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

Saturday, March 30, 2013

week ending Mar 30

Fed Balance Sheet Contracts Slightly in Latest Week -The U.S. Federal Reserve's balance sheet contracted slightly in the past week, but the central bank's holdings remained above the $3 trillion mark for the tenth consecutive week. The Fed's asset holdings in the week ended Wednesday declined to $3.204 trillion from $3.209 trillion a week earlier, the central bank said in a weekly report released Thursday. Holdings of U.S. Treasury securities increased by $9.8 billion in the past week to $1.794 trillion, but the central bank's holdings of mortgage-backed securities fell by $14.6 billion to $1.071 trillion. The decline in the mortgage balance is likely due to week-to-week accounting and does not reflect a shift in policy. The Fed's portfolio has more than tripled since the financial crisis thanks to stimulus programs intended to keep interest rates low. Mr. Bernanke said the Fed may adjust the pace of those purchases as the economy strengthens over time, but vowed to continue the program until there is "substantial improvement" in the labor market. Thursday's report showed total borrowing from the Fed's discount lending window was $385 million on Wednesday, down from $392 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 28, 2013 - Federal Reserve statistical release

Fed Banker Backs Dialing Down Easy Money - A member of the Federal Reserve's inner circle Monday promoted a plan for the central bank to scale back the pace of its bond-buying program as the jobs market improves, though he stressed that a decision on how to proceed is far from imminent. William Dudley, president of the Federal Reserve Bank of New York, said in a speech the Fed "should calibrate" how much U.S. debt and mortgage-backed securities it buys each month "by allowing the flow rate of purchases to respond to material changes in the labor market outlook." Mr. Dudley described the tapering proposal as somewhat more certain than Fed Chairman Ben Bernanke did last week after the central bank's two-day policy meeting. Mr. Bernanke stuck with the conditional tense, saying the Fed "may adjust" the pace of its bond-buying to a strengthening job market. The Fed is currently buying $45 billion in long-term Treasurys and $40 billion of mortgage-backed securities each month—part of an effort to boost the economy by driving down long-term interest rates to encourage more borrowing, spending and hiring. Mr. Dudley, one of the chief advocates of the bond-buying programs, appeared decisively in favor of tapering off purchases in the future. "At some point, I expect that I will see sufficient evidence of economic momentum to cause me to favor gradually dialing back the pace of asset purchases," he said, speaking to the Economic Club of New York.

Two Fed Presidents Call for Pressing on With QE - Bloomberg: Two regional Federal Reserve presidents said they want the Fed to keep buying bonds through the end of 2013, while a third official said the central bank isn’t doing enough to spur economic growth. “We should continue our large-scale asset purchases of Treasury and mortgage-backed securities through this year -- although the amount may need to be adjusted up or down, depending on how the economic situation evolves,” Boston Fed President Eric Rosengren said today in a speech in Manchester, New Hampshire. “This is a point when we have to be patient and let our policies work,” with stimulus “firing on all cylinders,” Chicago’s Charles Evans said to reporters. The comments by Evans, Rosengren and Minneapolis’ Narayana Kocherlakota reinforce Chairman Ben S. Bernanke’s push to sustain record easing even as some policy makers voice concern the stimulus is ineffective or harmful. The Fed affirmed a plan last week to buy $85 billion in bonds each month in quantitative easing that has ballooned its assets beyond $3 trillion.

Flock of Doves Back Fed Bond Buying - Several Federal Reserve officials rallied around Chairman Ben Bernanke’s plan to press ahead with the central bank’s $85-billion-a-month bond-buying effort in public comments Wednesday, although two said that the U.S. economy may soon be healthy enough for the Fed slow the pace of those purchases. The presidents of the Boston, Cleveland, Chicago and Minneapolis Fed banks — all of whom have backed Mr. Bernanke in Fed deliberations — reiterated their support in speeches Wednesday. The president of the New York Fed did the same earlier this week. Some other Fed bank presidents have been reluctant supporters; one has formally dissented.The Fed should continue “large-scale asset purchases of Treasury and mortgage-backed securities through this year,” Federal Reserve Bank of Boston President Eric Rosengren said in Manchester, New Hampshire. He said the benefits of the purchases continue to outweigh their costs, and he added future buying “may need to be adjusted up or down, depending on how the economic situation evolves,” echoing Mr. Bernanke’s recent comments.

Bernanke: Central Banker policies are not "beggar-thy-neighbor" - This is a response to some analysts who think central bankers are currently following a "beggar-thy-neighbor" policy. Fed Chaiman Bernanke disagrees (so do I). From Fed Chairman Ben Bernanke: Monetary Policy and the Global Economy. A few excerpts: Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions.

Bernanke Rejects Currency War Charges - Federal Reserve Chairman Ben Bernanke on Monday attacked the charge that his easy-money policies are provoking a global currency war, maintaining that low-interest rates in the U.S. and other advanced economies are designed to support domestic economic growth. In remarks prepared for an event in London, Mr. Bernanke said that many industrialized nations are “appropriately” pursuing easy-money policies in order to boost economic recovery following the 2008 financial crisis. These policies have a side effect of lowering the value of the nation’s currencies, and that sparked international tension, particularly between emerging markets and advanced economies.

Fed Watch: Fedspeak on Both Sides of the Atlantic -Federal Reserve Chairman Ben Bernanke and New York Fed President William Dudley both took to the podium yesterday. Dudley spoke directly to the current intersection between the economic outlook and monetary policy, while Bernanke took on the topic of monetary policy in a global context. Despite coming from different directions, both were supportive of current policy. Dudley first, as it seems journalists are seeing the speech with somewhat different eyes. Jonathon Spicer at Reuters walked away with: New York Fed President William Dudley, a close ally of Fed Chairman Ben Bernanke, gave a strong and comprehensive speech defending the very easy monetary policies that he said were gaining traction and must not yet be adjusted. Spicer concludes from the speech, accurately I think, that it is consistent with expectations that the Fed will continue large scale asset purchases at the current pace for the foreseeable future (most of this year, by my expectations). Notable was Dudley's view of the labor market. From the speech: The unemployment rate is modestly lower and private non-farm payroll growth a bit higher...other important indicators including the employment-to-population ratio and job-finding rates are essentially unchanged...This suggests that the labor market is far from healthy.We have seen this movie before...As a result, it is premature to conclude that we will soon see a substantial improvement in the labor market outlook.The implication for policy: Currently we are falling well short of our employment objective and the restrictive stance of federal fiscal policy is a factor. On inflation, we are also falling short, but by a considerably smaller margin. As a consequence, we need to keep monetary policy very accommodative.

How Fed Policy Could Leave The Country At The Mercy Of Another Recession - The Federal Reserve released its statement from the latest Federal Open Market Committee meeting this past week. Its projections see economic growth reaching 3.8 percent at best over the next three years, hovering between two and three percent per year after that, and finally driving unemployment down to between five and six percent after 2015. None of that is especially new or encouraging. But on Wednesday, Ryan Avent at The Economist pointed out another number in the report that hints at a more subtle, but possibly more pernicious problem. It’s the federal funds rate, which is the interest rate the Fed charges other banks when it lends them money — thereby guiding interest rates throughout the economy — and which has basically been at zero since the Great Recession:  If recovery proceeds as the Fed anticipates, its interest-rate target will remain at near zero until at least 2015. Perhaps more worrying, the FOMC’s best guess at the appropriate, long-run value of the fed funds rate is about 4 percent. That is strikingly low. In each of the past three recessions the Fed has responded by cutting the fed funds rate more than 4 percentage points. A fed funds rate at that level virtually guarantees that the next downturn will result in a relapse into [zero lower bound] territory.

"Is the Federal Reserve Breeding the Next Financial Crisis?" - From a historical perspective, monetary policy worldwide has been systematically accommodative for most of the past decade. From the "BIS Quarterly Review," September 2012: "Policy rates have on aggregate been below the levels implied by the Taylor rule for most of the period since the early 2000s in both advanced and emerging market economies." According to many economists, such loose monetary policy stance played a central role in exacerbating the severity of the global financial crisis of 2007-09. From "How Government Created the Financial Crisis," "Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience." In a recent paper (2013), we develop a simple theoretical model that speaks to the interaction between macroeconomic and financial stability. Our results show that Taylor's argument—i.e., that higher interest rates would have reduced both the probability and the severity of the crisis—is valid only with the auxiliary assumption that the policy authority had just one instrument at its disposal (the policy rate) to address both macroeconomic and financial distortions in the economy.

Fed’s Favorite Inflation Gauge Shows Little Pressure - Today’s government data included a twist on the inflation numbers which is worth watching. The inflation measure watched most closely by the Federal Reserve showed very little sign of price pressures, even though some other inflation measures have firmed up of late. The softness in the Commerce Department’s personal consumption expenditure (PCE) index is likely to reassure Fed officials, who decided earlier this month to stick with their easy money policies.

An unusual good news inflation story - Consumer spending has been surprisingly resilient in the face of a sharp rise in taxes and, more recently, higher petrol prices. It rose 0.3% (after inflation) in both January and February, the government reported this morning, and looks likely to rise at a 3% annual rate in the first quarter, a major reason many first quarter GDP growth estimates now top 3%. But a little-noticed factor has been lower inflation. I say little-noticed because inflation isn't lower based on its most widely followed measure, the consumer price index. Both total and core CPI (which excludes food and energy) are up 2% in the last 12 months, in line with its long-term trend and the Federal Reserve's 2% target. However, based on the lesser-known price index of personal consumption expenditures (PCE), headline and core inflation are only 1.3% (see nearby chart). This is more than a technical curiosity. The PCE index is used to calculate real consumer spending. Using the CPI, real spending would be up only 0.4%, instead of 0.6%, in the last two months. Over the last year, using the PCE index instead of the CPI adds 0.7% to the growth in both real consumption and real incomes.

Chicago Fed: "Economic Activity Improved in February" - The Chicago Fed released the national activity index (a composite index of other indicators): Economic Activity Improved in February Led by gains in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.44 in February from –0.49 in January. All four broad categories of indicators that make up the index increased from January, and three of the four categories made positive contributions to the index in February.  The index’s three-month moving average, CFNAI-MA3, decreased to +0.09 in February from +0.28 in January, marking its fourth consecutive reading above zero. February’s CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests limited inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. This suggests economic activity improved in February, and growth was somewhat above its historical trend (using the three-month average).

Chicago Fed: Economic Activity Improved in February -  According to the Chicago Fed's National Activity Index, February economic activity improved from January, now at 0.44, up from January's downwardly revised -0.49 (previously -0.32). This index has been negative (meaning below-trend growth) for eight of the past twelve months. However, today's number is the best level since November's 1.00. Here are the opening paragraphs from the report: Led by gains in production-related indicators, the Chicago Fed National Activity Index (CFNAI) increased to +0.44 in February from –0.49 in January. All four broad categories of indicators that make up the index increased from January, and three of the four categories made positive contributions to the index in February.  The index's three-month moving average, CFNAI-MA3, decreased to +0.09 in February from +0.28 in January, marking its fourth consecutive reading above zero. February's CFNAI-MA3 suggests that growth in national economic activity was somewhat above its historical trend.  Fifty-eight of the 85 individual indicators made positive contributions to the CFNAI in February, while 27 made negative contributions. Sixty-four indicators improved from January to February, while 21 indicators deteriorated. Of the indicators that improved, 16 made negative contributions. [Download PDF News Release]  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

Economy in U.S. Grew at Revised 0.4% Pace in Fourth Quarter - The U.S. economy grew at a faster pace than previously estimated in the fourth quarter, reflecting a bigger gain in business spending and a smaller trade gap. Gross domestic product rose at a 0.4 percent annual rate, up from a 0.1 percent prior estimate and following a 3.1 percent pace in the third quarter, revised Commerce Department figures showed today in Washington. The fourth-quarter slowdown was due to the biggest slump in military spending since 1972 and a reduction in the rate of inventory building. The world’s largest economy is projected to accelerate in the first quarter as companies invest in new equipment and rebuild depleted stockpiles, while consumers keep spending in the face of higher taxes. The pace of growth and efforts to drive down joblessness help explain why Federal Reserve policy makers are sticking to asset-purchase plans.

US Economy Expands at 0.4 Percent Rate - The U.S. economy grew at a slightly faster but still anemic rate at the end of last year. However, there is hope that growth accelerated in early 2013 despite higher taxes and cuts in government spending. The economy grew at an annual rate of 0.4 percent in the October-December quarter, the Commerce Department said Thursday. That was slightly better than the previous estimate of 0.1 percent growth. The revision reflected stronger business investment and export sales. Analysts think the economy is growing at a rate of around 2.5 percent in the current January-March quarter, which ends this week. Steady hiring has kept consumers spending this year. And a rebound in company stockpiling, further gains in housing and more business spending also likely drove faster growth in the first quarter. The 0.4 percent growth rate for the gross domestic product, the economy’s total output of goods and services, was the weakest quarterly performance in almost two years and followed a much faster 3.1 percent increase in the third quarter. The fourth quarter was hurt by the sharpest fall in defense spending in 40 years.

GDP Q4 Third Estimate at 0.4%, Up Fractionally from the Second Estimate - The Second Estimate for Q4 GDP came in at 0.4 percent, a slight improvement from the 0.1 percent in the Second Estimate. The consensus was for 0.3 percent.Here is an excerpt from the Bureau of Economic Analysis news release: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.4 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 0.1 percent. While nonresidential fixed investment is higher than previously estimated, the revision to GDP has not changed the general picture of the economy (for more information, see "Revisions" on page 3).  The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.  The deceleration in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.. [Full Release] Here is a look at GDP since Q2 1947 together with the real (inflation-adjusted) S&P Composite. The start date is when the BEA began reporting GDP on a quarterly basis.  I've also included recessions, which are determined by the National Bureau of Economic Research (NBER).

Q4 2012 GDP 0.4% - Q4 2012 real GDP was revised upward by 0.3 percentage points to 0.4% after the second revision.   While an improvement, gross domestic product results still imply a stagnant economy in the 4th quarter.   Government spending declines were the drag on the economy and sucked out -1.41 percentage points from 4th quarter real gross domestic product growth.  Federal defense spending alone declined  22.1% from Q3.   Nonresidential fixed investment was revised higher and businesses purchased equipment and software.  Private inventory changes hacked off -1.52 percentage points from Q4 real GDP as businesses shed their inventories.   Even without inventories in the economic growth mix,  the economy is still suffering from weakness in demand.Consumer spending was revised down to a barely breathing +1.28 percentage point contribution. Consumer spending was driven by durable goods purchase as they were a full percentage point of Q4's GDP. Real imports contracted more than realized and thus increased Q4 GDP. As a reminder, GDP is made up of: Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*. The below table shows the percentage point spread breakdown from Q3 to Q4 GDP major components. GDP percentage point component contributions are calculated individually. M +0.11 +0.73 +0.62 This next table compares the change in Q4 revisions from the real GDP percentage point contribution spread perspective. Consumer spending, C in our GDP equation, showed an increase from Q3. Durable goods consumer spending drove the rise, with a 1.00 percentage points to personal consumption expenditures. In terms of percentage changes, real consumer spending increased 1.8% in Q4 in comparison to a 1.6% increase in Q3. Below is a percentage change graph in real consumer spending going back to 2000 to show Q4 consumer spending is nothing to write home about.

Fourth Quarter Growth Was Incredibly Sluggish - The final revisions for 4th quarter GDP were released today, and while the numbers are slightly better than the negative growth first reported in January, they aren’t that much better either: – The economy expanded at a sluggish pace in the fourth quarter although a big gain in business investment and higher exports of services led the government to push up its previous estimate for growth. Gross domestic product expanded at a 0.4 percent annual rate, the Commerce Department said on Thursday, just below the 0.5 percent gain forecast by analysts in a Reuters poll. The growth rate was the slowest since the first quarter of 2011 and far from what is needed to fuel a faster drop in the unemployment rate. It was, however, higher than the government’s previous estimate of a 0.1 percent growth rate. Much of the weakness came from a slowdown in inventory accumulation and a sharp drop in military spending. These factors are expected to reverse in the first quarter. Consumer spending was more robust by comparison, although it only expanded at a 1.8 percent annual rate. That was a slower pace of growth than the government had previously estimated. Household spending powers about 70 percent of national output, and this still-lackluster pace of growth suggests underlying momentum in the economy was quite modest as it entered the first quarter, when a series of fiscal austerity measures began

Visualizing GDP: A Small Improvement Over the Second Estimate - The chart below is my way to visualize real GDP change since 2007. I've used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. That noticeable change in today's 0.4 percent Third Estimate from the 0.1 percent in the Second Estimate was the positive revision to Gross Private Domestic Investment and continued improvement in Net Exports of Goods and Services. The biggest component of GDP, however, Personal Consumption Expenditures, was revised down from the Second Estimate. My data source for this chart is the Excel file accompanying the BEA's latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product. Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.28 of the 0.4 real GDP (down from 1.47 in the Second Estimate). Here is a close look at the contribution changes from the Advance to Third Estimates. The upward revisions to Private Investment and Net Exports stand out. However, as I pointed out earlier, Personal Consumption Expenditures, by far the biggest percent of GDP, has been revised downward. Note that the drop in PCE is primarily in Services. That is not good news for employment, since service jobs are a substantial source of employment.

Latest US GDP Data Show Economy Weak at Year’s End but Corporate Profits Near Record High - The latest data from the Bureau of Economic Analysis confirm that the U.S. economy barely grew in Q4 2012. However, despite the weak economy, corporate profits as a share of GDP hit their second highest level ever. Based on the latest data, the BEA revised Q4 real GDP growth upward from an annual rate of 0.1 percent to 0.4 percent, still the second-slowest quarterly growth since the recovery began in 2009. The following table compares the latest revision to the second estimate released last month. Consumer spending was weaker than previously reported, with durable goods accounting for most of the growth that did take place. Fixed investment was a relative bright spot, led by business equipment and computers. However, growth of fixed investment was almost wholly offset by a decrease in nonfarm inventories. The BEA data provides no direct indication of the motive for inventory change, but it is easy to imagine that at least some businesses were showing caution about restocking, in view of anticipated tax increases and cuts in government spending for early 2013. In fact, as the table shows, fiscal tightening had already started in Q4. Decreasing government consumption expenditure and gross investment contributed a negative 1.41 percentage points to GDP growth in the quarter. A decrease in defense spending accounted for most of that, but falling state and local spending also accounted for -0.18 percentage points. As the following chart shows, government spending (more exactly, government consumption and gross investment) has been a negative factor throughout much of the recovery. In view of the outcome of the fiscal cliff negotiations and sequester, that trend will almost certainly continue in 2013.

 Comments on Q4 GDP and Investment - The third estimate of Q4 GDP report was released this morning, and although GDP was revised up, growth was still very weak at a 0.4% annualized real rate in Q4.  Personal consumption expenditures (PCE) were at a 1.8% annualized real growth rate; the third consecutive quarter with a sub 2% growth rate. There were two significant drags on GDP in Q4, the changes in private inventories subtracted 1.52 percentage points, and government spending subtracted 1.41 percentage points. Inventories will probably rebound in Q1, but government spending (especially at the Federal level) will remain under pressure all year. Overall this was a weak report, but with some underlying positives especially related to investment (a leading indicator).   The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.  For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.The dashed gray line is the contribution from the change in private inventories.The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

Gross Domestic Income up 2.6% in 4Q 2012 - It's been a full year and a half since ECRI said a recession was either already happening or would happen in a few months. As if to mark the occasion, the BEA served up another haymaker yesterday.   Well, yesterday as part of the third estimate of 4th quarter 2012 GDP, BEA reported on GDI:  Real gross domestic income (GDI), which measures the output of the economy as the costs incurred and the incomes earned in the production of GDP, increased 2.6 percent in the fourth quarter, compared with an increase of 1.6 percent in the third. For a given quarter, the estimates of GDP and GDI may differ for a variety of reasons, including the incorporation of largely independent source data. However, over longer time spans, the estimates of GDP and GDI tend to follow similar patterns of change.The BEA also said that:  Real GDP increased 2.2 percent in 2012 (that is, from the 2011 annual level to the 2012 annual level), compared with an increase of 1.8 percent in 2011. .... Real GDI increased 2.0 percent in 2012, compared with an increase of 1.8 percent in 2011.

Let it Bleed? by J. Bradford DeLong -- In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression. When I talk to my friends in the Obama administration, they defend themselves and the long-term macroeconomic outcome in the US by pointing out that the rest of the developed world is doing far worse. They are correct. Europe wishes desperately that it had America’s problems. Nevertheless, my conclusion is that I should stop calling the current episode the Lesser Depression. Yes, its shape is different from that of the Great Depression; but, so far at least, there is no reason to rank it any lower in the hierarchy of macroeconomic disasters.

The Unnatural Rate Hypothesis - Paul Krugman - But what I found striking with Fred Hiatt’s latest deficit-scold column was Hiatt’s offhand explanation of why his never-changing, never-right prediction keeps not happening; it’s because the Federal Reserve is gobbling up U.S. debt to keep interest rates low Clearly, this has become part of the CW. And once again we see how a highly dubious economic idea can become part of what Everyone knows and Nobody disagrees with, even if in this case Nobody includes a fellow by the name of Ben Bernanke, who gave a speech on this very topic just a few weeks ago. In fact, the notion that rates are low just because the Fed is buying up debt is wrong on at least three levels. First, as Bernanke stressed, long-term interest rates have moved very similarly across a wide range of countries, including countries where the central bank is buying up lots of bonds and countries where it isn’t.  Second, if Fed purchases of bonds are crucial to keeping rates down, we should see spikes in rates when those purchases stop.  You can see a couple of pauses in the Fed’s expansion of its holdings — and no relationship at all to rates. But finally and most importantly, since when do we believe that central banks can hold interest rates down at will, for extended periods, without consequences? Isn’t “printing money” supposed to be dangerously inflationary?

Michael Hudson Explains How Deficit Hysterics Target the Wrong Type of Debt - I was at the Atlantic Economy conference the week before last, and Michael Hudson got in one of the best quips: “Helicopter Ben has taken off and has been dropping money all over Wall Street. But he hasn’t dropped any on Main Street.” He has an informative talk with Paul Jay of Real News Network on why the fixation on public debt is wrongheaded, and we should worry about private debt instead.

The America That Works - “THE greatest nation on earth—the greatest nation on earth—cannot keep conducting its business by drifting from one manufactured crisis to the next. We can’t do it,” fulminated Barack Obama last month. The crisis of the moment, the “sequester” (a package of budget cuts designed to be so ghastly that Congress would pass a better version), duly came into effect on March 1st. Unless Congress agrees on an extension to its budget, the government will start to shut down on March 28th. In May the greatest nation will hit its debt ceiling; unless it is raised, Uncle Sam will soon start defaulting on his bills. This is the America that China’s leaders laugh at, and the rest of the democratic world despairs of. Its debt is rising, its population is ageing in a budget-threatening way, its schools are mediocre by international standards, its infrastructure rickety, its regulations dense, its tax code byzantine, its immigration system hare-brained—and it has fallen from first position in the World Economic Forum’s competitiveness rankings to seventh in just four years. Last year both Mr Obama and his election opponent, Mitt Romney, complained about the American dream slipping away. Today, the country’s main businesses sit on nearly $2 trillion in cash, afraid to invest in part because corporate bosses cannot imagine any of Washington’s feuding partisans fixing anything.

Why the federal budget can't be managed like a household budget - Today in homespun homilies that are out-and-out political hokum, we're going to take on the case of why so many of us believe the federal budget should be managed just like our household finances. This old saw is routinely trotted out by politicians looking to give themselves cover when they are talking about cutting – oops, I mean "saving" – programs most of us hold dear, like Social Security or Medicare. The Romney campaign said it. Paul Ryan claimed it, as recently as a little more than a week ago. It's not, you can all but hear them saying, that we want grandma eating cat food when she's 90, but gosh damn it, we need to restore some integrity to our federal finances. "Every family in America has to balance their budget," recently thundered Speaker of the House John Boehner. So what can be the appeal of this less than truthful analogy? The sad truth is it is a product of our profound financial ignorance.

Senate Democratic budget overly focused on deficit reduction - Senate Budget Committee Chairman Patty Murray (D-WA) introduced, and the Senate passed, a Senate Democratic FY2014 budget resolution, which would purportedly place the public debt ratio on a more-than-sustainable trajectory down to 70.4 percent of GDP by fiscal 2023. The Murray budget deserves credit for mitigating the macroeconomic drags posed by sequestration, modestly increasing infrastructure investment and proposing substantial revenue increases. But in the end, the budget’s fixation with ten-year deficit reduction targets would result in premature near-term austerity. The Murray budget proposes to raise an additional $923 billion in revenue over the next decade relative to current law. It also assumes that temporary tax provisions that would cost $954 billion to continue over the decade will either expire or be paid for—so against a current policy baseline in which these “tax extenders” are continued, the budget would raise $1.9 trillion.1 Revenue increases exert an economic drag, particularly while the economy remains weak, but are much less damaging per dollar than spending cuts. The Murray budget would use these revenue increases to partially replace the front-loaded, poorly designed sequester; in that context, the tax increases would help avert near-term austerity that is much more damaging. The budget would also slightly increase government spending in 2013 and 2014 relative to current policy—which assumes the sequester is repealed—and raise tax revenues in 2014.2

Battle of the Budgets: For the next year, at least, Republicans will have one less talking point to turn to when they want to hit Democrats on the budget. Over the weekend, Senate Democrats came together to pass their first budget since 2009, a comprehensive package that calls for additional stimulus and modest deficit reduction, stretched over the next ten years. Under Senate rules, lawmakers can’t filibuster a budget resolution, allowing Democrats to pass it by a vote of 50 to 49, with four Democrats—Mark Pryor of Arkansas, Kay Hagan of North Carolina, Mark Begich of Alaska, and Max Baucus of Montana—voting against the bill. Unlike the House budget—crafted by Republican Paul Ryan—the Senate plan isn’t meant to restructure the federal government or redefine its obligations. Nor does it try to balance the budget or order dramatic and controversial changes to the tax code. Instead, it’s a modest package responsive to the economic needs of the moment. It includes $100 billion in immediate infrastructure spending to bolster the economy, and calls for new taxes to raise $975 billion over the next decade.

Visualizing the 2013 US federal budget

Congress Has Not Passed A 2014 Budget, and Probably Won’t  -You probably read stories over the weekend about how the Senate passed a 2014 budget just before dawn on Saturday morning, a day after the House passed its version. Does it mean Congress may actually fulfill its constitutional duty and enact a fiscal plan this year? Does it open the door to a long-awaited tax reform? Sadly, the answer is almost surely no. The philosophical gaps between the House and Senate versions are massive even though in many cases, the dollar differences seem bridgeable. The House aims to balance the budget within a decade. The Senate has no such goal. The House would make major cuts in planned spending for health, income security, transportation, education, and community development. The Senate would boost some domestic spending and aim most of its reductions at the military budget. The Senate would increase taxes by nearly $1 trillion over 10 years. The House would not increase revenues by a dime, relative to the Congressional Budget Office’s projections. And that, ultimately, is where the fiscal policy debate will go aground. President Obama has said he’d support changes to both Medicare and Social Security if the GOP would agree to some new revenues. Most House and Senate Democratic leaders have said they’d go along, though reluctantly. Even some Senate Republicans have hinted that they could sign on to such a deal. But House Republicans have not budged. And as long as their position is that no tax increase of any size under any circumstance is acceptable, there will be no final budget resolution for 2014.

House And Senate FY14 Budget Resolutions = Legislative Masturbation - The GOP was taking credit for its No Budget No Pay provisions pushing the Senate to pass a budget resolution for the first time in four years. Senate Democrats were crowing about passing that budget resolution. The House GOP was bragging about it adopting the latest plan drafted by House Budget Committee Chairman Paul Ryan (R-WI) even though it has no chance of becoming law. And Dems were expressing a great deal of pride about the job first-year Senate Budget Committee Chairwoman Patty Murray (D-WA) did in getting the resolution out of committee and adopted in the floor. What no one was sayings was that none of this actually means anything in terms of getting a 2014 budget agreement. No one I know in the federal budget community thinks the House and Senate will be able to compromise their differences and agree on a budget resolution conference agreement that would actually be binding and create the opportunity to use reconciliation. In fact, no one I know in the budget community thinks the House and Senate are even going to go to conference and try to negotiate. That means that the No Budget No Pay provisions were meaningless and accomplished nothing; the country is no closer to having a budget agreement afterwards than it was before.

CBO | How Different Future Interest Rates Would Affect Budget Deficits - As I mentioned in an earlier blog post, we think that some of our answers to follow-up questions from Congressional hearings may be of general interest, so we’re posting them.  Following a recent hearing, we were asked by a Member of Congress: “How would higher-than-expected interest rates affect federal budget deficits over the next decade? In particular, what would be the effects of these scenarios:

  1. Interest rates rise to their average levels over the 1991-2000 period;
  2. Interest rates rise to their average levels over the 1981-1990 period; and
  3. Interest rates follow a path that is consistent with the average of the 10 highest projections shown in the October 2012 and February 2013 releases of Blue Chip Economic Indicators.”

Here was our answer:  For scenarios 1 and 2, we have assumed that by 2017, interest rates would rise to and then remain at the levels that Treasury interest rates averaged during the 1990s (scenario 1) or 1980s (scenario 2). Thus, over the 2018–2023 period, rates for 3-month Treasury bills would be 4.9 percent under scenario 1 and 8.8 percent under scenario 2, compared with 4.0 percent in CBO’s baseline projections (see Table 1 below). Similarly, rates on 10-year Treasury notes would average 6.7 percent between 2018 and 2023 under scenario 1 and 10.6 percent under scenario 2, compared with 5.2 percent in the baseline projections.

Time to end the reign of terror of scary upward-sloping graphs - Once a year, the Congressional Budget Office (CBO) publishes long-run debt projections under their assumptions about budget policy under future Congresses, known as the alternative fiscal scenario (AFS). It is used extensively by many—including House Budget Committee Chairman Paul Ryan (R-Wis.)—to argue that we face a catastrophe that can only be solved by effectively dismantling the social safety net and retirement systems that we have in place. But it’s also misleading.Michael Linden at the Center for American Progress recently released a great analysis showing that this scary long-run debt projection is only scary because CBO assumes that future policymakers will make policy decisions that will make the deficit much worse. If you remove those assumptions to arrive at a more honest baseline, then the problem of an unsustainable rising debt mostly disappears. But let’s back up a bit and marvel at the absurdity of long-term debt projections. Remember, these projected deficits are largely the product of CBO’s economic and demographic projections, coupled with assumptions about decisions made by future policymakers and long-term health costs. Moreover, economic, demographic, and other budgetary projections are most reliable in the near-term, and their margin of error compounds with time.

Cheating Our Children, by Paul Krugman - Over the past few weeks, there has been a remarkable change of position among the deficit scolds who have dominated economic policy debate for more than three years. It’s as if someone sent out a memo saying that the Chicken Little act, with its repeated warnings of a U.S. debt crisis that keeps not happening, has outlived its usefulness. Suddenly, the argument has changed: It’s not about the crisis next month; it’s about the long run, about not cheating our children. The deficit, we’re told, is really a moral issue. There’s just one problem: The new argument is as bad as the old one. Yes, we are cheating our children, but the deficit has nothing to do with it.  What happened? Basically, the numbers refuse to cooperate: Interest rates remain stubbornly low, deficits are declining and even 10-year budget projections basically show a stable fiscal outlook rather than exploding debt.. Yet the deficit scolds haven’t given up on their determination to bully the nation into slashing Social Security and Medicare. So they have a new line: We must bring down the deficit right away because it’s “generational warfare,” imposing a crippling burden on the next generation.  What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.

Twins No More - Paul Krugman - Back in the Reagan years two unprecedented things began happening to the US economy. For the first time ever, we began running large peacetime budget deficits; and for the first time ever we began running large trade deficits. In a famous analysis, Martin Feldstein pronounced them “twin deficits”, linking the external deficit to the budget deficit, a proposition that made sense at the time: the budget deficit was helping to drive up interest rates, and high rates led to an overvalued dollar. It’s occurred to me recently that much discussion of deficits these days implicitly assumes that something similar applies in today’s world — that by running budget deficits we’re indebting ourselves, as a nation, to foreigners (especially China). So it’s worth pointing out that this isn’t remotely true. It’s important to note, by the way, that the fraction of US government debt the Chinese own is basically irrelevant here; if the Chinese decide, say, to sell a bunch of stocks and buy government bonds instead, this raises the fraction of government debt they hold but doesn’t hurt the international investment position at all. What we should be looking at is simply the amount of external finance we’re relying on. And what you actually see is this:

Obama Promotes Ambitious Plan to Overhaul Infrastructure - — President Obama came to the congested ocean port here on Friday to promote his plans to rebuild the nation’s “raggedy” roads, bridges, schools and other infrastructure with a marriage of public and private investment. President Obama promoted his proposal on Friday at PortMiami, which is in the midst of $2 billion in improvements. At the end of a week absorbed by social issues like gun control and gay rights, the president returned to the economic challenges he has called his top priorities with a set of proposals to generate money for construction projects. “What are we waiting for?” Mr. Obama asked, “There’s work to be done. There are workers who are ready to do it. Let’s prove to the world that there’s no better place to do business than right here in the United States of America, and let’s get started rebuilding America.” Expanding on ideas from his first term and this year’s State of the Union address, Mr. Obama proposed a series of tax breaks and loans to stimulate private investment. Among other things, new “America Fast Forward Bonds” would help state and local governments borrow money for projects, while foreign pension and retirement funds would have a tax penalty eliminated so they could invest in infrastructure in the United States on a similar basis as American funds. Grant programs that were part of the president’s stimulus program would be expanded by $4 billion.

President Obama considering putting social insurance cuts in his budget - The New York Times and Wall Street Journal are reporting that President Obama is "strongly considering" including cuts to social insurance program benefits in his budget. The budget is slated to be released on April 10, the same day Obama is having yet another charm offensive dinner with Senate Republicans. Because this strategy has been working so well for him.  According to the WSJ, Such a proposal could include steps that make many Democrats queasy, such as reductions in future Medicare, Medicaid and Social Security payments, but also items resisted by Republicans, such as higher taxes through limits on tax breaks, people close to the White House said. [...] Including entitlement curbs would be notable, as Republicans often have criticized the White House for offering such steps in private negotiations but never fully embracing them as part of an official budget plan. Well, since Republicans are criticizing him for not fully and officially embracing his desire to cut benefits to the poor and elderly, by all means he has to make the offer. Included in that, reportedly, is the chained CPI for Social Security and an idea from Eric Cantor for restructuring Medicare that would combine Medicare’s coverage for hospitals and doctor services, creating a single deductible that could increase out-of-pocket costs.

As Obama signs sequestration cuts, his economic goals are at risk -With his signature this week, President Obama will lock into place deep spending cuts that threaten to undermine his second-term economic vision just four months after he won reelection. Obama has repeatedly championed a set of government investments that he argues would expand the economy and strengthen the middle class, including bolstering early-childhood education, spending more on research and development, and upgrading the nation’s roads and railways. He has said his comfortable reelection victory in November shows the country is with him.But none of those policies have come close to being enacted. Instead, after returning this weekend from a trip to the Middle East, Obama is set to sign a government funding measure that leaves in place the across-the-board cuts known as sequestration — a policy that undermines many of the goals he laid out during the 2012 campaign. Obama thinks the cuts are, in his words, “dumb,” and he says they will slow the economy and harm priorities by cutting spending on education, research and development, and many other programs. Yet Obama now finds himself enacting a broad domestic policy that he doesn’t support and that he believes will harm the country. “What he got in terms of the sequester is clearly incompatible with his investment plans,” said Jared Bernstein, a former White House economic adviser.

The Sequester Game - A few thoughts about the sequester and the political battle surrounding it. First, recall how it came about. When Democrats and Republicans in Congress couldn't agree on how to cut the budget deficit -- budget cuts or tax increases, and who bears the burden -- they decided to connect a "ticking clock" to a "bomb" of budget cuts that both sides would find loathsome. The cuts would hack away at favorite programs of both sides and be so terrible that the two sides would certainly come to an agreement rather than let the bomb go off. But suppose one side believes the cuts they object to, the cuts to defense for example, will be easy to reinstate down the road by whipping up public pressure, while the other side's programs will be much harder to bring back. Then the right strategy is to let the cuts happen, then do your best to get your programs reinstated while at the same time blocking the other side (and there's probably some bias on both sides about how much the public values the programs they support, and this bias makes it more likely that the thinking above will take hold -- let the cuts happen, the public will support my side, the programs my side likes will return, and the other side's programs will be gone). The reinstatement of programs (or tax increases) will surely involve compromise to some extent, agreeing to support programs or taxes the other side likes in return for their support of your programs. But given the lack of compromise to date I have to laugh at myself for saying that, and it's more the game will be to try to force reinstatement without any compromise by creating public backlashes against cuts (to say defense). In fact, we've seen some of this already.

Budget Deal Opens ‘Age of Austerity’ for Federal Agencies - The spending bill Congress passed shows $1.2 trillion in budget cuts that weren’t supposed to happen are now part of the political landscape. Lawmakers approved the so-called continuing resolution March 21 averting a government shutdown while giving a handful of agencies more flexibility to meet the mandated reductions under sequestration. Yet the budget ax still cuts deep: $85 billion this fiscal year in across-the-board reductions, forcing agencies to curtail services and lay-off or furlough employees. The cuts were designed to be so onerous Congress wouldn’t let them happen. Now some analysts say they may be enshrined in budget negotiations. “The age of austerity is here because Congress didn’t really produce a meaningful change in the budget cuts,” Darrell West, director of the Brookings Institution, a Washington-based public policy group, said in an interview. “Most of the government is going to be on a serious diet going forward.”

US sequester cuts and the fraud of “political gridlock” - The bill, which funds the federal government through September, was passed with bipartisan support by both houses of Congress. The sequester includes $9.9 billion in cuts to Medicare, $2 billion in public housing assistance cuts, $840 million in cuts to special education programs, as well as $400 million in cuts to Head Start, the early childhood education program. The nearly 4 million long-term unemployed who receive federal unemployment benefits will see an 11 percent cut in their benefits, or about $130 per month. A vast portion of the cuts will be implemented through furloughs of federal government employees, resulting in effective pay cuts of 20 to 35 percent. The military, however, announced that it may delay the furlough of some of its civilian employees after the Congressmen inserted language giving it greater flexibility in allocating cuts. Adding to the devastating impact of the furloughs, the bill freezes federal employees’ pay through the end of this year.  The White House sought to distance itself from the cuts, with Obama spokesman Jay Carney stating in a press conference Tuesday, “There is no question that we believe we should not have come to this point where sequester would be imposed.”  This is a fraud. The rapid passage of the bill with bipartisan support stands as a repudiation of the official narrative of a vast political divide between the two parties, and exposes the reality that the Democrats and Republicans, far from being at loggerheads, are united in their drive to make the working class pay even as the stock market soars and the corporate and financial elite is wealthier than ever.

FAA to close 149 air traffic towers as budget cuts bite - The US aviation authority plans to close 149 air traffic control towers in response to steep budget cuts that took effect this month. Towers will close at small airports but the facilities will remain open, the Federal Aviation Administration said. Pilots will have to co-ordinate takeoff and landing by themselves after 7 April using a shared radio channel. The towers marked for closure are all staffed by private contractors. Critics say the move will compromise safety. "We heard from communities across the country about the importance of their towers and these were very tough decisions," Transportation Secretary Ray LaHood said in a statement. But he said the closures of the control towers were an unavoidable response to the spending cuts known in Washington as the sequester.

Sequestration Cuts Hit The National Parks Hard - The effects of massive government budget cuts that took effect on March 1 are being felt across the country already, from the closure of air traffic control towers to cancellation of White House tours to hundreds of thousands of furloughs. Another agency that is beginning to make cuts — just as the spring and summer tourism seasons kick off — is the National Park Service. The park service faces a 5 percent cut just like other federal agencies under sequestration, which means major impacts on how the parks function and the visitor experiences at them. A memo from park service Director Jon Jarvis on March 8 warned that permanent positions will not be filled, and he wrote:… we will hire over 1,000 less seasonal employees this year. Seasonal employees are our utility infielders, the “bench” we turn to when fires break out, search and rescue operations are underway, and every other collateral duty. Many of these folks return year after year — they are the repositories of amazing institutional knowledge.In total, 3,000 jobs at the agency may be affected. Here are some of the national park superintendents who are being forced to make hard choices about their parks and staffs:

Wealthy Say Higher Taxes Haven’t Hurt Spending, Investing: Before Jan. 1, many warned that taxing the wealthy would snuff out the recovery. If the wealthy had to pay more taxes, they would spend less, invest less and give less to charity. So far, it doesn't seem to be happening—at least not on a large scale. According to a new poll, a majority of people making $500,000 or more (those paying the higher income tax rate) said that the tax hikes have not impacted their spending, charitable giving or investment strategies. The Shullman Luxury and Affluence Monthly Pulse found that 55 percent of people making $500,000 or more said higher taxes have not impacted their spending plans. Fully 61 percent of those making $250,000 or more said taxes have not impacted their spending plans.On investing, 59 percent of those making $500,000 or more (and 64 percent of the $250,000-plus group) said higher taxes have not impacted their investment strategies. When it comes to charity, 55 percent of those making $500,000 or more, and 62 percent of those making $250,00 or more, said paying more taxes has not impacted their giving plans.

Is tax reform the new “repeal and replace”? - We’re now one month out from the House Republican announcement that they were reserving H.R. 1 for comprehensive tax reform. So far, H.R. 1 is still empty, waiting for action. That may last for a long time. My bet? There will be no scoreable, revenue-neutral comprehensive tax reform. The most likely scenario is that there won’t even be a bill. Just as the mythical “repeal and replace” did in the previous Congress, tax reform gives Republicans an illusion of a positive agenda. Granted, and to their credit, this time around it’s a little more serious; Dave Camp’s House Ways and Means Committee has this year continued a series of hearings on tax reform. However, one-party tax reform is just about impossible. The problem is that tax reform involves mild, relatively invisible gains for many people — gains that are paid for through substantial, very visible costs to small groups, including many well-organized small groups. In effect, any party that moves ahead on their own is just asking for those well-organized groups (egged on, naturally, by opportunists in the other party) to attack.

The $600 Billion the I.R.S. Can’t Collect - Of course, in an economy as large and complex as America’s there are plenty of folks who don’t pay exactly what they owe. These people can range from those engaged in illicit activities like drug dealing to legitimate service industry workers, like babysitters, who are paid in cash. The difference between what is legally owed the federal government and what it actually collects in taxes each year is called the “tax gap,” which the IRS recently estimated reached $385 billion in 2006. Other studies have placed that figure higher — at upwards of $600 billion. So who owes this money and why? The single biggest contributor to the tax gap — accounting for 84% of it — are people who simply under-report their income. This doesn’t usually happen to folks whose employers withholds taxes from their paychecks, as 99% of people in that position end up paying their income taxes in full and on time. The biggest headache for the IRS is collecting business income from the self employed, who must voluntarily report their earnings, and may — accidentally or on purpose – omit items such as income received through bartering, debt cancellation, or kickbacks. The IRS says only 44% of taxes owed on such business income end up getting collected by the agency.

Stern magazine calls Big Four bosses “Legal Enemies of the State” - Germany's Stern magazine has an article, not currently online, whose thrust is summarised in this remarkable picture. The article names the global heads of the Big Four accountancy firms, and the big headline translates as "Legal Enemies of the State." Wow. That is a hefty charge. And the basis of the charge? Well, the article opens like this: "Because of these men, corporations like Amazon, Google etc. pay almost no tax. With their 700 000 staff they skilfully create tax tricks. It is high time to drag them out of their loopholes." How apt. Absolutely right. The Big Four accountancy firms help multinational corporations (and other wealthy players) escape huge tax bills, shifting the burden of tax onto the shoulders of others: smaller more local businesses, individuals, the victims of public sector cutbacks, and so on. The ability of multinationals to harvest these tax subsidies helps them out-compete their smaller, more locally-based rivals, killing them in markets and driving them out of business. The result is greater market concentration, greater oligopolistic pricing power for the multinationals, greater influence for the tax havens that facilitate all this (thus providing cover for all manner of nefarious activity,) greater economic inequality around the world, and more. All this goes by the name (in the Anglo-Saxon world) of 'tax efficiency' - when these outcomes are all profoundly inefficient. 

Attacking Success - Paul Krugman  - OK, this is rich. Or actually, it’s anti-rich. Or anti-rich liberal. Or something.  Anyway, Jonathan Chait informs us that the right-wing blogosphere is all-aTwitter over the fact that Matthew Yglesias just bought a nice condo. Apparently this is hypocritical because you can’t be a liberal and own private property, or something. Chait has a lot of fun with the whole thing, and its notion that a liberal supporter of mild redistribution is the same thing as a Communist; check out his picture caption. But I think there are two more things to be said here. On today’s right, not only is civic virtue, nay patriotism, associated with narrow defense of your own self-interest, any deviation from that standard — like being an affluent person who nonetheless supports aid to the poor paid for by progressive taxation — is considered prima facie hypocritical.  But second, notice how quickly a staple of right-wing outrage goes out the window if there’s possible political gains to be made by violating a supposed principle.  And unlike Romney, who was criticized for his business practices rather than his wealth per se, Yglesias is under attack simply for doing well.

Spam and Taxes - On the surface, taxing spam is a wonderful idea. Spam clogs the Internet, wastes our time just deleting it and continues because it makes money since you only need a few people so gullible or addled that they believe some Nigerian wants to share $25 million with them or buying a pill will “enhance” a male organ.  The problem is that nobody has ever figured out how to make a spam tax work. As my oldest son, a nerdy middle-aged businessman computer geek, says: “How you going to collect it?”  Commercial speech is not political or religious speech, at least under American law, and so less protected by the First Amendment. Spam sometimes goes beyond commercial speech to be criminal speech, as the Economist Magazine reported six years ago in a piece about a Russian fraud ring and spam.  Blocking spam is in the news for another reason this week – the largest ever Denial of Service attack, launched by Cyberbunker, which says it will send out spam for anyone save child pornographers and terrorists. As The Economist showed, that can include fraudsters.  Cyberbunker, which has declared itself a sort of royal independent cyber republic is, of course, not going to voluntarily fill out forms or even admit it can be levied.

Lanny Breuer Cashes in After Not Prosecuting Wall Street Execs, Will Receive Approximate Salary of 4 Million Dollars - It's official, and former Department of Justice (DOJ) Criminal Division Chef Lanny Breuer is bragging about it. He'll return for the third to time the white collar (now expanding its clients internationally) legal defense firm of Covington & Burling, but this time at a whopping salary. According to the New York Times: "Mr. Breuer is expected to earn about $4 million in his first year at Covington. In addition to representing clients, he will serve as an ambassador of sorts for the firm as it seeks to grow overseas." As BuzzFlash at Truthout has speculated before, one can argue (and the same holds true for Eric Holder, also a Covington & Burling alumni appointee), Breuer was building his value in the marketplace at the DOJ, while Wall Street executives who nearly destroyed the American economy went unprosecuted. And his future value to his old white collar defense firm was dependent, in large part, on him not angering the people who would be the clients of Covington & Burling when he left the Department of Justice. The result, one can contend: no prosecutions of banks "too big to fail" execs as publicly stated as a policy by both Breuer and Holder.

