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

Saturday, September 25, 2010

week ending Sept 25

Fed Balance Sheet Rises to $2.31 Trillion on Treasury Purchases-- The Federal Reserve’s total assets rose $11.1 billion to $2.31 trillion during the past week as the central bank increased its purchases of Treasuries.  The Fed said last month that as housing debt matures it will buy Treasury securities to maintain its total securities holdings at $2.05 trillion. The plan is aimed at preventing money from being drained out of the financial system. The central bank has purchased $30.2 billion of Treasuries since it began the program on Aug. 17. In the last week the Fed’s holdings of Treasury securities increased by $10.5 billion to $805.1 billion, according to a weekly release today.  The Fed’s holdings of mortgage-backed securities decreased by $361 million to $1.09 trillion, while its federal agency securities dropped by $414 million to $154.1 billion. M2 money supply rose by $4.9 billion in the week ended Sept. 13, the Fed said. That left M2 growing at an annual rate of 2.4 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--September 23, 2010

A Look Inside the Fed’s Balance Sheet - last week – WSJ interactive - Assets on the Fed’s balance sheet have shrunk since the central bank’s last rate-setting meeting on Aug. 10, declining to $2.279 trillion from $2.310 trillion. The bulk of the drop has come from the mortgage-backed securities portfolio, which falls as loans are paid off or mature. At last month’s meeting, the Fed said that it would reinvest the proceeds from that portfolio into Treasurys. Indeed, the central bank’s Treasurys portfolio has increased since August, and the Fed announced last week that it will purchase $27 billion more of Treasurys in coming weeks offsetting nearly all the decline seen in MBS since early August.  See a full-size version. Click on chart in large version to sort by asset class.

QE the Sequel: Putting Ben’s Money Where His Mouth Is  - A consensus is emerging among Fed watchers that the Fed is set to embark on a fresh round of “quantitative easing” (QE), faced with a subpar employment growth and a lingering threat of deflation. Abstracting from whether the economic outlook is such as to warrant further stimulus, I wanted to focus here on what kind of “QE” might be more effective this time round, if it were to happen. Pre-empting my conclusion, let me say that my proposal will probably sound like the mother of unconventional measures, but it’s actually a variant of what the Chairman himself proposed back in 2002, at his famous “it” speech on deflation. But let’s start from the beginning.For details on how the portfolio balance channel is supposed to work you can read Brian Sack’s speech at the Money Marketeers last year (here), So against this theoretical backdrop, the key questions to ask when contemplating “QE, The Sequel” are two: What assets should the QE program target in order to be effective? And, critically, who should be buying those assets?

Money is NOT Easy, and Never Was! - Chevelle, at Models and Agents, explains why the previous round of “quantitative easing” performed by the Fed did not have a [sufficient] expansionary effect: Clearly, measuring the counterfactual is impossible, but there are reasons to believe that the impact on aggregate demand was small. Why? First, because the reduction in mortgage rates boosted refinancings only by people who could refinance—i.e. people with jobs and some positive equity in their home. Not exactly the most cash-strapped ones who would have spent the extra cash. Second, the portfolio-balance effect of the LSAPs on the prices of assets like corporate bonds or equities is at best weak, if not counterproductive. The reason (which I explained in detail here) has to do with the fact that US Treasuries and MBS are not “similar in nature” to corporate debt and equities. Luckily, one Benjamin S. Bernanke explained how to perform private asset purchases that would, in fact, have an expansionary effect: If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets. If you see that guy around, tell him to talk to the Federal Reserve.

No soul-searching on the left? - I was reminded of this score-settling phenomenon when I read a recent Washington Post story on the empty seats at the Fed: This is, as it happens, a pretty terrible time for the Fed not to have as many smart economists in its upper ranks as possible; the central bank faces a massively consequential decision over the coming months of whether to undertake new steps to try to boost the economy. Massively consequential decision?  Yeah, I guess I’d say so.  But I think we can all agree that at this late stage, nearly three years after the start of the recession, it is nowhere near as “massively consequential” as the decisions of September and October 2008, when expectations of inflation and NGDP growth were rapidly falling below the Fed’s implicit target, and just about everyone agreed the economy needed lots more aggregate demand. I hope I’m not being impolite by bringing up a few inconvenient truths.  As far as I can recall there were virtually no articles in the leading elite newspapers talking about the urgent need for more monetary stimulus.  Yes, there might have been an occasional off-hand mention of monetary policy, acknowledging that perhaps, in theory, the Fed could do something.  But then the idea was quickly brushed off as a long shot, which shouldn’t distract us from the need for fiscal stimulus.  And all those empty Fed seats in early 2009?  Once again, I don’t recall any sense of urgency on the issue.

Money, Money, Money - Another chart to steal from Real Time Economics, this time provided by Justin Lahart.  The classic hydraulic macro story would imply that someone is hoarding cash. It would be really nice then if we could look around and see some cash being hoarded. Indeed, we do. A point I want to make is that none of these pieces of evidence is in-and-of itself conclusive: The small business survey, the flow of funds, inflation expectations, etc. There could be explanations for all of them that involve something other than the traditional liquidity demand story: that is that recessions are caused by excess demand in the market for cash/bonds/safety. However, the liquidity demand story suggests that certain things should all be happening at the same time: a decline in the demand for labor, a decline in the purchase of durables, a decline in consumer prices and business’s pricing power,  a decline in asset prices, a decline in inflation expectations, an increase in cash holdings, an increase in the ease of finding workers, etc.

FRB: Press Release–FOMC statement–September 21, 2010

Fed Statement Following September Meeting - The following is the full statement following the Feds September meeting.

Redacted Version of the September 2010 FOMC Statement

FOMC Statement, 9/21/10 - There is some news in today's FOMC statement. A key change in the statement from the August 10 statement is this: Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The FOMC is registering concern that the measured inflation rate is below its target, typically thought to be in the neighborhood of 2%. Of course the FOMC is careful to state this in terms of its dual mandate, as laid out in the Full Employment and Balanced Growth Act, otherwise known as the Humphrey-Hawkins Act. The Fed is supposed to care not only about inflation, but about real aggregate economic activity, as specified (somewhat vaguely) in the Act

The Fed Remains in “Wait and See” Mode - Here is the press release from today’s FOMC meeting followed by a few comments on the Fed’s decision to wait and see if conditions deteriorate before taking any further action: Press Release, Federal Reserve Press Release, Release Date: September 21, 2010,The Fed is “prepared to provide additional accommodation,” to support its mandate for high employment and low inflation and, as Calculated Risk points out, this is paving the way for more quantitative easing. Awhile back, Bernanke said the Fed wasn’t sure what it should do, so at least now it is prepared, but for me that doesn’t go far enough. The Fed appears to be waiting for significant bad news on either inflation or employment before it will consider further easing, but (1) we have a big employment problem now that needs to be addressed, so why wait? And (2) once the bad news arrives, it will be too late for the Fed to do much about it.

FOMC Statement: "Prepared to provide additional accommodation "  - Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Fed Signals It May Take Further Steps to Boost Economy - The Federal Reserve on Tuesday inched closer to fresh steps to bolster a sluggish U.S. recovery, saying it stood ready to provide more support for the economy and expressing concerns about low inflation.  The U.S. central bank's policy-setting panel made no shift in monetary policy at the end of a one-day meeting, keeping overnight interest rates near zero, but it opened the door wider to pumping more money into the economy. "The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate," the Fed said in a statement.

The Lone Dissenter: Kansas City’s Hoenig Enters New Territory - Six votes, six dissents. Federal Reserve Bank of Kansas City President Thomas Hoenig’s persistence on the central bank’s policy committee may not have won him many new supporters at the Fed this year. But he now holds a special place in the Lone Dissenters Club. Hoenig’s vote against the FOMC’s 8-1 decision to keep the federal funds rate near zero marked his sixth straight dissent of the year, the most by a Fed policymaker in a single year since at least 1994 when the Fed overhauled its communications practices. Hoenig, the longest-serving current Fed policymaker, has pushed all year for the FOMC to drop the “extended period” language from its statement and exit its near-zero interest-rate policy. He wants the target for the federal funds rate to rise to 1%, before a pause at that level to see how the economy adjusts.

Fed Keeps Rates Low: Is Bernanke Making a 'Dangerous Gamble'? - Last month, economist Thomas Hoenig delivered a speech at a public meeting in Lincoln, Nebraska, called Hard Choices. The normally mild-mannered Hoenig said the Fed's recent policy of holding interest rates near zero was a "dangerous gamble." He said he feared the moves of the nation's most important bank were worsening the US economy, and might even create another financial crisis. "Monetary policy is a useful tool, but it cannot solve every problem faced by the United States today," Hoenig said. "In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long." Economists, market forecasters and pundits regularly question monetary policy. So a critique, even a scathing one like Hoenig's, isn't that unusual. But what made Hoenig's critique unique was that it didn't come from some outside observer. Hoenig is one of the Federal Reserve's highest ranking officials and this year, he has become one of chairman Ben Bernanke's most vocal critics.

The Fed Speaks - Krugman - We’re failing in our mandate to deliver full employment; meanwhile, inflation is below target; therefore, we’ve decided to do nothing.  Oh, and why does the Fed keep saying that inflation expectations are stable? Here’s the five-year breakeven rate, the difference in yields between ordinary 5-year bonds and inflation-protected bonds:  Last winter, the market briefly thought the Fed might hit its target inflation rate; since then it has been saying, in effect, that inflation will stay too low for a long time. And based on what we know about prolonged periods of economic weakness, the market is probably too optimistic. What Atrios said.

The Fed is Awakening From Its Slumber  You may have missed it, but this afternoon a slumbering giant with a formidable arsenal of economic weapons began to awake. That giant is the Fed and its formidable arsenal is its ability to further expand its balance sheet and shape nominal expectations. Though the Fed did not fully awake today, it showed signs of awareness that have been absent in the past few months. Specifically, this excerpt from the FOMC press release reveals the Fed is becoming more concerned about the low levels of inflation: Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consisten, ... longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The Fed is finally getting concerned that inflation--a symptom of aggregate spending--is not where it should be.  As Colin Barr notes, this is the Fed's first explicit acknowledgment of this worrying development and it implies the Fed is one step closer to a further loosening of monetary policy.  Ryan Avent agrees on this point.

What's the Fed signaling? -One option for the Fed in this situation is to signal what it intends to do a few years down the road, when interest rates rise off the zero lower bound and the Fed resumes its usual powers. If the public is persuaded today that the future Fed will be more expansionary once we return to that regime, such a perception potentially could help stimulate spending today. Indeed, in a theoretical framework such as that developed by Gauti Eggertson and Mike Woodford, this kind of signaling is the only power that the Fed has in a situation like the present. Suppose you took that view, and assumed that the Fed sees things  The most natural interpretation of those words is that the Fed is aiming at a long-run inflation target that's higher than what we've been seeing lately. By its nature, that is a statement about what the Fed will be doing several years down the road, not a signal of something it's going to do in November. In other words, it sounds a lot like the Fed is trying to follow the Eggertson-Woodford policy prescription.

What is Clear, and Not So Clear, About Fed Policy - I want to comment on some of the reactions I've been reading about lately concerning the Fed's recent policy statement. The full text of the statement can be found here: FOMC September 21, 2010. Here is the last paragraph: The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.One reaction to this statement can be found here: Fed's Hint of Further Easing Leaves Wall Street Guessing.  Evidently, the Fed is creating some confusion for the markets. This quote from that article essentially sums it up: Depending on whom you asked, the central bank either said too much, too little or said it poorly... Well, the Fed can be annoying at times, I guess. It would be nice if the next time it would say neither too much, nor too little, and--of course--to say all it is saying (and not saying) much more clearly!

Paving the Way for QE2 - Fed Chairman Ben Bernanke suggested in his August 27th speech at Jackson Hole that additional easing would probably require “significant weakening of the outlook” or a meaningful decline in inflation expectations (or further disinflation).The change to the FOMC statement today on inflation suggests the second criteria might have been met:  "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability." This was a significant downgrade from the statement last month:  "Measures of underlying inflation have trended lower in recent quarters ..."The FOMC and staff forecasts will be presented next month and these forecasts will probably be revised down again. That will probably meet the "significant weakening of the outlook" criteria.

Is the Fed Really Gearing Up for Monetary Stimulus? -So what is it that the Fed is trying to do by preparing the market for the possibility of “additional accommodation”? I think three things are driving this language, with the third factor being the most critical to understand. 1. The Fed must appear that it's concerned and is doing something. The Fed has a congressional mandate to promote full employment and I believe Fed officials feel they must say things that make them appear that they're not twiddling their thumbs while Rome is burning.  2. Expectations game. By jawboning in such a way that affects expectations about future interest rates and inflation, the Fed can create about as big of an impact on markets and the economy as it can by actually doing something. 3. In the current context, Fed accommodation of fiscal deficits = monetary policy neutrality.

Is the Fed already easing? - TUESDAY'S meeting of the Federal Open Market Committee came and went without the announcement of any new Fed policy actions, a result that disappointed many observers (myself included). Still, the text of the Fed statement was widely interpreted as paving the way for new expansionary measures at the next meeting in November. That's the right interpretation, I think. But it's not impossible that the message itself has already begun having a stimulative effect. Gavyn Davies muses on the significance of the Fed's statement: The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle...

