the industry still has full government approval, fueled by excitement of what the future could hold.

Shale Gas Bubble About to Burst: Art Berman, Bill Powers - Food and Water Watch recently demonstrated that the dominant narrative, "100 years" of unconventional oil and gas in the United States, is false. At most, some 50 years of this dirty energy resource may exist beneath our feet. Bill Powers, editor of Powers Energy Investor, has a new book set for publication in May 2013 titled, "Cold, Hungry and in the Dark: Exploding the Natural Gas Supply Myth."  Powers' book will reveal that production rates in all of the shale basins are far lower than the oil and gas industry is claiming and are actually in alarmingly steep decline. In short, the "shale gas bubble" is about to burst.  In a recent interview, Powers said the "bubble" will end up looking a lot like the housing bubble that burst in 2008-2009, and that U.S. shale gas will last no longer than ten years. He told The Energy Report:  My thesis is that the importance of shale gas has been grossly overstated; the U.S. has nowhere close to a 100-year supply. This myth has been perpetuated by self-interested industry, media and politicians...In the book, I take a very hard look at the facts. And I conclude that the U.S. has between a five- to seven-year supply of shale gas, and not 100 years. The hotly-anticipated book may explain why shale gas industry giants like Chesapeake Energy have behaved more like real estate companies, making more money flipping over land leases than they do producing actual gas. 

Natural gas up nearly 100% from April lows - The US natural gas in storage is finally showing a more seasonal pattern, with the first sign of declines due to seasonal demand increases. This rise in demand was helped by low temperatures in the Northeast that followed Hurricane Sandy.With better demand fundamentals - especially after the hot summer that burned off some excess supply via increased power usage (see discussion) - natural gas continues to rally. Henry Hub spot price is now about 100% above the lows reached in April. In the long run, a number of pipeline projects should reduce excess supplies from the Marcellus Shale area, lowering regional price differentials and providing some stability to the business.  EIA: - As production in the Northeast United States has grown, particularly from the Marcellus, insufficient infrastructure has led to excess supply and depressed prices in some areas. Several major pipeline expansions and new projects are planned in the coming years to help further ease constraints in moving gas out of the Marcellus Shale region.

Thousands of Natural Gas Leaks Found in Boston - Beneath the streets of Boston is an aging network of natural gas pipelines that delivers fuel to heat homes and power appliances but also threatens to feed fires and even cause explosions. Highlighting the need for repairs, a new study detected more than 3,300 natural gas leaks throughout the city. Researchers from Boston University and Duke logged 785 road miles (1,263 kilometers) in the city, driving around in a GPS-equipped car with a device to measure methane, the chief chemical component of natural gas. The team discovered 3,356 separate natural gas leaks — some of them potentially hazardous. "While our study was not intended to assess explosion risks, we came across six locations in Boston where gas concentrations exceeded the threshold above which explosions can occur," Nathan Phillips, associate professor at BU, said in a statement.

War in Gaza = War Over Natural Gas? - We extensively documented that the wars in the Middle East and North Africa are largely about oil and gas.  (Update: Iran has just started building its gas pipeline to Syria.) As Professor Michel Chossudovsky noted in 2009, gas may be a central reason for the war over Gaza as well: This is a war of conquest. Discovered in 2000, there are extensive gas reserves off the Gaza coastline. British Gas (BG Group) and its partner, the Athens based Consolidated Contractors International were granted oil and gas exploration rights in a 25 year agreement signed in November 1999 with the Palestinian Authority. The rights to the offshore gas field are respectively British Gas (60 percent); Consolidated Contractors (CCC) (30 percent); and the Investment Fund of the Palestinian Authority (10 percent). The PA-BG-CCC agreement includes field development and the construction of a gas pipeline. The BG licence covers the entire Gazan offshore marine area, which is contiguous to several Israeli offshore gas facilities. (See Map below). It should be noted that 60 percent of the gas reserves along the Gaza-Israel coastline belong to Palestine. The BG Group drilled two wells in 2000: Gaza Marine-1 and Gaza Marine-2. Reserves are estimated by British Gas to be of the order of 1.4 trillion cubic feet, valued at approximately 4 billion dollars. These are the figures made public by British Gas. The size of Palestine’s gas reserves could be much larger.

B.C. First Nation members evict pipeline surveyors, set up road block - Members of a First Nation in northern British Columbia have evicted surveyors working on a natural gas pipeline project from their territory, seized equipment and set up a roadblock against all pipeline activity. A group identifying itself as the Unis’tot’en clan of the Wet’suwet’en Nation said surveyors for Apache Canada’s Pacific Trails Pipeline were trespassing. “The Unis’tot’en clan has been dead-set against all pipelines slated to cross through their territories, which include PTP (Pacific Trails Pipeline), Enbridge’s Northern Gateway and many others,” Freda Huson, a spokesperson for the group, said in a statement. “As a result of the unsanctioned PTP work in the Unist’ot’en yintah, the road leading into the territory has been closed to all industry activities until further notice.” The group said once the surveyors were turned back, members retrieved materials that had been left behind Tuesday. That equipment will be held until the company agrees to open up “appropriate lines of communication,” said the group.

Senators request facetime with Obama on Keystone pipeline - A bipartisan group of senators is asking President Obama for a meeting about the proposed Keystone XL oil sands pipeline that the lawmakers want the White House to approve. The letter from 18 senators, led by Sens. John Hoeven (R-N.D.) and Max Baucus (D-Mont.), announced via press release Friday calls for “setting politics aside” and urges Obama to back the project. It states: Nothing has changed about the thousands of jobs that Keystone XL will create. Nothing has changed about the energy security to be gained through an important addition to the existing pipeline network built with sound environmental stewardship and the best modern technology. Nothing has changed about the security to be gained from using more fuel produced at home and by a close and stable ally. And nothing has changed about the need for America to remain a place where businesses can still build things. Senate Minority Leader Mitch McConnell (R-Ky.) also signed the letter. It requests a meeting with Obama in the “near future.” The White House did not comment.

Former Clinton and Bush Cabinet Members, Now Oil and Gas Lobbyists, Expect Keystone XL Green Light - The Tar Sands Blockade of TransCanada Corporation's "Keystone XL South" continues in Texas, but former members of the Clinton and George W. Bush cabinets believe the northern half will soon be green-lighted by President Barack Obama. In a Nov. 13 conference call led by the Consumer Energy Alliance (CEA), an oil and gas industry front group, CEA Counsel John Northington said he believes a "Keystone XL North" rubber stamp is in the works by the Obama Administration. “I think the Keystone will be approved in fairly short order by the administration,” Northington said on the call. Northington has worn many hats during his long career: [He] served in the Clinton Administration at the Department of the Interior as Senior Advisor to the Director of the Bureau of Land Management. Mr. Northington also served as Special Assistant to the Assistant Secretary for Land and Minerals Management with energy policy responsibility for the former Minerals Management Service and the Bureau of Land Management.

Traders Employ Choppers, Satellites, and Infrared Telephoto Lenses to Gauge Food, Oil Supply - Spies snapping pics with infrared telephoto lenses. 24/7 helicopter and high def satellite surveillance. Special forces in Afghanistan? The latest espionage thriller? Hardly. Just oil data providers gathering information in Cushing, Oklahoma to give Wall Street traders an edge. Turns out all this snooping is legal, even if it sounds iffy at first. Whatever information leaks onto public land and airspace is fair game—folks just couldn’t as easily or usefully detect it in the past. But technology is rapidly changing all that. Cushing houses the largest oil storage facilities in the US. In recent years, oil has flowed in faster than out—by a lot—because Cushing is short on pipeline infrastructure. Oil that can’t easily be delivered to refineries drops in price, theoretically, to make up for the cost of alternate transportation. But more generally because nobody wants a product they can’t easily get at and use. So, the spread (price differential) between cheap crude in Cushing and more expensive international Brent crude is historically huge. Basically, if you can figure a way to cost effectively get oil out of Cushing—on trains, trucks, or barges, for example—you can pocket what’s left of the spread after you sell it to refineries on the coast. But taking that risk requires forecasting the price of Cushing oil, and forecasting prices requires timely supply data.

Energy Industry Pushes for Atlantic Drilling -  One of the most significant energy issues facing President Barack Obama in his second term is whether to allow oil drilling off the coast of the Atlantic, where production has been off-limits for decades.The energy industry, eager to find out how much oil and natural gas exists under the Atlantic sea floor, already is pushing the administration to allow seismic companies to survey the area. If granted approval, the companies could begin mapping the ocean's resources as early as next year. Depending on the extent of the resources, the U.S. could soon expand its production base and further cement its role as one of the world's most dominant energy producers. The International Energy Agency last week said the U.S. is poised to overtake Saudi Arabia as the top global oil producer by 2020. The U.S. banned drilling off the Atlantic Coast more than 20 years ago, partly due to low political support for it. This time, too, exploration won't come without a political price. Some East Coast states object to drilling activity off their coasts, partly because of environmental concerns. Environmental groups oppose not only offshore drilling but the seismic surveys that would need to be done well before any drilling takes place.The precise timing of any surveying remains uncertain, in part because companies want more assurance that if surveys do point to deposits of oil and natural gas, the government will move to sell drilling rights in the area.

Saudi summer oil burning hits record high in 2012 -JODI -   (Reuters) - Saudi Arabia burned record volumes of crude oil over the summer, official government figures show, contrary to its aim of using more gas for power generation to reduce wastage of crude that it could export. During the peak period from early June through September, Saudi Arabia burned an average of 763,250 barrels per day (bpd) of crude, compared to an average of 701,250 bpd last year and 747,750 bpd in the previous record summer of 2010, official government data issued on Sunday under the Joint Oil Data Initiative (JODI) shows. Saudi Oil Minister Ali al-Naimi said in March that more natural gas should be available from fields that only produce gas, or so-called non-associated fields, to meet peak summer power demand, potentially saving millions of barrels of valuable crude for export. Key to this plan was the ramp-up of Karan, Saudi Aramco's first non-associated offshore gas field, which was completed ahead of schedule, helping boost Saudi gas production by 18 percent over summer, Aramco said in October.Karan, which can pump gas free from OPEC-constrained crude oil fields, should save tens of millions of barrels of crude for export over coming years. But its rapid ramp up was not enough to prevent a rebound in crude oil burning in the world's leading oil exporting country

Fracking: A new dawn for misplaced optimism - You would think we were swimming in oil. The International Energy Agency's (IEA) latest World Energy Outlook forecasts that the United States will outstrip Saudi Arabia as the world's largest producer by 2017, becoming "all but self-sufficient in net terms" in energy production. While the "peak oil" pessimists are clearly wrong, so is a simplistic picture of fossil fuel abundance. When the IEA predicts an increase in "oil production" from 84 million barrels a day in 2011 to 97 in 2035, it is talking about "natural gas liquids and unconventional sources", which includes a big reliance on "fracking" for shale gas. Conventional oil output will stay largely flat, or fall. The IEA has been exposed before as having, under US pressure, artificially inflated official reserve figures. And now US energy consultants Ruud Weijermars and Crispian McCredie say there is strong "basis for reasonable doubts about the reliability and durability of US shale gas reserves". The New York Times found that state geologists, industry lawyers and market analysts privately questioned "whether companies are intentionally, and even illegally, overstating the productivity of their wells and the size of their reserves." And former UK chief government scientist Sir David King has concluded that the industry had overstated world oil reserves by about a third. In Nature, he dismissed notions that a shale gas boom would avert an energy crisis, noting that production at wells drops by as much as 90 per cent within the first year.

Are Wealth And Prosperity Synonymous? - The International Energy Agency recently predicted the US could become self-sufficient in energy within a couple of decades - a move that should make any nation more prosperous. Will Hutton, who chairs the economic research think tank Big Innovation Centre, and is principal of Hertford College in Oxford, says: "A secure energy supply will lead to lower energy prices, which could lead to a more vigorous US manufacturing sector." It might make the US more prosperous financially, but will it feel safer and more at peace with itself? Not necessarily so, thinks Jeff Gedmin at London-based think tank the Legatum Institute, which says its aim is to advance ideas and policies in support of free and prosperous societies around the world. "I don't think there is any kind of mechanical relationship between material wealth and the well-being of citizens," he says.

