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

Saturday, August 27, 2011

week ending Aug 27

US Fed balance sheet flat in latest week (Reuters) - The U.S. Federal Reserve's balance sheet was stable in the latest week, as the central bank's bond holdings were little changed, Fed data released on Thursday showed. The Fed's balance sheet was $2.843 trillion in the week ended Aug. 24, compared with $2.842 trillion in the week ended Aug. 17. For balance sheet graphic: The Fed's holdings of Treasuries totaled $1.648 trillion, unchanged from the previous week. Meanwhile, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) totaled $892.4 billion versus $892.6 billion the previous week. The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system totaled $109.8 billion versus $110.7 billion from a week earlier. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $1 million a day in the week ended Wednesday, slower than a $6 million average daily rate in previous week.

Fed Balance Sheet Expands In Latest Week - The size of the U.S. Federal Reserve's balance sheet expanded slightly in the latest week as the central bank maintained a large portfolio of assets following the end of its economic stimulus. The Fed's asset holdings in the week ended Aug. 24 grew slightly to $2.863 trillion, from $2.862 trillion a week earlier, it said in a weekly report Thursday. The Fed's holdings of U.S. Treasury securities remained the same as a week earlier at $1.648 trillion on Wednesday. After the last policy meeting, the Fed said it will keep the size of its portfolio stable by continuing to reinvest the proceeds of its maturing securities. Thursday's report showed total borrowing from the Fed's discount lending window fell to $11.70 billion from $11.90 billion a week earlier. Borrowing by commercial banks fell to zero, from $3 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts dipped slightly to $3.484 trillion, from $3.485 trillion the previous week. Meanwhile, U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.749 trillion from $2.752 trillion in the previous week. Holdings of agency securities fell to $734.58 billion from the prior week's $ 732.33 billion.

FRB: H.4.1 Release-- Factors Affecting Reserve Balances -- August 25, 2011

Analysis: Fed would get little bang from balance sheet tweak (Reuters) - Facing pressure to keep money printing in check, U.S. central bankers are mulling a modest approach to stimulus that would give the struggling economy only a tiny boost -- if it helps at all. After two rounds of bond purchases that have pumped $2.3 trillion into the banking system, the Federal Reserve could buy long-term Treasury debt while selling short-term securities it already holds. The idea, outlined by Bernanke in July, would be to lower long-term interest rates without increasing the money supply. That in theory could spur home purchases by lowering benchmark rates for mortgages. It could also make it cheaper for companies to borrow so they can buy more equipment. Such a plan could also weaken the dollar and increase stock prices, which might boost exports and make people feel more positive about the economy. But many analysts doubt growth would improve much unless the Fed injects a lot more money into the economy.

Waiting for the Fed to act - Economic conditions are deteriorating. Here's how and when the Fed might intervene. Bond yields on perceived safe assets have plunged as pessimism over global economic conditions takes hold. The 10-year U.S. Treasury rate has fallen 100 basis points since the start of July, signaling expectations of a profoundly weak economy and a very low inflation rate over the next decade. The yield on Treasury Inflation Protected Securities, whose coupon and par value are guaranteed to go up with any increases in the headline consumer price index, fell by almost 80 basis points over the same period. That suggests to me that lower inflationary expectations have made only a minor contribution to falling nominal yields, with perceptions of a weaker economy the dominant factor. And in response, the Fed should do what, exactly? I would suggest that the more important and achievable goal for the Fed should be to keep the long-run inflation rate from falling below 2%. The reason I say this is an important goal is that I believe the lesson from the U.S. in the 1930s and Japan in the 1990s is that exceptionally low or negative inflation rates can make economic problems like the ones we're currently experiencing significantly worse.

Central Banks Still Have Much Ammunition - Ambrose Evans-Pritchard writes there is still much monetary policy can do to support the economy: [W]ith fiscal policy exhausted, the burden must fall on monetary policy. Here we have barely begun to use our atomic arsenal even at zero rates. As Milton Friedman taught us – though nobody in Frankfurt -- it is a fallacy to think that low rates are loose. Zero can be extremely tight.  That may be the case now with US Treasury yields signalling deflation and M2 velocity collapsing as it did pre-Lehman.  To those who argue that the Fed is pushing on the proverbial string, David Beckworth from the University of Texas replies that the Fed showed between 1933 and 1936 that it could deliver blistering growth of 8pc a year despite debt deleveraging in the rest of the economy.  He is referring to this post where I noted the following:  Below is a table from his paper that shows household balance sheets in real terms.  Note that between the 1933 and 1936 U.S. household underwent a cumulative deleveraging  in real terms of 20%. This is far more in percentage terms that has happened over the past few years. And yet between 1933 and 1936 the U.S. economy had a robust recovery.  Real GDP averaged almost 8% growth during these years.

The Upcoming Expansion Of U.S. Bank Credit - Since the FOMC meeting, there has been a noticeable silence over the Fed’s monetary policy following QE2. But there is some evidence that the funding of government debt at low interest rates will shift to the repo market, rather than a new round of quantitative easing.The silence on this subject may be partly explained by the monetary focus shifting to Europe. However, it is likely that the Fed has no intention of introducing QE3, given that the expansion of narrow money so far has led only to a degree of price inflation, without much benefit to asset prices. And with the ECB still reluctant to print euros, QE3 would probably collapse the dollar/euro rate and propel gold considerably higher, putting unwelcome strains on the financial system. The Fed also finds itself having dramatically expanded the monetary base for little economic benefit: against all its expectations, the economy is sliding into recession again. Perhaps it is a case of all the people being no longer fooled all of the time with respect to what QE actually is. No, another approach is called for.

Auerback/Parenteau: Jackson Hole will be a Black Hole for Those Hoping for QE3 - Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise. We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy. But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy.  To reiterate, today’s growing economic malaise is unsurprising to those of us who viewed the upturn in the global economy in the aftermath of the Lehman bankruptcy largely as a consequence of the coordinated fiscal expansion that was undertaken at that time, NOT the embrace of “quantitative easing” or other forms of monetary policy ‘stimulus’. By the same token, it is equally easy to see the current accelerating downturn as a product of the premature withdrawal of said stimulus.

Bernanke signals no new stimulus - The chairman of the Federal Reserve, Ben Bernanke, has signalled that the US central bank will not take any immediate action to boost growth. In a keenly anticipated speech, Mr Bernanke simply said the Fed had a "range of tools that could be used to provide additional monetary stimulus". The Fed's September meeting would last for two days instead of one, he added. Earlier, revised data showed the US economy grew less than first estimated in the second quarter of 2011. The Commerce Department now says the economy expanded at an annualised rate of 1% between April and March, down from its first estimate of 1.3%. The figures were seen as raising pressure on the Federal Reserve to do more to boost the economy, for instance by introducing further quantitative easing - an injection of cash into the financial system.

Bernanke Offers No Plan for New Stimulus The Federal Reserve chairman, Ben S. Bernanke, said Friday that the economy is recovering and the nation’s long-term prospects remained strong, an upbeat assessment that offered little indication of any plans for additional measures to boost short-term growth.  Mr. Bernanke’s much-anticipated remarks1 follow the Fed’s announcement earlier this month that it intends to hold short-term interest rates near zero until at least the middle of 2013, a reflection of its view that growth will not be fast enough during that period to drive up wages and prices. “With respect to longer-run prospects, however, my own view is more optimistic,” Mr. Bernanke said in his prepared remarks. “The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”

Bernanke: We’ll Wait and See, but No Changes in Policy for Now - No surprises in Federal Reserve Chairman Ben Bernanke’s speech from Jackson Hole, Wyoming this morning. He starts off by saying that although it will take time, the economy will eventually recover: Might not the very slow pace of economic expansion of the past few years, not only in the United States but also in a number of other advanced economies, morph into something far more long-lasting? I can certainly appreciate these concerns…, however, my own view is more optimistic. As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals. If the Fed thought the drop in output and employment was permanent, then policy could not help and there would be little for the Fed to discuss. But if the fall is temporary, i.e. cyclical rather than structural, then it’s possible for the Fed to use monetary policy to help the recovery along. The question is, are they prepared to do so?

Ben Bernanke: Fed Can't Fix Economy - All eyes were on the Federal Reserve Chairman as he delivered a speech from a conference in Jackson Hole, WY. Could Bernanke tell us about some miracle cure for the ailing US economy? No, Uncle Ben could only tell us what we know: the Fed is ready to administer medicine if the economy continues to slow, but he didn’t write the prescription yet. The speech was a rehash of the official central bank statements–the pace of economic recovery is slowing, but it should pick up in the second half. If not, the Fed will deal will figure out something at its September meeting. Blah, blah, blah… The was not what people wanted to hear, especially less than two hours after learning that growth was worse than originally thought in the second quarter. The government released revised growth figures for the US economy: in the second quarter, GDP grew at an annual rate of 1.0 percent, down from the initial estimate 1.3 percent. This follows the paltry 0.4 percent growth rate for the first quarter. To put it bluntly, US growth stinks.

Bernanke: Fed will decide next month on new policy - — Federal Reserve Chairman Ben Bernanke on Friday put off a lengthy discussion of the easing options available to the central bank until the next Federal Open Market Committee meeting late next month.  “The Fed has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said.  These options were discussed in August and “we will continue to consider these and other pertinent our meeting in September,” Bernanke said.  Bernanke announced that the Fed had decided to expand its September meeting to two days – Sept. 20 and 21 – to review the pros and cons of further easing.  “The Fed is not prepared to act at this point, but kept a bias to ease in place,”

Bernanke's Invisible Bazooka Ploy - Mish -Bernanke is out of tools that make any sense even to him. Seriously, what can he do he has not already done? Given that $1.6 trillion in excess reserves did not do a damn thing to spur lending or job creation, what possible good can another $1 trillion do? The answer is none. Yet Monetarist fools want more QE. Monetarist fools are also hoping for "Operation Twist", technically not QE but an attempt to drive down long-term rates by buying the long end of the curve and selling the short end. Seriously, what possible good can come from say, driving down 10-year yields to say 1.75% or even 1.5% from here. Mortgage rates are at record low yields, yet new home sales are at the 1963 levels. Clearly something other than the yield curve is holding down sales. So what else can Bernanke do? Monetize more debt? How about ..... The Invisible Bazooka Ploy: Bloomberg reports Bernanke Says Fed Still Has Stimulus Tools, Doesn’t Signal He’ll Use Them: Federal Reserve Chairman Ben S. Bernanke said the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them. Translation: "I've got an invisible bazooka in my pocket and I will use it when I have to."

Quick Note on Bernanke - I just wanted to voice my disgust with Ben Bernanke quickly. Here is what I gathered from his speech in Jackson Hole:

    • 1. The Fed has the tools to offset shocks to money demand, but only sees fit to use them in the event that the country is facing actual deflation.
    • 2. The Fed is highly committed to memory-less inflation targeting, and is happy living with inflation below 2%.
    • 3. The Fed will not offset contractionary fiscal policy, handing proponents of active demand management victory on a silver platter, though they don’t deserve it.

We will have to wait until the next Fed meeting to see Bernanke’s “real” intentions on monetary policy. Will he steer the committee into a more aggressive stance? The stock market is very slightly up on the speech, so maybe WAll Street knows something that I don’t…but I just can’t see how an aggressive policy move is in the cards.

An Alternative Quick Take on Bernanke - The statement was utterly in line with my perception of the short run situation. Very close to my perception of the long run situation. The only difference is that I think long term fiscal imbalances are not that big of a deal. However, I would never have said that outloud if I were Bernanke anyway. I thought the way he handled the debt ceiling debacle was tactful and fairly strong from a central banker. I thought his repeat of the phrase “is likely to warrant” was understandable though slightly more conservative than what I would have been inclined to do. I would have considered adding “if not beyond”  I also felt his insinuations that short term fiscal policy needed to expansionary was done well in the context of what an independent Central Banker should say about a highly partisan issue.

Bernanke Speaks Without Saying Much - Fed Chairman Bernanke says he understands the nation’s economic pain. Speaking earlier at the Fed’s Jackson Hole conference, he also explains that “monetary policy must be responsive to changes in the economy and, in particular, to the outlook for growth and inflation.” But he downplays the prospects for additional stimulus. “Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view…” This despite his observation that “the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus.” Quite true, but apparently those tools will be kept in the shed for the foreseeable future. Bernanke’s comments arrived shortly after the government announced that GDP growth in the second quarter was slower than initially estimated. The economy expanded at a real annualized 1.0% rate vs. the earlier 1.3% estimate.  The net result: slower growth and a central bank that’s inclined to let the status quo in monetary affairs roll on.

Key Passages From Bernanke’s Jackson Hole Remarks -Federal Reserve Chairman Ben Bernanke’s speech at the Kansas City Federal Reserve Bank’s annual Jackson Hole, Wyo., conference ran more than 3,500 words. Here are some of the most important. The recovery is lousy: “It is clear that the recovery from the crisis has been much less robust than we had hoped….Unfortunately, the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features…have acted to slow the natural recovery process.” Financial stress is a “significant drag”: “Financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently re-emerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation…. It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth.”

The Near- and Longer-Term Prospects for the U.S. Economy - Ben Bernanke text

2011 Jackson Hole Economic Policy Symposium (papers) - FRB Kansas City

BIS Warns Bernanke On Fed’s Easy-Money Policies - A top economist at the Bank for International Settlements, the central bank of central banks, made a veiled criticism on Friday of Ben Bernanke‘s easy-money policies by siding with one of the Federal Reserve chairman’s chief internal critics. Stephen G. Cecchetti, chief economist at the BIS, praised Kansas City Fed President Thomas Hoenig for persistently speaking his mind in warning Bernanke about the dangers of keeping interest rates near zero for so long. When he had a vote on the Fed’s policy-setting body in 2010, Hoenig always voted against keeping credit so easy. Hoenig, a Fed veteran who is hosting his last summer annual retreat of top monetary policymakers here, has repeatedly warned that keeping rates so low for so long runs the risk of creating bubbles and sparking inflation. “We at the BIS agree with you,” Cecchetti told Hoenig and an audience of top global central bankers, including Bernanke and European Central Bank President Jean-Claude Trichet, before presenting his paper on how high debt stunts economic growth.

The Friday Podcast: Fed Behaving Dangerously, Fed President Says - On today's Planet Money, we talk to the one guy who, meeting after meeting, cast the lone "no" vote: Thomas Hoenig, president of the Kansas City Fed.

Focus Should Shift to Fixing U.S. Fiscal Woes - Federal Reserve Bank of Kansas City President Thomas Hoenig said there’s a limit to how much more the central bank can help the U.S. economy and that the focus should now be on solving the country’s fiscal problems.  “We can’t do it all,” Hoenig, the central bank’s longest- serving policy maker, said in an interview with Bloomberg Television that airs today. “We have a problem in this country with debt” and “if we don’t turn to the long run, we will be dealing with overnight crises for as far as the eye can see.”  “Monetary policy is an important tool, it is a valuable tool, but it is not an exclusive tool,” Hoenig said in the interview from Jackson Hole, Wyoming, where the Kansas City Fed is hosting the central bank’s annual symposium. Yet “it does not solve all problems.”  Hoenig, who has led the Kansas City Fed since 1991, said he would probably oppose the idea of the Fed taking further action to stimulate the economy. He said he still continues to support the central bank’s dual mandate for achieving price stability and full employment.

Why is the Fed Hesitant to Do More for the Economy? -I believe the Fed needs to do more — but it’s not my decision. It does, however, bring up a question. With so many economists pushing for easier policy, and with Bernanke himself criticizing the Japanese for not doing more when they were in a similar position, why is the Fed unwilling to commit to further easing? Where does the hawkishness come from?I think it’s a combination of several factors. First, some members of the board do not believe that monetary policy can do much to stimulate the economy, low interest rates or not, but they see the potential for large negative effects from inflation. These are the doctrinaire inflation hawks. Second, there are also some who that believe monetary policy is effective in normal times, but much less so near the lower bound for interest rates (which we are at presently). Thus, again, an expected-benefit expected loss analysis generally comes up negative, i.e. the cost of inflation is high relative to the benefits.Third, there is a fairly large group who believe it could work. But as Bernanke said in a speech not too long ago, this is uncharted territory for the Fed and they aren’t sure what to expect in terms of inflation, etc. This uncertainly leads members of this group to assign a large spread to the potential costs — they don’t think inflation will be a problem, but a large outbreak of inflation cannot be ruled out and must be factored into the decision. But the clincher is the fear that if they do end up creating inflation, the Fed could lose its independence

Bernanke’s Perry Problem, by Paul Krugman - Why don’t I expect much from Mr. Bernanke? In two words: Rick Perry.   I don’t mean that Mr. Perry, the governor of Texas, is personally standing in the way of effective monetary policy. Not yet, anyway. Instead, I’m using Mr. Perry — who has famously threatened Mr. Bernanke with dire personal consequences if he pursues expansionary monetary policy before the 2012 election — as a symbol of the political intimidation that is killing our last remaining hope for economic recovery.  To see what I’m talking about, let’s ask what policies the Fed actually should be pursuing right now.  In 2000 an economist named Ben Bernanke offered a number of proposals for policy at the “zero lower bound.”  Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies. These could include: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash. So why isn’t the Fed pursuing the agenda its own chairman once recommended for Japan?

Has Politics Paralyzed the Fed? - Actually, no. But Paul Krugman says yes. This morning's NYT Krugman column starts by focusing us on Rick Perry. Perry is of course an excellent foil, and genuinely scary. But does Perry actually influence Ben Bernanke's behavior? Well, not really. Since Perry is only "symbolic," what exactly is the substantive nature of the political pressure on the Fed? Krugman mentions two things: (i) the dissent by three members of the FOMC on the last policy decision; (ii) some public statements by Paul Ryan about dollar debasement and such. Now, (i) Dissent within the FOMC is certainly not political; that has to do with the internal workings of the Fed. I don't think you can make a case that Plosser, Kocherlakota, or Fisher were motivated by political pressure (see this, this, and this). (ii) There is nothing much new about members of the House criticizing the Fed. Ron Paul has for a long time been arguing that we should abolish the Fed, which seems to make even members of his own party want to run the other way. I don't see any evidence that monetary cranks have altered Fed behavior.

QE Confusion -- Michael Woodford has a piece in today's FT warning against QE3 today in the FT. There are a few problems with it, however.  Woodford's arguments are:

  • 1. QE and QE2 were supposed to work by raising the price level, which is theoretically unlikely. Agreed -- and the Fed specifically said that the LSAP was intended to be different from QE(*) precisely because it was not going to lead to a permanent expansion of the money supply. So an impact on the actual price level was never intended to be the mechanism through which QE helped the economy.
  • 2. QE and QE2 were supposed to work by flattening the yield curve and reducing long-term interest rates... but while QE1 accomplished this, QE2 did not. Woodford does not explain why he thinks the first round of QE worked but the second round didn't. Furthermore, there are a number of empirical studies that provide consistent estimates that QE2 did in fact have a significant impact on long-term interest rates. (See here for a summary of some of them.)
  • 3. QE2's main impact was through altering the market's expectations about future policy... but this is a bad way for the Fed to communicate with the markets.. But now that the Fed has explicitly described its intended policy with respect to short-term interest rates (i.e. zero for the next two years), why discount the possibility that QE3 could change expectations regarding long-term interest rates?

How QE3 Could Help - With Bernanke's speech today at Jackson Hole, QE3 is in the news. Yesterday Izabella Kaminska at Alphaville wrote about the Fed's use of Jedi mindtricks -- its influence on market expectations -- and rightly noted that one of the important impacts of any additional QE would be its effect on market expectations. Agreed.  But a couple of times now she has made reference to her belief that QE3 "might only prolong the liquidity trap or make it worse." I'm trying to understand the argument, and I'm not sure that I get it. When I hear the term "liquidity trap", I think about a situation (like the present) in which nominal short-term rates have been pushed down to zero, so conventional monetary policy has no impact on the economy. By selling short-term assets and buying long-term assets, how exactly would a new round of LSAPs by the Fed make the liquidity trap worse?  More generally, I have yet to see a convincing argument for why QE3 would be a bad idea (in the previous post I explained why I find Woodford's arguments unconvincing, for example), and I can see a couple of ways in which it might help.

The Mind Reels - From Stephen Cecchetti's paper at the Jackson Hole conference. As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. With few exceptions, the focus was on a real economic system in which nominal variables – prices or wages, and sometimes both – were costly to adjust. The result, brought together brilliantly by Michael Woodford in his 2003 book, is a logical framework where economic welfare depends on the ability of a central bank to stabilise inflation using its short-term nominal interest rate tool. Money, both in the form of the monetary base controlled by the central bank and as the liabilities of the banking system, is a passive by-product. With no active role for money, integrating credit in the mainstream framework has proven to be difficult. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing. On the fringe were theoretical papers in which debt played a key role, and empirical papers concluding that the quantity of debt makes a difference..  The mind reels - they are just starting to think about how to include debt in their models now?

A Look at the Accuracy of Policy Expectations - NY Fed - Since the 1980s, the primary policy tool of the Federal Reserve has been the federal funds rate. Because expectations of the future path of the funds rate play a central role in the term structure of interest rates and thus the monetary transmission mechanism, it is important to know how accurate these expectations are in predicting the funds rate. In this post, we investigate this issue using a well-known survey of private sector forecasters. We find that forecasts tend to over-predict the funds rate in easing cycles and under-predict it in tightening cycles. In addition, while forecasts during tightening cycles have become more accurate over time, forecast accuracy during easing cycles has not improved.

The Fed: Independent or Unaccountable? - I know that central bank independence is held as sacred by those who back fiat money.  But are their actions truly independent, or are they slaves to the Treasury, not truly independent, but unaccountable to voters and seemingly, Congress as well.  I have written about this before: Central Bank Independence is Overrated.  Central bank independence does not mean that Congress can’t tell them what to do, even if they ignore it.  It does mean doing what is best for the nation as a whole, regardless of what the politicians say. One reason why I think the Fed is unaccountable is the $1.2 Trillion of secret loans they made to banks during the crisis.  Those loans did not appear on the H.4.1 report.  If the Fed made these loans, where did it source the liabilities to fund these loans?  The Fed is not magic; it still has to find ways of funding the loans that it makes.  If it did not fund the loans, we have a real problem, because we can’t trust the reports that the Fed gives us.  If it did fund the loans, but did not report it, we have a real problem, because we can’t trust the reports that the Fed gives us. Are there more secrets that the Fed is hiding?

Fed secretly loaned $1.2 trillion in public money to Wall St. firms: report - An analysis of tens of thousands of documents obtained by Bloomberg through a Freedom of Information Act (FOIA) request shows that the U.S. Federal Reserve made approximately $1.2 trillion in loans from public money to support Wall Street firms in the midst of one of the worst financial crises ever. Differing from the $16 trillion in loans made through asset swaps and preferred stock agreements, which were first revealed by a recent Government Accountability Office (GAO) audit mandated by Congress, these loans came from public money, representing the greatest largess of the financial sector during a crisis that threatened to pull the whole globalized system of finance to its knees. Made from August 2007 through April 2010, the largest borrowers included familiar names like Morgan Stanley, which took $107.3 billion; Citigroup at $99.5 billion; and Bank of America with $91.4 billion. Foreign firms got a piece of the pie too: the Royal Bank of Scotland Plc was given $84.5 billion; UBS AG took $77.2 billion; and German bank Hypo Real Estate Holding AG took out $28.7 billion, according to Bloomberg. The Fed claimed it suffered "no credit losses" on the emergency loans, insisting that it has even made back over $13 billion in interest and fees. The loans were made in secret, and not even disclosed to the GAO, to prevent the appearance of weakness in the system, the Bloomberg report said.

Where Did All of the QE2 Money Go? - Hint: The Fed was extremely generous to foreign banks with the discount window.   Courtesy of the recently declassified Fed discount window documents, we now know that the biggest beneficiaries of the Fed's generosity during the peak of the credit crisis were foreign banks, among which Belgium's Dexia was the most troubled, and thus most lent to, bank. Having been thus exposed, many speculated that going forward the US central bank would primarily focus its "rescue" efforts on US banks, not US-based (or local branches) of foreign (read European) banks: after all that's what the ECB is for, while the Fed's role is to stimulate US employment and to keep US inflation modest. And furthermore, should the ECB need to bail out its banks, it could simply do what the Fed does, and monetize debt, thus boosting its assets, while concurrently expanding its excess reserves thus generating fungible capital which would go to European banks. Wrong. Below we present that not only has the Fed's bailout of foreign banks not terminated with the drop in discount window borrowings or the unwind of the Primary Dealer Credit Facility, but that the only beneficiary of the reserves generated were US-based branches of foreign banks (which in turn turned around and funnelled the cash back to their domestic branches), a shocking finding which explains not only why US banks have been unwilling and, far more importantly, unable to lend out these reserves, but that anyone retaining hopes that with the end of QE2 the reserves that hypothetically had been accumulated at US banks would be flipped to purchase Treasurys, has been dead wrong, therefore making the case for QE3 a done deal. In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!

Fed’s $1.2 Trillion In Financial Sector Loans ‘A Classic Case Of Moral Hazard’ - During the 2008 financial crisis, when the nation's banking system seemed on the verge of collapse, President George W. Bush authorized a $700 billion bailout of the financial industry. The U.S. Treasury implemented that program, known as TARP, in an effort to stave off economic catastrophe. At the same time, and in the years that followed, the Federal Reserve was undertaking its own rescue operation, in the form of private, previously undisclosed loans to banks and other institutions -- lending as much as $1.2 trillion, nearly twice the amount of the Treasury bailout, according to a data analysis performed by Bloomberg News and published on Monday. The scope of the Fed's private lending had previously only been guessed at, but figures obtained under the Freedom of Information Act by Bloomberg News show that the nation's central banker issued loans to more than 300 institutions between August 2007 and April 2010, including over 100 loans of $1 billion or more. While the Fed's loans likely helped to prevent a complete implosion of the global banking system, analysts say they fear the loans may have contributed to an atmosphere of complacency on Wall Street. Banks that received emergency cash infusions during the crisis may now believe the Fed will always be there to bail them out of trouble, the thinking goes.

More on how the GAO’s phony Fed audit failed to disclose some dirty secrets about BlackRock and JP Morgan - We recently revealed that the Government "Accountability" Office (GAO) audit of the Fed's emergency practices during the financial panic (which caused so much consternation even in watered down form) was a complete whitewash. In its review of the Fed's outsourcing practices, it failed to mention the most damaging and suspicious sole-source (no bid) contract awarded to BlackRock, which was for handling the New York Fed's toxic Bear Stearns portfolio, otherwise known as Maiden Lane. This contract would generate $108,000,000 in fees and was one of the largest awarded during the bailout period, but it might also have saved JP Morgan $1.1 billion in losses from its Bear Stearns acquisition.  A key finding from the GAO report: The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency lending activities. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively due to exigent circumstances as permitted under FRBNY’s acquisition policies.

The European Dollar Funding Crunch Is Back: Fed Does Another $500 Million In USD Swaps This Time With The ECB - And now for some disturbing news out of the ECB, just in time for tomorrow's sub-1% GDP announcement and Jackson Hole disappointment. Unlike last week, when the Fed conducted a $200 million FX swap with the Swiss National Bank, this week the bank in dire needs of dollar funding is the ECB itself... and for two and a half times than last week. Furthermore, unlike last week, when we knew in advance that at least one European bank was experiencing a dollar liquidity event, this time the update from the ECB indicated no USD-based liquidity constraints: the $500 million in 7 day USD punitive loans quietly expired and everyone once again assumed that Eurozone liquidity is back to normal. It isn't. The question once again now becomes, who finds themselves in a dollar funding crunch?

Why the M2 Growth Spurt? - Quantitative Easing (both I and II) has caused the monetary base—the sum of currency and bank reserves—to explode in the past three years, but has not resulted in similarly large increases in the growth of broader measures of the money supply such as M2. Instead banks have largely held the extra money that the Fed created in order to finance its purchases of longer term Treasuries and mortgage backed securities. You can see this in the following time-series chart. As the monetary base (right scale) increased sharply, the ratio of M2 to the monetary base—the M2 multiplier (left scale)—has moved in the opposite direction in complete lock-step fashion. Thus changes in the multiplier have offset increases in the monetary base.  But if you look closely at the lower right of the graph, you can see that this pattern may have shifted recently as the M2 multiplier increased. In fact, over the past couple of months, M2 growth has spurted, as you can see in the next chart showing monthly M2 averages through July.

Are We Facing Another Troubling Rise In Money Demand? - Economist John Taylor of Stanford is worried that the appetite for liquidity is rising... again. The source for this concern starts by recognizing that "quantitative Easing (both I and II) has caused the monetary base—the sum of currency and bank reserves—to explode in the past three years, but has not resulted in similarly large increases in the growth of broader measures of the money supply such as M2," he writes. Why hasn't M2 followed suit? Because banks are sitting on the liquidity injected into the system.  The net effect is clear in a graph supplied by Taylor. The sharp rise in the monetary base (right scale) contrasts with the decline in the M2 multiplier (left scale). "But if you look closely at the lower right of the graph, you can see that this pattern may have shifted recently as the M2 multiplier increased," he adds. This could be a sign that inflationary risks are rising. Alternatively, the uptick in the M2 multiplier may reflect a rising demand for money, in which case the risk of inflation is low. "It’s probably too early to tell for sure," Taylor opines, "but the Fed’s weekly Money Stock Measures, released each Thursday afternoon, will be important to monitor in the weeks ahead."

Liquidity Traps, Money, Inflation, and Bond Yields - What is a liquidity trap? This is really two questions: (i) What is the "liquidity" that is getting trapped and (ii) What is the "trap" all about? In Old Keynesian economics and Old Monetarism, we think of the financial world in terms of two assets: interest-bearing assets and money. Money is the stuff that is used in transactions - liquidity - and private sector economic agents are willing to substitute money for interest-bearing assets in response to changes in the nominal interest rate. The nominal interest rate is essentially a measure of the scarcity of money as a medium of exchange. Monetary policy is about swaps by the central bank of money for interest bearing assets, or the reverse, and the attendant effects of those actions. One of those effects is a short-run liquidity effect. A central bank swap of money for interest bearing assets tends to make money less scarce as a medium of exchange in the short run, and the nominal interest rate falls. But what if the nominal interest rate were zero? In that case, money is not scarce as a medium of exchange, so that money and "interest-bearing" assets are essentially identical, in which case central bank swaps of money for other assets are irrelevant. That's Grandma's liquidity trap.

Fidei defensor - Or, some people continue to defend the view that rapid inflation is just around the corner An Econbrowser reader writes, in defense of Governor Perry’s assertion that the Fed is debasing the currency: "The CPI is not a valid indicator of 'debasement.'" I think this comment provides a wonderful example of the Alice in Wonderland world in which some people reside -- if the data do not cooperate, redefine the terms! The reader continues:"Even putting aside quite legitimate quibbles with CPI calculation, the CPI remains contained because we are in a Depression and demand is anemic. This does not imply that the Fed is not debasing the dollar. It clearly is, as illustrated by M2, MZMN the Fed balance sheet, and gold." Now, in the dictionaries I read, I see the definition for debasement sound something like this: To reduce the exchange value (of a monetary unit) So I just simply don't understand the statement that the rate of change in the CPI is not the way to measure the pace of debasement, in the absence of an alternative bundle of goods to use as a reference. Actually, it is true that the exchange value of money has been decreasing against a bundle of goods purchased by households, namely the basket in the consumer price index. It's been doing that for most of the past century.

New Deflationary Expectations Taking Hold? - Once upon a time, we found that stock prices are a contemporary indicator of the state of the U.S. economy, meaning that instead of telling us what's going to happen in the future, they tell us what's happening today.  So what exactly is the stock market trying to tell us about what investors are expecting for the U.S. economy?  Let's first look under the hood of the S&P 500. Because changes in the growth rate of stock prices are directly proportionate within a narrow range to changes in the growth rate of their expected underlying dividends per share at defined points in the future, we can use dividend futures data along with current stock prices to determine the extent to which changes in future expectations in the stock market's fundamentals are responsible for the changes we observe in today's stock prices.

The Morality of the Other Side in the Class War - The Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board. The word from these folks is "No Inflation!" If that means millions more people will suffer unemployment for a few more years, that's a price that the Post and Samuelson are willing to pay.  Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don't need the Post and Samuelson to put them into print. So, this really is a public service. What's neat about this picture is that there is little dispute about the basic facts surrounding inflation. Inflation is a problem that stems from an overheated economy. Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar type hyper-inflation. This means that if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment. It will not just creep on us overnight when we are sleeping.

Dollar Watch - In the excitement over the debt ceiling debate, the increasing extent of fiscal drag, and anxiety about an economic slowdown, I have neglected discussion of the dollar. I still think that continued dollar depreciation is necessary to effect global rebalancing. I’d prefer it to happen by way of expansionary monetary policy, but we might get dollar depreciation as intransigent policymakers work hard to destroy the safe-haven role of US Treasury securities. [0] So, while all eyes are on Jackson Hole, here’s a quick, stream of consciousness review of some dollar-related issues. In Figure 1, I present the long history of the real value of the dollar, to provide perspective. Notice that the dollar has been declining in value since early 2002.

Keynesian Solutions - I’d like to remind the Harvard educated Keynesian economists that Federal government spending is currently chiming in at $3.8 trillion per year. Federal spending was $2.7 trillion in 2007 and $3.0 trillion in 2008. Keynesians believe government spending fills the gap when private companies are contracting. Obama has taken Keynesianism to a new level. Federal spending will total $10.8 trillion in Obama’s 1st three years, versus $8.4 trillion in the previous three years. Even a Harvard economist can figure out this is a 29% increase in Federal spending. What has it accomplished? We are back in recession, unemployment is rising, forty six million Americans are on food stamps, food and energy prices are soaring, and the middle class is being annihilated. The standard Keynesian response is we would have lost 3 million more jobs, we were saved from a 2nd Great Depression and the stimulus was too little. It would have worked if it had just been twice as large. The 2nd Great Depression was not avoided, it was delayed. Our two decade long delusional credit boom could have been voluntarily abandoned in 2008. The banks at fault could have been liquidated in an orderly bankruptcy with stockholders and bondholders accepting the consequences of their foolishness. Unemployment would have soared to 12%, GDP would have collapsed, and the stock market would have fallen to 5,000. The bad debt would have been flushed from the system. Instead our Wall Street beholden leaders chose to save their banker friends, cover-up the bad debt, shift private debt to taxpayer debt, print trillions of new dollars in an effort to inflate away the debt, and implemented every wacky Keynesian stimulus idea Larry Summers could dream up.  These strokes of genius have failed miserably. Bernanke, Paulson, Geithner and Obama have set in motion a series of events that will ultimately lead to a catastrophic currency collapse. 

GDP Recovery Since The Depression: Deep Freeze - GDP growth rates slowed sharply in most rich economies in the second quarter. So where does that leave output relative to its level before the start of the financial crisis? If we rank the G7 countries according to the change in real GDP since the end of 2007, Canada tops the league. But Canada, like the United States, has a fast-growing population, whereas the number of Germans and Japanese has started to shrink. GDP per person is therefore a better measure of relative performance. As the chart below shows, by this gauge Canada is still 1% below its pre-crisis level and America is 3.5% down. Among the G7 countries only Germany has regained its end-2007 level. Comparing output now with its level before the crisis actually understates the depth of the slump. An alternative yardstick (see article) is to compare GDP per head now with what might have been expected if it had continued to grow at the same pace as during the ten years before the crisis. On this basis, even Germany has not yet caught up, and Ireland’s income per head is now a painful 25% below its previous trend.

Chicago Fed: Economic growth below trend in July - This is a composite index from the Chicago Fed: Index shows economic activity improved in July: Led by improvements in production-related indicators, the Chicago Fed National Activity Index increased to –0.06 in July from –0.38 in June. Three of the four broad categories of indicators that make up the index improved in July; only the sales, orders, and inventories category deteriorated from June. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed: A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Goldman Cuts U.S. Full-Year Growth Forecast on Signs Recovery Has Stalled -Goldman Sachs Group Inc. (GS) lowered its forecast for U.S. economic growth in 2011 on signs the recovery in the world’s largest economy lost momentum. The U.S. will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, Goldman economists in New York including Jan Hatzius said in a note published on Aug. 19. Credit Suisse was also among banks lowering growth forecasts this month. Federal Reserve surveys showed manufacturing in Philadelphia and New York contracted in August, while a Thomson Reuters/University of Michigan index of consumer sentiment plunged to a three-decade low. Goldman’s change comes amid a monthlong drop in global equities and as Fed Chairman Ben S. Bernanke prepares to speak at the bank’s annual symposium in Jackson Hole, Wyoming this week. The data “are pointing to even weaker growth ahead,”

National Income Accounting for the Washington Post - Today Beat the Press features a quick lesson in national income accounting for folks who clearly do not know it: the  Washington Post editorial board and its columnist Robert Samuelson.. Starting at the beginning, we know that we can add up GDP on the output side by summing its components, consumption, investment, government, and net exports. This must be equal to the incomes generated in production. This gives us a basic identity that: 1) C+I+G+(X-M) = Y where Y stands for income. This identity must always hold, it is true by definition. We can then divide Y into disposable income, which is total income, minus taxes. This gives us: 2) Y = YD + T We can then divide disposable income into savings and consumption, since by definition any income that is not consumed is saved. This gives us: 3) YD = C+S since we now know that Y = C+S+T, we can rewrite equation 1 as, 4) C+I+G+ (X-M) = C+S+T we then eliminate consumption from both sides and we get: 5) I+G+(X-M) = S+T, rearranging terms gives: 6) (X-M) = (S-I)+(T-G) This one actually has a clear meaning. X-M is exports minus imports, or the trade surplus, S-I is private saving minus private investment, and T-G is taxes minus government spending, or the budget surplus. This identity means that the trade surplus is equal to the sum of the surplus of private savings over investment and the government budget surplus. Remember, this is an accounting identity, it must be true.

Q2 real GDP growth revised down to 1.0% annualized rate - From the BEA: Gross Domestic Product, First Quarter 2011 (second estimate) Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. This was revised down from 1.3% and slightly below the consensus of 1.1%. Exports subtracted more from GDP - as did changes in private inventories. Consumption of services and fixed investment were revised up slightly.  The following graph shows the quarterly GDP growth (at an annual rate) for the last 30 years. The current quarter is in blue.  The dashed line is the current growth rate. Growth in Q2 at 1.0% annualized was below trend growth (around 3%) - and very weak for a recovery, especially with all the slack in the system. Here is a table of the changes (contribution to GDP):

Just A Quick Note on GDP Revisions -

  1. The downward revision was driven primarily by a faster shrinking government sector than originally estimated.
  2. The decline in government spending now essentially matches the rise in personal consumption spending. Thus right now, all of the growth in the economy is coming from business investment.

I think the later point is important because few people seem to be able to internalize that business investment has been quite strong during this recession and indeed right now is the entire recovery, what recovery there is. That being said, that can only go on for so long. The economy needs durables and residential investment to recover. That means cars and homes. The cars may be looking up and I am still waiting for more homebuilding but they do not seem imminent.

The un-recovery - THE Bureau of Economic Analysis just released its second estimate of GDP growth for the second quarter, and the pace of expansion was revised down, from 1.3% to 1.0% (a bit worse than the revision to 1.1% that was expected). The 0.4% first quarter growth estimate wasn't changed, which means that for the first half of 2011 the American economy expanded at a 0.7% pace. That's below the rate of population growth, which is to say that in per capita terms output continues to shrink. So how are things looking forward? Will consider the BEA's take on the improvement in the economy from the first quarter to the second: The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in PCE and in exports and a downturn in private inventory investment. Imports subtract from measured output, so falling imports made for faster growth—but still signalled a weakening domestic economy. Federal government spending was up slightly in the second quarter, but the net government contribution was still a drag, thanks to falling state and local spending.

GDP Growth Revised Downward, but GDI Growth Revised Upward - The estimate of GDP grwoth for the second quarter of the year was revised downward today: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.0 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent. The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 1.3 percent (see "Revisions" on page 3). Thus, once again the situation is worse than we initially thought. However, Justin Wolfers finds reason to upgrade his forecast: There's more news in the first GDI estimates than in the revision to GDP. And it's good news. Given the track record of GDP v. GDI, I'm actually revising upward my views based on this report

Real Gross Domestic Income above Pre-Recession Peak - There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA also released Q2 GDI today as part of the second estimate for Q2 GDP. Recent research suggests that early releases of GDI is often more accurate than GDP. For a discussion on GDI, see from Fed economist Jeremy Nalewaik, “Income and Product Side Estimates of US Output Growth,” Brookings Papers on Economic Activity. The following graph is constructed as a percent of the previous peak in both GDP and GDI. This shows when the indicator has bottomed - and when the indicator has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.  It appears that GDP bottomed in Q2 2009 and GDI in Q3 2009. Real GDP is still below the pre-recession peak in Q2 2011, but real GDI is finally above the previous peak. Also real GDI increased 2.7% annualized in Q1 (GDP increased only 0.4%), and real GDI increased 1.6% in Q2 (GDP increased 1.0%).  However, by other measures - like real personal income less transfer payments and employment - the economy is still far below the pre-recession peak.

Can we Grow the Economy Any More? - Kevin Drum had an interesting post yesterday in which he collected a list of theories for why it's difficult to grow the economy any more:

  1. The basic Rogoff/Reinhart observation that financial collapses due to asset bubbles just take a long time to work through.
  2. The Tyler Cowen "Great Stagnation" hypothesis. We're now entering an extended period of low productivity growth because we're not inventing lots of cool new stuff.
  3. The related (I think) investment drought hypothesis. 
  4. The peak oil theory. Production of oil has pretty much maxed out, which means that every time the economy gets moving it will create a spike in oil prices, which will send the global economy back into recession.
  5. The Michael Mandel contention that increased consumption simply leaks out of the economy to China and other countries. Stimulating consumption in the U.S. just won't do much for the American economy if all those extra dollars mostly get spent on overseas goods and services.
  6. Various structural explanations that suggest the United States has an increasing number of workers who flatly don't have the skills to do anything useful in the modern economy.
  7. The self-serving group of partisan hack theories: regulatory uncertainty is the real problem, taxes are too high, the EPA is strangling America, hyperinflation is just around the corner, markets are cowering in fear of future deficits, etc. etc.
Of these, I subscribe to versions of 1, 4, 5, and 6.  But let me comment first on the ones I don't agree with.

CBO: No Recession, But Growth So Slow Jobless Rate To Top 8% Until 2014 - The Congressional Budget Office, in its midyear update of its budget and economic forecast, says it “expects that the recovery will continue,” meaning it doesn’t foresee a recession, but it says that slow growth will keep GDP well below the economy’s potential for several years. On the basis of economic data available through early July – which means it doesn’t reflect more recent gloomy date – CBO projects that inflation-adjusted GDP will increase by only 2.3% this year and by 2.7% next year.  Under current law, it says, federal tax and spending policies will impose substantial restraint on the economy in 2013, so CBO projects that economic growth will slow that year before picking up later to average 3.6% per year from 2013 through 2016. The U.S. economy won’t be operating at potential – meaning that labor and capital are fully employed – until 2017, CBO projects.  That means a lousy job market for years to come. CBO expects the unemployment rate to fall from today’s 9.1 to 8.5 percent in the fourth quarter of 2012—and then to remain above 8% until 2014.

Lots of ground to cover: An update - Atlanta Fed's macroblog - There are two pieces of information that emphasize the economy's recent weakness and potential slow growth going forward. The first is this week's revised forecasts and potential for gross domestic product (GDP) from the Congressional Budget Office (CBO), and the second is today's revision of second quarter GDP from the U.S. Bureau of Economic Analysis (BEA). Though estimates of potential GDP have not greatly changed, the CBO's downgrade in forecasts and BEA's report of much lower than potential growth in the second quarter have the current and prospective rates of resource utilization lower than when macroblog covered the issue just about a month ago. Key to the CBO's estimates is a reasonably good outlook for GDP growth after we get past 2012: "For the 2013–2016 period, CBO projects that real GDP will grow by an average of 3.6 percent a year, considerably faster than potential output. That growth will bring the economy to a high rate of resource use (that is, completely close the gap between the economy's actual and potential output) by 2017." The margin for slippage, though, is not great. Assuming that GDP ends 2011 having grown by about 2.3 percent—as projected by the CBO—here's a look at gaps between actual and potential GDP for different, seemingly plausible growth rates:

A Tale of Two Economies and the Inequality Dragon - This morning’s GDP data reveal that growth in the second quarter was a little slower than we thought—revised down to 1% from 1.3%.  With 0.4% in the first quarter, that means growth in the first half of the year amounts to about 0.7%.  Recall that it takes growth at trend—about 2.5%–to just keep unemployment from rising, and you will understand my incessant clamoring for someone to do something.  Like FAST!, for example.There’s another reason for the urgency.  You can also see in these data the resurgence of income and wealth inequality.  There’s quite a lag to the inequality data, so no one knows what the trends in income or wealth disparities look like post-2008, e.g.  What with high unemployment and weak middle-class earnings, along with solid corporate profits, one assumes that after taking a hit in the downturn, wealth accumulation is “back on track” as it were.  That’s certainly been the pattern of the last two recessions/recoveries.Today’s data provides some evidence in support of that expectation.  The first figure below shows the recent trends, up through last quarter, in corporate profits and workers’ compensation as a share of GDP.

Five Trillion Dollars - Paul Krugman - A couple of notes on the most recent Congressional Budget Office Projections:

  • 1. They offer a portrait of an economic catastrophe. Here’s the CBO estimates of potential real GDP — the amount the economy could produce without causing inflationary pressure — and actual GDP, in trillions of 2005 dollars per year: No, I don’t know where that recovery in 2015 is supposed to come from; my guess is that it’s basically the CBO unwilling to project a depressed economy more or less forever. But even with that bounceback assumed, the projection says that we’ll have a cumulative output gap of $5.1 trillion, with $2.8 trillion of that having already happened. Surely it would have been worth making an extraordinary effort to avoid this outcome.
  • 2. The CBO also projects unemployment staying above 8 percent until late 2014 — again, with no clear explanation of why it should fall sharply in 2015. This translates into a human catastrophe for the long-term unemployed. It also says that there will be no good reason to raise interest rates for the foreseeable future. I think if you had told people back in, say, 2007 that this would happen, they would have asserted with confidence that generating a faster recovery would be at the top of the political agenda. The fact that it isn’t — that deficits are still dominating the conversation, even as interest rates plumb record lows — is truly remarkable.

The Unrecovery, Acknowledged - Krugman - One positive thing in Bernanke’s speech — I’m trying to look on the bright side — is that for what seems to me the first time he has more or less acknowledged that we are not, in any real sense, experiencing a recovery: Notwithstanding these more positive developments, however, it is clear that the recovery from the crisis has been much less robust than we had hoped. From the latest comprehensive revisions to the national accounts as well as the most recent estimates of growth in the first half of this year, we have learned that the recession was even deeper and the recovery even weaker than we had thought; indeed, aggregate output in the United States still has not returned to the level that it attained before the crisis. Importantly, economic growth has for the most part been at rates insufficient to achieve sustained reductions in unemployment, which has recently been fluctuating a bit above 9 percent. Indeed. I usually illustrate the unrecovery using the employment-population ratio, but here’s an alternative, the ratio of real GDP to the CBO estimate of potential (which is the level consistent with stable inflation, not the absolute maximum the economy can produce):

Disappointing Richmond Fed And New Home Sales Seal The Recessionary Deal And so the double dip confirmation resumes, with the Richmond Fed printing at -10, the lowest since June 2009, well below consensus of -5, a collapse from June's -1, and the lowest since June 2009. From the report: "In August, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined nine points to -10 from July's reading of -1. Among the index's components, shipments lost sixteen points to -17, and new orders dropped six points to finish at -11, while the jobs index inched down three points to 1." And more: "Other indicators also suggested additional softening. The index for capacity utilization declined eight points to -14 and the backlogs of orders fell seven points to end at -25. Additionally, the delivery times index moved down twelve points to end at -4, while our gauges for inventories were virtually unchanged in August. The finished goods inventory index held steady at 17 in August, while the raw materials inventories index added one point to finish at 19." And the final nail in the economic coffin was New Home Sales which came at 298K, down from 312K upward revised prior, and missing the consensus of 310k: the lowest in 5 months.

Why Manufacturing Surveys Matter - In following trying to see whether we are really headed for a double dip I have been following the regional manufacturing surveys. Why are these an important indicator?Well there is a bit of a three-step but it goes like this:

  • 1) Regional Surveys help us to forecast the national ISM
  • 2) The National ISM helps us to forecast manufacturing payroll growth
  • 3) Manufacturing payroll growth is “key” in recessions

Not Learning from the Past - The Frum Forum notes that many economists are now assigning a high probability to a double-dip, and adds: If a double dip does come, it will be the inaction in the face of warnings that it was on the way which future generations will be most baffled by. One quibble, calling it a policy of inaction is too kind. There has been action, but the wrong kind: At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding. It's hard to believe we're doing this again.