Once More Through the Revolving Door for Justice’s Breuer - Coming off a grueling four-year stint at the Justice Department, Lanny A. Breuer is poised to make a soft landing in the private sector. Covington & Burling, a prominent law firm, plans to announce on Thursday that Mr. Breuer will be its vice chairman. The firm created the role especially for Mr. Breuer, a Washington insider who most recently led the Justice Department’s investigation into the financial crisis. For Mr. Breuer, who will now shift to defending large corporations, Covington is familiar turf. He previously spent nearly two decades there.“There’s a strong emotional pull to the firm,” Mr. Breuer, who departed as the Justice Department’s criminal division chief on March 1, said in an interview. “It’s my professional home.” Mr. Breuer is expected to earn about $4 million in his first year at Covington. In addition to representing clients, he will serve as an ambassador of sorts for the firm as it seeks to grow overseas.

Lehman plans to distribute $14.2 bln to creditors (Reuters) - Lehman Brothers Holdings Inc said on Wednesday it plans to distribute about $14.2 billion to creditors early next month, as the company winds down following its emergence from bankruptcy protection last year. The distribution, to be made April 4, will be Lehman's third since it emerged from Chapter 11 protection on March 6, 2012. Lehman said the payout will increase total distributions to about $47.2 billion, with two-thirds going to third parties. The company has said it hopes to distribute more than $65 billion, on average about 21 cents on the dollar for allowed claims. April's payout will include $9.4 billion to third-party creditors and affiliates, $4.4 billion to other Lehman debtors and affiliates, and $370 million for claims deemed valid since the second distribution on Oct. 1. Following the distribution, holders of senior unsecured claims against the parent company will have received about 14.8 cents on the dollar on their claims, a court filing showed.

World Derivatives Market Estimated As Big As $1.2 Quadrillion Notional, as Banks Fight Efforts to Rein It In - from naked capitalism - Yves here. Readers have asked us to write about the ginormous scale of the derivatives market. This article is a layperson-friendly discussion of bank efforts to stymie the not-onerous safeguards in Dodd Frank and why you should be up in arms about it. Derivatives, specifically credit default swaps, were the reason what would otherwise been a contained subprime crisis into a global financial meltdown. If you have not done so already, we strongly encourage you to call your Senator and Representative and tell them you are strongly opposed to this stealth effort by banks to keep taxpayers on the hook for the derivatives casino and allow it to continue to operate with minimal supervision. Cross posted from Americablog We wrote earlier about the recent move by bankers — and the politicians who serve them — to unreform the derivatives market, to return it to its pre–Dodd-Frank, pre–Crash-of-2007 state. This is a serious move by banks and bank lobbyists, and it could well happen soon. The seven bills in the House package of “tweaks” — as the House Agriculture website dishonestly puts it — have cleared the committee with Democratic support and are headed to the House floor. In the meantime, there are companion bills in the Senate. What will happen in the Senate? Well, Dick Durbin (always an Obama surrogate) famously said of the Senate that “the banks own the place.” And of course the White House has been notoriously bank-friendly since day 1. As a friend told me last week, “Bank lobbyists are good; they really earn their money.” Indeed. Our earlier story focused on both aspects of this push — the “bad Dems” side and the derivatives side. Let’s now look at just the derivatives aspect.

Why Derivatives May Be the Biggest Risk for the Global Economy -  Although recent BIS data shows only a little growth in the overall value of derivatives, some leading bond portfolio managers and derivatives experts believe that the market has continued to expand rapidly, without being especially visible. While there’s no way of knowing for sure, estimates of the face value of all derivatives outstanding tops a quadrillion (1,000 trillion) dollars, or more than 14 times the entire world’s annual GDP. By comparison, the total value of all the stocks trading on the New York Stock Exchange is roughly $15 trillion. Indeed, the New York Stock Exchange itself is being acquired by an up-and-coming derivatives exchange.

Is it already time to weaken Dodd-Frank?: There’s a reason why Warren Buffett said, “Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” And why Bill Clinton said he was wrong to avoid regulating derivatives when he had the chance. These financial instruments played a central role in the financial crisis, culminating with the collapse and bailout of AIG.A key effort in the Dodd-Frank financial reform act has been to bring transparency and reforms to the complex, shadowy market of derivatives. On Wednesday, however, Republicans and Democrats on the House Agriculture Committee approved seven bills that would roll back parts of the Dodd-Frank financial regulations. The bills will now proceed to a floor vote. So what do these measures do? They weaken Title VII of Dodd-Frank, which is the part that regulates derivatives.

The London Whale and the real link between the US economy and Cyprus - Dean Baker - As we now know, Cyprus is a small island country with a financial sector that has run amok, following in the footsteps of Ireland and Iceland. The assets of its banks were eight times the size of the country's economy.  This meant that when the banks' big bets went bad, there was no way Cyprus' government could afford the price of the bailout. As a result, Cyprus was forced to go hat in hand to the European Central Bank and accept whatever offer was put on the table. However the Cyprus crisis is finally resolved, it is not likely to be a pretty picture for the citizens of Cyprus. As the Cyprus crisis was unfolding last week, we also got to see the report of the Senate Permanent Subcommittee on Investigations (pdf) on JP Morgan's losses at its "London Whale" trading division. The report chronicles a series of bad bets on derivatives that were compounded by traders doubling down their stakes. They concealed the size of their losses both to bank officers and regulators. The end result was a $6bn loss. JP Morgan is a huge bank and can swallow $6bn in losses, but the incident showed as clearly as possible that the Dodd-Frank reforms are not working. The London Whale's losing trades were all done in the Dodd-Frank era. The bill's provisions did not prevent JP Morgan from making massive bets and misleading regulators about their nature and the risks involved. If the regulators were not able to catch the London Whale's huge gambles before they went bad, why would we think that they will catch the next crapshoot from the Wall Street gang? It's time that we looked at this seriously: the regulators lack either the will or the competence to rein in the big banks. The big banks are going to get away with everything they want, regardless of the provisions of Dodd-Frank.

Next stop New York: wealthy Russians hurry money from Cyprus to US - Pearly and serene amid the beeping and bustle of highway traffic, a 536ft, bulletproof yacht called the Eclipse has been anchored in the freezing water of the Hudson for over a month. It is the world's largest yacht, owned by Roman Abramovich, a secretive Russian oligarch whose net worth, at Forbes' last count, was about $10.2bn. It's no coincidence that Abramovich's glistening ship is anchored in New York. The city has been a haven for wealthy Russians for at least three years, as oligarchs and demi-oligarchs moored their money far away from the political whims of Vladimir Putin or the growing fiscal fiasco of the eurozone. "In Russia, whether you're friendly with the government is a very important thing, and that changes like the wind changes,". Evidence of Russian wealth has been everywhere.  "They have boats, they have cars; you go buy a plane for $40m, it's not a big deal any more," said Newman. Rybolovlev's 2012 acquisition of an $88m Central Park apartment once owned by Citigroup chief Sandy Weill still stands as one of the biggest real estate deals in New York history, and a soaring example of Russian influence and ostentation in high-end New York real estate. "How many Maybachs can you have, how many Maseratis can you have?" Newman recently learned of an extravagantly priced crocodile-skin T-shirt for sale. "I thought right away, 'there's going to be a Russian at Hermes buying that $100,000 t-shirt."

Why Does No One Speak of America’s Oligarchs? - Yves Smith - One of the striking elements of the demonization of Cyprus was how it was depicted as a willing tool of Russian money launderers and oligarchs. Never mind the fact, as we pointed out, that Cyprus is not a tax haven but a low-tax jurisdiction, and in stark contrast with Cyprus and Malta, has double-taxation treaties signed with 46 nations and has (now more likely had) with six more being ratified. Nor is it much of a tax secrecy jurisdiction, according to the Financial Secrecy Index. Confusingly, in the overall ranking, lower numbers are worse (Switzerland as number 1 is the baaadest) but in the secrecy score used to derive the rankings, higher is worse, with 100 being utterly opaque. The total rank is a function of “badness” (secrecy score) and weight (amount of business done). You’ll notice that all the countries ranked as worse than Cyprus have secrecy scores more unfavorable than it, with the exception of Germany, which is a mere 1 point out of 100 less bad. And even so, its greater volume of hidden activity gives it a much worse overall ranking. Of countries 21 tp 30, only 3 rank as less bad on secrecy: Canada, India, and South Korea.

Oligarchy Exists Inside Our Democracy - Suddenly it looks like we are seeing political victories for progressives, on LGBT rights, on issues important to Hispanics, even occasionally on issues important to women. At the same time, we lose every single battle over economic issues. How is it that when polls show that a huge majority oppose cuts to Social Security, Democratic politicians like President Obama and Senate Majority Leader Dick Durbin are all for it, as are the Republicans? How is it that when Obama gets elected on a pledge to hike taxes on incomes above $250K, with a huge majority and control of the Senate, and a legislative situation where all he has to do is nothing and it happens, and then it doesn’t? How is it that the same bill continued a bunch of disgusting loopholes for the richest Americans and the corporations they control, like the NASCAR loophole that essentially only benefits one enormously wealthy family? How is it that within days of hearings showing the incompetence of JPMorgan’s derivatives traders the House Agriculture Committee cleared legislation to inflict derivative losses on the FDIC?To answer that question, we have to get outside of normal discourse in the US, and take up a new work: oligarchy. Fortunately Yves has already crossed the boundary line from acceptable discourse into the unmentionable, so even though our pundit class doesn’t seem to grasp the possibility, it’s easy to see that this single concept explains the apparent discrepancy between wins on social issues and utter defeat on all economic issues.

The Debate on Bank Size Is Over - Simon Johnson - While bank lobbyists and some commentators are suddenly taken with the idea that an active debate is under way about whether to limit bank size in the United States, they are wrong. The debate is over; the decision to cap the size of the largest banks has been made. All that remains is to work out the details. To grasp the new reality, think about the Cyprus debacle this month, the Senate budget resolution last week and Ben Bernanke’s revelation that — on too big to fail — “I agree with Elizabeth Warren 100 percent that it’s a real problem.” Policy is rarely changed by ideas alone and, in isolation, even stunning events can sometimes have surprisingly little effect. What really moves the needle in terms of consensus among policy makers and the broader public opinion is when events combine with a new understanding of how the world works. Thanks to Senator Sherrod Brown, Democrat of Ohio; Senator Warren, Democrat of Massachusetts, and many other people who have worked hard over the last four years, we are ready to understand what finally defeated the argument that bank size does not matter: Cyprus.

Counterparties: Breaking up is hard to do - Simon Johnson has a rather startling claim in his NYT column today: “the decision to cap the size of the largest banks has been made. All that remains is to work out the details.” It’s worth reading the entire piece, but Johnson makes a few key points about why the conversation about America’s big banks has changed. First, the world is beginning to learn from Cyprus, which, Peter Gumbel says, proves that Europe has entered a “brave new world where nobody is too big to fail.” This should have come as little surprise: the European Commission last year all but declared that taxpayers wouldn’t be put on the hook for bank rescues. In other words, Gumbel writes, European officials have made it clear that nothing like this will ever happen again: In America, Johnson says, a similar change is happening: “Opinion on Capitol Hill has now moved in a way that will continue to reinforce itself.” Ben Bernanke told Congress earlier this month that too big to fail is “still here” — though Bernanke also said policy on this is “moving in the right direction”. The break-up-the-big-banks crowd now includes liberals, conservatives, ex-bankers, and Mormons. Last week, the Senate unanimously passed a non-binding (and possibly entirely symbolic) amendment that would end any market subsidy for banks with over $500 billion assets. A bipartisan too-big-to-fail bill from Senators Sherrod Brown and David Vitter is currently being written, Johnson says.

JPMorgan Chase Faces Full-Court Press of Federal Investigations - As the nation’s strongest bank, JPMorgan Chase used to be known for carrying special sway with regulators. Now it increasingly finds itself in the cross hairs of federal authorities. At least two board members are worried about the mounting problems, and some top executives fear that the bank’s relationships in Washington have frayed as JPMorgan becomes a focus of federal investigations. In a previously undisclosed case, prosecutors are examining whether JPMorgan failed to fully alert authorities to suspicions about Bernard L. Madoff, according to several people with direct knowledge of the matter. And nearly a year after reporting a multibillion-dollar trading loss, JPMorgan is facing a criminal inquiry over whether it lied to investors and regulators about the risky wagers, a case that could accelerate when the Federal Bureau of Investigation and other authorities interview top JPMorgan executives in coming weeks. All told, at least eight federal agencies are investigating the bank, including the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the Securities and Exchange Commission. Federal prosecutors and the F.B.I. in New York are also examining potential wrongdoing at JPMorgan.

US in crackdown on Citigroup anti-laundering flaws - The US Federal Reserve has ordered Citigroup to improve its compliance with anti-money laundering rules, citing deficiencies at an affiliate of Banamex, its prized Mexican banking arm. Citi is required to develop plans to strengthen its anti-money laundering procedures and adequately fund its risk-management programmes. There were no fines as part of the Fed order. The issues at Citi identified by bank regulators come more than 11 years after the company acquired Banamex for $12.5bn. As it sought Fed approval for the deal, Citi trumpeted its anti-money laundering credentials. The bank, then led by Sandy Weill, hired Richard Small, previously the Fed’s head of anti-money laundering. Banamex, the second-biggest bank in Mexico, is now Citi’s biggest retail network, with 1,700 branches in the country. Last year Citi recorded revenues of $9.7bn in Latin America, the largest part from Banamex. In Citi’s latest annual report, it said its operations in emerging markets subjected it to higher compliance risks under US anti-money laundering rules.

From Detroit to Cyprus, Banksters in Search of Prey - Black Agenda Report - From Nicosia, Cyprus, to Detroit, Michigan, the global financial octopus is squeezing the life out of society, stripping away public and individual assets in a vain attempt to fend off its own, inevitable collapse. The bankers “troika” that effectively rules Europe prepares to reach into the individual accounts of ordinary depositors on the island nation of Cyprus to fund the bailout of their local banking brethren. Across the Atlantic, a corporate henchman makes arrangements to seize the assets and abolish the political rights of a Black metropolis. The local colorations may vary, but the crisis is the same: massed capital is devouring its social and natural environment. Either we liquidate the banksters, or Wall Street will liquidate us.The proposed seizure of a big chunk of every ordinary Cypriot depositors’ accounts, in the guise of a one-time “tax,” was shocking even by the standards of the Euro Zone’s overlords: the International Monetary Fund, European Central Bank and European Commission. The original diktat to finance new lines of credit for Cyprus’s over-extended banks called for snatching 6.75 percent of the cash of customers with balances below 100,000 euros ($129,500), and 9.9 percent above that threshold. When the public went berserk, it was proposed that depositors with 20,000 euros or less be spared – but Cypriot lawmakers balked. The banks are now closed, to prevent people from withdrawing their money. But Europe’s ruling triumvirate at the bankers’ lair in Brussels continues to demand that the public-at-large pay to keep the global criminal financial enterprise humming, or be starved out. “In the absence of this measure, Cyprus would have faced scenarios that would have left deposit-holders significantly worse off,” they said – disaster banksterism

Foreign Investment in U.S. Dwarfs American Money Going Abroad - The U.S. is becoming more indebted to the world — with foreign investments in the U.S. dwarfing U.S. investments abroad by the biggest amount on record last year. America’s “international investment position” — how much the value of foreign investments in the U.S. exceed U.S. investments abroad — jumped to $4.7 trillion in the second quarter of last year before edging down to $4.4 trillion by year’s end, up from $4.0 trillion at the end of 2011, thanks to a drop in the value of U.S. investments abroad, the Commerce Department said in a report Tuesday that provided quarterly data for the first time. The gap in the second quarter of 2012 was the biggest on record since the government began tracking in 1976. The report suggests foreign investors and companies are playing a bigger role in U.S. financial markets and economy than ever. That worries some observers, since it makes the U.S. economy more vulnerable to violent shifts in the global economy. Yet it also suggests America remains a beacon for foreign investment after the financial crisis.

Berkshire to Pay Nothing to Be a Top Goldman Holder - Warren Buffett’s Berkshire Hathaway Inc. is poised to become one of Goldman Sachs Group Inc. (GS)’s largest shareholders without paying anything after the companies agreed on a plan to settle warrants granted at the height of the 2008 financial crisis. Berkshire had the right to buy 43.5 million Goldman Sachs common shares for $115 apiece until Oct. 1. Under a deal announced by the companies today, Buffett’s firm will get Goldman Sachs stock equal to the difference between the average closing price during the 10 trading days before Oct. 1 and the exercise price, multiplied by 43.5 million.

Stop subsidizing Wall Street - Thomas M. Hoenig - Imagine if the United States had an airline industry in which the biggest carriers that fly both domestically and internationally received a larger government fuel subsidy than those flying only domestic routes. Unfair? Yes — and that’s exactly how the U.S. financial system works. The fuel of the largest firms in our financial services industry is subsidized, and the public bears the cost. Financial firms can borrow money — their equivalent of fuel — more cheaply and with less market scrutiny when they have access to government guarantees of deposit insurance, loans from the Federal Reserve and, ultimately, taxpayer support such as we saw with the Troubled Assets Relief Program in 2008. This safety net was intended to stabilize the financial system by protecting the payments system that transfers money around the country and the world as well as the essential lending that commercial banks provide. But these protections also assure those who lend to banks that they will be repaid regardless of the condition of the bank. Under such circumstances, creditors give the firms a discount on the cost of the funds they borrow.

Corporate Profitability - Corporations are making "historic levels" of profit: Economy built for profits not prosperity, by Lawrence Mishel, EPI: Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-1951 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis. ... This helps to explain the lack of enthusiasm among corporate leaders for a jobs/stimulus program. They're doing fine. (Though that won't stop them from arguing that corporate tax cuts -- which would further increase the mountain of cash they are sitting on -- are the key to the recovery. Note however that business investment is relatively strong and "This historic share of income going to profits reflects historically high returns on investments, meaning more profit per dollar of assets.")

The corporate ‘predator state’ - Bipartisan agreement in Washington usually means citizens should hold on to their wallets or get ready for another threat to peace. In today’s politics, the bipartisan center usually applauds when entrenched interests and big money speak. Beneath all the partisan bickering, bipartisan majorities are solid for a trade policy run by and for multinationals, a health-care system serving insurance and drug companies, an energy policy for Big Oil and King Coal, and finance favoring banks that are too big to fail. Economist James Galbraithcalls this the “predator state,” one in which large corporate interests rig the rules to protect their subsidies, tax dodges and monopolies. This isn’t the free market; it’s a rigged market. Wall Street is a classic example. The attorney general announces that some banks are too big to prosecute. Despite what the FBI called an “epidemic of fraud,” not one head of a big bank has gone to jail or paid a major personal fine. Bloomberg News estimated that the subsidy they are provided by being too big to fail adds up to an estimated $83 billion a year.

US corporate executives cash in - USA Today reported Thursday that at least ten CEOs took in $50 million apiece in 2012, largely as a result of cashing in stocks that have soared in value with the rising market. According to the newspaper, “Early 2013 proxy filings detailing 2012 compensation show a growing number of CEOs reaping $50 million or more, gains that could prove unmatched in breadth and size since the Internet IPO craze enriched tech company executives more than a decade ago.” In its own analysis, the Wall Street Journal observed that executive pay has become ever more directly tied to stock values, noting that last year, more than half of compensation at major companies was tied to “stock or financial performance,” compared to 35 percent in 2009.Among the top pay packages according to preliminary calculation is that of Starbucks CEO Howard Schultz, which included stock options valued at $103.3 million this year, on top of $30 million in other compensation and stock, as well as $10.2 million in vested shares, according to USA Today.Ford CEO Alan Mulally likewise took home $61 million by cashing in shares that vested last year, added to his compensation of $21 million. This payout was based on a sharp rise in the company’s profitability that has been made possible by downsizing and the slashing of wages for newly hired workers to $15 per hour. Mulally’s pay is more than 2,500 times that of a new auto worker.

A Final Pet Peeve: The Right to Consumer Financial Industry Data  Why does the government have to rely on commercially-collected financial industry data sets or voluntary surveys of financial firms to discover the effects of policies the government has put in place? This is just embarrassing. The U.S. government has so little power over the financial industry – an industry that only exists by virtue of the full faith and credit, payments systems, FDIC insurance, etc. provided by the U.S. government – that it cannot demand data from banks and financial firms, but instead must ask politely for voluntary survey answers or search the data market and pay for information like a commoner?   The CFPB fancies itself a “data-driven agency” but is subject to budgetary constraints in obtaining that data. Worse, it can only obtain the data the market chooses to provide, which is often a bunch of incomplete data sets that cover performance of only a sample of any particular financial product or that consist of voluntary unverified survey responses of industry members. Even more galling, some of those data purchases come with use restrictions. For example, it appears that the CFPB's recent report on student loans was based on data provided voluntarily by lenders, data which was stripped of identifying information before it was shared with the government not merely to protect individual borrowers but to prevent identification of any particular lender within the data. 

No One is Immune from Credit Card Fraud, Not even the Chief Justice - Wow. Credit card fraud really can happen to anyone, as the Washington Post's Al Kamen reported this afternoon.  Apparently U.S. Supreme Court Justice John Roberts had his credit card number stolen and had to pay cash for his morning Starbucks. This story raises so many questions.  First, how many credit cards does Justice Roberts carry?  Could it be that he carries just one? Second, what type of card was it? Third, where was it compromised? Fourth, how much hutzpah does this thief have? Did the thief not know who he or she was dealing with?  Finally, I wonder if this event might bear on future consumer law cases before the court. One thing is clear. Even important people have to watch thier backs.

Deposit Insurance, and the Historical Reasons for It - FOR all the criticism of bailouts since the financial crisis struck, virtually no one has suggested that depositors in banks be made to suffer along with their investors, employees and customers. Until this week, when the euro zone proposed that, in return for a bailout of the failing banking system in Cyprus, depositors pay a “tax” of 6.75 percent of their deposits — 9.9 percent for deposits above 100,000 euros. Because bank deposits in Cyprus, and virtually everywhere, are insured, the plan shocked many people who figured that this insurance was the one financial safety net that was still truly “safe.” The Cypriot Parliament shot down the plan, though a smaller hit to depositors — many of whom are wealthy foreigners — was still in the offing late last week. Yet the tempest in the eastern Mediterranean is a reminder that depositors, in fact, are also creditors of banks and are potentially at risk. In the United States, deposit insurance is viewed as sacrosanct. But even here, such plans haven’t always worked, and at least until recent times they have been contentious.

It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors - Ellen Brown - Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.   New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.”  It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.”  The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

Michael Hudson Discusses Why We Need Public Banks to Prevent Cannibalization of the Economy on Real News Network from naked capitalism -  Michael Hudson continues his discussion of banking on Real News Network by focusing on the role banks played in different economies in the early period of industrialization.   Hudson explains how public banks could provide an alternative to our current model of extractive finance.

Unofficial Problem Bank list declines to 797 Institutions - Here is the unofficial problem bank list for Mar 22, 2013.  Changes and comments from surferdude808:  As expected, a quiet week as there were only four removals from the Unofficial Problem Bank List. The removals leave the list at 797 institutions with assets of $294.3 billion. The list has not been under 800 since Friday, July 23, 2010. A year ago, the list held 949 institutions with assets of $379.8 billion.Actions were terminated against Saehan Bank, Los Angeles, CA ($602 million Ticker: SAEB); CIBM Bank, Champaign, IL ($471 million Ticker: CIBH); Bank of Little Rock, Little Rock, AR ($193 million); and Bank VI, Salina, KS ($65 million). In a more rare event, the Federal Reserve terminated a Prompt Corrective Action order against Bank of Bartlett, Bartlett, TN ($370 million).Next week, we anticipate the FDIC will release its enforcement action through February 2013.

Banks Seek to Overturn Judge’s Ruling in Critical Mortgage Case - The nation’s largest banks, facing a torrent of lawsuits over shoddy mortgage securities, are pushing to overturn a series of tough rulings in an important case. In a rare move, 15 banks — including Bank of America, Citigroup, JPMorgan Chase and UBS — filed a motion in Federal District Court in Manhattan late Tuesday night to throw out a series of decisions by Judge Denise L. Cote, according to a copy of the court filing. In doing so, the financial institutions are aiming to broaden the amount of evidence they can gather in the hopes of quashing the lawsuit. The rulings, the banks argue, are so “gravely prejudicial” that the firms had no choice, a step that was not “taken lightly.” The case could have costly implications. In 2011, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, accused the banks of duping the housing giants into buying $200 billion of mortgage securities that ultimately imploded during the financial crisis. On Wall Street, the lawsuit is considered a critical litmus test for how successful the banks will be in stanching their losses from the mortgage litigation. The banks have been aggressively trying to thwart the lawsuit. In November, Judge Cote denied requests by the banks to toss out the lawsuit altogether.

Why Are Big Banks Going To War With A Federal Judge? - The nation’s largest banks have devised a novel way to protect their interests and save themselves from hundreds of billions of dollars in legal exposure. They’re taking a judge to court. Lawyers for 17 banks submitted an unusual filing in the Second Circuit Court of Appeals this week (just listing all the corporate lawyers involved takes up the first four pages). The banks – including JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, Citigroup and Morgan Stanley – stand accused of ripping off the mortgage giants Fannie Mae and Freddie Mac. The Federal Housing Finance Agency, Fannie and Freddie’s conservator, alleges that these banks improperly sold $200 billion worth of mortgage-backed securities without disclosing the shoddy underwriting of the underlying loans. FHFA argues the banks knew the loans in the securities were bad, yet sold them to Fannie and Freddie anyway, leading to massive losses and the need for a government bailout. So FHFA wants the banks to buy back the securities they improperly sold under false pretenses.The bank lawyers have become so dissatisfied with Judge Denise Cote’s rulings, in fact, that they have asked the Second Circuit to reverse them. The filing calls for a “writ of mandamus” that would throw out a series of rulings around discovery, which the bank lawyers claim “deprived Petitioners of their right to obtain evidence.” (You can chew for a moment on the idea that banks are being deprived of their rights.)

OCC, Fed Stonewalling Congressional Oversight of Independent Foreclosure Reviews - David Dayen - A couple months ago, Elizabeth Warren and Elijah Cummings opened what they described as an investigation into the Independent Foreclosure Reviews. We all knew the IFRs deserved some form of response by Congress, and we knew that the OCC and the Fed wanted no part of any questioning of their latest gift to predatory banks and their fraudulent practices. But we didn’t know how much they would try to stonewall this investigation right from the outset – at least not until today, when Warren and Cummings released some of their recent correspondence with the federal regulators. First of all, they note that the response only arrived last Friday – they requested the information January 31. And then there’s this: For our 14 specific requests, your response letter provided two partial responses and only one full response. The table below details specifically what we requested, the information you provided in your March 22 letter, and the information yet to be provided. The only full response was OCC and the Fed’s confirmation that no remediation has yet been paid out, though cards went in the mail last week announcing the settlement to those affected, with checks to be mailed in April. This is a trivial piece of information compared to Warren and Cummings’ requests for all the performance reviews conducted by the regulators of the IFRs, correspondence between the regulators and the servicers on the matter, amounts paid to each contractor conducting the reviews, total requests for review from borrowers, and the actual findings of the reviews. You can read the dismissive, two-page letter from Curry and Bernanke here.

Why The Government Is Desperately Trying To Inflate A New Housing Bubble - The Federal government and Federal Reserve are trying to inflate another housing bubble to save the "too big to fail" banks from a richly deserved day of reckoning. If we want to understand why the U.S. government is doing its best to inflate another housing bubble, we must start with the Devil's Pact partnership of the government and the "too big to fail" banks. Simply put, the TBTF banks would not exist without the Federal Reserve and Federal government bailouts, subsidies and protection from transparent marked-to-market pricing of the banks' collateral and risk. The basis if this partnership is simple: the banks' enormous profits and financial power have enabled them to capture the regulatory machinery of the government (the Central State) and the political machinery controlled by its elected officials. To understand the true meaning of the housing bubble, we need to understand how banks reap outsized profits. In classic capitalism, banks earn profits by maximizing the allocation of capital. In practical terms, this means lending money to low-risk, high-growth, high profit-margin enterprises, and avoiding lending to high-risk, low-margin enterprises.

Counterparties: Kicking the kickback habit - The FHFA today announced that it might finally do something about the force-placed insurance industry, a particularly lucrative — and scandalous — corner of the mortgage industry. Jeff Horwitz, who has been leading on this story since 2010, says that the long-overdue move is a “blow to banks and other mortgage servicers.”Horwitz’s original report explains what the problem is: mortgage servicers foist overly expensive and unnecessary insurance policy on homeowners. When a homeowner lets their property’s insurance policy expire, the mortgage servicer can step in and buy a policy on the homeowner’s behalf. This is meant to protect both homeowner and the lender, but it quickly becomes egregious: homeowners were often stuck with insurance that cost 10 times more than their previous policies. In turn, mortgage companies made millions for referring homeowners toward specific insurance companies.FHFA’s proposal is pretty simple: it bans the kind of payments between insurance companies and mortgage servicers that Horwitz likened to “simple kickbacks”. Not surprisingly, pushing homeowners into pricy policies they didn’t need was very profitable. JP Morgan reportedly made $600 million since 2006 through its relationship with Assurant, one of the largest force-placed insurance companies. One report found that 15% of force-placed premiums go straight back to banks.

Mortgages’ Future Looks Too Much Like the Past - In a perfect world, policy makers, legislators and concerned Americans would have spent the last few years conducting an honest dialogue about two important issues: how to resolve Fannie Mae and Freddie Mac, the government-owned mortgage finance giants, and how to create a housing finance system that would serve borrowers without imperiling taxpayers. But ours is an imperfect world, and discussions about these questions have taken place mostly behind closed doors in Washington. The rest of us Americans, who guarantee the mortgage market, have not been given much of a say. This is a pity because the future of housing finance in this country seems to be coming down to two taxpayer-backed concepts. One is the status quo, with Fannie Mae and Freddie Mac continuing to back the vast majority of mortgages. The other is a newly conceived public guarantor with some of the same problems that got Fannie and Freddie into trouble.

LPS: Mortgage delinquencies decreased in February - According to the First Look report for February to be released today by Lender Processing Services (LPS), the percent of loans delinquent decreased in February compared to January, and declined about 6.5% year-over-year. Also the percent of loans in the foreclosure process declined further in February and were down significantly over the last year. LPS reported the U.S. mortgage delinquency rate (loans 30 or more days past due, but not in foreclosure) decreased to 6.80% from 7.03% in January. Note: the normal rate for delinquencies is around 4.5% to 5%. The percent of loans in the foreclosure process declined to 3.38% in February from 3.41% in January.   The number of delinquent properties, but not in foreclosure, is down about 8% year-over-year (301,000 fewer properties delinquent), and the number of properties in the foreclosure process is down 21% or 449,000 properties year-over-year. The percent (and number) of loans 90+ days delinquent and in the foreclosure process is still very high, but the number of loans in the foreclosure process is now steadily declining.

Freddie Mac Mortgage Serious Delinquency rate declined in February, Lowest since mid-2009 - Freddie Mac reported that the Single-Family Serious Delinquency rate declined in February to 3.15% from 3.20% in January. The serious delinquency rate is down from 3.57% a year ago (February 2012), and this is the lowest level since mid-2009.  The Freddie Mac serious delinquency rate peaked in February 2010 at 4.20%. Note: These are mortgage loans that are "three monthly payments or more past due or in foreclosure".Although this indicates some progress, the "normal" serious delinquency rate is under 1%.  At the recent pace of improvement, it will take several years until the rates are back to normal.

Fannie Mae Regulator Sets No-Doc Modifications for Borrowers -  Seriously delinquent borrowers with mortgages owned or backed by Fannie Mae (FNMA) and Freddie Mac will be able to reduce monthly payments without documenting finances under a program introduced by the companies’ regulator. The move announced today by the Federal Housing Finance Agency is designed to stem losses to the U.S.-owned firms by letting borrowers at least 90 days behind on their loans bypass the administrative hurdles of typical loan modifications. Homeowners may still give their lender documents on financial hardships and can save more money by doing so, the agency said. “This new option gives delinquent borrowers another path to avoid foreclosure,” Edward J. DeMarco, the FHFA’s acting director, said in a statement. About two-thirds of U.S. home mortgages are backed by Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, which package loans into securities on which they guarantee payments of principal and interest. About 3.2 percent of mortgages they guarantee were at least 90 days in arrears in January, according to data from the two companies.

Fannie/Freddie to Homeowners: Do Nothing and Help Will Arrive -- Housing Wire is reporting that Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, has launched a new loan modification program. The program is a major departure from HAMP and HARP (thankfully!). It puts mortgage servicers in charge of delivering relief, instead of requiring homeowners to run down, chase, and exhaust themselves contacting their mortgage company. The basic details available so far are that the program will start this July 1 and end August 2015. It will be open to Fannie/Freddie homeowners who are 90 days or more delinquent on their mortgages. Homeowners will not have to submit proof of financial hardship or undergo extensive underwriting to be qualified for modifications.

Lawler: Single Family REO inventories down 23.4% in 2012 - From economist Tom Lawler: While Fannie Mae still hasn’t released its 2012 10-K, FHFA released its quarterly “Foreclosure Prevention Report” for Q4/2012, which includes data on foreclosure prevention activity, foreclosures, short sales/DILs, loan modifications, credit performance, and Real Estate Owned (REO) activity at Fannie Mae and Freddie Mac. ... Here is a chart showing the SF REO Inventory of Fannie, Freddie, FHA, Private-Label Securities, and FDIC-Insured Institutions. For the latter, I assume that the average carrying value is 50% higher than that of the average for Fannie and Freddie.SF REO inventories for these combined sectors were down 23.4% in 2012. CR Note: Total REO is about half the level in 2008.  In 2008 most of the REO was Private-Label Securities.  The peak in 2010 was related to more foreclosure activity at Fannie, Freddie and the FHA. The second graph is for just Fannie, Freddie and the FHA REO.

MBA: Mortgage Applications increase in latest survey - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 8 percent from the previous week. The seasonally adjusted Purchase Index increased 7 percent from one week earlier....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.79 percent from 3.82 percent, with points increasing to 0.44 from 0.38 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. ... The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) decreased to 3.90 percent from 3.95 percent, with points increasing to 0.42 from 0.36 (including the origination fee) for 80 percent LTV loans. The first graph shows the refinance index. There has been a sustained refinance boom for over a year. Refinance activity will probably slow in 2013. The second graph shows the MBA mortgage purchase index. The 4-week average of the purchase index has generally been trending up (slowly) over the last year

Vital Signs Chart: Mortgage Rates Still Near All-Time Lows - Mortgage rates continue to plumb historically low levels, on the threshold of the industry’s key spring home-sales season. The rate on a 30-year fixed-rate mortgage ticked down to an average of 3.54% in the week ended on March 21 from 3.63% the previous week. That also is down from 4.08% — the average rate for a 30-year fixed-rate mortgage a year ago.

Existing Home Inventory is up 7.5% year-to-date on March 25th - Weekly Update: One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'm tracking inventory weekly this year. In normal times, there is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer. The NAR data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) has provided me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year (to normalize the data). In 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.So far - through March 25th - inventory is increasing faster than in 2011 and 2012. Housing Tracker reports inventory is down -21.2% compared to the same week in 2012 - still a rapid year-over-year decline.

Home Price Gains Continue Increasing Nationwide - Citing “steady employment and low borrowing rates” as well as inventories that have fallen “to their lowest post-recession levels,” the S&P Dow Jones Indices released Case-Shiller housing data that showed home prices jumping 8.1% from the previous year. When charted, the data looks like it’s been hit with a booster rocket, with the past three months’ reports showing solid year-over-year gains of 5.5%, 6.8%, and the just-reported 8.1%. All twenty metro areas covered in the index posted gains, ranging from New York’s 0.6% to Phoenix’s 23.2%. Eight cities’ gains were in the double-digits: Miami (10.8%); Los Angeles and Minneapolis (each 12.1%); Atlanta (13.4%); Detroit (13.8%); Las Vegas (15.3%), and San Francisco (17.5%), in addition to Phoenix. That list is notable for its breadth: Miami, Las Vegas, and Phoenix all fell victim to a run of investment speculation during the housing boom, and subsequently crashed hard; but the other five metros range from rust-belt economies hit hard by the Great Recession (Detroit) to high-flying tech-driven ones that were relatively unscathed (San Francisco).

US Home Prices Rise 8.1 Percent, Most Since June 2006 - U.S. home prices rose in January at the fastest annual pace since June 2006, just before the housing bubble burst. The gain shows the housing recovery is strengthening ahead of the all-important spring buying season. The Standard & Poor’s/Case-Shiller 20-city home price index climbed 8.1 percent in the 12 months ending in January. That’s up from a 6.8 annual gain in December. Prices rose in all 20 cities. Eight markets posted double-digit increases, led by a 23.2 percent gain in Phoenix. Prices rose 17.5 percent in San Francisco and 15.3 percent in Las Vegas, one of the nation’s hardest hit markets during the crisis. Prices rose in 11 of 20 cities on a month-over-month basis. The monthly numbers are not seasonally adjusted and reflect the slower winter buying period.

Case-Shiller: Comp 20 House Prices increased 8.1% year-over-year in January - S&P/Case-Shiller released the monthly Home Price Indices for January ("January" is a 3 month average of November, December and January). This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities). Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.  From S&P: Home Prices Accelerate in January 2013 According to the S&P/Case-Shiller Home Price Indices Data through January 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed average home prices increased 7.3% for the 10-City Composite and 8.1% for the 20-City Composite in the 12 months ending in January 2013.The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 29.3% from the peak, and up 1.0% in January (SA). The Composite 10 is up 7.3% from the post bubble low set in Feb 2012 (SA). The Composite 20 index is off 28.4% from the peak, and up 1.0% (SA) in January. The Composite 20 is up 8.1% from the post-bubble low set in Jan 2012 (SA).  The second graph shows the Year over year change in both indices.

A Look at Case-Shiller, by Metro Area - Home prices continued their winning streak of year-over-year gains, according to the S&P/Case-Shiller indexes. The composite 20-city home price index, a key gauge of U.S. home prices, was up 8.1% in January from a year earlier. Prices in the 20-city index were 0.1% higher than the prior month even amid the slower winter selling season. Adjusted for seasonal variations, prices were 1% higher month-over-month. All 20 cities posted annual increases in January, as New York ended a string of annual declines. Even with the slower winter season, eight cities posted monthly increases. On an adjusted basis, no city reported a monthly decline. Economists see rising home prices as a lifeline for homeowners who suffered during the recession. “Rising prices at this point are welcome, because they rescue underwater homeowners and also help persuade potential new buyers that it is safe to come into the market. When the rate of price increases is significantly higher than average mortgage rates, the market looks a great deal more attractive. We expect prices to keep rising for the foreseeable future,” Read the full S&P/Case-Shiller release.

Factoid from today’s Case-Shiller home price report - According to data from today’s Case-Shiller Home Price Index report for January, home prices in all 20 US metro areas included in the Case-Shiller Composite-20 Index increased on a year-over-year basis in January for the first time since March 2006, almost seven years ago.

First Impressions Can Be Misleading: Revisions to House Price Changes - New York Fed - An assiduous follower of the national house price charts that the New York Fed maintains on its web page may have noticed that we appear to be rewriting history as we update the charts every month. Why the change? Was the earlier reported number a mistake that we simply corrected this month? If not, what explains the revision to the initial report?  The house price appreciation rates that we summarize in our figures and charts are based on repeat-sale house price indexes, meaning they compare a home’s sale price to the price it sold for in its previous sale. A feature of these indexes (regardless of who produces them) that may not be familiar to all readers is that they are continuously revised as new information on housing sales becomes available. To understand this process, consider the stylized data flow depicted in the exhibit below. Each different line in the exhibit represents the time between a purchase and a subsequent sale of a specific property. In period t, we are interested in estimating the percent change in house prices over the past twelve months. When we first calculate this house price change at date t, two sales are available to inform this calculation—sales B and C. For both of these sales, the “holding period”—the time between the purchase and the subsequent sale of the property—overlapped with the twelve-month period that we want in order to estimate the house price change. Sale A, however, does not impact this calculation, since its holding period does not overlap our twelve-month window, and sales D and E have not yet taken place.

Real House Prices, Price-to-Rent Ratio, City Prices relative to 2000 - Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.  As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.  This is why economist also look at real house prices (inflation adjusted).The first graph shows the quarterly Case-Shiller National Index SA (through Q4 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through January) in nominal terms as reported. In nominal terms, the Case-Shiller National index (SA) is back to Q2 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to November 2003 levels, and the CoreLogic index (NSA) is back to January 2004. The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.In real terms, the National index is back to October 1999 levels, the Composite 20 index is back to December 2000, and the CoreLogic index back to February 2001. In real terms, most of the appreciation in the last decade is gone.

Analysts increase 2013 house price forecasts - I've been watching inventory closely, and in February I wrote: "if inventory keeps falling sharply, we might see stronger house price gains in 2013 than originally expected ...". Since then I've pointed out several analysts who have increased their house price forecasts for 2013. Nick Timiraos at the WSJ lists more analysts today: Home Prices Seen Making Stronger Gains in 2013 Ivy Zelman, chief executive of research firm Zelman & Associates, said Wednesday she was now expecting prices to rise by 7% this year, up from earlier estimates of 6%, 5%, and 3%. ... She’s also calling for a 5% gain next year because she says the supply shortages and growing demand that fueled last year’s turnaround show no signs of easing. John Burns, who runs a real-estate consulting firm in Irvine, Calif., is calling for a 9% gain in home prices this year, up from a 5% forecast late last year.Among those who have revised up their forecasts in the last month are analysts at Morgan Stanley, Bank of America, Capital Economics and J.P. Morgan, which have taken their forecasts to 6-8%, from earlier predictions of 3-6%.

Is the Fed's Quantitative Easing Pushing Up Home Prices? - Is the Federal Reserve's quantitative easing over inflating housing prices? According to one Fed Official they aren't Yet the Federal Reserve is buying 50% of mortgage backed securities, keeping mortgage interest rates at record lows and affecting pricing on mortgage backed securities themselves. The January 2013 S&P Case Shiller home price index showed a 8.1% price increase from a year ago for over 20 metropolitan housing markets and a 7.3% change for the top 10 housing markets from January 2012.  This are the highest yearly gains since Summer 2006, the height of the housing bubble.  Inventories are at record lows and February new residential sales home inventories are now at 4.6 months of supply.  February's average new home sale price was $313,700, clearly outside the range of what most wages can afford.  The February new home median price was $246,800.  Median means half of new homes were sold below this price and both the average and median sales price for single family homes is not seasonally adjusted.

Understanding the housing bubble - That the packagers and buyers of private-label mortgage-backed securities made an incredibly costly mistake is now indisputable. But the question remains, why?One interpretation emphasizes misaligned incentives. Money managers earned bonuses while others were left holding the bag. Institutions like Fannie, Freddie, and AIG profited handsomely during the run-up, but the government picked up the tab when things went bad. These kinds of explanations come very naturally to most economists, whose models are usually built on the assumption that economic decision-makers are responding in a rational way to the incentives they face.But an alternative view is that the key players were simply mistaken as a group, lulled into a misunderstanding of what was going on through social and institutional feedback that sustained a misguided groupthink. This view is hard for many economists to embrace, though there is a good case to be made that this is an important part of the story of what we just went through. A new research paper by Ing-Haw Cheng, Sahil Raina, and Wei Xiong has come up with an ingenious way to test which of those two explanations best describes what really happened.

Pending Home Sales Tick Down -  The number of U.S. buyers signing contracts to buy previously owned homes fell modestly last month, but the overall figure remained near a three-year high, a sign that prospective homebuyers are likely returning to the housing market. The National Association of Realtors on Wednesday said its seasonally adjusted index for pending sales of existing homes dropped to a reading of 104.8 in February from January, falling 0.4% from a surge the previous month. The index was up 8.4% from a year earlier. The reading nearly matched expectations. Economists surveyed by Dow Jones Newswires had forecast the index would fall 0.3% from January’s previously reported reading of 105.9. That month’s reading was revised downward slightly to 105.2. An index of 100 is equal to the average level of contract activity during 2001.

Pending Home Sales index declines in February - From the NAR: Pending Home Sales Slip on Constrained Inventory The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.4 percent to 104.8 in February from a downwardly revised 105.2 in January, but is 8.4 percent higher than February 2012 when it was 96.6. Contract activity has been above year-ago levels for the past 22 months; the data reflect contracts but not closings. The PHSI in the Northeast declined 2.5 percent to 82.8 in February but is 6.8 percent above February 2012. In the Midwest the index rose 0.4 percent to 103.6 in February and is 13.2 percent higher than a year ago. Pending home sales in the South slipped 0.3 percent to an index of 118.8 in February but are 12.1 percent above February 2012. In the West the index increased 0.1 percent in February to 101.4 but is 0.8 percent below a year ago. Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in March and April.

Investors vs. Occupants in the Housing Recovery - One of the big questions about the sustainability of the housing recovery is whether it’s being driven by owner-occupants — the people who live in the houses they buy — or speculators.  In the last year or so, after all, some of the big institutional investors have bought up a lot of distressed properties because they perceived the market to be undervalued, and saw some major opportunities in the rental market. Blackstone, for example, is now the biggest owner of single-family homes, having purchased about 20,000 homes across the country, most of them foreclosures. New data released by the National Association of Realtors suggests that investors are still playing a role in the market, but their influence is down from its peak.The chart above shows the share of monthly home sales that went to investors. The data come from the Realtors Confidence Index, which is based on about 3,000 responses each month from members of the National Association of Realtors. In February, investors accounted for about one in five purchases, which is close to the long-term average

New Home Sales at 411,000 SAAR in February - The Census Bureau reports New Home Sales in February were at a seasonally adjusted annual rate (SAAR) of 411 thousand. This was down from a revised 431 thousand SAAR in January (revised down from 437 thousand).   The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. "Sales of new single-family houses in February 2013 were at a seasonally adjusted annual rate of 411,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 4.6 percent below the revised January rate of 431,000, but is 12.3 percent above the February 2012 estimate of 366,000.The second graph shows New Home Months of Supply. The months of supply increased in February to 4.4 months from 4.2 months in January. On inventory, according to the Census Bureau:  "A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted.  Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973.

A few comments on New Home Sales - When the new home sales report was released for January, showing a large increase in the annualized sales rate, I cautioned not to read too much into that number. It was just one month of data, and January is seasonally the weakest month of the year with the largest positive seasonal adjustment. Now that we have two months of data for 2013, one way to look at the growth rate is to use not seasonally adjusted (NSA) year-to-date data.  ccording to the Census Bureau, there have been 63 thousand new homes sold in 2013, up about 19% from the 53 thousand sold in January and February of 2012. That is a solid increase in sales. Note: For 2013, estimates are sales will increase to around 450 to 460 thousand, or an increase of around 22% to 25% on an annual basis from the 368 thousand in 2012. As I mentioned last month, although there has been a large increase in the sales rate, sales are still near the lows for previous recessions. This suggest significant upside over the next few years (based on estimates of household formation and demographics, I expect sales to increase to 750 to 800 thousand over the next several years). Also housing is historically the best leading indicator for the economy, and this is one of the reasons I think The future's so bright, I gotta wear shades. And here is another update to the "distressing gap" graph that I first started posting over four years ago to show the emerging gap caused by distressed sales.  Now I'm looking for the gap to start to close over the next few years.