Renewed Asset Purchases a Fraught Endeavor for Fed - Buying longer-term assets appears to be the favored path of the Fed in large part because it has already done it, having taken in more than $1 trillion in mortgage securities, and considerable amounts of government and agency debt. The action also benefits from being a variation on the traditional policy of manipulating short-term interest rates. Officials know that buying long-term bonds can make borrowing rates go down. But it isn’t a cost-free exercise and, what’s more, buying bonds now would be trickier than the first go-round. First, there is the matter of sorting out the economic benefit. When the Fed first embarked on buying long-dated mortgage and Treasury securities, it successfully sought to drive down long-term yields, making home and corporate borrowing more affordable. Those purchases ended last March, and the market managed to drive yields even lower without central-bank interventions. It isn’t clear how much bang for the buck the Fed could get if it re-enters the market. What’s more, how low would the Fed want yields to go? A considerable lowering in long-term yield could require massive asset purchases. But that could drive the Fed into a battle with markets.

Bond holders on collision course with QE2 - For all the talk of government bond vigilantes cowering policymakers and officials, when the US Federal Reserve speaks, as it did with this week’s closely read policy statement, investors sit and listen.  On Tuesday, bond investors were given a very strong signal that the Fed will soon start buying a lot more bonds under a form of monetary policy easing known as quantitative easing or what is being dubbed QE2. That is the broad conclusion after the Fed’s policy statement identified inflation as being too low for fulfilling its dual mandate of price stability and full employment. Amid its focus on US inflation being too low, the Fed ignored the rise in many commodity prices such as copper during the past three months. By setting inflation as a trigger for QE2, it makes it almost certain that the Fed will start buying bonds at some juncture. Inflation is a lagging indicator of economic activity and is seen falling in the coming months as the economy wrestles with high unemployment, falling asset prices and consumers paying down or walking away from their debts. A pre-emptive strategy means the Fed can pull the trigger, rather than waiting for an extended period before deflation, as seen in Japan, slowly becomes terribly entrenched. It thus reveals that for all the internal debate at the Fed between inflation hawks and doves about extending QE, there seems little doubt that Ben Bernanke’s status as a “deflation hawk” is driving the policy agenda.

What The Fed Should Do - Kevin Drum wants us to go beyond calling on the Fed to “do more” and start saying specifically what we’d like to see happen. The idea is that “the Fed needs cover for radicalism,” so here’s a maximalist agenda. It all starts with framing. If I were in charge I would do this. First you take the price level at the start of the recession. Then you draw a line representing two percent annual growth in the price level from that point moving forward. Then I would say “I am absolutely determined to get the price level back in line with this trend and intend to take whatever expansionary measures are necessary to do the job. I urge Congress to assist in this endeavor by making the long-term budget deficit smaller and the short-term deficit bigger. But whatever Congress does or doesn’t do, I am committed to raising the price level with every tool at my disposal.” I know some economists (Thoma definitely, and perhaps Krugman as well) disagree with this, but my view is that a very strong statement to this effect combined with even relatively mild action like cutting the interest on excess bank reserves to 0% would do the job. Where I come from, it’s easy for central banks to raise inflation expectations and difficult to lower them, so all we really need to do at this point is try.

Is the Fed doing more than U.S. commentators are suggesting? - The FT consistently paints the recent Fed as being somewhat dovish.  Here is one example: The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle...Since that period, most central bankers have been careful to avoid any language which even hints that a rise in inflation is acceptable to them. I can certainly find no previous record of the FOMC saying that inflation is too low, so it was a jolt to see this stated so starkly in the Fed statement yesterday. ...Bernanke Fed may be even more dovish than the Alan Greenspan Fed of 2003, and that is saying quite a lot. However sympathetic you are to the need for further monetary easing (and actually I am towards the sympathetic end of the spectrum), it is not difficult to see why the dollar has been falling, and gold rising, in the markets today.

Bernanke: Efforts Failed to Produce Recovery With 'Sufficient Vigor'. Federal Reserve Chairman Ben Bernanke reiterated his dissatisfaction with the course of the recovery Friday and suggested the Fed may downgrade its forecast for economic growth when it next meets. His comments came during a largely academic speech at Princeton University on lessons learned from the financial crisis. "Although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment," he told a conference at the Ivy League university where he taught from 1985 to 2002.

money volatility -- beggar-thy-neighbor - People should really read Mr. Bernanke's book on the Depression, Essays on the Great Depression. It clearly lays out Mr. Bernanke's thinking, more accurately his misconceptions on the era, and just as importantly, his failed strategies on how to meet the similar, but by no means identical situation we find ourselves in today. I pointed out a year ago in Ben's Bet, Mr. Bernanke's view of the 1930s is monetarist's revisionism first propagated by Milton Friedman. This revisionism's great advantage for Mr. Friedman, in the best tradition of economics, was it could not be proved right or wrong until the next crisis. However in the interim, it would helpfully provide cover for powerful interests, profiting greatly from the doctrine's growth and eventual dominance. In short, the monetarists' view was the Depression was caused predominantly by the Fed, particularly their failure to drop rates and loose money in response to the popped financial bubble of the 1920s.

Can the Fed Offer a Reason to Cheer? - Tyler Cowen - Optimism, or lack thereof, may seem the province of psychology, not macroeconomics. But the issue is very relevant to the difficulties that policy makers face: a deficit of optimism has much to do with why the United States economy remains stalled today. The Federal Reserve, pondering what to do to stimulate the economy, has a number of tools at its disposal. But if it could just convince Americans that it was committed to monetary expansion and economic growth, it would help the economy pick up speed.  Yet that is easier said than done. Here’s the problem: The economy needs help, but monetary policy, which is the Fed’s responsibility, has not been very expansionary. This is true even though the Fed has increased the monetary base enormously since the onset of the financial crisis.

Why aren't we using monetary policy to stimulate aggregate demand? - Tyler Cowen - My NYT column today is about why we can't move to a three percent inflation target (which I favor, at least for some number of years) and how we might make the leap.  Excerpt:...if the Fed announces a commitment to a higher inflation target but fails to establish its credibility, it will have shown impotence. It would be a long time before the Fed was trusted again, and the Fed might even lose its (partial) political independence. All of a sudden, the Fed would end up “owning” the recession. ...The Fed lost some of its political independence during the financial crisis. It undertook major rescue operations in conjunction with the Treasury, and these bailouts proved extremely unpopular. Congress has taken a closer look at Fed operating procedures and will engage in a one-time audit of the Fed’s emergency lending. When it comes to inflation, the Fed cannot easily turn to Congress and simply ask to be trusted.  This is the sad side story of our financial crisis: especially when it comes to financial matters, a great deal of trust has been lost. There is the prospect of a free lunch right before us, yet it is unclear that we will be able to grab it.

Why aren’t we using monetary policy to stimulate aggregate demand? - That question was posed here by Tyler Cowen at Marginal Revolution. The short answer that I gave Ed is that you can’t really use monetary policy to stimulate aggregate demand because the impact of monetary policy is much more diffuse and variable. As I’ve said before, for every winner who derives benefits from lower rates, there is a loser in the form of, say, a pensioner, who is deprived of income.  Tyler Cowen also points this out. Monetary policy is a very diffuse instrument – like using a meat cleaver instead of a scalpel for a surgery. I would also note that this dichotomy is of particular interest to people like Ed who worry that concentrating on aggregate demand obscures problems related to an economy’s resource allocation.

Dude, Where's My Central Bank? - Tyler Cowen made the case today that the Fed has not been expansionary enough:   I'll say, just look at the two figures below which show the expected CPI inflation rates at different forecast horizons.  The data comes from the Cleveland Fed and is based on a model that uses information from, among other places, the Treasury market  in a manner that controls for the liquidity premium. The first figure below shows  the "term structure" of expected inflation in September, 2010 and compares it to September, 2009, a year earlier.  The term structure or the plotted curves in the figure show the average expected inflation rate at different yearly horizons.  These figures show a striking drop in expected inflation over the past year.  The one-year inflation forecast went from 2.38% to 0.90% while the ten-year forecast moved from 2.03% to 1.54% (Click on figure to enlarge). 

Is Monetary Stimulus Politically Impossible? - Tyler Cowen discusses the prospects for monetary stimulus achieved through a more aggressive explicit inflation target. He comes down with the view that such a policy would be desirable, but is likely politically impossible: Part of the credibility problem stems from the political environment, especially in Congress. Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly. Kevin Drum seems to agree. Of course by definition, anything that the political system isn’t doing is impossible until it happens. But lets say Ben Bernanke and a majority of members of the Fed’s Open Market Committee wanted to do this and that Barack Obama and Larry Summers agreed that it was a good idea. What would the politics look like?

Tyler Cowen and Tinkerbell - Tyler Cowen wrote an excellent column on the dilemmas faced by our monetary policymakers.  Tyler understands that it isn’t even 100% clear who our monetary policymakers actually are, or for that matter, who they should be.  Should Congress set monetary policy, and have the Fed implement their policy?  Should the President?  Or should the Fed set policy?Given my fanatical views on monetary policy, I’ll find plenty of little things to nit-pick, and one big thing to praise (which many readers might tend to gloss over.) Tyler’s strength is his ability to translate complex ideas into simple and clear exposition.  While reading the article I occasionally came across statements that I thought oversimplified the issue, or were perhaps slightly misleading.  In each case, however, I couldn’t think of any other way to present the idea, without going way over the heads on the NYT readers.

Tyler Cowen's Happy Face Inflation Policy - Here is the basic idea, as I understand it. The future  is dark and uncertain; there is no sound basis for making long-horizon forecasts. This opens a door for psychology. Communities are now prone to psychologically-inspired waves of optimism and pessimism ("animal spirits," to use Keynes' colorful phrase). Since current investment demand primarily runs off of long-horizon forecasts (relating to the expected return to future capital), these animal spirits lead to large fluctuations in "aggregate demand" via investment spending. Things are even worse in a monetary economy, as the existence of cash facilitates a psychologically-inspired "flight to safety" that, while perhaps individually rational, contributes to a socially irrational contraction in aggregate demand. The contraction in aggregate demand means lower sales volumes, so firms lay off workers, who are now unemployed. As unemployed workers generate no wage income, they cut back on purchases, which contributes further to lower demand. Firms are induced to cut prices, which leads to deflation. As debt is nominally denominated (not indexed to inflation), the deflation raises the real debt burden of indebted households and firms. Debt renegotiation is possible, but the process is costly and slow. The upshot is a wave of bankruptcies that contributes to the depressed business climate.

I don't get the Fed's supposed commitment problem -Ive long been a proponent of the idea of inflation targeting by the Fed as a strategy for stimulating demand and reflating our moribund economy (for examples, see here, here and here) Why isn't the Fed doing it already? Today Tyler Cowen writes that the obstacles are mainly political.  My brief take on what Cowen is writing here is that the Fed's commitment to higher inflation needs to be credible for it to work, and if the Fed commits to higher inflation, some politicians will cry foul, which could not only compromise their commitment to sustained higher inflation, but ultimately threaten the Fed's authority and independence.But politicians are always crying foul about the Fed's actions.  And if the Fed can't do what it should be doing, then its authority is already compromised.Mark Thoma also emphasizes the commitment problem:

One-track minds - I WANT to return to the topic of the multi-faceted American recovery that I discussed yesterday, after reading some additional commentary on the issue in various places. Tyler Cowen, writing on the potential for more Fed action, mused that: Maybe we are in a new political economy equilibrium where each government agency is given “one shot” at a problem. Treasury had its one shot with the stimulus plan. The Fed had its exotic monetary policy operations and deal-making during the crisis. Maybe in bad times voters aren’t happy no matter what, and no one is allowed to try twice. We have not yet thought through the political economy of this scenario. The problem seems deeper than this one-shotism. Indeed, it seems that Americans can only seem to hold one agency responsible for action at a time, and can only focus on one potential economic challenge at a time. Try expanding the discussion and the circuitry of the nation's tired, rusting op-ed bots is overloaded, such that they begin whirring and smoking and firing a random, incomprehensible array of clichés at the printed page.

How a touch of inflation could boost the economy - Americans generally view rising prices as something to fear. But right now, a little inflation may be just what the economy needs. Consumer prices rose 1.2 percent over the 12 months that ended in August, the Labor Department said Friday, and only 0.9 percent when volatile prices for food and energy are excluded. That is well below the range of 1.5 to 2 percent sought by the Federal Reserve.  Somewhat higher inflation could strengthen the ailing economy. Inflation would make the heavy debt that Americans carry a bit more manageable as wages rise but the amount owed stays the same. And it would create more incentive for businesses to invest their cash rather than sit on it, because inflation would reduce the value of hoarded money.  Some economists fear outright deflation, a destructive, self-reinforcing cycle of falling prices that can cause a long period of economic misery.

The economic benefits of inflation - The Federal Reserve has taken extraordinary measures to get the economy moving again. This pulled us back from the brink of disaster, but, as the fifteen million Americans out of work can testify, it hasn’t been enough to get the economy out of neutral. And so a surprising number of high-profile economists, on both the left and the right, think that it’s time for the Fed to try one more extraordinary measure: injecting the economy with a healthy dose of inflation. Odd as that may sound, it’s actually not a crackpot concept. Right now, the U.S. economy has two fundamental, and interconnected, problems. First, consumers face huge debt left over from the borrowing spree of the past decade. Second, the dominant sentiment is caution—consumers are hesitant to spend, and businesses are hesitant to expand, invest, and hire. If the Fed were to moderately raise its inflation target—currently around two per cent—and commit itself to keeping prices moving higher for the next couple of years, it could help change this dynamic.