The US Follows Japan Into A Balance Sheet Recession: What Do Investors Know and Why Is It That Policymakers Appear Clueless? -  Director of Research at Paisley Financial, Mario Ricchio, writes on the abject futility of QE during a balance sheet recession. That is where I, and he, believe the US and Japan are right now. See my video take on this from a real estate perspective here. You can download Mr. Ricchio's report via this link, but in the mean time I would like to highlight some of the not so common sense remarks that I came across in such.    A debt-financed asset bubble precedes a balance sheet recession. Consequently, we begin by paraphrasing the thoughts of legendary hedge fund manager, Ray Dalio, on the cycle leading up to the collapse. A healthy economic expansion starts with a private sector (corporate or household) agent holding minimal debt. The private sector begins to see income rise at the pace of GDP. At this stage of the economic expansion, the majority of aggregate demand comes from cash-based income. As the economy expands, the private sector feels more optimistic and decides to leverage up the balance sheet by going to the bank and borrowing $100 per year against $1,000 of income...

Recovering From a Balance-Sheet Recession - Laura D’Andrea Tyson - In the United States, growth in the first half of the year was far slower than predicted, and forecasts for the full year have been marked down. Even if the economy does not slip back into recession, the jobs crisis will persist, because growth will be barely enough to absorb the flow of new entrants into the labor force and certainly not enough to make a significant dent in the unemployment rate. To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand brought on by the 2008 financial crisis that burst the debt-financed housing and spending boom preceding it.This boom displayed all of the features of a major financial crisis in the making. And the recession that followed had all of the features of what Richard Koo called a “balance-sheet” recession — a sharp decline in output and employment caused by a collapse of demand resulting from vast wealth destruction and painful de-leveraging by the private sector. The economy is now mired in an anemic balance-sheet recovery in which many consumers and businesses continue to curtail their spending relative to their income, increase their saving and reduce their debt even though interest rates are near zero. And the process of de-leveraging is only beginning.

US economy in August: moving sideways - Rebecca Wilder - Through mid August, the high frequency economic indicators point to further weakness, rather than a double dip.  In my view, whether or not the US is IN a recession - defined as the coincident variables followed by the NBER (.xls) are turning downward - is really a mute point for a good chunk of the working-aged population. It probably 'feels' like the economy never exited recession to many.  As an aside, it would be difficult for the US economy to actually ENTER a contractionary phase right now, since the cyclical forces that normally drag the US into recession - inventories, auto sales, and housing - are at severely depressed levels. Confidence (or lack thereof) can reduce domestic spending and investment - it's in this respect that the losses in equity equity markets are important. It takes time for shocks to work their way into the economic data. Nevertheless, high frequency indicators do not point to recession...for now.  Claims are elevated but ticked up last week. If claims do not fall back in coming weeks, the unemployment rate will rise again. This could indicate the outset of a contracting economy.  Weekly diesel production shows an increase in transportation activity (please see this post for an explanation of the data). Finally, daily Treasury tax receipts are slowing but growth remains positive.

The Butterflies Of August - While the August financial headlines have been dominated by the sharp decline in global equity markets and risk assets generally, there are a few stories that have gone relatively unreported and, in our opinion, underappreciated in their potential significance. Economies and the financial markets that express the value of their various assets are highly complex systems. As with all such systems, a small shift in an obscure part might, in fact, be highly significant, in that it could trigger a chain reaction which disrupts an unstable equilibrium, perhaps bringing down the entire system. A classic example is how a butterfly flapping its wings in the South Pacific might be the trigger that eventually whips up a storm that grows into a typhoon, in time making landfall and causing widespread damage. In this report, we examine what we might call The Butterflies of August and the potential risks that these have exposed.

Is a double-dip recession the least of our fears? Why the economy could be in for a decade of stagnation - Amid bleak economic growth and unemployment, the stock market swoon, and the downgrade of the credit rating of the federal government, the fear of a dreaded double-dip recession--or even of a 21st-century Great Depression--has been taking hold. But a rough consensus among economists may be starting to emerge. According to this line of thinking, although a double-dip is certainly possible, a long period of stagnation--that is, frustratingly low growth--is more likely, much like what we've seen since the recession officially ended two years ago. That would be preferable to another recession, of course. But it would mean that ordinary Americans--especially the roughly 26 million who either can't find a job or have given up looking--can look forward to years of hardship. "I think extended stagnation, rather than a double-dip, is most likely," Mark Thoma, an economics professor at the University of Oregon, told The Lookout. An Associated Press survey of economists released Tuesday put the likelihood of a recession--that is, another two or more straight quarters of economic contraction--before August 2012 at only 26 percent. But the respondents also expected the economy to inch along at just 2.1 percent growth for the rest of the year, and to barely do better in 2012.

Austerity is ushering in a global recession – Robert Reich - Not only is the United States slouching toward a double dip, but so is Europe. New data out today show even Europe’s strongest core economies – Germany, France, and the Netherlands – slowing to a crawl. We’re on the cusp of a global recession. Policy makers be warned: Austerity is the wrong medicine. We all know about the weaknesses in Europe’s “periphery” – Greece, Ireland, Spain, Portugal, and Italy. But the drop in Europe’s core is dizzying. Germany grew at an annualized rate of just half a percent last quarter, down from 5.5 percent in the first quarter of the year. France didn’t grow at all. What’s going on in Europe’s core? Partly it’s a loss of confidence due to debt crises in the periphery. But that’s hardly all. Europe depends on exports – especially to Asia, India, Latin America, and the United States. But exports to China and other emerging markets have been dropping. China, worried about inflation, has pulled in the reins on its sizzling economy. Brazil has been pulling back as well.

Big trouble ahead - Macca was struck by a short piece in a newspaper last weekend titled “Pessimism is The New Black”. The theme was that the wave of pessimism hitting global markets was a bit like a fashion trend: no real rationale, just an inexplicable thing of the moment that would soon morph into something more congenial. Sadly that is not the case. The underlying structural weaknesses that are roiling markets aren’t a fashion and they are not going to go away any time soon. Here’s a more sober assessment from the guy who is probably the highest paid fund manger in the world (Mo El Erian, CEO at PIMCO): “The world economy is now in the grips of a damaging feedback loop involving deteriorating fundamentals, lagging policy responses and destabilized financial markets. If policymakers do not act boldly, and do so in a globally coordinated fashion, the world risks slipping into a prolonged recession with worrisome institutional, political and social consequences”.[1]  As befits a former IMF economist, he minces his words. Unless something changes quite dramatically there will surely not be any bold, globally coordinated action and a prolonged global recession or near recession will follow this failure.

Andrew Lo: Financial Engineering Can Save The World - Andrew Lo moderated a panel discussion including “five of the founding fathers of modern finance”—Stewart C. Myers, Myron Scholes, Robert C. Merton, John Cox, and Stephen Ross. Although these names may not be familiar to everyone, their ideas, theories, and quantitative methods form the backbone of almost any financial economics textbook. Thus, it is curious that Lo—director of MIT's Laboratory for Financial Engineering—would put his reputation on the line by stating in front of such a highly esteemed group that financial engineers, so-called "quants", could use their tools to cure cancer, solve the energy crisis, or even address global warming (see The Evolution of Financial Technology video below at 16:35) Now, in all honesty, this isn’t that crazy of a statement. Remember, our government already tried to financially engineer the “American dream” of home ownership to millions of unqualified buyers (see Bush speech May 17, 2002) through the complex securitization of subprime loans into AAA rated investments. Arguably, the housing bubble would've never been able to get off the ground—or, at least, not nearly to the magnitude it did—were it not for the pervasive spread of these investments modeled on inadequate risk assumptions that put into question the solvency of almost every major U.S. and global bank.  Then again, maybe we just need to give financial engineering another chance.

Wars bankrupting the American economy - According to the War Resisters League, the United States spends 59 percent of its budget on the military. When spending on veterans’ affairs and nuclear weapons programs are added, says, the grand total is $1.01–1.35 trillion spent on national defense in 2010. published some facts about what it calls “ridiculous military spending,” facts that show America “can’t afford to police the world any more”:

  • U.S military spending is greater than that of China, Russia, Japan, India and the rest of NATO combined.
  • The total U.S. military spending constitutes approximately 44 percent of all the military spending on the planet.
  • Together, the wars in Iraq and Afghanistan cost more than $150 billion per year.

China Researcher: US May Be On Its Way To Default On Debt - The U.S. may be on its way to default on its debt despite the U.S. government's ability to print more money, a Chinese think tank researcher said Monday. There is no guarantee for sovereign debt, which increases the risks the lenders face, said Wang Tianlong, a researcher at the China Center for International Economic Exchanges, a think tank supervised by the country's economic planner, adding that the issuer could be more careless in using the loans. In the short term, the U.S. doesn't have much ability to reduce its deficit, Wang said in an opinion piece published in Securities Times. He added that the U.S. lacks the political system to guarantee that it will not default on its debt. There is also no way to punish the issuer country if it falsifies its accounting and there is no way to restructure the issuer either, Wang said.

Biden Gives Assurances On U.S. Debt - US Vice-President Joe Biden reassured China on Sunday that the United States would never default on its debt, and urged the world's second-largest economy to continue to invest in US Treasury bonds. In his only major address during a six-day tour of China - followed on Monday by visits to Mongolia and Japan, Biden pointed out that US citizens still hold the vast majority of the US debt. "So our interest is not just to protect Chinese investment. We have an overarching interest in protecting the investment, while the US has never defaulted and never will default," he told an audience of about 400 students that included dozens of Peace Corps Volunteers at Sichuan University. He promised that the US was taking steps to cut budget deficits and must control the growth of entitlements, such as medical care, while expressing great confidence in the strength of the US economy. "Not to worry," the US vice-president said. "We are still the single best bet in the world in terms of where to invest.

Krugman vs. Rogoff: How to Fix the Economy (video) [Transcript]

Treasuries: Priced For Disaster - Anxiety levels are rising and Treasury yields are falling. The pairing isn't unrelated, but the depth of the fall in government yields is astounding nonetheless.  The benchmark 10-year Treasury Note’s yield is hovering just over the 2% mark, near all-time lows. As recently as early July, it was over 3%. There’s no mystery here. The crowd is anxious about the macro outlook and so the rush to safe harbors is on. The extraordinary bull market in bonds, Treasuries in particular, has tripped up more than a few analysts over the past year. Indeed, there’s been no shortage of warnings that bonds were in a bubble and set to crash any day now. That forecast will eventually prove accurate, perhaps sooner than we think. But betting against Treasuries has been a losing proposition thus far.  Along the way, relationships between the major asset classes have moved to extremes. Consider how rolling three-year annualized returns compare for stocks (S&P 500), bonds (Barclays Aggregate), REITS (MSCI REIT) and commodities (DJ-UBS Commodity). The relatively steady, positive performance in fixed income looks like nirvana in recent history (see the blue line in the chart below).

U.S. Yields Price in QE3 as Traders Anticipate $500 Billion -- Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke to signal as soon as this week that the central bank will begin a third round of asset purchases to boost the economy, a scenario the world’s biggest bond dealers said is unlikely. Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent. “The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium”  If the Chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.” Central bankers from around the world will meet in Jackson Hole at an annual conference sponsored by the Federal Reserve Bank of Kansas City, the same place where Bernanke triggered financial rallies a year ago when he said the Fed was prepared to “do all that it can” to ensure economic recovery and suggested it would purchase more securities if growth slowed.

Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields (video)

As 4 Week Bill Auction Closs At 0.000%, Bill Rates Now Negative Through November - That today's just completed 4 Week auction was not surprising: it closed at 0.000% - after all where is that money going to go: Bank of America? Gold (don't answer that)? Spam? What is surprising is that when it comes to preserving copious amounts of cash, investors are willing to bid up the entire Bill curve not just overnight, but well over two months. That's right - as seen on the second chart below, the entire curve is now negative through November!

2 Year Auction Prices At New Record Low Yield Of 0.222%, Well Inside Of 3 Month LIBOR - Today's auction of $35 billion in 2 Year bonds was supremely forgettable aside from the yield, which once again was at an all time low, well inside of Libor, at 0.222% (to be expected since all bills for the next 3 months are yield negative rates), 1 bp inside of the When Issued of 0.23%. Even the internals were very boring, Directs, Indirects and Dealers all came on top of averages, with takedown ratios of 15.88%, 31.64% and 52.51%, and the Bid To Cover at 3.44, just wide of the LTM average of 3.38. All in all, a completely unremrkable way for Investors to park cash in what is the new equivalent of 4 Week Bills.

Debt and Regret - Zero is just a number. By that I meant that liabilities were simply negative assets. To have $3000 in assets is better than to have $1000 in assets. Likewise to have $1000 in assets is better than to have $1000 in liabilities. Yet, I didn’t see any distinction between those two positions. Debt is just negative assets. You cross zero, but so what? Zero is just a number. You don’t get all bent out of shape when you cross 37.  What’s so special about zero? I’ve talked to a lot of people since then. And, I know that you are supposed to respect zero. I know that it is emotionally important for almost everyone. Sadly, I still can’t say that I really understand. I see people arguing as if debt were obviously the biggest evil. And, then I see others saying, no unemployment is more evil. No one, that I know, is salivating over a 0.9% carry on cash for five years and no liquidity constraints. That in a world where inflation expectations are much below it.  It’s a license to steal and only one agent on planet earth has been granted it – the US government. Yet, that government sits impotent, unable to see the bounty laid before it. And, the beauty sheds tears for a lover who can’t grasp that she pines for him.

Debt and Regret: New 5 year US Treasuries Yielding 1.0279% - The US Treasury just auctioned off $35 Billion in 5 year Treasury Notes. $94 Billion in bids were placed. The high yield was 1.0279%. Nearly $32 Billion worth of the bids were below that. How does that compare with expected inflation over the next five years. At the beginning of the month it was around 1.5%. Could be lower now, but I am guessing not all the way down to 1.029%. People are willing to lose money in real terms in order to give it to the US Federal Government. Maybe we should consider giving people what they want?  I’m just saying.

Fed chief scolds Congress on debt-ceiling showdown - Federal Reserve Chairman Ben S. Bernanke chided Congress on Friday for its contentious approach to the national debt, saying the brinksmanship displayed by lawmakers could endanger the U.S. economy. In a rare scolding of Congress, Bernanke said that debt-ceiling negotiations this summer, which flirted with a national default, “disrupted financial markets and probably the economy as well.” Speaking at an annual conference of central bankers and economists in Jackson Hole, he warned that, “similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.” Even as he underlined the prominent part that Congress can play in fostering — or jeopardizing — the nation’s economic health, Bernanke gave no sign that the Fed, for its part, was preparing to take new steps to bolster the flagging recovery.

The U.S. Deficit In One Picture - One thing I would like to highlight is the large surplus funds in the Social Security Trust and others.  These were 'invested' in a special type of intra-governmental Treasury note.  These funds are not 'gone' anymore than a Treasury bond is 'gone.' It is a sovereign debt holding. If the US defaults on its debt, then it defaults. But let's call it what it is.  The Trust Funds are not the money that the government 'owes to itself.' It is a Trust fund, that is, money held by the government in Trust for others. The Trustees invested it in a special category of Treasury bonds that do not trade on the open market. So to somehow suggest that Social Security is bankrupt now because the government spent the funds on general obligations is to assert a violation of Trust, a fraud, and a selective default on the sovereign US debt.

Austerity Pep Squad -- Fergawdsakes: Sen. Mark Warner is hoping to form a bipartisan, bicameral post-Gang of Six group to pressure the already bipartisan, bicameral supercommittee to “go big or go home,” his spokesman told POLITICO Thursday.  Warner told the group Wednesday that “$2.2 trillion is not enough” deficit reduction and warned that any new plan will likely include both more taxes and higher fees for services like the Tricare military health care plan.  “The truth is that you will see some increase in some of the Tricare co-payments,” he said, according to the Virginian-Pilot. The cost of health care “is the fastest-growing part of the defense budget. … I know some of you don’t want to hear that … but everything has to be on the table.”  Who, exactly, do the Democrats hope to have vote for them in the next election? For the moment, billionaires only get one vote.

The wrong budget analogy - Washington's renewed obsession with government budget deficits has become a major obstacle to dealing with the U.S. unemployment crisis. At the root of this misplaced focus are widespread misconceptions about the role of deficits in the economy.The fact that high unemployment and budget deficits are occurring at the same time has generated confusion about the real sources of the slump. The increased deficit is a consequence, not a cause, of the downturn. When economic activity falls, so does tax revenue. Some categories of government spending, such as unemployment benefits, automatically rise during a recession. This contributes to a higher deficit.  Politicians of both parties have furthered the misunderstanding by frequently drawing an analogy between the federal budget and household budgets. "Families across this country understand what it takes to manage a budget," President Obama declared in a February radio broadcast. "Well, it's time Washington acted as responsibly as our families do." While this comparison appeals to a general belief that we should "live within our means," it's also misleading.

Billions Meant for Struggling Homeowners May Pay Down Deficit Instead - With housing prices dropping sharply [1], and foreclosure filings against more than 1 million properties [2] in the first half of this year, the Obama administration is scrambling for ways to help homeowners. One place they won't be looking: an estimated $30 billion from the bailout that was slated to help homeowners but is likely to remain unspent. Instead, Congress has mandated that the leftover money be used to pay down the debt. Of the $45.6 billion in Trouble Asset Relief Program funds meant to aid homeowners, the most recent numbers available show that only about $2 billion has actually gone out the door. The low number reflects how little the government's home loan modification and other programs have actually helped homeowners [3] deal with the foreclosure crisis. The programs have been marked by poor oversight [4] and consistent under-enrollment [5]. Homeowners have been forced to navigate an often bewildering maze at banks marked by slow communication, lost documents and other mistakes [6]. The amount of money spent is also low because the government pays out its incentive over a number of years.

Passing the baton - IN HIS Jackson Hole speech a year ago, Ben Bernanke wanted to leave no doubt that the Federal Reserve could and would act more aggressively to boost America’s flagging economy. This year he wanted to leave no doubt that the politicians could and should do more. The most highly anticipated central banker’s speech in months gave no hint of bold new initiatives from the Fed. He repeated the mantra that the “Fed has a range of tools that could be used to provide additional monetary stimulus”, but there was no discussion of them and not a whiff of imminent QE3, a third round of bond buying. Mr Bernanke promised that the Fed’s policy-setting committee would have a “fuller discussion” of other tools it could use at its September meeting, which has been extended a day. But he chose to use this speech to give Washington a lecture on fiscal policy, arguing that while America urgently needed a credible plan to reduce long-term deficits, it shouldn’t overdo the short-term tightening.

Spend Now, Save Later, Bond Fund Leaders Say - El-Erian says the United States needs to move simultaneously to fix five overlapping structural problems. The first is housing, staggered by fallen prices, foreclosures and “underwater” mortgages that exceed the value of the homes they financed. The second is the labor market, which has steered too many workers toward the housing, retail and leisure sectors, which will not fully recover anytime soon. To create new and better jobs, the government needs a renewed focus on improving math, science and engineering education, as well as job retraining programs to make workers more competitive. While waiting for education investments to pay off, however, Mr. Gross says the government should finance immediate job creation to shore up the third structural weakness: America’s fraying infrastructure. Updating roads, bridges and airports would provide an engine for reducing unemployment faster. The fourth weakness lies in lending. Banks, still smarting from the loan losses that resulted from the financial crisis, want to lend to big companies that don’t need money, but not to small businesses that do. On the fifth problem, the government’s questionable long-term solvency, the Pimco executives say Republicans and Democrats are both right. Spending on Medicare, Medicaid and Social Security entitlements must be curbed, and taxes must go up — on the affluent and perhaps the middle class, too.

Businessmen and Macroeconomics - Matt Yglesias is mildly upset over a report that Obama is turning to Warren Buffet and Alan Mulally for economic advice. It’s not clear how much to make of the report. But it’s always good to remember that businessmen — even great businessmen — don’t necessarily know much about how to make the macroeconomy work. How can that be? Don’t they know all about creating jobs? No, they don’t. They know all about expanding individual businesses — often, indeed usually, at the expense of other individual businesses. That’s an important and very lucrative skill, but it has very little to with the problem of expanding a whole economy, whose main customer is … itself. Realistically, even very large corporations don’t have to worry very much about, for example, the extent to which laying off workers will reduce demand for the company’s product. They don’t have to worry about the extent to which cutting wages will reduce purchasing power and the ability to repay debt. They are, to use economics jargon, living very much in a world of partial equilibrium, never having to confront the feedback effects that are at the heart of the kind of problems an economy as a whole faces.

Bernanke: A Chance To Talk About Fiscal Policy? - Mr. Bernanke has been a proponent of using government tax and spending policies to provide short-term stimulus to the economy, tied together with a credible plan to bring down the deficit in the long run. He’s also spoken out about adjusting both tax and spending policies to support long-run growth and investment. Nobody seems to have listened. In 2009, the Obama administration charged ahead with stimulus but stayed mostly silent on deficit reduction. This year, Republicans have pushed for deficit reduction, but are hostile to fiscal stimulus. Mr. Bernanke has been visibly uncomfortable with fiscal policy all along. This was especially true of the messy debt limit talks which ran into early August. Mohamed El-Erian, chief executive officer of Pimco, the big bond market fund, observed in the Financial Times Thursday that the Jackson Hole speech could be an ideal platform for Mr. Bernanke to argue that monetary policy can’t work by itself, and “explain why a sustainable solution must go well beyond Fed financial engineering and, specifically, incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit.”

The Limits of Keynesianism? - Is an age of austerity unavoidable? That is the question James McDonald asks in a thought-provoking piece that outlines the policy response to the financial crisis, and the problems that high levels of private debt pose to recovery. Felix Salmon approvingly flags down this passage: The markets have highlighted a fundamental shortcoming in Keynes' ideas: He assumed that governments would always be able to borrow. If they cannot, then Keynesian economics is dead in the water. It is worth considering why a government might find itself unable to borrow in the private markets. Consider the examples McDonald cites: the PIIGS.  McDonald omits the most salient point: all of the PIIGS are members of the Euro. It should not surprise us that a fixed exchange rate system calls the debts of high debt and low growth countries into question. By forfeiting monetary sovereignty, the PIIGS were left vulnerable to nominal shocks -- such as the financial crisis -- without the usual buffers of monetary easing or devaluing. Like the Gold Standard in the 1930s, the Euro has forced the PIIGS to adopt deflationary policies at precisely the wrong moment. Unfortunately, austerity is self-defeating here since it depresses growth; the denominator of the debt-to-GDP ratio shrinks in tandem with the numerator.

Irregular Economics - Krugman - David Glasner has a take-down of Robert Barro’s latest op-ed, in which Barro dismisses Keynesian economics for not being like “regular economics.” As Glasner says, there’s something deeply weird about asking “where’s the market failure?” in the face of massive unemployment, huge unused capacity, an economy producing less than it did three and a half years ago despite population growth and advancing technology. Of course there’s some kind of market failure, which means that there’s nothing at all odd about asserting that better policy can yield free lunches. More generally, the existence of business cycles is hardly a trivial feature of real economies. You can try to explain those cycles in terms of “regular economics” — that’s what real business cycle theory is all about — but that effort has been a dismal failure, even if the practitioners refuse to admit it. The desperate efforts to find something Obama has done that explains why the economy plunged are in effect a demonstration of the hollowness of that whole approach. But I want to add something more: why, exactly, are we supposed to have such faith in “regular economics”?

CBO Releases Its Annual Summer Update of the Budget and Economic Outlook - CBO Director's Blog - The United States continues to face profound budgetary and economic challenges. CBO discusses those challenges in the Budget and Economic Outlook: An Update—an annual report, released today, which presents the agency’s updated budget and economic projections for the current year and the next decade. Federal budget deficits and debt have surged in the past few years, and this year’s deficit—projected to be $1.3 trillion—stems in part from the long shadow cast on the U.S. economy by the financial crisis and the recent recession. Although economic output began to expand again two years ago, the pace of the recovery has been slow, and the economy remains in a severe slump. Recent turmoil in financial markets in the United States and overseas threatens to prolong the slump. CBO expects that the recovery will continue but that real (inflation-adjusted) GDP will stay well below the economy’s potential—a level that corresponds to a high rate of use of labor and capital—for several years.

CBO: Budget deal cuts U.S. deficit in half over next decade (Reuters) - A sweeping U.S. budget deal has brightened the country's fiscal outlook but unemployment will remain high over the near term, nonpartisan congressional forecasters said on Wednesday. The report by the Congressional Budget Office is likely to add fuel to the debate over jobs and the economy that is set to dominate Washington through the 2012 elections. The recent budget deal, passed earlier this month after months of acrimonious debate, will help slash projected budget deficits nearly in half over the next 10 years, CBO said. But economic growth will remain sluggish through 2012, CBO said. It said the unemployment rate, currently at 9.1 percent, will only fall to 8.5 percent by the time voters head to the polls in November 2012. The economic picture is probably even worse as grimmer data has emerged since the office completed its work in early July, CBO Director Doug Elmendorf said. "The pace of the recovery has been slow, and the economy remains in a severe slump,"

The Budget Deal May Not Last Until Christmas...I'll admit that saying the agreement will be gone by this Christmas is likely (but not necessarily) an overstatement. But saying that the "Budget Control Act" -- the debt ceiling increase/deficit reduction deal signed into law on August 2 -- isn't likely to be in place on January 1, 2013, or to have it's projected impact over the full 10 years it supposed to be in effect is anything but an exaggeration. The reason? Federal budget agreements have seldom, if ever, gone the distance. Instead, they have always been changed, waived, ignored or abandoned long before they were scheduled to expire.

The size of fiscal stimulus vs. the length of fiscal stimulus - For all the talk of a “large stimulus,” you don’t hear much about a “longer stimulus.” The problem with a “too small” stimulus is that you get an initial economic boost, but when the stimulus expires the economy slumps back down, as indeed happened in mid 2011.  Ideally a stimulus employs some idle labor, stops it from depreciating, and tides those workers over until they can look for other jobs in fundamentally better economic conditions.  Those last few words are important.  If conditions are not improving soon, the ability of the stimulus to “buy time” for those workers isn’t worth much.  The workers get laid off from the government projects and their reemployment prospects are no better than to begin with.  We end up having spent a lot of money to postpone our adjustment problems, rather than achieving takeoff. Deleveraging recessions last a long time, as shown by Rogoff and Reinhart.  The need for continuing deleveraging implies that even a stimulus twice the size of ARRA won’t turn the tide. For a given presented expected value sum spent on stimulus, it is better to spread it out across the years. 

Stimulating the Economy for Free (Almost) - Yesterday the CBO released new figures describing both its projections for the US federal budget deficit, and its estimate of the impact on the economy of the 2009 stimulus package (the ARRA). The budget forecast is grim, of course, and the CBO attributes much of the bad budget outlook to the bad economy.  But while there's a lot of good stuff in both documents, I was particularly intrigued by a rather remarkable sidenote included in the budget forecast document. The CBO explained that they believe that the Great Recession will have very persistent effects on long-run economic growth in the US. From yesterday's CBO budget update, p. 54 (pdf):  CBO projects that potential output will be about 2 percent lower, on average, between 2017 and 2021 than it would have been without the financial crisis and the recession. This is a point that Brad DeLong has particularly emphasized (see for example here and here); it's good to see the CBO incorporating the recession's "shadow", as Brad calls it, into their forecasts.  But this has important implications for projections regarding the costs and effects of stimulus spending right now. If a new stimulus plan had been implemented at the start of 2011, for example, the economy would be significantly stronger this year and the long-run effects mentioned by the CBO would be smaller going forward. And this in turn means that stimulus spending right now would, according to the CBO, significantly improve long-run growth prospects, and hence the budget outlook for the federal government.

Infrastructure 'Bank' Catches Washington's Imagination- The specter of another recession and the lack of ammunition from the Federal Reserve to stimulate the economy has Washington scrambling to come up with job-creating ideas. One solution is taking hold with policymakers on all sides of the political spectrum: Sen. John Kerry (D., Mass) has teamed up with Kay Bailey Hutchison (R., Texas) to come up with a national infrastructure bank. Boring, yes, and mightily challenged by past failures such as the $800 billion stimulus package that passed in 2009, or by the specter of government-backed mortgage monsters Fannie Mae and Freddie Mac.  But, proponents of an infrastructure bank argue, we have this problem we need to solve.  The U.S. is expected to face an annual funding gap of between $134 billion and $262 billion for each of the next 25 years for transportation infrastructure, according to a report from a 2009 conference led by former transportation secretaries Norman Mineta and Samuel Skinner. A study this year by the Urban Land Institute reached some similar conclusions.  Mineta, however, says both studies and others like them are "sitting on a shelf gathering dust."

Behavioral Economics, Tax Cuts, and the Stimulus - Recall that the debate at the time centered on how much of the recovery act would be composed of spending programs versus tax cuts. Liberals argued that the ARRA should have been weighted more towards government spending, such as infrastructure, because it was more stimulative than tax cuts that would likely be saved instead of spent. However, a combination of practical (a dearth of shovel-ready projects) and political concerns ultimately led to roughly 37% of the stimulus coming in tax cuts -- but there was a twist. Tapping the insights of behavioral economics, the Obama administration tried to structure the tax rebates such that households would be more likely to spend them. Here is James Surowiecki explicating this strategy: If you want people to spend the money, you don’t want to give them one big check, because that makes it more likely that they’ll think of it as an increase in their wealth and save it. Instead, you want to give them small amounts over time. And you want the rebate to show up as an increase in people’s take-home pay, because an increase in steady income is more likely to translate into an increase in spending. What can accomplish both of these goals? Reducing people’s withholding payments.

Committed Funding Streams and Public Support - Does committed funding -- as in the Social Security and Medicare payroll taxes -- protect programs from cuts ? It is often argued (sometimes here) that the committed funding makes it harder to cut Social Security OASDI pensions. Certainly recipients stress the (perceived) fact that they just want their money back and that it isn't like welfare.  How could we manage an expiriment to test this hypothesis ? It seems to me that the best approach would be to have two similar programs with the same name some of which had committed funding and two of which didn't. Quick pop quiz of Medicare plans A, B and D, which is funded how (answer after the jump).  Now lets see how this affects public opinion. Is it true that cuts to the programs without committed funding are considered more legtimate than cuts to the program with committed funding ? Has policy shifted so that only one set of programs is cut ? Which set ?

Who will (should?) pay hurricane costs - We talked earlier about House Majority Leader Eric Cantor (R-Va.) insisting that federal disaster relief in the wake of this week’s earthquake would no longer be automatic. Whereas Congress used to provide emergency funds after a disaster, without regard for budget caps of offsets, Republicans no longer believe in such an approach. I said it was likely Cantor would take a similar approach with Hurricane Irene. This afternoon, the Majority Leader’s spokesperson confirmed this with Brian Beutler — if the hurricane does major damage, Republicans will only allow federal assistance if Democrats accept comparable cuts elsewhere in the budget.

CBO’s Simple Story about the Deficit - A graph on the cover of the Congressional Budget Office’s summer budget update illustrates two policy paths we could pursue over the coming decade. One would essentially keep our deficit manageable through 2021. The other would make things much worse. The light blue area in the graph shows the deficit’s history since 2000 and CBO’s projection over the coming decade if Congress lets the 2001-2003 tax cuts expire in 2013, stops patching the alternative minimum tax (AMT), and allows scheduled cuts in Medicare payments to physicians to occur. Under that scenario, the deficit would shrink to just 1.2 percent of GDP, a sustainable level in a healthy economy. (Of course, entitlements will explode the deficit in the long run but that’s another story.) If Congress doesn’t let current law play out for those three policies, the deficit would grow over the decade, reaching a level nearly four times the current law deficit in 2021 (see the dark blue area in the graph). Almost all of the increase in the deficit would come from extending the tax cuts and the interest payments on the debt increase.

CBO: Baselines Matter, Especially Regarding Tax Policy - Here’s a chart in CBO director Doug Elmendorf’s blog post on their just-released budget and economic outlook that says at least a thousand words about the importance of tax policy in deficit reduction–particularly any deficit reduction that we’ll accomplish in the next decade.  This shows deficits as a share of GDP.  Note that 3 percent has been considered a good target given an economy that grows at about that annual pace.  Note that CBO’s economic forecast shows that’s not going to cut it as “sustainable” over the next few years though–with real GDP growth not coming above 3 percent until 2013 and then coming back down below 3 percent later in the decade.  Note very plainly in the chart above that deficits under the “policy-extended” scenario where expiring tax cuts are extended and deficit-financed (as usual) are closer to 5 percent of GDP, a far cry from the copacetic (just over) 1 percent of GDP deficits under CBO’s current-law baseline. As CBO explains in their blog post as well as in the report’s summary (emphasis added): if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003, 2009, and 2010 were extended (rather than allowed to expire on December 31, 2012, as scheduled); the alternative minimum tax was indexed for inflation; and cuts to Medicare’s payment rates for physicians’ services were prevented, then annual deficits from 2012 through 2021 would average 4.3 percent of GDP, compared with 1.8 percent in CBO’s baseline projections.

Tax breaks shouldn’t be sacrosanct -ALL SIX Republicans on the debt-reduction super committee have signed a no-new-taxes pledge, and that means the panel can only dig up extra revenues if some of those six decide that eliminating some tax breaks doesn’t count as raising taxes. But getting rid of ethanol subsidies, the low-income housing tax credit, and many other tax breaks ought to be an easy decision. Some tax breaks are really just government expenditures in disguise, and should be subject to the same scrutiny as any other spending program. Other tax breaks do let people keep more of the money they’ve earned, as antitax activists might prefer, but create a plethora of other problems. Either way, getting rid of many of these credits could save at least a few billion dollars a year - and potentially much more.

GOP may OK tax increase that Obama hopes to block - - News flash: Congressional Republicans want to raise your taxes.  Impossible, right? GOP lawmakers are so virulently anti-tax, surely they will fight to prevent a payroll tax increase on virtually every wage-earner starting Jan. 1, right? Apparently not. Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different "temporary" tax cut should end as planned. By their own definition, that amounts to a tax increase. The tax break extension they oppose is sought by President Barack Obama. Unlike proposed changes in the income tax, this policy helps the 46 percent of all Americans who owe no federal income taxes but who pay a "payroll tax" on practically every dime they earn. There are other differences as well, and Republicans say their stand is consistent with their goal of long-term tax policies that will spur employment and lend greater certainty to the economy.

Republican Tax Increases - If Republicans have their way, taxes will increase next year by $120 billion. Republicans in favor of tax increases? Sadly, yes. Last year the payroll tax on employees was cut from 6.2% to 4.2%, a policy that President Obama supported. Economists from across the political spectrum have also expressed support for a payroll tax cut including Keynes, Mankiw, Robert Reich, Dani Rodrik, Tyler and myself. The CBO scored a payroll tax cut as among the most effective policies for increasing employment, although it would have been better to cut the employer side of the tax. The payroll tax cut was temporary, however, and is scheduled to expire next year. So who is in favor of increasing taxes? Many of the same Republicans who fought hammer-and-tong to keep the George W. Bush-era income tax cuts from expiring on schedule are now saying a different “temporary” tax cut should end as planned.

For Some in G.O.P., a Tax Cut Not Worth Embracing — It is hard to find a tax cut that Congressional Republicans dislike. Unless it is a tax cut pushed by President Obama1.  In a turning of the tax policy tables, Democrats are increasingly hammering on Republicans who oppose the president’s proposal to extend for a year a payroll tax cut passed last year with bipartisan support.  That tax cut — which reduces workers’ contributions to Social Security2 this year to 4.2 percent of wages, from 6.2 percent — expires in December. The White House would like to extend it for another year. But Republicans in Congress are balking, arguing that such a cut adds needlessly to the nation’s budget deficit, and should be replaced with an overhaul of tax policy instead.  “All tax relief is not created equal,” “If the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.”  After  Republicans asserted that they would abide no tax increase, Democrats are equal parts incensed by this nuanced policy position and pleased with the opportunity to bang the other party over the head with it.

Republicans for Tax Hikes - It's not news when Jon Huntsman criticizes fellow Republicans. It's news when he agrees with them. On Sunday, in an interview with the Wall Street Journal, Huntsman found himself in a virtual love-in with Rick Perry and Michele Bachmann over, of all things, taxes. The paper asked Huntsman if "the half of American households no longer paying income tax—mainly working poor families and seniors—should be brought onto the income tax rolls."  He agreed, crediting the GOP's current front-runner for vice president, Sen. Marco Rubio, with the insight that "we don't have enough people paying taxes in this country." The Journal called this position the "new GOP orthodoxy," which it is. When he announced his presidential bid two weeks ago, Perry told a room of conservative activists and bloggers that "we're dismayed at the injustice that nearly half of all Americans don't even pay any income tax." He was following on Bachmann, who'd just told the South Carolina Christian Chamber of Commerce the very same thing."Part of the problem is today, only 53 percent pay any federal income tax at all; 47 percent pay nothing," said Bachmann.

Do Republicans really oppose temporary tax cuts or just Obama’s tax cuts? - In recent weeks, the politics of taxes seem to have flipped. Now it’s Democrats calling for the extension of a tax cut and Republicans arguing for a tax increase.  The tax cut in question, of course, is the payroll tax cut, which adds about $1,000 to the paycheck of the average American and which is set to expire at the end of this year. Republicans who were willing to let the federal government default on its debt to prevent even a hint of a tax increase are now willing to permit a $120 billion tax increase for next year. The question is, why? One possible answer is that a large tax increase in an election year is good for them because it’s bad for President Obama and the economy. But that’s a pretty cynical explanation. Another is that they care more about tax rates on the rich than they do about tax rates on the poor. But they resist that argument. The real answer, Republicans says, is that they just don’t like temporary tax cuts. ”We don’t need short-term gestures,” “Temporary tax rebates don’t work to create economic growth,”

Bad Slasher Movie: The Democrats’ sad, stupid, doomed campaign to keep the payroll tax cut - On Tuesday, as Washington rebuilt itself after a less-than-apocalyptic earthquake, a joke started to circulate on Twitter and Facebook. The popular version went like this: There was just a 5.8 earthquake in Washington. Obama wanted it to be 3.4, but the Republicans wanted 5.8, so he compromised.   From the tables of Pew polls to the blogs at the Huffington Post, Democrats are yowling about President Obama's habit of giving Republicans most of what they want.  It's not just policy—there's only so much you can do with John Boehner running the House and Mitch McConnell putting up sandbags in the Senate—it's also politics. The White House's big idea right now is extending, and maybe expanding, the temporary payroll tax cut that knocked FICA down from 6.2 percent to 4.2 percent. Why do Democrats like this idea? Because it has worked so well so far? According to Jared Bernstein, who was Joe Biden's chief economist when the White House got this cut included in the 2010 tax deal … sort of.

The GOP will raise taxes — on the middle class and working poor - America’s presumably anti-tax party wants to raise your taxes. Come January, the Republicans plan to raise the taxes of anyone who earns $50,000 a year by $1,000, and anyone who makes $100,000 by $2,000. Their tax hike doesn’t apply to income from investments. It doesn’t apply to any wage income in excess of $106,800 a year. It’s the payroll tax that they want to raise — to 6.2 percent from 4.2 percent of your paycheck, a level established for one year in December’s budget deal at Democrats’ insistence. Unlike the capital gains tax, or the low tax rates for the rich included in the Bush tax cuts, or the carried interest tax for hedge fund operators (which is just 15 percent), the payroll tax chiefly hits the middle class and the working poor.  And when taxes come chiefly from the middle class and the poor, all those anti-tax right-wingers have no problem raising them. In an editorial this weekend, the Wall Street Journal termed the payroll tax reduction “an inferior tax cut,” arguing that tax cuts should be “broad-based, immediate and permanent.” Broad-based? The payroll tax cut, which the Journal dismisses so contemptuously, benefits every employed American, while the tax cuts the paper champions — on capital gains and millionaires’ income — accrue to a far smaller group. Immediate? Unlike taxes paid annually or quarterly, the payroll tax is drawn from each paycheck from the moment the law takes effect. Permanent? The payroll tax is the tax that funds Social Security, so reducing it really can’t be a permanent policy. But the impermanence of the Bush tax cuts, which had been set to expire this year but were extended, presented no obstacle to the Journal’s fervent support for them.

The stupid complexities of the tax code -- James Stewart, on Saturday, looked at the narrow issue of how to tax carried interest, and made the very good point that it’s really just a small part of the much broader issue raised by the fact that we tax capital gains at a much lower rate than earned income:The root of the problem highlighted by Mr. Buffett is the disparity between tax rates on capital gains and ordinary income. Were these rates the same, the debate over how to treat carried interest would vanish, along with much of the disparity between tax rates for the rich and people like Mr. Buffett’s secretary. Is that so unthinkable? … “I’ve seen study after study that says lower capital gains rates have no impact on behavior,”  The system we have right now — where we tax earnings from capital at much lower rates than we tax earnings from labor — is counterintuitive. If you have money, you really have no choice but to invest it somehow, and when you invest it you’re generally going to try to maximize the return you get on that investment. That’s true whatever the capital gains tax might be. On the other hand, people really do have a choice whether or not — and how much — to work. Taxing labor will, at the margin, mean less of it.

Rick Perry: Middle Income Americans Don't Pay Enough Income Taxes -  I learn from newly minted GOP presidential candidate Rick Perry what’s wrong with America—that middle income Americans don’t pay enough taxes.  Really. We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax. (Quoted in this terrific Ruth Marcus column.) We’re apparently not dismayed that more than half of all Americans have been in a 30-year recession with little or no income growth.  We’re apparently willing to write off Social Security and Medicare payroll taxes, which are the big federal taxes for low- and middle-income Americans.  A family of four earning $30,000 may pay no federal income tax, but it pays $4,590 in payroll taxes (including the employer’s share, which economists believe is ultimately paid by the employee in the form of lower wages).  Payroll taxes are much bigger than income taxes for most families.

Was Buffett Right? Do Workers Pay More Tax than Their Bosses? - Taxpayers who get lots of income from capital gains and dividends pay less tax than those who earn most of their income from wages. People who get all of their income from long-term capital gains and qualified dividends will never pay a combined federal individual income and payroll tax rate of even 15 percent, no matter how much they make. That’s because the maximum tax on their investment income is 15 percent and they don’t face payroll taxes. (See graph. Note that the graph shows the highest possible tax rate by assuming the taxpayer 1) claims only the standard deduction and personal exemptions; 2) gets no benefit from other deductions, exemptions, exclusions, or tax credits; and 3) bears the cost of both the employer and employee shares of payroll taxes.)  In contrast, single people who get all their income from wages always pay more than 15 percent once their income hits about $12,500. When their income reaches about $500,000, their combined tax approaches 38 percent. The same story applies to married couples, although their effective tax rate is always less than that for singles if only one spouse works. At any total income level, you will always pay a higher tax rate if your income comes in the form of wages than if it is from investments only.

The Rich Can Afford to Pay More Taxes -- Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits. Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent). Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with. On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013.

Maybe the Rich Can Afford to Pay More Tax, But Should They? -- Bruce Bartlett says the rich are paying less income tax than they used to: In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since. Indeed it has.  In 1987 the effective tax rate dropped to 26.4 percent and in no year since does it get above 28.9 percent.  It seems 1986 was a fluke year in this data series, which begins with 1986.  The Tax Policy Center, which Mr. Bartlett respects, uses CBO data to calculate effective tax rates by household income quintile, over the years 1979 to 2007.  As the following graph shows, in 2007 those households in the highest income quintile (the top 20 percent) had an effective tax rate of a little less than 15 percent.  This has changed very little since 1986 or anytime in the 1980s.  Contrast that with the lower income quintiles, which all pay dramatically less tax now than they did in the 1980s.  The trend is most pronounced among those in lowest income quintile, which had an effective rate of about zero up until that magical year 1986, and thereafter a more and more negative rate. 

CEO Follies - Jeff Sachs - There may be no group of people in the world more out of touch with U.S. ground reality than super-rich CEOs of major U.S. companies railing against Warren Buffett's suggestion that the rich should pay higher taxes. The Wall Street Journal today brings a somewhat surprising case in point ("My Response to Buffett and Obama," by Harvey Golub, August 22, 2011). Former American Express CEO Harvey Golub, generally respected among his peers, lets loose an ill-informed screed that shows the cocoon in which many of these CEOs live their lives. U.S. CEOs pull in compensation that is hundreds of times higher than their workers, a far higher multiple than in any other part of the world. Many of them pulled in hundreds of millions of dollars in compensation and stock options over the past decade or so. They shelter their money in endless tax loopholes; live like royalty in a country that once prided itself on being a republic; effectively set their own pay through their pals on the executive committee; and all-too-frequently drive their companies and the U.S. economy into bubbles and frauds, all the while taking tens or hundreds of millions of dollars in compensation.  Now comes Mr. Golub, reportedly with hundreds of millions of dollars in net worth, to tell us that he's upset with those asking him to pay more taxes. He's so upset indeed that half of what he says is utterly absurd.

"A Wolf In Sheep's Clothing" - This really bothers me. You have to love that Warren Buffett, the richest man in the world, has deemed himself representative and ambassador for those making $250,000 and more..."People like myself" he says. People that take home $250,000 a year before taxes are somehow in the same category as the richest man in the world? I would say there is a fairly large gap between a $250,000 annual income and a $45 billion empire. And how did the powers that be arrive at this arbitrary yet significant figure of $250,000 as the line for dividing rich and poor?  Warren, why not donate your money to the government that you feel so strongly should be funded with more money from the "rich" that you have appointed yourself representative of?  I am beyond disgusted by these righteous "do as I say, not as I do folks that have already made a fortune and yet are lobbying for higher taxes as though they are elected representatives for the government's definition of "rich", meanwhile by and large their wealth has already been made and tax policy is immaterial to their incremental future wealth. If he feels so strongly about what people like him should be paying, WHAT'S STOPPING HIM? Pay more then, Warren, if it means so much to you. Nobody is stopping you and the government will gladly accept a larger check from you on April 15th.

Rich Guy "Deeply Resents" Helping Pay For Democracy - Hey here's a real dog bites man story for you: a really, really rich guy says to readers of billionaire Murdoch's Wall Street Journal that he "deeply resents" paying taxes and whines about how the government does things he doesn't like. Seriously, it wasn't in The Onion. Let's set the stage. Thanks to the "trickle down" policies of Reagan and Bush all the income gains in recent decades have gone to the top few. One in seven Americans and 25% of our children now live in poverty. (43% of our children are "at risk.") The average family income for "the bottom" 90% of us is $31,244, while the average income of the top .01% is over $27 MILLION. Per year, each year. The average income of the richest 400 Americans was $227.4 million -- and those 400 hold more wealth than the "bottom" 50% of Americans combined. Etc., etc. (I don't have to write about how many are unemployed, do it?)So with those statistics as background, former American Express CEO Harvey Golub wrote an op-ed in the Wall Street Journal today, responding to Warren Buffet’s call for the rich to start paying taxes again.

Rick Perry: Middle Income Americans Don't Pay Enough Income Taxes -  I learn from newly minted GOP presidential candidate Rick Perry what’s wrong with America—that middle income Americans don’t pay enough taxes.  Really. We’re dismayed at the injustice that nearly half of all Americans don’t even pay any income tax. (Quoted in this terrific Ruth Marcus column.) We’re apparently not dismayed that more than half of all Americans have been in a 30-year recession with little or no income growth.  We’re apparently willing to write off Social Security and Medicare payroll taxes, which are the big federal taxes for low- and middle-income Americans.  A family of four earning $30,000 may pay no federal income tax, but it pays $4,590 in payroll taxes (including the employer’s share, which economists believe is ultimately paid by the employee in the form of lower wages).  Payroll taxes are much bigger than income taxes for most families.

9 Things The Rich Don't Want You To Know About Taxes - For three decades we have conducted a massive economic experiment, testing a theory known as supply-side economics. The theory goes like this: Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity -- so much so that tax revenues will go up, despite lower rates. The late Milton Friedman, the libertarian economist who wanted to shut down public parks because he considered them socialism, promoted this strategy. Ronald Reagan embraced Friedman's ideas and made them into policy when he was elected president in 1980.  For the past decade, we have doubled down on this theory of supply-side economics with the tax cuts sponsored by President George W Bush in 2001 and 2003, which President Obama has agreed to continue for two years. You would think that whether this grand experiment worked would be settled after three decades.  But economics is not like that. It is not like physics with its laws and arithmetic with its absolute values.  Tax policy is something the Framers left to politics. And in politics, the facts often matter less then who has the biggest bullhorn.