Housing Starts and the Unemployment Rate - By request, here is an update to a graph that I've been posting for several years.  This shows single family housing starts (through February 2013) and the unemployment rate (inverted) also through February. Note: there are many other factors impacting unemployment, but housing is a key sector. You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts (blue) increased a little in 2009 with the homebuyer tax credit - and then declined again - but mostly starts moved sideways for two and a half years and only started increasing steadily near the end of 2011. This was one of the reasons the unemployment rate remained elevated. Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover.  However this time, with the huge overhang of existing housing units, this key sector didn't participate for an extended period.

A comment on Jobs, Household Formation and New Residential Construction - The key driver for new residential construction, both single family and rental properties, is household formation. And household formation is mostly driven by jobs.  So jobs are the key driver for new residential construction. But wait ... there are about 3 million fewer payroll jobs now than at the start of the recession. So why do we need any new housing units? Two frequently mentioned reasons are more foreign buying (so jobs are not a driver), and that housing is not transportable, so some areas will need more housing.    However many areas are seeing a pickup in construction (not just areas with better job growth).    There probably is more foreign buying, especially in the gateway cities like New York, Miami (for South American buyers), and in California for Asian buyers, but that doesn't explain all of the apparent disconnect between total jobs and households.I think the real reason for the changing ratio between total jobs and households is demographics. In the decade from 1994 through 2003 (data started in 1994), the BLS reported the number of people "55 and over" and "not in the labor force" increased by 4.3 million.  But in the last 9+ years,  from January 2004 until February 2013, the BLS reports the number of people over 55 and not in the labor force increased by 8.1 million. So more older people are leaving the labor force.

Personal Income & Spending Increased In February - The assumption by some economists that consumer spending and income is "rolling over" took a blow in today's February update from the Bureau of Economic Analysis. Disposable personal income (DPI) increased a respectable 1.1% last month while personal consumption expenditures (PCE) advanced 0.7% in February, or the most in five months. The year-over-year trends for both series looks sluggish, however, which certainly doesn't inspire confidence about the second quarter and beyond. But based on the numbers through February, it's still a tough case to argue that DPI and PCE are caught in a downward spiral.  Context is important these days because DPI has been unusually volatile lately, thanks in large measure to the impact of so-called "accelerated bonuses" in anticipation of tax hikes via the fiscal cliff, which was still a real and present danger in the final weeks of 2012. But as that one-time event recedes into history, along with the wild swings that were unleashed in its wake, DPI has returned to something approximating normal behavior and the recent trend of moderate growth appears to be intact once more.  The same can be said for consumer spending, with March data reflecting the biggest rise last September. Actually, today's relatively upbeat news on PCE isn't much of a surprise, given that the previously released February retail sales report was also the strongest in five months.

Personal Income Up 1.1%, Spending Up 0.7% for February 2013 - The February personal income and outlays report shows personal income bounced back by 1.1%  from last month's nose dive that was due to the payroll tax holiday expiration and fiscal cliff deal.   Disposable income increased 1.1%, but after adjusted for inflation, shows a monthly increase of 0.7%.   Consumer spending increased 0.7%, but when adjsted for inflation grew by 0.3% for the month.   The below graph shows the monthly percentage change of personal income going back to 1990.   Consumer spending is another term for personal consumption expenditures or PCE.   Real personal consumption expenditures are hugely important to economic growth as consumer spending is about 71% of GDP.   Real means adjusted for inflation. Graphed below are the monthly changes for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  The wild swings for the last four months are unusual.  We can also see it would have to be quite an increase in March in real consumer spending for  Q1 2013 GDP to be large.   Below are the real dollar amounts for real personal income (bright red), real disposable income (maroon) and real consumer spending (blue).  Notice by levels how much lower real disposable income is now.  Consumer spending encompasses things like housing, health care, food and gas in addition to cars and smartphones. In other words, most of PCE is most about paying for basic living necessities. Graphed below is the overall real PCE monthly percentage change.  January and February are the first two  months for Q1 where for both months real consumer spending has increased 0.3%. What people spent money on, adjusted for prices, or in real dollars, by monthly percentage change was:

  • durable goods: +0.1%
  • non-durable goods: +0.5%
  • services: +0.3%

Personal Income increased 1.1% in February, Spending increased 0.7% - The BEA released the Personal Income and Outlays report for February: Personal income increased $143.2 billion, or 1.1 percent ... in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $77.2 billion, or 0.7 percent. Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, the same increase as in January. ... PCE price index -- The price index for PCE increased 0.4 percent in February, compare with an increase of less than 0.1 percent in January. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent. ...Personal saving -- DPI less personal outlays -- was $310.9 billion in February, compared with $262.5 billion in January. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 2.6 percent in February, compared with 2.2 percent in January.  The following graph shows real Personal Consumption Expenditures (PCE) through February (2005 dollars).The dashed red lines are the quarterly levels for real PCE.  Using the two-month method to estimate Q1 PCE growth (first two months of the quarter), PCE was increasing at a 3.5% annual rate in Q1 2013 (using mid-month method, PCE was increasing at 3.2% rate). This suggests upward revisions to Q1 GDP forecasts

Real Disposable Income Per Capita: Up Only 0.2% Since February 2012 - Earlier today I posted my latest Big Four update featuring today's release of the January data Real Personal Income Less Transfer Payments. Now let's take a closer look at a somewhat different calculation of incomes: "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. The 1 percent nominal month-over-month increase is to some extent a rebound from the 4.1% January plunge that resulted from 2012 year-end tax strategies that saw a 1% increase in November and 2.7% in December.The BEA uses the average dollar value in 2005 for inflation adjustment. . For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Nominal disposable income is up 50.7% since then. But the real purchasing power of those dollars is up only 14.5%.Year-over-year disposable per-capita income is up 1.5%. But if we adjust for inflation, its only up 0.2%

US Savings Rate Near Record Low, Per Capita Disposable Income Almost Back To December 2006 Level - Both personal incomes and spending came in modestly higher than expected, with incomes rising 1.1% compared to an estimated 0.8% increase, while spending was up 0.7%, also higher than the 0.6% expected. But while the superficial headline grab did indicate a modestly better climate for both spending and incomes, it was a look under the cover once again that revealed the full extent of the pain that US consumers continue to find themselves in, over 5 years since the start of the second great depression. First, the bulk of the bounce in spending was driven by a surge in Non-Durable Goods, which rose by $48.5 billion in one month, and amounting to 61% of the total increase in personal outlays in February. This was the biggest monthly jump since the onset of the financial crisis: hardly inspiring much confidence for those companies which are wondering whether to ramp up capital expenditures and spending, especially since spending on Durable Goods declined by $400 million in February: a drop in discretionary spending due to the payroll tax cut. As Nomura explained, higher energy prices main reason for rise in spending last month. Gasoline, other energy goods consumption +8.07% in Feb., drove non-durable consumption up 1.88%; services spending gain driven by utilities, also reflects higher energy prices.

Restaurant Index declines in February - From the National Restaurant Association: Restaurant Performance Index Fell Below 100 in February as Sales and Traffic Levels Declined Due in large part to softer same-store sales and customer traffic levels, the National Restaurant Association’s Restaurant Performance Index (RPI) slipped below 100 in February. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.9 in February, down 0.8 percent from January’s five-month high. February represented the fourth time in the last five months that the RPI stood below 100, which signifies contraction in the index of key industry indicators.“The Restaurant Performance Index decline was due largely to softer sales and traffic results, which fell in February amid higher gas prices and the impact of the payroll tax hike,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “In addition, sales and traffic comparisons were more difficult due to the extra day in February 2012 as a result of Leap Year.”

US malls empty CMBS investors’ wallets - The Pier’s woes are hardly unique, given the weak US economy and the threat from internet shopping, but one ripple effect from its slide into bankruptcy is new. For the first time ever, investors in what was supposedly the safest tranche of a commercial mortgage-backed security (CMBS), a triple-A rated bond backed by properties including the Pier, have been told they will not be paid the interest they were promised. Investors were informed of the news this month, after the Pier failed to sell at auction, and strategists say that bond payouts could be curtailed for months to come. The wider question is whether the fate of these bonds is a harbinger of things to come for CMBS investors, as America’s malls face unprecedented difficulties. The $80.5m mortgage on the Pier was the largest in a pool of loans bundled together by Morgan Stanley and sold to investors in a $912m CMBS deal in 2007. It accounted for 7.7 per cent of the loan pool. Mortgage payments are used to pay monthly interest on all the CMBS, with the “super senior” tranche of bonds being paid first, and the remaining cash cascading down through lower-rated bonds like a waterfall. By certifying that super senior tranche triple-A, the credit rating agencies suggested there was close to zero chance the bonds would fail.

Customers Flee Wal-Mart Empty Shelves for Target, Costco - It’s not as though the merchandise isn’t there. It’s piling up in aisles and in the back of stores because Wal-Mart doesn’t have enough bodies to restock the shelves, according to interviews with store workers. In the past five years, the world’s largest retailer added 455 U.S. Wal-Mart stores, a 13 percent increase, according to filings and the company’s website. In the same period, its total U.S. workforce, which includes Sam’s Club employees, dropped by about 20,000, or 1.4 percent. Wal-Mart employs about 1.4 million U.S. workers. A thinly spread workforce has other consequences: Longer check-out lines, less help with electronics and jewelry and more disorganized stores, according to Hancock, other shoppers and store workers. Last month, Wal-Mart placed last among department and discount stores in the American Customer Satisfaction Index, the sixth year in a row the company had either tied or taken the last spot. The dwindling level of customer service comes as Wal- Mart (WMT) has touted its in-store experience to lure shoppers and counter rival Inc.

Something is rotten in the state of Walmart - And not the parasitic business model, or the sexist supervisors, or union busting and beating the workers down to the ground, or the depressing stores, the empty shelves, or the shoddy goods. No, management's gone completely round the twist: Wal-Mart Stores Inc is considering a radical plan to have store customers deliver packages to online buyers, a new twist on speedier delivery services that the company hopes will enable it to better compete with Inc. Wal-Mart does this at 25 stores currently, but plans to double that to 50 this year and could expand the program to hundreds of stores in the future. "This is at the brain-storming stage, but it's possible in a year or two,"  "I see a path to where this is crowd-sourced," Joel Anderson, chief executive of in the United States, said in a recent interview with Reuters. Can anybody who isn't a CEO and doesn't live in a gated community or a penthouse suite see the problem here? So, I order next month's case of frank 'n' beans online from Walmart, and the next day some meth freak in a pickup -- to carry the beans! -- shows up at my door, to case the house for copper piping? No thanks.

Consumer Confidence Falls in March — Americans are less confident in the economy than they were last month as massive government spending cuts stoke economic uncertainty. The Conference Board, a New York-based private research group, said its reading of consumer confidence fell in March after rebounding last month. The index is closely watched by economists because it makes a monthly gauge of how Americans are feeling about their jobs, incomes and other bread-and-butter issues. That’s important because consumer spending accounts for 70 percent of U.S. economic activity. The March confidence index fell to 59.7 from a revised reading of 68 in February. That’s also below the 68.7 reading that analysts polled by research firm FactSet expected. Anxiety about $85 billion in across-the-board government spending cuts that took effect March 1 caused the decline, the group says.

Consumer Confidence Tumbled in March - U.S. consumer confidence in March gave back almost all of its February rebound thanks to fiscal uncertainty, according to a report released Tuesday.The Conference Board, a private research group, said its index of consumer confidence declined about 8 points to 59.7 in March from a revised 68.0 in February, first reported as 69.6.Economists surveyed by Dow Jones Newswires had expected the index to fall, but only to 67.1. Consumer expectations for economic activity over the next six months dropped to 60.9 from a revised 72.4, originally reported as 73.8.

US budget cuts ‘hit consumer sentiment’ - US consumer confidence fell sharply this month, a closely-watched report has suggested. The Conference Board's index of consumer attitudes fell by 8.3 points to 59.7 in March. The research group primarily blamed the fall on the US federal budget cuts that came into force at the start of this month. Separate data on Tuesday from the Commerce Department was more positive, showing a rise in durable goods sales. Sale of such long-lasting factory products rose by 5.7% in February, the biggest increase in five months. Yet the Commerce Department also said that sales of new US homes fell in February. Sale of new residential properties fell to a seasonally adjusted 411,000 in February, 4.6% lower than the 431,000 sold in January, which had been a five-year high. The government cuts - called the "sequester" cuts - came into force earlier this month. They were due to the federal government running out of funds before a new budget was finally agreed by the US Senate on 20 March. "This month's retreat was driven primarily by a sharp decline in expectations, although consumers were also more pessimistic in their assessment of current conditions,"

Consumer Confidence Takes a Dive - The Latest Conference Board Consumer Confidence Index was released this morning based on data collected through March 14. The 59.7 reading was well below the consensus estimate of 66.9 reported by Today's number is a return to the weak level in January after an improvement last month. In context of this indicator's history, the consumer remains in a recessionary funk. Here is an excerpt from the Conference Board report. "Consumer Confidence fell sharply in March, following February's uptick. This month's retreat was driven primarily by a sharp decline in expectations, although consumers were also more pessimistic in their assessment of current conditions. The loss of confidence, particularly expectations, mirrors the losses experienced this past December and January. The recent sequester has created uncertainty regarding the economic outlook and as a result, consumers are less confident."  Consumers' appraisal of current conditions declined in March. Those saying business conditions are "good" decreased to 16.0 percent from 17.6 percent, while those stating business conditions are "bad" increased to 29.3 percent from 28.2 percent. Consumers' assessment of the labor market was mixed. Those claiming jobs are "plentiful" decreased to 9.4 percent from 10.1 percent, but those claiming jobs are "hard to get" edged down to 36.2 percent from 36.9 percent. Consumers are once again pessimistic about the short-term outlook. Those expecting business conditions to improve over the next six months decreased to 14.4 percent from 18.0 percent, while those anticipating business conditions to worsen increased to 18.3 percent from 16.6 percent. Consumers' outlook for the labor market was also less favorable. Those expecting more jobs in the months ahead declined to 12.3 percent from 16.1 percent, while those expecting fewer jobs increased to 26.6 percent from 22.1 percent. The proportion of consumers expecting their incomes to increase fell to 13.7 percent from 15.8 percent, while those expecting a decrease edged down to 18.0 percent from 19.3 percent.   [press release]

Consumer Confidence Index (the one that matters) Declines: The Conference Board's index of consumer confidence fell in March. What is noteworthy for those following the economy is that the current conditions index dropped by 3.5 points to 57.9. This component is the one that actually tracks current consumption reasonably closely...The recent drop in the current conditions index ... should be taken as a serious warning that consumers may be tightening their belts. That would not be a surprising response to the ending of the payroll tax cut, plus some amount of layoffs and cutbacks associated with the sequester. This is just one report among many, but it does suggest that the recovery optimists singing about having finally turned the corner may be wrong.

March Consumer Sentiment increases to 78.6 - The final Reuters / University of Michigan consumer sentiment index for March increased to 78.6 from the preliminary reading of 71.8, and up from the February reading of 77.6.  This was well above the consensus forecast of 72.5, but still fairly low. There are a number of factors that impact sentiment including unemployment, gasoline prices and, for 2013, the payroll tax increase and even politics (sequestration, default threats, etc).   The preliminary decline was probably related to both high gasoline prices and policy concerns. According to Reuters, concerns about policy have abated, and consumers expect "employment will accelerate through the rest of 2013".

Consumer Comfort in U.S. Declines for a Second Straight Week - Confidence among U.S. consumers fell for a second straight week as Americans’ views of the economy dimmed.  The Bloomberg Consumer Comfort Index dropped to minus 34.4 in the week ended March 24, a six-week low, from minus 33.9 in the prior period. The decrease was within the margin of error of 3 percentage points. A measure of the state of the economy declined to the lowest level since early February.  Concern may be growing that automatic cuts in government spending will slow the economy and prompt some companies to curb hiring. A 2 percentage-point increase in the tax used to fund Social Security that’s cut into take-home pay may also be weighing on sentiment.

Nearly Half of Workers Didn’t Notice Higher Tax in 2013 - One puzzler this quarter is how consumer spending and confidence have rebounded so quickly after higher tax rates reduced take-home pay this year. One explanation is that almost half of workers haven’t yet noticed the change. But their delayed recognition could weaken consumer spending later on. To avoid the fiscal cliff, Congress allowed the rate on payroll taxes for Social Security to return to its normal 6.2% this year, after two years at 4.2%. Upper-income earners also saw higher income-tax rates kick in. Yet according to a survey released Monday by personal-finance website, 48% of U.S. consumers didn’t notice the change in their 2013 paychecks. Even stranger, 59% of lower-income workers–the ones most likely living paycheck-to-paycheck–didn’t notice.

Social Security payroll contribution not a problem - This item confirms that the Northwest Plan for Social Security would work rather well for Congress, Social Security, and beneficiaries. Beltway conventional wisdom thought otherwise. My own reaction was of puzzlement by the Beltway conventional wisdom. Fiscal Times reports: We’ve already seen evidence that consumers have largely shrugged off this year’s expiration of the payroll tax holiday. A new survey from suggests one reason, beyond the housing rebound and stock market rally: many simply haven’t seen the hit to their paychecks. Tax hike? What tax hike? The payroll tax rate reverted to 6.2 percent this year after two years at 4.2 percent. Yet nearly half of working Americans surveyed (48 percent) said they haven’t noticed the higher taxes. Another 7 percent said they haven’t been affected.Vital Signs Chart: Gas Prices Drift Lower in March - Gasoline prices inched down in the past week, with the average cost of a gallon of regular falling to $3.680 from $3.696 during the previous week. After rising nearly 50 cents a gallon throughout the first two months of 2013, gasoline prices have eased thus far in March. Even the highs this year didn’t reach the levels of six months ago, when gas was above $3.80 a gallon.

The Oil choke collar loosens - A couple of years ago I wrote that a fair target for when the Oil choke collar would start to loosen was this year, i.e., 2013. The recent evidence is that the loosening is indeed starting. The most important information is that the price of gas has been declining on an annual basis since its peak of $4.25 in 2008. Specifically, its peak in 2011 was less than the peak in 2008. The peak in 2012 was less than 2011, and the peak so far this year is less than in 2012 (h/t gasbuddy):The news is even better when we consider the prices of gas as a share of average earnings. The following graph divides the price of a gallon of gas by average hourly earnings for nonsupervisory workers to give us the "real" gas price for Joe Sixpack: While gas prices are still higher than they were before the 2008-09 recession, each successive peak has been less, meaning that even at its last couple of peaks, it has taken less and less of a bite out of the average consumer's wallet. Another way to look at the same data is to calculate real, inflation adjusted wages with (red line) and without (blue line) the effect of gas prices, which is what the next graph does:

Durable Goods Orders Rebound In February - New orders for durable goods increased 5.7% in February, the best month since last September, the Census Bureau reports. But the good news was marred by a 2.7% retreat in business investment (new orders for capital goods less defense and aircraft) last month. The mixed news extends to the year-over-year changes, with new orders overall rising 3.8% vs. year-earlier levels while business investment slumped 1.1% in February compared with a year ago. Today’s update isn’t going to impress anyone, but the numbers du jour at least provide some support for thinking that the long-running deceleration in growth for new orders may have run its course. It’s worth mentioning that durable goods orders have been out of step with upbeat economic news from elsewhere in the economy in recent months. Indeed, most of the February data skews positive, as I noted last week. The weakness in durable goods orders shouldn't be ignored, but so far it's proven to be a misleading indicator of the broad economic trend.  Meantime, today's update suggests that the long-running slide in the growth rate for durable goods has bottomed out, as the next chart suggests. Yes, that's just speculation at this point. But if the rest of the economic reports continue to hold up in the March releases, it's reasonable to wonder if durable goods orders will mount a rebound in the months ahead.

Durable Goods Orders for February Rise, But Core Goods Orders Shrink - The March Advance Report on February Durable Goods was released this morning by the Census Bureau. Here is the Bureau's summary on new orders: New orders for manufactured durable goods in February increased $12.4 billion or 5.7 percent to $232.1 billion, the U.S. Census Bureau announced today. This increase, up five of the last six months, followed a 3.8 percent January decrease. Excluding transportation, new orders decreased 0.5 percent. Excluding defense, new orders increased 4.5 percent. Transportation equipment, up two of the last three months, drove the increase, $13.3 billion or 21.7 percent to $74.4 billion. This was led by nondefense aircraft and parts, which increased $9.0 billion. Download full PDF The latest new orders number at 5.7 percent was above the consensus of 3.8 percent. Year-over-year new orders are up 7.8 percent. However, if we exclude both transportation and defense, "core" durable goods were down 2.5 percent. Year-over-year core goods are up only 2.0 percent. The first chart is an overlay of durable goods new orders and the S&P 500..An overlay with unemployment (inverted) also shows some correlation. We saw unemployment begin to deteriorate prior to the peak in durable goods orders that closely coincided with the onset of the Great Recession, but the unemployment recovery tended to lag the advance durable goods orders.

Durable Goods Not So Bad, but Not So Good - Some Wall Street economists are looking at the bright side of Tuesday’s report on durable goods orders, which showed an overall increase of 5.7% from January to February and beat forecasts. The idea is that consumers and businesses are buying long-lasting products in greater quantities, suggesting growth in the U.S. economy. Yet more sober minds can’t ignore the big jump in aircraft and defense orders. Boeing Co. alone said it recorded 179 aircraft orders in February, compared with just two a month earlier. Volatile orders of defense capital goods also jumped, but not to the lofty levels of December, when the military orders spiked on concerns about the fiscal cliff.

Capital Spending Renaissance Deferred Once More As Nondefense Cap Orders Ex-Aircraft Tumble In February - While last month's durable goods was a huge headline miss of -5.2% due to a collapse in Boeing aircraft orders (just 2), the internals were strong with the core capex spending for nondefense capital goods ex-aircraft soaring 6.3%. Today, the situation is flipped with the headline number soaring by 5.7%, trouncing expectations of a 3.9% print. However, this was due entirely to the unbearably volatile transportation series, which in February saw a 95% surge in Nondefense aircraft and parts and a just as massive 68% surge in defense capital good new orders, driven once again by Boeing which reported nearly 200 airplane orders. As a result durables ex-transportation dipped by 0.5%, on expectations of a 0.6% increase, while the true core capex: non-defense capital goods orders excluding aircraft tumbled by -2.7% on expectations of a modest -1.1% decline. And with that last month's rise in Year-over-Year core Capex is over and the trendline continues into negative comps territory once more. So much for the great capex renaissance.

Forecasts: Solid Vehicle Sales in March - The automakers will report March vehicle sales this coming Monday, April 1st. Here are a few forecasts: From Reuters: US industry March auto sales tracking above 15 mln -Toyota exec "So far, this month of March looks to be very good for all manufacturers," [Bob Carter, Toyota's senior vice president for U.S. auto operations] told industry executives. He said industry sales are tracking up 6.6 percent in March, with an annual rate of 15.2 million to 15.3 million vehicles.From TrueCar: March 2013 New Car Sales Expected to Be Up Almost Five Percent According to TrueCar; March 2013 SAAR at 15.42M, Highest March SAAR Since 2007 The March 2013 forecast translates into a Seasonally Adjusted Annualized Rate ("SAAR") of 15.42 million new car sales ... up from 14.1 million in March 2012.From Kelley Blue Book: March New-Car Sales To Hit Highest Monthly Total Since August 2007 According To Kelley Blue Book New-car sales will remain steady at a 15.2 million seasonally adjusted annual rate (SAAR) in March. And from Reuters: U.S. auto sales could rise 8 pct in March -research firms Sales of new cars and trucks in March are expected to rise to 1,465,100 vehicles, while the annual sales pace is forecast to hit 15.3 million vehicles, J.D. Power and LMC said in a joint report released on Thursday. Since November, the annual rate has ranged from 15.3 million to 15.5 million.

Dallas Fed: Regional Manufacturing Activity increased in March - From the Dallas Fed: Texas Manufacturing Activity Picks Up Texas factory activity increased in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 6.2 to 9.9, indicating a slightly faster pace of output growth. The share of manufacturers noting a decrease in production fell to its lowest level in two years. Other survey measures also suggested a pickup in manufacturing activity, with the new orders and shipments indexes moving up strongly in March after dipping in February. The new orders index came in at 8.7, up from 2.8, and the shipments index rose 8 points to 10.6. Labor market indicators remained mixed. The employment index has been in positive territory so far in 2013 and edged up to 2.6 in March. ... The hours worked index remained slightly negative but ticked up to from –3 to –2.4. All of the regional manufacturing surveys released so far have indicated expansion in March, and this suggests a pickup in overall manufacturing following a weak period over the last 6 to 8 months.

Kansas City Fed: Regional Manufacturing contracted slightly in March - This is the last of the regional manufacturing surveys for March, and the Kansas City region was the only area showing contraction. From the Kansas City Fed: Tenth District Manufacturing Survey Fell at a Slower Rate The month-over-month composite index was -5 in March, up from -10 in February ... The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexes. ... The production index increased from -11 to -1, and the shipments and new order indexes recorded levels of 0, the highest value in seven months. In contrast, the employment index posted its lowest level since July 2009, and the new orders for exports index also fell.  Most future factory indexes improved considerably in March. The future composite index jumped from 4 to 14, and the future production, shipments, new orders, and order backlog indexes also increased. The future employment index rose from 2 to 12, its highest level in six months. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Chicago Manufacturing Activity Expands at Slower Pace in March - Manufacturing activity in the Chicago area expanded at a slower pace in March, the Institute for Supply Management-Chicago said Thursday. ISM’s business index fell to a reading of 52.4 from 56.8 in February. Readings of more than 50 indicate expansion. Economists had forecast a reading of 56.5, Bloomberg News reported. Chicago is a major center of U.S. manufacturing, which is one of trucking’s largest and most important customers.

Goldman Sachs: Sorry, U.S. manufacturing isn’t coming back - One of the hottest trend stories in recent years has been the idea that U.S. manufacturing is on the verge of a large, permanent comeback. Labor costs in China are rising, while U.S. energy costs are dropping. So, the logic goes, companies will return home. Charles Fishman dubbed it “The Insourcing Boom.” The only problem? This boom hasn’t really shown up in the data — at least not yet. Yes, U.S. manufacturing has expanded and added jobs since 2009 as the sector recovers from the recession. But that appears to be a cyclical bounce-back and not any sort of long-term shift.At least, that’s Jan Hatzius’s conclusion in a new research note for Goldman Sachs. “Evidence for a structural renaissance is scant so far,” he writes. Sam Ro digs out a bunch of charts from Hatzius’s note over at Business Insider. This first one shows that U.S. exports — a good proxy for manufacturing strength — have risen modestly in response to a falling U.S. dollar since 2009, as expected, but that’s about it. There’s nothing to suggest a sustained structural improvement beyond that:

“Offshored” Jobs Are Coming Back. But How Many? - Americans love a comeback, including when its factories coming back from overseas. But there’s little hard data about the size or scope of this “reshoring” phenomenon. Enter Harry Moser. Mr. Moser is the retired executive of a machine tool company who created the Reshoring Initiative, a Chicago-area group that promotes and tracks cases of reshoring across the U.S. He estimates that between 2010 and 2012, about 50,000 jobs were created in the U.S. because of the trend—which equates to 10% of the manufacturing jobs created in that period.Mr. Moser admits the numbers are squishy. He calculates it by tracking every case of reshoring he can find in the media or in company reports. Companies aren’t shy about trumpeting these moves, given their favorable public relations value, so it’s easy to compile.

Do intellectual property rights on existing technologies hinder subsequent innovation? =  A recent study (Journal of Political Economy) suggests that some types of intellectual property rights discourage subsequent scientific research."The goal of intellectual property rights – such as the patent system – is to provide incentives for the development of new technologies. However, in recent years many have expressed concerns that patents may be impeding innovation if patents on existing technologies hinder subsequent innovation," said Heidi Williams, author of the study. "We currently have very little empirical evidence on whether this is a problem in practice."Williams investigated the sequencing of the human genome by the public Human Genome Project and the private firm Celera. Genes sequenced first by Celera were covered by a contract law-based form of intellectual property, whereas genes sequenced first by the Human Genome Project were placed in the public domain. Although Celera's intellectual property lasted a maximum of two years, it enabled Celera to sell its data for substantial fees and required firms to negotiate licensing agreements with Celera for any resulting commercial discoveries. ...Williams' conclusion points to a persistent 20-30 percent reduction in subsequent scientific research and product development for those genes held by Celera's intellectual property.

Is "Intellectual Property" a Misnomer? - The terminology of "intellectual property" goes back to the eighteenth century. But once you have used the "property" label, after all, you are implicitly making a claim about rights that should be enforced by the broader society. But "intellectual property"  is a much squishier subject than more basic applications of property, like whether someone can move into your house or drive away in your car or empty your bank account. ... Is it really true that using someone else's invention is the actually the same thing as stealing their sheep? If I steal your sheep, you don't have them any more. If I use your idea, you still have the idea, but are less able to profit from using it. The two concepts may be cousins, but they not identical.  Those who believe that patent protection has in some cases gone overboard, and is now in many industries acting more to protect established firms than to encourage new innovators, thus refer to "intellectual property as a "propaganda term." For a vivid example of these arguments, see "The Case Against Patents," by Michele Boldrin and David K. Levine, in the Winter 2013 issue of my own Journal of Economic Perspectives.

The Boys Club of Tech Perpetuated by Foreign Worker Visas - It is 2013 and a dirty little secret is once again coming to light.  Silicon valley is devoid of women computer scientists and engineers.   It all started at a tech conference where two men in the audience were engaging in tech's typical juvenile sex jokes chatter with a woman techie sitting right in front of them.  She, unlike many women, who suffer in silence when alienated and ostracized by such continual boys club dialog, tweeted the banter to the world, along with a photo of the guys.   As a result of her very public call out she was fired.  Now this is a woman who already ran a blog, But you're a girl, known to speak out about misogynist tech culture and clearly her employer knew that upon hire.  Yet the kneejerk reaction of Silicon valley is to fire the woman, belittle the woman, blame the woman, bemoan the woman instead of being aware women have to listen to male geek sex jokes daily.  The two men were doing what is a daily practice in Silicon valley, talking loudly about forking and dongles, banal technology concepts, as sexual innuendo.  Other women techies called out the firing.  With that, what should be front page news instead of the above absurdity is this Congressional testimony about foreign guest workers being almost exclusively male.  Corporations claim a worker shortage, all the while increasing the barrier to entry for women.

Free Trade and Unrestricted Capital Flow: How Billionaires Get Rich and Destroy the Rest of Us - from naked capitalism.  Yves here. This post highlights an issue that gets far too little attention: how the “free trade” agenda has been used to promote a capital mobility agenda, and why that works to the detriment of ordinary citizens. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high international capital flows are strongly correlated with more frequent and severe financial crises. A very important BIS paper that has not gotten the attention it deserves, “Global imbalances and the financial crisis: Link or no link?” Claudio Borio and Piti Disyatat, discusses how the crisis was the direct result of what they call excess financial elasticity. That means having a banking system that was way too accommodating to the pet wishes of bank customers. From Andrew Dittmer’s translation of the paper from economese to English (the numbers are page references): The idea of “national savings” or “current account surplus” refers to the total amount of exports sold minus the total amount of imports sold (more or less). The “excess savings” theory holds that this excess had to have been financed somehow, and so presumably by countries in surplus, like China. However, for the US in 2010, the total amount of financial flows into the US was at least 60 times the current account deficit (9), counting only securities transactions. The current account deficit is a drop in the bucket. Why would anyone assume it had anything to do with the picture at all? Moreover, if the “savings glut” theory was correct, we would expect there to be certain historical correlations between the following variables: (a) current account deficits of the US, (b) US and world long-term interest rates, (c) value of the US dollar, (d) the global savings rate, (e) world GDP. There aren’t (4-6, see graphs). You would also expect credit crises to occur mainly in countries with current account deficits. They don’t..

Mistaking Men for Machines – How Neoclassical Economics Relies on Computer Science to Misunderstand Human Communication - We have a lot to be thankful for today that we owe to Alan Turing – who is generally recognised as among the first, if not the first, computer scientist. But, on the other hand, we also have a lot that we can trace back to Turing that we should be in no way grateful for as it has filled our minds with stupidities and our universities with people talking nonsense. Without detracting from Turing’s undoubtedly important achievements we here focus on the latter and how some of Turing’s ideas came to infect the human sciences in general and economics in particular.

Weekly Initial Unemployment Claims increase to 357,000 - The DOL reports: In the week ending March 23, the advance figure for seasonally adjusted initial claims was 357,000, an increase of 16,000 from the previous week's revised figure of 341,000. The 4-week moving average was 343,000, an increase of 2,250 from the previous week's revised average of 340,750.  This report included the annual revision. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased to 343,000 - still near the post-recession low. Weekly claims were above the 340,000 consensus forecast.  Note: This might be the beginning of unemployment claims being impacted by the "sequestration" budget cuts.

Weekly Unemployment Claims Up 16,000, Higher than Forecast - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 357,000 new claims number was a 16,000 increase from the previous week's 341,000, an upward adjustment from the previously reported 336,000. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, declined rose by 2,500 to 343,000. This week's release reflects the annual revision to the weekly unemployment claims seasonal adjustment factors. Here is the official statement from the Department of Labor: In the week ending March 23, the advance figure for seasonally adjusted initial claims was 357,000, an increase of 16,000 from the previous week's revised figure of 341,000. The 4-week moving average was 343,000, an increase of 2,250 from the previous week's revised average of 340,750.  The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending March 16, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending March 16 was 3,050,000, a decrease of 27,000 from the preceding week's revised level of 3,077,000. The 4-week moving average was 3,072,500, a decrease of 13,000 from the preceding week's revised average of 3,085,500.  Today's seasonally adjusted number was well above the consensus estimate of 338K. Here is a close look at the data over the past few years (with a callout for the several months), which gives a clearer sense of the overall trend in relation to the last recession and the trend in recent weeks.

Jobless claims rise. More than 5 million on unemployment rolls - Initial jobless claims increase 16,000 to reach 357,000. Continued unemployment claims keep declining, but nearly 5.4 million Americans are still on state or federal unemployment rolls. Today’s jobless claims report showed a notable increase to initial unemployment claims and a decline to continued unemployment claims as initial claims trended well below the closely watched 400K level. Seasonally adjusted “initial” unemployment claims increased by 16,000 to 357,000 claims from 341,000 claims for the prior week while seasonally adjusted “continued” claims declined by 27,000 claims to 3.050 million resulting in an “insured” unemployment rate of 2.4%. Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls. Currently there are some 1.90 million people receiving federal “extended” unemployment benefits. Taken together with the latest 3.46 million people that are currently counted as receiving traditional continued unemployment benefits, there are 5.36 million people on state and federal unemployment rolls.

The Same-Old, Same-Old Labor Market -  Atlanta Fed's macroblog - In his March 24 Wall Street Journal piece on declining government payrolls, Sudeep Reddy offers up a key observation:The cuts in the public-sector workforce—at the federal, state and local levels—marked the deepest retrenchment in government employment of civilians since just after World War II... down by about 740,000 jobs since the recession ended in June 2009. At the same time, the private sector has added more than 5.2 million jobs over the course of the recovery.As the Journal article notes, the story of shrinking government employment combining with private-sector payroll expansion has been remarkably consistent for much of the recovery. ...It is worth pointing out that the monthly average of 17,000 state, local, and federal government jobs lost since March 2010 has been nearly matched by average monthly increases of better than 14,000 jobs in manufacturing, a sector that persistently shed jobs in the previous recovery. The replacement of private- for public-sector employment has generated 175,000 to 185,000 net jobs per month in both 2011 and 2012. To put one perspective on that figure, at current labor force participation rates (along with some other assumptions and caveats), that pace would be sufficient to reach the Federal Open Market Committee's 6.5 percent unemployment threshold by sometime in spring 2015 (as you can verify yourself with the Atlanta Fed's Jobs Calculator).

Is Job Polarization Holding Back the Labor Market? – NY Fed - More than three years after the end of the Great Recession, the labor market still remains weak, with the unemployment rate at 7.7 percent and payroll employment 3 million less than its pre-recession level. One possibility is that this weakness is a reflection of ongoing trends in the labor market that were exacerbated during the recession. Since the 1980s, employment has become increasingly concentrated among the highest- and lowest-skilled jobs in the occupational distribution, due to the disappearance of jobs focused on routine tasks. This phenomenon is called job polarization.   An occupation is routine if its main tasks require following explicit instructions and obeying well-defined rules. These tend to be middle-skilled jobs. If the job involves flexibility, problem solving, or creativity, it’s considered nonroutine. Job polarization occurs when employment moves to nonroutine occupations, a category that contains the highest- and lowest-skilled jobs. The chart below shows the employment share of routine and nonroutine jobs in the United States starting from 1976. The share of routine occupations declined from 0.6 percent in 1976 to 0.4 percent in 2012, resulting in job polarization.

Walmart Sues Groups for Protesting Its Poor Working Conditions - In what some see as an attempt to muzzle critics, Walmart is suing a union and other groups over protests that sought to highlight the retail behemoth's low pay and poor working conditions. The lawsuit targets the 1.3 million-strong United Food and Commercial Workers International Union (UFCW), OUR Walmart, which is made up of "associates" of Walmart, and another group over repeated protest actions in over a dozen states, Bloomberg reports.

Freelancers Union Tackles Concerns of Independent Workers - SOON after landing a job at a Manhattan law firm nearly 20 years ago, Sara Horowitz was shocked to discover that it planned to treat her not as an employee, but as an independent contractor.Her status meant no health coverage, no pension plan, no paid vacation — nothing but a paycheck. She realized that she was part of a trend in which American employers relied increasingly on independent contractors, temporary workers, contract employees and freelancers to cut costs. Somewhat bewildered, somewhat angry, she and two other young lawyers who were also hired as independent contractors jokingly formed what they called the “Transient Workers Union,” with the facetious motto, “The union makes us not so weak.”  Ms. Horowitz’s grandfather was a vice president of the International Ladies’ Garment Workers’ Union, and her father was a labor lawyer. So it was perhaps not surprising that she responded to her rising outrage by deciding to organize a union. What she organized, however, was a newfangled version. The Freelancers Union, with its oxymoronic name, is a motley collection of workers in the fast-evolving freelance economy — whether lawyers, software developers, graphic artists, accountants, consultants, nannies, writers, editors, Web site designers or sellers on Etsy.

Why So Many Jobs Are Crappy - Work, being a core part of life, is meant to be interesting, engaging, and meaningful. Otherwise, why are we wasting our time on this planet? Yet, for many, work is not living up to its name. Work of the good kind is less and less on offer in the jobs being created. I've been reflecting on possible reasons why, and decided it's really simple. The problem is not the jobs. It's us. Most humans are simply not the kind of people a boss would want to hire. Take yourselves as a case in point. I'm guessing you’re the kind of people who'd prefer to feel needed rather than expendable. Well, that kind of attitude won't do. Bosses want to keep your wages down, and that would be harder to do if you were given opportunities to make yourselves invaluable and near on irreplaceable. Bosses need to keep their options open in case some of you get ideas about better pay and conditions, or just generally become 'difficult' or, dare I say, 'bolshie'. You know it's true. A boss needs to be able to dump you at the drop of a hat. Maybe it's to boost profits. Maybe it's to cut costs. Or maybe it's just because it feels good. And a boss needs to be able to dump you without it having detrimental effects. There must be ready replacements, eager to crank it up, the moment you're out the door. And if morale suffers, because the buddies you left behind miss you, the boss will want to send them packing too, and bring in a fresh batch of wage-slaves. Quite simply, there is little place for satisfying roles, the kind where you get to learn more and more interesting stuff over time.

Working as designed: high profits and stagnant wages -- Newly released data on corporate profitability for 2012 show the continuation of historic levels of profitability despite excessive unemployment and stagnant wages for most workers. Specifically, the share of capital income (such as profits and interest, which are hereafter referred to as ‘profits’) in the corporate sector increased to 25.6 percent in 2012, the highest in any year since 1950-51 and far higher than the 19.9 percent share prevailing over 1969-2007, the five business cycles preceding the financial crisis.This historic share of income going to profits reflects historically high returns on investments, meaning more profit per dollar of assets, as we document in The State of Working America. A higher profits share could result from an economy becoming more capital-intensive, where more assets are associated with each worker in the production of goods and services. However, the economy has become less capital-intensive since 2007 and is now only modestly more capital-intensive than it was over the preceding four decades. Profitability used to be lower when there was high unemployment, but in this downturn we have already seen the share of income going to profit exceed the high point reached in the last recovery or at any time in the last five recoveries. We now have an economy built to assure high corporate profitability even when it’s operating far below capacity and when most families and workers are faring poorly. This is further evidence that there is a remarkable disconnect between the fortunes of business and those best-off (high income households) and the vast majority.

Falling Labor Share of Income - I've posted on this blog in the past about how the U.S. economy has experienced a declining labor share of income. The just-released 2013 Economic Report of the President, from the Council of Economic Advisers, points out that this pattern holds across countries--and in fact is on average more severe in other developed economies than in the United States. The ERP writes (with citations omitted for readability): "The “labor share” is the fraction of income that is paid to workers in wages, bonuses, and other compensation. ... The labor share in the United States was remarkably stable in the post-war period until the early 2000s. Since then, it has dropped 5 percentage points. ....  The decline in the labor share is widespread across industries and across countries. An examination of the United States shows that the labor share has declined since 2000 in every major private industry except construction, although about half of the decline is attributable to manufacturing. Moreover, for 22 other developed economies (weighted by their GDP converted to dollars at current exchange rates), the labor share fell from 72 percent in 1980 to 60 percent in 2005." Here's a figure showing the change.

Real Wages Decline; Literally No One Notices - You read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was  more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak. Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year. Below are the gory details. The data source is Appendix Table B-47, "Hours and Earnings in Private Non-Agricultural Industries, 1966-2012." The table has been completely revised since last year's edition of the report. The data is for production and non-supervisory workers in the private sector, about 80% of the private workforce, so we are able to focus on what's happening to average workers rather than those with high incomes.. I use weekly wages rather than hourly because there has been substantial variation (with a long-term decline) in the number of hours worked per week, from 38.5 in 1966 to 33.7 in 2012. The table below takes selected years to reduce its size.

US median annual income falls 1.1% in February, down 6% since the start of the recovery - Some horrible statistics from The New York Times:

    • – For the first time in over a year, median annual income fell by a statistically significant amount from the previous month, according to a report from Sentier Research, a company run by former Census Bureau officials.
    • – Median annual household income (pretax) in February 2013 was $51,404, about 1.1 percent (or $590) lower than the January 2013 level of $51,994. The numbers are all pretax, and are adjusted for both inflation and seasonal changes.
    • – February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available.

Reversing those numbers and boosting growth/job creation should be Washington’s top goal, not making sure the 2023 budget deficit is 0.0% rather than 0.5% or 0.9% through fiscal legerdemain or questionable assumptions.

Median Household Income Down 7.3% Since Start of Recession - For the first time in over a year, median annual income fell by a statistically significant amount from the previous month, according to a report from Sentier Research.Median annual household income in February 2013 was $51,404, about 1.1 percent (or $590) lower than the January 2013 level of $51,994. The numbers are all pretax, and are adjusted for both inflation and seasonal changes.. The analysts at Sentier Research (a company that provides demographic and income analysis, run by former Census Bureau officials) note that median income has been depressed recently by inflation. While inflation is still quite low, income growth has been so weak that even very little inflation is enough to wipe out whatever gains households are seeing in their paychecks.The longer-run trends are even more depressing.  February’s median annual household income was 5.6 percent lower than it was in June 2009, the month the recovery technically began; 7.3 percent lower than in December 2007, when the most recent recession officially started; and 8.4 percent lower than in January 2000, the earliest date that this statistical series became available.

‘Trickle-down consumption’: How rising inequality can leave everyone worse off -As income inequality in the United States has soared and median wages have flatlined since 1980, economists have spent a lot of time debating why the top 1 percent have done so much better than everyone else. Is policy to blame? The decline of labor? Technology? An equally pressing question, though, is what those increasingly hefty incomes at the very top mean for the lives of everyone else. And a big, newly revised paper (pdf) by the University of Chicago’s Marianne Bertrand and Adair Morse finds that there is a connection, but not a happy one: The gains of the rich have come alongside losses for the middle class. As the wealthy have gotten wealthier, the economists find, that’s created an economic arms race in which the middle class has been spending beyond their means in order to keep up. The authors call this “trickle-down consumption.” The result? Americans are saving less, bankruptcies are becoming more common, and politicians are pushing for policies to make it easier to take on debt.

Do Millennials Stand a Chance in the Real World? -  In the past year or so, data have come in regarding how my own generation, often called Generation Y, or the millennials, has adapted to our once-in-a-lifetime financial crisis — the one that battered career prospects, drove hundreds of thousands into the shelter of schools or parents’ basements and left hundreds of thousands of others in continual underemployment. And some of that early research suggests that we, too, have developed our own Depression-era fixation with money.  The millennials have developed a reputation for a certain materialism. In a Pew Research Center survey in which different generations were asked what made them unique, baby boomers responded with qualities like “work ethic”; millennials offered “clothes.” But, according to new data, even though the recession is over, this generation is not looking to gorge; instead, they are the kind of hungry that cannot stop thinking about food. “Call it materialism if you want,” said Neil Howe, an author of the 1991 book “Generations.” It seems more like financial melancholy. “They look at the house their parents live in and say, ‘I could work for 100 years and I couldn’t afford this place,’ ” Howe said. “If that doesn’t make you focus on money, what would? Millennials have a very conventional notion of the American dream — a spouse, a house, a kid — but it is not going to be easy for them to get those things.” This condition is becoming particularly severe for the group that economists call younger millennials: the young adults who entered the job market in the wake of the recession, a period in which the unemployment rate among 20- to 24-year-olds reached 17 percent, when graduate school competition grew more fierce and credit standards tightened. Many also saw their parents struggle through a pay cut, a job loss or another economic disruption during the recession.

Warning: Wealth Comparisons by Age Group Through Time Are Bogus! - Dean Baker - The NYT commits the common sin of making such comparisons in an otherwise useful piece on the economic plight of millennials. It tells us: "The average net worth of someone 29 to 37 has fallen 21 percent since 1983; the average net worth of someone 56 to 64 has more than doubled." Of course we should be looking at medians, not averages, since Bill Gates' immense wealth doesn't help the rest of his age cohort. When we look at medians, the rise in wealth for older workers is much smaller, trailing the growth of the economy over this period. However even this number (10 percent for workers between the ages of 55 and 64) hugely overstates the growth in wealth. In 1984 the typical older worker would have had a defined benefit pension, the value of which is not included in these data. A relatively small share of older workers today would have a defined benefit pension. Therefore, this comparison hugely overstates the gains in wealth for older workers over the last quarter century. Median wealth for those approaching retirement, which includes the value of equity in their home, is roughly $170,000. This means that the median older household can use every penny they have to completely pay off their mortgage. Then they would have nothing left to support themselves in retirement except their Social Security. Everyone should understand this is the positive vision of wealth presented in this piece.

Wealth and Motivations for Saving - In a recent column in the Atlantic called "Building the Wealth of the Poor and Middle Class," Noah Smith suggests a few ways to improve the unequal distribution of wealth in America. He notes that "one obvious thing we could do to make wealth more equal is - surprise! -redistribution...But he adds (emphasis added): The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return...In addition to "nudging" middle-class and poor Americans to save more, we can help them get a better return on their assets -- the second thing that has a huge effect on wealth in the long run.  I think there is good reason to believe that a lot of people don't understand the importance of getting a good return on their assets. About 2000 households take the survey. In one question they are asked  to rate how important it is "To save so that I generate income from interests or dividends" on a scale from 1 to 7, with 1 being "very unimportant" and 7 being "very important." They can also choose "not applicable." In 2012, the most common response to this question was 1, that is, that generating return is a very unimportant consideration in household's saving behavior. 