Ten Predictions Made by the IEA's 2012 World Energy Outlook - The IEA’s 2012 World Energy Outlook has spurned many a headline since its release on Monday, which should be none too surprising given it is 688 pages long. The executive summary of the report can be viewed here (which is 676 pages less than the full version), while through even more distillation here are ten points I have gleaned from it in the past few days: 

• 1) The number of vehicles on the road is set to double to 1.7 billion by 2035. Increasing demand for road freight is responsible for almost 40% of the increase in global oil demand
• 2) US oil production is set to surpass that of Saudi Arabia by 2020 to become the largest global oil producer (caveat: this will only likely be until the mid-2020s, when Saudi takes back this accolade)
• 3) Natural gas is set to become the most widely-used fuel in the US by 2030.
• 4) Renewable energy is to soar by 2035, accounting for almost one third of total electricity output.
• 5) Iraq is to make the largest contribution to global oil supply growth as oil output exceeds 6 mbpd in 2020, rising to above 8 mbpd in 2035.
• 6) Global fossil fuel subsidies increased 30% in 2011 to $523 billion. Global fossil fuel subsidies are six times greater than those for renewables (at $88 billon)
• 7) Nearly three-quarters of projected non-OECD coal demand growth comes from China and India, with India surpassing the US by 2025 as the world’s second largest user of coal (behind China), while becoming the largest importer of coal by 2020.
• 8)  Water shortages are the key constraint on power and energy.
• 9) The US is predicted to become a net exporter of oil by 2035, although there is a good amount of skepticism surrounding this prediction. (and some general scoffing by peak oil theorists)
• 10) Global energy demand is set to grow by a third by 2035, with China, India, and the Middle East accounting for 60% of the increase. Energy demand in the developed countries (= OECD) barley rises

The World Running on ‘E’: The Coming Oil Crisis - While it’s unlikely the we’ll find ourselves using the last drop of the world’s oil anytime soon, we are nearly guaranteed to face a shortage of cheap and accessible oil in the coming century. Known oil reserves are only prepared to meet today’s global demand for another 40 years. And two indicators suggest that we have even less time than that. One, anyone charting the rising middle classes in China and India can tell you, global oil demand is growing. Without new sources of energy, today’s oil supplies will not meet tomorrow’s oil demand. And second, figures for proven oil reserves aren’t so proven. Reserve figures are reported by global oil suppliers that have heavy incentives to exaggerate their reserves. Healthy global reserve estimates help to reassure investors and stabilize volatile prices. The world’s largest oil supplier since the 1980s, Saudi Arabian ARAMCO, has reported no major oil field discoveries in thirty years. Even so, the company’s reported reserves have barely changed in decades.

Predicting Global and Regional Petroleum Consumption Trends Part 8: Japan - Most of my introductory remarks about Japan (JP) to follow are based on two EIA reports: a country analysis report on Japan, and, a report on the East China Sea. JP’s petroleum consumption as a country is third only to the USA and China. As you will see, not too long ago JP’s annual consumption rate was over 2 bby and it was still about 1.6 bby in 2011. That makes JP’s consumption rate greater than the entire African continent’s consumption rate (about 1.2 bby), about the same as the entire former Soviet Union region (1.5 bby) and little bit less than South America (2.2 bby) in 2011. Oil is Japan’s single largest source of primary energy source at 44% of total energy consumption, although this has been falling over the past decades in favor of natural gas and nuclear power, at least until the earthquake and tsunami in March 2011. What Japan does not have, is substantial domestic petroleum reserves. Citing the Oil and Gas Journal, the EIA states that JP’s reserves of oil are only 0.044 bbs (i.e., 44 million barrels). There is much talk and intrigue about JP having access to “domestic” reserves in the East China Sea, south of Okinawa, in an island chain called Daioyu/Senkaku (Chinese/Japanese name). As the dual naming implies, there is an ownership dispute for these islands between China and Japan. The EIA estimates that the East China Sea has between 0.06 and 0.10 bbs of oil in proven and probable reserves, but, China’s estimates of “undiscovered resources” runs much higher, at 70 to 160 bbs. Of course, even 0.1 bbs of oil is worth a lot of money, but, as far as having much impact on meeting JP’s present oil consumption (presently about 1.6 bby), this is negligible— about 1 month’s supply. However, a reserve of 70 to 160 bb is a very different matter—maybe enough to go to war over, some suggest. Personally, I think that there would have to be "proven and probable reserves" of at least 16 bbs (e.g., about ten year’s worth of JP’s present consumption) to make it worthwhile for JP and others (e.g., China) to fight over any time soon.

US to overtake Saudi Arabia in oil as China's water runs dry – It is official. The US will overtake Saudi Arabia to become the world's top oil producer by 2017. The International Energy Agency (IEA) said in its world outlook for 2012 this morning that the US will be a net exporter of gas by 2020, with all the vast implications of abundant cheap gas for its chemical, plastics, glass, and steel industries. "The United States, which currently imports around 20 per cent of its total energy needs, becomes all but self-sufficient in net terms – a dramatic reversal of the trend seen in most other energy importing countries," it said. This is entirely due to the shale and gas revolution. North America as a whole will become a significant net exporter.

China Energy Outlook: An Inside Look at Chinese Energy Thinking - Globally, only two reports are published on an annual basis wherein the world’s energy situation is fully scrutinized. These have a huge impact because in many government and company decision boardrooms – at least in Western Europe - everything which is written inside the two reports are seen as the truth, the whole truth, and nothing but the truth. We are talking about the International Energy Outlook of the United States Energy Information Administration, and the World Energy Outlook of the International Energy Agency funded by the OECD. A number of years ago China decided it needs its own version of the truth. To develop an expertise in generating models which encompass energy-economy-environment to understand how energy policy affects the future of China. It was decided at the highest levels to create 1) a short term outlook to 2015 which has just been published, and 2) A long term outlook to 2050 which will be published next year. They both encompass the Chinese and World energy situation. However, as usual the communication/language barrier - Mandarin is difficult to read for Westerners - makes this unbeknownst in the western world.  Fortunately, I had the opportunity to attend the first presentation in the western world of the new China Energy Outlook, for the Chinese Energy Research Institute, which is a part of the National Development Reform Commission of China, the government body in charge of macroeconomic planning.  More details below the fold for a summary of their talks and the China Energy Outlook (Executive Summary, English starts at page 19.)

CNOOC agrees to Canada’s demands for Nexen takeover: sources - CNOOC Ltd., China’s biggest offshore oil and gas producer, has accepted management and employment conditions set by the Canadian government as it seeks approval for its US$15.1 billion takeover of Nexen Inc., according to two people familiar with the matter. Negotiators for the Canadian government adopted many of the conditions requested by Alberta Premier Alison Redford last month, which include guarantees that at least 50% of Nexen’s board and management positions be held by Canadians, the two people said on condition they not be identified because negotiations are confidential. . Recent statements from Harper and federal cabinet ministers provide “favorable indications” CNOOC’s takeover of Nexen will soon be approved, as well as the separate bid the government is reviewing by Malaysia’s state-owned energy company for Calgary-based Progress Energy Resources Corp., said Kyle Preston, an oil and gas analyst at National Bank Financial Group in Calgary.

When it comes to trade with China, we are all hypocrites now - There are a number of bad arguments against approving the CNOOC takeover of Nexen, or more broadly opening the door to investment between China and Canada, as under a recently signed bilateral treaty: that CNOOC is state-owned, that China does not offer reciprocal treatment to Canadian investors, that Canada might be obliged to compensate Chinese investors for expropriating their assets, and so on. But amid the welter of pseudo-economic arguments there is another, avowedly non-economic objection that is rather harder to dismiss: simply, that we are consorting with monsters. Though far removed from the psychosis of Maoism, the Chinese regime remains among the world’s more brutal dictatorships, with a record of torture, imprisonment without trial, and persecution of minorities that shames the senses, even without the steamrolling of Tibet. By permitting Canadians to do business there, as much as by allowing Chinese firms to do business here, we are arguably signalling our acquiescence in, if not approval of, this behaviour. Certainly we are signalling there will be no economic price to be paid for it: you may mistreat innocent human beings on a mass scale — jail them, beat them, pluck their eyes out if you like — and commerce will flourish between us undiminished.

A tale of two energy visions: China and Australia - Over the past few weeks China and Australia have both released white papers on energy. The two documents could not be more different. Australia’s white paper is largely about our continued obsession with becoming an alternative “Saudi Arabia” of gas. It has a view we should take over as the world’s largest exporter of gas before the year 2020. The White Paper has extensive sections on building up the gas and petroleum sectors, as well as coal for export, and allowing market forces to work in the national markets for liquid fuels. In all this, the White Paper has a single paragraph on the country’s disastrous increasing dependence on petroleum products imports. The chart 2.4 (p. 18) says it all. The contrast with China’s Energy White Paper could not be starker. China clearly views its energy security as the most fundamental feature of its future prosperity. It is building renewable energy industries as fast as is economically and technologically possible, as its major ‘nation building’ 21st century project. All government departments are focused on achieving the energy goals. The energy targets announced in the White Paper speak for themselves:

• 100 GW for wind (more than doubling the current capacity).
• 21 GW for solar PV (a seven-fold increase).
• massive expenditure on the electric power grid to make it the backbone of China’s 21st century industrial economy.

Philippines & China: Joint Exploration, Not War - The Philippines' industrialist du jour, Manny V. Pangilinan--he goes by his initials "MVP"--has long sought to partner with Chinese energy firms in exploring contested areas in the South China Sea. Say what you will about Pangilinan, but his move shows astuteness about the political sensitivities surrounding energy exploration there. If you will recall, the Philippine president was sufficiently annoyed by recent run-ins with the Chinese in the South China Sea as to officially rename the part of it claimed by Manila the "West Philippine Sea." While China always issues fine words such as those spoken at the recently-concluded ASEAN summit about the matter, alike that other would-be regional domineer its actions do speak louder--and are often belligerent in the eyes of many Filipinos. Witness their abysmal public opinion of China. So, while Pangilinan does have his critics, his idea for the energy exploration unit of his vast group to partner with Chinese oil giant CNOOC makes business and political sense. As with any number of foreigners, Pangilinan is banking on leadership changes in the Communist Party to spur a joint exploration deal. I am somewhat doubtful, but one always hopes that the liberal idea of commercial opportunities trumping narrow national objectives holds even here:

Steel industry outlook worrisome - China's steel industry is a big cause for concern in the fourth quarter due to shrinking demand and heavy losses, according to an industry official.The fears were outlined by Huang Libin, an official from the Ministry of Industry and Information Technology, in an interview with China National Radio.  "The steel sector's performance has been bad since the beginning of the year," Huang said. "Their revenues are falling and demand remains weak." The entire steel sector is now operating at a loss and struggling with problems of oversupply and a broader economic slowdown, he said. MIIT data show that 45 percent of the country's steel companies suffered losses in the first nine months of 2012.  According to figures from the National Development and Reform Commission, 80 major steel firms reported a combined loss of 5.53 billion yuan ($877.78 million) in the January-September period.

China’s growing copper fetish - China’s copper mountain continues to build. Over the past month Chinese bonded (as in copper inventories in Chinese warehouses that are yet to pay VAT) and SHFE copper inventories have risen to record high levels, according to Goldman. Anyone with new pics of the phenomenon will be rewarded with an Alphaville mug (probably).  Here’s why they say all this copper-hugging is going on (our emphasis): Downstream de-stocking: Chinese refined copper demand did not pick up significantly in late 3Q12 and early 4Q12 as would normally be the case, partly reflecting the destocking cycle in the downstream end-use sectors (including air conditioners and automobiles). This is expected to end by 1H13. Higher Chinese refinery utilisation: Chinese copper smelters and refineries ramped up output in October, with average utilization rates rising to 93%, the highest for the year.Over-importing owing in large part to ‘financing deals’: Chinese refined copper net imports rose by 73% yoy ytd September, averaging 265ktpm, moving well above average requirements of c.225kt per month. As such, Chinese copper inventories have risen sharply this year (primarily at bonded warehouses), despite a negative Chinese copper import arbitrage (Exhibit 2). Since the import arbitrage is not attracting extra metal (over and above requirements), financing deals, which depend on the positive differential between domestic and foreign interest rates, are the likely culprit (in line with anecdotal evidence). And while China has been over-importing in recent months, Goldman also make the point that ex-Chinese LME stocks have not drawn down (unlike earlier in the year). That, they say, points to ex-Chinese demand weakness.

China’s Cotton Reserves Enough to Meet Deficit for Six Years  - Cotton stockpiles in China, the world’s biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the country’s deficit for the next six years, according to Allenberg Cotton Co. Inventories are rising as the government boosts purchases to support domestic prices and lift farmer incomes, Joe Nicosia, chief executive officer of world’s largest cotton trader, said at a conference in Hong Kong today. The country may buy 5 million tons for reserves this year, up from 3.2 million tons a year earlier, he said. “As long as China maintains this regime to subsidize cotton farmers, the world will be prone to overproduction,” he said. “Can you imagine a world without China importing any cotton for six years? They hold all the cards.”

Yang Jisheng: The man who discovered 36 million dead - Under Mao Zedong, Yang's good fortune was to find a job as a reporter with China's state-run Xinhua news agency. His misfortune had been to see his father die of hunger in 1961, at the height of the famine that killed an estimated 36 million people: "When my dad died, I thought it was just my family's problem. I blamed myself because I hadn't gone back home to pick wild plants to feed my dad. Later on, the governor of Hubei province said millions of people had died. I was astonished," Yang says. In the 1990s Yang, by now a senior editor at Xinhua, used his status to secretly research the truth about the famine in 12 different provincial archives: "I could not say I was looking for data about the famine, I could only say I was looking for data about the history of China's agriculture policy. In the data, I found a lot of information about the famine, and people who starved from it. Some of the libraries allowed me to take photocopies; some only let me write the information down. These," he gestures casually at a teetering pile of brown envelopes on the floor, "are the photocopies".

China Will Build the Tallest Building In the World in Just 90 Days - According to its engineers, this will be the tallest skyscraper in the world by the end of March of 2013. Its name is Sky City, and its 2,749 feet (838 meters) distributed in 220 floors will grow in just 90 days in Changsha city, by the Xiangjiang river. Ninety days! It's not a joke. According to the construction company, the skyscraper will be built in just 90 days at the unbelievable rate of five floors per day. They will be able to achieve this impossibly fast construction rate by using a prefabricated modular technology developed by Broad Sustainable Building, a company that has built 20 tall structures in China so far, including the a 30-story hotel [constructed in 360 hours - see link for time-lapse video].  Unlike the Burj Khalifa, the tower will be mostly habitable. Its final height will be 2,749 feet high (838 meters). Compared that to the Burj's 2,719 feet (829 meters), which include the spire at the top resulting in a total of 163 floors. Sky City will use an astonishing 220,000 tons of steel. The structure will be able to house 31,400 people of both "high and low income communities". The company says that the residential area will use 83-percent of the building, while the rest will be offices, schools, hospitals, shops and restaurants. People will move up and down using 104 high speed elevators.

