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

Saturday, March 23, 2013

week ending Mar 23

Fed Balance Sheet Tops $3.2 Trillion - The U.S. Federal Reserve's balance sheet continued to push into record territory, a trend that is likely to continue after central bank officials reaffirmed their commitment to aggressive bond-buying. The Fed's asset holdings in the week ended Wednesday rose to $3.209 trillion from $3.167 trillion a week earlier, the central bank said in a weekly report released Thursday. The balance sheet has been above $3 trillion for nine consecutive weeks. Holdings of U.S. Treasury securities increased to $1.785 trillion on Wednesday from $1.77 trillion a week earlier. The central bank's holdings of mortgage-backed securities grew to $1.086 trillion from $1.061 trillion a week earlier. Thursday's report showed total borrowing from the Fed's discount lending window was $392 million on Wednesday, down slightly from $397 million a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--March 21, 2013: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks

What's going to happen to the Fed's balance sheet? - The Federal Reserve has increased its assets from $900 billion in 2007 to over $3,150 billion and still climbing today. On the liabilities side of the Fed's balance sheet, reserve balances held by banks have gone from $10 B in 2007 to $1,750 B and climbing today. My expectation had always been that this would be a temporary situation, with a return to historical norms when economic conditions improved. Recently, three different teams have independently studied what that transition back to normal might look like. One study was carried out by Robert Hall and Ricardo Reis (professors at Stanford and Columbia, respectively) and another by Seth Carpenter, Jane Ihrig, Elizabeth Klee, Alexander Boote, and Daniel Quinn (all economists at the Federal Reserve Board). I participated in a third study with David Greenlaw at Morgan Stanley, Peter Hooper at Deutsche Bank, and Frederic Mishkin at Columbia. Our analysis used a similar methodology to that conducted by the Fed staff, and we reached similar conclusions to theirs, while Hall and Reis took a broader and more theoretical perspective. Here I describe the methods and findings of our study.

Fed’s exit will be gradual and difficult - Ben Bernanke has conceded, rather reluctantly, that the Fed’s exit strategy from quantitative easing will soon need to be reconsidered by the committee, and the debate could start at this month’s meeting. In any event, with economists now upgrading their forecasts for US GDP for the first time in quite a while, the markets are increasingly focused on whether the exit can be handled successfully. The first question is whether the exit will be gradual or abrupt. The chairman’s personal preference is very well known: it should be gradual, and extremely well flagged in advance. But Mr Bernanke might not be in office after next January, and there are others on the FOMC who could have different ideas. Furthermore, economic and market circumstances could change. In 1994, GDP growth and inflation both rose markedly, and the Fed slammed on the brakes without any warning. The resulting 3 per cent rise in the Fed funds rate delivered a major shock to the financial system. The Fed often tries to avoid repeating its most recent mistake. (Investors have a tendency to make the same behavioural error of placing too much weight on recent, often personal, experience.) In 1994, Alan Greenspan and colleagues believed that monetary policy had been behind the curve in previous economic cycles, and they saw virtue in acting in an unexpected way to maximise the effect of the policy change. Consequently, when Mr Greenspan had his next opportunity to tighten policy from 2004 onwards, he reassured the market that this would happen at a “measured pace”, or in an extremely gradual manner. The result was that the housing and credit bubbles were allowed to build almost directly under the eyes of the Fed.

Huge Fed Balance Sheet Has Historical Precedent - The massive and growing size of the Federal Reserve‘s balance sheet is the source of enduring angst for many central bank watchers, but a note from Morgan Stanley observes that on a relative basis, we’ve been here before. The bank told clients that twice before the size of the Fed’s holdings have reached a share of the nation’s gross domestic product comparable to where the central bank appears to be heading. Economist Vincent Reinhart wrote that during the Great Depression and during World War II, the Fed balance sheet topped out at around 20% of GDP. The current size of Fed holdings, which stand at just over $3 trillion, are short of that mark, but not by much.

Statement Following Fed’s March Meeting - The following is the full statement following the Fed's March meeting.

Parsing the Fed: How the Statement Changed - Fed watchers closely parse changes between statements to see how the Fed's views are evolving. The following tool compares the latest statement with its immediate predecessor and highlights where policy makers have updated their language.

FOMC Statement: "Labor market conditions have shown signs of improvement" - Slight upgrade. Economic projections here. GDP for 2013 revised down slightly, and the unemployment rate projections revised down.  Inflation revised down. FOMC Statement: Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.  The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives

Fed Holds, by Tim Duy: The two-day FOMC meeting concluded with policy unchanged, as expected. The statement itself was little changed as well. The Fed acknowledged the improved flow of data since the last meeting, noted tighter fiscal policy, and reaffirmed its view that inflation is likely to remain at or below the 2 percent target. The Fed removed a statement referring to easing global strains, presumably a reflection of the challenges in Cyprus at the moment. Asset purchases continue at their current rate.  A more interesting change can be seen in the Fed's statement regarding the future of the asset purchase program. The relative paragraph from the January statement: In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. was changed to this (emphasis added): In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives. The addition of the final clause appears to be a bow to policymakers who are concerned that the pace of easing might need to be curtailed in the nearer future. I assume this issue will once again be highlighted in the minutes. It appears to give the Fed room to alter the pace of purchases as the unemployment rate tends toward the 6.5 percent threshold even if, for example, jobs continue to grow in the 150k-200k range.  That said, I expect asset purchases to continue at this pace for most of this year (if not into next year). Moreover, most policymakers expect this as well. Note the relatively minimal changes to the projections:

Bernanke keeps U.S. economy on drip feed - The Federal Reserve is continuing its therapy of low interest rates and bond purchases to nurse the U.S. economy back to health. The policy comes amid considerable uncertainty about the strength of the recovery, fiscal policy and European financial stability. Closing a two-day meeting, officials with the central bank's policy-setting committee expect the recovery to "proceed at a moderate pace" and for unemployment to decline "gradually." However, the Fed acknowledged that the jobless rate, at 7.7 percent, remains elevated and still far above the 6.5 percent threshold the bank has set before it considers changing its interest rate policy.  The Federal Open Market Committee also said that inflation has been running "somewhat below" its longer-run goal of 2 percent, while "inflation expectations have remained stable" and well below the Fed's 2.5 percent threshold. This also points to a continuation of present policy. The Fed noted that "fiscal policy has become somewhat more restrictive," which works against the recovery, a theme that Fed Chairman Ben Bernanke echoed in press conference after the meeting. Bernanke said that monetary policy can partially, but not fully, offset the economic drag from fiscal policy. This deterioration in the economic outlook gives the Fed yet another reason to continue to try to stimulate the economy through monetary policy, he said.

Analysis: Fed Delivers Exactly What Markets Expect - The Federal Reserve leaves interest rates unchanged.’s Senior Financial Analyst Greg McBride breaks down the report with The Wall Street Journal Online’s Shari Deutsch.

Fed Officials Forecast Slower Growth, Lower Unemployment - Federal Reserve officials expect a slightly slower pace of growth and lower unemployment over coming years, in forecasts that also show a strong majority still expects the first interest rate hike to come in 2015.The central bank’s views were made public Wednesday as part of the release of its economic and monetary projections for the next few years. The outlook is based on the responses of the 19 members of the monetary policy setting Federal Open Market Committee. The Fed’s forecasts are released in conjunction with the policy statement announcing the outcome of the FOMC meeting held over Tuesday and Wednesday. In their forecasts, central bankers expect the U.S. economy will expand by 2.3% to 2.8% this year, and by 2.9% to 3.4% in 2014 and 2.9% and 3.7% in 2015. Those forecasts were revised slightly lower compared to projections prepared in December.

FOMC Projections and Press Conference - Bernanke press conference here or watch below. On the projections, GDP was revised down slightly, the unemployment rate was revised down, and inflation was revised down slightly. Projections of change in real GDP and in inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.  The unemployment rate was at 7.7% in February.    Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.  The FOMC believes inflation will stay below target. Here is core inflation:

The Fed's Economic Projections and Bernanke Conference The Federal Reserve FOMC released their updated economic projections and frankly they are weird.  GDP estimates were lowered yet the official unemployment rate projections were also lowered.  The rule of economic law is lower economic growth means less jobs and hires so how one can have subdued GDP with better unemployment figures is none too clear.  One thing the new FOMC projections might imply is the Fed is seeing a decoupling of economic growth from the health of the labor market.  Below are the FOMC's new figures.  GDP is Q4 to Q4, the unemployment rate is for Q4 as is the PCE price index.  Overall the FOMC implied the economy is ho-hum and they will continue their open ended quantitative easing at the same phenomenal levels.   We have an unemployment rate target of 6.5% before the FOMC considers changing policy.  Right now the unemployment rate is 7.7%.  This implies the Fed is planning on continuing their massive MBS and U.S. Treasuries buying until Q4 2015 potentially, although the Fed is now emphasizing tapering and could end as soon as Q3 2013.  The FOMC emphasized there would be no cliff, on/off switch, or trigger as they adjust their asset purchases and the rate would be much more about smooth flows.

WSJ Economists’ GDP Forecasts versus the Fed -   Now that Cyprus is on the back burner, at least for the time being, the big news today was the publication of the FOMC minutes along with the Fed's three-year economic projections (2013-2015). Actually, these projections date from the meeting of the Federal Open Market Committee on December 11-12, 2012. In other words, like a lot of government data, they're a bit stale by the time of publication. However, these are slow-moving data series, so time is not exactly of the essence. Below is a snapshot of a table from the Fed's website. It includes forecasts for GDP, Unemployment and Headline and Core PCE Inflation. But for now, we'll just focus on GDP. Earlier this month the Wall Street Journal did its monthly survey of economists on a variety of economic metrics, including of course GDP. Fifty of the 52 economists solicited participated. Here is a look at the range of forecasts for Q1 2013 GDP. I've also highlighted the range of Fed forecasts. I've calculated the median (middle), mean (average) and mode (most frequent). Interestingly enough there were two modes for 2013 GDP on either side of the average. Here is the same chart with the 2014 predictions and Fed range. Again we have two modes straddling the average, which, at 2.86%, is about half a percent higher than for 2013. Ten fewer economists were willing to make forecasts as far out as 2015 (had I been solicited, I'd certainly have been one of the missing). Not surprisingly for this shot in the dark, the median, average and mode are an identical 3.0%.

Bernanke Doesn’t See Major Risk From Cyprus - The continuing Cyprus banking meltdown reverberating across the euro zone likely will be contained on that side of the Atlantic, Federal Reserve Chairman Ben Bernanke said Wednesday. Mr. Bernanke is “not seeing a major risk to the U.S. economy” due to the crisis, he said at a press conference, though he acknowledged Cyprus faces a “difficult situation.” Cyprus is the latest member of the euro zone to contend with deep financial woes, and it is possible the country may be forced to break away from the multinational currency. Banks in the Mediterranean nation will be closed into next week as officials scramble for a solution.

Is the Fed's crystal ball rose-colored? - The big question is whether Fed officials can get it right after years in which they have regularly predicted a stronger economy than the one that materialized. In January 2011, Fed officials predicted that GDP would grow around 3.7 percent that year. It clocked in at 2 percent. In January 2012, they anticipated growth of about 2.5 percent. We ended up with 1.6 percent. Getting the forecasts right this time will be especially tricky: The economy came to a standstill at the end of last year, but job growth has picked up faster than expected. Lawmakers backed away from the fiscal cliff at the end of 2012 but couldn’t escape sequestration.  A lot is riding on the numbers swirling around in Fed crystal balls. Those forecasts are the foundation for critical decisions about how to support the economy. The Fed has often, both during the financial crisis and its aftermath, held their fire on monetary easing because they were overly optimistic about the economy.

Get While the Gettin' is Good - The understatement of the day comes from Fed chairman Ben Bernanke who essentially says: I'm Dispensable. “I don’t think that I’m the only person in the world who can manage the exit,” Bernanke said when asked at a news conference in Washington if he’s discussed his plans with President Barack Obama. Bernanke's big hope is that he can keep this house of cards from collapsing until January when his term expires, and Yellen takes over.He claims he is tired and wants out of the public life. He ought to be tired after sponsoring the world's biggest housing bubble then bailing out every "too big to fail bank" in the wake.

Fed’s Raskin Notes Uneven Jobs Gains - Highlighting uneven gains in the jobs market, a Federal Reserve official Friday said the central bank can help address challenges faced by low-income communities with more robust bank supervision and regulation. A wide range of economic indicators as well as anecdotal evidence indicate the Fed’s easy-money policies “are working to strengthen the recovery and that the labor market is improving,” Federal Reserve governor Sarah Bloom Raskin said in remarks prepared for delivery before the National Community Reinvestment Coalition annual conference. She said Fed policy makers intend to keep interest rates low “for a considerable time.” But Ms. Raskin underscored throughout her speech that job gains haven’t been distributed equally. Moreover, she said, the Fed can’t do much about that: The Fed’s easy-money policies “have little effect on the types of jobs that are created, particularly over the longer term,” she said.

The Fed Is Printing Money, But Where Is It Going? They Know But Will Not Say - Bob McTeer says with the provocative headline that The Fed Has Not Been Printing Boatloads of Money.. As you may recall, Mr. McTeer was a member of the Federal Reserve for 36 years "What they fail to grasp is that their initial assumption that the Fed is printing boatloads of money simply isn’t true." And yet one can look at the Fed's Adjusted Monetary Base, one of the few measures of money over which the Fed has a more direct measure of control, and we see this: Although those who follow money already know it, the Fed is printing money but that money is going directly to the banks through their methods of purchasing assets from them, both Treasuries and Mortgage debt (which may be of dodgy pedigree). We see that here in the expansion of Excess Reserves of the Banks. But Bob McTeer knows Banking, and he knows where most of that QE money has been going. "Asset purchases by the Fed normally lead to a multiple expansion of money since, at the margin, reserve requirements are only about 10 percent of deposits. The roughly $2 trillion of asset growth from before the financial crisis through QE2 was largely offset, however, by an expansion in excess bank reserves of $1.6 trillion. In other words, the banking system has been sterilizing or neutralizing the impact of the asset purchases on the money supply."

The Inherent Fragility of the “Wealth Effect” - You probably thought the boom/bust cycle experiment that started with Alan Greenspan was over when Ben Bernanke came to the Fed.  Or maybe you weren’t that naive to begin with. Either way, Bernanke is implementing very similar and in my opinion, dangerous economic policy. When Greenspan was head of the Fed, he made it well known that the stock market was a favorite target of his.  This became known as the “Greenspan Put”.  This was the levitating effect of stock prices that placed a “put” or floor under the equity market.  Greenspan was even more explicit a few weeks ago when he said:“the stock market is the key player in the game of economic growth.” I believe this is an incredibly misguided view of what the stock market is.  The stock market is a secondary market where SAVERS exchange shares of stock in what is nothing more than an allocation of their savings. The price of those shares reflect the GUESSES of future expected cash flows.  And as we all know, what you have in stock market gains is not real until you cash out of the game and exchange your shares with someone else.  Of course, everyone can’t cash out of the game at the same time since all shares issued are always held by SOMEONE.  So there’s an inevitable bagholder if the you-know-what hits the fan.  There is no escaping that simple fact.

The Fed Has Already Imposed A "Cyprus Tax" On U.S. Savers - While I find it doubtful, but not totally improbable, that a direct deposit tax would be instituted by domestic banks - the issue of the Fed's monetary policies, particularly since the last recession, has had a significant impact on "savers." As we have discussed in the past individuals are not "investors" but rather "savers." Therefore, in planning for retirement, of which there is a very finite and generally short time frame within which to achieve that objective, individuals must not only have a return ON their principal, to maintain purchasing power parity of those saved dollars, but also the return OF their principal so that it may be reinvested to generate further returns. One without the other, as has been see witnessed first hand over the last decade, is a losing proposition in the achievement of those retirement goals. As my friend Doug Short recently showed in his amazing commentary on working age demographics - the age group that should be seeing declines in employment, 65 and older, are actually showing increases. The destruction of principal since the turn of the century, which is far more disastrous than it appears when adjusted for inflation, has ended the dream of retirement for many individuals.

The War on Savers Heats Up - The United States has so many “wars” on its hands that no one can keep them all straight. The War on Terror, the War on Drugs, the War in Afghanistan, the Drone War, the War on Women, the War in Iraq. To this must be added a quiet war, begun in 2008 as a response to the financial crisis, and so low key that it doesn’t deserve capital letters – the war on savers. Ben Bernanke and the Federal Reserve are the principal protagonists in this war, through their Zero Interest Rate Policy that offers savers absolutely nothing on their investments, until at some point each saver is forced to start eating into their capital to survive. The interest savers would otherwise have earned in a normal economic environment is going to the banks, because while savers if they wished to borrow money can obtain rates anywhere from 4% to 30% depending on the term and the collateral used, banks and only banks can borrow at 0%, and invest in Treasuries to make an easy profit. The Fed’s policy has been providing a direct transfer of wealth to the banks from savers for five years now. Now comes the next stage in the battle, occurring on the island of Cyprus, and so quiet a foray that only financial blogs at first were discussing the implications of what has happened.  A €10 billion loan has been agreed to this weekend, but the terms are both extraordinary and horrific for savers. Those Cypriots who had deposits of €100,000 or less in local banks will be assessed a “tax” of 6.75% of their principal; those with more than €100,000 will be taxed at a rate of 9.90%.

Is possible inflation tomorrow more important than the reality of today’s moribund job market? - Is there a cost right now to the Federal Reserve’s low interest rate/bond buying policy? Sure. Seniors who are heavy into fixed-income instruments face a loss of income. And since they are less inclined to buy stocks, they don’t benefit from the capital gains of the rising equity market.But is that a reason for the Fed to tighten? It is not. What about the cost of an underperforming economy? JPMorgan economist Jim Glassman in a new report: The opportunity cost of an underemployed economy—the capital investment that doesn’t occur, the saving and accumulation of wealth that doesn’t happen, and the work effort that can never be recouped—is the only distortion that matters. The distortions caused by the Fed’s traditional and nontraditional policies, the potential mark-to-market losses in the Fed portfolio, and the temporary debt service relief the federal sector sees as a result of the Fed’s low rates are all secondary considerations Here are three stats that give context to the economic distortions caused by the slow-growth economy. According to the Labor Department’s Household Survey, 19 million Americans who aren’t in the job market say they would like a job. Another nearly 4 million are part-timers who would prefer a full-time gig. Finally, the US economy is probably operating some 6 to 10% below potential, which means “$800 billion to $1,400 billion of real GDP is not being produced annually that would be if the economy were operating at its capacity,” Glassman writes.

Goldman Sachs Upgrades Economic Forecast - Citing “solid” reports on employment, manufacturing and retail sales, Goldman Sachs says the U.S. has shown notable resilience amid higher taxes. The company nudged up its near-term growth forecasts, seeing 2.9% this quarter and 2% next. For Goldman, that was enough to shorten their estimated lifespan on the Federal Reserve‘s bond-buying program. It sees the Fed concluding these purchases by the third quarter of 2014, three months ahead of its previous projection.

The Slippery Grip of Growth – Never has a society spoken so much about growth, yet achieved so little. Time and time again predictions of recovery and a return to normal levels of economic growth have proven premature. The phrase “triple dip recession” has now entered the lexicon in the UK as GDP figures look like turning south again. One wonders how long it will be before quadruple, quintuple and sextuple dips take their place as common phrases to describe the UK’s mire. With each announcement of GDP slippage, the news is delivered as somewhat of a surprise to politicians, economists and the commentariat in general. We’ve never had a high regard for journalists and politicians but economists on the other hand are deemed to be infinitely more sober and trustworthy. After all, they are the subject matter experts, armed to their teeth with teams of highly qualified forecasters and the very latest in advanced statistical models. Far too advanced for us mere mortals to understand, you hear! Yet it is the economists who are the people who keep getting it wrong.

Fed Revisions Note Slower 2012 Output Than Previously Thought - U.S. industrial output was slower in 2012 than initially thought, reflecting slow economic growth last year in the nation’s factories, mines and utilities. Industrial production advanced 2.7% in the fourth quarter of 2012, 0.2 percentage point below its previous estimate, according to annual revisions by the Federal Reserve released Friday. The new figures include additional data not in earlier reports, as well as some recalculations of seasonal factors. The capacity utilization rate was revised down to 77.5% for the fourth quarter of 2012, 1.4 percentage points lower than previously reported. The decrease was because the industrial production index was revised lower and the capacity index increased more rapidly in 2011 and 2012, the Fed said. Rates for 2009 and 2010 were little changed.

The Economic Stupid is Strong With This One - Case in point: yesterday's post of an imminent economic collapse as written by John Hinderaker at Powerline.  It's rare that you find a column so full of inaccurate statements (with the exception of his own global warming denial posts).  So, let's begin: First -- where are these reports of a crash?  I read Bloomberg and the Financial Times everyday and Marketwatch a bit less regularly.  I also read most major economic statistical reports in the AM and most major economic bloggers.  I haven't seen any doomsday report issued.  Evidently, however, these reports are widespread in some circles.    Just about everyone expects the economy to crash, in some fashion, in the next few years. The fundamentals are very bad: year after year of virtually no growth; ever-declining labor force participation; grotesquely wasteful government spending; exploding federal debt; cronyism that saps vitality from our economy; and a largely dysfunctional education system. The questions are: 1) when will the crash happen? and 2) what form will it take? Let's start with real GDP growth.  As the chart above demonstrates, GDP has been growing consistently for the last four years and is now higher than pre-crisis levels.  While  And then there is the labor force participation argument. He is correct that this number has been dropping for the last four years.  However, with the baby boomers now entering retirement, we're seeing about 10,000 people leaving the labor force every day.

The Recovery is Real, by Tim Duy: A lot of ink has been spilled over the past three years fretting about the fragility of the economy. But the reality is largely the opposite. The economy has proved to be very resilient. We have weathered external demand shocks, external financial crises, and even fiscal contraction, and all the while economic activity continued to grind higher. Looking back, it seems that the biggest risk the economy faced was the Fed's start/stop approach to quantitative easing. That problem appears solved with open-ended QE linked to economic guideposts. At the risk of sounding overly optimistic, I am going to go out on a limb: The recovery is here to stay. Not "stay" as in "permanent." I am not predicting the end of the business cycle. But "stay" until some point after the Federal Reserve begins to raise interest rates, which I don't expect until 2015. This doesn't mean you need to be happy about the pace of growth. But it does mean that a US recession in the next three years should be pretty far down on your list of concerns. Consider a handful of recent data. Last year's slowdown in manufacturing activity has proved temporary. Sure, you might complain about weak consumer confidence, but I think it best to pay more attention to what household do. The housing market is unambiguously improving, which by itself should ease any recession concerns:Note recent reports that the housing market is catching even producers off-guard, constraining supply. Expect them to gear up over the year, setting the stage for a stronger activity in 2014. With the issues of jobs in mind, note that jobless claims continue to grind lower:

Economic Growth Poised to Accelerate - Federal Reserve Bank of Dallas - Gross domestic product (GDP) growth should accelerate from modest to moderate over the course of 2013 and into 2014, after stalling at the end of 2012. Since the autumn of 2011, the level of financial stress has been on a downward trend and has been at or below average since the summer of 2012, indexes show. The labor market is improving, and the latest Institute for Supply Management (ISM) survey data are positive. Financial stability, firming employment growth and positive survey data all point to more tailwinds for the economy in 2013; yet, the fiscal outlook looms as a headwind. Against the backdrop of sequestration, growth prospects during the first half of 2013 are anticipated to remain at a modest pace before increasing in the second half of 2013 and into 2014.  Real GDP growth is forecasted to accelerate from modest to moderate from first quarter 2013 through first quarter 2014 by the Survey of Professional Forecasters (SPF). The SPF forecasts first-quarter growth to be 2.1 percent, gradually increasing to 2.7 percent growth in first quarter 2014 (Chart 1). Fourth quarter 2012 real GDP growth was upwardly revised in the second estimate of GDP from a 0.1 percent contraction to a 0.1 percent expansion. The SPF forecasts continue to be less optimistic than the forecasts given in the Summary of Economic Projections (see table 1 of Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2013 ) produced by the Federal Open Market Committee (FOMC). The annual growth rate of real GDP was 2.2 percent for 2012. The SPF predicts moderate annual real GDP growth for 2014, coming in at 2.8 percent. Financial stability and less economic uncertainty contribute to the more optimistic outlook for output growth.

Why MMT is Right and the Dreamers are Wrong – Kaldor Versus the Kaldorians - The criticisms of Modern Monetary Theory (MMT) on the internet and in academia can be placed into three categories: the cranks; the nit-pickers; and the Kaldorians. The cranks make up by far the largest group. These are the people that simply have not bothered to understand the theory. These, which include some prominent academics, say things like: “The MMTers say that deficits don’t matter; they forgot about hyperinflation!” These people can usually be safely ignored as they are not arguing in good faith. The nit-pickers are a smaller group, but perhaps more vocal. They do understand the theory to a large extent but they try to pick holes on minor points. “Taxes,” they might say, “aren’t the only thing driving money; money is also ingrained in the legal system because it can be used to settle legal contracts and this gives it value.” In this the nit-pickers don’t appreciate the difference between a general theory and an additional consideration that might be included as an afterthought. Apart from this, the nit-pickers often misrepresent their “opponents” (mentors?) by cribbing throwaway comments from blogs and insisting that MMT explain itself (over and over again) when MMT has proponents have already developed a considerable literature that does just that. The Kaldorians are an altogether different breed. Where the others simply constitute noise in the blogosphere crowding out debate, the Kaldorians’ argument is rigorous, academic and extremely relevant to the potential success of certain policy approaches advocated not just by MMTers, but also more mainstream New Keynesians like Paul Krugman. This is not just an academic debate. It has very real implications for what policies we might suggest to get us out of the present crisis.

Is There Still Demand for Even More MMT Weblogging? - Brad DeLong  - When people like Paul Krugman or me read the writings of, say, Warren Mosler, we tend to focus on statements like "a government that can print its own currency can never be forced into default", and "if government bonds find no buyers, that simply means that instead of lending the government money and a positive nominal interest rate the banks are holding excess reserves and constructively lending the government money at zero", and that the government is not constrained by its budget because "the deficit can present no financial risk.  The underlying gestalt we get from things like Warren Mosler's Soft Currency Economics is this:

  • The government spends what it wants.
  • The government pays for it spends by creating reserve deposits.
  • The government then faces two technical financing decisions: (i) how much of the zero-nominal interest rate government debt that are reserve deposits does it wish to transform into interest-bearing government debt? and (ii) how much of its reserve deposits does it want to to extinguish via taxation?
  • But these are technical government financing decisions: they don't carry with them real constraints on what the government can spend when.

Each individual sentence is certainly correct. But the entire gestalt feels wrong. It is certainly the case that, at least until we reach the top of the hyperinflation Laffer curve, the government can always spend more in real terms and pay its creditors by creating reserve deposits out of thin air. It is certainly the case that these reserve deposits created can then, at the governments option, be either left to live, extinguished via taxation, or transformed interest-bearing taps of the government.

What Bush II and Clinton Got Wrong On The Economy - First, we start off with sectorial balances. Trade deficits must be offset by government and/or private deficits. For example, if we had a $50 billion trade deficit, then that needs to be offset with a $50 billion government deficit. Otherwise, the private sector will be driven into debt, which is not as sustainable long term. Let's look at the Bush years in the accompanying chart. Trade deficits far exceeded budget deficits, and grew quite large. As those trade deficits grew as a % of GDP, the budget deficit was shrinking. I think we know the net effect as the private sector was driven further into debt - real estate related debt, which unraveled in 2008. Now going back a little further, this condition also existed under Clinton though to a lessor extent. Both presidents should have run larger deficits to keep the sectors in balance. This could have been achieved through some combination of policies that either lowered the trade deficit, and/or increased spending, and/or tax cuts. Needless to say they both got it wrong, and Obama's stimulus spending was the correct move to begin to get the sectorial balances back in check. However, Obama really needs to be running larger deficits to correct for the past imbalances.

America’s Latest Phony Fiscal Crisis - Simon Johnson  - U.S. Rates on government debt are very low, the currency isn’t depreciating rapidly and inflation seems stable. There is no imaginable circumstance under which the U.S. would need to borrow from the IMF. Yet this great land of innovation has undeniably invented its unique kind of fiscal crisis.  Or, to be more precise, we have reinvented the uniquely American way of ruining our fiscal affairs. We have a budget deficit because revenue has been allowed to fall behind government commitments. This is the net result of the George W. Bush tax cuts, two foreign wars and the unfunded expansion of Medicare. Then, a financial crisis cratered the economy and further pushed down tax revenue while increasing unemployment and poverty. And, looking at decades ahead, health-care costs (not just Medicare) threaten to undermine competitiveness or even sink the economy.  So how does the political system respond? Most recently, with a sequestration program of across-the-board spending reductions that undermine military readiness and cut essential programs that help poor children. And now, with a budget proposal from House Republicans that slashes Medicaid, about half of which goes to protect the health of poor children.  Does this make any sense? No, but there is likely to be a lot more of this in our immediate future.

Republicans: There's No Debt Crisis, We Just Want to Screw the Poor - Appearing on Sunday morning talk shows this weekend, both Republican House majority leader John Boehner and Republican Congressman Paul Ryan admitted that there is no imminent debt crisis. On ABC’s “This Week,” Boehner said he agrees with President Obama that there is no immediate crisis concerning the country’s debt. Boehner told ABC’s Martha Raddatz: We do not have an immediate debt crisis. But we all know that we have one looming. And we have-- one looming-- because we have entitlement programs that are not sustainable in their current form. They're gonna go bankrupt. Washington has responsibility-- to our seniors and our near seniors-- that we firm up these programs so that they're there for the long term. Because if we don't do it, not only will they not get benefits, we will have a debt crisis right around the corner. We have time to solve our problems. But we need to do it now. Later, on “Face the Nation,” Paul Ryan agreed, even boasting that the United States is handling debt better than European countries and has a “resilient economy.”

Growth and Debt: It’s What Everyone’s Talkin’ About! - Well, over the past week, a lot of people have been asking about the relationship between a country’s debt level and its growth. This seems to have been precipitated by a couple of prominent debt alarmists—Reps Boehner and Ryan—both admitting that we don’t have a near-term debt crisis, though they were quick to add that unless we cut everything in sight we’d shortly thereafter be crushed by our debt burden. In other words, what’s tricky about sorting this out is that there are many in the debate whose shrink-the-government agenda is strongly aided by alarmism.  So what does the economic evidence show?  Here’s a nice summary from Bloomberg, and here are the key points as I see them:

  • –Our public debt ebbs and flows in ways that make it virtually impossible to sort out conclusive growth impacts.  Most notably, because of higher automatic spending and lower tax revenues, the public debt share of GDP rises in recessions, building in a negative correlation between growth and debt…
  • –…but one that is entirely meaningless in terms of concluding anything about growth impacts.  In fact, we very much want our debt share to rise in recession, as the federal government is the one sector that can offset the private sector contraction.  The causality, as Irons and Bivens (I&B, more on them below) point out in a highly readable paper on this stuff, thus runs from slow growth to high debt.
  • –So the only stories that make sense here are longer-term ones, and the main channel through which public debt would damage growth is through “crowding out” wherein a highly indebted government competes with private investors for scarce capital, leading to higher interest rates and slower growth.

Why Neoliberals Pretend Private Debt Doesn’t Matter and Public “Debt” Does -- The neoliberal policy approach in the decades leading up to the crisis basically amounted to enticing or pushing people into increasing levels of private debt. With private debt burdens mounting in relation to real GDP, we were told that consenting adults knew what they were doing. Then the crisis hit. Since then, as the private sector attempted to deleverage and get its unsustainable debt levels under control, we were told that the government's deficits, which increased as a matter of accounting, were unsustainable. The outcome, depending on which doomsayer you listened to, would supposedly be hyperinflation, escalating interest rates, sovereign default, a crippling debt burden on future generations, or some heady combination of any or all of these calamities. For governments that issue their own flexible exchange-rate nonconvertible currencies, these claims are nonsense.  So what explains the neoliberal preference for private debt and aversion to government deficits? The class-interested motivations seem crystal clear. Private indebtedness, unlike government deficit expenditure, binds the majority of individuals more tightly to the wage labor relation. Workers with mortgages or other debt obligations will be more subservient in relation to their employers, and less likely to risk their present positions in negotiations over wages and conditions.

TIPS Investors Pay to Lend Their Money - Who wants to pay to lend their money? Buyers of this afternoon’s U.S. Treasury Inflation Protected Securities auction do. At the current market rate of -0.6%, the 10-year inflation-protected government notes are poised to sell at a negative yield for the 8th-consecutive auction.

What the looming debt ceiling fight (yes, another one) tells us: At some point in coming weeks, Congress will have to authorize an increase in the debt limit, and give Treasury the authority it needs to borrow additional funds and pay the nation’s bills. The key thing to remember is this isn’t new borrowing — Congress has already made the commitments, and raising the debt limit is the only way to meet them. Not that this matters to the GOP. House Republicans are already planning the next fight over the debt ceiling, and as was true in 2011, they want spending cuts as compensation for raising the limit. Here’s Politico with more: House Speaker John Boehner’s majority has cut so deep into discretionary spending, they know they cannot go any deeper. So this time, to raise the nation’s debt cap — something GOP leadership estimates is likely to happen in July — they are moving on to tweaking entitlements. “You can’t cut the discretionary spending,” Rep. Mick Mulvaney (R-S.C.) said. “You can’t do this forever based on discretionary spending. You’re going to have to get to entitlements.”

The Politics of the 14th Amendment and the Debt Limit - In 2011, Republicans in Congress drove the nation to the very brink of defaulting on the national debt. During that debate, a number of conservatives argued that default was no big deal — that the debt was so terrible that default was a reasonable option to be considered. Although few Republicans agreed with this position, probably all agreed with Senator Mitch McConnell of Kentucky, the Senate minority leader, that the debt limit was a hostage worth ransoming to force President Obama to surrender to their demands. The most recent debt-limit extension was enacted in January and expires on May 19. On March 12, Senator McConnell signaled that he again planned to hold it hostage to Republican demands that programs to aid the poor and elderly be slashed. In a March 13 interview with the radio host Sean Hannity, the House speaker, John A. Boehner of Ohio, said repeal of the Affordable Care Act might be the ransom that will have to be paid for raising the debt limit. “Do you want to risk the full faith and credit of the United States government over Obamacare?” he said. “That’s a very tough argument to make.”  In 2011, a number of respected legal scholars asserted that a little-known provision of the 14th Amendment to the Constitution essentially invalidated the debt limit.

Stimulus Derangement Syndrome - Paul Krugman  -- Miles Kimball goes after John Taylor’s latest, and in the process reminds us of an earlier Taylor episode, in which JT argued that low interest rates are actually contractionary — a conclusion he reached by confusing the Fed’s setting of an interest rate target, which is achieved by buying bonds, with a rent-control-type price ceiling enforced by simply banning above-target transactions. It was an amazing thing for a highly credentialed macroeconomist to say. But it wasn’t unique; just offhand I can think of multiple comparable flubs ever since we began monetary and fiscal stimulus to fight the Great Recession.So, for example, we had Robert Barro arguing that multipliers are small because private spending fell during World War II (hello? Rationing? Banning of private construction?). We had “new monetarists” arguing that low interest rates cause deflation, not the other way around. We had Robert Lucas completely misunderstanding what Ricardian equivalence says about the effects of government spending. And I’m sure I’m missing other examples. What do these episodes tell us? First, how much people of conservative politics hate hate hate the idea of any kind of activist government policy to help the economy. Second, how weak their grip on their own intellectual principles is when it comes to arguments that seem to support that hatred.

Economists See No Crisis With U.S. Debt as Economy Gains -  Representative Paul Ryan, chairman of the House Budget Committee, declared this month that the U.S. national debt “is hurting our economy today.” It’s an idea embraced by almost every Republican and even some Democrats.Economic data -- on jobs, housing and investment -- don’t support that claim. And economists across the political spectrum dispute the best-known study of the subject, by Carmen Reinhart and Kenneth Rogoff, which found that nations with debt loads greater than 90 percent of their economies grow more slowly. Three years after a government spending surge in response to the recession drove the U.S. past that red line -- the nation’s $16.7 trillion total debt is now 106 percent of the $15.8 trillion economy -- key indicators reflect gathering strength. Businesses have increased spending by 27 percent since the end of 2009. The annual rate of new home construction jumped about 60 percent. Employers have created almost 6 million jobs. And with borrowing costs near record lows, the cost of paying off the debt is lower now than in the year Ronald Reagan left the White House, as a percentage of the economy.

America Is STILL Paying For The Civil War - If history is any judge, the U.S. government will be paying for the Iraq and Afghanistan wars for the next century as service members and their families grapple with the sacrifices of combat. An Associated Press analysis of federal payment records found that the government is still making monthly payments to relatives of Civil War veterans — 148 years after the conflict ended. At the 10 year anniversary of the start of the Iraq war, more than $40 billion a year are going to compensate veterans and survivors from the Spanish-American War from 1898, World War I and II, the Korean War, the Vietnam War, the two Iraq campaigns and the Afghanistan conflict. And those costs are rising rapidly. U.S. Sen. Patty Murray said such expenses should remind the nation about war's long-lasting financial toll. "When we decide to go to war, we have to consciously be also thinking about the cost," said Murray, D-Wash., adding that her WWII-veteran father's disability benefits helped feed their family.

House approves resolution to keep government running; bill heads to Obama - Congress approved a short-term funding bill Thursday that ends the possibility of a federal government shutdown next week. But a broader budget battle about taxes and spending for the year is just beginning. The stop-gap spending resolution, approved on a broad bipartisan vote in the House, locks in the $85 billion across-the-board spending cuts known as the sequester through the Sept. 30 end of the fiscal year. But the legislation includes provisions that will blunt the impact of the sequester. Within hours of the bill’s passage, the Defense Department announced that furlough notices scheduled to go out Friday to 800,000 civilian workers will be delayed until April 5. That will give officials time to see whether the new budget will still require 22 unpaid days or could result in fewer lost days for workers.Congress’s action also halted furloughs for thousands of meat inspectors by transferring $55 million from other agriculture programs to ensure meat and poultry plants stay open, agriculture officials said.

Is sequestration here to stay?: Sequestration was meant to be such a terrible, indiscriminate instrument that it would force both parties to overcome their differences and pass a major budget deal. Now it’s looking possible that the across-the-board cuts could just be here to stay.  The Continuing Resolution that passed the House Thursday and the Senate Wednesday contained changes intended to blunt a wide array of the cuts under sequestration, making it relatively less painful.While it didn’t reverse sequestration — which cuts defense discretionary spending by 8 percent and non-defense by 5-6 percent — it did raise the baseline funding for programs ranging from Head Start to cancer research. That gives these programs more of a cushion when the automatic spending reductions do take effect over the course of the year. (Two programs — for meat inspection and tuition for military service members — were exempted from sequestration altogether.) This bill doesn’t undo the overall level of spending cuts, which total $85 billion this year — it just moves the money from one part of the government to another to better protect prioritized programs from the sequester’s meat ax. Altogether, the CR sets new appropriations levels for two-thirds of all discretionary spending — a process that Democrats wanted to separate out from the bigger impasse over taxes and entitlements.

Sequester May End Not With a Bang but With a Series of Whimpers - The continuing resolution (CR) which was recently approved by Congress provides a framework for how the sequester may eventually be dealt with. The chances that there will be a big repeal bill or a grand bargain appear to be growing less likely. Instead, it seems the level of the sequester cuts will be mostly left in place but Congress will steadily make changes to the design of the cuts to make them less stupid as problems emerge. The process already started with the CR. In the bill Congress fixed several of the most technically problematic and politically unpopular aspects of the sequester’s across the board design. The size of the cuts remained mostly unchanged but money was shifted around and some agencies were given more flexibility in how they applied the cuts. For example, an amendment was adopted in the Senate that would prevent the furloughs of meat inspectors that would needlessly shut down entire plants. Similarly, money was shift to make sure the military’s tuition assistance program remained properly funded. On an individual level, all these small changes make sense but the cumulative effect is that they take much of the sting out of the sequester.  The more the sequester is handled in a piecemeal fashion, the less urgent it becomes to find a complete solution. It starts making more sense for individual legislators to push for narrow fixes to particular sequester-related problems than to try joining a push for a sweeping solution for the whole thing. As we just saw in the CR, these small fixes are hard to oppose. As a result, the sequester slowly becomes more tolerable, and that saps energy from efforts to find a big replacement

U.S. Congress set to force Postal Service to keep Saturday delivery (Reuters) - The financially beleaguered U.S. Postal Service has suffered a setback in its plan to end Saturday delivery of first-class mail, as Congress advanced a spending bill requiring six-day delivery. The Postal Service, which lost $16 billion last year, had announced last month its plan to switch to five-day mail service to save $2 billion annually. No law requires the Postal Service to deliver mail six days a week, but Congress has traditionally included a provision in legislation to fund the federal government each year that has prevented the Postal Service from reducing delivery service. The Senate on Wednesday approved a spending bill that maintained that provision. The bill, known as a continuing resolution, now goes to the House of Representatives for final approval. "Once the delivery schedule language in the Continuing Resolution becomes law, we will discuss it with our Board of Governors to determine our next steps," said David Partenheimer, a spokesman for the Postal Service.

House Progressives have the best answer to Paul Ryan: The correct counterpart to the unbridled ambition of the Ryan budget isn’t the cautious plan released by the Senate Democrats. It’s the “Back to Work” budget released by the House Progressives. The “Back to Work” budget is about putting Americans back to work…. The budget begins with a stimulus program that makes the American Recovery and Reinvestment Act look tepid. It includes $2.1 trillion in stimulus and investment from 2013-2015. The main policies there are a $425 billion infrastructure program, a $340 billion middle-class tax cut, a $450 billion public-works initiative, and $179 billion in state and local aid. This is a lot of stimulus. The liberal Economic Policy Institute estimates that would be sufficient to “boost gross domestic product (GDP) by 5.7 percent and employment by 6.9 million jobs at its peak level of effectiveness (within one year of implementation).”… Investment on this scale will add trillions to the deficit. But the House Progressives have an answer for that: Higher taxes. About $4.2 trillion in higher taxes over the next decade, to be exact. The revenues come from raising marginal tax rates on high-income individuals and corporations, but also from closing a raft of deductions as well as adding a financial transactions tax and a carbon tax. They also set up a slew of super-high tax rates for the very rich, including a top rate of 49 percent on incomes over $1 billion….

House Democratic budget would also boost employment - House Budget Committee Ranking Member Chris Van Hollen (D-MD) has introduced the House Democratic FY2014 budget alternative, which would lessen the near-term economic drags left in place by the lame-duck budget deal. While understandably less ambitious in terms of job creation than the Congressional Progressive Caucus’s “Back to Work” budget, the Van Hollen budget deserves credit both for financing some renewed fiscal expansion to boost growth and for fully averting the macroeconomic drags posed by sequestration. The Van Hollen budget adopts job creation proposals from the president’s jobs package (in his fiscal 2013 budget request), financing $174 billion in stimulus spending over fiscal 2013—2015. These stimulus provisions include $55 billion for rehiring teachers and modernizing K-12 schools, $37 billion in infrastructure investments, and $19 billion for a targeted tax credit for businesses that increase payroll, among other policies. Relative to current budget policy (which assumes the sequester is repealed), the Van Hollen budget would increase government spending in fiscal 2013 and 2014, as well as cut taxes in 2013. On net, we estimate that the Van Hollen budget would boost GDP growth by 0.4 percent and increase employment by roughly 450,000 jobs in 2013, relative to current policy. A smaller economic boost of 0.1 percent of GDP and roughly 110,000 jobs would be expected in 2014. Note that CBO’s baseline forecast shows employment rising by 1.5 million jobs between the fourth quarter of 2013 and the fourth quarter of 2014; these estimates do not suggest that 340,000 jobs would be lost between 2013 and 2014, simply that employment would rise faster and higher than otherwise projected over the next two years.

The Ryan Budget’s Nearly $6 Trillion Revenue Hole - The new budget from House Budget Committee Chairman Paul Ryan proposes a series of dramatic tax cuts that would cost nearly $6 trillion in lost federal revenue over the next decade and that would provide the lion’s share of their benefits to high-income households and corporations, our new paper explains.  But, despite its stated promise to the contrary, the budget does not include a plausible way to pay for it all. Estimates from the Urban-Brookings Tax Policy Center (TPC) show [the Ryan budget’s specified] tax cuts would cost the federal government nearly $6 trillion over the next decade, which exceeds the Ryan budget’s total spending cuts, exclusive of its interest savings.  These tax cuts would provide extremely large new tax cuts to wealthy Americans, even as Chairman Ryan’s spending cuts would fall disproportionately on the most vulnerable individuals and families. Chairman Ryan offers no proposals to offset the nearly $6 trillion in costs.  He only links to a tax reform framework from House Ways and Means Committee Chairman Dave Camp, which mentions “scaling back tax preferences that distort economic behavior” but provides no details on how to do so.  The Ryan budget does not identify a single deduction, credit, exclusion, or other preference to narrow or close.

What the Tax Policy Center Really Said About the Ryan Budget - The political response to the Tax Policy Center’s analysis of House Budget Committee chairman Paul Ryan’s (R-WI) fiscal plan was predictable, and mostly based on caricatures of what TPC actually concluded. To review: TPC found that tax cuts similar to those described in the committee’s plan would add $5.7 trillion to the budget deficit over the next decade. Republicans responded by suggesting we came up with these numbers while “smoking something.” Democrats concluded that TPC proved the GOP plan would raise taxes on the middle-class by trillions of dollars. To start, TPC did not analyze any specific tax proposal because the House budget does not include one. Instead, we analyzed the outlines of the tax cuts it endorsed—individual tax rates of 10 percent and 25 percent, a corporate rate of 25 percent, and repeal of the Alternative Minimum Tax and the tax hikes included in President Obama’s 2010 health law.    While the House budget promises to offset the entire cost of those tax cuts, it says very little about how it would do that, beyond a vow to “simplify” the revenue code. Our tax model is very sophisticated and our modelers very smart, but analyzing “simplify” is well beyond their abilities. Thus, we did not attempt to measure promised, but non-existent, revenue increases

Ryan Social Security Roadmap - When the Ryan Roapmap to Prosperity/2013 Republican House Budget was released some otherwise sharp observers like Ezra Klein claimed it just gave Social Security a pass: Here is Paul Ryan’s path to a balanced budget in three sentences: He cuts deep into spending on health care for the poor and some combination of education, infrastructure, research, public-safety, and low-income programs. The Affordable Care Act’s Medicare cuts remain, but the military is spared, as is Social Security. There’s a vague individual tax reform plan that leaves only two tax brackets — 10 percent and 25 percent — and will require either huge, deficit-busting tax cuts or increasing taxes on poor and middle-class households, as well as a vague corporate tax reform plan that lowers the rate from 35 percent to 25 percent.