Income Inequality: 1 Inch to 5 Miles: The rich really are getting richer while the vast majority is getting poorer. These facts should be at the center of any debate about changes in tax law and spending with the March 1 budget sequestration deadline just four days off. The income growth and shrinkage figures come from analysis of the latest IRS data by economists Emmanuel Saez and Thomas Piketty, who have won acclaim for their studies of worldwide income patterns over the last century. In 2011 entry into the top 10 percent, where all the gains took place, required an adjusted gross income of at least $110,651. The top 1 percent started at $366,623. The top 1 percent enjoyed 81 percent of all the increased income since 2009. Just over half of the gains went to the top one-tenth of 1 percent, and 39 percent of the gains went to the top 1 percent of the top 1 percent. Ponder that last fact for a moment -- the top 1 percent of the top 1 percent, those making at least $7.97 million in 2011, enjoyed 39 percent of all the income gains in America. In a nation of 158.4 million households, just 15,837 of them received 39 cents out of every dollar of increased income. That extreme concentration, however, is far from the most jaw-dropping figure that can be distilled from the new Saez-Piketty analysis. That requires a long-term comparison of those at or near the top with the bottom 90 percent.

Income Growth For Bottom 90 Percent Of Americans Averaged Just $59 Over 4 Decades: Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation), according to an analysis by Pulitzer Prize-winning journalist David Cay Johnston for Tax Analysts. During the same period, the average income for the top 10 percent of Americans rose by $116,071, Johnston found. To put that into perspective: if you say the $59 boost is equivalent to one inch, then the incomes of the top 10 percent of Americans rose by 168 feet ----- Incomes for the bottom fifth of Americans, for instance, grew about 20 percent between 1979 and 2007, according to a 2011 study from the Congressional Budget Office. During the same period, members of the top 1 percent saw their incomes grow by 275 percent. Another way to illustrate the huge disparity: the six heirs to the Walmart fortune had a net worth equivalent to the bottom 41.5 percent of Americans combined in 2010, according to an analysis from Josh Bivens at the Economic Policy Institute.

Income Growth For Bottom 90% In America Since 1966 Is... $59! - We’ve all seen these statistics before in one form or another, but David Cay Johnston does an excellent job going into more detail for us in an article he published late last month.  As he correctly notes, when things get extreme like this you ultimately end up with extreme social unrest.  Furthermore, as we have pointed out for years and years, this kind of disparity does not happen under free markets with rules and regulations applied equally to all.  It happens under totalitarian societies, whether fascism, communism or crony capitalist corporatism (which is the model in the USA).  It only happens when a very small oligarch class takes over the political process of a nation and then uses it to game the system.

Incomes of bottom 90 percent grew $59 in 40 years - During the same period, average income for the top 10 percent of Americans rose by $116,071.  Pulitzer Prize-winner David Cay Johnston has highlighted yet more statistics that illuminate the spike in income inequality in the U.S. in recent decades. Flagging Johnston’s analysis, HuffPo noted Monday, “Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation)… During the same period, the average income for the top 10 percent of Americans rose by $116,071.”

Incomes of Bottom 90 Percent Grew $59 in 40 Years; Top 10% grew $116,071 - Pulitzer Prize-winner David Cay Johnston has highlighted yet more statistics that illuminate the spike in income inequality in the U.S. in recent decades. Flagging Johnston’s analysis, HuffPo noted Monday, “Incomes for the bottom 90 percent of Americans only grew by $59 on average between 1966 and 2011 (when you adjust those incomes for inflation)… During the same period, the average income for the top 10 percent of Americans rose by $116,071.” Johnston offered a visual analogy for the disparity in a column for Tax Analysts last month: The vast majority averaged a mere $59 more in 2011 than in 1966. For the top 10 percent, by the same measures, average income rose by $116,071 to $254,864, an increase of 84 percent over 1966. Plot those numbers on a chart, with one inch for $59, and the top 10 percent’s line would extend more than 163 feet. Now compare the vast majority’s $59 with the top 1 percent, and that line extends for 884 feet. The top 1 percent of the top 1 percent, whose 2011 average income of $23.7 million was $18.4 million more per taxpayer than in 1966, would require a line nearly five miles long.

Speaking of inequality - Travis Waldron at Think Progress pointed out this excellent article by David Cay Johnston. It dovetails well with my last post, which showed the fall of individual real wages and their failure to regain their peak fully 40 years after it was reached. Johnston writes: Incomes and tax revenues have grown from 2009 to 2011 as the economy recovered, but an astonishing 149 percent of the increased income went to the top 10 percent of earners.  If you wonder how that can happen, the answer is simple: Incomes fell for the bottom 90 percent.  While this data is at the level of tax filing households, it is consistent with what we see at the level of the individual. More nuggets from Johnston: From 1966 to 2011, adjusted gross income in the bottom 90% grew a total $59 (2011 dollars, not the 1982-84 dollars I used in my last post) in 45 years, from $30,378 to $30,437.  "Candidate Bush said his tax cuts would make everyone prosper. But the real average pretax income of the bottom 90 percent in 2011 was $5,340 less than in 2000, a decline of more than $100 per week, or 15 percent, in pretax income." The income share of the bottom 90% fell from 66.3% to 51.8% over the 1966-2011 period.

For 'Faster Growth,' Soak the Poor? -  This weekend, the Wall Street Journal assembled a redoubtable list of conservative heavies in economics (George Schulz! Gary Becker! John Taylor!) to produce a completely insane account of what is wrong with America's economy and how to fix it. The upshot of the piece is that the U.S. economy is in the tank because the government gives too much money to poor people, and so it should stop. The article is another great example of conservatives' empathy gap on economic issues. The authors emphasize that entitlement cuts must be done in a "humane" way. But they do not stop and think about whether a one-third reduction in Social Security benefits would seem humane to a middle-class person who depends on Social Security as his largest source of income in retirement, as most do. They don't reckon with the possibility that capping the federal commitment to Medicaid would have not just fiscal effects but also human ones: denying health care to people who need it and cannot afford it. So why respond to the poverty-trap problem by calling for big cuts to benefits? The answer, of course, is that every economic ill must be shoehorned into an argument for lower taxes and less government spending. If a proposed solution to an economic problem doesn't involve taking benefits away from poor people, then it's not a solution at all -- at least by the logic that prevails on the Wall Street Journal editorial page.

Unfit for Work: The startling rise of disability in America - In the past three decades, the number of Americans who are on disability has skyrocketed. The rise has come even as medical advances have allowed many more people to remain on the job, and new laws have banned workplace discrimination against the disabled. Every month, 14 million people now get a disability check from the government. The federal government spends more money each year on cash payments for disabled former workers than it spends on food stamps and welfare combined. Yet people relying on disability payments are often overlooked in discussions of the social safety net. People on federal disability do not work. Yet because they are not technically part of the labor force, they are not counted among the unemployed. In other words, people on disability don't show up in any of the places we usually look to see how the economy is doing. But the story of these programs -- who goes on them, and why, and what happens after that -- is, to a large extent, the story of the U.S. economy. It's the story not only of an aging workforce, but also of a hidden, increasingly expensive safety net. For the past six months, I've been reporting on the growth of federal disability programs. I've been trying to understand what disability means for American workers, and, more broadly, what it means for poor people in America nearly 20 years after we ended welfare as we knew it. Here's what I found.

Unwilling to Work; 25% in Hale County AL Collect Disability, 14 Million Nationwide; A Simple Solution - A NPR report "Unfit For Work" notes the startling rise in those on disability. Here are some interesting facts from the article.

  • Every month 14 million Americans receive a disability check.
  • In 1961 the leading cause of disability was heart disease and strokes, totaling 25.7% of cases. Back pain was 8.3% of cases.
  • In 2011 the leading cause of disability was a hard to disprove back pain, totaling 33.8% of cases. The second leading cause was an equally difficult to disprove "mental illness" at 19.2%. Strokes and heart disease fell to 10.6%.
  • In West Virginia, a whopping 9% of the population collects disability checks. In Arkansas, 8.2% are on disability, and in Alabama and Kentucky, 8.1% collect disability. In Alaska, Hawaii, and Utah, the figure is 2.9%.
  • In Hale County Alabama 1 in 4 receive disability checks.
  • One thing nearly every case in Hale County Alabama has in common is Dr. Perry Timberlake who defines disability in a rather creative way.
  • Those on Supplemental Security Income, a program for children and adults who are both poor and disables is nearly seven times larger than 30 years ago.
  • Once people go onto disability, they almost never go back to work. Fewer than 1 percent of those who were on the federal program for disabled workers at the beginning of 2011 have returned to the workforce.

Gee Whiz, Incentives Matter - I can’t let this weekend’s episode, on Social Security disability benefits, pass without comment. In it, Chana Joffe-Walt “investigates” the Social Security disability program, first by visiting Hale County in Alabama, where 25% of all working age adults are receiving disability benefits, and then by talking to different types of people (lawyers and public sector contractors) who help people apply for benefits. The worst part of the episode comes at the end, where Joffe-Walt claims that the Supplemental Security Income program, by paying benefits to poor families with disabled children, discourages children from doing well in school and from seeking work as adults, because either would cause them to lose their benefits. On that topic, I’ll just outsource the rebuttal to Media Matters, citing the National Academy for Social Insurance and the Center for Budget and Policy Priorities, among others.But the story as a whole suffers from the same kind of facile extrapolation from the individual story to national policy. The first half (on Hale County) winds up to the following punch line: There are lots and lots of people receiving disability benefits, and they receive lots and lots of money in aggregate, because there aren’t enough jobs where you can sit down. Or, rather, that’s Joffe-Walt’s conclusion from talking to people in Alabama: the reason they can’t even imagine working with back pain, and she can, is that they don’t see any jobs around where you can sit down.

The Facts About Disability Insurance - National Public Radio (NPR) is running a series of stories about the Social Security Disability Insurance (DI) program.  Its first was extremely unbalanced and repeated some of the oft-claimed myths about DI.  Here’s the truth. DI provides modest but vital benefits to workers who become unable to perform substantial work due to a serious medical impairment, as I testified last week before a House subcommittee. Most of the recent rise in DI’s rolls stems from demographic factors:  the aging of the baby boom generation, the growth in women’s employment, and Social Security’s rising retirement age.  In fact, when you adjust for these factors, the program has grown only modestly (see chart).  Other factors — including the economic downturn — also have contributed to the program’s growth, but its costs and caseloads are generally in line with past projections.The typical DI beneficiary is in his or her late 50s — 70 percent are over age 50, and 30 percent are 60 or older — and suffers from a severe mental, musculoskeletal, circulatory, respiratory, or other debilitating impairment.  His or her earnings fell sharply in the years before applying to the program.  Only a minority of beneficiaries can do any work, and even fewer are able to do substantial work (enough to support themselves without help), studies generally conclude.

Disability Insurance: The Problem of Contagion in the Media - Dean Baker - Economists are used to talking about contagion, the idea that a financial crisis can spread from one country to another. Unfortunately it appears to be at least as serious a problem in news reporting. Last week This American Life ran a full hour long segment on the Social Security disability program. While the piece was well-done and provided much useful information about the difficulties facing people on the program, it fundamentally misrepresented the economic context. The piece implied that the program has seen a sustained explosion in costs as displaced workers seek it out as a lifeline. While there have been problems with the disability program for some time, these problems changed qualitatively as a result of the downturn. Disability payments actually had been somewhat below projections until the downturn. The downturn following the collapse of the housing bubble then sent costs soaring. The Trustees projections show that this rise is temporary and projected to fall back once the economy returns to something resembling full employment, as shown below. You can get a somewhat fuller discussion of this point in my earlier blogpost. The reality is that the explosion in costs is just one more spin-off of the disastrous economic policy crafted in Washington. We have not suddenly become a nation of slackers or unemployable deadbeats.

What 'This American Life' missed on disability insurance - Over the weekend, “This American Life” and “Planet Money” ran a long reported piece by Chana Joffe-Walt looking at the extraordinary growth of America’s disability insurance system. In Hale County, Ala., one in four residents is on disability, and Joffe-Walt spent time with a young child whose disability check has become the key to his family’s survival. Ezra interviewed Joffe-Walt about her piece here. But is there more to the story? Is America’s disability insurance system in need of fundamental reforms? I asked Harold Pollack, an expert on disability policy at the University of Chicago’s School of Social Service Administration (he’s also a nonresident fellow at The Century Foundation). A lightly edited transcript of our conversation follows

This Is What Happens When You Rip a Hole in the Safety Net - America’s social safety net, such as it is, has recently come under some scrutiny. Chana Joffe-Walt’s in-depth exploration of the increase in people getting Social Security Disability benefits at NPR got many listeners buzzing. Then in The Wall Street Journal, Damian Paletta and Caroline Porter looked at the increase in the use of food stamps, called SNAP. All three journalists look at the increasing dependence on these programs and come away puzzled: Why are so many people now getting disability and food stamp payments? The answer is twofold. Recent trends give us the first part of the explanation. Yes, as Paletta and Porter note, the economy is recovering and the unemployment rate is falling. But, as they recognize, the poverty rate is also rising. And therein lies the rub: people are getting jobs but staying poor. The available jobs are increasingly low-wage and don’t pay enough to live off of. And the big profits in the private sector haven’t led to an increase in wages.

US food stamp use swells to a record 47.8 million - Enrollment in the food stamp program has increased by 70 percent since 2008, to a record 47.8 million people as of December 2012, the Wall Street Journal reported Thursday. The biggest factor driving the increase is the stagnating job market and a rising poverty rate. This means that a staggering 15 percent of the US population receives food stamp benefits, nearly double the rate of 1975. In 2008, at the onset of the recession, 28.2 million people were enrolled in SNAP. While the official jobless rate, which peaked at 10 percent in 2009, had dipped slightly to 7.7 percent as of February this year, the SNAP program has continued to grow. The Congressional Budget Office (CBO) predicts that food stamp usage will drop only marginally, to 43.3 million people, by 2017. Even this estimate is predicated on the unemployment rate dropping to 5.6 percent over the next four years. The number of people using food stamps roughly corresponds to the number of Americans living in poverty, which rose to just below 50 million people in 2011. Utilizing the Supplementary Poverty Measure (SPM), which factors in expenses for food, clothing, shelter, health care and other essentials, the US Census Bureau estimates that nearly one in six people in the US is living in poverty.The average monthly benefit per person receiving SNAP benefits was only $133 last year. In order to qualify, a household’s income cannot be more than 130 percent of the poverty level, which is about $25,000 for a family of three, according to the Center on Budget and Policy Priorities (CBPP).

Why Has Crime Dropped Tremendously Over the Past Two Decades? - David Brooks writes today that violent crime has dropped tremendously over the past couple of decades despite the fact that it's gotten easier and easier to buy a gun. So maybe we should focus on something focus on something other than guns: Now we are in the middle of another debate about violence. If we lived in a purely rational society, this debate would have started with a series of questions: What explains the tremendous drop in violence? How can we build on recent efforts to bring the murder rate even lower? These general questions would have led to a series of more specific questions about police procedures, probably the most direct way to prevent shootings. Call on me! I know the answer! Please, please, please..... For a longer and more comprehensive take on this, I recommend Mark Kleiman's piece on crime and punishment in the current issue of Democracy. It's well worth a few minutes of your time.

Unemployment Fell in February in 22 US States - Unemployment rates fell in 22 U.S. states in February from January, a sign that hiring gains are benefiting many parts of the country. The Labor Department says unemployment rates rose in 12 states and were unchanged in 16. Nationally, unemployment slid to a four-year low of 7.7 percent in February, down from 7.9 percent in January. Since November, employers have added an average of 200,000 jobs a month, nearly double the average from last spring. States hit hardest during the recession are showing improvement. Florida’s unemployment rate fell to 7.7 percent in February, down from 9 percent a year earlier. Nevada’s rate, while tied with California and Mississippi for the highest among states at 9.6 percent, is down from 11.8 percent a year ago.

BLS: Unemployment Rate declined in 22 States in February - From the BLS: Jobless rates down in 22 states, up in 12 in Feb.; payroll jobs up in 42 states, down in 8 Regional and state unemployment rates were little changed in February. Twenty-two states had unemployment rate decreases, 12 states had increases, and 16 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today... California, Mississippi, and Nevada had the highest unemployment rates among the states in February, 9.6 percent each. North Dakota again had the lowest jobless rate, 3.3 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 Nevada have seen the largest declines - New Jersey is the laggard. The states are ranked by the highest current unemployment rate. No state has double digit unemployment and the unemployment rate is above 9% in only seven states: Mississippi, California, Nevada, Illinois, North Carolina, Rhode Island and New Jersey. In early 2010, almost half the states had an unemployment rate above 9%.

Which States Have the Highest Food Stamp Rates? - Use of food stamps is swelling despite the recovering economy, notes an article in today’s WSJ. Enrollment in the Supplemental Nutrition Assistance Program, as the modern-day food-stamp benefit is known, has soared 70% since 2008 to a record 47.8 million as of December 2012. Congressional budget analysts think participation will rise again this year and dip only slightly in coming years. Wonder what the state-by-state picture looks like? Here’s an interactive graphic that explores food stamp enrollment by state.

An Update on 2012 GSP Growth Forecasts - Chicago Fed - In 2011, the Chicago Fed began providing quarterly estimates of annual GSP growth for each of the five states in the Seventh District in its Midwest Economy Index (MEI) releases. In this blog, we present what we’ve forecasted for each state in 2012 along with an explanation of the factors behind our projections. The MEI is a weighted average of 129 state and regional indicators that measure growth in nonfarm business activity. Two separate index values are constructed, the MEI (absolute value), which captures both national and regional factors driving Midwest economic growth, and the relative MEI (relative value), which provides a picture of the Midwest’s economic conditions relative to the nation’s.

Climate change, NY State bonds, and risk - The New York Times points us to a possible first in the state government bond market. My initial reaction was to wonder about flood insurance risk assessment by state, and wether our conversation might go beyond FEMA into more real areas of risk assessment. Mostly we seem to spend our time not avoiding risk but arguing about reactions to risks taken over time. In the wake of Hurricane Sandy, the administration of Gov. Andrew M. Cuomo has started to caution investors that climate change poses a long-term risk to the state’s finances. . The warning, which is now appearing in the state’s bond offerings, comes as Mr. Cuomo, a Democrat, continues to urge that public officials come to grips with the frequency of extreme weather and to declare that climate change is a reality.  A spokesman for Mr. Cuomo said he believed New York was the first state to caution investors about climate change. The caution, which cites Hurricane Sandy and Tropical Storms Irene and Lee, is included alongside warnings about other risks like potential cuts in federal spending, unresolved labor negotiations and litigation against the state.

Wisconsin Gov. Walker Proposes Upheaval of Public Education | Common Dreams: Part of Wisconsin's right-wing Governor Scott Walker's budget proposal for 2013-15 features a frontal assualt on public education, Erin Richards reports in the Milwaukee Journal Sentinel.While some of his proposals, like a tax cut he touts as as middle-class relief that benefits the rich, have received attention, some of the most controversial education proposals have gone under the radar. One of these, Richards reports, would allow a school board to transform all of its public schools into charter schools.Other controversial proposals in Walker's budget, as Richards reports:

    • • Establishing a Charter School Oversight Board, attached to the Department of Public Instruction, that would approve more nonprofit entities around the state to authorize more independent charter schools. 
    • • Creating a special license that would allow professionals with subject-matter knowledge but no formal teaching background to teach in charter schools. 
    • • Granting district-authorized charter schools sole discretion over the school's budget, curriculum, staff training and hiring. 
    • • Increasing the annual per-pupil amount for independent charter schools to $7,852 in the first year of the budget and $7,931 in the second year of the budget, up from a current $7,775 per-pupil annually.

Sixty-Eight Percent of U.S. Enrolled School Children Qualify for Free or Reduced-Rate Lunches - Earlier this month, the USDA came out with its annual report on government food assistance programs, which now make up 70 percent of all USDA spending. What was formerly known as the Food Stamp Program, now called SNAP, accounts for 73 percent of the program. An average of 46.6 million people per month, or about 15 percent of the U.S. population, participated in the SNAP program last year with benefits averaging $133 per person per month and totaling $78.3 billion in federal spending. Since the financial crisis of ’08, the number of participants has really ticked upward, given that this is a “counter-cyclical” program. Among the top five funded food programs, two are administered through the nation’s schools, the National School Lunch Program, and the School Breakfast Program.

Dem bill would expand school lunch program to weekends, holidays - Four House Democrats have proposed legislation that would expand school lunch programs to weekends and holidays. Rep. Dina Titus (D-Nev.) proposed the bill, which would amend the Richard Russell National School Lunch Act to set up weekend and holiday "feeding programs." The proposal is meant to help ensure that at-risk school children meet their nutritional needs, but it would only extend this help during the school year, not during the summer. The bill is the latest entry to the list of legislation meant to tweak the national school lunch program. Sen. Tom Harkin (D-Iowa), for example, has proposed the Healthy Lifestyles and Prevention America Act, S. 39, which would broaden the federal nutrition program, including by expanding it to childcare centers.

News from the cutting edge of K-12 education - The Massachusetts public school system has taken the tired mantra "You can be whatever you want to be" to new heights of absurdity.  It is now possible for any student to declare what his sex is regardless of whether it is the biological opposite of what she was born as.   The new transgender manifesto, which includes punishments and counseling for students who object to the idea of changing one's sex by fiat, can be found here.The basic premise is that a student has the right to decide what sex he or she is, and the school is required to support the child's self-proclaimed identity in every respect.  According to the aforementioned document, if a boy decides he is a girl, he is to be addressed as "she," and school records are to reflect his new preference by recording his feminine name of choice.  Thus, "John" is to be known hereafter as "Jane" if s/he so desires, and parental assignation of nomenclature be damned.  Schools are to promote gender neutral clothing.  It appears that standard graduation garb such as blue gowns for boys and white for girls is to be scrapped along with any requirement that girls wear dresses to the prom.

Entire library journal editorial board resigns, citing ‘crisis of conscience’ after death of Aaron Swartz - In a dramatic show of support for the open access movement, the editor-in-chief and entire editorial board of the Journal of Library Administration announced their resignation last week. In a letter to contributors, the board singled out a conflict with owners over the journal's licensing terms, which stripped authors of almost all claim to ownership of their work. In a blog post after the resignation, board member Chris Bourg cited her experience of "a crisis of conscience about publishing in a journal that was not open access" in the days after the death of Aaron Swartz. The board had worked with publisher Taylor & Francis on an open-access compromise in the months since, which would allow the journal to release articles without paywall, but Taylor & Francis' final terms asked contributors to pay $2,995 for each open-access article. As more and more contributors began to object, the board ultimately found the terms unworkable. The ultimate future of the journal is still undetermined, but the next issue appears to be dead in the water. In a statement to the Chronicle of Higher Education, the journal's editor-in-chief said he did not wish to vilify the publishers, but for the journal's authors, the "math just didn't add up." The result, at least for now, is a journal with a well protected paywall and no editors.

Low-Income Students Aim Low in College Applications - You’ve probably seen recent reports that low-income, high-achieving high school students set their college sights much lower than their high-income counterparts. That’s the chief finding of recent research by Stanford’s Caroline M. Hoxby and Harvard’s Christopher Avery presented last week at Brookings Papers on Economic Activity. That finding is nicely illustrated in an infographic accompanying the paper (click for a higher-resolution version): Here’s their summary of findings:We show that the vast majority of very high-achieving students who are low-income do not apply to any selective college or university. This is despite the fact that selective institutions would often cost them less, owing to generous financial aid, than the resource-poor two-year and non-selective four-year institutions to which they actually apply. Moreover, high-achieving, low-income students who do apply to selective institutions are admitted and graduate at high rates. We demonstrate that these low-income students’ application behavior differs greatly from that of their high-income counterparts who have similar achievement

Low-Income, High-Achieving Students - Consider the situation of high-achieving students from low-income families. In some ways, what happens to them has a disproportionate effect on the degree of economic and social mobility in U.S. society. One would expect a disproportionate share of this group to show upward mobility. But at least in college choices, many of them are heading for nonselective schools that seem below their ability level.  A conference paper was presented last week with readable summary of "Key Findings"  with some infographics.  Hoxby and Avery define the group of interest here as students from families with annual income less than $41,472 (the bottom quarter of households), SAT scores in the top 10% of the distribution of those taking the test (which is about 40% of high school graduates), and  high school grade point average of A- or higher. They have data from the SAT folks on where students apply, based on where they have their SAT scores sent. If the student's test score is close to the median SAT score of those attending, they call it a "match." Students might also "reach" for a school where the median SAT score is above their own, or look for a "safety school" where the median test score is below their own. But the striking result is that so many high-achieving students from low-income families tend to apply to non-selective schools.

America’s low-lying educational fruit - I’m shocked but not surprised by the amazing series of charts that Evan Soltas has put together about the way in which educational attainment is inherited. The short version can be told in two charts. The first shows the clear relationship between income (which runs along the x-axis) and educational attainment. You can’t read the x-axis here, but the middle of the chart corresponds to an annual income of about $100,000 per year; below that, very few people have a college degree, while only at the very top of the income spectrum does it become the norm. Now look at the same chart, but looking only at people whose fathers have a college degree. Suddenly it’s a sea of yellow, even at lower incomes, while the red bars (high-school dropouts) have pretty much almost entirely disappeared. The lower graph, of course, is what we would want the US population as a whole to look like, in some ideal world: just about everybody graduating high school, with lots of bachelor’s (light yellow) and graduate (dark yellow) degrees. This is the world of opportunity facing people whose fathers graduated college, and it would be great if people whose fathers didn’t graduate college had a glimpse of it. Sadly, they really don’t. As Caroline Hoxby Christopher Avery show, poor kids simply don’t apply to the best universities, and often end up at subpar two-year colleges even when they have excelled at high school and could get full scholarships to the best colleges if only they just applied.

Will free MOOCs destroy Higher Education? - MIT Strategy professor Michael Cusumano published a lengthy opinion piece where he argued that free online courses may have much higher costs and consequences than the socially minded people promoting them intended. I worry, however, based on the history of free products and services available on the Internet and their impact. We have learned that there can also be “negative” network effects. In education, this would occur if increasing numbers of universities and colleges joined the free online education movement and set a new threshold price for the industry—zero—which becomes commonly accepted and difficult to undo. Of course, it is impossible to foresee the future. But we can think about different scenarios, and not all of them are good. The piece is a bit frustrating with some internal inconsistencies that would take too long to go through. But, by way of example, as I’ll get to in a moment, Cusumano’s concern is that free online courses by elite institutions may wipe out the non-elite ones but at the same time suggests that a free price sends a signal that those courses are of low value. So, on the one hand, their free price combined with high value will wipe out the non-elite courses while their free price sends a signal of low value compared to non-free courses offered by non-elite institutions. You can’t have it both ways.

Congressional Inaction Could Cost College Students - Congressional inaction could end up costing college students an extra $5,000 on their new loans. The rate for subsidized Stafford loans is set to increase from 3.4 percent to 6.8 percent on July 1, just as millions of new college students start signing up for fall courses. The difference between the two rates adds up to $6 billion. Just a year ago, lawmakers faced a similar deadline and dodged the rate increase amid the heated presidential campaign between President Barack Obama and Republican challenger Mitt Romney. But that was with the White House up for grabs and before Washington was consumed by budget standoffs that now seem routine. “What is definitely clear, this time around, there doesn’t seem to be as much outcry,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. “We’re advising our members to tell students that the interest rates are going to double on new student loans, to 6.8 percent.”

Student loan write-offs hit $3 billion in first two months 2013 - Equifax reported today that student loan write-offs hit $3 billion in the first two months of this year. This is up more than 36 percent from the same period a year ago. An Equifax study shows many college graduates remain unemployed, underemployed or cash-strapped as the U.S. economy continues its slow recovery. The credit reporting agency also points out the number of people going back to school has risen, as have tuition rates. With limited options available in a weakened labor market, delinquencies and loan write-offs are becoming common place.  The U.S. Consumer Financial Protection Bureau (CFPB) reported in March 2012 that U.S. student loan debt surpassed $1 trillion by the end of 2011. Now, interest rates on subsidized Stafford loan rates are set to double in July.  Even while the cost of earning a four-year undergraduate degree has risen 5.2 percent a year over the past 10 years, the number of student loans has continued to rise, even while other forms of debt have decreased.

Student loan write-offs hit $3 billion in first two months of year (Reuters) - Banks wrote off $3 billion of student loan debt in the first two months of 2013, up more than 36 percent from the year-ago period, as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recovery, an Equifax (EFX.N) study showed. The credit reporting agency also said Monday that student lending has grown from last year because more people are going back to school and the cost of higher education has risen. "Continued weakness in labor markets is limiting work options once people graduate or quit their programs, leading to a steady rise in delinquencies and loan write-offs," Equifax analyzes data from more than 500 million consumers to track financial trends. U.S. student loan debt reform has become a more pressing issue since the U.S. Consumer Financial Protection Bureau (CFPB) reported in March 2012 that the total surpassed $1 trillion by the end of 2011 and as interest rates on subsidized Stafford loan rates are set to double in July.

Student Loan Defaults Soar By 36% Compared To Year Ago - The growing debacle that is the US student loan bubble - nearly the same size and severity as the Subprime crisis at its peak- has been painfully dissected on these pages in the past, so at this point the only thing remaining is to keep track of the bubble growing exponentially in real time as it hits all time records, and eventually pops. Helping us to track the realtime growth is the latest data from Equifax, via Reuters, which confirms what everyone knows: things in student bubble land are getting worse by the minute. Much worse, because in just the first two months of 2013, banks wrote off $3 billion of student loan debt, up more than 36 percent from the year-ago period, as many graduates remain jobless, underemployed or cash-strapped in a slow U.S. economic recover.

Number of the Week: College Grads in Minimum Wage Jobs - 284,000: Number of American college graduates working in minimum-wage jobs in 2012. The Wall Street Journal this week reported on the troubling trend of college graduates getting stuck in low-skilled jobs, a problem that new research suggests may endure even after the economy improves. As the story noted, college graduates tend to earn more than their less-educated coworkers, even within the same field. But that isn’t true for everyone: According to the Labor Department, there were 284,000 graduates—those with at least a bachelor’s degree—working minimum-wage jobs in 2012, including 37,000 holders of advanced degrees. That’s down from a peak of 327,000 in 2010, but double the number in 2007 and up 70% from a decade earlier. While the raw number of college grads stuck in minimum-wage jobs remains elevated, their share of such jobs is at more or less its 10-year average. About 8% of all minimum-wage workers held at least a bachelor’s degree in 2012, a figure that has bounced around over the past decade with no clear trend. Given that the share of the labor force with a college degree has been rising steadily over the same period, the lack of a parallel trend among minimum-wage workers suggests that grads aren’t generally ending up at the absolute bottom of the earnings ladder.

California State Treasurer emphasizes shrinking retirement savings - Two reports – by the Employee Benefit Research Institute (ERBI) and Society of Actuaries – combine to document America’s worsening retirement security problem. They show how U.S. workers are failing to save adequately for retirement, even though the need is greater than ever because people are going to longer. Highlights:

  • Insufficient savings (2013 ERBI survey)
    • Last year, 57 percent of workers reported they had saved $25,000 or less for retirement.
    • In 2012, 66 percent of workers reported they have some retirement savings, compared with 75 percent in 2009.
    • 41 percent of workers said they either do not save for retirement or do not save enough because they have so much trouble meeting day-to-day expenses.
    • Only 50 percent believe they could come up with $2,000 in a month to meet an unexpected expense.
  • Longer life spans (Society of Actuaries, 09/12)
    • A male who reaches 65 this year is likely to live 20.5 more years, one year more than estimates from last year.
    • A woman turning 65 can expect to live 22.7 more years, up from 21.3 last year.
    • Longer life spans could increase corporate pension liabilities by $97 billion in the near future. Since 2008, those liabilities have risen from $1.6 trillion to $1.93 trillion

Declining Wealth Brings a Rising Retirement Risk - In a recent post, I examined aggregate national wealth from the Federal Reserve Board’s flow of funds statistics. They show that while national wealth is now approximately back to its precrisis level, the composition of it has changed. Much more is now held in the form of such financial assets as stocks and much less in nonfinancial forms such as housing. This is important, economically and distributionally, because the wealthy are much more likely to be invested in stocks and bonds, while the middle class has more of its wealth in home equity. Several new studies cast further light on the composition and distribution of wealth, with implications for the ability of millions of Americans to retire and have an adequate retirement income. On March 21, the Census Bureau published data on median household wealth – the median is the exact middle of the distribution of wealth. It shows that between 2000 and 2005, median wealth increased significantly, to $106,585 from $81,821. It then fell to $68,828 in 2011. Thus, although the stock market is close to its prerecession peak and aggregate national wealth has largely been restored, the median family’s wealth is still considerably below its peak and needs to rise considerably just to get back to where it was in 2000.The reason, of course, is that the housing market continues to lag. As Figure 1 illustrates, virtually all of the change in wealth since 2000 has been accounted for by the rise and fall of home equity, which closely tracks the price of homes

The Greatest Retirement Crisis In American History - We are on the precipice of the greatest retirement crisis in the history of the world. In the decades to come, we will witness millions of elderly Americans, the Baby Boomers and others, slipping into poverty. Too frail to work, too poor to retire will become the “new normal” for many elderly Americans. That dire prediction, which I wrote two years ago, is already coming true. Our national demographics, coupled with indisputable glaringly insufficient retirement savings and human physiology, suggest that a catastrophic outcome for at least a significant percentage of our elderly population is seemingly inevitable. With the average 401(k) balance for 65 year olds estimated at $25,000 by independent experts, the decades many elders will spend in forced or elected “retirement” will be grim. Corporate America and the financial wizards behind the past three decades of so-called retirement innovations, most notably titans of the pension benefits consulting and mutual fund 401(k) industries, are down-playing just how bad things are already and how much worse they are going to get. Americans today are aware that corporate pensions have been virtually eliminated and that the few remaining private, as well as the nation’s public pensions, are in jeopardy. Even if you are among the lucky few that have a pension owed to you, you cannot rest assured that it will be there for all the years you’ll need it. Whether you know it or not, someone out there is busy trying to figure out how to screw you out of your pension.

Americans Want More Social Security, Not Less - It is appropriate to judge an industry, including the retirement planning industry, by the results it produces. Any fair assessment must conclude that, as measured by the anemic financial stability it has produced, the retirement planning industry is an utter failure. You can blame workers for not saving enough, or not making the best asset allocation decisions, but the industry has known for decades what it was doing, wasn’t working. Our nation’s retirement savings scheme, both for pensions and 401(k)s is inefficient, far higher in costs than it should be and unfair, with the deck decidedly stacked against investors. Today there is wide belief that our Social Security system is challenged, or even poised for failure. It seems to be macho to say that one is not counting on Social Security being around in their retirement years. Don’t need it- don’t want it, seems to be the very definition of self-reliance. Hopefully, these financial cowboys who say they don’t need or want Social Security are rightly predicting their financial futures. Chances are they aren’t. Truth be known, the overwhelming majority of elderly Americans have little but Social Security to depend upon and, like it or not, Social Security is the most certain source of retirement income available at this time. Sure, the U.S. Government may be, or become, insolvent but remember, it was Uncle Sam that bailed out Wall Street five years ago.

Strike Debt Abolishes $1.1 Million of Medical Debt - Strike Debt, a group that emerged from the Occupy Wall Street movement, has planned a week of actions in multiple cities across the country to mark the abolition of $1.1 million in medical debt belonging to 1,064 people as part of the “Rolling Jubilee” project. While that may already seem like a huge number, Strike Debt claims it’s only getting started and ultimately hopes to abolish around twenty times what they raised, which would be nearly $12 million. “What we do is buy debt for pennies on the dollar,” Jacques, a member of Strike Debt, explained to activists gathered at Bryant Park on Thursday evening. “And instead of collecting on it like the debt collectors, we basically abolish it. We’re here today because we purchased over one million dollars of medical debt from over a thousand people in Kentucky and Indiana who had emergency room debt.” (A full report of the purchased debt can be found at the Rolling Jubilee’s transparency site.) In order to kick off the “Life or Debt” week of action, protesters planned a medical bankruptcy tour to the various health insurance companies who Strike Debt sees as being exploitive of the sick and vulnerable by using insurance payments to fatten the wallets of the companies’ CEOs instead of using that money for actual healthcare.

Best in the world, my a** – ctd. - Sometimes I lack the words. From the NYT: Two nights a year, Tennessee holds a health care lottery of sorts, giving the medically desperate a chance to get help. Yes, a lottery. That’s how the truly needy can hope to get care in the richest country in the world. More details:State residents who have high medical bills but would not normally qualify for Medicaid, the government health care program for the poor, can call a state phone line and request an application. But the window is tight — the line shuts down after 2,500 calls, typically within an hour — and the demand is so high that it is difficult to get through…The phone line opened at 6 p.m. on Thursday for the first time in six months.  “It’s like the Oklahoma land rush for an hour,” said Russell Overby, a lawyer with the Legal Aid Society in Nashville. “We encourage people to use multiple phones and to dial and dial and dial.” Yeah, sometimes I can get snarky when I talk about health care in the US. But I try – really hard – not to get emotional. This article made that difficult. Is this really a health care system which we can be proud of? Seriously?

Chart of the day: Nearly half of health spending for richer Americans is tax-financed - Below is a pre-publication version of a chart that appears in Chris Conover’s The American Health Economy Illustrated. How do individuals with incomes 400% or more of the federal poverty level get so much taxpayer assistance? The biggest single source is the exclusion from taxation of employer-sponsored health insurance. Medicare is the second biggest source. Additional detail in Exhibit 4 of the paper by Seldon and Sing, from which the data in the above chart were taken.

Should Congress create a national health-care exchange? - One of the core ideas behind the Affordable Care Act (ACA), President Obama’s ambitious and very controversial effort to expand access to medical insurance, is that state governments will work with the federal government to make high-quality care more accessible and affordable by creating subsidized state-based insurance exchanges. For those who aren’t covered by employer-sponsored insurance or Medicare or Medicaid, the exchanges are meant to offer a range of affordable insurance plans, with subsidies varying by household income. The architects of the ACA believed the exchanges would be one of the more politically attractive aspects of the law, as they were designed to give states considerable latitude and to harness the power of market competition. But 34 states, representing two-thirds of the U.S. population, have thus far refused to establish their own exchanges, and the federal government is scrambling to create its own exchanges in the states that have refused to play ball.Defenders of the ACA have noted the irony that conservatives, who tend to champion state autonomy, have led the opposition to the creation of state-based insurance exchanges. Yet as Douglas Holtz-Eakin of the American Action Forum, a leading critic of the ACA, has observed, the state-based insurance exchanges are best understood as “a second Medicaid program,” which will likely suffer from the same misaligned incentives as its more familiar cousin.

U.S. Health Care Prices Are the Elephant in the Room - Traditionally, the theory driving discussions on the high cost of health care in the United States has been that there is enormous waste in the system, taking the form of excess utilization of care. From that theory it follows that methods of controlling the growth of health spending should focus on ways to reduce the use of unnecessary or only marginally beneficial health care. Largely overlooked in these discussions has been the elephant in the room: the extraordinarily high prices Americans pay for health care. However, as a group of us noted in a paper in 2004, “It’s the Prices, Stupid,” it is higher health spending coupled with lower – not higher — use of health services that adds up to much higher prices in the United States than in any other member nation of the Organization for Economic Cooperation and Development. Aside from a few high-tech services, Americans actually use less health care and rely on fewer real health-care resources than do residents of other industrialized countries.  Readers who want to get a peek at this elephant in the room should peruse the set of slides published a few days ago by the International Federation of Health Plans, a global network of private health-insurance plans with 100 members in 31 countries. Shown below are three slides from the set:

21 graphs that show America’s health-care prices are ludicrous - Every year, the International Federation of Health Plans — a global insurance trade association that includes more than 100 insurers in 25 countries — releases survey data showing the prices that insurers are actually paying for different drugs, devices, and medical services in different countries. And every year, the data is shocking. The IFHP just released the data for 2012. And yes, once again, the numbers are shocking.This is the fundamental fact of American health care: We pay much, much more than other countries do for the exact same things. For a detailed explanation of why, see this article. But this post isn’t about the why. It’s about the prices, and the graphs. One note: Prices in the United States are expressed as a range. There’s a reason for that. In other countries, prices are set centrally and most everyone, no matter their region or insurance arrangement, pays pretty close to the same amount. In the United States, each insurer negotiates its own prices, and different insurers end up paying wildly different amounts. That’s what Steven Brill’s explosive article was about, and it’s why you see U.S. prices expressed as a range rather than a single number.

UPS agrees to pay $40 million for shipping illegal prescription drugs - UPS Friday agreed to forfeit $40 million and implement a compliance program after a Department of Justice probe found the company delivered drugs on behalf of illegal online pharmacies. The agreement followed an investigation that showed that UPS was shipping drugs on behalf of Internet pharmacies that were distributing controlled substances and prescription drugs that were not supported by a valid prescription. Despite being on notice from employees that such illegal shipments were being delivered, UPS “did not implement procedures to close the shipping accounts of Internet pharmacies,” said a Department of Justice statement.

You don’t ‘own’ your own genes: Researchers raise alarm about loss of individual ‘genomic liberty’ due to gene patents - Humans don't "own" their own genes, the cellular chemicals that define who they are and what diseases they might be at risk for. Through more than 40,000 patents on DNA molecules, companies have essentially claimed the entire human genome for profit, report two researchers who analyzed the patents on human DNA. Their study, published March 25 in the journal Genome Medicine, raises an alarm about the loss of individual "genomic liberty."  In their new analysis, the research team examined two types of patented DNA sequences: long and short fragments. They discovered that 41 percent of the human genome is covered by longer DNA patents that often cover whole genes. They also found that, because many genes share similar sequences within their genetic structure, if all of the "short sequence" patents were allowed in aggregate, they could account for 100 percent of the genome. Furthermore, the study's lead author, Dr. Christopher E. Mason of Weill Cornell Medical College, and the study's co-author, Dr. Jeffrey Rosenfeld, an assistant professor of medicine at the University of Medicine & Dentistry of New Jersey and a member of the High Performance and Research Computing Group, found that short sequences from patents also cover virtually the entire genome—even outside of genes.

Some Things That Will be True After AI - Kevin Drum muses about the advent of true artificial intelligence: I believe that we're only a few decades away from true artificial intelligence. I might be wrong about this, but put that aside for the moment. The point is that I believe it. And needless to say, that will literally change everything.  I agree with Kevin that AI is the biggest deal out there.  I also think it's coming, though I suspect it will take longer than 2040 to arrive fully* and that it will arrive in stages over the course of a number of decades.  Indeed, in important ways we can already feel the early effects.  It's worth thinking about some things that won't change as a result of AI, or at least not quickly.  Here's a draft list:

  • There will still be 9 or 10 billion humans on the planet (or may the gods and goddesses help us).
  • They will still want to live in big warm houses with lots of stuff, and travel around as much as they are able.
  • They will still want to have sex and raise children.
  • They will still be prone to getting very pissed if anyone tries to take their stuff away.
  • The economy will still consist of competing corporations regulated by governments.
  • Humans will still have all the legal rights.

It follows pretty immediately that most of our environmental problems, for example, won't be going anywhere as a result of AI.

Record-High Antibiotic Sales for Meat and Poultry Production - Pew - The same antibiotics used to treat sick people are also given to healthy animals — in much greater numbers — to make them grow faster and to compensate for overcrowded and unsanitary conditions. These practices are contributing to the emergence of drug-resistant superbugs that make infections more difficult and costly to treat. In 2011, more antibiotics were sold for use in meat and poultry production than ever before.

'Monsanto Protection Act' slips silently through US Congress: The US House of Representatives quietly passed a last-minute addition to the Agricultural Appropriations Bill for 2013 last week - including a provision protecting genetically modified seeds from litigation in the face of health risks. The rider, which is officially known as the Farmer Assurance Provision, has been derided by opponents of biotech lobbying as the “Monsanto Protection Act,” as it would strip federal courts of the authority to immediately halt the planting and sale of genetically modified (GMO) seed crop regardless of any consumer health concerns. The provision, also decried as a “biotech rider,” should have gone through the Agricultural or Judiciary Committees for review. Instead, no hearings were held, and the piece was evidently unknown to most Democrats (who hold the majority in the Senate) prior to its approval as part of HR 993, the short-term funding bill that was approved to avoid a federal government shutdown. Senator John Tester (D-MT) proved to be the lone dissenter to the so-called Monsanto Protection Act, though his proposed amendment to strip the rider from the bill was never put to a vote.

Monsanto Gets Its Very Own Law - Hope and change strikes again. A provision many are dubbing the “Monsanto Protection Act” was covertly inserted into the Agricultural Appropriations Bill that President Obama signed Tuesday. The provision protects genetically modified food interests from litigation. The provision protects genetically modified seeds from litigation in the face of health risks and has thus been dubbed the “Monsanto Protection Act” by activists who oppose the biotech giant. President Barack Obama signed the spending bill, including the provision, into law on Tuesday Since the act’s passing, more than 250,000 people have signed a petition opposing the provision and a rally, consisting largely of farmers organized by the Food Democracy Now network, protested outside the White House Wednesday. Not only has anger been directed at the Monsanto Protection Act’s content, but the way in which the provision was passed through Congress without appropriate review by the Agricultural or Judiciary Committees. The biotech rider instead was introduced anonymously as the larger bill progressed — little wonder food activists are accusing lobbyists and Congress members of backroom dealings

How the Monsanto Protection Act snuck into law -

  Slipped into the Agricultural Appropriations Bill, which passed through Congress last week, was a small provision that’s a big deal for Monsanto and its opponents. The provision protects genetically modified seeds from litigation in the face of health risks and has thus been dubbed the “Monsanto Protection Act” by activists who oppose the biotech giant. President Barack Obama signed the spending bill, including the provision, into law on Tuesday.  Updated, March 28: A number of readers have requested to know exactly where in the HR 933 they might find the provision dubbed the “Monsanto Protection Act.” It is Section 735 in the bill, the full text of which can be read here.

USDA pares farm payments by $152 million due to budget sequester: (Reuters) - The U.S. government will trim payments to 350,000 farmers by about $152 million to comply with automatic spending cuts that took effect at the start of this month, Agriculture Secretary Tom Vilsack said on Tuesday. Vilsack said the money would come out of the $5 billion-a-year direct-payment subsidy, which is paid in the fall, to offset reductions due in three USDA programs that have already disbursed money to farmers. During a speech to trade group officials, Vilsack said comparatively small amounts are due for each farmer, so it would be more efficient to pro-rate the direct-payment subsidy than to ask the farmers for a refund on checks already cut.

Bills Pushed By State Legislators Would Make Farm Animal Abuse Investigations More Difficult: -- An undercover video that showed California cows struggling to stand as they were prodded to slaughter by forklifts led to the largest meat recall in U.S. history. In Vermont, a video of veal calves skinned alive and tossed like sacks of potatoes ended with the plant's closure and criminal convictions. Now in a pushback led by the meat and poultry industries, state legislators across the country are introducing laws making it harder for animal welfare advocates to investigate cruelty and food safety cases. Some bills make it illegal to take photographs at a farming operation. Others make it a crime for someone such as an animal welfare advocate to lie on an application to get a job at a plant. Bills pending in California, Nebraska and Tennessee require that anyone collecting evidence of abuse turn it over to law enforcement within 24 to 48 hours – which advocates say does not allow enough time to document illegal activity under federal humane handling and food safety laws.

