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

Saturday, August 21, 2010

week ending Aug 21

Fed balance sheet shrinks on less mortgage debt (Reuters) - The Federal Reserve's balance sheet shrank in the latest week, partly due to a decline in its holdings of mortgage-related securities, Fed data released on Thursday showed. The fall in holdings of agency debt and mortgage-backed bonds came as the Fed this week reinstated its program of purchasing Treasuries in a bid to lower long-term interest rates and support the economic recovery, which has shown signs of weakening. The balance sheet fell to $2.297 trillion in the week ended Aug 18 from $2.310 trillion the previous week. The central bank's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) fell to $1.113 trillion on Wednesday from $1.119 trillion a week earlier. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system slipped to $157.21 billion from the previous week's $159.38 billion. At the same time, U.S. government securities held by the central bank increased, to $779.55 billion on Wednesday from $777.00 billion last week.

US Fed Total Discount Window Borrowings Wed $61.92 Billion - (Dow Jones) The Federal Reserve's balance sheet shrunk slightly in the latest week as higher U.S. Treasury holdings were offset by lower holdings of mortgage-backed securities.  The U.S. central bank said in data released Thursday that its asset holdings in the week ended Aug. 18 fell to $2.317 trillion from $2.331 trillion a week earlier.  Facing a slowing economy, central bank officials last week decided to reinvest the proceeds of maturing mortgage-backed securities the Fed held into U.S. Treasurys so as to keep its portfolio stable and avoid any tightening of financial conditions.  Holdings of U.S. Treasurys rose to $779.55 billion as of Aug. 18 from $777.01 billion as of Aug. 11. Mortgage-backed securities holdings dropped to $1.113 trillion from the previous week's $1.119 trillion level.  The report also showed that commercial bank borrowing from the Fed's discount window remained low, rising to $57 million as of Wednesday from just $1 million a week earlier. Total discount window borrowing was broadly unchanged at $61.92 billion from $62.23 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 19

 The Central-Bank Balance Sheet as an Instrument of Policy - NYFed - While many analyses of monetary policy consider only a target for a short-term nominal interest rate, other dimensions of policy have recently been of greater importance: changes in the supply of bank reserves, changes in the assets acquired by central banks, and changes in the interest rate paid on reserves. We first extend a standard New Keynesian model to allow a role for the central bank’s balance sheet in equilibrium determination and then consider the connections between these alternative policy dimensions and traditional interest rate policy. We distinguish between “quantitative easing” in the strict sense and targeted asset purchases by a central bank, arguing that, according to our model, while the former is likely to be ineffective at all times, the latter can be effective when financial markets are sufficiently disrupted. Neither is a perfect substitute for conventional interest rate policy, but purchases of illiquid assets are particularly likely to improve welfare when the zero lower bound on the policy rate is reached. We also consider optimal policy with regard to the payment of interest on reserves; in our model, this requires that the interest rate on reserves be kept near the target for the policy rate at all times. Available only in PDFspacer82 pages / 481 kb

Fed dissenter slams ultra low rate policy (AFP) The lone dissenter on the US Federal Reserve's policy-making body lashed out Friday at its decision to keep interest rates at virtually zero percent, warning such a policy could boomerang. The Federal Open Market Committee's decision last Tuesday to maintain rates at zero to 0.25 percent, a policy adopted since December 2008, was adding to uncertainty over US economic recovery prospects, said Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. "As much as I want short-term improvement, I am mindful of possible longer-term consequences of zero interest rates and further easing actions," Hoenig said at a community gathering in Nebraska state. "Zero rates during a period of modest growth are a dangerous gamble," he said.

Feds Bullard Supports Asset Purchases If Inflation Falls Further - The Federal Reserve might need to commence a program of moderate purchases of U.S. Treasury bonds if inflation continues to fall, James Bullard, President of the Federal Reserve Bank of St. Louis, said in an interview with the Wall Street Journal.  Mr. Bullard has become a vocal proponent of asset purchases if the economy continues to weaken and inflation falls further, though the subject is still the source of vigorous internal debate at the Fed and it’s not clear whether it will take this step. At its August meeting, the Fed took a small step in that direction by deciding to reinvest proceeds from maturing mortgage backed securities into Treasury bonds.  “I thought we should be in a position to return to a quantitative easing program if we got further disinflation,” Mr. Bullard said. Quantitative easing is a term central bankers use to describe purchases of assets like Treasury or mortgage bonds by the central bank, which floods the financial system with cash and could help to drive down long-term interest rates and spur growth.

Bullard says Fed may need to buy more Treasuries-(Reuters) - The Federal Reserve may need to ramp up its purchases of U.S. Treasury debt if price levels in the U.S. economy continue to show signs of softening, St. Louis Fed President James Bullard said on Thursday. Bullard said such actions were not yet warranted given expectations for a continued economic expansion. But he added that, if further signs of easing price pressures were to emerge, the central bank should not shy away from action.  "Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted," he said in prepared remarks. His comments came on the same day as a very weak batch of data renewed growth worries.

Fed's Kocherlakota: Markets misinterpreted FOMC’s decision -From Minneapolis Fed President Narayana Kocherlakota: Inside the FOMC The FOMC’s decision has had a larger impact on financial markets than I would have anticipated. My own interpretation is that the FOMC action led investors to believe that the economic situation in the United States was worse than they, the investors, had imagined. In my view, this reaction is unwarranted. The FOMC’s decisions were largely predicated on publicly available data about real GDP, its various components, unemployment, and inflation. Kocherlakota points out that the Fed's balance sheet was falling quicker than anticipated because of the high level of refinancing as mortgage rates have declined. But Kocherlakota fails to note that the mortgage rates have declined because of the weaker economy - and the Fed appears to be behind the curve in adjusting their views lower.

Fed’s Kocherlakota: Markets Misunderstood Recent FOMC Move - Last week, the Fed surprised many economists by announcing at the end of its policy meeting that it would reinvest the proceeds of maturing mortgage securities into Treasurys, in a bid to keep its balance sheet steady at around $2 trillion. Many market participants believed the action was a modest step toward providing additional support for the economy at a time when the already modest recovery seems to be losing much of its steam.Many economists struggled to make sense of the action. They feared the action’s limited economic impact meant the Fed has opted for a risky game of giving the market what it wanted–the appearance of action, without the substance.But for Kocherlakota, that story is wrong. He notes that in an environment of falling yields more mortgage holders are prepaying their debts earlier, for various reasons, causing the Fed’s balance sheet to contract more quickly than expected.

Fed Officials All Over the Map in Explaining Policy Shift - In the days since the Federal Reserve unveiled a notable shift in its portfolio strategy, policy makers have offered discordant explanations about what’s going on. At issue is the Fed’s decision to reinvest the proceeds of its maturing mortgage holdings into Treasury securities Kansas City Fed President Thomas Hoenig continues to believe rates need to rise, which leaves him in opposition to the decision made just over a week ago to maintain the size of the Fed’s balance sheet. St. Louis Fed President James Bullard, meanwhile, has talked of going even further than what’s been done thus far, suggesting the Fed could again expand its balance sheet if the recovery falters further. Minneapolis Fed leader Narayana Kocherlakota thinks it’s all a tempest in a tea cup, describing the Fed actions as technical and misunderstood by markets as a sign of growing worry over the outlook.

Farmer Bernanke and His New Farm Tools -Building upon Christopher Hayes' metaphor of central banking as farming, Neil Irwin shows that some of the issues in implementing unconventional monetary policy can be tricky since no one at the Fed has ever tried them before.  Fed officials are reluctant to act because they are uncertain of the outcome.  Here is Irwin: If the nation were a farm, Hayes argued, the Fed would be the agency in charge of water and irrigation. Its job is to keep water (money) flowing enough to maximize crops (strong job creation), but not pump in so much water as to cause flooding (inflation). We're currently in an extreme drought (a deep recession), but the Fed is refusing to pump in more water because it's afraid that doing so will cause flooding down the road. This drought is so bad that the Fed has already drained its main reservoir completely (cut the federal funds rate to zero). So if it's going to take new efforts to water the fields, it has to find more water through some unconventional means, such as by airlifting water in by helicopter, or piping it in from a nearby lake. Fed sits idle as America starves - Video - Chris Hayes

Why isn't the Fed acting? - ONE question a number of economic writers have obsessed over (including, admittedly and apologetically, your humble blogger) is just why the Fed has been reluctant to act in a more aggressive fashion as recent economic data have deteriorated. I've mentioned a number of potential explanations in the past—concern about bubbles, excessive optimism, internal divisions, and so on. But there may be something else going on, instead of or in addition to these other factors. Last month, Atlanta Fed economist David Altig received a lot of attention for comments he made concerning the Beveridge curve, which charts the connection between job openings and unemployment. A departure from the typical Beveridge curve relationship, it's assumed, implies some structural barrier between labour demand and labour supply. Mr Altig cautiously ventured that skill mismatch might be an issue. It may yet be too early to draw conclusions from this data (as Andy Harless argues here), but a speech today by Minneapolis Fed President Narayana Kocherlakota suggests that some Federal Reserve voices are taking the potential for structural unemployment very seriously

What Actions Should the Fed be Taking? Do Authoritarian Governments Reduce Growth? - The Economist asks: 1. What actions should the Fed be taking? My stock answer is here. I decided to stay on message with regard to fiscal policy. I don't think we should let Congress off the hook as we criticize the Fed for its inadequate response. There are also responses from Viral Acharya, Laurence Kotlikoff, Guillermo Calvo, Michael Bordo, and Tom Gallagher, with (perhaps) more to follow. (all responses) There is another question: 2. Do authoritarian governments reduce growth? I didn't answer this one, but there are responses from Ricardo Hausmann, Alberto Alesina, Lant Pritchett, Daron Acemoglu, and Arvind Subramanian. Again, additional responses may follow. (all responses)

What should the Fed be doing? - AS THE American recovery has shown signs of slowing, and as price increases and inflation expectations have fallen, the Federal Reserve's policy stance has come under increasing scrutiny. Critics point out that the Fed is failing to meet either of its principal mandates—price stability and full employment—and is neglecting its own economists' previous advice in courting deflation. Defenders of the Fed's policy response note that low inflation expectations were dearly purchased and shouldn't be risked, and they warn that a long period of lax policy could generate new bubbles. To clarify the issue, we went to our network of guest economists at Economics by invitation and posed the question: What actions should the Fed be taking? The consensus seems to be that the Federal Reserve should do more. The specific strategies proposed differ somewhat; Viral Acharya indicates that a housing finance fix is necessary to free monetary policy, for instance, while Guillermo Calvo suggests that the Fed must become more imaginative in targeting credit expansion to Main Street firms.

Ben Bernanke: Wall Street's Servant - Last week, the Fed announced that it would use the proceeds from retired mortgage-backed securities to buy up more government bonds. This may have a very modest effect in keeping long-term interest rates low, thereby giving a small boost to the economy. Such a measure would be reasonable if the economy was basically fine and just in need of a modest lift. But this is not the case. The unemployment rate is 9.5% and virtually certain to rise in the second half of the year. Job growth has basically stopped and GDP is likely to be in the range of 1-2% in the next four quarters, as state and local governments cut back spending, the stimulus phases down and the housing market resumes its slide. In this scenario, the Fed should be taking aggressive steps to bring the economy back to full employment. After all, this is part of its job description. . Therefore, the Fed's responsibility should be to do everything within its power to reach full employment; obviously, we are nowhere close now.

Fed Watch: A Bleak View - Deferring to the faltering economy, the Federal Reserve stepped up its policy efforts last week. Barely. Almost imperceptibly. Indeed, it is almost as if the Fed could muster nothing better than throwing a bone to its critics. Will they throw more bones in the coming months? In this environment, I suspect the Fed will continue to do more than I expect, but less than is necessary. The few data releases since the FOMC meeting have not been particularly encouraging. The trade deficit expanded, implying a downward revision to the Q2 GDP numbers. Initial unemployment claims continue to hover at levels consistent with weak job growth. University of Michigan consumer sentiment ticked up, but signals that households remain under severe pressure. Retail sales edged up in July, reinforcing the long standing trend of this recovery - an inability to grow fast enough to reestablish the previous trend:

Fed Has Done Much, Can Do More - Brookings - The Fed has taken aggressive steps to bring down interest rates in order to combat the deep slump in the economy that followed the financial crisis. The Federal Open Market Committee has used both traditional policy-lowering the federal funds rate to near zero in 2008-and nontraditional policy tools-most notably its 2009-2010 program to purchase up to $1.75 trillion in mortgage-related securities and U.S. Treasury securities. The effectiveness of the former is supported by an abundance of academic studies, and more recent work presents evidence of the importance of the latter. Yet critics contend that we would not be seeing such a slow and uneven recovery had monetary policy worked as intended.

Will the Fed do more? - If conditions deteriorate further, I believe the answer is yes.Tim Duy is discouraged that the Fed has given up on trying to reduce the output gap, noting in particular the speech by Federal Reserve Bank of Kansas City President Thomas Hoenig last Friday. But what caught my eye in Hoenig's remarks was this:The recovery is proceeding as many economists earlier this year outlined that it would. It is a modest recovery, with mixed results. Yet, GDP is likely to expand at somewhere around a 3 percent rate through the remainder of the year. And here's what Hoenig considered to be the most important part of his message, if we can judge by what was included in his dissenting opinion to the Fed's August 10 FOMC statement:, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.

Monetary policy for the 21st century - We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the “zero bound”, but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do “fiscal policy” in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

Joseph Gagnon on monetary policy - The case for monetary stimulus is strong. But what form should it take? With financial markets now in healthier shape, the Fed does not need to invoke the “unusual and exigent circumstances” clause to lend directly to the private nonbanking sector. Rather, it should return to its traditional roles of lending to the banking system and buying Treasury securities. Three actions, in particular, would be helpful at this time.  First, the Fed should lower the interest rate it pays on bank reserves to zero. This is a small step, as the current rate is only 0.25%, but there is no reason to pay banks more than the rate paid by the closest substitute, short-term Treasury bills. Second, the Fed should bring down the rates on longer-term Treasury securities by targeting the interest rate on 4-year Treasury notes at 0.25% and aggressively purchasing such securities whenever their yield exceeds the target. Finally, the Fed could bolster the stimulative effects of these actions by establishing a full-allotment lending facility to enable banks to borrow (with high-quality collateral) at terms of up to 24 months at a fixed interest rate of 0.25%.

Explained: Quantitative easing - MIT News -At its core, quantitative easing is the attempt by a central bank to inject more money into the economy and to keep long-term interest rates low through the purchase of large amounts of assets, often held by financial institutions. In March 2009, for instance, the Bank of England, the U.K.’s central bank, engaged in quantitative easing by buying U.K. government bonds as well as debt issued by private companies. The means those firms now have more cash on their hands, which in theory makes business lending easier. Quantitative easing may also lower the rates on five- or 10-year bonds. The Federal Reserve undertook a large quantitative easing measure by buying about $1 trillion in long-term Treasury bonds in March 2009. Taking bonds out of circulation might raise demand for the bonds left in the market, hence raising their prices and lowering their yields (bond prices and yields move in opposite directions) because the bond issuers do not have to promise higher yields in order to entice buyers. These lower rates should make further business investment more likely.

Queasing over Quantitative Easing, Redux - The Fed can create liquidity in two ways — it can send the liquidity out to the general economy, raising prices.  Or, it can use the liquidity to buy assets, in most cases, government or high quality bonds, which lowers interest rates in that area, raising the prices of assets so bought. Quantitative easing has a direct impact and an indirect impact.  The direct impact is that those that issue the bonds that have  been bought face lower yields and are inclined to issue more.  More Agency MBS, more Treasury issuance.  It is an obscure and indirect means of monetizing government debt and Agency MBS.  The government likes nothing better than to have a captive, non-economic buyer of its securities, particularly in a period of extreme deficit spending. The indirect impact is that as Treasury yields fall, the yields on other debts fall to a lesser degree.  There are many investors out there who need yield, and as safe yields fall, they take more risk in order to achieve their desired income.  The conundrum of QE is that people get torn between income and losing capital by taking too much risk.

The Fed does not want debt monetisation - In light of the continuing sluggish pace of the economic recovery, some market observers have suggested that the Federal Reserve step up its purchases of long-term Treasury securities beyond the small, symbolic move announced earlier this month. The goal would be to inject additional liquidity into the economy, perhaps as much as $2,000bn. But it is highly unlikely that the Fed will go ahead and implement such a programme because Treasury purchases of that magnitude would begin to monetise US government debt, something Fed Chairman Ben S. Bernanke and other Fed officials have publicly stated they will not allow to happen. Furthermore, large-scale purchases of Treasury securities beyond those already announced would be unlikely to accomplish their intended objective of stimulating the economy.

Unemployment in Anti-Monetary Policy Fed States - Ryan Avent is surprised by how quickly Minneapolis Fed President Narayana Kocherlakota is accepting structural unemployment as a reason for not pursuing monetary policy. Federal Reserve Bank of Kansas City President Thomas M. Hoenig is calling for a raise of interest rates, and Richard Fisher of the Dallas Fed is taking unemployment off his “to do” list at the Fed. I think there’s an implicit meme here that these states have little to no unemployment problems. What does unemployment look like in these people’s states? From google’s public data, we get this graph: These states are all mostly at the low end of unemployment, but they are still higher than the 20 year average. Let’s take the lowest end, Kansas. “Well 6.5% unemployment isn’t that bad for Kansas. It’s actually a pretty respectable number, all things considered” and you’ll think you came up with that argument yourself.

The Current Moment in Macropolicy - 1. With near-zero percent interest rates (negative in real terms) and $2.3 trillion balance sheet, and no clear results translated in growth, employment and credit to the real economy, which feasible options has the Federal Reserve? Is the FED playing a dangerous gamble as Kansas City FED’s chairman just said? a) As many, including Ben Bernanke’s former self, have pointed out, the Fed can engage in almost unlimited balance sheet expansion through purchases of private sector debt. Thus, rather than exchanging MBS and similar items as they mature with long-term government debt–the current “hold steady” policy–the Fed could acquire even more. This option is predicated on the assumption that the economy can absorb much more liquidity, that the true risk is deflation rather than inflation. My own view is that a bit of additional quantitative easing can help at the margin, but that fiscal policy would more effectively offset the effects of private sector deleveraging on effective demand.

Congress vs. Fed Independence - The Federal Reserve’s ability to make independent policy decisions sets it apart from other government agencies. Why do we allow this departure from our usual democratic procedures? Why have we chosen to give so much power to a small group of people at the Fed, a group that can set monetary policy as it pleases without worrying about how voters might react? One reason is to prevent short-run political considerations from interfering with the pursuit of policy that is best for the economy from a long-run perspective. The policies that maximize the chances of winning the next election aren’t always the best policies when a longer horizon is adopted. Another reason is the ability to act quickly. Congress may not have the capacity to react fast enough in the face of a developing financial crisis. 

Bernanke calls for a 4% inflation target - Well sort of.  It hasn't got a lot of attention in the bond markets, but this week both Jon Hilsenrath in the WSJ, and subsequently Paul Krugman in the NYT have revisited Ben Bernanke's paper Japanese Monetary Policy: A Case in Self-Induced Paralysis.  Bernanke wrote this in 1999 as an academic at Princeton University.  In it he calls on the Bank of Japan to set a "fairly high" inflation target to show that it "is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the "price-level gap" created by eight years of zero or negative inflation".  Bernanke argues that an inflation target of 3-4%, to be maintained for a number of years, would give the private sector some confidence about the authorities' desire to get away from the deflation trap. However, a doubling of the US inflation target would cause carnage in the US Treasury bond market (who wants a 10 year bond yielding 2.7% when the Fed is targeting 4% inflation?) - and with one of the shortest debt maturity profiles of any developed economy, the interest burden cost of changing the target might be enough to trigger a credit rating downgrade (and in the medium term even a default?).  For this reason alone I think that Bernanke is unlikely to talk about a change in the target publicly.  Bernanke's hands might be tied.

It's Happening: Aggregate Demand Forecasts Are Falling - For some time I have been making the case that the sustained decline in inflation expectations is indicating the market is expecting aggregate demand to decline going forward.  Given the Fed's failure to meaningfully respond to these forecasted declines, I have also claimed these developments effectively amount to a tightening of monetary policy.  This interpretation, however, can be challenged because inflation is a symptom of changes in aggregate supply and aggregate demand.  Thus, inflation expectations could be going down because productivity growth has been robust rather than from a decline in total current dollar spending. My view that it has been an expected weakening of aggregate demand driving the  declines in inflation forecasts has been based more on circumstantial evidence than any direct measures of aggregate supply or aggregate demand.  Recent data releases, however, now firmly support my view...

Developed economies could get trapped in a limbo land of zero inflation - The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period.The standard theory of the inflation mechanism, used by all the major central banks, assumes that the rate of inflation is driven by the size of the output gap in the economy (i.e. the extent of spare capacity) and by expected inflation. When the output gap rises, we would therefore expect the inflation rate to decline. It is important to ask how this apparently strong conclusion could be proved wrong.

Inflation Graph - Since I didn't post an inflation graph when CPI was released, here is one for a Saturday night: This graph shows three measure of inflation, Core CPI, Median CPI (from the Cleveland Fed), and 16% trimmed CPI (also from Cleveland Fed). They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI, median CPI, and the 16% trimmed mean CPI were all up 0.1% in July. Note: The Cleveland Fed has a discussion of a number of measures of inflation: Measuring Inflation

Disinflation right on schedule - Looks like the inflationistas may have to continue laying low, at least for a while. A chart from the release of this morning’s CPI numbers: As you can see, the year-on-year change in the core index has remained at a measly 0.9 per cent for the last four months, while the headline number had been coming down until flattening this month. No surprises, really, as the spread between 5-year Tips and Treasuries has been anticipating this decline since the end of April.  But you didn’t have to be looking at recent Tips spreads to have known that disinflation pressures have been taking hold. According to a recent paper by the IMF’s André Meier (with a hat tip to Menzie Chinn for the link), it’s likely that these pressures have been building at the same as the output gap, roughly defined as the difference between potential and actual economic output, has persisted.

The loneliness of the long-distance inflationista - Despite mounting signs of global deflation fear — as yields on ultra-long bonds fall — Morgan Stanley’s central-bank watcher and his colleague Arnaud Marès are still on inflation watch. Simply because, well, that’s where central banks like to be, too. As they noted on Thursday:Forced to choose between two evils. With extreme outcomes plausible rather than merely possible, central banks’ reactions are likely to be shaped by their relative degree of aversion to inflation or deflation. In other words, which outcome do they most want to avoid? We believe there are good reasons for all major central banks to fear deflation more than inflation.The devil you know. First comes the weight of experience. There have been many successful (albeit at times painful) victories over inflation in past decades. There are only two significant episodes of sustained deflation in the past century: the United States in the 1930s and Japan post-1990. Neither inspires a great deal of confidence that the means to emerge from deflation are well understood – and effective.It’s something we’ve heard before, in term of central banking psychology — there’s more than a bit of status quo bias and cost asymmetry here.

Bullard is back - In late July, James Bullard, president of the Federal Reserve Bank of Saint Louis, gave a speech which for all intents and purposes signalled that the central bank was contemplating a tilt towards easier monetary policy. Usually known for being an inflation hawk, Mr Bullard raised that Japan-style deflation could unfold in the US, and said quantitative easing might be an appropriate response. Well, Mr Bullard was back in action today - he argued that if the economy worsens, additional asset purchases - beyond the reinvestments of proceeds from expiring mortgage-backed securities that were agreed on August 10 by the Fed, might be necessary. But Mr Bullard - who cannot be easily put in a box when it comes his views on Fed policies - believes that any asset purchases should be done gradually. This puts him at odds with many of his colleagues on the Federal Open Market Committee who believe that aggressive, large-scale, overwhelming force type action would be the only action with the chance of working. “Large sudden asset purchases are rarely optimal,” Mr Bullard said today. “Shock and awe is almost never a good way to proceed.”

In a sluggish economic summer, no easy fix ahead (AP) The Federal Reserve has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Shoppers are reluctant to spend, and businesses are slow to hire. Let's face it: There is no easy or imminent fix for the flagging recovery. The sluggish economic summer wore on Friday with news that Americans spent less at most retail stores in July. Earlier this month came word that the trade deficit is ballooning and companies are not adding jobs fast enough to bring down unemployment. Typically, the Fed can lower interest rates to encourage Americans to borrow money and spend it, invigorating the economy. But the benchmark interest rate controlled by the Fed has been almost zero for more than a year now. The Fed this week took a new step by announcing it would use the proceeds from its huge portfolio of mortgage securities to buy government debt. The idea is to make cheap credit a little cheaper, particularly for things like mortgages.

The Revolution Will Not Be Seasonally Adjusted, The Sequel The initial estimate of 2.4% annualized real GDP growth in 2Q 2010 will likely be revised lower (probably to something with a 1%-handle, depending on who you ask) in light of new data for June that was worse than the estimated (net exports, personal spending, etc). The third quarter isn’t starting off so hot either, based on some of the early data points for July. We’ve already discussed the weakness in July nonfarm payrolls in great detail . Consumer credit continues to decline.That’s why today’s data on industrial production looked a little strange. Industrial Production came in much better than expected in July, up 1% month-over-month versus an expected increase of 0.5%, and appears to be continuing its unrelenting march higher. Looking through the underlying sector data, one group in particular jumped out: transportation equipment. We’ve included it in the chart below along with total industrial production.

Cargill sounds warning of a slow recovery…Cargill, the world’s largest agricultural commodities trader, on Tuesday warned that the global recovery had yet to gain traction as it reported a second straight decline in annual profit. As economists debate the merits of government intervention to avoid a double-dip recession, the company said the economic outlook was uncertain. “More uncertainty lies ahead, for the world has yet to transition from a policy-stimulated upturn to a structurally sustained recovery,” Cargill said in its annual report. “Europe’s debt crisis and China’s monetary tightening are moving markets. Governments have made promises that their economies cannot fulfil. Regulations are changing in unpredictable ways.” The US’s largest privately owned company by revenue has a unique vantage on global economic trends, trading commodities from corn to oil to salt with employees in 66 countries

Economists See Increased Chance Of Double-Dip Recession - Buried amidst the increasingly gloomy economic news of the last few weeks -- which includes stubbornly high unemployment, rising foreclosures and a grim outlook from the Fed, among other factors -- is a growing sense of doom among some prominent economists.  More than a few top economic thinkers have significantly upped the chances of a return to a recession. Today, the noted bear Nouriel Roubini delivered a grim prognostication via Twitter: "Risk of a double dip recession in advanced economies (US, Japan, Eurozone) has now risen to 40%." Roubini is not alone in his concern. Last week, David Rosenberg, the Gluskin Sheff economist (formerly of Merrill Lynch), whose words have become must-read barometers of bear-ishness, said that the chances of a double-dip recession in the U.S. are now "higher than 50-50."  Yale's Robert Shiller, one of the nation's preeminent housing experts and the co-creator of the widely watched Case-Shiller Index, also said last week that there's greater than a 50 percent chance of falling into another downturn. The culprit, according to both Rosenberg and Shiller, is, quite simply, jobs.

A mild contraction under way? - From looking at these bond rates we see very, very clearly the Q4 2008 financial distress. Bond rates plummeted as investors fled from shares to secure investments. GDP in that quarter plunged by -1.7%, or -7.0% in annualized terms, the worst quarter since Q2 1980. It was a huge financial and economic hit. Remember Lehman/WAMU/AIG? Q4 was quarter which immediately followed those collapses. By July 2009, however, bond rates had returned to around 4%, and have hovered there since about March-April 2010. Since April, though, rates have begun sinking again. These rates are dropping slowly, which means that the US economy is probably not going to hit another financial seamount, but will experience, at the very best, very little change in GDP. My opinion is that a contraction is under way and that GDP Q3 and/or Q4 will be mildly negative.

In the double dip - DAVID BECKWORTH directs us to the latest Macroeconomic Advisers estimates of American output, and he publishes this disturbing chart:  Macroeconomic Advisers estimates a monthly GDP figure, and according to their calculations nominal GDP declined in May and June. This doesn't necessarily mean that a full-on double dip has begun. Monthly GDP is noisy, and Macroeconomic Advisers notes: Monthly GDP declined 0.4% in June, the second consecutive monthly decline of this magnitude. The May decline was accounted for by inventory investment, while the June decline was more than doubly accounted for by net exports. Over this two-month span, domestic final sales posted moderate gains, largely reflecting growth of consumer spending. The level of monthly GDP in June was 1.5% below the second-quarter average at an annual rate.  Our forecast of 2.4% growth of GDP in the third quarter includes a 1.1% increase in monthly GDP in July, mainly reflecting an assumed reversal of the weakness in net exports in June.

How Low Must It Go? - Recently I noted that aggregate demand forecasts are falling.  Well today I learned that it gets worse: aggregate demand is already falling!  Macroeconomic Advisers just updated its monthly nominal GDP series, a measure of aggregate demand,  and it shows a decline for May and June as seen below (click on figure to enlarge): I shouldn't be surprised with these numbers since expectations of future economic activity affect current spending decisions and for some time expectations have been deteriorating. Still, I was shocked to see the outright decline in May and June. Let's be clear what this development means: total current dollar spending declined during May and June in the U.S. economy.  And most likely it continued to fall in July and August given the weak economic outlook.  This makes me wonder how low the dollar size of the U.S. economy must go before the Fed gets serious and pulls out its big guns?

Forget a Double Dip. We're Still in One Long Big Dipper. - Robert Reich - More people are out of work today than they were last year, counting everyone too discouraged even to look for work. The number of workers filing new claims for jobless benefits rose last week to highest level since February. Not counting temporary census workers, a total of only 12,000 net new private and public jobs were created in July — when 125,000 are needed each month just to keep up with growth in the population of people who want and need to work. Not since the government began to measure the ups and downs of the busines cycle has such a deep recession been followed by such anemic job growth. Jobs came back at a faster pace even in March 1933 after the economy started to “recover” from the depths of the Great Depression. Of course, that job growth didn’t last long. That recovery wasn’t really a recovery at all. The Great Depression continued. And that’s exactly my point. The Great Recession continues.

Economic forecaster: ‘Greatest Depression’ coming - Collapse of middle class means there's no fuel for recovery, Gerald Celente argues. The US economic recovery in recent quarters is little more than a "cover-up" and the world is headed for a "Greatest Depression," complete with social unrest and class warfare, says a renowned economic forecaster. Gerald Celente, head of the Trends Research Institute, told Yahoo!News' Tech Ticker that there's no risk of a "double-dip recession" because the first "dip" never ended. "We're saying there's no double dip, it never ended," Celente said. "We're looking at the Greatest Depression. There's no way out of this without [rebuilding] productive capacity. You can't print [money to get] out of it." Celente, who has been credited with predicting the 1987 stock market crash, the collapse of the Soviet Union and the subprime mortgage crisis of recent years, said the US and other developed countries can expect to see the sort of social unrest the world witnessed in Greece this year once government attempts to shore up the economy fail and lawmakers turn to "austerity measures" to plug gaping budget holes.

No, We're Not Turning Into Japan - The notion that the U.S. recession will turn us into Japan emerged immediately after the September 2008 bankruptcy of Lehman Brothers, and has proved to be one stubborn meme. You might think that the actual growth of the U.S. economy over the last four quarters would dampen the Japan talk, but you would be wrong. The anticipation of a double-dip recession, the persistence of high unemployment, and the overhyped deflation fears have resuscitated the Japan monster like yet one more Godzilla remake.  It's tiresome to have to say it, but the Japan comparison is very weak. Until the economy really feels like it's recovered, however, there will always be pundits—even respectable pundits—who find it useful to wave that flag, and a few slender bits of evidence that make it just plausible enough.

The United States Is No Germany - The debate regarding fiscal stimulus over the past year and a half has, frankly, made me despair at the state of the economics profession. If others believe stimulus spending is a bad idea, fine.But surely we should expect opponents of stimulus to engage in real debate, which means that they'd have to actually listen, just briefly, to what proponents of the argument are saying - in particular, that the case for stimulus has always been highly dependent on conditions on the ground.Fiscal stimulus only makes sense when the following two conditions prevail: high unemployment, so that the proximate risk is deflation, not inflation; and monetary policy constrained by interest rates that are very near the zero lower bound.This doesn't sound like a hard point to grasp.But again and again, critics point to examples of increased government spending in completely different circumstances, and then claim that those examples somehow prove their point.

The Ecstasy of Empire: How Close is America's Demise? - The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.” As John Williams ( has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats. It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.

The Purpose Behind Engineered Economic Collapse - In light of the entrenched way of perceiving things, especially in the U.S., it is difficult enough to convince some people that the economy is in fact not providing the security they desire, but is actually destroying their future completely. To explain to them that this is deliberate, that the economy is designed to self-destruct, that is another prospect altogether. Many people hit a proverbial wall on this issue because they simply cannot fathom that certain groups of men (globalists and central bankers) view money and economy in completely different terms than they do. The average American lives within a tiny box when it comes to the mechanics and motivations of finance. They think that their monetary desires and drives are exactly the same as a globalist’s. But, what they don’t realize is that the box they think in was BUILT by globalists. This is why the actions of big banks and the decisions of our mostly corporate establishment run government seem so insane in the face of common sense. We try to rationalize their behavior as “idiocy”, but the reality is that their goals are highly deliberate and so far outside what we have been taught to expect that some of us lack a point of reference.

The Federal Reserve Enters Decline - To keep things simple, oil is no longer available to fund world growth. Oil is certainly available to fund existing systems as they are currently set up, but not new growth. You can only fund new growth with an energy supply that is growing. That’s why the developing world has turned to coal, not oil, to fund its growth. Based on the most recent data, let’s update the chart of global crude oil production: The credibility of the United States Federal Reserve is closely aligned with its ability to induce economic activity, by the provision of money and credit. But you can see the problem: if there is not an expanding supply of energy, credit is less useful as credit cannot be paid back very easily in a future of either flat, or declining growth. Now that the return on the Fed’s credit provision has gone into decline, then its incumbent on the Federal Reserve to rethink its approach. But the Fed, governed by post-war economists, is apparently unable to learn from new information.

Is this finally the economic collapse? - Despite the many differences between Japan and the US, there is one similarity that continues to matter most in the risk management model my colleagues and I use at Hedgeye, our research firm -- debt as a percentage of GDP. Now that the US can't cut interest rates any lower, the only option left on the table is what the Fed just announced it would start doing -- buying Treasury debt. And that could lead the country to the brink of collapse: According to economists Carmen Reinhart & Ken Rogoff, whose views we share, crossing the 90% debt/GDP threshold is the equivalent of crossing the proverbial Rubicon of economic growth. It's a point from which it's almost impossible to return.

Financing U.S. Debt - Is There Enough Money in the World -- and At What Cost? From the abstract of a paper coauthored with John Kitchen: This paper examines the potential role for foreign official holdings of U.S. Treasury securities and the associated implications for Treasury security interest rates, international portfolio allocations, net international income flows, and the U.S. net international debt position, using a baseline outlook of current and projected U.S. budget deficits and growing debt. ...... The analysis applies empirical results regarding the role of U.S. structural budget deficits and foreign official holdings of U.S. Treasuries in determining Treasury security interest rates. Although initial review of information suggests that the world portfolio could potentially accommodate financing requirements over the intermediate horizon, substantial uncertainty remains about the relationships among foreign official holdings, exchange rates, and trade; the potential effects of "crowding out" in the international portfolio; and how and whether world portfolio allocations would adjust to accommodate higher shares of U.S. assets.

U.S. Debt: An Expensive Habit - If the US keeps borrowing money to finance large budget deficits, will the rest of the world have enough money to lend? A new paper from two economists, one of whom works for the US Treasury, suggests the US can make it through the year 2020, but only at great expense. John Kitchen, who works in the Treasury’s office of domestic finance, together with University of Wisconsin economist Menzie Chin, aimed to explore Carnegie-Mellon economist Alan Meltzer’s assertion that “there isn’t going to be enough money in the world in the years to come to finance the U.S. budget deficits.” They conclude that the money is likely there, but they do offer some sobering projections of where we’ll end up in only 10 years if we take it.  Assuming, for example, that the US budget deficit follows the trajectory mapped out by the Congressional Budget Office, and assuming the yield on the 10-year Treasury note rises to about 5.6% from the current 2.6%, they project foreign holdings of US Treasurys will have to rise to nearly $18 trillion, from about $4 trillion now, to meet U.S. financing needs. The annual interest payments on all that debt would amount to nearly $900 billion, or about 35% more than the current defense budget.

China Favors Euro Over Dollar as Bernanke Alters Path - China, whose $2.45 trillion in foreign-exchange reserves are the world’s largest, is turning bullish on Europe and Japan at the expense of the U.S.  The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.1 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.  “Diversification should be a basic principle,” Yu said in an interview, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets, instead we bought quite a lot.”

China Doubles Korea Bond Holdings as Asia Switches From Dollar - China more than doubled South Korean debt holdings this year, spurring the notes’ longest rally in more than three years, as policy makers shifted part of the world’s largest foreign-exchange reserves out of dollars. Korean Treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, data from the Seoul-based Financial Supervisory Service show. China should allocate some reserves to “financial assets in major Asian economies,” Ding Zhijie, a former adviser to China’s sovereign wealth fund, said in an Aug. 16 interview.  “The significance of both the dollar and euro has declined because of the global financial crisis and the European debt crisis, while the role of some emerging-market currencies rose,” said Ding, dean of finance at Beijing’s University of International Business and Economics.

China cuts long-term Treasurys by most ever as yields drop - China reduced its holdings of Treasury notes and bonds in June by the most ever as yields on US government securities fell amid signs of slower economic growth. The decline comes as US investors led by banks and mutual funds hold their biggest share of the debt, 50.5 per cent, since August 2007 at the start of the financial crisis, amid signs that a recovery from the longest contraction since the Great Depression has lost momentum. Government reports last week showed retail sales increased in July less than economists forecast and the annual rate of inflation remained at a 44-year low for a fourth month.