An Opportunity to Compare and Contrast Budgets -- It is good news that we now have both House and Senate budget proposals for FY 2014 to compare and contrast. This is a first step back toward old-fashioned regular budget order which will help get the country off of management by crisis, whether by debt limits, fiscal cliffs, sequesters, or continuing resolutions.  Regular order also gives us all an opportunity to participate in a more informed and open debate about where economic policy should be going. Of course the debate would be even better if the President had proposed a detailed budget before the House and Senate.  We can hope that this will occur next year.   The chart below provides the key year-by-year macro facts needed to compare the House and Senate proposals.  In my view this kind of chart is more useful for comparing proposals than the ten-year multi-trillion dollar totals which few people can understand.  The chart shows the recent history of federal outlays along with the path of outlays as a percentage of GDP under the Senate proposal and under the House proposal.  There is a clear difference of opinion about the future in these two paths. Note how spending gradually comes down to pre-crisis levels as a share of GDP under the House plan and remains high under the Senate plan.  The chart also shows where revenues will be as a share of GDP under the two proposals in 2023: 19.1% for the House and 19.8% for the Senate.

Understanding the Ryan and Murray Budgets - Last week House Republicans, under the leadership of Budget Committee Chairman Paul Ryan, unveiled their draft budget for the coming fiscal year. Senate Budget Committee Democrats also released their budget blueprint assembled by Chairman Patty Murray. Though the House has moved budget resolutions in recent years, this is the first time in four years that the Democrat-controlled Senate has attempted to move one. Accordingly only now is it possible to compare the two parties’ contrasting visions of fiscal policy management over the ensuing decade. This article highlights the distinguishing features of the two approaches.

The Ideological Chasm Between the House and Senate Budgets - Think of the federal budget as an expression of government priorities described by numbers and words. This week, we’ve seen two widely divergent views of the federal role in people’s lives, one from the Republican-controlled House Budget Committee and the other from the Democratic-controlled Senate Budget Committee. When you look at the numbers alone, you can see a wide, but potentially bridgeable, gap. When you read the words, you begin to grasp why our politics are so toxic. First the numbers: The Senate panel would have the federal government spend an average of 21.7 percent of Gross Domestic Product over the next decade. The House panel would spend about an average of 19.5 percent. That’s a difference of about $6 trillion over 10 years. The Senate committee would have the federal government raise an average of about 19.3 of GDP in revenues over the period. The House panel targets 18.8 percent. That’s a difference of about $1.1 trillion over the decade. In 2023, the Senate plan would collect about 19.8 percent of GDP in revenues, the House plan 19.1 percent And the bottom line: The Senate panel would have government run an annual deficit of about 2.4 percent. The House panel would bring the federal books nearly to balance over the entire period, with an average deficit of about 0.6 percent. By 2023, the Senate plan would maintain the deficit at about 2.4 percent while the House plan would create a small surplus.

Grand Bargaining - Paul Krugman - Like others, Greg Sargent has been pleading with “centrist” pundits to acknowledge an obvious truth: Barack Obama has actually proposed the mix of spending cuts and revenue increases they want, while Republicans are unwilling to make so much as a dime of compromise. Greg looks at yesterday’s talk shows and finds this confirmed openly by GOP leaders: there is no ratio of spending cuts to revenues that will reconcile them to any tax hike whatsoever. Greg presumably hopes that this admission will finally cure pundits of the habit of blaming both sides for the failure to reach a Grand Bargain — or, in practice, devoting most of their criticism to Obama. Silly Greg. As Scott Lemieux explains, the centrist view is that all Obama has to do is have the leadership to lead, with leadership. Nothing Republicans say or do can shake this conviction.

McCain Praising Obama Backs Revenue Compromise on Budget - Senator John McCain said Republicans should compromise and increase tax revenues as part of a “long-term grand bargain” on the budget, and praised President Barack Obama for reaching out to senators across the aisle.“I’m open -- have always been open -- to closing loopholes, eliminating special deals for special interests,” McCain, of Arizona, said in an interview on “Political Capital With Al Hunt,” airing this weekend on Bloomberg Television. “If you call that, ‘raising revenues,’ I’ve been guilty all my political career” of trying to cut special-interest loopholes. Obama and congressional Democrats want to combine higher revenues with spending cuts to replace the $1.2 trillion in automatic budget cuts that began taking effect March 1. Many Republicans, including House Speaker John Boehner of Ohio, have rejected tax increases, and the House last year voted to cut food stamps and other domestic programs rather than defense in order to avoid the reductions known as sequestration.

Taxes, or Spending? Budget Fight in Congress Focuses on a Distinction - In a low-income neighborhood in Bozeman, Mont., taxpayers helped pay for the construction of a grocery store, Town and Country Foods. They are doing the same in New Orleans, with federal dollars helping to build new groceries, including a Whole Foods, in an area still suffering after Hurricane Katrina.The Bozeman project relied on tax credits, while New Orleans is using federal grant money. To economists — and to taxpayers — that makes no real difference. “These are at some point arbitrary distinctions between taxes and spending,” said Donald Marron, the director of the Tax Policy Center, a nonpartisan Washington research group.  But to Congress, it makes all the difference — and is something worth fighting over. As lawmakers struggle to narrow the government’s deficit, every dollar taken away from the block grant program used in New Orleans counts as a budget cut. Every dollar taken away from the Bozeman tax credit program — part of a vast array of so-called tax expenditures that cost the federal government more than $1 trillion in lost revenue every year — counts instead as a tax increase.

No, Government Spending Really Isn’t Going Up Right Now - On the Bill Maher show the other night, I pointed out that contrary to the talking point that government spending is spiraling out of control, it in fact went up only 0.6%, 2009-2012.  Whenever I say that, I get emails from people who don’t believe it, and not just complaining conservatives.  Many progressives can’t believe that’s the case given the hair-on-fire rhetoric about Obama’s alleged ongoing spending spree. Well, here are the numbers, straight out of CBO.  Spending went up a lot in the recession, as it always does, as automatic stabilizers like unemployment insurance and food stamps ratchet up, and the Recovery Act is in there too.  But since then outlays have been flat, up less than 1% over the President’s tenure, 2009-2012 (as I said on the show) and actually falling as a share of GDP (the figure includes CBOs forecast for 2013).  I think those two lines partially explain why this recovery has been such a slog: we hit back hard against the recession in 2009 and GDP started growing in real terms shortly thereafter.  But we stopped too soon, certainly before the recovery reached most households.

The Most Radical Proposals In The House Conservative Budget- As Congress struggles to find a compromise between the House Republicans’ and the Senate Democrats’ budget proposals this week, the House conservatives have jumped into the fray with their own budget proposal. The Republican Study Committee (RSC), helmed by Chairman Rep. Steve Scalise (R-LA) released an even more radical plan than the official House Republican budget, which disproportionately guts programs for low-income Americans while giving even bigger tax cuts to the wealthiest Americans. The RSC budget purports to eliminate the deficit in just 4 years and limit total discretionary spending to $950 billion, the lowest level since 2008. In order to achieve this goal, the RSC cuts non-defense spending by $6 billion over four years, while the GOP budget slows spending growth over the same period. Here are 5 of the most extreme proposals in the budget from the RSC, of which roughly two-thirds of Republicans in Congress are members:

Medicare Cost Slowdown Could Close U.S. Budget Gap - Peter Orszag - New evidence that the slowdown in health care costs over the past five years is happening not only because of a weak economy comes from the  Economic Report of the President, released last week by the President’s Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy. Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it’s important to take more aggressive action to improve value in health care. The Economic Report of the President examines changes in health-care spending and unemployment rates across states, and concludes on that basis that the recession accounts for only 18 percent of the slowdown in spending growth since 2007. (A similar analysis for Medicare alone, which is mentioned only in a footnote in the report, shows an even smaller contribution from the recession, which is not surprising since Medicare beneficiaries tend to be better protected against economic fluctuations than the population as a whole.) The report then goes on to examine some of the structural shifts that could explain why health costs are decelerating, including the movement away from fee-for-service payments and toward greater care coordination.

Selling the Store: Why Democrats Shouldn't Put Social Security and Medicare on the Table - Robert Reich - Prominent Democrats — including the President and House Minority Leader Nancy Pelosi — are openly suggesting that Medicare be means-tested and Social Security payments be reduced by applying a lower adjustment for inflation. This is even before they’ve started budget negotiations with Republicans — who still refuse to raise taxes on the rich, close tax loopholes the rich depend on (such as hedge-fund and private-equity managers’ “carried interest”), increase capital gains taxes on the wealthy, cap their tax deductions, or tax financial transactions. It’s not the first time Democrats have led with a compromise, but these particular pre-concessions are especially unwise.If there was ever a time for the Democratic Party to champion working Americans and reverse these troubling trends, it is now — forging an alliance between the frustrated middle and the working poor. This need not be “class warfare” because a healthy economy is in everyone’s interest. The rich would do far better with a smaller share of a rapidly-growing economy than a ballooning share of one that’s growing at a snail’s pace and a stock market that’s turning into a bubble. But the modern Democratic Party can’t bring itself to do this. It’s too dependent on the short-term, insular demands of Wall Street, corporate executives, and the wealthy.

Three Reasons the GOP Ironically Remains the Best Hope for Protecting Social Security - President Obama wants to cut Social Security benefits as part of a grand bargain and he is working hard to get Congressional Democrats behind his proposal. The only thing preventing the program from being cut is House Republicans’ unwillingness to accept a deal. Fortunately, for people who care about Social Security there are three main reasons to hope the GOP will indirectly continue to prevent any cuts.

  • 1. Republicans really hate taxes – President Obama says any grand bargain must include new revenues, and at every turn House Republicans have made it clear that they take their no new tax pledge seriously. They rejected several past deals because they included tax increases and top House Republicans have repeatedly said they would not accept more taxes in a future deal.
  • 2. Republicans depend on older voters – Senior citizens are the most important voting bloc for Republicans. The GOP depends on old white people for getting elected, which helps explain the GOP’s behavior. Republicans often talk about “entitlement reform” in general but rarely act on it. Being dependent on the senior vote is probably why Republicans promised to protect everyone 55 and older from their Medicare voucher plan.
  • 3. Chained-CPI is a inherently a tax increase – Currently the only idea really being discussed for cutting Social Security benefits is adopting the Chained-CPI. This would also change how tax brackets are calculated and that would end up being a significant tax increase on almost everyone

The Ryan Budget’s Skewed Tax Cuts - We’ve shown that the $5 trillion in non-defense program cuts in House Budget Committee Chairman Paul Ryan’s new budget are heavily weighted toward low-income programs.  At the same time, based on the latest estimates from the Urban-Brookings Tax Policy Center (TPC), we now see that the tax cuts that he specified in his budget would be heavily weighted to high-income households. These tax cuts, which would cost $5.7 trillion if they met Chairman Ryan’s goals (including cutting the top rate from 39.6 to 25 percent), would give 55 percent of their benefits to the top 1 percent of U.S. households based on income, TPC reports. To be sure, Chairman Ryan says his budget would fully offset the cost of his proposed tax cuts by curbing tax expenditures (exclusions, deductions, and other preferences).  But he has offered no specific proposals to do so.We estimate, based on new TPC analysis, that the individual income tax cuts specified in the Ryan budget (assuming they met their goals, including the 25 percent top rate) would give an average $330,000 a piece to households with annual incomes above $1 million — compared to an average $1,700 tax cut for middle-class households with incomes between $50,000 and $75,000 (see first chart).

Why the Tax Cuts in the Senate Budget Don’t Add up - The Senate Democrats’ budget, like the House version, rips unfair and inefficient tax preferences that litter the revenue code. But the tax provisions of the Senate budget, which is being debated on the floor today, raise at least two big problems: They see flaws in only in those tax expenditures that benefit high-income households and big businesses. And while the fiscal plan promises to raise taxes on big business and the rich by $975 billion over 10 years, it tells us almost nothing about how. There is a reason for that lack of detail: Raising nearly $1 trillion by eliminating tax preferences for some businesses and a tiny slice of households is very hard to do. Not impossible, perhaps, but very hard.   The Budget panel’s 345-page committee report describes its revenue aims in exactly six paragraphs (pg. 138 if you are following at home). In sum: “Eliminating loopholes and cutting unfair and inefficient spending in the tax code for the wealthiest Americans and biggest corporations must be a significant element of a balanced and responsible deficit reduction plan….It is the clear intent of the Committee…that the savings found by eliminating loopholes and cutting unfair and inefficient spending in the tax code not increase tax burdens on middle-class families or the most vulnerable Americans.”

Grover Norquist’s Last Laugh - If you compare the leverage that Obama had in that set of bargaining with the leverage he has now in the post-sequester budget negotiations, it is like night and day. Had Obama hung tough and demanded a lot more in the way of tax increases on the wealthy, Republicans were just stuck—because no action would have caused taxes to increase on everyone. Obama had begun the bargaining requesting a reversion to the pre-Bush tax levels on the top two percent, targeting revenue increases of at least $1.6 trillion over a decade. Instead, he settled for just $620 billion—meaning that another trillion has to be taken out of the spending side. Senate Majority Leader Harry Reid was holding out for the higher number, correctly calculating that Republicans would have to give ground, when Obama undercut Reid by shifting the leadership to Joe Biden with instructions to make more concessions, without even the courtesy of informing Reid. The White House also disastrously miscalculated that the threat of defense cuts in the sequester would bring Republicans back to the table on taxes. Oops. Republicans realize that Afghanistan is winding down, and what’s most interesting about the Paul Ryan budget is that its proposed defense spending over the next decade is scarcely different from the Democrats’ proposal.

The public, investors mostly ignoring the sequester budget cuts - US politicians have been attempting to "adjust" the sequester law, as the level of pain from the spending cuts is expected to get progressively worse. LA Times: - It was bound to happen: As the sequester budget cuts are felt around the country, lawmakers are having second thoughts — and trying to tinker with them in a way that could lead to a full-scale government shutdown.  Senators want to load up a routine spending bill with provisions to reopen the White House to tours, shield meat inspectors from furloughs and keep air traffic control towers staffed, among other changes that would rearrange the across-the-board cuts.  Nearly 100 amendments have been filed by senators on both sides of the political aisle, stalling the measure that is needed to keep the government running after March 27. Without approval, the government would shut down, a prospect lawmakers and President Obama have said they want to avoid. The problem politicians face is that the public doesn't seem to care much. Polls show that a large portion of the voting population doesn't know what "sequester" means - in spite of it being the "law of the land". And it seems that those who do know are simply ignoring it. According to Google Trends, interest in the word "sequester" spiked at the beginning of March and has collapsed since then.

16 Giant Corporations That Have Basically Stopped Paying Taxes -- While Also Cutting Jobs! Outside the stadium our nation's kids and seniors and low-income mothers may be dealing with  food and housing cuts, but on the corporate playing floor new low-tax records are being set again this year. Just as this is a golden age for sports, this is also, as noted by the  New York Times, "a golden age for corporate profits."  Corporations have simply stopped paying their taxes, perhaps using the 2008 recession as an excuse to plead hardship, but then never restoring their tax obligations when business got better. The facts are indisputable. For over 20 years, from 1987 to 2008, corporations paid an average of 22.5% in federal taxes. Since the recession, this has dropped to 10% -- even though their profits have doubled in less than ten years.  Pay Up Now just completed a compilation of corporate tax payments over the past five years, using SEC data as reported by the companies themselves. The firms chosen are top-earners who have filed 10-K reports through 2012. Their US Tax figures represent the five-year total of "current" payments.  The 64 corporate teams paid just over 8% in taxes over the five-year period.

K is not capital, L is not labor -Garret Jones wonders why a standard result in economics is not more widely entrenched, both in policy conversations and conventional wisdom: Chamley and Judd separately came to the same discovery: In the long run, capital taxes are far more distorting that most economists had thought, so distorting that the optimal tax rate on capital is zero. If you’ve got a fixed tax bill it’s better to have the workers pay it… Why isn’t Chamley-Judd more central to economic discussion? Why isn’t it in our freshman textbooks?… The result can’t be waved away as driven by absurd assumptions:  So, the quick answer, obviously, is that those of us who support redistributive taxation don’t believe that the world works in the way that Chamley and Judd assume. It is very clear that Jones (who is an unusually insightful guy) doesn’t believe in a naïve mapping between real economies and Chamley-Judd-ville. See the “bonus implication” in his handout on the subject. To annihilate in broad brush strokes, there is little reason to accept the Ramsey model, upon which the Chamley-Judd results are built, as a sufficient description of the macroeconomy. [1] Some economists might argue that it’s a decent workhorse “asymptotically”, as a means of thinking about some long-term to which economies converge. But that’s a conjecture without evidence.

Scott Sumner Does Not Understand that S ≠ I - He expresses befuddlement at Steve Randy Waldman’s typically brilliant post, K is not capital, L is not labor. S equals I (and properly understood, I = E) only in an imaginary private sector of producers/consumers with no financial sector, no government sector, no international sector, no lending, and no borrowing — really a barter economy in which not consuming corn is “saving.” This is the walled-off imaginary sector constructed by Kuznets and company in the ’30s and embodied in the National Income and Product Accounts — NIPAs. (It was only properly supplemented years later with Flow of Funds accounting incorporating other sectors properly.) By necessity they had to construct it as if (to quote Garrett Jones). “Everything you delay gratification for is capital.” (I would add: “real” capital.) This is basic sectoral accounting, a subject in which neoclassical (and “market monetarist”) economists seem to have received no training.

A Look Behind the Curtain at Wall Street's 24/7 Effort to Gut Finance Reform - In the current issue of the Washington Monthly, Haley Sweetland Edwards has a long article about the torturous process of taking the Dodd-Frank financial regulation bill and turning it into the actual detailed regulations that banks have to follow. This sort of thing sounds a lot less interesting than the fight over the bill itself, but in real life it might be more important. Why? Because until the rules are written, laws like Dodd-Frank have no power: They are, in the words of one CFTC official, “nothing but words on paper” until they’re broken down into effective rules, implemented, and enforced by an agency. Rules are where the rubber of our legislation hits the road of real life. To put that another way, if a rule emerges from a regulatory agency weak or riddled with loopholes, or if it’s killed entirely—like the CFTC’s rule on position limits—it is, in effect, almost as if that part of the law had not passed to begin with. Edwards outlines why it's so hard to create effective rules, and as you'd expect, a big part of the reason is that the financial industry is spending billions of dollars gaming the system to slow down, maim, or just outright nullify the intent of the law. They have an army of lobbyists. They meet relentlessly with rulemaking officials. They propose crafty wording changes. They refuse to provide regulators with the data they need. In short, they just plain outgun everyone else, especially since the media's spotlight turns elsewhere almost immediately after a law is passed.

We need to change our approach to banking reform - In the painful aftermath of the worst financial crisis in 80 years our approach to urgently needed banking reform has been dreadfully wrong-headed. Which means we can be certain of yet another global credit crisis sooner rather than later. To date, the reforms under consideration by various governments including the U.S. do not address the core issue, which is that banks have too little skin in the game. It’s “other people’s money” with which bankers make their loopiest bets: to wit, federally insured depositors’ money, funds borrowed in global bond markets and $2 trillion-plus of taxpayer funds injected into banks to rescue them at the onset of a Great Recession triggered by the banks themselves. The pallid reforms now under consideration, almost all of them opposed by the architects of calamity in the banking industry, include shrinking banks deemed “too big to fail” by breaking them up, which was the fate of Standard Oil and other “trusts” in the early 20th century. There’s also talk of stripping banks of certain activities such as ultra-high-risk derivatives trading. Or perhaps we should limit bank lending to traditional borrowers — the function that has the most social utility — and restrict or forbid speculative investing by banks. None of these “reforms” address the unique nature of banking which, unlike other businesses is wed to debt financing.

Greenspan Says Too Big To Fail Problem 'Is Getting Worse, Not Better' - Alan Greenspan, a former Federal Reserve chairman, told CNBC on Thursday morning that “the too big to fail problem” is “getting worse, not better.” Greenspan, who was chairman of the Fed during the credit bubble that ultimately crashed the global economy and is widely blamed for that crisis, said that The Dodd-Frank Act “is not working.” Dodd-Frank was passed to prevent a similar financial crisis. “[What] we ought to do is to allow banks to fail, go through the standard Chapter 11 type of process of liquidation, and allow the markets to adjust accordingly,” said the 87-year-old Greenspan. “That has worked for a very long time.” The statements contrast those made by Greenspan in 2009, when he called on regulators to consider breaking up the banks that were considered too big to fail rather than allowing them to fail. “If they’re too big to fail, they’re too big,” Bloomberg News reports Greenspan said in October of 2009. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

Too Big To Fail and the problem of the 0.2% — of banks - A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system. Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8 percent and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.The megabanks can raise capital more cheaply than can smaller banks. Studies, including those published by the International Monetary Fund and the Bank for International Settlements, estimate this advantage to be as much as 1 percentage point, or some $50 billion to $100 billion annually for U.S. TBTF banks, during the period surrounding the financial crisis. In a popular post by editors at Bloomberg, the 10 largest U.S. banks are estimated to enjoy an aggregate longer-term subsidy of $83 billion per year.

Freddie sues over ‘substantial’ Libor loss - Freddie Mac has sued more than a dozen banks and the British Bankers Association, alleging it suffered “substantial losses” as a result of the manipulation of the Libor benchmark interest rate. Freddie Mac, now a government-controlled mortgage company, alleges the banks were “collusively suppressing” the rate, which caused it to receive payments on Libor-linked products “well below” what it would have been paid, according to the lawsuit filed on Thursday in federal court in Virginia. As a result of the alleged manipulation, Freddie suffered “substantial losses” from hundreds of swap transactions indexed to Libor as well as on billions of dollars of mortgage securities whose coupon payments were linked to Libor, the lawsuit alleged. Freddie also sued the BBA, which had sponsored Libor since the 1990s, claiming it participated in the alleged manipulation scheme to protect revenue it generated from selling Libor licences and to appease the banks that were on the Libor panel, according to the lawsuit. Freddie Mac has already joined class action lawsuits against the banks to reclaim alleged losses tied to Libor manipulation, including a case brought by the city of Baltimore, a Freddie Mac spokesman said. However, the mortgage company decided to launch its own lawsuit because it felt its claims were not sufficiently covered by existing class action suits. The lawsuit is the latest filed against the banks, including UBS, Royal Bank of Scotland, Barclays, Citigroup, JPMorgan Chase and Bank of America, among others on the Libor setting panel. The banks have previously been sued by bondholders and homeowners, among others.

Harpooning the JPMorgan Chase Whale - The Permanent Subcommittee on Investigations is making the JPMorgan Chase the poster child for what is wrong with derivatives trades generally.  The subcommittee issued a 301 page report and also held a hearing, JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses. The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. Subcommittee Chair Senator Carl Levin's opening statement tells us how vulnerable the financial system still is, going on five years after the global banking meltdown.  Our investigation brought home one overarching fact: the U.S. financial system may have significant vulnerabilities attributable to major bank involvement with high risk derivatives trading. The four largest U.S. banks control 90 percent of U.S. derivatives markets, and their profitability is invested, in part, in their derivatives holdings, nowhere more so than at JPMorgan. The Whale story broke last May where the mythical rogue trader lost over $2 billion on derivatives trades, which turned out to be $6.2 billion in losses.  Most of the press focused on the trader, known as The Whale, who made the risky derivatives bets and doubled down on the losses.  Earlier CEO Jamie Dimon was let off the hook with a softball Congressional response.  This subcommittee didn't play softball and instead made it clear, blaming a few for systemic financial vulnerabilities isn't going to do anything to stop the next financial disaster from happening

JPMorgan’s Follies, for All to See - Be afraid. That’s the takeaway for both investors and taxpayers in the 307-page Senate report detailing last year’s $6.2 billion trading fiasco at JPMorgan Chase. The financial system, thanks to dissembling traders and bumbling regulators, is at greater risk than you know.  After bailing out the nation’s banking system in 2008, taxpayers and investors have been assured that such a crisis will not happen again. The Dodd-Frank legislation was supposed to make our system safe from the kinds of reckless banking activities that brought the economy to its knees.  The Senate report disproves this premise with vigor.  Its pages of e-mails, testimony, telephone transcripts and analysis show that traders in the bank’s chief investment office hid money-losing derivatives positions, if only temporarily; that risk limits created by the bank to protect itself were exceeded routinely; that risk models were changed to minimize losses; that bank executives misled investors and the public; and that regulations are only as good as the regulators enforcing them.

Senate Censors Part of Report on JPMorgan About Its Stock Trading - The 307-page report the Senate released last Thursday on JPMorgan’s cowboy culture was deeply unsettling; the testimony under oath at the related Senate hearing on Friday was equally shocking with eyewitness accounts confirming that CEO Jamie Dimon ordered the withholding of  financial data to a regulator while both he and the Chief Financial Officer at the time, Douglas Braunstein, presented an Alice in Wonderland version of facts to the public in April 2012. But it now appears that the worst of this story may be so unsettling to the markets and the public perception of Wall Street that it must be censored from public viewing. Throughout the Senate Permanent Subcommittee on Investigation’s 98 exhibits of emails and internal memos on the wild trading schemes at JPMorgan, the word “Redacted” appears.  In a high number of the areas where the material is censored, it concerns trading in the stock market, not the credit market where Bruno Iksil, the trader known as the London Whale, was causing giant ripples and eventual mega losses for the largest bank in the U.S. To date, there has been no media attention to the issue of stock trading within the Chief Investment Office nor has the issue been raised by investigators.

Lesson of JPMorgan’s Whale Trade: Nothing Was Learned - People have learned their lesson. We've been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: Now it's the bankers who are cautious and their overseers who are aggressive.Details of JPMorgan Chase's multibillion-dollar trading loss — brought to light by a riveting and devastating report [1]  from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren't acting cautious and chastened. Risk managers aren't in the ascendance on Wall Street. Regulators remain their duped and docile selves. What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren't enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank's risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.

JPMorgan: Poster Child for the Most Dangerous Financial System Since 1929 - Last Friday, Senator Carl Levin told the Senate’s Permanent Subcommittee on Investigations that JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And here’s the punch line: that’s not even the worst of what JPMorgan did. Each of the charges leveled by Levin occurred on a regular basis over the past decade at the largest Wall Street investment banks. What has elevated JPMorgan to the top of the Wall Street dung heap is that the long laundry list of violations cited by Levin occurred in the commercial bank, not the investment bank. JPMorgan was gambling with the insured deposits of its customers – not its own capital. Thus far, it has acknowledged $6.2 billion in trading losses using other people’s money. Both Senator Levin, who chairs the Senate Subcommittee, and Senator John McCain, ranking minority member, confirmed that insured deposits of the bank were used for the risky trades that reached into the hundreds of billions of dollars in notional (face) amounts.

The London Whale, Richard Fisher and Cyprus - Simon Johnson - We finally had a modern Pecora moment last Friday, when Senators Carl Levin of Michigan and John McCain of Arizona laid bare how JPMorgan Chase has been run since the financial crisis and since the passage of the Dodd-Frank Act, which supposedly “reformed” banks. Within 24 hours, we had the clearest possible statement of how to think about the modern financial system – and make it less risky – in the form of a speech by Richard Fisher, president of the Federal Reserve Bank of Dallas. The timing was presumably coincidental, yet it also reflects the speed with which smart people are reassessing the risks posed by the mismanagement of financial institutions. With Mr. Fisher as a thought leader, some of the best new ideas are being developed within the Federal Reserve System.  Unfortunately, at least two powerful governors seem to resist sensible further reform.At its heart, the Levin-McCain report reveals executives with a profound misunderstanding of risk in the world’s largest bank (I use the calculations of comparative bank size offered by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation). Even worse, the report shows us in some detail that banks – even after Dodd-Frank – can and do readily manipulate complicated measures of risk in order to make their positions look safer than they really are.As Jeremy Stein, a Fed governor, pointed out recently, there are strong incentives to do this repeatedly in banking organizations (read the opening few paragraphs of his speech carefully).

Sheila Bair Talks about Bank Greed, JP Morgan London Whale Hearings on Bill Moyers – video from naked capitalism -- Not surprisingly, Sheila Bair was appalled by the revelations from Carl Levin’s hearings on the JP Morgan London Whale losses. She discusses not only what it says about the bank, but about the state of regulation in the US.

JPMorgan Chase’s Rating Downgraded To 3 By Government Regulators Over Management Concerns - JPMorgan Chase & Co. was downgraded again over concerns about the company's management and its board, according to the Wall Street Journal. A confidential government scorecard dropped the bank, long considered one of the best-run on Wall Street, from a 2 down to a 3 on a scale of 1 to 5, with 5 being the worst rating.  The downgrade follows the 2012 markdown issued by New York's Office of the Comptroller of the Currency due to oversight at the bank that the agency felt needed "improvement" in the aftermath of the so-called London Whale's massive trading losses earlier in the year.

Wall Street Deregulation Advances As Top Democrat Warns That Vote Could ‘Haunt’ Congress - A House Committee approved six new bills to deregulate Wall Street derivatives on Wednesday, advancing legislation that would expand taxpayer support for derivatives and create broad new trading loopholes allowing banks to shirk risk management standards created by the 2010 Dodd-Frank bill.  The House Agriculture Committee passed all six bills with broad bipartisan support, just five days after Sen. Carl Levin (D-Mich.) released a report detailing extensive failures to contain derivatives risks at JPMorgan Chase -- troubles that lead to billions of dollars in losses from a single trade. The legislation will next be considered by the full House of Representatives.  The most controversial bill to advance Wednesday is explicitly designed to expand taxpayer backing for derivatives. It was the only legislation that lawmakers were required to cast individual votes for or against; the others were all approved by unanimous voice votes. The bill to increase taxpayer support for bank derivatives dealing was approved by a vote of 31 to 14.

Is JPMorgan a farmer? - Imagine you’re a finance lobbyist and want to move deregulation and other industry-friendly policies through Congress. While you might think the House Financial Services Committee would be the logical place to do it — since it has jurisdiction over financial issues, naturally — what if there were a sneaky way to maneuver it through a far less scrutinized committee, so most people would have no idea what you were doing? Five days ago, Sen. Carl Levin, D-Mich., delivered a critical report and held an explosive hearing detailing the “London Whale” trades, made by a JPMorgan Chase satellite office in London. The Whale trades, which totaled $157 billion at their peak, are known to the industry as derivatives, massive bets on bets that present outsize risk to financial institutions and the broader economy. And of course, derivatives helped fuel the financial crisis of 2008. But less than a week after the Levin report, the House Agriculture Committee will hold a markup session today on seven bills designed to gut derivatives regulations passed in the Dodd-Frank financial reform law. If the bills pass, practically every improper and illegal action that JPMorgan Chase took in the London Whale debacle would be either made legal or allowed to foster outside of regulatory oversight.

Sneaky House Bill Would Gut Financial Reform - A bipartisan group of four representatives introduced a sneaky little bill Wednesday that would dismantle an huge chunk of the historic financial reform laws enacted after the financial crisis. The Swap Jurisdiction Certainty Act, introduced by Reps. Scott Garrett (R-N.J.), Mike Conaway (R-Tex.), John Carney (D-Del.), and David Scott (D-Ga.), all of whom sit on the House Financial Services Committee, would allow big banks to shift risky activities to foreign subsidiaries in order to avoid US regulations. Part of the landmark 2010 Dodd-Frank financial reform act requires that derivatives—financial products whose value is based on things like currency exchange rates and crop prices—be traded in public marketplaces, instead of in private. The new bill would exempt foreign companies from these US derivatives rules, which sounds reasonable; the law purportedly just affects other countries. But what it would mean is that huge US-based banks that operate internationally could just do their paperwork through their international arms to avoid regs, effectively gutting the section of Dodd-Frank that gave federal regulators the authority for the first time to regulate derivatives such as the credit default swaps that helped cause the 2007 bank failures. The Commodities Futures Trading Commission and Securities and Exchange Commission were supposed to have finalized the Dodd-Frank derivatives laws into regulations a long time ago, but those governing international trading are still pending.  But until they're finalized, the rules are still vulnerable to tweaking, or gutting, by crafty lawmakers (or crafty industry folk).

Congress Moves to DEREGULATE Wall Street - The best part of this story is that Wall Street is, of course, anything but regulated. Nevertheless, the minuscule rules that do apply to the nation’s financial oligarchs are apparently just too much to bare. It doesn’t seem to bother Congress that the TBTF banks are actively involved in offshore payday lending schemes with rates well over 500%, or that they destroyed multiple municipalities across the nation selling swaps, including picking away at the carcass of the once strong Detroit. Nope, all that matters is that Congress’ pockets are lined with Federal Reserve Notes. As expected, this is a bipartisan effort. From the Huffington Post: WASHINGTON — A bipartisan cadre of House lawmakers will move on legislation to deregulate Wall Street derivatives Wednesday, less than a week after Sen. Carl Levin (D-Mich.) released adevastating report on the multibillion-dollar derivatives debacle at JPMorgan Chase. “It is incredible that less than a week after new JPMorgan Whale hearings detailed how the bank’s London office piled up risk, hid losses, and dodged regulatory oversight, that some House members are again supporting the weakening of derivative safeguards.”

Financial Reform Is Being Dismantled. Why Doesn’t President Obama Seem to Care?  President Obama wants to consign the financial crisis to the past and delegate the implementation of financial reform to others in his administration. But he needs to get personally involved. Why? Because Senator Carl Levin’s recent hearing on the JP Morgan Whale showed that nothing has changed at the largest banks or the bank regulatory agencies since the run up to the financial crisis. In the early months of 2012—two years after passage of the Dodd-Frank Act—JP Morgan acted deceptively, regulators remained clueless, and investors were the last to know about the true magnitude of the bank’s $6.2 billion in losses. Nevertheless, Republicans and some Democrats in Congress are today working to repeal reforms.   Yesterday, House Democrats joined with House Republicans on the Agriculture Committee to support several bills that would “fix” several Dodd-Frank provisions to regulate derivatives, effectively gutting measures designed to rein in bank abuses. Proponents of deregulation—both Democrats and Republicans—were hoping that these bills would move silently through the committee and then the Financial Services Committee, and then quietly onto the floor of the House for passage.

The SEC embraces irony – its enforcement “inflection” “point” By William K. Black Many readers doubtless shared my doubt that the SEC was capable of exercising the critical self-examination and sense of humor about itself as a flawed institution that would make it capable of deliberate irony.  When I accessed the Wall Street Journal’s home page I found the most delicious example of SEC (and WSJ) irony.  The WSJ synopsis of its article on the SEC reads: “The SEC is filing significantly fewer civil fraud cases this year, as its efforts to punish misconduct related to the financial crisis start to ebb.”“Start to ebb?”  Is it only me, or have other readers missed the tidal bore of SEC enforcement cases “punishing” the “misconduct” of the most culpable, elite perpetrators of what even conservative finance scholars describe as “pervasive” accounting control fraud by our “most reputable banks”? Actually, at full tide there were zero prosecutions of elite bankers for the accounting control frauds that drove the financial crisis.  And there were zero civil or enforcement cases by the SEC against the elite officers who grew wealthy through the frauds that drove the financial crisis that actually left the officers suffering a net loss from their frauds and required them to admit their frauds.  The last time the SEC “tide” of enforcement actions against elites resembled even a pale imitation of the Bay of Fundy was a decade ago in response to the Enron-era frauds.  Even then, Eliot Spitzer, then the Attorney General of New York, put the SEC to shame with his far greater success with far fewer resources.

Reforming Money Market Mutual Funds - We analyze the leading reform proposals to address the structural vulnerabilities of money market mutual funds (MMFs). We take the main goal of MMF reform to be safeguarding financial stability. In light of this goal, reforms should reduce the ex ante incentives for MMFs to take excessive risk and increase the ex post resilience of MMFs to system-wide runs. Our analysis suggests that requiring MMFs to have subordinated capital buffers best accomplishes these goals. Subordinated capital provides MMFs with loss absorption capacity, lowering the probability that a MMF suffers losses large enough to trigger a run, and reduces incentives to take excessive risks. We estimate that a capital buffer in the range of 3 to 4% would significantly reduce the probability that ordinary MMF shareholders ever suffer losses. In exchange for having the safer investment product made possible by subordinated capital, the yield paid to ordinary MMFs shareholders would decline by only 0.05%. Capital buffers would generate significant financial stability benefits, while maintaining the current fixed net asset value (NAV) structure of MMFs. Other reform alternatives such as converting MMFs to a floating NAV would be less effective in protecting financial stability.

Most Hedge Funds Underperforming The S&P 500 For Fifth Year In A Row - Full YTD Performance - There is one problem with relentlessly ramping markets (whether due to four years of liquidity injections by the Fed, or due to four years of liquidity injections by the Fed) - they make all those who by definition have to be hedged, seem stupid by comparison. In this case, this means that for the fifth year in a row, the vast majority of brand name hedge funds are once again underperforming the S&P, even though most of them have shifted to the highest net long exposure in history, while charging their increasingly more angry investors 2 and 20 for the privilege of underperforming the most micromanaged asset of all - the S&P500, and its unpaid portfolio manager, Ben Bernanke. And while there are three certain things in life: death, taxes and Paulson being one of the worst performers in the world (perhaps he is moving to Puerto Rico not to avoid paying taxes but to escape furious LPs), as he indeed is for the third year running what is most surprising is that through the middle of March, according to HSBC, every single brand name hedge funds is once again underperforming the S&P.

‘Wash Trades’ Scrutinized - U.S. regulators are investigating whether high-frequency traders are routinely distorting stock and futures markets by illegally acting as buyer and seller in the same transactions, according to people familiar with the probes. Such transactions, known as wash trades, are banned by U.S. law because they can feed false information into the market and be used to manipulate prices. Intentionally taking both sides of a trade can minimize financial risk for the trading firm while potentially creating a false impression of higher volume in the market. The Commodity Futures Trading Commission is focused on suspected wash trades by high-speed firms in futures contracts tied to the value of crude oil, precious metals, agricultural commodities and the Standard & Poor's 500-stock index, among other underlying instruments, the people said. The agency is looking at potential wash trades by multiple high-speed firms, although it isn't known which ones investigators are scrutinizing. Firms found guilty of intentionally distorting the market through wash trades could face hefty fines.

Can Executive Compensation Reform Cure Short-Termism? - Brookings  - There is an increasingly pervasive view among corporate governance observers that senior managers are too focused on short-term results at the expense of long-term interests.  Concerns about “short-termism” have been expressed within the financial industry context and outside of it, but because of the recent financial crisis, much of the discussion has been directed at financial institutions.  To combat short-termism, several commentators have advocated executive compensation reform to encourage senior managers to adopt a longer-term perspective.  Yet these reforms will likely prove ineffective because of other significant pressures on managers to maintain current stock prices.Download and read the full paper » (PDF) Paper highlights include:

  1. A general overview short-termism and the causes and effect of overweighing short-term results relative to long-term consequences when making decisions.
  2. Proposals to redesign compensation structures to combat short-termism.
  3. Questioning the effectiveness of compensation proposals.
  4. A look at the new corporate governance world.
  5. An examination of changes to senior management job security.
  6. Policy proposals for better options to mitigate short-termism.

When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives - Yves Smith - One of the big lessons of the fraught negotiations over bailing out (or more accurately, in) Cyprus’s banks is that deregulating institutions with an implicit or explicit state guarantee is a bad idea. You’ve just given them a license to gamble with the public’s money, and you can rest assured that they will eventually avail themselves of it.. In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders. Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation its depositary in late 2011. As Bloomberg reported Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation

If Deposit Confiscation Happened In The US, It Wouldn't Impact 57% Of Americans - The average US worker remains concerned about their retirement even as the stock market reaches new all-time highs. The WSJ reports new data that shows the impact of stagnating wage growth and aging demographics is combining to squeeze individuals as a depressing 57% of Americans reported less than $25,000 in household savings and investments. On the bright side, the latest and greatest 'Cyprus' tax limit appears to be €20,000, or roughly the $25K threshold in the US, freeing those 'un'-wealthy citizens to keep their hard-earned private property.

US Deposits In Perspective: $25 Billion In Insurance, $9,283 Billion In Deposits; $297,514 Billion In Derivatives - Earlier today, the American Banking Association reminded Americans that there is absolutely nothing to worry about when it comes to the sanctity of US deposits: after all there is a whopping $25 billion in the FDIC insurance fund which means "insured depositors are safe and their deposits are protected by a strong FDIC fund....The FDIC insurance fund has over $25 billion in reserves and the banking industry " Obviously supposedly "insured" depositors in Cyprus also though there was nothing to worry about, until they woke up on Saturday with a haircut between 6.75% and 9.9% on their money in the bank. Sadly, it may be the case that the ABA is being just modestly disingenuous in its statement. Why? Instead of explaining it in detail, here is a snapshot that does more than thousands of words ever could.

Unofficial Problem Bank list declines to 801 Institutions - Here is the unofficial problem bank list for Mar 15, 2013.  This is an unofficial list of Problem Banks compiled only from public sources. Changes and comments from surferdude808:  As anticipated, the OCC released its recent actions this week, which contributed to several change to the Unofficial Problem Bank List. In all, there were seven removals and three additions that leave the list at 801 institutions with assets of $295.6 billion. A year ago, the list held 952 institutions with assets of $379.1 billion. Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The number of unofficial problem banks grew steadily and peaked at 1,002 institutions on June 10, 2011. The list has been declining since then

Fannie Sees Way to Repay Billions - WSJ -  The rebounding housing market has helped return Fannie Mae to profitability and now might allow the government-controlled mortgage-finance company to do the once unthinkable: repay as much as $61.5 billion in rescue funds to the U.S. Treasury.  The potential payment would be the upshot of an accounting move that Fannie Mae's senior executives are looking to make whereby the company would reclaim certain tax benefits that were written down shortly after the company was placed under federal control in 2008. The potential move was disclosed last week in a regulatory filing in which the company said it would delay the release of its annual report, due by Monday, as it tries to reach resolution with its accountants and regulator over the timing of the accounting move.

Government Should Reduce Role in Mortgages, FHFA Chief Says - The U.S. government should scale back its role in the mortgage market to focus on promoting standardized practices in order to ensure that the lending market of the future isn’t dominated exclusively by big banks, a top housing regulator said. Edward DeMarco, the acting director of the Federal Housing Finance Agency, has previously made clear that he doesn’t believe the government needs to provide a guarantee for the bulk of the nation’s mortgages. He elaborated on those views in an appearance Tuesday before the House Financial Services Committee.Mr. DeMarco’s testimony was briefly interrupted by protesters — five of whom were arrested, according to the New Bottom Line, an activist group. They cried out “Dump DeMarco” — an outgrowth of the FHFA’s decision last summer to reject an Obama administration loan assistance program.

Freddie Mac and Its Regulator Faulted Over Servicer Complaints - Freddie Mac and its regulator must do more to ensure loan servicers properly respond to complaints over handling of mortgages held or guaranteed by the U.S.-owned company, according to a government watchdog’s audit report. Servicers who collect payments and deal with borrowers for Freddie Mac failed to implement Federal Housing Finance Agency guidelines for so-called escalated complaints, the FHFA’s Office of Inspector General said in the report released today. Freddie Mac failed to supervise the servicers and FHFA, which oversees the McLean, Virginia-based company and Washington-based Fannie Mae, didn’t ensure the procedures were followed. Servicers that work with Freddie Mac, including Bank of America Corp., Citigroup and Wells Fargo , reported few or no escalated cases -- those that may involve fraud or regulatory violations -- despite having handled such cases, according to the report. Overall, Freddie Mac data on its servicers shows that about 98 percent didn’t report any escalated cases as of December 2012. “FHFA must take immediate action to improve servicer reporting, which will in turn help the agency to ensure that escalated cases are resolved,” the inspector general’s office said in the report. “Strengthened oversight -- through actions aimed specifically at improving servicer compliance with escalated case requirements -- can benefit homeowners, Freddie Mac, and ultimately taxpayers.”

Freddie Mac Indifferent to Homeowner Complaints - That is the finding of a report released yesterday by the Inspector General of FHFA, the agency that oversees our nationalized mortgage funders Fannie Mae and Freddie Mac.  Mortgage servicers are paid incentives by Freddie for quick foreclosures, but not for resolving homeowner complaints about mishandled foreclosure prevention and loss mitigation.  Bank of America took an average of 59 days to resolve homeowner complaints, well beyond the 30-day limit imposed by the servicer alignment initiative, and as of January 2014, by CFPB mortgage servicing regulations. 

Attorneys General Press White House to Fire F.H.F.A. Chief - Prominent state attorneys general are calling on President Obama to fire the acting director of the Federal Housing Finance Agency and name a new permanent director, arguing that current policies are impeding the economic recovery. Under its current leader, Edward J. DeMarco, the F.H.F.A., which oversees the bailed-out mortgage financiers Fannie Mae and Freddie Mac, has refused to put in place a White House proposal to reduce the principal on so-called underwater mortgages — a move that might prevent foreclosures and thus save the mortgage giants money, but also might expose taxpayers to additional losses. Led by Eric T. Schneiderman of New York and Martha Coakley of Massachusetts, the attorneys general argue that writing down the principal on underwater mortgages — those where the outstanding mortgage is greater than the current value of the home — would aid the recovery. They note that write-downs were a central part of a multibillion-dollar mortgage settlement that 49 state attorneys general negotiated with five major banks a year ago. And they say the White House should name a director to take that action.