How to Stimulate Aggregate Spending - There has been an uptick in the discussion of what exactly the Fed should do to stabilize aggregate spending.  Folks like Kevin Drum and Matthew Yglesias love it since it gives cover for the Fed to be more aggressive.   Well, it seems the folks behind the Wizard of Id comic strip have been reading these blogs because today they came up with their own radical proposal: (Click on figure to enlarge.) Actually, this proposal is not that new as it was recently promoted by Greg Mankiw and William Buiter.  This approach does create some serious problems as noted by Rajiv Shastri, but it would be highly effective in stimulating aggregate spending.  My preference is to go with Scott Sumner's proposal.

Inflation Below (Unofficial) Target - In its Tuesday statement, the Federal Open Market Committee said that inflation is too low for its taste: Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.  Of course, we're used to central banks worrying about inflation becoming too high, so this is an unusual thing to see.  Those who are still worrying about inflation, in spite of the data, are fighting the last war.  Fortunately, the Fed isn't interpreting the "price stability" part of its mandate to mean "zero inflation." The projection of board members' for inflation in the "longer run" can be taken as its unofficial target; as of the last release in June, they were aiming for expecting 1.7%-2.0% (as measured by the deflator for personal consumption expenditures).

Inflation when the economy is in the dumps - What happens to inflation during a downturn? This column documents the behaviour of inflation during 25 episodes of persistent large output gaps in 14 advanced economies over the last 40 years. It finds that such episodes bring about significant disinflation, although inflation tends to bottom out at low positive rates. Recent developments in advanced economies appear consistent with this disinflationary effect.

Inflation Fears of Rich, Poor Diverge -What one thinks about the inflation outlook appears closely tied to their household’s relative level of wealth, a Federal Reserve project exploring the measurement of inflation expectations has found.There are “differences in inflation expectations across demographic groups’ and there are “marked changes in the sizes of those differences over time,” a new report issued by the Federal Reserve Bank of New York said Thursday. The release was an update of a project being done between the New York and Cleveland regional Fed banks, with others, started in 2006. Household income is a key variable in determining views on the future path of prices, according to data covering the toughest years of the financial crisis.“As December 2008 approaches, inflation expectations diverge across income groups, owing mainly to an increased concern about low inflation — or even deflation — expressed by high-income respondents,” the paper said. Disagreement about the price outcome was concentrated in lower income groups.

Demand, supply, and the Fed - AS THE Fed almost, nearly recognises, a shortfall in aggregate demand is constraining employment growth. Karl Smith provides evidence, in the form of a survey of almost 1,000 CFOs: The survey results show 50 percent of respondents have no intention of deploying their cash over the next 12 months. More than half of responders say they will continue to sit on cash for liquidity to protect against another round of credit tightening and general economic uncertainty. Of the 50 percent that will deploy cash, only 56 percent will allocate to capital spending and investment. “The survey shows only 22 percent of firms say their new capital spending will lead to hiring. This bodes very poorly for employment in 2011.” So, this means demand is the only issue, right? Well no, as Menzie Chinn notes, the OECD recently concluded that about a third of the growth in America's long-term unemployment is structural in nature. And this follows on IMF research indicating that perhaps 1 to 1.75 percentage points of the present unemployment rate can be attributed to structural factors.

Hysteresis and Monetary Policy - Menzie Chen makes the point that there is no sharp distinction between cyclical unemployment and structural. That is, the longer a recession goes on the more and more people will become semi-permanently unemployed. Ryan Avent co-signs. I think the data on this phenomenon, known in economics circles as hysteresis, is compelling. Though, we don’t know exactly why it occurs. Stories about lost skills and disaffected workers are easy to come by. Hard data is not. However, hysteresis should be properly interpreted as saying “Monetary policy has long lasting real effects” not that recessions are purely the result of real shocks or mismatch. Hysteresis increases the urgency for higher inflation targets and indeed encourages us to pursue higher permanent inflation. If we believe hysteresis is true then that suggests that there is a semi-permanent tradeoff between inflation and unemployment.

Inflation and Jobs: The Big Picture - I want to continue my assault on the idea that we need to look under every rock for the causes of our current economic tragedy. Lots of things are going on for sure. However, good science seeks to abstract from the messy details of reality and get right to the core story. A the end of the day what is the biggest economic driver?  I want to abstract from everything else and just look at whether or not employment can be jerked around by monetary policy. Can printing money at an ever faster rate lead to the creation of jobs as many economists suspect?  We know that printing money at a faster rate will eventually lead to increasing inflation. So, lets take a look at increases in the rate of inflation versus increases in the number of jobs. The correlation is not perfect, but there seems to be a fairly strong relationship. Especially if we allow, as Milton Friedman suggests we do, for “long and variable lags” we see a strong pattern.

Would Inflation Cure What Ails the Economy? - When the economic crisis first hit in 2008, the Federal Reserve was very quick to sharply expand the money supply to keep the financial system from imploding the way it collapsed in the early 1930s, which brought on the Great Depression. When the Fed expanded the money supply, there were many economists who immediately warned that the Fed’s action would shortly bring on massive inflation. In the two years since, however, deflation has continued to be the economy’s fundamental problem. This has led some economists to suggest that in fact a bit of inflation would be the best possible thing for the economy today.A key reason why this is important is that deflation magnifies the burden of debt. In effect, people are forced to repay debts in dollars that are worth more than those they borrowed initially. The weight of debt therefore rises, imposing a crushing burden on the economy that inhibits spending, investment and growth. The great economist Irving Fisher thought this debt-deflation mechanism was at the core of the Great Depression. It may be the case now as well.

Can the U.S. slip into outright deflation? - The U.S. consumer price index for August came in pretty much as expected with a 0.3-per-cent gain, but the big news was the flat reading on the “core” index (which excludes food and energy). This is the metric that the markets and central banks focus on since food and energy tend to be volatile and related more to periodic supply factors than fundamental demand factors.  This CPI core index has now been at 0.1 per cent or below for nine of the past last 10 months and the year-over-year trend, at 0.9 per cent, has been below 1 per cent for five months running. Historically, back to 1957, I can only see this sub-1-per-cent trend happening for this long in 1960 – when the U.S. economy was in recession.  So, after nearly two years of de facto zero per cent policy rates, a weaker U.S. dollar, dramatic expansion of the Fed's balance sheet and a 10-per-cent deficit-to-GDP ratio, the U.S. economy is on the precipice of a deflationary experience. Whether or not it actually happens is a different matter, but at the present time, the economy is flirting with it.

Fed to Cut Growth Forecast, Europe Rescue Faltering, Pimco's El-Erian Says-- The Federal Reserve will cut its growth forecasts and Europe’s economic bailout is failing, said Mohamed A. El-Erian, chief executive at Pacific Investment Management Co., which runs the world’s biggest bond fund.  U.S. central bankers may wait beyond their meeting tomorrow to announce additional steps to sustain the expansion, El-Erian wrote in an opinion piece on Pimco’s website. Slower-than- expected economic growth has fueled speculation the Fed will expand its program of Treasury purchases as it tries to keep borrowing costs low. Industrialized nations are eager to let their currencies weaken to aid their economies, he said.  The Fed will signal new easing measures, “but probably not at this meeting,” wrote El-Erian, who is based in Newport Beach, California. “It should and, I suspect, will,” reduce its growth projections.

Seven More Years of Hard Times?, by Robert J. Shiller -  Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies. The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times. Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.

NBER: Recession Ended in June 2009 -  The National Bureau of Economic Research, the arbiter of the start and end dates of a recession, determined that the recession that began in December 2007 ended in June 2009.The business-cycle dating committee met by phone on Sunday and came to the determination. “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month,” the committee said in a statement. The 2007-2009 recession is the longest in the post-WWII period.

NBER: The Recession Ended in June 2009 - It’s important to note that this is an attempt to identify the trough of the recovery. It does not say we have recovered, only that we’ve turned the corner, and it doesn’t say anything about how long it will take to reach full employment.Is the date correct? An examination of recent data does reveal a “fishhook” shape, though the part of the hook with the barb is pretty short. So it’s hard to quarrel with the date they assigned, particularly given how past recessions were dated. But it is worth noting that the trough of the cycle for employment is far later in time than the trough for GDP, something that was true in the past two recessions as well, and that the date for the trough is influenced more by GDP than employment. The trough of the employment cycle alone would be much later in time, and it’s not clear we are there at all yet.

The NBER Calls It - While this was the correct call in terms of consistency with their definition and past practice (and I thought they should have made it sooner), it highlights the limitations of the "recession"/"expansion" dichotomy in describing the state of the economy. As they were careful to note, the economy continues to operate substantially below capacity. The "expansion" state is about the rate of change, not the (still lousy) level; as the NBER's FAQ puts it:  Q: Isn't a recession a period of diminished economic activity?A: It's more accurate to say that a recession—the way we use the word—is a period of diminishing activity rather than diminished activity.  So, since June, we've been in a period of non-diminishing activity. That's certainly better than continuing contraction, but growth has not been fast enough to make a substantial dent in unemployment.

The Recession Has (Officially) Ended - The recession officially ended in June 2009, according to the Business Cycle Dating Committee of the National Bureau of Economic Research, the official arbiter of such dates.As many economists had expected, this official end date makes the most recent downturn the longest since World War II. This recent recession, having begun in December 2007, lasted 18 months. Until now the longest postwar recessions were those of 1973-5 and 1981-2, which each lasted 16 months. The newly-declared end-date to the recession also confirms what many had suspected: The 2007-9 recession was the deepest on record since the Great Depression, at least in terms of job losses. Recession and expansion dates are based on various economic indicators, including gross domestic product, income, employment, industrial production and wholesale-retail sales. The Business Cycle Dating Committee typically waits to declare that the economy has turned until well after the fact, when it has a longer track record of economic data to confirm a new trend.

NBER Eggheads Finally Proclaim End of Recession - The NBER’s Business Cycle Dating Committee, of which I am a member, announced this morning that June 2009 was the trough of the recession that began in December 2007.    It was the longest recession since the 1930s.     It is the fate of the Committee to be teased mercilessly every time we make one of our formal declarations of a turning point in the economy.   We get it from both directions. On the one hand, people say “Who needs the NBER to tell us what we already knew?”    It is true that GDP has been expanding for 5 quarters now, and that most economists have therefore considered the recession over.      On the other hand, people say “It doesn’t feel like the recession is over to me or to people I know.  How can the NBER be so out of touch?”   The main answer, here:  The proposition that the recession is over is only a statement that things are no longer getting worse; it is not a statement that we are back to good times.

Experts: Recession ended last year - The longest recession since World War II ended 15 months ago, in June 2009, according to a report released Monday by the National Bureau of Economic Research, a leading organization studying issues related to the nation’s economy.  According to NBER’s Business Cycle Dating Committee, the U.S economy experienced the beginnings of an economic expansion in the middle of last year, marking the end of an 18-month recession that began in December 2007. The findings are welcome news for the White House, which has struggled to make its case that the unpopular steps it took to limit the economic damage have worked, even as the unemployment rate continued to rise above 9 percent well into 2010.

Well, Now That That’s Over…Or is it?  The National Bureau of Economic Research has finally made it official: the latest economic recession ended well over a year ago–in June 2009. Of course, that doesn’t mean that things are just peachy now.  We’re still in “recovery”–not “recovered”–mode: …which means there’s still plenty of need for counter-cyclical fiscal “stimulus” and that right now is not yet the right time to reduce the federal deficit. But that doesn’t mean that any deficit-financed spending or tax cut is justified.  You will hear a lot of economists, including those recently surveyed by CNN-Money in fact, say that the continued weakness in the economy is why all of the Bush tax cuts should at least be temporarily extended.  But that conclusion puts a pretty low bar on the Bush tax cuts:  it says they’re a good idea just because they cost money–in simply moving substantial resources from the government sector to the private sector.  It doesn’t ask how good a job those tax cuts will do in stimulating private-sector economic activity.  It doesn’t ask if there are ways to stimulate the economy even more, for less money.  It doesn’t ask if there are better ways to get money in the hands of people who really need the help the most.  It doesn’t ask if the dangers of this deficit financing of these particular tax cuts becoming permanent (and hence eventually a bad thing for our economy) are too large.

Is This What a Recovery Feels Like? - Room for Debate Forum, New York Times - -… The Business Cycle Dating Committee of the National Bureau of Economic Research said on Monday that the recession is over. In fact, the recession that began in December 2007 ended in June 2009. While many economists have long been saying that the recovery has begun, this news does not fit with how a great number of Americans see the overall economy, let alone their own situations.  If June 2009 was when the economy reached its low point, do Americans need to adjust their expectations about what the recovery means for their future? And should we now be less worried about the so-called W-shaped recovery?  Should Americans adjust their economic expectations now that the recession is technically over? ...articles by Yves Smith, Jeff Frankel, Mike Konczal, Tyler Cowen, Arnold Kling, and Megan McArdle.

America's recovery: Are we there yet? - THIS week, The Economist has a cover package on the state of the American recovery. Over a year after the recession's end, growth looks vulnerable and has yet to produce much in the way of new employment. Our economics editor and US economics editor sat down to discuss the factors constraining recovery and what more the government might be able to do to help. Have a listen:

Why No Amount of Fiscal or Monetary Stimulus Will Be Enough, Given How Small A Share of Total Income the Middle Now Receives - Robert Reich - I don’t generally side with the hawks but they have a point. Even though economy is heading downward, flooding it with more money may not help. The problem isn’t the cost of capital. Most businesses can get all the money they need. Big ones are still sitting on $1.8 trillion in cash.The problem is consumers, who are 70 percent of the economy. They can’t and won’t buy enough to turn the economy around. Most don’t qualify for more credit given how much they already owe (or have already defaulted on).Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they’re doing. Ultimately, even if fiscal and monetary policy weren’t deadlocked, we’d still face the same conundrum.