China Drains Obama Stimulus Meant for U.S. Economy: Commentary by Andy Xie – American pundits, Nobel laureates included, are predicting Japan-style deflation for the U.S. and Europe. They are urging the Federal Reserve to pursue another round of quantitative easing to stop the onset of an Ice Age for Western economies. The Fed didn’t oblige at its last meeting, but it threw a bone to the deflation crowd by promising not to pull money out of its previous round of asset purchases to stimulate a recovery. On the other side of the world, consumer prices are surging. Emerging markets as a whole now have an inflation rate of more than 5 percent. India is registering price increases of more than 13 percent. China’s are more than 3 percent. But it surely feels a lot higher for average Chinese.  Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama. Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Andy Xie Explains How The US Exports Inflation To China, And How It Will "Come Back To Bite Us" - Andy Xie follows up on his earlier Op-Ed that describes how the Fed is implicitly funding the stimulus in places like China. In a simplified version of the article, he talks to Bloomberg's Betty Liu, recapping the key issues."When the Fed prints money it is just creating inflation in emerging economies. But when the inflation in the EM gets high enough, it will bounce back, it will become inflation in the US." As to why EM countries would be unable to manage their inflation, Xie says that most emerging economies are focused more on holding down their currencies, as they see "global demand as relatively weak", seeking more than anything to keep their exports competitive. "That force is allowing them to allow all the money to come in and become inflation." And unfortunately Andy does not think unemployment is going lower any time soon, attacking the very core of the Fed's dual mandate: "I don't think high unemployment is a panacea for keeping inflation down."

Fed's Outright Treasury Debt Purchases May Top $300 Billion (Bloomberg) -- The Federal Reserve will likely reemerge as the biggest buyer of Treasuries when it resumes purchasing U.S. government securities today to prevent money from draining out of the financial system.JPMorgan Chase & Co. strategists estimate the Fed will buy about $284 billion in Treasuries over the next year, or more than the combined purchases of Japan and China during the year ended May. Analysts at Credit Suisse Group AG forecast purchases of $307 billion, with $47 billion coming from the proceeds of maturing agency debentures. The central bank will acquire Treasury notes due from 2014 to 2016 today and debt due in 2016 to 2020 on Aug. 19 with the proceeds from its maturing mortgage holdings. The Fed was the biggest buyer in the Treasury market between March and October 2009 as it purchased $300 billion in Treasuries to help keep borrowing costs low and bolster the housing market.

What should we do about national debt, and when? - The national debt is rising to levels that have never been seen in the United States during peacetime. Everyone agrees that it must come down. The question is how fast. Too fast could weaken the already weak economy. Too slow could do the same thing.  When the nonpartisan Congressional Budget Office updates its 2010 Budget and Economic Outlook on Thursday, it'll renew debate over the debt. Deficit hawks argue that radical steps must be taken now to reverse the soaring debt. This year's federal budget deficit alone is expected to close the fiscal year Sept. 30 in a range between a staggering $1.3 trillion and $1.42 trillion. That's about six times President Ronald Reagan's biggest deficit, and he was blasted as a dangerous budget-buster. The annual deficit is the gap between tax revenues and the government's spending in a year. The government covers the gap by borrowing, which raises the national debt. Today U.S. debt held by the public totals almost $8.8 trillion. Include money the government owes its trust funds, such as Social Security, and the number swells to $13.3 trillion.

Time Is Running Out For The West - The Great Recession has dramatically shrunk the time left for the big AAA states to prevent a full-blown sovereign debt crisis as their demographic time-bomb threatens, US rating agency Moody's has warned.  "Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has 'fast-forwarded' history, eroding all the time available to adjust, " said the group's quarterly Sovereign Monitor.  Moody's fears that the US will crash through its safety buffer by 2013 if growth falters (adverse scenario), with interest payments topping 14pc of tax revenues. The debt-to-revenue ratio has already doubled in three years to 430pc. The US, UK, Germany, France, and Spain are all at risk of an "interest rate shock", either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large.

US, UK rating face greater downgrade risk-Moody's (Reuters) - Moody's Investors Service said on Tuesday the top AAA ratings of the United States, Great Britain, France and Germany are well positioned but face new challenges that increase the possibility of a downgrade. The "distance to downgrade" for these four sovereigns has been reduced, the credit rating agency said in a statement, meaning their credit quality within that top category is declining. They continue to be well positioned based on a forward-looking assessment of their debt dynamics and debt affordability, Moody's added. "Since the last issue of Moody's Aaa Sovereign Monitor, the debate on the optimal timing of fiscal tightening has effectively been brought to a close for the largest European Aaa-rated governments, as they are now all pursuing deficit reduction measures,"

The Washington Post Says Bill Gates Is Broke - Actually, they made this assertion about the United States and the United Kingdom, which makes considerably less sense than saying Bill Gates is broke. There is no evidence that either country is coming up against any sort of spending limit. The bond markets are willing to lend both governments at very low interest rates and there is certainly no shortage of people who are willing to accept the currency of the two countries. Since it has no basis in fact, the Post's assertion that these countries are broke is presumably an expression of its unhappiness with how these governments spend their money. This is the sort of sentiment that newspapers are supposed to leave for the opinion pages

Escape from arbitrage: the movie - Two of my favorite economists, Bilkent University Professor Refet Gurkaynak and Johns Hopkins University Professor Jonathan Wright, have a nice new paper in which they survey macroeconomic theories of the term structure of interest rates. As an unusual digital supplement to their paper, they put together a movie in which you can watch the arbitrage glue that normally holds markets together start to fail as financial markets literally fell apart at the end of 2008. What you're watching in the movie are the yields to maturity (vertical axis) of different Treasury securities as a function of time to maturity (horizontal axis) as we move from one day to another over the last two years. We start out 2008 with securities of similar maturities offering very similar yields, as of course standard no-arbitrage finance theory says they should. But watch that nice relation fall apart as yields (and everything else) started tumbling down at the end of 2008. Gurkaynak and Wright have a discussion of this on page 39 of their paper.

Gross On Debt - Krugman - We’ve been scooped! Yesterday Robin and I were talking about the implications of a balance-sheet view of the economy’s troubles, and realized that it makes a strong case for using Fannie and Freddie to bring down homeowners’ debt burdens. And meanwhile, Bill Gross was laying out a proposal. You can quibble with the details, but Gross is right: “The American economy is approaching a cul-de-sac of stimulus — both monetarily and fiscally,” Gross told the crowd at the Treasury Department, “which will slow to a snail’s pace, incapable of providing sufficient job growth going forward. “Unemployment rates will approach and remain at double digits unless positive fiscal stimulus is provided in the next six months.” The important thing is to act — even if it’s not the perfect answer.

Long Term Debt Outlook - First, I don't think we need to do anything. That is, I think that under current law, the debt to GDP ratio will stabilize and decline. Obviously I shouldn't just think this. I can check CBO forecasts and know one way or the other. The standard view is that, under current law, the deficit would vanish in the medium term and return and grow to an unsustainable level as the population ages and Social Security and Medicare spending increases. This was true last year, but I don't think it is true now. The change is that the ACA (health care reform)would (according to the CBO) bring the growth of Medicare spending under control unless the ACA is modified. The CBO forecasts that, under current law, Medicare spending will grow to about 6% of GDP and level off (from about 4% now). The CBO also forecasts that Social Security OASDI spending will grow 1.2% of GDP and level off.  So the long term current law deficits seem to me to be about 3.2% of GDP. The long term inflation forecast is 2% and the long term read GDP growth forecast is 2 to 3% s, it seems to me that the debt to GDP ratio is forecast to decrease 1 to 2% per year over the long term. That's sustainable.

Treasury 10-Year Notes Gain for Fourth Week as Economic Recovery Falters - Treasury 10-year notes gained for a fourth week, pushing yields to the lowest since March 2009, as as economic data showed the recovery is losing momentum and the Federal Reserve resumed purchases of U.S. debt.  Yields on two-year notes dropped below 0.46 percent for the first time since the Treasury began issuing the securities on a regular basis in 1975. The U.S. will auction $102 billion of 2-, 5- and 7-year notes next week, the smallest monthly offering of that combination of securities since May 2009. The central bank plans to buy notes due from 2013 to 2014 on Aug. 24 and debt maturing from 2021 to 2040 on Aug. 26.  “You see all the fear again that’s driving rates,” “Money’s being forced to reach for yield, growth is going remain subdued, unemployment is going to remain high, pressure’s going to remain on the economy.”

What is happening with bond prices? - It is very hard to have a bubble in bonds because there is a date certain at which the principal is repaid. In year nine you cannot delude yourself into thinking that somebody will pay more than face value in year ten. And so in eight it is very hard to delude yourself into thinking that somebody in year nine will delude themselves into thinking that somebody will pay more than face value in year ten. Nevertheless, Jeremy Siegel and Jeremy Schwartz think that we are in a bond bubble: The Great American Bond Bubble:

For a Change, U.S. Debt Is Staying in the U.S. - Before the financial crisis struck in 2008, neither Americans nor private foreign investors showed much eagerness to finance Washington’s deficits. Budget deficits have ballooned again, but the story is different this time. Americans are buying most of the new Treasuries being issued. Foreign governments, whose purchases were once critical, were net sellers of Treasury securities in the first half of 2010, according to figures released this week.  That buying has reduced the Treasury’s need to attract foreign capital and has helped to keep interest rates very low. It is not clear, of course, how much that appetite for Treasuries reflects an eagerness to lend money to the United States government as opposed to a fear of losses from alternative investments.

A Bubble in Bonds? Silly Me, I Thought That Was Called A Recession? - Siegel and Schwartz argue that there is a bubble in the bond market. Brad Delong is baffled.  I’m not sure if I go quite as far as Brad does. Bonds can be in a bubble if people are mispricing default risk. Indeed, CDOs, which are at the end of the day fixed-income products, were in a heck of a bubble a few years back.However, is that what’s going on here? A sudden increase confidence in the US? Perhaps, it was Peter Orszag’s latest budget? Or, maybe bondholders are convinced that Democrats will let the Bush tax cuts expire thereby ending any chance of future deficits? Got to get your hands on that government debt before they stop printing it, eh?Somehow I doubt it any of this. No, this looks like a good ‘ole fashioned flight to quality. Nothing is certain in life but death and taxes and US Treasuries are backed by the most powerful taxing authority in the world.

Rates Fall as Market Fears Economic Weakness - As Labor Day approaches, interest rates have collapsed, plunging along with economic optimism.  That turn of events, which has shocked savers and stunned investors, appears to indicate that financial markets’ worries are turning in a very different direction from those of many governments.  The governments are seeking ways to bring down budget deficits, fearing that without austerity they could go so far into debt that they would never be able to borrow again. Investors in the financial markets seem to be much more concerned by the possibility of renewed recession and a general deflation that could send asset values and prices down.

 Obama Wins Low Yield as Markets Shrink Aiding Deficit - Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit. Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion. Last week, the U.S. government auctioned $34 billion of three-year notes at a yield of 0.844 percent, the lowest ever for that maturity. Spending by companies and consumers has slowed as the economy has shown signs of weakening. Companies in the Standard & Poor’s 500 Index have stockpiled a record $2.3 trillion of cash and equivalents. Company borrowing slid 29 percent in the first half of the year to $528 billion amid a dearth of business investment, Bloomberg data shows.

Why Treasury Bonds Do Not Fund Our Federal Deficit - The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government auctions bonds they are merely targeting reserves in the system. This action is mandated by Congress as an accounting tool and so is seen as a source of funding, however, in reality the Central Bank is merely draining reserves that the Treasury already spent into existence – reserves that were deposited at various banks (read this process in greater detail here). Therefore, it’s incorrect to argue that there won’t be buyers of U.S. bonds – with the banks earning 0.25% on their reserves and the government offering anything above that (depending on duration) the trade is a no-brainer for the banks who hold these reserves. The government is basically offering them free money and the Central Bank keeps control of the money supply in exchange (at least in theory). What is not occurring is some sort of funding mechanism. The Fed could care less if the auctions are 2X, 3X or 4X oversubscribed. They don’t get extra money when this occurs. They don’t get a gold coin that can then be spent. So long as they meet the 1:1 bid to cover the auction is a huge success because they drained their targeted reserves and convinced Congress that we aren’t going bankrupt.

Whither the bond vigilantes? -Mere months after Greece found itself on the brink of default and leaders throughout the developed world warned darkly that bond vigilantes would brutally punish other governments that failed to rein in ballooning deficits, the supposed advocates of fiscal discipline in the bond world are nowhere to be seen. Billions of dollars have poured into U.S. Treasuries, Japanese government bonds and other debt issued by more financially challenged governments, driving down yields to historic lows and driving out short-selling skeptics foolish enough to be on the wrong side of one of the market’s hotter trends. “A lot of the talk of vigilantism came from people who extended what happened in Greece and said it was bound to happen in the U.S. or Britain or elsewhere,” said  “If vigilantes were truly out there, they would have been clocking the U.S. bond for months on end. But any significant selling has never materialized.”

Where Are The Bond Market Vigilantes? Floyd Norris Jumps On The Bandwagon - I took some grief (and some praise) for two posts (here and here) from a week or so ago that said the bond market was unambiguously signaling that the current economic situation warranted deficit increases rather than reductions and that it had no problem with that.  Now Floyd Norris at the New York Times has come to the same conclusion as I did.  The money quote: But for now, the financial markets seem to fear recession and deflation much more than they fear deficit spending.

Appeasing the Bond Gods, by Paul Krugman - As I look at what passes for responsible economic policy these days, there’s an analogy that keeps passing through my mind. I know it’s over the top, but here it is anyway: the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue — are acting like the priests of some ancient cult, demanding that we engage in human sacrifices to appease the anger of invisible gods. Late last year the conventional wisdom on economic policy took a hard right turn. Even though the world’s major economies had barely begun to recover, creating jobs was no longer on the agenda. Instead, we were told, governments had to turn all their attention to reducing budget deficits. Skeptics pointed out that slashing spending in a depressed economy does little to improve long-run budget prospects, and may actually make them worse by depressing economic growth. But the apostles of austerity — sometimes referred to as “austerians” — brushed aside all attempts to do the math; immediate spending cuts were needed to ward off the “bond vigilantes,” investors who would pull the plug on spendthrift governments,... precipitating a crisis.

Expansionary Austerity? – Krugman - In today’s column I write about the way fear of invisible bond vigilantes is driving demands for austerity. I didn’t have space to deal with the other part of the austerity cult: the belief that the gods will reward austerity with economic expansion. But it’s equally unfounded in any actual evidence. In a terrific new working paper, MIke Konczal and Arjun Jayadev look under the hood of an Alesina/Ardagna paper that is being widely cited as evidence that austerity will lead to growth. They look to see how many of the austerity -> growth episodes actually involve fiscal contraction in a slump. Here’s a comprehensive list of those cases: Ireland 1987. And as I among others have noted, the things that drove Irish expansion — devaluation, a boom in its largest trading partner, and a sharp fall in interest rates — have no relevance to the United States today. All of which goes to remind us with how little wisdom the world is governed.

The Power Of Error - Krugman - So policy makers live in awe of savage priests, who demand that we sacrifice virgins to the invisible gods of the bond market. But what puzzles me is this: why do the priests have such influence? Never mind the victims (we never do); anyone who listened to the priests has lost a lot of money. A case in point: Morgan Stanley, the most bearish among the 18 primary dealers that trade government securities with the Federal Reserve, acknowledged that its forecast that Treasury yields would rise this year was misguided.  I wrote about this forecast in November 2009, because I believed that such predictions were having a big impact on the Obama administration. And I tried to point out then that the same people confidently declaring that there was a bubble in the bond market completely missed the housing bubble. And yet these people continue to influence policy.

Bond Madness - Krugman - Things are looking bleak for the economy; Goldman Sachs (no link) is predicting that 2nd quarter GDP growth will be revised down to 1.1%, and it’s downhill from here. I was looking back at some of my own notes about what happened last fall. At the time, there was serious consideration among the Obama people of pushing for some kind of second stimulus; what its chances might have been is hard to say. But the point is that they backed off. Why? My understanding is that they bought into the big scare of the time, which was that there was a “carry trade bubble” in the bond market, and terrible things would happen when it burst. And some of the scenarios being proposed were just plain bizarre: the bond bubble will burst, and this will plunge us into recession, and the Fed will have to buy up government debt, and this will mean inflation too. Really. And then the whole story shifted: suddenly it wasn’t the carry trade, it was sovereign debt risks, we’re all Greece. And now there’s a new one: you see, low interest rates will cause deflation. Really (near the end). And though the story shifts, the moral is always the same: the little people have to suffer.

CBO Releases Its Annual Summer Update of the Budget and Economic Outlook – director’s blog - CBO estimates, in its annual summer update of the budget and economic outlook, that the federal budget deficit for 2010 will exceed $1.3 trillion—$71 billion below last year’s total and $27 billion lower than the amount that CBO projected in March 2010 when it issued its previous estimate. Relative to the size of the economy, this year’s deficit is expected to be the second largest shortfall in the past 65 years: At 9.1 percent of gross domestic product (GDP), it is exceeded only by last year’s deficit of 9.9 percent of GDP. As was the case last year, this year’s deficit is attributable in large part to a combination of weak revenues and elevated spending associated with the economic downturn and the policies implemented in response to it. This report presents CBO’s updated budget and economic projections spanning the 2010–2020 period. Those projections reflect the assumption that current laws affecting the budget will remain unchanged—and thus the projections serve as a neutral benchmark that lawmakers can use to assess the potential effects of policy decisions.

CBO Releases Grim Budget Update - Today CBO released its annual summer budget update and economic forecast.  The projections are about as grim as we expected them to be.  CBO estimates that this year, the deficit will exceed $1.3 trillion ($27 billion less than CBO projected earlier this spring).  At $1.3 trillion, the deficit will be the second largest in 65 years as a share of GDP.  At 9.1% of GDP, it is second only to last year’s deficit – 9.9% of GDP.  Similar to last year, the deficit is due to a combination of weak revenues from the floundering economy and huge spending increases on stimulus measures.  Other highlights from the report:

Between a Fiscal Rock and a Hard Place - The Congressional Budget Office’s annual mid-session update provides some striking evidence of just how challenging today’s fiscal environment is. Because deficits were so high going into the economic slump, and because the financial crash was so steep, Washington must now navigate between two unacceptable outcomes: tight fiscal policy and slower growth now, or bigger deficits and slower growth later.   CBO’s latest estimates, summarized nicely in this blog by director Doug Elmendorf, paint the choices in stark terms. On one hand, if we let all the Bush tax cuts expire, allow stimulus to come to an end, and permit domestic spending to grow only fast enough to keep up with inflation, we can bring the federal deficit down to 4.2 percent of Gross Domestic Product in 2012, less than half of this year’s 9.1 percent. Once the economy recovers, deficits would settle in at manageable levels of between 2.5 percent and 3 percent from 2014 to 2020. This scenario, which effectively extends current law, sounds pretty good if the deficit is your biggest worry. But CBO figures that if we follow that path, the economy would grow by an anemic 2 percent over the next year, and it would be 2014 before the unemployment rate falls to 5 percent from today 9.7 percent. Not so good if your chief concern is fixing the short-run  economy.

National budget deficit for 2011 bigger than thought- The Congressional Budget Office predicted Thursday that the budget deficit for fiscal year 2011 will be $1.066 trillion, revised up from an estimate of $996 billion in March. The nonpartisan agency's semiannual budget report is likely to add fuel to the November midterm election debate over reducing the deficit at a time when the nation's economic recovery may call for more stimulus.The report estimated that the deficit will be 7 percent of the nation's gross domestic product in 2011. Congressional Budget Office Director Doug Elmendorf said the agency's projections haven't changed significantly since its March forecast, reflecting an economy that struggles to recover from recession and the prolonged impact of bailouts and other spending designed to spur growth

How to spend a trillion dollars (h/t: The Big Picture.) In early August of last year, the President declared that, thanks in part to his policies, the U.S. economy was "pointed in the right direction." We have lost jobs in six of the 12 months since then, for a net decline of 52,000 jobs. The 9.4% unemployment rate when he made this statement climbed to 10.1% and has since declined to 9.5%, still higher than it was last August. The President signed into law an $862 billion stimulus law and two health laws that will create $788 billion of new entitlements over the next decade. Combine these with countless other smaller spending bills, several of which were labeled as emergencies and therefore not paid for, and the U.S. government is $2.5 trillion more in debt than on the day this President took office. That's $8,000 more debt for every American man, woman, and child.

Big chunk of economic stimulus yet to be spent - As Americans puzzle over why the economic stimulus package enacted more than a year ago has failed to restore vigorous job growth, one explanation has emerged from new reports: A lot of the money is not yet out the door.  The $862 billion package was divided roughly in thirds among tax cuts, aid to states and the unemployed, and investments in infrastructure, health care and other areas. The first two have delivered most of their boost, but much of the investment spending is moving far more slowly. At the end of July, nearly 18 months after the stimulus passed, more than half of the $275 billion in investments had yet to be spent.

Marshall Auerback and David Franklin Debate Whether Stimulus Works on BNN - video

The Pain Caucus Comes to National Review - National Review writes that Obama needs to embrace Reagan era pain caucus solutions in their piece titled Obama: More a Carter than a Reagan (my bold): Both arguments miss the important ways in which the recessions the two men inherited are similar and the important ways in which their approaches differed. Both men faced seemingly intractable economic problems with no easy solution, but Reagan understood that curing the nation’s debilitating inflation was going to involve a good deal of short-term economic pain and political unpopularity, and he was prepared to endure that. By contrast, Obama has done everything in his power to avoid painful corrections — at great cost to future taxpayers. It is increasingly evident that his policies have merely put off these corrections or dragged them out, and that we have not avoided them at all. Reagan’s willingness to accept painful and unpopular but necessary economic adjustments — and Obama’s lack of the same fortitude — is the essence of what separates the two men.

Thinking clearly about demand declines — and what to do about them - Tyler Cowen's post separating types of demand problems is really worth reading. There are at least three ways in which demand can decline, he says, and each suggests different solutions.The first is the most basic: Spending goes down for a bit. You can fix that with stimulus.  The second is also intuitive, but more worrying: Spending readjusts to a permanently lower level. That one is harder to fix. You need to make people wealthier again, or shift your economy away from consumption.  The third is a bit more complicated: Demand for certain items -- say, consumer goods that people don't necessarily need to purchase -- falls, and you need to wait for people's wealth situation to change or for them to wear holes in their shoes. The economy, of course, can experience all three.

Demand, by any other name - TYLER COWEN has a post decomposing "falling demand" into various categories which is interesting, but which ultimately makes things more complicated than they need to be, particularly where policymaking is concerned. In a nutshell, Mr Cowen suggests that the demand declines associated with recession come in different flavours, varying between entirely temporary and cyclical to permanent. Depending on your assessment of which kind of demand declines are taking place, you'll favour different policy responses. This is a fine discussion to have, but I don't really want policymakers to pay attention to it. In fact, most recessions will have some combination of these factors, which are less discrete than Mr Cowen indicates—temporary declines can become permanent, and so on. ...

The Boom Not The Slump: The Right Time For Austerity - 8pp pdf - Should the United States cut its deficit in the short term? This has been the subject of intense debate among politicians, policy analysts and thinkers over the past year. What are the consequences of cu!ing the deficit with interest rates low, unemployment high and growth uncertain?

Afternoon at the Treasury - Yesterday, Tyler, myself and a handful of other economics bloggers had a chance to discuss the economy with Treasury Secretary Geithner and other treasury officials. Here are a few random notes. There was deep skepticism about the financial industry and about reform from some of the bloggers. More let’s say “radical” approaches such as Treasury taking an equity stake in underwater homes or giving everyone a guaranteed income were brought up. I was surprised to find myself on the side of the more conservative Treasury officials who cogently argued that such reforms were neither politically viable nor likely to work.  Treasury gave a good argument that reform had been deep and meaningful.

Some Econobloggers Visit the Treasury - Yves Smith - Readers may wonder why I haven’t written about my visit on Monday to the Treasury, but truth be told, I headed out afterward with Mike Konczal and Steve Waldman to get a drink, and we all looked at each other quizzically. I said something along the lines of “I’m not certain there is anything to write about,” and they nodded in agreement. I had less than a half page of notes. That isn’t to say we didn’t spend nearly 2 1/2 hours in a high-ceilinged conference room, and that we didn’t engage with Treasury officials, including Timothy Geithner, in what looked like conversation. But the assumptions of both sides re process as well as substance were so far apart that it often felt like we were talking past each other.  One part of the dynamic was the home court advantage the Treasury enjoys. This is their drill, their offices, they no doubt used their spiel on others and have it pretty well debugged, and more important, they play well off each other. So they have message discipline and stay unified and still manage to look relaxed and informal. By contrast, we seven bloggers were on hold in the very large corridor till the conference room cleared up, which meant we didn’t even have the chance to ask each other, “And what do you want to ask about?”

FT Alphaville » If Obama is anti-business, then explain this -Tim Geithner and his team from treasury met with some of the cool kids from the econoblogosphere on Tuesday. FT Alphaville was too busy to attend, unfortunately, and also not invited. So we’re grateful to Alex Tabarrok of Margin Revolution for reporting the following lines from “a senior treasury official”:“Markets believe we can borrow. The public doesn’t. We need both to move forward on the fiscal front.” “Businesses are investing in a way that shows more confidence than they are talking.” (graph here, see the last year or so AT) Thegraph that Tabarrok links to is this one:

What Treasury’s thinking - Treasury’s blogger meeting on Monday has been covered by quite a lot of the participants — see Lounsbury, Tabarrok, and Smith. On Wednesday, there was another meeting, this time with professional, salaried bloggers, with a decidedly center-left bias. (Tim Fernholz, Mike Allen, Derek Thompson, Shahien Nasiripour, Nick Baumann, Ezra Klein, me. Matt Yglesias was literally left out in the rain, unable to get past Treasury security.)I half understand why Treasury makes the distinction between the two types of bloggers, but Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives.The discussion was all held on deep background, so I can’t quote anybody. I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world.

Deficit Nonsense in the WSJ - Jonathan FBD Weisman strikes again. I blame Kevin Drum for the fact that I read a grossly dishonest article of his in the Wall Street Journal. The article is about public attitudes on the deficit and on proposed solutions. As a normal journalist, Weisman stresses anecdotes and only briefly mentions polling data.
I list episodes of what I consider journalistic malpractice after the jump.  The headline (not written by Weisman) contrasts with the text (written by Weisman or quotes chosen by Weisman). The headline is “Voters Back Tough Steps to Reduce Budget Deficit.” It isn’t that unusual for headlines to contradict the stories they head, but usually the evidence quoted in the article supports the article and not the headline. Weisman manages the extraordinary accomplishment of presenting a less valid summary of the data he considered and wrote about than someone who just skimmed his article and wrote a few words under extreme time pressure.

Rep. Ryan’s Reverse-Robin-Hood Budget Plan -Rep. Paul Ryan and his budget plan are getting a lot of respectful attention in the press.  (See here and here.) New York Times columnist Matt Bai suggests Ryan’s plan might represent “the starting point in what could be a serious negotiation about entitlements and spending.”  But a careful look at the plan shows it to be a radical blueprint to shift massive resources from the broad majority of Americans to the very wealthy, while leaving the budget on an unsustainable course for decades.  The Ryan plan would give the most affluent households a new round of large tax cuts by reducing the top income tax rates; eliminating income taxes on capital gains, dividends, and interest; and abolishing the corporate income tax, the estate tax, and the alternative minimum tax.  To offset some of the cost, the plan would place a new consumption tax on most goods and services, which would increase taxes on most low- and middle-income families. The tax cuts for those at the very top would be historic.  The richest 1 percent of Americans would see their taxes cut in half, and households with incomes above $1 million would receive a $502,000 tax cut each year, on average, according to the Urban Institute-Brookings Institution Tax Policy Center. In contrast, about three-quarters of Americans — those with incomes between $20,000 and $200,000 — would face tax increases.

If Obama Opposes Ryan’s Social Security Plan, Why Did He Appoint Him to the Catfood Commission? The Democrats have decided to once again go on the attack against Republicans for wanting to privatize Social Security. Even Steny Hoyer is banging that gong.  They’ve apparently remembered that they kicked the GOP’s ass in 2006 on the same issue, and thought it might be a good idea to revive it on the eve of the election. President Obama devoted his  weekly radio address today to Social Security, saying  the Republicans were “pushing to make privatizing Social Security a key part of their legislative agenda if they win a majority in Congress this fall.” If Obama thinks Ryan’s privatization plan is such a bad idea, why did he appoint Ryan to the 18 member Catfood Commission tasked with dealing with Social Security?  In fact, why did he stack the commission with privatizers and budget hawks in the first place?

David Stockman and the GOP Welfare State —Taibbi -I'm a little late in taking notice of this hilarious and extraordinary piece of punditry, but it strikes me that not enough attention has been paid to the recent self-crucifying New York Times editorial written by Ronald Reagan's former budget chief and economic Svengali, the notorious Richie Rich weasel David Stockman. Stockman, if you remember, was the perfect Picture of Dorian Gray Republican counter-persona hiding behind the broad-shouldered, muscular cowboy image Reagan projected when he was lecturing the world about how poor people had to give up the welfare tit and do their own damn work. The self-reliant tough-guy act was the public face of Republican economics, but laboring quietly behind the facade was Stockman, a rail-thin bean-counting geek with giant glasses who preached the supply-side lunacy of giving the rich a helping hand in the ostensible hope that wealth would magically trickle downhill.  Stockman was once the arch-priest of supply-side economics, but he's had a conversion over the years. In a piece blasting the legacy of Republican economic policy entitled "The Four Deformations of the Apocalypse" Stockman essentially argues that Reaganomics evolved into a policy that fused the worst aspects of the traditional economic strategies of both the right and the left:

Why Growth is Good - Robert Reich - If governments keep hacking away at their budgets while consumers almost everywhere are becoming more cautious about spending, global demand will shrink to the point where a worldwide dip is inevitable.You might ask yourself: So what? Why do we need more economic growth anyway? Aren’t we ruining the planet with all this growth — destroying forests, polluting oceans and rivers, and spewing carbon into the atmosphere at a rate that’s already causing climate chaos? Let’s just stop filling our homes with so much stuff.The answer is economic growth isn’t just about more stuff. Growth is different from consumerism. Growth is really about the capacity of a nation to produce everything that’s wanted and needed by its inhabitants. That includes better stewardship of the environment as well as improved public health and better schools. (The Gross Domestic Product is a crude way of gauging this but it’s a guide. Nations with high and growing GDPs have more overall capacity; those with low or slowing GDPs have less.)

Unenlightened Self-Interest: Deficit Hawk Down On Tax Cuts and Financial Reform - The argument that 'tax cuts for the wealthiest few stimulates growth' aka the trickle down theory needs to be buried alongside the 'efficient markets hypothesis' and the other principle beliefs of voodoo economics that have brought the US from the world's greatest nation to third world status in a generation It was the irresponsible tax cuts enacted by Bush II while increasing military spending on two wars, one highly discretionary, along with the increasing financialization of the economy through deregulation, fraud, 'one way globalization,' and crony capitalism that have undermined the foundation of the American economy. The banks must be restrained, the financial system reformed, and balance restored to the real economy before there can be any sustained recovery.

Liquidity Preference And Loanable Funds, Revisited – Krugman - A brief revisiting of the issues I raised more than a year ago regarding alternative views of interest rates. This was never a question of simply forecasting what was going to happen to rates. It was about what would drive rates. The view of Ferguson and others, back then, was that government deficits would drive up interest rates, choking off recovery. I and others argued that this was bad macroeconomics: interest rates would rise if and only if recovery took place. More specifically, short-term rates would stay near zero as long as the economy was deeply depressed; long-term rates would depend on expectations about the future of short rates, and hence on prospects for recovery. So the key point is not the fact that rates are now considerably lower than they were when that debate took place; it’s the fact that rates have fluctuated very much with optimism about recovery, never mind the deficits.

Fiscal Policy in Interesting Times - I gave a speech at the Retirement Research Consortium’s annual conference “Retirement, Planning, and Social Security in Interesting Times.” I’ve been saving up the link to the C-Span video to share during my vacation. Here it is. What makes today particularly interesting is that we face lots of uncertainty and major challenges. That a potent mix. We know less about what’s going on than usual, but we are playing for bigger stakes. Case in point: Fed Chairman Ben Bernanke’s recent statement about the outlook being “unusually uncertain” while the economy still struggles to heal from the financial crisis. Is it a rebound or a relapse? I fear it may be the latter, but we just don’t know.The meat of the speech considers the economic and fiscal uncertainties and challenges we face. For example, I lament the ridiculous uncertainty in our tax system. Not only do we not know what will happen in 2011, after the scheduled expiration of the 2001 and 2003 tax cuts, we don’t even know what the tax code is in 2010.

Four Steps to US Fiscal Health - Johnson and Kwak -The first is comprehensive tax reform aimed at aligning tax policy with desirable economic incentives. In particular, the US should consider introducing a value-added tax (VAT), widely used in other industrialized countries. The second change is carbon pricing, either by auctioning emissions allocations or by taxing carbon directly, at rates that start low and rise over the coming decades. The third change is a tax on the financial sector, in the form of a Financial Activities Tax on profits and remuneration at big banks that enjoy implicit government guarantees. The International Monetary Fund estimates that this form of value-added tax could bring in between 0.5 and one percentage point of GDP in revenue. Finally, there is the issue of entitlement spending, which is mainly an issue of health-care costs. There are two ways to reduce the government’s health-care outlays: reduce the amount of health care the government buys, or reduce the cost of health care.

How the Defense Industry is Hosing Obama and the Taxpayer… Again - The players in the Military-Industrial-Congressional Complex (MICC) regard hogwash like that produced in the Quadrennial Defense Review (QDR)  as essential weapons for waging their unremitting budget war to extract money from the American people.  Sun Tzu would have recognized the QDR for what it is: a Cheng (a dazzle) to set up a Ch’i (a stroke).  When I worked in the Pentagon, we had a more prosaic name for Master Sun’s timeless principle of using a distraction to set up a decisive maneuver: The QDR is part of a cape job to set up a phony debate over the need for ever rising defense budgets while putting the rest of the government on a diet (in a recession).

Frank, Paul Plan To Reduce The Deficit Through Military Spending Cuts - Reps. Barney Frank (D-MA) and Ron Paul (R-TX) are enlisting members of Congress to press President Obama's Commission on Fiscal Responsibility and Reform to propose "significant cuts to the military budget."Frank and Paul are seeking signatories to a letter to the fiscal commission, highlighting one trillion dollars in savings they can be achieved, through cuts and efficiencies, in the next 10 years. "[W]e write to urge in the strongest terms that any final Commission report include among its recommendations substantial reductions in projected levels of future spending by the Department of Defense," the letter reads. The main avenue for those savings, they say, include scaling back Cold War era policies and programs, and eradicating waste in research and contracting

The Problem With Billionaire Philanthropists - It was an uplifting moment last week when forty of the nation's richest people announced that they would give away at least half of their wealth. The pledges mean tens of billions of dollars more for charity in coming years. Yet the news was also troubling, since it is hard to see how all this new giving won't exacerbate the growing civic inequities in American life. A strong nonprofit sector, fueled by tax-deductible donations, is one of the great things about the United States and it's hardly new. What is unnerving is the scale of philanthropy today and the growing clout of super rich donors. The Bill and Melinda Gates Foundation gives away six or seven times as much money every year as the Ford Foundation, which just a decade ago was the largest foundation in the United States. And there's plenty more where that came from: In 1982 the combined net worth of the richest 400 Americans represented 2.8 percent of GDP. Now that figure is around 10 percent.

Tax cuts at the top and other priorities - President George W. Bush's defining tax cuts are set to expire in 2011. President Barack Obama and most of the Democrats would retain the reduced rates for all but the top 2 percent - those making over $250,000 a year ($200,000 for single filers). Obama explains that, given our "fiscal situation," we "simply can't afford" cuts of this magnitude for the very wealthiest Americans. Reportedly over $710 billion in revenue would be lost in the next decade. Republicans, of course, disagree. But their rationale has been murky. They fought mightily against recent efforts to extend unemployment compensation, to aid cash-strapped state governments and to further boost an anemic recovery because the proposals would add to a daunting federal deficit. But tax cuts for the richest among us are apparently copacetic; even if we have to borrow boatloads to pay for them.

Fed’s Bullard: No Tax Increase Now, Labor Reallocation Is Key - St. Louis Federal Reserve chairman James Bullard said Thursday that labor reallocation is a key challenge to lowering the U.S. unemployment rate, as workers displaced by collapse of the housing market struggle to find new work. In a lunch question-and-answer session in Rogers, Ark., Bullard said he would not assert that the U.S. should get used to a higher unemployment rate for the long term.But he said there were too many workers in the housing sector when home prices tumbled, and that matching employers’ needs with employees’ skills has been a challenge.“That’s not solved through the normal business cycle,” he said. Bullard also said he does not support a tax increase, saying it could harm the economic recovery. He acknowledged that while an increase may be on the agenda for some policy markets, “I wouldn’t do it right now.”

Jared Bernstein, White House Economist, Throws Cold Water On Bush Tax Cuts Compromise -A key member of the White House economic team is throwing cold water on a leading compromise proposal in the debate over the extension of the Bush tax cuts for the wealthy.  Jared Bernstein, Vice President Joseph Biden's chief economist, expressed skepticism with a plan to "phase out" the tax cuts for the wealthy as opposed to simply allowing those tax cuts to expire (as scheduled) later this year.  "There are many good reasons not to extend the high-end parts of the Bush tax cuts having to do with the fear that a temporary extension could be made permanent," Bernstein said. "What you are talking about -- a $30 to 40 billion range in terms of adding to the deficit by extending the high end -- could easily become $700 billion over a ten-year budget window."