The Bush Tax Cuts and the Deficit - How much do the Bush tax cuts and the alternative minimum tax patch widen the deficit? Take a look at the lightest blue bars below: That chart comes from the Congressional Budget Office’s latest report, released Wednesday, on the budget and the economic outlook.  The office is legally required to provide estimates for the budget under current law; this is known as the forecast “baseline.” Every year, though, Congress reliably makes changes to current law — changes that increase the deficit — just in the nick of time. This bar chart is intended to illustrate exactly how big those last-minute changes are, lest onlookers be tempted to ignore them. The lightest blue bars, labeled “Extend Tax Policies,” represent an estimate of how the deficit will grow if Congress extends the Bush tax cuts and indexes the alternative minimum tax for inflation, as legislators are expected to do once again. As you can see, these moves alone more than double the size of the deficit for most of the years shown.

Head, Desk, =Thunk= - So which is it: Stupidity, laziness, or just plain venalitySenate Democrats, who are desperate to stimulate the economy but don’t have the money to pass traditional stimulus legislation, will turn to cutting business taxes when they return to Washington this fall.  In doing so, they will try to drive a wedge between business interests and the GOP leadership, who has tried to block almost every element of the Democratic agenda, by pushing a round of corporate tax breaks, say Senate Democratic aides. Corporations are sitting on $1.8 trillion in cash and enjoying record-setting profits. What on earth makes these Senate Democrats think that more tax breaks are going to encourage them to open their coffers are hire people? Again, Democrats are buying into Republican memes, in this case the discredited one of supply-side growth. Companies do not hire people out of the goodness of their hearts, they hire people because said people can make them more money. How do comppanies make money? By selling goods and services. To whom do they sell goods and services? To the masses of people who right now aren't buying because they're either unemployed or terrified of losing their jobs. If people aren't buying the goods and services that companies produce, there's no reason to hire people. I don't know why this is so difficult for Senate Democrats to understand.

Corporatist Think Tank Pushing Repatriation with biased study--Linda Beale -A press release Thursday from the corporatist Washington "think" tank, NDN (New Democratic Network), announced a new study :  the study supports allowing huge multinational enterprises (MNEs) to repatriate their overseas earnings at almost zero tax.  The study relies on some questionable assumptions and, I believe, comes to a wrong conclusion.  Even without repatriation, the combination of the foreign tax credit and US MNEs' ability to manipulate their income results in very low tax rates on repatriated income.  With repatriation, the tax rate may even be negative.  There are almost no benefits that accrue to the US from repatriation, while the benefits to MNEs are substantial. The Joint Committee on Taxation has estimated that another rendition of the 2004 repatriation provision (part of the cornucopia of corporate tax benefits passed by the Bush Administration and responsible for lowering even further the tax-haven effective tax rates actually paid by US corporations) will cost about $80 billion over the ten years from 2011 to 2021. This is all occurring at a time when the rightwing GOP in the House and Senate has pushed to reduce US spending for social justice programs like Medicare, Medicaid and Social Security on the claim that its highest priority is reducing the US deficit.

America is GE's tax haven - (Reuters) - Washington politicians say high corporate tax rates are driving U.S. companies to invest offshore where tax rates are lower. But that is not General Electric's experience. GE's disclosures show that over the last decade it paid much lower tax rates in America than offshore, just the opposite of the Washington political mantra. Even more puzzling, the U.S. corporate giant chooses to take more of its profits in other lands despite the higher tax rates there. Given that GE has a roughly 1,000-person tax department dedicated to paying as little as possible in taxes, what the disclosures show is that something other than tax policy is driving GE's business decisions. The law gives companies a great deal of latitude in deciding how to arrange where they report profits from multinational transactions. GE won't elaborate on why it takes so much of its profit in higher tax jurisdictions offshore. From 2001 through 2010, GE's total American corporate tax burden averaged 9.4 percent of its profits in American corporate income taxes compared to its 17.9 percent foreign tax rate. GE's accounting for taxes, both current and deferred, shows that its American tax rate is just a bit more than half its foreign rate and only about a quarter of the statutory 35 percent rate set by Congress.

Not All Tax Breaks Are Created Equal - It has become fashionable (I am happy to say) for  politicians to talk about ending or at least scaling back tax subsidies. But  pols mean very different things when they say this. And new analysis by the Tax  Policy Center shows that whether they help you or not often depends on how much  money you make and whether you get big benefits from other tax subsidies—and  thus can itemize your deductions.When many conservatives talk about “closing tax loopholes”  they mean making sure that low-income people pay at least some tax. They  are offended that nearly half of households pay no income tax (though they often  fail to note that many do pay payroll and other taxes). When liberals talk  about ending tax subsidies, they have in mind raising taxes on corporations and  on the highest-income individuals. They–and Warren Buffett–are offended that  the rich pay relatively low tax rates even though their share of  national income (and wealth) is growing. With this discordant rhetoric in mind, let’s take a look at who benefits most from three popular tax subsidies.

Taxing Capital Gains at Ordinary Rates - Why not tax capital gains as ordinary income? That’s an old chestnut among those of us who believe that the differential between tax rates on different types of income causes more harm than good.   The usual objection to increasing the rate on capital gains—that’s the money you get when you sell an asset for more than you paid for it—is that it will discourage investment.  There’s been considerable academic work on this question, but tax expert Len Burman called the academic evidence “murky, at best.”  There are a few economic principles that we consistently get wrong in ways that do lasting damage to our economy and diminish our future. At the top of this list are arguments about large behavioral responses to changes in tax rates. I don’t think it’s zero, but I’ve simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way. And when you factor in the benefits of the investment and services government provides—something the literature tends to ignore—the hyper-responsiveness arguments are even less compelling.

A Sales Tax on Wall Street Transactions - Most of us pay state and local sales taxes on most things we buy, and most casino gambling is subject to state taxes ranging from up to 6.75 percent in Nevada to 55 percent on slot machines in Pennsylvania. But speculative purchases of stocks, bonds and other financial instruments in the United States go untaxed but for a tiny fee (less than a half-cent) on stock trades that helps finance the Securities and Exchange Commission. In Britain, by contrast, a 0.5 percent tax on stock transactions raises about $40 billion a year. President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany recently announced plans to introduce a similar tax in the 27 nations of the European Community. It is variously called a “transactions tax,” a “financial transactions tax,” a “security transaction excise tax” or a Tobin tax. By any name, Wall Street hates it, because it would cut into trading profits. But proponents like Dean Baker, co-director of the Center for Economic and Policy Research assert that it would primarily affect short-term “noise traders” and discourage speculation rather than productive investment.

Maybe Reuters Should Have Talked to Someone Supporting a Financial Transactions Tax - A Reuters article on plans by the European Union to impose a tax on foreign exchange transactions (actually the proposed tax would apply to a wide array of financial transactions, not just foreign exchange) reads like an editorial against such a tax. It tells readers that the tax could cause traders to leave the London market, that it would reduce liquidity and thereby increase volatility and also disrupt efforts to develop algorithms for intraday trading. If it had talked to a proponent of the tax, she would have noted the size of the taxes being discussed would just raise transactions costs back to where they were in the 80s or 90s. The cost of trading has plummeted in the last 3 decades due to computers. This tax will simply reverse some of this decline. There was already an extremely well-developed market in foreign exchange in the 80s. The effect of a tax on volatility is unclear. While it reduces the incentive for arbitrage, it will also make speculation less profitable. This could make large speculative swings of the sort that we have seen in financial markets in recent weeks less likely. Finally, it is not clear why it views the fact that the tax will make it more difficult to construct trading algorithms as an unintended consequence. These algorithms may provide large profits to the people who develop them, but the benefits to the economy and society are likely to be near zero.

S&P: 'No Math Error' In US Rating Cut, No Qualms about More Actions

  • -- Standard and Poor's defends U.S. rating downgrade
  • -- Executive says no math error, calls U.S. Treasury's claims "disingenuous"
  • -- S&P says will not flinch from further downgrades of other governments if justified
  • -- S&P says Greece to require further restructuring
  • -- S&P says China can manage its local government debt

Standard & Poor's and the Bilderbergers: All Part of the Plan? - What just happened in the stock market? Earlier this month, the Dow Jones Industrial Average rose or fell by at least 400 points for four straight days, a stock market first. The worst drop was on Monday, August 8, 2011, when the Dow plunged 624 points. Monday was the first day of trading after US Treasury bonds were downgraded from AAA to AA+ by Standard & Poor's (S&P). But the roller coaster actually began on Tuesday, August 2, 2011,  the day after the last-minute deal to raise the US debt ceiling - a deal that was supposed to avoid the downgrade that happened anyway five days later. Who Drove the S&P Agenda? Jason Schwarz shed light on this question in an article on Seeking Alpha titled "The Rise of Financial Terrorism." He wrote: [A]fter the market close on Friday August 5th, we received word that S&P CEO Deven Sharma had taken control of the ratings agency and personally led the push for a US downgrade. Also named by Schwarz as a suspect in the market manipulations was Michel Barnier, head of European Regulation. Schwarz notes that Barnier, like Sharma, was a confirmed attendee at past Bilderberger conferences. What, then, is the agenda of the Bilderbergers?

S&P chief to step down - US downgrade was not factor -  The president of Standard & Poor’s is stepping down, an announcement coming only weeks after the rating agency’s unprecedented move to strip the United States of its AAA credit rating. The McGraw-Hill Cos., the parent of S&P, said late yesterday that Deven Sharma will be replaced by Douglas Peterson, now the chief operating officer of Citibank N.A., Citigroup Inc.’s chief banking arm. Sharma, 55, “was ready for new challenges’’ after helping S&P separate its data, pricing, and analytics business from its ratings business, McGraw-Hill said in a statement. The company unveiled that restructuring at S&P late last year. Peterson, 53, will take over the helm of Standard & Poor’s Sept. 12. Sharma will stay on as an adviser at the parent company until the end of the year.

S&P Board Fires CEO For Telling The Truth, To Be Replaced With COO Of Citibank - Following years of pandering to client demands, and assigning trillions of dollars in fixed income securities with whatever rating money bought (among other things, a factor to the credit bubble and its subsequent implosion) S&P finally tried to do the right thing and tell the truth. However in this case it picked if not the worst, then certainly the most hypocriticial credit in the world to expose - the US itself. Sure enough two weeks after the downgrade, someone made the phone call and the CEO Deven Sharma is no more. As for the kick square in the gonads: Sherma will be replaced with the COO know it... the bank which demanded tens of billions in secret Fed bailout loans itself, Citibank, and whose existence is inextricably tied to America not seeing any more downgrades ever again. As the FT reports, "The McGraw-Hill board made the decision to replace Mr Sharma at a meeting on Monday, where it also discussed an ongoing strategic review."

Why A New Leader Won’t Save S&P -The credibility of S&P, and all the rating agencies, took an enormous hit when they gave sub-prime junk AAA-ratings, thus helping create the bubble that caused the 2008 financial meltdown. The Justice Department is investigating those ratings, and the SEC is also probing whether S&P selectively leaked information about the U.S. downgrade before the official announcement. Should the hiring of Douglas Peterson, the chief operating officer of Citigroup's retail and commercial lending unit, to replace Sharma offer any hope that S&P can restore its reputation? After all, Peterson has troubleshooting experience. Don't get your hopes up, says Rosner. “The problem is not about the leadership role,” Rosner says. “We've just long-asked rating agencies to do something that they couldn't. When it comes to sovereign ratings, there's no real way to put everything into quantifiable objective boxes. These ratings are opinions, and they should really be treated like the opinions of any sell-side analyst. It's just an opinion, as valid as mine and yours. No one should be required to listen to me.”

Taibbi on SEC brain damage: they hit their head on a pile of Wall Street money and never recovered - Matt Taibbi on SEC destruction of records. Read the whole report in Rolling Stone: The destruction of records by the SEC, as outlined by Flynn, is something far more than an administrative accident or bureaucratic fuck-up. It's a symptom of the agency's terminal brain damage. Somewhere along the line, those at the SEC responsible for policing America's banks fell and hit their head on a big pile of Wall Street's money – a blow from which the agency has never recovered.

Moody’s Analyst Breaks Silence: Says Ratings Agency Rotten To Core With Conflicts - A former senior analyst at Moody's has gone public with his story of how one of the country's most important rating agencies is corrupted to the core.  The analyst, William J. Harrington, worked for Moody's for 11 years, from 1999 until his resignation last year. From 2006 to 2010, Harrington was a Senior Vice President in the derivative products group, which was responsible for producing many of the disastrous ratings Moody's issued during the housing bubble. Harrington has made his story public in the form of a 78-page "comment" to the SEC's proposed rules about rating agency reform, which he submitted to the agency on August 8th. Moody's analysts whose conclusions prevent Moody's clients from getting what they want, Harrington says, are viewed as "impeding deals" and, thus, harming Moody's business. These analysts are often transferred, disciplined, "harassed," or fired.

Wall Street rating agencies’ corrupt system -Al Franken (CNN) -- "Let's hope we are all wealthy and retired by the time this house of cards falters." This quote, taken from an e-mail sent by a Standard & Poor's official in 2006, says it all. Just two years after it was written, the house of cards that S&P helped build collapsed and roiled the global economy. And while I welcome the news that the Justice Department has launched an investigation into S&P, I imagine it will conclude what a lot of us have long known: S&P made record profits by knowingly handing out sterling credit ratings to complete junk. It was the incompetence and corruption by S&P and its peers, Fitch and Moody's, that played a pivotal role in our financial meltdown that cost Americans $3.4 trillion in retirement savings, triggered the Great Recession with its massive business failure and job losses, and consequently caused the explosion of our national debt. The root of this corruption? The flawed "issuer pays" model on which the entire credit rating industry is based. The Big Three rating agencies were paid a fortune by Wall Street to hand out pristine AAA ratings to the subprime mortgage-backed securities the banks issued -- securities that turned out to be junk. No AAA rating? The issuer would take its business -- and its hefty fees -- elsewhere.

Wall Street Bailout: Too Big To Collect? - In light of the recent S&P downgrade, the U.S. suddenly looks more dire financially than before the downgrade ( (at least psychologically, as the country still has the ability to borrow at its pre-downgrade low interest rates.)  So it would make tracking down Wall Street bailout money still outstanding a good start to reclaim some of the lost treasure.  However, more than two years after the bailout, there never seems to be a straight answer to these two questions:  (1) Where has Uncle Sams' bailout money gone? (2) Has the money been paid back yet?    The Treasury Dept. already declared milestone reached in June, 2010 when  "Repayments to Taxpayers Surpass Tarp Funds Outstanding."  New York Times and CNNMoney both keep stattistics of the bailout and tell a different story from the government's account.  Pro Publica also keeps track of a bailout list including the $700 billion TARP program, and the separate bailout of Fannie Mae and Freddie Mac

In Fed’s Move on Capital One Deal, a Test of Dodd-Frank -- Capital One is the latest bank accused of being “too big to fail.” A proposed $9.2 billion purchase of the online bank ING Direct would make Capital One the fifth-largest bank in the United States with more than $200 billion in deposits. But before this acquisition can be completed, it requires clearance from the Federal Reserve, Capital One’s chief regulator. The Dodd-Frank Act requires that the Federal Reserve weigh the systemic risk of the combined company. If the risk outweighs the benefits of the transaction, the deal must be blocked. The Fed has yet to decide what constitutes a systemically risky acquisition. So its decision on Capital One could have a broad impact on what Dodd-Frank means for the nation’s biggest banks. Community interest groups led by the National Community Reinvestment Coalition, which oppose the deal, say that Capital One is already classified under Dodd-Frank as systemically important since it has more than $50 billion in assets. Why should any such bank be allowed to get bigger?

Wall Street Aristocracy Got $1.2T in Loans -- Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits. By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret. Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

Wall St Borrowed $1.2 Trillion from Fed… Barry Ritholtz points us to how essential US government intervention was for the banking system and in particular existing banks and the management at The Big Picture. It has links worth pursuing as well.  I continue to be of the mind that the Wall Street Bailouts were misguided, and that a massive Swedish style reorg would have been the best thing for the nation and the economy in the long run. Both Uncle Sam and the Fed would have provided the broad based debtor in possession financing required, and the losses would have fallen where they belonged — on the Shareholders and Bond Holders — and not the taxpayers. An honest broker of the situation would have:

1. Fire the senior management of the banks (see this)
2. Banned all lobbying activity as a condition of any aid (see this)
3. Forced a Swedish style prepackaged bankruptcy (see this and this)

What That Exposé Of The Fed’s Secret Bailout Told Us … And What It Didn’t - We've just learned about the Federal Reserve's extraordinary secret bailout of the country's big banks. We now know that the TARP bailout program was only the tip of the iceberg, and that financial institutions received a total of $1.2 trillion in loans and other funds while the rest of the country was left to struggle for economic survival.  We also know that, despite all that "we got our money back" rhetoric, these loans represent a cash giveaway to the banks that totals up to tens of billions of dollars - while homeowners and student loan borrowers continue to struggle. Here's what we now know about this secret bailout, thanks to a Bloomberg report, along with what we already knew - and what we still don't know:

  • We now know that the 10 biggest banks in America received $669 billion in emergency loans from the Fed.
  • We already knew that the same 10 banks now own 77% of the country's banking assets, more than before the crisis, making them even more "too big to fail" than ever.
  • We now know that the low interest rates they received were, in fact, a massive transfusion of cash - courtesy of the American taxpayer -just like TARP.
  • We already knew that the banks have not been asked to write down any of the principal on underwater homes.
  • We now know that the American taxpayer was asked to rescue failing businesses without being given any of the concessions any other lender or investor would have been demanded.
  • We already knew that they've refused to refinance most homeowners, even though underwater homes are arguably more reliable than some of the collateral the Fed accepted when it rescued Wall Street.
  • We now know that the total amount of this secret bailout is $1.2 trillion - which, as Bloomberg's investigative journalists observe, is roughly the same amount that's owed on delinquent and foreclosed mortgages.

OUTRAGE OF THE DAY: Do You Realize That The Government Is Still Paying Banks Not To Lend...?: One of the most outrageous "open secrets" of U.S. government policy these days is that the Federal Reserve is still paying big banks not to lend money. And it's doing that while screwing average Americans who have been responsible and lived within their means. Huh? Seriously: The Federal Reserve is quietly continuing with one of the many outrageous bank-bailout programs it initiated during the financial crisis--the one in which it pays big banks interest on their "excess reserves." What are "excess reserves"? Money that the banks have but aren't lending out--money that banks are just keeping on deposit at the Fed. The Fed is paying banks 0.25% interest on this money. 0.25% interest may not sound like much, but it's more than the banks are paying you to keep money in your savings or money-market account. It's also more than you'll earn if you lend the Federal government money for 2 years.

Should Banks Be Public Utilities? - video - Yves Smith - We discuss what the role of banks should be, given how much government support they have, on Real News Network. Enjoy!

Banks Decry Surcharges as Basel Plans Capital ‘Punishment’ for Size, Risk - Global banks are launching a counterattack against new capital guidelines, warning that they could reduce lending and harm growth as well as alter competition in the financial system. The Clearing House Association and the Institute of International Bankers, whose members include JPMorgan Chase & Co (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Deutsche Bank AG (DBK) and ING Groep NV (INGA), said in a letter that capital surcharges agreed to by the Federal Reserve and international regulators are “deeply flawed” and “reflexively based on the notion that size alone creates prudential concerns.” “There is a real tension between the regulators and the largest global systemically important institutions,” “Capital is almost being used as a punishment.” Bloomberg News obtained an Aug. 25 draft of the letter, which will be filed as a comment on proposed capital surcharges for big banks agreed on by the Basel Committee on Banking Supervision in June. The Fed, which is part of the Basel Committee, is also preparing to release its own proposals under the Dodd-Frank Act for stricter standards for the largest U.S. banks sometime in the next five weeks.

More Transparent Bank Stress Tests Are Needed - Europe and the United States both need to conduct another round of stress tests on their banks, with a model similar to what was done in the United States in 2009, but with a more negative downside scenario — in particular, assessing the effects of a major sovereign debt problem in the euro zone. The point of such a scenario is to determine how much equity financing banks need to have if the world economy turns ugly. If the big banks raise more capital in advance, we are less likely to see economic downturn again become financial catastrophe. The prevailing wisdom about Europe is that it faces primarily liquidity problems. In this view, a few of the larger countries have had trouble rolling over their debts, and some leading banks need help with short-term financing.  There are two problems with this positive spin on recent events. The first is that sovereign debt problems can easily become solvency issues — that is, more about whether countries can afford to service their debts rather than whether they can raise enough cash at reasonable rates in any given week.  But if signs of growth do not return soon, perhaps over three to six months, the next downward revision to forecasts will spread deeper debt pessimism.

Subprime, Shadow Banking and Liquidity Shocks - Why did relatively trivial losses in AAA mortgage bonds nearly vaporize the world economy in 2008? It seems absurd on its face. After all, despite the financial carnage in the U.S. housing market, the losses only amounted to a small proportion of global assets and GDP. Ben Bernanke's assurances that subprime would be "contained" almost seem plausible. Of course, this ignores the role credit default swaps (CDS) played in not only magnifying the aforementioned losses, but also in obfuscating them: the labyrinthine web of such opaque, over-the-counter contracts left banks unsure of what both they and their counterparties were on the hook for. It's no wonder the interbank market froze. The destruction of seemingly safe, cashlike assets -- and the resulting surge in the liquidity premium -- is the other part of the story. The past few decades have been marked by the rise of the so-called shadow banking system: securitization largely replaced traditional lending, while investors clamored to maximize returns on the putatively safe (but uninsured) holdings the unregulated system created. This was the great irony of the post-tech bubble economy: the juxtaposition of brazen, unhinged risk-taking among lenders with the extreme risk-aversion of investors.

Screw the American People, Except for the Corporate People -- Two things have been crystal clear from the outset in the Obama Administration:
1. Banksters cannot be held accountable for anything no matter how awful, no matter how criminal, because that would interfere with the all-important financial sector and murder the confidence fairy.
2. The government won’t enact any programs that would actually help homeowners who have been destroyed by the housing crisis, because that might mean that banksters would have to take losses.
As to point 1, Secretary of the Treasury Timothy Geithner told then New York Attorney General Andrew Cuomo not to prosecute banksters for fraud, because it would kill the Confidence Fairy. Then we found out about the Obama Administration plan for coping with the biggest case of fraudulent banking ever. Paul Krugman saw it as a muddle through plan: “… hoping that the banks can earn their way back to health.” Krugman didn’t like the plan, and it was just one more time Krugman was right and for the right reasons. Now as dday explains, HUD Secretary Shaun Donovan has joined the rest of the Obama Administration in assaulting representatives of the public who stand up to the banksters.
As to point 2, Obama refused to work the Congress to pass cramdown, letting the banksters win, despite his campaign promises. He and Geithner pushed hard for the useless HAMP, a total failure, as Neil Barofsky, the Special Inspector General for TARP said in a report late last year. Now 30 months into his term the Obama Department of Justice has made it perfectly clear that no banksters were guilty of anything. None! It beggars the imagination that this decision was made without even the pretense of a real investigation, and in the face of reports of wire fraud, mortgage fraud and securities fraud, and fraud on state courts around the nation, reports prepared by special commissions, bankruptcy examiners, and congressional committees.

Barack Obama and the cost of doing nothing - Wind the clock forward a century, closer to the early days of the Obama Administration — days of financial crisis and fear when Wall Street was “melting, melting” a la the wicked witch in the Wizard of Oz. Economist Larry Summers reportedly advised President Obama that time will heal the wounds of the financial markets and that no further action to restructure the big banks or the housing market is needed. The view of leaving the big banks alone is consistent with the line taken by Summers’ political sponsor, former Citigroup Chairman and Treasury Secretary Robert Rubin, who has served as the political protector of Wall Street in Washington for a quarter century. Both Marx and  Engels, as well as free market theorists, suggest that all things in politics and life change. Yet somehow both Rubin, Summers and their minions, such as Treasury Secretary Timothy Geithner, seem to think that we can ignore these changes and simply continue along without making any fundamental fiscal and financial decisions — especially changes that will inconvenience them or their associates and clients on Wall Street.

Video: Jeff Madrick on the politics of protecting consumers… As currently designed, the Consumer Finance Protection Bureau will have broad powers to set rules for many types of lending in the U.S. — everything from mortgages and credit cards to payday loans and check cashing firms. The bureau was the brainchild of Elizabeth Warren, the former Harvard Law professor and longtime consumer-rights champion.But from its inception, the bureau has been criticized by business groups and Republican leaders in Congress who argue that its powers are too broad, and that its potential regulations will be a drag on the economy. Earlier this year, 44 Republican senators sent President Obama a letter stating that if changes weren’t made, they’d refuse to confirm anyone to run the bureau, which would seriously hamper its enforcement ability. Nevertheless, in July, President Obama nominated Richard Cordray to head the new bureau. Cordray was the former attorney general of Ohio, and is well regarded by many consumer advocates, including Elizabeth Warren.

White House Rolls Back Regulations - Under fire from Republicans for a heavy-handed regulatory environment, the Obama administration Tuesday announced a roll back of hundreds of federal regulations. The White House is trumpeting its decision to eliminate hundreds of government regulations. It's part of an effort President Obama started in January to get rid of unnecessary rules.  NPR's Ari Shapiro reports it's also part of an effort to push back against his administration's reputation for being hostile to business.

Jamie Dimon’s Company Fined $88.3 Million for Trading with the Enemy - That’s not the technical term for violating economic sanctions against Cuba, Sudan, Iran, and Liberia (and FWIW I think the sanctions against Cuba are stupid). Nevertheless, that’s basically what the sanctions JP Morgan Chase just admitted to violating amount to. The big dollar amounts involve $178.5 million in wire transfers with Cubans. JPMC processed 1,711 wire transfers totaling approximately $178.5 million between December 12, 2005, and March 31, 2006, involving Cuban persons in apparent violation of the CACR. But the more interesting violation came when JPMC refused to turn over some documents relating to Khartoum until the government told the bank they knew JPMC had the documents. And in spite of that apparent obstruction, TurboTax Timmeh Geithner’s agency still treated Jamie Dimon’s disloyal company leniently because of what they called JPMC’s “substantial cooperation.”

Schwab sues banks for manipulating Libor rates - Charles Schwab Corp., the largest independent brokerage by client assets, sued Bank of America Corp., Citigroup Inc. and other banks claiming they manipulated the London interbank offered rate, or Libor, starting in 2007 in violation of U.S. antitrust law.  The banks conspired to depress Libor rates by understating their borrowing costs, thereby lowering their interest expenses on products tied to the rates, according to the lawsuit filed Aug. 23 in federal court in San Francisco, where Schwab is based.  The banks “reaped hundreds of millions, if not billions, of dollars in ill-gotten gains,” Schwab wrote.  In separate suits in April, three European asset-management firms and the Carpenters Pension Fund of West Virginia sued the banks claiming they manipulated Libor. U.S. and U.K. officials are cooperating in a probe of possible Libor manipulation, a person close to the investigation said in March.  The Schwab suit seeks unspecified damages, which may be tripled under antitrust law. It also includes claims for racketeering and securities fraud.

The DC Circuit’s Proxy Access Decision - As you’ve probably heard, the DC Circuit struck down the SEC’s proxy access rule last month, in Business Roundtable and Chamber of Commerce v. SEC. The three-judge panel held that the SEC’s proxy access rule was “arbitrary and capricious” because the SEC failed “adequately to assess the economic effects of a new rule.” Unlike most securities lawyers, to whom proxy access is a huge deal, I personally don’t find proxy access terribly interesting. But the Business Roundtable decision will affect many future SEC rules required under Dodd-Frank, so it’s important to consider the decision, and how the SEC should proceed in light of the decision.
For a variety of reasons, I think the DC Circuit’s decision was terrible — hilariously biased, and generally not worth the paper it was written on. (Not surprisingly, the opinion was written by failed Reagan Supreme Court nominee Douglas Ginsburg, who also wrote the 2005 opinion striking down another SEC rule.)

A summer tale of three cities - During the 20th century Detroit made some of the world’s coolest cars, with all those amazing gizmos that the Beach Boys sang about, and it kept making them until they weren’t so popular any more. You look back on it and wonder what businesspeople in Detroit were thinking during those long years of decline and then you spend some time observing the New York financial world and you wonder what people here are thinking. It has been three years since the global economy was brought down by the failure of made-in-New-York financial products – auction rate securities, collateralised debt obligations and the like – that were as badly engineered as any Edsel or Corvair. But there is surprisingly little talk in these parts even today about whether the big financial factories that dominate our local economy are making the right products or positioning themselves well for the demands of a new world. What Wall Street needs is more of the spirit fostered in another city of the US midwest: Cincinnati, home to Procter & Gamble, the consumer products company. It was there about a decade ago that A.G. Lafley, P&G’s chief executive, revived the fortunes of his company by dedicating it to the proposition that “the consumer is boss”.

Study Asserts World’s Stocks Controlled by “Select Few” (Bad Studies That Confirm Conventional Wisdom Refuse to Die Edition) - Yves Smith - A whole bunch of readers sent me either links to a paper “The Network for Global Control” or to reports on it.  I pre-debunked a report on an earlier version of this paper, as reported in Inside Science, by Battiston and Glattfelder. Let’s look at a breathless summary per PhysOrg:Using data obtained (circa 2007) from the Orbis database (a global database containing financial information on public and private companies) the team, in what is being heralded as the first of its kind, analyzed data from over 43,000 corporations, looking at both upstream and downstream connections between them all and found that when graphed, the data represented a bowtie of sorts, with the knot, or core representing just 147 entities who control nearly 40 percent of all of monetary value of transnational corporations (TNCs). This paper is a garbage-in, garbage out analysis. It does a network analysis based on share holdings at an institutional level. The problem is that the authors never bothered to understand how shares are held and how voting behavior varies based on institutional arrangements. To put it another way, the problem with the study is its failure to understand ownership, control and voting behavior in the institutional funds management arena.

Are You Ready? The Government Doesn't Give A Damn - I hope you are. Today proved one thing - oversold doesn't mean jack. The ~20 handle pop into the open was sold into immediately, despite the market's severely-oversold condition. A condition that is worse than during the height of the 08/09 crash. Drill that into your head folks: The government doesn't get it, exactly as they didn't get it in early 2008. They are, right now, squandering the opportunity to take effective action. I know this for a fact because the Republican Caucus has refused to address the issue and I know they're aware of it.  This is the GOP.  This is what it has done and is doing.  The GOP is proving time and time again that it will not get in front of these issues because doing so means kneecapping the banksters that have trashed our economy and continue to do so today. Not that Obama, Pelosi and Reid are any better, of course.

Triumph of the Rentier City? - New York is wonderful, but it has been given an enormous cost advantage in the aftermath of the financial crisis.  It's institutions received cheap capital in the form of TARP; a near zero Federal Funds Rate also amounts to a large subsidy for financial institutions.  Banks can currently make profits just by playing the yield curve.  These profits have helped restore Wall Street bonuses (and hence incomes of everyone else in Manhattan), but that doesn't mean they reflect productive activity. I don't want to make too much of this: TARP was necessary, and the low Federal Funds rate is necessary too.  New York is a great and resilient city.  But it is also home to many too big to fail institutions, and thus has political and financial advantages that, say, Chicago and San Francisco lack.

MMFs end exposure to Italian and Spanish banks - Worries about European banks’ US dollar funding have been growing lately, even though the latest Fed data show foreign banks still have huge piles of cash on an aggregate basis. But that’s just one part of the funding story. Another concerns our old friends, the money market funds. Fitch Ratings on Monday published its latest monthly report on US MMF exposure to European banks. It’s not a cause for panic but it does show how MMFs have reduced their overall exposure and, more interestingly, shifted to shorter-term lending. There were reports a few weeks back of MMFs being reluctant to provide longer-term funding so it’s nice to have some corresponding data. Here’s the relevant chart from the report:  Overall, the MMFs sampled by Fitch (it uses data from the 10 biggest MMFs, representing 43 per cent of total prime MMF assets) reduced their exposure to European banks last month by 9 per cent on a dollar basis.

SF Fed Warns Baby Boomers May Wound Stock Market - The next quarter century or so could be a tough one for the stock market, researchers at the Federal Reserve Bank of San Francisco warn. In a paper released by the institution Monday, two of its staffers said the retirement of the Baby Boom generation stands to strip away from equities a key source of support. The ongoing wave of retirees won’t crater the market, but they may well be “a factor holding down equity valuations over the next two decades,” writes Zheng Liu and Mark Spiegel write. As they see it, what the Baby Boomers have given to the market is something like what they will be taking away. Allowing for the “theoretical ambiguities,” the economists noted “U.S. equity values have been closely related to demographic trends in the past half century” across several key metrics. “In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values,” . “These demographic shifts may present headwinds today for the stock market’s recovery from the financial crisis,” the paper said.

Research: Aging Population will probably lower Stock Market P/E Ratio - From the San Francisco Fed: Boomer Retirement: Headwinds for U.S. Equity Markets? This Economic Letter examines the extent to which the aging of the U.S. population creates headwinds for the stock market. We review statistical evidence concerning the historical relationship between U.S. demographics and equity values, and examine the implications of these demographic trends for the future path of equity values. [E]vidence suggests that U.S. equity values are closely related to the age distribution of the population. Since demographic trends are largely predictable, we can forecast the path that the P/E ratio is likely to follow in the next few decades based on the predicted M/O ratio.... What does the model say about the future trajectory of the P/E ratio? ... To obtain this future P/E* path, we calculate the projected M/O ratio from 2011 to 2030 by feeding Census Bureau projected population data into the estimated model. Figure 2 shows that P/E* should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.

Stock Tip: Be Worried. Workers Are Consumers.: Repeat after me: Workers are consumers. Consumers are workers. We’re slouching toward a double dip, and Wall Street is imploding, because consumers – whose spending is 70 percent of the economy – have reached their limit. It’s not just the jobless who can’t spend. It’s mainly people with jobs. Median wages continue to fall. Weekly wages in July for Americans with jobs were 1.3 percent lower than eight months before. America’s median earners are now earning less (adjusted for inflation) than they earned ten years ago. Every CEO of every company that continues to squeeze payrolls (Verizon, are you listening? Ford?) needs to understand they’re shooting themselves in the feet. Where do they expect demand for their products and services to come from? They’re doing the reverse of what Henry Ford did back in 1914 – paying his workers three times what the typical factory employee earned at the time. The Wall Street Journal called his action “an economic crime” but Ford knew it was a cunning business move. With higher wages, his workers became his customers, snapping up Model-Ts and generating huge profits.

U.S. Banks Facing Main Street Squeeze as Economy Saps Earnings -- Two U.S. Treasury secretaries and Federal Reserve Chairman Ben S. Bernanke provided capital and cheap loans to banks during the last three years to help fuel an economic revival. It hasn't worked out. While those policies benefited Wall Street, they failed to produce a sustained recovery on Main Street, where unemployment remains more than 9 percent. Now the sputtering U.S. economy may sap bank earnings and Wall Street bonuses. Profit estimates for companies including Bank of America Corp. have been slashed as much as 30 percent following a report showing weaker-than-expected growth in first-half gross domestic product and after the Federal Reserve said it plans to leave benchmark borrowing costs at historic lows for two years. The 24-member KBW Bank Index has dropped 21 percent since July 28, the day before the latest GDP figures were reported, compared with an 11 percent decline in the Standard & Poor's 500 Index.

US funds show true state of eurozone banks  Morgan Stanley, calculates that of the €8,000bn funding that is currently in place for the largest 91 eurozone banks, some 58 per cent needs to be rolled over in the next two years. More startling still, some 47 per cent of this funding is less than a year in duration. Much of that is in euros.  However, as the saga of the money market funds shows, eurozone banks have been raising short-term dollar funds too, either to finance their portfolios of dollar assets, or to provide a cheap form of funding (which is then swapped back into euros.) The scale of this reliance is – thankfully – not nearly as large as it was in, say, 2007; back then eurozone banks had a vast network of dollar-funded mortgage vehicles, creating a funding mismatch that was about $800bn, according to the Bank for International Settlements. Nevertheless, some element of this mismatch remains; hence the current crunch.  Is there any solution? In the long term, some eurozone banks probably need to rethink some of their funding profile. In the short term, however, Huw van Steenis, an analyst at Morgan Stanley, has recently been promoting another interesting idea: eurozone authorities should offer joint guarantees for debt issued by banks, as a form of “circuit breaker” to counteract panic

U.S. Banks Seek Relief on Swelling Deposits  U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.  Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.  Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.

Fewer Banks In the U.S. Considered To Be at Risk - The number of banks on the government’s list of institutions most at risk for failure fell in the second quarter, the first drop since before the financial crisis began. Twenty-three lenders came off the list of so-called problem banks during the second quarter, bringing the total to 865, according to data released Tuesday by the Federal Deposit Insurance Corporation. Not all the troubled lenders will inevitably fail, but the F.D.I.C. considers them most at risk, making the quarterly update one of the clearest measures of the banking industry’s health. It was the first decrease in the number of problem banks since the third quarter of 2006. The report also contained other signs of improvement. There were 48 bank failures in the first half of 2011, far fewer than the 86 failures in the first six months of 2010. Last year’s total of 157 collapsed banks was the highest since the last severe recession, in the early 1990s. And the F.D.I.C. insurance fund that protects the nation’s depositors showed a surplus for the first time in two years. It stood at $3.9 billion, compared with a negative $1 billion balance at the end of the first quarter.

Unofficial Problem Bank list declines to 984 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Aug 20, 2011. Changes and comments from surferdude808:  The Unofficial Problem Bank List dropped by four institutions this week to 984 while aggregate assets increased by $1.2 billion to $412.5 billion. In all, there were seven removals and three additions. The removals include two cures, four failures, and an unassisted merger.

FDIC has to face $10 billion WaMu-related lawsuit - A federal judge ruled that the Federal Deposit Insurance Corp has to face a $10 billion lawsuit tied to the failure of Washington Mutual Bank.  The judge refused the FDIC's request to dismiss the lawsuit brought by Deutsche Bank National Trust Co over bad mortgages that were securitized by Washington Mutual. Washington Mutual, or WaMu, was seized by the Office of Thrift Supervision in September 2008 in the biggest bank failure in U.S. history. The FDIC was appointed receiver and immediately sold the bank to JPMorgan Chase & Co for $1.9 billion. The Deutsche Bank unit filed its lawsuit in 2009 arguing that loans that were pooled into mortgage bonds did not meet the underwriting standards that had been promised by WaMu, causing investors to lose billions of dollars.

CBO ramps up estimated cost of Fannie Mae, Freddie Mac - Fannie Mae and Freddie Mac will cost taxpayers $51 billion between 2012 and 2021, according to a new estimate released by the Congressional Budget Office Wednesday. The CBO increased its projection by $9 billion from its estimate released in June. Since placing the government-sponsored enterprises in conservatorship in 2008, the Treasury Department sent $170 billion in subsidies through the second quarter, of which $27.9 billion has been paid back. The Treasury sent $103.8 billion to Fannie Mae, with $14.7 billion returned. Another $66.2 billion went to Freddie with $13.2 billion of that paid back. The yearly payments to Fannie and Freddie should go down, according to the CBO. The nonpartisan bureau estimates the Treasury will send $5 billion to both mortgage giants by the end of 2011, down from $40 billion spent on them in 2010. In 2012, the CBO estimates $7 billion in bailouts, which should remain the peak until 2021. The CBO said the drop in 2011 was "mostly because the two entities are expected to recognize fewer losses on their mortgage investments and guarantees."

Moody's: Commercial Real Estate Prices increased in June - From Bloomberg: Commercial Property Prices Rose 0.9% in June, Moody’s Says U.S. commercial property prices rose 0.9 percent in June, the second straight monthly gain ... The index, which measures broad price trends, is down 6.6 percent from a year earlier and 45 percent below the peak of October 2007. The article mentions some of the events that have impacted commercial real estate since June, so July and August might be weaker:  Europe’s debt crisis, signs the U.S. will remain mired in sluggish growth through next year and the Standard & Poor’s downgrade of the nation’s credit rating roiled financial markets and triggered a selloff in securities linked to debt on commercial real estate. ... Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted. According to Moody's, CRE prices are down 6.6% from a year ago and down about 45% from the peak in 2007. Some of this is probably seasonal, although Moody's mentioned a price pickup "beyond trophy properties and major U.S. coastal cities".

Moody's: CMBS delinquencies up to 9.24% in July -- The delinquency rate on home loans within commercial mortgage-backed securities rose 22 basis points to 9.24% in July, according to Moody's Investors Service. The rate stayed higher than 9% each month this year. For July 2010, the delinquency rate was 7.89%. Moody's delinquency tracker showed mortgages in arrears rose in July in all but two vintages between 2000 and 2008. The rate for loans originated in 2003 fell six basis points, and mortgages written in 2008 inched lower by one bps. Meanwhile the delinquency rate in July for mortgages from 2001 rose by 795 basis points to 33.78%, due to a decline in the overall balance with only 18% of vintage balance still outstanding, according to Moody's. Analysts said an $835 million increase to $55.6 billion in the delinquent loan balance in July pushed the delinquency rate higher, and there weren't any new CMBS issues last month to help offset loans that defaulted or were paid off. 

Wall Street Banks Plan $5 Billion in CMBS Sales as Spreads Soar - Wall Street banks are planning to sell as much as $5 billion of bonds tied to commercial mortgages as they offload loans agreed to before credit markets stumbled and amid growing concern that the economy is faltering. The securities will be offered in September and October, bringing 2011 sales to about $25 billion, according to Julia Tcherkassova, a commercial-mortgage debt analyst at Barclays Capital in New York. Investors are pushing back on the debt with relative yields rising by the most since January 2009 as U.S. unemployment persists above 9 percent and Europe's sovereign-debt crisis worsens. Erratic moves in the values of the debt may eat into Wall Street profits and impede commercial-real estate lending. "It is next to impossible to quote new loans if the deal execution is so uncertain," 

State Officials Starting to Question Securitization Fail, Whether States Should Tax RMBS -  Yves Smith - This letter by Virginia delegate Bob Marshall is another indicator that mortgage backed securitization issues are not going away any time soon. Notice that the questions are sophisticated and show familiarity with recent litigation. And look at question 10. I’ve been wondering when cash strapped states might look to the apparent failure of mortgage securitizations to adhere to REMIC rules as a possible trigger for tax assessments. The IRS simply refuses to go there. I was given a pretty close to temporaneous report last year when a lawyer who understood the tax issues contacted the IRS; the enforcement officer who took his call, who was very senior, understood the implications immediately and was very keen. But she reported back later that the question had gone to the White House and the response was “We are not going to use tax as a tool of policy.” So enforcing statutes is somehow abusive? This is either a deeply internalized Wall Street centric view of the world, or just plain corruption, take your pick. The IRS can always defend its stance because tax notions of what constitutes a valid transfer don’t have to map onto the legal treatment.  I don’t actually expect any state to have the guts to charge the investors in RMBS taxes because the trusts didn’t comply with the rules set forth for them to get pass through treatment. It would be a blow up the mortgage industrial complex level event (as in I’m sure any state official who tried going this route would get the political equivalent of death threats). But this issue represents considerable leverage, and there might be creative ways to use it. For instance, several states get together and use the tax threat to get major investors to pressure servicers for real principal mods, which is something the overwhelming majority of investors would favor but have heretofore been too chicken to beat up on Wall Street about it.

More on the Opacity of Bank of America’s Financial Statements - Yves Smith - Yesterday, I made a basic point about the financial statements of banks and other financial firms, citing Steve Waldman, who said it better than I could:Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.  The illustration du jour regarding Steve’s point was that investors freaked out on Monday about an estimate that Bank of America might need to raise $40 to $50 billion in equity. The idea that the market would be surprised (as in not know that and simultaneously regard that figure as plausible) says a great deal about how little confidence investors have in their knowledge of big financial firms. The debate over Bank of America continued, with Dealbreaker providing another illustration of lack of convergence: In particular, given the rumors swirling that that BofA is going to be rolled up into the One Bank To Rule Them All, it might be worth checking in with JPMorgan. Their credit analysts have a note out today, and they think the news is so bad it’s good

It’s Time For A New Kind Of Bank Of America Solution—The Right Kind - Bank of America's stock continues to tank despite management's assurances that the bank has enough capital.  Now the stock has plunged below $7 and looks to be on its way below $6. Bank of America's stock is tanking because Bank of America's investors don't believe its assets are worth what Bank of America says they are worth. In other words, it's the fall of 2008 all over again. Well, we've seen enough. We're so angry at Bank of America, Treasury Secretary Tim Geithner, and other folks responsible for the Bank of America debacle right now that we can hardly see straight, so this plan may take the form of a rant. But so be it. Treasury Secretary Tim Geithner and many other Wall Street boosters have long contended that if Bank of America fails, the world will end. We're skeptical about that. In our experience, the world is pretty resilient. But we're going to accept that, if Bank of America does collapse in a pile of wreckage, the way Lehman did, the world will get messy for a while. And we're going to accept that there's a better way out of this mess. Here's what it is...

Why is Bank of America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame -- Yves Smith - Yesterday, the S&P 500 ended flat, yet Bank of America continued its truly impressive implosion, with its stock tanking 7.89%. It is now trading at a market cap of $65 billion, versus a book value of common equity of roughly $215 billion.  Market commentators were having so much fun discussing the meltdown that FT Alphaville even dedicated a post to the “The Bank of America Explanation Game.” This was its tally, and the post includes an explanation for each:

  • 1. An analyst note suggesting BofA will need to raise $40bn-$50bn

  • 2. Reports that BofA is keeping a stake in China Construction Bank

  • 3. Yet more talk of snags in a broad mortage settlement deal

  • 4. General market weakness and BofA’s susceptibility to HFT

  • 5. Wikileaks has apparently destroyed some of its BofA data files

Henry Blodgett at Clusterstock endorsed the “BofA needs a lot more capital” view, and pointed out the obvious: the bank had had plenty of opportunity to sell equity when its share price was higher, and if it did need to sell stock now, it was going to be extremely painful for existing holders. Concerns about BofA’s ability to bolster its balance sheet are probably not helped by rumors that the bank is trying to unload Merrill and (not surprisingly) finding no takers. Now narrowly, the trigger yesterday likely was the Jefferies view re Bank of America possibly needing to raise $40 to $50 billion. But that isn’t the most helpful way to frame the issue.

BofA moves to counter more blog rumours  - FT - Bank of America has again sought to calm investors’ fears about the bank, for the second day taking the unusual step of directly addressing rumours and analysis published in the blogosphere. The bank’s moves highlight the difficulties of containing and managing negative news in an environment where such information is quickly disseminated through websites and social media and picked up by mainstream media outlets, said experts. Even as its share price rebounded by more than 9 per cent on Wednesday, the bank sent a message to its staff regarding the barrage of rumours, including one blogger’s suggestion that JPMorgan was set to mount an emergency takeover of BofA.BofA had on Tuesday rebuffed analysis by Henry Blodget, a blogger and former Wall Street analyst who was banned from the securities industry eight years ago, that the bank could need to raise up to $200bn in additional capital. “For Bank of America, which feels more like a corporate piñata than a consumer bank at the moment, it is hard to underestimate the need to punch back,” But others questioned whether BofA had overreacted. “It is a very fine line between fighting back and protesting too much,” . “There is a perverse effect where, if you respond to this stuff seriously, then people have to report it seriously.”

Bank of America: time everyone took a long cold shower and sobered up - Bronte Capital - I am long Bank of America on my own behalf and on the part of my clients. It has not been a fun experience. (We have had great returns at Bronte but) Bank of America is one of two stocks on which Bronte has lost more than 3 percent of the portfolio.* So you can see this note as written from the perspective of a Bank of America loser. Still I am bullish on BofA at these prices. Very bullish. I think the politically driven finance bloggers (Yves Smith at Naked Capitalism) should be seen for their (I think justified) anti-bank agenda. Most of the rest are fitting their analysis around the stock price.** There is an awful lot of stock-price doing the analysis here. You might ask if I am putting my money where my mouth is – and I am a little. We purchased some more BofA below $7 but not much. Why not much? Risk control. Nothing else.

Bank of America: Could it fail and start another financial crisis? - While nobody was looking, America's largest bank approached the brink, tested the wind, lifted a foot, and started teetering. Well, to be fair, some people were looking. Wall Street has been worried about Bank of America for the better part of a year. Its stock price has declined from about $15 a share in January to a low of $6.01 this week, shedding nearly 30 percent of its value in the past month alone. There are rumors that JPMorgan will take it over. There are suggestions that Treasury Secretary Timothy Geithner should bail it out. There is talk of another credit crunch. Bank of America might just be the beginning. All speculation aside, Bank of America is not in great shape. To meet its capital requirements, the bank has been forced to sell off good assets along with bad. Over the past year, it has shed more than a dozen divisions, including its profitable overseas credit-card operations, its Balboa insurance unit, a stake in the money manager BlackRock, and a mutual fund company.