Fitch And Kroll Are Happy To Make Mortgage Securitization Fun Again -  Bloomberg has a delightful story today about a new JPMorgan RMBS transaction, its first non-agency deal since the crisis. Specifically about this: The bonds are made riskier by the New York-based bank and other originators of the mortgages offering weaker promises to repurchase misrepresented loans than those on similar deals, Fitch Ratings said today in an e-mailed report. Lenders and bond sponsors have been seeking to trim potential liabilities in such deals as the market revives after suffering billions of dollars of losses from debt sold before the collapse in home prices. The value of the so-called representations and warranties in the JPMorgan transaction is “significantly diluted by qualifying and conditional language that substantially reduces lender loan breach liability and the inclusion of sunsets for a number of provisions including fraud,”  So naturally the deal is limited to an Aa rating, as it would be at Moody’s based on those sort of rep and warranty weaknesses, right? Errr not so much: The classes of the deal expected to receive top credit ratings carried loss buffers of 7.4 percent as Fitch said it adjusted its analysis to reflect the greater investor dangers created by the weaker contracts, according to the report.

Updated Table of Short Sales and Foreclosures for Selected Cities in February - Economist Tom Lawler sent me the updated table below of short sales and foreclosures for several selected cities in February.  In every area that has reported distressed sales so far (two right columns), the share of distressed sales is down year-over-year - and down significantly in many areas.   Also there has been a decline in foreclosure sales just about everywhere.  Also there has been a shift from foreclosures to short sales. In most of these areas, short sales now out number foreclosures (Minneapolis and Orlando are exceptions). Another interesting point: short sales are now declining in many areas.  This might be related to sellers rushing short sales last year - before the one year extension of the Mortgage Debt Relief Act of 2007 was announced, and sales declining early in 2013.  Or it might indicate that short sales activity has peaked in some areas (this will be interesting to watch).

CoreLogic: Negative Equity Decreases in Q4 2012 - From CoreLogic: CoreLogic reports 200,000 More Residential Properties Return to Positive Equity in Fourth Quarter of 2012 CoreLogic ... today released new analysis showing approximately 200,000 more residential properties returned to a state of positive equity during the fourth quarter of 2012. This brings the total number of properties that moved from negative to positive equity in 2012 to 1.7 million and the number of mortgaged residential properties with equity to 38.1 million. The analysis also shows that 10.4 million, or 21.5 percent of all residential properties with a mortgage, were still in negative equity at the end of the fourth quarter of 2012. This figure is down from 10.6 million properties, or 22 percent, at the end of the third quarter of 2012. ... At the end of the fourth quarter, 2.3 million residential properties had less than 5 percent equity, referred to as near-negative equity. Properties that are near negative equity are at risk should home prices fall. ...This graph shows the break down of negative equity by state. "Nevada had the highest percentage of mortgaged properties in negative equity at 52.4 percent, followed by Florida (40.2 percent), Arizona (34.9 percent), Georgia (33.8 percent) and Michigan (31.9 percent). These top five states combined account for 32.7 percent of negative equity in the U.S." The second graph shows the distribution of home equity. Just under 10% of residential properties have 25% or more negative equity - it will be long time before those borrowers have positive equity. But other borrowers are close. According to CoreLogic, 1.7 million borrowers returned to positive equity from negative equity in 2012. I expect a similar number will return to positive equity in 2013.

Defying Gravity: Miami Condos Soar Again - During the height of the housing boom, some likened the feverish flipping game in Miami's condominium market to a circus. The circus is back, and more high-flying than ever. At a recent party to launch a new project from New York-based developer PMG, acrobats swung over the crowd, and in gravity-defying flourish, poured champagne into the glasses of wide-eyed investors. "It's exactly what we want. We wanted a little bit of show and a lot of flash," said Kevin Maloney, president of PMG, who re-entered the Miami market in 2010 to purchase some of the remaining beachfront and bayside construction sites. Prices are up nearly 25 percent from a year ago, according to the Miami Area Association of Realtors. How did it happen? Foreign, all-cash buyers like Venezuelans, Russians, Chinese, Canadians, and Brazilians. They were either looking for a safe-haven to park their money or were taking advantage of a weak dollar. Whatever the reason, they came, they saw, they bought.

Housing Bubble II – But This Time It’s Different - We have seen it for several years now: foreclosure sales—there were 5 million since the peak of the housing bubble—have become the hunting grounds for investors with two goals: hanging on to these homes until the Fed’s flood of money drives up their value; and defraying the expenses of ownership by renting them out. And funds have a third goal: collecting management fees. Thousands of smaller investors have piled into the game. And so have the giants. Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg, to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work. Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami. It had an impact. In the latest Case-Shiller report—a three-month moving average for October, November, and December—home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble. Las Vegas popped 12.9%, and Phoenix 23%. It’s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%.

Is The "Buy to Rent" Party Over? - For well over a year now, I have been writing about how this whole “buy to rent” investment strategy is one of the biggest disasters waiting to happen within the U.S. economy.  I have repeatedly noted that these private equity clowns were crowding into these markets with reckless abandon and that this would ultimately crush their business model as there’s no way rents can rise enough to keep yields attractive in a country where most people are struggling to meet their daily expenses.  Well it seems the day of reckoning may be at hand.  From Bloomberg:Rents for single-family homes are rising slower than property prices as firms such asBlackstone Group LP (BX) flood the market with homes for lease, posing risks to investors betting billions on the burgeoning market.Monthly payments for properties in Phoenix rose 1.3 percent in February from a year earlier, compared with a 25 percent jump in for-sale asking prices, according to Trulia Inc. (TRLA), which operates an online listing service. In Atlanta, asking prices climbed 14 percent as single family rents gained 0.5 percent, and in Las Vegas rents dropped 1.7 percent even as asking prices soared 18 percent.

MBA: Mortgage Applications decrease - From the MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier....The refinance share of mortgage activity decreased to 75 percent of total applications from 76 percent the previous week.The refinance share has decreased for ten straight weeks and is at its lowest level since early May 2012. ... The HARP share of refinance applications increased to 31 percent from 30 percent the prior week....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.82 percent from 3.81 percent, with points decreasing to 0.38 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The first graph shows the refinance index. There has been a sustained refinance boom for over a year, but activity has been declining over the last few months.  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

Mortgage applications slide 7.1% - Mortgage applications slipped 7.1% for the week ending March 15, marking the second straight week of declines, an industry trade group said Wednesday. The Mortgage Bankers Association reported fewer applications as home purchase and refinancing activity thawed. The refinance index and the purchase index dropped 8% and 4%, respectively, from the previous week. The refinance share of mortgage activity declined to 75%, making this 10 consecutive weeks of straight declines and the lowest recorded level since May of 2012. The adjustable-rate mortgage share of activity remained steady at 5% of total applications. Additionally, the average 30-year, fixed-rate mortgage with a conforming loan balance rose to 3.82%. The average 30-year, FRM with a jumbo loan balance surged to 3.95% from 3.90%. The average contract interest rate for the 30-year, FRM backed by the FHA remained at 3.53%. Meanwhile, the 15-year, FRM increased to 3.02% from 3.01%, and the 5/1 ARM dropped to 2.59% from 2.62%.

Existing Home Inventory is up 6.0% year-to-date on March 18th - Weekly Update:  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) kindly 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 18th - it appears inventory is increasing at a sluggish rate, but faster than in 2011 and 2012. Housing Tracker reports inventory is down -22.2% compared to the same week in 2012 - still a rapid year-over-year decline.

Existing Home Sales Increase 0.8% for February 2013 - NAR reported their February 2013 Existing Home Sales.  Existing home sales increased 0.8% from last month and inventories increased to a still very tight 4.7 months of supply.   Existing homes sales have increased 10.2% from a year ago.    Volume was 4.98 million against January's 4.94 million, annualized existing home sales. This is the highest level since November 2009, when the first time home buyer tax credit was in full swing.  Inventory of existing homes increased 9.6% for the month or 1.94 million existing homes for sale, a 4.7 months supply and inventory is down 19.2% from a year ago.  Inventories by months to sell at current sales volume is now at 2005 levels.  Short supply also partially explains the increasing prices.  The national median existing home sales price, all types, is up, now at $173,600, a 11.6% increase from a year ago. The average home price for February was $221,700, a 10.0% annual increase and up 1.5% from November.  According to NAR, we have bubble like price increases and may very well have much to do with the Federal Reserve mortgage backed securities purchases, known as quantitative easing.  The Fed's move is keeping mortgage interest rates at record lows.  The last time there were 12 consecutive months of year-over-year price increases was from June 2005 to May 2006. The February gain is the strongest since November 2005 when it was 12.9 percent above a year earlier.According to RealtyTrac, foreclosure filings are down bank repossessions are at a 65 month low, but foreclosure starts increased 10% for the month. Below is the breakdown by types of existing home sales by time and a quarter of February sales are distressed properties.

US Home Sales Highest in More Than 3 Years U.S. sales of previously occupied homes rose in February to their fastest pace in more than three years, and more people put their homes on the market. The increases suggest a growing number of Americans believe the housing recovery will strengthen. The National Association of Realtors said Thursday that sales increased 0.8 percent in February from January to a seasonally adjusted annual rate of 4.98 million. That was the fastest sales pace since November 2009, when a temporary home buyer tax credit had boosted sales. The February sales pace was also 10.2 percent higher than the same month a year ago. Steady hiring and near-record-low mortgage rates have helped boost sales and prices in most markets. The Realtors’ group says the median price for a home sold in February was $173,600. That’s up 11.6 percent from a year ago. More people are also starting to put their homes on the market, which could help sales in the coming months. The number of available homes for sale rose 10 percent last month, the first monthly gain since April. Even with the gain, the inventory of homes for sale was still 19 percent below a year ago.

Existing Home Sales in February: 4.98 million SAAR, 4.7 months of supply - The NAR reports: Existing-Home Sales and Prices Continue to Rise in February Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 0.8 percent to a seasonally adjusted annual rate of 4.98 million in February from an upwardly revised 4.94 million in January, and are 10.2 percent above the 4.52 million-unit level seen in February 2012. Total housing inventory at the end of February rose 9.6 percent to 1.94 million existing homes available for sale, which represents a 4.7-month supply 2 at the current sales pace, up from 4.3 months in January, which was the lowest supply since May 2005. Listed inventory is 19.2 percent below a year ago when there was a 6.4-month supply.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in February 2013 (4.98 million SAAR) were 0.8% higher than last month, and were 10.2% above the February 2012 rate.  The second graph shows nationwide inventory for existing homes.The last graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.  Inventory decreased 19.2% year-over-year in February from February 2012. This is the 24th consecutive month with a YoY decrease in inventory, but the smallest YoY decrease since 2011 (I expect the YoY decrease to get smaller all year). Months of supply increased to 4.7 months in February.

Existing Home Sales: Conventional Sales up Sharply - The NAR reported total sales were up 10.2% from February 2012, but conventional sales are probably up closer to 25% from February 2012, and distressed sales down.  The NAR reported (from a survey): Distressed homes - foreclosures and short sales - accounted for 25 percent of February sales, up from 23 percent in January but down from 34 percent in February 2012. Although this survey isn't perfect, if total sales were up 10.2% from February 2012, and distressed sales declined from 34% of total sales to 25%, this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying, although the NAR is reporting investors are buying about the same percentage as a year ago:  Investors, who account for most cash sales, purchased 22 percent of homes in February, up from 19 percent in January; they were 23 percent in February 2012. Of course inventory is the key number in the NAR report.  The NAR reported inventory increased to 1.94 million units in February, up from 1.77 million in January.  Some of this increase was seasonal, and this is still a very low level of inventory - but this might be an early hint that the inventory contraction is ending. Still inventory is down sharply year-over-year; down 19.2% from February 2012.  But this is the smallest year-over-year decline since 2011.  This graph shows inventory for February since 2001. In 2005 inventory kept rising all year - and that was a clear sign that the housing bubble was ending.  Inventory was very high from 2006 through 2011, and started declining in 2012.  This was the lowest level of inventory for the month of February since 2001. The months-of-supply increased to 4.7 months (still very low).  Since months-of-supply uses Not Seasonally Adjusted (NSA) inventory, and Seasonally Adjusted (SA) sales, I expect months-of-supply to continue to increase for the next few months. The following graph shows existing home sales Not Seasonally Adjusted (NSA).

Lawler: The “Strange Case” of the NAR’s Regional Existing Condo/Co-op Sales - From economist Tom Lawler: The National Association of Realtors estimated that existing home sales ran at a seasonally adjusted annual rate of 4.98 million in February, up 0.8% from January’s upwardly-revised (to 4.94 million from 4.92 million, though unadjusted sales were not revised) pace. While the NAR’s estimate was slightly below consensus, it was above my estimate based on regional tracking – mainly, it appears, because of a “most strange” surge in condo/co-op sales in the South not reflected in local realtor reports.  The NAR estimated that existing SF home sales ran at a SAAR of 4.36 million in February, down 0.3% from January’s pace – an estimate that seems broadly consistent with regional realtor/MLS reports. In sharp contrast, the NAR estimated that existing condo/co-op sales ran at a SAAR of 620,000, up 8.8% from January’s pace – with condo/co-op sales on the South purportedly up 20.8% on a seasonally adjusted basis on the month, and up 29.4% on an unadjusted basis from last February’s pace. This gain seems especially suspect given that Florida Realtors (formerly the Florida Association of Realtors) reported that existing condo and townhome sales by realtors in Florida (the “condo capital” of the South) in February were up only 7.0% from last February’s pace! Quite frankly, the NAR’s estimates for existing condo/co-op sales don’t “smell” right.  Below is a table showing historical estimates of regional existing condo/co-op sales from the NAR, expressed as a seasonally adjusted annual rate. Note all the periods where seasonally adjusted sales in a region were exactly the same for at least three consecutive months.

Analysis: Realtors’ Economist Sees Higher Home Prices in 2013 - Lawrence Yun, chief economist at the National Association of Realtors, talks with the Wall Street Journal’s Jim Chesko about a report showing that sales of previously owned properties grew last month to the highest level in more than three years. In addition, more people put their properties up for sale, a sign that the improving housing market will lift the economy this year. Existing-home sales increased 0.8% in February from a month earlier to a seasonally adjusted annual rate of 4.98 million; sales were 10.2% above the same month a year earlier.

Housing Starts increase to 917 thousand SAAR in February - From the Census Bureau: Permits, Starts and Completions - Privately-owned housing starts in February were at a seasonally adjusted annual rate of 917,000. This is 0.8 percent above the revised January estimate of 910,000 and is 27.7 percent above the February 2012 rate of 718,000. Single-family housing starts in February were at a rate of 618,000; this is 0.5 percent above the revised January figure of 615,000. The February rate for units in buildings with five units or more was 285,000. Privately-owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 946,000. This is 4.6 percent above the revised January rate of 904,000 and is 33.8 percent above the February 2012 estimate of 707,000.Single-family authorizations in February were at a rate of 600,000; this is 2.7 percent above the revised January figure of 584,000. Authorizations of units in buildings with five units or more were at a rate of 316,000 in February. The first graph shows single and multi-family housing starts for the last several years. Multi-family starts (red, 2+ units) increased slightly in February.  Single-family starts (blue) increased to 618,000 thousand in February and are at the highest level since June 2008.The second graph shows total and single unit starts since 1968.

Housing Starts Rebound In February - The trend is still the business cycle's friend when it comes to residential construction activity. Housing starts rebounded modestly in February, rising 0.8% to 917,000 on a seasonally adjusted annual basis, the Census Bureau reports. The slight gain follows January’s hefty 7.3% decline. In contrast to the volatility of the monthly data, the year-over-year comparison for starts remains strong, as today’s update shows. A similar story applies to newly issued housing permits, which suggests that residential construction activity will continue to advance in the spring. Even on a monthly basis, the positive trend is clear. Both starts and permits continue to rise. This is what a housing recovery looks like. Starts are below the post-recession peak set in December 2012, but not by much. Meanwhile, permits reached a new post-recession high in today’s February release, touching a seasonally adjusted annual rate of 946,000 last month.

U.S. Housing Starts Rise, Permits at 4 ½-Year High - U.S. builders started more houses and apartments in February, while requesting permits for future construction at the fastest pace in 4 ½ years. The increases point to a housing recovery that is gaining strength. The Commerce Department said Tuesday that builders broke ground on homes last month at a seasonally adjusted annual rate of 917,000. That’s up from 910,000 in January. And it’s the second-fastest pace since June 2008, behind December’s pace of 982,000. Single-family home construction increased to an annual rate of 618,000, the most in 4 ½ years. Apartment construction also ticked up, to 285,000. The gains are likely to grow even faster in the coming months. Building permits, a sign of future construction, increased 4.6 percent to 946,000. That was also the most since June 2008, just a few months into the Great Recession.

A few comments on Housing Starts - A few comments:
• Total housing starts in February were up 27.7% from the February 2012 pace. Single family starts were up 31.4%. This is a very strong year-over-year increase.
• Even with this significant increase, housing starts are still very low. Starts averaged 1.5 million per year from 1959 through 2000, and demographics and household formation suggests starts will return to close to that level over the next few years. That means starts will probably increase more than 60% from the current level (917 thousand SAAR in February).
• Residential investment and housing starts are usually the best leading indicator for economy.  Nothing is foolproof as a leading indicator, but this suggests the economy will continue to grow over the next couple of years.
Here is an update to the graph comparing multi-family starts and completions. Since it usually takes over a year on average to complete a multi-family project, there is a lag between multi-family starts and completions. Completions are important because that is new supply added to the market, and starts are important because that is future new supply (units under construction is also important for employment). These graphs use a 12 month rolling total for NSA starts and completions

Chart Of The Day: Housing Starts - Found In Seasonal Translation... Again - Today, we got more great news on the housing front as housing starts rose from an upward revised 910K (was 890K) to 917K, modestly beating expectations of a 915K print. This was a blistering number, and as the mainstream media will have you know, was the second highest since early 2008, lower only compared to the very amusing 982K starts recorded in the dead of winter in December of 2012. All of this would be great if it didn't have one rather profound two-word caveat: "seasonally-adjusted." What happens when one strips away the Arima-X-12 seasonal adjustments? We have the answer! As the chart below shows, when one maps the seasonal pattern in the winter, the November-February three month period, one gets the following chart. What one doesn't get, is how a 0.2K increase in not-seasonally adjusted housing starts (from 62.2K to 62.4) manifests itself in a 76K surge in seasonally adjusted house starts.

Gains in Permits Signal Sustained U.S. Housing Rebound -  Builders began work on more houses in February and permits for future construction climbed to the highest level in almost five years, pointing to a sustained rebound that will help power the U.S. expansion.  Housing starts climbed by 0.8 percent last month to a 917,000 annualized pace, the Commerce Department reported today in Washington. Permits rose 4.6 percent to a 946,000 rate, the most since June 2008.  Advances in residential construction will probably give an even bigger boost to growth this year than in 2012, when it contributed for the first time in seven years. Building permits increased last month from a 904,000 annual rate in January and compared with a 925,000 median forecast. A higher ratio of permits to starts signals home construction will pick up.

Vital Signs Chart: Strength in Home Construction - Home construction is showing strength heading into real estate’s key spring sales season. Housing starts climbed to a seasonally adjusted annual rate of 917,000 in February, up 0.8% from January. Building permits, which are less vulnerable to winter effects than starts, also gained, rising 4.6% last month. The strong results reflect the housing sector’s slow but steady recovery.

Surprise Demand for Housing Catches Industry Off-Guard - The housing turnaround seems to have caught almost everyone in the business by surprise. As desirable as the long-awaited improvement may be, the unusually low level of homes for sale is creating widespread problems for buyers and sellers alike, leading to bidding wars and bubblelike price jumps in places that not long ago were suffering from major declines. In the Sacramento area, where the housing bust took an especially heavy toll, the median sales price has surged 16 percent over the last year, according to Zillow.  Nationwide, sales prices rose 7.3 percent over the course of 2012, according to the Standard & Poor’s Case-Shiller index, ranging from a slight decline in New York to a surge of 23 percent in Phoenix. Tracking more closely with the national trend were cities like Dallas, up 6.5 percent; Tampa, which rose 7.2 percent; and Denver, which gained 8.5 percent. In many areas, builders are scrambling to ramp up production but face delays because of the difficulty of finding construction workers and in obtaining permits from suddenly overwhelmed local authorities. At the same time, homeowners — many of them lifted above water for the first time in years — often remain reluctant to sell, either because they want to wait and see how much further prices will climb or because they are afraid of being displaced in the sudden buying frenzy.

Houses Are Getting Bigger Again - The sequester will hurt government spending, and higher taxes may slow consumer spending. But the U.S. housing sector looks willing and able to be an important contributor to growth this year. Housing starts rose 0.8% to 917,000 in February, with single-family homes alone rising to their highest level since June 2008. Building permits increased to 946,000, also the best reading in almost five years. What is important to the outlook, especially on the labor front, is that the number of housing starts isn’t the only home-related item increasing. So is the size of a new home. The median new single-family home shrank about 6% during the housing bust, but it has rebounded since then. According to Commerce Department data, the median size of a new home started last year stood at a record 2,309 square feet, surpassing the previous high of 2,259 in 2006.Since a bigger home usually requires more materials and labor input, the combination of more homes and bigger home size should add to economic activity and payrolls this year. The turn is already evident. Residential construction added slightly to 2012 gross domestic product growth. Construction payrolls started increasing again last summer and are rising at a 30,000 monthly pace over the last five months. The average work week in construction also has drifted higher over the past two years.

Lumber Prices up Sharply, Suppliers Scramble to Keep Up - From the WSJ: Amid Housing Recovery, Humble Plywood Shines Anew - Growing demand and tight supplies have pushed up plywood prices by 45% in the past year, and U.S. producers are scrambling to get back up to speed after slashing output of the basic construction material during the housing bust. Georgia-Pacific, the largest U.S. producer of plywood, will announce Friday it plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20%.  With demand rising, the composite price for structural panels, which includes plywood and other wood products, jumped to $511 per thousand square feet on March 15 this year, up 45% from $351 in mid-March a year ago,  This graph shows two measures of lumber prices (not plywood): 1) Framing Lumber from Random Lengths through last week (via NAHB), and 2) CME framing futures. Lumber prices are now at 2004 and 2005 levels.  Demand is far below the levels during the housing bubble, but supply has fallen sharply too.

Builder Confidence declines in March to 44 - The National Association of Home Builders (NAHB) reported the housing market index (HMI) decreased 2 points in March to 44. Any number under 50 indicates that more builders view sales conditions as poor than good. From the NAHB: Builder Confidence Slips Two Notches in March Builder confidence in the market for newly built, single-family homes paused for a third consecutive month in March, with a two-point reduction to 44 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. While the HMI component gauging current sales conditions declined four points to 47, the component gauging sales expectations in the next six months and the component gauging traffic of prospective buyers both posted gains, of one point to 51 and three points to 35, respectively, in March. This graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the January data for starts (February housing starts will be released tomorrow). This was below the consensus estimate of a reading of 47.

AIA: Architecture Billings Index increases, Strongest Growth since 2007 - Note: This index is a leading indicator primarily for new Commercial Real Estate (CRE) investment.  From AIA: Architecture Billings Index Continues to Improve at a Healthy Pace With increasing demand for design services, the Architecture Billings Index (ABI) is continuing to strengthen. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the February ABI score was 54.9, up slightly from a mark of 54.2 in January. This score reflects a strong increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.8, higher than the reading of 63.2 the previous month – and its highest mark since January 2007.This graph shows the Architecture Billings Index since 1996. The index was at 54.9 in February, up from 54.2 in January. Anything above 50 indicates expansion in demand for architects' services.Every building sector is now expanding and new project inquiries are strongly positive (highest since January 2007). Note: This includes commercial and industrial facilities like hotels and office buildings, multi-family residential, as well as schools, hospitals and other institutions.

More Americans debt-free, but the rest owe more: More Americans are debt-free than in 2000, but the ones who have debt owe nearly 40% more, and seniors have the biggest percentage increase in debt, the Census Bureau said Thursday. The percentage of U.S. households carrying any debt dropped to 69% in 2011 from 74% in 2000, the government reported. But the median debt load rose to $70,000, from an inflation-adjusted $50,971. Debt owed by seniors doubled, to a median of $26,000, according to the Census. A median figure means that half of households carry more debt while half carry less. The government's data said seniors' rising housing debt led the increase in their overall debt load. But they also are more likely than before the recession to have unsecured debt or even student loans, often incurred as they try to help their adult children cope with job loss, divorce or education costs, "We've known for five-plus years that seniors are falling into debt, and it's very troubling,'' . "Most of us have this idealized concept of riding into the sunset with a paid-off house. Unfortunately, that isn't the case.'' The Census Bureau also said that, through 2011, the median household had a 16% lower net worth than in 2000. The big swings during the decade — moving higher between 2000 and 2006 before big declines — reflected the swings in housing prices, the bureau said.

Household Debt Up, Net Worth Down, Since 2000 - The Census Bureau has updated its household debt and wealth numbers to include the year 2011. The comparison period is 2000-2011. I've written enough this week, and these charts and notes mostly speak for themselves. I don't have to tell you what this means. You already know what it means.

Older Households Load Up on Debt - WSJ  - America's seniors are becoming more likely to increase their debt—and saw the biggest percentage jump in borrowing relative to other groups over the past decade. The median level of debt among households led by someone 65 and older—the level at which 50% are above and below—rose nearly 120% between 2000 and 2011 from roughly $12,000 to $26,000, due largely to rising mortgage debt, according to a Census report released Thursday. The report raises concerns about the financial health of older Americans at a time when many are worried they lack the savings and investments to retire comfortably. The recession damaged many seniors' nest eggs and fewer Americans are saving as much for retirement. The Federal Reserve's strategy for spurring the economy—low interest rates—has the impact of reducing returns for seniors on safer investments. Older households "are less likely to own their homes free and clear than was once the case," said Richard Fry, an economist at the Pew Research Center. Increased homeownership by seniors explains some of the increased debt, but older Americans have also ramped up use of "home-equity" loans, where consumers borrow against the equity in their homes, he said.

Which Cities Are Best and Worst at Budgeting? - Many Americans around the country have no clue what they spend on things like housing, food and entertainment. But a new study sheds light on where the worst “budgeters” are: Florida, Nevada, Georgia and the Rust Belt. In a new report,, a credit-card comparison website, says over 50% of U.S. consumers don’t keep a budget—and more than one in five don’t have a good idea of their spending. To figure out where the biggest offenders are, CardHub ranked the 30 biggest metro areas based on six factors: credit scores; debt-to-income ratios; combined bankruptcy and foreclosure rates; amount of “revolving” (credit card) debt adjusted for cost of living; total debt-to-median home price ratio; and non-housing expenses adjusted for cost of living, relative to average income. Here’s what they found:

US Restaurant Spending "Pretty Ugly" In February - February marks the first three-months of consecutive declines in restaurant sales in almost three years as Bloomberg reports consumers caught in "an emotional moment" spooked by higher payroll taxes, surging healthcare premia, and spiking energy costs. "February was pretty ugly" for many chains after January delivered an initial blow." Malcolm Knapp notes that "it's important to keep in mind that companies also are facing unusually tough comparable sales because of favorable weather in 2012," so the result is an industry that’s been "a lot softer so far this year." "People are acting fearfully, or you could almost say rationally in a way,” because it’s not surprising they change their dining habits when they feel less confident; as once again it's the middle class that appears under pressure. Casual dining is "definitely being squeezed" because "it's not food on-the-go and it's not high-end food for people trying to treat themselves."

Hotels: Occupancy Rate near pre-recession levels - Another update on hotels from STR: US results for week ending 16 March In year-over-year comparisons, occupancy was up 1.4 percent to 66.6 percent, average daily rate rose 4.5 percent to US$112.05 and revenue per available room increased 5.9 percent to US$74.66.  The 4-week average of the occupancy rate is close to normal levels. The following graph shows the seasonal pattern for the hotel occupancy rate using the four week average.The occupancy rate will increase seasonal over the next few weeks and then move sideways until summer vacation travel starts. This occupancy rate has improved from the same period last year - and is close to pre-recession levels.

Weekly Gasoline Price Update: Down a Penny or Two It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Gasoline prices fell again last week. Rounded to the penny, the average for Regular dropped one cent and Premium two cents. This is the third weekly decline (albeit a small one) after eleven weeks of price rises.According to, three states, Hawaii and California and Alaska are averaging at or above $4.00 per gallon, unchanged from last week, but this week our nation's capital joins them. One state (New York) is averaging above $3.90, down from two states (plus DC) a week ago. Earlier this month Business Insider featured a chart illustrating the gasoline price trend over the course of a year.

DOT: Vehicle Miles Driven increased 0.5% in January - The Department of Transportation (DOT) reported: Based on preliminary reports from the State Highway Agencies, travel during January 2013 on all roads and streets in the nation changed by +0.5 percent (1.2 billion vehicle miles) resulting in estimated travel for the month at 226.9 billion vehicle-miles. This total includes 71.6 billion vehicle-miles on rural roads and 155.3 billion vehicle-miles on urban roads and streets. The following graph shows the rolling 12 month total vehicle miles driven.  Traffic was up slightly in all regions. The rolling 12 month total is still moving sideways.The second graph shows the year-over-year change from the same month in the previous year. Gasoline prices were down in January compared to January 2012. In January 2013, gasoline averaged of $3.39 per gallon according to the EIA. In 2012, prices in January averaged $3.44 per gallon.   However prices spiked in February, and that will probably impact miles driven in the next monthly report.

Vehicle Miles Driven: Population-Adjusted Hits Yet Another Post-Crisis Low -  The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through January. Travel on all roads and streets changed by 0.5% (1.2 billion vehicle miles) for January 2013 as compared with January 2012. The 12-month moving average of miles driven increased only 0.24% from January a year ago (PDF report). And the civilian population-adjusted data (age 16-and-over) has set yet another post-financial crisis low. Here is a chart that illustrates this data series from its inception in 1970. I'm plotting the "Moving 12-Month Total on ALL Roads," as the DOT terms it. See Figure 1 in the PDF report, which charts the data from 1987. My start date is 1971 because I'm incorporating all the available data from the DOT spreadsheets. The rolling 12-month miles driven contracted from its all-time high for 39 months during the stagflation of the late 1970s to early 1980s, a double-dip recession era. The most recent decline has lasted for 62 months and counting — a new record, but the trough to date was in November 2011, 48 months from the all-time high. Total Miles Driven, however, is one of those metrics that should be adjusted for population growth to provide the most revealing analysis, especially if we're trying to understand the historical context. We can do a quick adjustment of the data using an appropriate population group as the deflator. I use the Bureau of Labor Statistics' Civilian Noninstitutional Population Age 16 and Over (FRED series CNP16OV). The next chart incorporates that adjustment with the growth shown on the vertical axis as the percent change from 1971.

Natural gas is 80% cheaper than oil on an energy-equivalent basis, and can save commercial truck fleets a bundle - The chart above is an update of one I’ve featured before showing the percentage price difference between natural gas on an energy equivalent basis from January 1994 to February 2013. To compare oil (priced in dollars per barrel) and natural gas (priced in dollars per million BTUs) on an energy equivalent basis, natural gas prices have to be increased by a factor of 5.8, because one barrel of oil produces 5.8 million BTUs of energy. Relative to the price of oil, natural gas prices have been falling steadily since early 2006, and are now almost 80% cheaper than oil on an energy-equivalent basis.  That’s a real game-changer and is providing huge cost-saving incentives to switch from gasoline to natural gas and its derivatives to power vehicles, especially the commercial variety. For example, consider this report from AutoBlog today: Thanks to the precipitous drop in prices for compressed natural gas (CNG) and liquid propane (LPG), fleets can save a fortune by switching over to these fuels. OEMs such as Freightliner and Thomas Built Bus have jumped into the market. International now offers the Transtar Class 8 semi (above) that runs on CNG. A cost calculator on the truck maker’s website shows that a fleet can save well over $150,000 in fuel costs over the six-year life of a truck. For fleets that run their per-mile operating costs to the penny, this is a financial windfall.

ATA Trucking Index increases in February - From ATA: ATA Truck Tonnage Index Edged Higher In February - The American Trucking Associations’ advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index rose 0.6% in February after increasing 1% in January. (The 1% gain in January was revised down from a 2.4% increase ATA reported on February 19, 2013.) Tonnage has now increased for four straight months, which hasn’t happened since late 2011. Over the last four months, tonnage gained a total of 7.7%. In February, the SA index equaled 123.6 (2000=100) versus 123.0 in January. The highest level on record was December 2011 at 124.3. Compared with February 2012, the SA index was up a solid 4.2%, just below January’s 4.6% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 4.4%. In 2012, tonnage increased 2.3% from 2011.  Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.  Here is a long term graph that shows ATA's For-Hire Truck Tonnage index. The dashed line is the current level of the index.

FedEx cuts forecasts and Asia capacity - FedEx plans to cut trans-Pacific capacity and push traffic towards lower-cost transport modes after a “radically changed” international trading situation prompted the package delivery operator to cut its full-year forecasts. Fred Smith, chief executive, said the company had experienced “very challenging” conditions in the quarter to February 28, with net income down 31 per cent down on last year. He blamed continuing poor air freight markets, overcapacity in package delivery and customers’ continued shift towards lower-cost transport modes. Mr Smith said the company would decrease flights between North America and Asia starting on April 1. It would also “aggressively manage” traffic flows to place lower-yielding business in lower-cost networks. The company was assessing how those moves might allow FedEx to retire some older, less efficient aircraft. “Policy decisions and the cost of fuel have radically changed the international trading situation,” Mr Smith told investors on a conference call. Significant new capacity had also come into the international air freight market, Mr Smith added – capacity has grown both because of the introduction of new wide-body passenger aircraft and dedicated freighters.

LA area Port Traffic increases year-over-year in February - I've been following port traffic for some time. Container traffic gives us an idea about the volume of goods being exported and imported - and possibly some hints about the trade report for February. LA area ports handle about 40% of the nation's container port traffic. The following graphs are for inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). To remove the strong seasonal component for inbound traffic, the first graph shows the rolling 12 month average. On a rolling 12 month basis, inbound traffic was up 4% in February, and outbound traffic down slightly, compared to the rolling 12 months ending in January. In general, inbound traffic has been increasing slightly recently, and outbound traffic has been mostly moving sideways.The 2nd graph is the monthly data (with a strong seasonal pattern for imports). For the month of February, loaded outbound traffic was up 4% compared to February 2012, and loaded inbound traffic was up sharply. This suggest an increase in the trade deficit with Asia for February

Not Much Grade Inflation Here - The American Society of Civil Engineers (ASCE) has released its 2013 Infrastructure Report Card, and the overall grade has inched up from a D in 2009 to a D+ this year. The estimated amount required to address deficiencies (to get a grade of B) is $3.6 trillion by 2020. As this table makes clear, of the $3.6 trillion, only $2.0 trillion is likely to be funded, leaving a $1.6 trillion gap. That's an additional $200 billion per year for eight years. A lot of the infrastructure we have is at the end of its useful life. We continue to be lucky rather than smart in avoiding widespread failure. This is an important report that should be read and appreciated in Washington. Like many other advanced warnings, it is likely to be ignored until the subject becomes an imminent crisis. At one level, the inability for the federal government to oversee adequate infrastructure is just another in a long line of failures of government to effectively do the things that even a person who believes in limited government would agree that it should do. Many of these projects, like transportation, energy, parks, drinking water, education, and waste management, have characteristics of public goods.  At another level, the continued deficiencies in infrastructure are a missed opportunity. The prevailing wisdom for what to do during a downturn was deficit spending to boost economic activity in ways that are "timely, targeted, and temporary." I thought this was short-sighted -- the right thing to do during a downturn is to advance forward capital projects that have already been planned over a window of several years.  What is saddest about today's report is that we are no closer to having a well defined plan for replacing antiquated infrastructure or adding critical infrastructure than we were four years ago.

Vital Signs Chart: Industrial Output Near Prerecession Levels - American factories boosted production in February. The Federal Reserve’s Industrial Production Index — a gauge of output by factories, utilities and mines — rose a seasonally adjusted 0.7% from January. Manufacturing output rose 0.8%, driven by cars and business equipment. Industrial production weakened last fall amid a global slowdown in trade but has since rebounded to the strongest level since March 2008.

Philly Fed Index Shows Manufacturing Expansion - Business conditions for mid-Atlantic manufacturers moved back into expansion this month, according to a report released Thursday by the Federal Reserve Bank of Philadelphia.The Philadelphia Fed said its index of general business activity within its regional factory sector increased to 2.0 after it unexpectedly fell to -12.5 in February from -5.8 in January.Economists surveyed by Dow Jones Newswires expected the latest index to improve but only to -2.0. Readings under zero denote contraction, and above-zero readings denote expansion.

Philly Fed Business Outlook: Manufacturers Report Slight Increases - The Philly Fed's Business Outlook Survey is a monthly report for the Third Federal Reserve District, covers eastern Pennsylvania, southern New Jersey, and Delaware. Today's report shows a slight increase after two months of contraction. However, the 3-month moving average fell to -5.4, the ninth negative reading in ten months. Since this is a diffusion index, negative readings indicate contraction, positive ones indicate expansion. Here is the introduction from the Business Outlook Survey released today: Manufacturers responding to the March Business Outlook Survey reported slight increases in business activity this month. Indicators for general activity and neworders increased notably, following negative readings over the previous two months. Indicators for shipments and employment remained positive and improved slightly this month. Changes in the survey's broad indicators of future activity were mixed but continued to reflect general optimism about growth over the next six months. (Full PDF ReportThe first chart below gives us a look at this diffusion index since 2000, which shows us how it has behaved in proximity to the two 21st century recessions. The red dots show the indicator itself, which is quite noisy, and the 3-month moving average, which is more useful as an indicator of coincident economic activity.

Philly Fed Manufacturing Survey Shows Expansion in March .. from the Philly Fed: March Manufacturing Survey Manufacturers responding to the March Business Outlook Survey reported slight increases in business activity this month. Indicators for general activity and new orders increased notably, following negative readings over the previous two months. Indicators for shipments and employment remained positive and improved slightly this month. Changes in the surveyʹs broad indicators of future activity were mixed but continued to reflect general optimism about growth over the next six months. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of -12.5 in February to 2.0 this month ... The new orders index increased from a reading of -7.8 in February to 0.5, its first positive reading in three months. The employment index increased from 0.9 in February to 2.7 this month, its second consecutive positive reading. Last week, the Empire State manufacturing survey also indicated expansion in March. Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through March. The ISM and total Fed surveys are through February. The average of the Empire State and Philly Fed surveys increased in March, and is back above zero.   This suggests the ISM manufacturing index will show further expansion in March.

Manufacturing employment: Nothing to see here, move along… Dylan Matthews at Wonkblog posts a graph from Robert Lawrence and Lawrence Edwards that purports to show manufacturing employment declines are simply a capitalist inevitability. It’s essentially this graph: So, if manufacturing employment is always shrinking as a share of overall employment, the implicit argument is that nothing– say very large trade deficits that characterized the past decade and a half in the American economy – can really affect this trend one way or the other. This is one of those few times, however, that one should actually go shallower, not deeper, to see if there’s really a story here. This graph shows manufacturing employment not as a share of the total, but simply in levels. For 35 years manufacturing employment levels were actually very stable – running between 16.5 million and 19.5 million (depending simply on the business cycle), and, never falling beneath this 16.5 million floor. Then, manufacturing employment fell through this floor (literally and figuratively) and never recovered.

Veterans Face Elevated Unemployment Rates - A decade after the launch of the war in Iraq, one troubling legacy is clear: persistently high unemployment among veterans. Veterans who served in Iraq or Afghanistan (or in many cases, both) had an unemployment rate of 10.9% in August 2012, according to new data released by the Labor Department on Wednesday. Among nonveterans, the unemployment rate was 7.9% at the time. Among the broader population of veterans who have served on active duty since September, 2011 — wherever they served — the unemployment rate was 9.9%, still significantly higher than for both non-veterans and for veterans of earlier conflicts. Those who served during the first Gulf War had an unemployment rate of just 5.9%. Unemployment among post-Sept. 11 veterans has been a persistent problem, despite various public and private-sector programs to put them back to work. The issue is partly one of demographics. The typical veteran of what the Labor Department refers to as “Gulf War era II” is male and under age 35 — two groups with elevated unemployment rates in the population at large. But demographics alone don’t explain the gap. The unemployment rate for Gulf War era II vets between ages 25 and 34 is 10.6%; for those under age 25, it is over 20%. Both figures are well above the equivalent rates for civilians, or even just civilian men.

BLS: No State had double digit unemployment in January 2013 - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were little changed in January. Twenty-five states and the District of Columbia recorded unemployment rate increases, 8 states posted decreases, and 17 states had no change, the U.S. Bureau of Labor Statistics reported today. .. California and Rhode Island recorded the highest unemployment rates among the states in January, 9.8 percent each. 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 for the first time since late 2008 (Note: with revisions, no state had double a digit unemployment rate in Dec 2012 too). In early 2010, 18 states and D.C. had double digit unemployment rates.

US Unemployment Rate Rose in 25 States, Fell in 8, No Change in 17 - Meanwhile, USA Today reports jobless rates rose in 25 states, D.C. Unemployment rates rose in 25 states and the District of Columbia in January, but almost half the states posted rates significantly lower than the national 7.9%, the government reported Monday. Unemployment fell in eight states and 17 states had no change from December, the Labor Department said in its monthly report on the labor market in all 50 states. North Dakota again had the lowest rate at 3.3%. California and Rhode Island tied for the highest unemployment rate — 9.8%. Nevada, which had the second-highest rate, was at 9.7%. Its rate dropped 2.3 percentage points, the most of any state. Nine states reported significant increases in unemployment rates in January, the government said. Illinois and Mississippi had the largest ones — 0.4 percentage point. Illinois' rate rose to 9% and Mississippi's was 9.3%.Here is the official Regional Unemployment Report from the BLS.

Jobless Rates Worst on the Coasts - Jobless woes beset states large and small as well as the East and West coasts in January, but the nation’s midsection continued to thrive. California and Rhode Island tied for the highest unemployment rate, 9.8%, according to the latest snapshot of the regional and state unemployment situation, out Monday from the Labor Department. The column of six states from North Dakota down to Texas had an average unemployment rate of 4.7%, well below the national level of 7.9% in January. (The U.S. jobless rate since has dropped another 0.2 percentage points, sliding to 7.7% in February.) According to the report, conditions stayed relatively static between December 2012 and January 2013 — but improved markedly over the past year. The national unemployment rate — basically flat between the end of last year and January — fell 0.4 percentage points, to 7.9%, during the first month of the year from January 2012. The report reflects a labor market that, judging by weekly and monthly benchmarks, is making slow but steady progress. Both coasts, from Maine through Florida in the East and Washington through California in the West, have significant pockets of weakness, and many economists warn that the full effects of both federal budget cuts and 2013 tax increases have yet to play out.  See the full map.

Weekly Initial Unemployment Claims increase to 336,000 - The DOL reports: In the week ending March 16, the advance figure for seasonally adjusted initial claims was 336,000, an increase of 2,000 from the previous week's revised figure of 334,000. The 4-week moving average was 339,750, a decrease of 7,500 from the previous week's revised average of 347,250. The previous week was revised up from 332,000. The following graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 339,750 - this is the lowest level since early February 2008.

Weekly Unemployment Claims: Up 2,000 But Less than Forecast - The Unemployment Insurance Weekly Claims Report was released this morning for last week. The 336,000 new claims number was a 2,000 increase from the previous week's 334,000, an upward adjustment from the previously reported 332,000. The less volatile and closely watched four-week moving average, which is usually a better indicator of the recent trend, declined by 7,500 to 339,750. This indicator is approaching 2007 pre-recession levels around 330K. Here is the official statement from the Department of Labor:In the week ending March 16, the advance figure for seasonally adjusted initial claims was 336,000, an increase of 2,000 from the previous week's revised figure of 334,000. The 4-week moving average was 339,750, a decrease of 7,500 from the previous week's revised average of 347,250. The advance seasonally adjusted insured unemployment rate was 2.4 percent for the week ending March 9, unchanged from the prior week's unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending March 9 was 3,053,000, an increase of 5,000 from the preceding week's revised level of 3,048,000. The 4-week moving average was 3,076,250, a decrease of 28,000 from the preceding week's revised average of 3,104,250. Today's seasonally adjusted number was below the consensus estimate of 345K. 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

Average for U.S. Jobless Claims at Fresh 5-Year Low -The number of people seeking U.S. unemployment aid barely changed last week, and the average over the past month fell to a fresh five-year low. The decline in layoffs is helping strengthen the job market. Weekly unemployment benefit applications rose just 2,000 to a seasonally adjusted 336,000, the Labor Department said Thursday. Over the past four weeks, applications have dropped by 7,500 to 339,750. That’s the lowest since February 2008, just three months into the recession. Economists pay close attention to the four-week average because it can smooth out week to week fluctuations. The steady decline in unemployment claims signals that companies are laying off fewer workers. That suggests many aren’t worried about economic conditions in the near future.

How Long Can You Receive Unemployment Benefits? (map graphics) At the height of the jobs crisis, unemployment benefits lasted as long as 99 weeks in many states. Today, they last less than half that long in many states. The situation in Michigan, where unemployed workers will soon qualify for a maximum of about 49 weeks of benefits, helps explain the three major factors behind the reduction. (See related article.) Unemployment rates are falling: The federal government offers four tiers of benefits based on a state’s unemployment rate — the higher the rate, the more weeks a state can receive. New Labor Department data this week showed Michigan’s three-month-average unemployment rate under 9%, meaning it no longer qualifies for the top tier of benefits.Federal programs are growing more restrictive: Congress has cut back the available federal benefits and made it harder for states to qualify. A year ago, a state needed an unemployment rate of 8.5% to qualify for all four tiers of federal benefits, which together lasted 63 weeks. Today, the bar has been raised to 9%, and the benefits last at most 47 weeks. Additionally, a separate federal program known as “Extended Benefits” has all but disappeared.States are cutting their programs: During the recession, Michigan, like most states, offered 26 weeks of regular unemployment benefits. Since 2011, it has offered just 20 weeks. The cuts also lead to a proportional reduction in federal benefits.

Why Are States Cutting Unemployment Benefits? - As today’s Wall Street Journal reports, unemployment benefits across the country are growing less generous. Among the reasons: A growing number of states are cutting back their regular, non-emergency benefits below the long-standard level of 26 weeks. What’s behind the trend? Backers of the cutbacks generally cite big debts accrued by state unemployment systems during the recession. Paying off those debts usually requires states to increase taxes on employers, which business groups and others fear could deter hiring. Cutting back benefits is one way to reduce costs and pay down those debts more quickly. But it’s worth understanding how states accrued those debts in the first place. State unemployment systems are funded through taxes on employers, who pay based on the number of workers they have and their history of laying them off (companies that lay off workers more often pay higher taxes). The systems are set up as trust funds, building up reserves during good times and drawing them down during recessions.