Structural Failure - Krugman - An important new report from EPI on why you shouldn’t believe the hype about structural unemployment. Why is this so important? Claims that there has been a huge jump in structural unemployment — that is, unemployment that can’t be cured by increasing aggregate demand — are playing a large role in the argument that we should basically do nothing in the face of a terrible economy. No need for the Fed to do more; no need for more fiscal stimulus — hey, it’s all about defective labor markets, and we should work on structural reform, one of these days. The question is, why on earth would you believe that structural unemployment is our main problem right now?Basic textbook macro tells you how to distinguish between slumps brought on by supply shocks and those brought on by demand shocks: look at inflation. If you have stagflation, rising unemployment combined with accelerating inflation, that’s the signature of a supply shock; if you have unemployment with disinflation, that’s the signature of a demand shock. And guess what we see?

Sequential Signals - John Hussman - Last week, we got a fresh set of economic indications from the Philadelphia Fed Survey. While the market evidently took relief from the modest uptick in the composite index to -0.7, a quick look at the component indices suggests a worsening of economic conditions in the latest report. Specifically, the Philly Fed new orders component fell to -8.1 from -7.1, which is the third month in negative territory. While there was a slight uptick in the index for number of employees (to 1.8 from -2.7), the better leading measure is the average employee workweek, where the index weakened to -21.6 from -17.1.  As I've emphasized in recent weeks, the U.S. economy is still in a normal "lag window" between deterioration in leading measures of economic activity and (probable) deterioration in coincident measures. Though the lags are sometimes variable, as we saw in 1974 and 2008, normal lags would suggest an abrupt softening in the September ISM report (due in the beginning of October), with new claims for unemployment softening beginning somewhere around mid-October.

Sustaining Current Account Deficits - I’ve done a lot of thinking on current account deficits, especially for countries that attempt to sustain them, which I believe is dangerous. The reason why is that if a country can’t continually increase and sustain its real productivity as a percentage of GDP faster than its net foreign obligations, it will force itself into an economic shock, unable to repay at current economic levels. In other words, if you don’t invest your foreign funds into the most productive assets, you’re in trouble. Click here to see the full piece. avoiding-a-financial-shock-with-sustained-current-account-deficits

Chinese Dollar Torture - Recently, the US Treasury Department released data showing an 11% decline in official Chinese holdings of US government bonds during the past year. For US dollar holders, this is a troubling trend. To put it simply, the Chinese government isn't adding to its US bond position, at least not in any meaningful way. Nor is it rolling over its previous purchases. According to the latest Treasury International Capital report, China resumed net purchases in July for the first time in three months. China's US Treasury holdings rose $3 billion. Dollar bulls looking to cheer the modest purchase may first consider the following, longer-term trend: Between September 2009-July 2010, Chinese holdings of US bonds fell from $938.1 billion to $846.7 billion, a drop of over $91 billion over nine months. In short, the Chinese are backing away from US debt. They're reducing their exposure to the US dollar, and by extension their vulnerability to a declining US economy. What's going on? Is the decline in Chinese holdings of US bonds strictly an economic assessment? Or is there something else afoot? What factions are driving this decision?

China Guts Dollar, Crushes US in Alarming Financial War Game -  On a rainy Tuesday in March 2009, U.S. military and intelligence officials gathered in a war room north of Washington to watch a simulated conflict flicker across a bank of video screens. The struggle was pitting the U.S. against China. And China was winning hands down, writes Eric J. Weiner in “The Shadow Market,” a bleak survey of how flush authoritarian governments deploy financial means to achieve geopolitical ends. The weapons were dollars, stocks and bonds, not bullets and bombs. The soldiers were Wall Street bankers, hedge-fund traders and economists. For two days, they explored what would happen if the world sank into economic warfare. The outcome was alarming. “There was no way for America to win,” Weiner says. Whenever the U.S. did something Beijing didn’t like, China began dumping a fraction of its dollar-backed assets, driving down the currency, sowing economic chaos and prompting U.S. leaders to appease the Chinese. America didn’t have as much leverage with its Asian banker as had been assumed -- a lesson reinforced this week when Chinese Premier Wen Jiabao rebuffed U.S. complaints that the yuan was undervalued.

Why a Sovereign Default Remains on the Table – It is costing some governments in Europe more than ever to raise money from the bond markets. This week, the gap between yields on government bonds issued by Portugal and Ireland and those issued by low-risk Germany rose to their highest levels since the introduction of the euro.Yet until Wednesday, when signs of Irish economic weakness and the general frailty of the private-sector recovery in Europe provided a jolt, the markets have been calm and the euro remains close to a five-month high against the dollar.In a paper this month, staffers at the International Monetary Fund argued that sovereign default in advanced economies is "unnecessary, undesirable and unlikely."  But among those who beg to differ is Willem Buiter, Citigroup's chief economist. In a report last week, he dismisses the IMF claim as "based on bad economics and simplistic political economy."He says no government credit is safe from the risk of default because it is harder than ever to rein in budget deficits

Why We Don't Need to Pay Down the National Debt - Since 1960, three times our leaders have tried to balance the budget and so reduce the debt. Each time, in 1969, 1980, and again in 2000, guess what happened? Recession. Why? Because running a budget surplus means draining funds from private businesses and families. The textbooks used to call this "fiscal drag." It just isn't smart. Nor is the present public debt close to being a record. In relation to our annual output it was much higher in 1946--that would be the year after the Greatest Generation won World War II. (Disclosure of a well-known fact: My father had a strong hand in economic management in the war years.) Did calamity follow? No. For a third of a century after the war, the debt-to-output ratio just gradually declined. By 1980 it was too low, which caused some problems. But then Ronald Reagan--who was another Greatest Generation guy, or who at least played one in the movies--came along and fixed that. It's true that we have got big economic problems right now. But the budget deficit and the public debt aren't among them. Kinsley just assumes they are, adding to the mountain of confusion already piled onto this topic. I hope his response will take up each of these points and rebut them--if he can.

If Deficits Are Totally Harmless, Why Have Any Taxes? –Jamie Galbraith will be happy to know that his resubmitted draft of this reply--which, believe it or not, is considerably less nasty than the one I had already responded to--has forced me to rewrite my reply, leaving out a variety of devastating rejoinders to insults that no longer appear, and taking far too much time for a lazy person such as myself. Now he seems to at least accept the legitimacy of the Congressional Budget Office. The CBO may be wrong but it is a professional, politically neutral organization whose assumptions surely are not obviously ridiculous. When I described these assumptions as "reasonable," this was shorthand for a long, somewhat boring explanation I was hoping to avoid. CBO budget projections ordinarily start with a "baseline" that assumes current spending programs will remain the same, except for safely predictable demographic changes. (For example, Social Security's benefit formulas won't change, but costs will increase due to an aging population.)

A Thousand Cuts: What Reducing the Federal Budget Deficit Through Large Spending Cuts Could Really Look Like -  There are hard budget decisions coming for our country and we need to get serious about them. Whether you agree with us that any deficit reduction should take place only after the economic recovery is firmly in place, or agree with those who believe deficits should be reduced immediately—halting projects and jobs mid-stream—there is little argument that the budget deficits projected for the years ahead are unsustainable. Everyone knows that tax increases, spending cuts, or both, are in our future. What few have been willing to do, however, is say what those tax increases and spending cuts might look like. Read the full report (pdf) Download the executive summary (pdf) Download the report to mobile devices and e-readers from Scribd

The Shape of Cuts to Come - In an excellent column, Stan Collender makes the point that it does no good to talk about cutting spending in pure numerical terms. If you don’t spell out which actual things you want the government to do less of then you’re not really doing anything. If we have a “hiring freeze,” for example, what tasks currently undertaken by civil servants are going to go undone?  My colleagues Michael Ettlinger and Michael Linden try to take this on in a new report they call “A Thousand Cuts.” It starts by looking at the quantity of deficit reduction that would be needed by 2015 in order to achieve the goal of “primary balance” (i.e., receipts equal non-interest spending) by that year. And it spells out a few different scenarios. One entails doing 33% of the reduction through spending cuts, one entails doing it with 50% cuts, one entails 75% cuts, one entails 100% through cuts, and one features 100% cuts and doesn’t count tax expenditures as spending. The report is both a guide to specifically which programs are relatively low value and also to how extraordinarily painful the reductions would have to be to do this all or exclusively on the spending side

Doing CBO’s job - By now you know the story. If not, it’s here. I just want the 2010 CBO projections to be in the same format as the 2008 ones were. This is important because the way the data are displayed either highlights or somewhat conceals what’s driving federal spending. CBO didn’t produce consistent figures, but now I have with their data. See below. This is the right way to view this information. Federal spending and revenue projections as a percent of GDP (CBO) Alternative Fiscal Scenario - Baseline Scenario

Jacob Lew, Obama Nominee And Former Citigroup Executive, Doesn't Believe Deregulation Led To Financial Crisis -  A former top executive at Citigroup who participated in the deregulation of Wall Street during the Clinton administration and recently was tapped by President Barack Obama for a top White House post told a Senate panel last week that deregulation didn't lead to the recent financial crisis. Jacob "Jack" Lew, Obama's nominee to lead the Office of Management and Budget, the White House agency entrusted with ensuring that federal regulations reflect the president's agenda, was asked Thursday during his confirmation hearing before the Senate Budget Committee by Sen. Bernie Sanders whether he believed that the "deregulation of Wall Street, pushed by people like Alan Greenspan [and] Robert Rubin, contributed significantly to the disaster we saw on Wall Street."Lew, a former OMB chief for President Bill Clinton, told the panel that "the problems in the financial industry preceded deregulation," and after discussing those issues, added that he didn't "personally know the extent to which deregulation drove it, but I don't believe that deregulation was the proximate cause."

The Anti-Dog Whistler - Krugman - So Obama’s nominee to head OMB told a Senate panel that deregulation didn’t lead to the financial crisis. Urk. I think he may technically be right — it wasn’t so much deregulation as the failure to extend regulation to keep up with financial innovation that did it. Still, talk about stepping on the message. And this gets to a point I’ve been trying to formulate: while the Obama’s political problems are largely due to a lousy economy, it’s also true that the administration seems to go out of its way to alienate its supporters. What I think of is the contrast between how Obama operates and how Bush operated. Bush and his handlers were masters of dog-whistle politics — of conveying to their base, in ways that went under the radar of mainstream media, the message that he was really one of them. The vaguely Biblical language about evildoers, for example, struck most mainstream commentators as being slightly odd, but never mind; what it conveyed to the religious right, however, was the message that Bush was a dominionist at heart.

Stag Hunt and macroeconomics - A coordination failure is when rational individual behaviour leads to a bad outcome. Some other outcome would be preferred by all. Keynesians especially emphasise coordination failures, though nearly all macroeconomists say that coordination failures sometimes happen, and say the US economy is in one right now. That makes us optimists. Maybe this isn't the best we can do. Stag Hunt has two Nash Equilibria, a bad one (hunt hare) and a good one (hunt stag). Each can catch a hare by himself, but it takes both players to catch a stag. Half a stag is better than a whole hare. If he expects the other player to hunt hare, it will be individually rational for each to hunt hare too. And if he expects the other to hunt stag, it will be individually rational to join him in hunting stag.

The Republican plan to turn back time - A new vision for America! If the Republicans gain a majority in the House of Representatives, reports the Wall Street Journal, they plan to cripple Obama's legislative achievements -- such as they are -- by denying funding for their implementation.Republican leaders are also devising legislative maneuvers that might have a bigger impact, using appropriations bills and other tactics to try to undermine the administration's overhaul of health care and financial regulations and its plans to regulate greenhouse gases. GOP leaders also hope to trim spending, return unspent stimulus funds and restore sweeping tax cuts.Business groups have compiled lists of impeding regulations they hope to see stopped under a GOP House majority.I was struggling to find words to express my Monday morning dismay at this breathtakingly ambitious agenda for making America great again by repeating exactly the same mistakes that screwed the country up, but Mark Thoma, a professor of economics at the University of Oregon, beat me to it (posting shortly after midnight!).

The GOP Pledge: Smaller Government, Bigger Deficits - Now it is official. Neither Democrats nor Republicans will run in 2010 on a serious platform to address the budget deficit.  We knew the Obama Administration and the Democrats weren’t going there. Now, despite all the breathless publicity given to the tea party’s alleged fiscal conservatism, neither are Republicans. The House GOP’s Pledge to America is an attempt to win support of fiscal conservatives without actually reducing the deficit. Indeed, taken together, the promises included in the document would result in long-term deficits far higher than if Congress merely maintained the status quo for the next two years.     

Is Every Failed Budget Idea Making A Return? - Can this really be happening?  Is every bad or failed budget idea from the 1970s to the 1990s coming around again and being discussed as if the failure never happened?  Doesn't anyone have a memory?  Does no one remember the pain?  Are we in an endless budget version of the movie Groundhog Day? First revenue sharing was being seriously proposed.  Then government shutdowns started to be discussed again as if they're a serious way to govern.  And now, it's...wait for it...two-year federal budgets as the cure-all for the fiscal ills of the country. Here's what I said yesterday on NPR's Marketplace about biennial budgets.  (Hint: I didn't pull any punches.)