JP Morgan May Take Over Bank Of America - There is a rumor circulated on Wall St. that JP Morgan will take over Bank of America within the week. The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The “merger” would completely destroy the value of BAC’s common shares. The government feels that the deal may be necessary as Bank of America struggles unsuccessfully to close several transactions to bolster its balance sheet. The Wall Street Journal reported that Business Insider speculated that the financial firm will need to raise $200 billion which would be another possible event that would wipe out common shareholders.Bank of America’s fortunes have been hurt by events in just the last few days. A New York State judge agreed to allow institutional investors to intervene in an $8.5 billion settlement between the bank and groups that lost money on mortgage-backed securities. China Construction Bank Corp said Bank of American will continue to hold 50% of its share in the foreign financial firm. Many investors hoped Bank of America would sell its entire stake to raise money. Several analysts believe that the costs of owning mortgage firm Countrywide Credit have grown unexpectedly large.

No Bondholder Left Behind - Via Brad Delong, Buce of Underbelly is upset about the proposed terms of a BAC bailout. Translated: okay, so equity gets hosed, which is just as it should be in insolvency. But it sounds like we will be paying $100 bill for something. And that would be? Why, the bondholders, I suppose–who else could it be, with numbers like this and on terms like this. It’s been the one abiding principle throughout the Geithner–no matter how parlous the state of whatever, no bondholder gets left behind.  Apparently we need to say it again, guys: capitalism means the risk of failure, and real failure when things go bad.  Bank bailouts that protect bondholders are ring-fencing for which the rest of us pay.  Sheesh, is that so hard to understand? No, I think this is wrong. I do not know why there is an enormous externality associated with letting bondholders get hosed. It is one of the great questions of our age. However, I can recognize an empirical regularity when I see it. The bondholders should be saved when possible. To misquote Mark Twain: its no wonder truth is stranger than economic models. Economic models have to make sense.

CBA trumps BofA -Bank of America, the bank that takes in a quarter of America’s deposits is worth less than Commonwealth Bank of Australia. Even adjusting for various factors, such as the obvious stress in the US banking system, which has not happened in Australia, the part nationalisation and the obvious financial debauch, it is an amazing figure: The reason I am publishing this chart isn’t to cheap shot Merrill Lynch, far from it. The point of this chart is that it is the chart of a company that holds 25% of all US bank deposits. It truly worries me that a bank that is supposedly “too big to fail” is trading like this in the equity market. BofA now has a lower market cap than the Commonwealth Bank of Australia.  BHP Billiton will report an annual net profit of $22bil today, 1/3rd of BofA’s entire market cap. What is it trying to tell us?!?!

Warren Buffett’s magical fairy dust lands on BofA - Behold the power of Buffett! With a $5 billion investment which will pay him $300 million per year in perpetuity, Warren Buffett has managed to boost the share value of Berkshire Hathaway by something north of $12 billion. Oh, and Buffett also gets a massive free option on BofA stock — the right to buy 700 million shares at $7.14 apiece, at any point over the next decade. If exercised, that would give him 7% of the company. This is very reminiscent of the time when Buffett did something similar with Goldman Sachs, in the immediate aftermath of the collapse of Lehman Brothers. That too boosted the stock in the short term (although not as much as this), and the investment turned out to be an excellent one for Buffett, even though Goldman’s common shares are still trading below that September 2008 level. There are basically two aspects to these deals. One is the capital raise itself, and the other is the magical Buffett fairy dust. The capital raise, in this case, is extremely expensive: Buffett drives a hard bargain. But the deal is worth it, for BofA, because of the magical Buffett fairy dust aspect. If BofA had simply brought this deal to market, offering $5 billion in preferred stock with generous attached warrants, I can guarantee you that the market would have come down harshly on the bank.

On the Buffett Purchase of BofA Preferred  - Yves Smith - Bank of America’s stock is now up 11.6% on the leak that the Charlotte bank is selling $5 billion of 6% cumulative perpetual preferred and in the money warrants ($7.14 strike price), again $5 billion in total  This is an admission of weakness, not strength. Bank of America had maintained it didn’t need equity as recently as yesterday and of course before that too, then does a sweetheart deal to build confidence (FT Alphaville has a nice summary of the terms, hat tip Richard Smith).  This preferred stock sale does not boost the Charlotte bank’s tangible common equity. It does not come close to filling the a smidge under $50 billion of overvaluation of its second liens, nor does it stop the continuing bleed of litigation, which will only increase over time. And a Buffett does not have enough firepower to rescue a Bank of America if this confidence boosting con fizzles. The bulls’ hope is that BofA will have enough time to earn its way out of this mess. But if a Eurocrisis hits, and this looks like a sooner rather than later event, investors will avoid risk first and think critically later. The real determinant is whether this gambit does much to bring in Bank of America’s CDS spreads, which were trading at higher-than-Lehman-before-its-failure levels.

Can Bank of America Buy Credibility? Global Bank Liquidity Issue or Solvency Issue? - Mish - I am somewhat in awe (in a negative sense) of the silliness of analysts and executives who think banks in the US and Europe are being hit with liquidity issues, not solvency issues.  Here is a case in point, from a Telegraph article: Market crash 'could hit within weeks', warn bankers. Did you catch the silly quote? If not here it is: "The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive.  This is not a liquidity issue. Banks are undercapitalized. I am not sure who that bank executive is, but he sounds like Rochdale Securities' analyst, Dick Bove.

Warren Buffett’s Bank Of America Investment Shows Faith In Government Support, Experts Say -- The multi-billion dollar capital injection that Bank of America said it's getting from Warren Buffett's company is an extremely safe investment, experts said Thursday -- but not because Bank of America is a strong company. Berkshire Hathaway's investment is safe, these finance experts said, because the government has the bank's back.Although government regulators insist the era of bank bailouts is over, many who study the financial industry say the nation's biggest banks are still too big to fail, meaning they must be rescued by the government when they face potentially fatal trouble in order to prevent a broader collapse of the financial system. Bank of America, the country's largest bank by assets, is thought to rank high on this list -- a perception seemingly underscored by Buffett's willingness to put a significant sum into the company. "This is the taxpayer giving Warren Buffett a great return,"  "He knows that Bank of America is too big to fail. If it is too big to fail, then why not?"

Big Asset Sale Near at Bank of America - Bank of America is completing plans to sell more than half of its stake in the China Construction Bank in a deal that could raise nearly $10 billion, just a day after Warren E. Buffett invested $5 billion in the beleaguered American financial giant.  A consortium of sovereign wealth funds in Asia and the Middle East as well as several private equity firms are in negotiations with bankers and could close a deal by early next week, two officials briefed on the talks said Friday. While Bank of America plans to sell at least half of its 10 percent stake in the Chinese bank, it is willing to unload much more than that for the right price, according to the officials, who spoke on the condition that they not be named because the sale was still being negotiated.  The sale would improve Bank of America’s capital position under international Basel III regulations. Mr. Buffett’s investment — and the likely sale of the Chinese stake — have helped allay those worries while reinforcing investor confidence in management.

Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal - Eric T. Schneiderman1, the attorney general of New York, has come under increasing pressure from the Obama administration to drop his opposition to a wide-ranging state settlement with banks over dubious foreclosure practices, according to people briefed on discussions about the deal. In recent weeks, Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks. Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities. But Mr. Donovan and others in the administration have been contacting not only Mr. Schneiderman but his allies, including consumer groups and advocates for borrowers, seeking help to secure the attorney general’s participation in the deal, these people said. One recipient described the calls from Mr. Donovan, but asked not to be identified for fear of retaliation.

Feds to AGs: Can’t Touch This - As this NYT story notes, the administration has been putting pressure on the AGs, particularly NY AG Schneiderman, for several weeks now, urging them to fall in line with the administration's hear-no-evil, see-no-evil position on MBS and servicing fraud.  The NYT story makes it sound as if the feds were jolted into intervening because of pleas from the banks.  It's enough to make one think that we're back in 2005.    First, is that if the Feds had shown some teeth on servicing, the AGs wouldn't have to be the ones cleaning up the mess. The AGs are acting because the federal bank regulators are dancing to the same tune they were in 2000-2008: Can't Touch This. (Now they're saying to the AGs "Please, Hammer, Don't Hurt 'Em".  Yuck, yuck, yuck.) Milquetoast consent orders (that impose costs on servicers without getting better servicing) and no criminal prosecutions so far other than of the garden variety warehouse fraud (Farkas et al.).  Second, and what really galls me, is that the administration doesn't have a serious alternative. The administration is flat out of ideas on servicing and has been so for at least a year. It's not that there aren't possibilities, but none are politically palatable to an administration that is terrified of rubbing Wall Street the wrong way. It'd be one thing if there were a plan. But the administration's got nadda.

Corrupt Obama Administration Pressuring New York Attorney General to Support Mortgage Whitewash - Yves Smith - It is high time to describe the Obama Administration by its proper name: corrupt.  Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man” category. But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell. The latest example is its heavy-handed campaign to convert New York state attorney general Eric Schneiderman to a card carrying member of the “be nice to our lords and masters the banksters” club. Schneiderman was the first to take issue with the sham of the so-called 50 state attorney general mortgage settlement. As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.  The Administration joined this effort to hurry it forward and assure it resulted in a suitably financier-friendly outcome. And it has done so despite recent HUD inspector general’s audits finding that the five biggest servicers were defrauding taxpayers. We’ve heard not a peep of follow up on that front; instead, the Administration keeps leaking its tired “A settlement is just around the corner” story.

NY Attorney General Facing Intense Pressure From Obama Administration On Bank Foreclosure Fraud Deal: "Wall Street Is Our Main Street And We Have To Make Sure We Are Doing Everything We Can To SUPPORT Them" - Efforts to reach a settlement that would end the long-running probe of foreclosure practices are snagged over whether banks will get broad legal immunity from state officials for mortgage-related claims. Federal and state officials are seeking penalties of $20 billion to $25 billion from Bank of America Corp., J.P. Morgan Chase & Co. and other financial firms under investigation since last fall. The banks are pushing hard for a deal, but they have insisted on a wide-ranging legal release from state attorneys general. "They wanted to be released from everything, including original sin," said a U.S. official involved in the discussions. The legal protection sought by the banks included loan origination; securitization and servicing practices; fair-lending procedures; and their use of the Mortgage Electronic Registration Systems, an industry-owned loan registry that often acts as an agent for owners of mortgage loans, people familiar with the discussions said.

Why Is the White House Defending the Banks from Investigations? Via Outside the Beltway, I see that the administration is pressing New York's attorney general to drop its investigation into dodgy foreclosure practices and settle with the banks.  Doug Mataconis, who wrote the post, says "I'm sure the large amount of donations coming from the financial sector into the coffers of the Democratic National Committee and Obama For America have nothing to do with this pressure. I also believe the guy who tells me he has a bridge in Brooklyn to sell me."  I quite agree that the administration should not be intervening, but let me suggest a more charitable explanation, contained within today's edition of the New York Times: "U.S. May Back Refinance Plan for Mortgages".  It looks like the administration has convened a working group to explore more aggressive options for dealing with underwater mortgages.

Mini Fight Breaks Out At A Memorial Service As A NY Fed Official And The NY Ag Go At It Over A Foreclosure Settlement: Eric Schneiderman, the New York AG, is battling political pressure to settle an investigation into banks' foreclosure practices, according to the New York Times. The settlement could cost JPMorgan, Bank of America, Citigroup, and Wells Fargo around $20 billion and would pay for loan modifications and possibly counseling for homeowners.  Schneiderman is said to object to it because the deal could compromise investigations into practices on the securitization side. Many in the Obama administration, the Justice Department and HUD, are pushing for the deal -- aggressively. Check out what the New York Times says happened at a memorial service when Schneiderman ran into an official in the NYFed. [Someone who was at the memorial service last week for the late Hugh Carey, the former New York governor, said Mr. Schneiderman "became embroiled in a contentious conversation with Kathryn S. Wylde, a member of the board of the Federal Reserve Bank of New York."] “It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”

Conflicts on the New York Fed Board - The regional federal reserve banks are weird, hybrid creatures, both private bankers' banks and public governmental agents. This hybrid existence means that they have conflicts baked into their DNA--they are both supposed to serve and regulate their member banks. These conflicts have been most patent with the New York Fed. During the AIG bailout, it was represented by the very lawyer who minutes before had been representing the private bank consortium that was trying to arrange a bailout of AIG and which benefitted from the public bailout. The latest manifestation of this problem is FRBNY Director Kathryn Wylde criticizing NYAG Eric Schneiderman for having the chutzpah to sue the hometeam over fraud with MBS and mortgage servicing:  “It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible." Gee, some might just think that what's going on with servicing fraud is indefensible. What does Wylde want? A trail of corpses?

It’s a Flawed Settlement - NYT Editorial - The Obama administration has turned up the heat on Eric Schneiderman, New York’s attorney general, to go along with a proposed settlement1 with the nation’s largest banks over dubious foreclosure practices. Mr. Schneiderman should stand his ground in not supporting the deal. The administration says that a settlement would quickly deliver much needed relief to hard-pressed borrowers, but it’s doubtful it would provide redress on a par with the banks’ wrongdoing or borrowers’ needs.  The deal has been in the works for nearly a year, after the state attorneys general announced an investigation into a robo-signing scandal in which banks were found to have filed false foreclosure papers in state courts. It was widely believed that the scandal would lead to a broad inquiry into how banks inflated the housing bubble, profiting as it expanded.  As it turned out, the inquiry was narrow. Mr. Schneiderman, who became the attorney general of New York after the scandal broke, has rightly refused to go along with a settlement that is not based on a thorough investigation, and has ordered investigations of his own. He has been supported by a handful of other state prosecutors, who say that the proposed deal would restrict their own investigations and prosecutions.

Mirabile Dictu! New York Times Tells Obama Administration Off, Backs Schneiderman on Mortgage Settlement -  Yves Smith - The editorial in today’s New York Times may be a sign that the tide is turning. The elites are starting to break ranks with the mortgage industrial complex. Gretchen Morgenson reported yesterday that the Obama Administration was pressuring the New York Attorney General Eric Schneiderman to drop his opposition to the so-called 50 state attorney general mortgage settlement. The short form is the banks want a “get out of liability for almost free” card, which is patently absurd. Not only have they caused a colossal economic train wreck, but sadly, they remain such central actors that they need to be involved in remediation. Letting them off cheaply would be tantamount to putting a band-aid on gangrene. As much as having Morgenson reveal this heavy-handed effort to undermine an investigation in progress was important, Morgenson is an outlier at the Times. She is the only writer in the business section who routinely exposes bad conduct in the corporate and financial arena.As much as Morgenson’s expose was key, the editorial page of the New York Times throwing its weight behind Schneiderman gives him real political cover. From “It’s a Flawed Settlement”:

States’ foreclosure talks with big mortgage servicers stall - An effort by state attorneys general to take big mortgage servicers to task over faulty foreclosure practices has stalled as financial institutions demand broad legal immunity from other mortgage-related probes. The nationwide effort looking into faulty foreclosures, which involves attorneys general from all 50 states as well as some federal agencies, was expected to have produced a settlement of more than $20 billion by now. But talks have stumbled over how much the banks should pay as well as to what degree they will be released from liability from future investigations. New York and Delaware have agreed to work together to pursue a wider-ranging probe into Wall Street's role in the mortgage meltdown. California Atty. Gen. Kamala D. Harris is also considering joining that effort, and has said publicly she is interested in pursuing investigations that involve the packaging, securitizing and selling of risky mortgages. Massachusetts Atty. Gen. Martha Coakley has also said she is interested in pursuing separate investigations into mortgage-securitization practices. Those probes are unlikely to move forward if the 50-state talks result in broad legal immunity for mortgage servicers. The five largest institutions involved — Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. — are pushing the states' attorneys for broad release.

Why the bank-settlement talks are likely to drag on indefinitely - Today brings dueling stories in the NYT and the WSJ on the status of the bank foreclosure-settlement talks. At issue is the question of whether the banks should be given immunity with respect to lawsuits surrounding their securitization shenanigans. Here’s the WSJ, saying quite clearly that they won’t: U.S. and state officials dismissed the push for broad immunity as a “nonstarter,” according to a federal official involved in the talks, but they have countered with a narrower offer. It would cover robo-signing and other servicer-related conduct but leave banks open to potential legal action for wrongdoing in fair lending and securitization, according to people familiar with the situation. Attorneys general in California, Delaware, Massachusetts and New York have said they are investigating mortgage-securitization practices. In the NYT, by contrast, Gretchen Morgenson says that New York’s Eric Schneiderman is pushing back against a federal attempt to give banks immunity on such matters:

New York Removed From State Group Working on Nationwide Foreclosure Deal - New York Attorney General Eric Schneiderman, accused of trying to undermine the work of a group negotiating a nationwide foreclosure settlement with U.S. banks, was removed from the panel’s leadership.  Schneiderman, who doesn’t want a settlement to block state investigations, was removed from the executive committee of state officials working on the deal, Iowa Attorney General Tom Miller said yesterday in a statement.  “New York has actively worked to undermine the very same multistate group that it had spent the previous nine months working very closely with,” said Miller, who is leading the state group. For a member of the executive committee, that “simply doesn’t make sense, is unprecedented and is unacceptable,” Miller said.

Iowa Community Group Blasts Miller for Removal of Schneiderman from Foreclosure Committee - The booting of Eric Schneiderman from the executive committee of the 50 state AG “investigation” of foreclosure fraud is pretty funny in this context: the AGs are supposed to be undertaking an investigation. Schneiderman is one of the few AGs actively involved in just such an investigation. And so he’s the one who has to get the boot. This shows the depravity of once-respected Iowa AG Tom Miller, who is spearheading the “investigation.” He has wanted a settlement to put these issues behind the banks from the very beginning. He wants the headlines that come with the settlement, the pot of money to show that his efforts helped homeowners, and the minimal disruption such a settlement would provide. When Miller was named the head of the “investigation,” he immediately received a windfall of campaign donations from the financial sector. He has chased a deal for almost a year, all time that could have been spent on a real investigation of the shoddy foreclosure practices of the big banks. All of these facts add up to show a representative of the people working more in line with the will of the banks. This has not escaped the attention of Miller’s own constituents. In a scathing release today, Iowa CCI, the same group that got Mitt Romney to offer his “corporations are people” remark, lambasted Miller for the “politically motivated” removal of Schneiderman from the foreclosure group

Obama Goes All Out For Dirty Banker Deal - Matt Taibbi - A power play is underway in the foreclosure arena, according to the New York Times. On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008. On the other side is the Obama administration, the banks, and all the other state attorneys general. This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes. The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space. This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline. 

The Timing of the Schneiderman Attack - I find this article odd for the way it mentions nothing of Bank of America’s attempts to game the legal system to stay in business, much less Tom Miller, Shaun Donovan, and Kathryn Wylde’s increasing attacks on Eric Schneiderman. Because his conclusion: that BoA may go under and if it does it may take the economy with it, explains why everyone just intensified their attacks on Schneiderman. The article, by Tom Leonard, purports to weigh the prospect of economic chaos. On the plus side, Leonard looks at prospects China might not be as bad as some people have been thinking, the promise of QE3, and news that small banks may be returning to health. On the negative, he notes that manufacturing and housing continue to decline. But none of that matters, Leonard suggests, as much as the fate of Bank of America. And on that count, Leonard writes, we have reason to worry. He looks at Bank of America’s desperate attempts yesterday to refute the analysis of Henry Blodget, who said BoA is probably worth $100 to $200 billion less than it claims to be–potentially, that is, insolvent. Leonard says we should be worried because if this analysis is correct–if BoA is actually insolvent–it’ll take the economy down.

Bombshell Admission of Failed Securitization Process in American Home Mortgage Servicing/LPS Lawsuit - Yves Smith - Wow, Jones Day just created a huge mess for its client and banks generally if anyone is alert enough to act on it. The lawsuit in question is American Home Mortgage Servicing Inc. v Lender Processing Services. AHMSI is a servicer (the successor to Option One, and it may also still have some Ameriquest servicing). AHMSI is mad at LPS because LPS was supposed to prepare certain types of documentation AHMSI used in foreclosures. AHMSI authorized the use of certain designated staffers signing with the authority of AHSI (what we call robosinging, since the people signing these documents didn’t have personal knowledge, which is required if any of the documents were affidavits). But it did not authorize the use of surrogate signers, which were (I kid you not) people hired to forge the signatures of robosigners. The lawsuit rather matter of factly makes a stunning admission (note that PSA here means Professional Services Agreement, and it was the contract between AHSI and LPS, click to enlarge): Did you get it? They said that these procedures were standard between the two companies, which was to “ memorialize the transfer of ownership lender to the securitization trust” right before initiating foreclosure. If you are a regular reader of this blog, you know that is impermissibly late. The note and mortgage had to get to the trust by a clearly specified date, usually 90 days after closing. As we’ve written numerous times, in the overwhelming majority of cases, the securitization entity was a New York trust, and New York trusts are like computer code, they can only operate exactly as stipulated.

JP Morgan is Foreclosing on the US Treasury - Yves Smith - I am not making this up.. JP Morgan Chase v Treasury Here is the high level story: JP Morgan Chase and Northwest Trust foreclosed on a property in Hillsboro, Oregon. Treasury (more accurately, the IRS) has a tax lien on the property. So this is pretty cheeky. The plaintiffs didn’t notify the IRS, who they claim was an existing junior lien holder, of the “sale”. Query what the IRS’s status is given the failure to give notice. So does JP Morgan want to own up to its error and pay the lien? Noooooo. THEY WANT TO FORECLOSE ON THE US GOVERNMENT. They are asking for the IRS to act in 30 days or go bye bye.  The compliant is silent on how the tax lien came about, but I thought as a general rule that tax liens were senior to mortgages. Reader input welcome.

Lender Processing Services Law Firm Targeting April Charney, Foreclosure Defense Pioneer - Yves Smith - You know the powers that be are pretty desperate when they feel compelled to go after a Legal Aid attorney. Admittedly, April Charney is no ordinary Legal Aid attorney. She was one of the first lawyers to focus on the question of whether party showing up in court really was the right party and whether it could demonstrate that it had the right to foreclose. Most judges (as in the non-captured-by-corporations kind) regard these as threshold issues. If someone shows up in court claiming that you owe them money and they want the judge to garnish your wages, I’m sure you’d want the judge to listen if the person who wanted your money couldn’t prove he had gotten your IOU from the chap who had made a loan to you years ago.  Charney has helped lawyers in Florida and around the US with these types of arguments, and has also been active in the group of lawyers working with Max Gardiner in North Carolina. She’s a diligent researcher and keeps on top of the rulings in her arena. In some ways I’m surprised this hasn’t happened sooner, but pro bank members of the Florida bar are apparently orchestrating an effort to get Charney fired from Legal Services of Jacksonville, which on its face is absurd. If you want to help April, 4ClosureFraud has provided names and contact information of the JALA (I assume Jacksonville Area Legal Aid) board members. I hope you tell them (nicely) that getting rid of Charney, given her track record, would raise a lot of questions and likely very unfavorable press for JALA.

Homeowner Associations in Need of Cash Sue to Force Foreclosures - Members of the Vintage East Condominium Association in Miami Beach got tired of waiting for JPMorgan Chase & Co. (JPM) to foreclose on unit 9, so they sued the bank in February to take control of the property.  In June, more than four years after the owner stopped making payments, a judge ruled that JPMorgan lost its claim to the $144,000 mortgage. The apartment is now on the market for $87,500, and the association may stave off insolvency with proceeds from the sale and a new owner who pays monthly dues, said Jane Losson, a board member at the complex. Four of the 11 other owners at the property are also behind on dues.  “I find it an outrage that the bank had decided to do nothing and the other owners got stuck,” . “If we get this unit sold, we’ll have a little money.”  Financially troubled condo associations are taking banks to court as foreclosure delays enable delinquent homeowners to stay in their buildings for years, often without paying dues that keep boards running. The groups start by pressuring lenders to speed up home seizures and take over payment of the monthly fees. In extreme situations, like the Vintage East case, associations may force banks to give up rights to the property.   “Our complaints say the banks abandoned their interest and either need to accept responsibility for the title or walk away.”

Foreclosures made up 31 pct. of home sales in 2Q  Foreclosures made up roughly one-third of all home sales1 this spring. While that's a smaller share of sales from the previous quarter, it's six times the percentage of foreclosures2 in a healthy housing market. Foreclosure sales, which include homes purchased after they received a notice of default or that were repossessed by lenders, accounted for 31 percent of the market in the April-June quarter, foreclosure listing firm RealtyTrac Inc. said Thursday. The share of the market would likely have been larger this spring if not for a state and federal investigation into faulty paperwork by banks and servicers. The probe has led many banks to delay foreclosure sales. Once that is complete, foreclosures3 will likely surge later this year. As a slice of all home purchases, foreclosure sales peak two years ago at 37.4 percent. In the second quarter, they declined from 36 percent in the January-March period.

Pre-Foreclosure Short Sales Jump 19% in Second Quarter - Short sales shot up 19 percent between the first and second quarters, with 102,407 transactions completed during the April-to-June period, according to RealtyTrac. Over the same timeframe, a total of 162,680 bank-owned REO homes sold to third parties, virtually unchanged from the first quarter. RealtyTrac’s study also found that the average time to complete a short sale is down, while the time it takes to sell an REO has increased. Pre-foreclosure short sales took an average of 245 days to sell after receiving the initial foreclosure notice during the second quarter, RealtyTrac says. That’s down from an average of 256 days in the first quarter and follows three straight quarters in which the sales cycle has increased. REOs that sold in the second quarter took an average of 178 days to sell after the foreclosure process was completed, which itself has been lengthening across the country. The REO sales cycle in Q2 increased slightly from 176 days in the first quarter, and is up from 164 days in the second quarter of 2010. Sales of homes in default or scheduled for auction prior to the completion of foreclosure had an average sales price nationwide of $192,129, a discount of 21 percent below the average sales price of non-foreclosure homes.

Update on Q2 REO Inventory - With the release of the Q2 FDIC Quarterly Banking Profile, we can estimate the number of REOs held by FDIC insured banks and thrifts. From economist Tom Lawler: "On the residential REO front, FDIC-insured institutions’ 1-4 family property REO holdings (in $’s of carrying value) declined to $12.0895 billion on June 30th, 2011 from $13.2795 billion on March 31st, 2011 and $13.7221 billion last June. The drop reflected the continued slow pace of REO acquisitions related to foreclosure delays, as well as a likely pick-up in REO dispositions last quarter. While the FDIC does not collect data on the NUMBER of properties held by FDIC-insured institutions, a reasonable “guess” is that their average carrying value is about 50% higher than the GSEs, or in recent years around $150,000." This gives an estimate of 80.6 thousand REO at FDIC insured institutions at the end of Q2, down from 88.5 thousand in Q1. This graph shows REO inventory for Fannie, Freddie, FHA, Private Label Securities (PLS), and FDIC insured institutions. Total REO decreased to 493,000 in Q2 from almost 550,000 in Q1.

MBA: Mortgage Delinquencies increased slightly in Q2 - The MBA reported that 12.87 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q2 2011 (seasonally adjusted). This is up slightly from 12.84 percent in Q1 2011.  From the MBA: Delinquencies Rise, Foreclosures Fall in Latest MBA Mortgage Delinquency Survey: The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 8.44 percent of all loans outstanding as of the end of the second quarter of 2011, an increase of 12 basis points from the first quarter of 2011, and a decrease of 141 basis points from one year ago...The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.43 percent, down 9 basis points from the first quarter and 14 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.85 percent, a decrease of 25 basis points from last quarter, and a decrease of 126 basis points from the second quarter of last year.This graph shows the percent of loans delinquent by days past due.

MBA Delinquency Survey: Comments and State Data - A couple of comments from MBA chief economist Jay Brinkmann on the conference call:

  • • The bad news is short term delinquencies increased in Q2. The not-so-bad news is long serious delinquencies declined slightly.
  • • Because of the high level of delinquencies, there are some questions about the accuracy of the seasonal adjustment.
  • • Florida has almost 25% of all loans in the U.S. in the foreclosure process. California is 2nd with 10.6%, but the percent of loans in-foreclosure in California (3.62%) is actually below the national average (4.43%).
  • • Judicial foreclosure states usually have the highest percentage of loans in the foreclosure process.

This graph shows the percent of loans in the foreclosure process by state and by foreclosure process. Red is for states with a judicial foreclosure process. Because the judicial process is longer, those states typically have a higher percentage of loans in the process. Nevada is an exception.

Number of troubled mortgages on rise again - In another hit to the beleaguered housing market, a report out Monday found that the number of delinquent mortgage borrowers -- those who have missed at least one payment -- rose during the second quarter. The delinquency rate grew only slightly, up 0.12 percentage points to 8.44%, but that reverses the steady improvement of the past two years. The increase, as reported by the Mortgage Bankers Association (MBA), may not sound like much, but it could mean that the recovery in the housing market will take even longer than thought. The MBA breaks down delinquencies by degree of severity, ranging from one payment past due to 60 days late, 90 days late and loans that are in the process of foreclosure proceedings, the final step before bank repossession. The number of loans more than 90 days late declined. Those are the mortgages that are most likely to proceed all the way to repossession. Still, the number of initial filings ticked higher.

Mortgage Delinquencies by Loan Type - By request, the following graphs show the percent of loans delinquent by loan type: Prime, Subprime, FHA and VA. First a table comparing the number of loans in Q2 2007 and Q2 2011 so readers can understand the shift in loan types. The first graph is for all prime loans. This is the key category now. Since there are far more prime loans than any other category (see table above), over half the loans seriously delinquent now are prime loans - even though the overall delinquency rate is lower than other loan types. The second graph is for subprime. This category gets all the attention - mostly because of all the terrible loans made through the Wall Street "originate-to-distribute" model and sold as Private Label Securities (PLS). Not all PLS was subprime, but the worst of the worst loans were packaged in PLS. Although the delinquency rate is still very high, the number of subprime loans had declined sharply. The third graph is for FHA loans. The delinquency rate increased in Q2 after declining for the last several quarters. Most of the FHA loans were made in the last couple of years. Another reason for the previous improvement was eliminating Downpayment Assistance Programs (DAPs). The last graph is for VA loans. All four categories saw a slight increase in Q2.

Mortgage Delinquencies by State: Range and Current - Earlier I posted a graph on mortgage delinquencies by state. This raised a question of how the current delinquency rate compares to before the crisis - and also a comparison to the peak of the delinquency crisis in each state. The following graph shows the range of percent seriously delinquent and in-foreclosure for each state (dashed blue line). The red diamond indicates the current serious delinquency rate (this includes 90+ days delinquent or in the foreclosure process).  Some states have made progress: Arizona, Michigan, Nevada and California. Other states, like New Jersey and New York, have made little or no progress in reducing serious delinquencies.  Arizona, Michigan, Nevada and California are all non-judicial foreclosure states. States with little progress like New Jersey, New York, Illinois and Florida are all judicial states.  The second graph shows total delinquencies (including less than 90 days) and in-foreclosure. Even though there has been some progress in a few states, there is a long way to go to get back to the Q1 2007 rates.

Early Delinquencies Rise Amid Outlook for Continuing Deterioration - The delinquency rate of first-lien residential mortgages increased to 8.44 percent of all loans outstanding as of the end of the second quarter of 2011, the Mortgage Bankers Association (MBA) reported Monday. The delinquency rate includes loans that are at least one payment past due but not yet in foreclosure. Although the rate is down 141 basis points from a year earlier, it rose 12 basis points when compared to the first quarter of 2011. The biggest increase came from loans in the earliest stage of delinquency – just one installment, or 30 days past due. The share of loans behind by one month’s payment jumped 11 basis points, from 3.35 percent in the first quarter to 3.46 percent in the second. “Mortgage loans that are one payment, or 30 days, past due are very much driven by changes in the labor market, and the increase in these delinquencies clearly reflects the deterioration we saw in the labor market during the second quarter,” . “While overall mortgage delinquencies increased only slightly between the first and second quarters of this year, it is clear that the downward trend we saw through most of 2010 has stopped,” Brinkmann said. “Mortgage delinquencies are no longer improving and are now showing some signs of worsening.”

Purchase Mortgages Falling to 20 Year Low! - Lenders will write fewer mortgages for home buyers this year than in any year since 1991. That gloomy estimate from the Mortgage Bankers Association reflects the state of housing demand. The MBA Economic and Mortgage Finance Forecasts project $1.1 trillion in residential mortgage origination volume in 2011, roughly $100 billion more than earlier forecasts-but the increase is entirely due to refinancings. Purchase loans are expected to end up at only $412 billion in 2011, less than originally forecast and down from $472 billion last year. Next year MBA is forecasting a 30 percent increase in purchase loans, to $531 billion. Despite lower a forecast for mortgage rates, weaker projected economic growth in 2012 led to a reduction in MBA’s origination forecast for all mortgages next year to $931 billion, which would be the lowest volume originated since 1997. “We have lived through a series of unprecedented events over the past month: the debt ceiling crisis, S&P’s downgrade of US Treasury debt, the ongoing sovereign debt crisis in Europe, a commitment by the Fed to keep rates near zero for the next two years and stock market volatility that has reached levels not seen since the fall of 2008.”

MBA: Mortgage Purchase Activity at Lowest Level Since 1996 - The MBA reports: Mortgage Applications Decrease with Purchase Index at Lowest Level Since 1996 The Refinance Index decreased 1.7 percent from the previous week. The seasonally adjusted Purchase Index decreased 5.7 percent from one week earlier and is at the lowest level in the survey since December 1996. "Another week of volatile markets and rampant uncertainty regarding the economy kept prospective homebuyers on the sidelines, with purchase applications falling to a 15-year low," The following graph shows the MBA Purchase Index and four week moving average since 1990. The four week average of the purchase index has been moving down recently and is at about 1997 levels. Of course this doesn't include the large number of cash buyers ... but purchase application activity was especially weak over the last two weeks.

Homeowners Need Help - NYTimes editorial - Neither Congress, nor federal regulators, nor state or federal prosecutors have yet to conduct a thorough investigation into the mortgage bubble and financial bust. We welcomed the news that the Justice Department is investigating allegations that Standard & Poor’s purposely overrated toxic mortgage securities in the years before the bust. We hope the investigative circle will widen.  But a lot more needs to be done to address the continuing damage from the mortgage debacle.  Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.  Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications.

U.S. May Back Refinance Plan for Mortgages The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.  One proposal would allow millions of homeowners with government-backed mortgages1 to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.  A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae2 and Freddie Mac3, and from investors in government-backed mortgage bonds4.

Possible Housing Proposals: New Refinance Plan and Rental Program - From the NY Times: U.S. May Back Refinance Plan for Mortgages: One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions ...  Administration officials said on Wednesday that they were weighing a range of proposals ... They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. ..But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished. This is a recycled suggestion that Tom Lawler criticised last year. There is a already program to do this called Home Affordable Refinance Program (HARP) that wasn't very successful.

Mass Mortgage Refinancing Is A Good Idea - Back at a Roosevelt Institute conference several months ago, I was on a panel with Joe Gagnon where he expressed surprised at a failure of coordination between fiscal and monetary authorities. One of the goals of quantitative easing, he said, was to make it possible for homeowners to refinance their loans at lower interest rates. The stimulative effect seems simple enough to see. With a lower monthly interest payment, an indebted household can pay down other debts more rapidly. A less-constrained household will increase its consumption of goods and services. But it hadn’t happened, even though with Fannie Mae and Freddie Mac nationalized it was in the administration’s power to make it happen.

Refinancing Malarkey - It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today's low rates, regardless of whether they are delinquent or underwater.  (Gotta love how the administration picks up a 3-year old Republican plan with obvious deficiencies and acts like it's fresh meat.) I fail to see how such a plan will accomplish much.   It ignores that there's already been lots of refinancing at low rates since 2008--it's not clear how much more refinancing some new initiative will possibly produce, much less how many foreclosures it will prevent.  The refi idea seems to do nothing on either negative equity or unemployment. Any program that fails to address those just isn't serious.  I get that the administration has a MacGyver problem given that it can't move anything in Congress, but that necessitates much more creativity, financially and legally, not rewarming old ideas.  My prediction:  this ends up accomplishing about as much as FHAShortRefi or Hope4Homeowners.   We need a TARP for Main Street.  This isn't it. 

Some Things that Could Have Been Done in Housing - Ezra Klein wrote a post, What Could Obama Have Done?, with a Part II followup, arguing that you “can believe Obama has made pretty significant mistakes, as I do, but also find yourself pessimistic as to the difference a flawless performance by the president — as opposed to a flawless performance by the Federal Reserve or the Congress — would have made to the economy.” What are some suggestions for what Obama could have done early in the administration? Brad Delong has some.  I’ll add my own.

  • 1. Use eminent domain to purchase MBS and then writedown the debts to manageable levels.  Legal, a huge move, but with some precedent in the HOLC.  This would have been Obama’s equivalent of Executive Order 6102.  It would have been an extraordinary action but so is the Recession we are going through.
  • 2 FYI when it comes to protecting the banks, Obama has been willing to go to great lengths to avoid Congress. 
  • 3.  FHFA could writedown mortgages under safety and soundness criterion with homeowners taking a shared appreciation clause – writedown for a loss now, and then taxpayers get part of the upside later.

FHFA Introduces Expanded House Price Index - A common criticism of the FHFA house price index (HPI) is that the index only includes GSE properties. Today the FHFA announced (PDF) an expanded series: These expanded-data indexes are quarterly for states, census divisions, and the United States. The FHFA is considering introducing MSA indexes too. Here is the Q2 expanded series data. Using the standard FHFA HPI:  U.S. house prices were 0.6 percent lower in the second quarter than in the first quarter of 2011 according to the Federal Housing Finance Agency’s (FHFA) seasonally adjusted purchase-only house price index (HPI). ... While the national, purchase-only house price index fell 5.9 percent from the second quarter of 2010 to the second quarter of 2011, prices of other goods and services rose 4.5 percent over the same period. Accordingly, the inflation-adjusted price of homes fell approximately 10.0 percent over the last year. The expanded FHFA national series was down 1.1 percent in Q2 (Seasonally adjusted), and down 6.1% from Q2 2010 - and down 24.2% from the peak. For comparison, the Case-Shiller national quarterly index was off 32.7% from the peak in Q1 2011.

Home Prices Decline 5.9% in Second Quarter - U.S. home prices fell 5.9 percent in the second quarter from a year earlier, the biggest drop since 2009, as foreclosures added to the inventory of properties for sale, according to the Federal Housing Finance Agency. Prices declined 0.6 percent from the prior three months, the Washington-based agency said today in a report. In June, prices retreated 4.3 percent from a year earlier, while increasing 0.9 percent from the previous month. Foreclosures are boosting the supply of properties on the market and undercutting the confidence of homebuyers, sapping demand even as mortgage rates tumble to near-record lows. The U.S. inventory of homes for sale averaged 3.7 million during the second quarter, the highest since the third quarter of 2010, data from the National Association of Realtors show. The mortgages on 6.5 million U.S. homes had late payments or were in foreclosure in June, according to Lender Processing Services Inc. in Jacksonville, Florida. “Foreclosures water down home prices because banks want to get rid of properties as fast as they can,”

Housing’s Drag on Economy May Worsen - As the U.S. economy shows signs of sputtering, instability on Wall Street is sapping the confidence of would-be property buyers, said Karl Case, co-founder of the S&P/Case-Shiller home- price index. That means housing, which aided every recovery except one before the most recent recession, may deepen its five-year drag on growth. “There’s a dramatic effect on an economy when a major sector is flat out,” said Case, professor emeritus of economics at Wellesley College in Massachusetts. “If housing takes another leg down, it’s an accelerator. It’s going to make a recession happen faster and deeper.” Home sales in July fell to the lowest point this year, the National Association of Realtors said in a report last week. Applications for mortgages to buy homes dropped to a 13-month low in the week ended Aug. 12, even as borrowing costs tumbled, according to the Mortgage Bankers Association. The Bloomberg Consumer Comfort Index sank to the lowest since the recession.

Investors Can’t Resell - Anemic demand from owner-occupant homebuyers has forced investors to rent out about half of the homes they purchase — as opposed to renovating and flipping the properties. Investor purchases of homes continued to decline for the third month in a row in July as investors were forced to adapt to new business models, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. Investor market share plunged to the lowest level in a year. The HousingPulse Survey found that the investors accounted for only 19.6 percent of home purchase transactions in July. That was not only down from a 23.0 percent investor market share as recently as April. The latest HousingPulse Survey results showed the proportion of first-time homebuyers in the housing market rose to 36.9 percent in July, from 35.4 percent in June. Meanwhile, the HousingPulse Distressed Property Index (DPI) climbed to 46.2 percent in July from 44.7% in June, indicating a high percentage of foreclosed property sales and short sale transactions in the housing market.

Analysts: Home sales going nowhere fast - Analysts reacted to the July new home sales decline Tuesday with dread, saying the housing market has years of stalled recovery ahead. The Commerce Department reported the seasonally adjusted rate of new home sales in July declined 6.8% from one year ago, coming in below analyst expectations. Sales slumped back below the 300,000 market and sit not too far from the low of 278,000 units in August 2010. "Sales of new homes are going nowhere fast," said Celia Chen, senior director at Moody's Analytics. "An economy hampered by political wrangling over the budget deficit and the sovereign debt crisis in the euro zone is weighing on job growth and consumer confidence. Demand for homes remains very soft despite mortgage interest rates that are falling to new lows." New home sales have to compete with a flood of distressed and previously foreclosed properties. The Commerce Department estimates roughly 165,000 new homes for sale on the market, roughly equal to a 6.6-month supply. However, the shadow inventory of distressed property ranges as high as 4.5 million properties.

New home sales slip to 5-month low - New home sales figures for July were just released. They showed that sales dipped 0.7% to a seasonally adjusted annual rate of 298,000 from a downwardly revised 300,000 in June. That was slightly worse than the 310,000 sales economists were looking for, and the lowest level since February.  The raw number of homes for sale dipped against to 165,000 from 166,000 a month earlier, while the "months supply at current sales pace" indicator of inventory held at 6.6. The median price of a new home fell 6.3% from $236,800 in June to $222,000 in July. But that was still up 4.7% from a year earlier.  July was another lackluster month for the new home market, with sales slumping in the key West and South regions and pricing taking another turn for the worse. Early reports suggest sales may be even worse in August given the slump in the economy and the sharp drop in consumer confidence we've seen. It all goes back to the labor market -- If we can't create many more jobs in this country, we're not going to see a lasting rebound in housing demand. And it sure doesn't look like unemployment is going to fall sharply anytime soon.

New Home Sales On Track To Finish As Worst Year On Record: Sales of new homes fell for the third straight month in July, a sign that housing remains a drag on the economy. If the current pace continues, 2011 would be the worst year for new-home sales on records dating back at least half a century. Sales fell nearly 1 percent in July to a seasonally adjusted annual rate of 298,000, the Commerce Department said Tuesday. That's less than half the 700,000 that economists say represent a healthy market. Last year, 323,000 homes were sold – the worst year on records that go back to 1963. While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs and $90,000 in taxes, according to the National Association of Home Builders. High unemployment, larger required down payments and tougher lending standards are preventing many people from buying homes. Plunging stocks and a growing fear that the U.S. could tip back into another recession are also keeping people from entering the troubled housing market.

New-home sales fell in July; 2011 shaping up to be worst on records dating back 50 years - "The number of people who bought new homes fell for the fourth straight month in July, putting sales on track to finish this year as the worst on records dating back half a century. Sales of new homes fell nearly 1 percent in July to a seasonally adjusted annual rate of 298,000, the Commerce Department said Tuesday. That's less than half the 700,000 that economists say represent a healthy market.Housing remains the weakest part of the economy. Last year was the worst for new-home sales on records dating back a half century. While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs and $90,000 in taxes, according to the National Association of Home Builders. But all sales remain weak. Sales of previously occupied homes fell in July for the third time in four months, and they are trailing last year's 4.91 million sales, the fewest since 1997. In a healthy economy, people buy roughly 6 million existing homes annually."

To Save the Housing Market, Tear Down Houses - The economic recovery is in a bad way. To get it back on track, the housing market will need revival. And yet, three years after the economic crisis (and after bailouts, multiple rounds of stimulus, and much toiling over the national debt) housing numbers are getting worse.  That saps consumer demand and drags down economic growth. Consumer real estate debt is still triple what it was in 1999, despite falling 10% from its 2008 record. The solution? Tear down houses. That's the subject of Massimo Calabresi and Stephen Gandel's feature story in this week's magazine. They discuss four big ideas, including razing houses and refinancing home mortgages at today's low rates, being bounced around to save the housing market. Razing houses, officials say, will increase competition for the remaining homes, driving up real estate values. That, in turn, will make it easier for home­owners to refinance to cheaper loans, freeing up spending and boosting consumer confidence.

How Chase Ruined Lives of People Who Paid Off Their Mortgages - Matt Taibbi, in giving a well deserved thrashing to the banking industry’s Tokyo Rose, aka New York Fed director Kathryn Wylde, said: [S]tealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Once you read the allegations in the cases included in this post, I strongly suspect you will agree that the “ruining lives” in the headline is not an exaggeration. And as important, these two cases, with very similar fact sets, also suggest that these abuses are not mere “mistakes”. These are clearly well established practices that Chase can’t be bothered to clean up, since cleaning them up costs money and letting them continue is more profitable.  Both cases took place in Alabama. In both cases, the borrowers had made every mortgage payment on time. One was a couple with three children, the Barnetts. The second is a widow, Besty Barlow, but her husband was still alive when this ugly saga started.

This Is All Kinds Of Wrong of the Day - A 70-year-old Florida woman and her terminally ill husband are being foreclosed upon by Bank of America because they paid their mortgage a week in advance. The Bullingtons, who have lived in Pasco County for 15 years, ran into financial trouble when James fell ill and their medical expenses skyrocketed. The couple asked the bank to reduce their monthly mortgage payment through a modification plan, and the bank agreed. Sharon Bullington sent in her first payment under the revised plan on December 23, and, even though it wasn’t due until January 1, the bank accepted it. In January, Bullington attempted to pay February’s installment over the phone, but got her routing number wrong — a mistake she didn’t find out about until several weeks later. The couple was summarily ejected from the plan in March. Confused, Bullington wrote a two-page letter to Bank of America president Brian Moynihan to clarify that the payment made in December was meant to cover January. Moynihan aide Ana Olivera wrote Bullington to reiterate the requirement that all payments under the Home Affordable Modification Program must be made “in the month in which [they are] due.”

The Grantham manifesto - Albert Edwards has a soul mate — GMO’s Jeremy Grantham. Like the SocGen strategist, he too is worried about the massive transfer of income to the very rich that has occurred and has been tolerated only because Central Bankers have created housing booms. So worried is Grantham that he thinks debt forgiveness and changes to the tax system may be needed if America is ever to prosper again. From Grantham’s latest letter to investors: My worst fears about the potential loss of confidence in our leaders, institutions, “and capitalism itself” are being realized. We have been digging this hole for a long time. We really must be serious in our attempts to resuscitate the “average hour worked” and the fortunes of the average worker. Walking across the Boston Common this morning, I came to realize that the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary as well as the tax changes I discuss here.

New-home sales fall, 2011 could be worst year yet — Sales of new homes fell for the third straight month in July, a sign that housing remains a drag on the economy. If the current pace continues, 2011 would be the worst year for new-home sales on records dating back at least half a century. Sales fell nearly 1 percent in July to a seasonally adjusted annual rate of 298,000, the Commerce Department said Tuesday. That's less than half the 700,000 that economists say represent a healthy market. Last year, 323,000 homes were sold — the worst year on records that go back to 1963. While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs and $90,000 in taxes, according to the National Association of Home Builders. High unemployment, larger required down payments and tougher lending standards are preventing many people from buying homes.

New Home Sales in July at 298,000 Annual Rate - The Census Bureau reports New Home Sales in July were at a seasonally adjusted annual rate (SAAR) of 298 thousand. This was down from a revised 300 thousand in June (revised from 312 thousand). The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. The second graph shows New Home Months of Supply. Months of supply was unchanged at 6.6 in July. The all time record was 12.1 months of supply in January 2009. This is still higher than normal (less than 6 months supply is normal).On inventory, according to the Census Bureau: "A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed. This graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale was at 61,000 units in July. The combined total of completed and under construction is at the lowest level since this series started.

On The Housing Market as a Driver of Stimulus -  There was a New York Times editorial today calling for providing relief to the housing market through aggressive policy:Unless the plan includes strong support for principal reductions and easier refinancings, it will not get at the root of the problem: too much mortgage debt and too little relief. This reflects a lot of other analysis, including New Bottom Line’s recent report “Win-Win Solution” that calls for principle writedowns to create a million jobs. Jonathan Cohn wrote about how any new stimulus that is proposed needs to be focused on three things: size, speed and smarts.  Jared Bernstein’s FAST stimulus program is an example of this.  I think getting the housing and foreclosure markets under control is a good idea in and of itself; an added benefit is that it’ll help with the recovery.  Stimulus provided through allowing underwater homeowners to refinance into record-low interest rates and sharing the losses fairly between homeowners and creditors with reduced principal payments hits all three of Cohn’s remarks.  Plus it is possible, because it can potentially be done by sidestepping Congress.