Number of the Week: Employers’ Benefits Costs -- 31%: The percent of employer costs that goes to paying for benefits. Nearly a third of employers’ costs per worker goes to benefits on top of regular wages and salaries, and the share is even greater in some industries. In December 2012, the most recent month for which detailed data are available, the average employer costs for each worker per hour was $30.84, according to the Labor Department. Of that total, $21.35 or 69% was for wages and salaries, the remainder went to benefits. The lion’s share of benefits’ costs is for health insurance, which on average makes up 8.5% of the total. That’s followed by legally-required benefits, at 7.8% of the total, which include Social Security, Medicare, workers’ comp and unemployment insurance. Paid leave takes up another 7% of the costs, with the remainder made up of retirement contributions and supplemental costs, such as overtime. But that’s just the average; the contributions vary greatly across different industries. A greater share of state and local government’s costs per employee goes to benefits — 35% — compared with 31% for full-time private-sector workers. The costs to the government are greater per worker at $41.94 with $27.24 going toward salaries, while private employers on average pay $33.63 overall per worker and $23.22 on wages. The makeup of benefit expenses is also widely different between private and government workers. Government benefit costs are higher for health and retirement contributions than their private counterparts, while private employers pay more in overtime and bonuses.

America: A Nation of Permanent Freelancers and Temps - The debate over telecommuting that Yahoo has spurred raises an important issue, but it’s not simply about workplace flexibility. It begs questions about the fundamental nature of work itself. By 2020, more than 40 percent of the US workforce will be so-called contingent workers, according to a study conducted by software company Intuit in 2010. That’s more than 60 million people. We are quickly becoming a nation of permanent freelancers and temps. In 2006, the last time the federal government counted, the number of independent and contingent workers—contractors, temps, and the self-employed—stood at 42.6 million, or about 30 percent of the workforce. How many are there today? We have no idea since 2006 was the last year that the government bothered to count this huge and growing sector of the American workforce.

The Unregulated Work of Mechanical Turk - Ever wonder what our labor market would look like without minimum wages or labor law protections? Take a look at the brave new world of online piecework platforms, like Amazon’s Mechanical Turk, which allows employers, politely termed “requesters,” to post jobs for a “global, on-demand, 24 x 7 work force.” Workers are offered pay for completion of a series of Human Intelligence Tasks (HITs), easily fragmented activities (like transcription, categorization or tagging) in which computers actually need assistance from carbon-based life forms like ourselves. Spamming and fake reviewing can be easily commissioned. For instance, I could probably pay less than 10 cents apiece for unique posted comments of at least 50 words including at least two positive superlatives on this blog. (Should I discuss this with my editors?) Estimates of what workers can earn on these crowdsourced tasks range from about $1.20 to $5 an hour without any benefits. Employers treat them as independent contractors not covered by federal minimum-wage legislation. A standard terms-of-use agreement gives employers the freedom to reject an employee’s work on any grounds; workers (oops, I mean contractors) have no easy recourse.

The disappearing or non-disappearing middle class - Despite the title, this post is mostly not about economics or even politics but rather about the central role of comparisons in statistics and statistical graphics. It started when someone pointed me to this article in which Megan McArdle points out the misleadingness of a graph that seems to show a bimodal income distribution but only by combining cells in the tail: McArdle makes a good point: of course, if you spread the histogram along a uniform scale (or, for that matter, a log scale), you don’t see that bump at the high end. McArdle reproduces some Census charts showing income stability over the past few decades: Before I had a chance to chance to write about this, I noticed that Mark Palko did the job for me. Palko writes: To the extent that statistics includes data visualization, this is definitely bad statistics. When trying to depict trends and relationships, you generally want to get as much of the pertinent information as possible into the same graph. You don’t want to force the reader to jump around the page trying to estimate slopes and compare magnitudes, nor do you want to take a few snapshots when you can easily picture all the data.

Study: Delaying marriage hurts middle-class Americans most -  The tendency of young adults to put off marriage has taken a harsh toll on Americans without college degrees, according to a new study by a group of family researchers. The study, titled Knot Yet, belies the mythology popularized on shows such as “Girls,” with characters spending their 20s establishing careers and relationships before deciding to settle down and have children. While that scenario portrays the experiences of many college-educated Americans, women with only high school degrees or a year or two of college are more likely to have their first child while cohabiting with a man who struggles to find a stable job that pays enough to support a family, the study said. The study found a large educational and class divide. College-educated women typically have their first child two years after marrying. The high school graduates as a group have their first child two years before they ­marry. In a statistic that runs counter to the image of unmarried mothers as reckless teenagers, the study said 58 percent of first births to women who have graduated only from high school are out of wedlock.

As Men Lose Economic Ground, Clues in the Family - — The decline of two-parent households may be a significant reason for the divergent fortunes of male workers, whose earnings generally declined in recent decades, and female workers, whose earnings generally increased, a prominent labor economist argues in a new survey of existing research. David H. Autor, a professor at the Massachusetts Institute of Technology, says that the difference between men and women, at least in part, may have roots in childhood. Only 63 percent of children lived in a household with two parents in 2010, down from 82 percent in 1970. The single parents raising the rest of those children are predominantly female. And there is growing evidence that sons raised by single mothers “appear to fare particularly poorly,” Professor Autor wrote in an analysis for Third Way, a center-left policy research organization.  In this telling, the economic struggles of male workers are both a cause and an effect of the breakdown of traditional households. Men who are less successful are less attractive as partners, so some women are choosing to raise children by themselves, in turn often producing sons who are less successful and attractive as partners. “A vicious cycle may ensue,” “with the poor economic prospects of less educated males creating differentially large disadvantages for their sons, thus potentially reinforcing the development of the gender gap in the next generation.”

The NY Times Calls Third Way “Center-Left” and Turns a Study on its Head - William K. Black - Some lies will not die.  As I have demonstrated repeatedly, Third Way is Wall Street on the Potomac.  It is funded secretly by Wall Street (it refuses to reveal its donors), it is openly run by Wall Street, and it lobbies endlessly for Wall Street.  Third Way, like every Pete Peterson front group, is dedicated to shredding the safety net as its highest priority and throwing the Nation back into a gratuitous recession through self-destructive austerity. Third Way, like other Pete Peterson front groups, supports privatizing Social Security.  That is Wall Street’s greatest dream, for it would increase their revenues by hundreds of billions of dollars.  Eric Laursen documented Wall Street’s effort to in his recent book: “The People’s Pension: The Struggle to Defend Social Security Since Reagan.”  Laursen describes the Third Way’s leader as a Pete Peterson protégé.  Peterson is a conservative Republican billionaire made wealthy on Wall Street who has dedicated a billion dollars of his wealth to his assault on the safety net. One of my prior articles provides the finance background of every member of Third Way’s governing board – exposing the total dominance by Wall Street and finance.  My goal was to make it impossible for a journalist who did even the most perfunctory research on Third Way to describe it as a “center-left” organization (or any analogous term).  I had not counted on the New York Times failing to clear such a tiny research hurdle.  Sadly, on March 20, 2013 the New York Times gave prominent coverage to a study sponsored by Third Way, which the reporter called “a center-left policy research organization” in an article entitled “As Men Lose Economic Ground, Clues in the Family.”

Counterparties: Why the young are falling behind - Things are better, but they’re also still bad. That’s the shorter version of the Fed’s view of the job market: “Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated”. The economy may be puttering steadily along, but young people are falling behind. Annie Lowrey reports that younger workers are doing worse than one particularly personal gauge of success — their parents. A study by the Urban Institute finds that Americans under 40 have accumulated less wealth than their parents at the same age. As Lowrey points out, “because wealth compounds over long periods of time”, that puts young people at a distinct long-term disadvantage, and also lowers economic expectations. The usual culprits — stagnant wages, the financial crisis, student debt — are to blame. Surveys from Pew and Gallup also highlight the damage the current economy has inflicted on the young. On the bright side (sort of), younger consumers are less enthusiastic about credit cards than they used to be. Which is fine, because for credit card companies, the feeling is mutual. They’re just not that enthusiastic about extending credit in an idling economy to people with falling wages and shockingly large amounts of student debt.

'Focusing on Low- and Moderate-Income Working Americans' - It's nice to see the Fed thinking in these terms. This is from a speech by Federal Reserve Governor Sarah Bloom Raskin:The Great Recession stands out for the magnitude of job losses we experienced throughout the downturn. These factors have hit low- and moderate-income Americans the hardest. The poverty rate has risen sharply since the onset of the recession, after a decade of relative stability, and it now stands at 15 percent--significantly higher than the average over the past three decades.1 And those who are fortunate enough to have held onto their jobs have seen their hourly compensation barely keep pace with the cost of living over the past three years.... About two-thirds of all job losses resulting from the recession were in moderate-wage occupations, such as manufacturing, skilled construction, and office administration jobs. However, these occupations have accounted for less than one-quarter of subsequent job gains. The declines in lower-wage occupations--such as retail sales and food service--accounted for about one-fifth of job loss, but a bit more than one-half of subsequent job gains. Indeed, recent job gains have been largely concentrated in lower-wage occupations such as retail sales, food preparation, manual labor, home health care, and customer service.

W.Va. Lawmakers Decry Labor Spending Cuts -- Democratic lawmakers in West Virginia are worried that budget cuts hitting the Labor Department as a result of the sequester could make the nation’s coal mines less safe. Sens. Jay Rockefeller and Joe Manchin along with Rep. Nick Rahall have asked the acting head of the Labor Department to rethink cuts to staff working through the backlog of legal challenges by mining companies to fines for safety violations. It now takes an average of 498 days for each case to be resolved, compared with the historic average of 200 days, the lawmakers wrote in a letter to the agency dated March 15. As cases drag on, they said, it becomes harder for regulators to track mines with poor safety records and companies can delay paying fines

How the Poultry Industry Is Grinding Up Workers’ Health and Rights - Walk through any supermarket poultry section and you can marvel at the wonders of the modern food processing industry: antiseptic aisles packed with gleaming, plump shrink-wrapped chickens, sold at bargain prices under the labels of trusted agribusiness brands like Tyson and Pilgrim’s. But all that quality meat doesn’t come cheap: it’s paid for dearly by factory workers who brave injury, abuse and coercion every day on assembly lines running at increasingly deadly speeds. According to newly published research on Alabama poultry workers by the civil rights group Southern Poverty Law Center (SPLC), the business model of the sector has sacrificed health and safety on the factory floor for the Tayloristic efficiency demanded by American appetites. The supersized industry, which churns out about 50 pounds of chicken per American stomach annually, dominates many struggling towns in Alabama, a mostly non-union state, supporting about 10 percent of the local economy and some 75,000 jobs. But according to the SPLC’s researchers, the production line is butchering workers’ health:

H-1B reform bill bolstered by testimony about male visa-holders - U.S. Senator Chuck Grassley has re-introduced an H-1B reform bill that once again takes aim at  offshore outsourcers, and Monday he got more ammunition for that battle. It came during a Senate Judiciary Committee hearing on comprehensive immigration reform and women. Testifying on the high-skills aspects of this issue, Karen Panetta, a professor of electrical and computer engineering at Tufts University, said that more than eight-out-of-10 of the visas used by offshore outsourcing firms are held by males. "That's outrageous," she said. Offshore firms use about half of the H-1B visas. Panetta, who also served as director of the IEEE's Women in Engineering Committee, was especially critical of the H-1B visa overall, and said it was being used to replace American workers with lower wage workers. But for women, the problem is especially acute, Panetta argued. "It's hard to get promoted when you don't get hired in the first place," said Panetta. She said the existence of a preferred pipeline for new hires has a "discouraging effects on independent American women considering the STEM [science, technology, engineering and math] fields."

G.O.P. Opposition to Immigration Law Is Falling Away - Republican opposition to legalizing the status of millions of illegal immigrants is crumbling in the nation’s capital as leading lawmakers in the party scramble to halt eroding support among Hispanic voters — a shift that is providing strong momentum for an overhaul of immigration laws. Senator Rand Paul of Kentucky, a Tea Party Republican, on Tuesday became the latest to embrace a more welcoming approach, declaring to the nation’s 11 million illegal immigrants that if they want to work in America, “then we will find a place for you.” While he never uttered the word “citizenship” and said a secure border must come first, Mr. Paul strongly implied that citizenship would eventually be available to them. Republican sentiment for a more liberal immigration policy has been building in the aftermath of last year’s election. But Mr. Paul’s comments provided strong new evidence that the rising generation of conservative leaders is turning against the Republican argument that those who enter the country illegally should be denied the chance to become permanent residents.

The minimum wage, part 2: Casey Mulligan fail edition; or, the $100 minimum wage gambit -I wanted to make a few points about this awful piece by economist Casey Mulligan, in which Mulligan not only opposes a minimum wage hike, but actively supports reducing the minimum wage. And this in spite of the fact that, as he admits, the “least skilled workers” in our economy are continuing to “see their wages fall over time.” That a right-wing University of Chicago economics professor opposes raising the minimum wage is hardly a news flash. But what I do strongly object to is the extremely misleading way Mulligan characterizes the evidence. He writes: News organizations have repeatedly noted that economists do not agree on the employment effects of historical minimum-wage changes and do not agree on whether minimum wage increases confer benefits on the poor. The vague suggestion that perhaps that minimum wage really does not “confer benefits on the poor” teeters dangerously close to the “opinions on the shape of the earth differ” school of journalism. Let’s talk specifics here. The impact of the minimum wage, and particularly the impact of the minimum wage on employment, is, as economist John Schmitt has noted, one of the most studied topics in all of economics. The results are most definitely in, and contrary to the clear impression Mulligan is trying to give, there is little reason to believe that the outcome from the years 2007 through 2009 would be any different than the results we have from any other year before that.

The Miracle Product That Cures Degenerative Entitlement Syndrome! - During last year’s presidential election, Dr. Willard M. Romney diagnosed a previously unrecognized epidemic illness that is eating away at the moral foundations of our country.  Romney was the first medical scientist to grasp that 47% of our citizens have been transformed into an army of zombie parasites now known to the experts as “moochers.”  The moochers have been infected with DES, Degenerative Entitlement Syndrome, a 21st century plague whose victims live lives solely devoted to sucking funds from the bank accounts of decent people.   Not one to sit idly by while an invasive undead horde saps and impurifies our precious bodily fluids, Dr. Romney attempted to sound the national alarm about the moocher scourge.  But alas, he was ahead of his time.  The country was not yet ready to hear his bracing but prescient DES warning. Moochers might appear normal, but don’t be fooled by appearances!  While these bloodsuckers are seemingly busy changing bedpans, waxing the floor at your office, serving up stacks of pancakes at Denny’s and standing in long lines to beg abjectly for “jobs’, they are all the while draining our hard-won and well-merited wealth.  A tell-tale symptom of DES is that while moochers pay all kinds of sales taxes, payroll taxes and government fees just like the rest of us, they don’t pay any income taxes.  Imagine!  No income taxes!   The DES sufferer will tell you that the absence of income tax obligations is somehow related to the moocher’s extreme deficiency in actual income.  A likely story!

Income Inequality Tends to Be Permanent - Income inequality may be harder for Americans to overcome than previously thought, according to a study released Thursday which found that differences in household incomes tend to be permanent. A study released Thursday at the Brookings Institution by a group of economists found that income inequality hasn’t just widened in recent decades but the gap appears to be permanent.The economists, including two from the Federal Reserve Board, tracked the annual tax returns of 34,000 households from 1987 through 2009 and found a rise in “permanent inequality,” or high-earning Americans becoming better off while lower-wage workers became worse off. They found that income inequality is long-lasting and the gap isn’t just the result of short-term unemployment or other temporary issues among lower-wage earners.

Food stamps put Rhode Island town on monthly boom-and-bust cycle -  The economy of Woonsocket was about to stir to life. Delivery trucks were moving down river roads, and stores were extending their hours. The bus company was warning riders to anticipate “heavy traffic.” A community bank, soon to experience a surge in deposits, was rolling a message across its electronic marquee on the night of Feb. 28: “Happy shopping! Enjoy the 1st.”At precisely one second after midnight, on March 1, Woonsocket would experience its monthly financial windfall — nearly $2 million from the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. Federal money would be electronically transferred to the broke residents of a nearly bankrupt town, where it would flow first into grocery stores and then on to food companies, employees and banks, beginning the monthly cycle that has helped Woonsocket survive. Three years into an economic recovery, this is the lasting scar of collapse: a federal program that began as a last resort for a few million hungry people has grown into an economic lifeline for entire towns. Spending on SNAP has doubled in the past four years and tripled in the past decade, surpassing $78 billion last year. A record 47 million Americans receive the benefit — including 13,752 in Woonsocket, one-third of the town’s population, where the first of each month now reveals twin shortcomings of the U.S. economy:

From State Welfare to Federal Disability - In an excellent report on disability NPR’s Planet Money notes : A person on welfare costs a state money. That same resident on disability doesn’t cost the state a cent, because the federal government covers the entire bill for people on disability. So states can save money by shifting people from welfare to disability. And the Public Consulting Group is glad to help.  PCG is a private company that states pay to comb their welfare rolls and move as many people as possible onto disability. …In recent contract negotiations with Missouri, PCG asked for $2,300 per person [moved from state welfare to federal disability]. In other words, money and real resources are being paid to redistribute wealth from one set of taxpayers to another.

Bankrupt San Bernardino approves over $1 mln in pay hikes (Reuters) - The bankrupt city of San Bernardino, California, approved over $1 million in pay increases for police and firefighters despite claims it can barely make payroll, let alone afford the salary hikes. Monday night's pay increases, for a city that appears before a federal judge again this week to plead for bankruptcy protection, are a result of its charter. It mandates that pay for safety workers must be tied to salary levels for 10 similar- sized California cities, all of which are wealthier than San Bernardino. The bankruptcy of the city 65 miles east of Los Angeles is a national test case on whether the pensions of government workers take precedence over other payments in a municipal bankruptcy. It is a high-stakes issue for pension plans and their beneficiaries, and for Wall Street bondholders who lend money to governments.

Wall Street: $474 Million, Detroit: $0 - The more time passes, the more skeletons emerge from the closet.  So what’s the punishment for an industry that has literally destroyed countless communities across the American landscape?  Trillions in taxpayer bailouts and even more control over our government.  They say “it would’ve been much worse without the bailouts.”  Tell that to Detroit.  From Bloomberg: The only winners in the financial crisis that brought Detroit to the brink of state takeover are Wall Street bankers who reaped more than $474 million from a city too poor to keep street lights working. The city started borrowing to plug budget holes in 2005 under former Mayor Kwame Kilpatrick, who was convicted this week on corruption charges. That year, it issued $1.4 billion in securities to fund pension payments. Last year, it added $129.5 million in debt, 9.3 percent of its general-fund budget, in part to repay loans taken to service other bonds.“We have no lights, no buses, poor streets and now we’re paying millions of dollars a year on our debt,” said David Sole, a retired municipal worker and advocate for Moratorium Now Coalition, a Detroit group that fights foreclosures and evictions. “The banks said they need to be paid first. But there is no money.”

Big-Project Binge Fueled Motor City’s Meltdown - When I hear free-spending national leaders call for more infrastructure investment, I think of Detroit’s absurd People Mover monorail gliding above empty streets. That’s unfair, I know. Yet the city’s epic tragedy, which entered a new stage last week when Mayor Dave Bing lost financial control, provides broader perspective on the potential consequences of mixing economic distress with bad policy making.  Here are five somewhat contradictory lessons from the Motor City’s sad history that relate to the larger national debate about America’s future.  Lesson No. 1: Government can do good things. Long before Ford’s Model T’s, Detroit -- the “Straits” -- rose as a great inland port because of large-scale public investment. The economic ecosystem of Great Lakes cities depended on the access to the East Coast created by a farsighted public servant, DeWitt Clinton, who used public funds to dig the Erie Canal.

The Worst Victims of the Education Sequester: Special-Needs Students and Poor Kids - The sequester's guillotine has little regard for good or bad programs as it unselectively slices spending across the country, but perhaps nowhere does its indiscriminate blade fall more harshly than within education. The students who will lose out will be the ones we should be most careful to protect: children from poor families and special needs kids. Federal funding for education will be slashed by 5.1 percent, until Congress can agree on a new budget. Though the federal government only makes up about 10 percent of the total education spending, this share is significant in every town budget. Schools need Washington's money to provide basic services for its students, as states and localities have faced their own budget crises in recent years.  The majority of federal funding for education is targeted for two groups of school kids -- the poor and the disabled. Title 1 (federal support for low-income school districts) and Head Start (the pre-school program for disadvantaged children) serve the disadvantaged kids. The Department of Education support for special education amounts to between a sixth and a quarter of education spending in any given year.

Chicago to close 54 schools to address $1 billion deficit - Tens of thousands of Chicago students, parents and teachers learned Thursday their schools were on a long-feared list of 54 the city plans to close in an effort to stabilize an educational system facing a huge budget shortfall. Mayor Rahm Emanuel said the closures are necessary because too many Chicago Public School buildings are half-filled, with 403,000 students in a system that has seats for more than 500,000. But opponents say the closures will further erode troubled neighborhoods and endanger students who may have to cross gang boundaries to attend school. The schools slated for closure are all elementary schools and are overwhelmingly black and in low-income neighborhoods....

The End of Private Schools? - The number of students enrolled in private schools has dropped precipitously in the last decade, from 5.3 million children in 2002 to 4.7 million in 2012. In 2005, 10.7 percent of children were in private school; that number fell to 10 percent in 2010. The knee-jerk reaction to this news is to blame the recession. But according to new research from Stephanie Ewert of the U.S. Census Bureau, the real reason for this shift isn't belt-tightening (in fact, Ewert found that short-term economic highs and lows have very little impact on private school enrollment), but rather the rise of charters, especially in major cities. Ewert found a significant negative correlation between enrollment trends in charter schools and private schools. In other words, as a city's charter school network expands, enrollment in private schools decline. Just look at these maps, which show changes in private and charter school enrollment by state. The red states are the ones that experienced both a decline in private school enrollment and an uptick in charter school enrollment. Here's the map for 2008 - 2009: And here's 2009 - 2010

Rupert Murdoch Wins Contract to Develop Common Core Tests - Amplify, the company owned by Rupert Murdoch, won a $12.5 million contract to develop formative assessments for Common Core tests. The award was made by the Smarter Balanced Assessment Consortium, one of two groups funded by the Obama administration to create national tests, administered online. Joel Klein runs Murdoch’s Amplify division. When Murdoch purchased Wireless Generation in the fall of 2010, he said:  “When it comes to K through 12 education, we see a $500 billion sector in the U.S. alone that is waiting desperately to be transformed by big breakthroughs that extend the reach of great teaching,” said News Corporation Chairman and CEO, Rupert Murdoch. “Wireless Generation is at the forefront of individualized, technology-based learning that is poised to revolutionize public education for a new generation of students.”

Shout it from the Rooftops! Performance Pay for Teachers in India - Students who had completed their entire five years of primary school education under the program scored 0.54 and 0.35 standard deviations (SD) higher than those in control schools in math and language tests respectively. These are large effects corresponding to approximately 20 and 14 percentile point improvements at the median of a normal distribution, and are larger than the effects found in most other education interventions in developing countries (see Dhaliwal et al. 2011). Second, the results suggest that these test score gains represent genuine additions to human capital as opposed to reflecting only ‘teaching to the test’. Students in individual teacher incentive schools score significantly better on both non-repeat as well as repeat questions; on both multiple-choice and free-response questions; and on questions designed to test conceptual understanding as well as questions that could be answered through rote learning. Most importantly, these students also perform significantly better on subjects for which there were no incentives – scoring 0.52 SD and 0.30 SD higher than students in control schools on tests in science and social studies (though the bonuses were paid only for gains in math and language). There was also no differential attrition of students across treatment and control groups and no evidence to suggest any adverse consequences of the programs.

Better Colleges Failing to Lure Talented Poor - Most low-income students who have top test scores and grades do not even apply to the nation’s best colleges, according to a new analysis of every high school student who took the SAT in a recent year.  The pattern contributes to widening economic inequality and low levels of mobility in this country, economists say, because college graduates earn so much more on average than nongraduates do. Low-income students who excel in high school often do not graduate from the less selective colleges they attend.  Only 34 percent of high-achieving high school seniors in the bottom fourth of income distribution attended any one of the country’s 238 most selective colleges, according to the analysis. Among top students in the highest income quartile, that figure was 78 percent. The findings underscore that elite public and private colleges, despite a stated desire to recruit an economically diverse group of students, have largely failed to do so.

It's the Dispersion Stupid: Why Men Don't Go to College - Dean Baker  - The NYT tells us that economists are struggling with cultural explanations for the fact that men's college enrollment rates have been lagging so far behind those of women. My colleague John Schmitt and former colleague Heather Boushey looked at this issue a couple of years ago. They noted that there was a far larger dispersion in the wages of men with college degrees than was the case with women. In fact, there was a substantial overlap between the distribution of wages of men without college degrees and men with college degrees. This means that while on average men will have higher earnings with a college degree than without one, for a substantial portion of men this is not true. Presumably the marginal college student (the one who is deliberating over going to college versus starting their career) is more likely to be in this group of losers among college grads than the typical college student who never contemplated not attending college. Since there is a much greater risk for men than women (who don't have the same dispersion of wages among college grads) of ending up as losers by going to college, it should not be surprising that fewer men than women would opt to go to college. So the story is really simple, you just need a bit of economics and statistics to get there.

Majoring in Drones: Higher Ed Embraces Unmanned Aircraft - Curricula and research projects related to drones are cropping up at both large universities and community colleges across the country. In a list of 81 publicly funded entities that have applied for a certificate of authorization to fly drones from the Federal Aviation Administration, more than a third are colleges, according to FAA documents obtained by the Electronic Frontier Foundation. Schools—and their students—are jockeying for a position on the ground floor of a nascent industry that looks poised to generate jobs and research funding in the coming years. The UAS operations major combines both manned and unmanned aerial training. Students first earn a commercial pilot certificate with multi-engine and instrument ratings, meaning they’d have almost all the qualifications necessary to fly a Boeing jet for Delta Airlines. After they’ve proven their traditional piloting abilities, they begin learning about unmanned aircraft. Different classes focus on operating drone cameras, ground systems, and communications platforms. In the major’s capstone course, students complete 19 lessons—about 70 hours— in a flight simulator modeled after Boeing’s Scan Eagle, an unmanned aircraft system that’s been in military use since 2004. As a final project, students draft a mock application for drone flight, developing a flight operations and safety plan that could hopefully pass muster if submitted to the FAA.

Colleges say federal cuts threaten future of science research in US, could cause brain drain - -At the Massachusetts Institute of Technology, faculty fret about the future of the school’s Plasma Science and Fusion Center. Thirty miles away, administrators at the state university campus in Lowell worry that research aimed at designing better body armor for soldiers could suffer.The concerns have emerged because of automatic federal budget cuts that could reduce government funding for research done at educational institutions, spending that totaled about $33.3 billion in 2010, Department of Education statistics show. And the possible cuts add to another anxiety at those schools and others across the country: brain drain. President Barack Obama and lawmakers failed to agree on a plan to reduce the nation’s deficit that would have avoided the automatic spending cuts, which began to roll out this month. Included in the cuts are 5 percent of the money for programs that fund education research, a Department of Education spokesman said Friday. But because negotiations over how to balance the budget are ongoing, the timing and size of many cuts to be made by government agencies remain unclear.

Adding Up Five Years of State Higher Ed Cuts = State cuts to higher education funding in the last five years have been severe and almost universal, as we explain in a new paper.  After adjusting for inflation:

  • States are spending $2,353 or 28 percent less per student on higher education, nationwide, in the current 2013 fiscal year than they did in 2008, when the recession hit.
  • Every state except for North Dakota and Wyoming is spending less per student on higher education than they did before the recession.
  • Eleven states have cut funding by more than one-third per student, and two states — Arizona and New Hampshire — have cut their higher education spending per student in half (see chart).

Deep state funding cuts have major implications for public colleges and universities.  States (and to a lesser extent localities) provide 53 percent of the revenue that is used to support instruction at these schools.  When this funding is cut, colleges and universities generally must either cut spending, raise tuition to cover the gap, or both. That’s just what they’ve done.  Over the last five years, public colleges and universities have both steeply increased tuition and pared back spending, often in ways that compromise the quality of the education that they offer. Reversing these trends and reinvesting in higher education should be a high priority for state policymakers.  A large and growing share of future jobs will require college-educated workers.  Investing in higher education to keep tuition low and quality high at public colleges and universities, and to provide financial aid to students who need it most, would help states to develop the skilled workforce they will need to compete for these jobs.

States Have Hiked College Tuition to Compensate For Cuts - CBPP  - States have slashed funding to public colleges and universities over the past five years, as I explained earlier this week and we detail in our new paper.  After adjusting for inflation, every state except North Dakota and Wyoming is spending less per student on higher education — 28 percent less, on average — than they did before the recession.Consequently, as the chart below shows, the schools have increased tuition to help make up for lost state revenue.  As a result, the average cost of attending a public college or university has surged.Average annual published tuition at four-year public colleges — the “sticker price” — has grown by $1,850, or 27 percent, in real terms between the 2007-08 school year, the academic year that began just prior to the recession, and the current 2012-13 school year. Tuition increases have been both substantial and widespread.  Since the 2007-08 school year, after adjusting for inflation, the average tuition at public four-year colleges has increased by:

  • More than 50 percent in seven states;
  • More than 25 percent in 18 states; and
  • More than 15 percent in 40 states.

Two states, Arizona and California, have increased tuition by more than 70 percent.

Is Student Loan Debt Forgiveness A Good Idea? -  The short answer, despite the pleadings of an over-stuffed body of ex-students facing inexorable debt loads, is "no". However, as Professor Daniel Lin notes in this brief clip, debt forgiveness does not resolve the underlying causes of rising student debt, and therefore cannot prevent future debt problems. Instead of debt forgiveness, he suggests making student loans like other types of loans: dischargeable in bankruptcy. This places the burden on lenders to ensure that students are not taking on more debt than they can handle. While it would lead to a reduction in the amount of loan dollars awarded and theoretically increase interest rates (as 'risk' is priced in from the current no collateral, no underwriting, no credit check idiocy currently), these are good things - naturally incentivizing borrowers to be more careful right now, and in the future, which puts pressure on colleges and universities to control their costs.

California Teacher Fund Needs $4.5 Billion Yearly Boost - The California State Teachers’ Retirement System’s $73 billion unfunded liability may be the state’s “most difficult fiscal challenge” and lawmakers should increase funding for the second-largest U.S. pension, the Legislative Analyst’s Office said. Additional money from taxpayers, through higher contributions from the state and school districts, along with increases from employees probably will be needed, the analyst’s office said today in a report. Investment returns aren’t likely to be enough to close the gap, it said. Pension costs for retired public employees are straining governments from California to Rhode Island. Calstrs, as the $161.4 billion system is known, has 66 percent of the assets needed to cover promises to current and future retirees, and will run out of money by 2044 unless changes are made, the analyst’s office said.

Automatic Retirement Saving Inches Forward - Automatic enrollment is slowly gaining steam as the choice strategy to encourage retirement saving.  A bold plan in California would eventually make the practice widespread and could revolutionize the state’s saving landscape. Last September, the California legislature approved a framework for automatically enrolling private-sector workers in a retirement savings plan.  Employers with more than five workers would have to offer a workplace retirement plan, automatically enroll employees in the newly established California Secure Choice Retirement Savings Plan (SCP), or face a fine. Workers enrolled in SCP would automatically contribute 3 percent of their pay to an IRA-like account unless they opted out; like an IRA, benefits would be based on account contributions and investment returns. Employers are only required to set up the plan, not to contribute to the account, and there is no explicit cost to taxpayers. A third-party—either a private firm or California’s pension administrator (CALPERS)—would administer the plan, investing no more than half the pooled funds in equities. (A private administrator may be the superior option given CALPERS’ recent history of fraud and mismanagement.) Annual administrative expenses would be limited to one percent of fund assets. The framework also calls for a guaranteed return, although the details have yet to be ironed out.

Workers Saving Too Little to Retire -- Workers and employers in the U.S. are bracing for a retirement crisis, even as the stock market sits near highs and the economy shows signs of improvement. New data show that powerful financial and demographic forces are combining to squeeze individuals and companies that are trying to save for the future and make their money last. Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008. The survey also found that 28% of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study's 23-year history. The same forces are weighing on corporate balance sheets. Based on another recent report, the Society of Actuaries said that rising life expectancies could add as much as $97 billion to corporate pension liabilities in coming years, an increase of up to 5%.

Who is not retiring, and why? - Via Bloomberg comes this note on demographics and the work force, and continues a conversation about how that impacts all of us. Probably not in the way most often provided in punditry...such as taking jobs away from the millenium generation, wealthy old geezers stereotypes, or alarms sounded about who is to pay for services we want, etc.  It's well known that the U.S. is turning gray. It's less well known that the workforce is turning gray as well. The percentage of Americans who are 65 and older will rise from 13 percent in 2010 to 20 percent by 2030 -- and, if the recent trend continues, a growing share of those elderly Americans will carry on working past the normal retirement age.In 1990, 11.8 percent of those 65 and older worked. In 2010 the figure was 17.4 percent. By 2020, the Bureau of Labor Statistics expects it to be 22.6 percent. The numbers are even more surprising for Americans older than 75. Less than 5 percent of them worked in 1990. In 2010, it was 7.4 percent. By 2020, according to the BLS, 10 percent of them will still be toiling away.

Direct Deposit and Social Security: Not so Nice for Those who Owe - Jonathan Ginsberg posted an interesting article on the National Association of Chapter 13 trustees web site this weekend, that will be relevant to many of our readers as well. Social security is now requiring all beneficiaries to set up direct deposit, which means the resulted funds could become available to executing creditors if there are any funds from any other source in the account as well. You might recall my blog about this some time back, which contains cites to some of the relevant law. As my previous blog explains, Federal law provides that Social Security payments are exempt from garnishment from civil creditors. If, for example, a credit card lender sues you and obtains a judgment, that creditor cannot ask Social Security to withhold funds from your government check. While these protections do not apply with equal force to the IRS collecting a tax debt or a creditor collecting child support, all other creditors are not to touch social security funds under any circumstances.  There is however, a rub. Under the applicable law, Social Security money (SSA) that is co-mingled with non-Social Security money may lose this special protection.

Chief Actuary for SS - Raid the Retirement Fund!  - Stephan Goss, the chief actuary for Social Security (SS) provided a detailed report on the status of the SS Disability Fund (DI) to the House of Representitives. The short story is that DI is going bust in a few years. The options to fix this problem were spelled out in the report. The extremes of the required "fix" range from an immediate cut in DI benefits of 16%, or an increase in DI payroll taxes of 20%. Nothing new there. But, there is a "Plan B" for the DI Fund. The solution is to raid the SS Retirement Fund for the deficits at DI: A simple tax-rate reallocation between OASI and DI, as was done in 1994, could equalize the financial prospects of the trust funds avoiding reserve depletion until 2033. Note: "Simple tax-rate reallocation" means $40+b a year.... Bingo! The raid on the retirement fund results in no cuts in benefits, and no new taxes. What's not to like about that result? The gutless wimps in D.C. would love to kick the can down the road a decade, therefore the Raid solution is an obvious choice. (The consequence of the Raid would be to reduce the expected life of the Retirement Trust Fund by as much as five years,.)

The economic plan to rob grandma's bread basket - This brings us to the case of something called chained CPI, the vaguely off-sounding idea (chains anyone?) that budget hawks claim would save an estimated $112bn over the next decade. Chained CPI – that's short, by the way, for chained consumer price index – works by assuming we adjust to inflation not by spending more money, but by changing our behavior. So let's say you're wheeling your shopping cart at the Piggly Wiggly. If the price of filet mignon goes up, most of us will take a look at a cheaper cut of meat, like chicken. The government is interested in the cost of what goes in your shopping cart, because that's how it knows whether prices are going up and down. It's also how it knows whether it should raise social security payments. The idea is to stop linking social security to plain old prices and instead link them to a longer chain of consumer prices – not just what you are buying, but what you could buy. You could economize by buying vegetables instead of meat; you could buy generic; you could try to stretch your shopping dollar. And if you do, then that means that the government wouldn't need to give you as much money in your social security payment.

To chain or not to chain - In an effort to obtain a Grand Bargain on deficit reduction, the Obama administration has offered to accept a Republican proposal for a new inflation index—a chained CPI—in setting the annual cost of living adjustment (COLA) for Social Security benefits. This new inflation index would also apply to the indexation of income tax brackets. Since a chained CPI is expected to show lower inflation, the change in indexation will mean lower COLAs and greater revenues over time. This is the first of two posts articulating why accepting a chained CPI for calculating the Social Security COLA is a bad policy choice. The other post will address the chained CPI proposal in the context of Social Security policy. This post addresses whether a chained CPI is simply a “technical fix,” as some maintain, to obtain an accurate measure of inflation. I pay particular attention to my disagreements with my friends at the Center on Budget and Policy Priorities (CBPP).

Social Security is the healthiest component of the U.S.’s retirement saving system - Last week I wrote that Social Security is the healthiest component of the U.S.’s retirement saving system and should therefore be expanded. This isn’t a popular position; liberals tend to prefer defined-benefit pensions from employers and conservatives defined-contribution accounts, such as 401(k)s and individual retirement accounts. But the reason Social Security works so well is that it lacks a fundamental problem that undermines the effectiveness of these other retirement vehicles. Both defined-benefit pensions and defined-contribution accounts are based on a shared and problematic premise: It is possible to set aside x percent of today’s gross domestic product for retirement and generate retirement income from those savings that exceeds x percent of future GDP. Some asset classes have long-run rates of return that exceed GDP growth: equities, for example. But the high returns are a compensation procyclical risk: These assets will tend to strongly outperform GDP when the economy does well and significantly underperform it during recessions.It doesn’t make sense to finance retirement in such a risky way. Retirement savings exist disproportionately for the benefit of people with low or moderate means and a relatively low tolerance for risk. If retirement assets were invested safely, they would not be expected to grow faster than the economy as a whole.

Retire Now, Social Security Later - Most people start drawing Social Security benefits as soon as they retire. But as John B. Shoven explains in "Efficient Retirement Design," a March 2013 Policy Brief for the Stanford Institute for Economic  Policy Research, this strategy is usually a mistake--and a mistake that have a loss in value of as much as $250,000. To understand the issues here, let's set the stage with some facts. Most people have two major assets at retirement: Social Security and a retirement account like an IRA or 401k, where they have some choice about when and how to draw down that account. Most people follow a strategy where they draw on Social Security right when they retire. Shoven writes: "Figure 1 shows the distribution of the months of delay between when someone retires (or when they become 62 if they retired before that age) and when they start their Social Security benefits. What you are supposed to see in Figure 1 is that the vast majority of people start their Social Security almost immediately upon reaching 62 or retiring....  Figure 1 makes it look like people think that starting Social Security and retiring are one and the same thing."

Worms, Pond Scum and Economists - Dean Baker -The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam. In the last week, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future. This means that young people today can expect many more years of dire labor market conditions, because the remedies that could turn around their job situations have been blocked by nonsense spewing from economists. Incidentally, this situation works out very nicely for those on top, who are enjoying the benefits of record-high profit shares, which have also helped to fuel a soaring stock market. We are now seeing economists joining the crusade to cut Social Security and Medicare by implicitly or explicitly claiming that these programs are somehow responsible for the dismal economic plight of the young. The argument is that we can only free up money for helping our young if we take money from the old, a group with a median income of $20,000 a year.

Return to Sender - Rooted in the Constitution and older than the country itself, the U.S. Postal Service supports 7.5 million private-sector jobs in the mailing industry. The Postal Service is essential to the fast-growing Internet sales industry. And the USPS is navigating this struggling economy relatively well, even making an operating profit in the most recent quarter. Yes, making a profit. When you count how much money the Postal Service earned on postage, and subtract how much it spent delivering the mail and paying related bills, the Postal Service earned a $100 million profit in the last three months of 2012. And remember, the USPS uses no taxpayer money. So why all this talk about the Postal Service losing money? And why is Postmaster General Patrick Donahoe planning to end Saturday mail delivery? There’s no question the Postal Service faces big challenges. Both email and a struggling economy are dragging down mail volume. But the Postal Service’s financial problem is actually driven by Congress’s decision to “pre-fund” retiree health care costs. Beginning in 2007, the USPS has been required to pay 75 years of those costs in advance, and to do so within just ten years.

Lacking access to public clinics, Sacramento's poor crowd local ERs - : The emergency room in Sacramento County has become the primary care clinic for many the region's poor. Four years ago, Sacramento County supervisors began shoring up successive budget deficits by making large cuts to public health clinics that primarily serve the poor. Since those cuts began, the number of patients at public health clinics in Sacramento County has fallen by about 50 percent, or 80,000, the latest county figures show. Over roughly the same period, the number of patients seeking emergency room treatment in Sacramento County has grown by 80,000, according to the Office of Statewide Health Planning and Development. The poor account for most of the rise.

Women in Healthcare Suffer Abuse Inside and Outside the Home - It’s pretty well known that while women dominate the fast-growing fields of domestic work and home health work, this is only a partial victory. After all, not only are these jobs low-paid, they come rife with abuse. But women also dominate other quickly growing healthcare jobs such as nursing, making up over 90 percent of that workforce, which are far better paid. Where a home health aide can expect to make just over $20,000 a year at the median, a registered nurse looks forward to nearly $65,000. This should be a great sign. Yet a new report shows that the abuse that plagues those who work in the home follows women even when they work in a hospital. The report from the Lucian Leape Institute, “Through the Eyes of the Workforce,” reviewed the research and convened roundtables and focus groups to look at the working conditions in the healthcare industry. What it found is widespread abuse. The rate of physical harm for the healthcare workforce, particularly for nurses, is thirty times higher than other industries. In fact, the Bureau of Labor Statistics reports that the injury and illness rate for full-time healthcare workers is 56 percent, compared to 42 percent for all private industries—and remember that this includes dangerous jobs like police officers, construction workers and firefighters. More than three-quarters of nurses surveyed by the American Nurses Association said that unsafe working conditions were interfering with delivering quality care. A third of nurses in a nationwide sample reported back or musculoskeletal injuries in the past year, and 13 percent reported unprotected contact with blood-borne pathogens.

Health Insurers Warn on Premiums - Health insurers are privately warning brokers that premiums for many individuals and small businesses could increase sharply next year because of the health-care overhaul law, with the nation's biggest firm projecting that rates could more than double for some consumers buying their own plans. The projections, made in sessions with brokers and agents, provide some of the most concrete evidence yet of how much insurance companies might increase prices when major provisions of the law kick in next year—a subject of rigorous debate.  The projected increases are at odds with what the Obama Administration says consumers should be expecting overall in terms of cost. The Department of Health and Human Services says that the law will "make health-care coverage more affordable and accessible," pointing to a 2009 analysis by the Congressional Budget Office that says average individual premiums, on an apples-to-apples basis, would be lower. The gulf between the pricing talk from some insurers and the government projections suggests how complicated the law's effects will be. Carriers will be filing proposed prices with regulators over the next few months.

Test of anthrax vaccine in children gets tentative OK (Reuters) - A presidential ethics panel has opened the door to testing an anthrax vaccine on children as young as infants, bringing an angry response from critics who say the children would be guinea pigs in a study that would never help them and might harm them. The report, however, released on Tuesday by the Presidential Commission for the Study of Bioethical Issues, said researchers would have to overcome numerous hurdles before launching an anthrax-vaccine trial in children. It now goes to Secretary of Health and Human Services Kathleen Sebelius, who will decide whether to take the steps the commission recommended.

Three-person IVF could move closer in UK - The UK could move a step closer to allowing the creation of babies from two women and a man later. The Human Fertilisation and Embryology Authority is to advise ministers and report on a public consultation and the latest advances in the field. The three-person IVF technique could be used to prevent debilitating and fatal "mitochondrial" diseases. But some groups have raised ethical and safety concerns about creating babies with DNA from three people. The babies would have DNA from two parents and a tiny amount from a third person.

Doctors call for ban of antibiotic use in farm animals as drug-resistant human infections hit ‘dangerous level - The common practice of using antibiotics to promote growth in farm animals must be banned immediately as part of a campaign to combat drug-resistant infections in humans, one of the country’s largest doctor groups urges in a new report. The problem of bacteria impervious to antibiotics has moved beyond the oft-reported super bugs like MRSA (methicillin-resistantStaphylococcus aureus) and C. difficile, and affects a “multitude” of common infections from strep throat to salmonella, the Ontario Medical Association (OMA) warns. People are already suffering more serious illness and spending longer in hospital because of the resistance, something that will become routine without prompt action, it adds. “The impact on patients has reached a dangerous level,” says the report. “Patients are now dying from infections that physicians have been successfully treating for decades.”

New Poultry Plant Rule Would Give Food Inspectors 1/3 Of A Second To Examine A Chicken: A new food inspection rule proposed by the US Department of Agriculture would let poultry plants conduct their own inspections, removing federal food inspectors from the assembly line. At a House appropriations oversight hearing on Wednesday, Food Safety and Inspection Service administrators argued the move would save taxpayers money and allow the department to focus on testing for pathogens like e. coli and salmonella. But other FSIS inspectors working in poultry plants piloting the new rule protest that public health is sacrificed by outsourcing inspections. Poultry plant employees often miss contaminated birds, and are even discouraged from removing the ones they do flag: In affidavits given to the Government Accountability Project, a nonprofit legal-assistance group for government whistle-blowers, several inspectors who work at plants where the pilot program is in place said the main problem is that they are removed from positions on the assembly line and put at the end of the line, which makes it impossible for them to spot diseased birds. The inspectors, whose names were redacted, said they had observed numerous instances of poultry plant employees allowing birds contaminated with fecal matter or other substances to pass. And even when the employees try to remove diseased birds, they face reprimands, the inspectors said.