Is the Chinese Construction Industry Too Large? - China Bears have been predicting a disastrous end to the experiment in "Capitalism with Chinese Characteristics" for a number of years now. Notwithstanding these gloomy prognostications, China has so far gone from strength to new strength with each passing year (with only relatively minor setbacks along the way). Thus it has become easy to dismiss the bears. Still, if history is any guide, they'll be right eventually and so it's worth trying to understand what might be the signs of that. I believe that the best way to think about post-Deng-Xiaoping China is that the society is engaged in a crash program to build a modern developed economy, complete with freeways, high speed rail, large cities, excellent airports, world class universities and a modern electricity grid and energy generating infrastructure. The Chinese population is over 1.3 billion people, and so, when the whole project is complete, China will be the highest population developed country by a factor of about four.  So how far along are they in this project? I think the easiest way to keep track is to look at the fraction of the Chinese population that is urban. In developed economies, 95%+ of the population lives in cities, whereas, in traditional pre-industrial societies, that fraction tops out at about 20% (and can be as little as 3-5%, depending on the society). China's urbanization fraction (according to their census) looks like this:

In China, To Get Rich Is Not So Glorious - But a handful of recent studies do give some insight into public sentiment in the world’s second-largest economy on the eve of its once-in-a-decade leadership transition. The upshot: More wealth buys more cars and handbags, but not necessarily happiness—and white-collar workers in China’s fast-changing economy are the most likely in the world to say they’re more stressed out this year than last. Overall life satisfaction has declined since 1990. “Sometimes I feel like I am driving down an expressway, speeding from one place to another, but I forgot the reason and I do not know the final destination,” says Rebecca Jiang, a 29-year-old civil servant. “I do not have the time or energy to enjoy the scenery. I am so busy I do not know what I really like, who I want to be. I am just traveling around. I am speeding even.” Money is one source of stress. Home prices have quadrupled in a decade in Beijing, but salaries haven’t risen so fast. “My parents and my husband’s parents had to spend all their savings to buy us an apartment,” says Jiang.

In China Schools, a Culture of Bribery Spreads -  For Chinese children and their devoted parents, education has long been seen as the key to getting ahead in a highly competitive society. But just as money and power grease business deals and civil servant promotions, the academic race here is increasingly rigged in favor of the wealthy and well connected, who pay large sums and use connections to give their children an edge at government-run schools.  Nearly everything has a price, parents and educators say, from school admissions and placement in top classes to leadership positions in Communist youth groups. Even front-row seats near the blackboard or a post as class monitor are up for sale.  Zhao Hua, a migrant from Hebei Province who owns a small electronics business here, said she was forced to deposit $4,800 into a bank account to enroll her daughter in a Beijing elementary school. At the bank, she said, she was stunned to encounter officials from the district education committee armed with a list of students and how much each family had to pay. Bribery has become so rife that Xi Jinping devoted his first speech after being named the Communist Party’s new leader this month to warning the Politburo that corruption could lead to the collapse of the party and the state if left unchecked. Indeed, ordinary Chinese have become inured to a certain level of official malfeasance in business and politics.  But the lack of integrity among educators and school administrators is especially dispiriting, said Li Mao, an educational consultant in Beijing. “It’s much more upsetting when it happens with teachers because our expectations of them are so much higher,” he said.

China’s ‘Go West’ boom offers bonanza for British banks - The Communist authorities of Chengdu -- the 2,500 year-old capital of Sichuan -- have invited the City of London to transform their 14m-strong city into a financial metropolis, hoping to outflank richer rivals such as Shanghai on the Eastern seabord with Square Mile know-how. "We want more British financial firms here in Chengdu," said Ren Ruihong, head of Chengdu's financial committee. "We want banks, insurance companies, private equity, and fund managers. We are turning Chengdu into the most open financial sector in China, and our main focus is on links to Britain and Dubai." Money is pouring into the region under the "Go West" policy of tax breaks for firms that set up operations in Western China, an area pressed up against the Tibetan plateau, covering almost a quarter of a billion people. Battle for dominance is split between the cultural enclave of Chengdu --with 51 universities turning out 200,000 students a year, and its `Italianesque' allure of slow food and the Dolce Vita -- and the sharp-elbowed rival of Chongqing, where the disgraced Bo Xilai ran the world's largest metropolis of 32m people as a private fiefdom until late last year. Chengdu's gung-ho mayor Ge Honglin -- an ultra-Green, like so many of China's rising leaders -- says the boom over the next decade will match the explosive growth seen in Shanghai in the 1990s, where the catch-up spurt is largely played out.

Is China Heading for Another Round of Capitalist Roading? -It is now several days since the once-every-ten years Congress of the Central Committee of the Chinese Communist Party that decides on the top leadership of the party and the nation for the coming decade closed up shop. On the surface the main winner is Xi Jinping, a reputed "princeling" whose father was a general of the Long March era and thus one of the leading cadres of the party in the early days of Mao's leadership. The main post that he was awarded is to be the Secretary-General of the party, which in communist-ruled countries has traditionally been the top leadership position, at least as long as the party rules the government and society. However, Xi is doing even better than just that and his predecessors. His two predecessors were Jiang Zemin and Hu Jintao. Both were initially selected to become leaders by Deng Xiaoping, who only held a few official positions, Vice Premier and Chairman of the Military Commission, the latter position making him Commander-in-Chief. But he was never Secretary-General of the party or President, the official Head of State, those two positions wandering among various others while he was Vice Premier and Military Commission Chairman. However, both Jiang and Hu would come to hold the three positions: Secretary-General, President, and Chairman of the Military Commission,

China's Economic Growth: A Different Storyline - When I chat with people about China's economic growth, I often hear a story that goes like this: The main driver's behind China's growth is that it uses a combination of cheap labor and an undervalued exchange rate to create huge trade surpluses. The most recent issue of my own Journal of Economic Perspectives includes a five-paper symposium on China's growth, and they make a compelling case that this received wisdom about China's growth is more wrong than right. For example, start with the claim that China's economic growth has been driven by huge trade surpluses. China's major economic reforms started around 1978, and rapid growth took off not long after that. But China's balance of trade was essentially in balance until the early 2000s, and only then did it take off. Here's a figure generated using the ever-useful FRED website from the St. Louis Fed. How does China's pattern of trade balances line up with argument about China's undervalued exchange rate? Here's a graph showing China's exchange rate over time in yuan/dollar. Thus, an upward movement on the graph means that yuan is weaker relative to the dollar, and a downward movement means that it is stronger relative to the dollar. The yuan does indeed get weaker relative to the U.S. dollar for much of the 1980s and first half of the 1990s--but this is the time period when China's trade balance is near-zero. China's exchange rate is pretty much unchanging for the five years or so before China's trade surplus takes off. Since 2006, the yuan has indeed been strengthening. Last week the yuan hit a record high against the dollar since 1994.

Economist bets professor over China's future - Earlier this year, two economists made a friendly wager. One of them, the blogger Prof Michael Pettis of the Beijing Business School, had earned kudos as one of the first to predict the sharp slowdown in China's economy seen over the last year. The other was the Economist. The magazine, that is. Their bet - for a bottle of booze - was over whether China's economy was about to run out of puff. The country has managed 9.9% growth on average over the past 35 years, but Prof Pettis thinks that the growth rate will fall to a measly (by Chinese standards) 3% this decade. The more gung-ho Economist by contrast was forecasting that China would stay on course to overtake the US as the world's biggest economy by 2018.

Bye, bye China ‘stimulus put’ - From the AFR: China’s incoming Premier Li Keqiang has said the country needs just 7 per cent annual growth to achieve an “affluent society” by 2020, suggesting the country’s new leaders won’t roll out a big-spending stimulus package to bolster the economy. He said China would not pursue “one-sided GDP growth” and development would be at a “medium speed” in the long term. He also said the redistribution of wealth would require a bigger role for the market in allocating resources, reviving hopes of financial reforms. The comments were released to state-run media early on Friday morning. Bye, bye China ‘stimulus put’. Hello long term commodity correction.

"China’s Transition: Three Scenarios" - My new book with Dan Blumenthal, An Awkward Embrace: The United States and China in the 21st Century, features three potential scenarios for the future of the Chinese economy and discusses implications for U.S.-China relations. The scenarios are:

1. Optimistic: China becomes wealthier and gradually becomes less authoritarian and a more responsible participant in the international system.
2. Somewhat Pessimistic: China becomes rich but stays authoritarian and increasingly challenges or even threatens the United States in economic and security spheres.
3. Very Pessimistic: China’s economic growth derails, leading to a period of internal instability that contributes to severe global instability.

U.S. Pivots, China Bristles - President Obama's Asia trip contains two messages that could be summed up, like some martial-arts pose, as "pivoting with an outstretched hand". Perhaps it started just as a date in the diary, but Mr Obama is keen to point out that his first foreign visits since the election aren't a mistake. They're a message. His national security adviser Tom Donilon told a Washington conference last week that the President decided early on in his first administration that the US was "underweighted" in some regions and "overweighed" in others, like the Middle East. The ugliness of the phrase shouldn't disguise the importance of the president's belief that the Pacific region is of a greater strategic value to America than other parts of the world. Donilon said: "The United States is a Pacific power whose interests are inextricably linked with Asia's economic, security and political order. America's success in the 21st Century is tied to the success of Asia." He defines this in economic, diplomatic and military terms.

S&P declares Australia a “one trick pony” - London-based Kyran Curry, the long-time primary credit analyst for Australia at S&P, is back and the news is getting worse. From the AFR: “The banks are highly indebted, they’re highly leveraged, they are the main vehicle Australia uses to fund its current account deficit…Australia has, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position…It’s got high levels of liabilities, it’s got very weak external liquidity and that basically means the banks are highly indebted compared to their peers…They’re benefiting from a safe haven at the moment – nonetheless investor sentiment can turn very quickly…We just worry that at some point, the people who are funding the Australian banks may decide that enough is enough and may begin to lose confidence in the bank’s ability to roll over their debt…That would come through a weakening in Australia’s major trading partners flowing through to a dramatic weakening in Australia’s fiscal position.” Curry said this could be a two or three year scenario. But he added: “Anything that weighs on the ability of Australia to bring forward new energy projects and that weighs on its export growth potential, that’s something that would put pressure on the rating. Australia is looking increasingly like a one-trick pony.”

A Call for Japan to Take Bolder Monetary Action  - For years, proponents of aggressive monetary policy have offered this unusual piece of advice as a way to end Japan’s deflationary slump and invigorate the economy. Print lots of money, they said. Keep interest rates at zero. Convince the market that Japan will allow inflation for a while.  Japan’s central bankers long scoffed at such recklessness, which they feared would ignite runaway inflation. But now, the bank’s hand could be forced by an unlikely alliance of economists and lawmakers who have argued for Japan to take more monetary action after more than a decade of weak growth and depressed prices. Championing their cause is the former prime minister Shinzo Abe, who is favored to return to the top job after nationwide elections next month. Otherwise deeply conservative, Mr. Abe surprised even his own supporters by calling for the Bank of Japan to be much bolder in tackling deflation, the damaging fall in prices, profits and wages that has choked Japan’s economy for 15 years.  In escalating remarks over the last week, Mr. Abe has said that he will press the Bank of Japan to act on government orders if his Liberal Democratic Party wins the Dec. 16 election and even rewrite Japanese law to reduce the bank’s independence. In a speech in Tokyo on Thursday, Mr. Abe said he would call for the Bank of Japan to set an inflation target of 2 to 3 percent, far above its current goal of about 1 percent, with an explicit commitment to “unlimited monetary easing” — an open-endedness that has caused jitters among some economists. The bank’s benchmark interest rate should be brought back to zero percent from 0.1 percent, Mr. Abe added.

Abe threatens to turn BOJ into an unlimited piggy bank for the govenment - The persistent slump in the Japanese economy has accelerated. Reuters: - Sentiment among Japanese manufacturers fell for a fourth straight month, a Reuters poll showed, providing more evidence that the world's third-biggest economy is slipping into recession amid a global slowdown and tensions with China [ see discussion ].  The monthly poll, which closely correlates with the Bank of Japan's quarterly tankan survey, comes after data this week showed the economy shrank 0.9 percent in July-September, the first contraction in three quarters.  A slew of weak data is likely to keep the central bank under pressure to ease monetary policy further after having boosted monetary stimulus for a second straight month in October as a strong yen and weak global demand threatened the export-reliant economy. Except rather than focusing on structural issues plaguing Japan, Shinzo Abe, the likely next prime minister of the nation, wants to use BOJ as a direct lender to the government. Of course he is not the first politician in recent months to use a nation's central bank to solve structural problems (such as excessive government debt).