US Pumps $418 Million Into 37 Community Banks - The Obama administration announced Wednesday that 37 community banks have received a total of $418 million in funds under a program designed to encourage local banks with less than $10 billion in assets to increase their lending to small businesses. The $30 billion Small Business Lending Fund, established under the Small Business Jobs Act of 2010, so far has provided about $1 billion to 80 community banks, including the latest funding, the Treasury Department said.  It provides capital to community banks at favorable rates, so that the rate for a bank to repay the government investment is reduced as it increases lending to small businesses. Many small businesses, which are estimated to generate around 60 percent of all new jobs created in the country, were pinched in the recession and credit crisis as they found it harder to get loans.

ATA Trucking index decreased 1.3% in July - From ATA: ATA Truck Tonnage Index Fell 1.3% in July: The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.3% in July after rising a revised 2.6% in June 2011. ... The latest pullback put the SA index at 114 (2000=100) in July, down from the June level of 115.5. Here is a long term graph that shows ATA's Fore-Hire Truck Tonnage index. The dashed line is the current level of the index. From ATA:  Trucking serves as a barometer of the U.S. economy, representing 67.2% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled 9 billion tons of freight in 2010. Motor carriers collected $563.4 billion, or 81.2% of total revenue earned by all transport modes.  When the June index was released it was already obvious that July would be weak based on comments from UPS and others. August will probably show a decline too.

Americans drove 15.5B fewer miles in first half of '11 - High gas prices prompted Americans to drive 15.5 billion fewer miles in the first half of the year — the lowest level of roadway use since 2004 — according to a federal report released Wednesday. U.S. drivers logged 1.453-trillion miles through June 30 — down 1.1 percent over the first half of 2010, the Federal Highway Administration said. The last time Americans drove less in the first half of the year was in 2004, logging 1.451 trillion miles, the government said. The all-time high for travel during the first half of the year was 1.497 trillion miles, set in 2007. This year's six-month tally fell 44 billion miles below that. June marked the fourth straight month of traffic decline, the government said, with the number of miles traveled falling by 1.4 percent. Travel fell most sharply in the South-Gulf region, where it was down 2 percent. 

DOT: Vehicle Miles Driven decreased -1.4% in June compared to June 2010 - The Department of Transportation (DOT) reported: Based on preliminary reports from the State Highway Agencies, travel during June 2011 on all roads and streets in the nation changed by -1.4 percent (-3.8 billion vehicle miles) resulting in estimated travel for the month at 259.1** billion vehicle-miles. This graph shows the rolling 12 month total vehicle miles driven. In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. Currently miles driven has been below the previous peak for 43 months - so this is a new record for longest period below the previous peak - and still counting! Note: some people have asked about miles driven on a per capita basis (or per registered driver), and I'm still looking at the data. The second graph shows the year-over-year change from the same month in the previous year. So far the current decline is not as a severe as in 2008. With the slowdown at the end of July and in August, miles driven might decline further.

The variable burden of household debt - EZRA KLEIN echoes a line of thinking that's increasingly common: If you take the Rogoff/Reinhart thesis seriously -- and people should, and increasingly are -- what distinguishes crises like this one from typical recessions is household debt. When the financial markets collapsed, household debt was nearly 100 percent of GDP. It’s now down to 90 percent. In 1982, which was the last time we had a big recession, the household-debt-to-GDP ratio was about 45 percent.That means that in this crisis, indebted households can’t spend, which means businesses can’t spend, which means that unless government steps into the breach in a massive way or until households work through their debt burden, we can’t recover. In the 1982 recession, households could spend, and so when the Federal Reserve lowered interest rates and made spending attractive, we accelerated out of the recession.I agree that debt is a problem, but not for the reasons Mr Klein cites. Debt levels have been extraordinarily high for the last two decades, and yet for most of that time households and businesses had no problem spending. Debt alone doesn't restrain spending; it's the burden of debt relative to incomes that can put a chill on outlays.

The Other Side of Household Balance Sheets - A popular explanation for the ongoing economic slump is that the United States is in the midst of a balance sheet recession.  This view holds that the vast amount of household debt built up during the housing boom is now being unwound and that this deleveraging is creating a drag on the economy.  Though intuitive, this balance sheet recession view is inadequate because one, it ignores the potential offset in spending by creditors and two, it misses a more fundamental problem: the elevated demand for liquidity.  I believe one of the reasons for this confusion is that advocates of the balance sheet recession view tend to focus on the liability side of household balance sheets while ignoring the details of the asset side.  A close look at the asset side reveals that despite the collapse in overall household assets, there has been a inordinately large buildup of liquid assets.  It is this accumulation of money and money-like assets rather than the deleveraging itself that has kept nominal spending from experiencing a robust recovery.  Here are numbers. From the peak of household asset values in 2007:Q2 to the latest data for 2011:Q1, households have lost around $9.4 trillion worth of non-liquid assets. Despite these large losses and the subsequent slump in personal-income growth, households have somehow increased their holdings of money and money-like assets by a staggering $1.6 trillion as seen in the figure below:  

One Number Says it All - The number is 0.2%. It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011. Never before in the post-World War II era have American consumers been so weak for so long. This one number encapsulates much of what is wrong today in the US – and in the global economy. There are two distinct phases to this period of unprecedented US consumer weakness. From the first quarter of 2008 through the second period of 2009, consumer demand fell for six consecutive quarters at a 2.2% annual rate. Not surprisingly, the contraction was most acute during the depths of the Great Crisis, when consumption plunged at a 4.5% rate in the third and fourth quarters of 2008. As the US economy bottomed out in mid-2009, consumers entered a second phase – a very subdued recovery. Annualized real consumption growth over the subsequent eight-quarter period from the third quarter of 2009 through the second quarter of 2011 averaged 2.1%. That is the most anemic consumer recovery on record – fully 1.5 percentage points slower than the 12-year pre-crisis trend of 3.6% that prevailed between 1996 and 2007. These figures are a good deal weaker than originally stated.

Stephen Roach: Consumers need debt jubilee - The over-indebted American consumer will be hard pressed to simultaneously reduce debt and maintain levels of consumption that support economic growth. On CNBC today, Stephen Roach of Morgan Stanley says, we need “ways to forgive the excesses of mortgage, installment and revolving credit, as what was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later.” There are four ways to reduce real debt burdens:

  1. by paying down debts via accumulated savings.
  2. by inflating away the value of money.
  3. by reneging in part or full on the promise to repay by defaulting
  4. by reneging in part on the promise to repay through debt forgiveness
Listening to Roach explain the conundrum of high unemployment and poor wage gains, juxtaposed with high debt, it is clear he recognizes there is zero chance that consumers will be able to support the kind of economic growth via deleveraging and accumulating savings that avoids a deflationary outcome. The macro backdrop for consumers is deflationary.

Roach on the Zombie American Consumer and Debt Forgiveness - Stephen Roach has a piece up on Project Syndicate pointing to the astonishing benchmark GDP revisions, which make the weak trend in consumer spending look even weaker. Here is what Roach points to:As part of the annual reworking of the US National Income and Product Accounts that was released in July 2011, Commerce Department statisticians slashed their earlier estimates of consumer spending. The 14-quarter growth trend from early 2008 to mid-2011 was cut from 0.5% to 0.2%; the bulk of the downward revision was concentrated in the first six quarters of this period – for which the estimate of the annualized consumption decline was doubled, from 1.1% to 2.2%. I have been tracking these so-called benchmark revisions for about 40 years. This is, by far, one of the most significant I have ever seen. We all knew it was tough for the American consumer – but this revision portrays the crisis-induced cutbacks and subsequent anemic recovery in a much dimmer light… The reasons behind this are not hard to fathom. By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years. When both bubbles burst, over-extended US households had no choice but to cut back and rebuild their damaged balance sheets by paying down outsize debt burdens and rebuilding depleted savings.

Final Consumer Sentiment at 55.7, Down Sharply from July - The final August Reuters / University of Michigan consumer sentiment index increased slightly to 55.7 from the preliminary reading of 54.9. This is down sharply from 63.7 in July.  In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. I think consumer sentiment declined sharply in August because of the heavy coverage of the debt ceiling debate. This was slightly below the consensus forecast of 56.0.

New Orders For Durable Goods Rise, But Business Spending Slumps: New orders for durable goods, a widely monitored leading economic indicator, rose 4.0% in July on a seasonally adjusted basis, the U.S. Census Bureau reports. That’s the highest monthly gain since March, although the increase is somewhat tainted because a big chunk of the advance came from a surge in aircraft orders. Excluding transportation, durable goods orders rose by a milder 0.7%. Even so, the gain suggests that while the economy continues to struggle, the risk of an imminent recession remains a low-probability event. Low, but not zero. It’s debatable just how low is low. In any case, one indicator is hardly the last word on the state of the business cycle. But if you’re trying to make a case for a darker outlook, today’s durable goods report offers a mixed bag. The main threat in the numbers resides with the business-spending component of durable goods (non-defense capital goods ex-aircraft), which slumped in July by a hefty 1.5%–the first drop since April and the biggest monthly setback since January’s 4% dive. The implication: sentiment in the business community is deteriorating again. “It’s going to take time before businesses become comfortable about investing and hiring,” Ryan Sweet, senior economist at Moody’s Analytics, tells Bloomberg. “The improvement in July [for durable goods] appears to be narrowly based.”

Is Business Spending At The Tipping Point? - "Business spending has been the recovery's bright spot," notes Kelly Evans in today's Wall Street Journal. "Now, it too may be fading." We'll know for sure, one way or the other, later today, when the update on durable goods orders is released. Meantime, it's premature to say this indicator has succumbed to the dark side. But the risk can't be dismissed, given the recent weakness in the overall economy. "The most important component in the durable goods report is the data on nondefense capital goods orders excluding aircraft, a key gauge of capital spending that correlates with the equipment and software component of the quarterly GDP report," writes Pimco's Anthony Crescenzi in his book The Strategic Bond Investor. "Fluctuations in capital spending tend to coincide with changes in business confidence levels." The good news is that recent numbers for business spending leave room for optimism. As the chart below shows, the latest report for June pegs business spending at its highest level (on a seasonally adjusted basis) since the recession ended.

Regional Manufacturing Surveys Continue to Go Badly - Richmond Fed: In August, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined nine points to −10 from July’s reading of −1. Among the index’s components, shipments lost sixteen points to −17, and new orders dropped six points to finish at −11, while the jobs index inched down three points to 1. Other indicators also suggested additional softening. The index for capacity utilization declined eight points to −14 and the backlogs of orders fell seven points to end at −25. Additionally, the delivery times index moved down twelve points to end at −4, This evidence continues to cut against my previous expectations for a return to growth after a blip. The downturn evident across surveys and has been persistent for several months now.  There can be little doubt at this point that manufacturing is beginning to recess. I would not be surprised to see Industrial Production peak in August.  Based on our standard understanding of how the macro-economy works, with construction depressed and industry recessing, the US economy may now be entering a recession.

Kansas City Manufacturing Survey: Manufacturing activity expands "modestly" in August - From the Kansas City Fed: Manufacturing Sector Continues to Expand Modestly;The Federal Reserve Bank of Kansas City released the August Manufacturing Survey today. According to Chad Wilkerson, vice president and economist at the Federal Reserve Bank of Kansas City, the survey revealed that Tenth District manufacturing activity continued to expand modestly, and producers remained generally positive about future months. The month-over-month composite index was 3 in August, unchanged from 3 in July and down from 14 in June. ... Manufacturing activity slowed in nondurable goods factories, while growth in factory activity increased in durable goods producing plants, particularly for machinery, fabricated metal, and electronic equipment products. Other month-over-month indexes were mixed in August.. Here is a table of the regional surveys in July and August; the Dallas Fed Texas Manufacturing will be released on Monday, August 29th.

Weaker Productivity Is a Worrying Sign - THERE’S been a lot of bad economic news lately, yet we may be overlooking the most disturbing development of all: our economic productivity has been weakening. This isn’t just a problem for the United States. Because America remains a leader in technology and innovation, it is also a matter of concern for the entire world.  Productivity statistics are hardly exciting reading, but they are important. The overlooked piece of news came this month from the Bureau of Labor Statistics. In the second quarter this year, it reported, nonfarm business labor productivity fell by 0.3 percent2, the second quarterly drop in a row. Our society is wealthy precisely because it can churn out products like automobiles, flush toilets and Google search algorithms at relatively low cost. Productivity slowdowns mean erosion of living standards over the long haul, and they also can lead to short-term crises. If productivity turns out to be much lower than expected, it often means that we have borrowed too much and taken on too much risk. Retrenchment can make a recession1 longer and deeper.

U.S. Workers Can Expect Only Modest Raises In 2012: Survey… A new survey says salaried U.S. workers can expect another year of modest raises in 2012. After increasing salaries by 2.6 percent this year and last year, companies are planning a 2.8 percent bump in 2012, benefits and human resources consultancy Towers Watson reported Monday. That's somewhat smaller than raises in the last decade. From 2000 to 2006, the year before the Great Recession began, salaries rose an average 3.9 percent for workers who were not executives. And the modest bump may not help add much buying power for shoppers. In the 12 months through July, prices for consumers have risen 3.6 percent, according to the government's latest calculations. Salary increases have been small, even though many companies are sitting on huge cash stockpiles. They're being conservative with permanent salary hikes because of uncertainty about the economy and memories of the deep cuts during the recession, said Laura Sejen of Towers Watson. Because of worries about the economy, companies are trying to avoid "fixed costs," such as permanent payroll increases, Sejen said. Hiring has also been tepid this year. More than 9 percent of the country's workers, or 13.9 million people, are unemployed.

Bhagwati: The Outsourcing Bogeyman - Jagdish Bhagwati says outsourcing myths are standing in the way of free trade initiatives ("If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered"). He says we shouldn't worry about outsourcing jobs because we can always use protectionism to save them:there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide. Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US. Until recently, only two foreign firms qualified.So no need to worry. If assembly line work is threatened by outsourcing, simple, just require US certification for the workers who produce these goods. Don't get me wrong, I think free trade is almost always the best answer. But in supporting it, we shouldn't hide from the short-run distributional consequences that fall on some segments of the population.

Jobless Claims: Stalled Again -- Initial jobless claims are going nowhere once more. And that's the optimistic view. It’s not the first time that the trend looked like it was turning favorable only to hit a wall. It’s probably not the last time we’ll suffer a headfake, but that doesn’t make it any more frustrating. The good news, in relative terms, is that new jobless claims aren’t moving in a fatal direction, not yet.  In other words, we’re still stuck in the land of neutral. That’s not good, but it’s not a smoking gun for expecting a new recession either--not today, at least, given the numbers in hand. New filings for unemployment benefits rose again last week by 5,000 to a seasonally adjusted 417,000. That’s puts new claims at the highest level since early July. But a big chunk of the recent rise may be due to a “special factor,” according to the Labor Department. Even if you accept the explanation at face value, new claims don’t seem to be falling much, if at all. As the chart below reminds, this series remains stuck in an elevated range. The implication: the labor market’s recovery will remain sluggish and prone to setbacks. So, what else is new?

Initial Claims Surge Far Higher Than Consensus, 1.2 Million Americans Have Dropped Off Extended Benefits Claim In Past Year -After taking a quick detour into pseudo-positive economic data, the BLS sends us right back into the depression, with an initial jobless claims number of 417, far higher than consensus of 405K (in fact higher than the highest number in the forecast range), and higher than last week's upwardly revised 412K. Naturally, the BLS is there to provide a justification for the spike, with 8500 jobs apparently "lost" due to the Verizon strike: "Special Factor: As a result of a labor dispute between Communications Workers of America and Verizon Communications, at least 12,500 initial claims were filed in the week ending 8/13/2011 and at least 8,500 initial claims were filed in the week ending 8/20/2011." In other news this is week 20 out of 20 with one or two exceptions of 400K+ prints. And to think that the August NFP number is due in just one week. In other news, continuing claims came below expectations of 3700K at 3641K, a number that will be revised higher as was last week's from 3702K to 3721K. The collapse in extended benefits, as the 99 week cliff claims more and more, means that 20K people fewer collected post Continuing Claims benefits, with those on EUC and extended benefits down from 5.8 million a year ago to 3.6 million: this is 1.2 million Americans that no longer can collect anything from Uncle Sam.

Nomura: U.S. Economy Lost Jobs in August - Kicking off what will likely be a series of downgrades to job forecasts in the coming week, Nomura’s U.S. economists said Wednesday they now expect nonfarm payrolls to show a decline of 5,000 in August – far off from their prior estimate of a 100,000 gain – due in part to the strike by Verizon Communications Inc. workers. They project that private payrolls will show a gain of 5,000 (following July’s 154,000 increase), suggesting that public payrolls will post a decline of 10,000 jobs this month.  The economists cite three reasons for their new forecast: 1) The sharp drop in the Philadelphia Fed’s August manufacturing survey “appears to signal a sudden decline in economic activity that we expect to be reflected in a slower pace of hiring.” 2) Growth in payroll tax receipts reported by the Treasury Department slowed from July. 3) The two-week strike by Verizon workers will reduce payrolls by about 45,000 for the period in which employers are surveyed. Even though layoffs didn’t rise in early August (at least as measured by jobless claims), the economists noted, “businesses likely shut the door on hiring as the economic outlook become even more ‘unusually uncertain’ amid fears of European contagion and stock market volatility. Surveys of business confidence have also pointed to stalled hiring intentions.”

CBO: Get Used To High Unemployment: Do you want the bad news or the really bad news? Let’s start with the bad news. Since the balance sheet recession is likely to persist for several more years, there’s a high probability of weak consumer driven growth. The bad news here, is that consumers aren’t likely to get much aid from the labor market in the coming years. At least according to the most recent projections from the CBO’s latest economic outlook. The CBO projects 8%+ unemployment to persist into 2013. The really bad news is that the impact of the deficit cutting bill that was recently passed by Congress is likely to include deeper cuts than initially presumed. The CBO says the baseline deficit will be below 3.5% of GDP in just TWO years if the Bush tax cuts don’t get extended. Even with the tax cuts, the deficit drops below 5%. Of course, some economists are touting this as a good thing as they claim that this will help the USA “pay off” the debt, but regular readers know there’s no such thing. Instead, what a 3.5% deficit will do in 2013 (assuming the balance sheet recession is still with us) is delay the necessary balance sheet rebuilding that consumers so desperately need. In fact, this budget could actually drive consumers back into debt which will only make our current matters worse by essentially kicking the can and delaying the inevitable debt de-leveraging for a future date.

The case of the US jobless recovery: Assertive management meets the double hangover - High and persistent unemployment in the US has emerged as one of the most important macroeconomic legacies of the 2007–09 world economic crisis. While the decline of business activity in the US was no larger than in Europe, the US is an outlier in its outsized response of the unemployment rate to its decline in output (IMF 2011). Here we quantify the shortfall of US employment—some 10.4 million missing jobs—and ask: Why did the number of jobs decline so much and why has it recovered so little? Two sets of causes stand out.

  • First, there has been a changing balance of economic power in the US between management and labour in the past two decades that has led to more aggressive firing of workers when business profits head south.
  • Second, the large negative output gap (actual real GDP below trend or potential) is not shrinking, due to the “double hangover” persisting in the aftermath of the housing bubble.

Less Migration Within the United States - Molloy, Smith and Wozniak offer evidence that the decline in U.S. mobility is a very broad-based--and not a trend that has been made notably worse by the recent woes in the U.S. economy and housing market. They write: "By most measures, internal migration in the United States is at a 30-year low. Migration rates have fallen for most distances, demographic and socioeconomic groups, and geographic areas. The widespread nature of the decrease suggests that the drop in mobility is not related to demographics, income, employment, labor force participation, or homeownership. Moreover, three consecutive decades of declining migration rates is historically unprecedented in the available data series. The downward trend appears to have begun around the 1980s, pointing to explanations that should be relevant to the entire period, rather than specific to the current recession and recovery—that is, the decline in migration is not a particular feature of the past five years, but has been relatively steady since the 1980s"

It’s time to get working on labor mobility - One of the problems with the news cycle is that perennial issues tend to get ignored in favor of things which have changed in the last few hours or days or weeks. So it’s worth taking a big step back, and looking at the global economy from 30,000 feet. When you do that, you see a lot of wasted resources — in food, in energy, in water, and of course in war. But add them all together and they still don’t come close to the human resources that are wasted every day. This is the 21st Century — the age of information technology and service-sector value-addition. The two most valuable companies in the world, Apple, and Exxon Mobil, both have fewer employees than the population of Moses Lake, WA. The right people in the right place are worth more now than at any point in history — even as the total population of the planet, and therefore its gross human potential, has never been higher. Silicon Valley entrepreneur Marc Andreessen, writing in the WSJ on Saturday, complains with good reason: Many people in the U.S. and around the world lack the education and skills required to participate in the great new companies coming out of the software revolution. This is a tragedy since every company I work with is absolutely starved for talent.

Long-term unemployment: Can the Obama administration do anything about it? - There is not much good economic news out there. The unemployment rate is 9.1 percent, and JPMorgan forecasts it will rise to 9.5 percent over the next year. The Wall Street consensus is that the chances we are in or will enter another recession are 30 percent to 40 percent. And the darkest spot in the dark economy? Skills-corroding, poverty-inducing, long-term joblessness. The average duration of unemployment has climbed to record highs, and about 44 percent of jobless workers have not had a job in six months.For workers, long spells of joblessness mean not just a loss of income but also the loss of community, routine, health, and skills.  When Congress comes back from its August recession, the White House will be waiting with a proposal to tackle the overall economic malaise—and long-term unemployment in particular. Details are scant, but the Wall Street Journal reports that the White House is putting together a package that includes ambitious infrastructure investment and a renewal of the payroll tax credit. It may also include retraining programs focused on aiding the long-term unemployed, but economists are skeptical it will do much for them.

Washington needs to wake up to the jobs crisis -- If Obama's fall campaign to tackle the jobs crisis sounds familiar, that's because it is. This President has talked about jobs more than 200 times since taking office. He signed an $820 billion stimulus package to buy (mostly public sector) jobs, followed by an $18 billion jobs package lumping construction funds with hiring incentives for small business. We watched the Paul Volcker-led Economic Recovery Advisory Board of 2009 disappear, replaced by the much-hyped Council on Jobs and Competitiveness of 2011, chaired by GE's Jeffrey Immelt. There's not much to show for all that. In the 26 months after the nation's unemployment rate first breached 9%, it slid back under only twice. Long-term joblessness is especially sinister: Minneapolis Fed chief Narayana Kocherlakota says it is unprecedented in post-World War II U.S. history to have this portion of the population unemployed for more than a year. Meanwhile a quiet cultural crisis brews as one out of five American men stop collecting paychecks -- getting by instead on unemployment or disability checks, the incomes of friends and family, and in some cases illicit activity.

How Washington Could Create Jobs Right Now - There are jobs to be had, jobs for the creating, even good ones, if Washington can just pull its head out of... the hole it's dug for itself. The report, "Back to Work: A Public Jobs Proposal for Economic Recovery," written by Rutgers law and economics professor Philip Harvey, recommends an approach that "doesn't require us to wait for the economy to recover in order to put people back to work. It puts people back to work as a way of nourishing the recovery. It's a strategy for producing a job-recovery rather than the jobless recovery we have been experiencing so far. "The recovery strategy... is conceptually simple: Create jobs for the unemployed directly and immediately in public employment programs that produce useful goods and services for the public's benefit. What this does for the unemployed is obvious. They get decent work while they wait for the recession to run its course... Benefits delivered... trickle up to the private sector, inducing private sector job creation that supplements the immediate employment effect of the job creation program itself." A million temporary jobs in a federally administered, direct jobs creation program -- jobs in childcare, eldercare, education, public health and housing, construction and maintenance, recreation and the arts. And as many as 414,000 jobs created outside the program. Annual cost in program spending: $46.4 billion. Actual net cost, taking into account revenues and savings: only $28.6 billion. How? For a fuller explanation, you can read the complete Demos report at: .

The Obama Jobs Plan: Offshore the Jobs Americans Don't Want?: US Trade Representative Ron Kirk was in San Francisco Wednesday promoting pending Free Trade Agreements with South Korea, Colombia, and Panama, a key aspect of the president's "jobs plan." I managed to catch up to him in the spacious lobby of a downtown high tech firm and he was nice enough to engage in a brief interview with no advance notice. My disagreement with many of his trade goals was clear from my opening question, yet he stuck around long enough for a few follow-ups, a full five minutes until his staff pulled him away. In that time, he managed to spit out just about every pro-free trade boilerplate talking point ever spoken, but displayed an alarming disregard for some of the consequences to American workers if the FTAs were to pass. Kirk doesn't believe that many middle-class manufacturing jobs will be a part of America's future. Like many free trade proponents, he views the loss of these jobs as inevitable, and he opined that Americans don't want them anyway, despite the 16% of Americans looking for full-time work right now. With unemployment what it is, and ever-widening income inequality, some of Kirk's remarks were shocking. If Kirk is truly representing the Obama jobs plan, we're in for a long, ugly ride.

Obama Weighs Plans to Boost Engineering, Construction Jobs - President Barack Obama is considering including two proposals crafted by outside advisers in an economic plan he’ll unveil in a post-Labor Day speech. The initiatives from members of the president’s Council on Jobs and Competitiveness can be accomplished without legislation, making them all the more appealing to a White House that has been repeatedly fought with congressional Republicans over fiscal matters. One proposal would increase the number of college graduates in engineering and give companies incentives to hire them. The other would employ construction workers to retrofit commercial buildings to make them more energy efficient.

A Jobs Program the White House, House Republicans Like - The White House is working on an economic proposal that House Republicans… wait for it… also support. That may be a man-bites-dog story these days, given the intense partisanship and differing ideologies in Washington. The Wall Street Journal reported Monday that as part of a larger jobs package, the White House is likely to propose some version of a program called Georgia Works, which allows people receiving unemployment benefits to receive eight weeks of training at private companies in what amounts to a tryout. The service is free to the companies, and offers a new connection to the workplace for jobless workers.It turns out this program has also caught the eye of House Republicans. In 2009, House Republicans included the program in a letter to President Barack Obama listing their job-creation ideas. In that letter, the Republicans suggested that the federal government require states to adopt Georgia Works-type programs in order to receive federal unemployment funding. “This has resulted in faster returns to work, less unemployment payments, and thus lower state unemployment taxes,”

Obamas Jobs Plan to Rely on Public-Private Partnerships - President Barack Obama‘s jobs plan will rely heavily on government partnerships with the private sector, White House spokesman Josh Earnest suggested. “The president’s top priority, in his view, is that we need to speed up our recovery, that there is more that we can do to strengthen our recovery and create jobs,” Mr. Earnest told reporters Friday. “This is something that’s going to be led by the private sector, but there is a role for the government to play to support the private sector’s efforts in that regard.” Anticipating resistance from congressional Republicans, Mr. Earnest said Mr. Obama’s speech after Labor Day laying out a plan to boost the economy and cut the deficit will include proposals “that by and large should have bipartisan support.”

This Labor Day We Need Protest Marches Rather than Parades - Robert Reich - Not only are 25 million unemployed or underemployed, but American companies continue to cut wages and benefits. The median wage is still dropping, adjusted for inflation. High unemployment has given employers extra bargaining leverage to wring out wage concessions.All told, it’s been the worst decade for American workers in a century. According to Commerce Department data, private-sector wage gains over the last decade have even lagged behind wage gains during the decade of the Great Depression (4 percent over the last ten years, adjusted for inflation, versus 5 percent from 1929 to 1939). Big American corporations are making more money, and creating more jobs, outside the United States than in it. If corporations are people, as the Supreme Court’s twisted logic now insists, most of the big ones headquartered here are rapidly losing their American identity.CEO pay, meanwhile, has soared. The median value of salaries, bonuses and long-term incentive awards for CEOs at 350 big American companies surged 11 percent last year to $9.3 million

USPS hopes Congress delivers overhaul package (Reuters) - In just a few weeks, the U.S. Postal Service expects to be insolvent, barring intervention by a divided Congress bogged down by partisan sniping. The quasi-independent agency, which delivers almost half the world's mail and employs more than half a million Americans, lost $3.1 billion in its most recent quarter and expects to default next month on a massive health benefits payment after reaching its $15 billion borrowing limit. The Postal Service, which receives no taxpayer funds to pay for operating costs and relies on sales of postage and other products, has struggled with a precipitous decline in mail volumes as consumers increasingly use e-mail and pay bills online. The drop-off was exacerbated by the economic recession. The mail carrier has asked Congress to approve major structural changes, including the elimination of Saturday mail delivery, as well as relief from its immediate cash crisis. It has proposed cutting 220,000 jobs, or more than a third of its full-time staff, by 2015, and is studying about 3,650 of its 32,000 offices for potential closure.

Study: Slower mail could save USPS $1.5 billion a year - The U.S. Postal Service could save about $1.5 billion annually if it relaxed its one-to-three-day guarantees for first-class and priority mail deliveries by a day, a new study says.  Postal executives are seriously considering the idea and are expected to announce plans regarding delivery schedules after Labor Day, according to USPS officials.  Currently the Postal Service guarantees that first-class mail deliveries will arrive within one to three days, on average. Priority mail shipments arrive within two to three days. But relaxing the guarantee by a day would cut about $336 million in premium pay for employees working overnight and Sundays to meet current delivery schedules, according to the study. Adding one day to the schedule would allow USPS to save at least an additional $1.1 billion, the study said.

Post Office: We Could Save Money By Making Customer Service Even Crappier -  According to a new study, the Post Office could save as much as $1.5 billion a year by cutting back on the quality of its service: Think snail mail is too slow? Imagine if it got slower. The U.S. Postal Service could save about $1.5 billion a year if it relaxed its two-to-three-day delivery schedules for first-class and Priority Mail deliveries by a day, according to a new study. Postal executives are seriously considering the idea and are expected to announce plans regarding delivery schedules after Labor Day, according to USPS officials. Currently the Postal Service advises customers that first-class and Priority Mail deliveries will arrive, on average, in two or three days. But relaxing the schedule by a day would cut about $336 million in premium pay for employees working overnight and Sundays to meet current delivery schedules, according to the study. Adding one day to the schedule would put less emphasis on speed and allow the USPS to save at least an additional $1.1 billion by delivering some long-haul Priority Mail shipments by ground instead of air, consolidating mail-processing facilities and employing fewer workers, the study said.

In Silicon Valley, the Night Is Still Young - LET the rest of the country worry about a double-dip recession. Tech land, stretching from San Jose to San Francisco, is in a time warp, and times here are still flush. Even now, technology types in their 20s and 30s are dropping a million-plus each on modest ranch houses in Palo Alto in Silicon Valley and Victorian duplexes in San Francisco, and home prices in some parts have jumped nearly 50 percent in the last six months. Jobs — good, six-figure jobs, with perks like free haircuts and lessons on how to create the next start-up company — are here for the taking, at least for software engineers. And for anyone with a decent idea and the drive to start a company, $100,000 to get it off the ground is easy to come by. Yet, for all the outward optimism, even before the recent gyrations on Wall Street, old fears have been creeping in, nagging memories of the dot-com bust. Now the worry is that all the turmoil on Wall Street will spread West. Can Silicon Valley really prosper if the general economy tips back into a recession? Can you make a fortune on your I.P.O. if the market is falling? Probably not. But then, no one should work here unless she is prepared to be lucky. Even in worrisome moments, like now, the essential optimism of this place endures.

Jobs, Jobs, Jobs - Karl Smith points out today that, even during the depths of the Great Recession, we were wealthier than we were in the 90s; we consumed more than in the 90s; and we had more average net worth than in the 90s. So why do we all feel so crappy about things? Answer: because one thing we aren't is more secure in our jobs than in the 90s. A lot more of us are unemployed, a lot more of us are underemployed, and a lot more of us who still have jobs are afraid that we might be next: Lack of jobs is why everyone feels bad, not because they have less or are poorer or the country isn’t producing or consuming as much. And, not to get too meta — in what I hope is an easily readable post — but an economy that makes lots of people feel bad is by definition a bad economy. Moreover, the feeling that you have now about the economy is not the feeling of lack of value creation. it's not that you are afraid of losing what you have or that budget constraints are pinching. It's that the stuff which is available to you sucks. It — in extreme cases — is a world where everyone has a job but where no grocery store has fresh milk. It’s a world where everyone gets a pay check but no one can find shoes that fit.

Would shoplifting create jobs? -- Matt says yes.  Having fewer goods on the shelves prompts retailers to replenish their inventories, which spurs economic activity.  You don’t even need to break any windows!  But there’s more to it than that.  As Matt points out, a key question is what storeowners expect to be the future rate of shoplifiting.  If a lot of shoplifting is expected, costs of supply go up and output will shrink, with some offsetting employment boost in the security guard sector.  In other words, the shoplifters who do the most good are those who don’t get caught and who in fact leave no trace.  If you are caught shoplifting, insist that you have no compatriots or allies and that you are a fully atypical individual and therefore that no Bayesian updating should go on about the likelihood of future retail crime.  Don’t dress or talk like a shoplifter!  (Be creative.)  Similarly, it is best if the invading aliens insist that they too are bothered by the Fermi paradox.

Time for infrastructure spending (video) The Nobel prize-winning economist, Peter Diamond, says more fiscal policy is needed to lower unemployment in America.

Are we replacing robots with Chinese people? - This Tyler Cowen article was too good to pass up.. The article is about new data that show that productivity growth has stagnated since 2009: One problem may be offshoring by American companies, as stressed in a study by Michael Mandel. Some productivity gains from the manufacturing of the iPad are captured by workers in China, who make important parts of the device, rather than by American workers. That would help explain why measured productivity has often been high over the last decade while despite year-to-year variation domestic wages and job creation have been flat.  I've been critical in the past of Mike Mandel's thesis. After all, productivity gains from outsourcing are real.  Hiring cheap Chinese workers to make my widgets more cheaply boosts my productivity almost the same, in the short term, as inventing a robot to make my widgets more cheaply.  BUT...productivity is not the same thing as technology. This is a fact that often gets ignored, since economists tend to treat the two as being equivalent. But they are not. In particular, trade can boost productivity without any new technology being invented.

Economic Downturns, the Social-Darwinist Waltz, and the Navigation of the Starship Asgard - Tyler Cowen writes: More rooftop-ready results on reservation wages: I conclude that some people aren’t very good at looking for jobs and further some people are not very good at accepting job offers… It seems to me that this is one of the steps in what I have sometimes called the Social-Darwinist Waltz. It goes like this:

  1. People are skilled decision-makers and rational judges of their own interests.
  2. Markets are very good ways of coordinating social activity among skilled decision-makers who are rational judges of their own interest.
  3. Markets are the best way to organize pretty much everything.
  4. When markets go wrong and produce bad outcomes, it is almost always because the government has interfered and has mucked things up with command and bureaucracy.
  5. You say government has not intervened, and yet the market outcome still sucks?
  6. Well, it must be because some people are not skilled decision-makers and are not rational judges of their own interests.
  7. But their lack of skill and foresight is non-adaptive.
  8. Their lack of skill and foresight is blameworthy.
  9. And they should be punished.
  10. And in punishing them, the market outcome is good after all.
  11. It improves the breed.

It is, I think, very important for rational policy to halt the Social-Darwinist Waltz where Tyler is, at step 7, and not go on to step 8.

What You Don't Get About The Job Search: The Unemployed Speak - We know their numbers. Roughly 25 million Americans, equal to the entire population of Texas, are unemployed, forced to work part-time, or have dropped out of the labor force entirely. But we don't all know their stories. So the Atlantic asked our readers to share with us the one thing most people don't understand or appreciate about looking for work. Here are some of the most heart-breaking and illuminating of the scores of responses we received in the last 24 hours.

The war against the unemployed - Unless Congress takes action, as many as 3 million Americans could lose their unemployment benefits shortly after the end of 2011, when federal unemployment benefit extensions expire. For many Republican legislators, at both the state and federal level, that day can't come a moment too soon. Who can forget Arizona Sen. Jon Kyl's famous declaration last March that "if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work"? If anything! Never mind the hardship that the 6.8 million people thrown out of work by the great recession are suffering. Never mind the powerful stimulative effects that result from the speedy injection of unemployment benefit payouts right back into the overall economy. Never mind the gross immorality of ensuring that the rich pay as little taxes as possible while the poor are left without a safety net. The emerging conservative orthodoxy holds that paying out benefits just encourages Americans to be lazy. End of story. The fact that the United States is still reeling from the greatest economic disaster since the Great Depression and verging perilously close to a double-dip recession makes no difference. At the state level, the crackdown has already begun. A half-dozen states, with Florida leading the way, have already cut back on benefits while at the same time forcing the unemployed to jump through numerous, onerous hoops just to qualify for a check.

The Case for Making Wages Public: Better Pay, Better Workers - Are you paid fairly? Do coworkers at your level make more or less money than you do? How much would you make if you got a promotion? If you took a job with a competing company, would you make more money? Many Americans, possibly the vast majority, don't know the answers to these questions. For decades pay has been something whispered from employer to employee. But keeping it secret might do a disservice to workers, managers, and broader economy. Economists love to talk about transparency. According to theory, if people have more information, then they can make better decisions. That makes for a healthier, more efficient economy. Why should pay be an exception to this rule?

Fighting the Firings -- When the current wave of mass firings of immigrant workers started three years ago, they were called “silent raids” in the press. The phrase makes firings seem more humane than the workplace raids of the Bush administration. During Bush’s eight-year tenure, posses of black-uniformed immigration agents, waving submachine guns, invaded factories across the country and rounded up workers for deportations. “Silent raids,” by contrast, have relied on cooperation between employers and immigration officials. The Department of Homeland Security identifies workers it says have no legal immigration status. Employers then fire them. The silence, then, is the absence of the armed men in black. To paraphrase Woody Guthrie, they used to rob workers of their jobs with a gun. Now they do it with a fountain pen. Silence also describes the lack of outcry on behalf of those workers losing their jobs. No delegations of immigrant rights activists have traveled to Washington D.C. to protest. Unions have said little, even as their own members were fired.. Those working feared losing their jobs. Those already fired worried that immigration agents might come knocking on their doors at night.

Young and Jobless - Since 1948, the Labor Department has been keeping track of how many young people find jobs during the summer, when employment of 16-to-24-year-olds typically peaks. Last month, the share of young people who were employed was just 48.8 percent, the lowest July rate on record. The youth unemployment rate fell by 1 percentage point over the last year, to 18.1 percent in July 2011 after having hit a record high the year before. But that decline is largely due to having fewer young people look for work. The labor force participation rate for all young people — that is, the proportion of the population 16 to 24 years old either working or looking for work — was 59.5 percent last month, also the lowest July rate on record.One takeaway: Youth unemployment is high, but it doesn’t tell the whole story since it leaves out a lot of people who have given up looking for work. Some of those who have dropped out of the labor force (or never entered) are in school, which is good for their careers, and the economy, in the long run. But many aren’t.

With Jobs Elusive, Young Workers Quit Looking - A smaller share of young people snagged jobs this summer than any other year on record, a new report shows.  Amid high unemployment, jobs were particularly elusive for the 16 to 24-year-old set between April and July. Some 48.8% of young people held jobs in July, the lowest rate for that month based on data going back to 1948, the Labor Department said Wednesday.  “The youth labor force…grows sharply between April and July each year,” the Labor Department said in its report, “During these months, large numbers of high school and college students search for or take summer jobs, and many graduates enter the labor market to look for or begin permanent employment.” Some 1.7 million more young people had jobs in July than in April, an increase slightly smaller than last summer’s 1.8 million increase. In all, 18.6 million people aged 16 to 24 had jobs last month. Fewer young Americans found jobs this summer than last year, but because some of them didn’t look for work, their official unemployment rate fell. The youth jobless rate declined to 18.1% in July after reaching a record-high 19.1% for that same month a year ago.

What's causing youth unemployment? (The Economist: Economics by invitation) How should we interpret high rates of joblessness among young people in advanced economies? Is there a relationship between youth unemployment and social unrest? Is austerity likely to worsen the problem?

Corporate Interests Threaten Child Welfare - WHEN I sit with my two teenagers, and they are a million miles away, absorbed by the titillating roil of online social life, the addictive pull of video games and virtual worlds, as they stare endlessly at video clips and digital pictures of themselves and their friends, it feels like something is wrong.  No doubt my parents felt similarly about the things I did as a kid, as did my grandparents about my parents’ childhood activities. But the issues confronting parents today can’t be dismissed as mere generational prejudices. There is reason to believe that childhood itself is now in crisis.   In the United States and elsewhere, a broad-based “child saving” movement emerged in the late 19th century to combat widespread child abuse in mines, mills and factories. By the early 20th century, the “century of the child,” as a prescient book published in 1909 called it, was in full throttle. But over the last 30 years there has been a dramatic reversal: corporate interests now prevail. Deregulation, privatization, weak enforcement of existing regulations and legal and political resistance to new regulations have eroded our ability, as a society, to protect children.

New Hampshire Republican Sponsor Of Minimum Wage Restriction Law Says Young People Are ‘Not Worth The Minimum’  -Earlier this year, the newly elected Republicans in New Hampshire overrode the veto of Democratic Governor John Lynch to push through a new minimum wage restriction law that lowers the minimum wage to the federal minimum of $7.25 an hour. But Republican State Representative Carol McGuire still thinks the federal level is too high. ⁠In a statement to journalists, she stated that she would like to repeal all minimum wage laws and allow corporations to pay workers whatever rate they want. She also said the $7.25 minimum is overly generous to young people who are “not worth the minimum“: “It’s very discriminatory, particularly for young people. They’re not worth the minimum,” she said. She believes there are young people who would get a job if they could be paid $5 an hour instead of the minimum.

TANF at 15, Part I: How Well Does It Provide Income Support for Poor Families - President Clinton signed the 1996 welfare law 15 years ago today, creating the Temporary Assistance for Needy Families (TANF) block grant to replace the Aid to Families with Dependent Children (AFDC) program. We’ll present a series of posts this week that provide a closer look at how welfare reform has played out over the last 15 years. Today’s post focuses on TANF as a source of income support for poor families. As the following charts make clear, TANF remains an important source of income support for a small, but vulnerable group of families. However, because relatively few families receive TANF and benefits are very low, TANF plays a much more limited role in helping families escape poverty or deep poverty (i.e., income below half the poverty line) today than AFDC did. Over the last 15 years, the national TANF caseload has declined by 60 percent, even as poverty and deep poverty have worsened. While the poverty rate among families declined in the early years of welfare reform, when the economy was booming and unemployment was extremely low, it started increasing in 2000 and now exceeds its 1996 level. The increase in deep poverty has been especially large. The number of families in deep poverty rose by 13 percent between 1996 and 2009, from 2.7 million to 3 million.

TANF at 15: A Weak Safety Net Getting Weaker, CBPP: Monday will mark the 15th anniversary of the Temporary Assistance for Needy Families (TANF) block grant (i.e., “welfare reform”).  Here are some highlights of TANF as we know it today. (3 graphs)

    • TANF’s role in providing income support to poor families has declined dramatically
    • Most of the employment gains realized in the early years of TANF have disappeared
    • TANF has failed to provide an adequate safety net to needy families during this long and difficult recession

Automatic Stabilizer Fail - If you believe the US political system is incapable of handling counter-cyclical policy, and that we need to rely on automatic stabilizers, this CBPP graph is depressing: In other words, Temporary Assistance for Needy Families (the result of the 1996 “welfare reform”), for whatever its other merits might be, has not been particularly sensitive to increases in poverty.  As the number of needy families grew during the recession, the TANF rolls barely budged.  More here.

Welcome To The Third World — One upon a time, the US was a place where police came when you called, a basic safety net caught those who fell on hard times, and a lifetime of work was rewarded with a decent retirement. A First World country, in other words. To be born here was to win life’s lottery.  But apparently this was an illusion fueled by borrowing and money printing, and now that we can’t borrow quite so much, many things we took for granted are going away. Consider this video of Chicagoans being dropped from state health care assistance. And these recent news stories:

New job trends reproducing gender inequality - Jobs that come with large paychecks but long work hours are slowing the gains women have made since the late 70s in narrowing the gender wage gap. A study by sociologists from Indiana University and Cornell University finds that the growing trend of overworking -- working 50 hours a week or more -- is partly responsible for the slowdown Americans have experienced since the mid-1990s in the convergence of the gender gap in pay. The gap between the percentage of women working full-time compared to men has shrunk during the past 30 years but the gender gap involving long working hours has changed little and remains large. "Women, even when employed full time, typically have more family obligations than men," said IU sociologist Youngjoo Cha, who specializes in gender, labor markets and social inequality. "This limits their availability for the 'greedy occupations,' that require long work hours, such as high-level managers, lawyers and doctors. In these occupations, workers are often evaluated based on their face time."

Economic inequality is linked to biased self-perception - Pretty much everybody thinks they're better than average. But in some cultures, people are more self-aggrandizing than in others. Until now, national differences in "self-enhancement" have been chalked up to an East-West individualism-versus-collectivism divide. In the West, where people value independence, personal success, and uniqueness, psychologists have said, self-inflation is more rampant. In the East, where interdependence, harmony, and belonging are valued, modesty prevails.Now an analysis of data gathered from 1,625 people in 15 culturally diverse countries finds a stronger predictor of self-enhancement: economic inequality."We don't know the precise mechanism, but it seems unlikely that it is primarily an East-West difference," . "It's got to do with how your society distributes its resources."

Wisdom of crowds - In developing nations, anti-poverty programs face a basic hurdle: Who, exactly, is poor enough to qualify for the aid being given out? Emerging states often lack the official records, such as income and tax documents, that are used to make those judgments in wealthier countries.Now, a novel study co-authored by two MIT economists has identified a surprisingly effective way of deciding who, in the developing world, is especially poor: Let the citizens sit down and decide among themselves. The study is based on fieldwork conducted in 640 Indonesian villages. Indonesia, like many other developing countries, lacks the comprehensive data needed for means testing; that is, it cannot create objective measures of personal wealth to indicate which citizens need aid most badly.  There are two striking results.  First, when citizens are asked to make collective judgments about the relative wealth of their neighbors, the outcomes are very close to those produced by objective measures. Second, citizens are far more satisfied by the results when they are consulted than when they are left out of the process.

One in Four California Families Can't Afford Food for Their Kids - California households with children reported food hardship, according to a new analysis of Gallup data released last Thursday by the Food Research and Action Center (FRAC). “It’s disturbing, but not surprising,” said Kelly Hardy, director of health policy at Children Now. The report analyzed data gathered as part of the Gallup-Healthways Well-Being Index project’s responses to the question: “Have there been times in the past 12 months when you did not have enough money to buy food that you or your family needed?” “It sends a clear signal of economic distress, particularly for families with children,” noted James Weill, president of FRAC. “The answers to the question reveal there are times that these families are going without eating a meal, or the parents are skipping a meal for their children, or children are skipping meals.” California had the second highest number of metropolitan areas with rates of food hardship in households with children in 2009-2010, according to the report.

Georgia food stamp needs up 42 percent in the last 2 years - The economic slowdown of the past few years has led to a big jump in the number of Georgians receiving food stamps. One of every seven families in the state benefits from the food stamp program. That’s a total of 1.8 million food stamp beneficiaries in Georgia, a 42% increase in the last two years. To qualify for food stamps, a family’s income must be at or below 130% of the federal poverty level. That translates to just less than $2,000 per month for a family of three. Recipients get a card which tracks the amount of money they have remaining in food stamps. That card is accepted at stores around the state. The U.S. Department of Agriculture determines what can be purchased with that food stamp card.

USA becomes Food Stamp Nation but is it sustainable? - Altogether, there are now almost 46 million people in the United States on food stamps, roughly 15 percent of the population. That's an increase of 74 percent since 2007, just before the financial crisis and a deep recession led to mass job losses. At the same time, the cost doubled to reach $68 billion in 2010 -- more than a third of the amount the U.S. government received in corporate income tax last year -- which means the program has started to attract the attention of some Republican lawmakers looking for ways to cut the nation's budget deficit. While there are clearly some cases of abuse by people who claim food stamps but don't really need them, for many Americans like Saucedo there is little current alternative if they are to put food on the table while paying rent and utility bills.

Squatter problem balloons in Detroit - The foreclosure crisis has led to a surge of complaints about squatting in Detroit, and city officials acknowledge they're not sure what they can do about the problem. In a city with more than 100,000 vacant properties, city officials and residents say they're increasingly seeing people take over empty houses and call them their own. Once they're in, it's tough to get rid of them: Michigan law places the burden of proof on rightful owners, and the eviction process can take months. "With families losing houses, they've got to go somewhere," "They are canvassing the neighborhoods, and there are houses on every one of those streets. Our area has been hit with a number of abandoned houses and foreclosures, and that's a major concern for us. I wish I knew how to tackle that, but I don't have a clue."