Huge scale of California pollination event: Californian almond pollination requires billions of honeybees travelling thousands of miles in a nationally coordinated migration operating on a scale that is almost unimaginable to most beekeepers in the UK. This week, BBC Radio 4 is On the Trail of the American Honeybee - the story of migratory beekeeping, and a story that touches on some of the most controversial - and disturbing - aspects of modern agriculture. With over 1,000 sq mi of the Valley under almonds, the almond bloom of late spring is a spectacular sight. Almond blossom appears before the leaves emerge and the resulting white and pink flowers make great swathes of the Valley look as if heavy snow has fallen.

Soaring Bee Deaths in 2012 Sound Alarm on Malady - — A mysterious malady that has been killing honeybees en masse for several years appears to have expanded drastically in the last year, commercial beekeepers say, wiping out 40 percent or even 50 percent of the hives needed to pollinate many of the nation’s fruits and vegetables. A conclusive explanation so far has escaped scientists studying the ailment, colony collapse disorder, since it first surfaced around 2005. But beekeepers and some researchers say there is growing evidence that a powerful new class of pesticides known as neonicotinoids, incorporated into the plants themselves, could be an important factor. The pesticide industry disputes that. But its representatives also say they are open to further studies to clarify what, if anything, is happening.  In a show of concern, the Environmental Protection Agency recently sent its acting assistant administrator for chemical safety and two top chemical experts here, to the San Joaquin Valley of California, for discussions.  In the valley, where 1.6 million hives of bees just finished pollinating an endless expanse of almond groves, commercial beekeepers who only recently were losing a third of their bees to the disorder say the past year has brought far greater losses.

EPA report: More than half nation’s rivers in poor shape - More than half of the country’s rivers and streams are in poor biological health, unable to support healthy populations of aquatic insects and other creatures, according to a nationwide survey released Tuesday. The Environmental Protection Agency sampled nearly 2,000 locations in 2008 and 2009 — from rivers as large as the Mississippi River to streams small enough for wading. The study found more than 55 percent of them in poor condition, 23 percent in fair shape, and 21 percent in good biological health.The most widespread problem was high levels of nutrient pollution, caused by phosphorus and nitrogen washing into rivers and streams from farms, cities and sewers. High levels of phosphorus — a common ingredient in detergents and fertilizers — were found in 40 percent of rivers and streams. Another problem detected was development. Land clearing and building along waterways increases erosion and flooding and allows more pollutants to enter waters. Conditions are worse in the East, the report found. More than 70 percent of streams and rivers from the Texas coast to the New Jersey coast are in poor shape. Streams and rivers are healthiest in Western mountain areas, where only 26 percent were classified as in poor condition. The EPA also found some potential risks for human health.

With Drought Season Off to a Bad Start, Scientists Forecast Another Bleak Year - Drought conditions in more than half of the United States have slipped into a pattern that climatologists say is uncomfortably similar to the most severe droughts in recent U.S. history, including the 1930s Dust Bowl and the widespread 1950s drought. The 2013 drought season is already off to a worse start than in 2012 or 2011—a trend that scientists at the National Oceanic and Atmospheric Administration (NOAA) say is a good indicator, based on historical records, that the entire year will be drier than last year, even if spring and summer rainfall and temperatures remain the same. If rainfall decreases and temperatures rise, as climatologists are predicting will happen this year, the drought could be even more severe. The federal researchers also say there is less than a 20 percent chance the drought will end in the next six months. "There were certainly pockets of drought as we went into spring last year, but overall, the situation was much better than it is now," In February, 54.2 percent of the contiguous United States experienced drought conditions, compared to 39 percent at the same time last year. Large swaths of South Dakota, Wyoming, Nebraska and Montana—which entered last year's major agricultural growing season with very moist conditions—are now battling severe and extreme drought as farmers get ready to plant their spring crops.

Drought Has Stranglehold on West; Southeast Sees Relief | Climate Central:  The extended drought continues to choke the Western half of the country, with water supply concerns rising in New Mexico and Texas as anxiety about another bone-dry summer is raised. This week, the dryness grew worse in Texas while expanding into California, Montana, and Oregon, so that most of the land west of the Mississippi River was under some form of drought conditions, according to Thursday's update to the U.S. Drought Monitor. Conditions in the Great Plains remain dire: parts of eastern Texas are facing rainfall shortages on the order of 8-16 inches. Reservoir levels in Donley County, in the Texas Panhandle, were 12 inches below normal. Cimarron County, Okla., has gone 100 consecutive days with less than a quarter inch of rainfall. Wichita Falls, Texas, a city of about 100,000, has been added to the state's list of communities that may run out of water within 180 days, although city managers don’t think that is likely. According to reporting by the Texas Tribune, Wichita Falls will likely enact unprecedented water restrictions by the end of the summer, which would ban the filling of swimming pools, restrict car-washing businesses, and affect industrial water users.

Drought worsens in Central Texas, threatening water supplies - Drought conditions have worsened around Texas, including in the Austin area, which is especially worrisome to cities monitoring already strained water supplies. According to the latest drought monitor map released Thursday, much of Williamson County slipped into extreme drought, the second-worst drought category, since last week, with Hays County already in extreme drought. Travis and Bastrop counties and much of the Hill Country are in severe drought, the third-worst category. Lakes Travis and Buchanan, the region’s primary water sources, are just 40 percent full as of Thursday. That’s compared with 75 percent full on March 28, 2011. That year was the driest on record in Texas. Statewide, reservoirs are two-thirds full, compared with 80 percent in March 2011. “We’re probably going to see much greater water supply problems” this year, State Climatologist John Nielsen-Gammon said. Across Central Texas, some cities have recently ratcheted up conservation measures, with others keeping a close eye on water supplies.

In drought-ravaged plains, efforts to save a vital aquifer - Threatened by another summer of crop-shriveling drought, Kansans are watching a bold experiment unfold in Sheridan County, population 2,556, a sliver of the state's northwest corner. On lands dominated by agriculture, locals have agreed to across-the-board cuts to water use. The state of Kansas didn't order the cuts, nor did a regional entity. Rather, at a time when states and locals are jockeying for water, stakeholders in the 100 square-mile "high priority" (meaning particularly parched) zone of Northwest Kansas Groundwater District 4 reached a consensus to reduce groundwater pumping by 20 percent over the next five years. They are gambling on short-term wants for a longer-term need - to preserve the aquifer their lives depend upon. Sheridan's plan is just one of many major efforts to fend off a slow-moving disaster with national implications: The High Plains Aquifer, which feeds some of the world's most productive croplands, is running dry.The aquifer, also called the Ogallala, is one of the world's largest underground sources of freshwater. It stretches 174,000 square miles through the middle of the country from South Dakota to Northwest Texas, touching parts of Kansas and five other states, watering more than one-quarter of all irrigated acreage in the U.S. and some of world's largest grain cattle feedlots. The Ogallala also provides drinking water to four of every five people living above it. 

Drier climate will spread diarrhoea - Researchers say they have found a clear link between climate change and the spread of diarrhoea and similar diseases in one African country. But the nature of the link may be unexpected. Diarrhoea, which kills 1.5 million children annually, is likely to become more prevalent in many developing countries as the climate changes, a report says. But the authors found an unexpected twist in the way the climate is likely to affect the disease. Kathleen Alexander, an associate professor of wildlife at Virginia Tech’s College of Natural Resources and Environment, says climate drives a large part of diarrhoea and related disease, increasing the threat which a changing climate poses to vulnerable communities. The analysis of 30 years of data by her team found an unexpected peak of diarrhea during the hottest and driest part of the year, when there were most flies.

China's Toxic Water - On World Water Day, I'd like to share with you a strong collection of images from southern China, showing local activists fighting against industrial pollution in their waterways, and cancer sufferers in so-called "cancer villages", linked to pollution from hazardous chemicals. Earlier this year, China's environment ministry released a report officially acknowledging the existence of these villages for the first time and signaling its willingness to address toxic water pollution. Greenpeace reached out to World Press Photo award-winner Lu Guang and other photographers to bear witness and has allowed me to share their images here on World Water Day, in an effort to bring this environmental and human tragedy to the world's attention. Photos and captions were provided by the photographers and Greenpeace. [17 photos]

UN chief warns that nearly half the world could face a scarcity of water by 2030 - Secretary-General Ban Ki-moon is warning that by 2030 nearly half the world’s population could be facing a scarcity of water, with demand outstripping supply by 40 percent. Ban said one in three people already live in a country with moderate to high water stress. He spoke Friday at a U.N. event marking the opening of the International Year of Water Cooperation 2013 and the 20th anniversary of the proclamation of World Water Day. He said “competition is growing among farmers and herders; industry and agriculture; town and country; upstream and downstream; and across borders.” With a growing global population and climate change, he said international cooperation is essential to protect water resources.

Climate may be less sensitive to greenhouse gases than previously thought. So now what? - The world has pumped roughly 100 billion tons of carbon into the atmosphere over the past decade. But you wouldn’t know it by looking at global temperatures. The Economist, in a piece titled “Apocalypse Perhaps a Little Later,” quotes NASA’s James Hansen thusly: “The five-year mean global temperature has been flat for a decade.” What’s more, surface temperatures since 2005 are at the low end of the range of projections derived from 20 climate models, notes Ed Hawkins of the University of Reading. If temperatures remain flat for much longer, they’ll drop out of the models’ range entirely. The Economist: The mismatch between rising greenhouse-gas emissions and not-rising temperatures is among the biggest puzzles in climate science just now. It does not mean global warming is a delusion. Flat though they are, temperatures in the first decade of the 21st century remain almost 1°C above their level in the first decade of the 20th. But the puzzle does need explaining.

As Scientists Predicted, Global Warming Continues - One often hears the statement in the media that global warming stopped in 1998, or that there has been no global warming for the past 16 years. Why pick 16 years? Why not some nice round number like 20 years? Or better yet, 30 years, since the climate is generally defined as the average weather experienced over a period of 30 years or longer? Temperatures at Earth’s surface undergo natural, decades-long warming and cooling trends, related to the La Niña/El Niño cycle and the 11-year sunspot cycle. The reason one often hears the year 1998 used as a base year to measure global temperature trends is that this is a cherry-picked year. An extraordinarily powerful El Niño event that was the strongest on record brought about a temporary increase in surface ocean temperatures over a vast area of the tropical Pacific that year, helping boost global surface temperatures to the highest levels on record (global temperatures were warmer in both 2005 and 2010, but not by much.) But in the years from 2005 – 2012, La Niña events have been present for at least a portion of every single year, helping keep Earth’s surface relatively cool.Thus, if one draws a straight-line fit of global surface temperatures from 1998 to 2012, a climate trend showing little global warming results. If one picks any year prior to 1998, or almost any year after 1998, a global warming trend does result. The choice of 1998 is a deliberate abuse of statistics in an attempt to manipulate people into drawing a false conclusion on global temperature trends. One of my favorite examples of this manipulation of statistics is shown an animated graph called “The Escalator”, created by (Figure 1).

Why the Globe Hasn’t Warmed Much for the Past Decade - Even the quickest glance at a graph of global temperatures makes it clear that the planet was warming sharply during the 1980s and 1990s. But while the 2000s were the hottest decade on record, the rate of warming slowed considerably after the turn of the current century — even while human emissions of heat-trapping greenhouse gas emissions have continued to grow. The question that has lingered is where’s all the extra heat going? The answer, according to a new paper in Geophysical Research Letters, is that a lot of it is being stored in the deep ocean, more than a half-mile down. “We normally think about global warming as what we experience on the Earth's surface,” said co-author Kevin Trenberth, of the National Center for Atmospheric Research, in an interview. If extra heat is temporarily stored elsewhere thanks to natural climate variations, we won't necessarily notice it. But sooner or later it will inevitably emerge, which means that the current slowdown in warming may well be balanced by a period of rapid warming in a few years — nobody knows how many — from now. Scientists have always said that global warming would proceed in fits and starts, not in a smooth upward trend in temperatures. This study offers one specific explanation of why that happens.

In Hot Water: Global Warming Has Accelerated In Past 15 Years, New Study Of Oceans Confirms - A new study of ocean warming has just been published in Geophysical Research Letters by Balmaseda, Trenberth, and Källén (2013). There are several important conclusions which can be drawn from this paper.

  • Completely contrary to the popular contrarian myth, global warming has accelerated, with more overall global warming in the past 15 years than the prior 15 years. This is because about 90% of overall global warming goes into heating the oceans, and the oceans have been warming dramatically.
  • As suspected, much of the ‘missing heat’ Kevin Trenberth previously talked about has been found in the deep oceans. Consistent with the results of Nuccitelli et al. (2012), this study finds that 30% of the ocean warming over the past decade has occurred in the deeper oceans below 700 meters, which they note is unprecedented over at least the past half century.
  • Some recent studies have concluded based on the slowed global surface warming over the past decade that the sensitivity of the climate to the increased greenhouse effect is somewhat lower than the IPCC best estimate. Those studies are fundamentally flawed because they do not account for the warming of the deep oceans.
  • The slowed surface air warming over the past decade has lulled many people into a false and unwarranted sense of security.

Two Key Climate Change Concepts Are 'Misunderstood' - There is widespread confusion about the near-term benefits of reducing greenhouse gas emissions, and that misunderstanding may be complicating the formidable task of reducing manmade global warming, argue two climate researchers in Science in a story published Thursday. The scientists, Damon Matthews of Concordia University in Montreal and Susan Solomon of MIT, make the case that policymakers, the media, and to some extent the public have misunderstood the implications of two key concepts — the “irreversibility” of climate change, and the amount of global warming already in the pipeline due to historical greenhouse gas emissions. The duo challenge what they say have become pervasive misinterpretations of recent scientific results, including findings from a 2010 National Research Council report they helped write that said that the amount of global warming to date is essentially irreversible on the timescale of about 1,000 years. That study has been repeatedly cited by policymakers to justify delays in tackling carbon emissions by making global warming appear to be inexorable, regardless of what actions are taken.

How climate change threatens the seas: "Ocean acidification," the shifting of the ocean's water toward the acidic side of its chemical balance, has been driven by climate change and has brought increasingly corrosive seawater to the surface along the West Coast and the inlets of Puget Sound, a center of the $111 million shellfish industry in the Pacific Northwest. USA TODAY traveled to the tendrils of Oyster Bay as the second stop in a year-long series to explore places where climate change is already affecting lives. The acidification taking place here guarantees the same for the rest of the world's oceans in the years ahead. This isn't the kind of acid that burns holes in chemist's shirt sleeves; ocean water is actually slightly alkaline. But since the start of the industrial revolution, the world's oceans have grown nearly 30% more acidic, according to a 2009 Scientific Committee on Oceanic Resources report. Why? Climate change, where heat-trapping carbon dioxide emitted into the air by burning coal, oil and other fossil fuels ends up as excess carbonic acid absorbed into the ocean.

NSIDC: Arctic Sea Ice Report, March 25, 2013 - On March 15, 2013, Arctic sea ice likely reached its maximum extent for the year, at 15.13 million square kilometers (5.84 million square miles). The maximum extent was 733,000 square kilometers (283,000 square miles) below the 1979-2000 average of 15.86 million square kilometers (6.12 million square miles). The maximum occurred five days later than the 1979-2000 average date of March 10. The date of the maximum has varied considerably over the years, with the earliest maximum in the satellite record occurring as early as February 24 in 1996 and as late as April 2 in 2010. This year’s maximum ice extent was the sixth lowest in the satellite record. The lowest maximum extent occurred in 2011. The ten lowest maximums in the satellite record have occurred in the last ten years, 2004 to 2013.

Arctic Ice Hits Annual Max and Its 6th Lowest on Record - The skin of sea ice that covers the Arctic Ocean has reached its maximum extent for 2013, the National Snow and Ice Data Center announced Monday, and the annual melt season has begun. As of March 15, ice covered 5.84 million square miles of ocean, the sixth-lowest since satellite observations began in the 1970s, and 283,000 square miles lower than the 1979-2000 average. Reflecting the influence of global warming, the 10 lowest sea ice maximums have all occurred over the past 10 years. Last summer’s ice minimum, moreover, was the lowest on record, with 2007 coming in a distant second. Taken together, it’s one more sign that the planet is warming under the influence of heat-trapping greenhouse gases.The Arctic is warming especially quickly, however, thanks to a sort of vicious cycle that operates between ice, ocean and sunlight. When the sea is covered with bright, reflective ice, incoming sunlight bounces back into space. When the darker water underneath is exposed, some of the Sun’s energy is absorbed, heating the seawater. That warms the air in turn, increasing the melting and exposing even more dark seawater to the incoming sunlight, and so on.This feedback cycle, known as Arctic amplification, triggered by warming temperatures, has been reducing ice cover more or less steadily for the past 40 years, at least. This sea ice decline may be impacting areas well outside the Arctic Circle, by setting in motion a chain of events that lead to altered weather patterns in the Northern Hemisphere, favoring some types of extreme weather events.

Scientists link frozen spring to dramatic Arctic sea ice loss.  Climate scientists have linked the massive snowstorms and bitter spring weather now being experienced across Britain and large parts of Europe and North America to the dramatic loss of Arctic sea ice. Both the extent and the volume of the sea ice that forms and melts each year in the Arctic Ocean fell to an historic low last autumn, and satellite records published on Monday by the National Snow and Ice Data Centre (NSIDC) in Boulder, Colorado, show the ice extent is close to the minimum recorded for this time of year.  "The sea ice is going rapidly. It's 80% less than it was just 30 years ago. There has been a dramatic loss. This is a symptom of global warming and it contributes to enhanced warming of the Arctic," said Jennifer Francis, research professor with the Rutgers Institute of Coastal and Marine Science. According to Francis and a growing body of other researchers, the Arctic ice loss adds heat to the ocean and atmosphere which shifts the position of the jet stream — the high-altitude river of air that steers storm systems and governs most weather in northern hemisphere."This is what is affecting the jet stream and leading to the extreme weather we are seeing in mid-latitudes," she said. "It allows the cold air from the Arctic to plunge much further south. The pattern can be slow to change because the [southern] wave of the jet stream is getting bigger. It's now at a near record position, so whatever weather you have now is going to stick around," she said.

Northern blizzards linked to Arctic sea ice decline - Climate scientists say the massive snow storms to hit North America and Europe this year were linked to shrinking sea ice levels in the Arctic. Satellite pictures reveal the sea ice levels were the sixth lowest since satellite records began over 30 years ago. National Snow and Ice Data Centre's Walt Meier says the thickness of the sea ice is also a concern. "More importantly, at this time of year, is the thickness of the ice, and that's still looking quite low," he said."It's probably at or near record low levels for this time of year." The shrinking Arctic sea ice levels reached their seasonal maximum on March 15. MeteoGroup forecaster Claire Austin says March has been especially chilly so far. "It's much, much colder and it has been cold for the last few weeks - so it is unusual," Ms Austin said. "We do get snowfalls, even up as far as April, where we see some quite significant snowfalls at times. "This is just incredibly cold air [that] doesn't want to go away unfortunately."

Arctic change reverberates around globe, experts say - Most of the sea ice that forms each fall and winter in the Arctic now melts each spring and summer, a recent change that is impacting global patterns of weather and trade as well as the U.S. military's strategic planning, experts told reporters during a briefing Tuesday. "There are tremendous two-way and multiple interactions between the Arctic and the rest of the world," retired Rear Adm. David Titley said during the teleconference organized by Climate Nexus, a group trying to raise awareness about climate change. Experts tied the melting ice in the Arctic to the recent spate of stormy winter weather in parts of the U.S. and Europe. They also noted that the prospect of ice-free summers in the Arctic as soon as 2030 is already impacting international trade and U.S. Navy plans to protect Arctic resources.

Declining U.S. carbon dioxide emissions - Emissions of carbon dioxide from fossil fuel consumption in the United States have fallen remarkably since 2008, with recent levels the lowest since 1995. Here I comment on some of the factors behind this.  Generating electricity from natural gas emits about half the carbon dioxide as coal. Hence we enjoyed a serendipitous, unplanned decline in carbon emissions from a development that ended up benefiting consumers rather than forcing them into painful adjustments. This is not to claim that the problem is solving itself. An even bigger factor in the reduction in fuel use was likely the economic recession itself. The Economic Report of the President estimated that 52% of the decline in U.S. CO2 emissions could be attributed to the economic recession, 40% to fuel switching, and 8% to improved energy efficiency. As the economy recovers, the EIA is expecting U.S. emissions to resume their historical climb if there are no new policy actions. But there is one important lesson from the recent U.S. experience that's worth emphasizing: these outcomes may ultimately end up being driven by events that are bigger than any policy initiatives we might contemplate.

Our Carbon, Our Climate, Our Cash - We all buy stuff that generates carbon dioxide emissions and threatens the stability of our climate. We don’t directly pay the resulting costs, which are postponed to a vague and indefinite future in which none of us can be held individually accountable for a devastating increase in the level and variability of average global temperatures. A tax on carbon consumption could help solve the problem, bringing the prices of carbon-intensive goods and services into closer alignment with their true costs and discouraging us all from buying more of them.  We would be hard hit by a sudden shift in relative prices, and some of us are especially vulnerable to an increase in energy costs. However, we could use carbon tax revenues to help compensate for the shock – offering everyone a rebate-like dividend to buffer reductions in purchasing power and encouraging ourselves to invest in technologies that reduce our carbon footprint.  A new Climate Protection Act introduced by Senators Bernard Sanders, the independent from Vermont, and Barbara Boxer, Democrat of California, proposes such a tax. About 60 percent of the revenues would be returned directly to consumers, 25 percent allotted to deficit reduction and 15 percent devoted to investments in renewable energy. The bill’s sponsors aim to win the support of the American people rather than influential industry lobbying groups. Is this aim a strength or a weakness? The way you answer this question depends on who you think will throw the most weight behind climate-change legislation. It also depends on who you think “owns” our atmosphere and who you believe should get compensated when it is compromised.

PROMISES, PROMISES: Hopes on climate change action may fall short again in Obama’s new term - Slowing the buildup of greenhouse gases responsible for warming the planet is one of the biggest challenges the United States and President Barack Obama face. The effects of rising global temperatures are widespread and costly: more severe storms, rising seas, species extinctions, and changes in weather patterns that will alter food production and the spread of disease. Politically, the stakes are huge. Any policy to reduce heat-trapping pollution will inevitably target the main sources of Americans’ energy: the coal burned by power plants for electricity and the oil that is refined to run automobiles. Those industries have powerful protectors in both parties in Congress who will fight any additional regulations handed down by the administration that could contribute to Americans paying more for electricity and gas at the pump. There’s also the lingering question of how much the U.S. can do to solve the problem alone, without other countries taking aggressive steps to curb their own pollution.

Using a carbon tax to implement energy deregulation - The Financial Times calls the carbon tax the “least worst” tax for its economically efficient ability to raise tax revenue while curtailing an unwanted externality, greenhouse gases. Plain-old blocking-and-tackling economics there. Back in 2011, several AEI scholars illustrated one way a carbon tax might work: Subsidies for ethanol and other alternative fuels would be abolished (basic research on renewable energy would be funded on the same stringent terms as other basic research). As discussed above, business and household energy tax credits would be abolished. Regulations designed to lower greenhouse gas emissions would be repealed. Instead, a tax on greenhouse gas emissions (“carbon tax”) would be imposed. The tax would be similar to Revenue Option 35 in the Congressional Budget Office’s March 2011 Budget Options book, but would be implemented as a tax rather than as a cap‐and‐trade program. The tax would take effect in 2013 and be phased in at a uniform pace over five years, so that the 2017 tax equaled the level prescribed for that year in the CBO option, slightly more than $26 per metric ton of CO2equivalent. As prescribed in the CBO option, the tax would thereafter increase at a 5.6 percent annual rate through 2050. A carbon tax version of CBO Revenue Option 35 would raise roughly $1.2 trillion over a decade with annual revenue gains of over $150 billion a decade out. We can debate what to do with the revenue, but the point is to replace an economically inefficient way of dealing with climate change.

Carbon taxes spurned in Senate budget vote -  The Senate went on record against imposing taxes on industrial carbon emissions in a pair of symbolic votes Friday, providing clear evidence that major climate change legislation lacks political traction. Lawmakers voted 41-58 to reject Sen. Sheldon Whitehouse’s (D-R.I.) proposal to ensure that revenue from any carbon tax be returned to the U.S. public through deficit reduction, reducing other rates and other “direct” benefits. Thirteen Democrats joined 45 Republicans opposing the Whitehouse amendment to the nonbinding budget plan, including some Democrats facing reelection in 2014 such as Sens. Max Baucus (Mont.), Mark Pryor (Ark.) and Mark Warner (Va.). The Whitehouse amendment went head-to-head with Sen. Roy Blunt’s (R-Mo.) anti-carbon tax amendment to ensure that any future carbon tax legislation requires 60 votes to pass. Blunt’s amendment drew a procedural protest that itself would have required 60 votes to overcome, and only got 53 “yes” votes — a majority, but not enough. He drew eight centrist Democrats to his side

Conservative Principles for Environmental Reform - The existing environmental regulatory architecture, largely erected in the 1970s, is outdated and ill-suited to address contemporary environmental concerns. Any debate on the future of environmental protection, if it is to be meaningful, must span the political spectrum. Yet there is little engagement in the substance of environmental policy from the political right. Conservatives have largely failed to consider how the nation’s environmental goals may be best achieved. Perhaps as a consequence, the general premises underlying existing environmental laws have gone unchallenged and few meaningful reforms have proposed, let alone adopted. This essay, prepared for the Duke Law School conference on “Conservative Visions of Our Environmental Future,” represents a small effort to fill this void. Specifically, this essay briefly outlines a conservative alternative to the conventional environmental paradigm. After surveying contemporary conservative approaches to environmental policies, it briefly sketches some problems with the conventional environmental paradigm, particularly its emphasis on prescriptive regulation and the centralization of regulatory authority in the hands of the federal government. The essay then concludes with a summary of several environmental principles that could provide the basis for a conservative alternative to conventional environmental policies.

Real Pragmatism for Real Climate Change: Interview with Dr. John Abraham - At a time when extreme weather incidents are causing billions in damages, businesses, governments and the public need the right information to make the right decisions. The bad news is that nature of superstorms like Hurricane Sandy has a human fingerprint. The good news is that if man is harming the climate, man can also do something about it. Dr. John Abraham is a thermal sciences researcher and professor at the University of St. Thomas, in Minnesota who has straddled many worlds in his quest for answers to climate change, from working with the US defense industry to pro-bono work creating low-cost energy solutions to Africa’s remote areas. Dr. Abrahams discusses:

• What climate change REALLY means
• How the Earth’s warming bears a human fingerprint
• How we can do something now about climate change, with today’s technology
• How and why the public remains ill-informed on the issue
• How Hurricane Sandy can be viewed from the climate change spectrum
• How the Earth’s warming has a human fingerprint
• Where the silver lining in all of this is
• Why Keystone XL will probably (but shouldn’t) be green-lighted
• How ‘micro-wind’ may be a hot seller in our renewable future
• How the future could see a merger of interests in the fossil fuel and alternative energy sectors

IMF: Want to fight climate change? Get rid of $1.9 trillion in energy subsidies.: What’s the simplest way to tackle global warming? Make sure that fossil fuels are priced properly and not subsidized. Is it really that easy?That’s the core idea behind a large new report (pdf) from the International Monetary Fund, which argues that the world “misprices” fossil fuels to the tune of some $1.9 trillion per year. Eliminating these subsidies, the IMF argues, and replacing them with appropriate carbon taxes could cut global greenhouse-gas emissions by 13 percent, curtail air pollution, and shore up the finances of many poorer countries now in debt trouble. So let’s take a closer look at the IMF’s numbers. Energy subsidies, the report argues, come in two very different flavors: –$480 billion in direct subsidies for consumption. This is what we typically think of as “fossil fuel subsidies.” In 2011, governments around the world spent some $480 billion to lower the price of petroleum, natural gas, coal, and electricity for their citizens. The vast majority of these subsidies occur in developing nations, particularly in North Africa and the Middle East

A New Declaration - The Occupied Wall Street Journal - We hold these truths to be self-evident: That the real, physical world is the source of our own lives, and the lives of others. A weakened planet is less capable of supporting life, human or otherwise. Thus the health of the real world is primary, more important than any social or economic system, because all social or economic systems are dependent upon a living planet. It is self-evident that to value a social system that harms the planet’s capacity to support life over life itself is to be out of touch with physical reality. That any way of life based on the use of nonrenewable resources is by definition not sustainable. That any way of life based on the hyper-exploitation of renewable resources is by definition not sustainable: if, for example, fewer salmon return every year, eventually there will be none. This means that for a way of life to be sustainable, it must not harm native communities: native prairies, native forests, native fisheries, and so on.

Why such a fuss about extinction? What is wrong with extinction? I ask because I am merely wondering whether we sometimes forget a grim reality of the story of life on Earth - that extinction has always been with us. In fact, it has quite often been good for us. We are certainly far better off without velociraptors slashing their way through our cities. Our streets are safer with no sabre-toothed tigers. And imagine trying to swat one of those monster prehistoric insects like a vulture-sized dragonfly. The question of extinction most recently surfaced at the talks on the Convention on International Trade in Endangered Species of Wild Fauna and Flora - the treaty meant to save endangered species from the devastating effects of trade. The slaughter of rhino, the decimation of elephant, the forlorn last stand of the tiger - all had their profiles raised as the delegates in Bangkok negotiated their fate. And anyone hearing the protests and the campaigns, and the shocking statistics about the losses, might be forgiven for thinking that extinction was some new kind of evil that was not invented until rapacious and uncaring mankind came along. I should state right now that some of the most ghastly examples are indeed entirely the result of man's activities, sometimes unwittingly, sometimes carelessly.

U.S. economy and electricity demand growth are linked, but relationship is changing - A country's economy and its energy use, particularly electricity use, are linked. Short-term changes in electricity use are often positively correlated with changes in economic output (measured by gross domestic product (GDP)). However, the underlying long-term trends in the two indicators may differ. All else equal, a growing economy leads to greater energy and electricity use. However, in developed countries like the United States, the relationship has been changing for some time, as economic growth now outpaces electricity growth. As suggested by data over the past 60 years, EIA's Annual Energy Outlook 2013 Reference case projections through 2040 show that U.S. electricity use and economic growth will continue to be linked. However, the long-run trend of slowing growth in electricity use relative to economic growth will also continue: the rate of projected growth in electricity use will be less than half the rate of economic growth. In particular, EIA does not expect any sustained return to the situation between 1975 and 1995, when the two growth measures were nearly equal in value, or the earlier period in which the growth rate in electricity use far exceeded the rate of economic growth.

Heating Homes With Switchgrass Pellets Could Save Northeasterners Billions And Cut Their Carbon Emissions -- According to a new cost-benefit analysis by the Agricultural Research Service (ARS), a switch from burning oil for heat to burning switchgrass biomass would cut down on both energy costs and carbon emissions for homes in the northeastern United States. What’s especially significant is that study’s accounting of carbon emissions considered the entire life cycle of switchgrass, from crop planting, to growing, to harvesting and production. It still found switchgrass pellets yield a significant reduction in carbon dioxide equivalent (CO2e) emissions compared to both heating oil and natural gas, as well as a cost saving of just under $7 per gigajoule of heat compared to oil: [T]he researchers calculated that using switchgrass pellets instead of petroleum fuel oil to generate one gigajoule of heat in residences would reduce greenhouse gas emissions by 146 pounds of CO2e. Using switchgrass pellets instead of natural gas to produce one gigajoule of heat in residences would reduce greenhouse gas emissions by 158 pounds of CO2e.

Revisiting the Energy Return and Merits of Soybean Biodiesel  -In the current issue of Scientific American, there is an article with nice multiple graphics to educate people about today’s higher cost of producing energy as measured by the EROI. Energy return on investment (EROI) is the value used to represent the energy obtained per unit of energy spent to obtain it. The article titled, “The True Cost of Fossil Fuels,” is written by Mason Inman, who is writing a biography of geologist M. King Hubbert, the “father of peak oil”.  Inman explains that even though much of the easy-to-extract oil is already gone, the average EROI of conventional oil, at 16, is still far higher than that of other liquid fuels. As we go after oil from more difficult places, however, that number continues to fall. He tells us that 5 to 9 is the minimum EROI required for industrial societies to function economically.  The following graphic (using Inman’s EROI values) puts some of today’s liquid fuel sources into perspective:As shown, corn ethanol is on the bottom of the heap for the EROI of the included liquid fuels, at 1.4. Irrigated corn produced in Nebraska would be even lower. And corn ethanol’s not even close to fitting into the 5 to 9 required economic range, which is why it would not survive without the infrastructure subsidies and mandates that it has been afforded.

SNL: Audit prompts DOE to re-examine $17M spent on CCS projects - The U.S. Department of Energy is seeking to recover nearly $4 million from an industrial carbon capture and storage project and is reviewing some $13 million more that it awarded to three similar "clean coal" projects, an inspector general audit released March 26 revealed. The department has recovered some of the $3.7 million it gave to a clean coal project "and is continuing to pursue the recovery of the remainder," . Two other projects with about $3 million in "questioned costs" and a third one flagged by the inspector general for more than $10 million of "unsupported costs" are being examined by the Office of Fossil Energy, McConnell said.The DOE incurred these costs as it disbursed $623 million of the nearly $1.5 billion that the American Recovery and Reinvestment Act of 2009 committed to "clean industrial technologies and sequestration projects," Gregory Friedman, the department's inspector general, said in an introductory memorandum to Energy Secretary Steven Chu. This stimulus funding for carbon capture and storage deployment or research and development efforts led DOE to sign a total of 46 cooperative agreements before the Sept. 30, 2010, deadline set by the Recovery Act.

How helium is like mortgages - John Kemp might just have delivered the perfect John Kemp column yesterday: 1,700 words on an obscure commodity you probably didn’t even realize was a commodity. In this case, it’s a noble gas: the Federal Helium Reserve (yes, there’s a Federal Helium Reserve) is at risk of imminent shutdown, which in turn threatens everything from the semiconductor industry to MRI scanners. Already, at least one particle accelerator had to delay operations “because of problems obtaining fresh supplies of helium.” Kemp’s column is based in large part on a 17-page GAO report which includes this chart, showing the seemingly inexorable rise in the price of refined helium. (Another thing you didn’t know: helium comes in both “crude” and “grade A refined” versions.) As you can see from the chart, the problem here isn’t finding crude helium, so much as it is refining the stuff into something usable. But around half of the helium used in the United States, and roughly a third of the gas consumed worldwide, is sourced from a stockpile in northern Texas left over from the Cold War. At the moment, the only way that helium can be sold from that stockpile is in order to pay down the debt which was run up in 1960 building the Texas facility. But thanks in large part to the soaring helium price, there’s virtually none of that debt left — and when it’s all gone, the government can’t sell any helium any more. As a result, it’s pretty urgent that Congress put in place some kind of mechanism to keep the sales going. The alternative would be devastating to many industries including the medical profession.

Are Exploding Manhole Covers In Washington DC Caused By Shocking Levels Of Leaking Natural Gas? - Residents of Washington, DC are used to jokes about metaphorical hot air, humidity, and the swampy history of their city. But there’s something they may not know about the District: it’s overrun with methane, which sometimes makes manhole covers explode. Natural gas is mostly methane, and it is carried through underground pipes to heat buildings and cook food. Those pipes are often old, and this led ecologist and chemical engineer Robert Jackson of Duke University to drive around DC over a period of two months, regularly measuring the air to take methane levels. He and his research team found methane leaks everywhere, with thousands of places having significantly higher than normal methane concentrations, and some places reaching 50 times normal urban levels (100 ppm vs 2 ppm). A similar study in Boston last year found essentially the same results. In DC, the source wasn’t the swamp on which the city was built — it was fossil fuel. (The methane they measured had more carbon-13 rather than the normal, modern carbon-12.)

Governors implore White House to assess coal export emissions - A pair of Northwestern governors want the White House to weigh the effects of United States coal exports on global climate change. Democratic Govs. John Kitzhaber (Ore.) and Jay Inslee (Wash.) said a confluence of factors — declining U.S. coal consumption, increasing demand in China and India, and proposed export terminals in their states — require that the White House investigate the climate impact of exporting coal. “Given that the cumulative total of coal exports from Oregon and Washington could result in CO2 emissions on the order of 240 million tons per year, well above the significance level described in the draft guidance – it is hard to conceive that the federal government would ignore the inevitable consequences of coal leasing and coal export,” they said in a letter sent Monday to White House Council on Environmental Quality (CEQ) Chairwoman Nancy Sutley. The governors were referencing a 2010 CEQ draft guidance to federal agencies that asked them, under the National Environmental Policy Act (NEPA), to consider the climate impact of their actions.

Governors Ask Obama to Weigh Climate Impact of Coal Ports - President Barack Obama’s administration should weigh the climate-change impact of burning coal in Asia when considering whether to approve Pacific coal- export terminals, two Western governors said. In a letter to the White House Council of Environmental Quality, the Democratic governors, John Kitzhaber of Oregon and and Jay Inslee of Washington, said the administration must expand its review of the projects and consider the carbon dioxide that would be released when the coal is burned for power. Collectively, three proposed terminals, which the Army Corps of Engineers is reviewing, would result in the export of up to 100 million tons of coal a year, they said. “We believe the federal government must examine the true costs of long-term commitments to supply coal from federal lands for energy production, whether that production occurs domestically or in Asia,” the governors wrote in a letter yesterday to Nancy Sutley, the head of that White House office. The climate impact of these decisions “dwarf those of almost any other action the federal government could take in the foreseeable future.”

New EIA Data Reveal U.S. Coal Use Rising Again - New data from the U.S. Energy Information Administration (EIA) reveals a troubling trend: Coal-fired power generation — and its associated greenhouse gas emissions — were on the rise as 2012 came to an end. According to the data, which was released this week, natural gas prices have risen significantly since April of 2012, prompting a rise in coal-fired electric generation (see figure below). This increase marks a dramatic change from the trends we’ve seen in the United States over the past several years. U.S. energy-related carbon dioxide (CO2) emissions from the power sector had been falling, mostly due to more electricity being generated by renewables, slowed economic growth, and a greater use of low-cost natural gas, which produces roughly half the CO2 emissions of coal during combustion. The new uptick in gas prices and coal use suggests that we cannot simply rely on current market forces to meet America’s emissions-reduction goals. In fact, EIA projects that CO2 emissions from the power sector will slowly rise over the long term. To keep emissions on a downward trajectory, the Administration must use its authority to prompt greater, immediate reductions by putting in place emissions standards for both new and existing power plants.

New Study Exposes How Natural Gas Isn't the Clean Fossil Fuel It's Hyped up to Be - Last week, investigators studying methane leakage levels in Manhattan reported alarming preliminary findings. The gas industry and Con Edison estimate 2.2% leakage in its distribution systems, and at leakage above 3.2%, according to the Environmental Defense Fund, natural gas ceases to have any climate advantage over other fossil fuels. But the study found an average cumulative leakage of over 5% in natural gas production and delivery. At these levels, natural gas—93% of which is methane—has a far more potent greenhouse gas impact than burned coal or oil, the authors stated.  When burned, methane natural gas produces CO2 but at half the level of burned coal or oil, a fact that has won natural gas the reputation as the cleanest fossil fuel. In the atmosphere, however, methane (CH4),  the principal ingredient of natural gas, is a powerful greenhouse gas, like CO2 absorbing infrared radiation from the earth and warming the planet. Indeed by weight, and over time (100 years), methane warms 20 times more than carbon dioxide. 

Interior Department Finishes Look-Before-You-Leap Oil Shale Plan - In a sharp contrast to the Bush administration’s eager embrace of commercial oil shale development, the Department of Interior today unveiled a final plan that calls for careful research into the feasibility and environmental issues surrounding oil shale, and opens about only half as much federal lands to potential leasing for commercial development.“This plan maintains a strong focus on research and development to promote new technologies that may eventually lead to safe and responsible commercial development of these domestic energy resources,” said Interior Secretary Ken Salazar in announcing the final plans. “It will help ensure that we acquire critically important information about these technologies and their potential effects on the landscape, especially our scarce water resources in the West.” Oil shale, not to be confused with shale oil in places like North Dakota which is actual oil trapped in underground rock formations, is actually a sedimentary rock containing kerogen. It must be heated and put under high pressure, either underground or after being mined and brought to the surface, to produce a petroleum liquid. Successful commercialization of oil shale in the U.S. has been an unrealized dream for many decades. The Obama administration plan finalized today makes available about 700,000 acres of land in Colorado, Utah and Wyoming for potential oil shale leasing. That compares to 1,340,774 acres in the Bush plan.

Obama Energy Pick’s Gas Study Faulted Over Industry Ties - President Barack Obama’s nominee for energy secretary is drawing criticism for leading a study that minimized risks of natural gas while failing to disclose that some of its researchers had financial ties to the industry. The nominee, Ernest Moniz, is head of the Massachusetts Institute of Technology’s Energy Institute, which issued a report in 2011 that said the environmental risks of increased drilling and production “are challenging but manageable.” A report co-author had already agreed to take a position with Talisman Energy Inc (TLM). when the report was released. Another researcher was on the board of Cheniere Energy Inc. (LNG), which is building an export facility for liquefied natural gas. “The public should have been informed that MIT’s natural gas study was written by representatives of the oil and gas industry,”

Natural Gas Lobbyist Takes on Obama on Fracking - Bloomberg: The new head of a U.S. natural gas trade group said he will seek to raise the industry’s visibility as the Obama administration considers regulations that may limit hydraulic fracturing for the fuel. America’s Natural Gas Alliance, which includes Chesapeake Energy Corp. (CHK) and Devon Energy Corp. among its members, today named Marty Durbin as chief executive officer. Durbin, 47, is the nephew of Richard Durbin, the second-ranking U.S. Senate Democrat. Durbin takes over the Washington-based group as President Barack Obama’s administration considers rules for hydraulic fracturing, or fracking, for oil and gas on federal lands. The process forces water, sand and chemicals underground to unlock gas trapped in shale-rock formations, and helped to drive down prices last year to a decade low. Environmentalists say fracking poses pollution risks. The energy industry has backed state regulations as sufficient to limit the risks, Durbin said. “The good news about the administration is it recognizes the benefits of natural gas,” Durbin said

EPA announces expert panel to review fracking study  (Reuters) - The U.S. environmental regulator has selected experts in fields ranging from well-drilling to toxicology to review a highly anticipated report on the natural gas and oil extraction method commonly known as fracking. The Environmental Protection Agency's science advisory board on Monday named 31 experts from universities, scientific labs and companies to review the agency's landmark hydraulic fracturing study that is expected to be delivered in 2014. The study, first requested by Congress in 2010, may prove pivotal in the government's regulation of fracking that has unlocked generations' worth of oil and gas supplies. EPA Acting Administrator Bob Perciasepe said the selection of a range of impartial experts shows the agency, whose foes have accused it of being opaque in its practices, is being open in the report's procedure. "We have worked to ensure that the study process be open and transparent throughout, and the SAB (scientific advisory board) panel is another example of our approach of openness and scientific rigor," he said in a statement.

Shale Boom Not Leading to Widespread Hiring in Ohio - Ohio’s shale boom appears to be injecting a lot more retail spending in the corner of the state where that exploration and development work is concentrated, but it isn’t yet leading to much more hiring. Researchers at Cleveland State University found that sales receipts in the 13 Ohio counties that have the state’s highest concentration of shale development grew 21.1% in 2012 to $14.9 billion, up from $12.3 billion the year before. By contrast, in the 44 Ohio counties without any shale development, receipts went up only 6.9%. The report divided the state into four categories — high shale development, zero shale development, as well as moderate and weak shale development. Sales receipts grew only 7.6% in moderate shale counties, 10.9% in weak shale counties. “Sales activity in strong shale counties has clearly been faster than elsewhere in the state during 2012,” the report says. So far, though, the same doesn’t hold true for hiring. The researchers found employment rose 1.4% year-over-year in counties with heavy shale production, exactly the same as in counties with moderate development. Weak shale counties had 0.8% job gains, while counties with no shale development saw 1.3% in job gains.

Federal Study: Shale Development Fragmenting Allegheny County Forests - A new study from the U.S. Geological Survey (USGS) delineates how the construction of new roads and pipelines for Marcellus Shale natural gas development and other energy industries can mince up local forests, leading to smaller ecosystems and limiting wildlife. Using aerial imagery, USGS researchers found that developers laid 140 miles of new roads and eight miles of new pipelines for the sake of 647 Marcellus Shale gas wells drilled in Allegheny County from 2004 to 2010. In doing so, the developers have subdivided the county's wooded areas, creating 35 new "forest patches" out of larger tracts of woodland. Some species of wildlife cannot or will not live within these smaller patches of "edge forest," preferring instead the wider ranges of so-called "interior forest," according to the study. "For example, certain birds require interior forest area," said Terry Slonecker, USGS research geographer and lead author of the study. "So when you start to slice and dice the landscape with roads and pipelines, much less interior forest is available for them to exist." Additionally, the disturbance of land from new developments can cause large amounts of debris and runoff to flow into waterways, damaging water ecosystems and aquatic wildlife.

EARTHQUAKES: States deciding not to look at seismic risks of fracking - Nine months after a National Academy of Sciences panel said oil and gas regulators should take steps to prevent man-made earthquakes, officials in key states are ignoring quake potential as they rewrite their drilling rules.  Two major drilling states, California and Texas, are overhauling their drilling rules without looking at the seismic risks linked to deep injection of drilling and hydraulic fracturing wastewater. New York regulators dismissed earthquake concerns in their drawn-out process of updating drilling rules.  One possible exception, though, may be Illinois. Comprehensive legislation introduced there mirrors the "traffic light" regulation system suggested in the NAS report. That system would allow small earthquakes but would shut down wells when public safety is at risk. "The regulatory body affiliated with the permitting of wells should include, as part of each project's operation permit, a mechanism (such as a 'traffic light' mechanism) for the well operator to be able to control, reduce, or eliminate the potential for felt seismic events," the panel wrote in its report (Greenwire, June 15, 2012).  U.S. EPA has also looked at earthquakes related to energy development. But its study has stalled in the draft stage, and EPA officials say they have no timetable for issuing a final report (EnergyWire, March 19, 2013).  Geologists have known for decades that deep injection of industrial waste can lubricate faults and unleash earthquakes. One of the most famous instances of man-made earthquakes, or "induced seismicity," occurred in the late 1960s at the Rocky Mountain Arsenal near Denver, where the Army manufactured chemical weapons.

Waste may have led to quake  — An unusual and widely felt magnitude 5.6 quake in Oklahoma in 2011 probably was caused when oil-drilling waste was pushed deep underground, a team of university and federal scientists concluded. That would make it the most-powerful quake to be blamed on deep injections of wastewater, according to a study published yesterday by the journal Geology. The waste was from traditional drilling, not from the hydraulic fracturing technique, or “fracking.”In Ohio, an injection well used to hold wastewater from the fracking process has been tied to a series of earthquakes that shook Youngstown in late 2011. Those quakes included a magnitude 4.0 temblor on Dec. 31. In the Oklahoma case, not everyone agrees with the scientists’ conclusion: The state’s official seismologists say the quake was natural.