The Tax Cut We Can Afford - UNLESS Congress and President Obama act soon, Americans’ taxes will increase in 2011, when the cuts enacted under President George W. Bush are due to expire. Almost everyone agrees that this makes little sense given the economy’s fragility. But consensus ends there. The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The president’s plan would be taking an unnecessary gamble with the struggling recovery. Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

Are Handouts for Billionaires More Important Than Feeding Children? - The Republican Party is trying to maintain the fiction that direct economic relief for millions of working Americans is a fiscally irresponsible splurge, while simultaneously backing hundreds of billions of dollars worth of economically useless tax cuts for the wealthy. The demands are staggering: cut food stamps for the poor, but preserve perks for billionaires. As Tim Fernholz notes for The American Prospect, serious economists do not believe that President George W. Bush's tax cuts for the rich are an effective way to stimulate the economy. Rich people don't spend money, they save it. If we want to create jobs, we need to put money in the hands of people who will spend it. At minimum, that means directing aid to the unemployed and providing federal assistance to states, so that local governments don't lay off hundreds of thousands of teachers and cops. This is not only the decent, humane thing to do when the economy is struggling, it actually helps. Money the government spends to save a teacher's job goes out into the economy to pay bills and buy products. For states, this also means that basic public infrastructure is preserved—kids learn and the streets stay safe.

69% of America: Rescind Bush tax cuts on rich = As a battle over the Bush tax cuts looms in Congress, a new CNN/Opinion Research poll found on Friday that a large majority of the public wants them to expire for the wealthy. A whopping 69 percent said the tax breaks for individuals making over $200,000 – and families making over $250,000 – annually should expire at the end of this year. Eighty-one percent favor extending them for Americans making less than that, which both parties largely agree with. The poll found that only 31 percent support extending the tax cuts for what would be the top 2 to 3 percent of Americans, enacted in President George W. Bush’s first term, and scheduled to lapse on December 31.

Another View of the Bush Tax Cuts - Adam Looney at the Brookings Institution has a nice new paper on the Bush tax cuts. It can be summarized in this picture: As Adam notes, the argument we are having is “whether to extend all of the tax cuts or merely to extend the vast majority.” Or, to put it a slightly different way: Do we want to “extend an extra $310,000 in tax relief to the wealthiest 120,000 taxpayers or …instead make a relatively small down payment toward fiscal responsibility?”As Adam’s graph (and the Tax Policy Center analysis upon which it is based) shows, the highest 0.1% of earners (average income $8 million) would still benefit, to the tune of more than $61,000, even if the top rate is increased from today’s 35 percent to 39.6 percent, as President Obama prefers.

A Little Joke About the Bush/Obama Tax Cuts - Part 2 - Conveniently, today the Congressional Budget Office released their update to their budget and economic outlook, so I have some updated numbers for my Bush/Obama tax cuts version of that joke: President Obama: “Could you loan me ten dollars $2.65 trillion for 10 years’ worth of all of the Bush tax cuts but just give me five about $2 trillion for the “middle-class” ones? That way you’ll owe me five, I’ll owe you five, and we’ll be even about $700 billion, and I’ll say “no problem, keep it,” and I’ll claim to have reduced the deficit by that $700 billion.“ Some footnotes to that joke:

Dealing with the Sunset of the Bush Tax Cuts (Part I) This is a topic that is starting to heat up and is getting lots of media attention. Not surprisingly, there are also lots of groups busy trying to spin the discussion to suit their socio-political objectives, whether or not the spin informs voters accurately about the issues. Therefore, it seems that this is a good time to attempt to cover the debate from various perspectives through a series of articles. I expect to pick up various releases and "reports" from think tanks and groups and dissect them. Are they using more rhetoric than analysis? Are they using language that will tend to bias the reader rather than providing a firm foundation in information? What can we really expect if Congress enacts new tax cuts to "extend" the Bush tax cuts? What can we really expect if Congress does not enact new tax cuts but instead allows the current law to operate as intended?

How the fight over tax breaks affects your bottom line - Bush-era tax cuts enacted in 2001 and 2003 are set to expire at the end of the year, and lawmakers are battling over whether to extend any or all of them before November's congressional elections. Most Republicans want to extend all of the cuts, saying that any increase in taxes will hold back the economic recovery. Obama and Democratic leaders are proposing to extend many of the cuts but say tax breaks for top earners should expire to help pare down growing national deficits. Each plan would affect average tax rates for income groups differently.

No, Steve, it’s not like when Hitler invaded Poland - Today in private equity hubris – Blackstone chairman Stephen Schwarzman on Obama’s tax policies (via Newsweek): “It’s a war,” Schwarzman said of the struggle with the administration over increasing taxes on private-equity firms. “It’s like when Hitler invaded Poland in 1939.” In addition to his penchant for hyperbole, the private equity boss appears to lack any sense of irony. According to the Newsweek article, “Schwarzman is also angry at the president for some of his rhetoric”.

Experts: US can no longer afford housing tax breaks - Federal housing policy offers the wealthiest Americans billions in tax breaks without delivering much bang for the buck in increased homeownership, critics told government policymakers Tuesday."We aren't getting our money's worth," Mark Zandi, chief economist of Moody's Analytics, said at a government conference on reforming housing policy. The government spent $230 billion last year to promote homeownership through tax breaks and spending programs. The biggest chunk — $80 billion — went toward the mortgage interest deduction, according to the Congressional Budget Office.

Investment by Legal Organizations and Tax Rates - I keep being told that the lower personal tax rates lead to greater business investments, especially by small businessmen that are not incorporated, those that flow their business income into their personal accounts so they are subject to the personal tax rates rather than the corporate tax code. Numerous, sophisticated econometric exist that conclude that lower taxes lead to greater investment. But interestingly, that all seem to use aggregate data on nonresidential fixed investment to support this conclusion. I assumed that they used this data because the data on investment by small "Mom and Pop" firms as compared to investment by large corporations was not available. So imagine my surprise when I found that the BEA published data on investment by legal form of organization. It can be found at, Table 4.7. Investment in Private Nonresidential Fixed Assets by Industry Group and Legal Form of Organization. This data allows researchers to organize business investment into three groups.

We Are Ruled By Banks (Though Decreasingly So) This post from Yglesias freaked me out. Apparently 2/3 of the people who pick a regional Fed president are appointed by local banks. People on the left sometimes talk about America being ruled by corporations, but I've never seen as dramatic and direct an example of it as this. Banks get to choose who makes monetary policy! And when you consider the role of institutions like the New York Fed in handling the bailout, you get a situation where public policy is explicitly controlled by special interests rather than the public at large. Fortunately, the Dodd-Frank financial regulation bill (pdf) makes things better:: Presidents of the Federal Reserve Banks will be elected by class B directors - elected by district member banks to represent the public - and class C directors - appointed by the Board of Governors to represent the public. Class A directors - elected by member banks to represent member banks – will no longer vote for presidents of the Federal Reserve Banks.

After the Golden Age of Finance - – Even after the passage of new financial regulations in the United States, the Dodd-Frank Act, and the publication of the Basel Committee’s new capital requirements, the financial sector’s prospects over the next few years remain highly uncertain. After all, banks remain deeply unpopular in all developed countries. Bankers are still social pariahs, as lowly valued by the public as drug dealers or journalists.  For banks and their shareholders, it looks a case of heads they win, tails we lose. Thus, as banks return to profitability, politicians in North America and Europe have begun to talk again about new taxes that would skim those profits off to the benefit of taxpayers, whose support kept banks in business at the height of the crisis. From the late 1970’s until 2007, the financial sector grew far more rapidly than the real economy. . By 2007, the figure was over 400% in the US, the United Kingdom, and Japan. Is this a short-term phenomenon? Will the financial sector return to pre-crisis growth rates when the economic situation has been fully stabilized? Will financial “deepening” continue? Will bank stocks once again outperform the market?

Making a Better Consumer - NYTimes - This summer, with the bubble long gone, Congress and the Obama administration enacted a sweeping new law meant to change the business of lending and borrowing money. The part of the law that will directly affect the most people will be the new Consumer Financial Protection Bureau, which has already been the subject of heated debate. And the central question facing the bureau will be how to distinguish between corporate malfeasance and consumer frailty.  It is not an easy task. For as long as there has been money, people have been doing stupid things with it. We borrow more than we can afford. We pay higher interest rates than we need to. We play the lottery. The new consumer bureau can prohibit some of the banks’ worst practices. But figuring out precisely where to draw the line will be much more nuanced than the past year’s black-and-white, left-and-right debate over whether an agency should exist at all.

The Fiscal Times vs Elizabeth Warren - What does The Fiscal Times, the online newspaper founded by Pete Peterson, have against Elizabeth Warren? On Friday, it ran a peculiar piece by Eric Pianin: Warren’s critics say that her aggressive advocacy and stinging rhetoric make her the wrong choice to head a new agency that will have to mediate between conflicting industry and consumer advocacy interests as it writes and enforces a raft of new regulations. This just isn’t true: the CFPB does not have to mediate between industry and consumer interests. The whole point of the CFPB is that it exists only to serve consumers. The Food and Drug Administration doesn’t look to balance the needs of consumers with those of pharmaceutical companies; similarly, the CFPB will simply set standards which big banks will have to meet. There are lots of financial regulators charged with ensuring the health of the banking sector; the CFPB the only one charged with looking after consumers. So anybody like Pianin who thinks that the CFPB ought to be at least in part captured by the banks is fundamentally missing its raison d’etre.

“A Shocking Proportion of Consumers Fail Basic Financial Literacy Tests”-  In recent years, concern has been growing about the financial astuteness of consumers as research suggests they often make what appear to be welfare-reducing decisions.[1] Many individuals do not hold a checking account (Hilgert et al., 2003); maintain large outstanding balances on credit cards when cheaper forms of credit are available (Gartner & Todd, 2005); take out payday loans at astronomical interest rates when cheaper forms of credit are available (Agarwal, Skiba, and Tobacman, 2009); choose sub-optimal credit contracts (Agarwal et al., 2006); fail to refinance mortgages when it would be optimal to do so (Agarwal, Driscoll, and Laibson, 2006); and fail to plan for retirement, reaching it with little or no savings (Lusardi and Mitchell, 2006).  Surveys find that a shocking proportion of consumers, both in the U.S. and in other countries, fail basic financial literacy tests. Many adults do not understand the difference between compound and simple interest; the characteristics of financial assets such as stocks and bonds; the benefits of portfolio diversification; or the important features of their own mortgages, Social Security and pension plans

Regulators Who Look Like America - Buried in the financial-reform bill President Barack Obama signed in July is an innocuous-sounding provision, Section 342. It establishes Offices of Minority and Women Inclusion (OMWI) in each federal financial regulatory agency in an effort to expand gender and racial diversity and mitigate predatory financial practices. For many conservatives, Section 342 is anything but anodyne. Among the shrillest critics has been the nation's financial paper of record, The Wall Street Journal. Fearmongers on the Journal's editorial board have branded Section 342 "the biggest under-reported threat" of the bill, declaring it "the most brazen attempt to hijack central bank policy since its founding nearly a century ago." There is little reason for such hysteria. Section 342 confers no enforcement powers; instead, it merely takes a cue from the Wall Street mantra that if something is not measured, it doesn't matter. Underlying the OMWI is the idea that greater racial and gender equity among regulators will produce an informal institutional check against predatory financial practices. These practices disproportionately target the women and communities of color for whom the housing crisis wiped out a generation's worth of wealth-building assets.

Fighting Flares on New Rules For Street - Banks, companies and trade associations challenged federal regulators Friday over the controversial question of how to regulate derivatives under the new Dodd-Frank financial revamp, the first big day of posturing since the law was enacted last month. The meetings, particularly a three-hour roundtable hosted jointly by the Commodity Futures Trading Commission and the Securities and Exchange Commission, illustrate how Wall Street's attention has shifted from Congress to the federal agencies that have to interpret the law by writing hundreds of new rules. Perhaps nowhere is the attention to detail more apparent than the focus on complex financial instruments known as derivatives, in part because the rules will impact scores of companies and can affect how hundreds of billions of dollars in credit moves through the economy.

Buyout Firms In 'Grassroots' Lobbying Effort To Preserve Tax Loophole - The private equity industry is lobbying hard to convince members of Congress to lay off the tax scheme that allows investment fund managers to pay a lower tax rate than their secretaries.The Private Equity Council, a lobbying group for private equity, is mobilizing fund managers to get members of Congress to come visit PE-owned companies in their districts to "showcase some of the industry's success stories," the New York Post reported Monday. (Private equity is arguably better known for buyouts and layoffs than creating jobs.) At stake is the taxation of "carried interest," the 20 percent of a fund's investment profits that its managers take in on top of a fixed fee. Carried interest is currently taxed as capital gains at a top rate of 15 percent. House Democrats have long sought to tax carried interest like income, which has a top rate of 35 percent, only to see their proposals fail in the upper chamber.

Overdraft Protection Expires: No More Overdraft Fees Without Opting-In - The era of the $35 cup of coffee has come to an end, for most. Unless a consumer chooses to opt-in for overdraft protection, their ATM and debit purchases will be declined if an account has insufficient funds. Prior to Sunday, banks could automatically enroll their customers in the service, which covers the point-of-sale transaction but can result in steep penalties. Shoppers at the counter might turn red with embarrassment when their purchase is refused, but the alternative is for their account to go further into the red -- with fees up to $35 for each swipe of the card.. Just last week, a federal judge accused Wells Fargo of "profiteering" by employing overdraft policies that led customers to pay multiple fees. The bank was ordered to return $203 million to its customers. However, Wells Fargo intends to appeal and several other banks have indicated that they will not change their policy of processing the day's largest transactions first (as opposed to chronological order), which increases the likelihood of multiple small transactions incurring overdraft fees.

Incentives - A long time ago I became interested in economics when someone pointed out that it wasn’t just dull money stuff, but rather that it was the study of incentive structures. That still strikes me as true today: a good piece of economics explains how and why we react to changes in incentives. It is therefore somewhat surprising to find that some commenters on bank regulation – and even some regulators – can be so bad at understanding incentive structures. If you make an activity really difficult or expensive for banks to do, but it is profitable, then non-banks will figure out a way to do it (usually in a badly capitalised, unregulated vehicle). Moreover, if you make one way of taking a risk really difficult and expensive but another way of taking the same risk much cheaper, then banks will take it in the second way not the first. That is why I have always advocated regulators having a specialist regulatory arbitrage group to spot these features and plug them.

Number of the Week: Bankers Keep Getting Richer - $11,759: The average monthly wage of newly hired Wall Street bankers at the bottom of the recession. The second quarter of 2009 was a dark time for the US economy. Output was down a inflation-adjusted 4.1% from a year earlier, unemployment hit 9.3% and the Dow Jones Industrial Average gyrated around 8500.  But for the select group who landed jobs as Wall Street bankers, it appears to have been a bonanza. According to the latest data available from the Census Bureau, the average wage for people hired into finance and insurance jobs in New York City was $11,759 a month, up 23% from a year earlier. That’s more than double the average wage for all new hires in the city, which in turn was more than double the average wage for new hires in other major cities.

Needed: a new economic paradigm, Joseph Stiglitz - The blame game continues over who is responsible for the worst recession since the Great Depression – the financiers who did such a bad job of managing risk or the regulators who failed to stop them. But the economics profession bears more than a little culpability. It provided the models that gave comfort to regulators that markets could be self-regulated; that they were efficient and self-correcting. The efficient markets hypothesis ... ruled the day. Today, not only is our economy in a shambles but so too is the economic paradigm that predominated in the years before the crisis – or at least it should be.  It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment.  Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favored assumptions, full rationality.

Capitalist Myopia, by Maxine Udall - I think about company towns and company stores whenever someone starts bleating about government power; the sameness that would be induced by government control of the means of production; the two-tiered system that will evolve if government has too much power; the inefficiencies that will result from government regulation. All more or less true. But then I think of the sameness of company town housing, the two-tiered system of worker and management, and I think of the "inefficiencies" of unsafe workplaces and the "race to the bottom" that must necessarily ensue in the absence of a common standard for consumer and worker safety. And I conclude that economic and political power should not be concentrated excessively in anyone's hands, whether public or private. Socialized investment banking, the result of unfettered self-interest in combination with unregulated conflicts of interest, may accomplish what generations of coal miners, steel and auto workers, teamsters, teachers unions, and union organizers could not. Unfortunately, collective action uninformed by virtue is unlikely to result in anything that is any better than that achieved by investment banking without virtue. It might even be worse. That will be the true cost of capitalist myopia.

EFF-ing Up - There was a kerfuffle earlier this week when the CFTC said that Exchange of Futures for Futures transactions–EFFs–were legal, despite the CME’s claim that they were banned wash trades.  There has been some breathless commentary that this is a grave competitive threat to CME, and raises the specter of “fungibility,” meaning that clearing and execution would effectively be unbundled.  A trade could be traded on one exchange, and then cleared elsewhere.  This would, supposedly, increase the competition that the CME would face. I rolled this rock up the hill too many times pre-crisis, when fungibility was a headline issue before it was overshadowed by the crisis and its effects.   For instance, this was a big issue in the DOJ’s infamous passive-aggressive letter in the winter of ‘08.

 Janet Tavakoli - How to Thwart the Assassins of the American Dream - Arianna Huffington's new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union: "Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care -- the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties..." Arianna notes how America imploded while bankers soared: "Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how 'markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside.' This from the man who, as Bill Clinton's Treasury secretary, was vociferous in opposing the regulation of derivatives -- a key factor in the current economic crisis -- and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup."

Democratic Misgivings on a Size Cap for Banks - The Brown-Kaufman amendment to the recently enacted financial regulatory overhaul proposed a size cap on our largest banks, limiting their assets to a very small fraction of the size of our economy. The premise was simple — and could fit on a bumper sticker (or in a campaign flier for November) — “too big to fail is too big to exist.” But this proposal to modify Dodd-Frank, as the financial reform legislation is known, failed in the Senate in early May, with 33 votes in favor and 61 — including 27 Democrats — opposed. Since then, Democratic supporters have been asking their representatives the obvious question: Why did you vote against Brown-Kaufman? Interestingly, no senators have yet replied — at least on the record — that the power of the megabanks was too great to be overcome. Instead, three main arguments are going the rounds.

Basel III Liquidity Requirements - As I noted in my post on Lehman's liquidity pool, the financial crisis of 2008 — and the Lehman episode in particular — highlighted the pressing need for formal liquidity requirements. Fortunately, the Basel Committee has made a new liquidity regime a focus of Basel III. The new liquidity regime can be found in the December 2009 consultative document as amended by last month's Annex. The main component of Basel III's liquidity regime is the Liquidity Coverage Ratio (LCR), sometimes known as the "Bear Stearns rule." The LCR requires banks to maintain a stock of "high-quality liquid assets" that is sufficient to cover net cash outflows for a 30-day period under a stress scenario.

New Bank Capital Rules Will Eventually Foster Growth, Studies Assert - New international regulations on how much capital banks must hold will initially make borrowing more expensive and dampen economic growth, according to two studies released Wednesday by the central bankers and regulators who are writing the new rules. But the economic effects will be smaller than feared, and eventually stricter regulations will lead to higher growth by preventing future bank crises, the studies said. The studies published by the Financial Stability Board and Basel Committee on Banking Supervision, whose members include central bankers and regulators from the United States, Europe, China and most other major countries, contradict assertions by the banking industry that the new regulations could throttle growth. The estimated effects on output of the proposed rules “are significantly smaller than some comparable estimates published by banking industry groups,”

The Fed's Backup Plan(s) for Lehman -Here are the last of the documents from the Lehman Examiner's Report that I found interesting. The first is a list of the top 25 Lehman counterparties by exposure. (CCE is current credit exposure; MPE is maximum potential exposure.) The two counterparties with the highest exposure to Lehman? The Italian government, and Berkshire Hathaway (BH Finance LLC is a Berkshire sub).

Goldman CEO, others get millions from options (Reuters) - Goldman Sachs Group Inc on Friday said several top company officials, including Chairman and Chief Executive Lloyd Blankfein, exercised stock options this week and obtained millions of dollars of profits by selling the resulting shares, regulatory filings show. Blankfein exercised 90,681 stock options at a strike price of $82.875, and obtained a $6.09 million gross profit by selling the resulting shares on Wednesday at prices between $148.97 to $152.00. In similar options exercises and sales, President Gary Cohn exercised 73,653 options and had a $4.95 million profit, Chief Financial Officer David Viniar exercised 67,326 options and had a $4.52 million profit, and General Counsel Gregory Palm exercised 47,895 options and had a $3.22 million profit.

CBO’s Latest Projections for the TARP - In March, CBO estimated that the total cost of the Troubled Asset Relief Program (TARP) would be $109 billion over the life of the program.  That estimate (which represented the present value, adjusted for market risk, of the program’s activities) was based on market values in February, actions that had occurred up to that time, and an assumption that additional amounts would be allocated to programs that were not yet specified.  In the baseline budget projections that CBO released yesterday, the lifetime cost of the program has been reduced to $66 billion.  Three factors account for the reduction: further repurchases of preferred stock and sales of warrants from banks, a lower estimated cost for assistance to the automobile industry, and the elimination (due to the passage of time and provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203) of the opportunity to create new programs. 

Guest Post: Strip Mining the U.S. Economy - The focus of this missive is not environmental, though, but economic. Because now it is the U.S. economy that is being ’strip mined.’ In the same way that mining companies will descend on a region with heavy equipment and chemicals, brutalizing the land until nothing is left, corporations large and small are doing the same thing with the goal of extracting profits rather than minerals, to the long term cost of the U.S. economy itself. A recent Economist chart tells the story:“Corporate profits are back within a whisker of the all-time highs achieved before the downturn in late 2008″ The Economist writes. “American profits are already back to 11% of GDP. Corporate America is reaping the rewards from cutting costs, especially in capital investment and labour, through an unpleasant mix of redundancies, reduced hours and lower pay. The great squeeze cannot go on forever, of course, but it shows no sign of slackening.”

New Attempts to Woo “Unbanked” Customers - Federal and local governments are trying once again to persuade some of the 17 million U.S. adults who rely on check-cashing services to open their own bank accounts. Past efforts to lure "unbanked" consumers into the financial mainstream have fallen short. Some states require state-chartered banks to offer low-cost accounts, but banks rarely promote them. A Treasury Department initiative earlier this decade offered grants to banks and community groups to sign up consumers, but few accounts were opened.

Amar Bhide on the Stalinization of Finance - Yves Smith -Amar has an article at the Harvard Business Review which encapsulates some of the core arguments from his book. I’m providing a few extracts here because it appeals to my sensibilities and I therefore think NC readers will like it as well. The most interesting bit to me is the aspect that I highlight in the headline to this post: that the evolution of finance, particularly in its near universal adoption of standardized models in lending processes bears a troubling resemblance in its process and outcomes to a centrally planned economy (funny that people like to dump on the Fed for interest rate setting, and miss the other. widespread aspects of de facto centralization, via standardization and over-reliance on models). Some of his arguments overlap ones I’m made repeatedly here. For instance, I’ve decried the fact that shifting lending from loan officers in branches to standardized, score-based templates resulted in considerable loss of information: face to face assessment of the borrower (does he understand what he is getting into? Does he regard the loan as a serious commitment?) and knowledge of the community (How healthy is his employer? What is the outlook for the local economy?)

Number of the Week: Bankers Keep Getting Richer - $11,759: The average monthly wage of newly hired Wall Street bankers at the bottom of the recession. The second quarter of 2009 was a dark time for the US economy. Output was down a inflation-adjusted 4.1% from a year earlier, unemployment hit 9.3% and the Dow Jones Industrial Average gyrated around 8500.  But for the select group who landed jobs as Wall Street bankers, it appears to have been a bonanza. According to the latest data available from the Census Bureau, the average wage for people hired into finance and insurance jobs in New York City was $11,759 a month, up 23% from a year earlier. That’s more than double the average wage for all new hires in the city, which in turn was more than double the average wage for new hires in other major cities.

Questioning the “The Authorities Did a Great Job in the Crisis” Meme - Yves Smith - What is disconcerting is how this view has now become conventional wisdom, despite the panicked Fed reaction (being way behind the curve, then overreacting and making 75 basis point cuts the new normal, with the result that short rates are now so low that the Fed is boxed in), denial and failure to investigate the seriousness of looming problems (for instance, Bear’s implosion should have led to a full bore investigation of the credit default swaps market, which would have led straight to AIG); the inconsistent bailout processes; the heinous language and process of the passage of porked-up TARP.  And now we have the aggressive selling of “how well it all worked.” For starters, consider the misleading “banks have paid back the TARP meme.” Yes, thanks to other back door, less visible bailouts, super cheap interest rates, regulatory forbearance (aka, extend and pretend, starting with bank second mortgages and HELOCs). This is simply a shell game, with the banks eager to pay back the TARP for the worse possible reason, so the top brass could escape restrictions on compensation.

The mess that is deposit insurance - There are three reasons to have deposit insurance. The first reason is systemic: it prevents bank runs. There’s no rush to pull your money out of the bank if you know that the government is guaranteeing your deposits. As a result, the entire banking system becomes much more stable and secure. The second reason is one of simple fairness: depositors shouldn’t be expected to do due diligence on the banks where they deposit their money. And when a bank fails, those depositors shouldn’t lose their money. The last reason is by far the least noble of the three, but even the FDIC admits that it comes into play when the deposit insurance limit is raised: every time that happens, depositors increase the amount of money they have in bank CDs. So if the government wants to help shore up a rickety banking system, one cheap way of doing so is to increase the FDIC insurance limit. Suddenly, the banks will see an inflow of relatively cheap funds, and will seem to be in much better shape.

Fed: Large banks ease lending standards slightly, demand still weak - From the Fed: July 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices -The July survey indicated that, on net, banks had eased standards and terms over the previous three months on loans in some categories, particularly those categories affected by competitive pressures from other banks or from nonbank lenders. While the survey results suggest that lending conditions are beginning to ease, the improvement to date has been concentrated at large domestic banks. Most banks reported that demand for business and consumer loans was about unchanged. On net, a small fraction of domestic banks reported having eased standards on prime residential mortgage loans; the few respondents that had eased standards were all large banks. The increase in demand over the past few months for prime residential mortgage loans reported by several respondents

Fitch: Largest US banks could lose up to $42B - Fitch Ratings said Wednesday the four largest U.S. banks could book losses of up to $42 billion if Fannie Mae and Freddie Mac force them to take back troubled mortgages they originated. Fitch estimates that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants' seriously delinquent loans. In the worst case, they could lose $42 billion if the government-sponsored entities force them to buy back half of their bad loans. Investors that buy loans from banks have the right to force lenders to repurchase them if there were lies on the loan applications. Recently, Fannie and Freddie have actively done this for $354.5 billion worth of bad mortgages. As a result, these banks have started to beef up their cash reserves recently to absorb the losses.

Moody's: Commercial Real Estate Price Index declines 4% in June - Moody's reported (via Bloomberg) today that the Moody’s/REAL All Property Type Aggregate Index declined 4% in June. This is a repeat sales measure of commercial real estate prices.Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices. CRE prices in red only go back to December 2000. The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).

Retail Spaces Lead Drop in U.S. Commercial Property - U.S. commercial real estate prices fell the most in almost a year in June as the economic recovery showed signs of faltering, Moody’s Investors Service said. The Moody’s/REAL Commercial Property Price Index dropped 4 percent from May, the company said today in a report. The decline was the biggest since July 2009, and pushed the gauge down 0.9 percent from the start of the year.  “We expect property prices to remain choppy for some time as commercial real estate markets and the broader economy continue their slow recovery from the recession,” Moody’s researchers said in the report.

Moody's Reports Commercial Property Prices Are 41% Below Peak - Real estate prices on U.S. commercial properties dropped 4 percent in June, according to data released by Moody’s Investors Service Thursday. The decline followed two months of price increases, illustrating that “performance remains choppy” in the commercial real estate sector, the New York-based ratings agency said. In the first half of 2010 the index has risen in three months and fallen in the other threeThe Moody’s/REAL Commercial Property Price Indices (CPPI) is now 41.4 percent below the peak that was recorded in October 2007, after the June price drop.

The worst bet in real estate today: Construction loans - The biggest bank killer around isn't some exotic derivative investment concocted by Wall Street's financial alchemists. It's the plain old construction loan, Main Street banks' bread and butter for decades. Deutsche Bank has called them "without doubt, the riskiest commercial real estate loan product." The Congressional Oversight Panel, a financial watchdog, has warned that construction loans have deteriorated faster and inflicted bigger losses on banks than any other real estate loans. And the worst may be yet to come. Banks, adopting a desperation strategy known as "extend and pretend" or "delay and pray," have been reluctant to admit defeat, repossess half-completed housing developments and strip malls — and dump them on a depressed market at a big loss. "There probably are many loans out there that are in worse shape than reflected on lenders' books,". Even so, the numbers are already grim:

Boston Fed: Economics Couldn’t Reveal Housing Bubble - Should economists and policy makers have identified the housing market bubble before it burst? The answer is most likely no, says the Federal Reserve Bank of Boston, because economic theory was not up to the challenge.“Economic theory provides little guidance as to what should be the ‘correct’ level of asset prices — including housing prices,” the new paper published by the bank says. “While optimistic forecasts held by many market participants in 2005 turned out to be inaccurate” those projections were not “unreasonable” given what was understood about the economy and housing market dynamics in the years before housing prices crashed and helped create one of the worst economic downturns in generations.

Relitigating the housing bubble - The post-housing-bubble narrative has been that the unsustainability of prices was obvious ex ante, and so we should be able to call them in the future. This to me seems to be a bit of hindsight bias, but it is always difficult to make a case that claims which turn out to be ex post false were nevertheless ex ante reasonable. Kristopher Gerardi, Christopher Foote, and Paul Willen have a new paper out that I’ve been waiting for someone to write. They go through pre-collapse claims of the housing pessimists, optimists, and agnostics, and evaluate not just who was write and wrong but which beliefs where obviously right and which were debatable. This is a fun and accessible paper starring a well-known cast of characters, with prominent roles for Paul Krugman, Dean Baker, and Robert Shiller, and a quick cameo by The Economist, Calculated Risk, and John Cassidy. I strongly recommend it.

Boston Fed’s New Excuse for Missing the Housing Bubble: NoneOfUscouddanode - Yves Smith - It is truly astonishing to watch how determined the economics orthodoxy is to defend its inexcusable, economy-wrecking performance in the runup to the financial crisis. Most people who preside over disasters, say from a boating accident or the failure of a venture, spend considerable amounts of time in review of what happened and self-recrimination. Yet policy-making economists have not only seemed constitutionally unable to recognize that their programs resulted in widespread damage, but to add insult to injury, they insist that they really didn’t do anything wrong. Even worse, the latest excuse, from the Boston Fed, is that they are blameless because no Serious Economist could have recognized the bubble. So there are quite a few reasons this “noneofuscouddanode” tale is sheer bunk. First is that economics is really really bad at fieldwork.

Wrong To Be Right - Krugman - Yves Smith says most of what needs to be said about the Boston Fed study saying that nobody could have called the housing bubble. I’d just add that it’s helpful to look at what we knew back when. Here’s a picture from Kash of house prices up to early 2005; by the way, these were OFHEO prices, which most now believe understated the rise, which was better shown by Case-Shiller. But here’s what it looked like, even then:  Given this kind of picture — and given the fact that the late-80s rise in southern California was, in fact, a bubble — how could you not be very worried? And when you looked at the rationalizations for high housing prices being given at the time, it was obvious that they were questionable. Sorry: the evidence just screamed bubble. No excuses for those who didn’t want to hear it.

Guess Who Benefits Most From Foreclosure Abatements? - Just in case you missed this article in The Hill, the headline will save you from any suspense: Banks to benefit most from White House program to help fight foreclosures. Here’s the bad news:“Banks will get the biggest benefit from an Obama administration housing program designed to help unemployed homeowners escape foreclosure.Housing experts expressed concern that banks, not homeowners, will be helped by the White House’s $3 billion funding infusion — $2 billion from the Treasury Department and another $1 billion from the Housing and Urban Development Department — going to those states hit hardest by the housing market crash and unemployment.” This is no surprise, as we have mentioned repeatedly (here, here, here and here), the so-called mods and abatement programs are thinly disguised back door bailouts for banks.

The bastardization of the American Dream - Today the Obama Administration will host a conference on the future of housing finance. It's a great topic, considering that Fannie Mae and Freddie Mac are more than $150 billion in the hole. But this is about more than what to do with the GSEs.There are bigger questions to ask about how we approach home ownership in the U.S. For decades, buying a house was seen as the ultimate socio-economic accomplishment. The real estate collapse has gotten plenty of people--including myself and members of the Obama Administration--wondering if this is really how we want the national psyche to be oriented. By one account, housing represents between 17% and 18% of GDP. Can you imagine what it would be like if we plowed that much money and focus into education and training and the creation of quality jobs?

Obama’s housing reform panel angers affordable-housing advocates - Affordable-housing advocates raised concerns Thursday that the Obama administration is excluding consumer and community groups from playing prominent roles in a government-sponsored conference next week that will kick off efforts to overhaul national housing policy. After the administration announced the 12 panelists for Tuesday's conference, the nonprofit National Community Reinvestment Coalition said consumer and community groups had been "muscled out" by financial companies, economists and academics without a sense of how housing policy plays out in communities.  "Apparently being a community organizer qualifies you to be president, but it's not good enough to be part of HUD and Treasury's think tank on housing,"

US house mortgage arrears mount - Tim Geithner, Treasury secretary, and Shaun Donovan, housing secretary, are meeting investors, bankers and public policy experts to discuss housing finance. Investors continue to shun private-sector mortgages, with most new home loans now financed through Fannie Mae and Freddie Mac, the agencies taken over by the government in 2008. Mortgage rates have also plunged to record lows but falling borrowing costs have failed to revive the US housing market. Indeed, the Washington deliberations, which will centre on what the level of government support for Fannie and Freddie should be, comes amid continuing pain for homeowners. In the average congressional district, serious mortgage delinquency rates – defined as borrowers more than three months behind on their payments – are 9.4 per cent, compared to 3.3 per cent at the time of the election in 2008, according to a study by Deutsche Bank.

A Fannie-Freddie Model - Ideally, reforming the government-controlled mortgage financing behemoths Fannie Mae and Freddie Mac would achieve three goals:

    • 1) Minimize the government’s balance sheet risk from a future collapse in home prices.
    • 2) Promote a more constructive pricing of risk that isn’t distorted by government guarantees.
    • 3) Avoid an increase in borrowing costs that could come as the government’s role is redefined. (Well, this goal might not be ideal: There is something to be said for a world of lower home prices and higher market-based credit costs, but any idea that produces that result seems a political non-starter.)

These three goals might seem contradictory: If the government narrows its role in housing finance and risk isn’t being underpriced, doesn’t that imply higher mortgage rates? That’s why most reform proposals for Fannie and Freddie would simply preserve a government guarantee and make it explicit, although that guarantee has cost taxpayers $148 billion in the past two years.

The Wingnuts go after Fannie and Freddie - In recent weeks the wingnut right wing ideologues have made a lot of headway in their goal of gutting Social Security. Well-funded by hedge fund manager Pete Peterson as well as right wing Washington think tanks, they have promoted the preposterous notion that our wealthy and productive economy cannot afford to take care of our elders. Now they have turned their sights on Fannie and Freddie. They argue that it is time to cut Uncle Sam out of the home mortgage market. Just as he has no role to play in providing decent pensions to our retired population, he should not help make homeownership affordable for most Americans. "Free markets" can do it all so much better than Uncle Sam can do. Oh, right, free markets did such a good job with the subprime mortgage market, creating a global financial crisis that rivals the Great Crash of 1929. Hey, let's reward them by getting government out of the mortgage markets so that Pete Peterson can run the whole shebang for the benefit of Wall Street. That, of course, is the real goal.

2 Zombies to Tolerate for a While - The Massachusetts Democrat had been watching a morning news program that had me on, and soon afterward he was calling my cellphone to fume about that morning’s discussion. The topic? Why it has taken the government so long to address the fate of the zombie mortgage giants, Fannie Mae and Freddie Mac.  It is an issue that has been talked about a lot of late. On Tuesday, the Treasury secretary, Timothy F. Geithner, will convene a meeting of government officials and executives like Bill Gross of Pimco and Lewis Ranieri, the father of the mortgage-backed security, to delve into future housing policy and the role played by Fannie and Freddie.  On the television program that had stirred Mr. Frank, “Morning Joe” on MSNBC, the prevailing view was that any effort toward a resolution of Fannie and Freddie — government-created mortgage companies that were taken over by the government as the financial crisis mounted — had been put on the back burner during the overhaul of financial regulation. The consensus was that Fannie and Freddie was now the third rail of American politics. Mr. Frank was having none of that.

Fannie and Freddie to Stay the Course (As if the Bailout allows any other) Yesterday’s GSE hearing came and went with nothing special happening. There was no confirmation of earlier rumors that the system would order a mortgage rate reduction.  Instead it was status quo all the way. Geithner affirmed the government’s commitment to reflating the mortgage bubble and keeping housing prices artificially high. Rather, Mr. Geithner — and the conference after his remarks — focused largely on drafting a new and improved version of the current system, in which the government subsidizes mortgage loans made by private companies.The absence of such support, Mr. Geithner said, would deepen future recessions because unsubsidized private companies would curtail lending. There were the same old lies about how inflating a bubble and then using the mechanism of the GSEs to provide lower-cost mortgages represents some “progressive” outcome. Think about the double artificiality and manipulation here: first the banks use government to inflate a bubble, and then they use it to provide market access at prices which are artificially low over the short run. (Of course, as with any heroin dealer giving away a free sample, they intend to make you pay in the end.) So it’s a double affront to reality.

A Helpless Housing Market Keeps Fannie and Freddie in Limbo - Mortgage-industry industry leaders will attend a summit with government officials today (Tuesday) to discuss how to reform Fannie Mae (NYSE: FNMA) and Freddie Mac (OTC: FMCC), the two mortgage giants that so far have devoured close to $150 billion in taxpayer bailout funds. However, that meeting is likely to be derailed by a far greater problem: After making modest progress, the housing market again appears on the verge of collapse.  "There's been a feeling in government, which seems to be more pervasive than it was six months ago, that says, 'We've solved this housing problem; let's move on to Fannie and Freddie,'"

Bill Gross: "Private Market Can't Work" - Right now, from the housing hearing.... "Private market is unrealistic; government guarantees necessary." Oh really Bill? What's the real problem Bill? The real problem is that you have "invested" on a broken mantra.  That house prices never go down.  That down payments are unnecessary - that is, that leverage should be sky-high (infinite in the case of 100% financing.)  Where government is required to guarantee the payment of principal and interest - for a private good, consumed by private people. Sounds like socialist, even Marxist claptrap, doesn't it? That's because it is! The underlying problem is that when you allow people to take leverage risk goes up.  Leverage goes parabolic as down payments approach zero. 20% down payments have a market-proven ability to mitigate risk.  They make risk manageable even if people default.