BOJ Governor Refutes Opposition Leader's Plan; Policy Unchanged - Japan's top central banker took the unusual step of weighing in on the country's parliamentary election campaign, criticizing the platform of the front-runner for prime minister as "unrealistic" and "negative" for the economy. Bank of Japan Gov. Masaaki Shirakawa on Tuesday rebutted point by point the detailed monetary-policy proposals offered in recent days by Shinzo Abe, head of the opposition Liberal Democratic Party, which currently leads in all major public-opinion polls for the Dec. 16 election. Mr. Shirakawa made the comments at a regular news conference following the central bank's two-day policy board meeting, where members defied mounting political pressure and declined to take additional easing measures. The crossfire between the BOJ and the LDP has taken the political war between central bankers and politicians to new heights, making monetary policy the defining issue in the political campaign, and even threatening the independence of Japan's central bank.

There Is Only One Thing That Can Save Japan Now: Inflation - The paralysis is over, maybe. Five years since the rest of the global economy started turning Japanese, and 20 years since they did, Japan wants to turn back the clock to a time when they had nonzero growth. In other words, they want the Bank of Japan (BOJ) to do something. That something is printing money, and printing more of it. Ahead of next month's elections, Shinzo Abe, the once and perhaps future prime minister of the opposition Liberal Democratic Party (LDP), has called on Japan's central bank to do unlimited easing and to increase its inflation target from 1 percent to 2-3 percent. If Gerald Ford were in charge of PR, he might have said it's a plan to whip deflation now. That's a plan Japan has been waiting on for quite some time. Before subprime or credit default swaps, the Japan of the go-go 1980s invented the modern bubble economy. At its peak, the ground beneath the Imperial Palace in Tokyo was famously worth more than all of the real estate in California combined. The Nikkei nearly reached 39,000 in 1989; it reached 9140 today. This historic market collapse didn't lead to a historic employment collapse thanks to aggressive deficit spending, aside from a failed experiment with austerity in 1997, though growth did collapse. . Blame the BOJ. That's what then-Princeton professor Ben Bernanke did in 1999, when he accused the Japanese central bank of "self-induced paralysis" for allowing deflation to set in. Consumers like falling prices, but economies don't. Deflation increases the burden of debt and increases the incentive to put off purchases. That's econospeak for disaster. And a disaster is exactly what the chart below shows us. It looks at Japan's nominal GDP, which is just the total size of its economy, unadjusted for inflation, over the past two decades.

Is An 18% JPY Devaluation The 'Best-Case' Scenario For Abe's 'New' Japan? - The JPY dropped 1.3% against the USD this week for a greater-than-6% drop since its late-September highs as it appears the market is content pricing Abe's dream of a higher inflation-expectation through the currency devaluation route (and not - for now - through nominal bond yields - implicitly signaling 'real' deflationary expectations). In a 'normal' environment, Barclays quantified the impact of a 1ppt shift in inflation expectations from 1% to 2% will create a 'permanent inflation tax' of around 18% (which will be shared between JPY and JGB channels). However, as we discussed in detail in March (and Kyle Bass confirmed and extended recently), the current 'Rubicon-crossing' nature of Japan's trade balance and debt-load (interest-expense-constraint) mean things could become highly unstable and contagious in a hurry. When the upside of your policy plans is an 18% loss of global purchasing power, we hope Abe knows what he is doing (but suspect not).

Japan Signs Rare Earth Deal with India - Japan has sealed its new “friendship” in the world of rare earths by formally signing a Memorandum of Understanding (MoU) with India for imports of rare earth (REE) minerals annually. The agreement signed last Friday will allow Japan to import about 4,100 tons of rare earths per year from India, probably from next spring. Once upon a time, Japan used to rely almost 100% on China for its supply of rare earth minerals, a crucial component in mobile phones, hybrid cars and missile guidance systems. The imports from India will take care of about 10 percent of Japan’s peak annual demand. A joint venture between Japan’s Toyota Tsusho Corp. and India’s state-run Indian Rare Earths Ltd. will be in charge of monitoring the new deal. A statement by India’s external affairs ministry released subsequent to the signing of the deal said the conclusion and signing of the agreement would further enhance and strengthen the India-Japan strategic and global partnership.

The Honest Truth: ASEAN is Still Rather Lame - World leaders--among them from ASEAN member countries, China, Japan and the US came, saw and whimpered in Phnom Penh, Cambodia. Among other things, differences within ASEAN itself are causing trouble coming up with a united policy on the matter of the South China Sea to negotiate with China. (Remember, the current ASEAN chair Cambodia is a longtime Chinese ally dating to the Khmer Rouge era and beyond. While it has no claims there, the general perception is that it's removing the issue from the ASEAN meeting agenda at China's behest.) Meanwhile, having previously accelerated the date of ASEAN economic integration including new accession countries Cambodia, Laos, Myanmar and Vietnam (CLMV) to 2015, our dear leaders are now moving it back--from the start of 2015 to the end of 2015. As usual in the political and economic realms, it's two steps forward, one step back. Actually, we at LSE IDEAS came up with a publication prior to the massive ASEAN shindig that expressed caution about the influence of the association vis-a-vis China and the United States in shaping affairs in our region. It's kind of sad, but the honest truth is that ASEAN has some ways to go before it can match the agenda-setting capabilities of the would-be regional hegemons. Oh well...

RBI bans loans to buy gold - The Reserve Bank of India (RBI) on Monday notified a total ban on banks from advancing any loans to its customers for purchasing gold in any form, which includes primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds ( ETF) and units of gold mutual funds. In its October 30 policy meet, the central bank had announced this decision. However, the banking regulator said that banks are allowed to give loans for "genuine working capital requirements to jewelers". The notification was issued after it was found that there was a significant rise in the import of gold into India in recent years. The step by the central bank came on concerns that direct bank financing for the purchase of gold in any form — that is bullion, primary gold, jewellery , gold coin, etc — could lead to fuelling of demand for gold in the country.

Argentina unmoved on debt ‘holdouts’ payment - The Argentine government has vowed only to pay creditors who restructured their debt and has ruled out a new default as it does legal battle with holders of defaulted debt seeking full repayment. The prospect of default sent a chill through debt markets after a US appeals court on October 26 upheld a New York court ruling that Argentina could not pay the holders of its defaulted debt it restructured in 2005 and 2010 without also paying the “holdouts”. These are led by NML Capital and have been suing since Argentina halted payment on nearly $100bn in 2001. High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/a0af310e-31a6-11e2-92f0-00144feabdc0.html#ixzz2CfvDAuxG The value of some of Argentina’s restructured debt has sunk by a third since the October ruling and one-year credit default swaps (CDS) have soared as the market bets that Argentina will be forced into a technical default, despite having the cash and willingness to pay its performing debt. However, the appeals court ruling remains on hold pending clarification expected this month from New York Judge Thomas Griesa on the mechanism via which Argentina pays the exchange bondholders, such as the Bank of New York Mellon, and the impact on third parties. The judge, who received filings from Argentina and interested parties on Friday and will hear from NML on Monday – has promised to rule “well in advance” of Argentina’s next bond payment, on December 2.

Why we might soon see another Argentine default - Judge Thomas Griesa, of the Southern District court in Manhattan, is mad as hell, and he’s not going to take it any more. Yesterday he unleashed three different orders and declarations on Argentina, all of which might as well have been dictated to him by Elliott Associates, the plaintiff suing Argentina for some $1.3 billion. You’ll remember that last month, the Second Circuit, upholding one of Griesa’s orders, asked Griesa to clarify a couple of matters before the order could be fully enforced. In April, after Griesa’s orders first came out, I said that they were “notable for their lack of legal reasoning”, and added that “Griesa is throwing his hands in the air, here, and basically punting the whole issue up to the appeals court.” Well, the appeals court agreed: while upholding Griesa’s orders, it also asked him for something much more detailed. Which is exactly what he has now delivered. Three different orders from Griesa arrived yesterday, all related. The meatiest is this one; the other two are here and here. In them, Griesa answers the questions put to him by the Second Circuit: firstly, what exactly does Argentina need to do, in order to comply with his order? And secondly, how broad are the orders, in terms of including intermediary banks and the clearing system more generally? Specifically, does Bank of New York risk being punished for the actions of a Latin American sovereign state over which it has no control?

All You Need To Know About Argentina's Upcoming "Technical Default" - Technically, a technical default may still be avoided, but it is now unlikely. As the following presentation from JPM's Vladimir Werning shows, the market has already decided what the "next most likely big picture step" will be. The big question is what the less than big picture next steps will be. And as the following flow chart of options to all "potentially" impaired parties shows, there are quite a few possible steps as the variety of causal permutations has suddenly exploded. For everyone who has gotten sick and tired with following the sovereign default story of one Greece and Spain, please welcome... Argentina, where things are about to get a whole lot more interesting.

Mexican market potential - TYLER COWEN draws our attention to a story in the Wall Street Journal: Six years ago, Mexico was the world’s ninth largest exporter of cars. Today the country is ranked fourth—behind Germany, Japan and South Korea—with exports expected to total more than 2.14 million vehicles this year. One in 10 cars sold last year in the U.S. was made in Mexico. Next year, every new taxi in New York’s fleet—made by Nissan Motor Co. —will carry the “Hecho en Mexico” label. Mexico is now exporting vehicles to China, and even helped Japan keep up with orders after last year’s tsunami. Mexico’s Economy Minister Bruno Ferrari boasted that a batch of new factories planned by car makers will help Mexico surpass South Korea in a few years. Let's apply the "extent of the market" analysis to Mexico's improving fortunes. The focus of trade policy is certainly relevant: By throwing open its market under the North American Free-Trade Agreement (NAFTA) with the United States and Canada and a host of other bilateral trade accords, Mexico has become a base from which carmakers export to both halves of the Americas, and worldwide. Volkswagen, for example, makes all its Beetles and Jettas there. Although Nissan produces some vehicles at a Renault plant in Brazil, most of those it sells in Latin America come from two plants in Mexico. In all, 2.1m of the 2.6m vehicles produced in Mexico last year were exported.

Craziness on Three Continents - NEP’s William Black appears on The Real News Network discussing problems in Ecuador, Spain and the heartland of the U.S.

Transatlantic Divergence - Paul Krugman - But pursuing the theme that America is doing the least worst among major economies, here’s a chart I find illuminating: In the early stages of the crisis, unemployment rose more rapidly in the US than in Europe. This mainly reflected differences in institutions: it’s much easier to fire people in America. From some point in 2010 onward, however, the US situation has gradually improved; initially some of the drop in unemployment was basically people leaving the labor force, but more recently there have been solid though modest gains in the ratio of employment to the relevant population (you have to adjust for aging). Meanwhile, Europe has gotten much worse; now formally in recession, but the truth is that it has been going downhill all along. Why the divergence? The obvious answer is that the austerity stuff broke out in 2010, and the austerians took over policy much more completely in Europe than in the United States.

In which I agree with Megan McArdle - For quite a while, I’ve been arguing that the simultaneous occurrence of sustained depression in most developed countries provides fairly conclusive evidence that both new classical macroeconomics and standard versions of real business cycle theory cannot explain actual macroeconomic outcomes. That argument is directed both against US-based economists like Casey Mulligan and Narayana Kocherlakota, who are trying to explain the US experience in terms of problems specific to the US labor market[1] and to European advocates of austerity who blame the crisis in peripheral European countries on (mostly falsely) alleged government profligacy in those countries. An immediate implication, drawn out here by Paul Krugman, is that the success or otherwise of the limited stimulus undertaken by the Obama Administration should be assessed by comparison to the performance of other countries, most of which undertook less stimulus, returned to austerity faster, and have experienced correspondingly weaker growth. But, as Megan McArdle snarks here, there’s an implication more appealing to Republicans. If Obama can’t be blamed for a global recession, neither can Bush. Although McArdle’s argument isn’t watertight (the US is big enough that US actions have a big effect on the world as a whole), the conclusion is broadly correct. There’s plenty of blame to go around for the Global Financial Crisis and the subsequent depression, and the Bush Administration deserves only a small share.

Europe in recession - The Business Cycle Dating Committee of the Centre for Economic Policy Research (the European counterpart of the U.S. NBER) last week issued a declaration that Europe entered a new recession a year ago, dating the business cycle peak at 2011:Q3. Interestingly, although Europe had been in the expansion phase over 2009:Q3-2011:Q4, real GDP still had not yet returned to its 2008:Q1 peak before the current recession began. The CEPR announcement applies to Europe overall, and there are important differences across countries. Output has been falling in Italy and Spain but is still growing in Germany. This marks the first recession in CEPR's business cycle chronology going back to 1970 in which Europe went into recession without the United States also being in a downturn.

Playing Poker with Trillions: A Prison of Debt on Both Sides of the Atlantic - SPIEGEL - In the midst of this confusing crisis, which has already lasted more than five years, former German Chancellor Helmut Schmidt addressed the question of who had "gotten almost the entire world into so much trouble." The longer the search for answers lasted, the more disconcerting the questions arising from the answers became. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? Is it possible that we are waiting for the world to conform to our worldview once again, but that it would be smarter to adjust our worldview to conform to the world? Is it possible that financial markets will never become servants of the markets for goods again? Is it possible that Western countries can no longer get rid of their debt, because democracies can't manage money? And is it possible that even Helmut Schmidt ought to be saying to himself: I too am responsible for getting the world into a fix?  Be it the United States or the European Union, most Western countries are so highly indebted today that the markets have a greater say in their policies than the people. Why are democratic countries so pathetic when it comes to managing their money sustainably?