Wastewater injection spurred biggest earthquake yet, study finds - A new study in the journal Geology is the latest to tie a string of unusual earthquakes, in this case, in central Oklahoma, to the injection of wastewater deep underground. Researchers now say that the magnitude 5.7 earthquake near Prague, Okla., on Nov. 6, 2011, may also be the largest ever linked to wastewater injection. Felt as far off as Milwaukee, more than 800 miles away, the quake—the biggest ever recorded in Oklahoma—destroyed 14 homes, buckled a federal highway and left two people injured. Small earthquakes continue to be recorded in the area. The study appeared today in the journal's early online edition. The recent boom in U.S. energy production has produced massive amounts of wastewater. The water is used both in hydrofracking, which cracks open rocks to release natural gas, and in coaxing petroleum out of conventional oil wells. In both cases, the brine and chemical-laced water has to be disposed of, often by injecting it back underground elsewhere, where it has the potential to trigger earthquakes. The water linked to the Prague quakes was a byproduct of oil extraction at one set of oil wells, and was pumped into another set of depleted oil wells targeted for waste storage.Scientists have linked a rising number of quakes in normally calm parts of Arkansas, Texas, Ohio and Colorado to below-ground injection. In the last four years, the number of quakes in the middle of the United States jumped 11-fold from the three decades prior, the authors of the Geology study estimate. Last year, a group at the U.S. Geological Survey also attributed a remarkable rise in small- to mid-size quakes in the region to humans. The risk is serious enough that the National Academy of Sciences, in a report last year called for further research to "understand, limit and respond" to induced seismic events. Despite these studies, wastewater injection continues near the Oklahoma earthquakes.

Different Kind Of Boom: Replacing Extracted Oil And Gas With Toxic Wastewater Causes Earthquakes - After pulling massive amounts of fossil fuels out of the Earth’s crust so we can burn it up into our atmosphere, we have a good sense of where the stuff goes. Our oceans. A global greenhouse. Our lungs. But what happens to the ground formerly occupied by those fossil fuels? It’s becoming increasingly clear that oil and gas extraction processes are actually weakening the structural integrity of the Earth’s crust just enough to cause more frequent earthquakes, in places not used to them. Oklahoma, for instance, is not known for earthquakes. Yet the central U.S. has seen an elevenfold jump in recent years, including the Sooner State’s largest earthquake on record. This 5.7-magnitude quake occurred on November 6, 2011 near Prague, Oklahoma. And research published yesterday in Geology from the University of Oklahoma, Columbia University, and the U.S. Geological Survey has made a direct connection to the disposal of wastewater from conventional oil production:

Oklahoma's largest ever earthquake found to be fracking related [Prague, OK, Nov 6, 2011, 5.7 magnitude, destroyed 14 homes, injured 2 people] - A University of Oklahoma seismologist’s research, released today, provides further evidence that Oklahoma’s largest-recorded earthquake was triggered by injection wells used by the oil and gas industry.  Katie Keranen’s findings, published today in the geoscience journal Geology, adds to a growing chorus of scientific evidence suggesting that injection and disposal wells are likely causing an uptick of earthquakes in the continental United States.  The research centered on a sequence of earthquakes that occurred in November 2011 near Prague, Okla. They included a 5.7-magnitude quake on Nov. 6, the largest quake  triggered by injection wells to date, according to the research.  The analysis suggests that injection-induced earthquakes could be larger than previously thought,  and that they could occur on much longer timescales.  “This is basically a different class of induced earthquake,” Keranen tells StateImpact.

More Scientific Evidence Linking Fracking and Earthquakes - As the practice of hydraulic fracturing to produce natural gas continues to spread not only in the U.S. but worldwide, the scientific community has increasingly focused on the environmental consequences of the technique. The most worrisome side effect of “fracking” is the rise of earthquakes in areas where the practice is extensive.The latest evidence comes in the form of an article in the 26 March issue of “Geology,” a publication of the Geological Society of America.  The study focused its research on seismic activity in Oklahoma over the past two years and concluded that a 4.8-magnitude earthquake centered near Prague on 5 November 2011, was “induced” by the injection wells. Two subsequent earthquakes, including a 5.7-magnitude “event” the following day, was the biggest in contemporary state history, were caused by the first earthquake and existing tectonic stresses in the earth. Oklahoma’s 6 November 2011 earthquake was the state’s largest recorded with modern instrumentation. Two people were injured in the quake, which destroyed 14 homes, buckled pavement and was felt in 17 states, as far north as Wisconsin. Professor Keranen said during an interview that there is excellent seismic data to back up the paper’s conclusions, stating, “The evidence that we collected supports this interpretation. We can say several things with certainty: That the earthquakes begin within hundreds of meters of the injection wells in the units they inject into, so spatially we don’t have much doubt, there is a direct spatial link.”

Quake Tied to Oil-Drilling Waste Adds Pressure for Rules - Bloomberg: Scientists have linked Oklahoma’s biggest recorded earthquake to the disposal of wastewater from oil production, adding to evidence that may lead to greater regulation of hydraulic fracturing for oil and gas. The 5.7-magnitude quake in 2011 followed an 11-fold bump in seismic activity across the central U.S. in recent years as disposal wells are created to handle increases in wastewater from hydraulic fracturing, or fracking. Researchers at the University of Oklahoma, Columbia University and the U.S. Geological Survey, who published their findings yesterday in the journal Geology, said the results point to the long-term risks the thousands of wells pose and shows a need for better monitoring and government oversight. “There’s not a magic bullet,” Heather Savage, assistant research director at the Lamont-Doherty Earth Observatory at Columbia University, said in an interview. “But if we have more monitoring capabilities, we can watch these things, and catch all the precursor events.”

Parts of Low Country Now Quake Country - Jannes Kadyk’s modest brick home suffered more than $5,000 in damage. Bert de Jong’s more stately home will need about $500,000 to get back into shape. Both houses, like thousands of others, were damaged during recent earthquakes that have shaken the flat farmland in this area dotted with villages and tucked up against the North Sea. The quakes were caused by the extraction of natural gas from the soil deep below. The gas was discovered in the 1950s, and extraction began in the 1960s, but only in recent years have the quakes become more frequent, about 18 in the first six weeks of this year, compared with as few as 20 each year before 2011. Chiel Seinen, a spokesman for the gas consortium known as NAM, said the extraction had created at least 1,800 faults in the region’s subsoil. “These faults are seen as a mechanism to induce earthquakes,” he said. The findings in the Netherlands parallel the anxiety about hydraulic fracturing technology in the United States, where several states have halted drilling temporarily, though more commonly out of fear that chemicals used in the process may pollute water sources.

US shale gas to heat British homes within five years - Nearly 2m homes in the UK will be heated by shale gas from the US within five years, under a deal agreed on Monday that is likely to be the first time major exports of the controversial energy source are used in the UK. The US government has kept a tight rein on exports since the shale gas boom started more than five years ago. But the deal struck by energy company Centrica marks the start of a new era in gas use in the UK, because it opens up the market to cheap supplies from the US, as North Sea gas fields run out and pipelines to Europe remain expensive. Shale gas exploitation has been blamed for environmental problems in the US, including water, ground and air pollution and leaks of methane. Under the deal, Centrica will pay £10bn over 20 years for 89bn cubic feet of gas annually – enough to heat 1.8m homes – from Cheniere, one of the first US companies to receive clearance from the federal government to export shale gas in the form of LNG (liquefied natural gas). The first deliveries, by tanker, are expected in 2018.

List of the Harmed – Updated as of February 23, 2013 - The following is an ever-growing list of the individuals and families that have been harmed by fracking (or shale gas production) in the US. Should you encounter any issues (misinformation, broken links, etc.) or if you are/know someone who should be added to this list, please contact us at

IMF Report Calls for Governments to Drop $1.9 Trillion Energy Subsidies - The International Monetary Fund (IMF) has just released a report covering a study into energy subsidies around the world and how much they cost governments. They analysed 176 countries and concluded that global energy subsidies cost the governments $1.9 trillion and discourage private investment in the sector. They even suggest that getting rid of all energy subsidies could force people to be more efficient with their energy consumption, leading to a 13 percent reduction in carbon dioxide emissions. Carlo Cottarelli, the director of fiscal affairs at the IMF, told reporters that “energy subsidies are large and they’re harmful. They lead to excessive consumption of energy, they absorb public-sector resources that could be used for more useful purposes, and they benefit the rich more than the poor.” The IMF has long tried to persuade member countries that they should at least cut back on energy subsidies, and now hope that this report will give them the useful ammunition that they need to make a stronger case. Policy makers are often reluctant to reduce subsidies and allow energy prices to grow, and the IMF claims that this has led some developing nations to cut back on public health and education in order to supply decent energy subsidies.

Bombshell IMF Study: United States Is World’s Number One Fossil Fuel Subsidizer - Between directly lowered prices, tax breaks, and the failure to properly price carbon, the world subsidized fossil fuel use by over $1.9 trillion in 2011 — or eight percent of global government revenues — according to a study released this week by the International Monetary Fund. The biggest offender was by far the United States, clocking in at $502 billion. China came in second at $279 billion, and Russia was third at $116 billion. In fact, the problem is so significant in the U.S. that the IMF figures correcting it will require new fees, levies, or taxes totaling over $500 billion a year, or more than 3 percent of the economy. The most significant finding is that most of the problem — a little over $1 trillion worth — is the failure to properly price carbon pollution. Global warming is the ultimate example of a “negative externality” — a market failure in which one market actor enjoys the benefits of an exchange while another actor pays the costs. When we burn gasoline to power our cars or coal-fired electricity to run our homes, we enjoy the benefits of that energy use. But someone else — a farmer facing increased drought, coastal populations facing rising seas, or the global poor facing food supply disruptions — shoulders the burden of the added carbon pollution we’re dumping into the atmosphere. It’s the global ecological equivalent of tapping into your neighbor’s electrical wiring so that they wind up paying your utility bill.

Will the final blow for America’s shale gas ‘revolution’ be high prices? - As U.S. natural gas prices flirt with the $4 mark, some skeptics of the so-called shale gas revolution think prices are headed much higher. Such a move would, not surprisingly, seriously undermine the official story that the United States has a century of cheap natural gas waiting for the drillbit. Several years ago when natural gas began flowing in great quantities from deep shale deposits beneath American soil, it seemed to be the beginning of the end of America’s troubled journey into dependence on energy imports—a journey marked by frequent worry, occasional war and enormous expense. But, to some people this supposed solution to America’s energy needs has begun to seem as costly to the environment and human health as the country’s dependence on imported energy has been in terms of mental distress, money and blood. It turns out that this new kind of natural gas requires the industrialization of the countryside in order to extract it. And that, say those closest to the action, risks tainting air, land, and drinking water and compromising the health of humans and animals alike.

What happens when natural gas is no longer dirt cheap? - Eduardo Porter has a nice column today on the fact that U.S. carbon-dioxide emissions have dropped 13 percent since 2007. He mentions the usual factors: the recession, better fuel-efficiency for cars and trucks, the switch from coal to natural gas. But here’s the flip side to that story: The recent plunge in U.S. carbon emissions isn’t likely to last — at least not without further changes to energy policy. One big reason? Natural gas prices are starting to creep back upward again. By now, the shale-gas story is well-known. Four years ago, natural gas cost around $9 per million British thermal units — too costly for most electricity needs. But recently, thanks to big advances in drilling techniques, companies have been able to extract gas from shale-rock formations in places like Texas and Pennsylvania. Natural gas prices dropped below $2 per million BTUs last year. As a result, electric utilities switched from coal to cleaner natural gas, which emits less carbon when burned. But that trend appears to be bottoming out. As Jerry Dicolo reports in the Wall Street Journal today, natural gas prices have recently crept back up to $4 per million BTUs. That’s due to a combination of a colder winter, higher demand for heating fuel, scaled-back drilling, and also new storage facilities that are preventing a glut of gas on the market.

A Forewarning on Fracking - With the ethanol boom came the inevitable bust, which hit some rural communities harder than others. The ethanol bust provides a glimpse into the future for communities that have opened their doors to shale gas extraction or those that seek to do so. Indeed, a recent report by Cornell University says fracking is already having mixed economic results, even in the short term. The report says: “The rising tide is not likely to lift all boats: there will be losing communities, and individuals who are displaced or left behind. Moreover, the experience of many economies based on extractive industries warns us that short-term gains frequently fail to translate into lasting, communitywide economic development. “Most alarmingly, a growing body of credible research evidence ...shows that resource-dependent communities can and often do end up worse off than they would have been without exploiting their extractive reserves.”

Leaked EPA Documents Expose Decades-Old Effort to Hide Dangers of Natural Gas Extraction - Efforts by lawmakers and regulators to force the federal government to better police the natural gas drilling process known as hydraulic fracturing, or "fracking," have been thwarted for the past 25 years, according to an exposé in the New York Times. Studies by scientists at the U.S. Environmental Protection Agency on fracking have been repeatedly narrowed in scope by superiors, and important findings have been removed under pressure from the industry. The news comes as the EPA is conducting a broad study of the risks of natural gas drilling with preliminary results scheduled to be delivered next year. Joining us is Walter Hang, president of Toxics Targeting, a firm that tracks environmental spills and releases across the country, based in Ithaca, New York, where fracking is currently taking place. [includes rush transcript]

Editorial: Prevention key to tanker safety - B.C.’s largest oil-spill cleanup vessel hit a sandbar on Sunday on its way from Esquimalt to the Vancouver news conference announcing the federal government’s “world-class tanker safety system.” Accidents happen, but the irony is too rich to ignore. So is the obvious lesson: Our coastline is a hazardous place for ships and mariners. Disaster is always one human mistake away. In the desperate hope of changing the minds of the many British Columbians who oppose the Enbridge Northern Gateway pipeline, Natural Resources Minister Joe Oliver on Tuesday echoed the words of Premier Christy Clark, whose five conditions for backing the pipeline include a “world-leading” safety and spill-response plan. The federal plan gives us little confidence that it would prevent spills.

Ontario municipalities raise oil spill concerns on Enbridge pipeline reversal - A coalition of Ontario municipalities is raising concerns about plans to reverse the flow of Enbridge Inc.’s Line 9 pipeline to Montreal, reviving the spectre of a 2010 rupture on the company’s Lakehead system near Marshall, Mich. that spilled more than 20,000 barrels of crude oil into local waterways. Calgary-based Enbridge wants to send oil east along a 639-kilometre section of the 1970s-era pipeline from North Westover, Ont., near Hamilton, giving Quebec refineries owned by Suncor Energy Inc. and Ultramar Ltd. access to cheaper crude oil from Alberta and North Dakota’s Bakken formation. Enbridge has also applied to increase capacity on the entire Sarnia-to-Montreal route to 300,000 barrels per day, from 240,000 barrels today.

Suncor seen shelving Voyageur oil sands plant - Suncor Energy Inc is expected to shelve plans for a multibillion-dollar oil sands processing plant in northern Alberta when it announces the fate of the facility in the coming days, blaming a forecast for weakening returns. The decision by Canada’s largest oil company on its long-delayed and partially built Voyageur upgrading plant in Alberta is one of a pair of major developments in the oil sands due this week, the other being the targeted start-up of Imperial Oil Ltd’s Kearl mining project after about four years of construction. The two events show the changing dynamics of Canada’s oil sands industry as it deals with more difficult economics due to surging production of cheaper light oil from the North Dakota Bakken and a move away from “upgrading” the oil sands bitumen into lighter, refinery-ready oil in Alberta. Suncor said in February that the “economic outlook for the Voyageur upgrader project is challenged” and it cut any expenditures on it to a minimum pending a decision on going ahead.

Total to Take $1.65 Billion Loss on Canada Oil-Sands Project - Total SA (FP), Europe’s third-biggest oil company, will book a $1.65 billion loss in the first quarter on the canceled Voyageur Upgrader project in Canada’s oil sands after selling its stake to Suncor Energy Inc. (SU) More than $5 billion of investment in Voyageur over the next five years is “no longer justified from a strategic and economic point of view,” the Paris-based company said in a statement. The explorer will sell its 49 percent stake in the project to venture partner Suncor for $500 million. Alberta oil sands are beset by rising labor costs and a shortage of workers as well as a discount for the price of Canadian heavy crude as U.S. oil output exceeds expectations. Suncor yesterday canceled the Voyageur venture after Chief Executive Officer Steve Williams said in December the profit margin for processing Alberta bitumen was “disappearing.” Total’s decision to sell its stake “is the right one and made due to negative market conditions,”

Peru declares environmental state of emergency in its rainforest - Peru has declared an environmental state of emergency in a remote part of its northern Amazon rainforest, home for decades to one of the country's biggest oil fields, currently operated by the Argentinian company Pluspetrol. Achuar and Kichwa indigenous people living in the Pastaza river basin near Peru's border with Ecuador have complained for decades about the pollution, while successive governments have failed to deal with it. Officials indicate that for years the state lacked the required environmental quality standards. A new law published on Monday that sets out, for the first time, environmental quality standards setting acceptable limits for contaminants in soil, may be a key advance, say officials. Peru's environment ministry has given Pluspetrol 90 days to clean up the affected areas and reduce the risk of contamination to the local population. In declaring the state of emergency, Peru's environment ministry said tests in February and March found high levels of barium, lead, chrome and petroleum-related compounds at different points in the Pastaza valley.

Life After Oil and Gas - To what extent will we really “need” fossil fuel in the years to come? To what extent is it a choice? As renewable energy gets cheaper and machines and buildings become more energy efficient, a number of countries that two decades ago ran on a fuel mix much like America’s are successfully dialing down their fossil fuel habits. Thirteen countries got more than 30 percent of their electricity from renewable energy in 2011, according to the Paris-based International Energy Agency, and many are aiming still higher.  Could we? Should we? A National Research Council report released last week concluded that the United States could halve by 2030 the oil used in cars and trucks compared with 2005 levels by improving the efficiency of gasoline-powered vehicles and by relying more on cars that use alternative power sources, like electric batteries and biofuels. Just days earlier a team of Stanford engineers published a proposal showing how New York State — not windy like the Great Plains, nor sunny like Arizona — could easily produce the power it needs from wind, solar and water power by 2030. In fact there was so much potential power, the researchers found, that renewable power could also fuel our cars.  “It’s absolutely not true that we need natural gas, coal or oil — we think it’s a myth,” said Mark Z. Jacobson, author of the study, published in the journal Energy Policy. “

A New Approach for Identifying Demand and Supply Shocks in the Oil Market - NY Fed - An oil-price spike is often used as the textbook example of a supply shock. However, rapidly rising oil prices can also reflect a demand shock. Recognizing the difference is important for central bankers. A supply-driven increase in the price of oil can result in higher unemployment and inflation, leaving central bankers with the difficult decision to loosen policy, tighten policy, or not respond at all. A demand-driven increase reflecting global growth may support the case for tighter policy. In this post, we describe an approach for decomposing oil price changes into supply and demand shocks using financial market data.

U.S. January Crude Imports Climb 5% from Dec. - U.S. crude imports climbed 5% to 7.953 million barrels a day in January from December, according to statistics from the U.S. Energy Information Administration Thursday. Meanwhile, net imports of oil jumped 20% to 7.160 million barrels a day in the first month of this year from the prior month. Net imports are made up of the total amount of crude and petroleum products (such as gasoline and diesel) imported, minus the amount of crude and products exported. The increase in both categories went against the recent tide. Imports have been on the wane as domestic crude production has steadily climbed in recent years, due to new drilling techniques that have unlocked a vast amounts of oil from shale formations. The increased U.S. oil production has eased the need for imports, analysts said. December marked the first time crude imports were below eight million barrels a day in 15 years. Also, U.S. net oil imports had declined for five straight months before January's increase.

U.S. Oil Demand Declined in February, API Says -  U.S. oil demand in February fell to the lowest level for the month in 20 years as gasoline rose to the highest price for the time of year, the American Petroleum Institute reported. Total petroleum deliveries, a measure of demand, dropped 4.1 percent from a year earlier to 18 million barrels a day, the lowest February level since 1993, the industry-funded group said in a monthly report today. The retail price for regular gasoline, averaged nationwide, rose to $3.786 a gallon on Feb. 26, the highest for the month in AAA data going back to 2004. “There is the price effect,” said John Felmy, chief economist at the API. “Consumers are being very cautious.” February gasoline deliveries were 8.36 million barrels a day, down 3.1 percent from a year earlier and the lowest demand for the month since 2001, the API said.

Awash in Misinformation: America's Domestic Tight Oil 'Bump': Last month, Daniel Yergin, Chairman of Cambridge Energy Research Associates, told Members of Congress in his prepared remarks, "Owing to the scale and impact of shale gas and tight oil, it is appropriate to describe their development as the most important energy innovation so far of the 21st century" and "the unconventional oil and gas revolution has already had major impact in multiple dimensions. Its significance will continue to grow as it continues to unfold."  Yet the Energy Information Administration (EIA) and independent analysis confirm that far from the "energy revolution" of the century, the increase in domestic oil production represents a temporary bump in production that will be short-lived., "The growth results largely from a significant increase in onshore crude oil production, particularly from shale and other tight formations. After about 2020, production begins declining..." But evidence is growing that the production is not likely to rise as high as hoped, and his analysis indicates the drop in production could begin by 2017. In late February, the EIA reported that "Saudi Aramco's CEO Khalid al-Falih warned that rising domestic energy consumption could result in the loss of 3 million barrels per day (bbl/d) of crude oil exports by the end of the decade if no changes were made to current trends." The New York Times reported that Chinese consumption by 2020 could be almost two-thirds greater than it was in 2011, resulting in a 6 million barrels per day (mbd) increase. Thus, viewed in context evidence indicates that U.S. domestic oil production could max out as early as 2017 and then begin a slow decline -- just as Saudi Arabia could be exporting 3 mbd less and China could be needing 6 mbd more. The consequences to the U.S. economy of such a confluence could be drastic.

Don't Overlook The US Dollar Factor For Oil Prices - It's no secret that oil prices and the US dollar exchange rate have an economically robust relationship.   But if this connection is conspicuous and inevitable, it's not always fully appreciated, according to a new study that aims to remind readers of the historical record. "An appreciation (depreciation) of the dollar exchange rate is typically accompanied by a decline (rise) in both global oil prices and oil production, indicating a fall (rise) in global oil demand," write two economists from Ghent University in "The U.S. Dollar Exchange Rate and the Demand for Oil." The paper advises that the oil price/US dollar exchange relationship has been "ignored" in empirical research. Instead, there's a "growing consensus that global crude oil price fluctuations are mainly driven by changes in the demand for oil—Jim Hamilton's "Causes and Consequences of the Oil Shock of 2007-08", for instance. The new study points out that there's more to the story: In particular, since global oil prices are predominantly expressed in US dollars, a shift in the dollar exchange rate should affect the demand for crude oil in countries that do not use the US dollar for local transactions. When the US dollar exchange rate depreciates, oil becomes for instance less expensive for consumers in non-US dollar regions, boosting their demand for oil (Austvik 1987). The chart below compares dollar-based year-over-year changes in monthly oil prices (red line) with annual changes in the dollar's trade weighted index for major currencies (blue line).

Why Did Saudi Arabia Reduce Oil Production? - I'm a bit slow in getting to this, but there now seems to be a bit of a mystery about Saudi oil production (latest data shown above).  In mid 2011 through mid 2012, Saudi production was hovering a little below 10mbd (averaging all data sources).  It started to drop a little bit last fall, but then in November and December it took a really sharp dive, and now seems to have stabilized at or a little above 9mbd. In total, they've lost almost 1mbd of production between July and December.  This is a large move. For example, it's as large as the 1mbd loss in 2006, and two thirds as big as the 1.5mbd production cut implemented to stabilize prices following the great recession in 2008. As usual, the big questions are whether it's voluntary or due to production difficulties, and if it's voluntary, why they did it.  For past episodes, there's little doubt that the late 2008 cut was intentional to support prices, but the 2006 production decline is controversial.  I'm of the view that it was forced due to long-standing underinvestment in their capacity meaning they couldn't maintain 9.5mbd at that time, but some other well-informed oil bloggers have maintained that it was an intentional production cut. In this case, the fall is very abrupt, which is more characteristic of an intentional cut.  On the other hand, it comes amidst a generally rising rig count (signaling more work is being done to maintain or expand capacity).  If it was voluntary, it's not immediately obvious why from the spot price chart:

Is the end of the oil era nigh? - Perhaps the analysts in Citi’s commodities team (which includes the inimitable Ed Morse) didn’t get the memo? You know, the one about needing to talk up the old carbon complex as much as possible? After all, how else do you account for the disruptive tone of the following summary points: The Substitution of Natural Gas for Oil Combined With Increasing Fuel Economy Means Oil Demand Is Approaching a Tipping Point The combination of an accelerating push to substitute natural gas for oil and ongoing improvements in fuel economy is enough to mean that oil demand growth may be topping out much sooner than the market expects. The shift from oil to gas is already underway in the US, where the shale gas revolution is giving a large economic incentive to make the switch. As the US shift gains pace, politics, greater natural gas availability and environmental concerns are facilitating the trend into the global market, more than compensating for the narrower gas-oil spread. Citi’s automobiles team estimates that new car fuel efficiency is now improving by 3-4% p.a., with trucks managing 1-2%. As cars make up ≈60% of the total global road fleet we conservatively estimate that new vehicles (cars and trucks combined) fuel economy increases by 2.5% p.a. And then there’s this… One of the many unforeseen ripple effects of the US shale revolution is a push to substitute natural gas for oil. This is set to accelerate with LNG already challenging diesel’s 13 mb/d heavy duty truck use globally but especially in China, bunker’s 3.7 mb/d seaborne market, and CNG and propane set for exponential growth not only in markets such as Brazil, Egypt, Iran and India, but in Russia and the US as well.

How Resource Limits Lead to Financial Collapse - Resource limits are invisible, so most people don’t realize that we could possibility be approaching them. In fact, my analysis indicates resource limits are really financial limits, and in fact, we seem to be approaching those limits right now.  Many from the “peak oil” community say that what we should worry about is a decline in world oil supply. In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. This collapse is related to high oil price, and also to higher costs for other resources as we approach limits (for example, desalination of water where water supply is a problem, and higher natural gas prices in much of the world). The financial collapse is related to Energy Return on Energy Invested (EROEI) that is already too low. I don’t see any particular EROEI target as being a threshold–the calculations for individual energy sources are not on a system-wide basis, so are not always helpful. The issue is not precisely low EROEI. Instead, the issue is the loss of  cheap fossil fuel energy to subsidize the rest of society.  If an energy source can produce a large amount of energy in the form it is needed with low inputs, it is likely to provide a large share of government revenues.  As we move to energy that requires more expensive inputs for extraction (such as the current $90+ barrel oil), these benefits are lost. The cost of roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.

When Oil Revenues Go Awry - By now it is no great secret that the small, but vastly rich oil and gas producing state of Qatar is playing a major role in supporting and financing opposition forces in the Syrian civil war. The conflict raging now for over two years has seen horrific fighting and destruction of Syrian cities and towns as the opposition continues in their relentless efforts to overthrow the government of President Bashar Assad in Damascus. That can be perceived as either a positive or a negative political move, depending on one’s views

Iranian Oil Production - The above shows the latest stats on Iranian oil production.  Although there is wide disagreement (ie uncertainty) in the exact level of Iranian production, there seems to be agreement that in the last six months it has stabilized at a level around 600kbd below where it was in the latter part of the previous decade.  It no longer seems to be falling quickly, but nor has it recovered to the previous level.

Iraqi Oil Production - Completing my catch-up on oil production for the three most important Middle Eastern producers, here is Iraq.  Iraq had a substantial gain in 2012 - around half a million barrels per day - backslid a little in December, and then has apparently started to regain in February. I expect further production gains in 2013, and, assuming the country can maintain stability, for Iraq to become a more and more important oil supplier over time.  Stability remains a risk, of course.  However, the country's oil production is already far more stable than it was under Saddam (due to the latter being under international sanctions, no doubt).

India to Possibly Halt All Iran Oil Imports - India may completely halt its importation of Iranian oil starting in April, according to a number of media reports citing unnamed officials. Delhi is currently Iran’s second largest oil consumer and purchases around U.S. $11.5 billion of Iranian oil each year at current prices, according to Bloomberg News. This trade has become increasingly strained as the United States and European Union have enacted third party sanctions against countries that continue doing business with Iran’s energy and financial sectors. Indeed, according to Oxford Analytica, the current terms of the trade are Iranian oil for Indian commodities instead of cash. Although the U.S. has provided India with a waiver from its sanctions because Delhi has reduced the amount of oil Iran purchases, the EU has threatened to stop insuring India’s refineries if they continue processing Iranian oil. Meanwhile, OPEC members like Saudi Arabia, Iraq and Kuwait have also reportedly assured the refineries that they will use their own oil reserves to make-up for the loss of Iranian oil should India halt its purchases. Currently Delhi imports more than 300,000 barrels per day (b/d) of Iranian crude. India’s oil ministry has yet to make an official announcement on the matter.

Russia And South Africa To Create OPEC ‘Platinum Cartel’ - Russia and South Africa, which together control about 80% of the world’s reserves of platinum group metals, plan to create a trading bloc similar to OPEC to control the flow of exports according to Bloomberg. “Our goal is to coordinate our actions accordingly to expand the markets for realization of these metals,” Russian Natural Resources Minister Sergey Donskoy said yesterday in an interview at a summit of leaders from Brazil, Russia, India and South Africa in Durban. “The price depends on the structure of the market, and we will form the structure of the market.” South Africa mines about 70 percent of the world’s platinum, while Russia leads in palladium, a platinum group metal used in autocatalysts, with about 40% of output, according to a 2012 report by Johnson Matthey Plc.

Ecuador auctions off Amazon to Chinese oil firms - Ecuador plans to auction off more than three million hectares of pristine Amazonian rainforest to Chinese oil companies, angering indigenous groups and underlining the global environmental toll of China's insatiable thirst for energy. On Monday morning a group of Ecuadorean politicians pitched bidding contracts to representatives of Chinese oil companies at a Hilton hotel in central Beijing, on the fourth leg of a roadshow to publicise the bidding process. Previous meetings in Ecuador's capital, Quito, and in Houston and Paris were each confronted with protests by indigenous groups. Attending the roadshow were black-suited representatives from oil companies including China Petrochemical and China National Offshore Oil. "Ecuador is willing to establish a relationship of mutual benefit – a win-win relationship," said Ecuador's ambassador to China in opening remarks. According to the California-based NGO Amazon Watch, seven indigenous groups who inhabit the land claim that they have not consented to oil projects, which would devastate the area's environment and threaten their traditional way of life.

China's proven oil, gas deposits surge - People's Daily Online: (Xinhua) -- China's crude oil and natural gas reserves discovered within its mainland saw sharp rises last year, a natural resources official said on Wednesday. Xu Dachun, vice director in charge of resources exploration with the Ministry of Land and Resources, said China found 1.52 billion tonnes of new crude deposits in 2012, up 13 percent year on year. Of them, 270 million tonnes can be exploited with current technologies. China discovered 961.22 billion cubic meters of natural gas last year, up 33 percent year on year. The proven reserves also hit a record high, Xu said. Out of the newly found deposits, 500.8 billion can be exploited with current technologies, up 36 percent. Along with increasing oil and gas discovery, the output of the two fuels rose in 2012. China produced 205 million tonnes of crude oil and 106.76 billion cubic meters of natural gas last year, up 1 and 5.4 percent year on year, respectively. The output of coal-bed methane, an unconventional gas, stood at 2.57 billion cubic meters, up 24 percent year on year.

Japan breaks China’s stranglehold on rare metals with sea-mud bonanza - Japanese scientists have found vast reserves of rare earth metals on the Pacific seabed that can be mined cheaply, a discovery that may break the Chinese monopoly on a crucial raw material needed in hi-tech industries and advanced weapons systems. "We have found deposits that are just two to four metres from the seabed surface at higher concentrations than anybody ever thought existed, and it won't cost much at all to extract," said professor Yasuhiro Kato from Tokyo University, the leader of the team. While America, Australia, and other countries have begun to crank up production of the seventeen rare earth elements, they have yet to find viable amounts of the heavier metals such as dysprosium, terbium, europium, and ytterbium that are most important. China has a near total monopoly in the heavier end of the spectrum, though it is also the dominant supplier of the whole rare earth complex after driving rivals out of business in the 1990s. It still accounts for 97pc of global supply. Beijing shocked the world when it suddenly began to restrict exports in 2009, prompting furious protests and legal complaints by both the US and the EU at the World Trade Organisation. China claimed that it was clamping down on smuggling and environmental abuse.

Number of dead pigs found in Chinese rivers rises to 16,000 - The number of dead pigs recovered in the last two weeks from rivers that supply water to Shanghai has risen to more than 16,000. The government in China's financial hub said 10,570 carcasses had been pulled from its Huangpu river. That is in addition to 5,528 pigs plucked from upstream tributaries in the Jiaxing area of Zhejiang province. Authorities give daily updates, telling the public that tests show Shanghai's water is safe, but no official has given any full explanation about the massive dumping of pig carcasses. Hog farmers have told state media that the dumping of carcasses is rising because police have started cracking down on the illicit sale of pork products made from dead, diseased pigs.

There are even more dead pigs in a Chinese river - In the week and a half since we first brought you the all-important details on those dead pigs filling the Huangpu River in China, officials have raised the body count to more than 16,000. On Sunday, the government said the pulling-dead-pigs-out-of-the-water operation was “basically finished.” Chinese official media reports that some of the dead animals were traced by their ear tags to pig farms in Shaoxing, and their owners have been prosecuted. Farmers in Shaoxing have recently been charged with selling meat from diseased animals. The New York Times points out the silver lining of the porcine flotilla: At least the diseased pigs aren’t ending up on dinner plates. As the government cracks down on contaminated meat, the only place to put them is in the river. Three cheers for food safety!

China Finds Dead Ducks in Sichuan in Latest Scare - More than 1,000 dead ducks were found in a river in the southern Chinese province of Sichuan, sparking an investigation into the nation’s latest environmental scare.  The birds were fished from the Nanhe river in Pengshan county as of yesterday and were disposed of safely, Xinhua News Agency reported, citing Liang Weidong, an official with the local government publicity office. Local authorities are investigating how the ducks died and who was responsible for dumping them into the water, according to the report.

China Local Government Debt to Reach 16.3 trillion Yuan in 2013 - As China’s local governments cash in on real estate development, they’re amassing a lot of debt at the same time. Huatai Securities, a major Chinese securities broker says local government debt could reach 16.3 trillion yuan this year.  That’s around $2.5 trillion US dollars, and almost 30% of China’s GDP.""The threat of a banking collapse is very real concern for the world’s second largest economy. Hong Kong economist Larry Lang said earlier this month that it’s already started to happen, triggered by debt defaults from local governments."

The Birth Of A Global Currency - In China’s remarkable rise on the global economic stage, one key element of the country’s economy has trailed far behind. The renminbi (RMB) or yuan remains an exotic instrument, rarely used outside the Chinese borders and barely understood. The world’s second-largest economy has a currency that ranks 14th most used in the world, just ahead of the Danish krone, behind the Russian rouble and miles away from the euro and US dollar, No. 1 and No. 2, respectively. But that is quickly changing. The internationalization of the RMB, as engineered by the Chinese government, is happening at warp speed. At the start of 2012, the RMB ranked 20th among international currencies, according to SWIFT (Society for Worldwide Interbank Financial Telecommunication). It leaped six spots in nine months.“At some point in the next decade to come, the RMB will be a major player among global currencies,” said Chris Davies, Deputy CEO of HSBC China. “This is very much a step-by-step process, a technical process, as the currency moves from being ‘ring-fenced’ to one more convertible globally.”

BRICS strike deal on Development Bank In a pioneering step that could change the dynamics of South-South geo-economic landscape, the BRICS’ finance ministers have cleared the path-breaking Development Bank that will cater to the funding needs of infrastructure-hungry developing world that is negotiating its ascent to the global pecking order. It’s a game-changing moment for the global South as the bank is envisaged as an alternative to the West-dominated Bretton Woods institutions, an important milestone in accelerating reform of global financial institutions of governance. “It’s done,” South Africa’s Finance Minister Pravin Gordhan said in the coastal South African city after a meeting with his counterparts from the other four BRICS countries. “We made very good progress,” Gordhan said. Finance Minister P. Chidambaram represented India at the crucial meeting that has firmed up what is expected to be the showpiece deliverable of the summit of the $14 trillion grouping.

BRICS Nations Plan New Bank to Bypass World Bank, IMF - The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund. The leaders of the so-called BRICS nations -- Brazil, Russia, India, China and South Africa -- are set to approve the establishment of a new development bank during an annual summit that began today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises. “The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.” The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.

Japan suffers decline in factory output - The challenge facing Japan’s new leadership in escaping from economic stagnation and deflation was underscored on Friday as data showed further declines in consumer prices and an unexpected contraction in factory output. Haruhiko Kuroda, the new governor of the Bank of Japan, could struggle to reach his goal of generating 2 per cent inflation in two years, analysts said, after the government data indicated core consumer prices fell 0.3 per cent in February compared with a year earlier. It was the fourth consecutive month of decline in core CPI, which excludes prices of fresh food. The fall came in spite of a more than 15 per cent fall in the value of the yen, which has pushed up prices for many items sourced outside Japan, from gasoline to package holidays. “We believe the BoJ’s 2 per cent target is still a long way off,” said Chiwoong Lee, an analyst at Goldman Sachs, adding that it would take time before the impact of the weaker yen was felt on prices in general, rather than merely imports. Mr Kuroda, a proponent of aggressive monetary easing, will lead his first BoJ policy-setting meeting next week following his appointment by Shinzo Abe, the prime minister. Mr Abe was elected in December on a pledge to revive an economy that has managed to grow only about 0.5 per cent a year on average since the mid-1990s.

The Abenomics Farce Continues - It's not been a great evening so far for the leadership in Japan. We are now six months into the greatest monetary policy bluff of all time and thanks to the sound and fury from Abe (and now his henchmen) the JPY has devalued by an impressive 25%. The goal, of course, to target inflation and combat the dreaded deflation - that Abe himself today said "can take a long time." So how are we doing? Not so great it seems. Just as the US went 4-for-4 today in dismal data so Japan is 3.5-for-4 as the much-watched 'inflation' missed expectations once again with a -1% print (that would be deflation) - the worst level since August 2010; Japanese Industrial Production slumped 11% year-over-year, far in excess of the consensus 5.8% drop (biggest miss since Feb 2009) and the biggest collapse (ex-Fukushima) since October 2009; and to top it all off, Japanese unemployment ticked up higher than expectations to 4.3% - equal worst in 7 months. The one saving grace was a PMI above 50 (but driven by an 18-month high print in input costs and accompanied by a drop in backlogs and slump in employment sub-indices - so not exactly bursting with euphoria).

Reflation and Expenditure Switching in a Two Speed World - Just to remind people how poorly fixed exchange rates served the world economy in the Great Depression, I reprise Eichengreen’s famous depiction of comparative economic performance: I agree with Bernanke’s view that these unconventional monetary policy actions are likely to be positive sum, although I might place a little more emphasis on expenditure switching effects. In my view, even if central banks are happy to see their currencies depreciate, this might end up leading to a positive outcome. This is despite the fact that the net outcome will be more or less unchanged exchange rates (against at least a set of countries) [1]. Reflation would imply a higher price level, and as I have pointed out (with Jeffry Frieden, and with Joshua Aizenman), this will have a salutary effect on economies currently experiencing persistent and large output gaps -- namely a lessening of real debt loads, and a relaxation of credit constraints. In fact, expectations of inflation are now heightened slightly From Deutsche Bank: As I’ve noted before, we don't need an acceleration of inflation in all countries. Exactly because the world economy has been experiencing a two speed recovery (fast in emerging markets, slow or none in advanced), the benefits of inflation vary by region. So more rapid inflation is necessary in the US, Euro area, and particularly Japan. Moreover, my point about exchange rates does not apply to all countries: for the same reasons, we would want emerging market economy rates to appreciate, while those of the advanced economies to depreciation.

Letter from an angry reader - From Stormy, who has written on global trade for over a decade, sends an e-mail on the discovery that we are losing competitive advantage: I find it absolutely stunning that the Yves post and MIT study below is considered big news. Four or five years ago, I saw the writing on the wall. Off-shoring, of the game. All the blather about new technology was just that: blather—otherwise, how do we explain China? It uses cheap labor does Vietnam, Mexico...on and on. Apple and IBM are the poster children of the modus operandi. They are American companies in name only. Eventually, I just gave up singing the song. All the big economic voices have their selling  of corporate profit....  Globalization—poorly designed for all us schmucks. It was designed for the rich....end of story. WTO rules? Ok: Last time. China played that WTO game by stiffing its own companies to lure the multi-corporations to set up house on Chinese soil.  Non-existent environmental standards in China, which lowered the cost of doing business. Unions? None. Lowered the cost of doing business. Cheap, slave labor. I could continue...but what is the use? And of course: monetary manipulation. Make cheap in China—sell high in the West. And what did the U.S. do? Worry about the consumer stepping up to the plate!---banks charged uxorious rates for credit cards and loans. Extending risky credit was the name of the game. Get every last penny from the American consumer.

The Consequences of a Leaderless Economy - What happens when there’s no leader in the global economy? That’s what the world is finding out right now. Since the 2008 financial crisis the countries that sit atop the world economy – the United States, China, and Germany – have failed to cooperate and fix a broken system that is creating unnecessary suffering. At the heart of our global economic problems is a failure to lead by the world’s most important countries and the absence of an international regulatory framework with the power to encourage them to do so. For the latter part of the 20th century, we lived in an economic world orchestrated by the Washington consensus. While this system had many losers and fed and subsidized financial institution profits, it also provided a semblance of order for the global economy. But for many, the 2008 crisis signaled that the long period of U.S. hegemonic leadership was coming to a sputtering end.

Watchdog to impose 1% surcharge on Canada’s top six banks deemed ‘too big to fail’ - Canada’s financial regulator on Tuesday named all six of the big banks as “systemically important,” dispelling a cloud of uncertainty that has been hanging over the sector for more than a year since the watchdog telegraphed its intention to take this step. The banks named by the Office of the Superintendent of Financial Institutions are the Bank of Montreal, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank. The six will be required to boost the minimum amount of common equity tier one capital they hold to 8% from the 7% level required under Basel rules. They will also be subject to greater regulatory scrutiny and wider disclosure rules. The long anticipated move brings Canada more closely in line with so-called Basel III banking rules hammered out by international regulators in the wake of the financial crisis.

Canada Discusses Forced Depositor Bail-In Procedures for "Too Big To Fail" Banks in 2013 Budget - Inquiring minds in Canada managed to slog through a massive 433 page budget proposal and discovered a Depositor Haircut Bail-In Provisions For Systemically Important Banks. Sure enough. Right on page 145 of the Canada Economic Action Plan for 2013 We see ..."The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail- in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants." In case you are unfamiliar with bank parlance, deposits are not "assets" they are "liabilities". A plan that would turn "certain bank liabilities" into regulatory capital is a plan to confiscate deposits.

Financial repression 101 - Sign says: "Christina don't **** with democracy".  That's exactly what Christina Fernández de Kirchne's government has been doing for some time.The Nation: - Among several reasons for these accusations could be the country’s current inflation rate (estimated by economists to be 26 percent, while the government cites it as 11.1 percent); the state’s assumption of control of private pension funds valued at 30 billion; the government’s restrictions on currency exchange, making it difficult for citizens to travel outside of Argentina; restricted freedom of speech; and, most significantly, an accusation of widespread corruption.Argentina's actions don't just threaten the nation's democratic system. The latest policies amount to a harsh form of financial repression that will bring the nation's private sector to its knees. As confidence in Argentina's stability deteriorates, foreign reserves are becoming dangerously low. The latest move to close any loopholes that allowed outflows of dollars from the country is now impacting domestic market liquidity

Global pool of triple A status shrinks 60% - The global pool of government bonds with triple A status from the three main rating agencies, the bedrock of the financial ­system, has shrunk more than 60 per cent since the financial crisis triggered a wave of downgrades across the advanced economies. The expulsion of the US, the UK and France from the “nine-As” club has led to the contraction in the stock of ­government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11tn at the start of 2007 to just $4tn now, according to Financial Times analysis. The shrinkage, largely a result of US’s downgrade by S&P in August 2011, is part of a dramatic redrawing of the world credit ratings map, which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of “safe” assets.While US and European government downgrades have dominated headlines, the FT’s analysis highlights the series of upgrades across much of the rest of the world – especially in Latin America. Topping the list in the scale of credit upgrades since January 2007 are Uruguay, Bolivia and Brazil. The biggest downgrades were in crisis-hit southern Europe, with Greece seeing the steepest drop.

Dan Kervick Interviews Bill Black and Marshall Auerback on The Attitude - I had the pleasure of sitting in today for Arnie Arnesen as a guest host for The Attitude on WNHN 94.7 FM in Concord, New Hampshire.    In the first half of the show I talked with Diana Lacey, President of the New Hampshire State Employees Association and SEIU Local 1984.   Diana addressed the impact of the ongoing sequester on government employment and the provision of government services, and we also chatted about the general importance of the government’s role in the economy.   In the second half of the show I talked with fellow NEP bloggers Bill Black and Marshall Auerback.  First up was Bill, who discussed the general economic situation in Europe and the constraints placed on the recovery strategies of individual Eurozone countries due to the lack of sovereign national currencies.  Then Marshall and I spoke about the situation in Cyprus and its ramifications for Europe going forward.  You can listen to the podcast of the show at these links: The Attitude – Hour One - The Attitude – Hour Two

Graphic: The Top 10 European Economies - The outbreak of the crisis in Cyprus this week is putting renewed focus on the economic health of Europe. So far, only smaller European economies, such as Greece and Ireland, have needed bailouts to prevent a collapse. But how economically stable are the continent’s biggest countries? Below, we lay out the numbers for Europe’s ten biggest economies, including a quick look at what their biggest pressures are. Download high-resolution image Download high-resolution image

Italy’s Berlusconi says primed for snap vote if no deal clinched - Silvio Berlusconi, the 76-year-old leader of Italy's center-right bloc, told thousands of supporters gathered in central Rome he was ready for a snap vote as his rival began talks to try to form a government. "We are all ready for another election campaign and this time we will win big!" the former prime minister shouted from a stage at the start of an hour-long speech. The flag-waving crowd responded with a roar. The national election held a month ago gave no single group a working majority in parliament, leaving the euro zone's third-largest economy in limbo as the bank crisis in Cyprus renews fears of an outbreak of market turmoil in the currency bloc. President Giorgio Napolitano on Friday asked center-left leader Pier Luigi Bersani to see whether he can win backing in parliament to form a government and end the political impasse.

Bersani Pleads for "More Insanity" as Italian Government Talks Collapse - Pier Luigi Bersani, who heads the centre-left (Common Good) coalition has a mandate by the Italian president (Giorgio Napolitano), to form the next government of Italy and become its next Prime Minister. However, talks between Bersani, and Silvio Berlusconi’s centre-right Popolo della Libertà PDL (the People of Freedom) alliance fizzled yesterday, as expected. Talks between Bersani and Beppe Grillo's Five Star Movement M5S fizzled today, also as expected. The reaction of Bersani as reported by the Financial Times is rather amusing.  “Only an insane person can have the eagerness to form a government in this moment,” declared Mr Bersani, grim faced and looking somewhat exasperated, at his webcast meeting with the Five Star Movement. “I am ready to take on this enormous responsibility and I would ask everyone to take on a little bit of it.”