Bill Gross: To Think Private Housing Lending Can Replace The Government Is Absurd - We're keeping one eat turned to the Treasury's Future of Housing Finance panel being hosted by Tim Geithner Among the panelists is PIMCO bond chief Bill Gross, who has called for the government to maintain its strong backing of Fannie and Freddie. Says Gross: It's just not going to happen that the private sector will somehow come in and replace the government in this area, and to think housing can be totally financed without the government's balance sheet. Gross does favor an idea put forth by the American Enterprise Institute for countercyclical downpayment standards (increasing downpayment requirements when housing is going up), though other panelists are skeptical.

The future of Fannie and Freddie? None - Bond guru Bill Gross warned on Tuesday that without U.S. government guarantees, only mortgage bonds backed by super-safe loans, would interest him. He frets too much. The funeral of Fannie Mae and Freddie Mac may be coming, but housing support from D.C. will live on. The key question is how much.The Gross plan would see the two mortgage giants evolve into a fully nationalized, mega-securitization engine. That, along with his suggestion for a massive home loan refinancing plan, could mean an even bigger role for Washington in U.S. housing. But President Barack Obama’s administration has little appetite for that kind of approach. As it is, an annual $250 billion in government subsidies, according to the Congressional Budget Office, gives a poor return on investment. In a normalized housing environment, mortgage interest rates might be only 0.2 percentage points higher without it, according to studies from Ohio State University and a former Freddie Mac economist. And international comparisons hint that home ownership rates might not owe much to the government’s role, either.

The Gross Option - When James Pethokoukis said he heard tale of a Fannie / Freddie I assumed it would be something along the lines of this plan Bill Gross is putting forwardBill Gross, who runs Pacific Investment Management Co.’s $239 billion Total Return Fund, said that policymakers "should quickly re-engineer" a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac. Not loan forgiveness as Pethoukis suggests. Indeed, if the US government would announce that Fannie and Freddie have full faith and credit then we could probably refi everyone in the United States at around 3.5 – 4%. Its hard for me to see how the fully secured Fannie / Freddie could trade at a lower yield than 30 yr Treasuries. The prepay risk is basically inverted because yields can’t go much lower, giving the homeowner little option value. However, some people will move, default, etc. Which means you get principle back on average much earlier than 30 yrs.

Bill Gross Urges Full Nationalization Of GSEs - During the live hearing, Bill Gross stated the obvious: private players in the MBS space will never participate as long as long as the government accepts zero down payments. Of course, he is absolutely correct - the only entity stupid enough to gamble with its seemingly endless resources in such a manner is the US government. And in doing so, it continues to widen the schism between public and private interests, and makes the return of private businesses in this most important segment of US credit markets an impossibility. In fact, Gross urged a move one step further, with the full nationalization of the GSEs - as the GSEs are nationalized now in all but writing, this would be logical. Alas, the fact that US Debt to GDP would jump from 90% to 140% may make this proposal a little difficult to implement.

Bill Gross' big idea - At Tuesday's conference on the Future of Housing Finance, Bill Gross suggested that anyone who was current on a Fannie/Freddie loan should automatically be refinanced to the current mortgage interest rate of about 4.5 percent. This should happen instantaneously, without underwriting. I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS).

Banking Execs Say Gov't Needs To Back Mortgages -  The call from business for less government has a notable exception: the mortgage market.The Obama administration invited banking executives Tuesday to offer advice on changing the government's role in backing the mortgage market. While they disagreed on the exact level of support needed, the group overwhelmingly advocated the government should maintain a large role in the $11 trillion market.  If the government pulled out, executives said, millions of Americans wouldn't be able to convince banks to take the risk of giving them home loans. Ending government support could lead to a spike in mortgage rates. That could deter many from buying homes, and banks, mortgage lenders and Realtors would lose money over time.

U.S. Must Support Flagging Housing Market: Geithner - US Treasury Secretary Timothy Geithner said Tuesday that the government must bolster the embattled American housing sector to avoid more damaging recessions in the future."Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," he said. "House price declines could be more acute, with even greater damage to financial wealth and economic security," Geithner said at a conference in Washington on the future of housing finance in the United States.

Geithner Affirms U.S. Role as Mortgage Backer - NYTimes— The Obama administration has been barraged with ideas for reworking the government’s role in housing finance, spanning the spectrum from guaranteeing all mortgage loans to eliminating all federal subsidies for homeownership. Treasury Secretary Timothy F. Geithner, speaking Tuesday at a conference to discuss the possibilities, made clear that the administration was not pondering such radical kinds of surgery as it develops a proposal it hopes to unveil in January. Rather, Mr. Geithner — and the conference after his remarks — focused largely on drafting a new and improved version of the current system, in which the government subsidizes mortgage loans made by private companies.

The Fannie And Freddie Effect Is Here Long Term -This week’s summit on their fate did little to allay his concerns, thanks to its failure to offer concrete solutions. Here is the problem: Fannie and Freddie have been the high priests of the religion of home-ownership.  Government-backed but publicly traded, the two “companies” funded and securitised masses of mortgages – $5,400bn-worth at the last count – keeping rates low for America’s homebuyers. So far, so good. Fannie and Freddie made money by exploiting their government guarantee to raise cheap funds; millions of households were able to buy a brick-and-mortar piece of the American dream; and bankers and real estate agents fed at the trough of a booming housing market.  The system worked as planned until September 7, 2008 when the Bush administration was forced to take direct control of Fannie and Freddie just as they were drowning in a sea of falling house prices and soaring mortgage defaults. The seizure – euphemistically called “conservatorship” – has cost taxpayers some $150bn so far but independent forecasters put the final bill at around $380bn. More worryingly, nobody in Washington seems to know what to do with Fannie and Freddie. Wind them down? Recapitalise them and re-release them back into the wild of capital markets? Break them up?

Single Family Housing Starts decline in July -Total housing starts were at 546 thousand (SAAR) in July, up 1.7% from the revised June rate of 537 thousand (revised down from 549 thousand), and up 14% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Single-family starts declined 4.2% to 432 thousand in July. This is 20% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over a year - with a slight up and down over the last several months due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

Home-builders index slumps to 17-month low  -- Home-builder confidence slumped in August to a 17-month low, according to a report released Monday, in another indicator of a tentative housing market. The National Association of Home Builders/Wells Fargo Housing Market Index fell by one point to 13, its worst reading since March 2009. Economists polled by MarketWatch had anticipated a rise to 15. To put in perspective, any reading over 50 indicates that more builders view conditions as good than poor. There hasn't been a reading over 50 since April 2006.

California housing industry's economic output down 80% since 2005 - The industry's economic output has plunged by about 80% since 2005, representing a loss of tens of billions of dollars and hundreds of thousands of jobs, according to a report released Monday by the California Homebuilding Foundation and the Center for Strategic Economic Research. The study found that new housing construction contributed $13.8 billion to the California economy in 2009, down from $67.7 billion in 2005. Employment plummeted to 77,000 last year from 487,000 jobs in 2005 — a drop of 84%

Q2: Quarterly Housing Starts by Purpose - This morning the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q2 2010. This graph shows the NSA quarterly starts intent for four categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale. Condo starts in Q2 were just above the all time record low (4,000 vs 3,000 in Q4 2009).  Units built for rent set an all time record low in Q1 (19,000 units in Q1 2010) and rebounded to 31,000 units in Q2. Some of this increase is seasonal, but it does appear that many large apartment owners think the vacancy rate has peaked - and some builders and owners are starting to build new apartments (probably for delivery in 2011).

Research desk explains: How do housing starts and household formation rates relate? - During recessions, the household formation rate generally falls. Renters squeeze more people into the same units, young adults either stay with or move back in with their parents, and so forth. This has happened during the most recent downturn, and even before the crash. Gary Painter, a professor at USC, estimates (PDF) that the number of U.S. households fell by 1.2 million from 2005 to 2008. The comparison of the household formation rate and the number of housing units being constructed indicates how many excess units are being built, or how big a shortage is, if one exists. During the financial crisis, a large number of excess units were constructed, and with both housing starts and household formation falling, this is being corrected to some degree, (data courtesy of the Census Bureau): However, while some correction is going on, it is not sufficient to help the housing sector recover. Household formation has fallen far enough that excess housing built during the bubble is not being filled, which means there is little demand for new housing construction, which is hurting the homebuilding sector. This creates a Catch 22 of sorts.

FHA Gets Tougher on Mortgages - Consumers looking for home loans backed by the Federal Housing Administration will face tougher hurdles and higher costs under new legislation and new rules that could take effect as soon as this month. Higher monthly fees, larger down payments and better credit scores are among the new initiatives intended to ensure that the FHA stays solvent. Its reserves, which are used to cover bad loans, plummeted to $3.5 billion at midyear from $19.3 billion in September 2008, according to a report from the FHA's parent, the Department of Housing and Urban Development. Here's a rundown on some of the initiatives:

HAMP data for July - From Treasury: HAMP Servicer Performance Report Through July 2010. And here is the HUD Housing Scorecard.  About 422 thousand modifications are now "permanent" - up from 389 thousand last month - and 617 thousand trial modifications have been cancelled - up sharply from 521 thousand last month. According to HAMP, there are 255,934 "active trials", down from 364,077 last month. There is still a large number of borrowers in limbo since only 165 thousand trials were started over the last 5 months. I expect another large number of cancellations in August.The second graph shows the cumulative HAMP trial programs started. Notice that the pace of new trial modifications has slowed sharply from over 150,000 in September to under 17,00 in July. The program is winding down ...

U.S. Mortgage Relief Effort Is Falling Short of Its Goal The Obama administration’s mortgage relief program, originally intended to shield three million households from foreclosure, now looks as if it will permanently help as few as one-sixth of that number.  While millions say they need help avoiding foreclosure and many struggling households applied, data released Friday showed the dropout rate from the Making Home Affordable Program was very high: 96,000 trial modifications were canceled by lenders in July. The number of canceled trials now exceeds 616,000.  Those numbers are leading some housing experts to call the program, which modestly rewards lenders for modifying mortgages, a failure. But administration officials say that many households were helped even if their modifications were only temporary.  “They were able to benefit from reduced mortgage payments each month at no cost to the taxpayers,” Herbert M. Allison, an assistant Treasury secretary, said during a briefing.

Obama Administration Defends Lackluster Foreclosure Programs; Says Interest Rates Will Remain Low To Help Housing Market - Policymakers will likely keep mortgage rates low for the next several years because it's the best and cheapest way to heal the housing market, a senior Obama administration official hinted on Wednesday. In a nearly hour-long, wide-ranging interview with a small group of reporters from various publications, the senior official, who spoke frankly on the condition of anonymity:

Banks to benefit most from White House program to help fight foreclosures - Banks will get the biggest benefit from an Obama administration housing program designed to help unemployed homeowners escape foreclosure. Housing experts expressed concern that banks, not homeowners, will be helped by the White House's $3 billion funding infusion -- $2 billion from the Treasury Department and another $1 billion from the Housing and Urban Development Department -- going to those states hit hardest by the housing market crash and unemployment. "Giving money to the banks isn't what the government should be doing right now," said Dean Baker, co-founder of the Center for Economic and Policy Research. "I'm not a big fan; it's ill-conceived," he said.

Fed Unveils Slew of Mortgage Rules - The Federal Reserve unveiled a slew of rules Monday aimed at protecting consumers from abusive lending practices blamed for luring millions into unaffordable home loans. The rules include a ban on yield-spread premiums, controversial payments that mortgage brokers have historically received in exchange for guiding consumers toward higher-interest rate mortgages. “This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points,” the Fed said. The ban, set to take effect April 1, would apply to both mortgage brokers and the companies employing them. It also would prohibit loan originators from steering consumers toward loans that aren’t in their best interest but would generate stronger returns for brokers or loan officers. Loan originators would be able to continue receiving compensation based on a percentage of the loan amount.

Checking in on housing - IT HAS been a while since we've looked in on America's housing market. In the intervening period, things have not improved. Builder confidence continues to drop in the wake of the expiration of the federal housing tax credit (it never got all that far above recent lows in the first place): As the chart above, from Calculated Risk, indicates, housing starts usually follow confidence (or vice versa). Either way, the outlook for building and construction employment is dismal. Meanwhile, here's the latest look at price changes, from CoreLogic: According to the CoreLogic HPI, national home prices, including distressed sales, increased by 1.4 percent in June 2010 compared to June 2009 and increased by 3.7 percent [revised] in May 2010 compared to May 2009. The June 2.3 percentage point deceleration from May is very large by historical standards. The deceleration was most pronounced in more expensive and distressed segments of the market.

"Buy and bail" homeowners get past Fannie, Freddie loan hurdles -  Real estate professionals call it "buy and bail." This involves acquiring a new house before the buyer's credit rating is ruined by walking away from the old one because it's "underwater," or worth less than the mortgage. It's an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.  The practice, which constitutes fraud if borrowers lie on loan applications, is continuing even after Fannie Mae and Freddie Mac, the biggest U.S. mortgage-finance companies, beefed up standards to prevent it, according to brokers such as Collier and Meg Burns, a staffer at the Federal Housing Finance Agency. Whether driven by greed or desperation, the persistency of buy and bail underscores the lingering impact of the worst housing crash since the Great Depression

US banks seizing homes at record levels – Major US banks wrote off approximately $8bn (£5.1bn) on mortgages in the first three months of this year, on track to repeat – or even surpass - last year's full-year total of $31bn.  Fresh data shows that the number of US homes being repossessed due to mortgage arrears rose to 92,858 last month, up 9pc on June and up 6pc from the same month last year.  The figure is just 1pc below the all-time high – recorded in May this year – and comes amid renewed concerns about the amount banks are writing-off in mortgage-related losses. Bank repossessions increased on a year-over-year basis in July for the eight straight month in a row.  According to industry researcher RealtyTrac – which provided the repossession statistics - the total number of US mortgage holders receiving a foreclosure notice – either a default notice, a notice of auction or a repossession order – rose by 4pc in July to 325,229. .

Bank Repossessions Hit Record High --, a market-leading source of foreclosed home listings and foreclosure market analysis, reported today that bank repossessions during the second quarter of 2010 topped out at 269,962 properties, the highest ever quarterly total since the foreclosure crisis began. The figure was up 5% from the previous quarter, and 38% from the second quarter of 2009. business analyst John Clark was careful to point out the difference between bank repossessions and new foreclosures when assessing the statistics. "Bank repos occur after a home has been in foreclosure for some time," Clark remarked. "After the homeowner's allotted time to pay off the debt runs out, the banks start repossessing." Bank repossessions are considered the final stage of foreclosure. Due to foreclosure moratoriums and loan refinancing and modification programs, many foreclosure properties avoided repossession for longer than usual. Now that those periods have largely expired.

Editorial - Foreclosures Grind On - NYTimes - There is a lot of grim economic news out there, including Thursday’s report that initial claims for unemployment insurance rose to half a million people last week. The news on housing — where the financial crisis began — is also bad. And the government’s response to high foreclosure rates continues to fall far short of what is needed to help Americans hold on to their homes and to stabilize home prices.  In July, for the 17th month in a row, there were more than 300,000 foreclosures filings, including default notices, auction notices and bank repossessions, according to RealtyTrac, a marketer of foreclosed properties. Over the past eight months, bank repossessions have surged. In July, 92,858 homes were repossessed.  As repossessed homes are put up for sale, house prices are likely to fall further. As prices fall, more borrowers end up “underwater” — owing more on their mortgages than their homes are worth. That’s a big risk factor for default, especially when coupled with high unemployment. Moody’s estimates that 1.9 million homes will be lost this year, down only slightly from 2 million in 2009.

Could Millions of Homes Be Foreclosure Proof? - Yves Smith - A story by Ellen Brown gives a good summary of how the widespread use of a national electronic mortgage registry called MERS, designed to save mortgage securitizers the cost and bother of recording mortgages at the local courthouse, is backfiring spectacularly.  Although in a industry as large and diverse as the mortgage industry, one has to generalize with caution. Nevertheless, early in this century, the mortgage securitization industry took the view that recording mortgage at the local courthouse was a tad barbaric, and sought to streamline the process via the use of a national electronic mortgage registry called MERS.  There were two wee problems with this idea: 1. Real estate is governed by state law. In 45 of 50 states, the note is the critical instrument; the mortgage is a mere “accessory”. You need to demonstrate that you are the owner of the note (the “real party of interest”) in order to foreclose. 2. Many of the securitizers got very sloppy with the transfer of the note to the securitization entity, a trust. Theyv’e tried to rely on MERS to prove ownership, or worse to foreclose in the name of MERS. A rising tide of state court decisions is nixing this approach

Professional investors move into flipping foreclosed homes - Hoping there are big profits to be made in the aftermath of California's housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices. The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits. Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

One Year Supply of Houses? and other stuff - When the July existing home sales data is released, will we see 12 months of supply? Double-digits supply is a given. The high for this cycle was 11.2 months back in 2008, and based on preliminary reports, I think a new high is very likely and 12 months of supply is a reasonable possibility.CoreLogic reported house prices were flat in June (this is a 3 month weighted average of April, May and June). Altos Research compiles a price index for 10 cities that shows prices falling in July. They report "The Composite, which was reasonably flat in June, showed a marked decrease in July, falling more than half a percentage point (0.63%)." RadarLogic CEO Michael Feder writes: Beware the "Fall" of 2010 Moody’s housing economist Celia Chen has released a forecast of housing that is pretty dire. If the U.S. enters a doubledip recession, writes Chen, home prices could fall another 20% before stabilizing in early 2012.

Regional Reports: Home Sales fell sharply in July -From DataQuickA total of 18,946 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in July.  This was the slowest July since 2007, when 17,867 homes were sold, and the second-slowest since July 1995, when 16,225 sold.Other reports show similar declines as home sales fell sharply all across the country in July. We are now seeing double-digit months of supply nationwide - and we might even see the months of supply metric reach 1 year. The previous months-of-supply high for this downturn was 11.2 months in 2008. Housing economist Thomas Lawler's preliminary estimate for existing home sales in July is 3.95 million SAAR. If so, this would be fewest sales since 1996. Lawler's estimate for inventory in July was 4.04 million (although it is a bit of a mystery how the NAR calculates inventory). That would mean 12.3 months of supply! This graph show months of supply and the annualized change in the Case-Shiller Composite 20 house price index.

U.S. Home Resales Due for New Low, Citigroup Says: Chart of Day - Home resales in the U.S. may have tumbled to a record low in July as the expiration of federal tax credits dragged down the housing market, according to Josh Levin, a Citigroup Inc. analyst who follows homebuilders. The CHART OF THE DAY shows how his estimate for last month, an annual rate of 4.1 million units, compares with the monthly totals since the National Association of Realtors consolidated sales figures for single-family homes and condominiums in 1999. Levin’s projection -- a departure from his usual research, he wrote yesterday in a report -- is about 10 percent below the current low. Sales of existing homes hit bottom in November 2008 at a rate of 4.53 million, matched in January 2009. The estimate amounts to a 24 percent plunge from June’s pace of 5.37 million.

Homebuyer Demand All But a ‘Standstill’: Altos Research - After the tax credit induced "mini-boom" in the spring, home prices should remained pressured through the end of the year, according to the real estate data provider Altos Research.The average national house price was $474,946 in July, according to the Altos 10-city composite price index. The index fell "significantly" from its high in the summer of last year, when buyers were taking advantage of the homebuyer tax credit. It has declined for the past 11 months. The tax credit expired in April. It's a 0.63% decrease from June but up 0.66% over the last three months. Asking prices for homes fell in 19 of the 26 markets tracked. The biggest declines came in Phoenix at 5.1%, Washington, D.C. at 4.1%, and Miami at 3.3%.

Bay State home sales dive 30 percent in July - After 12 consecutive months of year-over-year increases, Bay State single-family home sales fell dramatically in July, according to the MLS Property Information Network. Last month, 3,014 single-family homes were sold in Massachusetts, compared to 4,320 for the same month last year - a stunning 30 percent drop - as the $8,000 federal tax credit expired and historically low mortgage interest rates failed to boost sales.  “You’re seeing the effect of the end of the tax credit,” said Karl Case, a housing economist and co-founder of the S&P Case-Shiller Housing Price Index. Case also noted that the drop in sales means people are doubling up, “Adult chidlren are staying with mom and dad longer, and fewer immigrants are buying homes.”

CoreLogic: House Prices flat in June - From CoreLogic CoreLogic® Home Price Index Increases Decelerate in June According to the CoreLogic HPI, national home prices, including distressed sales, increased by 1.4 percent in June 2010 compared to June 2009 and increased by 3.7 percent [revised] in May 2010 compared to May 2009. The June 2.3 percentage point deceleration from May is very large by historical standards. The deceleration was most pronounced in more expensive and distressed segments of the market. Excluding distressed sales, year-over-year prices only increased by 0.2 percent in June and May’s non-distressed HPI increased by 0.5 percent. Prices are expected to further moderately decline as the economy remains weak through the fall” .This graph shows the national LoanPerformance data since 1976. January 2000 = 100. The index is up 1.4% over the last year, and off 28% from the peak.

Refinance Activity, Mortgage Rates and Effective Rate - The MBA reported this morning on the surge in refinance activity:  The Refinance Index increased 17.1 percent from the previous week and was the highest Refinance Index observed in the survey since the week ending May 15, 2009. ... The refinance share of mortgage activity increased to 81.4 percent of total applications from 78.1 percent the previous week, which is the highest refinance share observed since January 2009. The first graph shows the MBA's refinance index (monthly) and the the 30 year fixed rate mortgage interest rate and one year ARM rate, from the Freddie Mac Primary Mortgage Market Survey®.  As mortgage rates have fallen, there has been a surge in refinance activity. But it is still well below the activity during the 2009 refinance boom, or in 2002/2003. It takes lower and lower rates to get people to refi - and many borrowers have insufficient equity (or negative equity) or inadequate income to refi.

Refi’s rock but expansion of activity not happening - Historically low interest rates finally moved the needle for refinancings as the MBA said they rose 17.1% for the week to the highest since May ‘09. Purchases however can’t get out of their own way as they fell 3.4% and are just 3.5% off the lowest level since 1997. This economic response to low rates is indicative of our whole economy that has the Fed now pushing on a string. In times of deleveraging, lower rates only encourage refi’s, not new economic activity whether the purchase of a home or the expansion of a business. ABC confidence rose 2 pts to -45 and is now 1 pt above its 1 yr avg. Portugal sold 3 mo and 12 mo bills and raised more than expected. Fitch did a stress test on the important European insurers and said they passed “based on the hypothetical scenario of a default on Greek government debt” and its “knock on effects on the sovereign debt of Portugal, Ireland, Spain and Italy.”

Your House Might Be Underwater for Years - Rebounds in housing have typically been driven by declines in mortgage rates. Not this time. Rates on a 30-year mortgage have dropped to about 4.5 percent -- the lowest since the early 1950s -- with little effect. Tax credits and other programs to encourage buyers have provided only a modest, temporary boost.  Other traditional measures of value, such as the size of monthly mortgage payments relative to income, show that housing is a bargain now.  None of that matters because houses are bought with an eye toward the future and in anticipation of an eventual sale.  We saw what happened in the boom in the middle of the decade -- even though prices soared, demand increased as consumers thought about how much money they would have made had they bought sooner. Now we’re seeing the opposite mindset. If a potential buyer believes that housing prices may fall more, then mortgage rates of 4.5 percent won’t attract home buyers. Rates could even drop to zero and it might not outweigh consumers’ negative perceptions.

Huge miss coming on Existing Home Sales? - MarketWatch is reporting the consensus for July existing home sales is 4.85 million SAAR (seasonally adjusted annual rate).  And from Dow Jones: Week Ahead  "July existing-home sales ... likely declined 4.3% from June" June sales were reported as 5.37 million, so a decline of 4.3% would be 5.14 million SAAR. Note: July existing home sales will be reported next Tuesday. Housing economist Tom Lawler's preliminary forecast was 3.95 million SAAR (based on a bottom up analysis). Many of the regional reports showed sales declines of 20% or more from July 2009 when the NAR reported sales of 5.14 million SAAR. A 20% decline from July 2009 would be in the low 4 millions ... Maybe the MarketWatch and Dow Jones consensus numbers are incorrect (other numbers will be released later today), or there is probably going to be a big miss next Tuesday. Take the WAY under!

Senate bill would make energy-efficient mortgages mainstream…Let's talk home economics: The average American household spends $2,340 to heat, cool, and electrify its home for a year, according to the Department of Energy.That's more than average annual spending on property taxes ($1,900) and homeowner's insurance ($800). Over the course of a 30-year mortgage, energy costs amount to $70,000 -- a big chunk of change, especially when you consider that the median home price in the U.S. is $177,000.Actual costs will vary, of course, depending on regional climate, the size and efficiency of the home, and how many sweaters you're willing to wear in the winter. Homeowners can save as much as $400 a year if their homes are built to the International Energy Conservation Code [PDF], and more if they go beyond that standard.Smart homebuyers (and renters) will factor energy costs into decisions about where to live. You'd think mortgage lenders would consider energy costs too -- they need to know whether potential buyers can afford a particular home. But lenders largely ignore energy expenses, since they're not a part of standard mortgage underwriting criteria.

Homeowner confidence fell in second quarter: Zillow (Reuters) – Homeowners were less confident about the value of their homes in the second quarter, with one-third believing home prices had not yet reached a bottom, real estate website said on Thursday.Nevertheless, a significant number of homeowners said they planned to put their home up for sale in the next six months if they saw signs of a real estate market turnaround.Homeowners were more pessimistic about the short-term future of home values in their local market than they had been in the previous three quarters, according to the Zillow Second Quarter Homeowner Confidence Survey.Indeed, 33 percent believed home values in their local housing market had not yet reached a bottom, while 38 percent believed they had already reached a bottom.

Number of the Week: Insults and Injury for Renters - 12%: The increase in the cost of renting one’s home since April 2006 when home prices peaked. One of the few bright spots in times of crisis is the way certain things become cheaper. With 30-year fixed mortgage rates and house prices down sharply from their pre-crisis peaks, for example, buying a home has become feasible for millions of Americans.For renters, though, the situation has only gotten worse. Housing busts have a paradoxical effect on rents. When falling house prices make ownership less attractive, more people tend to enter the rental market, helping rents along on their perennial upward march. This time around, the droves of people walking away from their mortgages have provided an added supply of renters.

What happens if more people want to rent? - This morning I was on the Brian Lehrer show talking about the Obama Administration's conference on the future of housing finance. You can listen to the interview here. One thing that came up during the interview was this concept of renting. Strange as it may seem, renting is a key part of the housing market. Indeed, tens of millions of American families rent. And as the homeownership rate drops each quarter, chatter is growing louder about how renting might be a decent option—not just a fall-back plan—for plenty of people. (This vision of a renting renaissance often goes hand-in-hand with an important demographic shift; aging Baby Boomers are less likely to want to live in 4-bedroom houses with quarter-acre lawns to mow.)

One-Fourth Of Renters Will Never Buy A Home: Survey - More than a quarter of Americans currently renting houses and apartments have no intention to ever buy a home, according to a survey published on Wednesday. The survey, by real estate search site, found 27 percent of renters do not plan to ever buy a home. Although 72 percent still expect to buy eventually, that proportion is down from 77 percent six months ago. Of those who do hope to become homeowners, two-thirds say they will wait two years or more. This reluctance to buy could drag out the real estate market's slump longer than many have predicted, Trulia said. "Renters converting into buyers are crucial to turning around the housing slump, but the current economic crisis is causing people to become very hesitant to get off the fence and buy a home,"

What is a renter?  -Richard Florida, among others, has suggested that the United States overindulges in homeownership, and that rental housing gives flexibility to people such that they become more creative. I have no quarrel with the idea that homeownership has been oversold.  But a lot of the story about why renting is great involves New York City. There can be no doubt that New York is an innovative and creative place, and that it has a lot of renters by national standards. But about 2/3rds of rental units in New York City are rent controlled or rent stabilized. If one occupies a rent controlled or stabilized apartment, he gets a lot of the benefits of owner-occupancy: reduced housing cost risks, and security of tenure. Renters in New York share far more of the bundle of rights than renters in most parts of the country; they are almost like owners expect for the possibility of capital appreciation. San Francisco, San Jose and Los Angeles also have some form of rent control. The point is that the owner-renter dichotomy is really a false one, as there are shades of tenure in between. These shades might matter a lot.

Unemployment drives more home sellers to cut price (Reuters) - Owners cut prices on one-quarter of U.S. homes listed for sale in July, a fourth straight monthly rise, as job market fallout trumped record low mortgage rates, real estate website said on Wednesday. Sellers in the 50 largest cities slashed $30.1 billion from prices on houses on the market as of August 1, up from $27.3 billion in the prior month, San Francisco-based Trulia said in a report provided to Reuters before official release.Unemployment near 10 percent, wage cuts, restrictive lending practices and home values that have fallen below their mortgage balances have left many potential buyers unable to take advantage of low rates."With one out of every four homes experiencing at least one price reduction, sellers are feeling no relief this summer in a market climate of fewer qualified buyers and widespread uncertainty about the job market,"

Housing Starts and the Unemployment Rate - This graph shows single family housing starts and the unemployment rate through July (inverted). You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Usually housing starts and residential construction employment lead the economy out of a recession, but not this time because of the huge overhang of existing housing units. After rebounding a little - mostly because of the home buyers tax credit - housing starts (blue) have moved mostly sideways (and down some recently). This is what I expected when I first posted the above graph a year ago.

Mass Delusion - American Style - The American public thinks they are rugged individualists, who come to conclusions based upon sound reason and a rational thought process. The truth is that the vast majority of Americans act like a herd of cattle or a horde of lemmings. Throughout history there have been many instances of mass delusion. They include the South Sea Company bubble, Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials. It appears that mass delusion has replaced baseball as the national past-time in America. In the space of the last 15 years the American public have fallen for the three whopper delusions:

  1. Buy stocks for the long run
  2. Homes are always a great investment
  3. Globalization will benefit all Americans

What Housing Bubble? - Broadly speaking, there are two mechanisms by which it can adjust. The first is that incomes can fall, held down by weak demand from firms choosing not to invest or households choosing not to spend. (This leaves less income available for saving and thus forces total saving to fall.) The second is that asset prices can rise, bid up by savers looking for a place to put their savings. (This increases the incentive to invest and decreases the incentive to save.) Over the past decade, the world has consistently faced an environment in which the propensity to save exceeded the propensity to invest, and various nations, at various times, have adjusted by one mechanism or the other. It should be obvious – and used to be obvious, at least to mainstream economists – that the latter mechanism is preferable. During the recent US housing boom, I was of the school that believed rising house prices were an example of that preferred mechanism taking effect. At the time, I had plenty of company. Today – now that we have transitioned to the less preferred mechanism for equating saving and investment – my cohorts all appear to have deserted.

18 Signs That America Is Rotting Right In Front Of Our Eyes - Sometimes it isn't necessary to quote facts and figures about government debt, unemployment and the trade deficit in order to convey how badly America is decaying.  The truth is that millions of Americans can watch America rotting right in front of their eyes by stepping out on their front porches.  Record numbers of homes have been foreclosed on and in some of the most run down cities as many as a third of all houses have been abandoned.  Unemployment remains at depressingly high levels and the number of Americans on food stamps continues to set new records month after month.  Due to severe budget cuts, class sizes are exploding and school programs are being eliminated.  In some areas of the U.S. schools are even going to four day weeks.  With little to no funding available, bridges are crumbling and street lights are being turned off in many communities.  In some areas, asphalt roads are actually being ground up and turned back into gravel roads because they are less expensive to maintain.  There aren't even as many police available to patrol America's decaying cities because budget problems have forced local communities across the U.S. to lay off tens of thousands of officers.

Philly Fed Index shows contraction in August, first time since July 2009 -  Here is the Philadelphia Fed Index: Business Outlook Survey The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 5.1 in July to ‐7.7 in August. The index turned negative, marking a period of declining monthly activity for the first time since July 2009 (see Chart). Indexes for new orders and shipments also suggest a slowing this month; the new orders index fell slightly, to ‐7.1, while the shipments index turned negative, declining to ‐4.5. The percentage of firms reporting a decline in employment (23 percent) was higher than the percentage (20 percent) reporting an increase. More concerning was the significant drop in the average employee workweek index from 1.7 in July to ‐17.1 in August.This graph shows the Philly index for the last 40 years. This index turned down sharply in June and July and was negative in August for the first time since July 2009.

Philly Fed double-dip disappoints - The Federal Reserve Bank of Philadelphia’s index of business conditions registered a big unexpected fall into negative territory, on Thursday. Here’s the breakdown of the survey results via Bloomberg: As can be seen, the index fell to -7 in August, whilst analyst consensus had been looking for a figure of +7.0. That data adds to an already bleak set of US jobless figures out on Thursday, which showed new claims for US umemployment benefits expectedly climbed to a nine-month high last week of 500,000. Analysts had been expecting the figures to slip to 476,000.

Troubling Fed Statistics on Industrial Production and Capacity Utilization - The latest readings on statistics published this week by the Federal Reserve suggest that the outlook for the U.S. economy remains bright. However, if you compare them side-by-side, the two series paint a picture that is seemingly at odds with conventional interpretations.  More specifically, the year-on-year trend of industrial production -- a gauge of the nation's output of computers, appliances, automobiles, and industrial machinery -- has rebounded from its 2009 lows at a far faster pace than capacity utilization, which measures how much of America's productive capacity is being put to good use. Is this significant? Well, the last two times we saw disparities as large as we have now was in the spring of 1976 and in late-1983. As the following chart suggests, both occasions marked an interim peak in the year-on-year trend of real (inflation-adjusted) gross domestic product

Is U.S. Manufacturing Disappearing? - Chicago Fed - When discussing the health of the manufacturing sector, one major issue is whether we should assess the number of people employed in the sector or focus on the amount of output created in manufacturing. Interestingly, each leads to the opposite conclusion about the strength of manufacturing in the United States.[1]Manufacturing employment as a share of total employment in the United States has been declining over the past 60 years. In 1950, nearly 31% of nonfarm workers were employed in manufacturing. Since then, the share has been dropping three or four percentage points per decade, falling to 28.4% in 1960, 25.1% in 1970, 20.7% in 1980, 16.2% in 1990, 13.1% in 2000, and 9.1% in 2009. Even with this downward trend in manufacturing’s share of jobs, employment in manufacturing has on average been fairly stable over the past 60 years, averaging a decline of –0.1% per year. In contrast, the growth of nonfarm employment averaged 1.9% per year, and this led to the reduction in manufacturing’s share of jobs.[2]  By 2006, the U.S. economy employed about as many workers in manufacturing as in 1950, just over 14 million. And so, looking at manufacturing employment alone leads one to believe that the sector is in decline or at best stagnant.

Restaurants in "survival mode" - From the LA Times: U.S. restaurants starved for business Overall, customers spent about 7% less in 2009 than the previous year, and business is still slow, said Darren Tristano, analyst with the food industry research firm Technomic Inc. The company expects consumers to spend just 0.5 percentage point more on restaurant food this year than last year. ..."We're in survival mode — have been for a while,"  "This is the weakest that the restaurant business has been," said [Bonnie Riggs, NPD Group's restaurant industry analyst]. Year over year, the number of patrons coming to restaurants has declined for each of the last seven quarters — the most prolonged drop in the 22 years that the company has been keeping track, she said. Nationwide, the number of restaurants dropped in 2010 for the first time in more than a decade, according to NPD, falling 5,202 to 579,416. Restaurants are a discretionary expense and are frequently first in and last out of a recession. The second half slowdown is already hitting restaurants again according to the National Restaurant Association's Restaurant Performance Index that showed contraction in June.

Is this a small business recession? - First-time claims for unemployment insurance benefits headed higher last week—not a good sign for the strength of the economic recovery. Or should I say "recovery"? The Department of Labor numbers, out this morning, mark the fourth increase in the past five weeks and the highest rate of claims in nine months. Another set of government data which came out yesterday sheds some interesting light on where those losses may be coming from. In a phrase: small businesses. That's not typically what you'd expect in a recovery. Small businesses are often given the credit for getting people back to work the fastest. But according to the Bureau of Labor Statistics's Business Employment Dynamics report for the fourth quarter of 2009, 61.8% of all net job losses came from firms with one to 49 employees. Considering that those firms only employ 29% of workers, that's pretty remarkable. A headline in today's WSJ reads "Small Firms Lagging, With Bulk of Job Losses."