The Year of Betting Conservatively by Nouriel Roubini - Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe). Economic growth in the United States has remained anemic, at 1.5-2% for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the eurozone, has already endured a double-dip recession, and now even strong commodity exporters – Canada, the Nordic countries, and Australia – are slowing in the face of headwinds from the US, Europe, and China. Meanwhile, emerging-market economies – including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa – also slowed in 2012. China’s slowdown may be stabilized for a few quarters, given the government’s latest fiscal, monetary, and credit injection; but this stimulus will only perpetuate the country’s unsustainable growth model, one based on too much fixed investment and savings and too little private consumption. In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. But now it is permeating the eurozone’s core. And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming “fiscal cliff,” spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1% of GDP. In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.

Who will dictate Europe's future? - Which country holds the key to the euro's fate? Which of the 17 members will turn out to be the "pivot state" - the country around which the future of the eurozone will turn? I spent most of last weekend thinking about the future of Europe with economists, politicians and senior policy makers at a two-day seminar organised by the Centre for European Reform. (I know, I get all the fun.) One way or another, this question kept on coming up - maybe because it's a useful way to think about the different paths which the euro could take from here. Two years ago, you might have said Greece was the pivot state. Policy makers were convinced that a Greek exit from the euro would be the end of the whole thing. The effort to save the euro boiled down to a massive effort to keep Greece in. Not any more. I don't speak to many City folk or European policy makers who are confident that Greece can stay in the single currency. But I would say a majority are fairly convinced that the euro will survive - even if some of them wish it were not so. 

What not to worry about in the euro crisis - FT.com: With this list of things not to worry about, it is now easier to focus on what I do worry about. The first of those, and the most important, is the impact of austerity on growth. 2013 promises to be an awful year for the eurozone economy that could well derail the current strategy. The second on my list is the continued failure to resolve the crisis, and accept the inevitability of an official sector involvement in a future Greek debt restructuring – or direct transfers. Pushing resolution beyond the German elections in September next year is bordering on the insane. And finally, the banking union faces further delays and is now subject to a lack of ambition. It will have no positive effect on the crisis because it will not separate the banks from their sovereigns, and contains no power of resolution and no deposit insurance. The debate has degenerated into a typical inter-institutional fight about who gets to do what. As you can see, my list of things not to worry about is the longer one. This is not a return to optimism – no danger here. It is a plea to focus on the few things that really matter.

Should the Eurozone’s fiscal rules be abolished? - Yes, I know it sounds an outlandish question, but it is unclear to me what the rationale is for fiscal controls imposed at the Eurozone level? A simplistic answer is that they are designed to stop future debt crises. However, if you ask any Eurozone government whether it wants to avoid another debt crisis, they would say emphatically yes. And this is not just words - they are taking highly unpopular measures to reduce their current deficits. So why do these efforts need to be augmented and directed from the European/Eurozone level? (1) Let’s go right back to the formation of the Euro. A standard rationalisation for the Stability and Growth pact (SGP) was the following. With its own currency, there is market discipline on a government spending too much or taxing too little. As government deficits rise, so do interest rates. This may be because deficits lead to excess demand and inflation, and the central bank raises interest rates to counteract this, or it may be because inflation or default risk increases. Put that same economy into a monetary union, and that discipline is diluted. In particular, there is only a union wide interest rate, and the impact on inflation in the monetary union as a whole may be small. Individual union members may therefore not internalise the impact that their deficits have on the union

Irish People say No More! - The number of Irish people who have had enough of the Banks is growing each week. With the support of the Irish Constitution they realise that they too have options. I went along on Wednesday and met a number of folks from all walks of life, young married couples, business people, employed and unemployed people and the thing that struck me was that there was none of the angst we hear on a daily basis between public/private sector, employed/unemployed people etc.. etc.. it was all walks of life united in one common agreement, that the Banks caused the economic disaster and they should answer for those actions. So, I along with my group of new friends went along to the Four Courts, into the arena where the Banks are usually comfortable and the common man is most certainly uncomfortable, we completed our individual Summonses paid our fee’s, photocopied our documents, and lodged them with the Court and retired to the Legal Eagle for a well deserved cup of coffee and intelligent discussion on the matters at hand.

Cyprus To Run Out Of Money In Next Three Or Four Weeks: Press- The Cypriot government will run out of money sometime in the next three to four weeks, giving President Demetris Christofias no choice but to make a deal with the troika of official creditors composed of the European Commission, the International Monetary Fund and the European Central Bank, the Financial Times reported on Monday, citing EU officials. Speaking to reporters in Brussels last week, Cypriot Finance Minister Vassos Shiarly noted that representatives of the troika were in Nicosia to assess the situation, about which he expressed a sense of optimism. "We're making very good progress...and I'm looking forward to a very good result," Shiarly said. According to the FT, however, one senior Eurozone official was not impressed by the actions of the Cypriot government. "They have been procrastinating for months now, and - without even any troika people on the ground - have repeatedly claimed that they are close to achieving results. Without having started anything!" the business daily cited the official as saying.

Lagarde Says Greece Deal Should be "Rooted in Reality"; Mish Says Lagarde Should be "Rooted in Reality" - Today's case of the "pot calling the kettle is black" comes from IMF chief Christine Lagarde in a warning to Brussels nannycrats and the ECB Greek deal should be "rooted in reality" An agreement among Greece's international creditors on reducing its large debt pile should be "rooted in reality and not in wishful thinking," the head of the International Monetary Fund said ahead of a tense meeting with European leaders. "I am always trying to be constructive but I am driven by two objectives," she said in an interview, "to build and approve a program for Greece that is solid, that is convincing today, that will be sustainable tomorrow, that is rooted in reality and not in wishful thinking. The problem for the IMF, Germany, the nannycrats in Brussels, ECB, and Greece is the "objective" of keeping Greece in the eurozone is one of the things destroying Greece. It is wishful thinking that Greece is going to stay in the eurozone. I am all for a large dose of "reality" but the objectives of the Troika and the nannycrats in Brussels does not permit reality.

ECB official sees Greek aid deal covering 2 years: European Central Bank policy-maker Joerg Asmussen said yesterday that the euro zone should agree next week on two years of funding for Greece and leave further help to be decided later, a view likely to irk the International Monetary Fund (IMF), which wants a permanent solution. "We should next week settle the financing for 2013 and 2014, but you have to be honest and say we do not really expect the country to have access to markets in 2015 and 2016; that means a follow-up programme would be necessary," Mr Asmussen told German broadcaster ZDF. A two-year deal would postpone a longer-term solution to the Greek debt crisis until after a German general election in September next year, when it might be politically easier for Germany, the European Union paymaster, to take tough decisions.

Merkel's day of reckoning as taxpayer haircut on Greece looms - Germany, Holland, and the creditor states of northern Europe have not lost a single cent on eurozone rescue packages, so far. They have lent money, at a theoretical profit. They have issued a fistful of guarantees to Europe’s twin bail-out funds, covering Greece, Ireland, Portugal, Spain, and soon Cyprus. They have taken on opaque and potentially huge liabilities through the European Central Bank. Yet little has disturbed the illusion that the euro is a free lunch for the surplus powers. An assumption persists that the creditors will - and should - be spared the consequences of flooding Southern Europe with excess capital. All the losses in Greece until now have been concentrated on those pension funds, insurers, and banks that stayed to the bitter end, rewarded with 75pc haircuts for their loyalty. We are at last nearing the awful moment when the curtain is ripped away. Greece’s economy has contracted 7pc over the last year. Public debt will spiral to 190pc of GDP in 2013. Leaving aside the Gothic horror of youth unemployment at 58pc, Greece’s debt trajectory is simply out of control. The International Monetary Fund says the country cannot claw its way back to viability unless EU governments and bodies take their punishment. The Fund’s Board and the powers behind it - the US, China, Japan, Brazil - will withdraw if the current farce goes on.

Privatizing Greece, Slowly But Surely - THE government inspectors set out from Athens for what they thought was a pristine patch of coastline on the Ionian Sea. Their mission was to determine how much money that sun-kissed shore, owned by the Greek government, might sell for under a sweeping privatization program demanded by the nation’s restive creditors. What the inspectors found was 7,000 homes — none of which were supposed to be there. They had been thrown up without ever having been recorded in a land registry. “If the government wanted to privatize here, they would have to bulldoze everything,” says Makis Paraskevopoulos, the local mayor. “And that’s never going to happen.” Athens agreed. It scratched the town, Katakolo, off a list of potential properties to sell. But as Greece redoubles its efforts to raise billions to cut its debt and stoke its economy, the situation in Katakolo illustrates the daunting hurdles ahead.

US Embassy, Athens Warns Of Rise In 'Unprovoked' Racist Attacks - Via US Embassy, Athens: Security Message for U.S. Citizens: Safety and Security in Greece ; November 16, 2012 - The U.S. Embassy informs U.S. citizens that the “Threats To Safety and Security” section of the Greece Country Specific Information page has been updated to inform U.S. citizens of a rise in unprovoked harassment and violent attacks against persons who, because of their complexion, are perceived to be foreign migrants. U.S. citizens most at risk are those of African, Asian, Hispanic, or Middle Eastern descent in Athens and other major cities. Please review the Country Specific Information for Greece. We encourage all U.S. citizens to review their personal security plans; remain aware of their surroundings, including local events; monitor local news stations for updates; and report specific incidences of targeted violence to the U.S. Embassy in Athens or the U. S. Consulate General in Thessaloniki at the numbers below. U.S. citizens should maintain a high level of vigilance and take appropriate steps to enhance their personal security.

For Greece: "Nothing Is Gonna Be Alright" - During a week in which Americans are supposed to give thanks, we thought this inside look at the reality on the streets of Greece was worthwhile comprehending. From the May 2011 Syntagma Square uprising to "the 'firesale' of their country, their labor rights, and their livelihoods to corrupt domestic elites and foreign financial interests" the brief documentary follows the dramatic portrait of a country veering to the brink of collapse - and the people who choose to struggle to build a new world from the ruins of the old. "For [the elites] Greece is a guinea pig, to find out up to what point they can 'milk' [us]" is how one narrator describes the situation, adding that "they are refusing to see the reality [saying] it's not happening, it's not happening, it's not happening, everything is gonna be alright; Nothing is gonna be alright" as "loans enslave people." Utopia remains on the horizon...

Thousands of police march in Spain austerity protest - About 5,000 police officers marched through the centre of Madrid on Saturday to protest salary cuts and the thinning of their ranks as Spain grapples with its sovereign debt crisis. The officers, who had travelled from across Spain. rallied three days after the nation was gripped by a general strike over the austerity cuts. Health and education workers have already taken part in similar marches. “Citizens! Forgive us for not arresting those truly responsible for this crisis: bankers and politicians,” read one banner held aloft by a line of officers as they marched to the interior ministry.

Thousands of Spanish police officers march against austerity (PHOTOS) Around 5,000 Spanish police officers marched through the streets of Madrid on Saturday to protest government austerity measures, including frozen pensions and the elimination of their Christmas bonuses. Officers travelled from across Spain to take part in the demonstration which was called by the nation’s main policing union. Protesters blew whistles, shouted slogans, and carried anti-austerity banners as they marched through the city centre to the interior ministry. "Citizens! Forgive us for not arresting those truly responsible for this crisis: bankers and politicians," read one banner. The Spanish government has imposed harsh spending cuts aimed at saving 150 billion euros between 2012 and 2014. The move has been met with anger and protests from hundreds of thousands of Spanish citizens. The austerity measures are in exchange for a rescue loan of up to 100 billion euros from the EU to help the country’s stricken banks.

Spain's Rajoy says EU budget proposal unacceptable (Reuters) - Spanish Prime Minister Mariano Rajoy said on Saturday that a draft European budget was unacceptable. The proposed seven-year budget would turn Spain into a net contributor to the EU for the first time by cutting aid and subsidies. European Union chief Herman Van Rompuy proposed a compromise draft EU budget on Wednesday, aiming to go part way to meeting spending cut demands from Britain, Germany, Sweden and the Netherlands. Van Rompuy's draft would cut 80 billion euros out of the roughly 1 trillion euro ($1.3 trillion) budget for 2014-2020 proposed by European Commission President Jose Manuel Durao Barroso. France on Thursday rejected the proposal saying the limits it proposes on farm subsidies were unacceptable. "The first draft presented by Mr. Barroso seemed to us a good document to start talks. The one that Mr. Van Rompuy presented later is unacceptable," Rajoy said in the southern Spanish city of Cadiz, where he was at a summit of Latin American and Iberian leaders. Spain fears losing some 20 billion euros of fishery, agricultural and development funds in the 2014-2020 budget, if it is cut as much as Van Rompuy proposes, El Pais newspaper reported on Saturday. Britain has threatened to veto the budget because cuts do not go far enough and EU officials are looking at ways to manoeuvre around a potential veto. 

Spain's banks see bad debts hit new high - Problem loans at Spain's banks hit a new all-time high in September, as the collapse of the country's property bubble continued to hurt the economy. Bad debts, mostly loans to home buyers and property developers, reached 182bn euros ($233bn; £146bn) or 10.7% of bank assets, according to central bank data.. Spain's government announced a two-year suspension of evictions for the most vulnerable people last week. Meanwhile, industrial orders fell sharply in Italy, separate data showed. Total orders in September fell 12.8% from a year ago, and a seasonally-adjusted 4% from August, according to the Italian statistical office. The data suggests that Italy's recession may be deepening again, after appearing to stabilise over the summer.