Thrifty’s Not So Nifty - Few people have heard of the “paradox of thrift,” a very old economic theory that was revived, and dusted off, and contextualized, by John Maynard Keynes and has lately reappeared as a shuttlecock in the battle between Left and Right over stimulus spending and other responses to the economic crisis.  Liberal economists have invoked the paradox to support the argument that large-scale government spending is the key to economic recovery. The premise of the paradox of thrift is that when people save in a way that removes money from the economy (rather than redirecting it to productive investment), consumption falls without an offsetting increase in investment. The fall in consumption and resulting fall in production may reduce incomes to a level at which total savings decline, even though everyone is trying to save more. That is the paradox and it illustrates what is called the “fallacy of composition”: what is good for the individual may be bad for society as a whole.

More Americans Tapping Into Entitlement Programs Swells Budget Deficit - As many U.S. citizens continue to rail against the ballooning budget deficit, the reality is that most Americans are unwilling to swallow the bitter pill it will take to tame it.  Perhaps that's because nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history, according to a report from The Wall Street Journal.  At the same time, the number of American households not paying federal income taxes has grown to an estimated 45% in 2010, up from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

Fearing a soaring deficit, many analysts favor letting Bush tax cuts expire The tax cuts at the heart of a fierce pre-election battle on Capitol Hill were designed when the economy was booming, the federal budget was in surplus and George W. Bush was campaigning for president on a promise to return the extra cash to taxpayers.  Today, the economy is sluggish and the national debt is soaring to worrisome levels. As lawmakers bicker over whether to extend the Bush-era tax cuts, not just for the middle class but also for the wealthy, many economists and budget analysts say there's a simple way to curb borrowing: Let the tax cuts expire for everyone.  Official and independent budget estimates show that letting tax rates spring back to pre-Bush levels for all taxpayers would bring the country within striking distance of meeting President Obama's goal of balancing the budget, excluding interest payments on the debt, by 2015.

OECD Suggests Higher U.S. Taxes in New Publication - A new publication from the OECD, Economic Survey of the U.S. (large PDF), suggests much higher tax revenue. Specifically, the international group recommends that we enact two major new taxes, a value-added tax (a type of national sales tax) and a carbon tax (or cap-and-trade). Cap-and-trade is an Obama proposal that has been losing support, and the VAT is expected to be suggested by the President's commission on fiscal reform when it finishes its report after the November election. More in line with Tax Foundation work (see here and here and here, for example), the OECD publication recommends trimming or repealing several deductions and exemptions in our personal income tax, specifically the mortgage interest deduction, the deduction for state and local taxes paid, and the exemption for employer-provided health insurance. If those big holes in the tax base were plugged, there wouldn't be as much need for President Obama's proposed 28% limit on the value of deductions, but the OECD cheers on that idea anyway, even suggesting that it be lowered to 15%.

Tax cuts not the way to fix economy - President Obama proposes to let the Bush tax cuts for the rich expire as a way of “saving” $700 billion over the next 10 years. He says that our nation cannot afford those cuts, given the unsustainable outlook for the federal budget and the threat it poses to both our short-term and long-term economic health. But that savings is just a fraction of the $2.2 trillion cost (without interest) of the generously defined “middle-class” portions of the Bush tax cuts, which President Obama does want to extend. The president’s choice to continue most of the Bush tax cuts is puzzling. He has repeatedly blamed the Bush tax cuts for the fiscal mess he inherited and rightly points out that they did our economy little good — and a lot of bad — over the past decade.

About Those Expiring Tax Cuts . . .Dan Gross has written what is likely the most informative and intelligent thing you will read about the tax cut expiration debate this entire year. I want to excerpt all 5 bullet points — but I would end up posting the entire piece. Points 1, 2 and 3 are the most informative, but point 4 is the most amusing — so that’s the one I will excerpt here: 4) The bold and confident assertions made about the links between tax rates and economic growth, market performance, and prosperity are almost certainly wrong. Keep this in mind: The people who designed the current, unsustainable tax system promised us that lower marginal rates, and lower taxes on capital and dividends, would boost the economy, promote investment, create jobs, spur market performance, and raise everybody’s income. They were wrong. (It’s no coincidence that these same people also warned us that raising taxes in 1993 would kill market returns and the economy. They were wrong then, too. They’re pretty much always wrong.)

Obama Among ‘Small Businesses’ Facing Higher Tax Rate (Bloomberg) -- Senate Republican leader Mitch McConnell says President Barack Obama wants to subject half of all small-business income to a tax increase, a move that he says would strike a blow at the U.S. job-creation engine. McConnell’s numbers add up only if you consider people like billionaire investor George Soros, most movie stars and Obama himself small-business owners, tax experts say.  That’s because the lawmaker is basing his figure on a broad definition of the term that experts say includes authors, actors and athletes who employ few if any workers. It also encompasses businesses that many people wouldn’t consider small, such as Soros’s hedge-fund firm and major law partnerships.  “Every student who is a part-time Web designer, partner in a law firm with a billion dollars of revenue and investor in a hedge fund gets lumped together in the data, along with real small businesses,”

About "Small Businesses" - Krugman - I gather from the comments that some readers thought that in this post I was seriously claiming that I’m a small business owner. Geez. The point, of course, is that when Republicans claim that 50% of small business income goes to people in the top 2 tax brackets, their definition of small business income is way too broad. In the JCT report (pdf) they’re relying on, “business income” — which is what they’re calling small business income — is defined as income from sole proprietorships (Schedule C); income from rental real estate, royalties, partnerships, subchapter S corporations, estates and trusts, and real estate mortgage investment conduits (Schedule E); and farm income (Schedule F), as would be reported on lines 12, 17, and 18 of the 2010 Form 1040.  What this means is that my book royalties (and Obama’s) are counted as part of what the GOP calls small business income; so is the income of partners in medical groups and law firms, much of the income of hedge fund managers, and so on. The point is that I’m not a real small businessman, but I play one in anti-tax propaganda.

Where are all my MMT'ers At? - Bill Gross, speaking after the Fed announcement today on CNBC, was asked by Erin Burnett. "Can we afford $2Trillion never mind $4Trillion in tax cuts?" Gross responded:  "Well no we can't - we can afford $2Trillion in quantitative easing because that basically is printing money, but the deficit is out of control and ultimately the dollar will pay the price." I took him to mean that we couldn't cut taxes by $2T because the deficit is out of control. It's around the 9 minute mark in this video. Gross proceeded to say that he did want tax cuts for the middle class, but not the top brackets. So, here's the question:  Gross acknowledged "printing money" for quantitative easing, and advocates it heartily.  We already know from our prior discussions of Modern Monetary Theory (MMT) the government need not tax in order to spend - they can just spend - they can just print money (of course, there may be consequences if they do this). Why then, is it a problem to cut taxes by $2T, but not a problem to just print $2T for QE?  Said differently, we don't need taxes to "pay" for the budget - we can just print money for that too/instead.  Said a third way, why not get rid of QE, and use the $2 Trillion for tax cuts instead?

Spending and Taxes Are the Gas and Brake Pedals of the Economy - But let's get to the "key point" of Michael Kinsley's response to me: Why do we need taxes?   We need them, and use them, to control total effective demand. A car has an accelerator and a brake. Spending is the accelerator.  Taxes are the brake.  They're very useful, but the force of the accelerator has to be greater than the force of the brake, or the car will not move.The reason there were private savings to be tapped after World War II was, actually, the size of the public deficits during the war. The two are opposite sides of the same accounting relationship.  And for exactly the same reason, the private savings rate has become sharply positive in the last two years -- up from 2.1 percent in 2007 to 5.9 percent of disposable income in 2009.  Same cause, same effect.

Who Should Get the Tax Cut -- The Rich or Everyone Else? - Robert Reich -The rich spend a far smaller portion of their money than anyone else because, hey, they’re rich. That means continuing the Bush tax cut for them wouldn’t stimulate much demand or create many jobs.But it would blow a giant hole in the budget — $36 billion next year, $700 billion over ten years. Millionaire households would get a windfall of $31 billion next year alone.And the Republican charge that restoring the Clinton tax rates for the rich would hurt the economy — because it would reduce the “incentives” of the rich (including the richest small business owners) to create jobs — is ludicrous.Under Bill Clinton and his tax rates, the economy roared. It created 22 million jobs.By contrast, during George Bush’s 8 years, commencing with his big 2001 tax cut, the economy created only 8 million jobs. And as the new Census data show, nothing trickled down. In fact, the middle class families did far worse after the Bush tax cut. Between 2001 and 2007 — even before we were plunged into the Great Recession — the median wage dropped.

Most Americans Want All Bush Tax Cuts Extended - A new CNBC poll gives a boost to Republicans – along with some Democrats – who want to maintain the Bush-era tax breaks. In the new poll released this week, 55% said that “increasing taxes on any Americans will slow the economy and kill jobs,” CNBC said. Only 40% said the Bush-era tax cuts should be canceled for higher earners, as President Barack Obama advocates. Obama and congressional Democratic leaders want to allow the Bush-era breaks to expire for families earning more than $250,000 beginning next year. But they’ve run into opposition from Republicans as well as a growing number of centrist Democrats. Other recent polls generally have showed significant public support for maintaining current tax levels on higher earners. But it’s usually fallen short of an outright majority.

G.O.P. Cites Tax Cuts and Health Care as Main Focus — House Republicans on Thursday will issue a legislative blueprint called “A Pledge to America” that they hope will catapult them to a majority in the November elections. Its goals include a permanent extension of all the Bush-era tax cuts, repeal of the newly enacted health care law, a cap on discretionary federal spending and an end to government control of the mortgage giants Fannie Mae and Freddie Mac.  With control of the House, the Republicans said they would seek to immediately cancel any unspent money from last year’s $787 billion economic stimulus program, to freeze the size of the “nonsecurity” federal work force, and to quickly cut $100 billion in discretionary spending. But the blueprint, with echoes of the 1994 Contract With America, does not specify how the spending reductions would be carried out.

Group of Democrats Wants Capital Gains Rate Kept at 15% - Another group of House Democrats is calling for extensions of current tax rates. Rep. John Adler of New Jersey is rounding up support among fellow Democrats to extend the current 15% tax rate on capital gains and dividend income. People familiar with the effort said Adler has collected about 40 signatures on a letter to House Speaker Nancy Pelosi (D., Calif.).  President Barack Obama has proposed raising the rate to 20% for people earning more than $200,000, or $250,000 for married couples.  Last week, 31 Democrats urged Pelosi to keep lower income tax rates in place for all Americans, rather than letting Bush-era tax cuts expire for higher earners.

So How Did the Bush Tax Cuts Work Out for the Economy? - The 2008 income tax data are now in, so we can assess the fulfillment of the Republican promise that tax cuts would produce widespread prosperity by looking at all the years of the George W. Bush presidency.  Just as they did in 2000, the Republicans are running this year on an economic platform of tax cuts, especially making the tax cuts permanent for the richest among us. So how did the tax cuts work out? My analysis of the new data, with all figures in 2008 dollars: Total income was $2.74 trillion less during the eight Bush years than if incomes had stayed at 2000 levels. ...Even if we limit the analysis by starting in 2003, when the dividend and capital gains tax cuts began, through the peak year of 2007, the result is still less income than at the 2000 level. Total income was down $951 billion during those four years.

Debate on Tax Cuts May Be Delayed - Floor debate over the highly contentious issue of what to do about the expiring Bush-era tax cuts may be delayed until after the November elections, senior Democratic aides said on Wednesday.  Senate Democrats will meet over lunch on Thursday to discuss the issue, but appeared close to a decision to postpone a debate that was shaping up to be a fierce clash with Republicans. Democrats nominally control 59 seats in the Senate, but would need 60 votes to overcome a likely filibuster... And no Republican has come forward willing to support legislation that does not extend the lower rates at all income levels.  Still, some Democrats have lobbied in favor of forcing a vote that they say would show that Republicans are obstructing tax relief for 97 percent of Americans while fighting to maintain the lower rates for millionaires.

Senate leaders drop plans for pre-election vote on extending tax cuts - Senate leaders on Thursday abandoned plans to extend a broad array of tax cuts before the November elections, delaying a vote that could affect tax rates for virtually every American. "Democrats believe we must permanently extend tax cuts for the middle-class before they expire at the end of the year, and we will," Jim Manley, a spokesman for Senate Majority Leader Harry M. Reid (D-Nev.), said in a statement. "Unfortunately, to this point we have received no cooperation from Republicans to do so . . . We will come back in November and stay in session as long as it takes to get this done."  Unless Congress acts, tax cuts enacted during the Bush administration are due to expire in January, raising income tax rates across the board.

The Super Rich Get Richer, Everyone Else Gets Poorer, and the Democrats Punt- Robert Reich - The super-rich got even wealthier this year, and yet most of them are paying even fewer taxes to support the eduction, job training, and job creation of the rest of us. According to Forbes magazine’s annual survey, just released, the combined net worth of the 400 richest Americans climbed 8% this year, to $1.37 trillion. Wealth rose for 217 members of the list, while 85 saw a decline. Wall Street continued to dominate the list; 109 of the richest 400 are in finance or investments. From another survey we learn that the 25 top hedge-fund managers got an average of $1 billion each, but paid an average of 17 percent in taxes (because so much of their income is considered capital gains, taxed at 15 percent thanks to the Bush tax cuts). The rest of America got poorer, of course. The number in poverty rose to a post-war high. The median wage continues to deteriorate. And some 20 million Americans don’t have work. And yet the Bush tax cuts of 2001 and 2003, which conferred almost all their benefits on the rich, continue.