Disease threatens aquaculture in developing world - Disease may challenge the ability of fish farming to feed the growing human population even as wild fish stocks decline and climate change hampers food production from other sources, a study shows. Aquaculture is the fastest growing food sector in the world, according to the UN Food and Agriculture Organization, with 90 per cent of production coming from the developing world, where it makes a significant contribution to many nations' economies. But fish and shellfish disease will increasingly present a major problem for aquaculture in tropical countries, many of which rely on this form of food production for dietary protein, according to the study, which calls for better disease-response strategies and infrastructure in developing countries. The study, published in February's issue of the Journal of Applied Ecology, is the first analysis of the global pattern of disease outbreaks in aquaculture

How Monsanto Outfoxed the Obama Administration -Last November, the U.S. Department of Justice quietly closed a three-year antitrust investigation into Monsanto, the biotech giant whose genetic traits are embedded in over 90 percent of America’s soybean crop and more than 80 percent of corn. Despite a splash of press coverage when the investigation was initially announced, its termination went mostly unreported. The DOJ released no written public statement. Only a brief press release from Monsanto conveyed the news.  The lack of attention belies the significance of the decision, both for food consumers around the world and for U.S. businesses. Experts who have examined Monsanto’s conduct say the Justice Department’s decision not to act all but officially establishes the firm’s sovereignty over the U.S. seed industry. Many of them also say the decision ratifies aggressive practices Monsanto used to entrench its dominance and deter competition. This includes  highly restrictive contractual agreements that excluded rivals, alongside a multibillion-dollar spree to buy up seed companies. When the administration first launched its investigation, many antitrust and agriculture experts believed it was still possible to imagine an industry characterized by greater competition in the marketplace and greater diversity in seeds. That future may now be foreclosed.

A harsh case of ‘farm bill nausea’ -  Jim Wiesemeyer, a leading Washington, D.C., ag policy and trade specialist with Informa Economics, told area corn growers last month that in his 35 years in the nation’s Capitol, he’s never seen so many fights behind the scenes among commodity groups, national farm organizations and some farm-state lawmakers. “Some people have farm bill fatigue. I have farm bill nausea,” he told the crowd at the South Dakota Corn Growers Association forum at the Sioux Falls Convention Center. Although the farm groups are “backstabbing” each other, he said farmers are so busy in the marketplace that he hasn’t received a lot of calls from them on the farm bill.Wiesemeyer said the farm bill is not hitting the ground running this winter, but rather the numbers from the leaders probably won’t come until April, May or June. The extension expires in September. Another fear when a farm bill extension was passed last year was that taxpayer-subsidized crop insurance might suffer. Wiesemeyer thinks it is “low-hanging fruit” that might face problems. He said that, so far, for the 2012 crop, a record $14.7 billion has been paid out. For every dollar that producers paid in, $2.47 was paid out. The taxpayers, he said, are paying for that difference, and “the naysayers will use that number.” He said there will be crop insurance in the farm bill, but the 62 percent of crop insurance premiums that now are paid by the government might not continue.

'Honey Laundering' Is An International Problem - There might be something funny in your honey. Food-safety experts have found that much of the honey sold in the United States isn't actually honey, but a concoction of corn or rice syrup, malt sweeteners or "jiggery" (cheap, unrefined sugar), plus a small amount of genuine honey, according to Wired UK. Worse, some honey — much of which is imported from Asia — has been found to contain toxins like lead and other heavy metals, as well as drugs like chloramphenicol, an antibiotic, according to a Department of Justice news release. And because cheap honey from China was being dumped on the U.S. market at artificially low prices, Chinese honey is now subject to additional import duties. So Chinese exporters simply ship their honey to Thailand or other countries, where it is relabeled to hide its origins, according to This international "honey-laundering" scandal has now resulted in a Justice Department indictment of two U.S. companies and the charging of five people with selling mislabeled honey that also contained chloramphenicol.

Wet Spring Needed to Replenish Drought-Starved Soil in U.S. - : Above-average rainfall is needed in the U.S. Midwest and Great Plains to replenish soil parched from last year’s drought and ensure adequate harvests, a climatologist with the National Drought Mitigation Center said. Since Oct. 1, precipitation has broken the worst drought since the 1930s in eastern parts of the Corn Belt, while dryness continues to grip more westerly grain-growing areas, Mark Svoboda, the University of Nebraska-based climatologist, told reporters today in Washington. Unlike last year, when crops had some reserve moisture from 2011 to draw upon, fields have a deficit heading into planting season, he said. “We need a big spring, that’s the bottom line, because we don’t have the carryover going into 2013 we had going into 2012,” Svoboda said. While last year’s drought, which reduced corn yields to their lowest since 1995, has eased in some regions, it is still a major concern for farmers and ranchers. As of March 12, 53.3 percent of the contiguous U.S. was affected by moderate to exceptional drought, down from 54.2 percent a week earlier, according to the government’s Drought Monitor report. Exceptional drought, the most severe category, was at 5.5 percent for the second week.

NOAA Issues ‘Mixed Bag’ Spring Outlook for April, May and June - The West and South will continue to face more drought this spring, while the Midwest is likely to see heavy rains and some serious flooding as the northern snowpack melts, according to a seasonal forecast released by the U.S. government on Thursday. The Seasonal Outlook, a product of the National Oceanic and Atmospheric Administration (NOAA), provides national forecasts for temperature, precipitation, droughts and flood risks for the months of April, May and June, in order to help the public better prepare for the risk of extreme weather events. Seasonal Drought Outook, March 21 2013. Click to enlarge the image. Credit: NOAA “The big story for the upcoming spring appears to be the expectation that drought will continue across large parts of the South-Central and Southwestern United States, even expanding into California and Eastern Texas,” said Mike Halpert, acting director of the Climate Prediction Center in a video accompanying the outlook. “Some of those areas, in particular in the central part of that region, have experienced drought now for over a year, and at this time we just don’t see relief coming during the next three months.”

Land Prices - Anyhow, there's a nice article in the New York Times about farmland prices.  The article suggests (as do most NYT articles on land values) that it's just another bubble.  Since we've had a couple bubbles in relatively recent memory, now everything's a bubble. I'm not so sure.  There is a lot that's different about farmland values as compared to houses.  For one, we don't have quite the same level of debt relative to assets,  25.5%.  That's the highest since the 1980s boom.  But then given today's low interest rates, it's not really a fair comparison to the 1980s.  It's also less than half the 60%+ level of debt we had for housing at the peak of the bubble.  For another, we don't have stated-income mortgages.  Banks are more cautious with farms than they were with houses during the Countrywide Mortgage years. The simple analysis compares the price to rent ratio to current long-run interest rates. Today it looks like land that sells for around $10,000/acre rents for $500-600/year.  That's a 5-6% yield where 10 year T-bill rates at this writing are a little under 2% and 30-year T-bill rates are a little over 3%.

Ethanol’s Days of Promise and Prosperity Are Fading -  Backed by government subsidies and mandates, hundreds of ethanol plants rose among the golden fields of the Corn Belt, bringing jobs and business to small towns, providing farmers with a new market for their crops and generating billions of dollars in revenue for the producers of this corn-based fuel blend. Those days of promise and prosperity are vanishing. Nearly 10 percent of the nation’s ethanol plants have stopped production over the past year, in part because the drought that has ravaged much of the nation’s crops pushed commodity prices so high that ethanol has become too expensive to produce. A dip in gasoline consumption has compounded the industry’s problem by reducing the demand for ethanol. The situation has left the fate of dozens of ethanol plants hanging in the balance and has unsettled communities that once prospered from this biofuel.Thousands of barrels of ethanol now sit in storage because there is not enough gasoline in the market to blend it with — and blends calling for a higher percentage of ethanol have yet to catch on widely in the marketplace. Advanced biofuels from waste like corn stalks and wood chips have also yet to reach commercial-level production as some had predicted they would by now.

A Dangerous Fixation: Modern agriculture was born when an abundant supply of synthetic nitrogen started flowing at Oppau The Haber-Bosch process busted wide open the natural limits on plant growth. Nitrogen is a building block of all proteins and other molecules necessary for life, including DNA, and a critical nutrient for all plants and animals. Most of the nitrogen naturally fixed from the atmosphere for plant use is captured by bacteria that grow on the roots of legumes like peas and bean plants. Ammonia is transformed by these symbiotic bacteria into nitrates, which are then taken up by plants. This nitrogen cascade manifests in a variety of ways. Nitrogen oxides contribute to the production of ground-level ozone, or smog, which increases the risk of serious respiratory illness and cancer; a different problem arises in the stratosphere, where these gases destroy beneficial UV-blocking ozone. Nitrogen fertilizers also stimulate natural bacteria to produce more nitrous oxide, which contributes to acid rain and is a greenhouse gas that traps 300 times more heat per molecule than does carbon dioxide. Reactive nitrogen infiltrates surface streams and groundwater, polluting drinking wells. Excess levels of nitrogen in some ecosystems bolsters some species at the expense of others, leading to overall reduced biodiversity. Perhaps the most visible impacts are the huge “dead zones” in the Baltic Sea and other areas downstream from farms. One of the worst is in the Gulf of Mexico, where fertilizer runoff carried by the Mississippi River feeds huge algae blooms that deprive other organisms of oxygen. The zone changes in size depending on the flow volume of the river and other seasonal factors. Last year it was about 6,700 square miles—larger than Connecticut.

NASA’s Startling Satellite Data Shows Massive Drop In Mideast Freshwater Reserves During Warming-Driven Drought - A new study using data from a pair of gravity-measuring NASA satellites finds that large parts of the arid Middle East region lost freshwater reserves rapidly during the past decade. Scientists found during a seven-year period beginning in 2003 that parts of Turkey, Syria, Iraq and Iran along the Tigris and Euphrates river basins lost 117 million acre feet (144 cubic kilometers) of total stored freshwater. That is almost the amount of water in the Dead Sea. The researchers attribute about 60 percent of the loss to pumping of groundwater from underground reservoirs. The findings are the result of one of the first comprehensive hydrological assessments of the entire Tigris-Euphrates-Western Iran region. NASA’s twin Gravity Recovery and Climate Experiment (GRACE) satellites are providing a global picture of water storage trends and is invaluable when hydrologic observations are not routinely collected or shared beyond political boundaries. “GRACE data show an alarming rate of decrease in total water storage in the Tigris and Euphrates river basins, which currently have the second fastest rate of groundwater storage loss on Earth, after India,”

Pentagon weapons-maker finds method for cheap, clean water (Reuters) - A defense contractor better known for building jet fighters and lethal missiles says it has found a way to slash the amount of energy needed to remove salt from seawater, potentially making it vastly cheaper to produce clean water at a time when scarcity has become a global security issue. The process, officials and engineers at Lockheed Martin Corp say, would enable filter manufacturers to produce thin carbon membranes with regular holes about a nanometer in size that are large enough to allow water to pass through but small enough to block the molecules of salt in seawater. A nanometer is a billionth of a meter. Because the sheets of pure carbon known as graphene are so thin - just one atom in thickness - it takes much less energy to push the seawater through the filter with the force required to separate the salt from the water, they said. The development could spare underdeveloped countries from having to build exotic, expensive pumping stations needed in plants that use a desalination process called reverse osmosis. "It's 500 times thinner than the best filter on the market today and a thousand times stronger," said John Stetson, the engineer who has been working on the idea. "The energy that's required and the pressure that's required to filter salt is approximately 100 times less."

World With More Phones Than Toilets Shows Water Challenge - There are 6 billion mobile phones, according to the International Telecommunication Union, while 1.2 billion of the planet’s 7 billion people lack clean drinking water and 2.4 billion aren’t connected to wastewater systems.The most vulnerable -- whether in China, India or sub- Saharan Africa -- may be the young that must survive poor- quality or insufficient water while supplies are overused in other countries such as the U.S., said Maxime Serrano Bardisa, a water analyst for Bloomberg New Energy Finance in London. An American taking a five-minute shower uses more water than the average person in a developing-country slum uses for an entire day, according to BNEF. Statistics show at least one in three people don’t have a toilet. More people die from diseases caused by not having a clean, safe place to go to the bathroom than from HIV/AIDS, malaria and tuberculosis combined. Almost three-quarters of all diseases in India are caused by water contaminants.

The "De-Extinction" Fantasy - Advances in molecular biology and genetic manipulation have enabled humans to bring extinct animals back from the dead. You don't have to be a rocket scientist to see the irony in this—humans caused their extinction in the first place. Both in driving thes species to extinction and bringing them back, humans get to play God, which is clearly something they love to do. De-extinction is not a fantasy because we don't have the technological wherewithal to resurrect a few extinct animals—we do. It is a fantasy because doing so is viewed as somehow redeeming humankind by making up for the past "mistakes" which caused the animals to go extinct in the first place. But those weren't mistakes. Those extinctions happened as a result of characteristic human behavior. De-extinction is therefore the usual fantasy in which technology saves the day. In killing off the animals and then attempting to use technology to resurrect them, Homo sapiens is acting in strict accordance with its nature. For those of you still laboring under the illusion that humans are exercising Free Will in these big behavioral matters, this de-extinction case presents an excellent opportunity to rid yourself of your confusion on this non-trivial point.

A dramatic greening of the Arctic over the past 30 years -A remarkable transformation in the vegetation of the Arctic has occurred over the past 30 years, according to a study of satellite data published on March 10, 2013, in Nature Climate Change. The authors found that Arctic vegetation growth and temperatures in 2011 resembled what occurred 250 - 430 miles farther to the south back in 1982. That's the approximate distance in latitude between San Francisco and San Diego, or Washington D.C. and Atlanta. More greening occurred in Eurasia than North America, and the Arctic's new greenness is visible on the ground as an increasing abundance of tall shrubs and trees. Large patches of vigorously productive vegetation now span a third of the northern landscape, an area about equal to the contiguous United States. "Higher northern latitudes are getting warmer, Arctic sea ice and the duration of snow cover are diminishing, the growing season is getting longer and plants are growing more," said co-author Dr. Ranga Myneni of Boston University's Department of Earth and Environment, in a NASA press release. "In the north's Arctic and boreal areas, the characteristics of the seasons are changing, leading to great disruptions for plants and related ecosystems." The changes in the Arctic's vegetation are being driven by human-caused global warming, which is occurring in the Arctic at more than double the rate of the rest of the planet. This so-called "Arctic amplification" is due, in part, to the increased melting of ice and snow near the pole. When ice and snow melt, they uncover darker surfaces underneath, which absorb more sunlight and increase Arctic temperatures in a vicious cycle which melts even more ice and snow. Using 17 climate models, the researchers predicted that a continuation of warming in the Arctic in coming decades could lead to over a 1300 mile latitudinal shift in Arctic vegetation zones by the year 2100, compared to the period 1951 - 1980. That's a distance greater than the north-south extent of the contiguous United States. However, more frequent forest fires, increased pest outbreaks, and summertime droughts due to a warming climate might slow down Arctic plant growth.

"Cold winter extremes in northern continents linked to Arctic sea ice loss,"- The satellite record since 1979 shows downward trends in Arctic sea ice extent in all months, which are smallest in winter and largest in September. Previous studies have linked changes in winter atmospheric circulation, anomalously cold extremes and large snowfalls in mid-latitudes to rapid decline of Arctic sea ice in the preceding autumn. Using observational analyses, we show that the winter atmospheric circulation change and cold extremes are also associated with winter sea ice reduction through an apparently distinct mechanism from those related to autumn sea ice loss. Associated with winter sea ice reduction, a high-pressure anomaly prevails over the subarctic, which in part results from fewer cyclones owing to a weakened gradient in sea surface temperature and lower baroclinicity over sparse sea ice. The results suggest that the winter atmospheric circulation at high northern latitudes associated with Arctic sea ice loss, especially in the winter, favors the occurrence of cold winter extremes at middle latitudes of the northern continents.

Study: Climate change to worsen hurricane storm surge: Could the USA deal with a Hurricane Katrina every two years? Such a scenario is possible by the end of the century due to climate change, according to a study published Monday in the Proceedings of the National Academy of Sciences. The frequency of extreme storm surges — the deadly and devastating walls of water that roar ashore during hurricanes — is projected to increase by as much as 10 times in coming decades because of warming temperatures, the study finds. Global warming has already doubled the chance of storms like Katrina, according to the study, which was led by climate scientist Aslak Grinsted of the University of Copenhagen in Denmark. Storm surge is typically the biggest killer from hurricanes, and also usually causes the most destruction: Katrina killed more than 1,800 people and caused $125 billion in damage, mostly from storm surge, while Sandy last year killed dozens and caused at least $50 billion in damages. Grinsted's research shows that there will be a tenfold increase in frequency of storm surges if the climate becomes 3.6 degrees Fahrenheit warmer. "This means that there will be a 'Katrina' magnitude storm surge every other year," he says.

No, Global Warming Has NOT Stopped - The Mail on Sunday is a sister publication of the UK tabloid Daily Mail, and has a history of running ridiculously misleading claims downplaying the reality of climate change. Probably the worst offender is David Rose, who has been constantly hammering the idea—despite all the evidence against it—that the Earth has not been getting warmer for the past 16 years. To make this claim he has to egregiously cherry-pick his data, choosing where to look on a graph of temperatures to make it look like warming has slowed. I’ve shown just how Rose is so fast and loose with reality in previous posts, when he first came to my attention for claiming warming had stopped (and then tried to show that the Sun’s lack of activity would cool the Earth, a claim for which there is essentially no good evidence), and then again when he posted a graph so wrong it would mean getting an F in ninth-grade math. You can also read debunkings of Rose’s ridiculosities from the UK Met Office, the national weather service for the United Kingdom, which regularly has to issue articles debunking the nonsense posted in The Mail.Unfortunately, because he is so loud and given a venue in the The Mail, people who prefer fiction to reality use Rose’s claims to bolster their own. Big names in climate denial then write fact-free OpEd letters to venues like the Wall Street Journal, which get read by even more people, fooling them into thinking climate change isn’t happening.But it is happening. So Rose is still denial mode, writing yet another error-laden article for The Mail, again claiming warming has stopped, and again relying on grossly misinterpreting real data

BRICs Cook the Climate (Part One) -- Yves here. The viewpoint expressed in this article will not go over well in some circles, since the BRICs have insisted that they have the same right to pollute as much as first world countries did in getting to their living standard. But the problem is the planet cannot remotely support everyone in emerging economies living at first world living standards, at least the way we produce them now. And that isn’t operative only the energy and greenhouse gasses fronts. We’ll all need to eat lower down on the food chain as well.  As they meet in Durban on March 26-27, leaders of the BRICS countries – Brazil, Russia, India, China and South Africa – must own up: they have been emitting prolific levels of greenhouse gases, far higher than the US or the EU in absolute terms and as a ratio of GDP (though less per person). How they address this crisis could make the difference between life and death for hundreds of millions of people this century. How bad are the BRICS? The 2012 Columbia and Yale University Environmental Performance Index showed that four of the five states (not Brazil) have been decimating their – and the earth’s – ecology at the most rapid rate of any group of countries, with Russia and South Africa near the bottom of world stewardship rankings.[1] And China, South Africa and India have declining scores on greenhouse gas emissions, according to the EPI.

BRICs Cook the Climate (Part Two) - Second of two parts, see Part One here. A secondary objective of the Copenhagen deal – aside from avoiding emissions cuts the world so desperately requires – was to maintain a modicum of confidence in carbon markets. Especially after the 2008 financial meltdown and rapid decline of European Union Emissions Trading Scheme, BASIC leaders felt renewed desperation to prop up the ‘Clean Development Mechanism’ (CDM), the Third World’s version of carbon trading. Questioning the West’s banker-centric climate strategy – which critics term ‘the privatisation of the air’ – was not an option for BRICS elites, given their likeminded neoliberal orientation. By the end of 2012, the BRICS no longer qualified to receive direct CDM funds, so efforts shifted towards subsidies for new internal carbon markets, especially in Brazil and China. In February 2013, South African finance minister Pravin Gordhan also announced that as part of a carbon tax, Pretoria would also allow corporations to offset 40 percent of their emissions cuts via carbon markets. The best way to understand this flirtation with emissions trading is within the broader context of economic power, for it is based on the faith that financiers can solve the world’s most dangerous market externality – when in reality they cannot maintain their own markets.

Can the world fight climate change and energy poverty at the same time? - The United Nations has set two huge energy-related goals for the coming century. The first is to bring electricity to the 1.3 billion people who still don’t have it. The second is to curtail fossil fuel use and keep global warming below 2°C. Those are daunting goals. They’re also in somewhat awkward tension with each other. The first requires increasing the amount of energy the world uses, including fossil fuels. The second requires harnessing cleaner power sources, using energy more efficiently, and even conserving power. So is it possible to do both at once? The U.N. certainly thinks so. Last year, Secretary-General Ban Ki Moon unveiled his “Sustainable Energy for All” initiative, which aims to bring electricity to 1.3 billion people by 2030, and double the amount of renewable energy in the world, and double the pace at which the world gets more energy-efficient. The estimated price tag? Some $48 billion per year, financed by the private sector, governments and the public sector.In theory, assuming this plan was doable, it could be compatible with those broader climate goals. At least, that’s the conclusion of a recent study in Nature Climate Change, which found the world would still have a good chance of staying below 2°C if it achieved all three of these goals by 2030.

Calculating the True Carbon Footprint of a Renewable Energy Grid - Scientists have developed a new way to calculate the carbon footprint of batteries needed to store wind and solar power for the electrical grid. A key problem is that the US electrical grid has virtually no storage capacity, so grid operators can’t stockpile surplus clean energy and deliver it at night, or when the wind isn’t blowing. To provide more flexibility in managing the grid, researchers have begun developing new batteries and other large-scale storage devices. But the fossil fuel required to build these technologies could negate some of the environmental benefits of installing new solar and wind farms, according to Stanford University scientists. “It turns out that that grid storage is energetically expensive, and some technologies, like lead-acid batteries, will require more energy to build and maintain than others.” Most of the electricity produced in the United States comes from coal and natural gas-fired power plants. Only about 3 percent is generated from wind, solar, hydroelectric, and other renewable sources. The study considers a future US grid where up to 80 percent of the electricity comes from renewables. “Wind and solar power show great potential as low-carbon sources of electricity, but they depend on the weather,” says co-author Sally Benson, a research professor of energy resource engineering and the director of GCEP. “As the percentage of electricity from these sources increases, grid operators will need energy storage to help balance supply with demand. To our knowledge, this study is the first to actually quantify the energetic costs of grid-scale storage over time.”

The Hard Math on Fossil Fuels - How close is the world to devastating climate upheaval? My column on Wednesday argued that the natural gas boom is helping the United States reduce its emissions of heat-trapping carbon into the air, encouraging power generators to switch to gas from the much dirtier coal. American CO2 emissions last year totaled about 5.25 billion tons — almost 13 percent less than in 2007. But as some readers argued, the decline is so modest that it is almost irrelevant. To stop the world’s temperature from rising more than 2 degrees Celsius (3.6 degrees Fahrenheit) above the pre-industrial era — considered by most climate scientists as the prudent limit — emissions must fall much faster.   In fact, keeping to the target probably requires that a good share of the world’s fossil fuel remains untapped.

EPA Fuel Economy Report: Americans Vehicles Saw 1.4 MPG Jump Last Year - Yesterday, EPA released a new report that showed major fuel efficiency gains in American vehicles. EPA’s annual report that tracks the fuel economy of vehicles sold in the United States is signaling a significant 1.4 mile per gallon (mpg) increase for 2012 cars and trucks – along with a continued decrease in carbon pollution. The expected 1.4 mpg improvement in 2012 is based on sales estimates provided to EPA by automakers. EPA’s projections show a reduction in carbon dioxide emissions to 374 grams per mile and an increase in average fuel economy to 23.8 mpg. If achieved, these would be among the largest annual improvements since EPA began reporting on fuel economy. These improvements would more than make up for a slight 0.2 mpg decrease in 2011 that resulted primarily from earthquake and tsunami-related disruptions to vehicle manufacturing in Japan. From 2007 to 2012, EPA estimates that CO2 emissions have decreased by 13 percent and fuel economy values have increased by 16 percent. The report goes on to estimate that from 2007 to 2012, fuel economy increased 16 percent, with a 13 percent decline in carbon dioxide emissions. As Gina McCarthy put it, this saves money at the pump, reduces GhG emissions, and cleans the air.

With a Big If, Science Panel Finds Deep Cuts Possible in Auto Emissions and Oil Use - A panel convened by the National Academy of Sciences has concluded that deep cuts in oil use and emissions of greenhouse gases from cars and light trucks are possible in the United States by 2050, but only with a mix of diverse and intensified research and policies far stronger than those pursued so far by the Obama administration. Sadly, much of the report has a “same as it ever was” feel, including a push for “feebates” on efficient vehicles balanced by a surcharge on gas guzzlers: “Feebates,” rebates to purchasers of high-fuel-economy (i.e., miles per gallon [mpg]) vehicles balanced by a tax on low-mpg vehicles is a complementary policy that would assist manufacturers in selling the more-efficient vehicles produced to meet fuel economy standards. The report also describes the merits of a gasoline tax or “price floor” on petroleum-based fuels: Several types of policies including a price floor for petroleum-based fuels or taxes on petroleum-based fuels could create a price signal against petroleum demand, assure producers and distributors that there is a profitable market for alternative fuels, and encourage consumers to reduce their use of petroleum-based fuels. High fuel prices, whether due to market dynamics or taxes, are effective in reducing fuel use.

On the Watch for a Solar Storm - In 1859 the Sun erupted, and on Earth wires shot off sparks that shocked telegraph operators and set their paper on fire.It was the biggest geomagnetic storm in recorded history. The Sun hurled billions of tons of electrons and protons whizzing toward Earth, and when those particles slammed into the planet’s magnetic field they created spectacular auroras of red, green and purple in the night skies — along with powerful currents of electricity that flowed out of the ground into the wires, overloading the circuits. If such a storm struck in the 21st century, much more than paper and wires would be at risk. Some telecommunications satellites high above Earth would be disabled. GPS signals would be scrambled. And the surge of electricity from the ground would threaten electrical grids, perhaps plunging a continent or two into darkness. Scientists say it is impossible to predict when the next monster solar storm will erupt — and equally important, whether Earth will lie in its path. What they do know is that with more sunspots come more storms,

Why the EPA might delay its carbon rules for power plants: Is the Obama administration planning to backtrack on its carbon rules for power plants? That’s the big environmental question on everybody’s mind lately. The core of Obama’s second-term agenda on climate change, recall, involves new regulations from the Environmental Protection Agency on greenhouse-gas emissions. Last year, the EPA took a major step forward by proposing carbon standards for all future power plants — a rule that would make it impossible to build new coal-fired facilities in the United States. But now it looks like the EPA will miss its April 13 deadline for finalizing those rules, and my colleague Juliet Eilperin reported last week that the administration was even “leaning toward revising its landmark proposal to regulate greenhouse gas emissions from new power plants.” So what’s going on? Experts say that it all comes down to how much legal risk the EPA wants to take on. At issue here is a rule the EPA proposed last March that would set carbon emissions standards under the Clean Air Act for all new coal- and gas-fired power plants built in the United States. Going forward, any new plant would have to emit no more than 1,000 pounds of carbon-dioxide per megawatt-hour of electricity produced. Most modern natural-gas plants can meet that standard, so they should be fine. Conventional coal plants, however, average upwards of 1,800 pounds per megawatt-hour. That means it would be impossible to build a new coal facility in the United States unless it could capture and bury its carbon-dioxide — a technology that’s still very much unproven.

Old and dirtier or new and cleanlier - U.S. environmental regulators likely will delay finalizing rules to limit carbon emissions from new power plants, a measure that has been one of President Barack Obama’s top strategies to fight climate change, the Washington Post reported yesterday. The rules were proposed by the Environmental Protection Agency nearly a year ago. They are expected to be revised to set a separate standard for coal-fired plants, as opposed to natural-gas-fired plants, the newspaper said. The administration had been expected to tackle emissions from existing power plants, which are responsible for up to 40 percent of U.S. emissions, after finalizing the rules on new plants. An administration official said the report was not accurate because the EPA still was working on the rule. The official did say that sifting through the massive volume of comments was time-consuming. The EPA’s regulatory tracker said the so-called greenhouse-gas “New Source Performance Standard” for new power plants was to be finalized by the end of this month. But Gina McCarthy, nominated to head the EPA and who was in charge of EPA rules as assistant administrator for its office for air and radiation, hinted last month that finishing the proposal might take extra time because it had received nearly 2 million comments.

Green Groups Press EPA for Climate Rule Industry Loathes -  Environmental groups are stepping up pressure on President Barack Obama to issue the first greenhouse-gas limits for power plants as the utility industry seeks to weaken the standards before a deadline next month.  The Sierra Club and its allies say a top priority for Obama in meeting his second-term pledge to deal with climate change is for his Environmental Protection Agency to issue restrictions on carbon dioxide coming from power plants. They warned against bowing to industry criticism and scaling back or putting off the rule, which spurred a record 2.67 million public comments, most in support of it.

China's Suntech Power in $541m debt default - China's Suntech Power Holdings, the world's biggest solar panel maker, has defaulted on its debt. The firm said it had failed to repay $541m (£360m) worth of bonds due on 15 March. That triggered cross-default clauses on its other loans as well. The failure to make payments on the bonds could lead to potential lawsuits against Suntech. However, the firm said it was in talks with the bondholders and was unaware of any legal proceedings being initiated. "It is currently a very difficult time for our company and our industry, but the management and board of Suntech are committed to finding a way forward," David King, chief executive of Suntech, said in a statement. "We are currently exploring strategic alternatives with lenders and potential investors, which could help to set us on a path towards longer term success." The firm has outstanding loans from International Finance Corporation as well as Chinese domestic lenders.

China’s Wind Power Production Increased More Than Coal Power Did For First Time Ever In 2012 - Amid all the news about coal and pollution problems in China you might have missed this one: According to new statistics from the China Electricity Council, China’s wind power production actually increased more than coal power production for the first time ever in 2012.Thermal power use, which is predominantly coal, grew by only about 0.3 percent in China during 2012, an addition of roughly 12 terawatt hours (TWh) more electricity. In contrast, wind power production expanded by about 26 TWh. This rapid expansion brings the total amount of wind power production in China to 100 TWh, surpassing China’s 98 TWh of nuclear power. The biggest increase, however, occurred in hydro power, where output grew by 196 TWh, bringing total hydro production to 864 TWh, due favorable conditions for hydro last year and increased hydro capacity. In addition, the growth of power consumption slowed down — in Chinese terms a modest increase of 5.5 percent — influenced by slower economic growth, and possibly the energy use targets for provinces set by the Chinese central government.

Coal Is the Fuel of the Past and the Future - Hal Quinn, president of the National Mining Association, says coal in 2016 will again be the world’s favorite carbon fuel, pushing out petroleum as the world's largest source of energy. This may seem especially surprising at a time when the use of coal in the United States is in decline, edged out by cheap natural gas and increasingly strict regulations from the Environmental Protection Agency. Yet a rising tonnage of coal is being used for electric generation worldwide. The Third World is hungry for coal, as it increases electricity production. In the developed world, nuclear setbacks -- most notably the aftereffects of the Fukushima-Daiichi nuclear power plant accident, when a tsunami wave knocked out six reactors -- have helped boost the commitment to coal. The accident has forced the Japanese to burn more coal and the Germans to begin phasing out their nuclear power plants. Other European countries are dithering, and the cost of building nuclear plants is risin

America’s Dirtiest Coal Company - Here’s the story: In the fall of 2007, Peabody Energy Corp. (BTU), the coal-mining giant, spun off all its unionized mines into a new company, Patriot Coal Corp. (PCXCQ) In the process, it got rid of the promises it had made over generations to coal miners and their families.  Or, as Peabody’s chief executive officer put it, “We’re reducing our legacy liabilities roughly $1 billion.” This was such a good idea that another coal giant, Arch Coal Inc. (ACI), unloaded its union mines on Patriot as well, though it cycled them first through yet another front. All totted up, Patriot now had 10,000 retirees and their health-care benefits on its books.  This company was designed to fail. Patriot is almost certainly the only five-year-old company on earth with three times as many retirees as employees, 90 percent of whom never worked for the company. And fail it did, declaring bankruptcy last summer. Now it’s going through Chapter 11 reorganization and hoping to emerge freed of its obligations for the pensions and medical care of those miners.

NRC Delays Action on Vent Plan While to Study Options - U.S. nuclear regulators delayed action on a recommendation that utilities install radiation filters at 31 U.S. reactors, a victory for the industry that estimated the proposal may cost as much as $20 million per unit. The Nuclear Regulatory Commission yesterday said its staff should consider other approaches that would block release of radiation during an accident. The standards, developed in response to the Fukushima nuclear disaster in Japan, must be in place by March 2017, according to a commission statement. Scott Burnell, an NRC spokesman, said the agency is seeking an enhanced ability for nuclear-plant operators to “protect public health and safety.” “There will be some sort of filtering solution on these plants,” Burnell said. The NRC approved an order requiring the vents to work even if a plant loses power, as happened to the Fukushima reactors. NRC staff also recommended utilities be required to install radiation filters as a further safety improvement.

Sealed 'black cells' stall radioactive waste cleanup at Hanford nuclear reservation -  In the late-1990s, the Hanford nuclear reservation's British contractor designed the world's largest nuclear waste treatment plant around a fateful feature: "black cells." Fifteen years, a new set of contractors corpora-terrorists and $8 billion of construction later, the U.S. Department of Energy is still trying to figure out whether they'll work. The cells, enormous concrete boxes lined with stainless steel, will hold mixing silos to process waste from 44 years of making plutonium for nuclear bombs. They'll be highly radioactive and inaccessible to humans for the treatment plant's life. They're also central to Hanford's [insane] plans to treat 56 million gallons of nuclear waste stored in 177 underground tanks. Recent disclosures of fresh leaks in six of those tanks, a half-dozen miles from the Columbia River, has brought renewed urgency to finishing the treatment plant, already delayed by two decades.

Power at Fukushima nuclear fuel ponds 'partially restored' - Cooling systems to spent fuel ponds at Japan's Fukushima nuclear plant have been partially restored after a power failure, operator Tepco says. The outage hit ponds at reactors 1, 3 and 4, although cooling to the reactors themselves was not affected. Cooling had been restored to the pool at reactor 1, with cooling at the reactor 3 and 4 pools expected to resume on Tuesday evening, Tepco said. It is assessing the cause of the outage, which began on Monday evening. The "highest priority" was being placed on restoring the cooling system to the spent fuel pool at reactor 4, Kyodo news agency quoted Tokyo Electric Power Company (Tepco) spokesperson Masayuki Ono as saying. The hottest of the ponds, its temperature stood at 30.5C on Tuesday morning, Tepco said, well below the safety limit of 65C. It estimated it would take four days to reach that limit.

Rat at Fukushima Plant May Have Caused Blackout - The operator of the crippled Fukushima Daiichi nuclear plant said Wednesday that it had found what it believed was the cause of an extended blackout that disabled vital cooling systems this week: the charred body of a rat.The operator, Tokyo Electric Power Company, said that when its engineers looked inside a faulty switchboard, they found burn marks and the rodent’s scorched body. The company said it appeared that the rat had somehow short-circuited the switchboard, possibly by gnawing on cables.  The company, known as Tepco, has blamed problems with the switchboard for the power failure that began Monday, cutting off the flow of cooling water to four pools used to store more than 8,800 nuclear fuel rods. It took Tepco almost a day to restore cooling to the first of the affected pools, with cooling of the final pool resuming early Wednesday.

Record cesium level detected in fish caught near Fukushima nuclear plant - The Japan Times: Tokyo Electric Power Co. said Friday it detected a record 740,000 becquerels per kilogram of radioactive cesium in a fish caught in waters near the crippled Fukushima Daiichi Nuclear Power Station, equivalent to 7,400 times the state-set limit deemed safe for human consumption. The greenling measuring 38 cm in length and weighing 564 grams was caught near a water intake of the four reactor units in the power station’s port on Feb. 21 during the utility’s operation to remove fish from the port.Tepco has installed a net on the sea floor of the port exit in Fukushima Prefecture to make it hard for fish living near the sediments of contaminated soil to go elsewhere.According to Tepco, the previous record of cesium concentration in fish was 510,000 Bq/kg detected in another greenling captured in the same area. Currently, fishermen are voluntarily suspending operations off the coast of the prefecture except for experimental catches.

University of Tennessee’s Fracking Plan Stirs Protests - The University of Tennessee faced protests here on Friday over its proposal to let a private company drill for natural gas across a Environmentalists say opening the Cumberland Forest in eastern Tennessee to hydraulic fracturing, a process known as “fracking,” could harm wildlife and scenery on the 8,000-acre tract of state-owned land. But the university says it would create a rare, controlled environment in which experts could study the environmental impact of the controversial drilling technique, while also generating revenue to finance research. The State Building Commission voted unanimously on Friday to approve the proposal to open the site up for bidding. Once a company is selected, the commission would need to approve the terms of the contract. Mark Emkes, the head of the state’s Department of Finance and Administration, said he was sensitive to environmental concerns but supported the university’s position. “There is a lot of demand for this supply.” The forest has been overseen by the university’s agriculture department since 1947 and, after decades of strip mining and clean-cutting trees by private companies, has been restored to a biologically diverse condition. The university has been considering leasing out the land since 2001.

The Dangers Of Fracking - infographic 

The Facts On Fracking - OPPOSITION to fracking has been considerable, if not unanimous, in the global green community, and in Europe in particular. France and Bulgaria, countries with the largest shale-gas reserves in Europe, have already banned fracking. Protesters are blocking potential drilling sites in Poland and England. Opposition to fracking has entered popular culture with the release of “The Promised Land,” starring Matt Damon. Even the Rolling Stones have weighed in with a reference to fracking in their new single, “Doom and Gloom.” Related Times Topic: Natural Gas (Fracking)Do the facts on fracking support this opposition? There is no doubt that natural gas extraction does sometimes have negative consequences for the local environment in which it takes place, as does all fossil fuel extraction. And because fracking allows us to put a previously inaccessible reservoir of carbon from beneath our feet into the atmosphere, it also contributes to global climate change. But as we assess the pros and cons, decisions should be based on existing empirical evidence and fracking should be evaluated relative to other available energy sources. What exactly is fracking, or more formally hydraulic fracturing?

Another Look at Natural Gas - After my column on Wednesday about how the nation’s natural gas boom is helping reduce emissions of heat-trapping carbon, I received a bunch of e-mail arguing that gas obtained by hydraulic fracturing could, on the contrary, worsen climate change. The main reason is that fracking wells — where water, chemicals and sand are pumped at high pressure into horizontal shafts to fracture shale rock deep underground — leak. Cheap natural gas is helping to cut carbon emissions because power companies are using it to replace coal, a much dirtier fuel. But the benefits would be wiped out if a lot of the gas escaped into the atmosphere, because natural gas is mostly methane, which traps much more heat in the atmosphere than carbon dioxide.  One study last year suggested that replacing coal with gas would reduce greenhouse gas emissions only as long as the leakage of methane into the air from gas production did not exceed 3.6 percent.

Shale gas development impacts on surface water quality in Pennsylvania - pdf - Proceedings of the National Academy of Science - Concern has been raised in the scientific literature about the environmental implications of extracting natural gas from deep shale formations, and published studies suggest that shale gas development may affect local groundwater quality. The potential for surface water quality degradation has been discussed in prior work, although noempirical analysis of this issue has been published. The potential for large-scale surface water quality degradation has affected regulatory approaches to shale gas development in some US states, despite the dearth of evidence. This paper conducts a large-scale examination of the extent to which shale gas development activities affect surface water quality. Focusing on the Marcellus Shale in Pennsylvania, we estimate the effect of shale gas wells and the release of treated shale gas waste by permitted treatment facilities on observed downstream concentrations of chloride (Cl−) and total suspended solids (TSS), controlling for other factors. Results suggest that (i) the treatment of shale gas waste by treatment plants in a watershed raises downstream Cl− concentrations but not TSS concentrations, and (ii ) the presence of shale gas wells in a watershed raises downstream TSS concentrations but not Cl− concentrations. These results can inform future voluntary measures taken by shale gas operators and policy approaches taken by regulators to protect surface water quality as the scale of this economically important activity increases.

The “Fracking” Revolution Comes to China - With some predicting China will import 79% of its oil by 2030, could domestic shale gas extraction help China meet its energy needs? As shale gas fever sweeps through Beijing, analysts are looking at the costs and benefits of extracting what is increasingly a controversial source of energy. But for China, with its growing middle class, the immediate and long-term demand for energy has the potential to spark a revolution in shale gas before sufficient and safe technological know-how and regulations are developed.

Long-Term Costs Of Fracking Are Staggering - All the hype by the fossil fuel industry about energy independence from fracking (hydraulic fracturing) in tight gas reservoirs like the Barnett Shale has left out the costs in energy, water and other essential natural resources. Furthermore, a recent report from the Post Carbon Institute finds that projections for an energy boom from non-conventional fossil fuel sources is not all it’s cracked up to be. The report cites a study by David Hughes, Canadian geologist, who says the low quality of hydrocarbons from bitumen – shale oil and shale gas – do not provide the same energy returns as conventional hydrocarbons due to the energy needed to extract or upgrade them. Hughes also notes that the “new age of energy abundance” forecast by the industry will soon run dry because shale gas and shale oil wells deplete quickly. In fact, the “best fields have already been tapped.” We must ask, is it worth the cost when it takes from 3 million to 9 million gallons of water per fracture to extract this fuel? The withdrawal of large quantities of surface water can substantially impact the availability of water downstream and damage the aquatic life in the water bodies, says Wilma Subra, scientist and national consultant on the community and environmental impact of fracking. When groundwater resources are used, aquifers can be drawn down and cause wells in the area to go dry.

“A hydraulic fracturing peace treaty? Not so fast, my friend.” - Yesterday, newspapers coast-to-coast ran a story declaring the end of conflict over hydraulic fracturing operations by oil and gas drillers. One headline read, ‘Both sides agree on tough new fracking standards.’ Another read, ‘Fracking companies, environmentalists and philanthropies join forces.’ A third read, ‘Oil, gas companies and environmentalists agree on new fracking standards.’The story behind the headlines collapses almost immediately. This is not a conflict between oil and gas companies and “environmentalists.” The drillers are up against landowners, neighbors, and taxpayers; people who drink municipal water, people who drink well-water; doctors, nurses, firefighters, EMS technicians,and so on. To portray this is just “environmentalists” makes it seem as though it is just two special interest groups at odds. It sets up a situation where one or more groups with the word “Environment” in their name think they can cut a deal with the drillers.The groups that claimed to represent the “environmentalist” side were led by the Environmental Defense Fund, and also included the Clean Air Task Force and the Pennsylvania Environmental Council. Last year, billionaire Michael Bloomberg, of the financial and media corporation Bloomberg Limited Partnership, gave the Environmental Defense Fund $6 million over three years to pursue and announce just such deals with oil and gas drillers.

Russia, Saudi Arabia hope to emulate U.S. shale boom - Fracking isn’t just for shale. In Russia, producers are importing techniques from the U.S. to squeeze billions of dollars of extra oil from Soviet-era fields.  TNK-BP, Russia’s third-largest producer, will use hydraulic fracturing combined with horizontal drilling in almost half the wells it sinks this year, a sixfold increase in just two years, the company said. OAO Rosneft, OAO Lukoil and OAO Gazprom Neft have similar plans. Meanwhile, Saudi Arabia, the world’s biggest oil exporter, will drill about seven test wells for shale gas this year, according to Oil Minister Ali Al-Naimi.  “We know where the areas are,” Al-Naimi said at a conference in Hong Kong Monday, referring to the country’s shale gas deposits. “We have rough estimates of over 600 trillion cubic feet of unconventional and shale gas so the potential is very huge and we plan to exploit it.”

Guardian: 'White House Officials ... Gave Strong Indications The President Is Inclined To Approve The Keystone XL Pipeline' -The Obama Administration has, tragically, signaled it may retreat on two major climate issues. The UK Guardian reported Friday: on the most immediate environmental decision in his in-tray — the future of the controversial Keystone XL pipeline project – White House officials indicated on Friday that Obama’s green and liberal supporters would be in for a disappointment. Officials signalled that the president was inclined to approve the project. And as if that wasn’t enough to suggest Obama’s recent strong words on climate (“If Congress Won’t Act Soon To Protect Future Generations, I Will“) were just that — words – the Washington Post reported on Friday: The Obama administration is leaning toward revising its landmark proposal to regulate greenhouse gas emissions from new power plants, according to several individuals briefed on the matter, a move that would delay tougher restrictions and could anger many environmentalists.

Spending, budget bills bring energy, Keystone in focus - The Senate will vote on amendments to a government-funding bill Tuesday that could include several energy-related provisions. The $984 billion federal spending bill is the opening salvo for such measures. The separate Senate and House budgets likely to get votes this week will offer other avenues. Among the potential amendments: stripping the military biofuels program, requiring federal agencies to plan for climate change and circumventing President Obama’s authority to decide the Keystone XL oil sands pipeline’s fate. On Keystone, lawmakers in both the House and the Senate have floated bills to force its approval. Keystone requires Obama’s signature because it crosses national borders. Environmental activists are trying to stop those efforts dead in their tracks.

Oil Sands Show Obama’s Policy-Making at Its Worst - What a mess President Obama makes as he tries to placate both sides of a dispute and comes out looking just inept. The president’s possible approval of the 2,000-mile-long pipeline from the oil sands (previously known as the tar sands, and most correctly bitumen sands) of Alberta, Canada, to the refineries and shipping terminals of the U.S. Gulf Coast is a tale of political calculation gone sadly wrong. His clumsiness is not helped by a favorable environmental statement issued recently. In January 2012, the president was expected to give his approval and that of the State Department to what is an international agreement, he punted. Concerned about stout opposition in his own administration, and particularly from his Environmental Protection Administration chief Lisa Jackson, Obama demurred and requested more studies. This did two things: It antagonized the Canadian people, always sensitive to slights from the United States, and humiliated the government of Prime Minister Stephen Harper. Joe Oliver, Canada's minister for natural resources, told me on the record just before Obama’s statement that he had had strong indications from the administration that the Keystone XL pipeline would be approved. In the event, he and the Canadian government were outraged and embarrassed.

German scientists quit oil sands research over public climate concerns— Pressure over environmental concerns has forced Germany’s largest scientific organization to pull out of joint research with Alberta on better ways to upgrade oil sands bitumen. German scientists with the Helmholtz-Alberta Initiative will no longer work on such projects, Bernd Schneider, lead scientific co-ordinator for the Helmholtz Association, said Tuesday. “This bitumen upgrading will now be quitted,” Schneider said from Potsdam, Germany. The initiative was created in 2011 with a five-year, $25-million commitment from the Alberta government, in addition to other funding. The plan was to bring together the University of Alberta and one of Europe’s largest scientific groups to improve environmental and engineering performance in the oil sands.