Europe has a bad night - Another night of poor European data, firstly with Spanish bank bad loans hitting yet another new record: Spanish banks, awaiting the first payments from a 100 billion-euro ($127 billion) European credit line, saw bad loans hit a new high in September, new data showed on Monday. ..Bank of Spain data showed banks’ bad loans stood at 10.7 percent of their outstanding portfolios in September, the highest level on record and up from 10.5 percent a month earlier. Loans that fell into arrears increased by 3.5 billion euros from August, reaching 182.2 billion euros in September. Given that nearly every metric in Spain is going the wrong way at present, including the Tinsa housing index, this really isn’t a surprise and there is no reason to suggest that yet another record won’t be set again when we get the reading for October. In response to the on-going crisis stemming from the collapse of the housing market the Spanish government looks to be coming up with some fairly desperate ideas in order to attempt to generate some demand: Spain may offer automatic residency to foreigners such as Chinese and Russians who buy homes in the country, aiming to help the ruined housing market, a government official said Monday.

Spain to offer residency to foreign house buyers - Spain is to offer foreigners residency permits if they buy houses worth more than (EURO)160,000 ($200,000) as part of an attempt to reduce the country's bloated stock of unsold homes. Trade Ministry secretary Jaime Garcia-Legaz said the plan, expected to be approved in the coming weeks, would be aimed principally at the Chinese and Russian markets as the domestic demand was stagnant and showed no sign of improving. Spain has more than 700,000 unsold houses following the collapse of its real estate market in 2008. The country's economy is struggling and is currently in recession with 25 percent unemployment. Thousands of houses have been repossessed by banks and their owners evicted because they cannot pay their mortgages. The government last week approved a decree under which evictions would be suspended for two years in specific cases of extreme need.

Idiocy in Spain: Bank Proposal to Build More Houses, Issue More Mortgages, Despite Massive Inventory and Enormous Drop in Sales - Idiocy is running rampant in Spain. The Association of Spanish Banks (AEB) thinks the solution to the debt crisis is to build more houses in spite of the fact sales are down by as much as 85%. Via Google translate, please consider Nonresident aliens buy 85% fewer homes than before the crisis.  Throughout the first half of this year only 1,363 homes were sold to foreign residents in Spain, far from the 9407 transactions in the same period of 2006, before the bursting of the housing bubble. As pointed out shortly after the prime minister, Mariano Rajoy, the government wants to dispose of the stock of unsold homes, an issue that the Ministry of Public Works had already made ​​clear in the Plan for Infrastructure, Transport and Housing (PITVI ) 2012-2024. This reflects that "demand by foreigners is critical to recovery and sanitation sector", which has barely managed to reduce their unsold stock in 8000 from their peak levels in 2009 to about 680,000 homes. Also via Google translate, El Economista reports The government granted a residence permit to foreigners who buy homes of more than 160,000 euros The government granted a residence permit in Spain to foreigners who purchase a home whose price exceeds 160,000 euros, as announced by the Secretary of State for Trade, Jaime García-Legaz.

Garbage Piles Up in Spain as Unpaid Municipal Bills Mount; Green Shoot of the Day: Cement Consumption Falls 34% - As Spain attempts austerity by cutting back payments to regions, those regions run out of funds to pay bills. For an interesting case-in-point, please consider (via Google translate from El Economista) Municipalities Owed €2,000 Million, Companies Refuse Collection and Cleaning Defaults on local councils put back on the ropes to urban sanitation companies. No respite worth. If the final plan provider payment partially interrupted the problem, the situation again becomes serious. "Since the beginning of the year delinquencies has skyrocketed. In just eight months to August, the accumulated debt of the sessions with cleaning companies was around 1,680 million. This rise is worrisome for a sector in Spain employs over 120,000 people, "said the president of Aselip (Association of Public Cleaning), Francisco Jardón. The result is that today the municipalities pending bills with these companies together account for nearly 2,000 million euros.  As also in the pharmaceutical sector, the debt problem is that, far from disappearing, is regenerated by now. "When the government launched the provider payment plan in April the problem was corrected by 90 percent. Then consistories debt with sanitation companies was nearly 3,000 million euros and around 300 million were left payable "adds Jardón. Why? "For the Royal Decree which implemented that plan did not, do not know why, consortia or associations, which also have hired urban sanitation".

Organized gangs offer homeless empty apartments in exchange for cash - When Esther Sanz found out that she was about to be evicted from her apartment she approached the social organization Platform for those Affected by Mortgages (PAH). She also went to see her parish priest in the San Cristóbal neighborhhod of Villaverde, a district in Madrid. That was when two people came up to Sanz and offered her an alternative: “Give us 600 euros and we’ll open an apartment for you today.” It wasn’t the first time the offer had been made. In Villaverde, empty properties don’t last a day. The wave of evictions sweeping across the capital in the past few years has hit San Cristóbal particularly hard. In this working class neighborhood an underground real estate agency is flourishing. Among 6,000 properties in one area, residents say about 500 are what has become known as pisos patada — literally, flats with the doors kicked in. Their owners, the banks, do nothing with them after an eviction and in many cases don’t even pay community fees. The number of people waiting to take advantage of this is growing.

Spanish judges take to the streets to protest reform they say discriminates against the poor - Judges and prosecutors across Spain are taking to the streets to protest against a Justice Ministry reform they claim increases their workload, reduces some of their powers and restricts justice for those on lower income. Some 200 magistrates and prosecutors blew whistles and cut off traffic outside the Justice Ministry in central Madrid. Many carried placards reading "Justice R.I.P.". Other said "We want to do justice for all not just those with money." The ministry's reforms were part of the Spanish government's austerity measures. The judiciary also opposes a decision to hike tariffs for people appealing court rulings, a measure they say discriminates against the low-paid. Friday's rallies were the latest of a series against the conservative government, which is battling against recession and 25 per cent unemployment.

Catalonia is voting on its future in Spain – and Madrid is worried - The red and yellow striped flags of Catalonia bobbed about giddily as Lluis Recoder delivered his message: despite the crisis gripping Spain, Catalans could be as rich as Scandinavians. "If we were a European state we would be seventh in Europe in per capita income, after Denmark and Sweden," the Catalan nationalist and regional government minister declared, to an enthusiastic response. His figures are based on wealth calculations that can look skewed. (Struggling Ireland is, for example, richer on a per capita basis than thriving Germany). But they are seen here at least as proof that Catalonia – a region of almost eight million people – could be not just viable but also wealthy if it were to separate from Spain. "It is very viable," said Artur Mas, the Catalan president, in an interview with the Guardian. "What is not viable is the current situation." The Catalan separatist campaign will come to a head this weekend in an election that will in effect serve as a plebiscite on the region's future in Spain. It is a long-running affair, borne of historical and cultural factors that have persisted for centuries. But you do not have to scratch too hard before you get to the principal bone of contention in crisis-ridden Spain: money.

Portugal Sees Debt at 120% of GDP This Year, Peaking in 2014 - The Portuguese government forecast debt will rise to 120 percent of gross domestic product this year, higher than predicted earlier, before peaking in 2014 at a lower level than it previously estimated. Debt will peak at 122.3% of GDP in 2014 after reaching 122.2% in 2013, Finance Minister Vitor Gaspar said in Lisbon today as he announced the completion of the sixth quarterly review of the country’s aid program. The government previously forecast debt would reach 119.1 percent of GDP this year, 123.7 percent in 2013 and 123.6 percent in 2014. The budget deficit targets for this year and 2013 were unchanged. “Executing the budget in 2012 continues to be a difficult exercise,” Gaspar said. This year’s deficit target “will be met and the government is not considering resorting to additional measures.”

Sharp drop in Italians' pro-European Union feelings, survey finds - Support for the European Union has sharply dropped in Italy over the past crisis-ridden years, a survey released Wednesday showed. The findings - presented at the Rome offices of the European Commission - suggest a shift in attitudes. Italians have traditionally been strongly pro-European, but resentment is growing against tough EU-mandated government austerity policies. Trust among the Italian population in Brussels institutions has decreased by 17 percentage points from 2010 to 2012, falling to 40 per cent, the ISPO research institute said. In 2005, trust levels stood at 64 per cent, and held above 60 per cent until 2009, when Italy entered a deep recession following the global financial crisis. Discontent with the EU was highest among supporters of former prime minister Silvio Berlusconi, of populist comedian-turned-politician Beppe Grillo, and among those who do not intend to cast votes in next year‘s elections, ISPO said.

Euro zone mulls Greek debt buy-back up to 40 billion euros - Euro zone finance ministers are considering allowing Athens to buy back up to 40 billion euros of its own bonds at a discount as one of a number of measures to cut Greek debt to 120 percent of GDP within the next eight years. Under a proposal discussed by ministers, Greece would offer private-sector bondholders around 30 cents for every euro of Greek debt they hold ... The ministers, who failed to reach agreement last week, have also discussed granting Greece a 10-year moratorium on paying interest on about 130 billion euros of loans from the euro zone's emergency fund ...There is also the possibility of reducing the interest rate on loans made by euro zone countries directly to Greece in 2010, from 1.5 percent to just 0.25 percent ...

Greek debt can only become sustainable by 2022 if all steps taken - Greek debt can fall to below 120 percent of output by 2020 only if euro zone countries accept losses on their loans to Athens, provide additional financing or force private creditors into selling Greek debt at a discount, according to a document prepared for a meeting of finance ministers on Tuesday.The 15-page document shows that without a package of debt-reducing measures Greek debt will fall to 144 percent of GDP in 2020, 133 percent in 2022 and 111 percent of GDP in 2030, from a current level of around 170 percent."The package of options will not make it possible to arrive at a debt-to-GDP ratio of close to 120 percent in 2020 without taking recourse to measures that would entail capital losses or budgetary implications for euro area member states or envisage a more comprehensive DBB entailing the activation of collective action clauses," the document said.Deferring interest payments by 10 years to 2022 on loans made through the euro zone's temporary rescue fund would cut Greek debt by 43.8 billion euros, or 16.9 percent of GDP.

No deal for Greece as talks drag - European finance ministers concluded a marathon meeting Wednesday without finalizing the details of a debt-reduction package for Greece. The absence of an agreement endangers the release of the next round of Greece's international bailout package, funding the country needs to remove the threat of bankruptcy and a messy exit from the eurozone. Jean-Claude Juncker, the Eurogroup president, said in a statement that the discussion was "extensive" and that progress was made."The Eurogroup ... made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt," Juncker said.

Eurogroup meeting, interrupted - Statement by the Eurogroup President, Jean-Claude Juncker. The Eurogroup welcomed the staff-level agreement reached between the Troika and the Greek authorities on updated programme conditionality, including a wide range of far reaching measures in the areas of fiscal consolidation, structural reforms, privatisation and financial sector stabilisation. The Eurogroup noted with satisfaction that all prior actions required ahead of this meeting have been met in a satisfactory manner. This reflects a wide ranging set of reforms, as well as the budget for 2013 and an ambitious medium term fiscal strategy for 2013-16. These efforts demonstrate the authorities’ strong commitment to the adjustment programme. The Eurogroup commended the considerable efforts made by the Greek authorities and citizens to reach this stage. Against this background, the Eurogroup has had an extensive discussion and made progress in identifying a consistent package of credible initiatives aimed at making a further substantial contribution to the sustainability of Greek government debt. The Eurogroup interrupted its meeting to allow for further technical work on some elements of this package. The Eurogroup will reconvene on Monday, 26 November.

EU Budget Laugh of the Day "No One Is Discussing Quality" - For now, the EU budget talks have collapsed. One major problem is cross agendas. All 27 nations have to agree to budget changes, and disputes are many.  The BBC reports hours of hard bargaining await.  Countries that rely heavily on EU funding, including Poland and its ex-communist neighbours, want current spending levels maintained or raised. The UK and some other net contributors say cuts have to be made. At stake are 973bn euros (£782.5bn; $1,245bn). France objects to the proposed cuts in agriculture, while countries in Central and Eastern Europe oppose cuts to cohesion spending - that is, EU money that helps to improve infrastructure in poorer regions. They are the biggest budget items. The Van Rompuy plan envisages 309.5bn euros for cohesion (32% of total spending) and 364.5bn euros for agriculture (37.5%).  German Chancellor Angela Merkel says another summit may be necessary early next year if no deal can be reached in Brussels now. In a speech to the European Parliament on Wednesday, the EU Commission President, Jose Manuel Barroso, complained, "No one is discussing the quality of investments, it's all cut, cut, cut."

German doubts force rethink on Greece - FT.com: German objections to suffering losses on official loans to Greece have forced the eurozone to explore more complex means of helping Athens cope with its debt mountain. After almost 10 hours of intense talks on Tuesday night, eurozone finance ministers failed to agree on how fast to cut Greece’s debt pile. They called a further meeting next week to settle differences and release €44bn of long-overdue aid. The main stumbling block was Berlin’s refusal to back “illegal” cuts to the interest rates on bilateral loans to Greece or return the profits from the European Central Bank’s purchases of Greek bonds, said people involved in the talks. An alternative proposal involves offering €10bn of extra loans to Athens from the European Financial Stability Fund, the eurozone’s temporary bailout pot. The option is seen as a leading contender for a compromise deal. This extra lending would support a more ambitious scheme to purchase Greek bonds held by private investors, part of a package of debt relief measures to bring down Athen’s debt to significantly below 120 per cent of economic output by 2022.