Payroll Tax Cut - Labor cost as a share of business output is now at a post WW - II low. and has fallen about eight percentage points since 2000. This would suggest that the weak demand for labor does not stem from high labor cost. Actually since the third quarter of 2000 while labor cost as a share of total business cost has plunged, private payroll employment has also fallen from 111.2 million to 107.6 million in the second quarter of 2010. Yes, this data contradicts the theory taught in introductory economics. But, if as this data series implies that weak employment is not because of high labor cost why should further cuts in labor cost via a cut in the payroll tax lead firms to hire more employees? I strongly suspect that those advocating cutting the payroll tax simply remember the theory they learned in their introductory economics class and have never actually looked at the data. If they had they would know that changes in the demand for labor and changes in labor compensation have a strong positive correlation.

Since When Is It Nice to Raise Taxes and Cut Benefits? - Mike Kinsley's embrace of Maya MacGuineas tells a lot about what counts as "niceness," to both of them.  It's not the consequences of their proposals.  To me, it's brutally unfair to suggest that the estate tax go lightly on big fortunes while cutting into lower-middle-class homes and small businesses.  And this is what Kinsley's suggestion amounts to.Likewise Maya MacGuineas's suggestion that Social Security and Medicare be means-tested: it's both politically and socially nasty.  Politically, because without universality the programs quickly become tarred as welfare. Socially, because once that happens, they'll be cut, elderly poverty will rise and the old will lose access to health care. MacGuineas writes that the Boomers "were in charge for much of the period when Social Security and Medicare surpluses were used to finance the rest of government."   The accurate way to state this point, would be this: "Since 1983 all  working Americans paid far more in payroll taxes than current beneficiaries required, while taxes were cut for the wealthy."  I cannot see why this is an argument for cutting Social Security and Medicare for those same working Americans, now about to retire.

Relative Deprivation and the Put-Upon American Merely Upper Class - James Fallows on Professor Todd Henderson. Well worth reading for the quote from Tom Wolfe. I should point out one thing about the feelings of relative deprivation that I attribute to Professor Henderson--that of feeling, in his lizard brain, relatively deprived, put-upon, and middle class because the gap between his merely upper-class standard of living and the superrich that he knows of is today much, much larger than the gap between the upper class and the superrich that existed a generation ago and that he expected to exist today. These feelings of relative deprivation are things I know well, because they are my own. I try to stomp them out as silly (which they are). But they are there.

Rat Race America - Krugman - Brad DeLong’s post on Todd Henderson, the already-infamous whining Chicago professor who appears to be near the 99th percentile but feels poor, is worth reading for more than the takedown. Brad isn’t the first to make this point, but his discussion of how rising inequality at the top — a fatter right tail in the income distribution — makes the objectively rich feel poor is exceptionally fine: What Brad doesn’t say, but is also true, is that the status anxiety created by high inequality means that the rich-but-not-rich-enough often lead worse lives than their somewhat poorer counterparts did a few decades ago: they work longer hours, take fewer vacations, and spend more on things that don’t give them pleasure but that they hope will impress others.

The Sorrow And The Self-Pity - Krugman - Everywhere you look these days, there are terrible stories. I live in a very sheltered world, yet I know young people just out of college who can’t find jobs, men in their late 50s who have lost their jobs and can’t see how they’ll ever find another, families barely scraping by and terrified by what might happen if anyone gets sick. Meanwhile, wise men tell us that we all need to make shared sacrifices — especially with regards to Social Security, of course; gotta keep those manual laborers working until they’re 70, you know. And in this world people with secure jobs, with incomes of around $450,000 a year, are feeling very sorry for themselves over the possibility that they might end up paying somewhat higher taxes next year.  By the way, let me highly recommend the Tax Policy Center’s new tax policy calculator. As best I can figure, the aforementioned sorry-for-himself person might end up paying higher taxes — it depends on the details of his family situation — but probably not more than 2 percent of his income.

Have You Left No Sense Of Decency? - Krugman - Let me recommend, once again, Brad DeLong’s superb discussion of how it is that people at the 99th percentile, despite making twice what their counterparts made in 1980, feel poorer now than they did then. On reflection, however (and discussion with Robin), it seems to me that there’s something Brad didn’t say that’s worth mentioning — the change in social norms. Even in 1980, there were surely many people at or near the 99th percentile who felt sorry for themselves, at least some of the time. It happens to everyone, after all: I lead a very privileged life (yes, I’m well into the range that will pay higher taxes under the Obama plan), yet even now I find myself experiencing occasional flashes of green-eyed envy. But 30 years ago people with high but not super-high incomes generally felt ashamed of themselves for griping — or at least, felt that they would be ridiculed if they gave voice to their gripes. Today, all restraints are off. The fuss over Messrs. Henderson and Stein is the exception that proves the rule: they wouldn’t be providing this spectacle if they didn’t normally swim in social circles where complaining that you only have 9 or 10 times median family income is considered totally acceptable.

Does the well-off law professor have cause to complain? - This guy is the blogging topic of the weekend; his family earns $455,000 a year (addendum: this number seems not to be true) and yet he worries about his taxes going up and the resulting diminution of real income.  I think we cannot permanently extend the Bush tax cuts; nonetheless, being a contrarian, I would like to explore the question of when a wealthy person has cause to complain.  I read about this guy and his pitchfork and it genuinely scared me, especially his description of Ben Stein and his intermingling of the political and the aesthetic.

Who’s Really Rich, Ctd. - Pop quiz. Say you make a steady $250,001, every year. How many dollars of additional income tax will you pay if the Obama administration’s tax plan goes through? A thousand dollars? A few thousand? Nope. Three cents. Here’s how it works. Your taxes below $250,000 remain the same. And on that excess $1, your income tax rate increases from 33 percent to 36 percent. For most earners making between $250,000 and $500,000 a year, the Obama plan would increase income tax liability by just a few hundred dollars — an average of $600, according to the Center for Economic and Policy Research’s Dean Baker. But those few hundred dollars proved the straw that broke the camel’s back for Todd Henderson, a professor at the University of Chicago. He and his wife, apparently a pediatric oncologist, pull in about $400,000 a year — or, at least, somewhat more than $300,000, a sum that puts them comfortably in the top 2 percent of American wage earners. They are rich. But, Henderson writes, they aren’t really rich. They are “just getting by.”

How To Be Rich And Miserable In The Wealthiest Nation That Has Ever Existed -

  1. Accumulate really a very large amount of debt.
  2. Decide to care deeply about what people who are a lot richer than you think of you.
  3. Spend all of your money and then some trying to keep up with them.

There's a little pile-on going on with an unfortunate U of C law professor complained about the terrible consequences of the return to pre-Bush tax rates over $250k and got mocked for it by Michael O'Hare and then thoroughly dismantled by Brad DeLong - although I think it's worth noting that the income amounts given are speculative. Still, his whining isn't a matter of speculation. I think they did a thorough job, so I don't need to add too much. But I do find it interesting just how often the pattern of unhappy high-income people follows the checklist I started with. Massive debt loads can make you poor whatever your income, and once they're run up, you don't get any enjoyment from them. Judging yourself by the standards of wealthy people is a good way to make yourself very unhappy (as is hanging out with wealthy people, often, as many of them didn't get wealthy by being nice). And you cannot possibly keep up if you try.

As Luck Would Have It - Maxine Udall - Paul Krugman, Brad "Deling", and James Fallows have been blogging about how the rich are different from you and me (see here, here, here, and here, and now Mike the Mad (but pretty coherent) biologist here). It is an interesting confluence of chance events, for I have been reading Roland Benabou and Jean Tirole's very thought-provoking paper, Belief in a Just World and Redistributive Politics...  Here's from the first paragraph of B&T: Psychologists have similarly documented the fact that most individuals feel a strong need to believe that they live in a world that is just, in the sense that people generally get what they deserve, and deserve what they get. When confronted with data that conflicts with this view they try to ignore, reinterpret, distort, or forget it—for instance, by finding imaginary merits to the recipients of fortuitous rewards, or assigning blame to innocent victims. That last sentence got me thinking about the latest issue of American Whitewater, which contains Charlie Walbridge's semi-annual recount of whitewater deaths and near-misses. "Maxine," you say, "what could possibly be the connection?"

Bad Arguments Against Tax “Increases” - Last week, a professor making more than $250,000 per year (with his wife’s income) put up a blog post (since taken down) criticizing President Obama for wanting to “raise” his taxes.* First, it’s just not true that the rich will reduce their spending dollar-for-dollar as their taxes go up. Second, there certainly are hard-working, young, dual-income, multiple-child, productive families who have high expenses. It is true that there is no single thing as “the rich.” Third, the “Cayman Islands” argument (that the really rich don’t pay taxes) is mainly false and, to the extent it is true, again yields a different policy conclusion. Warren Buffett, for example, pays an average tax rate of 18%, so the claim that “the super rich don’t pay taxes” is just not true. Fourth, if it is true that the rich are feeling squeezed, this actually undermines the main argument against tax “increases”–that higher marginal rates will cause people to work less hard.Fifth, the professor makes the tired old argument that his spending (which goes to local “entrepreneurs”) is better than government spending (“handouts”). In general, I agree that it is better to make our production decisions based on consumers’ preferences rather than congressional votes.

The Angry Rich, by Paul Krugman - These are terrible times for many people in this country. Poverty, especially acute poverty, has soared in the economic slump; millions of people have lost their homes. Young people can’t find jobs; laid-off 50-somethings fear that they’ll never work again. Yet if you want to find real political rage — the kind of rage that makes people compare President Obama to Hitler, or accuse him of treason — you won’t find it among these suffering Americans. You’ll find it instead among the very privileged, people who don’t have to worry about losing their jobs, their homes, or their health insurance, but who are outraged, outraged, at the thought of paying modestly higher taxes. The rage of the rich has been building ever since Mr. Obama took office. At first, however, it was largely confined to Wall Street. Now, however, as decision time looms for the fate of the Bush tax cuts ... the rage of the rich has broadened, and craziness has gone mainstream. It’s one thing when a billionaire rants at a dinner event. It’s another when Forbes magazine runs a cover story alleging that the president of the United States is deliberately trying to bring America down as part of his Kenyan, “anticolonialist” agenda,

A Quarter-Million Doesn’t Go As Far As It Used To - Todd Henderson, a law professor at the University of Chicago, is mad as hell, and he’s not gonna take Obama’s Clinton-level tax proposal anymore: The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way. Without getting deep into numbers, let’s just note that Obama advocates letting the top marginal Bush tax cuts expire. This means that all your income up to $250,000 will benefit from the same extended tax breaks as everyone else. It’s only the income above $250,000 that will be taxed at the confiscatory Clinton rates. Say your income is $300,000: Instead of paying $16,500 on that last $50k, you’ll be paying $1,500 more. Or — hold on a sec — $4.11 a day. Hey, that’s coffee and a croissant, pal, and that’s enough to get the good professor heading for the window:

Ezra Klein - The rich are not bad. Just rich. Here's a riddle: Todd Henderson's household makes north of $400,000 in a city where the median household income is $46,748. Yet Henderson says his family is "just getting by despite seeming to be rich." How can this be? The Hendersons don't "seem" rich. They are rich. They are one of the richest families in the country. Their country is the richest country in the world. And the world is richer than it's ever been before. The Hendersons are thus one of the richest families in the richest country in the richest era the world has ever known.  Which doesn't mean that they don't worry about money. The implication of our rhetoric about taxes is that no one making more than $250,000 will feel a tax increase. That's not true. Our economy has adapted to having rich people, and now there's lots of stuff for them to buy. Private school, for instance. Fancy cars. Dinners at Alinea. Only a very select few make so much money that they cannot figure out how to buy enough stuff to make them feel financially stressed. This is Henderson's argument, and he's right: You can make $400,000 and still worry over the checkbook. You can make $400,000, in fact, and be terribly in debt.

The tax plight of the $250,000 to $500,000 crowd - My former colleague at Fortune magazine, Shawn Tully, has been trying for a while to popularize an acronym of his devising: HENRYs, for high earners, not rich yet. Yes, it's a stretch, but it describes a real phenomenon: Very successful households (two-income couples, mostly), on the young side, who are making $250,000-$500,000 a year but don't have a whole lot in the way of assets — and may have big housing and/or education debts — don't feel particularly rich, and bear just about the heaviest tax burden of any income group. HENRYs isn't the only name for this gang. Matt Miller, also writing in Fortune, once called them the lower upper class. I'm going to go with HENRYs. They're well-represented among readers, and they're the fulcrum of the current U.S. tax debate. The tax cuts pushed by the Bush administration and approved by Congress at the beginning of this decade are set to expire next year. The Obama administration wants to preserve most of the cuts, but only for those making less than $250,000 a year. So $250,000 marks the dividing line between the middle class, who are deemed deserving of continued tax relief, and the rich, who are not

Wealthy families fighting for no taxation on wealth transfers - So far, at least four of the wealthiest few Americans have died in 2010, when there is no estate tax under the "reduce, repeal and spring back" law enacted as part of the Bush series of tax cut bills with gimmicking sunset provisions.  The temporary elimination of the estate tax in 2010 cost the government roughly $6.5 billion in estate tax revenues in connection with just these four deaths.  That a significant amount, especially when one considers that much of the value in these estates is likely to be financial assets on which the decedents paid very little in taxes during their lifetimes. Bernie Sanders (independent senator from Vermont)  introduced a bill this year --the Responsible Estate Tax Act (S. 3533) that would return the estate tax under Code section 2001 to the 2009 exemption level and add a progressive rate structure.  Id.  Accordingly, there would be an exclusion amount of $3.5 million and the tax would be determined by applying a 45 percent rate for values of estates from $3.5 million up to $10 million, 50% for amounts above that up to $50 million, and  55% for amounts over $50 billion, with a 10% surtax on estates of more than $500 million  (i.e., amounts in excess of $500 million would be taxed at 65%).  The bill would be retroactive to the beginning of 2010. 