Federal Debt Drama and What It Means for State and Local Governments - Financial markets have been on a pretty turbulent roller-coaster following the last minute bargain Congress struck to forestall a debt crisis, S&P’s downgrade of US Treasuries, and economic uncertainty in Europe. Most discussion has focused on national issues but it’s important to ask what this all means for state and local governments. State and local budgets are still pretty tight, with revenues well below 2008 levels (adjusted for inflation). But the current federal drama doesn’t seem to be compounding subnational government woes. Most state and local officials knew that they were unlikely to get more federal aid after the stimulus funds dried up, but the actual deal struck by Congress is better than many states expected.  The agreement cuts federal discretionary spending a lot but largely protects entitlements, including Medicaid (and Social Security and Medicare). New limits take the form of spending caps on discretionary spending using the Congressional Budget Office’s “current law baseline,” which adjusts for inflation. Baselines are often political creations but they sometimes matter a lot—Standard and Poor’s really blew it by assuming the wrong one—and that’s clearly the case for the cuts in discretionary spending.

The State and Local Budget Crisis - The cost of the 2011 cutbacks in federal spending will fall most directly on consumers and retirees by scaling back Social Security, Medicare, Medicaid and social spending programs. The population also will suffer indirectly, by lower federal revenue sharing with U.S. states and cities. The following chart from the National Income and Product Accounts (NIPA, Table 3.3) shows how federal financial aid has helped cities shift the tax burden off real estate, although the main shift has been off property taxes onto income – and onto consumption (sales) taxes.  Untaxing real estate has served mortgage bankers by freeing more rental income (the land’s site value) to be paid as interest. Property taxes have not absorbed anywhere near the rise in debt-leveraged housing and commercial prices. However, this has not lowered the cost of housing for most people. New buyers must pay a price that capitalizes the property’s rental value. Less and less of this payment has taken the form of local property taxes. More and more has been paid to mortgage lenders as interest. So cutting property taxes has simply left more revenue to be capitalized into higher debt-financed prices.

Philly Fed State Coincident Indexes for July - Above is a map of the three month change in the Philly Fed state coincident indicators. Several states have turned red again. This map was all red during the worst of the recession, and all green not long ago. Here is the Philadelphia Fed state coincident index release (pdf) for July 2011. In the past month, the indexes increased in 29 states, decreased in 13, and remained unchanged in eight for a one-month diffusion index of 32. Over the past three months, the indexes increased in 34 states, decreased in 12, and remained unchanged in four (Arkansas, Delaware, Hawaii, and Washington) for a three-month diffusion index of 44.The second graph is of the monthly Philly Fed data for the number of states with one month increasing activity.  The indexes increased in 29 states, decreased in 13, and remained unchanged in 8. Note: this graph includes states with minor increases (the Philly Fed lists as unchanged). These are coincident indexes constructed from state employment data.

Why capitalism is choosing Plan B - Across US states, governors are forcing through Greek-style austerity measures. Corporations wouldn't have it any other way Last week, Democratic governors in New York and Connecticut repeated the austerity politics of Greece's Prime Minister Pappandreou and Portugal's former Prime Minister Socrates. In doing so, they likewise imitated the austerity politics of their Republican and Democratic counterparts across virtually all 50 states. Austerity for labour and the public is everywhere capitalism's Plan B. Even capitalists now see that capitalism's Plan A failed. You will recall that Plan A entailed a crisis-response programme of bailing out the banks, insurance companies, large corporations and stock markets to achieve "recovery". The theory behind Plan A – we used to call it "trickle-down economics" – was that recovery would spread from financial markets and financiers to everyone else. It never did. So now the same servants of capitalism who imposed Plan A are dishing out Plan B.

Monday Map: Growth of High Income Taxpayers - This map shows percentage growth of taxpayers earning over $200,000, minus the percentage growth of all taxpayers, over the decade-long period from 1999 to 2009. The $200,000 threshold is in nominal dollars, so all states will have had considerable growth, but the differences between the states demonstrate that certain states have had much stronger increases in wealthy taxpayers than others. North Dakota takes the top spot - returns with AGI over $200,000 increased 144.53%, while all returns increased only 9.3% - a considerable difference of 122.7%. Michigan is last - returns over $200,000 increased only 17.6%, while total returns actually decreased by 0.5%, for a final difference of 18.1%. To see the raw data, visit this page.

Widespread layoffs hit state government - Gerry Ketchum says he can walk you through Department of Social and Health Services offices that look like a ghost town because of jobs cuts. In some cases, after passing through a busy front lobby, "you walk back and I'm like, 'Where are all the people? What happened to all the people who used to be here?' " For the first time anyone can recall, state government employment has shrunk for two years in a row due to budget cuts, shedding nearly 4,700 full-time jobs since 2009. That's more than 7 percent of the workforce. State figures show the biggest job losses have occurred in King, Pierce and Thurston counties. Most of those who have left the state workforce since fiscal 2009 did so on their own, state figures indicate. About 21 percent of the losses were through layoffs, although that figure varies widely by agency.

Alabama agencies cutting 1,100 employees — Alabama's state government is going to have 1,100 fewer employees by this fall due to state budget cuts, the end of federal stimulus funding and different standards of care for the mentally disabled. The state government had more than 37,000 employees when the layoffs started, and they are speeding up as agencies approach the start of the new fiscal year on Oct. 1. Any layoff has an impact on the state's economy because the average salary for a full-time, permanent state employee was $42,943 as of July 2010, according to the state Personnel Department. The state Department of Mental Health is looking at a total of 582 layoffs, including 400 from the closure of Partlow Hospital in Tuscaloosa, or about one-fourth of its staff.The state Department of Agriculture and Industries has cut 89 employees since spring due to budget cuts, or nearly one-fourth of its staff. At Alabama's trial courts, 252 employees in circuit clerks' offices and 20 in state administrative offices are being laid off at the end of the month. That, coupled with the layoffs of 151 juvenile probation officers, bailiffs and court administrative employees in the spring, will bring the total cuts to 423, or 20 percent of the staff, including elected officials.

California $382,519 Prison Doctor Shows Budget Gaps Don’t Bar Big Salaries - Jeffrey Wang closed his struggling medical practice in Visalia, California, in 2007 to take a job as a physician treating inmates in Corcoran State Prison, where murderer Charles Manson is locked up. Wang made $382,519 in 2010, including overtime and extra- duty compensation. He was one of almost 100 doctors, dentists and other medical practitioners in the state who got at least $300,000 last year to work behind bars, according to the controller’s office. California prison doctors earn more than counterparts in New York, Texas and Florida, data compiled by Bloomberg show. The highest-paid physician in New York’s penal system in 2010, for instance, collected $200,147, including overtime, according to the state comptroller’s office.

State most bullish on the economy isn't a state - Consumers who live in the District of Columbia have more economic confidence than residents of any other part of the country, according to a new Gallup poll. Maryland and Virginia also rank in the top 10 for consumer confidence.  One reason could be that government employment is still relatively strong near the nation's capitol — at least for now, Gallup says. That could change as federal austerity makes its way through the system.  Overall, U.S. economic confidence has fallen. In the first half of the year, Gallup's Economic Confidence Index averaged -28 nationwide, falling slightly from the first six months of 2011, when the index averaged -26. The score reflects "Americans' pessimistic views of the current and future U.S. economy," according to the polling firm, which characterized the change in the index as essentially flat from last year.

S.D. schools cut costs with 4-day week - This district in the rolling farmland of southeastern South Dakota is among the latest to adopt a four-day school week as the best option for reducing costs and dealing with state budget cuts to education. “It got down to monetary reasons more than anything else,’’ Superintendent Larry Johnke said. The $50,000 savings will preserve a vocational education program that otherwise would have been scrapped. The four-day school week is an increasingly visible example of the impact of state budget problems on rural education. This fall, fully one-fourth of South Dakota’s districts will have moved to some form of the abbreviated schedule. Only Colorado and Wyoming have a larger proportion of schools using a shortened week. According to one study, more than 120 school districts in 20 states, most in the west, now use four-day weeks.

City plans to cut 800 public school workers for school year as budget - Nearly 800 city public school workers will get pink slips in October as part of necessary belt-tightening, officials said yesterday. The layoffs target school aides, parent coordinators and other staffers as schools across the city trim an average of 2.4% from their budgets. Teachers will be spared from the layoffs, but nearly 2,000 will lose their permanent positions and become temporary instructors or substitutes. Educators said the cuts will hurt students. "The children are going to suffer from this," said a teacher who lost her job at a Brooklyn elementary school in June and is looking for a position at another public school."When you take teachers and aides out of the building, it certainly will affect the school," said Shuldiner.

District warns 238 of layoffs - Spokane Public Schools administrators issued an unprecedented 238 layoff notices Tuesday in preparation for a “worst-case scenario” state budget.  On the list: 72 elementary school teachers, 42 high school and middle school teachers, 28 special-education teachers, 55 counselors, 10 speech language pathologists, six librarians, six psychologists, seven occupational therapists and physical therapists; and five specialty educators.The total number of layoff notices is the highest any current administrator could recall, said Staci Vesneske, assistant superintendent. The district faces a budget shortfall between $9 million and $12 million. By union contract, the deadline for notifying certified employees of their employment status is May 15, so the district had to move forward with layoff notices even though the Washington Legislature is still working on a final budget. “I’m frustrated and, of course, disappointed,” . “Let’s just go to the bare basics, and do what’s best for the kids. If that means putting administrators back in the classrooms, then that’s what we should do.”

CPS Faces ‘Fiscal Calamity,’ Budget Watchdog Warns - Chicago’s public schools face “fiscal calamity” unless administrators take steps to shore up the district’s underfunded teacher pensions and get spending under control, the Civic Federation said in its annual budget analysis released Monday. While the Federation said it supports the district’s $5.9 billion budget for fiscal year 2011, the report noted other threats to the district’s long-term financial position, including its repeated reliance on a reserve fund to deal with budget deficits. CPS managers also “must continue to emphasize cutting costs if they are going to head off an enormous fiscal crisis in just two years,” In its annual analysis, the budget policy group noted that teacher pension costs are expected to increase by $450 million in 2014, when the state pension relief bill expires. The bill, passed last year, reduces the district’s required payments to the pension fund for three years. While providing CPS with temporary budget relief, the action deepened the problem by “depriving the pension fund of badly needed contributions,” the report said.

Are Charter Schools Draining Private School Enrollment? - Charter schools are a major policy initiative at the national and local levels. As charter schools spread, one key question is whether they reduce private school enrollment, especially at Catholic schools. If so, an increase in charters could change public school spending patterns, decrease the number or size of private schools, and alter educational outcomes and school quality for public and private school students. But is this really the case? Maybe not. In this post, based on our 2010 New York Fed staff report, we find that despite widespread fears to the contrary, the expansion of charter schools in Michigan led to only a small decline in private school enrollment.

Not-for-Profit College Board Getting Rich as Fees Hit Students - Founded by Harvard and 11 other universities in 1900 to create a standardized test to admit students based on merit rather than family connections, the College Board by 1999 was facing cash-flow problems. Caperton turned the nonprofit company into a thriving business, more than doubling revenue to $660 million by boosting fees, expanding the Advanced Placement program and the sale of names of teenage test-takers to colleges. A former West Virginia governor, he persuaded 11 states to cover fees for a preliminary SAT in the 10th grade. Now, Caperton is planning to retire amid concern that the College Board’s improved revenue has come at the expense of students and their families, who pay hundreds of dollars in fees even before they apply to college, parents, admissions officials and high school counselors said. “The College Board is more interested in marketing and selling things than it is in its primary responsibility, promoting equity and educational opportunity,”

Nonprofit Head of College Board Paid More Than Harvard’s Leader - The president of the College Board, the nonprofit owner of the SAT entrance exam, has seen his compensation triple since 1999 and now gets more than the head of the American Red Cross, which has more than five times the revenue.  The value of Gaston Caperton’s compensation was $1.3 million including deferred compensation in 2009, according to tax filings, also surpassing that of the president of Harvard University. Richard Ferguson, the now-retired chief executive officer of rival testing company ACT Inc., got compensation valued at $1.1 million. Nineteen executives at the New York- based College Board got more than $300,000.  The College Board, ACT and a third nonprofit company -- Educational Testing Service -- make money owning, designing or administering college entrance tests. All have unusually generous compensation for either executives or directors. “Congress should take a hard eye at these tax-exempt testing companies that pay big-time salaries and seem to want to shake every dollar possible out of the pockets of students applying to college.”

California state colleges ready for another round of budget cuts - California’s public universities and colleges could be in for another round of budget cuts if the economy doesn’t pick up. If state revenues fall below projections, that could trigger automatic state cuts to both education and social services in California. So in preparation for that contingency, the chancellors of the Cal State system and California community colleges say they’re making plans to cope with midyear reductions in state funding. Each system could lose another $100 million if that comes to pass. In the current state budget CSU, with 23 campuses, lost $65 million, while the 112-campus community colleges saw a loss of $400 million. Both chancellors say additional cuts this year would result in fewer courses, larger classes, scrapped summer sessions and, of course, even higher fees.

The Tarnished State of California's Golden College System - As the academic year gets under way it will be the third time in the past four years that the schools are operating with reduced funding. Beleaguered by a budget crisis, Sacramento has shrunk outlays for California State to $2.14 billion from almost $3 billion in 2007-08. University of California funding has seen similar reductions: shriveling to $2.37 billion from $3.3 billion. Community colleges have taken a hit as well over the past couple of years, leading to fewer enrollments and course offerings. The problem is schools may not be able to keep up with a growing population and an economy that needs more and more high-skilled workers. Indeed, by 2025, the state is expected to have nearly 1 million fewer college graduates than it needs to meet projected economic demand, according to a report by the Public Policy Institute of California. It goes without saying that decreased funding isn't helping schools close that gap. "We have the capacity on the campuses," Brostrom says. "We just don't have the funding to do it."

The Real "Dropout Economy"  - We're living in a "Dropout Economy," and it's not the post-apocalyptic, Mad Max Beyond Thunderdome fantasy that seems to fuel conservative dreams of a government-free utopia. This Dropout Economy comes at a huge cost in lost wages and lost revenueA new study provided to Whispers from the American Institutes for Research finds that for just one year—2002—some 40 percent didn't graduate, costing the federal income $566 million in potential taxes, state governments another $164 million and the students themselves $3.8 billion in lost income over their life. Just multiply that by the average dropout rate of many more college classes and the cost of not graduating skyrockets. Those losses, said the report, "represent only the tip of a very big iceberg." ...Low graduation rates also squeeze the taxpayer, said the report, because state and federal spending on them to support colleges and through grants and scholarships are wasted. A 2012 AIR report, said states spend more than $1.3 billion per year on students who drop out in their first year while the Feds drop another $300 million per year. The report doesn't say much about why so many college students drop out, but the things some students are doing to pay tuition is a clue. High tuition causes many students to drop out because they "have other bills that mom and dad don't pay," and the stress of working to support themselves and going to school at the same time becomes too difficult.

College Costs Drop for Higher-Earning Households - Middle- and upper-class families opted for cheaper schools and more financial aid to send their children to college this year.  Overall, families spent less on college for the 2010-2011 school year and grants and scholarships accounted for an increased share of the costs, according to student-lender Sallie Mae’s study of more than 1,600 undergraduate students and parents. The trends were more pronounced among middle- and upper-class families that were vigilant in pursuing financial aid and choosing cheaper colleges during a weak economic recovery.  “Notably, high-income families pulled back from their 2010 levels of spending, with a sharp decline in how much parents pay from income and savings,” the report said. “Middle-income families utilized the substantially increased availability of grants and scholarships, and simultaneously reduced their contributions towards the cost of college from parent income and savings.”  Scholarships and grants covered a third of families’ college costs in 2011, up 10 percentage points from a year earlier.

College students stumped by search engines, lack basic literacy skills - The members of the generation that is sometimes dubbed the "millennials" are alternately reviled or lauded by the news media for their tech-savvy, gadget-loving ways. But a new ethnographic research project on students in five Illinois universities may put a dent in that reputation. It found that many college kids don't even know how to perform a simple internet search.   The students "appeared to lack even some of the most basic information literacy skills that we assumed they would have mastered in high school," Lynda Duke and Andrew Asher write in a book on the project coming out this fall. At all five Illinois universities, students reported feeling "anxious" and confused when trying to research. Many felt overwhelmed by the volume of results their searches would turn up, not realizing that there are ways to narrow those searches and get more tailored results. Others would abandon their research topics when they couldn't find enough sources, unaware that they were using the wrong search terms or database for their topics.

Returns to Education - There's a very useful report out from the Georgetown University Center on Education and the Workforce that has a bunch of graphs of lifetime earnings varying by highest educational level.  The graph above gives the top-line summary - you will make 3 or 4 times more with a professional degree than as a high-school drop out (and that's assuming that the high-school dropout is actually working, which is far from certain since employment population ratios are very low for those educational groups). When they say "lifetime earnings", since it's not possible to figure out what people will make 20 years from now, what they are actually doing is taking survey data of how much people of all different ages are making at the moment, and then adding up all the numbers.  So it's basically the area under these curves:

Bryce Covert: Recession Has Lit the Fuse on Explosive Student Debt - This week’s credit check: Average student debt can spiral up to $100,000 with interest and late payments. Room and board charges at colleges have doubled in actual dollars since 1982. It’s no great secret that student loan debt is exploding. The total amount is set to top $1 trillion, more than total credit card debt. But accompanying that post-recession surge in student debt (as all other consumer debt is being paid down) is a surge in delinquencies. As The Wall Street Journal reports, “In the second quarter, 11.2% of student loans were more than 90 days past due and the rate was steadily rising. The rise in student borrowing is a longtime trend, but things have clearly gotten worse in the recession. And don’t forget, this debt isn’t going anywhere, no matter how little students are able to pay it back. Unlike almost all other forms of consumer debt, student loans can’t be discharged.  “You will be hounded for life… They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.” They can also dock Social Security checks when you retire, he adds. No matter when the economy finally pulls out of this stagnation, students will still be saddled with a heavy load.

For Many Seniors, There May Be No Retirement - Many older people are finding themselves in a position they never expected to be in at retirement age: still working or in need of a job. And the laundry list of reasons just keeps growing. Already battered nest eggs took another beating this month with the market's wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. And the Federal Reserve recently said it would likely keep rates "exceptionally low" through mid-2013. On top of that, housing prices are still in the doldrums, leaving homeowners with much less equity to tap.More than three in five U.S. workers in their 50s and 60s plan on working past 65 -- and 47% of that group say they'll do so because they'll need the money or health benefits, according to a 2011 study from the nonprofit Transamerica Center for Retirement Studies. But in this tight labor market, working into your golden years isn't easy. And you'll have to make your age and years on the job come across as assets, not liabilities. In addition, with the current market upheaval, you'll need a financial plan that puts your savings on the fast track and takes into account how Social Security and Medicare benefits could be affected.

The New Retirement Plan: No Retirement - From the WSJ: For Many Seniors, There May Be No Retirement: Already battered nest eggs took another beating this month with the market's wild swings. With interest rates essentially at zero since 2008, income from Treasurys and certificates of deposit is pretty paltry. ... On top of that, housing prices [leave] homeowners with much less equity to tap. Here is the survey mentioned in the article: The New Retirement: Working

• The survey found that for many Americans, the foundation of their retirement strategy is simply not to retire, to work considerably longer than the traditional retirement age, or work in retirement:
–39 percent of workers plan to work past age 70 or do not plan to retire
–54 percent of workers expect to plan to continue working when they retire
–40 percent now expect to work longer and retire at an older age since the recession
• Workers’ greatest fears about retirement include “outliving my savings and investments” and “not being able to meet the financial needs of my family.”
• Most workers will continue working out of financial necessity:

Forget the market: We can’t afford to retire anyway - Not only are equities getting hammered with a four-week run of losses that have led to an evaporation of $2.9 trillion in wealth, but now the market’s getting blamed for grim forecasts about Baby Boomers staying in the workforce longer and putting off retirement. The reality, experts say, is that many Americans are woefully underfunded for retirement and have been since well before the recent slide in stock prices. According to research published by the Employee Benefit Research Institute in June, many Americans — especially low-income workers — will have to work past 65 to ensure enough retirement income. As of last year, when the stock market was still robust, only 47 percent of workers between the ages of 57 and 63 were projected to not have enough saved to live comfortably in retirement. Indeed, data from Fidelity Investments show that the average amount in its customers’ 401(k) plans is $72,700 — that’s only going to yield a few thousand dollars a year in retirement. “Whether the stock market has crashed or not, you really have no choice but to carry on working,”

21 Signs That The New Reality For Many Baby Boomers Will Be To Work As Wage Slaves Until They Drop Dead - All over America tonight, millions of elderly Americans are wondering if their money is going to run out before it is time for them to die.  Those that are now past retirement age are not going to be rioting in the streets, but that doesn't mean that large numbers of them are not deeply suffering.  There are millions of elderly Americans that are leading lives of "quiet desperation" as they try to get by on meager fixed incomes.  Many are surviving on Ramen noodles, oatmeal, peanut butter or whatever other cheap food they can find in the stores.  There are some that are so short on cash that they will not turn on the heat in their homes until things get really desperate.  As health care costs soar, millions of elderly Americans find themselves deep in debt and facing huge medical bills that they cannot possibly pay.  A lot of older Americans would go back to work if they could, but jobs are scarce and very few companies seem to even want to consider hiring them.  Right now caring for all of the Americans that have already retired is turning out to be an overwhelming challenge, and things are about to get a whole lot worse.  A massive tsunami of retirees is coming, and America is not ready for it. The following are 21 signs that the new reality for many Baby Boomers will be to work as wage slaves until they drop dead....

Social Security disability on verge of insolvency - Laid-off workers and aging baby boomers are flooding Social Security's disability program with benefit claims, pushing the financially strapped system toward the brink of insolvency. Applications are up nearly 50 percent over a decade ago as people with disabilities lose their jobs and can't find new ones in an economy that has shed nearly 7 million jobs. The stampede for benefits is adding to a growing backlog of applicants — many wait two years or more before their cases are resolved — and worsening the financial problems of a program that's been running in the red for years. New congressional estimates say the trust fund that supports Social Security disability will run out of money by 2017, leaving the program unable to pay full benefits, unless Congress acts. About two decades later, Social Security's much larger retirement fund is projected to run dry as well

Social Security’s disability fund will go broke in 5 years - New congressional estimates show that the account that Social Security disability checks are drawn from will be insolvent by 2017 without intervention, the Associated Press reported. Applications for assistance from the already financially strained program are up 50 percent over the last decade, and cash is dwindling as demand far exceeds supply. When disabled people are laid off and can't find a new job — an increasingly common scenario — they lean even more heavily on the fund. Social Security's larger retirement fund is set to run out about 20 years after the disability money runs out, according to the same congressional estimates. The combined funds will run out in 2038, according to the Congressional Budget Office. In 1994, the disability fund was poised to run dry, and money was transfered from the retirement fund — a course of action that is again recommended. Approximately 56 million people will receive Social Security benefits this year, and last year benefits totaled out to about $124 billion.

The Post Goes Into Overdrive In Its Social Security Scare Campaign - Showing once again why it is known as "Fox on 15th Street," the Washington Post headlined an article "Social Security crisis is worsening." The subhead told readers, "rise in disability applications driving it to the verge of insolvency." Those who read the article carefully will discover that the "it" being driven to insolvency is the Social Security disability program, which is a bit more than one-tenth of the combined retirement, survivors and disability program that people usually think of as "Social Security." The latest projections from the Congressional Budget Office show that the combined program will be fully solvent until 2038. Even after this date, the program will still be able to pay 81 percent of scheduled benefits. Alternatively, if taxes were raised enough to make the program fully solvent, the necessary tax increase is equal to about 5 percent of projected wage growth over the next three decades. The Post doesn't like to make these points because it doesn't advance its agenda for cutting Social Security.

Bernie Sanders Introduces Bill To Lift The Payroll Tax Cap, Ensuring Full Social Security Funding For Nearly 75 Years - Today, Sanders announced that he will introduce legislation that would strengthen Social Security without cutting benefits to any of its beneficiaries. Sanders’ legislation would eliminate the income cap that currently exists in the payroll tax that does not tax income above $106,800:  To keep Social Security strong for another 75 years, Sanders’ legislation would apply the same payroll tax already paid by more than nine out of 10 Americans to those with incomes over $250,000 a year. [...] Under Sanders’ legislation, Social Security benefits would be untouched. The system would be fully funded by making the wealthiest Americans pay the same payroll tax already assessed on those with incomes up to $106,800 a year.  Sanders points out that President Obama himself endorsed this idea on the campaign trail in 2008. “What we need to do is to raise the cap on the payroll tax so that wealthy individuals are paying a little bit more into the system. Right now, somebody like Warren Buffet pays a fraction of 1 percent of his income in payroll tax, whereas the majority…pays payroll tax on 100 percent of their income.

Why Is President Obama So Anxious to Cut Social Security? - Dean Baker: On his tour of the Midwest last week, President Obama again indicated his interest in cutting Social Security. He repeated a proposal that his administration first put forward in the debt ceiling negotiations: he wants to cut the annual cost of living adjustment by 0.3 percentage points. This cut may sound small, but it adds up over time. A person in their 70s who had been getting benefits for ten years would see a reduction of 3 percent. By the time they were in their 80s, the cut would be 6 percent. And if they lived into their 90s, their benefit would be more than 9 percent lower as a result of President Obama's proposal. For an average retiree who can expect to get benefits for 20 years, President Obama's plan would cut their lifetime Social Security benefits by roughly 3 percent. By comparison, his much feared tax increases on the rich would reduce the after-tax income of someone earning $300,000 a year by just 0.5 percent. In this case, a beneficiary who will be mostly dependent on their Social Security income in retirement will take about six times as large a hit relative to their income under President Obama's plan to cut Social Security than a couple earning $300,000 would from his plan to raise their taxes.

Updated: Approximating Social Security's Rate of Return - What kind of return can you expect to get from your "investment" in Social Security?  We thought it was long past time to update our previous look at that question to take advantage of the updated actuarial projections that were just issued in July 2010.  We then created a mathematical model for the data that represents the "present law" assumptions for the program's payout, which should put most of the calculated internal rates of return in our tool below within 0.2% of the projected return provided by Social Security's actuaries. That is, assuming they don't hike your taxes or slash your benefits at some point in the future!

Florida’s welfare drug testing costs more than it saves : Republican Florida Gov. Rick Scott’s plan to test welfare recipients for drugs is costing the state money, despite his claims that the program would actually save tax dollars. A WFTV investigation found that out of the 40 recipients tested by Department of Central Florida’s (DCF) region, only two resulted in positive results. And one of those tests is being appealed. Under the rules of the program, the state must reimburse recipients who receive negative test results. The state paid about $1,140 for the 38 negative tests, while saving less than $240 a month by denying benefits over the two positive tests. “We have a diminishing amount of returns for our tax dollars,” the ACLU’s Derek Brett told WFTV. “Do we want our governor throwing our precious tax dollars into a program that has already been proven not to work?”

Nursing homes hit twice - South Dakota nursing homes will lose $10.2 million in annual Medicare money starting this fall as a second blow on top of this summer's cuts in Medicaid. The loss, effective Oct. 1, represents 11 percent of the Medicare budget for the state's 107 nursing homes. Federal officials say the cuts will correct earlier overpayments, but agency leaders said the change will force them to cut services and raise rates on private-pay residents. The Medicare losses follow Medicaid cuts up to 4 percent the state imposed July 1 with its new budget. "Long-term care providers are taking a double hit," "Certainly I'm very concerned what this could mean for the quality of care for our elderly and disabled. Tighten your belt, try to avoid staff cuts, but that's getting pretty difficult in this environment." Medicaid, a federal and state program, pays the day-to-day living expenses for more than half of South Dakota's nursing home residents. The Legislature, dealing with a loss of revenue because of the recession, cut Medicaid payments this year to hospitals, nursing homes and other agencies in order to balance the state budget.

Why Hospitals Are Angry Enough About New Medicaid Legislation To Sue - Michael McCord of the New Hampshire Business Review provides a good synopsis of why ten hospital administrators are so upset about the latest state budget that they’ve filed a lawsuit. Each October, New Hampshire and the state’s hospitals engage in an accounting sleight of hand set up in 1991. Hospitals wire the state millions of dollars to pay the “Medicaid Enhancement Tax,” and the state then wires the amount back, often within minutes. The goal of the tax was to create the illusion of raising money so the state could apply for and receive more federal matching funds to cover uncompensated care costs for Medicaid services and indigent patients. Not all the federal funds go back to hospitals and doctors – New Hampshire has the second-lowest Medicaid reimbursement rate in the country – and money is diverted to the general fund. The ploy has been known over the years as “Mediscam.” “We used to joke and say ‘What would happen if the state didn’t wire this money back?’” A majority of the state’s 26 hospitals are about to find out the answer.” That’s most of the Medicaid issue in a nutshell. McCord goes on to explore other hospital complaints about forced layoffs and other budget problems that arose in the wake of this year’s legislative decisions.

Cut Medicare, Help Patients - MEDICARE is going to be cut. That is inevitable. There is no way to solve the nation’s long-term debt problem without reducing the growth rate of federal health care spending. The only question is whether the cuts will be smart ones. Smart cuts eliminate spending on medical tests, treatments and procedures that don’t work — or that cost significantly more than other treatments while delivering no better health outcomes. And they can be made without shortchanging patients. There are plenty of examples; here are three. Late last year, the Food and Drug Administration determined that the drug Avastin, which has serious side effects, is not effective for treating breast cancer. Astonishingly, Medicare declared it will still pay for Avastin1 — at a cost of about $88,000 per year for each patient. Consider colonoscopies. The United States Preventive Services Task Force recommends not doing colonoscopies for most people over 75 because there is no evidence that they save lives in this population. Moreover, the risk of perforating the intestines rises with age. Yet Medicare pays for the procedure regardless of the patient’s age.

The Strange Power of Really Bad Ideas, Medicare Edition - Krugman - Why do bad ideas flourish in policy discourse, even though a few minutes of thought and research would show just how bad they are? Why do they often become not just widely accepted but absolute orthodoxy, the things you have to believe in order to be a Very Serious Person? I don’t have a full answer; self-interest is part of it, but not, I think, the whole story, since some bad ideas — like expansionary austerity — hurt even most of the elite. Whatever the reasons, however, in recent years some of us have watched in horror as obviously bad ideas somehow sweep elite opinion. Top of the list right now is the idea of raising the Medicare eligibility age. It’s a terrible idea on multiple grounds. First, the underlying notion — Americans are living longer, so retirement programs should start later — is true only of the upper half of the income distribution. Life expectancy for the other half has not risen much:

The Thomases vs. Obama’s Health-Care Plan - It has been, in certain respects, a difficult year for Clarence Thomas. In January, he was compelled to amend several years of the financial-disclosure forms that Supreme Court Justices must file each year. The document requires the Justices to disclose the source of all income earned by their spouses, and Thomas had failed to note that his wife, Virginia, who is known as Ginni, worked as a representative for a Michigan college and at the Heritage Foundation. The following month, seventy-four members of Congress called on Thomas to recuse himself from any legal challenges to President Obama’s health-care reform, because his wife has been an outspoken opponent of the law. At around the same time, Court observers noted the fifth anniversary of the last time that Thomas had asked a question during an oral argument. The confluence of these events produced the kind of public criticism, and even mockery, that Thomas had largely managed to avoid since his tumultuous arrival on the Court, twenty years ago this fall.

Retreat Back to Regulatory Capture: US FDA, NIH, Department of Health and Human Services All Back Off - After some brave words about transparency, integrity and all that, US government officials seem to be running back to the arms of the health care corporate CEOs. As reported by Reuters, U.S. lawmakers likely will change the criteria for advisers reviewing new medicines next year because of complaints that the rules meant to prevent conflicts of interest make it harder to find real experts. Congressional lawmakers may require the Food and Drug Administration to relax the rules that bar advisers from reviewing a drug if they have even indirect financial ties to related manufacturers, as part of an FDA funding bill.

U.S. Scrambling to Ease Shortage of Vital Medicine - Federal officials and lawmakers, along with the drug industry and doctors’ groups, are rushing to find remedies for critical shortages of drugs to treat a number of life-threatening illnesses, including bacterial infection and several forms of cancer1. The proposed solutions, which include a national stockpile of cancer medicines and a nonprofit company that will import drugs and eventually make them, are still in the early or planning stages. But the sense of alarm is widespread. “These shortages are just killing us,” said Dr. Michael Link, president of the American Society of Clinical Oncology2, the nation’s largest alliance of cancer doctors. “These drugs save lives, and it’s unconscionable that medicines that cost a couple of bucks a vial are unavailable.” So far this year, at least 180 drugs that are crucial for treating childhood leukemia, breast and colon cancer3, infections and other diseases have been declared in short supply — a record number. Prices for some have risen as much as twentyfold, and clinical trials for some experimental cures have been delayed because the studies must also offer older medicines that cannot be reliably provided.

Smoke Signals - Chicago has one of the highest asthma rates in the country, and health advocates say Fisk and its sister plant, the 86-year-old Crawford station a few miles away, only make things worse by belching up soot. “We can’t say that having two power plants in the middle of the city causes high asthma rates,” “But, either way, you have all these people sensitive to air pollution living in a three-mile radius.” One 2001 study from the Harvard School of Public Health suggested that fine particle pollution from Fisk and Crawford alone caused 41 premature deaths, 2,800 asthma attacks, and 550 emergency room visits in Chicago each year. And that’s to say nothing of the toxic mercury from the plants that finds its way into rivers and lakes or the carbon-dioxide wafting out of their smokestacks and heating the planet. These two antiquated plants have been able to persist for so long—and avoid installing modern pollution controls—thanks largely to a loophole in environmental law. When the Clean Air Act was written in 1970, the bill’s author, Edmund Muskie, had exempted existing power plants from the new pollution limits—he figured the older plants would get retired soon anyway. But utilities quickly realized that it was profitable to keep these dirty, unregulated plants chugging along. In 1977, Congress tried to close the loophole by requiring older facilities to clean up as soon as they underwent major modifications, but that just led to scorched-earth haggling over what counted as “major.” Today, one-third of the coal plants operating in the United States came online before the 1970 law was passed.

New EPA rule could lead to rolling blackouts in Texas - The head of the Texas Public Utility Commission expressed concern Friday that a new federal air quality rule, set to take effect Jan. 1, will cause disruptions in electric service. If implementation of the Cross-State Air Pollution Rule is not delayed, "I have no doubt in my mind that this rule will result in reliability issues and rolling outages in Texas," Donna Nelson said at the start of the commission's meeting. The rule, issued in early July by the Environmental Protection Agency, would require substantial reductions in emissions of nitrogen oxides and sulfur dioxide at power plants in 27 states. The EPA says the rule will save and prolong lives by reducing harmful smog and soot pollution. Gina McCarthy, an EPA assistant administrator, said in a previous statement that power plants in the state "will be able to cut their pollution without jeopardizing reliable electricity service for Texans."

Cost of Texas electric grid expansion soars - The cost of building thousands of miles of transmission lines to carry wind power across Texas is now estimated at $6.79 billion, a 38 percent increase from the initial projection three years ago.  The new number, which amounts to roughly $270 for every Texan, comes from the latest update on the project prepared for the Public Utility Commission. Ratepayers will ultimately be on the hook for the cost, but no one has begun to see the charges appear on their electric bills yet because the transmission companies building the lines must first get approval from the commission before passing on the costs to customers.   Ultimately, the commission says, the charges could amount to $4 to $5 per month on Texas electric bills, for years.  In 2008, when the Public Utility Commission approved the project, it was estimated at $4.93 billion. Gov. Rick Perry, who appoints the three Public Utility Commissioners, has strongly backed the build-out, which will result in several thousand miles of new transmission lines carrying wind power from West Texas to large cities hundreds of miles across the state. This is expected to spark a further boom in wind farm development, particularly in the Panhandle.

Food Prices and Riots - For a long while now I've been wanting a student to do some work on the link between food prices, riots and other kinds of conflict.  So, one of my students, Jon Eyer, just sent me this link.  I don't know exactly what these folks are doing or where they got their data.  But the graph, reproduced below, sure is compelling.  We have had a few papers linking weather to conflict.  It seems to me the obvious mechanism in those papers was food prices. So why haven't more people looked at food prices themselves? And since climate change may cause food prices to rise, Eric Hammel over at Thomas Ricks' FP blog is connecting the dots to argue that climate change is the biggest national security challenge we face. That might be overstating the case.  But this does seem like a very real threat.

Ash hole update - Two species of small, stingless Asian wasps that prey on emerald ash borers were released for the first time in national forests. An unknown number of wasps, Oobius agrili (pictured) and Tetrastichus planipennisi, were let loose in late July along the eastern edge of the Huron-Manistee National Forests.The hope is that these insects will help slow, or stop, the spread of the voracious, tree-killing ash borers. Researchers have been examining the potential of these "parasitoid" wasps for years now, primarily trying to determine if brining a new Asian insect to this country will do more good for ash trees than harm to native insect species.

Monsanto and the Mortal Danger to Traditional Agriculture Via: Axis of Logic: The greatest threat to the future of food production in the world is the introduction of genetically engineered foods from the bio-tech industry. Contrary to their mendacious propagandized promises of solving the problem of world hunger through the so-called second green revolution, the bio-tech companies are instead in the process of destroying the world’s ecosystems, and thus the natural food chains and life cycles. Their goal is certainly not to solve any problem at all, but instead to fill the corporate coffers with the profits from selling their dangerous products to countries with already high mortality rates from malnutrition and starvation.

Graph of the Day: Drought across the United States, July 2011 - More of the United States was in exceptional drought in July 2011 than in any other month in the past 12 years, according to the National Climatic Data Center. The worst of the drought is spread across Texas, Oklahoma, New Mexico, and parts of Arizona, Colorado, Nebraska, and Louisiana. But 26 percent of the lower 48 states experienced severe to extreme drought in July.  On the other hand, about 33 percent of the contiguous United States experienced exceptionally rainy weather in July. The wet weather occurred largely in the Northern Plains and Western states.  These weather patterns—the mix of unusually dry and unusually wet—are reflected in plant growth throughout the month. The image shows plant growth in July compared to average conditions. Places where plants were growing more than average are green, while unusually poor growth is shown in brown. The image was made with data from the Advanced Very High Resolution Radiometer on the NOAA-18 POES satellite.

Climatologist: Texas drought may worsen - Texas climatologist John Nielsen-Gammon says it's likely at least parts of the state will have severe drought again next summer, and maybe beyond that. Nielsen-Gammon said water supply problems could be even worse than they are now, the Houston Chronicle reported Monday. The Texas A&M University climatologist correctly predicted the onset of a significant drought last October because of an atmospheric phenomenon known as La Nina that produced unusually cold ocean temperatures. During a La Nina winter, Texas generally experiences mild temperatures and drier-than-normal weather. Nielsen-Gammon said chance favors at least parts of Texas continuing to experience a drought that will stretch on for two or more years. The Texas Commission on Environmental Quality said 796 communities across the state are now limiting water use, including 506 which have issued mandatory restrictions. As of August, the state's reservoirs were at 68 percent capacity.

State electric grid strains amid record heat; Austin breaks 86-year-old record - It was so hot Wednesday that power plants across the state stuttered amid high demand, prompting the manager of the electric grid for much of the state to order about 100 large industrial customers to shut down for more than two hours as electricity reserves dipped dangerously low. In Austin, temperatures Wednesday reached 106 at Camp Mabry — the 70th day of triple-digit heat, breaking an 86-year-old record. The Electric Reliability Council of Texas declared a Level 2 power emergency at 3:10 p.m. after overstressed plants produced 5,000 fewer megawatts of power than expected. It was the second time this month that ERCOT had declared such an emergency. On Aug. 4, ERCOT cut off all the interruptible customers and deployed about 400 megawatts of power in emergency reserves, spokeswoman Dottie Roark said. ERCOT, which manages the electric grid for three-fourths of the state, has been warning customers all week to conserve power. As power plants have been running at full capacity through this record hot summer, breakdowns have been common, Roark said. In addition, wind generation Wednesday was 880 megawatts, compared with 1,450 megawatts Tuesday and 1,840 megawatts Monday. "Until we get a break in the temperature and the drought, we're just going to have more days like this,"

Taste of things to come: Texas drought to shut down power plants - Hey, you know what's wild about Texas turning into a gigantic desert thanks to climate change? I mean besides the fact that this makes it basically Kuwait-on-the-Rio-Grande? Many of the state's power plants, which rely on fresh water to produce electricity, could be shut down by the lack of water.  The current drought provides us a window on what's to come: A number of Texas power plants may need to cut back operations or shut down completely if the state’s severe drought continues into the fall, an official with Texas’ main transmission manager told FuelFix. If the state’s drought continues for much longer and water levels continue falling at other power plant reservoirs, other units could be forced to curtail operations or shut-down completely, [  So, that's kind of a bummer -- especially when you consider that the record temperatures that have accompanied this drought have already led to record demand and "power emergencies." That means more wear on plants and … well, you can see where this is going. If climate change picks up, it could be a drag on the economy, not to mention hamstringing Perry's "Texas miracle."

Agriculture drains global water resources - The depletion of water resources including ground water and wetlands for agriculture will leave many food producing areas, such as northern China, and India’s Punjab increasingly vulnerable to drought and crop failures in future, warns a report out today. The recent droughts in Kenya and Somalia have played a key role in the crop failures that have left thousands starving. Currently 1.6 billion people live in areas of water scarcity and this could quickly grow to 2 billion if business continues as usual, warns the joint report from the International Water Management Institute, based in Colombo, Sri Lanka, and the United Nations Environment Programme. (See here and here for Nature’s coverage of the global water crisis.) “Many of world’s bread baskets have already reached their water limits,”

Arctic sea routes open as ice melts - Two major Arctic shipping routes have opened as summer sea ice melts, European satellites have found. Data recorded by the European Space Agency's (Esa) Envisat shows both Canada's Northwest Passage and Russia's Northern Sea Route open simultaneously. This summer's melt could break the 2007 record for the smallest area of sea ice since the satellite era began in 1979. Shipping companies are already eyeing the benefits these routes may bring if they remain open regularly. The two lanes have been used by a number of small craft several times in recent years. But the Northern Sea Route has been free enough of ice this month for a succession of tankers carrying natural gas condensate from the northern port of Murmansk to sail along the Siberian coast en route for Thailand.

Thawing Arctic Permafrost Likely to Release Large Amounts of Carbon  - New research which contradicts 2007’s Intergovernmental Panel on Climate Change’s assessment suggests that billions of tons of carbon dioxide trapped in high-latitude permafrost may be released into the atmosphere by the end of this century if the temperatures continue to rise apace, which in turn will only further and quicken global warming.  A sink becomes a source, as revealed by these two simulations of net CO2 fluxes due to climate change at the end of 21st century. The control simulation on the left did not include permafrost processes. The permafrost simulation on the right included processes that depict how carbon accumulates in soil and how it decomposes. In the latter simulation, large carbon losses are seen in central Canada where substantial permafrost stocks exist that are vulnerable to warming. Units are in grams of carbon per square meter per year.

Planet Stupid - I have received more than one climate change denier comment in the last 24 hours. I want you people who seek to "enlighten" the rest of us about the "natural "causes for global warming to know that I will always delete your comments, in so far as they have nothing to do with Reality. Furthermore, I am not at all surprised that so many Humans are willing & able to deceive themselves about what is happening on this planet, which I have lately (to myself) labeled Planet Stupid. And here's the kicker:  if more Humans took my view seriously — that members of so-called Homo sapiens ("wise man") are fuck-ups, and shouldn't cling to such an unwarranted, inflated view of themselves, the better off Humanity might be in the long run. And now of course Humans are for the first time in the history of the species fuck-ups on a global scale. There's no where to run, and there's no where to hide.

Pollution Causes 40 Percent Of Deaths Worldwide, Study Finds — About 40 percent of deaths worldwide are caused by water, air and soil pollution, concludes a Cornell researcher. Such environmental degradation, coupled with the growth in world population, are major causes behind the rapid increase in human diseases, which the World Health Organization has recently reported. Both factors contribute to the malnourishment and disease susceptibility of 3.7 billion people, he says.  The report is published in the online version of the journal Human Ecology and will be published in the December print issue. "We have serious environmental resource problems of water, land and energy, and these are now coming to bear on food production, malnutrition and the incidence of diseases," said Pimentel. Of the world population of about 6.5 billion, 57 percent is malnourished, compared with 20 percent of a world population of 2.5 billion in 1950, said Pimentel. Malnutrition is not only the direct cause of 6 million children's deaths each year but also makes millions of people much more susceptible to such killers as acute respiratory infections, malaria and a host of other life-threatening diseases, according to the research.

Canada moves to phase out coal - Canada released long-awaited regulations Friday that analysts said could phase out most of the country’s coal by midcentury. The new rules apply a stringent performance standard on new plants, requiring them to emit roughly the same greenhouse gases as natural gas generators. That means that new coal plants won’t be able to be built in Canada without carbon capture technology, since coal typically releases twice as much carbon dioxide as natural gas does in the burning process. Considering that carbon capture has never been proven at commercial scale to control coal’s emissions, the fate of the fuel in Canada is uncertain.  Environment Minister Peter Kent said the regulations would help Canada meet its goal of slashing emissions 17 percent below 2005 levels by 2020. Coal currently fires about 17 percent of Canada’s electricity and releases about 13 percent of the country’s greenhouse gases.

Cracking down on coal-fired plants - Coal-fired plants in Canada will have to meet new emissions requirements by July 2015. The federal government’s proposed rules include a performance standard for both new coal-fired plants and older plants looking to extend their operating lives. Plants already online before 2015 would be able to operate without restriction for their lifetime. The rules, combined with other measures, will cut greenhouse gas emissions from electricity generation by 31 megatonnes by 2020, according to the government. Federal Environment Minister Peter Kent defending focusing on new plants by noting that “fully two-thirds of Canada’s coal-fired units are very close to their end of operating life.” “What we’ve done is to avoid stranding capital on plants that still have years left in their operating lives,”

REPORT: Will Natural Gas Fuel America in the 21st Century? - Even assuming the EIA forecast for growth in shale gas production can be achieved, there is little scope for wholesale replacement of coal for electricity generation or oil for transportation in its outlook. Replacing coal would require a 64% increase of lower-48 gas production over and above 2009 levels, heavy vehicles a further 24% and light vehicles yet another 76%. This would also require a massive build out of new infrastructure, including pipelines, gas storage and refueling facilities, and so forth. This is a logistical, geological, environmental, and financial pipe dream. Although a shift to natural gas is not a silver bullet, there are many other avenues that can yield lower GHG emissions and fuel requirements and thus improve energy security. More than half of the coal-fired electricity generation fleet is more than 42 years old. Many of these plants are inefficient and have few if any pollution controls. As much as 21% of coal-fired capacity will be retired under new U.S. Environmental Protection Agency (EPA) regulations set to take effect in 2015. Best-in-class technologies for both natural-gas- and coal-fired generation can reduce CO2 emissions by 17% and 24%, respectively, and reduce other pollutants. Capturing waste heat from these plants for district and process heating can provide further increases in overall efficiency. The important role of natural gas for uses other than electricity generation in the industrial, commercial, and residential sectors, which constitute 70% of current natural gas consumption and for which there is no substitute at this time, must also be kept in mind. Natural gas vehicles are likely to increase in a niche role for high-mileage, short-haul applications.

USGS boosts natural gas reserve estimate - The U.S. Geological Survey said Tuesday that the Marcellus Shale region contains some 84 trillion cubic feet of undiscovered, recoverable natural gas, far more than thought nearly a decade ago. Tuesday’s figure is much higher than the last government assessment in 2002, which suggested about 2 trillion cubic feet of recoverable gas. The USGS said the estimate came from new information about the gas-rich formation underlying New York, Pennsylvania, Ohio and West Virginia, and from technical improvements in how wells are drilled. Environmental groups have expressed concerns that the process of extracting the gas from deep underground could contaminate the water supply. But gas industry groups welcomed the independent government estimate.

U.S. to Slash Marcellus Shale Gas Estimate 80% - The U.S. will slash its estimate of undiscovered Marcellus Shale natural gas by as much as 80 percent after a updated assessment by government geologists.  The formation, which stretches from New York to Tennessee, contains about 84 trillion cubic feet of gas, the U.S. Geological Survey said today in its first update in nine years. That supersedes an Energy Department projection of 410 trillion cubic feet, said Philip Budzik, an operations research analyst with the Energy Information Administration.  “We consider the USGS to be the experts in this matter,” Budzik said in an interview. “They’re geologists, we’re not. We’re going to be taking this number and using it in our model.”  The revised estimates, posted on the agency’s website, are likely to spur a debate over industry projections of the potential value of shale gas.