Italy in limbo after Bersani loses government bid - ITALIAN LEFTIST LEADER Pier Luigi Bersani lost his bid to form a new government today after failing to break a political deadlock, leaving the eurozone’s third largest economy in limbo. The ex-Communist had been given a mandate last week by Italy’s president to try and muster enough support to govern after inconclusive elections that left the country vulnerable on financial markets. After six days of intense and often bitter consultations with rival parties, Bersani reported to President Giorgio Napolitano that he had failed to gather the parliamentary backing needed to rule.

Irish Legacy of Leniency on Mortgages Nears an End -  Although there are more than 143,000 delinquent home mortgages in Ireland, foreclosures have been so politically and legally difficult that, in the last three months of last year, they numbered 38. That could change. Under pressure from the international lenders who agreed to a €85 billion, or about $109 billion, bailout of the Irish economy in 2010, the law is being amended to overturn a legal ruling that has been restricting banks’ right to repossess property. As Ireland’s fellow euro zone member Cyprus may be about to learn, bailouts come with strings that can bind for years to come. Besides pushing for changes to property-repossession law, Ireland’s creditors, collectively known as the troika — the European Commission, the European Central Bank and the International Monetary Fund — has also prompted the government to introduce the country’s first property tax in more than 15 years, a measure intended to raise €500 million a year. Unlike Cyprus, where wealthier depositors are being forced to help pay for ruined banks, the Irish government picked up the tab for its broken lenders before it, too, had to seek help.

Contrary To Prior Lies, Spanish 2013 Economic Contraction Even Worse Than In 2012 - The Bank of Spain just sent a stark message. In its annual update of economic forecasts, it estimates Spain's economy will shrink 1.5% in 2013 - that is three times as bad as the official government forecast of -0.5%. As Reuters reports, this is even worse than 2012's 1.4% contraction as the bank notes that, Spaniards "remain immersed in a process of deleveraging...and families have seen a notable shrinking of income." The GDP estimate is around consensus which was roundly ignoring the Spanish government's 'lying' optimism but under the cover of the Cyprus debacle, the Spanish have been pushing to ease their deficit restrictions as the deficit is expected to reach 6% in 2013 (well above the 4.5% target set by the EU). With unemployment expected to rise over 27.1%, we suspect youth unemployment will once again take center stage as the European Union's scariest chart.

Spain's central bank offers grim economic forecast - Spain's central bank is predicting a continuing recession and mounting unemployment for the rest of 2013 as the country struggles to free itself from a broad European slowdown and repair its finances. The Bank of Spain said Tuesday it expects the country's economy to shrink 1.5 percent this year, compared with 1.4 percent in 2012, and only return to growth in late 2014. It forecast the jobless rate will rise to 27.1 percent this year, up from 26 percent last year. That also won't start falling until 2014. The country's budget deficit is expected to drop to 6 percent of its economy in 2013, down from 10 percent last year. Spain's economy is the fourth-biggest of the 17 European Union countries that use the euro after Germany, France and Italy.

Here We Go Again: Spain Says 2012 Budget Deficit "Will Be Bigger Than First Estimated" - Back in December 2011, Europe swooned and bond yields soared when it was shocked, shocked, to learn that Spain had been lying about its budget deficit all year, a number which was subsequently hiked several more times. Then in 2012, to keep up with the pretense that things are better, Spain once again did what it does best: fudged numbers, this time desperate to make it appear that its actual government deficit was better than expected because one had to 'obviously' exclude all those items that are not part of the government spending... like payments for its broke provinces, or indirect funding for its broke banks. Now it turns out that in addition to fudging the definition of "budget", Spain was, surprise surprise, lying once again. From Bloomberg: "The Spanish government said its 2012 budget deficit will be bigger than first estimated after the European Union requested changes in how tax claims are computed. The budget shortfall excluding aid to the banking sector was 6.98 percent of gross domestic product last year, more than the 6.74 percent predicted on Feb. 28, Deputy Budget Minister Marta Fernandez Curras told reporters in Madrid today. That compares with 8.96 percent in 2011."

Portugal to contract 2.3% in 2013: central bank - The Portuguese economy is set to contract by 2.3 percent this year due to a sharp fall in domestic demand and disappointing export growth, the Bank of Portugal said on Tuesday. With the new forecast, which predicts a deeper contraction than an earlier estimate of 1.9 percent, Portugal is now in line with estimations made by Lisbon's creditors, the European Union (EU) and the International Monetary Fund (IMF). The central bank outlook expected Portugal's economy to grow by 1.1 percent in 2014 despite headwinds caused by new austerity measures necessary to stay in line with the country's 78-billion euro ($100 billion) bailout programme, negotiated in May 2011. With recession deepening, Portugal this month won an extra year from creditors to bring its public deficit into line with EU limits, as it faces record unemployment and mounting social discontent. Portugal, suffering its worst recession in 40 years, now has until 2015 to bring the deficit below 3.0 percent of gross domestic product (GDP).

France Is Still In Trouble - From the latest GDP report (another estimate of 4Q12): In 2012 Q4, French gross domestic product (GDP) in volume* stepped back (–0.3%), after +0.2% the previous quarter.  Over the year, GDP growth was null in 2012, after +1.7% in 2011.  In 2012 Q4, total domestic demand (excluding inventory changes) weighed down on GDP growth: –0.1 point after +0.1 point. Indeed, households’ consumption expenditure remained sluggish (–0.1% after +0.1%) and gross fixed capital formation (GFCF) continued to decrease (–0.8% after –0.4%). Exports decreased in Q4 (–0.6% after +1.0%), but less strongly than imports whose decline increased (–1.2% after –0.2%): ultimately, foreign trade balance contributed again positively to GDP growth (+0.2 point after +0.3 point). On the contrary, changes in inventories continued to weigh down on GDP growth in Q4: –0.4 point, after –0.2 point the previous quarter.  The overall data is extremely disappointing.  First, 2012 saw no growth.  And while the economy grew 1.7% in 2011, that was largely due to a big bump in the first quarter of 2011.  Take that out, and you have two years of near stagnation in GDP. Consumption dropping .1%, investment decreased .8% and exports decreased .6%.  Put more generally, all major private sector contributors to GDP dropped in the 4th quarter.

French consumer recession worse than Italy's; Euro area economy in trouble - As discussed earlier (see post) the French economy continues to struggle. The nation's consumer recession is now thought to be worse than Italy's.Markit - “France has overtaken Italy as having the worst performing retail sector of the three largest euro area economies. Sales fell at a survey-record pace, as did employment. Italy registered another steep drop in sales, while German retailers witnessed a flat trend in March.” French economic output data suggests that the GDP growth - which has been lagging the Output PMI Index - will be in the red for a good portion of 2013.A big part of the economic stagnation in France was caused by the implementation of the country's own version of the "fiscal cliff". WSJ: - Mr. Hollande's government responded to the weaker economy in 2012 by raising taxes by €7 billion ($9 billion) to try to limit the damage to public finances. If the government hadn't done this, along with a smaller effort to curb public spending, the deficit would have increased above 5.5% of output, . Another €20 billion of taxes have since been introduced for 2013.  But there is now evidence that tax increases are hurting the economy with Insee reporting that consumer spending power fell last year for the first time since 1984. Households, who typically make up well over half of GDP, cut their spending for the second month in a row in February and haven't spent as little since June 2010, Friday's data showed.

Poland Is Not Yet Lost - Krugman - But its leaders remain determined to give disaster a chance. Poland is one of Europe’s relative success stories. It avoided the severe slump that afflicted much of the European periphery, then had a fairly strong recovery: As you can see, growth has faltered more recently, largely due to fiscal austerity plus the puzzling decision to emulate the ECB and raise interest rates in 2011. Still, by European standards there’s a refreshing absence of sheer economic horror. And a lot of that relative success clearly had to do with the fact that Poland not only kept its own currency, but allowed the zloty to float. As a result, during the years of big capital flows to the European periphery, Poland saw a currency appreciation rather than differential inflation, and it was able to correct that real exchange rate quickly when crisis struck:

Youth Unemployment Rates: US, Germany, Italy, Spain, France, Greece; Where to From Here? - Here are some unemployment charts I put together via Ycharts. Spain and Greece have youth unemployment over 50%. Germany, at 7.9%, has the only youth unemployment rate under 10%. US has second-best 16.8%, nothing to brag about except in relative terms.  Once again, notice the tight clustering at the start of the recession vs. the huge spreads today. As with youth unemployment, Spain and Greece lead the pack with overall unemployment rates above 25%.

The Stunning Differences In European Costs Of Labor – Or Why “Competitiveness” Is A Beggar-Thy-Neighbor Strategy - The ominous term, “competitiveness” has been bandied about as the real issue, the one that causes European countries, in particular some of those stuck in the Eurozone, to sink ever deeper into their fiasco. To fix that issue, “structural reforms,” or austerity, have been invoked regardless of how much blood might stain the streets. And a core element of these structural reforms is bringing down the cost of labor. In Europe’s private-sector, the cost of labor—gross earnings plus employer-paid social contributions, pensions, disability, etc.—is marked by stunning differences. At the bottom of the spectrum is Bulgaria: the average private sector employee costs a company €3.70 per hour worked; in manufacturing even less, €2.90. Romania is right there at €4.50 and €3.80 respectively. Near the top of the spectrum is Belgium at €40.40 and €41.90 per hour worked. But no one beats the Swedes: €41.90 and €43.80. Per hour worked, the average Swedish employee costs a manufacturer over 15 times more than an employee in Bulgaria. So, relocate all manufacturing plants from Sweden to Bulgaria? Or Romania? Even Greece would be a great place. The cost of labor there is only €14.70 per hour worked, about a third of what it costs up north. It’s the only country in the EU where the average cost of labor actually fell in 2012—and by 6.8%!

EU Caught Playing Dirty and it’s All About Russia: Jen Alic took us through the nuances of this game, noting that Russia could bail out Cyprus in return for a nice chuck of exploration acreage offshore. By the close of the day, that is exactly how things appeared to be unfolding. Later in the day, it began to emerge that Gazprom had reportedly offered Cyprus a bailout deal in return for offshore exploration rights. But by Friday, Russian and Greek Cypriot officials had said no deal had been reached. The deal Cyprus put on the table was the creation of a Cypriot state company with control of gas reserves into which Russian companies could invest, along with a nice stake in Cypriot banks to be rescued by the Russian investment fund. It’s not enough for Moscow, which is holding out for more—and likely to get it if the EU refuses to budge.This all came after the EU tried to get Cyprus to agree to partially fund an EU bailout package by putting a levy on bank deposits and offering account-holders compensation in the form of potential gas futures. This is where the EU was caught playing dirty—and it’s all about Russia. Russian oligarchs use Cyprus for their offshore banking needs, and as such hold a lot of the bigger accounts that would have been targeted under this scheme. The EU would never have done this in the past because Russia would have just turned off the gas spigots that control European supplies. What’s behind the new bravado? Quite simply, 122 trillion cubic feet of Mediterranean gas in the Levant Basin, discovered by Israel (in a US-Israeli partnership), and in Lebanon, Syria and Cyprus. If all goes well, the estimated 425 billion cubic meters (16 trillion cubic feet) of gas found in Israel’s Leviathan field will eventually be pumped via undersea pipeline directly to Turkey and then on to Europe. Another Israeli gasfield, Tamar, has 250 billion cubic meters (9 trillion cubic feet) and production should begin in April. This is Europe’s answer to the Russian gas stranglehold. It’s no longer afraid of Russia turning the spigot off.

Russian Ties Put Cyprus Banking Crisis on East-West Fault Line - Andreas Marangos, a Porsche-driving lawyer here, had just woken up when he heard the news that threatened to destroy his and Cyprus’s most lucrative business: setting up shell companies and providing financial services for wealthy Russians. A week later, this Mediterranean island nation is still trying to figure out how to raise the $7.5 billion European lenders say it must have by Monday in return for a bailout. Late Saturday, the tentative plan was to seize a portion of all deposits above 100,000 euros, with the bite set at 20 percent for those banking with Cyprus’s biggest bank. For Mr. Marangos, either plan is bad news. “Since last Saturday, we are just answering calls from angry clients,” said the lawyer, whose firm has helped Russians and Ukrainians set up 6,000 companies in Cyprus so that they can avoid taxes, benefit from a sound legal system and, they hoped, keep their money safe. Cyprus still offers those draws, he insisted, but his clients “thought we had betrayed them.” Accusations of treachery, mostly aimed by poorer nations at Germany for demanding budget cuts and other painful steps in return for help, have become a regular feature of Europe’s three-year-old debt crisis. But what began in Cyprus as just another episode in a now-familiar narrative of stingy, rich Northern Europeans versus put-upon, poor southerners has escalated into a bigger drama tinged with cold war-style language and strategic calculations involving not just money but also energy and even military power.

‘Our money’s not in Cyprus’ oligarchs say - IF RUSSIAN oligarchs still have money in Cyprus, where a lot of them base their businesses, they aren't letting on. "You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel group Mechel , as he dismissed a suggestion this week that the financial meltdown in Cyprus posed a risk to his interests. His response is typical across the oligarch class of major corporations and super-rich individuals, reflecting the assessment of officials and bankers on the Mediterranean island who say the bulk of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class savers. The collapse of an economy 75 times smaller than its own may not have much impact in Russia, though the crisis has strained relations with the European Union, raised questions on Russian influence over Cypriot politicians and highlighted geopolitical competition for new offshore gas fields. But some would suffer.

Raiding Cypriot accounts will not save the banking system - Cyprus is zeroing in on a solution to avoid getting ejected from the EMU. It's simple. Since taxing everyone's account by a few percent didn't work, it's time to raid all the larger accounts. NY Times: -   A one-time levy of 20 percent would be placed on uninsured deposits at one of the nation’s biggest banks, the Bank of Cyprus, to help raise 5.8 billion euros demanded by the lenders to secure a 10 billion euro, or $12.9 billion, lifeline. A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus. This action will really upset the Russian mafia, but is not going to save the the nation's banks. Once the financial system opens for business, the run on banks will ensue - no matter what sort of controls the authorities will try to impose. No sane depositor who is able to open an account in Germany, France, or even Italy would leave cash in Cyprus.  Some of those deposits will quickly move back to where they came from - Russian banks. Given the size of deposits at Cypriot banks, there isn't enough in eligible collateral for MRO financing (short term secured borrowing from ECB) to replace these lost deposits. The flight of capital will increase the funding needs far beyond the €10bn Cyprus is trying to raise. And it's unclear if the ECB should continue to provide further emergency loans (ELA). After all, the Eurosystem's exposure to Cyprus is simply insignificant on a relative basis. The ECB's balance sheet is still massive. It can generate more than enough interest income in a few months to cover the losses of Cypriot banks' defaulting on their ECB loans. So why throw good money after bad?

Cyprus and Eurozone Bank Deposits - To me, the central issue raised by this week's Cyprus debacle is how it has affected confidence across the eurozone.  To what degree has the possibility of insured depositors at a eurozone bank losing a portion of their deposits affected the mindset of depositors?  To what degree has ECB acquiescence to this possibility undermined the notion that deposit insurance in the eurozone means the same thing in all countries?  And to what degree has the ECB's direct threat to end support for Cyprus's banking system in the event that the government of Cyprus can not arrange sufficient funds to meet its conditions made a farce of its earlier promise to "do whatever it takes to preserve the euro"?  And while no one can definitively say that they know the answers to these questions, the answers will likely have a very direct bearing on the future of the eurozone.  It's a pity that we need to ask them at all -- if things had been handled better in Brussels, Frankfurt, and Nicosia last weekend then we wouldn't even be thinking about these questions right now.  But they weren't, and we are. While I don't know how significantly confidence in the eurozone periphery's banks have been shaken by this week's events, I do have an idea of what I will be keeping an eye on over the coming weeks and months: deposits in banks in Greece and Spain.

The Cyprus banks that have transfixed the world - All eyes in global banking have been fixated on Cyprus's two largest banks for the last week, as their near collapse, and the dramatic steps taken to avoid it, threaten the cornerstones of banking and the EU's single currency. Here are profiles of both banks. Bank of Cyprus Just 10 percent of Bank of Cyprus's 27.8 billion euros of deposits come from outside the eurozone, in stark contrast to Cyprus's overall banking sector, where 30 percent of deposits are non euro zone. Russians and depositors from the UK hold a roughly equal amount, at 1.2 billion euros. Cypriot depositors account for 66 percent of the bank's deposits, and Greek for 23 percent. The figures are dated end-September 2012 and published in the bank's third quarter accounts. (Similar figures for Laiki are not available). Cyprus (52 percent of loan book), Greece (33 percent), and the rest Russia, Romania, Ukraine, Channel Islands, plus representative offices in Moscow, Saint Petersburg and Ekaterinburg in Russia, Kiev in Ukraine, Belgrade in Serbia and Johannesburg in South Africa. The loan book percentages are as of September 30, 2012.

Cyprus yet to conclude deal with troika as talks move into early hours of Sunday - Talks in Nicosia aimed at concluding a set of measures to secure a 10-billion-euro EU-IMF bailout for Cyprus continued past midnight on Saturday without any conclusion. Cypriot President Nicos Anastasiades met party leaders at the Presidential Palace on Saturday night following several hours of talks with troika representatives. The officials from the European Central Bank, European Commission and International Monetary Fund also took part in the discussion with the party leaders but left the meeting shortly after midnight. Party leaders left the Presidential Palace about an hour later. Earlier, Finance Minister Michalis Sarris said that “substantial progress” had been made in concluding a deal with the troika and Reuters reported a senior Cypriot official saying that an agreement was within reach. However, late on Saturday a senior Cypriot official suggested his government was not close to tying up matters with the troika. “We are not in touching distance of an agreement,” “Every half hour, new demands are made,” the official said.

Cyprus talks to continue; no deal yet — Cyprus officials and international representatives ended torturous negotiation in the early hours of Sunday with no agreement on a plan to raise money the island nation needs to qualify for a bailout package. Talks are set to resume later Sunday in Brussels, but time is running out: Failure would mean Cyprus could declare bankruptcy in just two days and possibly have to exit the eurozone. Cyprus President Nicos Anastasiades and Finance Minister Michalis Sarris will travel to the Belgian capital early Sunday. A viable plan must be cemented before finance ministers from the 17 countries that use the euro currency meet in Brussels in the evening. "Negotiations are at a very delicate phase," government spokesman Christos Stylianides said in a statement. "The situation is very difficult and the margins very limited." Cyprus has been told it must raise 5.8 billion euros ($7.5 billion) in order to secure 10 billion euros in rescue loans from other European countries that use the single currency, as well as from the IMF.

Ukip urge Brits to withdraw their money from Spanish banks - The UK Independence Party leader said that the European Union had “crossed a line” by trying to extract funds from savers under the terms of the abandoned Cypriot bail-out. Mr Farage said: “Even I didn’t think that they would stoop to actually stealing money from people’s bank accounts. “There is going to be a big flight of money and that flight of money won’t just be from Cyprus, it will be from the other eurozone countries, too. There are 750,000 British people who own properties, or who live, many of them in retirement, down in Spain. “Now that we see the EU are prepared to resort to anything to keep alive their failing euro project, our advice to expats living down in the Mediterranean must be, 'Get your money out of there while you’ve still got a chance’.”

Cyprus now looks to take 25 percent from bank accounts of wealthy -- Cyprus said on Saturday it was looking at seizing a quarter of the value of big deposits at its largest bank as it races to raise the funds for a bailout from the European Union and to avert financial collapse. Finance Minister Michael Sarris said "significant progress" had been made in talks in Nicosia with officials from the European Union, European Central Bank and International Monetary Fund. He confirmed discussions were centered on a possible levy of around 25 percent on holdings of over 100,000 euros (about $130,000) at Bank of Cyprus, and expressed hope that a package could be ready by the end of the day for approval by parliament. Cyprus faces a Monday deadline to clinch a bailout deal with the EU or the European Central Bank says it will cut off emergency cash to the island's over-sized and stricken banks, spelling certain collapse and a potential exit from Europe's single currency.

Cyprus seeks 11th-hour deal to avert financial collapse - Without a deal on Monday, the ECB says it will cut off emergency funds to Cypriot banks, spelling certain collapse and potentially pushing the country out of the euro zone. A senior Cypriot official said Nicosia had agreed with its lenders on a 20 per cent levy over and above €100,000 at the island's largest lender, Bank of Cyprus, and four per cent on deposits above the same level at other banks. Media reports suggested talks were stuck on a demand by the IMF that Bank of Cyprus absorb the good assets of competitor Popular Bank and take on its nine billion euro debt to the central bank as well.

As Deadline Nears, Cyprus Scrambles to Devise a Bailout - The Cypriot president, Nicos Anastasiades, flew to Brussels on Sunday after mapping out a tentative outline of a deal late Saturday with representatives of the troika of negotiators involved in the bailout: the European Central Bank, the European Commission and the International Monetary Fund. His first order of business was a meeting with Mario Draghi, the president of the central bank; Christine Lagarde, the managing director of the monetary fund; and José Manuel Barroso, the president of the commission. Herman Van Rompuy, the president of the European Council, which represents European Union leaders, was expected to preside over the meeting. Mr. Anastasiades had also briefed Cypriot political leaders on the outline...The revised bailout terms now under discussion would assess a one-time tax of 20 percent on deposits above 100,000 euros at one of the nation’s biggest banks, the Bank of Cyprus, which has the largest number of savings accounts on the island. ...

New Demands Every Half-Hour From IMF; Can Cyprus Be Saved? Impossible Math - Cypriot President Nicos Anastasiades was picked up by private Jet and is now meeting with the cardinals in Brussels (IMF, EU finance ministers, ECB, Various Government leaders) according to Cyprus MailQuoting an unnamed senior government official, Reuters said Nicosia had agreed with EU/IMF lenders on a 20 per cent levy over and above €100,000 at No. 1 lender Bank of Cyprus, and four per cent on deposits over the same level at other banks. However, an hour or so later, the Cyprus News Agency, also quoting an unnamed Cypriot official, said the two sides were not even close due to the stance of the IMF, which tabled new demands “every half an hour”.  Racing to placate its European partners, Cypriot lawmakers voted in late-night session on Friday to split failing lenders into good and bad banks - a measure likely to be applied to No.2 lender Cyprus Popular Bank, or Laiki. They also gave the government powers to impose capital controls, anticipating a run on banks when they reopen on Tuesday. A plan to nationalise semi-state pension funds has met with resistance, particularly from Germany which made clear that tapping pensions could be even more painful for ordinary Cypriots than a deposit levy.

With Russia "Demanding Cyprus Out Of The Eurozone" Here Is A List Of Possible Russian Punitive Reprisals - As has been made abundantly clear on these pages since the breakout of the latest Cyprus crisis, the Russian policy vis-a-vis its now former Mediterranean offshore deposit haven-cum-soon to be naval base, has been a simple one: let the country implode on the heels of the Eurozone's latest humiliating policy faux pas, so that Putin can swoop in, pick up assets (including those of a gaseous nature, much to Turkey's chagrin) for free, while being welcome like the victorious Russian red army saving Cyprus from its slavedriving European overlords (a strategy whose culmination Merkel has very generously assisted with). Curiously there had been some confusion about Russia's "noble" motives in Cyprus (seemingly forgetting that in Realpolitik, as in love and war, all is fair). We hope all such confusion can now be put to rest following the clarification by Jorgo Hatzimarkakis, the German Euro deputy of Greek origin, who told Skai television on Sunday morning that Russia did not want Cyprus to stay in the eurozone.

JPMorgan On The Inevitability Of Europe-Wide Capital Controls - With the Cypriot government still 'undecided' about what to 'take' and the European leaders very much 'decided' about what to 'give', the fact of the matter is, as JPMorgan explains in this excellent summary of the state of affairs in Europe, that because ELA funding facility is limited by the availability of collateral (and the haircuts applied to those by the central bank), and cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This makes it inevitable that capital controls and a capital freeze will be imposed, in their view, but it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend's decision created for investors relative to previous policy decisions. Add to this the move by Spain, which announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing, and the chance of sparking much broader deposit outflows across the union are rising quickly.

Do Capital Controls Mean Cyprus Has Already Left the Eurozone?, by Tim Duy: Cyprus is in a struggle to save itself, at least the European definition of "save itself," and remain a Eurozone member. But will Cyrpus even use the same euro as the rest of Europe when all is said and done? After all, banks remain closed in Cyprus, which means a euro in a Cypriot bank has very little value. If you can't spend it, is it really a euro? And even when banks reopen, it is assumed that capital controls will be imposed to prevent euros from leaving the island. So a French euro will be able to purchase goods and services in Germany, but a Cypriot euro will not. It seems then that a Cypriot euro is unambiguously worth less than a French euro.  Thus, there will be two Euros in circulation (if not already). This is the thesis of blogger Guntrum B. Wolff: The most important characteristic of a monetary union is the ability to move money without any restrictions from any bank to any other bank in the entire currency area. If this is restricted, the value of a euro in a Cypriot bank becomes significantly inferior to the value of a euro in any other bank in the euro area. Effectively, it means that a Cypriot euro is not a euro anymore. By agreeing to this measure, the ECB has de-facto introduced a new currency in Cyprus. I think this might be right. If I can spend my dollar in Oregon but not in California, it is really the same dollar? I think not.  Is this how the Eurozone experiment will end? Not with a formal "exit," but with a return to banking dominated by national boundaries and enforced by capital controls? No longer a true common currency, but a dozen currencies sharing the same name, each with a different value?

Meanwhile, Cash Exodus From Cyprus Surges Despite Bank Closures, Capital Controls - When Cyprus put its banks into lockdown last weekend until... well indefinitely, now that capital controls are established, the main reason was to halt all capital outflows from the henceforth liquidity starved island whose banks will only exist as long as the ECB provides an ever greater dose of liquidity to account for the collapse in deposit funding. Which is why it is surprising, make that shocking, that as Germany FAZ reports, in the past week there has been a surge in cash outflows from Cyprus, even as its financial system has been supposedly ringfenced from the world, which by the way is the only thing preventing the EUR17 billion bailout from soaring by orders of magnitude because should a liquidity leak be discovered, it is all over for the country's financial system.

Bad Bank Losses 30-90%; Food Supplies Down to Two Days; Plenty of Fuel, Not enough Cash - Capital controls and a good-bank, bad-bank structure is what is now on the table. In spite of what may be agreed upon, I stated earlier today the losses will be bigger than currently perceived.I am not the only one to come to that conclusion, Faz has some estimates in its report striking high cash outflows from Cyprus Despite the closed banks and capital controls in the past week, more money flowed out from Cyprus than in previous weeks, according to payment transfers. Prior to the escalation of the crisis in Cyprus accruing on the payment system "Target liabilities of Cypriot central bank to the European Central Bank (ECB) had increased to a rate of approximately 100 to 200 million euros per day. In the past week, billions of dollars flew in spite of controls.Withdrawals at ATMs have been limited to €260 per day but on Sunday the value was further reduced to €100 per day. Cyprus lists accounts amounting to €30 billion in foreign currency, mainly dollars (86 percent) and pounds (6 percent). The investment bank Goldman Sachs estimated that this money belongs to foreigners, mainly Russians, Britons and Russians living in Latvia.

Cash Demands Impact Supermarket Shelves - SUPERMARKET shelves are in danger of emptying according to head of the supermarket union Andreas Hadjiadamou.  Supplies will only last two or three more days according to Hadjiadamou and there will be severe problems if a solution is not found and if banks remain closed. According to deputy of the supermarket union, Nicos Athanasiou, problems had already started being noticed at certain supermarkets in Larnaca. “Most people are making purchases with a certain amount of care and caution, buying the basics,” he said. “Most consumers have been purchasing dry and canned food the last couple of days in case things get worse,” he added. Athanasiou said there had not been a large fall in sales although in almost all of the supermarkets there were shortages of goods from suppliers who only accept cash payments.

Cyprus, European Union Reach Draft Bailout Deal -- Cyprus and its international lenders have reached a draft rescue deal, sources told CNBC.  No levy will be imposed on any deposits in Cypriot banks and the Popular Bank of Cyprus, known as Laiki, will effectively be closed.  Deposits below 100,000 euros in Laiki, the country's second biggest bank, will be moved to the Bank of Cyprus, while deposits above 100,000 euros will be frozen.  Euro zone finance ministers gave their approval to the plans to restructure Cyprus's banking sector, an EU official told Reuters. It was unclear whether Cypriot party leaders, who would have to vote on the proposal, had been given the details.

Bailout deal reached - Cyprus and international lenders reached a draft deal in the early hours of this morning, which had to be approved by the Eurogroup. Details of the deal were sketchy but involved heavy levies on both of Cyprus’ biggest banks. Other banks appeared to have been spared. And no charges will be incurred against any Cypriot bank account with less than 100,000 euros in them, the officials said. Reuters reported that the deal involves setting up a "good bank" and a "bad bank" and will mean that Popular Bank of Cyprus, known as Laiki, will effectively be shut down. Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be. Some reports suggested it might be as high as 40 per cent. Sources told Reuters that the proposal involved shifting deposits below 100,000 euros from the Popular Bank of Cyprus (also known as Laiki) to the Bank of Cyprus to create a "good bank".

Cyprus agrees €10bn bailout deal - Cyprus reached an 11th-hour €10bn bailout deal with international lenders on Monday morning that avoids a controversial levy on bank accounts but will force large losses on big deposits in the island’s two largest lenders. The deal will allow the European Central Bank to keep its emergency lifeline open to Cypriot banks on Monday, preventing a meltdown of the financial sector that threatened the country’s euro membership. It was reached in the early hours of Monday after a stormy meeting of 17 eurozone finance ministers that lasted almost 12 hours, and included a threat by the Cypriot president to pull his country out of the euro. “It’s been a particularly difficult road to get here,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs the committee of finance ministers. “We’ve put an end to the uncertainty that has affected Cyprus and the euro in recent days.” The plan does not need approval from the Cypriot parliament because the losses on large depositors will be achieved through a restructuring of the island’s two largest banks and not a tax. The parliament passed a new law governing bank failures just three days ago at Brussels’ urging

Revamped Cyprus deal to close bank, force losses - Cyprus clinched a last-ditch deal with international lenders on Monday for a 10 billion euro ($13 billion) bailout that will shut down its second largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians. The agreement emerged after fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund - hours before a deadline to avert a collapse of the banking system. Deposits above 100,000 euros, which under EU law are not guaranteed, will be frozen and used to resolve debts, and Laiki will effectively be shuttered, with thousands of job losses. An EU spokesman said no levy would be imposed on any deposits in Cypriot banks. A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.

Cyprus Salvaged After EU Deal Shuts Bank to Get $13B - Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets. “It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.” It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of the crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.

Last-minute Cyprus deal to close bank, force losses (Reuters) - Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout. The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund. Without a deal, Cyprus's banking system would have collapsed and the country could have become the first to crash out of the European single currency. Swiftly backed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a "good bank". Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki's debts and recapitalize Bank of Cyprus through a deposit/equity conversion. The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.

Cyprus Popular Bank Unsecured Depositors to Contribute EUR4.2 Billion to Rescue Package -Eurogroup - The bail-in of unsecured depositors from Cyprus Popular Bank will contribute around 4.2 billion euros (US$5.5 billion) to the Cyprus rescue package, Jeroen Dijsselbloem, president of the Eurogroup said in the early hours of Monday morning. Speaking after a meeting of euro-zone finance ministers, Mr. Dijsselbloem also said there is no "fixed date" for the reopening of Cyprus' banks. He said Cyprus' lenders will provide up to EUR10 billion including a still-unspecified contribution from the International Monetary Fund. Mr. Dijsselbloem said senior bondholders and savers with deposits over EUR100,000 in Cyprus Popular Bank face being "wiped out." In a statement, the Eurogroup said Cyprus Popular Bank will be split into a good and bad bank. The latter will be run down over time while the good bank will eventually be folded into the Bank of Cyprus. When that happens, Bank of Cyprus will take on EUR9 billion of European Central Bank liquidity assistance. The Bank of Cyprus will also receive the good assets and the insured deposits from Cyprus Popular Bank. The Bank of Cyprus will be recapitalized through a deposit to equity conversion of uninsured deposits with the full contribution of shareholders and bondholders, the Eurogroup said in its statement. Mr. Dijsselbloem was unable to say how steep the losses these bondholders and shareholders will have to accept.

Cash rationed in Cyprus after eurozone inflicts losses on biggest bank - Cyprus's two biggest banks have rationed the amount of cash savers can withdraw every day as the authorities scramble to prevent the collapse of the country's financial sector over the next 24 hours. Savers at the Laiki bank and Bank of Cyprus will be hit by new cash limits of €100 a day on Monday as both financial institutions are forcibly restructured. The future of the Bank of Cyprus, the island’s largest financial institution, has been called into doubt following emergency talks between the eurozone and the International Monetary Fund on Sunday night. In the early hours of Monday morning, Cyprus agreed provisional "bail-in" plans with the eurozone and IMF, meaning depositors, including many Russians, with over €100,000 in the bank face forced losses of up to 40pc. The draft agreement means that there will be no general "stability levy" on depositors in Cypriot banks with losses restricted to uninsured deposits over €100,000 in the Bank of Cyprus and Laiki.

Big Cyprus banks to stay shut after bailout - Most banks in Cyprus will open again Tuesday for the first time over a week. But the two biggest lenders at the heart of a €10 billion European Union rescue will stay shut for two more days to give regulators time to prepare for a run on deposits. Deposits of over €100,000 at Bank of Cyprus and Popular Bank will be frozen until they have been restructured. Popular Bank will be split up, its viable assets and insured deposits transferred to Bank of Cyprus, and its non-performing loans moved into a bad bank that will be wound down. Big depositors at Popular Bank face complete wipe out, along with shareholders and bondholders. The losses facing big depositors as part of a deposit-equity conversion at Bank of Cyprus have yet to be determined but could be around 30%, a Cypriot government minister said Monday. Again, shareholders and bondholders will be tapped first.  The big unknown is how small depositors will react, or what restrictions they'll face when they try to access their money from Tuesday. The Cypriot parliament last week gave the government powers to implement temporary capital controls.

Cyprus Rescue: The Destruction of a Tax Haven - Cyprus is paying a high price for the $13 billion financial rescue it finally obtained from the E.U. early Monday after a week of high drama: the destruction of a key pillar of its economy, its status as the offshore tax haven of choice for wealthy Russians. Under the terms of the deal, Cyprus will proceed with a massive cutback of its major banks. The biggest losers will be bondholders and depositors who have more than $130,000 in their accounts; the exact size of their losses still has to be calculated, but it could easily be above 20% and perhaps much higher in some cases. However, smaller depositors with less than $130,000 will be spared, a significant change from the initial rescue deal agreed upon a week ago that was rejected by the Cyprus parliament. Under that arrangement, all bank-account holders would have been taxed, regardless of the size of their deposits, to enable the island to come up with its own $7.5 billion contribution toward the bailout. (MORE: Cyprus Banking Crisis: The Endgame

Russians prepare to quit Cyprus -  While last week saw dozens of well-heeled Russians and their representatives fly down to Cyprus to check on bank accounts and confer furiously with Cypriot officials, they are being closely followed by another wave of visitors: the European bankers who hope Cyprus’s loss will be their gain. One Cypriot lawyer with Russian clients said he had already been approached by half-a-dozen European banks in locales ranging from Latvia to Switzerland to Germany, some of them promising they could open new bank accounts for his clients in under an hour. In Limassol, a lawyer for a Russian oligarch described receiving a call from the tycoon’s Swiss bank, which offered to open bank accounts for all the oligarch’s Cyprus-based employees as a favour, as well as emails from a dozen local Cypriot consulting firms imploring him to use their services when opening new accounts abroad. While it remains to be seen how Cyprus’s many Russian businessmen will be affected by the proposed bailout and what comes after, most appear to have one foot out the door already. They are now considering to which jurisdiction they will move their businesses and how. “The Cypriots killed their country in one day,” says Mr Mikhin, referring to Friday March 15, when President Nicos Anastasides accepted the EU’s proposal to seize €5.8bn in emergency funds from Cyprus’s local and foreign depositors. “The locals should understand: as soon as the money leaves, the people who go to restaurants, buy cars and buy property leave too. The Cypriots’ means of living will disappear,” he says.

Cyprus Crisis: A Triumph For Russian Isolationists - The mainstream media usually presents a very unbalanced view on the events in which Russian interests are involved. The “Cypriot bailout” is no exception. These messages are wrong, and they miss the most interesting part of the story. I can tell that in Moscow there are many people who are jubilating right now. Their wildest dreams have come true. “Russia should be grateful to the European Union and we should send them a gift or something”, wrote one of the pro-Kremlin journalists on Sunday. The Russian ruling elite is not monolithic. There are at least two different camps, vying for power and control over the state ideology. One such group believes that Russia can become integrated in the Western world and can be someday accepted by West as an equal partner. Contrary to the popular belief, this group is quite influential, and a big number of oligarchs support its views and political actions. From the beginning of this year, this group has been running out of luck and now it is risking running out of money. The other group believes in Russia’s self-sufficiency and would like to see the demise of the world’s dollar-based monetary system. Members of this group don’t trust the West. It is easy to see that this group is celebrating right now. Their opponents have received a near-mortal blow. The official position of Vladimir Putin has always been anti-offshore. Not many Western journalists are willing to tell their readers

Have The Russians Already Quietly Withdrawn All Their Cash From Cyprus? - Yesterday, we first reported on something very disturbing (at least to Cyprus' citizens): despite the closed banks (which will mostly reopen tomorrow, while the two biggest soon to be liquidated banks Laiki and BoC will be shuttered until Thursday) and the capital controls, the local financial system has been leaking cash. Lots and lots of cash. Alas, we did not have much granularity or details on who or where these illegal transfers were conducted with. Today, courtesy of a follow up by Reuters, we do.  As it turns out, the Russian oligrachs this whole operation was geared to punish, may have used the one week hiatus period of total chaos in the banking system to transfer the bulk of the cash they had deposited with one of the two main Cypriot banks, in the process making the whole punitive point of collapsing the Cyprus financial system entirely moot.

Will Cyprus Be Contained? -  Yves Smith - In March 2007, Fed chairman Ben Bernanke said that he thought the impact of losses on subprime mortgages was likely to be contained. It took five months for events to start proving him wrong. Last week, in a press conference, Bernanke indicated that he thought the likelihood of the crisis in Cyprus having larger ramifications was limited, and avoided using the “c” word. But the message was similar to that of March 2007. So now that Cyprus has agreed to resolve its problem banks on its own, the island nation has secured a short-term sovereign cash fix. As MacroBusiness described it: The restructure is enough for the IMF to agree to release a 10 billion euro bailout, which will do nothing whatsoever to address Cypriot public debt sustainability or the economy (other than hurt both). And there also is a rather visible inconsistency between the Eurocrats’ insistence that Cyprus was too small to make any difference and the stock and currency market response to the news of a deal.  So are we likely to see the sort of delay between the assessment and the onset of trouble, as we did in 2007, or is Cyprus a nothingburger, as the Troika and many investors contend? I welcome reader input, but I’d say the odds of knock-on effects are greater than the cheery official assessments would lead you to believe.

Merkel's Vision: "United States of Germany" - Following brutal negotiations with EU finance ministers, the IMF and various European government officials, Cyprus finally agreed to measures that her highness, Angela Merkel would accept. This time she held her ground. Previously, Merkel compromised every key position she has ever held in the sake of political expediency.For example, Merkel went twice went to the well on Greece to appease her opponents. She repeatedly caved in on demands from French president Nicolas Sarkozy. She reversed her stand on nuclear energy following German polls.  So why did Merkel drew the line at Cyprus? To Merkel everything is a play to win the next election and ultimately to preserve her legacy.  She fears the rise of the eurosceptic Alternative for Germany (AfD) Party and the best way to take some wind out of the AfD sails is to show she cares about austerity. Merkel's vision is not a United States of Europe. Rather, Merkel's vision is for a "United States of Germany".   In this light, every move she has made makes perfect "political" sense, solidarity be damned.

Cyprus: It’s not over yet - What a difference a week makes: now, if your uninsured deposits are at the Bank of Cyprus, you’re probably going to lose about 40% And if they’re at Laiki, you’re going to lose everything. The agreement between the Cypriot government and the Troika of the EU, IMF, and ECB is a bold and brutal geopolitical power-play. There might be language in the official communiqué about how “The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution”, but given the billions of euros that Russians are being forced to contribute unwillingly, the chances that they’ll happily throw a bit more money into the pot have to be tiny. In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU. For one thing, there won’t be any capital controls: that’s a good thing. (Some deposits at Bank of Cyprus will be frozen, which is a kind of capital control, but there aren’t corralito-style barriers on the general movement of euros in and out of the country.) On top of that, public markets have been left unruffled: there’s been no panic on Europe’s bolsas, partly because the biggest hit has been taken by private Russian citizens.

What to look for in the Cyprus deal:

  • 1. Output on the island could easily decline by 25% or more, and I don’t think that will involve much subsequent mean-reversion.  There will be a deflationary shock, an uncertainty shock, an “austerity shock,” a credit contraction shock, and a few other negative shocks as well. 
  • 2. It’s never a good sign when a deal is structured so that no one has to vote on it.
  • 3. The deal itself still doesn’t cough up all the money, but rather relies on subsequent tax increases and privatizations to come up with at least another billion euros.  Believe it or not, the numbers don’t add up.
  • 4. “This was not a good weekend for Russian billionaires.”
  • 5. I wonder if the two main banks even have the money they claim they do.  Who tells the truth going into a deal like this?
  • 6. Capital controls in Iceland are expected to remain in place at least through 2015, which would make seven years (and counting).  That is a better run country with lots of fish and aluminum smelting.  You can expect the same or longer from Cyprus, and that’s assuming this deal can last that long, which I doubt.
  • 7. ELA assistance is now, all the more obviously, contingent rather than certain.  Who would keep their money in the “good bank” which is being folded into Bank of Cyprus?  Why would anyone do this? 
  • 8. The capital controls will have to be strict.  What will the price of a Cypriot euro be, relative to a German euro?  50%?  I call this Cyprus leaving the euro but keeping the word “euro” to save face. 

Russian Oligarchs to (Involuntarily) Fund Cyprus Bailout -- Negotiations for Cyprus’ bailout, which has hinged largely on its hydrocarbons future, have ended with Russia missing the chance to swap aid for offshore exploration licenses and the Greek Cypriots agreeing to an EU bailout package that hits at the Russian oligarchy by shutting down the island’s second-largest bank. Over the course of last week, Greek Cypriots were shuffling back and forth to Moscow in an attempt to lure Russia into a bailout package that would have given it a stake in the island’s estimated 60 trillion cubic feet of natural gas offshore—but it wasn’t a big enough stake to tempt the Kremlin. Earlier in the week, Cypriot officials had rejected an EU bailout package that would have seen anyone with a bank account over 20,000 euros paying a 3-15% levy on deposits in return for future gas shares. Cyprus then hit up Russia to raise the stakes in this geopolitical game for control of Mediterranean hydrocarbons. The trick was to raise the specter of a Russian grab for Cypriot gas reserves in order to force a kinder bailout offer from the EU. Russia held out for more from Cyprus, but the possibility of a deal with Moscow was enough to put steps in motion for a new plan.

The Cyprus Bailout Solves Nothing - Do you still want to hold your money in Italian banks?  What about Spanish banks, or even in the United States?  The Cyprus bail-out, or bail-in as the EU likes to call it, has not put those questions to rest. They’ve become even more urgent now that the Troika – the alliance of European Union, European Central Bank, and IMF bureaucrats who spend their time going from one country bailout to another – have decided that depositors will be on the hook the next time a bank goes under. What’s even more worrisome is that they have shown themselves willing to ignore the laws governing bank failures, and that’s why you can’t breathe too big a sigh of relief over the latest version of the Cyprus “rescue”. It’s true that the deal announced this weekend is better than the one proposed the previous weekend.  Individual depositors with accounts no greater than €100,000 will be protected, even in the second largest bank – Laiki – which is to be shut down.  Insured deposits in Laiki Bank will be transferred over to the Bank of Cyprus – the country’s largest bank – which will become a “good bank” in comparison to Laiki as the “bad bank” that will house only its impaired assets.  Shareholders and bondholders in Laiki Bank will be wiped out, and owners of deposits greater than €100,000 will lose some portion of their deposit, an amount yet to be determined, but expected to be significant.

Waiting for the fall-out - A WEEK late and billions of euros short euro-zone leaders have knocked out a deal with Cyprus over its ongoing banking crisis. Charlemagne provides key details here. The agreement is significantly better than last week's hash in a few ways. Insured depositors will not face losses; instead stockholders will be cleaned out, bondholders will be bailed in, and uninsured depositors will face big losses: The country’s second-biggest bank, Laiki, would be wound down. Viable assets and insured deposits would be put into a “good bank”. Another €4.2 billion worth of uninsured deposits would be placed into a “bad bank”, to be disposed of, with no certainty that big depositors will get any money back.The treatment of the biggest bank, Bank of Cyprus, was a bit less harsh. It is to be restructured severely by wiping out shareholders and bailing in bondholders, both junior and senior. Uninsured depositors would probably incur haircuts of the order of 35%, said senior sources involved in the negotiation. The “good bank” emerging from Laiki would be merged with Bank of Cyprus. As Charlemagne notes, the deal isn't much different from that proposed by the IMF some time ago. The confusion and delay in reaching the new framework are bound to prove costly.

Cyprus’ Banks to Remain Closed Until Thursday - The Central Bank of Cyprus says the country’s finance minister has decided to order all banks in the country to remain shut until Thursday. The announcement late Monday came hours after the central bank had said all banks except the country’s two largest lenders, Laiki and Bank of Cyprus, would open on Tuesday morning. Banks have been closed since March 16 to avert a run on deposits as the country’s politicians struggled to come up with a plan that would raise enough funds to qualify for an international bailout.

Cyprus banks to stay closed for days - Cypriot banks will remain closed until Thursday, the government announced on Monday night, as President Nicos Anastasiades acknowledged that the country had come “a breath away from economic collapse” before its last-minute bailout. Speaking after he agreed a €10bn international rescue that includes the restructuring of the island’s two biggest lenders with losses for bigger depositors, Mr Anastasiades also said capital controls would be imposed but as a “very temporary measure that will be gradually relaxed”.  The chairman of the group of eurozone finance ministers warned that the bailout marked a watershed in how the eurozone dealt with failing banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors. Jeroen Dijsselbloem, president of the eurogroup, was speaking after Cyprus reached its 11th-hour bailout deal with international lenders that avoids a controversial levy on bank accounts but will force large losses on big deposits in the island’s top two lenders. Government officials announced on Monday night that all Cypriot banks, including the stricken Laiki and Bank of Cyprus, would remain closed until Thursday.

Saving Cyprus Means Nobody Safe as Europe Breaks More Taboos - The island nation’s rescue sets precedents for the euro zone that may stick in the memory of depositors and bondholders alike as investors debate who will next fall victim to the debt crisis. Under the terms of the agreement struck yesterday in Brussels, senior Cypriot bank bond holders will take losses and uninsured depositors will be largely wiped out.  The message that stakeholders of all stripes can be coerced into helping a cash-strapped nation may make investors more skittish they’ll be targeted if Slovenia, Italy, Spain or even Greece again is next in line to need help. The risk is that bank runs and bond market selloffs become more likely the moment a country applies for a new rescue, said economists and academics from Nicosia to New York.  “We now have a new type of rule and everyone within the euro zone has to sit down and see what that implies for their own finances,” Nobel laureate Christopher Pissarides, an adviser to the Cypriot government, told “The Pulse” on Bloomberg Television.