‘We, as a nation, have to wake up’: First Nations leaders vow to do what it takes to block oil pipelines - An alliance of First Nations leaders is preparing to fight proposed new pipelines both in the courts and through unspecified direct action. Native leaders from both Canada and the United States were on Parliament Hill on Wednesday to underline their opposition to both the Northern Gateway and Keystone XL pipelines. The first would tie the Alberta oil sands to the West Coast, while the second would send bitumen to refineries on the American Gulf Coast. “We’re the ones that’s going to save whatever we have left of this earth,” he said. Chief Reuben George of the Tsleil-Waututh First Nation on Vancouver Island said it’s time to act against the federal government’s resource development agenda. “We, as a nation, have to wake up,” he said. “We have to wake up to the crazy decisions that this government’s making to change the world in a negative way.”

Chevron Pipeline Leaks Thousands of Gallons of Diesel into Precious Wetlands - On Monday a drop in pressure was detected along one of Chevron Corp’s pipelines which carries diesel and jet fuel between the Salt Lake City refinery and Boise, Idaho. Chevron (NYSE: CVX) had to close the valves and stop all flow through the 29,400 barrel a day pipeline. It is estimated that a total of between 100 and 150 barrels (4,200 gallons and 6,300 gallons) leaked into the precious wetlands around the Salt Lake just weeks before millions of birds are expected to descend on the area on their journey to nesting sites further north. John Whitehead, the assistant Director of the Utah division of water quality has said that “one of the concerns we have is we have three weeks to clean up before the northern migration. More important than risk of fire are the toxic effects on the ecosystem. The diesel is floating right now. That allows the cleanup to happen more easily. But we will be looking at longer term impacts to the wetland area it flows through.” The northern migration occurs each year as millions of birds land in the regions on their way from warm lands to the South of Utah to nesting areas in the north of Utah.

BP asks judge to halt ‘fictitious’ and ‘absurd’ Deepwater oil spill payouts - BP launched its promised appeal against "fictitious" and "absurd" oil spill compensation payouts on Friday and asked a judge to temporarily halt those made on a so-called business economic loss basis. In a New Orleans court filing, the oil giant gave examples of businesses in industries far from the spill and unconnected with the coastline that enjoyed strengthened earnings in the spill year of 2010 and yet had received millions in spill compensation. The British oil and gas group, which has already sold a substantial part of its business to pay reparations and fines for the disaster, said it could be "irreparably harmed" by the payouts without relief from the court, because they could cost it "billions" more than it budgeted for when it agreed to a settlement in April 2012. BP was appealing a March 5 ruling, which upheld the way the compensation was being paid to business claimants wanting recompense.

U.S. Crude Discount Narrows as Pipeline Problems Fade - The price gap between the world's two most-important oil contracts shrunk to the narrowest in nearly eight months Tuesday, as new transportation links helped U.S. oil futures extend gains versus Europe's Brent crude. Increasing pipeline capacity and rising rail shipments in recent months have helped shrink an oil-supply glut in the middle of the U.S. that has weighed on domestic oil prices. After start-up issues in January, the newly expanded Seaway Pipeline is set to increase oil shipments to the Gulf Coast later this year. Rail transport of oil also has more than doubled over the past year, according to industry statistics, moving crude to refineries along the coast that didn't have access to domestic crude output. And last week, operators of the Longhorn pipeline reversed its flow to send oil from west Texas to refineries along the Gulf Coast, further relieving the glut. The new transport links, part of a broader transformation of the U.S. from energy consumer to major energy producer, are showing signs of overcoming a two-year struggle to move oil from new fields in North Dakota, Texas and other regions to the refiners pumping out gasoline and other fuels.

Tanker rout reversing as U.S. buys more Middle East oil - Oil companies are increasing tanker bookings to haul Persian Gulf crude to the U.S. at the fastest pace since September, spurring a threefold surge in shipping rates by the end of April for Frontline 2012 Ltd. and other owners. Charters doubled to 26 million barrels in the four-week period to March 16, from the corresponding period to Feb. 28, according to Morgan Stanley. Daily revenue for very large crude carriers, each hauling 2 million barrels, will reach as high as $30,000 within six weeks, from $12,800 now, the bank estimates. Shares of Frontline 2012 will rise 17 percent in 12 months, the average of six analyst estimates compiled by Bloomberg shows. Refineries in the Gulf of Mexico, the world’s largest importing region, are buying more oil because U.S. consumption is expanding at the fastest pace in two years. The Organization of Petroleum Exporting Countries, 70 percent of whose output comes from the Persian Gulf, increased production for the first time in six months in February, data compiled by Bloomberg show. The extra cargoes are easing the biggest regional glut in tankers for this time of year since at least 2010.

Why is Iran Willing to Suffer Economic and Political Isolation, just for Nuclear Power?: In the past year, tensions surrounding Iran’s nuclear ambitions reached unprecedented levels, verging on war. With Israel assigning a “red line” for Iran’s proliferation efforts, the world nervously awaited for a likely Israeli air strike on suspected Iran’s nuclear sites—with all of its enormous political and economic consequences. Concurrent to this mounting crisis were the less discussed, though no less important, sanctions against Iran. Acting with much of the global community, the United States was able to convince a host of nations, including some of Iran’s closest trading partners, to cease major trade with Iran. As of now, the Islamic Republic is not only in a precarious security position, it is also as diplomatically and economically isolated as it has ever been. The question that inevitably arises is why Iran is willing to go to such great pains to acquire nuclear weapons. What in the regime’s view can justify courting a military conflict and enduring crippling sanctions?

President Xi's Russian visit to seal oil and gas pipeline deals -- CHINA and Russia are expected to strike deals on boosting oil trade and building a natural gas pipeline during President Xi Jinping's forthcoming state visit to Russia, Vice Foreign Minister Cheng Guoping said. Cheng told reporters agreements had been reached among leaders of both states, with enterprises from the two countries now at the negotiating table in Moscow. Xi will visit the country from tomorrow to Sunday at the invitation of President Vladimir Putin, Cheng said. Xi's visit is a continuance of the long-held tradition that heads of the two states exchange visits after taking office, he said, showing that China's new leadership attaches great importance to Sino-Russian relations, and the high level and special nature of the bilateral relationship.

WTF Chart Of The Day: China PMI Vs Electricity Production - HSBC's China Flash PMI just printed above expectations at 51.7, disappointing those hoping for more stimulus but just Goldilocks enough to satisfy the world that China is firing on all cylinders... But, and there's always a but, the following chart suggests that the diffusion-driven survey-based PMI data may be just a little different from the hard data on the ground. Of course, everything could have magically turned around in the last 3 weeks (aside from Copper demand and PBoC repo/rev. repo that is). For now, we tip our hat to the well planned PMI print as indicative that all is well in the smog-ridden pig-barren nation but scratch our chin at just what is powering all this growthiness...

China's Bullet Trains and Mega City Quality of Life - Megacity growth in the developing world is fueled by a desire to access their large local labor markets. Growing megacities suffer from high levels of traffic congestion and pollution, which degrade local quality of life. Transportation technology that allows individuals to access the megacity without living within its boundaries offers potentially large social benefits, because individuals can enjoy the benefits of urban agglomeration while not paying megacity real estate rents and suffering from the city’s social costs. This paper presents evidence supporting the claim that China’s bullet trains are playing this role. The bullet train is regarded as one of the most significant technological breakthroughs in passenger transportation developed in the second half of the 20th century. Starting in 2007, China has introduced several new bullet trains that connect megacities such as Beijing, Shanghai, and Guangzhou with nearby cities. Through facilitating market integration, bullet trains will stimulate the development of second- and third-tier cities. By offering households and firms a larger menu of location alternatives, bullet trains help to protect the quality of life of the growing urban population. We document that this transport innovation is associated with rising real estate prices in the nearby secondary cities

Mainland China's First Default Raises Specter Of China's Credit Bubble Collapse - For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th - and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings - owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits - and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms. We already know the little discussed but gargantuan size of China's corporate bond market (which dwarves the US relative to GDP) as the mis-allocated credit tsunami of the last few years begins to hit its lending limit - just as Chinese corporate leverage is surging.

The Dangers of a Chinese Financial Crisis AFR finally has some realism coming out of the spate of mining conferences underway in Hong Kong: hile the view on China is overwhelmingly positive on the main floor of the Credit Suisse Asian Investment conference, where executives are talking about continued strong demand for steel and a fast-growing economy, a darker picture has emerged in the private rooms and closed sessions such as the one titled Asian banks: banking crisis – who’s next, India or China.For China, the fear is that all the preconditions are in place for a banking crisis, including an explosion in credit at the same time the economy is slowing.“I think there is a 60 to 70 per cent chance that the Chinese government will need to bail out the banks in three years,” said one participant. He warned that the knock-on effects for growth and commodity prices would be severe.“If China can’t maintain the pace of fixed asset investment, then growth falls below 5 per cent or even to zero,” he said. “The market is not mentally prepared for that.”

Record Corporate Insolvencies in Australia - The housing bubble in Australia has popped but the biggest declines are still ahead. Meanwhile other problems have surfaced, as expected in this corner, namely Insolvencies hit record levels in January A total of 628 firms collapsed in January, the highest-ever for what is a traditionally quiet month and a 21.2 per cent increase from the previous year, accounting company Taylor Woodings said in a report released on Wednesday. NSW recorded the highest number of collapses among the states, with 189 insolvencies, although it was 2.6 per cent lower than the previous corresponding period. In contrast, insolvencies doubled in Western Australia from 29 in January 2012, to 58 this year. In the first seven months of the 2013 financial year, ASIC reported 6053 company insolvencies, the second-largest recorded and 0.2 per cent lower than last year.

Mastermind of QE reappointed at Bank of Japan, suggests more change- The Bank of Japan on Monday reappointed Masayoshi Amamiya, a mastermind of quantitative easing, to oversee a key division charged with drafting monetary policy, a sign it is gearing up for a radical shift in its policy framework under a new leadership that takes over this week. The expected new BOJ governor, Haruhiko Kuroda, has pledged to do whatever it takes to achieve the central bank's new 2 percent inflation target focusing on expanding its balance sheet with purchases of longer-dated government bonds. The reappointment of Amamiya, a 57-year-old career central banker admired for his skills in coming up with creative banking ideas, may heighten the chance the central bank will shift its policy closer to the quantitative easing campaign of the last decade. "Amamiya is the architect of many of the BOJ's existing policy frameworks. His return now may be to review them and prepare for an overhaul in time for the BOJ's next rate review in April," said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo.

Japan’s central bank chief vows to end deflation - The newly installed governor of Japan's central bank said Thursday that he plans to do whatever he can to end deflation and break the economy out of the doldrums. After a meeting with Prime Minister Shinzo Abe, Haruhiko Kuroda told reporters he had reiterated his pledge to "do everything we can to get the economy out of deflation." Kuroda, a Finance Ministry veteran who most recently headed the Asian Development Bank, has firmly backed Abe's economic strategy including setting a 2 percent inflation target which he says he hopes to meet within two years. While Abe is hoping for a quick reflation of the economy, Finance Minister Taro Aso expressed doubts Thursday during questioning in parliament. "To be honest, I'm skeptical whether (prices can rise by 2 percent) within two years so easily," Abe and some experts view years of falling prices, which tend to discourage corporate investment, as a key reason for Japan's economic stagnation over the past two decades. However there are doubts about how much looser monetary policy can help after years of near-zero interest rates.

Nobel Laureate Stiglitz Gives "Abenomics" Thumbs Up - Prime Minister Shinzo Abe’s policy of strong-arming the Bank of Japan into adopting an aggressive monetary easing policy has gotten a thumbs up from one of the world’s best-known economists–Nobel laureate Joseph Stiglitz of Columbia University. The aggressive easing and fiscal stimulus advocated by Mr. Abe are exactly what Japan needs in this age of “competitive currency devaluation,” Prof. Stiglitz said Friday in an interview with media organizations in Tokyo. On Thursday, he met with Mr. Abe and conveyed support for his economic policies. Prof. Stiglitz’s approval of Mr. Abe’s policies–known as “Abenomics”–is so strong he wants his own country to follow suit.“What we really need in the U.S. is expansionary policies that Abenomics is bringing into Japan,” he said, lamenting the political gridlock in Washington and the inability of the U.S. Congress to do much by way of economic stimulus.

Japan's Feb trade deficit at $8.1 billion as exports lag - Japan recorded a trade deficit of 777.5 billion yen ($8.1 billion) in February despite the weaker yen as exports of cars and auto parts slipped while energy-related imports surged nearly 12 percent. It was the eighth consecutive monthly deficit following a record monthly deficit of 1.63 trillion yen in January. Exports in February totaled 5.28 trillion yen ($55.1 billion) while imports surged to 6.06 trillion yen ($63.2 billion), the Finance Ministry reported Thursday. Over recent months, the yen's weakening by about 20 percent against the U.S. dollar has helped export manufacturers but also boosted the cost of purchases of LNG and crude oil to make up for electricity shortfalls as all but two of Japan's nuclear power plants are operating following the March 2011 Fukushima Dai-Ichi plant disaster. Japan's trade deficit rose to a record 6.93 trillion yen ($78.3 billion) in 2012 as fuel imports surged and a bitter territorial dispute with China provoked anti-Japanese riots, hammering exports to the world's No. 2 economy.

Japanese February Exports Fall 2.9% - Japan’s exports fell more than economists forecast and the nation’s trade deficit persisted, underscoring challenges to Prime Minister Shinzo Abe’s campaign to revive the world’s third-biggest economy. Shipments dropped 2.9 percent in February from a year earlier, the Finance Ministry said in Tokyo today. The median estimate of 22 economists surveyed by Bloomberg News was for a 1.7 percent decrease. Imports rose 11.9 percent, leaving a trade shortfall of 777.5 billion yen ($8 billion).  Extra easing by the Bank of Japan is “likely to weaken the yen, boosting import costs and expanding the trade deficit,” Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo and a former central bank official, said before the release. “The positive impact of the declining yen has yet to be seen.”

Japanese Exports Drop More Than Expected Smashing Adj. Trade Balance To New Record Low - It appears Abe and his henchmen had better stop doing things and say something as the huge devaluation of the JPY so far is NOT having the effect he had hoped for. Exports dropped 2.9% - more than expected - and while imports rose less than expected, the currency drop still meant an 11.9% surge in imports. All this means is that on a seasonally-adjusted basis, the Japanese Trade Balance just hit a new all-time record low (negative). USDJPY is strengthening on the news... it seems that well-placed non-news headline at 2am Japan time is well worth it now to cover this debacle... We assume the lesson is - just wait, "if we devalue, they will come."

Enter Big Government, S Korean Welfare State? - One of the unspoken things many Asians feel has contributed to Western malaise is the ubiquity of extensive welfare states. Why, then, would leading Asian countries flirt with consigning themselves to a similar fate? Apparently, this is the very question facing South Korea--your archetypal success story. Needless to say, this success has not benefited everyone equally, hence calls to reform the Korean system away from massive industries (chaebol) and provide more opportunities for others not fortunate enough to be so favoured: From childcare to old-age pensions, Park [Geun-Hye] wants to ramp up social spending by $125bn over the next five years as she responds to growing complaints that the proceeds of growth have been skewed towards the rich and the chaebol conglomerates that dominate the economy.  Ms Park is presenting this as a turning point after decades of small government. While the country is, by some measures, as prosperous as Italy or New Zealand, its spending on public services remains far lower than in most developed countries. Ms Park believes that this must change as the nation enters the next stage of its development. But do her sums add up?

Some Countries Making Headway Dealing With Aging Populations, S&P Says - Aging populations are putting a lot of strain on government finances everywhere from the U.S. to Japan. Yet in a new report, Standard & Poor’s Ratings Services says several countries in the developed world are making headway curtailing their increasingly expensive social programs and getting closer to putting their finances on a sustainable footing. Marko Mrsnik, a senior European sovereign analyst with S&P, says in a report released Tuesday night that “several nations” have started implementing health-care and pension changes to deal with their aging populations, which will require them over time to devote ever-bigger shares of spending to health benefits. That’s hurting people right now, given the weakness of many economies around the globe, especially in Europe, but could yield benefits over time. “If kept in place, S&P believes that the structural changes and budget consolidation many sovereigns have put in place in recent years should improve their prospects for maintaining sustainable public finances,” Mr. Mrsnik said. “The pressures of population aging on public finances could be gradually contained over the long term.”

Indonesia's wage wars - Hundreds of factory workers have gathered in front of the Indonesian Supreme Court building in central Jakarta, their arms raised in anger. The demonstrators seem oblivious to the searing heat, despite the fact they are dressed in heavy black jackets - a uniform given to them by their union leaders. The atmosphere is almost festive at times - a traditional workers' song blares from speakers, and a few dozen members of the crowd start singing and dancing. Protests such as these with workers demanding a higher minimum wage are now a regular occurrence in big cities in Indonesia, taking place on an almost weekly basis. As the economy has grown, workers, , worried they are getting left behind, want a bigger piece of the pie.

Global Slowdown Accelerates Driven By Confidence / New Orders Plunge - Goldman's 'Swirlogram' places the global industrial cycle squarely in the 'Slowdown' phase as growth momentum fades rapidly. Driven by plunges in aggregate confidence levels and New Orders (less inventories) - as well as CAD and AUD data - this reinforces last month's preliminary view of a slowdown beginning. Goldman notes we could potentially see weaker global activity over the coming months. Is it any wonder we are seeing bellweather names missing in a big (un-unique) way.

Eurozone Trade Deficit -  One thing worth noting about the European mess (in addition to the latest trouble with Cyprus) is that Europe has been running a noticeable trade deficit for the last couple of years (chart above).  This isn't a long term structural situation, but is more likely due to the fact that the ECB hasn't reduced interest rates as much as other major central banks.  This in turn makes the Euro stronger than it otherwise would be, which makes European exports more expensive, and makes foreign imports more attractive to European citizens. Obviously, this isn't helpful to Europe's recovery.

The Very Confident Jean-Claude Trichet - Paul Krugman  - I’m somewhat belatedly getting to Jean-Claude Trichet’s op-ed in the Times; now that I have, I find myself puzzled. What, exactly, was his purpose in writing this? For that matter, what, exactly, did it say? I live and breathe this stuff, and I can’t get much of a message here except “trust us, we know what we’re doing”. That said, I guess it’s an endorsement of austerity policies, which, he says, are working: Confidence is returning and paving the way for growth and job creation. And he explains why: austerity is good Not because it is an elementary recommendation to care for your sons and daughter and not overburden them, but because it is good for confidence, consumption and investment today. Oh, wait — the second quote there comes from remarks Trichet made in September 2010. Just as a reminder of how prescient these remarks proved:

Europe cannot allow unfinished business to fester - Europe’s economic situation is viewed with far less concern than was the case six, 12 or 18 months ago. Policy makers in Europe far prefer engaging the US on a possible trade and investment agreement to more discussion on financial stability and growth. However, misplaced confidence can be dangerous if it reduces pressure for necessary policy adjustments. There is a striking difference between financial crises in memory and financial crises as they actually play out. In memory, they are a concatenation of disasters. But as they play out, the norm is moments of panic separated by lengthy stretches of apparent calm. Is Europe out of the woods? Certainly a number of key credit spreads, particularly in Spain and Italy, have narrowed substantially. But it is far from clear that market conditions have improved. Investors are still limited. Restrictions limit the ability of pessimistic investors to short European debt. Regulations enable local banks to treat government debt as risk-free. This allows them to access funding from the European Central Bank on non-market terms. And there is the suspicion that, in extremis, the central bank would come in strongly and bail out bond holders. Remissions are sometimes followed by cures and sometimes by relapses. A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment.

In colorblind France, rising diversity tests unity - The streets in one of the Paris region's toughest housing projects, Les Bosquets, or The Groves, capture the daily realities of the French-style ghetto, an enclosed world where many residents don't speak French. Delinquency soars and the unemployment rate is estimated at some 40 percent, nearly four times the national rate. Montfermeil's town hall could not provide an official figure. Just 17 kilometers (10.5 miles) from Paris, Les Bosquets is light years from the world of Parisians. Les Bosquets, like other projects that surround the big cities of France, belies this nation's special brand of integration whereby newcomers from afar assimilate into the French culture, becoming one with it whatever their origins. Despite quiet debate, French authorities, whatever their political colors, have stood by a French model that's colorblind to differences, in total contrast to the U.S. notion of a vibrant melting pot. The story of France is often viewed as the antithesis to the U.S., one in which race and ethnicity are not counted in the government census and minority rights need not exist, due to residents who share a common identity of "French." Many French shudder at the word "multiculturalism." But housing projects such as Les Bosquets, often cut off by poor public transport from the cities, raise questions about how much assimilation is really happening in France and whether the French model of integration, long the nation's pride, is wearing thin.

Italian president urges unity as poll pressure grows(Reuters) - Italian President Giorgio Napolitano appealed to political leaders on Sunday to work together to form a government, but his appeal fell on deaf ears and pressure grew for a new poll after last month's deadlocked election. The threat of months of political instability following the inconclusive ballot has triggered warnings across Europe that Italy cannot afford to delay urgent reforms to shore up its massive public debt and boost its sickly economy, now stuck in recession for over a year. Napolitano is due to begin consultations with political leaders on Wednesday to see if there is any chance of establishing a government after the election which left parliament split between three deeply opposed forces.

Ireland Recovers, and Recovers, and Recovers - Paul Krugman

  • March 2010: “Greece has a role model, and that model is Ireland” — Jean-Claude Trichet
  • December 2011: “As European leaders scramble to overcome the Continent’s debt crisis, many are pointing to Ireland as a model for how to get out of the troubles.”
  • March 2012: “Confidence is returning to Ireland and to Europe. The Irish economy is turning the corner. ” — Jose Manuel Barroso.
  • The latest GDP figures:

A stupid idea whose time had come -A “one-off” often isn’t. Calling something after “stability” isn’t very stable. Saying that something is not a precedent usually makes it one. Presenting the Cyprus bailout’s “upfront one-off stability levy” for depositors in Cypriot banks:It is a levy of 9.9 per cent on deposits above €100k, but also of 6.7 per cent on those holding amounts below €100k down to zero. The move by the Eurogroup will also hit resident and nonresident depositors alike. We see no sign of a floor to protect the savings of the average Limassol widow or Larnaca house-buyer. Carsten Schneider, a German politician of the SPD, hooted this month about burning “Russian black money”. Rather less about the little people. What a socialist. Still, note that it is what it is: a tax, not a haircut or a sign of banks blowing up. That’s the whole point.

Cyprus Rapes Citizens with 6.75% to 9.9% "Tax" on Deposits; Contagion of Idiocy is Everywhere - The hot news out of Cyprus today is the direct confiscation of depositor's money via an alleged tax on deposits of 6.75 percent on amounts less than 100,000 euros and 9.9 percent above that.  The measures will raise 5.8 billion euros, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels. The euro region’s bailout kitty and, possibly, the International Monetary Fund will look to make up the shortfall. A partial “bail-in” of junior bondholders is also possible. Funds to pay the levy were frozen in accounts immediately, ECB Executive Board Member Joerg Asmussen said.  Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a percent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion.  Read that last paragraph carefully. Officials raped Cyprus citizens to avoid "unsettling investors in larger countries". Here's the deal. Large investors should have risk. The nannycrats and thugs in Europe still don't see it this way and this is the most blatant example of theft yet, all in the name  of preventing "contagion".

Cyprus Savers Get Robbed By Eurozone Bail Out -- Size matters when it comes to bank bail outs and European politics.  In the most brazen bail out deal yet, the citizens of Cyprus just had their savings seized to give the money to the banks.  I kid you not.  Here is the Eurogroup statement: These measures include the introduction of an upfront one-off stability levy applicable to resident and non-resident depositors.  Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders. Bail In means private citizens are responsible for the bail out.  These masked terms mean anyone with over €100,000 has a whopping 9.9% of their money seized and anyone with deposits in a Cyprus bank below €100,000 is going to lose 6.75% of their savings deposited in Cyprus financial institutions.  Unbelievable.  The savings deposit seizure was announced when the banks are closed, so instead of a run on the banks, we have a run on the ATMs.  Needless to say those ATMs are limited in withdrawals and also ran out of money fairly quickly . Lockdown of Cypriot Savings was preplanned and has already taken place before the announced private deposit seizure.

Sowing the wind - The terms of Cyprus's bank bailout have shocked the world. For the first time, small bank depositors will take a hit. Small depositors have long been regarded as sacrosanct. Although in theory they rank alongside bondholders and large depositors in the queue for funds, in practice they have always been protected - usually by taxpayers.  There is a widespread belief that because small deposits are insured in nearly every developed nation, therefore they should not take losses when banks are bailed out instead of being allowed to fail. Depositors losing money when banks are kept afloat, when they would have escaped unscathed if the banks failed, seems both unfair and illogical. Hence the reason for the "shock and awe" response to the Cyprus bailout terms. A 6.75% one-off "stability levy" will be imposed on deposits covered by deposit insurance (under 100,000 Euros). The levy on larger deposits will be 9.99% - not a great difference, really, and much less than might have been expected: after all, depositors could lose 100% of deposit value above 100,000 Euros. Additionally, there will be higher withholding taxes on interest. These penalties will be applied to all deposits, including those in well-managed banks that don't require bailout. The description of this as a "tax" or levy is a bit of a fudge. Under what type of taxation scheme are people provided with shares to compensate them for the taxes they have paid? But that is what is happening here. Depositors will be provided with bank shares to the value of their losses. They are being "bailed in" in the same way as junior bond holders: a percentage of their deposits are being converted to equity. The money taken from the depositors will go to the sovereign to compensate it for the cost of bailing out the banks. At the end of the process, the sovereign will be left with a manageable amount of debt, and the banks will be owned by their depositors and junior bondholders. In effect they will have become mutuals.

Cyprus depositors’ fate sealed in Berlin - Unbeknown to the Cypriot delegation members as they entered the hulking Justus Lipsius summit building in Brussels on Friday night, their fate was already sealed: their German counterparts wanted about €7bn for the estimated €17bn bailout of their country to come from deposits in the country’s banks. “They were hand in hand with Finns, who were much more dogmatic,” said one senior eurozone official involved in the 10-hour marathon talks that stretched until 3am on Saturday morning. “Had that not happened, full bail-in,” the official added, using the terminology for wiping out nearly all Cypriot bank accounts. Mr Anastasiades was left reeling by the response to his request for modest adjustments, according to Cypriot officials. Wolfgang Schäuble, the German finance minister, said Nicosia would immediately have to raise as much as €7bn from depositor haircuts. A stunned Mr Anastasiades decided to walk out. “The president said, ‘I can’t do that’,” said one member of the Cypriot delegation. “You’re trying to destroy us. Even if I agree to it, I can’t pass it [through parliament].” But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations. The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.

The Cypriot Haircut, by Paul Krugman - With all the problems in Greece, Italy, Spain, and Portugal I wasn’t watching Cyprus. But that’s where the big euro news is this weekend; in return for a bailout, Cyprus is supposed to impose a large haircut — that is, loss — on all depositors in its banks. You can sort of see why they’re doing this: Cyprus is a money haven, especially for the assets of Russian beeznessmen; this means that it has a hugely oversized banking sector (think Iceland) and that a haircut-free bailout would be seen as a bailout, not just of Cyprus, but of Russians of, let’s say, uncertain probity and moral character. The big problem, however, is that it’s not just large foreign deposits that are taking a haircut; the haircut on small domestic deposits is a bit smaller, but still substantial. It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!” Tomorrow and the days immediately following should be very interesting.

Deposit insurance, bank runs, international currencies, and the inflation tax - Just a short post on one point about the recent Cyprus business.  Governments usually provide deposit insurance to prevent bank runs. If the banking system is too big, and the banks' losses are too big, relative to the government's capacity to pay that insurance claim, that's a problem. But the problem is very different if the government (unlike Cyprus) can print currency to pay bank deposits that are liabilities in that same currency. If worse comes to worst, the government just prints as much currency as is needed to pay the depositors what they are owed. If that means is has to print "too much" currency, that's a problem, because it means inflation will be "too high". But that inflation will adversely affect the real value of currency and bank deposits equally. So even if people expect it might happen again, this doesn't cause a bank run, where people try to get out of bank deposits into currency. It's a very different sort of problem in a country like Cyprus where the government cannot print money. If people see a "one-time tax" on bank deposits happen once, they might expect it to happen again. And if they expect it to happen again they will try to get out of bank deposits into currency. Which is a bank run. The difference is that inflation from printing too much money is a tax on currency too. Cyprus cannot tax currency; it can only tax bank deposits.

With Regard to the Cyprus Bank Deposit Confiscations: Is Nothing Sacred? - Customer funds were long considered 'sacred' at brokerage firms, and were segregated from the proprietary operations of the company. And they were stolen at MF Global, and no one has been punished.Bank deposits, protected by insurance and the guarantees of the government, were long considered 'sacred' at financial institutions. And they are being stolen in Cyprus as a matter of convenience to the crony capitalists in Europe, who are loathe to force the banks to take their losses.  And so they impose them on the people.  And this is what was done, and is still being done, in the US and the UK as well.  It is merely being done in a different form. The Parliament of Cyprus will vote on this plan on Monday. There are always various ways, and people, who will be willing to justify such theft. The banks were taking dirty Russian money, the people are lazy spendthrifts. This is always how it goes when the oligarchs steal to finance their gambling losses.  And in their insular arrogance they always go too far, provoke a reaction, and then act surprised.

GOLDMAN: The Bailout Could Be A Great Deal For Cyprus --Goldman Sachs is out with a reaction to the Cyprus bailout deal negotiated over the weekend, the most controversial part of which entails a haircut on bank deposits, something that hasn't yet been seen until now in the euro crisis saga.  Goldman analyst Francisco Garzarelli says that while the deal could cause some short-term volatility, the fallout from Cyprus will likely be contained, assuming the controversial measures are able to survive a vote in the Cypriot parliament this week (which remains an open question).The biggest worry is about how depositors in other peripheral euro area countries like Spain will perceive the deal, and whether they will question the safety of the deposits in their own banks, which could also be in need of another bailout in the future.Garzarelli thinks that the ECB stands at the ready, writing, "Should there be evidence of deposit flight in peripheral countries, ad hoc operations, including the use of ELA facilities, are possible."

Why Cyprus' Rescue Matters To Us - Cyprus may be one of the eurozone's tiniest economies - its third smallest - but for the next 48 hours or so, it may be the single currency area's most important. The point is that there could be serious repercussions for other financially over-stretched economies, such as Spain's and Italy's, from the nature of Cyprus's 10bn-euro (£8.7bn) bailout - which includes, for the first time in any eurozone rescue, losses imposed directly on depositors in banks. These losses, running to almost 6bn euros, stem from an emergency levy of 9.9% on bank deposits over 100,000 euros (£86,600) and 6.75% below that. The levy serves as a caution to lenders to banks that they should take care where they place their funds and avoid banks which overstretch themselves - as Cypriot banks did. But precisely the same arguments - for what is known as a "bail-in" by private-sector creditors - were put by liberal-market purists at the peak of the banking crises in Ireland and Spain. In the end, eurozone governments were terrified that if lenders to Spanish and Irish banks were punished, there would be a devastating domino effect of withdrawals of funds from banks in other weaker economies - a domino effect that would jeopardise the survival of the eurozone. So, reckless lenders to Spanish and Irish banks were not punished.

Why today’s Cyprus bailout could be the start of the next financial crisis - It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.Early Saturday, the nation reached an agreement with international lenders for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut. Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.

Cyprus bail-out risks UK troops’ savings - Thousands of British savers, including armed forces personnel, are to be hit by a eurozone tax on Cypriot banks after the island’s £8.7bn bail-out. Approximately €2bn (£1.7bn) of British deposits held in Cyprus will be subject to a levy of up to 10pc.  British-born Cypriots and their families, some of the UK’s 3,500 service personnel on the island and holiday home owners with savings locally are likely to be affected. The tax will raise €5.8bn to refinance the country’s ailing banks, in addition to the eurozone funds. The Government is considering reimbursing some of those affected.  In a departure from previous eurozone bail-outs – the Mediterranean country is the fifth to have turned to the eurozone for financial aid – savers are being asked to make sacrifices in a move which critics say sets dangerous precedents. As well as the levy on savers, the Cypriot government has also agreed to increase its corporation tax rate by 2.5 percentage points to 12.5pc to boost revenues.

This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus - Cyprus's banks, like many banks in Europe, are bankrupt. Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have. The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008. The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus's banks pay part of the tab. Not the bondholders. The depositors. The folks who had their money in the banks for safe-keeping. When Cyprus's banks reopen on Tuesday morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone's emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.

IMF: Eurozone Banks Are In Trouble, Trample Taxpayers and Democracy To Bail Them Out! - Eurozone nations have to fundamentally reorganize themselves and shift sovereignty away from national parliaments to new layers of centralized, transnational, beyond-control bureaucracies that can decide at will when to extract untold wealth from taxpayers. That’s what the Eurozone has to do, according to the “first ever European Union-wide assessment of the soundness and stability of the financial sector,” released Friday by the institution that the world couldn’t do without, the IMF. “Financial stability has not been assured,” the report stated flatly about the fiasco in the Eurozone, despite ceaseless hope-mongering by Eurocrats and politicians, and banks remain “vulnerable to shocks.” The report, which never mentioned banks or countries by name, discussed a number of “risks” that could topple these banks, with some of these “risks” already having transitioned to reality: “Declining growth.” Banks with “excessive leverage, risky business models, and an adverse feedback loop with sovereigns and the real economy” are particularly vulnerable. Hence, most banks. A number of European countries have been in a deep recession, some of them for years. So “declining growth” is a reality, and these “shocks” are happening now, said the IMF in its more or less subtle ways.

Cyprus Bailout: What Happened to Absolute Priority? -Here's the situation as I understand it. Cyprus has unmanageable government debt, not least because of the liabilities that stem from supporting the insolvent banking sector. The EU will put in money to pay off Cyprus's bondholders, but only if there is a copay from Cypriot taxpayers.  Cyprus seems to have decided that the best way to do this co-pay is a (supposedly) one-time tax on all bank deposits. The tax is slightly progressive, with a higher rate on big Euro deposits.   There is, of course, always the issue of whether there should be a bailout. But putting that aside, the problem with the Cypriot bailout, as I see it, is that it is a bail-in that does not comply with absolute priority because being done through the tax system, rather than through an insolvency proceeding. The problem isn't that Cypriot depositors have to make a co-pay, but that the co-pay costs are not being divvied up among Cypriot depositors and the other creditors and equityholders of Cypriot banks either per absolute priority or ratably. For all of the complaints about absolute priority violations with GM and Chrysler's bankruptcies, the Cypriot situation looks much worse.

Europe is risking a bank run - On Saturday morning, the finance ministers of the eurozone may well have started a bank run. With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe. I am using the expressions “in all but name” and “effectively” because legally, Cyprus is not defaulting or imposing losses on depositors. The country is levying a tax of 6.75 per cent on deposits of up to €100,000, and a tax of 9.9 per cent above that threshold. Legally, this is a wealth tax. Economically, it is a haircut. I myself had favoured a haircut, or tax, on deposits of more than €100,000 – the portion not covered by the deposit insurance guarantee. There is no moral or economic reason to protect foreigners who have decided to park large sums in a Cypriot bank account for whatever reason. Such a haircut would also have been in line with the philosophy of deposit insurance. Its purpose is not to provide absolute certainty, but to prevent bank runs, which is what happens when you go after small depositors. Well-designed deposit insurance schemes thus impose ceilings.

Facing Bailout Tax, Cypriots Try to Get Cash Out of Banks - In a move that could set off new fears of contagion across the euro zone, anxious depositors drained cash from automated teller machines in Cyprus on Saturday, hours after European officials in Brussels required that part of a new 10 billion euro bailout be paid for directly from the bank accounts of ordinary savers. The move — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered. Although banks placed withdrawal limits of 400 euros, or about $520, on A.T.M.’s, most had run out of cash by early evening. People around the country reacted with disbelief and anger. “This is a clear-cut robbery,” said Andreas Moyseos, a former electrician who is now a pensioner in Nicosia, the capital. Iliana Andreadakis, a book critic, added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”

Cyprus as Precedent: Will There Be Bank Runs Elsewhere? - Anyone want to take bets on whether there will be runs on Italian, Spanish, and Portugese deposits? That's my bet. I'm not sure that we'll see small retail depositor runs, but I would predict that high dollar deposits in all of those countries will start flowing abroad very fast before any capital controls can catch up with them. And that will push up borrowing costs for those banks if they want to retain high-dollar deposits.

The Cyprus precedent - I stuck my neck out in January, saying that Cyprus was “certain” to default.  But now the bailout has arrived, and — in something of a shocker — there’s no default. Instead, €5.8 billion of the bailout is going to come directly from depositors in Cyprus’s banks, in the form of what the EU is calling an “upfront one-off stability levy”. Don’t for a minute believe that this decision is part of some deeply-considered long-term strategy which was worked out in constructive consultations between the EU, the IMF, and the new Cypriot government. Instead, it’s a last-resort desperation move, born of an unholy combination of procrastination, blackmail, and sleep-deprived gamesmanship. The details aren’t entirely clear yet: we’re told that deposits of more than €100,000 are going to have to pay a tax of 9.9%, for instance, but it’s not obvious whether that applies to all of the large deposit or just to the amount over €100,000. And there’s still a real chance that the Cypriot parliament could scupper the whole deal. But for the time being, everybody’s going on the assumption that the deal will go through, that Cyprus will get its €10 billion bailout from the EU, and that everybody with a Cypriot bank account in Cyprus (a group which includes members of the UK military) will see their accounts taxed by at least 6.75%.

The War on Common Sense Continues, by Time Duy: This weekend, European policymakers opened up a new front in their ongoing war on common sense. The details of the Cyprus bailout included a bail-in of bank depositors, small and large alike. As should have been expected, chaos ensued as Cypriots rushed to ATMs in a desperate attempt to withdraw their savings, the initial stages of what is likely to become a run on the nation's banks. Shocking, I know. Who could have predicted that the populous would react poorly to an assault on depositors?  Everyone. Everyone would have predicted this. Everyone except, apparently, European policymakers. The situation remains fluid, with even the final hit to depositors still unknown. The Financial Times is reporting that authorities are considering altering the plan to shift the burden on the tax away from smaller depositors. Moreover, at this point it is not clear is the parliment will concede to the measures despite a last minute push by ECB officials to affirm the deal before markets open Monday. And the impact on other nations in the European periphery remains unknown. At this point, I would imagine the damage is done, regardless of any modification of the plan. Cypriots know that their savings are now on the bargaining table. To be sure, there will be repeated reassurances that this is a one-off event, but how trustworthy are such assurances? Indeed, if Greece is any example, this will not be the last bailout, and thus plenty of time for the European policymakers to insist on another bite at the apple. Perhaps if authorities completely backtrack on the plan could they stave off a bank run, but even on that I am not confident. Trust is easy to lose and hard to earn.

In Cyprus, Europe Sets a New Standard for Stupidity - The European Union’s astonishing fumbling over Cypriot banks has both immediate and longer-term implications. On March 21, when the banks are due to reopen, the question is whether a run will destroy the Cypriot banking system. If that can be avoided, the next question will be what’s left of the EU’s plans to reform its system of bank supervision -- and what happens the next time an EU bank gets into trouble. The danger of a run is real. This past weekend, the government of Cyprus and its financial backers, the EU and the International Monetary Fund, settled on a bailout formula for troubled Cypriot banks that included a 6.75 percent levy on insured deposits. The ensuing outcry prompted a revision to the deal that will curb or eliminate this provision before the banks reopen. But the message has already been sent: In the EU, insured deposits aren’t safe. One can only marvel at this turn of events. Earlier in the financial crisis, Europe’s governments recognized that stronger deposit insurance was a vital part of shoring up their banking systems. They agreed to guarantee deposits of as much as 100,000 euros ($130,000). Last weekend, with the IMF (unbelievably) on board, they decided to renege on that commitment.

Will Cyprus Become Creditanstalt 2.0? - Yves Smith - The cheery view that Europe had moves past its crisis now looks to have been a tad premature. The astonishing weekend revelation that Cyprus had struck a deal for a Eurozone rescue of the island nation’s banks that hinged on a deposit grab, um, tax, of 6.75% of deposits below €100,000 and 9.9% for those above €100,000, sends a message that anyone in a weak bank in a periphery country, particularly a large deposit holder, is at risk. The one thing that America learned in the Great Depression is that to prevent debilitating bank runs, depositors need to be sure their holdings are safe. And if you need to extend government guarantees to provide that reassurance, then government bloody well better keep the banks on a short leash to make sure you don’t have to pay out on those guarantees all that often. The recklessness of letting financiers talk governments out of constraining bank activities is coming home to roost. Creditanstalt, an Austrian bank that collapsed in 1931, precipitated a financial panic that led to a series of bank failures and a currency crisis, a classic combination of contagion worsened by poor official responses. The Cyprus deposit-seizure scheme has the potential to kick off a similar broad-based financial unraveling, but whether it does depends on both customer and official reactions.  Mind you, it’s not certain this deal will get done. The Cyprus parliament has to approve it, with the vote to take place Sunday. That has been postponed as a result of public outrage and the difficulty of obtaining the needed support. Cypriot president Nicos Anastasiades is trying to restructure the program to take less from small depositors and more from the big dogs.  But this thoughtful gesture apparently did not go over in some circles. The Greek blog Clockwork Project (hat tip George P) says, per Google Translate: An angry phone call from Russian President Vladimir Putin received early Sunday morning, Nikos Anastasiadis. The Putin reportedly said verbatim in-Cypriot President: Better to put the German flag at the Presidential Palace. Do not you understand that this decision destroy your country?

Cyprus Bailout Math; Can Depositors Be Left Whole? - In Cyprus Details: Blackmail, Bulldozer Threats, Bank Holiday to Tuesday; Reflections on Arrogance and Idiocy, I made the claim that Cyprus depositors need not be liable for any of this.  First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders. What I wrote above was a guess, but an accurate one. Reader Jeff Baryshnik, Baryshnik Capital Management Inc., in Toronto provides some specifics in an email to me a few hours ago.  I read with interest your article on the Cyprus bailout deal.  After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.  By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks’ liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers.   Instead of raising 5.8Bn EUR from depositors, it could raise 1.4Bn from combined market cap, 2.0Bn from bondholders and preferred shareholders, and 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books. This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative. 

Cyprus Races to Prevent Bank Crisis - Uncertain it has the votes to pass the measure, Cyprus's government postponed an emergency parliamentary session on Sunday that had been called to vote on the levy, while the cabinet petitioned the central bank to extend Monday's bank holiday by at least another day, a move that was likely. ... Anastasiades—sworn into office just a little over two weeks ago—directly controls 20 seats in Parliament through his center-right Democratic Rally party. He is supported by the Democratic Party with eight seats as well as the European Party with two seats and third environmental party—which has balked at the levy-with another one seat. To pass, the measure must have at least 28 votes in Cyprus's 56-seat Parliament, with a tie vote going to the government under Cypriot parliamentary rules. But with some coalition lawmakers wavering, others demanding some sort of compensation for deposit holders, and at least one parliamentarian currently out of the country and unable to vote, passage is by no means assured.

How To Start A Global Banking Crisis: Cyprus Edition - kid dynamite - Cliff notes:  Cyprus has a bank deposit insurance program (100k EUR).    They also have a asset/liability issue.   They decided to impair insured deposit accounts with a mandatory 6.7% “tax” on insured accounts under 100k EUR, and a 9.9% “tax” on accounts over 100k EUR.   You can call it a tax, confiscation, levy, one time special fee, bail-in, or whatever else you like, but the bottom line is this:   they have stated that their deposit insurance is not money-good. Here’s the question that everyone seems to be asking, but no one seems to have the answer to: If you have money in a Cyprus bank*, why on earth would you leave that money there after this event?   And oh, while you’re at it trying to answer that question, please ask yourself the same question, only change “Cyprus” to “Spanish”… and then to “Italian”… or maybe “Irish”… The Eurozone has, by endorsing this plan, committed banking suicide.   Without valid deposit insurance, how do you stop runs on the banks?    Didn’t Cyprus just *ensure* a run on their own depository system?

Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now! - In Cyprus, a decision was made to screw savers with a 6.75% to 9.9% "Tax" on deposits. Supposedly this move was made to "avoid unsettling investors in larger countries and sparking a new round of market contagion." In reality, the action was mandated theft, imposed by EU officials to protect senior bondholders. How can such an action do anything but cause contagion?  The move is expected to raise a mere 5.8 billion euros according to Dutch Finance Minister Jeroen Dijsselbloem, leader of the euro-area ministers. Fallout from this action will cost far more than that.What is someone in Greece, Spain, or Italy supposed to think?

Europe Does It Again: Cyprus Depositor Haircut "Bailout" Turns Into Saver "Panic", Frozen Assets, Bank Runs, Broken ATMs - Late last night, after markets closed for the weekend, following an extended discussion the European finance ministers announced their "bailout" solution for Russian oligarch depositor-haven Cyprus: a €13 billion bailout (Europe's fifth) with a huge twist: the implementation of what has been the biggest taboo in European bailouts to date - the  impairment of depositors, and a fresh, full blown escalation in the status quo's war against savers everywhere. Specifically, Cyprus will impose a levy of 6.75% on deposits of less than €100,000 - the ceiling for European Union account insurance, which is now effectively gone following this case study - and 9.9% above that. The measures will raise €5.8 billion, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, said.But it doesn't stop there: a partial "bail-in" of junior bondholders is also possible, as for the first time ever the entire liability structure of a European bank - even if it is a Cypriot bank - is open season for impairments. The logical question: why here, and why now? And what happens when the Cypriot bank run that has taken the country by storm this morning spreads everywhere else, now that the scab over Europe's biggest festering wound is torn throughout the periphery as all the other PIIGS realize they too are expendable on the altar of mollifying voters and investors in the other countries that make up Europe's disunion.