Mind The (Wealth) Gap - Congratulations to 440,000 of us! That’s how many people became Millionaires in the past 12 months (ending in June).  According to a new survey from Phoenix Marketing International’s Affluent Market Practice, the number of American households with investible assets of $1 million or more rose 8% in the 12 months ended in June. The survey says there now are 5.55 million U.S. households with investible assets of $1 million or more. That follows two years of declines and brings the Millionaire count back to 2006 levels. Of course, that is still below the peak of 5.97 million in 2007 and the current growth rate is well below pre-financial crisis levels, when the Millionaire population increased as much as 35% a year.  Still, the numbers offer further evidence that the wealthy may have decoupled from the rest of the economy, as we expected would happen in "A Tale of Two Economies," my 2010 outlook. The study’s authors say high salary growth, rather than investments, are the main drivers of the Millionaire expansion

There's rich, and then there's rich - Pay dynamics there are usually chalked up to growth in "CEO pay", but as new research out of the Chicago School of Business indicates, CEO salaries are peanuts compared to the change being earned in finance: We also find that hedge fund investors and other “Wall Street” type individuals comprise a larger fraction of the very highest end of the AGI distribution (the top 0.0001%) than CEOs and top executives. In 2004, nine times as many Wall Street investors earned in excess of $100 million as public company CEOs. In fact, the top twenty-five hedge fund managers combined appear to have earned more than all five hundred S&P 500 CEOs combined (both realized and ex ante). This trend accelerated after 2004. In 2007, it is likely that the top five hedge fund managers earned more than all five hundred S&P 500 CEOs combined.

Wall Street and Inequality  I want to thank everyone who sent me a copy of “Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?” overnight. They make an effort to really bore down into the question of who, exactly, the superrich are. The answer turns out to be—largely finance types: We look at hedge fund, venture capital (VC) fund, and PE or buyout fund investors. The data here are very coarse, and we make a number of assumptions to obtain estimates of income. A large number of professionals in these areas are highly compensated We estimate that the professionals in hedge, VC, and PE funds include roughly the same number of individuals in the top 0.1% of the AGI income distribution as the top nonfinancial executives. While we do not estimate precise distributional changes over time for this sector, we show that these industries are significantly larger today than ten and twenty years ago and, therefore, that their employees must represent a larger fraction of the top brackets than before.

Wealthy benefit most from tax subsidies: study (Reuters) — Billions of dollars in U.S. tax breaks to encourage home ownership, retirement savings, business start-ups and education mostly benefit top income earners and do little to help low- and middle-income people build wealth, a report released on Wednesday said.  The U.S. government spent nearly $400 billion, mostly through tax breaks, in 2009 to promote home ownership and other wealth-building strategies, and more than half of that benefited the wealthiest 5 percent of taxpayers, said the study sponsored by the nonprofit Annie E. Casey Foundation and the Corporation for Enterprise Development (CFED). The Annie E. Casey Foundation and the CFED advocate for greater economic opportunities for the poor. The groups will submit the report to President Barack Obama's fiscal commission, which is due to recommend ways to reduce deficits approaching 10 percent of GDP and slow the growth of the country's $13 trillion debt.

Taxing Sin: A Win-Win for Everyone? - Taxing sin is nothing new, of course. Among the earliest federal taxes were those on alcohol, tobacco, and playing cards, and they remained mainstays of the federal revenue system until the creation of the corporate and individual income taxes in 1909 and 1913, respectively. In 1900, 50 percent of all federal revenue came from taxing alcohol, tobacco, and playing cards; the rest mostly came from customs duties. Today, taxes on alcohol and tobacco constitute just 1 percent of federal receipts. Related to taxes on sin are taxes on luxuries -- things people could easily do without or are consumed almost exclusively by the rich. Over the years, the federal government has had special taxes on carriages, refined sugar, watches, yachts, billiard tables, gold and silver plate, furs, jewelry, electrical appliances, luggage, phonographs and recordings, cameras and film, and many other items.2

Financial Innovation and the Distribution of Wealth and Income - Now that Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators promulgating the rules under this new bill must tackle a major problem that the reform bill addresses only indirectly. This is the problem of excessive “leverage” – financing with too much debt. Leverage permeates the modern financial system. Leverage makes the system too large, in the sense that large parts of the system operate outside the reach of regulators, and the system has a tendency to create vastly too much money and credit, thereby causing asset bubbles. Asset bubbles create the illusion that the financial sector is adding substantially more value to the global economy than it really is, and expose the rest of the economy to too much risk. Moreover, too much of society’s resources go to compensate the people in the system who are causing this to happen.

At Chicago Fed Meeting, Concerns Over Regulatory ‘Capture’ -As regulators around the world are moving to restructure oversight of banking, this issue of regulatory capture is particularly acute. Even though some large financial institutions no longer exist, the new global banking system is very likely to continue with giant banks. The issue came up several times in the first day of a two-day conference on banking supervision at the Federal Reserve Bank of Chicago on Thursday.“I think that we need to make sure that national supervisors have sufficient resources and incentives to address the problems of overseeing national and internationally active institutions,” said Jose Vinals, financial counselor and director of monetary and capital markets at the International Monetary Fund. “In too many countries, national supervisors lacked not only the ability to act… but also the willingness to act because they were captured in many cases by industry and also by the political process… For this work to advance, one would need the full commitment at the highest political level.”

Financial Overhaul’s Success Depends on Regulators - The U.S. financial regulatory overhaul does a fairly good job at trying to prevent a new financial crisis, but its success will depend on the people who are actually regulating. Since the Dodd-Frank financial overhaul law that was enacted in July gives regulators a lot of discretion, it’s destined to fail if the wrong people are in power, a group of top economists said. The only buffer against that risk is that the Federal Reserve, the U.S. central bank which maintains a good amount of independence from politics, will have a lot of the discretionary powers. “The current management is as good as you can reasonably expect,” said Paul Krugman, a Princeton University economist and Nobel laureate, adding there was no guarantee that it will be the same in three years. One of the key provisions of the law is to identify which financial institutions are so big and interconnected that their demise could threaten the entire financial system. The decision falls to a new council of 10 regulators, led by the Treasury Department, which gained authority to tap firms as systemically important. Once a firm is judged too-big-to-fail, it will then be up to the Fed to decide whether the council should vote on breaking up big companies.

Volcker Spares No One in Broad Critique - Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system. Standing at a lectern with his hands in his pockets, Volcker moved unsparingly from banks to regulators to business schools to the Fed to money-market funds during his luncheon speech. He praised the new financial overhaul law, but said the system remained at risk because it is subject to future “judgments” of individual regulators, who he said would be relentlessly lobbied by banks and politicians to soften the rules. Here are his views on a variety of topics.

On the Curious Timing and Content of Volcker’s Mislabeled “Blistering” Speech - Yves Smith - Today, quite a few commentators fell in with the take of the writeup by Real Time Economics on a speech by Paul Volcker given a conference on macroprudential regulation hosted by the Federal Reserve Bank of Chicago.Its lead-in: Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system. Now admittedly, it’s refreshing to see someone of Volcker’s stature make some candid comments about banks and financial regulation. And taken in isolation, some of his remarks were suitably critical. But did anyone who took up the line that this was tough talk actually watch the speech?  You can view it here. Unfortunately, the reactions to Volcker’s speech say far more about politics and PR in the US than they do about what he actually said. Volcker’s comments were delivered in a moderate, occasionally perplexed tone. He was often candid and descriptive, far from “blistering.” And despite the Wall Street Journal headline, “Volcker Spares No One in Broad Critique,” in fact he left many targets untouched

You get what you pay for - EZRA KLEIN wrote a post a few days ago discussing the position that will be occupied by Elizabeth Warren, a scholar of financial regulation and a driving force behind the creation of the Consumer Financial Protection Board. Most observers of the administration believed that Ms Warren wanted the job of director of the new organisation. Instead, she was named to an advisory position, largely, the thinking goes, to avoid the length, grinding process of Congressional confirmation. Mr Klein says: The confirmation process is so desperately broken that top nominees [such as Ms Warren] who are already working in government prefer vague advisory positions. It's a pretty safe bet that potential nominees with good jobs in the private sector are declining consideration entirely. This leads my colleague at Democracy in America to respond: What I find most interesting in Mr Klein's comment is the possibility that the demand for competent, high-level bureaucrats outstrips supply. The delay and general unpleasantness of the confirmation process may scare away some talented prospective civil servants, but there may be other excellent reasons they stay away. Take your pick. There are a number of possible reasons for shortages in the supply of potential brain-trusters.

Some Suggestions for the New Consumer Chief - The appointment of Elizabeth Warren to oversee the establishment of the Consumer Financial Protection Bureau, announced on Friday, makes it pretty obvious how special the circumstances were that surrounded it. Consumer groups hoped she would become director, the job title named in the law that created the bureau. But the White House chose a more indirect appointment — making her an assistant to the president — to avoid a confirmation battle with lawmakers who argue that she’s a bank-slaying radical. Whatever she’s called, however, there is plenty of work awaiting her. A couple of big pieces of recent legislation have accomplished a lot already. The Card Act, for instance, made it much harder for people under the age of 21 to get credit cards and required banks to get permission before letting consumers spend more than their credit limits (and charging them lots of fees for the privilege).

The First Thing CFPB Should Do Is...Ron Lieber had an interesting column in the Saturday New York Times about the seven issues  -- from student loans to credit bureau reporting to credit cards -- that Elizabeth Warren should tackle at the start as she gets the new Consumer Financial Protection Bureau up and running. But before Warren will be able to take on any of these things, she'll need to start with something far more basic: convince consumers that CFPB is something they should care about, trust, and support.  Warren can't simply assume that the good press she's received so far will continue or that it somehow gives her political immunity.  To the contrary, she's now a part of the Obama administration and, therefore, fair game for the heavily partisan criticism that has become a large part of doing business in Washington.

Warren PR Push Intensifies as Evidence Against Her Succeeding Mounts -Yves Smith - It is increasingly evident that the appointment of Elizabeth Warren to act as special advisor to the President and Treasury for the newly-established Consumer Financial Protection Agency has everything to do with Obama trying to shore up his questionable credentials as a reformer and perilous little with helping ordinary citizens. So the only question that remains is whether her appointment in a peculiar interim role will nevertheless result in a more forceful, effective consumer watchdog. It’s important to put this move in context. As much as this agency has received a lot of coverage, since Warren has been an effective advocate of aggrieved consumers, this is only a teeny part of financial reform. Even if I am proven wrong, an aggressive consumer agency would have only a limited impact on bank behavior and risks. And it is destined not be be very effective due to how it was set up. Recall it was originally envisaged as an independent body.  Rather than put some modest checks into the law (like requiring that the agency coordinate on certain issues), the consumer watchdog was shunted into the most bank-friendly regulatory body, the Fed (it’s operating on an interim basis at the Treasury, and will be moved into the Fed next July). Consumer advocates pointed out that the idea had no precedent:

Weekly Audit: Can Elizabeth Warren Save the Economy? - President Barack Obama’s decision to appoint Elizabeth Warren to set up the new Consumer Financial Protection Bureau (CFPB) couldn’t have come at a more critical time.Over 44 million Americans were living in poverty last year. That’s the highest number on record. The Great Recession is taking a terrible toll on everyone outside the executive class, but policymakers have been reluctant to pursue an economic agenda that improves the lives of ordinary Americans. The uniqueness of Warren’s new post raises plenty of questions, but it puts a fierce defender of the middle class in office at a time when the middle class most needs help.

Warren Plays Volcker-Like Role for Obama in Finance Regulation -- President Barack Obama struck a familiar chord when he named Elizabeth Warren to help set up a new consumer protection bureau: putting a prominent figure in an advisory role to validate his economic message.  At the start of his presidency, that validation came from former Federal Reserve Chairman Paul Volcker. His appointment to lead the president’s Economic Recovery Advisory Board within weeks of Obama’s election lent the president credibility with the financial industry and Americans wary of his policies.  In Warren, 61, Obama chose a longtime consumer advocate and Wall Street watchdog who is a favorite of Democratic activists. She’ll take on the job as an assistant to the president at the same time as Obama’s political advisers are trying to position Democrats as champions of the middle class, less than two months before congressional elections.

Shelby: GOP majority would 'revisit' Wall Street reform law - A Republican majority in the Senate would "revisit" the Wall Street reform bill passed earlier this year, Sen. Richard Shelby (R-Ala.) said Tuesday.  Shelby, the ranking member of the Senate Banking Committee who might become chairman under a GOP majority, suggested that Republicans might strip out elements of the bill most favored by President Obama and congressional Democrats if Republicans win control of Congress. "The bill is so sweeping and such a game-changer in many ways that it's incumbent upon us to revisit it," Shelby said at the Reuters Washington Summit.Shelby had in part led the opposition to the Wall Street reform bill that finally passed Congress in July and was signed into law by President Obama. Revisiting that law, the Alabama Republican said, would start with oversight hearings and figuring out what elements need changing. In particular, Shelby named the new Consumer Financial Protection Bureau as one of the most distasteful parts of the law.