The Greek Resistance - Yves Smith - This Aljazeera video seeks to understand how Germans and Greeks view each other in light of the way the Trokia is breaking Greece as an example to other periphery countries (yes, Greece would have had adjustment problems regardless, but they are being made far worse by the measures taken to avoid exposing the insolvency of French and German banks). It covers how the crisis has rekindled lingering hostilities. It also sheds new light on the pre-crisis economic relationship between Germany and Greece, including corrupt deals between the Greek government and German arms-makers. It also treats austerian thinking with more dignity than it deserves, but that is a secondary theme of this show.

No Greek Deal, but did Germany Blink? - Everyone is talking about European finance ministers failing to reach an agreement on Greek funding.  There is another meeting scheduled for Monday.  It is clear that a Greek exit, which many observers had thought was inevitable six months ago, is not in the cards.  Instead, what is being debated is how to fund Greece, which we continue to note is not really about aiding Greece as much as ensuring the country's ability to service its debt, which is primarily in official hands.  Still that does not stop some officials from proposing to give the private sector another haircut through the buy back of government bonds at a 50 cents or so on the euro.  Anticipation of some buy back may be helping to drive Greek bonds higher today. However, perhaps the most important take away from the failed talks was that it appears to have spurred a tactical shift by Germany.  Shortly after talks ended, Germany indicated that it is open to providing new financing for the euro zone's EFSF lending capacity and accept lower interest rates on existing loans.  It seems more determined than it has been in making sure that the Athens' program remains intact.  The new funds would ostensibly be used by buy back Greek bonds. To be sure though, increasing the EFSF lending capacity does not necessarily cost German a single cent.  Despite cries from some quarters about German  reluctance to give more funds to Greece, the fact of the matter is that the EFSF works on the basis of guarantees, not money from the creditor nations.  The EFSF funds are raised by the sale of bonds to investors, not by transfers from German tax payers.

EU's Rehn Sees Definitive Deal on Greek Aid on Monday - Greece has taken all the steps necessary to secure its next tranche of aid and euro zone finance ministers should be able to sign off definitively on the assistance on Monday, the European commissioner for economic affairs said on Wednesday. "I trust everyone will reconvene in Brussels on Monday with the necessary constructive spirit, and move beyond the detrimental mindset of red lines," Olli Rehn told the European Parliament. "Frankly, I see no reason why we should not be able to conclude the package - and do away with the uncertainty that has been holding back a return of confidence, and thus of investment and growth, in Greece." Finance ministers have met twice in the past two weeks but failed both times to agree on the next steps for Greece and how to bring its debt level down to a sustainable level, despite more than 24 hours of negotiation. Greek Prime Minister Antonis Samaras, asked if he was worried about the non-payment of the aid tranche so far, told reporters in Brussels: "No, I don't have any worries but every day that goes by without a decision will burden the economy, its psychology, its markets and citizens and Greeks' pride. "I'll not let the Greek people's sacrifices go to waste, you can be sure of that,"

EMU leaders look for Greek debt restructuring solutions; Germany may need to step up for more than its share - Under pressure from the IMF, the Eurozone leadership is desperately looking for ways to restructure the Greek government debt in a politically "acceptable" way. The IMF has been calling for some form of relief that would put Greece on a more sustainable path. The troika forecasts for Greek recovery in the past have been nothing more than exercises in self deception (see chart from Marc to Market). Realistic estimates put Greek debt at double the GDP some time in 2014 unless there is a restructuring. The IMF charter simply prohibits the fund from providing support to nations without at least some reasonable expectation (even an optimistic one) of recovery. Lowering rates and extending maturities seems to be the most palatable solution so far. Businessweek: - “I have preferences and that means no fresh money because it is difficult to explain to our taxpayers,” Austrian Finance Minister Maria Fekter said. She predicted a “mixed package” that could include lower rates, though countries with higher borrowing costs like Spain and Italy would want compensation for any losses on lending to Greece. And that's one of the places the situation gets sticky. Italy and Spain say they are not in a position to take losses, even if these losses do not involve loss of principal. While funding Greek bonds, Italy and Spain would be paying more in their own borrowing costs than they would receive from the reduced Greek debt coupon. These nations are now pressuring Germany to compensate them for whatever "Greek pain" they may endure. GS: - German government may be asked to compensate other governments for additional Greek financial support. Reducing interest payments for the Greek government would be one way to narrow the funding gap that has opened up. Lower rates, however, would imply that some governments, notably the Italian and Spanish governments, would have to pay higher rates in funding the Greek help than what they receive in interest payments from the Greek government. One solution, according to press reports, would be that the German government compensates these governments, to some extent at least, for the interest spread.

Workers Must Get a Bigger Slice of the Pie - ECONOMIC growth in Europe depends on a recovery in household consumption. And that, in turn, requires a rethinking of the balance between capital and labor. Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P. Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. Europe’s strategy for dealing with the euro zone crisis has exacerbated these trends and is therefore a further obstacle to economic recovery. European countries are relying on two things to boost investment and hence employment: First, they are trying to lower labor costs, make their business environments more attractive by switching the burden of taxation from the corporate sector to the consumer, pushing through labor reforms aimed at reducing workers’ bargaining power and curtailing social rights and transfers. Second, they are attempting to boost business confidence by consolidating public finances. The strategy promises to further aggravate Europe’s core problem — a structural shortage of demand — by bringing about a further decline of labor income and a further rise in inequality. With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.

Moody’s strips France of AAA-rating - MOODY’S has stripped France of its prized triple-A rating. Moody’s has cut the sovereign credit rating on Europe’s second biggest economy by one notch to Aa1 from Aaa, citing an uncertain fiscal outlook and deteriorating economy. The downgrade, which follows a cut by Standard & Poor’s in January, was widely expected but is still a blow to Socialist President Francois Hollande as he strives to convince the world he can fix France’s public finances and stalled economy. Moody’s said it was keeping a negative outlook on France due to structural challenges and a “sustained loss of competitiveness” in the country, where business leaders blame high labour charges for flagging exports. “The first driver underlying Moody’s one-notch downgrade of France’s sovereign rating is the risk to economic growth, and therefore to the government’s finances, posed by the country’s persistent structural economic challenges,” Moody’s said. “These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France’s gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.”

Downgraded France says it needs more time — France's government has shrugged off the latest downgrade of its credit rating, saying Tuesday that it just needs time for reforms to the sluggish economy to take root. In a setback for President Francois Hollande's Socialist administration, Moody's Investors Service stripped Europe's No. 2 economy of it of its prized AAA credit rating late Monday on concerns that its rigid labor market and exposure to Europe's financial crisis were threatening its prospects for economic growth. This is the second ratings downgrade to have hit France this year: Standard & Poor's agency lowered its score in January. The third leading agency, Fitch, still ranks France at AAA-rating but warned it could still be downgraded. Finance Minister Pierre Moscovici insisted that France's credibility remains strong and that the government's plan to reduce unemployment and restore growth would bear fruit. France has come under scrutiny as its €2 trillion ($2.5 trillion) economy has stagnated, with many leading French companies laying off workers. Meanwhile, Hollande's administration has laid out a series of deficit-reduction targets, vowing to bring it in line with European rules next year. It has also unveiled a plan to improve the competitiveness of its economy, by giving companies €20 billion ($25 billion) in tax rebates, reducing red tape for businesses, and providing small companies with extra support to compete abroad.

EU bailout fund delays auction after France downgrade - The EU's bailout fund said on Tuesday it was postponing an auction of three-year bonds following rating agency Moody's decision to downgrade France by one notch from its top rating. "The rating action by Moody's, reducing France's long-term debt rating from "Aaa" to "Aa1", means that EFSF's new long term issuance (currently rated Aaa by Moody's)" no longer satisfies the necessary criteria for selling debt, the agency said in a statement. "EFSF is currently unable to proceed until this technical aspect is resolved," said Christophe Frankel, the fund's chief financial officer. Long-term bond issues of the EFSF, the bailout fund set up to assist struggling eurozone countries such as Greece or Ireland, have to be fully backed by countries that enjoy a similar rating to its own top rating. France has dropped out of that exclusive club -- which now includes only Finland, the Netherlands, Germany and Luxembourg -- so the fund does not have sufficient guarantees to issue long-term debt. "EFSF will look to bring its new three-year ... offering once the issuer is able to satisfy" these conditions, Frankel added.

Eurozone PMI In Steep Decline as Services Suffers Worst Month Since Mid-2009 - With the markets giddy over the "success" of people spending more money than they can afford on gifts that make little practical sense, other inquiring minds note the Markit Flash Eurozone PMI® shows Eurozone sees ongoing steep decline as services suffers worst month since mid-2009.  Key Points:
Flash Eurozone PMI Composite Output Index at 45.8 (45.7 in October). Two-month high.
Flash Eurozone Services PMI Activity Index at 45.7 (46.0 in October). 40-month low.
Flash Eurozone Manufacturing PMI at 46.2 (45.4 in October). Eight-month high.
Flash Eurozone Manufacturing PMI Output Index at 45.9 (45.0 in October). Two-month high.
The Markit Eurozone PMI® Composite Output Index was little-changed in November according the flash estimate, up fractionally from 45.7 in October to 45.8. October’s reading had been the lowest since June 2009 and, for the fourth quarter of 2012 so far, PMI data suggest the strongest contraction of output since the second quarter of 2009.Activity has now fallen in 14 of the last 15 months, with the exception being a marginal increase seen in January. Output fell sharply in both the manufacturing and service sectors and, while the former saw the rate of contraction ease slightly, the latter saw business activity fall at a rate not seen since July 2009

Is Germany's economy turning the corner? - For the first time in months the IFO survey (see discussion) saw an improvement - in both the current situation and in the expectations of future conditions.The Ifo Institute: - The Ifo Business Climate Index for German industry and trade rose again after six successive decreases. Companies expressed slightly greater satisfaction with their current business situation. They were also far less pessimistic about future business developments. The German economy is holding up in the face of the euro crisis.  In manufacturing the business climate index rose slightly following a six-month decline. Companies expressed slightly greater satisfaction with their current business situation. They were also less pessimistic than last month with regard to the six-month business outlook. Export expectations were positive for the first time in three months. The business climate index in wholesaling increased sharply. The wholesalers surveyed reported a dramatic improvement in their current business situation and expressed far less pessimism regarding future developments. The business climate also brightened in retailing. While assessments of the current business situation were somewhat poorer, retailers expect business to pick up significantly in the future.

EU Leaders Prepare for Battle Royal at Summit - European Union leaders are headed to Brussels on Thursday for a big showdown over the bloc's spending budget, in a battle that pits richer against poorer member states, the East of the continent against the West, and the U.K. against almost everyone else.  European Council President, Herman Van Rompuy, who will preside over the two-day meeting, has vowed repeatedly to keep heads of state in Brussels through the weekend to avert a collapse of the talks, arguing that a deal is needed urgently to ensure the EU and its institutions continue to function properly.The Multiannual Financial Framework, as the 2014 to 2020 budget is known, sets out the headline figures allocated to different EU programs and activities, ranging from foreign policy to transport and infrastructure.

UK, Germans say deeper cuts or no deal in EU budget – Britain and Germany warned on Friday there will be no summit deal on the European Union’s proposed 1 trillion euro long-term budget without deeper spending cuts, after the latest compromise plan ignored their calls for further restraint. British Prime Minister David Cameron dismissed a proposal to scale back tentative cuts to EU farm subsidies and regional aid to placate France and Poland, taking savings elsewhere to keep the overall budget cut at about 80 billion euros. “It isn’t a time for tinkering,” he told reporters as he arrived for the second day of budget talks. “There hasn’t been the progress in cutting back proposals for additional spending.” German Chancellor Angela Merkel said she didn’t believe leaders would reach the unanimity needed to clinch a budget deal at this summit, but played down the consequences of failure. “I have always said that it wouldn’t be dramatic if today were only the first step,” she told reporters. “I think the positions are still far apart and if we need a second round we will take the time to do it.” But EU officials warned that failure would divert time and resources away from efforts to shore up the faltering euro zone, and reinforce the impression among citizens and investors that EU leaders suffer from collective indecision.

Budget Clash Leaves EU Summit Close to Failure - The prospect of failure hangs over a European Union leaders’ summit that is intended to lay out the 27-country bloc’s long-term spending plans. While heavyweights like Britain and France are pulling in opposite directions, smaller members are threatening to veto a deal to make themselves heard. Negotiators will try to navigate the myriad demands on the second day of the meeting Friday. A tense first session left many observers predicting leaders will need more time to bridge their differences over the bloc’s spending priorities for the years to come. “I have my doubts that we will come to an agreement,” German Chancellor Angela Merkel said early Friday. The EU budget primarily funds programs to help farming and spur growth in the bloc’s less developed countries. In financial terms, it amounts to only about 1 percent of the EU’s gross domestic product, but the real significance of the budget is that it lays bare the balance of power between the bloc’s members. The bloc is divided along several lines. The most notable is between richer countries that want to reduce their contributions to the common budget at a time of economic malaise, and poorer ones that rely on EU money for development aid and economic investment. British Prime Minister David Cameron is the most vocal leader demanding restraint, while French President Francois Hollande wants the budget to keep paying subsidies for farming and development programs for poorer nations.