Truth and rhetoric in job creation - The most important and most difficult task facing the Obama administration is making a dent in the unemployment situation. There aren’t many things that the government can do to try to boost the number of jobs in the U.S., but at the top of the list has to be attempts to boost lending to small and medium-sized businesses.  This morning, a Treasury announcement showed one way that this can and should be done. Treasury’s CDFI Fund has awarded just over $100 million to 180 local financial institutions, including $750,000 to my own credit union. That kind of money, leveraged and lent out to small businesses, can do more for creating jobs than just about any other government program.The CDFI initiative is small beer, however, compared to the Small Business Jobs and Credit Act, which would create a $30 billion fund to be used to encourage small banks to lend to small businesses. Combined with standard bank leverage, that could mean $300 billion in new, job-creating loans. Where does the $30 billion come from? A significant chunk of it would come from five big oil companies:

N.Y. Fed: Households Continue To Reduce Debt - Households continue to reduce their debt levels into the start of the summer, the Federal Reserve Bank of New York said Tuesday in a new report that offers a broad overview of the challenging financial conditions of the average American. The bank reported that by the end of June, “households steadily reduced aggregate consumer indebtedness” for seven straight quarters. As of the end of the second quarter, total consumer debt was $11.7 trillion, down 1.5% from the prior quarter, and 6.5% from its peak in the third quarter of 2008. Total household mortgage and housing finance related debt was down 6.4% from its peak in the third quarter of 2008. When mortgage and home equity related factors were taken out of equation, indebtedness fell by 1.5% from the prior quarter and was 8.4% below the peak seen in the fourth quarter of 2008

NY Fed: Total Household Debt down 6.4% from the peak in 2008 - From the NY Fed: New York Fed Releases New Report, Web Page on Household Credit Conditions in U.S., Select States Showing Decline in Consumer Indebtedness The report shows that households steadily reduced aggregate consumer indebtedness over the past seven quarters. In the second quarter of 2010, they owed 6.4 percent less than they did in 2008, the peak year for indebtedness.  Additionally, for the first time since early 2006, the share of total household debt in some stage of delinquency declined, from 11.9 percent to 11.2 percent. However, the number of people with a new bankruptcy noted on their credit reports rose 34 percent during the second quarter, considerably higher than the 20 percent increase typical of the second quarter in recent years.  Here is the report: Quarterly Report on Household Debt and Credit

Debt: Red America | The Economist - LET'S begin the day with an image. Paul Kedrosky passes along this picture, from the New York Fed: I suppose one key point to make is that current debt levels are similar in size to those in late 2006 and early 2007, but the asset values supporting those levels in 2006 and 2007 were much higher. Current debt burdens feel heavier than they did previously, and that's going to continue to impact household consumption and investment.

Tracking Progress on Deleveraging - The Federal Reserve Bank of New York has started a great new quarterly report with a ton of information on household credit status in the U.S.  This will help us to assess the process of deleveraging as it continues.  The data is based on a random sample of credit reports from Equifax, one of the three big credit reporting agencies. The most interesting graph is this one for overall household debt and it's composition: The only problem with this is that these are nominal figures, and so tend to overstate the extent of the debt run-up, and understate the progress in paying it down (since even if nominal debt stays flat, inflation will slowly erode it in real terms).  One possibility would be to inflation adjust the data, but instead what I decided to do was compute the ratio to disposable personal income (ie after taxes) from the BEA as this  is what we really care about - how big is the debt relative to the income potentially available to service it.

Fidelity Sees Record Number Raid Their 401(k)s - In the wake of news about a spike in new applications for unemployment benefits comes another potentially troubling sign: A record number of workers made hardship withdrawals from their retirement accounts in the second quarter. What's more, the number of workers borrowing from their accounts reached a 10-year high, according to a report issued Friday by Fidelity Investments. The trends reflect the financial stress many workers find themselves in as the economy struggles to find sure footing, said Beth McHugh, Fidelity's vice president of marketing insight. High unemployment and companies cutting back on overtime or overall hours have reduced the take-home pay of many workers. "People tend to be taking home less," she said. "As a result the percentage of individuals initiating hardship distributions is one of the things we're concerned about."

401(k) plans aren’t just for retirement - One of the reasons that banks made so much money from overdraft fees is that people are naturally optimistic: they never think, when they open a checking account, that they’re going to go overdrawn very often. So overdraft fees aren’t a big deal to them at the time.Much the same is true of retirement accounts like 401(k) plans. People load them up with stock-market investments, because they’re not going to touch the money until they retire, which is a long way off, and stocks tend to perform well over the long run. Financial advisers, similarly, tend to recommend stocks for the long run — and there’s nothing more long-run, for most people, than their 401(k) account. Except in the real world it doesn’t work like that: Fidelity has just announced that by the end of the second quarter, 22% of its 401(k) participants had borrowed against their accounts. That’s about 2.5 million Americans right there:

From Luxury to Necessity, and Back Again - For years Americans had been labeling more and more appliances and other purchases as “necessities,” rather than “luxuries.” Microwaves, computers and other wonders of modern civilization, upon being adopted in greater numbers, became more likely to be considered need-to-haves instead of nice-to-haves, according to surveys conducted by the Pew Research Center. But now, whether because the recent downturn has reset priorities or because new technologies have replaced the old ones, many of these appliances are reverting to the “luxury” category. The chart below shows what percent of surveyed Americans said each consumer item was a necessity: As you can see, for these items the necessity rating peaked about four years ago, and has fallen sharply since then. For example, in 2006, 64 percent of Americans said television sets were a necessity; last year, 52 percent agreed; this year, just 42 percent agreed.

Checking In on Consumer Credit Defaults - The Federal Reserve Bank of New York released its quarterly report on household debt and credit on Tuesday. It showed that for the first time since early 2006, total household delinquency rates declined last quarter. As of June 30, “only” 11.4 percent of outstanding household debt was in a stage of delinquency, compared with 11.9 percent on March 31 and 11.2 percent in June of last year.Below are a few visual highlights from the report. First is a chart showing that total consumer debt has been declining for seven quarters. It’s not clear how much further this aggregate debt level will fall, since economists do not have a good sense of  how much household debt constitutes a “healthy” level of debt. After all, household debt had been growing steadily long before the housing bubble.

Total Credit Market Debt as a Percentage of GDP

The June Trade Release: A Clash of Narratives - The recent trade release for June sparked some consternation, as it indicated 2009Q2 growth, conditional on data already released, would be lower. But there was also some unhappiness as it was taken by some to mark the return of the spendthrift consumer.[0] Yet, everywhere I see discussion of how consumption is lackluster, because households are deleveraging and beset by uncertainty. [1] These two narratives clash. Which one is right?As Figure 1 shows, the 2009Q2 advance release and the monthly trade figures match up pretty well for goods ex.-oil. The match for total goods imports doesn't share the same contours, due in part coverage differences and perhaps due to seasonal adjustment issues. [2]

Household saving rates - Rebecca Wilder - Menzie Chinn at Econbrowser breaks down US import data by sector to argue the following (see entire article here): Consumption hardly seems resurgent, so attributing the increase in imports to consumers means that one is assuming a very high share of imports to incremental consumption -- something I'm not sure makes sense. So, I think the book is still open on whether the consumer is going to drive the US back into a rapidly expanding trade deficit. Another way to look at this is by comparing global household saving rates. Specifically, I look at the household saving rates across the US (the world's largest economy in 2007, as measured in PPP dollars - download the data at the IMF World Economic Outlook database), UK (6th largest economy), Canada (a small-open economy), and Germany (5th largest economy). The household saving ratio is calculated as gross household saving divided by personal disposable income, as reported in country National Accounts.

With consumers slow to spend, businesses are slow to hire - Corporate profits are soaring. Companies are sitting on billions of dollars of cash. And still, they've yet to amp up hiring or make major investments -- the missing ingredients for a strong economic recovery.  Many Democrats say the economy needs more stimulus. Business lobbyists and their Republican allies say it needs less regulation and lower taxes.  But here in the heartland of America, senior executives say neither side's assessment fits.  They blame their profound caution on their view that U.S. consumers are destined to disappoint for many years. As a result, they say, the economy is unlikely to see the kind of almost unbroken prosperity of the quarter-century that preceded the financial crisis.

Chart Book: The Legacy of the Great Recession — Center on Budget and Policy Priorities

Fire and Imagination - The country is a mess. The economy is horrendous, and millions of American families are running out of ammunition in their fight against destitution. Steadily increasing numbers of middle-class families, who never thought they’d be seeking charity, have been showing up at food pantries. The war in Afghanistan, with its dreadful human toll and debilitating drain on the nation’s financial resources, is proceeding as poorly as ever. As The Times reported on Friday, an ambitious operation that was supposed to showcase the progress of the Afghan Army turned into a tragic, humiliating debacle. And while schools are hemorrhaging resources because of budget meltdowns, and teachers are losing jobs, and libraries are finding it more and more difficult to remain open, American youngsters are falling further behind their peers in other developed countries in their graduation rates from colleges and universities.  This would be a good time for the Obama crowd to put aside its concern about the absence of giddiness among liberals and re-examine what it might do to improve what is fast becoming a depressing state of affairs.

“Missing workers” not counted - The July unemployment rate held steady at 9.5% in July, but the primary reason it did not rise is that the labor force shrank by 181,000 workers. This points to the backlog of “missing workers,” who dropped out of, or never entered the labor force during the downturn. In the last three months, the labor force has declined by 1.2 million workers, reversing much of the 1.7 million increase in the labor force in the first four months of the year. This clearly shows how the forward momentum from earlier this year has largely evaporated.  To get an idea of the size of the current backlog of missing workers, consider the following: The labor force should have increased by around 3.6 million workers between December 2007 and July 2010, given that the working-age population grew over this period. Instead the size of the labor force actually decreased by 309,000. This means that the pool of "missing workers” now numbers around 3.9 million, none of whom are reflected in the official unemployment count. As these workers enter or re-enter the labor force in search of work, this will contribute to keeping the unemployment rate high

Weekly initial unemployment claims at 500,000, highest since November 2009 - The DOL reports on weekly unemployment insurance claimsIn the week ending Aug. 14, the advance figure for seasonally adjusted initial claims was 500,000, an increase of 12,000 from the previous week's revised figure of 488,000. The 4-week moving average was 482,500, an increase of 8,000 from the previous week's revised average of 474,500.  ...The advance number for seasonally adjusted insured unemployment during the week ending Aug. 7 was 4,478,000, a decrease of 13,000 from the preceding week's revised level of 4,491,000.This 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. This is the highest level for initial claims - and also for the 4-week average - since November 2009.

The wrong direction - Last week, initial claims touched 500,000. As you can see, this isn't simply an outlying data point. Initial claims have been moving slowly upward for much of the year, with a substantial and almost uninterrupted climb in the last two months. This should be setting off alarm bells at the Federal Reserve. As should continued declines in expected inflation:  Long-term inflation expectations dipped again from July to August.  The Cleveland Fed notes that its latest estimate of 10-year expected inflation is 1.68 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. With the employment picture looking grim and inflation forecast to miss the Fed's target for years, it would seem to be an appropriate time to begin taking aggressive steps to reverse the economy's course.

Number of Women With More Than $50000 in Debt on the Rise - Forty-five percent of women seeking debt relief assistance have more than $50,000 in household debt, up from 33 percent of women just two years ago. Among the women seeking assistance in dealing with their debt, a growing number come from high income families or women who are widowed or divorced. Those are just some of the findings of a new study on women and debt conducted by CareOne Debt Relief Services, one of the nation's largest networks of debt relief providers. The study, "Women, Debt and the Recession: A Snapshot of the Changing Face of Debt in America from CareOne Debt Relief Services," compared the debt, income, age and marital status of 50,000 CareOne customers from two six-month windows – one from October 2007 through March 2008 and one from October 2009 through March 2010.

Why Girly Jobs Don't Pay Well - A really good kindergarten teacher is worth $320,000 annually, according to one recent estimate, well publicized in this newspaper. That would reflect the present value of the additional money that students in a really good kindergarten class can expect to earn over their careers. But average pay for kindergarten teachers is only about $50,380. And even at that level, kindergarten teachers, many employed by public school systems, fare relatively well compared with those in similar jobs. Preschool teachers, who are typically responsible for only slightly younger children and don’t belong to teachers’ unions, earn, on average, about $27,450. More than 97 percent of employees in kindergarten and preschool teaching are women. Though women now average higher levels of educational attainment than men, many continue to enter occupations dominated by women where wages are relatively low.

Another Threat to Economy: Boomers Cutting Back - America's baby boomers—those born between 1946 and 1964—face a problem that could weigh on the economy for years to come: The longer it takes for the economy to recover, the less money they'll have to spend in retirement. Policy makers have long worried that Americans aren't saving enough for old age. And lately, current and prospective retirees have been hit on many fronts at once: They have less money, they earn less on what they have, their houses aren't rising in value and the prospect of working longer to make up the shortfall has dimmed significantly in a lousy job market. Banks, home buyers and bond issuers are all benefiting as the U.S. Federal Reserve holds short-term interest rates near zero to support a recovery. But for many of the 36 million Americans who will turn 65 over the next decade—and even for the 45 million who have another decade to go— the resulting low bond yields, combined with a volatile stock market, are making a dire retirement picture look even worse.

The U.S.' Share of Record Global Youth Unemployment - On 12 August 2010, CNBC reported on data provided by the International Labor Organization that global youth unemployment had hit a record high.  We wondered how many of that increase of 7.8 million unemployed teens and young adults might be Americans. . We found that the population of Age 16-24 individuals in the U.S. from 2007 through 2009 has been nearly rock steady, increasing from an average of 37,409,000 in 2007 to 37,568,000 in 2009, an increase of 159,000 in all, the change representing the result of an annualized growth rate of 0.2%.  Next, we compared the average number of employed individuals in 2007 with the number of employed individuals in 2009. Looking again at the not-seasonally adjusted data, we found an average number of 19,875,000 employed teens and young adults in 2007, compared to an average of 17,601,000 employed young people in 2009, a decline of 2,274,000.

Labour markets: Summer spikes - The Economist - LAST week, Casey Mulligan noted that teenage employment continues to rise in the summer as students are let out of school, despite the recession—a sure sign, in his view, that labour supply is a crucial factor in determining the unemployment rate, even in recessions. High unemployment, he supposes, is due to the unwillingness of labourers to take jobs, which he attributes to various government policies that create bad incentives for unemployed workers. At the same time, he can't seem to absorb the fact that most of the economists supporting countercyclical, Keynesian policies agree that there is some role for supply issues in unemployment, just not a very big one relative to demand. As a response to Mr Mulligan, I noted that jobs teenages fill in the summer probably aren't like the jobs most adult workers occupy. They're explicitly short-term (indeed, of fixed duration), requiring few skills, with no opportunity for advancement or benefits. Just as important, they're largely seasonal positions targeted specifically at teenagers—camp counselors, lifeguards, landscaping workers, amusement park attendants, and so on. .

Teenage niche economics - LET me tell another story to help explain what I mean when I say that teenagers often consume and work in their own little niche economy, with its own seasonal demand and supply. Your humble blogger is a native of the mid-Atlantic region of America, where families often take trips to Kings Dominion, a large theme park just north of Richmond, Virginia. As a kid, I often had occasion to be jealous of cousins residing in Virginia, who went back to school in the fall much later than I did. Why? Because of the Kings Dominion rule. Here's the Roanoke Times to explain: The Kings Dominion law has nothing to do with royalty. Twenty-two years ago, state lawmakers swore fealty not to king or queen but to amusement parks and tourism. By legislative edict, classes must begin after Labor Day.

Teenagers Are More Employable…Or Something Like That?? -I read a lot of stories about people who claim to be unemployed because they can’t get a job that they are qualified for but also can’t downgrade because employers fear that they will leave at the first opportunity or be difficult or entitled or whatever. I’m not entirely sure how I feel about these claims, but I do know that I find the following graph from the New York Times Economix blog pretty interesting:If employers are concerned about people leaving after a short period of time, wouldn’t they be unwilling to hire the school-aged (age 16-19) kids? After all, they are the ultimate short-term employees. I do notice that the seasonal increase in this employment is smaller in worse years (2008-2010) than in previous more prosperous years, but it’s not like companies have stopped offering summer employment because they have plenty of adult workers to fill those spots. It’s hard to argue that these school-aged individuals getting this employment are more qualified than all of the unemployed adults, so there has to be some other explanation.

Thousands apply for jobs at California McDonalds restaurants - Michael Smith and Julius Giles couldn't be less alike. Smith is 63 with three children in college and a veteran of 25 years in the local television business; Giles is a 23-year-old Sacramento City College student and a single father of a 2-year-old daughter. But on Tuesday afternoon, the two shared a table at a Sacramento McDonald's: unemployed, applications in hand, waiting for their names to be called. Smith and Giles were among thousands who showed up at McDonald's outlets throughout Northern California and western Nevada – trying to land one of 1,000 jobs the company was filling during a hiring day event. More than 100 applicants came to the K Street site alone.

At Small Firms, Job Cuts Run Deep - The bulk of job losses at the end of last year were concentrated in the smallest firms, underscoring how small business is lagging in this recovery.  Businesses with fewer than 50 employees accounted for 61.8% of all job cuts in the private sector in the fourth quarter, the Labor Department reported Wednesday, while the same sized businesses created 54.1% of new jobs. Companies of this size employ roughly 29% of all workers. The numbers are a reverse from the same time a year ago, when small businesses made up a larger share of jobs that were added as opposed to lost. Small firms made up half of all jobs lost at the end of 2008 but also comprised 53.9% of all job gains.

How structural is unemployment? - THE Beveridge curve plots the relationship between job openings and unemployment. Typically, job openings lead to falling unemployment in a linear(ish) fashion, and when data departs from this typical relationship it may be because structural factors are generating higher than expected levels of joblessness. In the last quarter or so, it has come to look as though the relationship may be breaking down. Rising job openings have not generated the drop in unemployment one might expect. The Atlanta Fed's David Altig recently noted that this could indicate growing structural unemployment, and Minneapolis Fed president Narayana Kocherlakota went much further, declaring that most of existing unemployment is structural. But Mr Altig provides another view of the Beveridge curve that complicates the picture: You can see the second quarter datapoint that looks like a departure from the usual line. But what you also see is that this departure is quite common in the early stages of recovery from a deep recession.

Can Government Help with Structural Unemployment? -Minneapolis Fed President Narayana Kocherlakota and others have been arguing that there is little the Fed can do about the unemployment problem because it is mainly structural in nature. I don’t agree with that conclusion. I think there’s a large cyclical component no matter how the data are cut, but let’s focus on the structural component for a moment. The first point is that the rate at which the structural transformation will take place depends upon the rate of business investment. Long-term real interest rates — the focus of quantitative easing — can certainly be used to influence the rate of investment. Minimally, the Fed needs to what it can to prevent real rates from increasing due to falling inflationary expectations. The cheaper it is to make the transformation, something the Fed can influence, the faster it will happen. Second, while we wait for the structural transformation to take place, fiscal policy can be used to bridge the gap.

Just how curious is that Beveridge curve? - macroblog - A few weeks back I made note of the following:"Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade." The focal point of that comment was the so-called Beveridge curve described by the Cleveland Fed's Murat Tasci and John Lindner as follows: "The Beveridge curve is an empirical relationship between job openings (vacancies) and unemployment. It serves as a simple representation of how efficient labor markets are in terms of matching unemployed workers to available job openings in the aggregate economy."Since my last post, the U.S. Bureau of Labor Statistics (BLS) published the June edition of its Job Openings and Labor Turnover Survey (JOLTS). Just as not much changed in June relative to May, either with respect to job openings or the unemployment rate, not much changed with the Beveridge curve:

Why do I expect the unemployment rate to increase? - This morning, in the "Negative News Flow" post, I noted that the unemployment rate will probably start ticking up again soon. Here are a few reasons why I think the unemployment rate will increase (some overlap):

1) The main reason is the general slowing economy. There is a general relationship between GDP and the unemployment rate

2) With the end of the housing tax credit, I expect residential construction employment to decline further over the next few months.
3) The 4-week average for initial weekly unemployment claims has increased recently. This is the highest level since February.
4) Few teens joined the labor force this summer. Perversely this low level of teen participation appeared to push down the seasonally adjusted unemployment rate.
5) The Labor Force Participation Rate decreased from 65.0% in May to 64.6% in July. This was a key reason the unemployment rate decline to 9.5% in June from 9.7% in May.

The Four Horsemen of the Job-pocalypse - With 25 million Americans broadly unemployed, enough to fill the states of Pennsylvania, New Jersey and Maryland, our job crisis is multi-dimensional. First, as we know, very few employers are hiring. Even when they announce job openings, they're slow to fill them. Second, when employers set aside money for workers, they're increasingly adding contracters rather than full time staff. Third, a team of factors are depressing the wages and benefits of our workforce. Fourth, even if you're hired at a decent wage, the rampant rise of medical inflation will eat into your salary in the years to come. There you have it: the Hiring Crisis, the Part-Time Crisis, the Earnings Crisis and the Health Care Crisis. Together, I'll call them the four Horsemen of the Job-pocalypse.

Where the jobs will be - Which places will grow the most jobs and, conversely, which will see the biggest job losses? To get at this, my Martin Prosperity Institute (MPI) team applied the detailed employment projections of the BLS to U.S. metro regions. The BLS forecasts job trends across 22 major occupational groups which include more than 822 specific job categories for the decade 2008 through 2018. My MPI team used these BLS national forecasts to generate similar estimates for each of America’s 392 metro regions. Essentially, we used the BLS overall estimations to predict job growth in each region based on its current mix of jobs.Over the next couple of weeks, I’ll be posting the results of our analysis here. I’ll get us started today with a series of maps and analyses of the metros that stand to gain the most jobs overall.

More Americans 'Completely Satisfied' With Their Pay - Nearly a third of workers say they are “completely satisfied” with the amount of money they earn, according to a recent Gallup poll. That is as high a level of pay satisfaction as Gallup has recorded in  two decades.  Additionally, fewer than half of American workers today (43 percent) say they think they are “underpaid” for the work they do, down from 51 percent in 2008. A slight majority — 53 percent — say they are paid the right amount, and the remaining 4 percent say they are probably “overpaid.”  Not coincidentally, these contented attitudes about bird-in-the-hand jobs coincide with continued fears about job loss and difficulty in finding alternative employment.

Business Bankruptcies Fall While Consumer Filings Soar -The stampede of businesses filing for bankruptcy slowed significantly in the first half of the year, but consumers continued to seek protection from their creditors at a record pace.The number of companies filing for Chapter 11 reorganizations fell 17% during the first six months of this year, compared to first half of 2009, according to data released Tuesday by the Administrative Office of the U.S. Courts. The number of businesses filing to liquidate in Chapter 7 was nearly flat. The apparent stabilization among businesses stands in stark contrast to the 781,150 consumers who sought bankruptcy protection through June 30. That number exceeds the amount of consumer filings for the same period in 2009 by 15% and puts total filings on pace to reach their highest annual level since bankruptcy laws changed in 2005.

Bankruptcies jump across nation, region - Bankruptcy lawyer Stefan Coleman said people have tapped out their savings, stocks and 401(k) plans for funds over the past two years. "People have nothing left," he said.Rising foreclosures -- especially in Maryland -- are another key factor, bankruptcy lawyer Harris Ammerman said."There are more foreclosures and more auctions, which translates into people seeking relief in the bankruptcy law," Ammerman said." "And rising bankruptcy filings aren't likely to end anytime soon.

Bankruptcy filings soar in US and in California's Central Valley – Bankruptcy courts in the Central Valley and beyond are busier than they've been in years, as distressed families and businesses increasingly seek respite from the financial storm. Nationwide, bankruptcy filings rose 20 percent in the 12-month period ending June 30, according to records released Tuesday. The 1.57 million cases filed in federal courts were more than at any time since Congress tightened bankruptcy rules in 2005. "We've seen an increase in bankruptcy filings across the board," Fresno attorney Benny Barco said Tuesday. "A lot of it has to do with loss of employment." In April, May and June, some 422,061 bankruptcy filings were entered nationwide. This exceeded the number in nearly every quarter going back to 1995, records compiled by the Administrative Office of the U.S. Courts show

Bankruptcy and the Crisis: Why so Few? - Those who follow Bob's postings on bankruptcy filing numbers will have seen that U.S. consumer bankruptcy filings have been plodding upwards steadily, but only to roughly where they were before the BAPCPA bubble back in 2005.  One of the inscrutable mysteries of the financial crisis of 2007-??, which is after all a housing and consumer debt crisis, has been how few bankruptcies have been filed.  Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect. American households tripled their mortgage debt from $3.5 trillion at the end of 1996 to $10.5 trillion at the end of 2007.  Median income, meanwhile, rose by about 40%.  While credit card and other unsecured debt grew less dramatically, that is only because homeowners used mortgage refinancing to soak up quite a bit of credit card debt.  All this debt growth came to a screeching halt in early 2008, after subprime mortgage lenders were wiped out by early payment defaults, and the bond market, spooked by losses at Bear Sterns and elsewhere, suddenly lost its appetite for mortgage-backed securities

Bankruptcies: Going for broke | The Economist - BANKRUPTCY filings rose 20% in the year to June 30th compared with the previous 12-month period, according to statistics released on August 17th by the Administrative Office of the US Courts. This takes quarterly filings to their highest point since tougher bankruptcy laws were introduced at the end of 2005. That change brought a spike of bankruptcies, as companies and individuals rushed to declare themselves broke under the more lenient old regime. The data suggest that an older trend is reasserting itself. This is could be more bad news for America—or it could just mean that creative destruction is alive and well.

The Erosion of America's Middle Class  - der Spiegel - But sometime at the beginning of last year, people in Ventura realized that the cars parked in front of their driveways at night weren't old wrecks, but well-tended station wagons and hatchbacks. And the people sleeping in them weren't fruit pickers or the homeless, but their former neighbors. Finley also noticed a change. Suddenly twice as many people were taking advantage of his social service organization's free meals program, and some were even driving up in BMWs -- apparently reluctant to give up the expensive cars that reminded them of better times. Finley calls them "the new poor." "That is a different category of people that I think we're seeing," he says. "They are people who never in their wildest imaginations thought they would be homeless." They're people who had enough money -- a lot of money, in some cases -- until recently.

Death and Joblessness - The unemployed commit suicide at a rate two or three times the national average, researchers estimate. And in many cases, the longer the spell of unemployment, the higher the likelihood of suicide. On online fora such as Unemployed-Friends, the topic comes up often, users finding news reports or hearing tell of deaths in their community, and mourning them. There was the Staten Island suicide, where an emergency medical services employee who thought himself about to be fired posted his final words on Facebook: “I can’t go on anymore. I just hung myself.” In Anaheim, Calif., there was the man underwater on his mortgage and awash in credit card debt who shot his wife and and one of his children before himself. His two children survived. His wife did not. In Indiana, there was the middle-aged mother who sent her daughter out to buy soda and killed herself before her daughter came back. That happened the day after the repossession of her Chevy Malibu.

Suicides Among the Unemployed: A National Humiliation - If you haven't been following Annie Lowrey's stories about chronic joblessness at the Washington Independent, you should. Today she has a story titled, simply, "Death and Joblessness." It is about the apparent spike in suicides occurring in some places scarred by the economic crisis:  So how many suicides are associated with the recession? Nobody knows, not yet. The statistics lag about three years, so the official Center for Disease Control numbers still predate the financial crisis. Right now, therefore, the reports remain anecdotal. In rural Elkhart County, Ind., where the unemployment rate is 13.7 percent, there were nearly 40 percent more suicides in 2009 than in a normal year. In Macomb County, Mich., where the unemployment rate is also 13.7 percent, an average of 81 people per year committed suicide between 1979 and 2006. That climbed to 104 in 2008 and to more than 180 in 2009.

Getting To Full Employment - Given the problems the United States has been having and the unnecessary, misplaced, and wrong-headed, but very real angst of people about becoming insolvent if we continue to increase the size of the deficit, I find myself wondering why we have not turned to another time-tested and very effective New Deal solution to the problem of growing employment. That solution is the Fair Labor Standards Act. Why not amend the Act so that the standard for a full-time work week is lowered to 35 Hours, while the minimum wage is raised to $10.00 per hour? While this would not by itself create full employment, because many of the already employed, will increase the frequency with which they work at second jobs, I think it’s likely to decrease the unemployment rate by 5% or so. Along with a Federal Job Guarantee program, which would cost much less if it were implemented in the context of a decreased normal work week and an increase in the minimum wage, the employment problem would be gone within 6 months, and the increase in aggregate demand would end the recession.

Thousands of employers face tax tied to UI debt  — Michigan faces an estimated $140 million interest bill next year stemming from its federal unemployment borrowing, and that could mean additional taxes starting in January for thousands of employers.A state solvency tax, assessed on “negative balance” employers whose employee-benefit claims exceed the unemployment taxes they paid, is slated to return in January to repay interest on the $3.8 billion the state has borrowed from the U.S. Department of Labor to help pay benefits.The federal stimulus law included a temporary interest waiver for Michigan and other states borrowing money, but that reprieve ends at year's end and states must start paying interest in 2011 unless Congress extends the waiver. State and business officials hope that extension will occur.

State Unemployment Rates: Generally unchanged in July - This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Eleven states now have double digit unemployment rates. A number of other states are close.. Nevada set a new series high at 14.3% and now has the highest state unemployment rate. Michigan held the top spot for over 4 years until May. From the BLS: Regional and State Employment and Unemployment Summary

July Unemployment Rates, by State: Uneven Progress - The job market’s slow recovery was a bit uneven last month, the Labor Department’s report on state employment showed Friday. The unemployment rate declined in 18 states and Washington, D.C. compared to a month earlier. The jobless rate rose slightly in 14 states and was flat in 18 others. But the department was quick to note that in 46 states and Washington, D.C. the unemployment rate changes weren’t statistically significant. Just four states — Alabama, Nebraska, North Carolina and Tennessee — reported statistically significant changes. The jobless rate fell in all four states. The labor market improved in a larger swath of states compared to the same time a year ago. The unemployment rate fell in 27 states and Washington, D.C. But it rose in 20 states and stayed flat in three others. (interactive table)

State owes $2.2 billion to feds for unemployment benefits - Illinois has borrowed more than $2.2 billion from the federal government since July 2009 to pay unemployment benefits. The good news is the state has not had to borrow since April, and the loan is interest-free for now. “We really do access it as needed. It’s a day-to-day decision, five days a week,” Illinois Department of Employment Security spokesman Greg Rivara said Thursday. Illinois has plenty of borrowing company. According to the National Conference of State Legislatures, 31 states and the Virgin Islands had borrowed $38.7 billion to pay jobless claims as of this week. Several states exceeded Illinois borrowing, topped by California at nearly $7.5 billion.

Bailout Nation States & Municipalities - Bloomberg’s Chart of the Day shows the growth in federal payouts to state and local governments, also known as grants-in-aid, in the past half century:They have increased almost three times as fast as overall spending during the period, according to data compiled by the Commerce Department. Funds were provided at a $525 billion annual rate in the second quarter, a 33 percent jump from two years ago. Most of the money went to pay health-care expenses under the Medicaid insurance program and to cover educational costs. . . . The federal government provided $131.25 of state and local aid last quarter for every dollar spent 50 years ago. For total expenditures, the second-quarter figure was only $45.75, as the chart illustrates.”

22 cities in danger of a double-dip recession -- The chance of a national double-dip recession is hotly debated amid an increasing number of signs that the economic recovery is losing pace, but the risk is particularly troublesome on a local level.  A new report from Moody's singled out 22 cities that are at risk of slipping back into a recession in as early as three months. To come to this conclusion, the economists considered dwindling progress in employment, housing starts, home prices and industrial production. (See the map above for the full list.) The at-risk cities are spread across the country, though more than half of the cities are in the South, and five are concentrated in the Midwest.  "With chances of a national double-dip recession now estimated at about one in four, several metro areas will probably experience their own downturns in the first half of 2011,"

US cities face up to massive cuts - Local government in the US has traditionally been leaner than its British equivalent, with minimal public healthcare, patchy public transport and an ingrained culture of contracting out to private operators. The worst recession since the war has caused a triple-pronged slump: unemployment has eroded income tax takings, a dive in house prices has hurt property tax and weak consumer spending has reduced sales tax. Funding is stretched to breaking point. The National League of Cities estimates that US municipalities, which had revenue of $398bn last year, face a fiscal hole of between $56bn and $83bn over the two years to 2012. States, which fund broader services such as schools, prisons and highway patrols, are in a worse jam — they grappled with a $192bn shortfall in 2010, equivalent to 29% of their budgets, according to the Washington-based Centre on Budget and Policy Priorities.

Updated State and Local Sales Tax Data - The Tax Foundation has released two new reports: one listing updated combined state and average local-option sales tax rates, and one listing combined state, county and city sales tax rates for major metropolitan areas. The states with the highest combined state and state and average local-option sales tax rate are Tennessee (9.44%), California (9.08%), Arizona (9.01%), Louisiana (8.69%), Washington (8.61%), New York (8.52%), Oklahoma (8.33%), Illinois (8.22%), Arkansas (8.10%) and Alabama (8.03%). Delaware, Montana, New Hampshire and Oregon rank lowest with no state or local sales tax. Alaska comes next with a combined rate of 1.11%, followed by Hawaii (4.35%), Maine (5 percent), Virginia (5 percent), Wyoming (5.17%) and South Dakota (5.22%). Among major metropolitan areas (populations greater than 200,000), the cities with the highest combined state, county and city sales tax rates are Birmingham, AL (10%), Montgomery, AL (10%), Long Beach, CA (9.75%), Los Angeles, CA (9.75%), Oakland, CA (9.75%), Fremont, CA (9.75%), Chicago, IL (9.75%), Glendale, AZ (9.6%), Seattle, WA (9.5%) and San Francisco, CA (9.5%).

Funding Public Services is the Best Route to Prosperity - The New England states, can no longer afford to spend scarce resources on tax credits and other business giveaways. Instead, the region needs to focus its economic development efforts on rebuilding neglected infrastructure and improving education for people at all levels, from pre-school youngsters to older adult workers.  Those are the conclusions of a new study released today by economist Jeffrey Thompson of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. Thompson's paper is based on his extensive analysis of research on what works and doesn't work to create jobs and strengthen state and regional economies. It suggests a better approach to economic development, one that the New England states should pursue as they slowly dig out from the Great Recession that began in late 2007. According to Thompson, the New England states have for too long viewed funding for public services and economic development as competing interests. That's a false dichotomy, he says.

Budget shortfall could mean 7300 layoffs for Texas prisons - More than 7,300 criminal justice employees would have to be laid off if Texas' corrections agency is required to cut its spending by 15 percent, officials said Monday, warning that such a move could force the closure of several prisons and endanger public safety. The prediction came as state corrections officials made public their budget request for 2012-13. The proposal asks for $6 billion and holds the line on much new spending, but it includes more than $720 million to fund already-promised pay raises for correctional and parole officers, and escalating costs of medical care for prisoners, among other items

Texas Seeking 1,500 New Food Stamp Workers Texas Health and Human Services Commissioner Tom Suehs has asked for more than 1,500 new eligibility workers to deal with anticipated higher demand for food stamps. The Dallas Morning News reported Tuesday that the state currently has more than 8,300 eligibility workers, processing in excess of 2.6 million cases. Suehs says that by 2013 the program could have nearly 3.1 million cases. The 2009 Legislature passed a bill ordering the commission to identify how many workers it would need to eliminate processing delays and errors.

Miami Misused Fuel-Tax Revenue to Keep City Street Lights On, Auditor Says - Miami, facing a projected $96.5 million budget gap in the next fiscal year, misused fuel-tax revenue to keep the streetlights on, an auditor’s report said. The city transferred $10.4 million from an account reserved for road and bridge maintenance and public transportation to its general fund in fiscal 2008 and 2009, Victor Igwe, the city auditor, said today in a report. More than 90 percent of that was used to pay for keeping streetlights lit, which isn’t a permitted use of the money, the report said.

State budget cuts of $1.5B are looming, Norris warns - Tennessee's budget will likely need a cut close to $1.5 billion next year, according to a local lawmaker, though an administration official claims the figure is much lower. Senate Majority Leader Mark Norris, R-Collierville, said the budget is headed for a cliff in a Thursday speech to the Mid-South Medical Group Management Association. The problem, he said, is that one-time federal stimulus dollars won't be available next year. "Some people don't call it 'the cliff' anymore; they call it 'the abyss,'" Norris said. Nearly $2 billion in nonrecurring funds helped Tennessee's 2010-2011 budget recover from recession-related revenue shortfalls, Norris said. When legislators head back to Nashville in January, Norris said they'll have about $173 million in these nonrecurring funds

Minnesota and Wisconsin Share Services to Cut Budgets - Minnesota and Wisconsin have ripped several million in costs out of their budgets by sharing everything from amusement park inspectors to prisoners’ food, according to a report released by the states (and summarized here by Faced with about $5 billion in their cumulative budget gaps, Minnesota and Wisconsin have plenty of reason to share services.  Over the past few decades the Midwestern neighbors, both of which have frigid winters and an abundance of lakes, have attempted to share everything from road salt to Walleye for their lakes. But with the post-recession drops in tax receipts, they have more reason now with the post-recession drop in tax receipts.  While states expect taxes to rise this year, the recovery is expected to be slow. Also, in this election year, legislators and governors have been more eager to close budget gaps with cuts over taxes.

Pennsylvania voters back infrastructure tax hike: Governor -- Most Pennsylvania voters support a plan for higher taxes on oil companies and motor vehicle licenses to pay for repairs to roads, bridges and public transit, state Governor Ed Rendell said on Thursday. Rendell released the poll ahead of an August 23 meeting of lawmakers to discuss ways of filling a $472 million gap in transportation funding created by the federal government's rejection of a state plan to put tolls on Interstate 80. The poll found 74 percent of voters in favor of closing a tax loophole on oil company profits to raise about $500 million for infrastructure spending, the Democratic governor said.

State faces growing list of transit woes - Connecticut is facing a growing list of interrelated transportation problems, including aging infrastructure, worsening traffic buildup on state highways, and inadequate integration of existing facilities, the state's top transit planner said yesterday. For example, most of Connecticut's bridges were built in the 1950s and 1960s, and state leaders need to make an impassioned case to win funding to upgrade them to modern standards, Thomas Maziarz, the DOT's planning and policy chief, told members of the state's Transportation Strategy Board at a meeting at the Capitol in Hartford Thursday.  "So much of our infrastructure was built in the 1950s and 1960s as part of the interstate highway system and are kind of like a baby boom moving through the cycle," Maziarz said. "We built about 50 percent of our bridges then and now we are at the point where we have to deal with that, and it is driving most of our deficit."

Will Connecticut Last A Week? - According to its Comptroller, CT will be down to a week’s worth of cash unless it issues $520M in debt by Fall. If the planned offering of general bond obligations is delayed until 2011, “This coming fall the state would likely have just over a week’s worth of expenses in the bank — a level lower than advisable,” Napier wrote in an August 13 letter that is posted on her website.  ”Conceivably, the State may run out of funds for capital expenses that have already been authorized, allocated and incurred, such as school construction projects,” she added.  So before the end of the year, Connecticut expects to offer the $520 million of general obligations and as much as $600 million of special tax obligations, which would raise money for transportation. Both issues likely would be offered via negotiation.