Coming soon to uninsured deposits near you -  ON THE subject of euro zone fragility and the impact of the Cyprus incident on broader confidence in the single currency, an exhibit. Fresh off negotiating the Cyprus deal Jeroen Dijsselbloem, the Dutch finance minister and head of the "Eurogroup" of euro-zone finance ministers, said in comments to Reuters and the Financial Times that: A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors... In other words, Cyprus is absolutely a unique case, BUT if trouble should come to banking sectors elsewhere in the euro zone hitting uninsured depositors would seem a sensible way to go. Alternatively: rich Spaniards, Italians and so on should perhaps think about moving money in excess of deposit guarantee limits elsewhere.

Cyprus fallout: over half of Germans doubt deposit guarantee - Reuters reports that according to a survey by Stern magazine over half of Germans doubt that their government will honor its deposit guarantee. At a minimum, this suggests how big the blow was to trust and confidence in the EU financial system caused by the decision to bail-in depositors to pay for the losses hidden on bank balance sheets. Regular readers know that ultimately there is only one way to restore trust and confidence in the financial system: bring transparency to all the opaque corners of the financial system. For banks, this means that they will have to disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  It is only with this disclosure that market participants can see the true condition of these banks.

Denmark Reviews Bail-In Law as ‘Terrorists’ Shape Banking - As the euro area tries out its first bank bail-in in Cyprus, the European Union nation that led the way in burden sharing two years ago is now reviewing its commitment to the legislation. Denmark, whose banks hold assets about four times the size of the $300 billion economy, may reclaim the option to bail out its biggest banks after a government-appointed committee recommended the adjustment to existing laws. "To have a principle that we would never, under any circumstances, save a bank -- that’s like saying you would never trade with terrorists,” Michael Moeller, chairman of Denmark’s committee on systemically important financial institutions, said in an interview. “But what if they had an atomic bomb that could blow up half the United States?” Denmark is reconsidering its stance on bail-ins after losing 23 percent of its banks to a real estate bubble that burst in 2008. Banks’ average return on equity has fallen by 73 percent in the period, plunging the economy into a recession. The 2011 failure of Amagerbanken A/S -- the first in the EU to trigger senior creditor losses within a state resolution framework -- tainted Denmark’s entire financial industry as even Danske Bank  funding costs jumped.

Analysts: Europe bank run is under way - It used to be that you knew a bank run was under way when you saw crowds outside a bank trying to get in and get their money. This is another thing that online banking seems to have gotten rid of. Despite the lack of crowds, many analysts believe what had been a "jog" by big European investors (with the exception of Germany) is now a sprint. On Monday Gavyn Davies, who chairs Fulcrum Asset Management and is an adviser to the British government, wrote in the Financial Times: A bank run is now happening within the eurozone. So far it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers. This was followed on Tuesday by a report from Citi analyst Matt King who applied Greece, Ireland, and Portugal's documented withdrawal rates to Spain and Italy: In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52 percent, and foreign government bond holdings by an average of 33 percent, from their peaks. The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further $272.17 billion and $270.9 billion in capital flight respectively, skewed towards deposits in the case of Spain and towards government bonds in the case of Italy....Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly significantly accelerate the timescale and increase the amounts of these outflows.

Cyprus to shape future euro bank rescues: Eurogroup head - A rescue program agreed for Cyprus will serve as a model for dealing with future euro zone banking crises and other countries will have to restructure their banking sectors, the head of the region's finance ministers said. The approach would mark a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programs. "What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times on Monday, hours after the deal was struck. "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," he said.

Cyprus bail-out: savers will be raided to save euro in future crises, says eurozone chief - Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe's single currency by propping up failing banks, a senior eurozone official has announced. The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales and other assets to eurozone bank accounts in countries such as France, Spain and Italy. The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, told the FT and Reuters that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe. "If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders." Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

Cyprus Finance Minister: Uninsured Laiki Depositors Could Face 80% Haircut - Cyprus's finance minister said Tuesday that large deposit holders at Cyprus Popular Bank, the island's second biggest lender, could face losses of as much as 80% on their deposits as the government moves to wind down its operations. Speaking in a television interview with state broadcaster RIC, Michalis Sarris indicated that it could also take years before those depositors see any of their money returned. "Realistically, very little will be returned," Mr. Sarris said. Asked if, like in other bank closures, it could take six to seven years before depositors get back there money, he said: "maybe yes. And the amount [returned], could be 20%. Certainly, for depositors above 100,000 euros it could be a very significant blow." His remarks come just hours after Cyprus's central bank governor estimated that the losses facing large depositors at rival Bank of Cyprus PCL (BOCY.CP), could reach as much as 40%.

Damage ripples through Cypriot economy - On Monday, EU officials pronounced Cyprus saved after the country agreed terms with international lenders on a €10bn bailout. On Tuesday morning, Elena Antoniou, a Cypriot interior designer, fired her staff. “I told them, ‘Guys, three months of part-time and then we’re closing’,” The epicentre of the Cypriot crisis was the offshore financial business that inflated its banking system to about eight times the size of its economy – much of that with deposits from wealthy Russians. But as that economic model crumbles, the damage is spreading in all directions, hitting businesses only loosely related to the high-flying offshore sector. Some analysts predict the economy will contract 10 per cent or more this year. The experience of Ms Antoniou, and of her family and business associates, shows how quickly the pain has spread. The cement company run by her husband is facing tough times. Her son, who works at a local arm of a Greek bank, is worried about his future. “The whole point of the bailout was to shrink the banking sector, but they’ve destroyed our entire economy,” she said. “The thing that’s scary is the confusion – nobody knows anything.” The most immediate problem confronting businesses was a scarcity of cash. As of Tuesday, banks had been closed for 11 days and were not expected to reopen until Thursday.

Cyprus Sets Bank Revamp Amid Protests - We are in no position to give you the exact amount this moment," [Central banker Panicos Demetriades] told reporters, referring to the amount that will be taken from large deposits at Bank of Cyprus, but he added "it's about 40%."  Based on estimates from government officials, the losses would affect some 19,000 deposit-holders at the Bank of Cyprus who, combined, hold some €8.01 billion ($10.30 billion) in uninsured deposits. Uninsured savers at Cyprus Popular Bank, who hold a combined €3.2 billion, will lose most of that. "Realistically, very little will be returned," Finance Minister Michalis Sarris said in the interview broadcast on state television. "The amount [returned], could be 20%. Certainly, for depositors above €100,000 it could be a very significant blow," he said.

Europeans Planted Seeds of Crisis in Cyprus - When European finance chiefs explained their harsh terms for rescuing Cyprus this week, many blamed the tiny Mediterranean nation’s wayward banking practices for bringing ruin on itself. But the path that led to Cyprus’s current crisis — big banks bereft of money, a government in disarray and citizens filled with angry despair — leads back, at least in part, to a fateful decision made 17 months ago by the same guardians of financial discipline that now demand that Cyprus shape up. That decision, like the onerous bailout package for Cyprus announced early Monday, was sealed in Brussels in secretive emergency sessions in the dead of night in late October 2011. That was when the European Union, then struggling to contain a debt crisis in Greece, effectively planted a time bomb that would blow a big hole in Cyprus’s banking system — and set off a chain reaction of unintended and ever escalating ugly consequences. “It was 3 o’clock in the morning,” recalled Kikis Kazamias, Cyprus’s finance minister at the time. “I was not happy. Nobody was happy, but what could we do?”

The Lesson From Cyprus: Europe Is Politically Bankrupt - Over the past week, Europe, or rather the present EU leadership, has done damage to itself it will never be able to repair. It seems to escape everbody, but that doesn't make it any less true: people from Portugal to Spain to Italy to Greece to Cyprus and Ireland are worse off today than they were when they first adopted the euro. Moreover, their economies are all getting worse as we speak and projected to plunge further. The once highly touted blessings of the common currency are by now lost on most of southern Europe; for them, the euro has been a shortcut to disaster. Until Cyprus, the EU had always maintained two prime objectives (and spent €5 trillion over 5 years to prove it): keeping all members in the eurozone, and guaranteeing all bank deposits under €100,000. These objectives exist from now on only in words. Brussels has threatened to both grab deposits of small savers and throw Cyprus out of the monetary union. Two watershed moments in one. The membership of the European Union, the subsequent introduction of the euro and the seemingly endless flow of credit that came with these "privileges" provided the region with a temporary illusion of increasing wealth and new-found prosperity. Today it knows that none of it was real, or earned; it was all borrowed. It's time to pay up but there's no money left. It needs to be borrowed. From the European core and its banking system.

Moody's: Cyprus crisis is credit negative for euro area sovereigns - Euro area policymakers' handling of the Cyprus crisis to date, the increased risk tolerance apparent in their actions, and the uncertainty that a more uncompromising and less predictable approach to crisis management creates for investors' assessment of risk, are credit negative for euro area sovereigns. Even if negotiations are successful and Cyprus remains within the euro area, policymakers' recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial market dislocation throughout the euro area in the future, even if those decisions do not disrupt financial market calm in the present. If negotiations fail and Cyprus exits the euro area, the disruption could prove to be beyond policymakers' ability to manage. Shift in policymakers' risk tolerance increases exposure to high-severity tail risks The conditions imposed by euro area policymakers for financial assistance, which seek to reduce moral hazard and limit future liabilities by imposing discipline on recipients of financial assistance, are rational and understandable. Policymakers' conclusion that the Cypriot government' s debt burden would be unsustainable without some form of burden-sharing is reasonable. The refusal to lend to sovereigns that are clearly insolvent is consistent with past actions.

The Axe is in Position, Only the Timing of the Swing is in Question - It has been amusing listening to the hypocrisy from Brussels regarding the leverage in Cyprus. Jeroen Dijsselbloem, president of the eurogroup led the charge that Cyprus had an unsustainable problem with deposits over 700% of GDP. Here is a little perspective courtesy of the Financial Times.  Somehow we are supposed to believe that 7-1 ratio of deposits to GDP in Cyprus is a problem but the 22-1 ratio in Luxembourg is not. And what about the 4-1 ratios in France and the Netherlands?What sunk Cyprus now rather than later was Cyprus was dumb enough to be in Greek bonds.

Men in Black Seek Answers; Troika to Return to Spain in May Asking "What Happened to €42 Billion in ESM Bank Recapitalization Tranches?" SAREB, Spain's bad bank, has received assets (primarily bad loans) from Bankia, NCG Banco, Catalunya, Caixam, Banco de Valencia and others. Bankia, a component of Spain's nationalized bank system has been one disaster after another. Guru's Blog reports that has you invested €37,500 in the IPO of Bankia at €3.75 per share, it would be worth 70€ today, a loss of 99.81%. Bankia shareholders have been wiped out. Recovery is impossible. The question at hand now is "What Happened to the €41 billion Spain received in two tranches of ESM money for bank recapitalization?" That's a good question and one the "men in black" want to know as well.  El Confidencial reports Troika Will Return to Spain in May to Investigate Bankia The troika, made up of the European Commission, the ECB and the IMF threaten an upcoming visit to Spain, during the last week of the month of May. The 'men in black' come this time seeking to clear up some of the derivatives in the famous bank bailout. Specifically, the Troika will put a magnifying glass on Spain to check in detail the fate of the more than 41 billion euros delivered to the Government of Mariano Rajoy. The effective distribution of the two tranches of the ESM bailout is troubling supervisors. They also do not understand the development of other obligations as set out in a memorandum of understanding (MoU) signed last July.

Italy Roiled As Cyprus Precedent Casts Shadow on Banks, Rating - --Italian banks racked up steep losses in European trading on Monday as investors began to grasp the implications of the Cyprus bailout: For the first time in Europe's five-year-old debt crisis, depositors will have to shoulder some of the burden of bailing out troubled lenders. Intesa Sanpaolo, Italy's largest bank by domestic assets, fell 6.2%, while its main rival, UniCredit, fell 5.8%. Unlike Cyprus, banks in Italy have a large bondholder base, presumably putting these investors, along with shareholders, ahead of depositors in the line of fire. While that may make their savings accounts safer, it still raises funding costs for banks, eating into their profits and making restored balance sheets all the more elusive. Reports that senior euro-zone officials in Brussels no longer see depositors as off limits in future bank crises--drove credit-default swaps--a proxy for wholesale borrowing costs--higher on Italian banks.

The broken Euro - Imagine you can put money into your bank, but you can't get it out again. At least you can, through ATMs, but only in very small amounts. If you have money on deposit, you can't take the money out and close the account. And if it's a time deposit, when it reaches the end of its life, you can't have the money to spend. You have to roll it over into a new deposit. You can't cash a cheque in a high street bank. You can't pay bills in a high street bank, either. Your employer pays you in cash, because there are no electronic payments. Which is just as well, really, because you need cash. There are no automated payments such as direct debits, so you pay all your household bills in cash. Credit and debit cards are no longer accepted anywhere, so you buy all your shopping and petrol for your car with cash. You can't make phone or internet purchases. If you have more than one account, you can't transfer money between your accounts. If only one of your accounts has ATM access, once that account is empty, you are stuck with no money.You can't go on holiday abroad because you can't take any money out of the country. Your employer won't send you abroad on business, either, because you might not come back.....

"Mario Draghi’s Economic Ideology Revealed?" - ECB President Mario Draghi made a presentation to heads of state and government at last week’s European Council on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended. Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success. Structural rigidities and greedy trade unions lead to failure.

S&P cuts euro-zone 2013 GDP forecast to minus 0.5%  -- Standard & Poor's on Tuesday cut its euro-zone gross-domestic-product forecast for 2013 to negative 0.5% from a previous estimate of a decline of 0.1%, citing difficult financial conditions in the region. "There are reasons to believe that monetary policies in the euro zone are no longer able to offset, at least partly, the restrictive effects of tight fiscal policies," EMEA Chief Economist Jean-Michel Six said in a note. "As the private and the public sectors in most countries continue to deleverage simultaneously, the main supporting factor for growth has to be found in foreign sales," he said. Export performances across the region have varied considerably, the report said, with Spanish and Portuguese exports performing well, while French and Italian exports have underperformed

The biggest problem - EUROPE has a lot of economic problems. It has the sort of problems everyone has: demographic headwinds, plateauing educational attainment, the need to continue pushing out the technological frontier, and so on. It has the regular sorts of problems some countries do better than others: tangled and excessive regulation, rigid labour markets, overly large and inefficient public sectors, and so on. It has the acute problems now common to rich countries: excessively large and overleveraged banks, deleveraging households, and piles of bad loans. But Europe has another big economic problem, and that's a nominal problem: The red line shows year-on-year growth in the euro zone's nominal output or, if you like, how much more money, in euro terms, is being spent across the euro area relative to the year prior. The blue line shows the same number, in dollar terms, for the American economy. The large divergence at the end corresponds to the large divergence in the performance of real growth and unemployment.

The Euro crisis in one graph - With a number of economists and pundits speculating that the imposition of capital controls in Cyprus marke the beginning of the end for the Euro in its current configuration, the below graph which I've copied from The Economist is especially telling:  Take a look at the green line. It shows that, outside of Germany and France, the average Eurozone economy has been in almost unremitting malaise or contraction for over five years! How long do the citizens of those countries put up with austerity seen as imposed by Brussels and Berlin before they decide they have had enough?

Hot Money Blues, by Paul Krugman - Whatever the final outcome in the Cyprus crisis — we know it’s going to be ugly; we just don’t know exactly what form the ugliness will take — one thing seems certain: for the time being, and probably for years to come, the island nation will have to maintain fairly draconian controls on the movement of capital in and out of the country. In fact, controls may well be in place by the time you read this. And that’s not all: Depending on exactly how this plays out, Cypriot capital controls may well have the blessing of the International Monetary Fund, which has already supported such controls in Iceland. It will mark the end of an era for Cyprus, which has in effect spent the past decade advertising itself as a place where wealthy individuals who want to avoid taxes and scrutiny can safely park their money, no questions asked. But it may also mark at least the beginning of the end for something much bigger: the era when unrestricted movement of capital was taken as a desirable norm around the world.  Hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.

Krugman vs Bernanke on Capital Flows - Here’s Krugman’s op-ed on capital flows today: But the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment. And here is Bernanke on capital flows in a speech today: Of course, heavy capital inflows and their volatility pose challenges to emerging market policymakers, whatever their source. Policymakers do have some tools to address these concerns. In recent years, emerging market nations have implemented macroprudential measures aimed at strengthening their financial systems and reducing overheating in specific sectors, such as property markets. Policymakers have also experimented with various forms of capital controls. Such controls raise concerns about effectiveness, cost of implementation, and possible microeconomic distortions. Nevertheless, the International Monetary Fund has suggested that, in carefully circumscribed circumstances, capital controls may be a useful tool.1

A simple point about capital controls - John Dizard writes: Capital controls turn into trade controls, as the locals attempt to find ways to turn hard assets or non-banking services into foreign exchange. At some price, for example, you can buy a boat in Cyprus with post-haircut, capital-controlled local deposits, sail it to Lebanon, and then sell it for real, usable money. The same with antiques, jewellery, or anything else you can think of. Even capital goods such as fork lifts can be motored off in the middle of the night. Here is a long Cardiff Garcia post on capital controls, excellent throughout.  From Garcia, there is also this: Reinhardt, Rogoff and Maduff did a meta-analysis in 2011 on prior studies of capital controls. The only uncontroversially (though mildly) successful use of controls on outflows they found was Malaysia in the aftermath of the Asian financial crisis. Even then, the controls were accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar.

Pessimal Currency Area Theory - Paul Krugman -- Kevin O’Rourke asks a good question. He points out that the classic argument for the euro’s irreversibility, from Barry Eichengreen, was that any threat to leave the euro would set off “the mother of all financial crises”: a crisis of confidence that would collapse a country’s banks. I used to believe this, but eventually noticed that the logic would break down if a country had its banking crisis first, and was forced into an Argentine-style corralito. And Cyprus is there: closed banks, capital controls. In an important sense it’s already off the euro; it has an inconvertible currency, the Cypriot euro, that just happens to be pegged to the other euro at a parity of 1. Why, exactly, should this parity be sacrosanct? Wait, there’s more. The theory of optimum currency areas says, in brief, that countries face a tradeoff between convenience and adjustment. Having your own currency raises transaction costs and makes business more difficult; but giving up your own currency means that you have to adjust to overvaluation through deflation, which is much more costly than devaluation. At this point, however, Cyprus has made doing business very difficult via capital controls, while retaining its inability to deal with overvaluation via currency realignment. So it has created a pessimal currency area, offering the worst of both worlds. And Cyprus is now very overvalued — not only have the big capital inflows of yore dried up, a major export industry — offshore banking — has just died.

Cyprus has finally killed myth that EMU is benign - The punishment regime imposed on Cyprus is a trick against everybody involved in this squalid saga, against the Cypriot people and the German people, against savers and creditors. All are being deceived. It is not a bail-out. There is no debt relief for the state of Cyprus. The Diktat will push the island’s debt ratio to 120pc in short order, with a high risk of an economic death spiral, a la Grecque. Capital controls have shattered the monetary unity of EMU. A Cypriot euro is no longer a core euro. We wait to hear the first stories of shops across Europe refusing to accept euro notes issued by Cyprus, with a G in the serial number. The curbs are draconian. There will be a forced rollover of debt. Cheques may not be cashed. Basic cross-border trade is severely curtailed. Credit card use abroad will be limited to €5,000 (£4,200) a month. “We wonder how such capital controls could eventually be lifted with no obvious cure of the underlying problem,” said Credit Suisse. The complicity of EU authorities in the original plan to violate insured bank savings – halted only by the revolt of the Cypriot parliament – leaves the suspicion that they will steal anybody’s money if leaders of the creditor states think it is in their immediate interest to do so. Monetary union has become a danger to property.

Is Europe's central bank misleading us over who's to blame for eurozone crisis? - Over the course of the last week's tense negotiations over a Cyprus bailout deal, much of the commentary has focused on the role of Europe's finance ministers. But perhaps closer attention should be paid to Mario Draghi, the president of the European Central Bank. On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended. Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED. According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi's intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.

EU proposes tighter rules on investment incentives - The European Commission's Directorate-General for Competition is the EU equivalent of the U.S. Department of Justice Anti-trust Division plus units for controlling domestic subsidies to industry. According to a new policy briefing from the European Policies Research Centre at the University of Strathclyde, DG-Competition has released a draft of new regulations on "regional aid" (subsidies to firms in poorer regions of the EU) that, among other things, includes tighter rules on investment incentives. EU rules on subsidies to business have long fascinated me because they present a stark contrast to the totally unregulated bidding wars for investment we see here in the United States. As I have shown, EU Member States have been able to obtain investments with far lower subsidies than U.S. states have, even for the same company!The big change is that large firms would only be eligible for regional aid in areas with gross domestic product per capita below 75% of the EU average, that is, only in the poorest areas of the European Union (plus so-called "outermost regions" like French Guyana). Currently, countries are allowed to give subsidies in regions that are only poor relative to national standards, and every Member State has areas that qualify to give investment incentives to large firms.

Bank of Cyprus Big Savers To Lose Up to 60 Percent — Large depositors at Cyprus’ largest bank may be forced to accept losses of up to 60 percent, far more than initially feared under the European rescue package to save the country from bankruptcy, officials said Saturday.  Deposits of more than 100,000 euros ($128,000) at the Bank of Cyprus would lose 37.5 percent in money that would be converted into bank shares, according to a finance ministry decree obtained by The Associated Press. In a second raid on these accounts, depositors also could lose up to 22.5 percent more, depending on what experts determine is needed to prop up the bank’s reserves. Banking and finance ministry officials confirmed these details in interviews with the AP. They spoke on condition of anonymity because they are not authorized to publicly discuss the issue. The deposits that converted to bank shares would theoretically allow depositors to eventually recover their losses. But the shares now hold little value and it’s uncertain when — if ever — the shares will regain a value equal to the depositors’ losses. Europe has demanded that large depositors in the country’s two largest banks — Bank of Cyprus and Laiki Bank — accept across-the-board losses in order to pay for the 16 billion euro ($20.5 billion) bailout. But officials had previously spoken of a loss to big depositors of 30 to 40 percent.

Save the rich! -- The public, as well as most of the financial commentariat space, seem mostly to be behind the amended terms and conditions to Cyprus’ Eurogroup bailout, believing them to be fairer for most concerned.Unlike the original proposal, the new terms do, for example, discriminate between good and bad banks — lessening the burden on those invested in better banks. They spare insured depositors below €100,000. And they require greater participation from other uninsured parties and equity holders in those banks deemed particularly bad.Indeed a much greater burden will be taken up by those holding uninsured deposits above €100,000. Those invested in really bad banks like Laiki, meanwhile, will be joined in the bail-in procedure by equity shareholders, bond holders and uninsured depositors. The details are still being ironed out, but it seems that in some cases over 50 per cent of deposits above €100,000 may be turned into equity.

Cyprus to reopen banks, impose capital controls (Reuters) - Cypriots are expected to descend in their thousands on Thursday on banks, which reopen with tight controls imposed on transactions to prevent fleeing depositors from cleaning out the vaults in a catastrophic bank run. The east Mediterranean island fears a stampede at banks almost two weeks after they were shut by the government as it negotiated a 10 billion euro ($12.78 billion) bailout package with the European Union to escape financial meltdown. The rescue deal is the first in Europe's single currency zone to impose losses on bank depositors, raising the prospect that savers will panic and scramble to get at their cash. Authorities insist that strict rules imposed to prevent a bank run will be temporary, but economists say they will be difficult to lift as long as the economy is in crisis. On Wednesday night, container trucks loaded with cash pulled up inside the compound of the central bank in the capital Nicosia to prepare for the reopening, a Cyprus central bank source said. A helicopter hovered overhead and police with rifles were stationed around the compound.

Cyprus Banks Set To Reopen, To Serve As Glorified ATMs With A €300 Cash Withdrawal Limit - Tomorrow Cyprus banks will reopen sometime around noon (they are supposed to close at 6 pm but likely will close far earlier). What does that mean? Apparently nothing much. Because according ot various newswires the withdrawal limit at all banks will be €300 per day. In other words, all said "reopening" will do, is to allow physical branches to be used as glorified ATMs but with a very terrified and confused carbon-based teller on the other side (the same ATMs which a few days ago saw their limit reduced from €300 to €120). All other cash transactions will be strictly curbed, virtually no cash will be allowed to exit the island, and the what's more the government will ban the termination of the oh so ironically-named time deposits. This means that time deposits will now become "permanent deposits", even if within the €100,000 insured limit. The good news: credit card treansactions will be permitted when paying for goods and services anywhere on the island. Of course, electronic cash just happens to not be physical cash, which is why the bank is so cavalier with allowing people to access their own money.

Cyprus banks to reopen with emergency restrictions on cash withdrawals - Cyprus has made eurozone history by imposing swingeing measures to stop money flooding out of the country when its banks reopen after a 12-day hiatus on Thursday. After repeatedly delaying the reopening of the banking system, officials said banks would finally open at noon local time, raising concerns that customers will scramble to remove savings on which they could otherwise be facing losses of at least 40%. Cash withdrawals from banks will be limited to €300 (£253) a day – although banks in recent days have been restricting withdrawals to €100 per customer to prevent them running out of cash while the country has negotiated its €10bn bailout. Yiangos Demetriou, head of internal audit at the island's Central Bank, told the Cypriot state broadcaster that a limit of €5,000 would be set on the use of credit cards abroad and insisted the measures would be imposed for just four days. Since the euro was launched in 1999, no member of the single currency has faced such emergency measures to keep cash within its borders. "The rationale is that these measures will be reviewed on a daily basis, so if there is the possibility of relaxing them we will," Demetriou said.

Counterparties: Cyprus births controls - Today, Cyprus announced it will impose capital controls restricting where, when, and how depositors can access and use their money. Here are some of the things depositors won’t be able to do when the banks open in Cyprus tomorrow:

  • cash a check
  • withdraw more than €300 a day
  • take more than €3000 in cash per person in any currency out of the country
  • purchase more than €5000 in foreign goods and services with a credit card each month
  • Make non-cash payments outside Cyprus without documentation showing they are paying for imports

These restrictions are intended to last for seven days, but Hugo Dixon doubts they’ll be that short-lived. In Iceland, capital controls have been in effect for seven years, and will stay in place for at least another two. We’ll know for sure what an economy under these restrictions looks like when banks open tomorrow for the first time in ten days, but it’s pretty far from a modern, functioning economy. As far as the euro goes, David Keohane says the clear-headed thing: capital controls obviously “make a mockery of the idea of a currency union”. Cardiff Garcia looks at at a meta-study on capital controls and finds that only once — in Malaysia — were they effective. In that case, the controls were “accompanied by aggressive counter-cyclical spending, bans on short-selling the currency and trading it offshore, and defending the ringgit against speculators by fixing it to the dollar”. Those things aren’t happening in Cyprus and won’t be.

Russia Is Next In Line To Restrict Cash Transactions - The Russians are taking a page from the Europeans book (and not a positive one for libertarians). Given the substantial criminal activity and illegal entrepreneurship in Russia - the grey and black economies account for 50–65 percent of GDP and estimates that about $50 billion was taken out of Russia illegally in 2012 alone - the great and glorious leaders have decided to impose restrictions on cash transactions. As Russia Beyond The Headlines reports, Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015 - starting with a higher ($19,500) restriction in 2014. They will also enforce mandatory cash-free salary payments (cash compensation accounts for 15% of GDP currently) in an effort to both bring some of the population's 'grey' income out of the shadow; and increase the volume of cash reserves in the banks. It would appear that wherever we look now, leadership are realizing that the limits of fiscal and monetary policy have been reached and now changing rules, limiting freedom, and outright confiscation are the only way to maintain a status quo.

Bank of Cyprus head fired under bailout deal -The chief executive of the Bank of Cyprus, the island’s biggest lender, has been sacked by the central bank governor as part of an international bailout deal, state media said on Wednesday. Yiannis Kypri was fired on the instructions of the so-called troika of the European Union, European Central Bank and International Monetary Fund, the Cyprus News Agency (CNA) reported. It said his departure was ordered as part of the restructuring of the Bank of Cyprus under the bailout deal, which involves the bank absorbing the remains of Laiki, the second biggest bank in Cyprus that has been wound down.

Cyprus crisis: cash limits to last ‘about a month’ - The Cypriot government has warned that banking curbs to prevent money from leaving the country will apply for longer than expected, in a blow to the island's attempts to revive its paralysed economy. The country's foreign minister, Ioannis Kasoulides, said the regime, including a limit on cash withdrawals at €300 (£253) per day, would last for "about a month" – just 24 hours after the population was told they would only be in place for a week. The capital controls, the first ever to be imposed on a eurozone member state, have been introduced to prevent a cash exodus that would destroy what is left of the Cypriot banking system. Kasoulides said: "A number of restrictions will be lifted and gradually, probably over a period of about a month according to the estimates of the central bank, the restrictions will be lifted."

Destruction of Cyprus Economy Proceeding Ahead of Schedule - Yves Smith - When I first heard about the Cyprus ritual execution bailout, I had thought that the widespread predictions that the island nation’s economy would contract by 20% to 30% over the next two years were off base.  I thought it would happen much faster, on the order of two to three months. An estimated 45% (mind you, 45%!) of the economy is banking, and almost all of that international banking. So if you generously assume 200% of the 900% of GDP was bona fide domestic assets (remember you have a lot of retirees), the other 7/9 goes poof. And that’s before you get to the fact that a lot of the services provided to foreign customers (the higher-end accounting and legal services) will have no future in a purely domestic banking business. So assume 90% of that 45% disappears in short order.Reuters tells us that depositors with over €100,000 in the biggest bank, Bank of Cyprus, will have no liquidity (see boldface): Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back… Officials had previously spoken of a loss to big depositors of 30 to 40 percent….The New York Times’ story is broadly consistent with the Reuters account, indicating that over 60% of deposits at the Bank of Cyprus could be toast:Under the terms of the transaction, large depositors would have 77.5 percent of their savings turned into different forms of equity, with the rest remaining as a frozen, non-interest-bearing deposit that they would be able to access in the future. But even in the best case, in which the bank thrives on the back of a quickly recovering economy — a long shot most economists believe — the loss is likely to exceed 60 percent and could well be much more than that.

After Cyprus, euro zone will slip into depression - A deal was always likely to be done at the last minute in Cyprus. The sums of money were too small, and the impact of the country chaotically pulling out of the euro too catastrophic, for the two sides not to be prepared to compromise. Late at night, with a deadline looming, the two sides managed to cobble together a deal. The euro staggers on for another day. But the Cyprus debacle will deepen the depression now starting to grip the European economy. This is no longer a financial crisis — it is an economic crisis. And the collapse of Cyprus will make that a whole lot worse.The so-called rescue will push one more country into a catastrophic recession. It will provoke an outflow of global funds from the euro-zone. And it will encourage small businesses and depositors to hoard cash. A modern economy can’t function without a healthy banking system. And after Cyprus, no bank in the euro zone can be regarded as safe anymore.

Will Slovenia Be the Next Victim of German Politics? -- Yves Smith - The IMF says that Slovenia will need to issue €3 billion in bonds this year. Since yields have short up from 4.5% to to as high as 6.4% as a result of the Cyprus rescue, that could be a costly order. And notice that these are dollar bond yields; the country is taking currency risk to get these funding rates. The country may be forced to seek painful assistance from the Troika.  Slovenia is commonly depicted as a potential victim of the botched Cyprus bailout, but if it is treated harshly, it will really be a victim of the hardening of attitudes in the northern nations. Austerity continues to drive periphery country economies into depressions, worsening their debt to GDP ratios, one of the key metrics the Eurocrats watch. But the surplus nations refuse to admit that their policies have failed, since they are trapped in a morality tale that depicts the debtor nations as profligates who must be punished. Never mentioned is the fact that debt levels in all advanced economies rose as e result of the global financial crisis, brought to you by American, British, French and German banks.  Like Cyprus, Slovenia’s problem is its banking sector. But it’s a tame 200% of GDP, while most measures put Cyprus’ banks at 800% to 900% of GDP.

Slovenia faces contagion from Cyprus as banking crisis deepens - Slovenia’s borrowing costs have rocketed over recent days as it grapples with a festering financial crisis, becoming the first victim of contagion from Cyprus. “Banks are under severe distress,” said International Monetary Fund in its annual health check on the country. Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad. Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc. “The country has lost competitiveness since joining the euro and it’s lead to slow economic collapse. Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank. The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012. “A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.

Rational Reason to Panic; Hot Money Blues; Right for the Wrong Reasons - The first rule of panic is simple: "Panic before everyone else does." With that rule in mind, the pertinent question at hand is also simple: "Should I panic now?" For those in Europe, I offer an emphatic "Yes!" One is foolish at best to keep more than 100,000 euros in any European bank, especially any Southern European banks. By "panic" I mean get your money out now, while you can, before everyone else does. I am not the only one who thinks that way. Wolfgang Münchau makes a well-stated case in his Der Spiegel column Euro rescue plan: Thank Dijsselbloem! Dutch Finance Minister and Euro Group Chief, Jeroen Dijsselbloem earned much criticism because he deviated from the official line that Cyprus was an "isolated incident". I welcome this unusual burst of openness. Dijsselbloem expressed the brutal truth. I'm not criticizing that he states the policy. Rather, I criticize the policy itself. This policy will destroy the euro, with the two now foreseeable interlocking mechanisms. The first way is capital flight from the euro crisis countries. Expect permanent restrictions on the free movement of capital. The second way is a never ending recession in the eurozone.

The Terrifying Political Economy of Waiting - While most people did not recognize it at the time, the financial crisis really began in 2007. By mid to late 2008, events seemed to be moving blindingly fast. The public and popular media woke up to the significance of what was before an insular event that a relatively small group of people had been analyzing.  Since then many people, including the writers of this blog, have been watching events intensely. It is common among these critical observers to think (and to have thought) that the semblance of stability that was brought about by early 2009 couldn’t be sustained, either domestically or internationally. For over four years now, we’ve watched as our oligarchs played this dangerous balancing act, staying just one inch away from disaster.  The terrifying thing is, it’s quite possible they can keep this going for a while longer. The long, drawn out nature of this crisis is more terrible and causes much more suffering then a quick failure to contain events. Had the Euro failed wholesale in 2009 or 2010, it is very possible that a tremendous amount of human suffering may have been avoided. Had the American banking system quickly and unambiguously fell apart, our situation might be completely different. Instead we get this painfully slow ship cruising relentlessly towards an iceberg. We’re used to movies, where the director starts at just before the climax and always makes sure to let us see the resolution. However, this isn’t a movie. It could be years before a breakdown comes that finally can’t be kicked down the road and requires major institutional change. Or we could be days.

Cyprus, Seriously - Krugman - Cyprus should leave the euro. Now. The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding. If you look at Cyprus’s trade profile, you see just how much damage the country is about to sustain. This is a highly open economy with just two major exports, banking services and tourism — and one of them just disappeared. This would lead to a severe slump on its own. On top of that, the troika is demanding major new austerity, even though the country supposedly has rough primary (non-interest) budget balance. I wouldn’t be surprised to see a 20 percent fall in real GDP. What’s the path forward? Cyprus needs to have a tourist boom, plus a rapid growth of other exports — my guess would be agriculture as a driver, although I don’t know much about it. The obvious way to get there is through a large devaluation; yes, in the end this probably does come down to cheap deals that attract lots of British package tours.

Why Won't Cyprus Obey Krugman? - Longtime euro-critic, Paul Krugman tells Cyprus, "Leave the euro.  Now."  .  He recognizes that it will probably not do so, but reasonably invoking the deep recession of neighboring Greece, he argues that they should leave before they end up like Greece.  The question then arises, why are they not likely to do so, and for that matter, why has not Greece done so? A lot of it of course is some sort of desire to "belong to Europe" and all that, which strongly influences both Greece and Cyprus, and continues to attract such possible joiners as Poland, which Krugman accurately notes did better than any other nation in Europe while not being in the euro during the Great Recession.  Sweden also did well staying out, atlhough the UK is not such a great example.  The fact is that Cyprus is a very open economy, with imports running about 1/3 of GDP.  A very major drop in the value of a new Cypriot currency would sharply increase the cost of living for Cypriots, and while the unemployment rate would certainly rise a lot, the entire citizenry would experience the potentially sharp decline in the standard of living.  While this devaluation might make it easier for Cyprus to recover several years down the road, that recovery would indeed be several years down the road, and in the meantime there would be a lot of pain for the entire citizenry that will not happen if they stay with the euro.

Debt and Devaluation, Mediterranean Edition - Paul Krugman - When I talk about Cyprus and the possibility of leaving the euro, one immediate question people raise is what about the government’s debt, which is of course in euros. Wouldn’t an exit make that debt unsupportable, and force default? The less fundamental answer is, what makes you think that Cyprus can avoid default even if it stays on the euro? According to the most recent numbers I’ve seen, the bailout deal will immediately jump Cypriot debt up to 140 percent of GDP, about the same as Greece in 2010 — and as I’ve argued, we’re looking at the likelihood of an even more severe slump plus deflation than Greece has experienced. How is this supposed to work? The more fundamental answer is, holding the nominal exchange rate fixed and relying on “internal devaluation” rather than devaluation devaluation does not, in fact, help make debt more manageable. Either way, the real value of the debt gets blown up over time — more quickly via devaluation, to be sure, but that’s the flip side of making the necessary cost adjustment faster too. So the debt is not a good reason to stay on the euro. I guess that if I were arguing for keeping the euro, I would instead be making mainly a political case — basically, that you’ll get better treatment from Brussels and Berlin if you remain a good soldier. But boy, will the cost be high.

Forget Cyprus. This chart shows why the European Central Bank may be reigniting the Eurozone crisis - Is the European Central Bank, that monetary institution so beloved by many center-right folks, stoking the Eurocrisis? Mike Darda of MKM Partners is worried about a drop in the money supply in the dysfunctional region: The Eurozone may be on the cusp of a systemic risk setback. The two-year euro interest rate swap spread, a proxy for banking funding risk, has jumped up to 53 bps after a six month period of quiescence around the 40 bps level. Perhaps the timing is not a coincidence: the ECB has allowed the euro area monetary base to collapse back below its trend level path at a time when the M1 money stock remains 14% below its trend level path, NGPD is 15% below its trend level path (and falling) and the GDP price deflator is more than 3% below its trend level path. In other words, against this deflationary foliage, the ECB is running an excessively tight monetary policy, which will increase the risk of systemic risk flare ups, economic setbacks and a general slide toward Japanification: slow growth and deflation.

British expats in Cyprus face savings raid - Three quarters of a million Britons living in Europe could see their savings raided to help save the European Union's single currency following the Cyprus debt crisis. A senior eurozone figure on Monday suggested the plan to save Cyprus could serve as a template for rescuing other troubled EU states. Under the terms of the Cyprus bailout, any savers with more than £85,000 deposited in either of the island’s two main banks - Laiki and the Bank of Cyprus - will lose between 40 and 100 per cent of their money. In return for levying this ‘haircut' on deposits, Cyprus will receive the international funds necessary to keep its troubled banks afloat. Jeroen Dijsselbloem, the Dutch chairman of the eurozone, suggested that this structure could become the model to be applied across Europe, where banks in Spain, Portugal and Italy are also in trouble. “If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’,” he said.

Cyprus banks and UK deposits - Bank of Cyprus UK is a UK-incorporated bank regulated by the FSA. It is a separate legal entity from its  Cypriot parent and has its own capital, which is ring fenced to make it unavailable for raiding to bail out its parent. Deposits in the Bank of Cyprus UK are insured under the UK's Financial Services Compensation Scheme.   Unfortunately for UK depositors, Laiki Bank UK is not a separate entity. It is a branch of Laiki Bank (Cyprus). Deposits in Laiki Bank UK are insured under the Cyprus deposit guarantee scheme. Because Cyprus is a member of the European Union, the Cyprus scheme is consistent with the European Union's rules for deposit guarantee schemes. Deposits in Laiki Bank UK are therefore insured up to a limit of 100,000 Euros at the prevailing exchange rate. Any claim for compensation would be made in the first instance against the UK Financial Services Compensation Scheme. It would be the responsibility of the UK Government then to seek reimbursement from the Cyprus scheme. However, the terms of the winding-up order for Laiki Bank DO apply to deposits in Laiki Bank UK. Deposits of less than 100,000 Euros will be transferred to the Bank of Cyprus (or possibly Bank of Cyprus UK - it is unclear at present) as part of the closure procedures for Laiki Bank. Deposits above that amount are frozen and depositors should expect to lose a substantial proportion of the excess above 100,000 Euros, possibly as much as 100%. No compensation will be available for this loss.

Surge in Britons mulling euro transfer, says firm - Independent financial advisory company deVere Group on Tuesday reported a “surge” in the number of British expats seeking advice about moving funds out of some of the eurozone’s most troubled economies following the Cyprus bailout deal.According to deVere Group chief executive Nigel Green, “more and more expats in Spain, Italy, Portugal and Greece are now not unreasonably worried for their deposits in these countries.” He added: “Over the last week, since the messy deal to bailout Cypriot banks began, our financial advisers in these areas have reported a significant surge in enquiries from expats who are looking to safeguard their funds in other jurisdictions which are perceived to be safer.“Whether the institutions like it and accept it or not, there is a real risk of a major deposit flight from these countries as people feel their accounts could be plundered next.”

Bank shortfall looms - Britain’s banks are under-capitalised. Not just by a little bit, but a lot. Under the Bank of England’s worst-case estimate, lenders need to raise something in the order of £60bn, more than three times the amount required to bail out Cyprus, which gives some idea of the scale of the problems officials think the industry faces. This week, the Bank of England’s Financial Policy Committee, the most powerful body overseeing macro-economic stability, will reveal its decision on how to tackle any capital shortfall. Banks are braced for grim news on the strength of their balance sheets. Arguments over bank capital have raged since November when the FP C came out with its demand for regulators to begin a detailed examination of the books of the country’s banks. The FPC’s statement crystallised the nagging worry many banking experts have that lenders have not come close to admitting the scale of the losses they face. “Under-recognition of expected losses would imply that the banking book valuations of banks’ assets were overstated,” said the FPC in its financial stability report.

Taking a bet on house prices (with our money) - In overall terms the UK budget was more of the same. There were some very minor tax cuts in the short term (worth around 0.1% of GDP), matched by some reductions in spending which may be largely accounting tricks. From 2015 there was some additional public investment, financed by reductions in current spending, but again very small numbers. More politics from this totally political Chancellor.  So nothing here that will do anything substantive to help stimulate demand in the economy. As the Chancellor would say, don’t take my word for it - ask the OBR (para 1.7). Ditto for the monetary policy changes (although it is worth reading Andrew Rawnsley’s amusing take on this). But there was one rather interesting and potentially significant measure that might have some impact. The government will provide a buyer with up to 20% of the value of a new-build home valued at £600,000 or less, and initially this loan will be interest free. In addition, the government will provide guarantees for much of the portion of a mortgage above 80% of the value of a new or existing home. So, on the assumption that the biggest mortgage most can obtain at the moment involves 75% of the value of the house, the government will either directly provide an additional 20%, or insure a mortgage provider that does the same. Both measures will be available for three years.

Immigration & irrationalism - Britain has an immigration problem - but not of the sort generally supposed. Let's be clear. The facts show that immigrants are a net fiscal benefit rather than a cost, and that immigration is, except for a small negative effect at the bottom end, a net positive for wages (pdf) and for economic growth (pdf).Economically speaking, then, immigration is (net) a good thing.  So, what's the problem? It's that the public just don't believe the economic evidence. I don't think this is simply because they hold economists in low esteem: the man on the Clapham omnibus does not devote his waking hours to thinking "that Jonathan Portes talks some shite." Rather, I suspect the problem is a more general one - that irrationalism plays a big role in human affairs.

Britain faces the prospect of gas rationing for the first time - Britain faces the prospect of gas rationing for the first time as a perfect storm of prolonged cold weather and disruptions to Norwegian supplies push the energy grid close to breaking point, experts warned. Households and businesses have turned up the heating in recent weeks to keep warm in the unseasonably cold weather, running gas reserves so low that there is a very real prospect of running out in the coming weeks if the cold snap persists. “If this dreadful weather continues for the next two or three weeks we should be very worried, because if we get into a position where we do run out of gas there is not a lot that can be done in the short term,” warned energy expert Ann Robinson. “Rationing would be inevitable, for businesses and domestic users and maybe for gas-powered electricity producers as well, so we might be looking at electricity rationing too,” Although businesses would expect to bear the brunt of any rationing, households could also be implicated, experts said. The Government was forced to issue a statement today strongly denying suggestions that Britain’s gas supplies are about to run out, after a series of concerning developments around the energy grid. As the cold weather continued to wreak havoc on the grid, the wholesale price of gas jumped by as much as 50 per cent at one point to a record 150p a therm after a water-pump failure forced the closure of a key import gas pipeline.

"Gas supplies are not running out", says government - The long cold winter that shows no sign of ending as we head towards the end of March means that the UK is very close to running out of its own gas supplies and could be forced to buy more expensive imports from Norway and Russia. However, the government has strongly denied that the UK will run out of gas supplies despite reserves being down to just 1.5 days of gas. A spokesman for the Department of Energy & Climate Change said: “Gas supplies are not running out. Gas storage would never be the sole source of gas meeting our needs, so it is misleading to talk purely about how many days’ supply is in storage. “We are in close contact with National Grid, who are able to step into the market to source gas and increase incentives on gas suppliers if they think there is a risk of a supply shortfall.” In a further development a vital pipeline from Belgium to the UK used to transfer energy to Britain was shut down due to a technical error. The problem has now been fixed. This means if the cold spell stays for a prolonged period there is a possibility that energy supplies will need to be rationed.Businesses would see supplies rationed first, but it is possible that rationing could be extended to households because of the difficulties in securing further gas supplies quickly.

The problem of safe assets and the 60% drop in the supply of AAA government bonds - Since the start of the financial crisis, the US, UK, and France have all lost their AAA ratings. And as a result, the FT reports, “the stock of ­government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11 trillion at the start of 2007 to just $4 trillion now. … A further shrinkage in the pool of triple A ratings could fuel fears about a looming “collateral crunch” – a shortage of those assets that can be used as security by banks and others when borrowing in capital markets or from central banks.”Economist David Beckworth has been blogging about this issue for some time. Now, the US is still pretty safe, and Washington could intentionally run even bigger budget deficits to supply the huge global demand for Treasuries. But that being unlikely, Beckworth offers a second, more palatable option: There is a way out of these problems. Both the Fed and the ECB need to return aggregate nominal incomes in their regions to their pre-crisis trends and do so using a nominal GDP level target. Being a level target it would keep long-run inflation expectations anchored while still allowing for an aggressive monetary stimulus in the short-run (i.e. until the pre-crisis trends were reached). It would also stabilize nominal spending expectations and add more certainty to long-run forecasts.

Bernanke rejects competitive devaluation worries - U.S. Federal Reserve Chairman Ben Bernanke on Monday rejected worries that the world's troubled large economies were competitively cutting their currency values and hurting smaller, healthier ones in the process. Bernanke told an audience at the London School of Economics that, although the exchange rates of some major economies have fallen, the policies are aimed at boosting growth and “confer net benefits on the world economy as a whole.” Moreover, he said, because the main economies are all pumping up their money supplies — effectively pushing down the value of their currencies — the net change between their currencies is not very significant. Do the strongly stimulative economic policies of countries like the United States, Britain, Japan and elsewhere “constitute competitive devaluations?,” Bernanke asked rhetorically. “To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries.”