Is Euro-geddon Nigh? - One of the most basic lessons from the 1930's, as well as the semi-regular banking panics of the 19th century, is the importance of preventing bank runs.  This can be accomplished by providing a mechanism, such as deposit insurance, that makes depositors confident that they will always be able to get their money out - therefore they won't feel an urgent need to take it out at the first sign of trouble. Even though its been evident for a while that Europe, or at least its "leaders", seem determined to forget (or ignore) the lessons of economic history, what they're doing with Cyprus is rather stunning.  Neil Irwin writes: It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us. Early Saturday, the nation reached an agreement with international lenders for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut. Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.

The Cyprus bailout fiasco - The major news over the weekend was the continuing incompetence of Europe’s policymakers, who seem determined to make the euro crisis look as much like Great Depression II as possible. There’s already 27 percent unemployment in Greece and Spain. Ireland and Portugal are at 15 percent and 16 percent, respectively. Fascism is making unsettling inroads, and Germany is ascendant. The eurocrats have apparently decided that what the continent needs now are some good old-fashioned bank runs.Deposit insurance helps prevent the kind of crippling mass withdrawals we saw in the Great Depression. If you know the government has insured your money, you’re much less likely to withdraw your money in a panic on rumors of your bank’s impending demise. But in the bailout of Cyprus’s banks, depositors who have less than €100,000 in the bank—and thus are supposed to be fully insured—will lose nearly 7 percent of their money. Meantime, the banks’ bondholders won’t take any haircuts and their rich (disproportionately Russian) depositors—will have their haircut subsidized by small-time Cyprus savers. The Financial Times, in a standout editorial, calls the move “morally unconscionable” and “a conscious choice to make poorer people pay to help richer ones.”

Merkel Says "Cyprus is a Special Case" (So was Greece); Is Spain the Next "Special Case"? Portugal? Merkel Guarantees German Deposits - The pertinent question for today is "How many lies will people believe?" I ask that because a German government spokesman says The compulsory levy to pay the depositors in Cyprus, was a special case as Merkel guarantees German deposits for the first time since 2008. The compulsory levy to pay the depositors in Cyprus, is a "special case", says the Chancellor. Given the compulsory levy in Cyprus, Chancellor Angela Merkel has renewed the deposit guarantee for German savers. "It's the mark of a guarantee" said government spokesman Steffen Seibert. Cyprus is a special case. There are "no parallels with other countries, and thus Cyprus has no effect on them," said Seibert. Unrest among depositors and savers in other euro area countries is therefore not justified.I seem to recall Greece too was a "special case". How many more special cases are there? What country is the next special case? Is it Portugal or Spain?Toss a coin because it does not matter. Deposit guarantees cannot be believed.Anyone and everyone in Spain and Portugal ought to be pulling out every cent they can out of their banks. Trust has been lost and once again the idiots in Brussels underestimated the reactions to their thuggery.

JPMorgan Asks "Has Europe Bazookaed Itself In The Foot", Answers "Yes" - "Has Europe bazookaed itself in the foot? Even if we avoid a negative outcome this week, events in Cyprus invite broader questions about the region’s commitment, repeated ad nauseum since June to ‘break the feedback loop between sovereigns and banks’. The IMF warned as recently as Friday that the Euro area lacked an effective deposit guarantee framework (before agreeing to a haircut that adroitly proves its point). The Cypriot package reinforces the fact that existing deposit guarantee schemes are only as strong as the sovereign which backs them; something which is unlikely to go unnoticed in the rest of the region (although we think specific contagion risks are limited near-term). Other EU member states will likely be affected, there are significant numbers of UK depositors in Cypriot banks, some of whom the UK has now promised to protect (with echoes of the Icesave situation), and some potential contagion channels may not be obvious. It is notable that German policy-makers have been insisting on Cyprus’ significant ‘systemic relevance’ over recent days while pushing a package that may test it."

Europe Braces for Fresh Turmoil on Cyprus Crisis - European policy makers signaled flexibility on the application of an unprecedented bank tax in Cyprus, seeking to overcome outrage that threatened to derail the nation’s bailout. European shares and the euro fell. While demanding that the levy raise the targeted 5.8 billion euros ($7.6 billion), finance officials said easing the cost to smaller savers was up to Cyprus. A vote on the tax, needed to secure 10 billion euros in rescue loans, was delayed for a second day. Banks may not reopen tomorrow after a holiday today, state-run broadcaster CYBC reported. “If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.” While Cyprus accounts for less than half a percent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece. Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial- market disruptions to avoid sovereign defaults. The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,”

Putin brands Cyprus saving levy as ‘unfair’ — RT Business: The Russian leadership has lashed out at Cyprus’ plan to tax bank deposits. President Vladimir Putin called the initiative ‘unfair’, while Prime Minister Dmitry Medvedev drew comparisons with illegal forfeit. If Cypriot authorities go ahead with the tax plan and levy every deposit placed in the country’s banks, it would be “unfair, unprofessional and dangerous,” Putin said, according to presidential spokesperson Dmitry Peskov. The assessment was voiced during a special meeting with senior economic aides and officials on Monday, in which the situation in the eurozone and the Cyprus banking crisis were discussed. The Russian Prime Minister Dmitry Medvedev was even harsher in his comments. “This looks like a forfeiture of other people’s money,” he told the RIA news agency, calling the decision strange and controversial. The country’s former finance minister Aleksey Kudrin, in his turn, has blamed the EU and its financial institutions for not helping the country in time, which has led to the current crisis. “The EU and its regulators are responsible for the current situation on Cyprus. They have slipped up on it,” Kudrin wrote in his Twitter feed.

Russia attacks Cyprus bailout plan - Vladimir Putin and other Russian leaders lashed out at an EU-led proposal to impose a levy on all Cyprus-based bank accounts as part of a €10bn bailout for the Mediterranean island. More videoUnder the deal struck with international lenders in the early hours on Saturday, a 6.75 per cent levy would be imposed on all deposits under €100,000, while accounts over that threshold would be hit with a 9.9 per cent levy. But the proposals caused uproar in Cyprus and led to long queues outside banks over the weekend as savers sought to withdraw funds. Talks led by Nicos Anastasiades, president of Cyprus, were under way on Monday to soften the proposals, including cutting the levy on deposits below €100,000 from 6.7 per cent to 3 per cent. Account holders with €100,000 to €500,000 would lose 10 per cent, while deposits above €500,000 would be cut by 15 per cent, according to a government adviser. The tax on deposits was designed to raise €5.8bn as part of a €17bn bailout of the country’s banking system. The depositor levy was demanded by a German-led creditor group of countries to bring down the bailout’s price tag. Mr Putin, at a meeting with economic advisers on Monday, was among several Russian leaders to criticise the bailout, which came without consultation with Moscow and could cost Russian depositors up to €2bn, according to Nicosia bankers.

Will Russia Kill The Cyprus Bailout? - While hope appears to still be alive that the Cypriot government will hand over their natural resources to wealthy Russia (or Gazpromia) and all depositors (Russians and Cypriots alike will be saved), we suspect there is a much bigger threat from Russia that has not been discussed. As Monument Securities' Marc Ostwald notes "there's a 50/50 chance Cypriot bailout fails because of the 'massive danger' a large amount of Russian cash flees Cyprus following deposit tax plans." Russia has ~$60 billion exposure to Cyprus, including loans to companies registered in the country and after the haircut 90% of Russian deposits will still be free to leave the country if the levy is approved.

Euro Officials Pressing for Cyprus Bank Levy Signal Flexibility -- European policy makers signaled flexibility on the application of an unprecedented bank tax in Cyprus, seeking to overcome outrage that threatens to derail the nation’s bailout. European shares and the euro fell.While demanding that the levy raise the targeted 5.8 billion euros ($7.6 billion), finance officials said easing the cost to smaller savers was up to Cyprus. A vote on the tax, needed to secure 10 billion euros in rescue loans, was delayed for a second day until tomorrow. Banks may not reopen tomorrow after a holiday today, state-run broadcaster CYBC reported.“If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.” While Cyprus accounts for less than half a percent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece. Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial- market disruptions to avoid sovereign defaults.

The Cyprus Deal is Already Under Threat (Of Course) One day after it was agreed on and announced by the Eurogroup and Cyprus president Nicos Anastasiades, the deal that would turn the Eurozone into a Pandora's box like no other EU measure to date has done looks like it may never reach the finish line. The Cypriot parliament, in which freshly elected Anastasiades holds just 20 of 56 seats, has pushed a vote on the deal forward until Monday, a clear sign that the president's political adversaries will not easily be locked into an agreement that is obviously and for good reason hugely unpopular.As I wrote yesterday in Bank Run In Cyprus; Who's Next?, this very curious looking deal has the potential to kill off confidence in the EU banking sector practically overnight. If bank deposits in Cyprus are not guaranteed (even if only up to a maximum), there is no reason for people in other Eurozone countries to trust their deposits will be treated any differently. In Cyprus, if the deal is voted through parliament, depositors will lose between 6.75% and 9.99% of their money, but there is nothing to keep the EU/IMF/ECB troika from imposing 20% or 40% (or you name it cuts) on deposits in Italy, Spain, France, take your pick.There are reports that Anastasiades accepted the "agreement" because Germany made it a do or die deal, but that still doesn't explain why Berlin would take such an obvious risk with the entire EU banking sector. Although I have to admit the risk apparently wasn't recognized yesterday by 95% or more of the international press, so you might be tempted to believe that neither Germany nor the rest of the Eurogroup saw it either. But that would be excessively stupid. And incompetent as they are, even I don't think they're that far gone.

Cyprus Delays Vote on Deposit Levy — Cyprus’ parliamentary vote on a levy on bank deposits has been postponed by a day until Tuesday evening. Yiannakis Omirou, the speaker of parliament, said Monday the delay is needed to give the government time to amend an international bailout deal agreed on last week. That deal includes a levy on bank deposits as a condition of rescue loans. The Cypriot government is now trying to modify the deal to lower the burden on small savers with less than (EURO)100,000 in the bank. The modification must be approved by the other eurozone finance ministers before the Cypriot parliament can vote on it.

Nicosia declares Tuesday a bank holiday, but ECB urges for action - The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed. Nicosia postponed from Sunday to Monday the tabling in Parliament of the bill including the measures for the Cypriot bailout – including a bank account haircut and a tax hike on interest and corporate earnings – but the European Central Bank insists on a rapid voting because there are already signs a domino effect will follow across European lenders and markets from Monday. There is genuine fear of market unrest on Monday morning when stocks may crumble in the eurozone and bank accounts in other southern European bank may suffer.Skai radio reported on Sunday that the Bank of Greece has sent between 4 and 5 billion euros to Cyprus in order to help Cypriot banks respond to cash requirements by their clients.

Cyprus delays EU bailout debate as MPs baulk at terms  - Cyprus postponed an emergency debate in Parliament on a controversial EU bailout on Sunday, threatening a prolonged closure of the island's banks as MPs baulk at an unprecedented tax on savings. Fellow euro zone countries and international creditors imposed the deeply unpopular levy of up to 9.9 per cent on all deposits in the island's banks as a condition for a desperately needed 10 billion-euro (S$16.3 billion) bailout. Conservative President Nicos Anastasiades needs to get the legislation ratifying the deal through Parliament before banks reopen or face a run on accounts. But Cyprus media reported that the scale of revolt against the agreement among MPs has thrown into disarray his efforts to do so over a three-day holiday weekend, and he may have to declare an additional bank holiday on Tuesday. Negotiations are under way with the central bank to keep branches closed for an extra day, despite the potential economic cost, the privately run Sigma TV reported.

Cypriot authorities in revised deal talks - Cyprus’ embattled president was on Sunday in talks with Brussels and political rivals to ease the terms of a planned levy on smaller deposit holders as he tried to scrape together a parliamentary majority for a €10bn bailout for the debt-laden island. A revised deal being discussed in Nicosia, with the blessing of the European Commission, would shift more of the burden on to deposits larger than €100,000, according to officials involved in the talks. “The ECB officials were very blunt,” said one Cypriot official familiar with the discussions. “There are serious fears of contagion regarding Italy and Spain if this legislation doesn’t go through.”Cypriot officials insisted no levy on smaller depositors was impossible. One senior Cypriot official involved in the talks said that because about 35 per cent of all deposits are below the threshold, exempting them would mean a rate so high for the rest that it would no longer be viewed as a tax. Archbishop Chrysostomos, the island’s influential spiritual leader, called for Cyprus to leave deposits intact, leave the eurozone and readopt its former currency, the Cyprus pound.

Cyprus Banks Closed Until Thursday; Solution is Feasible, Can Be Extrapolated to Spain, Says Spanish Economist; Lies of the Day - Direct robbery of Spanish citizens would net Spain about €120 Billion according to economist Niño Becerra who says "Cyprus Solution is Feasible, Can Be Extrapolated to Spain" Santiago Niño Becerra, Professor of Economics at the University Ramon Llull in Barcelona, says a tax as imposed on Cyprus in exchange for bailout, would be possible and that "it is very clean, unlike a freeze all balances, which would be a mess." Through his twitter account, Niño Becerra says it would be more painful for Cypriots if "the bailout were to occur in the form of public debt." The Spanish government was quick yesterday to claim the Cyprus solution was not applicable to other countries. Niño Becerra disagrees: "I'm not saying this will happen, only that it is feasible, it is possible and if extrapolated to Spain, would be very clean." Becerra estimated savings using Spanish a "tax" of 10% would raise €120 Billion. A 5% tax would raise €60 Billion, which, added to the €40 Billion commitment would be the amount regulators said a year ago that they may need for Spanish banks.  Direct theft is now considered a "feasible" option for Spain. Lovely.

Cyprus banks will stay closed until Thursday  The Cypriot central bank has announced that the country's banks will stay closed until later this week as fears mount of a bank run. The country's banks were closed for a scheduled Bank Holiday on Monday, something that allowed Cyprus to try to implement a levy on savers' deposits. That move triggered unease among depositors in Cyprus, where cash machines soon ran out of funds.  This is the first time the 17-nation eurozone has seen a country dip into people's savings to finance a bailout. Meanwhile, an emergency session of the Cypriot parliament has been postponed until Tuesday. Also, Germany must approve the plan, but is not due to vote until next month.Following eurozone finance ministers' negotiations last week, Cyprus became the fifth euro-area country to get a bailout to save its banks, which suffered significant losses because of their exposure to Greek debt.

The Cyprus File - Here is Das’s summary of the Cyprus deal points and possible outcomes.  But first, the latest news snapshot:

  • The bailout terms are still changing (that controversial haircut for small depositors was a major sticking point);
  • Cypriot parliament to vote on Tuesday (and there are rumours that even that’s postponed);
  • at the moment the banks in Cyprus will be closed until Thursday (unless still more time is needed to find terms that the Cyprus parliament will agree…).
  • Grumpy Russians toss a spanner in the works, saying “The EU took action to levy a tax on deposits without consulting Russia, and for this reason we will further consider the issue of our participation from the point of view of restructuring the earlier loan”.
  • So this update will soon be out of date too…

The End Of Systemic Trust: The Canary Just Died - Prior to yesterday, if you were trying to handicap how the unelected leaders of the Eurozone were going to react to a tough situation, you only had to refer to the quote "When it becomes serious, you have to lie" from Mr. Junker to understand their mindset. But so long as someone at the ECB was willing to flood the world with free EURs (with significant backup provided the US Federal Reserve) the market closed its eyes, held its breath and took the leap of faith that all was well. However, post the Cyprus decision, the curtain has been pulled back and wizard revealed with all his faults and warts. It would be hard to over-emphasize how significant the Cyprus situation is. The damage done here is not related to the size of the haircut - currently discussed between 3 and 13% - but rather that the legal language which each and every investor on the planet must rely on in order to maintain confidence in the system has been subordinated to the needs of the powerful elite.

Darling: Cyprus savings raid could trigger bank runs across Europe - Bank runs and financial panic could spread across Europe after Cyprus proposed raiding people's savings for a new bail-out, Alistair Darling has said. The former Chancellor said Cyprus is doing "everything you should not do" after the tiny country decided to seize around 6.75 per cent from smaller deposits and almost 10 per cent from larger ones. The country is currently deciding whether to make richer savers pay a bigger proportion of the bill but Mr Darling said the whole idea of taking money from ordinary savers is dangerous. He said EU should not be letting Cyprus "blow apart" the principle of protecting deposits under €100,000, as people will start pulling their cash out of banks if they fear this elsewhere.

JPMorgan: Opening "Pandora's Deposit Box" Means "More Extreme Deposit Flights In Future Crises" - There are three key highlights in yet another take on Cyprus, this time from JPMorgan's Robert Henriques: the first, and most obvious, is that "more extreme scenarios of burden-sharing will not necessarily reinforce investor confidence" - that much is clear; the second, as we pointed out over the weekend, is that what happened in Cyprus is a "the death knell for an EU Common Deposit Guarantee scheme, which was to be an integral part of the Banking Union proposals" - so much for the key part of European monetary and fiscal integration. But the third, and most important, is that "we would expect future crises to be exacerbated by more extreme deposit flight. This would likely mean the ECB would have to increase its presence as liquidity provider of last resort, which, under normal circumstances, would lead to increased asset encumbrance and lower recoveries for senior debt." The problem for Europe, as diligent readers know too well already, is that asset encumbrance is already at record high levels, meaning the ability to find "free" assets used to create new loans will be next to impossible.

"All The Conditions For A Total Disaster Are In Place"- The Cyprus bailout package tax on bank deposits is a deeply dangerous policy that creates a new situation, more perilous than ever. It is a radical change that potentially undermines a perfectly reasonable deposit guarantee and the euro itself. Historians will one day explore the dark political motives behind this move. Meanwhile, we can only hope that the bad equilibrium that has just been created will not be chosen by anguished depositors in Spain and Italy. The really worrisome scenario is that the Cypriot bailout becomes euro-systemic – in which case the collapse of the Cypriot economy will be a sideshow. This will happen when and if depositors in troubled countries, say Italy or Spain, take notice of how fellow depositors were treated in Cyprus. All the ingredients of a self-fulfilling crisis are now in place: It will be individually rational to withdraw deposits from local banks to avoid the remote probability of a confiscatory tax. As depositors learn what others do and proceed to withdraw funds, a bank run will occur. The banking system will collapse, requiring a Cyprus-style programme that will tax whatever is left in deposits, thus justifying the withdrawals. This would probably be the end of the euro.

Eurogroup Folds: Tells Cyprus To "Safeguard" Depositors Under €100,000 Euros; Angry Russians To Get Even Angrier - Reuters headlines crossing the closing tape, supposedly out of a (very credible) Greek source, according to whom the Eurogroup will give Cyprus more flexibility on bank levy, and that Cyprus should safeguard depositors under €100,000, even as the full €5.8 billion deposit goal must still be hit. Well, at least they were not kidding with the whole plan. This was not unexpected - there are two key questions which remain woefully unanswered: i) how will Europe restore the confidence it has lost by even contemplating insured deposit impairments, and ii) a deposit haircut is still a deposit haircut, and as noted earlier, the majority of Cypriot parties have announced they would vote against any bank levy, not just that which is determined to be "fair" by 10 European bureaucrats, and supposedly only hurts those evil, evil Russian billionaires. In other words, the final word still remains with the Cypriot parties. Let the horse trading begin. Finally, the Russian response to the discovery that haircuts on big deposits just rose from 9.9% to over 15.6% will hardly be warm and cuddly. Now may be a good time to ban gun (and plutonium) sales to angry Russian billionaire oligarchs.

The Яussians Are Coming! The Яussians Are Coming! - Krugman ‎- How big a deal is the Russian factor in Cyprus’s crisis? Pretty big, it seems. Over at FT Alphaville, Izabella Kaminska reports on estimates of 19 billion euros in Russian nationals’ deposits in Cyprus banks, which is more than the country’s GDP. Without being an expert here, I wonder whether this is an understatement; given what we think we know about the nature of much of this Russian money, is all of it really being declared as Russian?Let me make a broader point: we’ve now seen three island nations around Europe become huge international banking hubs relative to their GDPs, then get into crisis because their domestic economies don’t have the resources to bail out those metastasized banking systems if something goes wrong. This strongly suggests, to me at least, that we have a fundamental problem with the whole architecture (to use the preferred fancy word) of international finance.Cyprus, as a euro-zone country, should really be part of a euro-wide safety net buttressed by appropriate regulation; it’s insane to imagine that the euro can be run indefinitely with merely national deposit insurance. But euro-area deposit insurance doesn’t seem to be in the cards — and anyway, there are plenty of other potential Cypruses out there. All of which raises the question, is the era of free capital movement just a bubble, fated to end one of these years, maybe soon?

Counterparties: Insane in the Mediterrain - Innocent Cypriots, arguably guilty Russians and possibly clueless British expats may be about to have their bank deposits taxed (read: partially taken) to recapitalize Cyprus’s struggling banks. The island of just under a million, whose central bank governor is actually named Panicos, has closed its banks until Thursday in order to stop its citizens from, well, panicking. Less than a month ago, Cyprus’s newly elected president vowed none of this would be spoken of, let alone happen: “Such an issue isn’t even up for discussion.”  Still, the Cyprus bail-in deal looks marginally less crazy if you squint in a particular wonky way. As Lex notes, the cornerstone of modern banking — that deposits are untouchable and risk free — was never really true. This risk-free deposit notion was particularly dubious, Simon Nixon suggests, for a country that’s “one of the most leveraged in the world,” with banking assets eight times the size of its GDP. “Cyprus is not in a position to rule out any ideas, even stupid ones,” Nixon wrote earlier this month. Joseph Cotterill calls the plan, whose official title is the “upfront one-off stability levy”, a “stupid idea whose time has come”. There has been lots of talk that Cyprus situation is a dangerous precedent. Citi’s Willem Buiter thinks it’s a good precedent that we’ll see repeated many times in the next few years. His logic: bank bail-ins, in which depositors, not bondholders, suffer losses, are the quickest route to restructuring Europe’s debt. Buiter also argues that taxing ordinary folks’ savings accounts is less politically offensive than taxpayer-funded bailouts. Germany, for its part, appears to hate idea of taxing ordinary savers — though Germany presumably hates the idea of paying for the full Cyprus bailout even more. Jim O’Neill of Goldman Sachs wonders “whether this means investors can trust European politicians at all.” Judging by the the latest official statement on Cyprus, it may be impossible to even understand Europe’s politicians. (Somehow, the Eurogroup has contrived to say that it “reaffirms the importance of fully guaranteeing deposits below €100,000”, while at the same time agreeing that Cyprus should expropriate a significant chunk of those very deposits.)

Missing the Forest For the Trees: Cyprus Edition - The real problem facing Cyprus and the rest of the Eurozone periphery is more fundamental than who will be bailed out, who will be bailed in, and how it will happen. For these concerns are the result of a flawed monetary union--a currency area that does not meet the optimum currency area criteria--that if not fixed will continue to haunt the Eurozone.  Figuring out how to deal with Cyprus without addressing the flawed nature of the Eurozone is just kicking the can the down road. More radical reforms are needed.   One reform is to alter ECB policy so that it actually tries to stabilize nominal spending for the entire Eurozone, not just Germany. Since it inception, ECB monetary policy has been biased toward Germany at the cost of destabilizing the Eurozone periphery. This could be fixed by having the ECB abandoned its flexible inflation target and adopt a NGDP level target. Another complementary reform, would be to create meaningful fiscal transfers in the Eurozone similar in scale and scope to the United States. Both of these options, however, would face stiff opposition from Germany. For the former would require temporarily higher inflation than Germany desires and the former would require large fiscal commitments for the Eurozone from Germany. Neither is likely to happen. That leaves the final reform option: break up the Eurozone into austere and non-austere currency unions. This ideas has been suggested before by Ramesh Ponnuru and Ambrose Evans-Pritchard.

What the Cyprus case tells us - In order to understand the current problems in Cyprus, it is first necessary to know how the mess arose in the first place. Reuters have a very good background article here, and I will use it extensively. The 'series of events' that led up to the crisis commences with Cyprus joining the Euro zone:Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.When Cyprus joined the single European currency, Greek and other euro area deposits were reclassified as domestic, leading to billions more local lending, Following the 2008 crisis, this conservative reputation was to lead to money flowing into the banks in Cyprus as a 'safe haven'. The problem was that the money arriving has nowhere productive to go, so mirroring what had taken place in other economies (e.g. the US), the money ended up in real estate, fuelling a bubble in real estate prices. However, this flow of money could not all be absorbed in real estate, with the Cyprus banks growing at a rate totally divorced from the wider economy. Due to historical ties, the destination of choice for the inward flow of money was an outwards flow towards Greece: More striking was the bank's exposure to Greek debt. At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.

Why Europe planned the Great Cyprus Bank Robbery - Cyprus is a tiny country, who cares what happens there? Well if you are a Russian with tonnes of cash stashed away in the island’s banks, you most certainly do. In fact, even if you don’t have any deposits parked there, chances are the chain reaction from the European Union’s planned great bank robbery could one day hit your finances too. For years Russians have treated Cyprus like their private little Switzerland. They have collectively pumped in over $31 billion in Cypriot banks, boosting the local economy and turning the idyllic island into an upmarket playground. Here’s how it could all come unstuck. The EU’s cash grab Cyprus is the latest addition in the long line of insolvent European countries – Portugal, Ireland, Greece and Spain – needing a bailout from the wealthy northern Europeans (read Germany). The solution is simple – the EU will provide nearly $13 billion in bailout money to help the Cypriot government pay its bills and avert a banking collapse.But there’s a hitch – in exchange the EU’s bosses want Cyprus to pick up part of the tab by levying a one-off tax on bank deposits of up to 9.9 percent. Basically, if you have a deposit of, say, $100,000, you get a $10,000 haircut. Now observe that none of the other nations that came knocking at Brussels’ door with a begging bowl had such an avaricious levy imposed on them. The reason is plainly evident: over 40 percent of the depositors are Russians and, therefore, easy targets. The EU honchos evidently believe most of these Russian account holders are not legit and relieving them of a tidy amount doesn’t hurt the good gentry of Europe.

Yglesias Cheers a Double Betrayal of Cyprus -   William K. Black - Yglesias has been writing about Cyprus, and my critiques of the policies he has been proposing are the subject of this column.  The short version of the background one needs to understand the issues is that Cyprus is in a crisis and the EU is willing to bail out its collapsing banks only if Cyprus raises revenues.  The EU is unwilling to make the banks’ sophisticated creditors – the bondholders – take any losses.  The EU wanted the banks’ least sophisticated creditors – the depositors – to take losses, even if their deposits were small enough to be within the deposit insurance limit.  The reality, which the EU wishes to obscure by calling its proposal a tax, is that that the EU was insisting that depositors no longer be fully protected from loss by government deposit insurance.  The EU demand was made shortly after the EU and Cyprus’ government pledged that depositors under the insurance limit would suffer no losses.  Cyprus’ government’s duplicity was prompted by its close ties to Russian oligarchs who deposit the funds they loot from Russia in the failing Cypriot banks.  Cyprus’ plan, therefore, imposed a hefty (6.6%) loss on (smaller) insured depositors in order to keep the percentage loss on huge depositors well in excess of the 100,000 euro insurance limit under 10 percent.

Cyprus aims to let small savers out of deposit tax; veto still likely (Reuters) - Cyprus's government proposed on Tuesday to spare small savers from a divisive levy on bank deposits but said it expects parliament to reject the measure, needed to secure an international bailout and avoid default and a banking collapse. Unless parliament accepts the levy on deposits, EU countries say they will withhold a bailout, plunging one of the smallest European states closer to financial oblivion with potentially severe consequences for the rest of the troubled euro zone. "The feeling I'm having is that the house is going to reject the bill," President Nicos Anastasiades told reporters. Asked why, he added: "Because they feel and they think that it is unjust and it's against the interests of Cyprus at large." Asked what he would do next, he said: "We have our own plans." Europe's demand at the weekend that Cyprus break with previous EU practice and impose a levy on bank accounts as part of a 10 billion euro ($13 billion) bailout sparked outrage among Cypriots and unsettled financial markets.Stunned by the backlash and fearing rejection by Cypriot lawmakers, euro zone finance ministers urged Nicosia on Monday to avoid hitting accounts below 100,000 euros, and instead increase the levy on big accounts, which are unprotected by the state deposit-insurance system.

A much better alternative for Cyprus - Which raises the single biggest question facing the Cypriot parliament as it prepares to vote today: should it accept the deal on the table, or should it hold out for something better? And if it chooses the latter option — as seems likely — should it simply fiddle with the tax-rate percentages, much as one might fiddle with the Breakingviews Cyprus calculator, or should it try to build something which is more different and more fair? Most importantly, what alternatives does Cyprus’s parliament have? Here’s the short, three-page paper: it’s called Walking Back from Cyprus, and it’s authored by Buchheit and his frequent collaborator, Mitu Gulati of Duke University. Their plan is simple: First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole. Second, term out everybody else by five years, or ten if they prefer. That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years — your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.

Gaming the Cyprus Negotiations (Updated) - Yves Smith -The state of play in Cyprus is that negotiations in Parliament are underway, with the hope of a yes vote on a “Plan B” today (see update at the end, this is looking a lot rockier than conventional wisdom surmised). The Cypriot officialdom has allowed for slippage in this timetable, with the bank holiday in effect till Thursday. European ministers confirmed that they’ll approve an agreement so long as Cyrpus obtains €5.8 billion from depositors. Monday night, President Nicos Anastasiades gave his version of the Hank Paulson armageddon speech on national TV, laying out the fact that no deal means an immediate collapse of “one bank” (presumably Liaki), and a possible exit from the Eurozone.  The widespread assumption is that the Cypriots will fall into line, since the alternative really does look even uglier. But the runway is pretty short. The government could conceivably extend the bank holiday through Friday, which means through the weekend. But anything beyond that likely starts to eat at the real economy. Moreover, even getting a deal still will have a big, negative economic impact in Cyprus. Deposits are certain to flee, so the bank crisis that was hoped to be averted is still a real possibility. Why sit around and let your ox be gored a second time? The Prodigal Greek (hat tip Guardian) notes: No matter what today’s outcome, Cyprus’ banking system will not be the same ever again. If Germany’s intention was to reduce the size of it – closer to the eurozone average – they managed to achieve that with a masterful stroke in just one weekend. Deposits flight combined with the sale of the Greek operations will probably leave the Cypriot banking system half the size it was on Friday night, even left with one systemic bank after restructuring.

Straight from the Rumor Mill - Speculation on Cyprus is rampant. It is difficult to separate fact from fantasy as reports as to what is happening vary widely. For example Ekathimerini reports "Cypriot Finance Minister Michalis Sarris is about to be replaced upon his return from his current trip to Moscow, Kathimerini understands, as he no longer enjoys the support of President Nicos Anastasiades following his handling of the crisis." The ZeroHedge version of the story is Cyprus Finance Minister Resigns, President Refuses To Accept Resignation. There is quite a bit of difference between being forced out and resigning.  Neither site provided links to their stories. The Telegraph live blog just chimed in with "17.39 Cyprus's finance minister has told Reuters that there is "not truth" to reports of his resignation."Of course, no link was provided to Reuters. The sad state of affairs in blogging is many sites do not link to anything but themselves, and when you search for a story, you often cannot find it. Here are more unreferenced reports from the above linked-to live blog.

Cyprus lawmakers reject bank tax; bailout in disarray - Cyprus's parliament overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout on Tuesday, throwing euro zone efforts to rescue the latest casualty of the currency area's debt crisis into disarray. The vote by the small state's legislature was a stunning setback for the 17-nation euro zone, after lawmakers in Greece, Portugal, Ireland, Spain and Italy had repeatedly accepted unpopular austerity measures over the last three years to secure European aid. The rejection, with 36 votes against, 19 abstentions and one absence, brought the east Mediterranean island, one of the smallest European states, to the brink of financial meltdown.

Cyprus Stands Up and Rejects Savings Account Seizure - The Cyprus Parliament rejected a bail out plan that would have seized almost 10% of private savings deposits and used the money to bail out Cyprus banks.  The vote was almost unaminous:Cypriot legislators in the capital Nicosia voted 36 against the proposal with none in favor in a show of hands today. There were 19 abstentions.The ECB was quoted as saying they will provide liquidity to Cyprus banks, yet no press release has been issued."No decisions have been taken so far because we don't know the final results of the discussions in Cyprus, but given the present legal background, the ECB will be prepared to fulfil this task of a lender of last resort," Nowotny told news agency Dow Jones in an interview.The Financial Times asks where was the European Central Bank in all of this:  Why the harsh treatment of tiny Cyprus? Two aspects of the ECB’s role are striking. First was its threat to bring down the Cypriot banking system if a deal was not reached –Second was the ECB’s failure to stop Cyprus trying to finance its part of the rescue plan by imposing a levy even on bank deposits smaller than €100,000, the level supposedly guaranteed under a cross-EU pact.

Cyprus’s bad haircut day -- Cyprus has said όχι to the idea of taxing deposits: good for them. And the parliament did so decisively, as well: 36 “no” votes, 19 abstentions, and zero “yes” votes. Even the president, who initially said that Cyprus had no choice but to say yes, was already moving on to Plan B before the vote was even taken, although no one yet is entirely clear what exactly Plan B entails.One very big hint comes from the fact that the Cypriot finance minister, Michael Sarris, is in Moscow today (where he’s denying via text message reports that he has resigned). Russia accounts for the lion’s share of Cyprus’s uninsured deposits, and president Vladimir Putin has said that even a 9.9% tax on those deposits would be “unjust, unprofessional and dangerous”. Given that the only way that Cypriot president Nicos Anastasiades kept the tax to below 10% was by taxing the insured depositors at an unacceptable 6.75%, there is obviously a lot of appetite within Russia to help Cyprus find a way out of this mess. One way to do that would be for Gazprom, the Russian energy giant, to spend a few billion euros on rights to Cyprus’s natural gas resources; another would be for the Russians to buy a bank or two, leaving Cyprus to raid local pension schemes for extra liquidity until natural-gas revenues come on stream. Or, of course, there’s always the Buchheit-Gulati option. The thing they all have in common is the idea that they’re basically trying to provide a bridge to the point at which Cyprus starts getting lots of money from its natural gas.

A Cypriot game of chicken  - After that resounding no vote, what’s in the stars for Cyprus today? Martina Stevis and Michalis Persianis write in the WSJ that there are short term ideas — basically, Cypriot and European officials are discussing capital controls for when banks are due to open next Tuesday. Meanwhile the IMF is coming up with a plan to merge Cyprus’ two biggest banks into a ‘bad bank’, a source told the pair. The IMF wouldn’t be drawn on that.  Where does the ECB stand in all this? It is about the only encouraging sign out of Cyprus that officials there are working with Europeans on capital controls. But what about the ECB’s Emergency Liquidity Assistance, made available via the Cypriot central bank, which has for some time been playing a big role in the country’s liquidity? The very brief and ambiguous eurogroup statement issued after the Cypriot parliament’s vote reaffirmed a “commitment to provide liquidity as needed within the existing rules”. It didn’t seem to reassure anyone. From the FT: One official involved in the talks said even if Moscow were willing to make additional loans or purchase a bank, the ECB may still withhold funding needed to keep the financial sector alive.

Europe Plays I-Didn’t-Do-It Blame Game on Cyprus Bank Tax - To listen to the German and French governments, the European Central Bank and European Commission, no one was responsible for the Cypriot deposit tax that was unanimously endorsed in the early hours of March 16 and fell apart yesterday. German Finance Minister Wolfgang Schaeuble opened the blame game on Sunday, telling ARD television that the commission, ECB and Cypriot government engineered the swoop on ordinary bank accounts and “now they have to explain it to the Cypriot people.” By then, the Cypriot people were lining up at cash machines and painting “No” on the palms of their hands to protest the levy that, even with a tax-free allowance built in for the smallest savers, didn’t win a single “Yes” vote in the Cypriot parliament. “The Cyprus fiasco has the hallmark of a classic whodunit,” Sony Kapoor, head of the Re-Define think tank, said in an e-mailed note. “Someone somewhere took a decision that now no one nowhere appears to have made.” Indignation in Nicosia led other finance ministers to disown what they had decided.

Up in the air - YESTERDAY, Cyprus' parliament rejected a bail-out plan that would have raised €5.8 billion (to go along with the €10 billion on offer from the troika) via a levy on bank deposits. Rejected is too mild a word, actually. The plan failed to garner a single "yes" vote, and Cypriot leaders are now scrambling to come up with an alternative. Its banks remain closed and could stay that way until early next week. The tiny nation's central bank head, Panicos (I know) Demetriades, reckons that once they're open again some 10% of deposits could flee, accounting for some €7.5 billion. After yesterday's no vote, the European Central Bank said that it would continue to provide liquidity to Cyprus "as needed within the existing rules". That may not mean that liquidity to flow if no deal is reached. To stem the departure of deposits, Cyprus is considering some weighty measures, report Matina Stevis and Michalis Persianis: The measures include imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country and making these transactions slower to clear; and introducing border checks to cap the amount of cash leaving the country.

Cyprus warned over parliament's bailout rejection: Germany's finance minister has warned Cyprus that its crisis-stricken banks may never be able to reopen if it rejects the terms of a bailout. Wolfgang Schaeuble said major Cypriot banks were "insolvent if there are no emergency funds". He was speaking after the Cypriot parliament rejected an international bailout deal that would have imposed a one-off tax on bank deposits. Frantic talks are under way to try to agree an alternative plan. Leaders of political parties in Cyprus are due to meet later after parliament rejected the controversial levy, proposed as part of a 10bn-euro (£8.7bn; $13bn) bailout package. The BBC's Mark Lowen, in Nicosia, says the country is in turmoil and the eurozone's plan has completely unravelled,Not a single MP voted in favour of the controversial deal, sending a clear message to Brussels that the strategy needs a drastic rethink, our correspondent adds. Late on Tuesday, Mr Schaeuble said that he "regretted" the vote.

PIMCO reduces exposure to euro in wake of ‘botched’ Cyprus bailout: report - PIMCO has reduced its euro holdings in response to the proposed deposit levy as part of Cyprus’s controversial bank bailout, calling the unprecedented move “a policy mistake,” according to Reuters. “We’ve reduced our allocations to European currency (in the last 24 hours), because it makes sense to think about this as not only a policy mistake but also a recognition that the euro is far from being a perfect reserve currency,” Saumil Parikh, a managing director and investment-committee member, told Reuters on Tuesday. PIMCO is reconsidering euro-zone recovery forecasts in the wake of the “botched bailout,” Parikh was quoted as saying.

Economists warn Cyprus will face a recession ‘for decades’ - Russians are preparing to withdraw billions of euros from Cyprus and the island will plunge into a recession lasting for decades due to the onerous terms of a EU bailout, economists warned on Monday. “The Russians are already indicating they want to withdraw their money. Why should they stay? They will go somewhere where they can be protected; we can’t protect them,” economist Simeon Matsi told AFP. “We have indications that billions (of euros) will be withdrawn, we already know of about three billion that is ready to move. They are already asking lawyers to draw up documents to withdraw money.”As a condition for a desperately-needed 10-billion-euro ($13 billion) bailout for Cyprus, fellow eurozone countries and international creditors Saturday imposed a levy on all deposits in the island’s banks.

EU Said to Discuss Cyprus Capital Controls, Longer Bank Holiday - European policy makers are in Cyprus discussing further capital controls and the extension of a bank holiday through to the end of the week, said a European official familiar with the talks.  No decisions have been made yet, said the person, who spoke on condition of anonymity because the discussions are confidential. The officials, which come from the European Central Bank, the International Monetary Fund and the European Commission, may wait until the outcome of an ECB Governing Council meeting that starts in Frankfurt tomorrow, said the person. The Cypriot parliament today rejected an unprecedented levy on bank deposits, dealing a blow to European plans to force depositors to shoulder part of the country’s rescue in a standoff that risks renewed tumult in the euro area.

Cyprus: It’s not about the numbers - The Eurogroup agreed on Monday night to allow Cyprus to change the make up of its controversial deposit tax. Instead of imposing a levy of 6.75 percent on savings under 100,000 and 9.9 percent on those above 100,000 – as agreed in Brussels in the early hours of Saturday – Nicosia can play around with the numbers, just as long as it raises the arranged amount of 5.8 billion euros. Cyprus’s new but already beleaguered President Nicos Anastasiades is proposing that bank customers with deposits under 20,000 euros should not be taxed at all, while keeping the levy the same for the remaining depositors. Cypriot MPs have already shown a reluctance to approve the tax, mindful of the impact on depositors but also the long-term damage it could do to the island’s banking system and economy. However, what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if a financial meltdown is averted in Cyprus this week, the decision to tax depositors there in order to reduce the eurozone and International Monetary Fund contribution to the island’s bailout has sown the seeds for a future eruption.

Cyprus Conservative Opposition Parliamentary Member Says "If No Solution Soon, Print Cyprus Pounds and Abandon the Euro" - Marios Mavrides, a conservative opposition member of the Cyprus parliament just chimed in with his viewpoint "If No Solution Soon, Print Cyprus Pound and Abandon the Euro".  The conservative opposition parliamentarian of Cyprus, Marios Mavrides, said Wednesday that if his country can not find a solution shortly, it "will begin to print  Cyprus pounds and abandon the euro." In order to examine alternatives to address the situation is to be created after today's session in Parliament, the President has called a meeting with the leaders of the parliamentary groups for this Wednesday, March 20, at 11.00 hours, according to a statement released by the Presidency. Here's the joke of the day from Eurogroup finance chairman Jeroen Dijsselbloem: "I confirm that the Eurogroup stands ready to assist Cyprus in its reform efforts."

Nigel Farage Message To Europeans: "Get Your Money Out While You Can" - In Nigel Farage's first TV appearance since the Cypriot wealth tax was announced, the Englishman pulls no punches. In all his years and all his experience of the desperation of the European Union's leadership "never did [he] think they would resort to stealing money from people's savings accounts." The simple fact is that they know they cannot let any country leave, no matter how small, for "once one country goes, the whole deck of cards will come tumbling down." There is now "clear irreconcilable differences" between the North and the South of Europe and now that they have done this in one country, "they are quite capable of doing it in Italy, Spain and anywhere." The message that sends to people is "get your money out while you can." As far as his British constituents, he strongly recommends George Osborne (UK Chancellor) urge ex-pats to remove all their money and do monthly transfers from home. "Do Not Invest In The Euro-Zone," he concludes, "you have to be mad to do so - as it is now run by people who do not respect democracy, the rule of law, or the basic principles upon which Western civilization is based."

Cyprus Bailout: Stupidity, Short-Sightedness, Something Else? from naked capitalism  - Yves here. This post from addresses some important misperceptions about the background leading up to the bank bailout impasse in Cyprus, including the alternatives that were available that were perversely bypassed. I also have a separate post due to launch shortly, but this article is an important stand-alone piece and debunks quite a lot of conventional wisdom. Cross posted from with permission. A quick run-down on the impressively stupid handling of the “Cyprus bailout” by the EU.And, before we go on, we should note that the on-the-ground situation for visitors and tourists is perfectly fine – Cypriots are not prone to rioting and even though the banks are closed, the ATMs still work. We are all at work and things are otherwise proceeding normally.

Cyprus: Will the Mouse That Roared be Gored? (Updated) - Yves Smith - Cyprus, as its President Nicos Anastasiades predicted but no one outside Cyprus quite believed would happen, has resoundingly defied the will of the Eurozone in failing to surrender a single Parliamentary vote to a diktat to haircut depositors to save its number two bank, whose failure would in all likelihood bring down Cyprus’s entire banking system. The members of the President’s own party abstained despite his resigned support for the deal. And mind you, this was after the terms revised to allow for deposits under €20,000 to be spared.  The EU was utterly unprepared for this rebellion. Heretofore, threat of withholding of funds and financial armageddon were sufficient to bring legislatures and national leaders to heel. Anastasiades, by contrast, didn’t even try to keep Parliament voting until the results changed. The finance minister tendered his resignation as an admission of failure but Anastasiades rejected it and has him negotiating with the Russians, at a minimum to restructure a €2.5 billion loan from 2011 but clearly to see if Russia will ride in to the rescue.  But absent a retreat by the Troika (which seems extremely unlikely) or a big Russian bailout (which is also unlikely but less so), it seems difficult to imagine than any other plan could be implemented by next Tuesday (eg, either a bank restructuring or a Euroexit). So considerable dislocation is likely to result, with unknown but potentially serious knock-on effects. The reaction from Germany was vitriolic. From the BBC:Germany’s finance minister has warned Cyprus that its crisis-stricken banks may never be able to reopen if it rejects the terms of a bailout.

Round Trips to Cyprus - Paul Krugman  - Still trying to wrap my head around the Cyprus situation; what makes it so interesting is the role of the island as a tax, regulation, and law enforcement haven. It’s not just about the Russian connection, but that connection is really huge. Here’s another metric: Cyprus is, according to official figures, the largest single foreign direct investor in Russia — this from an economy roughly the same size as metropolitan Scranton PA. What’s that about? The FT explained it a while back: This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies. The Central Bank of Russia classifies Cyprus as the largest single source of FDI in the Russian Federation, with a total of $41.7 billion in cumulative inbound FDI into Russia’s non-financial sector between 2007 and 2010 (over 2.7x German levels)… And a key aspect of the current mess is that the Cypriot government isn’t willing to give up this business. That’s why solutions like converting large deposits into CDs haven’t been on the table; once round-tripping Russians know that they can find their money trapped for long periods, they’ll go find another treasure island

Cyprus, Taxes, and Russian Transfer Pricing - The Russian government is irate over the proposal to levy a tax that is almost 10 percent on Cyprus bank deposits:  For years, Russian firms -- both private and state-run -- have been using Cyprus as a tax haven. Attracted by a corporate tax rate of 10% -- half that of Russia's -- Russian investors have funneled money into Cyprus shell companies since the early 1990s. The money is then repatriated through investments in Russian ventures. Cyprus is actually the leading source of foreign investments into Russia, according to data from the Russian central bank. The tax-dodging scheme is similar to ones used by corporations and individuals from a host of nations in tax shelters worldwide. What is this tax dodge? Paul Krugman points us to a Financial Times post:  This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies.

Cyprus Contagion Spreading: Greek Bonds Plunge Most Since Bailout -  The no-brainer trade of the year is hitting a wall of reality in the last few days. Greek government bonds (GGBs), levitated on a sea of central bank excess and a plethora of promises, are coming back to earth rapidly as the fears of their Mediterranean brethren spreads contagiously to other bond markets. Spain and Italy are suffering notably today also but it is the almost 7% drop in the price of GGBs instantly removing all 2013 gains that is the most worrisome... This is the largest price drop since the March 2012 bailout 'success'.