With projected revenues dropping by as much as $1 billion, Oregon leaders debate what to do -- Oregon's state budget picture is bleaker than previously thought, with revenues down by as much as $1 billion since the Legislature wrote the current, $14 billion two-year spending plan. On Tuesday, Gov. Ted Kulongoski advised legislative leaders, school superintendents and agency directors that state economists expect tax collections to be down significantly more than the $577 million shortfall projected in May.Because the Oregon Constitution prevents state government from running a deficit, the governor ordered agencies to cut spending by 9 percent to fill the $577 million hole in the 2009-2011 budget. Now state economists believe revenues will shrivel by an additional $200 million to $500 million, prompting Kulongoski to send a flurry of letters and notices warning of more cuts to schools and state services.

Will California Repudiate Its Debt? - California’s government soon could be paying its bills with IOUs, Controller John Chang announced this week. And a new report found that Californians’ personal income dropped 2.5 percent in 2009, the first decline since World War II.  Meanwhile, the state budget still hasn’t been passed, despite a June 15 requirement in California Constitution. The governor and Legislature remain gridlocked. And the projected deficit for the state budget, for the year that began July 1 – assuming a budget gets passed eventually – is $19 billion.  The state’s debt currently stands at $68.8 billion, according to Treasurer Bill Lockyer’s Web site. The cost to service the debt is $5.5 billion in fiscal 2010–11, Last December, the possibility of default was brought up by Bill Watkins, an economist at California Lutheran University in Thousand Oaks. He wrote on his blog:  In my opinion, California is now more likely to default than it is to not default. It is not a certainty, but it is a possibility that is increasingly likely….

Schwarzenegger Orders Furloughs to Start After Top California Court Rules - California Governor Arnold Schwarzenegger said 150,000 government workers must begin taking time off without pay starting Aug. 20 following a court ruling lifting an injunction temporarily blocking the furloughs.  The California Supreme Court, saying it would review the governor’s plan, stayed decisions by lower courts that had halted the furloughs. Schwarzenegger directed state workers to take three unpaid days off each month to save cash. The high court set a Sept. 8 hearing on a challenge to the order.  California began its fiscal year on July 1 without a spending plan after Schwarzenegger and Democrats who lead the Legislature remained deadlocked over how to fill a $19.1 billion deficit. The Republican governor on July 28 issued an executive order for the monthly furloughs until a budget is passed.

Furloughs back on starting this Friday - The state Supreme Court allowed Gov. Arnold Schwarzenegger to resume unpaid furloughs of 144,000 state employees for three days a month, starting Friday, while it reviews his authority to do so.The justices on Wednesday suspended an Alameda County judge's order last week that blocked the furloughs. Superior Court Judge Steven Brick had said there were serious questions about the governor's power to cut employee workweeks on his own, and that the workers would suffer hardships from what amounts to a 15 percent pay cut.The furloughs can now resume until the court decides the legality of Schwarzenegger's orders last year that sidelined 200,000 state employees for three days a month through this June. That case, which involves similar issues, is scheduled to be argued in San Francisco on Sept. 8, with a ruling due within 90 days. If the court finds the furloughs illegal, the state could be ordered to repay the workers more than $1 billion.

California Budget Logjam May Prompt IOUs Starting Next Month, Chiang Says (Bloomberg) -- California may begin paying bills with IOUs in September for a second year in a row as a legislative logjam over erasing a $19 billion deficit prevents passage of a budget. State Controller John Chiang said the IOUs may be issued in two to four weeks if the budget impasse persists. The warrants will pay for everything from contracted services to health-care clinics so California can preserve funds to make payments on priority items such as bonds. “I will not let the state of California become insolvent,” Chiang said today in a speech at the Sacramento Press Club. He said he is closely monitoring the state’s cash flow, which may flip to negative by late October

Calif schools to get $1.2B from federal jobs bill - The state aid bill President Obama signed last week is expected to provide $1.2 billion to help California's cash-strapped schools, but uncertainty over the state budget could delay plans to rehire laid-off teachers or restore school days.  The emergency legislation provides $10 billion to states to save or create estimated 160,000 education jobs, including up to 16,500 in California. The Obama administration plans to begin distributing the education money to states later this month and wants school districts to use the money to retain and rehire teachers for the 2010-2011 academic year, which has already begun in some districts. But California lawmakers and Gov. Arnold Schwarzenegger still haven't reached agreement on a state budget for the fiscal year that began July 1, and there is no deal in sight, creating financial uncertainty among school districts.

Given Stimulus Funds to Rehire, Schools Wait and See - As schools handed out pink slips to teachers this spring, states made a beeline to Washington to plead for money for their ravaged education budgets. But now that the federal government has come through with $10 billion, some of the nation’s biggest school districts are balking at using their share of the money to hire teachers right away. With the economic outlook weakening, they argue that big deficits are looming for the next academic year and that they need to preserve the funds to prevent future layoffs. Los Angeles, for example, is projecting a $280 million budget shortfall next year that could threaten more jobs. “You’ve got this herculean task to deal with next year’s deficit,” said Lydia L. Ramos, a spokeswoman for the Los Angeles Unified School District, “So if there’s a way that you can lessen the blow for next year,” she said, “we feel like it would be responsible to try to do that.” 

Official: SC may not be eligible for stimulus cash --- Education officials were scrambling to see if the state still might be eligible for $143 million in federal money to stave off teacher layoffs. The money was coming from a jobs bill Congress approved last week, but a change in language may disqualify South Carolina because it is one of several states that didn't maintain a sufficient amount of funding for higher education, officials said. "Everybody's hoping that Congress can work this out," Rex said. "The simplest fix would be to change the bill's language back to the way it was in the federal stabilization legislation. That minor technical change could save more than 2,000 teachers' jobs in South Carolina and keep our class sizes from growing even further."

Study: Recasting Mich. schools would save millions - Michigan taxpayers could save $612 million a year by reshaping or consolidating public schools along county lines, according to a report published Sunday.  The annual savings after three years from trimming school management layers, recasting administration and erasing district boundaries would equal roughly 4 percent of total school budgets, says a study from Michigan State University researchers that was commissioned by Booth Newspapers.  The switch could be made without closing a single school or shifting students, according to the study. The savings would come from realigning services and administration at Michigan's 550 school districts largely along county boundaries.

LA Times Ranks Teachers - The LA Times investigative report on teacher quality is groundbreaking. The teacher's union has already started a boycott but, as the shock recedes, I think this is going to be emulated throughout the country. It should have been done decades ago.   The Times obtained seven years of math and English test scores from the Los Angeles Unified School District and used the information to estimate the effectiveness of L.A. teachers — something the district could do but has not. The Times used a statistical approach known as value-added analysis, which rates teachers based on their students' progress on standardized tests from year to year. Each student's performance is compared with his or her own in past years, which largely controls for outside influences often blamed for academic failure: poverty, prior learning and other factors.... In coming months, The Times will publish a series of articles and a database analyzing individual teachers' effectiveness in the nation's second-largest school district — the first time, experts say, such information has been made public anywhere in the country.

Ideas the near future will scoff at - The L.A. Times investigation into standardized test scores is amazing, and you should definitely be reading everything they have. The Times deserves lots of praise, especially for it’s humane but honest treatment of the teachers, for whom this must be a stressful and, for many, shameful ordeal. When you read these stories about teachers across the hall from one another, with the same population of students from the same socioeconomic background, yet performing so vastly different from each other I find it hard not to reflect on a dying notion in educational reform: that the problem is that teachers need is more resources and smaller classrooms. In the not-so-distant future it will unanimously be understood that this was a completely wrongheaded idea, and we will wonder how it could ever have been believed.

United States’ North-South Achievement Gap - An even more striking aspect of the map is the white space covering the American South. Although more lightly populated than the North, the American South had a substantial population throughout American history. In 1850, for example, the white population in the South was 5.6 million, compared to 8.5 million in the Northeast. In 1900, the comparison was 12.1 million to 20.6 million. By 1950, the gap had almost closed -- 36.9 million compared to 37.4 million. While it is understandable that the South did not have as many significant figures as the North, the magnitude of the difference goes far beyond population. The northeastern states of New England plus New York, Pennsylvania, and New Jersey had produced 184 significant figures by 1950, while the states that made up the Confederacy during the Civil War had produced 24, a ratio of more than 7:1.

Career-college head warns: Proposed rules could hobble healthcare sector - As Congress and the White House eye ways to rein in the exploding for-profit education business, some industry leaders are warning policymakers: Don't overstep.Recently proposed Department of Education (DOE) rules could hobble for-profit medical colleges at a time when those schools are feeding more and more of the nation's ever-rising demand for health professionals, cautioned Randy Proto, CEO of the American Institute The rules would slow the growth of career colleges, Proto said in a recent phone interview, and "thwart our ability to meet that need." Broadly, Proto wondered why the administration has singled out for-profit schools, while largely excluding traditional nonprofit institutions. That discrepancy, he warned, puts the for-profits at a distinct disadvantage — something that could harm the lower-income students who tend to enroll disproportionately in career schools.  The administration "is trying to define thresholds for certain types of programs and not others," he said. "The rules are being applied unequally.

Engineering Degrees Earn Top Pay Among College Class of 2010 - Engineering degrees account for four of the five most highly paid majors among the college Class of 2010, according to a new study conducted by the National Association of Colleges and Employers (NACE).  NACE’s Summer 2010 Salary Survey shows that petroleum engineers earned the highest starting salary offer—$74,799—followed by chemical engineers ($65,628). (See Figure 1.)  The only non-engineering degree to crack the top five was computer science, coming in at third with an average starting salary offer of $61,112.  Rounding out the top five were computer engineering ($59,917) and electrical/electronics engineering ($59,381).  Despite the high salaries, the current averages actually represent lost ground for all but chemical engineering graduates.

Gainful Employment? -Millions of college students are getting ready to go back to school. Millions more adult students attending year-round institutions are about to enter their next term. Among the common questions: Will this all be worth it? Having a clearer picture would sure be nice. The U.S. Department of Education is trying to give students that clearer picture and protection from making what it deems could be wrong choices. How? With its new regulation called "Gainful Employment."  It would apply a formula to programs in career-oriented majors, like healthcare, business and education to name a few, to decide which ones lead to 'Gainful Employment.' Those that do not would be eliminated. Students would also get concrete information about graduation rates, employment rates, potential salaries in their chosen field, loan debt info and the like before they choose their school. This information should help students analyze their risk/reward scenario.

The "Great Brain Race" in Global Higher Education - There are obvious reasons why higher education should be followed by IPE scholars. First, higher education is a significant industry in itself, especially if countries can attract many full fee-paying foreign students. UK universities, for instance, claims that higher education makes a £59 billion contribution to annual GDP. Second, it is commonly believed that cutting-edge education can increase national competitiveness. For instance, while the UK has slashed funding for its universities, which are almost entirely public unlike those in the US, cuts have not been levelled in science, technology, engineering, and mathematics. These STEM subjects are supposedly key to maintaining and building competitiveness compared to, say, political science and English majors whose worth is less obvious. Third, the shifting balance of who gets what, when, and where in terms of the best and brightest students and instructors also suggest how the balance of global economic activity is shifting.

Pension Cuts Won't Cover U.S. Taxpayers' $3 Trillion Bill, Professor Says - “Even if states uniformly eliminated generous early retirement deals and raised the retirement age to 74, the unfunded liability for promises already made would still be more than $1 trillion,” Joshua D. Rauh, associate professor of finance at Northwestern University’s Kellogg School of Management in Evanston, Illinois, said in a statement. The study of 116 U.S. retirement plans for teachers and government workers showed that as of June 30, 2009, they had $1.89 trillion in assets to cover $3.15 trillion in liabilities, Rauh said. The research used the typical fund’s assumption that investments will earn about 8 percent annually. That is a gap of $1.26 trillion -- more than double the shortfall of a year earlier, according to a study by the Pew Center on the States. The research used the typical fund’s assumption that investments will earn about 8 percent annually. That is a gap of $1.26 trillion -- more than double the shortfall of a year earlier, according to a study by the Pew Center on the States. Using more conservative investment assumptions, such as the rate of return on U.S. Treasury zero-coupon bonds on June 30, 2009, the liabilities are $5.28 trillion, Rauh calculated.

Can the Illinois pension catastrophe be stopped? - Public pension systems in Illinois have long served as vehicles for the government to borrow money out of the view of taxpayers. In place of even higher public employee salaries, politicians have made unfunded pension promises extending far beyond their own terms in office. These debts are coming due, placing a massive burden on state and local budgets.Government accounting standards have facilitated this surreptitious borrowing by grossly undervaluing the state's pension liabilities. A true financial valuation of unfunded pension liabilities reveals a debt of more than $200 billion for the state and local governments. That is around $42,000 per Illinois household and only counts benefits that public employees can claim based on today's pay and work history.

Schwarzenegger budget plan would borrow from CalPERS - Gov. Arnold Schwarzenegger has privately proposed borrowing $2 billion from the state's giant pension fund to help bridge California's $19 billion budget deficit. The plan would take the money as an advance against future savings from pension cuts, according to sources close to the negotiations who would not be identified because of the sensitive nature of the talks. The Republican governor is demanding that lawmakers reduce pension benefits for newly hired state workers back to pre-1999 levels as part of any budget agreement he signs. The Legislature and Gov. Gray Davis that year authorized larger pension benefits under the assumption that investments would perform better than they have.

California pension reform effort loses support - Legislation intended to curb pension spiking has become so watered down that it would now do little to prevent California public employees from boosting their end-of-career paychecks, critics say, prompting reform advocates and bill sponsor state Controller John Chiang to withdraw support. Assembly Bill 1987 had been touted as an end to the pension boosting that occurs when public employees add unused vacation, sick time and other benefits to their final year's compensation in order to drive up pensions. But as debate over public pensions flares in the wake of reports of inflated salaries and pensions in scandal-plagued Bell, reform advocates say that union-backed amendments to the bill have neutered its beneficial effects.

GM pension funding improves slightly - In a registration statement filed prior to GM’s intent to issue new shares later this year, GM disclosed that its pension plans were underfunded by $26.3 billion as of June 30. Its U.S. plans had $16.7 billion in unfunded liabilities, while non-U.S. plans were underfunded by $9.6 billion.  That’s a slight improvement from the end of last year, when the plans had $27.4 billion in unfunded liabilities—$17.1 billion for U.S. plans and $10.3 billion for non-U.S. plans. According to an April analysis by pension actuarial consultant Milliman Inc., GM’s $27.4 billion in unfunded pension liabilities at the end of 2009 was the largest deficit of the 100 biggest pension programs sponsored by publicly held companies, followed by Ford Motor Co. whose plans had about $12 billion in unfunded liabilities (BI, April 26).

Sixty Percent Of Baby Boomers Don't Have Enough For Retirement - Nearly three in five baby boomers face a financial bust in retirement if the current economic climate persists, according to a study cited in a recent article by the Wall Street Journal."Early" baby boomers, aged 56 to 62, have a 47 percent chance of not having enough money to pay basic retirement costs, according to the Employee Benefit Research Institute. "Late" boomers, aged 46 to 55, as well as workers currently aged 29 to 45, have about a 45 percent chance of running short, the study noted. A study released earlier this month by the Century Foundation showed that declining housing values, weak investment markets and scarce opportunities for employment will all force baby boomers to tighten their belts in their old age. "In 2008 alone, housing prices dropped an average of 33 percent, greatly depleting the wealth of the majority of baby boomers, who have relatively little savings beyond what they have invested in their home. Concurrently, the 40 percent drop in equity markets in 2008 had a devastating affect on higher net worth baby boomers, for whom stock ownership is the predominant form of wealth," the report noted.

Record Number Of Americans Using Retirement Funds As Source Of Immediate Cash - If our readers have been wondering where, in addition to the decision to never make mortgage payments again, do Americans get the money to buy a 2nd iPad (for that real 3D-effect of iTunes porn), preorder the iPhone 12.499, and bid up Amazon stock at 999x P/E, here is your answer: according to a new study by Fidelity, a record number of workers tapped their retirement funds and made hardship withdrawals from their accounts in the second quarter. In other words, just like the country they live in, Americans no longer give a rat's ass about the retirement years in a narrow sense, and the future in a broader one, and since real unemployment is about 20%, wage deflation is everywhere, even as Solitaire time is down to 0 (except for SEC employees), and nobody has any money left, the only logical recourse is to borrow from the self-funded pension fund. According to the Fidelity study, "Among the 11 million workers whose 401(k) plans are run by Fidelity, 11 percent took out a loan from their plan during the 12 months ended June 30, the company said, up from 9 percent at the same point a year earlier. By the end of the second quarter, plan participants with loans outstanding against their 401(k) accounts had reached 22 percent versus 20 percent a year earlier."

The retirement solution -  MEGAN MCARDLE has a great piece in this month’s Atlantic on the equity premium and retirement. The bottom line is we’re all long the stock market in our defined-benefit plans (even if you don’t have one you’re on the hook as a taxpayer for the state ones), private pension accounts, and even Social Security. If equities continue to perform the same way they have the last ten years, most of us will not have enough money to retire in comfort. Ms McArdle quotes me in concluding: I don’t know if it’s ever going to be realistic that everyone saves enough to spend the last third of their life on vacation. And she adds:That’s all right for economists and journalists, who can probably spend a good bit of their golden years at a desk, typing. But is that realistic, or appealing, for people with less cerebral jobs? Realistic or not, it may be the future for all of us. The fact is that economists and journalists often don’t retire because we enjoy our jobs and they’re not physically taxing, retirement is not something we tend to embrace. But most people are not so lucky. Even if they like their jobs it, the work may be too physically demanding to continue into old age.

Panel Weighs Cuts in Social Security - A White House-created commission is considering proposals to raise the retirement age and take other steps to shore up the finances of Social Security, prompting key players to prepare for a major battle over the program's future.  The panel is looking for a mix of ideas that could win support from both parties, including concessions from liberals who traditionally oppose benefit cuts and from Republicans who generally oppose higher taxes, according to one member of the commission and several people familiar with its deliberations. In addition to raising the retirement age, which is now set to reach age 67 in 2027, specific cuts under consideration include lowering benefits for wealthier retires and trimming annual cost-of-living increases, perhaps only for wealthier retirees, people familiar with the talks said.On the tax side, the leading idea is to increase the share of earned income that is subject to Social Security taxes, officials said. Under current law, income beyond $106,000 is exempt. Another idea is to increase the tax rate itself, said a Democrat on the commission.

The coming Democratic split on Social Security - On one side is the president, who said Tuesday in Ohio, “I have been adamant in saying that Social Security should not be privatized and it will not be privatized as long as I am president…The population is getting older, which means we’ve got more retirees per worker than we used to. We’re going to have to make some modest adjustments in order to strengthen it… And what we’ve done is we’ve created a fiscal commission of Democrats and Republicans to come up with what would be the best combination to stabilize Social Security not just for this generation, but the next generation. I’m absolutely convinced it can be done.” On the other side we have Paul Krugman, who wrote in The New York Times earlier this week, “The program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Krugman continues, “Social Security’s attackers claim that they’re concerned about the program’s financial future… Instead, it’s all about ideology and posturing… To a large extent they rely on bad-faith accounting.

DCCC’s Chair Van Hollen Won’t Commit to Protecting Social Security from Cuts/Higher Retirement Age - MSNBC host Cenk Uygur gave Chris Van Hollen, the Chair of the Democratic Congressional Campaign Committee (DCCC), multiple opportunities to state clearly that Democrats would oppose any cuts in Social Security, including in the form of delaying the retirement age. Van Hollen dodged and weaved, then cynically failed every test. Cenk correctly asked whether van Hollen would commit to oppose such cuts, even if the President’s so called deficit reduction ("let them eat cat food") commission recommended them. Van Hollen refused to commit, implying instead that if cutting Social Security were part of a larger package of reducing deficits, he and other Democrats might support the commission’s recommendations. . So if it wasn’t clear before, we can now place the Chairman of the DCCC, the body that allocates your campaign contributions to House Democrats, in the same column as John Boehner and Alan Simpson when it comes to [not] protecting Social Security.

A Tale Of Two Expenses - Krugman - Social Security outlays are projected to rise from 4.8 percent of GDP now to 6 percent of GDP in 2030. This is a huge crisis, requiring complete overhaul of the system. Defense spending rose from 3.8 percent of GDP in 2001 to 5.5 percent last year; you should also add a couple of tenths of a percentage point for non-defense security spending. This was no big deal — certainly not a reason to reconsider the tax cuts sold back in 2001 as easily affordable given large projected budget surpluses. Just saying.

More On Mortality - Krugman - I see from comments on this post that some readers are missing the point, in a couple of ways. First, my beef with the “life expectancy was only 68 years!” thing is that it’s meant to convey the impression that in the good old days the typical Social Security recipient only collected three years of benefits before keeling over; in fact, it was more like 14 years, and has now risen to 18.5. So yes, the length of time benefits are collected has risen, but not as dramatically as the usual suspects would have you believe. Second, child mortality really is irrelevant: someone who dies at age 7 neither pays into the system nor collects benefits. Third, yes, death in working years does have an effect: if a 57-year-old dies, he or she has spent 35 or so years paying in, but never collects benefits. The point, though, is that all of this is folded into the SSA projections, which show benefits rising from 4.8 percent of GDP now to an eventual plateau around 6 percent of GDP. That’s not peanuts, but it’s far from the apocalypse you keep hearing about.

Attacking Social Security, by Paul Krugman - Social Security turned 75 last week. But the program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.  Social Security’s attackers claim that they’re concerned about the program’s financial future. But their math doesn’t add up, and their hostility isn’t really about dollars and cents. Instead, it’s about ideology and posturing. And underneath it all is ignorance of or indifference to the realities of life for many Americans.  About that math: ...The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

The Deal - Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:....Krugman is our most valuable player by far — our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don’t know, and it isn’t his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we’ll offer our own ideas at how the “there-is-no-trust-fund nonsense” might best be approached, in a way average people can follow. Here's the simple version. In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.

Lessons from FDR: When the Right Cries Wolf, Bite Back - Alf Landon, the Kansas governor running as the Republican Party's 1936 presidential candidate, called it a "fraud on the working man" and "a cruel hoax." The New York Times, in an editorial, said it was "ill-considered" and "very questionable." Harper Sibley, the president of the U.S. Chamber of Commerce, warned that it would result in "more unemployment in the future, killing the goose that lays the golden eggs."  Congressman John Taber, a Republican from New York, proclaimed that "Never in the history of the world has any measure been brought here so insidiously designed as to prevent business recovery, to enslave workers and to prevent any possibility of the employers providing work for the people." His New York colleague, GOP Congressman Daniel Reed, warned that if it passed "the lash of the dictator will be felt." The American Medical Association denounced it as a "compulsory socialistic tax." Silas Strawn, former president of both the American Bar Association and the U.S. Chamber of Commerce, described it as "economically preposterous and legally indefensible." It was, he said, part of President Franklin D. Roosevelt's attempt to "Sovietize the country." What was this threat to American prosperity, freedom, and democracy they were all decrying? It was Social Security, which President Roosevelt signed into law on August 14, 1935

Destroying Social Security to 'Save' It: the Arithmetic of Benefit Cuts - House Minority Leader John Boehner said that while the law has served the needs of millions of Americans seniors, the Social Security and Medicare Trustees have "repeatedly warned Congress and the American people that reforms are necessary or future benefits will be threatened." He added that Republicans are "committed to protecting Social Security and preserving this invaluable program for current and future generations of retirees." Time to take a little closer looks at this framing in light of the numbers. Boehner here is defining 'crisis' explicitly in terms of "threatened" "future benefits" and then commits his party to "protecting" and "preserving" Social Security. But how does his party propose to do this? Well by cutting benefits, either through an increase in retirement age or via a switch to some form of price indexing. Kind of like saving your foot by cutting off your leg. We know what the Trustees say: 100% of scheduled benefits payable through 2037 and 78% after that declining to 75% at the end of the projection period.

Auerback: Which Party Poses the Real Risk to Social Security’s Future? - It is true that some Republicans have signed on to the idea of privatization, notably a proposal championed by Rep. Paul D. Ryan (Wis.), the senior Republican on the House Budget Committee. But only a handful of GOP lawmakers have actively embraced the measure and, in the aftermath of the worst shock to the financial system since the Great Depression, many Republican lawmakers would just as soon see the idea forgotten. So why don’t the Democrats leave well enough alone? Why bother even setting up “bipartisan commissions” to discuss the issue of Social Security? At the risk of sounding like one of those ungrateful members of the “Professional Left”, whom Robert Gibbs recently decried, I note that it was President Obama who most recently re-opened this issue by setting up a commission on reducing long term budget deficits and dealing with the long term issue of entitlements, including Social Security. In the Commission’s remit, nothing is off the table, including Social Security and Medicare.  And Obama wonders why voters remain unhappy?

Harder than it has to be - Years ago, Sam and Suzi American were doing well and decided to set aside a little money for when times were not so flush. Each year they invested in bonds issued by the US Treasury. Nothing safer – they are backed by the “full faith and credit” of the United States, just like every other US Treasury bill, note or bond. This year Sam and Sue had some extra expenses but were a little short – about $41 billion, so they redeemed some of their US bonds, leaving them with only $2.5 trillion in US bonds. A bit more than the Chinese, who only hold $900 billion or so. Sam and Sue expect – just like the Chinese and everyone else who holds US bonds - to cash out their bonds from time to time – as much as $100 billion a year by 2020, most likely - and anticipate running out of their current nest egg around 2040 after which they'll have to cut their spending by 22%. They will not, however, be bankrupt – no matter what some of the town gossips say. If Sam and Sue want to make sure they don't run short of funds 30 years from now, sometime between now and then – if they were the Social Security system (and they are) – they could increase the amount of earned income subject to FICA taxes from $106,000 to $300,000 and make the system sound for a long time, 50 to 70 years.

The Myth of the “Credibility of Markets” - A few days ago, I wrote a piece suggesting that President Obama’s attack on the proposed GOP threat to Social Security masked a more fundamental threat posed by members of his own party. Sadly, this analysis appears to be confirmed today in Mike Allen’s politico playbook: The virtue of action on Social Security is that it demonstrates the ability to begin to affect the long-run deficits. Social Security isn’t the biggest contributor to the problem - that’s still health-care costs. But it could help a little bit, buy time, and strengthens the odds of a political consensus behind other spending cuts or tax increases. Most importantly, it would establish more CREDIBILITY with the MARKETS. The mood of the world at the moment (slightly excessive, from the administration’s point of view) is that if you don’t do anything with spending cuts, it doesn’t get you credibility.” (My emphasis). This, in a word, encapsulates the Administration’s perverse Wall Street-centric thinking. Credibility with the American people takes a back seat to this amorphous concept called “the markets”, and the corresponding need to maintain “credibility”.

Social Security Will Be There (and Should Be There) for My Children by economistmom -  I was just on CNN’s “Your Money” show with host Ali Velshi this weekend, and among the topics was Social Security on its 75th anniversary, as they interviewed Michael Astrue, the Social Security commissioner.  Michael made all the right points about how “exhaustion” of the Social Security trust fund in 2037 does not mean Social Security goes away, but it does mean we have to consider ways to bring the program into better balance–the hard choices between benefit cuts, tax increases, or some combination of both.   But I wish he had not emphasized the program being able to cover 78 percent of promised benefits even after trust fund exhaustion, because it puts still too much emphasis on the trust fund balance as determining how sustainable the program is.  The point I tried to make in my remarks on the CNN program was that I am optimistic that Social Security will be there after 2037 and should be there to serve a social insurance function, that Social Security is not “broken” but simply underfunded which just means it will start costing us money on net and that we could easily choose to continue to fund 100 percent of promised benefits–or any other level and distribution of benefits–with the policy choices we as a society are willing to make.

Medicare trustees' upbeat outlook relies on big pay cuts for doctors - The Obama administration promoted the 2010 Medicare trustees report as evidence the health system reform law is helping shore up the program's finances. Critics said that outlook is based on unrealistic assumptions and misleading accounting.Medicare Part B does not face insolvency because it is funded by a combination of general tax revenues and beneficiary premiums. Expenditures on outpatient care grew at an average annual rate of 8.3% during the past five years, exceeding gross domestic product growth by 4.2 percentage points annually, on average. Projected annual spending growth for Part B is estimated to average only 5.3% during the next five years, about the same as the GDP growth rate, the report said. But this assumes deep physician pay cuts will take effect. Unless Congress steps in, physician rates are scheduled to decline 23% on Dec. 1, an additional 6.5% in January 2011 and 2.9% in 2012.

The Untold Medicare Improvement - My Fiscal Times column today looks at the latest Medicare trustees report. It shows an enormous improvement in Medicare’s finances due to passage of the Affordable Health Care Act. Oddly, the Obama administration seems reluctant to take credit for this improvement, apparently because an accompanying memo from Medicare’s actuaries predicted that Congress would increase payments to health care providers. What everyone apparently has missed is that the problem identified by the actuaries was part of the law when last year’s report was prepared. Therefore, all of the savings shown in this year’s report compared to last year’s report are still perfectly valid. They have nothing to do with the problem identified in the actuaries’ memo.

Critics’ Misleading Attack on “Misleading” Medicare Report - Sunday’s New York Times op-ed by Stanford Ross and David Walker (“Misled on Medicare”) charges that the latest Medicare trustees’ report on the program’s finances is misleading.  In fact, it’s Messrs. Ross and Walker who are telling only part of the story. They allege that the trustees report is “based on unreasonable assumptions that produced unrealistic and misleading results.”  But those assumptions are simply that the new health reform law — which strengthens Medicare’s short- and long-term finances — will take effect as enacted. Trustees’ reports have always assumed that the laws of the land will be implemented, rather than hazard guesses about how future Congresses might change those laws. Messrs. Ross and Walker ask that the trustees’ report also include “a more realistic” estimate that assumes only some of health reform’s Medicare savings will materialize.  But that’s exactly what the trustees did. 

End to COBRA subsidy means higher health insurance bills - Deficit-conscious lawmakers have not renewed a subsidy that helped many jobless Americans afford health benefits. A longstanding federal law called COBRA requires employers to continue insurance for former employees, typically for 18 more months, if they pay the entire premium plus a 2% administrative fee. Last year, Congress approved a 65% COBRA premium subsidy, but it ended May 31.There's little chance that the subsidy will be renewed this election year, because Congress is in recess and little time remains in the session. But with the economy still struggling and layoffs continuing, hundreds of thousands of Americans may face a tough decision: Pay high COBRA premiums or drop coverage if they can't get cheaper individual policies.

Economy Led to Cuts in Use of Health Care, Study Says - NYTimes — The economic crisis in the United States has reduced the use of routine medical care, and the cutbacks here are much deeper than in countries with universal health care systems, researchers say in a new report.  The study, published by the National Bureau of Economic Research, finds that “Americans, who face higher out-of-pocket health care costs, have reduced their routine medical care” much more than people in Britain, Canada, France and Germany. Individuals and families in all five countries lost income because of unemployment and lost wealth because of steep declines in stock prices. “We find strong evidence that the economic crisis — manifested in job and wealth losses — has led to reductions in the use of routine medical care,” the researchers said.

For Cost Control, Vouchers and Medicare Don't Mix, by Austin Frakt: With the ambition of reducing the federal debt, Congressman Paul Ryan has offered a proposal to convert Medicare to a voucher-based program. ... In principle, such a system could reduce federal Medicare costs... The history of Medicare and its politics suggest it is unlikely to work out that way.  About Ryan's plan, economist Paul Krugman wrote in the New York Times, "[W]e already know, from experience with the Medicare Advantage program, that a voucher system would have higher, not lower, costs than our current system." Krugman is correct. What's going on? Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technically and politically. ... By adding another private-sector layer to the program--health insurers--the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement

The Next Health-Reform Campaign - Carrying out health-care reform presents challenges far beyond those of ordinary legislation or even such landmarks as Social Security and Medicare. After a law establishes a new program, the next steps are usually a bureaucratic process of policy implementation. But the legislation passed by Congress last March, the Patient Protection and Affordable Care Act, will need to run a gauntlet of treacherous hurdles and be politically implemented. The reforms will have to be defended in two national elections because the major provisions don't go into effect until January 2014. Assuming the law survives national efforts to reverse it, its implementation will also depend on complementary action in all 50 states, including many where Republican leaders have been hostile to the changes, questioned their constitutionality, and enacted measures to nullify the federal reforms. Although the federal courts are unlikely to uphold these challenges, the same states may resist fulfilling the substantial responsibilities that fall to them under the law. And even some supportive state governments may find it challenging to carry out their role despite the ample federal money they stand to receive.

Some Thoughts on Pharmaceuticals Prices - Maxine Udall - Brian Palmer at Slate asks "why are some pharmaceuticals so expensive?" and provides pretty standard answers. Mr. Palmer also rightly cites the high R&D costs of new drugs; "Squeezing as much money out of their few successes as possible?" Well, they do a pretty good job of "squeezing." It looks like they are barely eking out a living compared to other Fortune 500 firms, doesn't it?  Click here to enlarge. Where's the R&D induced volatility that justifies the excessive profits? Wouldn't you expect at least one year of profits more in line with other Fortune 500 firms? But leave that aside. Surely the large profits are getting us more R&D and more new molecular entities (NME), yes? Maybe not. For one thing, it appears that drug makers in the US spend more on advertising than they do on R&D. In 2007, the Economist reported that R&D was running about one fifth of revenues in the US, while marketing was running about one-third. Not really surprising given that (as the article notes) the US is the only country paying full price for pharmaceuticals. And what about the output of new drugs?

Getting Tricky - I feel almost a detached hatred for the Drug companies, especially after reading this article from Maxine Udall. Maybe it comes from even earlier, after none of them offered me a Job after college like they did my Cousin. The persistence of the residual anger and resentment, like most medical conditions, has been festering for years; I doubt that it is set to explode, though there are Those who would consider this Post the explosion itself. We shall see–We shall see! I have always been a Tax economist, as far as philosophy, even if Everyone would question my training. This means that if it need fixing, then find an abusive tax for it. It might amuse some economists, though it generally arouses anger among business personnel. The goal is to make the Drug companies act nicer, even if they are Predators in Heat. You younger Readers should ignore that last comment. We’ll just assert that We must come up with a form of taxation which will make Drug companies good citizens and responsible people.

Killing the Patient - Its important to remember: more people die from contact with the medical care system than die from breast cancer, prostate cancer and lung cancer combined. Indeed, these numbers are on the conservative end as they count primarily people killed by hospitals. Numbers on the health care system writ large are hard to come by but some - admittedly controversial - estimates put medical care as the leading cause of death in the US, and by a fairly wide margin. I often use “Drink Plenty of Fluids” as an example of common medical advice that not only has little scientific basis but might very well kill the patient. The basic intuition, of course, was that people, when sick, often loose a lot of fluids and may become dehydrated. In turns out that the body is a complex equilibrium system (not unlike the economy) and that dehydration might be exactly what it wants. In particular, in some cases fluid loss is an effort by the body prevent excess build-up in the lungs or brain. Now Robin Hanson notes the same thing might be true with breaking fevers. While in extreme cases fevers can be deadly, in many (most?) cases they are likely quite helpful and could even save your life.

Will Insurance Companies Game the ACA? - Starting in 2014 insurance companies will no longer be allowed to discriminate against people with preexisting conditions. They'll have to take all comers for (almost) the same price, regardless of how healthy they are. The incentive here is obvious: within the confines of the law, insurance companies will do their best to lure the healthiest patients into their programs and convince the sickest ones to switch. But how much leverage do they have to do this? Looking for clues, Aaron Carroll takes us back to a study done in 1997, when Medicare patients were allowed to switch back and forth between HMOs and traditional fee-for-service plans:

Is ‘More Efficient’ Always Better? - Efficiency is the seemingly value-free standard economists use when they make the case for particular policies — say, free trade, more liberal immigration policies, cap-and-trade policies on environmental pollution, the all-volunteer army or congestion tolls. The concept of efficiency is used to justify a reliance on free-market principles, rather than the government, to organize the health care sector, or to make recommendations on taxation, government spending and monetary policy. All of these public policies have one thing in common: They create winners and losers among members of society.

Brain connections break down as we age---It's unavoidable: breakdowns in brain connections slow down our physical response times as we age, a new study suggests.This slower reactivity is associated with an age-related breakdown in the corpus callosum, a part of the brain that acts as a dam during one-sided motor activities to prevent unwanted connectivity, or cross-talk, between the two halves of the brain, said Rachael Seidler, associate professor in the University of Michigan School of Kinesiology and Department of Psychology, and lead study author. At other times the corpus callosum acts at a bridge and cross-talk is helpful, such as in certain cognitive functions or two-sided motor skills. The U-M study is the first known to show that this cross-talk happens even while older adults are at rest, said Seidler, who also has appointments in the Institute of Gerontology and the Neuroscience Graduate Program. This resting cross-talk suggests that it is not helpful or compensatory for the two halves of the brain to communicate during one-sided motor movements because the opposite side of the brain controls the part of the body that is moving. So, when both sides of the brain talk simultaneously while one side of the body tries to move, confusion and slower responses result, Seidler said.

Junk food-addicted rats chose to starve themselves rather than eat healthy food - A diet including unlimited amounts of junk food can cause rats to become so addicted to the unhealthy diet that they will starve themselves rather than go back to eating healthy food, researchers have discovered. In a series of studies conducted over the course of three years and published in the journal Nature Neuroscience, Scripps Florida scientists Paul Johnson and Paul Kenny have shown that rats' response to unlimited junk food closely parallels well-known patterns of drug addiction -- even down to the changes in brain chemistry. "What we have are these core features of addiction, and these animals are hitting each one of these features," Kenny said. In their first study, the researchers fed rats on either a balanced diet or on the same diet plus unlimited access to junk foods purchased at a local supermarket, including processed meats and cakes. Within a short time period, the rats on the junk food diet began to eat compulsively and quickly became overweight.