Hopes Fade for Quick Deal on European Union Budget - Leaders resumed haggling over a trillion-euro budget for the European Union in a second day of talks on Friday but played down expectations of a deal before the weekend amid bitter divisions over where cuts should fall. “I don’t think there’s been enough progress so far,” Prime Minister David Cameron of Britain told reporters. “There really is a problem that there hasn’t been the progress in cutting back proposals for additional spending,” he added. Late Thursday, Herman Van Rompuy, the president of the European Council, presented a new budget plan for the seven years from 2014 to 2020. The new outline reshuffled the amounts to reduce proposed cuts for agriculture and development assistance but kept the overall spending ceilings in his earlier proposal on the budget, which is worth the equivalent of about $1.3 trillion. Mr. Cameron suggested that Mr. Van Rompuy’s plan represented little more than “tinkering” and said it wasn’t “the time for moving money from one part of the budget to another.” Britain so far has gotten nowhere in a push to slash spending on the Union’s administrative apparatus, a small but symbolic area of costs and one of the few budget items easily comprehensible to ordinary citizens. After the first day of negotiations broke up after midnight Thursday, Chancellor Angela Merkel of Germany said the leaders’ positions remained “quite far apart.” She indicated that a deal on spending is unlikely this week.

EU Leaders End Summit With No Deal on a Budget - European Union leaders ended a two-day summit Friday without a deal on a common budget for the 27-nation bloc, foiled by clashes between nations that are net contributors to EU finances and those that receive more than they pay. Leaders said in a statement afterward, however, that after a "constructive discussion," there was the possibility of a deal "in the beginning of next year." The negotiations come at a difficult time for Europe. Grim economic conditions throughout much of the bloc have complicated the talks and exacerbated long-simmering discontent in nations such as the U.K. and the Netherlands about funding the budget, roughly two-thirds of which goes to paying farm subsidies and supporting investment projects in the bloc's poorer nations. "We're not going to be tough on budgets at home just to come here and sign off on big increases in spending," said U.K. Prime Minister David Cameron, who is seeking a freeze in the budget. But Mr. Cameron added that he thought a deal was "absolutely doable." Mr. Cameron and other leaders are facing electorates that have become increasingly reluctant to foot the bill for European integration. And the debt problems of the countries that use the euro, perhaps the most prominent symbol of the bloc's integration, have only made politicians more skeptical of forging closer ties with their European neighbors.

EU Budget Summit Fails in Echo of Debt-Crisis Stalemate - European Union leaders failed to agree on the 27 nation bloc’s next seven-year budget, replaying the clash between rich and poor countries that has stymied the response to the euro debt crisis. National chiefs plan another summit early next year, when northern countries including Britain and Germany may have the upper hand in seeking to cut subsidies to lesser-developed southern and eastern economies clamoring for EU investment. “Anything short of admitting that our talks have been extraordinarily complex and difficult would not reflect reality,” Jose Barroso, head of the European Commission, which manages the subsidy programs, told reporters after a two-day meeting in Brussels. Britain’s defense of its cash-back guarantee and France’s clinging to farm aid gave the summit the flavor of EU negotiations in the 1970s or 1980s, diluting efforts to equip Europe with a budget to make it more competitive. Eastern and southern countries said reduced financing for public-works projects would condemn them to lag behind the wealthier north.

EU summit ends without budget deal - A summit of the European Union’s 27 national leaders, charged with agreeing on a long-term budget for the bloc, broke up Friday afternoon without being able to reach a deal. Coming just days after the 17 eurogroup finance ministers failed, yet again, to agree on the conditions for releasing badly needed bailout money for Greece, the failure of the two-day summit raises questions about how the bloc makes important decisions. In most cases, unanimity is required, meaning that each country wields veto power. The EU’s top officials, who put in long hours trying to soften up the national leaders individually before putting them together in the same meeting room, tried to put a brave face on the budget deadlock. European Council President Herman Van Rompuy, who presides over the summits, said the ‘‘constructive discussions’’ at the summit meant an agreement could be reached early next year. He added that the national leaders had instructed him and European Commission President Jose Manuel Barroso to continue working toward consensus over the coming weeks.

Blame flies over budget ‘bazaar’.  - It took Europe’s leaders two days to discover they could not agree on a €1tn budget but less than half an hour before the blame game started over who was responsible for the latest grinding episode of euro-stasis. David Cameron accused José Manuel Barroso, European Commission president, for “insulting the European taxpayer” by failing to offer a single euro of cuts to the proposed €63bn budget for running the EU bureaucracy. Some diplomats blamed Angela Merkel, German chancellor, and François Hollande, French president, for failing to patch up their strained relations to provide a lead in seeking a solution. Others said Herman Van Rompuy, the EU president and chief negotiator, showed a lack of urgency and imagination in the way he conducted the talks. But perhaps the most surprising element in the post-mortem was how little blame was attached to David Cameron, Britain’s prime minister, whose promise to defend his country’s rebate and call for steep cuts had caused alarm in Brussels. Europe’s leaders seemed determined to present Mr Cameron as a constructive partner in the negotiations – rather than the isolated, veto-wielding eurosceptic portrayed by many European newspapers this week. After his isolation at a summit in Brussels last year over a new fiscal pact, Mr Cameron wants to get back into the fold as he tries to win friends for future fights on issues such as a proposed banking union and a possible renegotiation of Britain’s EU relationship. But his decision to hold out for a better budget deal will be welcomed by Tory MPs at Westminster, as will his hard-hitting attack on Mr Barroso, whom he accused of living in “a parallel universe” in refusing to countenance cuts to the EU civil service.

In Britain, an EU exit is no longer taboo -  Euroscepticism in Britain has been exacerbated by the eurozone crisis and a British exit from the European Union is now being openly discussed -- unless London's calls for reforms are taken seriously. Britain's ambivalence to the European project can be explained by a lingering conviction that the EU remains essentially a common market to facilitate trade, says Paul Whiteley, professor of politics at Essex University. "Britain became a member because there were economic advantages. It was very much focused on trade," he told AFP. It is perhaps no coincidence then that British support for EU membership has dropped sharply in the last five years as the economic crisis has taken hold, Whiteley says. A regular opinion poll that he organises found in August that 61 percent of Britons wanted to leave the EU compared to just 39 percent who wanted to stay in.

Shadow banking hits $67 trillion globally: task force (Reuters) - The shadow banking system - blamed for aggravating the financial crisis - grew to a new high of $67 trillion globally last year, a top regulatory group said, calling for tighter control of the sector. A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policymakers that the so-called shadow banking system of non-bank intermediaries continues to harbour risks to the financial system. The FSB, a task force from the world's top 20 economies, also called for greater control of shadow banking, a corner of the financial universe made up of entities such as money market funds that has so far escaped the web of rules that is tightening around traditional banks. "The FSB is of the view that the authorities' approach to shadow banking has to be a targeted one," the group wrote in a report, noting the current lax regulation of the sector. "The objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability," it said. Officials at the European Commission in Brussels also see closer oversight of the sector as important in preventing a repeat of the financial crisis that has toppled banks over the past five years and rocked the euro zone. The European Commission is expected to propose EU-wide rules for shadow banking next year.

‘Shadow Banking’ Up to $67 Trillion, Financial Group Says - NYT— The so-called shadow banking system, blamed by some for aggravating the global financial crisis, grew to a new high of $67 trillion worldwide last year, a regulatory group said on Sunday, calling for tighter oversight of nonbank institutions like hedge funds, private equity firms and other investment companies. The report by the Financial Stability Board appeared to confirm concerns among policy makers that shadow banking is set to thrive beyond the reach of a regulatory net that has been tightening around conventional banking. The board, a task force from the world’s top 20 economies, also called for greater regulatory control of shadow banking. “The F.S.B. is of the view that the authorities’ approach to shadow banking has to be a targeted one,” the group said, pointing to current lax regulation of the sector. “The objective is to ensure that shadow banking is subject to appropriate oversight and regulation to address banklike risks to financial stability,” it said. The United States had the largest shadow banking system, with $23 trillion in 2011, followed by the euro zone, with $22 trillion, and Britain, with $9 trillion. The American share of shadow banking has declined in recent years, while the shares of Britain and the euro zone have increased.

FSB seeks to tame shadow banking - FT.com: Non-bank lending markets face unprecedented levels of government intervention under sweeping new proposals to tame “shadow banking” laid out by global regulators meeting as the Financial Stability Board. The Basel-based regulatory group made clear on Sunday that it intends to push for tighter oversight of any part of the $67tn sector that takes on bank-like attributes such as using short-term assets to fund longer-term lending, known as “maturity transformation”. They also intend to set global capital and liquidity standards for non-banks that could be subject to investor panics akin to a depositor run. “If it looks like a bank and quacks like a bank, it has got to be subject to bank-like safeguards,” Lord Turner, the UK regulator who helped lead the project, told the Financial Times. In a shift in tone from early discussions of shadow banking, the FSB was careful to say that some shadow banking, which includes all private financial institutions that are not banks, insurers or pension funds, provides much needed funds to the real economy. The wide-ranging package includes new rules for everything from asset securitisation to short-term lending, as well as guidelines for regulators around the world on how to distinguish potentially dangerous innovations from garden variety “market finance”.

Beware the next financial blindspot - During the crazy credit boom of 2006 and 2007, Paul Tucker, now deputy governor of the Bank of England, tried to sound an alarm about shadow banks. In a couple of prescient speeches he warned that “Russian doll finance” or “vehicular finance” – as he dubbed the shadowy network of non-bank finance entities in London – could pose systemic risks. In the event, his comments had little impact; few listeners had a clue what “Russian doll finance” meant. But this week Mr Tucker finally got his wish: the Financial Stability Board issued a report that called for more oversight of the shadow banking world and its $67tn assets. In some senses this is encouraging. But as the FSB finally – belatedly – flexes its muscles, it is worth asking why it has taken six years for regulators to act. For behind that “Russian doll” tale there is a powerful principle that sheds light on past policy mistakes and highlights remaining challenges. The problem is one of tunnel vision, or what might be described as “silos” in policy making.

U.K. Eyes a Swedish Bank Model - After a wave of banking scandals, British policy makers are rethinking the way banks should do business, and some are looking to a little known Swedish lender and its retro business model for inspiration. Sweden's Svenska Handelsbanken started ramping up in the U.K. a decade ago, exporting an unusual business model: Instead of cutting costs by centralizing decision making at a large head office, it left most business decisions to a network of local branch managers. These managers don't get bonuses and are held to account if the loans they make go bad. Today, unscarred by the financial crisis, the Swedish lender is one of the fastest-expanding retail banks in Britain, opening a new branch every 10 days. It is also one of the most profitable, with U.K. operations helping the Swedish parent generate a 13.7% return on equity. "Their business model is fascinating, Quaker even, in its orientation," said Andrew Haldane, the U.K. central bank's executive director for financial stability, in a recent speech. "For banking, this is back to the future." Mr. Haldane is one of several U.K. policy makers to express admiration for the bank in recent months.

George Osborne says survival of big banks is good for British society - Big banks are good for Britain and must not be broken up, according to George Osborne, as he argued the country’s largest lenders were beneficial to society. The Chancellor warned that “aggressively” breaking up banks would do little to benefit the UK and insisted the Government’s plans to put in place a so-called “ring fence” to force banks to isolate their riskier, investment banking businesses from their retail arm was the right way to make the financial system safer. “If we aggressively broke up all of our big banks, I am not sure that, as a society, we would benefit from it,” he said. “We don’t have a huge number of banks, sadly, large banks. I would like to see more.” His comments came as he gave evidence to the parliamentary commission on banking standards where he was accused of attempting to pressure members into supporting his ring-fencing reforms.

U.K. Budget Deficit Unexpectedly Swells on Spending Gain - Britain’s budget deficit unexpectedly widened in October as government spending surged and the economic slump hit tax revenue from company profits. The shortfall excluding government support for banks was 8.6 billion pounds ($13.7 billion) compared with 5.9 billion pounds a year earlier, the Office for National Statistics said in London today. The median of 25 estimates in a Bloomberg News survey was for a deficit of 6 billion pounds. Spending jumped 7.4 percent while tax income climbed just 1.8 percent. Britain’s deficit is on course to overshoot the 120 billion pounds forecast by the Office for Budget Responsibility for the fiscal year, dealing a blow to Chancellor of the Exchequer George Osborne before his Autumn Statement on Dec. 5. He will present an economic update at a time when the Bank of England has stopped expanding stimulus -- a move backed by all but one policy maker, according to a separate report today. “Worse-than-expected public sector borrowing in October has put the pressure back on the chancellor,”

Offsetting private sector financial balances with fiscal policy - Although I used this post from Chris Dillow as an excuse to talk about a particular problem with looking at ex post estimates of cyclically adjusted budget deficits, I did not address the main issue of his post, which is how the government budget deficit should respond to private sector financial imbalances. As Rich Clayton points out in comments, the issue raised by Chris is important, and it has been raised by others [1], but I’m not sure there are any simple answers.  Suppose the private sector runs a surplus or deficit, which has nothing to do with the business cycle (i.e. it runs a cyclically adjusted surplus or deficit). Should the public sector attempt to match this by running a deficit or surplus (so the national surplus or deficit is much smaller), or should it focus on doing the right thing in relation to the stock of government debt. If the government has a fixed debt to GDP target, for example, should it try to keep to that target, even though the private sector is running a surplus or deficit? This is equivalent to the question of whether the government should worry about current account surpluses or deficits that have nothing to do with the business cycle.