Geologists Sharply Cut Estimate of Shale Gas - Federal geologists published new estimates this week for the amount of natural gas that exists in a giant rock formation known as the Marcellus Shale, which stretches from New York to Virginia. The shale formation has about 84 trillion cubic feet of undiscovered, technically recoverable natural gas, according to the report from the United States Geological Survey. This is drastically lower than the 410 trillion cubic feet that was published earlier this year by the federal Energy Information Administration. As a result, the Energy Information Administration, which is responsible for quantifying oil and gas supplies, has said it will slash its official estimate for the Marcellus Shale by nearly 80 percent, a move that is likely to generate new questions about how the agency calculates its estimates and why it was so far off in its projections. The decision by the agency to lower the estimates comes amid growing scrutiny from Congress about how the administration calculates its numbers and why it depends on outside and industry-tied consultants to produce some of its reports.

After USGS Analysis, EIA Cuts Estimates of Marcellus Shale Gas Reserves by 80% - The U.S. Geological Survey released its estimates for natural gas reserves in the Marcellus Shale formation this week, concluding that earlier estimates were significantly inflated. According to the USGS, there are about 84 trillion cubic feet of technically-recoverable natural gas under the Marcellus Shale, a massive sedimentary rock formation below eight East Coast states. Previous estimates from the Energy Information Administration put the figures at 410 trillion cubic feet. In calling the USGS “the experts,” the EIA says the new figures are the most accurate. The agency has now cut its earlier estimates by 80%. You might think the industry would be lamenting these downgraded figures. Actually, they’re celebrating them. In 2002, before new drilling methods were in place to more cost-effectively access shale gas, USGS estimates of recoverable gas were far lower than the current figures:

Did Fracking Cause the Virginia Earthquake? - The epicenter of Tuesday's quake was in Mineral, Virginia, which is located on three very quiet fault lines. The occurrence of yet another freak earthquake in an unusual location is leading many anti-fracking activists to wonder whether "fracking" in nearby West Virginia may be responsible.  Fracking, or hydraulic fracturing, is the process of initiating and subsequently propagating a fracture in a rock layer, employing the pressure of a fluid as the source of energy.  According to geologists, it isn't the fracking itself that is linked to earthquakes, but the re-injection of waste salt water (as much as 3 million gallons per well) deep into rock beds.  Braxton County West Virginia (160 miles from Mineral) has experienced a rash of freak earthquakes (eight in 2010) since fracking operations started there several years ago. According to geologists fracking also caused an outbreak of thousands of minor earthquakes in Arkansas (as many as two dozen in a single day). It's also linked to freak earthquakes in Texas, western New York, Oklahoma and Blackpool, England (which had never recorded an earthquake before).

Fracking could have caused East Coast earthquake —Experts are looking for a reason behind Tuesday afternoon’s unlikely 5.8 magnitude earthquake that shook people up and down the East Coast, and some are saying that a recent rise in fracking could be the culprit.  Hydraulic fracturing, or “fracking,” is the man-made splintering of underground rocks to expedite the exploiting of natural resources. It’s become a widespread phenomenon since its introduction in 2004, and though the practice can help increase supplies of oil and gas without reaching out internationally for imports, the result it can have on the geological make-up of the Earth can be ravaging. Now some experts say the rise in fracking could be to blame for yesterday’s quake. When sites are subjected to fracking, waste salt water is injected back into the earth once fractures are created; in some cases, as many as 3 million gallons of the waste can be put into the earth in each well. Explicitly, the United States Geological Survey has published a finding confirming that processes like fracking can be to blame for “natural” disasters. "Earthquakes induced by human activity have been documented in a few locations in the United States, Japan and Canada,” writes the USGS. “The cause was injection of fluids into deep wells for waste disposal and secondary recovery of oil and the use of reservoirs for water supplies."

Washington Monument top cracked by earthquake --Park service: Monument will be closed indefinitely to keep public safe - The National Park Service says engineers have found a crack near the top of the Washington Monument presumably caused by a 5.8 magnitude earthquake that shook the East Coast. Park service spokesman Bill Line said Tuesday night that structural engineers found the crack where the 555-foot landmark narrows considerably. He says the lower portions checked out fine earlier but later they found the crack.  An outside engineering service will study the crack on Wednesday. He says it's too early to say what would be involved in fixing it. The 91,000-ton monument is made of Maryland marble.

Quake shuts nuclear power plant in Virginia - Two nuclear reactors at the North Anna power plant outside Richmond, Va. have shut down as a result of the earthquake Tuesday, the Nuclear Regulatory Commission said. Twelve other nuclear power plants in New Jersey, Virginia, Pennsylvania and Maryland have also declared unusual events but have not shut down, the NRC said. The shutdown at the North Anna facility was automatic, an NRC spokeswoman said, triggered by a 5.9 magnitude earthquake. The plant is located just seven miles northeast of the quake's epicenter in Mineral, Va. It is 40 miles from Richmond, Va. and 70 miles from Washington, D.C. Two other plants are located within 100 miles of the epicenter -- Calvert Cliffs near Lusby, Md., and Surry near Williamsburg, Va. Those plants have not reported any problems. The reactors at North Anna are now relying on power from four back-up diesel generators to run basic plant functions, the NRC spokeswoman said. Those functions include running pumps that keep spent nuclear fuel stored at the plant cool.

Federal officials: 2 nuclear reactors taken offline near quake site in Va.; No damage reported - Federal officials say two nuclear reactors at the North Anna Power Station in Louisa County, Va., were automatically taken off line by safety systems around the time of the earthquake. The Dominion-operated power plant is being run off three emergency diesel generators, which are supplying power for critical safety equipment. The NRC and Dominion are sending people to inspect the plant. A fourth diesel generator failed, but it wasn’t considered an emergency because the other generators are working, according to the Nuclear Regulatory Commission. Dominion said it declared an alert at the North Anna facility and the reactors have been shut down safely and no major damage has been reported. The earthquake was felt at the company’s other Virginia nuclear power station, Surry Power Station in southeast Virginia, but not as strongly there. Both units at that power station continue to operate safely, Dominion said. The quake also caused Dominion’s newest power station, Bear Garden in Buckingham County, to shut down automatically.

NRC MONITORING ALERT AT NORTH ANNA FOLLOWING VIRGINIA EARTHQUAKE  - The U.S. Nuclear Regulatory Commission headquarters in Rockville, Md., is monitoring an Alert at the North Anna nuclear power plant in Virginia, following today’s earthquake in central Virginia. The NRC is also monitoring Unusual Events, the lowest emergency classification, declared at several other Eastern U.S. nuclear power plants. In accordance with agency procedures, the NRC’s regional offices in King of Prussia, Pa., and Atlanta have activated their incident response centers. NRC resident inspectors at the affected nuclear power plants will continue to monitor conditions for the duration of the event. North Anna declared its Alert, the second-lowest of the NRC’s four emergency classifications, when the plant lost electricity from the grid following the quake just before 2 p.m. Tuesday. Power is being provided by onsite diesel generators and the plant’s safety systems are operating normally. Plant personnel and NRC resident inspectors are continuing to examine plant conditions. NRC staff in the Maryland headquarters felt the quake and immediately began checking with U.S. nuclear power plants. The NRC is in direct communications with North Anna and is coordinating its response with other federal agencies.

Quake sensors removed around Virginia nuke plant due to budget cuts -  A nuclear power plant that was shut down after an earthquake struck central Virginia Tuesday had seismographs removed in 1990s due to budget cuts. U.S. nuclear officials said that the North Anna Power Station, which has two nuclear reactors, had lost offsite power and was using diesel generators to maintain cooling operations after an 5.9 earthquake hit the region. The North Anna plant, which was near the epicenter of Tuesday's quake, is reportedly located on a fault line. The U.S. Nuclear Regulatory Commission rates the plant as the seventh most likely to receive core damage from a quake. But they say the chances of that are only 1 in 22,727. According to the Virginia Department of Mines, Minerals and Energy (DMME), the Virginia Tech Seismological Observatory (VTSO) removed all seismographs from around the plant in the 1990s due to budget cuts. In February, Dominion Virginia Power confirmed its commitment to add a third reactor to the plant.

Exelon Declares 'Unusual Events' At 4 Nuclear Plants After Quake - Exelon Corp. (EXC) said Tuesday that four of its nuclear-power plants have declared "unusual events" following an earthquake in northern Virginia. Exelon'sLimerick plant near Philadelphia, Oyster Creek plant near Toms River, N.J., Peach Bottom plant near Lancaster, Pa., and Three Mile Island Unit 1 plant near Harrisburg, Pa., declared unusual events in the wake of a 5.9-magnitude earthquake centered northwest of Richmond, Va., the company said.  The company did not report any damage or other effects at the plants. Plant operators are inspecting facilities and equipment to check for any damage or impacts, said Exelon spokeswoman April Schilpp. She added that power-plant crews will continue to watch power-plant equipment in the event of any additional earthquake activity. Schilpp noted that "unusual events" are the lowest of four emergency classifications used by nuclear-power-plant operators.

CantorQuake: Trembling at the Heart of GOP Claims We Don’t Need Government - Back in March, after the Japanese earthquake, Eric Cantor defended Republican plans to cut funding from the USGS and warning systems to help in case of a disaster.This is the epicenter of the freak 5.9 Richter earthquake that just hit Virginia. Here’s the location of the Anna 1 and 2 nuclear power plants, which lost power and are now operating on diesel backup generators. Power has now been restored. And here’s a partial map of Eric Cantor’s district. (h/t lpsrocks) Update: Maps and Anna plant news updated. Update: The NRC apparently ranks this nuclear power plant as the 7th most likely to be hit by an earthquake. Update: Apparently, budget cuts in the 1990s led to the removal of seismic equipment at the North Anna plant.

GOP's Cantor To Disaster Victims (Again): Tough Luck. (video) Virginia has declared a state of emergency in preparation for the arrival of Hurricane Irene, which could cause the worst flooding and damage of the last hundred years, but the upright House Majority Leader Eric Cantor - of Virginia - isn't about to dole out federal funds to any lazy malingerers just because they've lost their house and everything they own, no sirree bob. Just like when that so-called tornado hit Joplin, Mo., he says any disaster relief funds must be paid for with cutting spending somewhere else. Hey, we know: Let's cut that heartless bastard's salary.

Nuclear Safety and the East Coast Earthquake - Sen. Dianne Feinstein - As a native San Franciscan, I know firsthand the destructive power earthquakes can have on lives, property and critical infrastructure. Luckily this week's 5.8 magnitude earthquake, with an epicenter in Virginia, caused minimal damage and thankfully no loss of life. The earthquake did cause two nuclear reactors at the North Anna Nuclear Power Plant in central Virginia to lose power, requiring the deployment of back-up diesel generators.  The incident was a stark reminder of how vulnerable America's nuclear power plants are to natural disasters. Uninterrupted electricity is essential for nuclear safety. Without electricity, nuclear power plants are unable to pump cooling water through reactor cores and spent fuel pools to prevent overheating and fuel melting.  Without power, plant operators cannot control reactor activity or remotely monitor spent fuel. Nuclear has a future in our country's energy mix, but we must ensure that our domestic plants are designed to both endure the threats we can foresee and respond to scenarios we never imagined.

German energy: Shock to the system - The Economist - ELECTRICITY producers in Germany are in disarray. The cause of the chaos is the government: in June it decided to shut all the country’s nuclear power stations by 2022, after Japan’s struggles to contain radiation leaks from its reactors following an earthquake and tsunami in March. A study commissioned by the economics ministry has estimated the cost of that decision, in lost jobs and higher energy and carbon prices, at around €32 billion ($46 billion). The government had planned to extend the life of nuclear plants by an average of 12 years. Other things make matters worse. Germany’s four big electricity generators have too much debt. They are also being forced by the European Commission to spin off their distribution arms to improve competition. The firms are trying to adjust, shrink and extricate themselves from unprofitable foreign ventures and to co-operate more with municipal power-producers. E.ON, Germany’s biggest power company, is threatening to lay off up to 11,000 people. More disturbing, perhaps, is that the disarray extends to the renewables industry, which is supposed to benefit from the nuclear closures and fill the gap.

Laser Advances in Nuclear Fuel Stir Terror Fear - Scientists have long sought easier ways to make the costly material known as enriched uranium — the fuel of nuclear reactors and bombs, now produced only in giant industrial plants. One idea, a half-century old, has been to do it with nothing more substantial than lasers and their rays of concentrated light. This futuristic approach has always proved too expensive and difficult for anything but laboratory experimentation. Until now. In a little-known effort, General Electric has successfully tested laser enrichment for two years and is seeking federal permission to build a $1 billion plant that would make reactor fuel by the ton. That might be good news for the nuclear industry. But critics fear that if the work succeeds and the secret gets out, rogue states and terrorists could make bomb fuel in much smaller plants that are difficult to detect. Iran has already succeeded with laser enrichment in the lab, and nuclear experts worry that G.E.’s accomplishment might inspire Tehran to build a plant easily hidden from the world’s eyes.

Large Zone Around Fukushima “Uninhabitable” - The Fukushima nuclear disaster fell off the front pages this summer, and the media stopped monitoring the day-by-day battle at the stricken plant. If you didn’t think about it, you might be excused for believing that the worst was avoided. But the truth is much more ominous. The Japanese government is preparing to declare a large zone around the plant uninhabitable, probably for decades, due to contamination at unsafe levels. The government is expected to tell many of these residents that they will not be permitted to return to their homes for an indefinite period. It will also begin drawing up plans for compensating them by, among other things, renting their now uninhabitable land. While it is unclear if the government would specify how long these living restrictions would remain in place, news reports indicated it could be decades. That has been the case for areas around the Chernobyl plant in Ukraine after its 1986 accident. I’m very unclear on how land that’s uninhabitable will be rented. Maybe that’s a nice way of saying that the government will buy their properties, or more to the point buy their affections. I doubt there’s a demarcation at 12 miles, and the area is perfectly fine for living at mile 13. At Chernobyl the images of deformities among local residents, outside the exclusion zone, are horrifying. I don’t think you can know exactly how far away you need to be for safety’s sake.

10 trillion becquerels per hour of radiation currently being released from Fukushima plant: Researcher (VIDEO)

Fukushima: Researcher too frightened to get closer than 100 km from meltdowns after seeing radiation levels — “I’ve been quite shocked by the amount” (VIDEO) - Chris Busby [visiting professor at the University of Ulster’s school of biomedical sciences and scientific secretary of the European Committee on Radiation Risk, a think-tank -Bloomberg]

  • I absolutely don’t want to go anywhere near this because having seen what I’ve seen of radiation levels I’m too frightened to go closer to this site than 100 km… And even 100 km I’m not too happy about.
  • I was in [???] and there was a significant of radioactivity on the ground there, which i did not expect… I’ve been quite shocked by the amount…
  • Looks perfectly normal… but actually what you have there is an enormous amount of radioactivity and a lot of particles floating around the place, you just can’t see it…

Radioactive Sludge in Kindergartens in Tokamachi City, Niigata - Tokamachi City in Niigata Prefecture is located 205 kilometers west of Fukushima I Nuclear Power Plant. It's not even under the plume according to Professor Hayakawa's map.  Tokamachi is the green arrow. Fukushima I Nuke Plant is the red tag "D". (Map created at Jukurabe.)  Tokamachi City in Niigata Prefecture announced on August 22 the result of the survey of radioactive materials in the soil in nursery schools and kindergartens in the city. 18,900 becquerels/kg of radioactive cesium was found in the sludge at the bottom of the container that collects rainwater at a public nursery school, and 27,000 becquerels/kg of radioactive cesium was found in the yard compost pile at a private kindergarten.

Fukushima Now Radiating Everyone: ‘Unspeakable’ Reality ‘Will Impact All Of Humanity’ -  Australia’s CBS exposed the “unspeakable” realities of the Japanese catastrophe in its 60 Minutes program Sunday night during which leading nuclear scientist Dr. Michio Kaku said radiation from Fukushima will impact of all of humanity. The nuclear energy power industry violation of the right to health is apparent throughout the new Australian report. “In fact the whole world will be exposed from the radiation from Fukushima,” Dr. Kaku told CBS reporter Liz Hayes.

Japan Triples Airborne Radiation Checks as ‘Hot Spots’ Spread  Via: Bloomberg: Japan will more than triple the number of regions it checks for airborne radiation as more contaminated “hot spots” are discovered far from Tokyo Electric Power Co.’s crippled Fukushima nuclear power station. The government said it will increase radiation monitoring by helicopter to 22 prefectures from the six closest to the plant, which began spewing radiation after an earthquake and tsunami struck the station in March. The plan comes after radioactive waste more than double the regulatory limit was found 200 kilometers (125 miles) from the plant this week. Authorities have refused to give a cumulative figure for radiation released from the Fukushima Dai-ichi nuclear plant after estimating in June that fallout in the six days following the quake was equal to 15 percent of total radiation released in the Chernobyl nuclear disaster in 1986.

Military installs two high-powered radiation detectors in Japan - — The U.S. military can now do in-depth radiation testing and analysis in Japan, though officials say the new capability is only precautionary. Two high-powered detectors recently installed at the Army public health laboratory at Camp Zama can provide advanced radiation analysis and eliminate the need to send samples to the U.S., officials said.  The new gear enhances the military’s ongoing radiation monitoring program in the aftermath of the nuclear meltdown at the Fukushima Dai-Ichi power plant, sparked by the massive earthquake and tsunami on March 11.All four services in Japan have equipment such as handheld meters to gauge radiation on and around people and objects — basic but critical information in a nuclear crisis.

China Claims Fukushima Disaster Has Contaminated a 252,000-Square-Kilometer Area of Pacific Ocean  Via: Asahi: Radioactive substances that leaked from the crippled Fukushima No. 1 nuclear power plant have spread over far broader areas of the sea than Japan has acknowledged, according to the State Oceanic Administration of China. An Aug. 15 article in the electronic version of Science and Technology Daily, a Chinese newspaper, cited an ocean environment survey conducted off Fukushima Prefecture in the western Pacific Ocean as part of the Oceanic Administration’s written reply to an inquiry by the newspaper. The article said that radioactive substances were detected in a 252,000-square-kilometer area within 800 kilometers to the east of Fukushima Prefecture. It said the level of cesium-137 was up to 300 times higher than corresponding concentrations in waters near China. Strontium-90 was detected at levels up to 10 times higher than those found in Chinese waters.

Windfarms prevent detection of secret nuclear weapon tests, says MoD - The Ministry of Defence (MoD) is blocking plans for hundreds of wind turbines because it says their "seismic noise" will prevent the detection of nuclear explosions around the world. The MoD claims that vibrations from new windfarms across a large area of north-west England and south-west Scotland will interfere with the operation of its seismological recording station at Eskdalemuir, near Lockerbie. The station listens out for countries secretly testing nuclear warheads in breach of the 182-nation Comprehensive Test Ban Treaty. At a meeting today, Carlisle council rejected the latest application for six wind turbines at Hallburn Farm, near Longtown, because of the MoD's objections. The noise from the turbines would increase interference to an unacceptable level, the MoD said. The company that made the application, REG Windpower, warned that plans for many other windfarms in the area were similarly affected. As much as one gigawatt of renewable power was being held up by the MoD, the company told the Guardian.

Canadian Tar Sands And The True Cost Of Oil (PHOTOS) Thousands of miles north from the horror of 9/11 lay the World’s second largest oil reserves, their development soon to be spurred on by the realities and fears arising from that fateful day. The ensuing search by America for a friendlier source for its energy needs, and the rapidly rising cost of oil propelled the development of Alberta’s Tar Sands to the point where they are now the United States' largest single source of oil and America is the market for the vast majority of the approximately 1.5 million barrels of oil produced there each day. A few years later I had my first glimpse of Canada’s Tar Sands. Hovering over them in a helicopter, below me lay devastation on a scale that could be only described as biblical. Vast tar mines, refineries fouling the air, and the leaching and unlined tailings “ponds” which lie along the Athabasca River are the world’s largest toxic impoundments. Toxic lakes of industrial waste that can be seen from space.

Mr. Obama: XL + Tar Sands = Bad Political Equation - Today I asked President Obama to give me a reason to knock on doors for him again next year. Today I asked him to use the authority of his office to save the future from the massive, climate obliterating carbon bomb that's bound to go off if the oil industry gets the go ahead to build the Keystone XL pipeline -- the massive, 1700 mile fuse linking U.S. oil refineries to the catastrophic power of the Canadian oil sands. The power is in his hands. He doesn't need Congress and he doesn't need the courts; he just needs the courage to stand behind his convictions. It's a crying shame that it had to come to this. It's a shame that we've reached a situation where every-day political activists like myself and thousands of others like me have found it necessary to break the law and face arrest in order to push this president to do what he promised to do, what he must do, what he knows is the right thing, the only thing to do. How is is possible that we should have to go to such dramatic lengths to stop this president from making the stupidest and most destructive decision for the climate that any president could ever make -- much less one who promised to "roll back the specter of a warming planet"?

A few facts about the Nebraska SandHills....  The SandHills are the major recharge zone for the Ogallala (or High Plains) aquifer.  That’s where water goes into the system to (hopefully) replace what we take out via wells.  The SandHills are also the largest “grass stabilized” dune field in the world, and without the grasses, they would be the largest sand dune field in the Western Hemisphere.  The soils are very very sandy and porous, allowing quick and efficient infiltration of any fluids that happen to impinge upon them.  My colleague and I have just made the first measurements of the recharge rate (although only at a single point) in the region and I have a pretty good idea of how easily things can work their way down to the water table (i.e. the aquifer). Probably the thing about the XL pipeline that scares me the most is he potential for one or more “small” leaks.  A small leak in the buried pipeline (several barrels per day) would probably go unnoticed for a long time.  The monitoring equipment at the pumping stations are designed to read and control flows of thousands and thousands of barrels per day, and a leak of just a few or maybe even ten just wouldn’t register.  In that case, oil/tar would leak, and leak, and leak, mostly unnoticed.  It probably wouldn’t be discovered until the plume worked its way 12 or so feet up to the surface, and then only if someone happens upon the site.  Most places in the SandHills see very little human traffic.  This scenario could dump hundreds or thousands of barrels of oil before it’s ever noticed.

State Department Environmental Impact Study of Keystone XL Pipeline Released, Skids Greased for Approval - As expected, the State Department essentially gave its environmental blessing to the Keystone XL pipeline today, which would stretch nearly 1,700 miles from Alberta, Canada to Texas, and which would deliver as much as 700,000 barrels of noxious tar sands oil every day.  This is not a final approval on the project, but getting a favorable environmental impact study (EIS) from the State Department, which prepared the EIS, is a necessary hurdle before final approval. In reaching its conclusion that the Keystone XL pipeline from the oil sands deposits in Alberta would have minimal environmental impact, the administration dismissed criticism from environmental advocates, who said that extracting the oil would have a devastating impact on the climate and that a leak or rupture in the 36-inch-diameter pipeline could wreak ecological disaster. Opponents also said the project would prolong the nation’s dependence on fossil fuels, threaten sensitive lands and wildlife and further delay development of clean energy sources. The State Department said in an environmental impact statement that the pipeline’s owner, Trans Canada, had reduced the risks of an accident to an acceptable level and that the benefits of importing oil from a friendly neighbor outweighed the potential costs.

China to Sue ConocoPhillips Over Oil Spills - The Chinese maritime authority is preparing to sue ConocoPhillips, the American oil company, over two oil spills in June that engulfed large swaths of Bohai Bay in north China, according to a report by Xinhua, the state news agency. The report, which appeared on Wednesday, said the State Oceanic Administration was aiming to set up a team of lawyers by the end of the month to sue for compensation. It cited an agency spokesman as saying that 49 Chinese law firms had applied to provide legal assistance. The two spills, involving 3,200 barrels of oil and drilling fluids, occurred in the country’s largest offshore oilfield, called Penglai 19-3, and spread over at least 324 square miles in Bohai Bay. The Penglai field was co-developed by China National Offshore Oil Corporation, commonly known as Cnooc, and ConocoPhillips China operates it.

Photos Show Oil At BP’s Deepwater Horizon Gulf Spill Site -A report in a blog written by trial lawyer Stuart Smith of New Orleans on Wednesday claimed that the well was leaking and that BP had hired 40 boats to clean the mess. A flurry of allegations and denials ensued. “None of this is true,” BP said in a statement. “We inspected our operations and our assets and didn’t find anything,” said BP spokesman Daren Beaudo. We knew better than to expect any sort of candid response from BP or the Coast Guard who after all denied oil was leaking for a full week after the DH rig sank last year, so we were very pleased when Bonny Schumaker from the California-based nonprofit On Wings of Care (see link to website below) agreed to do a flyover. She took a four-hour flight out to the Deepwater Horizon site yesterday (Aug. 19) with Gulf Restoration Network (GRN) photographers Jonathan Henderson and Tarik Zawia.

Obama to resume Gulf of Mexico lease sales - The Obama administration has decided to resume oil and natural gas lease sales in the Gulf of Mexico for the first time since the BP oil spill 16 months ago. The Interior Department decision was immediately welcomed by industry officials and Gulf-area lawmakers but criticized by environmental groups. Interior Secretary Ken Salazar made the announcement Friday. The sale, set for December in New Orleans, will involve areas in the western Gulf, near Texas. “Since Deepwater Horizon, we have strengthened oversight at every stage of the oil and gas development process,” Salazar said. “Exploration and development of our western Gulf’s vital energy resources will continue to help power our nation and drive our economy.”

U.S. to Offer Oil Leases in the Gulf — Making good on a promise, the Interior Department announced Friday that it had scheduled its first sale1 of offshore oil2 leases in the Gulf of Mexico since the Deepwater Horizon disaster last year. But it is changing some of the rules to ensure that leased parcels are actually drilled and not hoarded.  President Obama’s relations with the oil industry have suffered since the BP spill, with many executives accusing him of choking off domestic petroleum supplies and suppressing job creation. But it is unclear whether the resumption of lease sales will affect the rate of oil production in the gulf or improve relations.  The department said Friday that it was more than doubling the minimum bid for the right to drill in deep water in the gulf, to $100 an acre from $37.50 an acre in the proposed sale3, which is scheduled for Dec. 14. The auction encompasses more than 20 million acres of the western gulf. Officials said the change was based on an analysis of the last 15 years of lease sales in the gulf, which found that leases that received high bids of less than $100 per acre have experienced virtually no exploration and development.

Where can America find more income and jobs? - In January 2008, ExxonMobil and Norway's Statoil announced a promising discovery in the Julia Field in the Gulf of Mexico that may contain a billion barrels of oil. In October of that year, Exxon applied for a 5-year extension of the lease for time to develop a suitable development plan. To the company's surprise, the U.S. Department of Interior denied the request in February 2009, and has continued to turn down subsequent appeals. The company has filed a lawsuit to have the decision overturned. The Wall Street Journal reports: Exxon's lawsuit said the government has granted "thousands" of extensions over time. It said the government's denial of its extension relied on legal interpretations that it "had never before applied and had never before articulated." Statoil asserted in its lawsuit that no request for an extension for a deep-water development "had ever previously been denied."  Jim Brown reports that the Julia well was drilled in 6,500 feet of water to a depth 31,160 feet, numbers that continue to dazzle me with the scope of the engineering challenge involved.  Exxon is known for moving slowly in developing plans for offshore production but given the complexity of developing oil fields six miles below the surface that is to be expected.

Number of the Week: How Many Rigs Are Drilling for Oil? - 1,069:

The number of rigs drilling for oil in the U.S. this week. The figure reflects a huge surge in U.S. oil drilling, up nearly 60% in the past year and the highest total since at least 1987, when  oil services company  Baker Hughes Inc. began keeping track. The drilling boom is being driven by a variety of factors. New technologies have allowed companies to tap vast new oil reserves in places like North Dakota, Texas and, most recently, Ohio. High oil prices are making once-unprofitable fields more tempting. And low natural-gas prices are leading companies to shift their focus to finding oil. Natural-gas drilling, which generally uses the same rigs but in different places, is down 8% in the past year. All that drilling is helping to boost U.S. oil production. The U.S. pumped 3.9 million barrels a day from onshore fields in March, up 5.9% from a year earlier and the most in nearly a decade.. U.S. crude oil imports last week were down 11% from a year ago; on a percentage basis, the U.S. imported less of its oil last year than any year since 2003.

Oil Reserves Sidestep U.S. Vessels - In its hurry to transport millions of barrels of oil from federal stockpiles to stabilize world oil prices earlier this summer, the Obama administration has repeatedly bypassed federal law by allowing nearly all the oil to move on foreign-owned vessels, drawing protests from domestic maritime operators.  The domestic ship owners say that 46 times the administration has waived the Jones Act1, a 90-year-old law requiring purely domestic cargo to move on United States-flagged ships except under extraordinary circumstances. Only once this summer has oil from the reserve moved on American barges.  Even as unemployment hovered over 9 percent, the administration approved dozens of applications to transport nearly 30 million barrels of domestic crude oil within the borders of the United States on tankers employing foreign crews and flying the flags of the Marshall Islands, Panama and other countries.  The move, which saved time and money for the oil companies that bought the oil, took potential work from more than 30 American cargo vessels and as many as 400 sailors, American ship owners said in recent days.  “This has literally flabbergasted the American maritime industry,”

Not The Best Idea - The normally savvy Matt Yglesias responds to a Kevin Drum post (which in turn was in part an elaboration of this post of mine): Kevin Drum writes about the possibility that American growth is now constrained by the growth in the oil supply. That may be true in practice, but I would argue that there’s no reason to believe it should be true in theory. After all, consider the gasoline tax. Right now, we levy a flat per gallon fee, and that fee is too low to meet our infrastructure needs. We ought to raise it. But instead of raising the flat per gallon fee, would could change it to a percentage tax like a regular sales tax. But the increase in tax revenue could be used to offset something else. For example, the payroll tax could be set to fall automatically any time high oil prices led to “extra” gas tax revenue. That way oil price spikes would generate an automatic subsidy to production and employment. This doesn't make sense.  One way to see this is to note that a rise in oil prices inevitably removes purchasing power from the pockets of American consumers and instead gives it to people in OPEC countries (and Texas!).  Coupling a shift in the tax burden from payroll tax to gas tax to this, doesn't change that fact one whit.  If anything it's likely to worsen the problem since the gas tax is more regressive than the payroll tax and thus will differentially hurt poor consumers who have a higher preference to consume versus save.

Oil Market: Rectifying The Broken Paper Pricing Model  - It has become quite apparent that major changes are necessary in the oil futures market after the latest year of volatility which had little relation to the actual fundamentals of supply and demand in the marketplace. Oil is too an important commodity to have such a large dislocation from the actual physical market of supply and demand. It is used by people all over the world as a necessary commodity for daily transportation, businesses rely on the commodity to produce goods, and economies need a stable price reflective of fundamentals to flourish in an efficient matter. In short, speculators have no business in the oil market, they distort prices, and sure helped slow global growth during the past year by running up prices well beyond the fundamentals based upon actual inventory levels of the commodity.

Bachmann Stands by Pledge: Gas Under $2 a Gallon -  Michele Bachmann Friday defended her campaign promise made earlier in the week that the price of gasoline will drop back down below $2 a gallon when she is in the White House. The Minnesota congresswoman and Republican presidential candidate pledged to utilize the nation's vast, untapped resources to bring down high energy prices and "create millions of high-paying jobs instantly." ... "Under President Bachmann you will see gasoline come down below $2 a gallon again," she said. "That will happen." Tom Kloza, chief oil analyst at the Oil Price Information Service, said the price of gasoline  when Obama came into office was largely the result of a severe economic contraction."We're going to have to recognize the rest of the world has this increasing appetite for oil," he said. "If we go below $2 a gallon, it probably means there has been a lot of wealth loss and we are in a deflationary period."  Lower gas prices, however desirable they might seem, would not be accompanied by good economic news, Kloza said.

Michele Bachmann Petroleum Geologist - Bachmann also talked about U.S. oil reserves. “What Barack Obama has done is to lock up America’s energy reserves,” she said. “We’re the No. 1 energy-resource-rich nation in the world. We have more oil in three Western states in the form of shale oil than all the oil in Saudi Arabia.” Oil companies have spent billions and several decades on the “vast shale oil deposits” in those three western states that she lists as exceeding Saudi Arabia’s reserves. So far that so-called shale oil has produced nothing because it isn’t oil. It’s a very low grade substance called kerogen which nature never got around to cooking into oil. All attempts to complete nature’s task have required lots of water and power. And the process for shale oil releases toxic material into ground water. As a minimum, any shale oil production would require oil prices well above $100/barrel.  That oil price equates to $4 a gallon gas, not exactly Bachmann’s announced target for her presidency. Success with western shale oil has been five years away for the past 60 years.

TheOilDrum: Tech Talk - The Oil and Gas of Southern Alaska - The wells that have been drilled and brought into production in the past have produced, to date, around 1.3 billion barrels of oil, 7.8 trillion cubic ft (TCF) of natural gas and 12,000 bbl of natural gas liquids in total. At the end of June, the U.S. Geological Survey (USGS) announced the results of a new assessment of the resources of the region. There is a considerable amount of coal in the region, which is likely to contain methane, and this is now included.The excluded region in the above graphic shows the coal that lies below 6,000 ft, and is considered unlikely to hold any gas. In addition to this coalbed methane, the USGS re-evaluated the likely volumes held in the sandstone and conglomerates that have, to date, been the host rocks for the oil and gas that have been extracted. Finally, the USGS assessed the potential of tight sands in the region to hold technically recoverable volumes of gas. As the recent experience with natural gas has shown, just because a resource exists and can be recovered does not mean that it will make sufficient money to justify the investment in the extraction. Thus the USGS can only say that there is a significant likelihood of oil and gas being present and recoverable, without bringing the costs and price of the fuels on the market into the discussion, and thus defining whether the resource is, or will be a reserve, or not.

Our Oil-Constrained Future - I've talked a few times (first here, most recently here) about the possibility that world growth is now constrained by oil production. The basic story is simple: As long as there's spare oil-production capacity, increasing demand caused by economic growth produces only a steady, manageable increase in oil prices. But oil production is now close to its maximum and can't be easily or quickly expanded. When the global economy grows enough that demand starts to bump up against this ceiling, oil prices don't rise slowly and steadily; rather, they spike suddenly, causing a recession, which in turn reduces oil demand and drives down prices. When the economy recovers, the cycle starts all over. Because of this dynamic, the production ceiling for oil produces a corresponding ceiling for world economic growth. Stuart Staniford puts some numbers to this for our most recent recession. What would it have taken for growth to continue at its 2000-08 rate over the past few years? In the counterfactual world, 2009 gross world product would have been 6.4 percent larger than in the actual world. We can estimate the implications for oil supply because we know that the global income elasticity of oil demand is about 2/3. Thus the counterfactual world would have required an additional 4.5 percent more oil than the real world.

TransitionVoice: How to talk about the end of growth: interview with Richard Heinberg

Denmark to lay claim to the North Pole sea bed — Denmark on Monday presented its "Arctic Strategy" for the next decade, confirming that it intends to lay claim to the North Pole sea bed by 2014 at the latest. The 58-page report said Denmark and its autonomous Arctic territories of Greenland and the Faroe Islands had agreed on a common strategy for the region, including producing "documentation for claims to three areas around Greenland, including an area north of Greenland which among other areas covers the North Pole." That claim, which the report said would be made in 2014 at the latest, could put the Scandinavian country on a collision course with Russia, the United States, Canada and Norway.The five countries all have claims in the region, where melting polar ice and new technologies have made the "high north" easier to access and fueled competition for untapped oil and gas reserves.

UK and US oil price split widens - It's one special relationship that has been looking increasingly rocky in recent months. US and UK oil prices have historically traded hand-in-hand, but the benchmark contracts have been growing apart for a while, and now seem to be living almost totally separate lives.  This is a very different story from the pre-recession conditions of 2008, three years ago, when the oil price hit its record $147 per barrel in London, the benchmark West Texas Intermediate contract was not far behind, at $145 per barrel.  However, something strange started to happen not long afterwards - an increasing divergence in the price that means the $26 difference between the US and UK oil prices is now the biggest on record.  When the differential first started to emerge, it was put down to a build-up of inventories at the landlocked Cushing facility, a pipeline hub where WTI oil is stored. Serving the domestic US market, its contracts are much more reflective of American demand than the world in general.

Libyan Oil Production -It looks like the Libyan revolutionaries have taken Tripoli: Obviously this is excellent news for the Libyan people and it is devoutly to be hoped that they can now begin the long and difficult process of developing a more benevolent form of government that can stabilize the country and realize the aspirations of it's people. Any government is probably going to want to do something about the graph up top, which shows that Libyan oil production has now fallen almost to zero as of July.  The new state will need revenues and in Libya those must come primarily from oil.  It will probably take a number of months at best to restore sufficient order for the oil to begin flowing again. When it does, that will help the global macroeconomy also.

Libyan oil could take years to come back - If Libyan rebels are successful in their bid to oust the country's longtime dictator, Moammar Gadhafi, analysts say Libya's prized "light oil" should begin trickling back on the market within a few months. But hopes of a quick resolution were quashed Tuesday as fighting continued. While it appeared Libya was on the brink of a regime change Monday, Gadhafi said Tuesday that he's alive and well in Tripoli and won't leave Libya. tOnce producing 1.6 million to 1.8 million barrels a day, Libyan oil production was cut to near zero after civil war broke out in February. The cut, which epresented only about 2% of global oil production, caused oil prices to spike and was the main reason several developed nations released oil from their strategic stockpiles earlier this summer.

China, Libya and the cost of doing business - I often heard a variation of this statement about why regimes in the Mideast liked China: The Chinese come to do business, and they don't meddle with domestic politics. A Reuters report yesterday suggested there may be a price to come in Libya: "We don't have a problem with western countries like Italians, French and UK companies. But we may have some political issues with Russia, China and Brazil," Abdeljalil Mayouf, information manager at Libyan rebel oil firm AGOCO, told Reuters. The comment signals the potential for a major setback for Russia, China and Brazil, which opposed tough sanctions on Gaddafi or pressed for more talks, and could mean a loss of billions of dollars worth of oil exploration and construction contracts in the African nation.

China's oil demand rebounds to 9.05 million b/d in July - Chinese oil demand: up about 7% from a year ago - China's apparent oil demand* in July increased to 38.29 million metric tones (mt), or an average of 9.05 million barrels per day (b/d), as oil consumption appeared to have recovered after seasonal refinery maintenance, according to an analysis of recent Chinese government statistics by Platts, a leading global provider of energy, petrochemicals and metals information.  In June, apparent oil demand by the world's second largest oil consumer slumped to just 9.01 million b/d, the lowest so far in 2011, as several refineries were shut for turnarounds.  In July, Chinese refineries processed 37.49 million mt of crude oil, or an average of 8.86 million b/d, up from June's processing rate of 8.69 million b/d and 6.2% more than the crude throughput a year ago.  "The July refinery throughput figure takes into account the slowed production at some plants due to turnarounds as well as an unexpected shutdown at PetroChina's Dalian refinery in northeast Liaoning province due to a fire at the plant in mid-July," 

One Billion Cars Now on World’s Roads, Driven by Exploding Demand from China - Driven by demand from countries like China, India and Brazil, the global market for automobiles is accelerating faster than ever. According to an analysis from the auto trade journal Ward’s, there are now over one billion cars, light-, medium- and heavy-duty trucks on roads around the world, up from 980 million at the end of 2009. In just half a year, the global auto fleet expanded by around 35 million vehicles. That’s the second-biggest increase ever. The U.S. is still has the biggest population of cars and trucks – one for every 1.3 people in the country. But the American fleet is not growing much, only about 1% a year. The explosion in automobile deployments is coming from China, where registrations grew by 27.5%, bringing the country’s vehicle population to 78 million. That increase was more than half of the total global expansion, according to Ward’s. The leap in registrations gave China the world’s second-largest vehicle population, pushing it ahead of Japan, with 73.9 million units, for the first time.

China’s blindfolds and bullet trains - Train speeds in China topped out at 160 kilometers per hour back in 2004, the year the government pulled the throttle on an historic, nationwide expansion for high-speed rail.  Around that time, bullet-train expert Tadaharu Ohashi, chairman of Japan’s Kawasaki Heavy Industries, advised China’s energetic railroad builders not to rush into the project. Japan, a world leader in the technology, had spent 30 years raising train speeds to 300 kph.  Ohashi said China would need about eight years to master the technology needed to run 200 kph trains, and another eight years to accommodate 350 kph rolling stock. But the Chinese railways minister at the time, Liu Zhijun, balked at the slow-go suggestion and pushed instead for “leapfrog development” of a fast-train network. He then oversaw a huge build-out with an iron fist until, seven years later and after major investments in technology and manpower, China’s fastest trains were hurtling at 380 kph on the nation’s busiest route between Beijing and Shanghai.  It was a technological marvel that stunned the world — until the project hit a wall.

China Overtakes U.S. for First Time as Largest PC Market, Researcher Says - China probably overtook the U.S. as the largest personal-computer market last quarter, after three decades of American dominance in an industry pioneered by Apple Inc. (AAPL) and International Business Machines Corp. (IBM) Personal-computer shipments in China rose 14 percent to 18.5 million units during the second quarter, the first time they surpassed the number in the U.S., where they fell 4.8 percent to 17.7 million, Bryan Ma, an analyst at research firm IDC, said in an interview today. On a full-year basis, China will likely pass the U.S. in 2012, he said. The estimates highlight the growing importance of China’s consumers to the global economy after the country passed the U.S. in 2009 as the largest auto market. Hewlett-Packard Co. (HPQ), the world’s largest PC maker, indicated this month it may pull out of that business, while China’s Lenovo Group Ltd. (992) posted quarterly profit that almost doubled.

China Manufacturing Activity Declines  —A survey of China purchasing managers signaled a second straight monthly decline in manufacturing activity in the world's No. 2 economy, and the country's Commerce Ministry warned that its export sector is facing new difficulties. The reading of 49.8 in the preliminary HSBC China Manufacturing Purchasing Managers Index, issued early Tuesday in Beijing, came in higher than some analysts expected, and above the index's final reading of 49.3 for July. While the number was above the July reading and higher than some analysts had expected, it was still below the key level of 50, which separates growth in the industry from contraction. "The data reflected the basic situation, that the manufacturing activity of small- and medium-sized companies has improved moderately," said Standard Chartered economist Li Wei. He added that he expects industrial production to stabilize in the near term.

China Faces Obstacles in Bid to Rebalance Its Economy - A casual glance out the window is all it takes to witness the blistering growth that has become the signature feature of this provincial capital and of other cities in the vast Chinese interior. A phalanx of half-finished office and apartment towers flanked by yellow cranes rises above the brown waters of the Jinjiang River.  China has vowed repeatedly, most recently during the just-concluded visit1 by Vice President Joseph R. Biden Jr., who met in this city with Vice President Xi Jinping, to overhaul its state-directed growth model and empower its consumers to spend more on their own, something that would make its economy more sustainable and help the sluggish world economy as well. But leaders in Beijing and places like Chengdu are finding it difficult to steer China away from growth that relies largely on infrastructure projects, construction and export manufacturing, economists and financial analysts say.  “China’s leaders are committed to altering their country’s macroeconomic landscape,”  “But the country’s political economy will not change as fundamentally as many in China and abroad hope. And the next decade is likely to be more fraught than conventional wisdom suspects.”

Chinese Banks: “These Things Aren’t Banks” -- Yves Smith - This is a terrific discussion of Chinese banking by two experts who do not mince words, Carl Walter of JP Morgan and Victor Shih of Northwestern University. Both have a great sense of history and go to some length to portray how economic and monetary arrangements for these “banks” differ from what most of us would assume. The discussion includes periodic crises and the creative means used to rescue banks, the unusually high level of financial assets for an emerging economy, the sustainability of growth, and the role of banks in the political system.

China’s New Currency Policy - – China’s government may be about to let the renminbi-dollar exchange rate rise more rapidly in the coming months than it did during the past year. The exchange rate was actually frozen during the financial crisis, but has been allowed to increase since the summer of 2010. In the past 12 months, the renminbi strengthened by 6% against the dollar, its reference currency.A more rapid increase of the renminbi-dollar exchange rate would shrink China’s exports and increase its imports. It would also allow other Asian countries to let their currencies rise or expand their exports at the expense of Chinese producers. That might please China’s neighbors, but it would not appeal to Chinese producers. Why, then, might the Chinese authorities deliberately allow the renminbi to rise more rapidly?There are two fundamental reasons why the Chinese government might choose such a policy: reducing its portfolio risk and containing domestic inflation.

Japan Unveils $100 Billion Effort to Cope With Yen's Strength -- Japan unveiled a $100 billion effort to help companies cope with a surging yen, signaling that officials may be resigned to the currency remaining high. The government will release foreign-exchange reserves to the Japan Bank for International Cooperation for funding to aid exporters and spur purchases overseas, Finance Minister Yoshihiko Noda told reporters in Tokyo today. JBIC, as the lender is known, is a state-run export credit agency. The yen traded at 76.64 per dollar as of 2:55 p.m. in Tokyo, stronger than the level before officials last intervened to weaken the currency on Aug. 4. The yen's rise since the March 11 earthquake to post-World War II highs is sapping exporters' profits and undermining the nation's recovery after three straight quarters of economic contraction. "The government's message may be that businesses need to come up with their own ways to deal with the strengthening currency, that they shouldn't hold their breath for intervention," "But the reality is that the demerits of a strong yen far outweigh the merits."

Moody’s downgrades Japan’s debt rating - Moody’s has cut Japan’s credit rating by one notch citing concerns about the government’s ability to reduce its mountain of debt and implement long-term fiscal sustainability measures.Moody’s now holds rating for Japan at Aa3, on a par with rival agency Standard & Poor’s, which rates the world’s third-largest economy at AA-, the same level as China.  Later this month, Japan will face yet another change in the country’s political leadership, the frequency of which Moody’s cited as a key factor obstructing the implementation of necessary fiscal measures to bring down its debt.  Naoto Kan, the incumbent, is expected to stand down as soon as this Friday as leader of the ruling Democratic party and prime minister to make way for the country’s sixth prime minister in as many years.  One of the leading contenders for the job is Seiji Maehara, former foreign minister, who opposes the immediate tax rises that are being discussed as a way to finance the reconstruction of much of Japan’s north-east coast, which was devastated by the March 11 tsunami.

Moody's Downgrades Japan's Debt Rating - Moody's Investors Service on Tuesday downgraded its rating on Japan's debt. The agency said it lowered the rating because of Japan's large budget deficits and growing government debt. Moody's cut Japan's government bond rating to Aa3 from Aa2. The new rating is three notches below Moody's top Aaa rating. It said the outlook for the rating is stable. The downgrade puts Moody's Japan rating in line with other major agencies. Both Standard & Poor's and Fitch rate Japan AA-, three notches below their top AAA ratings. In May, Moody's warned it could downgrade Japan after the world's No. 3 economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami. Frequent administration changes have prevented Japan's government from adopting effective long-term economic and fiscal policies, Moody's said. The country's economic problems were compounded by the natural disaster and the subsequent nuclear crisis.

How bad is it in Japan? -- Karl Smith offers some useful comments, stressing that Japanese unemployment does in fact seem high.  My view is twofold:

  • 1. Japanese output performance, while hardly stunning, is not as bad as the numbers make it appear.  In a TGS age, the numbers will basically overstate the performance of health care + education economies (lots of rent-seeking counted as output) and understate the performance of export economies.  Most exports are “real stuff,” and with some exceptions, such as arms sales, the buying is not driven by rent-seeking or agency-ridden third party payment.   Japan of course is an export-based economy.  Consider the possibility that the U.S. and Japanese growth rates have not been as different as they look in the published numbers. By the way, regarding output per man hour, Japan has been about 70 percent of the U.S. level since the 1990s and not falling.
  • 2. As Interfluidity points out, it is precisely the inefficient sectors of the U.S. economy which are the sources of whatever employment growth we have.  If those sectors are smaller in your economy, reemployment will be correspondingly tougher.

Is It Really That Bad In Japan - The Japanese Stagnation has become the classic macro case study. For at least a decade it was featured so prominently on our PhD Comprehensive exams that one of my fellow graduate students asked “If the Japanese economy ever recovers does that mean we don’t have to take Macro anymore” Yet ever now again people ask, maybe macro policy Japan isn’t that bad. Maybe its all structural. They are an aging population after all.  Matt Ygleisas considers the question I sometimes think Japan may just be Texas in reverse. Japan’s labor force is shrinking because of low birthrates, very high life expectancy, and an unusually severe case of aversion to immigrants. Japan also clearly did have a very real recession in the 1990s after the stock market crash. But at first blush it doesn’t seem obvious that present-day Japan actually does have large quantities of idle resources. Japanese firms seem to have coordinated around expectations of sluggish growth and investment, but why wouldn’t growth be sluggish if the workforce is shrinking? I don’t think that can explain it. Here for example is growth in Japan’s working age population versus growth in employment. Population in blue, employment in red.