Food warnings often fail to reach U.S. consumers.  Maxwell’s experience reflects common problems with food recalls: They routinely fail to recover all of the product and sometimes even leave tainted foods in stores.In 2009, for instance, when the Department of Agriculture was involved in 59 recalls in which the amount of food sought and recovered was known, 56 came up short of the amount identified as potentially tainted or were produced at a time when factory controls were lax. Because recalls are described as voluntary, some experts say the owners of supermarkets, especially smaller stores, can mistakenly believe it is acceptable to leave recalled products on the shelves. And while the federal government publishes notices about recalls, it depends on the press, manufacturers and retailers to spread the news

The fault, dear brutus, is not in our farms, but in ourselves - An op-ed in the New York Times illustrates why those concerned about energy use and “sustainability” should not be concerned about farms and being locavores, but about households energy usage: Overall, transportation accounts for about 14 percent of the total energy consumed by the American food system. Other favorite targets of sustainability advocates include the fertilizers and chemicals used in modern farming. But their share of the food system’s energy use is even lower, about 8 percent. The real energy hog, it turns out, is not industrial agriculture at all, but you and me. Home preparation and storage account for 32 percent of all energy use in our food system, the largest component by far. Driving to a nearby Walmart to buy factory foods may be more environmentally sound if it saves you a car trip because you’re going there anyway, or if it’s closer than wherever it is you buy local food. And it sounds like foodies should be focusing on which ways to prepare food conserve the most energy

Two agricultures, not one - Talking about the future after peak oil is a challenging thing. One of the things that makes it most challenging is the extent to which so many people seem unable to imagine any way of doing things that isn’t business as usual in some lightly modified form. Last week’s post made a passing reference to this odd blinkering of our collective imagination, in the context of current worries in the peak oil blogosphere about “peak phosphorus.” It’s true, of course, that the rapid depletion of the world’s reserves of rock phosphate, a key ingredient in chemical fertilizers, is a serious short term problem. Today’s agricultural systems depend on chemical fertilizers, and there aren’t any other abundant and highly concentrated sources of mineral phosphate available to be dumped into the intake hoppers of fertilizer factories. Still, this doesn’t mean that we’re all going to starve to death; it means that the way we produce food nowadays is not long for the world, and will be replaced by other ways of producing food that don’t depend on mass infusions of nonrenewable resources.

Artificial Meat? Food For Thought By 2050 - Artificial meat grown in vats may be needed if the 9 billion people expected to be alive in 2050 are to be adequately fed without destroying the earth, some of the world's leading scientists report today. But a major academic assessment of future global food supplies, led by John Beddington, the UK government chief scientist, suggests that even with new technologies such as genetic modification and nanotechnology, hundreds of millions of people may still go hungry owing to a combination of climate change, water shortages and increasing food consumption. In a set of 21 papers published by the Royal Society, the scientists from many disciplines and countries say that little more land is available for food production, but add that the challenge of increasing global food supplies by as much as 70% in the next 40 years is not insurmountable.

Ukraine to limit grain exports due to drought. KIEV — Ukraine is impose a cap on wheat and barley exports until the end of the year due a severe drought, officials said on Tuesday, after a full ban by Russia triggered concern on global grain supplies. Ukraine will export a maximum of 3.5 million tonnes of wheat and barely until the end of the calendar year, the agriculture ministry said, barely half of what it exported last year in the same season. "We are proposing to allow the export of 2.5 million tonnes from now until the end of the year," said Agricultural Policy Minister Mykola Prysyazhnyuk, adding that one million tonnes currently held in ports would also be exported.

Livestock farmers hit by rising wheat price – Rising wheat prices are threatening the trade of livestock farmers, according to Peter Kendall, the president of the National Farmers Union (NFU).  Mr Kendall says the current record price of wheat is good news for crop farmers but a serious concern for those who feed their animals grain.  Six weeks ago, there was a global wheat glut with stocks at a 23-year high, yet the price has since surged 70pc, including a 20pc rise last week alone, because of the failure of Russia’s harvest due to severe drought.  He claims it has had a greater effect than the “big grain robbery” of 1973, when Russia stealthily bought up stocks on global markets without letting on that it had production problems.

Sugar, Wheat, Rice Worth $2.9 Billion Ruined by Pakistan Floods - Pakistan’s deadliest floods in its history damaged more than a million acres of sugar cane, cotton and rice fields and caused 250 billion rupees ($2.9 billion) of agricultural losses, a farmers’ group said.  Floodwaters ravaged 700,000 acres of planted cotton, and 200,000 acres each of rice and cane, Mohammed Ibrahim Moghul, chairman of Agri Forum Pakistan, said by phone. Rains also destroyed 500,000 metric tons of wheat, 300,000 acres of animal fodder and 100,000 head of livestock, he said. Wheat prices gained in Chicago after five days of declines and sugar rose in New York and London on speculation the losses may force the world’s sixth most-populous country to import the staples. Pakistani officials appealed for urgent deliveries of food, shelters and medicine for 14 million people displaced by the catastrophe that’s killed at least 1,600 people and is now in its third week.

Pakistan: A submerged population - The monsoon rain has left a wide range of Pakistan‘s populated regions flooded. Especially the floodplains surrounding the River Indus are severly affected, as images of the Smos satellite show. Also other satellites, such as TerraSAR-X and the recently launched TanDEM-X support emergency response for the slowly growing international aid. These technologies are useful for location-related information, but to fully understand the dimension of the floods, it helps to have a closer look at the population distribution. The following gridded population cartogram (an enhanced version from the world population atlas) draws a picture of where people live in Pakistan. The underlying elevation information allows to understand the topography and the Indus is included for better orientation. The map shows that beyond the urban centres of the largest cities (labelled), much of the about 170 million people in the country are living along the rivers and in the floodplains while the Eastern and Southeastern regions remain less populated:

Pakistan threatened by cholera after flooding - -- Cholera is threatening survivors of the Pakistan flooding and the United Nations estimates that 6 million people still lack access to food, water and shelter, weekend media reports say.  In addition, Pakistan increased the estimate of the number of people affected by the floods to 20 million from 14 million.  The flooding began nearly 3 weeks ago after huge monsoon rains in the Indus River basin. The area is in southern Pakistan, northeast of Karachi.  The flooding, the worst in Pakistan's history, has killed an estimated 1,500 people and devastated the economy by destroying crops and livestock, reports said.  More broadly, about 20% of the country has been flooded in this year's rains, and more rain is coming, reports say. Pakistan is a bit less than twice the size of California.

Levels Plummet in Crucial Reservoir - Water levels in Lake Mead, the Colorado River reservoir, fell sharply again this summer and are nearing an elevation that would set off the first-ever official water shortage on the river, The Arizona Republic reported last week. The reservoir, which supplies roughly 30 million users in the West, dropped to 1,087 feet above sea level, or about 40 percent of capacity. Were the lake to hit 1,075 feet, allocations on the river would be cut by more than 100 billion gallons under the terms of a 2007 agreement struck by seven Western states and Mexico. Las Vegas, which draws about 90 percent of its water from Lake Mead, is particularly vulnerable to dropping lake levels. Were levels to fall to 1,050 feet, or 26 percent capacity, one of the city’s two water intake pipes on the lake would cease functioning. In anticipation of such an event, water managers have developed a highly controversial plan to tap groundwater in northeast Nevada and transport it to the city via a multibillion-dollar pipeline.

Our Summer of Extremes - For weeks, central Russia has been in the grips of its worst-ever heat wave, which has caused probably thousands of fatalities. As a result of drought and heat, more than 500 wildfires have raged out of control, smothering Moscow in smoke and threatening several nuclear facilities. Russia’s government has banned wheat exports, sending world grain prices soaring. Pakistan is struggling with unprecedented flooding that has killed more than a thousand people and affected millions more. In China, flash floods have so far killed more than a thousand people and destroyed more than a million homes. On a smaller scale, European countries like Germany, Poland, and the Czech Republic have also suffered serious flooding. Meanwhile, global temperatures in recent months have been at their highest levels in records that go back 130 years. Arctic sea-ice cover reached its lowest recorded average level for the month of June ever. In Greenland two huge chunks of ice broke off in July and August. Are these events connected?

Russian Scholar Warns Of 'Secret' U.S. Climate Change Weapon… As Muscovites suffer record high temperatures this summer, a Russian political scientist has claimed the United States may be using climate-change weapons to alter the temperatures and crop yields of Russia and other Central Asian countries. In a recent article, Andrei Areshev, deputy director of the Strategic Culture Foundation, wrote, "At the moment, climate weapons may be reaching their target capacity and may be used to provoke droughts, erase crops, and induce various anomalous phenomena in certain countries."  The article has been carried by publications throughout Russia, including "International Affairs," a journal published by the Foreign Ministry and by the state-owned news agency RIA Novosti.

Jeff Masters: Massive 926 mb extratropical storm generating huge waves off Antarctica - One of the most intense extratropical storms in recent years is churning up the waters near the coast of Antarctica in the South Indian Ocean. The powerful storm peaked in intensity yesterday afternoon with a central pressure of 926 mb -- the type of pressure typically found in a Category 4 hurricane. Storms this intense form on average once per year, or perhaps less often, according to an email I received from Jeff Callaghan of the Australia Bureau of Meteorology. Since extratropical storms do not form eyewalls, the winds at the surface from this monster storm probably reached "only" 100-120 mph (equivalent to a Category 2 or 3 hurricane). The storm is forecast to generate huge waves with a significant wave height of 13 meters (44 feet) today, according to the NOAA Wavewatch III model (Figure 3).  I have flown into an extratropical storm this intense -- in 1989, I participated in a field project based in Maine that intercepted a remarkable extratropical storm that "bombed" into a 928 mb low south of the Canadian Maritime provinces. You can read my story of that somewhat harrowing flight here.

In Weather Chaos, a Case for Global Warming - The floods battered New England, then Nashville, then Arkansas, then Oklahoma — and were followed by a deluge in Pakistan that has upended the lives of 20 million people. The summer’s heat waves baked the eastern United States, parts of Africa and eastern Asia, and above all Russia, which lost millions of acres of wheat and thousands of lives in a drought worse than any other in the historical record.  Seemingly disconnected, these far-flung disasters are reviving the question of whether global warming is causing more weather extremes.  The collective answer of the scientific community can be boiled down to a single word: probably.

Heidi Cullen, Daily Beast: The Hottest Summer Ever - As the latest heat wave passed through the East Coast, some were wondering if this summer’s heat  would ever end. If you ask just about anyone in the northeast what this past July was like, they’ll tell you it was hell. On July 6, 2010, Central Park hit 103 °F which led to reports of electrical transformers bursting into flames and underground cables going haywire. In Washington, D.C., they had 20 days with temperatures above 90 °F and Philadelphia had two days above 100 °F. There’s no doubt that the heat was awful for everyone, but as a climatologist who studies global warming, I found these high temperatures a troubling peek into where our weather is headed and how poorly prepared we are to deal with it.

RealClimate: Expert Credibility in Climate Change –We accept and rely upon the judgment and opinions of experts in many areas of our lives. We seek out lawyers with specific expertise relevant to the situation; we trust the pronouncement of well-trained airplane mechanics that the plane is fit to fly. Indeed, the more technical the subject area, the more we rely on experts. Very few of us have the technical ability or time to read all of the primary literature on each cancer treatment’s biology, outcome probabilities, side-effects, interactions with other treatments, and thus we follow the advice of oncologists. We trust the aggregate knowledge of experts – what do 97% of oncologists think about this cancer treatment – more than that of any single expert. And we recognize the importance of relevant expertise – the opinion of vocal cardiologists matters much less in picking a cancer treatment than does that of oncologists.  Our paper Expert Credibility in Climate Change is predicated on this idea.

More than two dozen local chambers of commerce in the US will join forces to advocate for market-based mechanisms to price carbon, much to the dismay of the national US Chamber of Commerce -

More than two dozen local chambers of commerce in the US will join forces to advocate for market-based mechanisms to price carbon, much to the dismay of the national US Chamber of Commerce. The Chambers for Innovation & Clean Energy (CICE), led by the San Francisco Chamber of Commerce, is being organised under five core principles, including that businesses must be part of the solution to reduce greenhouse gases (GHG) and that market-based solutions produce the best results. The group’s main objective is to work with federal legislators to shape a carbon reduction programme that sends clear signals to the market about where to invest R&D dollars, said Rob Black, vice-president of public policy at the San Francisco Chamber.

UN Environment Programme: 200 Species Extinct Every Day, Unlike Anything Since Dinosaurs Disappeared 65 Million Years Ago - According to the UN Environment Programme, the Earth is in the midst of a mass extinction of life. Scientists estimate that 150-200 species of plant, insect, bird and mammal become extinct every 24 hours. This is nearly 1,000 times the "natural" or "background" rate and, say many biologists, is greater than anything the world has experienced since the vanishing of the dinosaurs nearly 65m years ago. Around 15% of mammal species and 11% of bird species are classified as threatened with extinction.

Global warming: World’s highest island glacier vanishing - The glacier on Puncak Jaya in Papua, Indonesia, the Earth’s highest island, is quickly melting away, giving geologists little time to extract ice core samples. Ice cores extracted in June from one of the last tropical glaciers in the Pacific recently arrived in the United States, where researchers will spend the coming months scrutinizing their every detail. Glaciologists spent two grueling weeks drilling for the ice cores atop Puncak Jaya in Papua, Indonesia. Puncak Jaya is the Earth’s highest island peak and the tallest mountain between the Andes and the Himalayas at 16,000 feet (4,884 meters).

Jason Box: Of Greenland's 30 widest glaciers, the northern-most ones are losing the most ice (Petermann, Helheim, etc.) When the Petermann Glacier calved an ice island four times the size of Manhattan earlier this month, GPS sensors embedded in the ice and time-lapse cameras sitting on nearby rock were watching.   But scientists who put them there were caught off guard. Traveling to northwestern Greenland to retrieve the data that equipment recorded will cost them roughly $93,000, money they currently don't have.  That's unfortunate, says Jason Box, a climate scientist at Ohio State University who helped place those instruments, because the difficulty comes as his research team has made a startling discovery. Of the 30 widest glaciers in Greenland, it's the ones in the north -- where Petermann is located -- that are collectively losing the most ice. "The science really hasn't caught up with the observations," he said of those results "The observations are showing really dramatic changes. There is an element of surprise. The fact that there is so much change in northern Greenland is not something the community is aware of yet."

Greenland ice sheet faces 'tipping point in 10 years' - The entire ice mass of Greenland will disappear from the world map if temperatures rise by as little as 2C, with severe consequences for the rest of the world, a panel of scientists told Congress today. Greenland shed its largest chunk of ice in nearly half a century last week, and faces an even grimmer future, according to Richard Alley, a geosciences professor at Pennsylvania State University"Sometime in the next decade we may pass that tipping point which would put us warmer than temperatures that Greenland can survive," Alley told a briefing in Congress, adding that a rise in the range of 2C to 7C would mean the obliteration of Greenland's ice sheet. The fall-out would be felt thousands of miles away from the Arctic, unleashing a global sea level rise of 23ft (7 metres), Alley warned. Low-lying cities such as New Orleans would vanish.

Pacific Island nations threatened by rising sea levels Global warming could spell the end for a number of tiny island nations in the Pacific, Shi Yingying reports.  Despite their image of paradise on Earth, many Pacific Islands are struggling with environmental issues, such as rising sea levels caused by global warming, pollution, and conflicting relationships between the tourism industry, local culture and ecology.

Caribbean Storm Damage Costs May Increase by 50% Along With Global Warming - Climate change may add 50 percent to the storm damage costs incurred by some Caribbean nations over the next two decades, said Swiss Reinsurance Co., the world’s second-largest re-insurer. Wind, storm surges and inland flooding already cost some Caribbean nations up to 6 percent of their economic output each year, the Zurich-based company said today in a statement on its website. Global warming could add costs amounting to another 1 to 3 percent of output by 2030, it said. Insurers are being hit with more claims as damages from natural catastrophes rise. Costs to clean up after storms and other natural disasters reached a record $180 billion in 2005, of which insurers covered about half, according to Munich Re, the biggest re-insurer.

Why has extreme weather failed to heat up climate debate - We've had so much record heat around the world lately that the records themselves are setting records: 17 nations have reached new temperature highs, a new record for records in a year. Pakistan hit (129F) 54C, a new record for all of Asia. Moscow had never hit 100F (38C) before; lately it's been a rare day when the mercury settles lower. Now scientists have confirmed what's been pretty obvious: the entire world has just come through the warmest six months, the warmest year, and the warmest decade on record. Following the hottest June ever, yesterday said July was the second hottest July recorded – and the warmest ever for land temperatures alone. Just in case those feel like abstractions, here's what they mean in practice: because warmer air holds more water vapour than cold, deluge increases. Hence, Pakistan has seen the worst flooding in its history. Because heat cuts grain yields, Russia has stopped exporting grain, spiking prices. Greenland? Guess what – heat melts ice. In fact, the only thing that defies common sense this brutal summer is how little political reaction there's been.

Is concern for the environment a luxury good? - Is concern for the environment a luxury good?  Google Insights is a publically available online tool for tracking aggregate Google search activity over time for specific geographic areas. Recent research shows that Google search terms are a powerful tool to predict public health epidemics and economic activity. Given the current macroeconomic situation – the end of 2007 was the beginning of the most significant economic downturn in the US since the Great Depression – this tool provides a lever for studying the relationship between the business cycle and public opinion.This column presents data from Google searches for the words “unemployment” and “global warming” by US users. It argues that recessions increase concerns about unemployment at the expense of people’s interest in climate change – in some cases leading them to deny its existence.

Gov. Chris Christie sign offshore wind power bill — A new wind may be blowing in electricity for New Jersey but there are concerns it may bring a chill to ratepayers. Gov. Chris Christie today signed an act that aims to facilitate offshore wind power for use in the state. The measure offers financial aid and tax credits to attract private companies to participate in developing wind farms in the ocean. But this effort may also involve significant expense to be passed on to power consumers. The Offshore Wind Economic Development Act was signed by Christie at a former BP Oil Company facility in Gloucester County, where a port that once held tanks of fuel oil will become New Jersey’s launching point for an ambitious renewable energy program.

Capitalism is Our Best Defense Against Climate Change - Capitalism has caused climate change — and it will also help the world adapt in order to survive the impending shake-up, UCLA Professor Matt Kahn argues in his new book, "Climatopolis: How Our Cities Will Thrive in the Hotter Future" Kahn, an environmental economist, takes a pessimistic view of climate change — it's too late to avoid rising sea levels and hotter summers, he wrote — but he believes cities can cope with the changes. "Many people are fixated on how we can reduce greenhouse gases, and acting like adapting to a warmer climate is still in the sci-fi future," Kahn said. "But we've passed the point of no return. Certain urban places — like Los Angeles — will suffer. But I'm optimistic that Los Angeles will also adapt." Sure, you could hedge your bets and move north and inland, where cities are more sheltered from higher sea levels and warmer temperatures. Kahn predicts that Salt Lake City, Milwaukee, Buffalo, Minneapolis and Detroit may give New York and L.A. a run for their money in the new, warmer world. By his calculations, you could get a real bargain if you buy now: The price of one home in L.A. equals the cost of 100 homes in Detroit.

Bacteria and Phytoplankton Affect the Weather - It turns out that critters so small that they can't be seen with the naked eye might affect the weather, and perhaps even climate. As I pointed out last year, spacefaring bacteria might affect rainfall:In 2002, several scientists claimed that bacteria high in Earth's atmosphere came from space. Last year, scientists said that bacteria in the upper atmosphere may actually make rain. Specifically, they said that bacteria can freeze at fairly warm temperatures, so that the "biological ice nuclei" form condensation nuclei which triggers rain.Now, NOAA scientists say that phytoplankton affects hurricanes. As New Scientist writesUsing a computer weather simulator, [NOAA's Anand Gnanadesikan] compared the formation of tropical storms in the Pacific under today's phytoplankton concentrations to conditions without any phytoplankton at all. What he found was an overall decrease in tropical storms in a phytoplankton-free digital Pacific. The mechanism for this shift lies in phytoplankton's ability to absorb sunlight, which heats up the water around it. Without phytoplankton, the sun's rays penetrate deep into the ocean, leaving the surface water cold.

A Looming Oxygen Crisis and Its Impact on World’s Oceans - Unlike the Deepwater Horizon disaster, this summer’s dead zone is not a new phenomenon in the Gulf. It first appeared in the 1970s, and each summer it has returned, growing bigger as the years have passed. Its expansion reflects the rising level of fertilizers that farmers in the U.S. Midwest have spread across their fields. Rain carries much of that fertilizer into the Mississippi River, which then delivers it to the sea. Once the fertilizer reaches the Gulf, it spurs algae to grow, providing a feast for bacteria, which grow so fast they use up all the oxygen in their neighborhood. The same phenomenon is repeating itself along many coastlines around the world. This summer, a 377,000-square-kilometer (145,000-square-mile) dead zone appeared in the Baltic Sea. In 2008, scientists reported that new dead zones have been popping up at an alarming rate for the past 50 years. There are now more than 400 coastal dead zones around the world.

Massive coral mortality following bleaching in Indonesia - The Wildlife Conservation Society today released initial field observations that indicate that a dramatic rise in the surface temperature in Indonesian waters has resulted in a large-scale bleaching event that has devastated coral populations.  WCS's Indonesia Program "Rapid Response Unit" of marine biologists was dispatched to investigate coral bleaching reported in May in Aceh-a province of Indonesia-located on the northern tip of the island of Sumatra. The initial survey carried out by the team revealed that over 60 percent of corals were bleached. Subsequent monitoring conducted by marine ecologists from WCS, James Cook University (Australia), and Syiah Kuala University (Indonesia) were completed in early August and revealed one of the most rapid and severe coral mortality events ever recorded. The scientists found that 80 percent of some species have died since the initial assessment and more colonies are expected to die within the next few months.

Massive coral die-off seen in 93 °F waters. Area off Indonesia is 7 °F warmer than usual - One of the most destructive and swift coral bleaching events ever recorded is under way in the waters off Indonesia, where water temperatures have climbed into the low 90s, according to data released by a conservation group this week.  The Wildlife Conservation Society (WCS) says a dramatic rise in sea temperature, potentially linked to global warming, is responsible for the devastation. In May, the WCS sent marine biologists to investigate coral bleaching reported in Aceh — a province of Indonesia — located on the northern tip of the island of Sumatra. The initial survey carried out by the team revealed that more than 60 percent of corals in the area were bleached. Subsequent monitoring of the Indonesian corals completed in early August revealed one of the most rapid and severe coral mortality events ever recorded. The scientists found that 80 percent of some species have died since the initial assessment, and more colonies are expected to die within the next few months.

A Blueprint For Blue Planet Protection-- The oceans have become so depleted by over-fishing, pollution and climate change that they can only be saved by a large global network of reserves, according to a growing consensus among marine scientists. Campaigners say that sea life -- particularly at the top of the food chain -- is suffering to such an extent that there will eventually be no fish left if action drastic action is not taken to protect the oceans. More than 70 percent of the world is covered by oceans. There are currently more than 4,000 marine protected areas covering just over 1 percent of the oceans, but the vast majority of reserves have only limited protection. According to Professor Callum Roberts, of the University of York, one of the leading campaigners and author of The Unnatural History of the Sea, only about 0.1 percent of the sea is completely protected from all exploitation. This should be between 25 and 45 percent to give marine species the best chance of recovery, he said.

A Battle in Mining Country Pits Coal Against Wind - Their goal is to save the mountain, and they intend to do so with a wind farm. At least one study has shown that a wind project could be a feasible alternative to coal mining here, although the coal industry’s control over the land and the uncertain and often tenuous financial prospects of wind generation appear to make it unlikely to be pursued. That, residents say, would be a mistake. For many renewable-energy advocates outside the region, the struggle at Coal River Mountain has become emblematic of an effort across the country to find alternatives to fossil fuels. They have lent money, expertise and high-profile celebrities like Daryl Hannah and James Hansen, the NASA climate scientist, to help residents advance their case for wind power and to make it a test case for others pursuing similar projects nationwide.

Wind vs coal in West Virginia - The sign of the net present value, positive or negative, likely boils down to the discount rate:  By 2008, those models had been folded into an economic comparison between future surface mining at Coal River Mountain and the proposed placement of a 164-turbine, 328-megawatt wind farm along its spine. The analysis — which Professor Orr, the Sierra Club and other groups helped finance on behalf of Coal River Mountain Watch, a community group in the once-bustling town of Whitesville — found that the energy potential of the mountain’s coal, and the royalties that would accrue to companies owning land there, vastly outstripped anything a wind farm could replicate, at least in the short term.  The longer view, however, seemed to argue strongly for a wind farm.  Using wind turbine tax rules established by the state in 2007, the researchers calculated that a wind farm of the size proposed for Coal River Mountain would generate $1.74 million in annual tax revenue for Raleigh County. That’s roughly equal to the total coal taxes the county collected for the 2007-2008 fiscal year, according to the state auditor.

AP Enterprise: Old-style coal plants expanding - Utilities across the country are building dozens of old-style coal plants that will cement the industry's standing as the largest industrial source of climate-changing gases for years to come.An Associated Press examination of U.S. Department of Energy records and information provided by utilities and trade groups shows that more than 30 traditional coal plants have been built since 2008 or are under construction. The construction wave stretches from Arizona to Illinois and South Carolina to Washington, and comes despite growing public wariness over the high environmental and social costs of fossil fuels, demonstrated by tragic mine disasters in West Virginia, the Gulf oil spill and wars in the Middle East.

There isn’t any sensible alternative to nuclear power - Ask the average environmentally-concerned person how our power generators will achieve the tough emissions reductions needed to play their part in cutting global warming, and you will probably get a simple, clear answer: wind and solar.  Recent research by the International Energy Agency shows that nearly half of interviewees worldwide think that wind and solar power will be the two main sources of electricity generation by 2040. There is just one problem: that idea is naïve, overoptimistic, and almost certainly mistaken. Quite literally, it is “hot air”. It is not nuclear scientists or the International Atomic Energy Authority saying this. Take James Lovelock, one of the world’s most renowned environmentalists: “We are at the point where there is no sensible alternative to nuclear power if we are to sustain civilisation.”

Radioactive Boar on the Rise in Germany - It's no secret that Germany has a wild boar problem. Stories of marauding pigs hit the headlines with startling regularity:  Even worse, though, almost a quarter century after the Chernobyl nuclear meltdown in Ukraine, a good chunk of Germany's wild boar population remains slightly radioactive -- and the phenomenon has been costing the German government an increasing amount of money in recent years. As Germany's wild boar population has skyrocketed in recent years, so too has the number of animals contaminated by radioactivity left over from the Chernobyl nuclear meltdown. Government payments compensating hunters for lost income due to radioactive boar have quadrupled since 2007.

Study tracks ocean plastic spread - A study has measured the amount of plastic debris found in a region of the Atlantic Ocean over a 22-year period. US researchers, writing in Science, suggest the volume of plastic appeared to have peaked in recent years. The team said monitoring the free-floating plastic also provided an insight into the behaviour of ocean surface currents. They found plastic, most pieces measuring no more than a few millimetres, in more than 60% of 6,136 samples collected by dragging fine-meshed nets along the ocean's surface. The researchers - from the US-based Sea Education Association (Sea), Woods Hole Oceanographic Institution and the University of Hawaii - described plastic as a "major contaminant".

Is Gulf Seafood Safe? - The FDA and NOAA say that Gulf seafood is fine. President Obama ate a fish taco yesterday made with Gulf fish.So does that mean Gulf seafood is safe to eat? I had hoped - for the sake of the Gulf fishermen and the entire Gulf economy - that the answer was yes. But after digging a bit, I'm not so sure. For example, Local fishermen don't trust the safety of the fish: "Fishermen here are calling it 'Voodoo seafood' because we are all cursed," "We do not think it is safe but the state officials say it is. Who do you trust? The people that know these waters or the government?" Thompson added. Neither do local shrimpers: "The last thing I want to do is scare anyone away from the seafood down here,"  "But if I’m not eating it or feeding it to my children, I can’t advise anyone else to eat it either." As AOL news notes: Petroleum contamination is known to cause cancer and brain damage. But how much oil and gas does it take to make seafood dangerous?

The Gulf Oil Spill Disaster - First, let’s begin with the “good” news. The ecological destruction that was first feared is not going to be as bad as once thought, for a variety of reasons. It is not good, but it is not the unmitigated disaster it could have been. Edward Overton, PhD, Professor Emeritus, Dept. of Environmental Sciences, LSU, is an expert on oil spills. He was at the Exxon Valdez. The Exxon Valdez (EV) was a big, black, thick tide of oil. The Deepwater Horizon is a much bigger spill: every ten days the amount of the EV spill spewed into the Gulf, from April 20 to July 15. Professor Overton spoke mostly for the record. He is very much a concerned environmentalist, and he is also a very serious scientist. He reminded us that the Louisiana wetlands are a very important part of the ecological system of the Gulf of Mexico. Oversimplifying, they are the nutrient source for the small animal world which feeds the larger. Without the wetlands much of the Gulf ecosystem dies. If they were destroyed, they would not come back very easily, as without their very root system the land would erode away. Bluntly, oil kills wetlands if it gets into it.

USF Scientists Say Oil Droplets Speckle Gulf Floor - USF scientists made a big announcement Tuesday after one of their research vessels returned from a two-week research mission in the Gulf. They say they found significant amounts of toxic oil sitting on the Gulf floor and it is killing sea life. USF scientists blame not just BP’s leaking well, but the dispersants the oil giant pumped in to break it up.  The new findings from crew members aboard USF’s Weatherbird II research vessel come on the heels of a government study that says 75 percent of the oil is gone. The researchers say more likely, the oil is in such tiny droplets that it's harder to detect. They also say it's moved farther east than originally thought.They used a UV light to detect oil in what's known as the Desoto Canyon, 40 miles off the Panhandle. "It was very, very small droplets, and when we irradiated them, they sparkled like a constellation of stars," said Dr. David Hollander, a chemical oceanographer with USF’s College of Marine Science.

Researchers say they saw 22-mile hydrocarbon plume in Gulf - (CNN video) -- Scientists at the Woods Hole Oceanographic Institution said they detected a plume of hydrocarbons in June that was at least 22 miles long and more than 3,000 feet below the surface of the Gulf of Mexico, a residue of the BP Deepwater Horizon oil spill.According to the institution, the 1.2-mile-wide, 650-foot-high plume of trapped hydrocarbons provides at least a partial answer to recent questions asking where all the oil has gone as surface slicks shrink and disappear. "These results indicate that efforts to book-keep where the oil went must now include this plume" in the Gulf, said Christopher Reddy, a Woods Hole marine geochemist and oil spill expert. He is one of the authors of the study, which appears in the Aug. 19 issue of the journal Science.

Report Paints New Picture of Gulf Oil - Oceanographers from the Woods Hole Oceanographic Institution (WHOI) in Massachusetts surveyed the gulf around the BP well from the research ship Endeavor from 19 to 28 June, a period of heavy flow. All told, the instrumentation made more than 57,000 separate chemical analyses of a plume southwest of the well. The first thing that the researchers noticed was that the plume wasn't quite as “massive” as many news reports had made out. The plume surveyed by Endeavor was only 200 meters thick and about 2 kilometers wide. Although plenty of oil was flowing from the ruptured well, it didn't look much like an underwater oil slick. The team's camera picked up a yellowish fog half a kilometer from the well (see figure), and water samples farther from the well did not look or smell like oil. The plume did, however, contain more than 50 micrograms per liter (about 0.05 parts per million) of a group of particularly toxic petroleum compounds that includes benzene, the team reports online today in Science. That amount of benzene-related petroleum compounds is roughly consistent with the 1 to 2 parts per million of total oil reported in plumes by some other researchers.

Scientists: Up To 80% Of Gulf Oil Remains - Georgia scientists say their analysis shows that most of that BP oil the government said was gone from the Gulf of Mexico is still there.  The scientists say as much as 80 percent of the oil still lurks under the surface. The Georgia team said it is a misinterpretation of data to claim that oil that is dissolved is actually gone. The report from University of Georgia and other scientists came from an analysis of federal estimates.  Earlier this month federal scientists said that only about a quarter of the oil remained and the rest was either removed, dissolved or dispersed.  "Where has all the oil gone? It hasn't gone anywhere. It still lurks in the deep," said University of Georgia marine scientist Chuck Hopkinson. He headed the quick independent look by the Georgia Sea Grant program at the estimates the White House released.

Scientists say Gulf oil to linger, Obama's estimates rosy - — Scientists heaped more criticism Thursday on the Obama administration's claim that most of the Gulf of Mexico oil spill is gone, saying that it was too early to determine the remaining oil's impact on the waters or marine life.  Most of the 4.1 million barrels of spilled oil remains in the environment even if it's not visible, posing unknown consequences for sea life and the thousands of Gulf residents whose livelihoods depend on fishing, scientists said. They accused the Obama administration of painting a rosy picture while revealing only a portion of the data on which government experts based their analysis, released two weeks ago. The testimony came as a new independent study, published in the journal Science, reported that a vast fog of oil — 22 miles long and more than a mile wide — is floating far below the Gulf's surface, where low water temperatures are slowing its natural breakdown.  It was the most conclusive evidence yet of a subsea oil "plume" that could linger for years, said Richard Camilli of the Woods Hole Oceanographic Institution in Massachusetts, the lead author of the report.

BP Oil Spill: Scientists Find Giant Plume of Droplets 'Missed' by Official Account - Scientists have mapped a 22-mile plume of oil droplets from BP's rogue well in the depths of the Gulf of Mexico, providing the strongest evidence yet of the fate of the crude that spewed into the sea for months. The report offers the most authoritative challenge to date to White House assertions that most of the 5m barrels of oil that spewed into the Gulf is gone."These results indicate that efforts to book-keep where the oil went must now include this plume," said Christopher Reddy one of the members of the team from Woods Hole Oceanographic Institute.The report, which is published in the journal Science, also said the plume was very slow to break down by natural forces, increasing the likelihood that oil could have travelled long distances in the Gulf before it was degraded.

Extent of lingering Gulf oil plume revealed - The swathe of oil still stretching from the Deepwater Horizon spill is over 35-kilometres long, according to a new report. The study, published in Science1, is the first major peer-reviewed analysis of the underwater oil plume. It also indicates that the plume has persisted for several months, with oxygen measurements showing little sign of the oil being degraded quickly by microbes in the water.A team led by researchers at the Woods Hole Oceanographic Institution (WHOI) in Massachusetts found that the main plume is suspended at a depth of 1,000–1,200 metres below the surface and in some places is more than 2 kilometres wide and 200 metres thick. Other oil plumes are present in the Gulf of Mexico, but this was the first to be identified and is the most thoroughly sampled. "Up to this point, people had identified hydrocarbons in subsurface waters, but they weren't able to say just how wide the plume was, how tall it was, or how long it was, or that it was continuous," says lead author Richard Camilli, an oceanographer at the WHOI.

Report: Nearly 80 Percent of Spilled Oil Still Threatens Gulf - Most of the oil spilled into the Gulf of Mexico earlier this year is still there, and poses a sizable risk to the marine ecosystem, according to a report issued yesterday by a group of independent marine scientists.  Of the 4.1 million barrels of oil spilled during the Deepwater Horizon disaster, the researcher estimate between 70 and 79 percent remains in the water. The new calculations are a marked difference from a government report issued on August 4 which argued that just 26 percent of the oil was "residual" in the water.Media reports quickly picked up on this figure, and made it sound as though the vast majority of oil had simply disappeared. Jane Lubchenco, the head of the National Oceanic and Atmospheric Administration, appeared to be hedging her bets when she said, "At least 50 percent of the oil that was released is now completely gone from the system, and most of the remainder is degrading rapidly or is being removed from the beaches."The new report, authored by a mix of oceanographers at the University of Georgia and the Skidaway Institute of Oceanography called such characterizations "largely inaccurate and misleading."

Why is the U.S. Government Protecting BP? Why should bona-fide scientists not talk “openly about” the worst ecological disaster in history?  Who does that help?  The fishermen who probably lost their livelihood?  The tourist locations that have lost vacationers?  Real estate owners whose property values have declined?  These people and many more have been damaged by BP.  What’s the big secret here?   The government knows that a BP bankruptcy would cause a giant financial meltdown that would probably make what happened in 2008 look tame. That is the reason I think the government is working so hard to protect BP. In June, the President said, “Untold damage is being done to the environment — damage that could last for decades.” I think the President got it right the first time.

Top Expert: Geology is "Fractured", Relief Wells May Fail ... BP is Using a "Cloak of Silence", Refusing to Share Even Basic Data with the Government - Few people in the world know more about oil drilling disasters than Dr. Robert Bea. Bea teaches engineering at the University of California Berkeley, and has 55 years of experience in engineering and management of design, construction, maintenance, operation, and decommissioning of engineered systems including offshore platforms, pipelines and floating facilities. Bea has worked for many years in governmental and quasi-governmental roles, and has been a high-level governmental adviser concerning disasters. He worked for 16 years as a top mechanical engineer and manager for Shell Oil, and has worked with Bechtel and the Army Corps of Engineers. One of the world’s top experts in offshore drilling problems, Bea is a member of the Deepwater Horizon Study Group, and has been interviewed by news media around the world concerning the BP oil disaster. Washington’s Blog spoke with Dr. Bea yesterday.

Editorial - Restoring the Gulf - NYTimes - Is the crisis in the gulf over? In a word, no. There is progress. The well should be permanently capped in a matter of days. And while some scientists question the White House’s claim that nearly three-quarters of the oil has gone — skimmed, burned, devoured by microbes — the oil slicks have clearly shrunk and thousands of square miles have been reopened to fishing.  There is still plenty to worry about. Of the five million barrels spilled, at least a million barrels remain. Nearly 700 miles of beaches and wetlands are oiled or at risk. The extent of the damage — or the size of BP’s bill — will not be known until the scientists and the courts have spoken, but there is still a lot to clean up. Even that will not be the end of it. Another, even bigger, challenge lies ahead: reversing decades of man-made degradation in the vast Mississippi River Delta.