Exclusive - Euro zone call notes reveal extent of alarm over Cyprus -  Euro zone finance officials acknowledged being "in a mess" over Cyprus during a conference call on Wednesday and discussed imposing capital controls to insulate the region from a possible collapse of the Cypriot economy. In detailed notes of the call seen by Reuters, one official described emotions as running "very high", making it difficult to come up with rational solutions, and referred to "open talk in regards of (Cyprus) leaving the euro zone". The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria's Thomas Wieser. Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the island's predicament.

ECB Guarantees Cyprus Aid Only Through Monday — The European Central Bank says it will keep emergency aid for Cyprus’ troubled banks in place at least until Monday but will have to cut it off after that unless an international rescue program is drawn up. The ECB is keeping the Cypriot banks alive by allowing them to draw on emergency support from the local central bank. But the ECB has said it would cut that aid off if there is no bailout deal soon. The ECB said Thursday that its governing council decided to maintain the current level of so-called Emergency Liquidity Assistance until Monday. But it says that, after that, such assistance can only be considered if an EU-IMF program is in place that would ensure the banks’ solvency.

Cyprus Bailout: What to do Now? Yves here. You will notice that this list of options for Cyprus is very depressing and does not envision Russia riding in to the rescue in a big way. It also treats a 20% fall in GDP as a possibly optimistic base case. Yesterday, we discussed why we thought the combination of an across-the-board bank levy (regardless of institution health), in absence of restructuring the capital structure of banks was a bad idea and bad precedent.Today, we will lay out what we think should happen. We recognize that we are working with more limited information than the teams actually negotiating the bailout, but we will give it our best shot. Our parameters for a proper solution are the following:

  • 1. Respect the $100K deposit insurance limit
  • 2. Preserve moral hazard/fairness to bank creditors. In other words, hit the creditors of the bad banks more aggressively than the creditors of the good banks.
  • 3. Have a solution that is sustainable for Cyprus over the medium-term.

ECB to Push Cyprus Over the Brink - Yves Smith - Mr. Market decided yesterday that the fact that the Cypriot finance minister, Michalis Sarris, was meeting as previously scheduled with Russian officials meant all would be well. And even better…Bernanke said the Cyprus banking mess would be contained. So why worry? The ECB just announced that it will extend the ELA to Cyprus only through Monday. After that, it will cut off Cyprus if it has not knuckled under to an EU/IMF deal. This is tantamount to cutting off its central bank and pushing it out of Eurozone if it does not capitulate. During the day yesterday, Eurozone officials made it clear that they would not accept some other ideas that Cyprus had developed to try to shield depositors, such as accessing pensions fund assets, restructuring the two largest banks, and selling its gas rights to Russia. This was deemed unacceptable in that it would increase debt levels. The fallacy, of course, is that the Trokia is unduly obsessed with the numerator of this equation (the borrowings) and not the denominator (the impact on the economy). estimates the impact of trashing the banking system to be a minimum 20% contraction of GDP in two years. And mind you, this is after Cyprus was a good Eurozone citizen and sent €3 billion to help the Greek government.

Bank industry chief warns Cypriot banks must reopen in days (Reuters) - A solution must be found to reopen Cypriot banks within days before it is "too late", one of Europe's top bankers warned on Wednesday, saying he feared the island's problems risked knocking confidence across the region. "Everything needs to be solved very quickly. This is a matter of a very few days before it gets too late," Christian Clausen, president of lobby group the European Banking Federation told Reuters in an interview. "Speed is extremely important," said Clausen, who is also chief executive of Nordea Group, the Nordic region's biggest lender. Clausen's comments were echoed by Hung Tran, deputy managing director of the Institute of International Finance, a global bank lobby group. "The country is small and the numbers involved are small but the symbolism is significant," Tran told Reuters. "The protection for small depositors has been violated. "Deposits have never been haircut in five years of financial crisis," said Tran, who helped negotiate an earlier restructuring of Greek debt that handed losses to investors. "The risk is that there will be a deposit flight out of Cyprus."

EU gives Cyprus bailout ultimatum, risks euro exit (Reuters) - The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone. In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown. In stark warnings earlier in the day, the European Central Bank said it would cut off liquidity to Cypriot banks and a senior EU official made clear to Reuters that the bloc was ready to see the bankrupt island banished from the euro in the belief it could then contain damage to the wider European economy. The ECB ultimatum came as the island's leaders struggled to craft a "Plan B" to raise the 5.8-billion euro contribution demanded by the EU in return for a 10-billion euro ($13-billion) bailout from the EU and IMF; angry Cypriot lawmakers threw out a tax on deposits, calling the EU-backed proposal "bank robbery". In a mark of strained relations and confusion, euro zone officials conceded during a conference call on Wednesday which Cyprus refused even to join that the situation was "in a mess".

Cyprus: The Sum of All FUBAR - Krugman - At this point the Cyprus situation is pretty clear — and clarity does not bring reassurance. In fact, it looks as if Cyprus has managed to combine in one place everything that has gone wrong elsewhere.

  • 1. Runaway banking. Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.  Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.  And the business model only works until there’s a big loss somewhere. Which brings me to:
  • 2. Big domestic real estate bubble, Spain or Ireland-sized. Not yet fully deflated, which means lots more losses to come. And the combination of the real estate bubble and the income from dodgy banking also led to:
  • 3. Massive overvaluation, with Cypriot prices and costs having risen much more than in the rest of the euro area. In 2008 the current account deficit was more than 15 percent of GDP!

Krugman’s Bad Math on Cyprus - Yves Smith - Paul Krugman, in a post earlier today, Cyprus: The Sum of All FUBAR, acts as if he has figured out what is the real problem with Cyprus. The only problem is his math is all wrong, and a better analysis undermines his major assertions.  You know something is amiss when a discussion of “what ails Cyprus” fails to mention the fact that domestic banks, particularly #2 bank Laiki, the epicenter of the crisis, is heavily exposed to Greece. The crisis in Cyprus is to a large degree a knock-on from the implosion of the Greek economy.  Krugman starts by claiming that domestic deposits are 500% of GDP and merely based on “asking around” has determined the culprit is a real estate bubble: Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. It might have helped if Krugman had bothered getting real data on Cyprus, particularly since, as we pointed out, there appears to be an anti-Cyprus PR campaign underway.

Cyprus targets big depositors in bank plan - Cyprus announced plans on Thursday to overhaul its banking industry and force losses on big depositors as the European Central Bank threatened to withdraw crucial funding if the island’s government failed to agree on a bailout. Panicos Demetriades, Central Bank of Cyprus governor, said parliament would be asked to wind up Laiki, the island’s second lender, and split it into a “good” and “bad” bank, with larger deposits folded into the latter. “The banking system needs restructuring otherwise it will go bankrupt and it needs to be done immediately,” Mr Demetriades said. “By establishing this legal framework, resolution measures will be imposed on Popular Bank [Laiki] so that it will be in a position to continue to offer banking services to its clients.” Deposits up to €100,000 would be guaranteed and bank jobs would be safeguarded, he added. “Otherwise, Laiki Bank will be led to immediate bankruptcy and termination of its operations, with catastrophic consequences for the workers, the depositors in their entirety, our banking system and the country’s economy,’’ said Mr Demetriades.

Cyprus overhauls two biggest banks to stave off collapse - Cyprus will inflict losses of up to 40pc on large depositors but guarantee all deposits up to €100,000 in a plan to restructure its biggest banks and prevent the island’s economic collapse next week.Following a run on the Laiki bank on Thursday, the Cypriot government has submitted a bill to Parliament which would enact strict capital controls for when banks open next Tuesday, restricting the movement of funds for up to 60,000 British expatriates with bank accounts in Cyprus. Finance ministers for the 17 eurozone countries on Thursday night considered the proposals to restructure and freeze all assets held in the Popular Bank, known in Greek as Laiki, and the Bank of Cyprus. The EuroGroup backed away from letting Cyrpus collapse and announced that negotiations would begin on the new Cypriot proposals. "The EuroGroup stands ready to discuss with the Cypriot authorities a draft new proposal, which it expects the Cyprus authorities to present as rapidly as possible," said a statement issued after a telephone conference. "After the conclusion of such negotiations the Cyprus authorities should begin legislating the elements of such an agreement."

Treasure Island Trauma, by Paul Krugman -- A couple of years ago, the journalist Nicholas Shaxson published a fascinating, chilling book titled “Treasure Islands,” which explained how international tax havens — which are also, as the author pointed out, “secrecy jurisdictions” where many rules don’t apply — undermine economies around the world.  One question Mr. Shaxson didn’t get into much, however, is what happens when a secrecy jurisdiction itself goes bust. That’s the story of Cyprus right now. And whatever the outcome for Cyprus itself (hint: it’s not likely to be happy), the Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began.  While the Cypriot economy may be tiny, it’s a surprisingly large financial player, with a banking sector four or five times as big as you might expect given the size of its economy.  Why are Cypriot banks so big? Because the country is a tax haven where corporations and wealthy foreigners stash their money. Officially, 37 percent of the deposits in Cypriot banks come from nonresidents; the true number, once you take into account wealthy expatriates and people who are only nominally resident in Cyprus, is surely much higher. Basically, Cyprus is a place where people, especially but not only Russians, hide their wealth from both the taxmen and the regulators. Whatever gloss you put on it, it’s basically about money-laundering.

Cyprus Needs to Lay Its Hands on One-Third of Its GDP By Monday - There are lots of places you can go to get all the latest messy details about Cyprus—Felix Salmon's take is good—but the nickel version is that everyone is fed up. The Cyprus legislature has refused to approve the EU/IMF bailout plan, and so far both the EU and the IMF are refusing to sweeten the deal. Maybe Russia could help, but they probably won't. So we're in a standoff: The euro currency union edged toward a rupture on Thursday when the region’s central bank said it was ready to pull the plug on Cyprus.The stark ultimatum came in a terse statement from the European Central Bank’s governing board that on Monday it would cut off the flow of euros to Cyprus’s financial system unless the country’s leaders reach terms with the International Monetary Fund and other European nations on an international bailout. Just to give you an idea of what all the numbers mean, the EU/IMF plan requires Cyprus to come up with about $7.5 billion as its share of the bailout. That's roughly a third of their GDP. To put that into local terms, it would be as if the United States were being asked to pony up $5 trillion. This is about equal to all government spending—federal, state, and local—for an entire year.

Mood Darkens in Cyprus as Deadline Is Set for Bailout - President Nicos Anastasiades presented Parliament on Thursday with a plan that scrapped a controversial tax on bank deposits. The central bank said the new package included “consolidation measures” to enable Cyprus Popular Bank, also known as Laiki Bank, to continue operating. As the country’s most troubled lender, it would be reorganized by placing underperforming loans and questionable assets into a so-called bad bank and transferring healthy assets to the Bank of Cyprus, the nation’s largest financial institution. ... But the central bank warned that if Parliament failed to pass the measure, “Laiki will default immediately, causing major consequences to its employees and its clients.”  Lawmakers will also vote on restrictions on taking cash out of banks and out of the country, known as capital controls, when the banks reopen. ...The central bank said on Thursday that Cyprus had until Monday to reach an agreement ... the group of 17 finance ministers whose countries use the euro issued a statement declaring themselves “conditionally satisfied” with most of the new proposal, which the so-called troika of lenders ... is to assess on Friday after the Parliament vote.

Clock Ticks on Cyprus  - Cyprus, in an 11th-hour bid to unlock international aid, reopen the nation's banking system and preserve membership in the euro, readied a plan that would restructure its second-largest lender and enforce unprecedented restrictions on financial transactions. The proposals, if they take effect, would allow authorities to restrict noncash transactions, curtail check cashing, limit withdrawals and even convert checking accounts into fixed-term deposits when banks reopen. They have been closed since March 16. Parliament is set to debate the measures on Friday. If Cyprus can't pass them, it could find itself with little choice but to leave the euro zone—opening a Pandora's box that could threaten Spain and Italy. Time is short: The European Central Bank on Thursday threatened to cut off a financial lifeline if Cyprus's banks aren't stabilized by Monday. Euro-zone finance ministers spoke Thursday night and said they are ready to discuss Cyprus's latest plan, but made no promises to accept it. Several officials complained of a near-breakdown of communications between the Cypriot government and the so-called troika of international creditors—the ECB, European Commission and International Monetary Fund.

Cyprus Banking Crisis: The Endgame Begins - The ultimatum has been issued: the E.U. is pressuring Cyprus to end its standoff over a proposed financial-rescue package and agree to new terms very rapidly — or face bankruptcy. Cyprus is scrambling to respond with a revised plan that would shield small depositors, but it still needs to finalize details and then win approval from the E.U.Two days after the Cyprus parliament overwhelmingly rejected the bailout, which would have taxed the deposits of all bank-account holders, the E.U. hit the island with a one-two punch. The first blow was a brief two-line announcement from the European Central Bank (ECB) that it would stop providing emergency liquidity assistance to Cypriot banks on Monday, March 25, unless the island nation agreed to a bailout deal with the E.U. and the International Monetary Fund before then. The announcement was a blunt attempt to force Cyprus’ hand, mainly because the tiny nation’s biggest banks have racked up heavy losses from soured loans to Greece and are dependent on liquidity from the ECB. Cutting off that financial lifeline would push them into bankruptcy, perhaps even taking the government with it, because the banks’ assets are estimated by Standard & Poor’s to be five times the size of Cyprus’ economy. “Neither the bank shareholders nor Cyprus’ government appear able on their own to meet the banks’ pressing capital needs,” S&P said in a statement announcing it was lowering the island’s long-term credit rating to CCC from CCC+, judging the financial outlook to be “negative.”

Russia Rejects Cyprus Financial Rescue Bid as Deadline Looms -  Russia spurned Cyprus’s offers of assets for a bailout as the island nation’s lawmakers begin debate on legislation to avert a financial collapse. “I think we aren’t able to get the support that we wanted to get,” Cypriot Finance Minister Michael Sarris said in an interview after checking out of the Lotte Hotel in Moscow. “But we must go back home because things are getting serious.” Cypriot lawmakers begin debating legislation today to prevent a financial meltdown as the European Central Bank threatens to cut off a lifeline for the country’s banks in three days unless a bailout agreement with the European Union is reached. Russian companies and individuals may have about $31 billion of deposits in Cyprus, which in turn is the biggest source of foreign direct investment in Russia. “The only thing that Cyprus could hope for is Gazprom buying some reserves from them,”

Europe, Russia Reject Latest Cyprus Bailout Plan Before It Is Even Voted By Parliament - Yesterday, when we described the latest Cyprus bailout proposal being (belatedly) debated by the Cyprus parliament and soon to be voted, we wondered how long before the Troika rejects it outright.  After all the "Solidarity Bailout" Plan C (or whatever it is) did not do what Germany more than anything wanted to accomplish - punish Russian depositors as this entire farce has been nothing but a political gambit dictated by Germany from the onset. And so while GETCO's entire army of algos awaits the flashing red headline with a touch of optimism to unleash robotic buying of ES and EURUSD, we fast forward to the inevitable denouement, which is, not surprisingly, bad news for Cyprus, because as the FT reports, confirming our initial skepticism, "European officials rejected Cyprus’ plans for an alternative package to save its banking sector and remain in the euro, starting a fresh round of talks with the island nation’s government on Friday."

Cyprus: What are the Russians playing at? - Paul Murphy, watching Cypriot finance Minister Michael Sarris returning empty-handed from Moscow, says that “Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why”. His point is that the most likely outcome right now — he calls it “popping the red pill” — is that big depositors at Laiki Bank (read: rich Russians) are likely to lose some 40% of their money. Since that will make Russia very unhappy, why is Russia doing nothing to prevent it? I don’t pretend to understand Russian politics, but this move seems to me to be a classic high-risk, high-aggression play; think of Medvedev as a geopolitical hedge-fund manager or poker player, and it begins to make a bit more sense. Firstly, it’s worth noting that Russia is actually moving backwards on the amount of help it’s likely to extend to Cyprus. When the bailout plan was first announced, it included Russia extending its existing €2.5 billion loan to the country by five years, as well as reducing that loan’s interest rate. Now, Russia is refusing to agree even to that.

EU rescue may tilt Cyprus from Moscow in regional power shift -- "The Russians, as good friends of Cyprus, want to take care of us," he said breezily, dismissing a question with a wave of his hand and smiling, Christofias, whose government took a 2.5 billion euro ($3.2 billion) loan from Moscow in 2011, is no longer the president of Cyprus and is not involved in the torrid efforts to try to agree a bailout package with the EU and IMF. But the gap between his perception of events then and the current state of affairs is illustrative of the dilemma facing this small island, where the geopolitical interests of Russia, the EU, Greece and Turkey collide. If Cyprus had any hopes left that Moscow might provide funds to help bail it out, they were dashed on Friday when Cypriot Finance Minister Michael Sarris left Russia empty handed after days of negotiations. "The talks have ended as far as the Russian side is concerned," Russian Finance Minister Anton Siluanov said, with no agreement even to extend the existing, 4-1/2-year loan. That leaves Cyprus isolated, having earlier rejected Europe's bailout plan. To prevent its banks collapsing, it must now return cap in hand to Brussels. "It was very naive of Cyprus to think that Russia was going to help it out,"

Furious Merkel: "Cyprus’ Decision To Test Europe Is Unacceptable" - Europe's paymaster - that would be Germany for those who have not paid attention to events over the past four years - is not used to being snubbed. It certainly is not used to being snubbed by what every empty chatterbox and their kitchen sink will tell you is a "small and irrelevant" country (all the more so in the aftermath of last summer's embarrassing defeat in its head on confrontation with the ECB, in which the Bundesbank showed that sometimes the best offense is a gracious retreat). It most certainly is not used to not being invited to discussions involving the future of its precious mercantilist European union, especially when said union may no longer exist as we know it in 48 short hours. And Germany is angry.

Cyprus Shifts To Plan 'DD' (Douple-Dip The Large Depositors) - It seems that the Cypriot government is going full circle on its plans to save its nation and its people. As UK Think Tank Open Europe notes, "it now seems we have come all the way back round to the deposit levy as a solution in Cyprus. Overnight, the EU/IMF/ECB Troika rejected the plans for a Cypriot solidarity fund, particularly one based on pension assets and gas reserve revenues (which German Chancellor Angela Merkel specifically spoke out against)." The new - Plan 'D' - (Plan A - Haircuts; Plan B - Beg Russia for Bailout; Plan C - Solidarity Fund) appears to be moar haircuts and double-dip on the large depositors (seemingly what Brussels wants anyway). Plan 'D' - a restructuring and bigger deposit levy (a 12.2% tax on deposits above €500,000 or a 9.46% deposit on deposits above €100,000 would yield the necessary €3.5bn) - "may amount to trying to burn the larger depositors twice," as the plan to shift bad assets to a bad bank (along with the large uninsured depositors) and wound down (meaning 20-40% losses) and still face the initial large-deposit-tax - leaving the Russians large depositors with 50%-plus losses. As the FT notes, "that may make sense in the medium term, but in itself does not create new money"

Cyprus Update - It is after 5 PM in Cyprus and Parliament is expected to vote soon ... on something.  From the Telegraph: Cyprus bail-out: live [H]ere's what we think that proposal might look like, based on reports and rumours from journalists on the ground.  Laiki Bank - the island's second largest lender - is wound down. Depositors' first €100,000 are hived into the Bank of Cyprus. Everything else is put into a bad bank, and sold off, likely at a 20pc to 40pc discount. ... According to information on the spread of deposits, a 9.46pc levy - lower than the 9.9pc proposed in the Eurogroup's original plan - on deposits over €100,000 would do the trick. Under such an arrangement, the biggest losers would be those with deposits over €100,000 in Laiki Bank, who could be charged a 9.46pc levy and have any deposit over €100,000 swallowed into the 'bad bank' and sold off at a discount, losing as much as 40pc of its value. ...

Cyprus Capitulates to Eurozone - Yves Smith - Finance Minister Sarris came back from Moscow without any assistance from Russia. Russia had apparently made clear it was unwilling to offer loans, and would at most buy assets. Pravda reported that the Russians said if Cyprus hit their deposits, they would not put in a dime. And frankly, except for military assets, which could only be offered by the government, they’d do better scooping up bargains in the wreckage of deflation rather than now.  Bloomberg tweeted about 40 minutes ago that Cyprus had approved the legislation necessary for the EU bailout, but still does not have a news story up. The Wall Street Journal as of now has a “Breaking News” item on its website, again no story yet, “Cyprus lawmakers approve key bills aiming to secure broader bailout package.” So this looks to be a done deal. I wonder how this will work. Capital controls are being implemented, since news reports from Cyprus indicated that residents intended (understandably) to drain accounts once banks reopened. In addition, I can’t see how the current government survives. Indeed, the President and key members of Parliament may need to flee the country.

Regrets Pour In; Cyprus Parliament Passes Bailout Plan; Will Her Highness Approve? - The Cypriot parliament passed bailout measures today, but they are not quite the measures that Her Highness, Angela Merkel approves. They are not measures Cypriot citizens will approve of either. Let's take a look at the present state of blackmail, as passed by Cyprus and reported by the BBC. MPs in Cyprus have voted to restructure the island's banks - one of several measures to ease the crisis, which has hit confidence in the eurozone. They have also approved a "national solidarity fund" and capital controls to prevent a bank run. MPs did not vote on a key measure - a levy on large bank deposits. They rejected similar moves on Tuesday.  The "solidarity fund" would allow the pooling of state assets for an emergency bond issue, reports the Reuters news agency. These include future gas revenues and some pension funds - an idea that German Chancellor Angela Merkel has strongly condemned. Ms Merkel had warned Cyprus not to "exhaust the patience of its eurozone partners", reports say.

Angela Merkel reportedly outraged over Cyprus’s behaviour - German chancellor Angela Merkel reportedly expressed outrage at the behaviour of Cyprus during an extraordinary meeting of the parliamentary faction of her Christian Democrats in the Bundestag. According to reliable sources present at the meeting, she said Cyprus was "exhausting the patience of its euro partners" and she was particularly incensed that the government had failed to produce a "plan B". She also complained about the lack of communication from Nicosia. On the streets of Cyprus, she is viewed as a hate figure, blamed for the bank deposit tax plan, even though the idea originally came from Nicosia, and for insisting that Cyprus should raise a third of the country's rescue fund itself. The effect of this at home has merely been to increase Merkel's support. She knows that voters would never forgive her if she used their taxes to bail out banks that offer an offshore haven for the fortunes of Russian oligarchs. Images of Merkel as an SS guard or donning a Hitler moustache have appeared in Cyprus but one German government official said: "The old Nazi cliches are simply too easy to fall back on when someone's looking for an outlet for their anger".

If capital controls are introduced in Cyprus, it is the end of the single currency in all but name - Only a few days ago, the Cypriot authorities were instructed by their parliamentarians comprehensively to reject the idea of hair-cutting deposits to pay for bank recapitalisations. Well, now they've gone full circle and it looks as though they are going to, er, haircut depositors afterall. With the European Central Bank threatening to pull the plug on Monday by denying further liquidity support, and showing absolutely no sign of blinking, Cypriots have little choice in the matter. The present plan is only slightly more palatable than the last. The two most problematic banks are to be restructured, with uninsured creditors taking a 40 per cent hair cut. That gets the Cypriot authorities some of the way towards the €5.8bn they need, or is that €6.7bn? Reports suggest the beastly Troika has upped the ante. In any case, the balance, whatever it might be, is going to come from "taxing" uninsured deposits above €100,000 in other banks in the way originally proposed. So insured depositors keep their money, but many bank workers lose their jobs. Not much of a trade off if you an employee of Laiki Bank. It also spells the end of Cyprus's offshore banking model, though this may scarcely seem to matter as it was hard to see it surviving the bailout anyway. However, the perhaps more widely significant part of the proposal is the planned application of capital controls. This is of course entirely necessary to prevent a further run on the banks the moment they open their doors on Monday. Many Russian depositors are threatening to remove their spoils if they are subjected to any kind of a haircut. This would quickly render these organisations essentially insolvent regardless of the recapitalisations. Almost no amount of capital is sufficient for a bank which has lost the confidence of its depositors.

Cyprus Officially Passes Capital Controls Into Law -  - While it is unknown if the Cypriot parliament will agree to, and enact into law, the Troika-demanded deposit haircuts, after the shocking vote of mutiny against Merkel earlier this week that saw not one politician vote for the Europe suggested deposit tax levy (and even the ruling party abstained), a vote which will once more take place tomorrow, moments ago Cyprus became the first Eurozone country to officially implement governmental capital controls into legislation. At this point it had no choice: whatever happens with the deposit haircut, or with everything else, it is now inevitable that the local Cypriots will do all they can to pull as much money from domestic banking system as possible following the complete loss of faith and trust in banks, which is why the government had no choice but to intervene with its own "controls." Sadly, this marks a milestone in the development of the Eurozone - it's all downhill, and accelerating, from here.

Cyprus Passes Parts of Bailout Bill, but Delays Vote on Tax - Cyprus’s parliament on Friday partly approved a revised formula for obtaining an international bailout to avert a default, amid strong signals that the plan would not pass muster with international lenders.  But they put off voting on a crucial new proposal until later this weekend — one that would confiscate a stunning 22 percent to 25 percent of uninsured deposits over 100,000 euros through a new tax to be placed on account holders in one of the nation’s most troubled banks.  And so, going into the weekend ahead of a Monday deadline imposed by the European Central Bank, it appeared there was still no immediate path to a lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its banks from collapsing.  One of the provisions approved by Parliament on Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen [capital controls]... Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by hiving off its troubled assets into a so-called bad-bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus, which lawmakers are now proposing to hit with a 22 to 25 percent tax on uninsured deposits. Cyprus’s so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — still must approve the plan.

Cyprus Adopts Bank Overhaul Plan - As details of the latest plan emerged late Friday, there were signs that the country may be forced to also resolve Bank of Cyprus, its biggest lender, a prospect it was fighting to avert by proposing an even deeper levy on the lender's uninsured depositors than one demanded earlier by euro-zone partners. Two officials involved in the negotiations said the government in Nicosia was planning to impose a 20% levy on depositors with more than €100,000 in their accounts in Bank of Cyprus. The government hoped that would allow them to protect the lender, which holds more than one third of total deposits on the island, some €28 billion. But senior European finance-ministry officials in a call Friday evening expressed doubts that the plan would raise enough money to ring fence the lender, according to two officials on the call. ... Resolving both banks "makes more sense," said [one] official. .The creation of a "good bank" and a "bad bank" could improve Cyprus's lot in two ways. First, creditors of the bad bank could be made to bear steep losses. That would reduce the amount of aid the Cypriot government needs to provide to the banking system. Second, by bolstering Bank of Cyprus, the plan could persuade the ECB to continue providing liquidity to the country's financial system—which it has threatened to cut off.

Cyprus Update - Paul Krugman - Well, it looks as if the Icelandization of Cyprus — at least in the sense of making offshore depositors take a big hit — is happening faster and more decisively than I feared. Great summary by Paul Murphy at FT Alphaville, ending thusly: Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia. But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why. Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable. The choice is obvious. Still, if I were a Cypriot official I might seek a bit of extra security for my family.

‘Banco de Mattress’ looms for Cypriots - You may have thought that your European assets lived in a borderless single market, but as we see now being played out in the case of Cyprus, that is not necessarily the case. For the past couple of years, the capital-controls obsessed have been going on about Article 65 of the Treaty, which gives considerable room for interpretation, if that’s what’s wanted, for any member state that wants to lock its residents’ currency behind its national borders. So even after the banks (presumably) reopen on Tuesday, a euro in Cyprus will now not be as freely transferable, or, really, as valuable, as a euro in Frankfurt. In some very real ways that is also true of euros on deposit in Greece, whose use is increasingly subject to detailed review and delay by tax authorities; or euros in Italy, where the size of cash transactions is severely restricted, at least by law. Therefore, now that the Article 65 capital-controls cat is out of the bag, it is reasonable to consider when and where it will be used again, when a European banking system gets into trouble. You may be rich, in nominal Cypriot euros, or (fill in the blank) euros, but so what?

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.

Repeat After Me, Cyprus Is (Was) Not a Tax Haven - Yves Smith - Cyprus is over as an international banking center, which the Financial Times reports was one of Berlin’s objectives for its rescue. However, the business press (and yours truly following them) has referred to Cyprus as a tax haven. That description is part of the PR campaign to justify punishing the island.  By reader Claudius, hoisted from comments. There’s been a general meme in many of the ‘Cyprus comments’ that intimate if not outright discriminate Cyprus’ Financial Center status as a bastion of money laundering and international corruption. This is then used to reason a justification for why Cyprus is simply getting its comeuppance. To be clear, I am neither an apologist for Cyprus’s present predicament nor a belligerent activist against tax havens, such as the Cayman Islands or Isle of Man. Cyprus is a low-tax jurisdiction, not a tax haven. Cyprus is on the OECD’s ‘white list’ of jurisdictions complying with the global standard for tax co-operation and exchange of information. Its fiscal and regulatory regimes are fully aligned with the acquis communautaire and the Code of Conduct for Business Taxation of the EU and the requirements of the OECD, the FATF, and the FSF. However the Cayman Islands’ maintains only 12 bilateral tax information arrangements; and The Isle of Man, 14. Cyprus an arrangement with all of its OECD bilateral (double-taxation treaty) partners – 46 fully, 6 being ratified. Within these 52 countries, Cyprus has double-taxation treaties with about every country in the EU, and includes China, the US, Russia and, practically, every Middle East country. All the double-taxation treaties concluded by Cyprus were drafted on the basis of the Organization of Economic Co-operation and Development (OECD) model treaty.

From Smoldering Ashes Comes Good News of Reality - It's easy enough to focus on the smoldering ashes of the politically and economically insane move in Cyprus by the heavy-handed bureaucrats in Brussels and Germany. Instead, I suggest we focus on the bright side, and there is plenty to be found.

  1. The nannycrats have been permanently exposed as liars
  2. Trust is gone
  3. Everyone can now clearly see that deposit guarantees were a lie
  4. Realization has set in that in spite of nannycrat denial, this will happen again
  5. The move in Cyprus will strengthen the Five Star Movement in Italy
  6. The move in Cyprus will embolden the separatists in Spain
  7. The move in Cyprus will strengthen UKIP in Great Britain
  8. The move in Cyprus is even likely to strengthen Alternative für Deutschland (AfD)
  9. Eurobonds and joint budgets are exposed as dead
  10. In Germany, Merkel is likely to have won a Pyrrhic victory (if indeed she won anything at all)
  11. Sensible people now realize all this talk of European solidarity is a gigantic lie
  12. Even ardent supporters of the eurozone are now starting to question its existence

Sham guarantee - So you think small bank deposits are guaranteed, do you? That they are perfectly "safe"? Read what follows, and think again.  The Eurogroup President's statement on Cyprus included the following commitment (my emphasis): "The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000". Ok, so that's the standard line on deposit insurance. Small deposits, including current accounts, are safe from loss because they are 100% guaranteed by government.Here's the President of Cyprus on the subject (again, my emphasis): The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay. Indeed it would not. After all, the reason for the proposed depositor haircut is that the Cypriot government can't afford to borrow even 7 billion euros, let alone 30 billion. Actually the Cypriot government can't borrow at all, really. Its credit rating was cut to junk quite some time ago and the only buyers for its debt now are the same banks that are threatening to implode if they aren't recapitalised.

First they came for the deposits…  Izabella Kaminska - This won’t be popular. But it’s an important alternative to the “it’s expropriation” view on Cyprus. While the decision to force a bank levy on depositors creates an important precedent, it also represents something much more complex than pure confiscation or forfeiture. It’s certainly not expropriation in the communist or command economy sense, that’s for sure. In fact, I’d argue that what it really represents is the inevitable shift away from a debt funded economy to an equity funded one. That’s not to say the shift has been managed fairly or logically. I’m with Willem Buiter on the point that it would have been better if small island depositors had been spared. But I’m also with him on the point that this is ultimately a step in the right direction. It all comes down to the need to capitalise failing banks with equity, and to get creditors taking responsibility for their bad investments. I’m going to write now in general terms, and not about Cyprus specifically.

Will The Real Clowns Please Stand Up? - As I pointed out in my recent post The Italian Genie Is Out of the Bottle, the European mainstream media has rounded on Beppe Grillo, painting the Italian comedian and political activist who founded the ascendant 5-Star political party as a populist clown. Yet with one European government after another reeling from myriad self-inflicted crises, and the whole euro debacle fast descending into a tragi-comic farce of Shakespearean proportions, one can’t help but wonder who the real clowns are – especially here in Spain, whose government ministers’ only talent seems to be to gorge themselves on the public purse, while leaving behind a trail of evidence so obvious that even the mainstream media can’t ignore it. No one epitomizes all that’s wrong in Spanish politics better than Luis Bárcenas, the man at the center of the recent corruption scandal implicating pretty much all of the Spanish government’s senior rank and file. While serving as the Popular Party’s treasurer, not only did he run an extensive kick-back racket but he also kept detailed records of all the under-the-table (i.e. illegal) bribes given by corporate entities to the party – a basic error that even the most inexperienced two-bit gangster would know to avoid.

Italy's Companies Face Slow 'Death' as Credit Crunch Deepens - Confindustria, the business federation, said 29 percent of Italian firms cannot meet "operational expenses" and are starved of liquidity. A "third phase of the credit crunch" is underway that matches the shocks in 2008-2009 and again in 2011. In a research report the group said the economy was caught in a "vicious circle" where banks are too frightened to lend, driving more companies over the edge. A thousand are going bankrupt every day. Franco Bernabè, the head of Telecom Italia, echoed the warnings, lamenting that firms are literally "dying from lack of liquidity". He called on the Bank of Italy to take bolder action to head off disaster. "The Italian economy is being suffocated. The country must intervene rapidly to reinject funds into the economy", he said.

Bad debts at Italian banks top 126 bln euros in January (Reuters) - Bad debts at Italian banks rose to 126.1 billion euros in January and lenders further reduced loans to households and businesses, data showed on Tuesday. The Italian banking association ABI said bad loans, which have become a major concern for lenders because of Italy's prolonged recession, rose by 18 percent in January from a year earlier and by around 1.1 billion euros compared with December. Bad debts totalled 91 billion euros in January 2011. ABI has said it expects the growth rate of bad loans to peak in the first half of this year. Gross bad loans are now 6.4 percent of total loans, the highest level since September 2000, ABI said. Lending from Italian banks to households and non-financial firms fell by 2.8 percent in February, declining for the tenth consecutive month after falling at a similar pace compared with January.

Spanish Lenders’ Bad-Loan Ratio Resumed Increase in January - Bad loans as a proportion of lending at Spanish banks resumed their increase in January in a sign that asset quality remains under pressure after state-aided lenders transferred soured real estate risk to a bad bank. Non-performing loans as a proportion of total lending climbed to 10.8 percent in January from 10.4 percent in the previous month as 3.2 billion euros ($4.1 billion) of loans soured, the Bank of Spain in Madrid said on its website today. That’s up from 8.1 percent a year ago. Bad loans continue to rise in Spain as the International Monetary Fund predicts the economy will shrink 1.5 percent this year and the unemployment rate will hit 27 percent, making it harder for borrowers to keep up credit payments. The bad-loans ratio dipped in December from a record of 11.4 percent in November as lenders, including Bankia group, that have taken state aid transferred soured real estate assets to a bad bank.

When do we call it a solvency crisis? - Michael Pettis - Neither of us, in other words, (and few in the meeting) felt that the recent market enthusiasm was justified. Never mind that the Spanish economy, to return to the country I know best, contracted again in the fourth quarter of last year, that it is expected to contract again this year, that unemployment is still rising, and that the ruling party is involved in yet another scandal that has driven its popularity down to 20%. Never mind that young Spaniards are emigrating (20,000 a month net), that the real estate market continues to drop, that businesses are still disinvesting and popular anger is extraordinarily high. The ECB, it seems, is willing to pump as much liquidity into the markets as it needs, so rising debt levels, greater political fragmentation, and a worsening economy somehow don’t really matter. This crisis continues to be just a liquidity crisis as far as policymakers are concerned – and not caused by problems in the “real” economy – and the solution of course to a liquidity crisis is more liquidity. But is peripheral Europe really suffering primarily from a liquidity crisis? It would help me feel a lot better if I could find even one case in history of a sovereign solvency crisis in which the authorities didn’t assure us for years that we were facing not a solvency crisis, but merely a short-term problem with liquidity. A sovereign solvency crisis always begins with many years of assurances from policymakers in both the creditor and the debtor nations that the problem can be resolved with time, confidence, and a just few more debt rollovers.

While Cyprus Sinks, France and Slovenia Start to Founder -  Yves Smith - The official sick man list of Europe has long been the PIIGS, or if you prefer, the GIPSI: Greece, Ireland, Spain, Italy, Portugal. As the Cyprus restructuring drama has moved into high gear, it’s obscured news of a serious deterioration in the French economy and the weakened condition of Slovenia, which has a population and GDP roughly 1.5 times as large as that of Cyprus.  MacroBusiness cited the terrible PMI report on France overnight, and quoted Markit’s chief economist Jack Kennedy: The latest Flash PMI data spell further bad news for the French economy, with the downturn in output accelerating to the sharpest in four years. Again it’s difficult to find any crumbs of comfort among the data, with new orders and backlogs both declining at sharper rates and employment cuts continuing. Moreover, future expectations in the service sector slumped to the lowest level since the peak of the financial crisis in late-2008, underlining the extent of companies’ worries over a persistently bleak economic climate. Quartz had a similar bad reaction to the Markit report:  To frame it in another horrifying perspective, the PMI of the euro zone’s second-largest economy was lower than that of Spain and Italy—and almost down to Greek levels (video), as Reuters’ Jamie McGeever explains. What’s most worrying is when you look at how France’s data stacked up against the euro zone’s as a whole, which were also published today. While the euro zone’s PMI (blue line) and its GDP growth (orange line) have moved pretty closely in sync, France’s PMI has become unhinged in the last couple of years. And that’s bad because, as PMI reflects business confidence, it’s typically a leading indicator of GDP growth (click to enlarge):

Will France Be the Next EU Basket Case? - The numbers coming out of France continue to disappoint.  More importantly, there is little indication there is any room for improvement in the near future.  The most concerning conclusion is the economic numbers are slowly degenerating to the point where France becomes the next EU country to have an economic crisis. Let's start with a look at GDP: The red line shows overall GDP growth. It was barely positive in 2011 and has printed three quarters of negative growth in 2012. The above chart places the 2012 slow growth number in perspective. The biggest problem is a lack of investment, which contracted strongly in three of the last four quarters. Also note the breadth of the decline, which occurred at the business, household and government level. The other areas of the economy are in fair shape, with PCEs and trade growing, albeit at low levels.

Le Monde Headline "No, France is Not Bankrupt" - This amusing headline story by Bruno Moschetto, a professor of economics at the University of Paris in the French newspaper Le Monde has me laughing out loud this morning: "No, France is Not BankruptNo, France is not bankrupt ... The claim is untrue economically and financially. A state cannot be bankrupt, in its own currency to foreigners and residents since the latter would be invited to meet its debt by an immediate increase in taxation. In abstract, the state is its citizens, and the citizens are the guarantors of obligations of the State.In the final analysis, "the state is us." To be in a state of suspension of payments, a state would have to be indebted in a foreign currency, unable to deal with foreign currency liabilities in that currency. Economic illiteracy is nearly everywhere you look and that article is a prime example. Bruno Moschetto suggests France is not bankrupt because the state is not indebted in a foreign currency. Actually, France does have its debts in a foreign currency, euros. Note that France cannot print euros at will to pay its debts (the very essence of a foreign currency).

Hollande Announces 20 "Confidence Shock" Measures to Support Home Building - Sticking with his economically insane campaign promise to construct 500,000 new homes in 2013, Hollande Announces 20 Measures to Support Home Building. Advocating a "confidence shock" to revive the building "against the Emergency Economic, social and environmental" the head of state has shown its desire to remove "all obstacles to construction", while there was about 340,000 starts of new homes in 2012, below the target of 500,000.  I commented on this once before but it's worth a repeat now that Hollande is hell-bent on forcing his will on the market. The US is currently running about 890,000 housing starts annually, on a seasonally adjusted basis. And Hollande wants an equivalent 2,380,952 starts "for the public good". US housing is distressed. However, France is in the midst of a bubble now burst, and it is beyond stupid to keep building anywhere in the face of falling demand.

Eurozone economic downturn deepening - The Eurozone’s economic downturn has deepened this month — even before Cyprus’s bailout debacle — creating another headache for policymakers battling to revive the bloc’s fortunes, a business survey showed on Thursday. Most survey responses were received before news of Cyprus’s bailout deal including an unprecedented levy on all bank deposits broke. Survey compiler Markit, who released the preliminary data and will issue final responses at the start of April, said the picture could be even worse by then. “Events that hit business confidence can have a very rapid effect on the data and so there is good reason to believe that responses we collect this week will on average be more negative,” said Chris Williamson, Markit’s chief economist. “It’s really quite disappointing. Given the deterioration in the political and financial market outlook there is really little hope from what we see that there is going to be a turnaround in the second quarter, and in fact more likely an increased weakening.” Article continues belowThe Flash Eurozone Composite Purchasing Managers’ Index, which makes up around 85 per cent of the final reading and is seen as a reliable economic growth indicator for the bloc, fell to 46.5 in March from February’s 47.9.

Eurozone economic downturn deepens - Eurozone business activity missed forecasts in March, heightening concerns about an economic recovery as the deepening Cyprus crisis threatens to rock confidence across the single-currency bloc. The disappointing data weighed on markets, with the euro and European stocks falling. The Markit “flash” purchasing managers’ index, which measures business activity in manufacturing and services, fell from 47.9 in February to 46.5 in March, a four-month low. Economists had been expecting the data to increase. France showed a particularly worrying decline, as output contracted to a four-year low, with Markit saying it was “difficult to find any crumbs of comfort among the data”. German activity fell to a three-month low, though it maintained a level above 50 that denotes an expansion. Most survey responses were received before the crisis in Cyprus began to unravel last week with a failed bailout plan and officials across the region scrambling for a replacement. The euro dipped 0.1 per cent to $1.2922, close to a four-month trough. German stocks fell 0.9 per cent while the FTSE Eurofirst 300 dipped 0.5 per cent. In Paris, shares were down 0.9 per cent. Chris Williamson, Markit’s chief economist, said that the Cyprus debacle threatened to further hurt business and consumer confidence across a region already facing headwinds.

The financial-repression levy | The Economist: EUROPE’S leaders have once again managed to make a drama into a crisis by, at least at first, agreeing to a 6.75% levy on insured Cypriot depositors as the price of a bail-out. The plan to rescue Cyprus has quickly turned into another botched job. An overnight raid on savings is a shock. But savers in other developed countries have also seen a hit to their purchasing power in the form of negative real interest rates, a type of financial repression. The clever thing about this approach is that it erodes the purchasing power of savers’ capital slowly but steadily, rather than dramatically, and thus tends not to provoke much protest.Americans who invested in six-month bank certificates of deposit earned 3.2% between 2009 and 2012, before tax, whereas consumer prices rose by 6.6%. The financial-repression levy was therefore 3.2%. In Britain even savers who put cash in the best tax-free “individual savings accounts” (which have modest annual limits) would have earned a cumulative 11% between 2009 and 2012, during which time consumer prices rose by 13.4%. Outside that tax shelter, middle-class savers who pay a marginal tax rate of 40% would have earned a net return of 6.6%. In real terms, their savings would have declined by 6%, not far short of the original Cypriot deposit levy.

UK government launches huge mortgage subsidies - A state-backed mortgage guarantee scheme worth £130billion will see the market flooded with 500,000 cheap loans. The Government is to subsidise deposits and provide state backing for loans to help homebuyers get on the property ladder or move up. But there were warnings that the scheme risks creating a house price bubble. The Help to Buy scheme will offer loans to top up the deposits of those buying newly built properties worth up to £600,000 who can only put up 5 per cent of the loan themselves. The Treasury will add an extra 20 per cent of the house value to enable them to get a mortgage. The first five years of the loan will be interest free. After that it will attract a 1.75 per cent payment, which will rise annually by inflation plus 1 per cent. Borrowers will be able to apply from April 1 and be able to repay the loan at any point. This part of the scheme is worth £3.5billion. The second, bigger, part – available from next January – will guarantee £130billion of mortgages on any property, not just newbuild, worth up to £600,000.

The 2013 Budget and UK Monetary Policy -The Budget yesterday included an important update to the remit of the Bank of England’s Monetary Policy Committee (MPC). Depending on who you listen to, this is either an important change that could offer a considerable additional stimulus to the UK economy, or a major disappointment. So which is it?  The document reaffirms flexible inflation targeting, and rejects alternatives such as nominal GDP targets. However the Treasury wants to make it clear to the MPC just how flexible it can be. It can, for example, ‘see through’ (i.e. ignore) any short term increase in inflation for a lot longer than the two years that has so far been part of the MPC’s mantra. It can create ‘intermediate thresholds’ as part of forward guidance. In short, it believes flexible inflation targeting is quite compatible with the MPC doing what the US Fed is currently doing. [1]  I think Britmouse has it exactly right when he writes:  “I see nothing at all in the new remit text which compels the MPC to do anything different to current policy.  It is all about judgement.  Neither did the old remit prevent the MPC from giving forward guidance if they so desired.”

Krugman warns U.S.: Don't end up like U.K. - Americans wouldn’t normally pay much attention to a British budget.  We have enough budget issues of our own! But when the British Finance Chief  unveiled his public spending plans today, at least one prominent American economist must have been  watching closely.  Paul Krugman -- Nobel-prizewinning Professor of Economics at Princeton University --  is a keen student of the British economy.  And a stern critic of the way it’s been managed. In Krugman's best selling book, End This Depression Now, he argues that Europeans -- including the Brits -- are obsessed with austerity. And that they’re driving their economies into a death spiral …  cutting public spending when they should be doing the opposite and  boosting  growth.  "The British economy, like the U.S. economy,  needs to push public investment back up," says Krugman. "It needs to spend more because this is a special time. This is a once-in-a-three-generations economic crisis. And it’s not a time to be penny-pinching."   Krugman argues that what the Brits have been doing to cut their debt  is completely counterproductive.  He says that austerity shrinks the economy, reducing tax revenues and increasing  government debt. The British government should borrow more to  spend more, to spark  up the economy. 

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