Six lessons Japan can teach the West - If you are living in the U.S. or Western Europe and feeling pretty bad about the miserable state of the recovery, political paralysis, and growing unease about your country's future, remember things could be worse. You could be in Japan. Japan has been experiencing those same woes for the past 20 years. And there is no end in sight. Prime Minister Naoto Kan is likely to step down by the end of the month. An announcement could come as early as Friday. His replacement will be the third PM since the Democratic Party of Japan won its historic electoral victory two years ago. Kan leaves behind an economy that has contracted for three consecutive quarters. Yes, part of the reason is the devastating earthquake and tsunami that slammed into Japan in March. But a bigger reason is the continued failure of Japan's political leaders to tackle the economy's deepest problems.  Japanese politics just doesn't seem to allow for any new ideas ever becoming actual policy. As the U.S. and Europe find themselves in a protracted downturn of their own, while their political leadership bickers, dawdles and vacations, more and more voices have started asking if the West is entering an endless, Japanese-style economic funk. HSBC's chief economist Stephen King made that point in a report this week

Let's Sell Japan Our Problems - The thermostats in office buildings in Tokyo these days are set to 28° C —or a balmy 82.4°F . You walk into a building and get hit with heat—a little bit unsettling given the blast of cold air I expect in a New York City skyscraper. But in the aftermath of a tragic earthquake, tsunami, and nuclear plant meltdown that has left this country short of electricity, corporations have been asked to reduce power consumption drastically. Lights in lobbies and hallways have been drastically cut back or turned off. Throw in some absolutely oppressive weather and I feel like I'm walking around in some sort of underlit steambath.  Men have abandoned suit jackets and ties and stream to the office in their white shirts.  Bottled water is an essential for any meeting. Everyone is reporting to work an hour early, when it's slightly cooler; the air conditioning shuts off at 6 p.m. If you are working late, bring a towel. Japan is not only short of energy, it's also short of leadership and ideas. Prime Minister Naoto Kan is set to resign soon, his approval rating so low that the only friend he has left is his dog, and the dog is waffling. Kan paying the price for the government's flawed handling of the natural disaster and nuclear one that followed.

Korea's External Debt Nears US$400 Bil. Mark - Latest data suggests that Korea's external debt may have surpassed the 400-billion US dollar mark. Experts have warned that 400-billion in foreign liabilities could rattle Korea's financial market, as it will likely spark fears over a shortage in foreign reserves and a liquidity crisis, affecting investor sentiment. According to the Bank of Korea and the Ministry of Strategy and Finance on Tuesday, Korea's external debt stood at 398-billion dollars during the second quarter, a 15.4 billion dollar increase from the previous quarter. But this is a slower expansion than the January to March period, when the figure recorded over 22-billion dollar growth. The finance ministry said a rise in foreign debt is unavoidable to a certain degree, due to Korea's heavy dependence on trade and the size of its economy and added that despite the rise, the overall size of the debt was not very big. The country's foreign debt compared to its gross domestic product, 37.6 percent in the second quarter, is lower by nearly 15 percentage points than three years ago, when the world was hit by the global financial crisis. The rise has mainly come from money used in trade financing, foreign currency loans taken out from domestic banks, and more currency stabilization bonds and treasuries issued by the governments.

US Container Imports Fell 5.4 Percent in July - Soft demand for home goods helped push U.S. containerized imports down 5.4 percent last month from July 2010 after a 1.7 percent year-over-year decline the previous month. July’s import volume totaled 1,432,602 twenty-foot-equivalent units, PIERS data show. The numbers suggest an “anemic” buildup to the annual peak season for holiday imports, said Journal of Commerce Economist Mario O. Moreno. Second quarter imports rose 4 percent, in line with Moreno’s forecast. He expects imports to rise or fall by no more than 1 percent in the third quarter and to rise 1 to 2.5 percent in the fourth quarter. He expects to lower his full year forecast to a range of 2.5 to 3.5 percent from the previous 4.7 percent. He noted that year-to-year comparisons were affected by comparisons with July 2010, when importers booked early to avoid capacity constraints, but said retailers and consumers are cautious in a shaky economy.

JOC: Alphaliner Says Ocean Carriers Face Prolonged Slump - Container shipping is heading toward a prolonged slump that could last longer than the 2009 downturn, research analyst Alphaliner warns. Unlike the 2009 recession, which was by triggered by the first fall in demand for container shipping, the current slump results from an oversupply of capacity and weak demand growth in Europe and the U.S., according to Alphaliner. “The main carriers’ operating margins have slipped this year and the poor operating conditions experienced these days could well last for two more years, given the prevailing oversupply situation.” Ocean carriers suffered aggregate losses of $19 billion in 2009, according to Drewry’s, a London-based consultant, as container traffic declined 9 percent from the previous year. The lull in container ship orders between the fourth quarter of 2008 and the first quarter of 2010 reduced the order book from 60 percent to 26 percent of the existing fleet, but did not solve the overcapacity problem,

Obama Administration Being Dishonest About Status Of Free Trade Agreements - Nearly every time the President has spoken about the economy since the start of the summer, one of the topics that he’s brought up consistently has been a series of free trade agreements that, at least to listen to him, have been negotiated and are merely awaiting Congressional approval. As it turns out, it’s not quite that simple and that the agreements are tied up by the same ridiculous partisan sniping that has made even the simplest acts of governing nearly impossible: For weeks, President Obama has derided Congress for failing to pass the agreements, as well as a measure that would provide money to assist workers displaced by foreign competition. “The only thing preventing us from passing these bills is the refusal by some in Congress to put country ahead of party,” he said at a recent news conference. Senior Republicans in Congress have howled in protest, pointing out that the agreements have not left the president’s desk to journey to the Hill for a vote. That Congressional Republicans and the president cannot even agree on the status of these critical trade agreements reflects just how toxic and divisive their relationship is, anchored largely in fiscal policy disagreements.

Economic growth stalls amidst debt crisis, austerity - The Organization for Economic Cooperation and Development (OECD) said the gross domestic product of its member countries grew by only 0.2 percent in the second quarter of this year, dropping from 0.3 percent in the first quarter. Growth has slowed for four consecutive quarters, hitting the lowest level in two years. The OECD’s 34 members include the UK, Russia, Japan, Canada, the United States and most countries in the Eurozone. Most of the member nations separately announced their growth figures earlier this month. German economic growth all but collapsed, expanding only 0.1 percent in the second quarter, compared to 1.3 percent in the first. The Japanese economy shrank 0.3 percent, after contracting .9 percent in the first quarter. The French economy stopped growing completely, after an expansion of 0.9 percent. The United Kingdom grew just 0.2 percent, after expanding 0.5 percent in the first quarter. Three years after the financial crash of 2008, none of the problems that have plunged the world economy into a recession, resulting in the destruction of millions of jobs, have been resolved. The bailout of the financial system has transferred the bad assets of the banks onto government balance sheets, and the ruling class is responding through brutal austerity measures and intensified exploitation

Satyajit Das on the Botox Economy - 08/23/2011 - Yves Smith  - As much as I like Satyajit Das’ books (his new offering, Extreme Money, is just out and was reviewed favorably in the Financial Times), I wish he’d get on TV more often. His being in Sydney puts him at a bit of a disadvantage.  This clip is amusing. It ran on a morning show with 1 million viewers (remember, Australia has a population of only 20 million, so this is a big deal). And yes, most Australian accents are nowhere near as pronounced as those of the newscasters.

At the weigh-in - video - On many measures, the emerging economies now have more heft and reach than the developed ones

India's Functioning Anarchy - No sooner had a newly-elected member taken his oath than a number of MPs from the Bahujan Samaj Party, which rules India's largest state, Uttar Pradesh, stormed into the well of the House, shouting slogans and waving placards in protest against the government's land-acquisition policies. The Speaker attempted for a few minutes to get them to return to their seats, then gave up and adjourned the session for an hour. When the MPs reassembled, the opposition members - now joined by MPs from a rival regional party - marched towards the Speaker's desk, making even more noise. After a few more ineffectual minutes of trying to be heard above the din, the Speaker adjourned parliament again. One more attempt was made before the House adjourned for the day, with no item of legislative business transacted. That, unfortunately, is often par for the course in India's parliament, many of whose opposition members appear to believe that disrupting proceedings, rather than delivering a convincing argument, is the most effective way to make their points.

Report: Tunnel linking US to Russia gains support - A train could someday make a journey from New York City to London if a plan to build a 65-mile tunnel between North America and Asia comes to pass. The Times newspaper in the U.K. said that idea to construct a $60 billion tunnel under the Bering Strait was this week backed by some of President Dmitry Medvedev’s top officials. The paper described the idea as "the greatest railway project of all time." The tunnel would mean Russian territory would meet U.S. jurisdiction underneath the islands of Big Diomede, which is Russian, and Little Diomede, which is American. One problem might be that there is no rail line to Alaska's west coast.

Chinese paper warns of 'Black Death' of debt crisis - The "Black Death" of the debt crisis across the euro zone will hurt China's exports, although Beijing's relatively small holdings of euro assets will limit damage to foreign exchange reserves, the nation's top official newspaper says. The bleak diagnosis for the euro appeared in the overseas edition of the People's Daily, the main newspaper of China's ruling Communist Party, in a commentary by a former central bank official and an economist for the state-owned China Development Bank. "The euro debt crisis has now been going for nearly two years since the end of 2009, and the sovereign debt crisis has spread like the Black Death of the fourteenth century across the euro zone countries," said the commentary, referring to the rodent-borne pandemic that devastated Europe.

China needs to diversify FX reserves adviser (Reuters) - China should diversify its huge foreign exchange reserves into non-financial assets to hedge against risks from a long-term decline in the U.S. dollar, Xia Bin, an academic adviser to the central bank said on Tuesday. "The Chinese government is certainly worried about (the safety) of its foreign exchange reserves," Xia told a forum. "China should reduce the portion of financial assets in its reserves and increase the portion of non-financial assets," he said. Xia said China should use its reserves to buy overseas energy, resources and equity instead of buying more euro debt. China has long advocated diversifying its war chest of $3.2 trillion of reserves away from the dollar, but as much as 70 percent of the holdings are still invested in U.S. dollar assets, including U.S. Treasuries, according to analysts.

Foreclosure Crisis in Europe vs US - While European markets have seen increases in mortgage foreclosures, more robust regulatory intervention seems to have kept defaults and foreclosures to much lower levels than we are experiencing in the United States.  At the peak of the crisis a year ago, about 9% of US mortgages were in serious default (90 days or more past due or in foreclosure.)  The United Kingdom and Spain had default rates of less than 3%, which they still regard as a crisis.  The only EU country with mortgage defaults exceeding US levels is Latvia.  Detailed information on European foreclosure rates and prevention measures are available at the EU web site on the new mortgage credit legislation.  The report containing the table on the right is available here.  European banks argue that the lower default rates are a result of less reckless lending prior to the crisis, compared to the US subprime market, and that may be true.  It is also clear from the EU Commission summaries that most European countries have actively required or strongly encouraged lenders to work out as many troubled mortgage loans as possible, and have introduced delays and procedural hurdles in the foreclosure process to further stimulate workouts.

Belgium adds to call for euro bonds, bigger bailout - Pressure on Germany and France to take radical action on the euro zone debt crisis mounted on Friday, as financial markets sagged further and Belgium added its support to calls for the region to issue debt jointly.  Belgian Finance Minister Didier Reynders said the bloc should issue common euro bonds and expand its bailout fund to calm repeated market selloffs of government bonds and bank shares of vulnerable debtor countries.  But Reynders' call in the Financial Times for the euro zone had to prove it had "deep pockets" underlined increasing fears among euro zone governments that they would be unable to reassure investors that euro zone banks are safe without drastic action by the 17-nation bloc.  Merkel repeated her criticism of proposals for euro zone bonds, telling a rally of her Christian Democrats this was a "slippery slope" that would probably leave everyone worse off. "Euro bonds would not allow any rights at all to intervene to force discipline on others," she said.

Germany rebuffs renewed euro bond debate - Germany on Saturday rebuffed renewed calls that euro zone countries should issue joint euro-denominated bonds and have a joint finance minister, arguing that would only be possible if fiscal policy were collective already.  "As long as we don't collectivise financial policy we also cannot have a uniform interest rate level. The different rate levels are the incentive to run a solid economy or the punishment if you are not running it properly," Finance Minister Wolfgang Schaeuble, speaking at his ministry's open day.  "So the question is, how do we manage to promote political integration step by step. We cannot collectivise interest rates," Schaeuble said, referring to proposals that the euro currency bloc should issue common euro bonds.  Germany has led resistance to calls that the euro currency bloc should issue common euro bonds and expand its bailout fund to calm repeated market selloffs of government bonds and bank shares of vulnerable debtor countries.

EU President Van Rompuy Opposes Common Euro Bonds - European Union President Herman Van Rompuy ruled out issuing common bonds as a cure for the debt crisis, saying any joint borrowing should wait until European economies and budgets are better aligned.  With three countries drawing financial aid and national debts ranging from 6.6 percent of gross domestic product in Estonia to 142.8 percent in Greece, this is the wrong time to set up a single borrowing agency, Van Rompuy, 63, said in an interview broadcast on Belgium’s RTBF radio today.  “We could have euro bonds on the day when there is genuine budgetary convergence, the day when everyone is in balance or virtually in balance,” he said.

Eurobond points - How many Op-Eds can people write saying that without a eurobond the eurozone will fall apart?  I don’t think SPD would support the idea if they were in power; it is instead a way to set up an “I told you so” on Merkel, when things go badly, as they will.  It is hard to imagine that all the eurozone countries would sign off on it, and how does the market handle the political uncertainty in the meantime?  Finland has been demanding collateral for its loans to Greece and other countries wish to follow suit, and that is what any agreement would look like ex post.  That’s assuming every country finds it constitutional, a heroic leap.  Or what if German bond rates skyrocket after a eurobond announcement?  Does everyone go read Jean Tirole on renegotiation-proof agreements?  A eurobond without Germany, and possibly without France, also collapses inductively.  Or say Merkel agreed tomorrow to a eurobond and managed to hang on to power.  What fiscal management conditions would be demanded in return and would anyone expect Greece to accede to them?  How long does it take seventeen nations to agree anyway?  Does all borrowing get run through the eurobond or just some?  How are borrowing adjustments at the margin to be settled?  What if a country won’t put its fair share into a eurobond reimbursement fund, instead preferring to prioritize its individual creditors?  Who or what punishes them?  Are markets these days good at picking apart bundled assets?

Balanced Budget Acts as Dumb in Europe as in U.S.: If you think balanced-budget amendments are the stuff of madmen or dreamers, you were in for a surprise this month.  No, not the requirement of the U.S. debt-ceiling agreement that Congress vote up or down on such an amendment -- everyone knows that proposal will be dead on arrival. Rather, it was the joint recommendation of German Chancellor Angela Merkel and French President Nicolas Sarkozy that all 17 euro-area members adopt constitutional amendments by next summer that would require balanced budgets by specific target dates.  In the context of the world’s current economic troubles, how could responsible, economically sophisticated leaders think it is a good idea to impose an inflexible constitutional debt ceiling? Merkel and Sarkozy are, after all, a far cry from Rick Perry.  What makes mainstream politicians imagine that sovereign states would be helped, not harmed, by taking away their option to borrow and spend their way out of a fiscal crisis?

It's Official: Spain Is Getting A Balanced Budget Amendment…Spain will get a balanced-budget amendment added to its constitution, after socialist Prime Minister José Luis Rodríguez Zapatero proposed such a measure today.  Members of opposition party Partido Popular -- including PM candidate Mariano Rajoy -- have already been calling for such an ammendment. Zapatero's approval signals that such an ammendment will indeed be signed into law. "I consider it feasible to reach this agreement of constitutional reform, and I invite both major political parties and others in the Congress to solidify this in a bill...that could be approved immediately," Zapatero said, according to El Mundo. While Spain is not the first country to pass a balanced-budget ammendment recently, the proposal may also be seen as a face-saving measure by the incumbent socialist party to regain support ahead of national elections in November.

Liberty, Equality, Austerity - Krugman - Sigh. France cuts growth targets, unveils austerity plan. We’re told that it is doing so because it expects slower growth — which the austerity will make even slower. But France faces soaring interest rates, right? No: At this point the entire advanced world is doing exactly what basic macroeconomics says it shouldn’t be doing: slashing spending in the face of high unemployment, slow growth, and a liquidity trap. It’s a global 1937. And if the result is another recession, the witch-doctors will just demand more bleeding.

Please tax us, French super-rich tell government - Some of France's richest people, including the billionaire heiress of L'Oreal and the head of oil giant Total, urged the government on Tuesday to tax them more to help to solve the country's financial problems.  In a petition published on the website of weekly magazine Le Nouvel Observateur on Tuesday, 16 company executives, business leaders and super-rich individuals called for the creation of a "special contribution" that would target wealth without forcing the rich to quit France for overseas tax havens. The petition, whose signatories included L'Oreal heiress Liliane Bettencourt and Total chief Christophe de Margerie, follows a call by U.S. billionaire Warren Buffett for U.S. authorities to raise taxes on himself and other ultra-high earners to contribute to austerity efforts. In France, President Nicolas Sarkozy is already planning to axe some tax exemptions that benefit the wealthy as he seeks some 5 billion euros ($7.2 billion) to 10 billion in extra revenue in the 2012 budget following a market rout that has highlighted concern over French public finances.

Greece growth to be worse than thought - Greece’s finance minister has warned the country is sinking deeper into recession, with revised forecasts indicating negative growth of close to 5 per cent this year. The new projection came as experts from the European Union and International Monetary Fund started assessing progress with fiscal and structural reforms before a decision is taken on releasing another €8bn slice of bail-out funding.Evangelos Venizelos said in an interview on Friday with an Athens radio station: “There’s now a range of forecasts suggesting growth could shrink by above 4.5 per cent – and we have yet to see where it will stop.” “The truth is that a mix of domestic and external factors is intensifying the recession and this is our biggest problem,” Mr Venizelos said. Earlier EU-IMF projections, used as the basis for Greece’s revised fiscal programme approved by parliament in June, assumed the economy would shrink this year by about 3.8 per cent and show modest positive growth of some 0.8 per cent in 2012.

Greek collateral deals put bailout at risk - Moody's (Reuters) - Euro zone states seeking collateral for aid to Greece should think again if they want its bailout to stay on track, a rating agency said, as one of them said it would only press for such guarantees as a last resort. Greece agreed last week to provide AAA-rated Finland with cash collateral for its loans to Athens, in a bilateral agreement that sparked requests for similar treatment from Austria, the Netherlands and Slovakia. As finance ministry experts said Greece faced a deeper than expected recession, Moody's warned on Monday that by trying to secure collateral, its euro zone peers risked delaying the debt-mired state's next bailout payment and driving it into default. The rating agency also said it expected other euro area members to block the agreement with Finland, and Dutch Finance Minister Jan Kees de Jager said suggestions the bilateral deal was lawful were incorrect.

Moody's warns that Greek bailout might be delayed - Moody's rating agency warned on Monday that EU countries which demand collateral agreements with Greece might delay the payment of the next 8 billion euro tranche of the rescue fund for Athens, push it into default and hamper the fight against the crisis in the Eurozone.  Last week Finland negotiated a bilateral deal with Greece; soon Austria, the Netherlands and Slovakia demanded similar guarantees. Greek Finance Minister Evangelos Venizelos asked the European Commission, the ECB and the IMF for help with solving possible further disputes with countries demanding collateral agreements. Moody's considers the Greek-Finnish agreement a sign that some Eurozone countries and politicians are not capable of implementing measures necessary to maintain stability in the region. It adds additional pressure on France and Germany to take an even stronger position and present a clearer plan than the one agreed on last week. Germany has already expressed its objection towards the pact with Finland, pointing out that such agreements should be consulted with and approved by all of the Eurozone members.

Finland puts Greek bailout package under pressure  - The US-based ratings agency in a note on Monday (22 August) predicted other eurozone countries will reject a deal between Finland and Greece for Athens to put around €600 million in an escrow account in case it is unable to pay back Helsinki's part of its second bailout.  "A proliferation of collateral agreements would ... imply that the some euro-area countries would bear disproportionately large shares of the risk associated with the provision of financial support ," it said. "We expect other euro-area members to ultimately reject the Finland-Greece deal ... but the message sent by the calls for such agreements confirms that Europe is conflicted over the very decision to provide financial support to its members, not just the amount of support." Finnish Prime Minister Jyrki Katainen has warned that if the collateral deal is thrown out, Finland will not sign up to the second Greek bailout.

Finland threatens to withdraw Greek bailout support  - Jyrki Katainen, the Finnish prime minister, has threatened to withdraw support for the Greek bailout in a move that could crush the fragile signs of recovery on global markets.  Mr Katainen said that if Finland's bilateral agreement with Greece over collateral payments was overruled, the Nordic country could back out of the rescue programme.  He told reporters that the private collateral agreement, in which Greece agreed to give Finland €1bn (£875m) in cash in return for its suppport, was "our parliament's decision that we demand it as a condition for us joining in".

Greek Bond Yields Climb to One-Month High on Loan-Deal Discord - Greek government bonds slumped, with 10-year yields climbing to the highest level in a month, amid concern tensions between countries are putting a new loan package for the Mediterranean nation at risk. The spread between Greek and German two-year yields widened to a record 39 percentage points. Europe is in the midst of agreeing on 159 billion euros ($229 billion) in new public aid for Greece. Some nations, including Finland, have demanded collateral in return for loans. Spain’s two-year notes dropped as the country sold 2.94 billion euros of bills. “The aid package is not sorted out yet, and so the market thinks that things might not be as stable as they were perceived earlier, which is weighing on Greek government bonds,” Greek 10-year yields climbed for a sixth day, rising 56 basis points to 17.37 percent as of 3:51 p.m. in London. They earlier increased to 17.40 percent, the highest level since July 21.

Greek bond yields at new record highs — Interest rates on Greek 10-year bonds climbed to new records Thursday amid concerns that demands for collateral in return for rescue loans could undermine the country's latest rescue package. The bond yield climbed to above 18 percent, with the difference between the interest rates on Greek and German ten-year bonds, known as the spread, stretching to more than 16 percentage points. Greece has been relying since last year on funds from a €110 billion ($159 billion) package of bailout loans from other European Union countries and the International Monetary Fund. On July 21, European leaders agreed on a second bailout, worth an additional €109 billion. Finland, which saw a nationalist, anti-bailout party win a large share of the votes in national elections earlier this year, struck a deal to secure cash guarantees from Athens in return for its bailout contribution. The Finnish deal needs to be approved by the other eurozone countries in order to go through, but if it does another four countries — the Netherlands, Austria, Slovenia and Slovakia — have said they will seek the same terms, throwing into question the future of the second bailout. 

German Adviser: We Must Help Greece - The euro zone must continue to stand by Greece while it carries out a decade of reforms, but should leave Italy and Spain to put their own houses in order, a top economic adviser to the German government said Wednesday.  Wolfgang Franz, chairman of the independent council of economic advisers to the federal government, also said in a telephone interview that the European Central Bank has seriously compromised itself in starting to buy Italian and Spanish bonds and should stop doing so as soon as possible. Mr. Franz said he was "horrified" by the Finnish government's request for collateral against its next tranche of aid, saying that this could cause the whole deal to unravel.  "This is a discussion that should be ended as soon as possible," he said. "This is the exact opposite of solidarity."

Greece: It’s the corruption, stupid! = On a stiflingly hot day, I come here to interview Petros Themelis, a finance ministry official, who runs a call centre that’s part of the Greek government’s battle against tax evaders. The idea is that public-spirited citizens ring up and snitch on those they suspect of tax dodging. This is the human factor in a much bigger war: Greece’s life‑or-death struggle with the Debt Beast.  The state’s accumulated borrowings are equal to about 160 per cent of national output. Greece cannot afford to service the interest, much less repay the capital. The country is, in effect, insolvent. Without the largesse of outsiders – many billions in bail-outs from the International Monetary Fund and the European Union – it would already have collapsed into bankruptcy.  In a last-ditch effort to stave off such an outcome, the Greek government is trying something new – well, new for Greece. It’s treating tax collection as a process that requires more rigour than passing round a church plate. There is much to shoot for: about €30 billion (£26.2 billion), or 12 per cent of GDP, are lost to tax cheats every year.

Greece Quietly Activates Emergency Liquidity Measures - Greek default might not be that far away.  As yields on Greek bonds skyrocket and questions about collateral threaten to undermine the bailout, Greece's central bank has quietly activated the Emergency Liquidity Assistance (ELA) program to help banks struggling to stay afloat, according to Greek newspaper Imerisia (via Reuters). The ELA is supposed to provide cash in "exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets," according to the European Central Bank's definition. Although the ECB has to approve such transactions, it allows the Greek central bank to provide funds even after interbank and ECB outlets are closed. Everyone knew that Greek banks were not in good shape right now, but just how close are they to dragging the country over the edge? Too close for comfort, particularly with all the collateral drama going on right now. BTIG estimates that Greece will need $144 billion to meet its goals and obligations in 2011. The July 21 bailout agreement will include roughly $157 billion in financing if implemented.

Greek cbank activates funding scheme for banks-paper(Reuters) - Greece's central bank has activated an emergency liquidity assistance scheme so that it is available if banks need to draw from it, financial daily Imerisia wrote on Thursday without citing any source. The Emergency Liquidity Assistance (ELA) is one of the options the euro zone has at its disposal to keep Greek banks afloat if the country's sovereign debt is pushed into default by a new bailout deal that was put together by EU leaders last month, and the ECB stops accepting it as collateral. "The ELA has already been activated through the Bank of Greece. All small, medium and large banks (except for National Bank of Greece) have stated they will participate, in order to be able to draw funds if and when they need them," Imerisia wrote without mentionning its source. The Greek central bank declined to comment on the report.

Europe’s Banks in Lending Squeeze - New signs of stress are piling up in the ailing European banking system. Commercial banks boosted their reliance on the European Central Bank, borrowing €2.82 billion ($4.07 billion) from an emergency lending facility on Tuesday, while other banks continue to park unusually large amounts with the central bank, according to data released Wednesday. While the amount of borrowing is tiny relative to the multitrillion-euro European banking system, it, and the increase from €555 million a day earlier, nonetheless suggest that some lenders are struggling to borrow from traditional funding sources, such as the capital markets or other banks.

European Bank Job ‘Bloodbath’ Surpasses 40,000 - UBS’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue. UBS, Switzerland’s biggest bank, said yesterday it will eliminate 3,500 jobs, mainly from its investment bank. It follows HSBC Holdings Plc (HSBA), which announced 30,000 cuts on Aug. 1, Barclays Plc (BARC), which is cutting headcount by 3,000, and Royal Bank of Scotland Group Plc (RBS), which is eliminating 2,000 posts. Credit Suisse Group AG (CSGN) announced 2,000 reductions on July 28. European banks are slashing jobs this year six times faster than their U.S. peers, according to data compiled by Bloomberg, as concerns about the creditworthiness of Italy, Spain and France roil financial markets and reduce income from fixed- income trading, stock and bond underwriting as well as mergers and acquisitions. Financial firms are also cutting costs as regulators force banks to hold more and better quality capital to withstand future shocks.

Italy’s Debt May Swell as Austerity Chokes Growth - Italy’s austerity drive, enacted in exchange for European Central Bank bond purchases driving down borrowing costs, may backfire as it chokes the economic growth needed to ease Europe’s second-biggest debt burden. Prime Minister Silvio Berlusconi’s Cabinet approved 45.5 billion euros ($66 billion) in deficit reductions in Rome on Aug. 12, the nation’s second austerity package in a month, to balance the budget in 2013 and convince investors that Italy can trim debt of about 120 percent of gross domestic product. That’s the biggest ratio in Europe after Greece, whose fiscal woes sparked the sovereign crisis last year. While the back-to-back packages aim to eliminate Italy’s budget gap, spending cuts and tax increases risk damaging the economy at a time when the global recovery is stumbling. The measures, already in effect, require parliamentary approval that starts today as Senate committees review the law before both houses vote in September. “There are clear downside risks to growth emanating from such a sharp fiscal tightening profile, which could tip Italy’s fragile economy into a recession,”

What Italy tells us about Europe's debt crisis - So we all know Italy is a mess. Its government debt to GDP ratio of 127% in 2010 is the third worst in the OECD (after Japan and Greece). Economic growth is practically nonexistent, with growth surpassing 2% only once since 2001. So is it any surprise that Italy has been tarred as one of the PIIGS and fallen into a debt crisis? Actually, it is. Yes, Italy has its economic problems, but its government has not been fiscally irresponsible, with a much more conservative record than most other countries in the developed world. In other words, Italy has been gripped by Europe's debt crisis even though it really doesn't deserve to be. That scary fact tells us a lot about where Europe's debt crisis may be headed.

Tens Of Thousands Of Greek Businesses Face Closure - Tens of thousands of small Greek businesses could shut down in the next year, a local trade group warned Wednesday, adding that a quarter of a million jobs could soon be lost as a result. According to a survey commissioned by GSEVEE, a trade group representing small businesses, 183,000 enterprises are expected go out of business within the next 12 months, including 100,000 that may go bust by the end of 2011. The survey also says 250,000 jobs are at risk due to those closures and says 134,000 of those jobs could be lost by year end. Greece's economy is now in its third year of recession, made worse by billions of euros worth of tax increases and budget cuts the government has enacted in the past year-and-a-half to narrow its budget deficit. In May 2010, Greece narrowly avoided default with the help of a EUR110 billion bailout from its fellow euro-zone members and the International Monetary Fund, and is now awaiting another EUR109 billion aid package from the European Union and IMF. According to the latest government estimates, Greece's economy could shrink by up to 5.3% this year, after contracting 4.5% in 2010. Recent unemployment data show that 822,000 workers--some 16.6% of the workforce--are now jobless.

Greek 10-Year Yield Climbs to Record 18.54% on Concern Bailout Will Fail - Greek bonds slumped, with 10-year yields rising for an eighth day to a euro-era record, amid concern Finland’s demands for loan collateral jeopardize Greece’s second bailout package and may trigger a default. German two-year notes gained after a U.S. report showed initial jobless claims unexpectedly increased last week, fueling concern the world’s largest economy is slowing and spurring demand for the safest assets. The spread between Greek and German 10-year yields widened to as much as 1,632 basis points, also the most since the euro was introduced in 1999. The benchmark Stoxx Europe 600 Index fell 1.2 percent.  “Markets are doubting whether the second bailout package will ever be ratified by all the euro-region member states,” . “There’s not much that can worsen the situation from where we are now.”

Greece 2-Yr Bond Hits Record As Bailout Comes Under Fire - Yields on Greek bonds have been under control since a second bailout agreement was announced July 21, but new fears that the agreement will not be fulfilled are sending them skyrocketing. Yields on 2-yr bonds topped 45% this morning, a new record. New fears that the bailout agreement could fail have surged since last week, when a bilateral collateral agreement with Finland spurred on other eurozone countries to clamor for the same thing. Such negotiations could delay a bailout indefinitely. Greece could experience an true (non "selective") default if a bailout is not implemented quickly enough. Finnish leaders met yesterday, pledging flexibility in their collateral demands. However, it's difficult to forsee a solution which other eurozone nations will approve without their own individual agreements with Greece. Collateral was a make-or-break condition of Finland's participation in the bailout, and is part of the bailout agreement. No other country was assured collateral by the agreement.

Bailout for Greece Falters Over Demand for Collateral —Euro-zone policy makers on Thursday appeared no nearer to settling a dispute over Finland's collateral demands in exchange for participating in a €110 billion ($158.6 billion) bailout for Greece, raising concerns that the Mediterranean nation may default.  Markets have grown more worried about the potential for a Greek debt default amid an apparent lack of progress in resolving the collateral issue this week. Finland, meanwhile, shows no sign of backing down.  Also Thursday, German Chancellor Angela Merkel unexpectedly canceled a trip to Russia in early September to shepherd through parliament a crucial change to the euro-zone bailout fund.

Greece forced to tap emergency fund - In a move described as the "last stand for Greek banks", the embattled country's central bank activated Emergency Liquidity Assistance (ELA) for the first time on Wednesday night. Raoul Ruparel of Open Europe told The Telegraph: "The activation of the so-called ELA looks to be the last stand for Greek banks and suggests they are running alarmingly short of quality collateral usually used to obtain funding."  He added: "This kicks off another huge round of nearly worthless assets being shifted from the books of private banks onto books backed by taxpayers. Combined with the purchases of Spanish and Italian bonds, the already questionable balance sheet of the euro system is looking increasingly risky."  Although it was done discreetly, news that Athens had opened the fund filtered out and was one of the factors that rattled markets across Europe. At one point Germany's Dax was down 4pc before it recovered. In London, bank stocks - which have been punished by traders nervous about the European debt crisis - fell again.

Greece: No bond swaps without 90 pct participation - Greece said Friday it might only go ahead with a bond swap plan that is a critical part of its second bailout if at least 90 percent of private creditors who hold government bonds participate. The July 21 bailout plan would see banks and other financial institutions give Greece easier repayment terms on its bonds. However, in return, Greece has to fund an expensive collateral arrangement, which will secure the remaining value of the bonds and would cost the country about euro42 billion ($60 billion) until 2020. The Athens Stock Exchange on Friday posted extracts of a letter sent by the government to foreign finance ministers saying that Greece "shall not be obliged to proceed" unless it could get at least 90 percent of its eligible bonds swapped or rolled over. "If these thresholds are not met, Greece shall not proceed with any portion of the transaction" if it determines -- along with international partners such as the eurozone and International Monetary Fund -- that the total contribution of the private sector is insufficient for the July 21 agreement to work, the letter said.

Greek Bond Swap Take-Up Only 50 Percent - Banks have committed only 50 percent of Greece's debt to the private sector to a bond swap deal crucial to its second international bailout, a source close to the talks said on Thursday, pointing to a delay in the deal. The source told Reuters the government was still way short of the 90 percent of all privately held government debt targeted for a "haircut" under the scheme, agreed as a way of making private creditors pay some of the cost of bailing Greece out. Bankers said the delay was due to the fact that details of the proposed deal remained unclear and hoped for more clarity from the Greek government within days. Initial hopes were for an agreement by mid-August but Greek officials have said they now expect a deal in September.  "Participation is at around 50 percent now," a source close to the talks told Reuters. "Take-up could jump sharply in the next few days if remaining details are clarified."

The silent run on European banks, update - Separately, bankers estimate that Italian banks lost the equivalent of €40bn-worth of money market funding in July. And while money market funds are still lending to French banks, the duration of deals has shrivelled dramatically, from several months to just a few weeks (at most). This matters, since French banks rely on money markets for about €200bn of funding. Now, the good news is that these raw numbers are small compared to the total volume of money that eurozone banks raise in the wholesale and interbank markets, which is around €8,000bn. Better still, the European Central Bank has stepped into the gap to replace those vanishing funds. That has kept the system running, even as funding costs for eurozone banks have exploded to a level which are “massively prohibitive” – and thus unsustainable – for most banks, as Suki Mann, analyst at Société Générale says. Here is the article.  The “Better still” sounds funny to my ears, but I think you get the point.

Dutch Finance Minister on the Debt Crisis: We Are All Threatened by Contagion’ - In an interview with SPIEGEL, Dutch Finance Minister Jan Kees de Jager calls on the German government to remain firm in its opposition to euro bonds. He also warns that even the fiscally solid nations of the euro zone will get into trouble if they keep having to increase the volume of the bailout fund.

The Destructive Power of the Financial Markets - Der Spiegel - The enemy looks friendly and unpretentious. With his scuffed shoes and thinning gray hair, John Taylor resembles an elderly sociology professor.  Taylor is the chairman and CEO of FX Concepts, a hedge fund that specializes in currency speculation. It's the largest hedge fund of its kind worldwide, which is why Taylor is held partly responsible for the crash of the euro. Critics accuse Taylor and others like him of having exacerbated the government crisis in Greece and accelerated the collapse in Ireland.  People like Taylor are "like a pack of wolves" that seeks to tear entire countries to pieces, said Swedish Finance Minister Anders Borg. For that reason, they should be fought "without mercy," French President Nicolas Sarkozy raged. Andrew Cuomo, the former attorney general and current governor of New York, once likened short-sellers to "looters after a hurricane."

Four EU states may extend short-selling ban (Reuters) - Stock market regulators in Italy, France, Spain and Belgium will announce shortly whether to extend short-selling bans to prevent any further slide in bank shares as the euro zone debt crisis continues. Il Messaggero, an Italian newspaper, said on Thursday the short-selling bans will be extended for another month until the end of September. A spokeswoman for Spanish regulator CNMV said no decision had been taken yet. 'What I can confirm is that all the countries involved are in talks, and also in talks with ESMA (European Securities and Markets Authority), on whether to lift the ban or extend it. What the decision will be, I don't know,' she said. French market regulator AMF said it will issue a statement after the market close. 

France, Spain, Italy Extend Bans on Short-Selling - French, Italian and Spanish stock- market regulators extended temporary bans on short selling introduced this month in a bid to stem market volatility.  Spain and Italy extended their bans through Sept. 30, regulators in both countries said in a statement. France’s Autorite des Marches Financiers said its ban could last as long as Nov. 11. The “objective” is to lift the temporary ban on short-selling of financial stocks “as soon as market conditions allow,” Spain’s CNMV market regulator said.  The three countries, along with Belgium, imposed bans on short-selling of some financial stocks from Aug. 12 in an effort to stabilize markets after European banks including Societe Generale (GLE) SA hit their lowest levels since the credit crisis of 2008. The restrictions cover short selling of shares and equity derivatives in some financial firms.

Price Discovery Era Coming To An End As Spain, France, Belgium, Greece Extend Short Selling Ban "Due To Market Conditions" (Update: And Italy) - Kiss the free market goodbye. Spain's and France's regulator have both just announced that the short selling ban, which was supposed to expire tomorrow, has now been extended until the end of September 30, and November 11, respectively. Add to this Belgium and Greece whose regulators announced they will lift its own short selling ban "when conditions allow", or some time in October, in and we can pretty much be confident that the European market rout seen earlier is due to someone leaking the news that price discovery in Europe is now officially over.

Market Chaos ‘Potentially Dangerous for Humanity’ - Financial markets are inefficient and growing to the point of overwhelming the economy, according to Paul Woolley, an expert on market dysfunctionality. In an interview with SPIEGEL he explains why it's up to investors to stop dangerous trends and hold financial institutions accountable. Woolley: The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium -- it's falling into chaos.

ECB Monetizes €14.3 Billion In Insolvent Peripheral Debt Last Week; €111 Billion In Total - Following last week's €22 billion in secondary market bond purchases, this week we get a new total of €14.291 billion in settled Italian and Spanish bonds monetized: the third highest weekly total ever, bringing the cumulative total E110 billion. This follows on the heels of the BOJ intervening (or not) in the JPY market and the SNB buying 1 month CHF futures (leverage, leverage, leverage). What can one say but free, efficient, and central-bank free markets as far as they eye can see. Also guess what will happen when political pressures push the ECB to stop monetizing: all the moves tighter will be unwound in a manner of nanoseconds, and then a whole lot of "some."

Germany fires cannon shot across Europe’s bows - German President Christian Wulff has accused the European Central Bank of violating its treaty mandate with the mass purchase of southern European bonds. In a cannon shot across Europe’s bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem. “I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU’s workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank’s independence,” he said. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said, Mr Wulff said the ECB had gone “way beyond the bounds of their mandate” by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.

Bundesbank: "Mein Entschluss: Anschluss-Plus" - Germany Reveals The European Annexation Blueprints ZeroHedge We were wondering how long it would be before Germany, following in the footsteps of such luminaries as Hank Paulson and Tim Geithner, would formally announce to the world that with it now openly calling the shots in Europe, it would be its way or the mutual assured destruction way. We just got our answer courtesy of the just released August Outlook from the Bundesbank, in which the German national bank lays out the framework of the upcoming European anschluss play by play, as Germany prepares to roll out the Fourth Reich welcome mat without ever spilling a drop of blood. After all: why injure the soon to be millions of debt slaves? To wit from the report: "Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened." Translation: "we will gladly help everyone out... in exchange for a little of that vastly overrated fiscal sovereignty... Did we say a little? We meant all of it..."

Merkel Rejects Seeking Collateral in European Bailouts as Splits Emerge -  German Chancellor Angela Merkel rejected demands that Greece provide collateral for emergency loans as splits emerged in her Cabinet, reflecting euro-area divisions on the issue. Merkel told lawmakers from her Christian Democratic bloc that a call by Labor Minister Ursula von der Leyen for countries to put up gold as security for bailouts is “not the right way,” Ulrich Scharlack, a spokesman for the parliamentary group, said yesterday in Berlin after they were briefed by Merkel on the region’s debt crisis. The disagreement at the top of Europe’s biggest economy underscores risks over a second Greek aid package after the Finnish government said Aug. 16 that it secured a collateral arrangement to ensure its contribution would be repaid. Austria and the Netherlands, which both share Finland’s AAA rating, called for similar deals, as did Slovakia and Slovenia. “We expect other euro-area members to ultimately reject the Finland-Greece deal,” Moody’s Investors Service said. “But the message sent by the calls for such agreements confirms that Europe is conflicted over the very decision to provide financial support to its members, not just the amount of support.”

Fiscalization Watch -  Krugman - A correspondent informs me that Wolfgang Schaeuble, the German finance minister, has just given a speech asserting that excessive public debt caused the 2008 crisis. In fact, I’m told, he said that It’s actually undisputed among economists worldwide that one of the main causes – if not the main cause – of the turbulence – not just now, but already in 2008 – was excessive public debt everywhere in the world. OK, we can prove that wrong immediately: I dispute it, Brad DeLong disputes it, Christy Romer disputes it, and I think we fall into the category of “economists worldwide”.But more seriously, let’s look at the full list of countries that got into trouble because of high debts accumulated before the crisis, as opposed to those that have developed large deficits as a consequence of the crisis. Here’s the full list:

    • Greece

Malicious ECB rate hikes - Rebecca Wilder - Lieblings quote of the day by Dean Baker: "The ECB is run by a perverse cult that worships 2.0 percent inflation and is prepared to sacrifice almost all other economic goals to meet this target." The article goes on to argue that the ECB should increase its inflation target to 3-4% in order to facilitate positive wage growth in the debt deflationary economies like Spain. I've argued a similar point in the past.  However, I'd like to add that this "pervese cult" called the European Central Bank (ECB) raised its policy rate on April 13 - a point in time that correlates perfectly with a shift in trend across euro-area bond markets. Specifically, April 13 marks the upswing in risk premia on Italian, Spanish, and Belgian bonds relative to German bunds. Hmmm...policy mistake?   Now that's just malicious.

Greenspan: "The Euro Is Breaking Down" - Some dramatic comments from former Federal Reserve Chairman Alan Greenspan. "The euro is breaking down and the process of its breaking down is creating very considerable difficulties in the European banking system,” Greenspan said today, according to Bloomberg. He told attendees at the Innovation Nation Forum today that European leaders must reassess the feasibility of a monetary union between 17 countries with very different ideas of government and monetary policy. Here's what else he had to say:

  • - He boded relatively optimistic on the U.S. economy, saying that the biggest threats to the American economy come from Europe.
  • - He's also less worried about a double-dip recession than most, though he "certainly grant[s] the odds are rising."
  • - Gold is not in a bubble. "The major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating."

Swedish Banks Told to Gird for Second European Credit Crisis, Frisell Says - Swedish banks must do more to prepare for a deterioration in Europe’s debt crisis that could freeze interbank markets and cut off funding, said Lars Frisell, chief economist at the country’s financial regulator.  “It won’t take much for the interbank market to collapse,” Frisell, who is also a member of the Basel Committee for Banking Supervision, said yesterday in an interview in Stockholm. “It’s not that serious at the moment but it feels like it could very easily become that way and that everything will freeze.”  Swedish policy makers have been pressing for the nation’s lenders to seek more permanent, longer-term funding after the financial crisis in 2008. Following the collapse of Lehman Brothers Holdings Inc., Sweden’s central bank provided liquidity peaking at $30 billion because the country’s banks weren’t able to borrow in the U.S. currency to repay short-term loans.

The Goulash Archipelago: EU Remains Silent as Hungary Veers Off Course - SPIEGEL ONLINE - This group of dark-skinned men and women, consisting of old and young people, teenagers and widows, represents the advance guard of a massive undertaking currently underway in Hungary. Under Hungarian Prime Minister Viktor Orbán's plan to promote national renewal and moral rearmament, more than half of all the unemployed nationwide are to be put back to work. The 40 gypsies from Gyöngyöspata, who don't even use the more acceptable term Roma to describe themselves, have been assigned the job of clearing hibiscus bushes and undergrowth for four months. They are among 300,000 Hungarians who will soon be performing "community" work under a new law, which dictates that anyone who is out of work for more than 90 days in a row forfeits the right to social welfare and membership in the social insurance system.

Family finances ‘worse than in recession’ - Household finances are under greater strain now than at the height of the recession in 2009, new figures issued today reveal, raising further concerns over the recovery of the British economy.  High inflation, high unemployment, rising debt levels and falling take-home pay have led to the fastest drop in household savings and available cash since monthly figures were first collected two and a half years ago.  Markit's Household Finance Index for August hit a new low of 33.2 (readings below 50 signal a deterioration in finances, above 50 an improvement), with two out of five households reporting deteriorating finances over the month compared with just one in 20 recording an improvement.  Broke Britain: click here to download graphic (131k)

Tom Ferguson: The English Riots – Just Meaningless Sound and Fury? - In a recent essay, Slovenian theorist and literary provocateur Slavoj Zizek attempts to unpack the political meaning of the riots in England. These broke out in response to the shooting of Mark Duggan by the Metropolitan Police and then spread rapidly from London to other cities. Zizek argues that the riots amounted to an exercise in sound and fury signifying nothing — symptoms of an “ideological-political predicament” in which opposition can only be expressed through meaningless bursts of violence. This is the essence, he suggests, of global capitalism. He takes issue with both conservative and liberal responses, calling out the former for promoting an authoritarian crack down and the latter for trying to find “deeper meaning” in the social and economic conditions faced by the rioters.  Zizek misses the point: Austerity politics is a social and economic disaster.

Banks 'should take more risk' argues BoE executive director - Banks should be allowed to take more risk to underpin the recovery in spite of the lasting damage caused by the financial crisis, a leading regulator has suggested.  Andrew Haldane, executive director of financial stability at the Bank of England, argued that banks have over-reacted and are now suffering from "acute risk aversion".  This aversion has pushed up the cost of credit and "may be retarding the recovery".  Departing from current thinking, Mr Haldane suggested regulators now allow banks to operate with weaker finances to encourage lending.  Specifically, he indicated that banks could reduce the amount of loss-bearing capital they hold from around 10pc to 7.5pc.  "Setting regulation to boost risk-taking may feel like a radical departure," he said. But, drawing parallels with the Great Depression, he pointed out that President Franklin Roosevelt relaxed bank regulation in 1933

Western Economies Face A Long Haul Back To Health - The latest slump in equity markets suggests investors are no longer fretting about the near-term cycle. Rather, we could be in for the long haul. Before developing that, more on UK house prices by way of illustration. Their enormous rise in real terms from 1995-2007 was – of course – fuelled by a surge in mortgage finance. They have since dropped by 20 per cent, but the ratio of prices to real wages – Shore’s main criterion – is still well above the long-run average. And UK real wages are still falling, as they have every month since June 2008. This ties in with a 2009 study from US-based academics Carmen Reinhart and Kenneth Rogoff which looked at 21 past banking crises in 18 countries. The average fall in real house prices was 36 per cent, with an average duration of six years. Let us set this in a wider context. Over several centuries, the march of technology has involved jobs being transferred from leading economies to emerging ones. Normally, this has been gradual enough for the leading economies to adjust. But the rise of China and the rest has been too swift and vast for that. Real wages in the west have suffered accordingly.

Financial Crisis Is Too Big for Developed World to Cope, Ex-IMF Head Says - The crisis threatening the global financial system exceeds the capabilities of developed nations and requires a new International Monetary Fund “debt facility,” former IMF head H. Johannes Witteveen said. “Unusual problems require unconventional solutions,” Witteveen wrote in an opinion piece in the Financial Times today. “The world’s financial system is threatened by a new crisis that could be even worse than that of 2008.” He was IMF managing director from 1973 to 1978. Renewed signs of economic weakness globally and the downgrading of U.S. debt by Standard & Poor’s have rekindled concern about the quality of government borrowing, especially in Europe. Slumping confidence has wiped $8 trillion from the value of equities in four weeks. The leaders of euro zone nations have done everything politically feasible to counter the crisis, while the European Central Bank and the U.S. Federal Reserve are close to the limit of their capabilities, Witteveen said. A new fund could tap the currency reserves of China, Japan, the Middle East and European nations such as Germany, he said.