Reinventing Government Ruining the Gulf of Mexico - This article by David Hilzenrath in the Washington Post is interesting. The news is that an internal inspection for Transocean use reported that some equipment (two cranes) had to be replaced and could not be used, but the official inspection outsourced to a private firm, concluded that everything was fine  I learned how little I know about regulation of drilling rigs. First, they are considered ships and, therefore, are licensed by the nation where they are registered. The Marshall Islands decided that it was fine for the Deepwater Horizon to drill in the gulf. This is crazy. Drilling rigs are not like freight ships. If a country regulates who can drill somewhere, they should regulate the equipment. Second, like the Marshall Islands, the USA outsources inspections to firms hired by those they inspect (like ratings agencies). This second bit of insanity is a recent innovation introduced by the Coast Guard in 1995 back when the guy who signed the commodity futures modernization act was President.

Drilling Permits for Deep Waters Face New Review - The Obama administration said Monday that it would require significantly more environmental review before approving new offshore drilling permits, ending a practice in which government regulators essentially rubber-stamped potentially hazardous deepwater projects like BP’s out-of-control well.  The administration has come under sharp criticism for granting BP an exemption from environmental oversight for the Macondo well, which blew out on April 20, killing 11 workers and spewing nearly five million barrels of oil into the Gulf of Mexico.  The more stringent environmental reviews are part of a wave of new regulation and legislation that promises to fundamentally remake an industry that has operated hand-in-glove with its government overseers for decades.

U.S. Imported 388 Million Barrels of Oil in July, Highest Total in 18 Months - In his monthly update on the level of foreign oil imports in the U.S., energy expert T. Boone Pickens said that based on the latest figures from the U.S. Department of Energy's Energy Information Administration (EIA), the U.S. imported 65 percent of its oil, or 388 million barrels in July 2010, sending approximately $29.6 billion, or $663,231 per minute, to foreign countries. This is highest number of barrels imported in one month since January 2009. "President Obama has pledged to eliminate Middle East oil dependence in 10 years, but the latest oil imports statistics show we're not making much progress. In July we imported 388 million barrels of oil, which is the highest total since President Obama took office in January 2009. It's not hard to see that spending approximately $30 billion on oil month after month is hurting the economy.

Goldman Says Spreads Between WTI Crude Oil Contracts Are Strengthening - Global crude oil demand may have exceeded supply in the past two months as inventories stored on tankers fell to an 18-month low, Goldman Sachs Group Inc. said. “Now that floating storage has dropped to its lowest levels in over 18 months, we expect to experience declining onshore inventories in coming months,” Goldman Sachs analysts including David Greely and Stefan Wieler said in a report today. “Given that world demand tends to increase seasonally in the second half, we would expect the draw on world inventories to accelerate.”  Oil held on ships may have dropped by as much as 40 million to 45 million barrels in June and July, in part due to the clearing of a “large portion” of Iranian floating storage

Hungry For Oil: Feeding America's Expensive Habit - Every day the United States goes through another 20 million barrels of oil. Finding enough crude to supply the country's oil habit is difficult because much of the oil that's easy to get to is gone. Now companies are extracting oil in places that are expensive to drill and raise concerns about safety and the environment. BP's disastrous oil spill in the Gulf of Mexico is the most obvious example. Out on the rolling prairies of North Dakota — and just about everywhere else — oil doesn't bubble up out of the ground anymore. You have to go in and force it out.

Iraq's Oil: Hard To Get Out - Iraq’s bloody-minded and inefficient bureaucracy is one of several problems oil majors face. Many are still hopeful about the country’s prospects, but the euphoria of last year, when the government started auctioning large fields, has given way to caution. Increasing Iraqi oil production from 2.5m barrels a day to 12m, a quarter more than Saudi Arabia pumps now, will take more than the six to seven years that the government projects, not least because of Iraq’s continuing political violence.

Nigeria: Nation's Dying Energy Sector - Since the discovery of oil in 1956 in Oloibiri, a town in Bayelsa state, the oil and gas sector cornered the economic activities and gradually became the lifeblood of Nigeria's economy. As the sector grows, more problems compound with very little or minimal solutions to address them.  Of recent, the sector was in the spotlight for several reasons such as fuel scarcity, shortage of gas to power, corruption and brain-drain.  Despite efforts by the past leaders to adjust some of the abnormalities that made the sector to operate in difficult terrain, the industry continued to top the list of inefficient sectors in the economy.

Platts Report: China's July Oil Demand Pulls Back from June's Record High - China's apparent oil demand slowed in July, dropping from June's record high of 36.74 million metric tons (mt) to 35.82 million mt or about 8.47 million barrels per day (b/d), according to the just released Platts analysis of official data from the People's Republic of China. The July demand figure is down 5.6% from June and is up only 2.7% from a year ago, a sharp drop off from the double-digit year-on-year gain reported for the prior month.  "The sharp drop in China's oil demand growth in July is a clear indication that Beijing's tightening policies are taking effect," said Mriganka Jaipuriyar, senior editor for Platts in Singapore. "With both industrial production and asset investment dropping in the month, it is not surprising that oil demand has slowed down too. Looking ahead, whether we actually see negative oil demand growth will depend on whether China decides to pursue its tighter policies or reverses them."

Eschatology (Peak Oil vs. Techno-Class War) A big part of the consumer indoctrination program the kleptocracy is using to boil the frogs is to string them along with their faith in the cult of technology. Today it seems both quaint and scary that anyone still believes in “progress”. If that terms means things get “better”, then we know there’s no such thing as progress, in any area. So far the ideology which would place no limits at all on power and wealth accumulation has had its way. But their gains become ever more marginal and ever more expensive. Energy return on investment (EROEI) gets worse and worse. That’s Peak Oil setting in. Every action has an equal and opposite reaction. So far we’ve managed to hold off the reaction, even as the sum of our action becomes ever more monumental. The potential energy being stored up is astronomical. It can’t, and it won’t, be long before that energy is rendered kinetic.  Do we really think we can keep it up forever? Do we really think our Tower of Babel will make it to heaven?

U.S. Energy Information Administration (EIA) - Annual Energy Review - pdf & chart series

IEA: ‘cheap oil is over’ as demand approaches new record - The International Energy Agency (IEA) is forecasting world oil demand will set a new record next year when is smashes through 2008’s pre-recession high – and warning that the “era of cheap oil is over.” According to the IEA’s latest Oil Market Report, published August 11, global demand will reach 86.6 million barrels per day in 2010, and then 87.9 million barrels per day in 2011, assuming a continuing global economic recovery. This means demand is set to pass the all-time high of 86.9 million barrels per day established in 2008 before the global economic downturn.The figure has been given significance by those that say oil peaked midway through 2008. Peak oil refers to the time of maximum production – the high point of the oil output bell chart, after which, as geologist M King Hubbert showed, output will diminish even though much oil remains to be extracted. If oil did peak at 86.9 million barrels per day, then demand would be expected to overtake supply early in 2011. (Personally, I don’t believe oil has peaked – but this will soon be put to the test.)

Finding New Ways to Fill the Tank — Most research on renewable energy has focused on replacing the electricity that now comes from burning coal and natural gas. But the spill in the Gulf of Mexico, the reliance on Middle East imports and the threat of global warming are reminders that oil is also a pressing worry. A lot of problems could be solved with a renewable replacement for oil-based gasoline and diesel in the fuel tank — either a new liquid fuel or a much better battery. Yet, success in this field is so hard to reliably predict that research has been limited, and even venture capitalists tread lightly. Now the federal government is plunging in, in what the energy secretary, Steven Chu, calls the hunt for miracles.

Study: UK demand for electric vehicles to surpass hybrids by 2020, hit 21% market share - A new British study by Glass's Information Services Ltd. (GIS) is predicting that battery electric vehicles will overtake hybrids in UK market share and will reach a combined total of 21 percent by the end of the decade. That market share matches the expectations for France and Italy, but falls short of Germany's potential – which is expected to hit 26 percent.Until the last two years, European automakers have mostly been skeptical of electric vehicles because of the technological limitations of batteries. However, increasingly tough limits on carbon dioxide emissions mean that almost every manufacturer will have to incorporate some degree of plug-in vehicles into its lineup to average out their dirtier vehicles.

Europe’s Brisk Energy Transition - Europe’s evolution toward a heavier reliance on renewable energy is nicely documented in a report released this week by Eurostat, the European Union’s statistics agency. The study, “Statistical Aspects of the Energy Economy in 2009,” provides a wealth of interesting detail without a lot of editorializing. From 2008 to 2009 alone, the use of renewable energy in the European Union increased 8.3 percent. As I’ve reported as part of our continuing series, “Beyond Fossil Fuels,” some countries have made particularly great strides in this arena. Portugal now gets nearly 45 percent of its electricity from renewable sources, up from 17 percent five years ago. The Eurostat report found that the production of energy from hard coal and natural gas showed an “important decrease” (9.2 and 10.1 percent, respectively). To reduce greenhouse gas emissions, the European Union is also aggressively pushing its members to cut back on their use of coal. Consumption of coal dropped 16.3 percent in 2009.

Transparency: Which Countries Invest the Most in Alternative Energy? - Interactive viewer | Raw image

Peak Everything - When you really need something, it’s natural to worry about running out of it. Peak oil, the notion that global petroleum production will top out and then begin to decline permanently, has been a global preoccupation since the 1970s, and the warnings get louder with each passing year. Environmentalists want to put limits on the consumption of fossil fuels, but they haven’t been very successful in encouraging people to consume less energy, even with the force of law at their backs. The debate over peak oil is heavily politicized, so let’s set it aside and test the idea of imminent resource peaks and their consequences for economic growth on three other nonrenewable resources: lithium, neodymium, and phosphorus.

Will there be a helium crisis? - Is it possible that the relative price of helium will rise in nearly unprecedented fashion?  Robert Richardson voices his opinion: [The US government should] Get out of the business and let the free market prevail.  The consequence will be a rise in prices.  Unfortunately party balloons will be $100 each rather than $3 but we'll have to live with that.  We will have to live with those prices eventually anyway. He notes: There is no chemical means to make helium.  The supplies we have on Earth come from radioactive alpha decay in rocks.  Right now it's not commercially viable to recover helium from the air, so we have to rely on extracting it from rocks.  But if we do run out altogether, we will have to recover helium from the air and it will cost 10,000 times what it does today. Yet helium is the second most abundant element in the universe and it accounts for 24% of the mass of our galaxy, according to Wikipedia.  The marginal cost curve stands between plenty and scarcity.

Mexico Slaps New Tariffs Against US Truck Ban - Like other FTAs, the North American Free Trade Agreement is supposed to cover the free movement of goods, is it not? Apparently, the US still has trouble coming to terms with this notion. Sometime ago, I made a detailed post early last year about how "driving while Mexican" was banned Stateside for truckers coming from south of the border due to specious safety concerns. To pacify the Teamsters union, then-President Bill Clinton passed legislation in 1995 banning Mexican long-haul trucking services from entering the US. Aside from there being no evidence that Mexican truckers had worse safety record--they actually had better ones while plying their trade in the US--these frankly discriminatory rules have made American consumers pay more for the unnecessary process of having Mexican trucks unload goods at the border to be taken onward by US ones. Not only is time wasted doing so, but the costs of this rigmarole are passed on to American consumers.

Some Big Ideas from Small Countries -A panoply of innovations has helped Chile to outperform its South American neighbors.   Chile’s fiscal institutions - structural budget balance with the parameters estimated by independent expert panels — insure a countercyclical budget.  They are among the mechanisms that are particularly worthy of emulation by other commodity exporting countries, to defeat the Natural Resource CurseCosta Rica in Central America and Mauritius in Africa each pulled ahead of its peers some time ago.  Among many other decisions that worked out well for them, both countries have foregone a standing army. The result in both cases has been histories with no coups, and financial savings that can be used for education and other good things.  Singapore achieved rich country status with a unique development strategy.  Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion.   Some small advanced countries also have lessons to offer.  

Hey Bric Spender - a special series on consumers -Over the next two weeks, beyondbrics will be taking a closer look at the rise of the emerging market consumer. We’ll be looking across countries and continents, sectors and demographics, at the local affects of rising incomes. We’ll also explore the wider implications for the investment community, and for global businesses - whether they sell wrinkle creams, smartphones, or plane tickets. Why? The rationale is simple: the shifting wealth of the world - to the south and the east - represents the biggest historical change in how the world consumes. And the numbers are startling.

SHIPPING: Russian tankers take Arctic shortcut to China Two Russian tankers carrying 70,000 metric tons of natural gas to China are, for the first time, using a shortcut through the Arctic Ocean.Chaperoned by two nuclear-powered icebreakers, the shipment left the port town of Murmansk for Asia on Saturday. Shipping companies OAO Sovcomflot and OAO Novatek are aiming to cut their delivery time to China by half by using the northern route rather than the Suez Canal.

The Trade Deficit Nightmare - Every single month, we buy much more stuff from the rest of the world than they buy from us.  That means that every single month there is a massive outflow of wealth from the United States.  Every single day, America becomes just a little bit poorer as Americans continue to run out and fill up their shopping carts with cheap plastic crap from China and dozens of other emerging economies.  Not that trade is a bad thing.  Trade can actually be a very good thing.  But the gigantic trade imbalances that the United States has been running for years are absolutely bleeding us dry.  Unfortunately, our politicians have just stood idly by as each month we continue to transfer massive amounts of wealth out of the United States.The U.S. Commerce Department recently announced that the U.S. trade deficit increased by 18.8 percent in June to $49.9 billion.  Most analysts had expected the figure to be somewhere around 41 to 43 billion dollars. In the month of June, imports rose to approximately $200 billion while exports fell to about $150 billion.

Editorial - Return of the Killer Trade Deficit - NYTimes - The world economy is falling back on very dangerous habits. The United States is tentatively emerging from recession but is still at risk of another dip. Yet trade statistics released last week indicate that American consumers are sucking in large quantities of imports as spending recovers, while weak demand in the rest of the world is crimping American exports.  Meanwhile, China is mopping up demand everywhere you look with its artificially cheap supply of goods. Germany, the world’s other exporting power, is cutting its budget and relying on foreign demand to drive its economic rebound. This isn’t sustainable.  The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home. The American economy is too weak to carry this load. The recent trade data led economists to slash growth estimates for this year.

Killer Trade Deficits -Krugman - I agree with everything this NYT editorial has to say about the economics of widening international imbalances. Where I disagree is on the issue of negotiating strategy. My colleagues believe that we should lecture the Chinese on what a bad thing they’re doing, but not actually threaten sanctions, lest we start a trade war. My belief is that this gets us nowhere. Right now, China is following a policy that is, in effect, one of imposing high tariffs and providing large export subsidies — because that’s what an undervalued currency does. That should be a violation of trade rules; it might in fact be a violation, but the language of the law is vague on the subject. But leave aside the fine print of the law for a moment: what China is doing amounts to a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions. Yet the Chinese have taken our measure, and decided that we won’t act. Until or unless that changes, we’re just whistling in the wind.

Off target - PAUL KRUGMAN comments once more on trade balances and Chinese currency policy: Right now, China is following a policy that is, in effect, a seriously predatory trade policy, the kind of thing that is supposed to be prevented by the threat of sanctions. Yet the Chinese have taken our measure, and decided that we won’t act.  I respect Mr Krugman a great deal, but I continue to believe that this is a very misguided view. He says, "the Chinese have taken our measure, and decided that we won't act." There is no evidence to substantiate that claim. Certainly Mr Krugman has not provided any. Meanwhile, the information I have seen and discussed at this blog leads me to believe that the Chinese aren't allowing the yuan to appreciate more because they don't believe they can. China is negotiating a very difficult economic situation. It needs to maintain growth; should 300 million desperately poor Chinese labourers opt to "get tough" with Beijing, Washington's threats will seem like the growls of a puppy.

Beijing looks to broaden renminbi use = China will allow foreign central banks and overseas lenders substantially to increase investment in its domestic interbank bond market, in a move aimed at encouraging internationalisation of the Chinese currency. The People’s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back [to China]”. Foreign central banks, lenders in Hong Kong and Macao that already conduct renminbi clearing and overseas banks involved in renminbi cross-border trade settlement will be allowed to participate in the Rmb19,500bn ($2,870bn) interbank bond market. Beijing is trying to encourage use of the renminbi for trade as part of a long-term plan to promote it as a reserve currency and reduce China’s exposure to the US dollar, now used for most Chinese trade. “This is an integral part of pushing the internationalisation of the renminbi,”

China Reforms May Mark Start of Financial 'Big Bang'  (Bloomberg) -- China may be on the cusp of a “big bang” as it allows foreign investors increased access to its domestic capital markets, according to Nomura Holdings Inc. The People’s Bank of China said yesterday overseas financial institutions will be allowed to invest yuan holdings in the nation’s interbank bond market in a pilot program to spur currency flows from abroad. The currency is also known as the renminbi, or RMB. “The above move to remit funds back into the RMB interbank bond market comes alongside the expansion of RMB deposit taking by Hong Kong banks as trade and settlement programs widen,” analysts led by Sean Darby wrote in a report today. “Perhaps the ‘mini QFII’ facility and the pilot scheme allowing foreign institutions access to China’s RMB market will be seen as the beginning of ‘big bang’.”

China's Currency: Wiggle it. Just A Little Bit - “ADOPTING a more flexible exchange-rate regime serves China’s long-term interests as the benefits…far exceed the cost in reorganising industries and removing outdated capacities.” That is the kind of thing Tim Geithner, America’s treasury secretary, might say to his counterparts in Beijing as part of the strategic and economic dialogue between the two countries. But it is in fact a quote from Hu Xiaolian, deputy governor of the People’s Bank of China (PBOC), the country’s central bank.In a series of speeches last month, Ms Hu argued that a freer exchange rate liberates China’s monetary policy; spurs innovation in China’s export industries; and channels investment to its service sector, where many of China’s new jobs will be found. China’s decision on June 19th to make its currency more flexible was therefore an “important move”. But in the two months since, the yuan has hardly budged.

So Much for the Flexible Yuan… A wonderful chart courtesy of the Council on Foreign Relations depicting what I described several weeks ago: Since announcing its renewed commitment to currency flexibility in the days leading up to the G20 summit, the appreciation of the yuan has been more symbolic than substantive…click on the chart for a crisper image, or visit China’s Head Fake. As I wrote several weeks ago (see Currency Manipulator): China’s strategy of publicly announcing a more flexible yuan policy in the days leading up to the G20 summit effectively deflected the debate away from the yuan. What’s more, China’s announcement was seemingly rewarded by a Treasury now more reticent to label it a currency manipulator.

The south will rise - PAUL KEDROSKY publishes a chart that appears to extrapolate current economic growth rates over the next few decades:  And he says: Unless you've been under a rock you likely saw the stories today about how China is supposedly going to pass the U.S. in terms of GDP by 2030. Absent collapse, I don't think it's going to happen (a 6%-plus pro-China delta in GDP growth for 20 years is wildly unlikely), but the [above] graph is fairly typical of that sort of linear thinking. Can you spot other unlikely trajectories? Extrapolation is a tricky business, and perhaps it is likely that China's growth rates will slow to levels characteristic of richer nations before it actually passes the American economy. But as far as I can tell, the trajectories Mr Kedrosky calls unlikely are unlikely only in the sense that they lead to a different rank ordering of nations than the current one. We can put things a different way. Is it realistic that Chinese per capita income will approach the levels seen in Malaysia and Mexico within the next 15 years (that is, a level of wealth equivalent to about half that in South Korea)? If you think the answer is yes, then you think China will catch America over that time period.

More Signs of (Probably Futile) Labor Pushback in China - Even though a strike at a Honda factory and suicides at Foxconn garnered world wide attention and led to significant pay increases, at this remove, the hubub about them seemed overdone (”China faces wave of strikes after Foxconn pay rise“). China is still very much an authoritarian country, the Honda strike was approved officially, and using suicides as a route to get wage increases is not a model that will get widespread traction. Perhaps more important, both companies were foreign, which also raises the question of whether one can generalize from these cases. The New York Times offers the other side of the coin: the futility of labor action against entities near and dear to the officialdom. One would have to imagine that state-owned banks hold a particularly favored position. Former bank staff, typically middle aged, fired in downsizing efforts, are virtually unemployable in China. Over the last two years, these workers have found their protests met with fierce opposition.

Protecting Asia From the West's Financial WMD -Liberalize, privatize, and deregulate your way to almost paradise; that was the message the West propagated during the height of the Washington Consensus era. Like many other Asian countries, however, China did not heed this call, preferring to stay away from securitization in a big way. Instead, China's recent financial problems are more prosaic and involve large government-run banks being compelled to lend to state-owned enterprises with sometimes limited regard for their ability to repay these loans. This trope was prominent in the middle part of last decade, and has resurfaced during recent times Critics often say that investment in export-geared enterprises is the last thing China needs at this point, but we have yet to see another massive wave of defaults. Anyway, back to today's story. The LSE house journal Global Policy has an interesting feature from the chief advisor to the China Banking Regulatory Commission (CBRC), Andrew Sheng, on how China was able to avoid the worst effects of the financial crisis. Aside from prudent regulation, another important task was shielding the Chinese economy from aftershocks emanating from the subprime capital of the planet and other bastions of financial innovation.

Can India outpace China’s growth? Just as China officially overtakes Japan to become the world’s second biggest economy, people are already looking down the league table. Morgan Stanley’s latest report - ”India and China: New Tigers of Asia” - suggests that India will soon be Asia’s growth pace-setter and start rising up the economic size rankings, albeit from its current lowly position outside the top ten.“We believe that, over the next two years, India should start matching China’s GDP growth of around 8.5-9.5%, barring another global financial crisis. More importantly, we think that, by 2013-15, India will start outpacing China’s GDP growth notably.”“Over the next 20-25 years, we expect India to remain the highest growth economy among large countries. India could have the advantage of maintaining its high-growth phase for a longer period than East Asia did as UN data shows that India’s age dependency will continue to decline until 2040.”So what’s behind this prediction?

So Much for Workers in India Being Cheaper - Yves Smith - When I was on C-SPAN the weekend before last, I got a call I didn’t quite know how to field. He claimed that Indians represented 35% of the managers in American companies, and that American visa restrictions meant that they were all going to send those jobs to India. I stumbled around a bit, and took issue with his claim (it certainly isn’t true at the senior levels of major companies), and also pointed out I didn’t think he argument about managerial jobs being sent to India held up, since new MBAs in India are now making more than their counterparts in the US.  In general, simple labor cost comparisons are vastly overrated in manufacturing. Factory labor is only 10% of the product cost of most manufactured goods, so the savings of having the work done in China is not all that large, and is often offset by other factors But in those cases like call centers, where the logistical issues are irrelevant, the issue I mentioned on air is coming to apply more broadly: India is no longer offering a cost advantage  From the Financial Times:

Much of Indian ‘Middle Class’ Is Almost Poor - Compared to China, India has more of its middle class precariously perched just above the poor, a spot from where it is very easy to tumble back into poverty. India’s middle class—defined as those able to spend between $2 to $20 a day in 2005 purchasing power parity dollars—has expanded to about 420 million, according to an Asian Development Bank report on Asia’s middle class out Thursday. But almost 60% of them live on between $2 and $4 a day. That’s about 20 to 40 rupees a day in nominal terms (using an exchange rate of 15.66 rupees to one purchasing power parity dollar) or between $300 to $600 in parity terms (4,700 rupees to 9,400 rupees) a month for a family of five.

Experts ask if GDP is outmoded as prosperity indicator - Over the past three decades China has achieved an annual economic growth rate of nearly 10 percent But that growth has come at a price. Sixteen of the world's 20 most polluted cities are located in China, and more than 80 percent of the country's rivers are considered polluted. Environmentalists say between 5 and 7 percent of China's annual growth is negated by the costs of ecological damage.The debate about the hidden costs of growth-oriented economics originated with German professor Gerhard Scherhorn, who warned some 30 years ago that "we are consuming nature's gifts by overfishing the oceans, lowering the water table, reducing biodiversity and driving global warming". So should the gross domestic product (GDP), the standard measure of economic output, continue to be the major factor in determining a country's level of prosperity? Hans Diefenbacher, an economist in Heidelberg, doesn't believe so.

The sick man - WHEN China's economy was announced as the world's second-largest earlier this week, the news was spun as a China story, or occasionally as a story about the Chinese challenge to America. But the data that triggered the announcement were Japanese, and China's rapid catch-up to the Japan says as much about the latter economy as the former. Five years ago China’s economy was half as big as Japan’s. This year it will probably be bigger (see chart 1). Quarterly figures announced this week showed that China had overtaken its ancient rival. It had previously done so only in the quarter before Christmas, when Chinese GDP is always seasonally high.Since China’s population is ten times greater than Japan’s, this moment always seemed destined to arrive. But it is surprising how quickly it came. For Japan, which only two decades ago aspired to be number one, the slip to third place is a gloomy milestone. Yet worse may follow

A yen for intervention? - Japan’s exporters might be howling in pain but elsewhere, the almost uninterrupted rise of the ‘Teflon yen’ is being greeted with glee by the country’s importers, currency traders and of course, former finance ministry types.  As the Japanese currency continued its onward and upward moves on Tuesday, reaching Y85.20 to the dollar, the former ‘Mr Yen’, Eisuka Sakakibara — the retired finance ministry bureaucrat who gained a reputation for moving currencies on every utterance — continued to enjoy shades of his former glory. On Tuesday, he predicted — somewhat dramatically — that the Japanese currency might surpass its post-war high of Y79.75, reached in April 1995, as early as end-September.What’s more, as Bloomberg reports, he warned that Tokyo would struggle to halt the yen’s further advance as the US was unlikely to support any intervention to weaken the currency

Japan Slowdown Amid Yen Rise Adds Pressure for Action - Japan’s weakest economic growth in three quarters adds pressure on policy makers to safeguard the recovery by expanding fiscal spending and loosening monetary policy to weaken the yen. Growth slowed to an annual 0.4 percent pace in the three months ended June 30 as consumer spending stalled and exports cooled, Cabinet Office figures showed yesterday. The expansion was less than the estimates of all 19 economists surveyed and pushed the economy into third place behind the U.S. and China. “If the yen strengthens further, the Bank of Japan may have no choice” but to ease monetary policy, said Yoshiki Shinke, senior economist at Dai-Ichi Life Research Institute in Tokyo. “We could see more fiscal support from the government.”

Japan To Mull New Stimulus As Yen Threatens Recovery (Reuters) - Japan's government will consider further stimulus steps, potentially making it the first developed country to turn to additional fiscal spending since the global crisis, as a strengthening yen threatens its faltering recovery. But the additional stimulus is expected to be relatively modest and is likely to involve reallocating funds rather than new spending. The government will start to debate stimulus steps on Friday, Economics Minister Satoshi Arai was quoted as saying by Jiji news agency on Tuesday. The latest move by the government, which is burdened by the highest debt to gross domestic product ratio among developed countries, could be aimed primarily at inducing the Bank of Japan to ease policy further to stem a further rise in the yen, analysts said.

A yen for growth - NOT long ago, I wrote:Not everyone can push down their exchange rate at once, it's true. But if central banks seek to reduce the negative growth impact of a rising real exchange rate by increasing monetary expansion, then it's possible for everyone to win—the attempt to win the battle over the limited pool of global demand will help reflate domestic economies. The situation is not unlike that in the Depression. Struggling economies progressively left the Gold Standard This is sort of what I had in mind:The yen fell today after a Sankei newspaper report fueled expectations the bank will expand a 20 trillion yen ($230 billion) credit program as soon as this week to lower short-term interest rates and weaken the currency. Trade Minister Masayuki Naoshima said today that the yen is too strong against the dollar and should drop about 6 percent to help exporters.Now, if everyone does what Japan does, then Japan will gain no exchange rate advantage from the move. But Japan will benefit, along with everyone else, from the fact that central banks have pumped a significant amount of new monetary stimulus into the system.

Japan Economy Minister: No Talk With PM On Concrete Stimulus Steps - Japan's economy minister Satoshi Arai said Friday there had been no talk of concrete economic stimulus steps during his one-on-one meeting with Prime Minister Naoto Kan.  "I exchanged views on current economic conditions with the prime minister and we talked about what is needed to protect the seeds of an autonomous recovery. But we didn't talk about concrete steps today," Arai told a regular a press conference.  Arai met privately with the prime minister prior to the press conference, as part of a series of meetings Kan is holding with economy-related ministers about economic stimulus steps expected to be introduced soon.

We need more quantitative easing to create jobs - I argue in this piece that:

  • Quantitative easing should be expanded
  • Even if the Bank of England were to buy the entire UK national debt that this policy would not be inflationary
  • The global recovery is faltering and an expansionary policy is needed to encourage private investors to create jobs
  • Additional quantitative easing could save as much as £38.5bn a year in interest costs to the taxpayer

Number of payday loans quadruples (UK) The number of consumers taking out a payday loan, which could have interest rates of 2,000 per cent, has quadrupled over the last four years, suggests new research by Consumer Focus. Taking out a payday loan could lead to debt problems if the payment is deferred as large amounts of interest may be accrued as a result. Consumer Focus estimates that 1.2 million people have turned to a payday loan since 2006 and have borrowed £1.2 billion in total. The firm urges banks to offer consumers affordable short-term loans as an alternative so that borrowers will not need debt help in the future.

Europe's economies: Turbocharged Germany | The Economist - THE machine that sputtered badly during the slump in world trade is now firing on all cylinders. Figures released on August 13th showed that the German economy grew by 2.2% (an annualised rate of close to 9%) in the three months to the end of June, well above even the most optimistic forecasts. The German figures, the best since reunification almost two decades ago, meant that the euro-area economy had a good quarter, too. GDP in the 16-country block rose at an annualised rate of 4%—much faster than in America and only a bit shy of surprisingly strong growth figures in Britain. The success of the euro-area’s largest economy owed a lot to a surge in exports (much of it to emerging markets) and to investment by firms at home looking to upgrade and expand their capital stock to meet that demand. Germany’s talent for bespoke engineering and sleek cars fits well with the needs of fast-industrialising countries and their new middle classes.

Negative Reaction to Charity Campaign: German Millionaires Criticize Gates' 'Giving Pledge' - Germany's super-rich have rejected an invitation by Bill Gates and Warren Buffett to join their 'Giving Pledge' to give away most of their fortune. The pledge has been criticized in Germany, with millionaires saying donations shouldn't replace duties that would be better carried out by the state.

The Stealth Debt Restructuring: Inflation - Europe’s sovereign debt crisis seems to have gone on holiday along with most of the rest of the Continent during August. But many economists warn that the underlying debt problem is merely in remission and could recur at any moment, once again upsetting world markets. Joachim Fels, co-head of global economics at Morgan Stanley, talked Thursday about how Europe is ultimately likely to deal with excessive debt in Greece, Spain, Portugal and several other countries. His answer boils down to one word: inflation. What’s more, though Mr. Fels did not go so far as to say that inflation would be a good thing, he also did not make it sound as if a modest rise in prices would be such a bad thing, either. Over coffee with a handful of journalists at the Morgan Stanley offices in Frankfurt, Mr. Fels argued that the European Central Bank and United States Federal Reserve are already exporting price pressures to the many countries in Asia, Eastern Europe or Latin America that peg their currencies to the dollar or euro.

Entering a Death Spiral?: Tensions Rise in Greece as Austerity Measures Backfire --The austerity measures that were supposed to fix Greece's problems are dragging down the country's economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back. This dire prognosis comes even despite Athens' massive efforts to sort out the country's finances. The government's draconian austerity measures have managed to reduce the country's budget deficit by an almost unbelievable 39.7 percent, after previous governments had squandered tax money and falsified statistics for years. The measures have reduced government spending by a total of 10 percent, 4.5 percent more than the EU and International Monetary Fund (IMF) had required.The problem is that the austerity measures have in the meantime affected every aspect of the country's economy. Purchasing power is dropping, consumption is taking a nosedive and the number of bankruptcies and unemployed are on the rise. The country's gross domestic product shrank by 1.5 percent in the second quarter of this year. Tax revenue, desperately needed in order to consolidate the national finances, has dropped off. A mixture of fear, hopelessness and anger is brewing in Greek society.

Greece's Central Govt Debt Rose EU6.6 Billion in Second Quarter (Bloomberg) -- Greece’s central government debt increased 6.6 billion euros in the second quarter from the preceding quarter, according to an e-mailed statement from the Athens-based Finance Ministry. The increase, to 316.9 billion euros, indicates that debt is “evolving within the set framework” of economic policy, which is to contain the public debt growth rate and bring it back to a sustainable path, according to the statement.

Greek Debt Crisis Finally Over? Maybe Not. - The world's grown accustomed to bouncing from crisis to crisis, like passengers in a car where the transmission keeps slipping and the vehicle keeps jerking.  One day it's Greece, then Portugal, then US. debt, then the lack of jobs. You know the drill.  Greece is one part of the crisis and while it has faded from the headlines, its debt problem hasn't faded. Carl Weinberg at High Frequency Economics spends a lot of time probing the debt crisis, which even if not in the headlines still weighs heavily on the global investor psyche. His latest report on Greece is a sharp reminder of why the worry persists.   Greece, as we all remember, hit the wall on debt and was leaning toward sovereign default when the world came to its rescue. The world in this case is the IMF and the EU central bank which offered Greece emergency loans in return for meaningful reforms.  Greece implemented some reforms and the loans started flowing. The problem, as Weinberg sees it, is not that Greece is getting aid but that the aid is in the form of debt, the very stuff that got country in trouble and the very stuff that is causing investors around the world to be so risk averse.

Greek crisis refuses to go away - The European Commission has approved the next €9bn (£7.4bn) tranche of loans for Greece but the underlying economy continues to deteriorate as Greek banks suffer a record loss of deposits and output contracts at a quickening pace. A report by HSBC said banks had lost 8pc of their entire deposit base in the five months to May. "The Greek market has never, since the first data in 2001, experienced such attrition," said banking analyst Joanna Telioudi. While some withdrawals point to capital flight by wealthy Greeks, it is clear that households and companies are running down savings to make ends meet. The Athens Chamber of Commerce warned yesterday that its members are in "dire straits", with a majority facing a liquidity threat.

Ireland: A recession of the banks, by the banks, and for the banks - A farmer  goes into an embattled tractor dealer and reaches an understanding on the purchase of an expensive tractor.  The farmer then goes to his local bank manager to get financing to purchase the tractor; as agriculture is not doing too badly despite the recession, there is some hope.  But the bank has an unexpected response: we can’t give you a loan to buy that tractor, but we can finance one very like it — that we recently reposessed.  So banks are in the farm machinery business, at the expense of actual farm machinery businesses. A recreational golf player reports that it’s a good time to play golf in Ireland.  Some local courses that had gotten shabby and run-down are finally having some needed working capital put into them, and now they look good.  How did this happen?  The banks took them over and will do anything to attract a bit of business, even if it means putting in some additional money.  Then there’s the miseries of the hotel business, which have featured in the national newspapers. 

Ireland Can Withstand The Euro's Ordeal By Fire, But Can Southern Europe? - Drugs and chemicals made up 57pc of Ireland’s €103bn exports last year. The IT giants Intel, Microsoft, Google, Paypal, and now Facebook all have well-known operations in Ireland, but Pharma quietly yields more money and jobs. Corporate tax of 12.5pc is half the story: the other half is a strategic industrial policy dating back to the 1990s.  Unlike other GIIPS (Greece, Italy, Portugal, and Spain), Ireland has an open economy geared to global trade. It has at least a sporting chance of clawing its way out of a horrendous eurozone trap. It can reasonably hope that exports will slowly offset the collapse of domestic demand induced by a 13pc cut in public wages and the most draconian deflation measures since the creation of the Republic.

Nope, it's not enough for the weakest of the "Zone" - Rebecca Wilder - Spanning the period April 14, 2010 to June 7, 2010, the euro lost 12.5% in value against the $US (this is not a trade-weighted measure of the currency value, but it'll do). As the currency tumbled, Q2 nominal export income grew quickly over the quarter for the top 5 economies in the Eurozone. The export income is welcome in Italy's economy, one of the PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain). But what about Greece, or the rest of the PIIGS countries that desperately need the external income?It's not enough. The problem is, that the external support generated by a euro depreciation is too evenly distributed across the "Zone". The result: those economies with both external and domestic demand posted record growth rates (i.e., Germany), while those with an overwhelming contraction in domestic demand posted further GDP declines amid reasonable external demand growth.

The Bonus Risk - In its July session, the European parliament approved some of the strictest rules in the world on the bonuses paid to bankers. The aim is to curb risk-taking by financial institutions. The new rules require that no more than 30% of bankers’ bonuses be paid in cash, that between 40% and 60% be deferred for at least three years, and that at least 50% be invested in “contingent capital,” a new form of debt that converts to equity when a financial company is in distress. The most innovative aspect of these new rules is that the limits do not apply only to financial institutions’ chief executive officers, but to all the top managers (though the definition of top managers is delegated to national parliaments). The alleged justification for this major interference in private contracting is the systemic effect that these bonuses can have.  The problem with this argument is that there is no evidence supporting the first crucial link in its logic. Much research has tried to establish a connection between bankers’ compensation schemes and risk-taking, but has failed to find one.

European Bond Spreads: Rising Again - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Aug 18th): From the Atlanta Fed: Peripheral European bond spreads over German bonds remain volatile and elevated. Since August 9, the 10-year Greece-to-German bond spread has risen 93 basis points (bps) through August 17. Likewise, Portugal’s bond spreads rose 32 bps, Italy’s rose 16 bps, Spain’s rose 21 bps, and Ireland’s rose 42 bps during the same period. As of today, the Greece-to-German spread has widened to 834 bps (peaked at 963 bps in May) and the Ireland-to-German spread has increased to 293 bps (peaked at 306 bps in May).

Sovereign Debt Part 5D: European Banks, What if Things Go Really Badly? - More Than Half of Europe’s Banks Would Need Capital. A quarter would be insolvent. This part was moved a bit later to allow a more thorough analysis of the European Bank Stress Tests. There are two questions I’ve been asked repeatedly since the European stress tests were announced.  Q1. Was there much sovereign stress in the European bank stress tests? NO. The most glaring oversight, in the opinion of the author and many other analysts, is assuming there would be no sovereign defaults, and thus not showing any losses on the bank’s long term holdings (in the banking category vs the “trading book”). According to the Committee of European Banking Supervisors, the sovereign stress scenario results in “39 billion euro associated with valuation losses of sovereign exposures in the trading book “.

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