Obama Raises Prospects of New Economic Team - President Barack Obama, in an hour-long town hall-style meeting on CNBC, raised the prospects that top members of his economic team could soon be leaving, and he signaled he will press hard to raise taxes on wealthy hedge-fund and private-equity managers. Asked about the future of his economic team, the president praised Treasury Secretary Tim Geithner and National Economic Council Chairman Larry Summers, but he said: “I have not made any determinations about personnel. I think Larry Summers and Tim Geithner have done an outstanding job, as have my whole economic team. This is tough, the work that they do. They’ve been at it for two years. And, you know, they’re going to have a whole range of decisions about family that’ll factor into this as well.”White House aides quickly said there are no plans to send either Geithner of Summers packing.

Obama punts on economic team - -President Obama on Monday refused to comment on how long he expects two of his key economic advisers to stay on the job following the midterm elections.  Asked at a town-hall event televised on CNBC if he has asked Treasury Secretary Timothy Geithner and National Economic Council chief Lawrence Summers to stay on board until the end of his term, Obama praised the duo but said he has not made any personnel decisions regarding his economic team.
"I have not made any determinations about personnel," Obama answered. "I think Larry Summers and Tim Geithner have done an outstanding job as have my whole economic team."

Top White House Economic Adviser to Depart - Lawrence H. Summers, who for nearly two years has been the architect of President Obama’s economic policies, is leaving the White House to return to Harvard University at the end of the year, the White House announced on Tuesday. The news was first reported by Bloomberg News. Earlier in the day, the White House press secretary, Robert Gibbs, had declined to speculate about Mr. Summers’ future. He also said that the president was “enormously pleased” with the job performance of Mr. Summers and that of Treasury Secretary Timothy F. Geithner. Mr. Summers has often been at the center of heated debates as President Obama’s advisers struggle with the gravest economic crisis since the Great Depression. Some advisers complained that, under Mr. Summers, meetings became “endless debating sessions,” a phrase used separately by two aides who asked not to be named given the delicacy of internal matters.

Lawrence Summers to Step Down After Midterm Elections - Lawrence Summers, the economist who helped design and secure President Barack Obama's top economic policy priorities, will return to Harvard University at the end of the year. Mr. Summers will be the third top economic official to leave the administration, following the president's first budget chief and his first Council of Economic Advisers chairman. Two people familiar with the matter said the president is considering a senior corporate executive as a successor to lead the National Economic Council, answering criticism that the Obama administration lacks private-sector experience and is aloof from corporate America.

Mirabile Dictu! Summers to Depart - Yves Smith - As much as some will be pleased to see Larry gone (he was a leading advocate of bank-friendly policies), his replacement is certain not to represent a change in philosophy. In fact, one of the ideas being mooted is to install an “ambassador” the business community because it is allegedly up in arms with Obama. Huh? The last thing Obama, who has been astonishingly accommodating to corporate interests, needs to do is signal weakness. But he has made the cardinal mistake of trying to please everyone and has succeeded in having no one happy with his policies. Past Presidents whose policies rankled special interests, such as Roosevelt, Johnson, and Reagan, were tenacious and not ruffled by noise. Obama, by contrast, announces bold-sounding initiatives, and any real change will break eggs and alienate some parties, then retreats. So he creates opponents, yet fails to deliver for his allies.

Summers: Good Riddance - The good news: Summers is gone Jan 1 (no word yet on Geithner).The bad news? I am not sure what (if any) impact this will have on the administration’s economic policies.To review:  Summers is the former Clinton Treasury Secretary, mentored by Robert Rubin. As such, he was one of (many) architects of the financial crisis. In addition to believing all of the usual foolishness about efficient markets, he bought into the radical deregulation arguments pushed by the free market absolutists. Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm–Leach–Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.

No, No, CEO - Krugman - There’s a lot of buzz around the idea that Obama will or should appoint a CEO to take over the Summers job. Now, the first thing to say is what Yglesias says: Obama should pick someone who can do a good job. Never mind image, or the message the appointment supposedly sends — there are about 600 people in this country who care about that stuff, and most of them are paid to care. So the question is, does having been a successful CEO constitute good qualifications for this job? And the answer is no. For one thing, the NEC director is supposed to serve as a coordinator and honest broker among views — not, or at least not primarily, as a decision maker. One of the complaints about Larry Summers was precisely that he supposedly wasn’t sufficiently willing to let others’ views get aired (I have no idea how true this was). That’s not what CEOs are paid for — their job is to be decisive, not summarize other peoples’ arguments. Beyond that, the idea that business executives know what the economy needs is just wrong.

The awesome stupidity of replacing Larry Summers with a CEO - If the Obama administration appoints a corporate executive to replace Larry Summers as National Economic Council director then the White House fully deserves the thumping it will get in November. The ostensible reason for this colossal misunderstanding of the current political situation, sourced to anonymous administration officials, is that the White House wants "to allay the business community's doubts about administration policies." This is nonsense. The only way for Obama to "allay" the so-called business community's "doubts" would be to join with Republicans in seeking a repeal of bank and healthcare reform, abandon his efforts to raise taxes on the wealthy, and fire Elizabeth Warren. By the definition currently employed on the opinion pages of the Wall Street Journal, anything to the left of Ayn Rand or Jim DeMint is "anti-business." Anything less than their total freedom to pursue profit free of all government restraint is utterly unacceptable -- no matter what the consequences for the country at large.

Liberal blogger directly confronts David Axelrod, accuses White House of “hippie punching” - Top Obama adviser David Axelrod got an earful of the liberal blogosphere's anger at the White House moments ago, when a blogger on a conference call directly called out Axelrod over White House criticism of the left, accusing the administration of "hippie punching." "We're the girl you'll take under the bleachers but you won't be seen with in the light of day," the blogger, Susan Madrak of Crooks and Liars, pointedly told Axelrod on the call, which was organzied for liberal bloggers and progressive media. The call seemed to perfectly capture the tense dynamic that exists between the White House and the online and organized left: Though White House advisers in the past have dumped on the left, anonymously and even on the record, Axelrod repeatedly pleaded with the bloggers on the call for help in pumping up the flagging enthusiasm of rank and file Dems.

Jumping Ship and Punching Hippies -Larry Summers? Outta here. David Axelrod? Him, too. Rahm Emanuel? Give it a minute. It’s not unusual for a new administration to see an exodus of exhausted senior staff members as it nears the two-year mark; a friend who went to work in the Bill Clinton White House at around that point recalls that the outgoing crew had the look of the first wave to have stormed the beaches at Normandy. But this was still a watershed week: Summers, who, according to insiders, was the dominant voice in the administration’s economic policies, announced on Tuesday that he’s returning in January to Harvard (a place that, for him, may not be any less stressful than the White House); Axelrod, the man at the nexus of the Obama campaign in 2008, will leave Washington to start planning the president’s re-election campaign of 2012; and Emanuel, the hard-driving chief of staff, is playing it coy but is widely expected to depart and run for mayor of Chicago following the surprise announcement that Richard M. Daley will not seek another term.

Volcker: Obama Isn’t Antibusiness -Volcker, who chairs Obama’s economic recovery board, told Fox Business Network that the perception of the president as being against businesses is “wrong,” according to a transcript of an interview that is supposed to air Wednesday evening. “He is not a wild-eyed leftist radical. It’s ridiculous,” said Volcker, who was also chairman of the Federal Reserve Board from 1979 to 1987. “Since he has been in office he has been a defender of open markets.” Volcker’s comments come several days after supporters of Obama, during a live townhall-style event on CNBC, questioned why the president appeared to be beating up on businesses, particularly Wall Street

SSRN-Regulating the Shadow Banking System The “shadow” banking system played a major role in the financial crisis, but was not a central focus of the recent Dodd-Frank Law and thus remains largely unregulated. This paper proposes principles for the regulation of shadow banking and describes a specific proposal to implement those principles. We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a form of money. All of these features rely on an evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions, a usage that can have significant efficiency gains and would be costly to eliminate. History has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of strict rules on collateral for both securitization and repo as the best approach for shadow banking, with compliance required in order to enjoy the safe-harbor from bankruptcy.

Shadow Banking and Financial Regulation - Harvard Law School Forum on Corporate Governance and Financial Regulation - Without a safety net, banking is unstable. This proposition finds support in economic theory. In an influential analysis, Douglas Diamond and Philip H. Dybvig showed that banks without deposit insurance exhibit multiple equilibria—one of which is a bank run. [1] And financial history confirms this hypothesis. Banking panics were common in the U.S. before the enactment of deposit insurance, but nonexistent thereafter. The apparent instability of banking has given rise to a standard policy response in the form of a social contract. [2] That contract entails certain privileges that are unavailable to other firms: most notably, access to central bank liquidity and federal deposit insurance. These privileges amount to a safety net, and they stabilize banking. The social contract also imposes obligations—activity restrictions, prudential supervision, capital requirements, and deposit insurance fees. These obligations are designed to counteract the moral hazard incentives implicit in the safety net and protect taxpayers from losses.

Basel III vs Dodd-Frank on ratings agencies and risk weights - The disastrous twins, ratings agency credit ratings and RWAs (risk weighted assets), are still embedded in Basel III. Dodd-Frank does not like this much. The ratings agencies are still a big part of Basel III, though the December draft does allow for the alternative possibility of using bank-internal models for assessing credit risk. Alas, the very obvious risk that banks would game their own internal models, and the perceived need for a public standard to regulate to, was the very reason that Basel II relied so heavily on external ratings agency ratings in the first place, rather than bank-internal ones. Banks promptly gamed the ratings agency ratings instead. It seems that under Basel III, banks are to have a choice of which models to game.If you get the feeling that Basel isn’t really on the right track with this whole credit rating thing, you might have a point. Over on the other side of the pond, there is much greater dissatisfaction with the role of the agencies. Dodd-Frank is professedly keen to turf them out of a regulatory role altogether, though it was rather vague on specifics. Now the post-Dodd-Frank rulemaking phase has produced  this request for comment (see FT Alphaville for the link and surrounding interesting commentary from Markit).

Managing Credit Booms and Busts: A Pigouvian Taxation Approach… We study a dynamic model in which the interaction between debt accumulation and asset prices magnifies credit booms and busts. We find that borrowers do not internalize these feedback effects and therefore suffer from excessively large booms and busts in both credit flows and asset prices. We show that a Pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare. We calibrate the model by reference to (i) the US small and medium-sized enterprise sector and (ii) the household sector, and find the optimal tax to be countercyclical in both cases, dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms.

FDIC to vote on how to liquidate firms (Reuters) - U.S. banking regulators will vote on Monday on how the government would dismantle large financial companies on the verge of collapse.The vote at a Federal Deposit Insurance Corp board meeting will be on a rule that would take effect immediately, but also would allow the agency to gather more comments.FDIC Chairman Sheila Bair said last month that she wants to move quickly on this authority, arguing it is key to preventing future government bailouts of the financial industry. Under the law, the government would designate certain financial companies as systemically important. That means the collapse one of those companies could threaten the financial system. The FDIC has the power to seize and break them up if they are heading toward collapse.

Lehman Black Hole Update: It’s Gotten Bigger! - The  Financial Times provides an update on the Mess That Ate the Markets, circa September-October 2008. As we’ve harped on, Lehman’s bankruptcy advisors have been remarkably unhelpful in providing much insight on why the firm had such a big hole in its balance sheet. The previous estimate we had seen was $150+ billion (a swing of $26 billion in net worth as of the firm’s last financial reports, end of May 2008, versus the last loss tally of $130 billion). Now if I read this correctly (and readers are encouraged to tell me if I have this wrong or there are other interpretations) the shortfall risen a lot.

Why Backstopping Repo is a Bad Idea - Yves Smith - The normally sound Gillian Tett of the Financial Times endorses an idea that is both dangerous and unnecessary, namely, government backstopping of the system of short-term collateralized lending called repo, for “sale with agreement to repurchase.” The problem with her analysis is that her proposal treats symptoms rather than the underlying ailment. It would amount to yet another sop to already heavily subsidized big dealer firms. The argument, basically, is that the repo system posed and therefore continues to pose systemic risk, ergo a backstop makes sense. As her article puts itOne of the main reasons why entities such as Lehman Brothers collapsed, after all, was that investors fled from repo deals, because they became frightened about counterparty risk. Yves here. This is the nut of where the argument starts to go off the tracks. It makes counterparty risk the central issue, and the quality of collateral a related issue. But the real problem is that the only securities that were once considered to be suitable were those of the very highest quality, namely Treasuries. The real problem is in widening the market beyond that. If you have absolutely impeccable collateral, you don’t care if your counterparty goes belly up if you aren’t at risk of losses on the assets you hold.

Who You Gonna Believe? - Krugman - I went through my mail today, and got the usual batch of letters declaring that I’m wrong about everything, and that we should do the opposite of anything I say. Hey, it’s a free country. But I found myself wondering, as I often do, about the determination with which people believe pundits who please them ideologically, no matter how wrong they have repeatedly been — wrong in ways that, if you believed them, cost you money. Suppose you had spent the last five years actually believing what you read from the usual suspects — the WSJ opinion pages, National Review, right-wing economists, etc.. Here’s what would have happened:In 2006 you would have believed that there was no housing bubble.In 2007 you would have believed that the troubles of subprime couldn’t possibly spread to the financial system as a whole.In 2008 you would have believed that we weren’t in a recession — and that the failure of Lehman was unlikely to have bad consequences for the real economy. In 2009 you would have believed that high inflation was just around the corner. At the beginning of 2010 you would have believed that sky-high interest rates were just around the corner.

Why Do I Predict TARP Less ? - I am generally reluctant to make predictions. However, I am willing to predict that the cost of TARP will be less than forecast by the CBO. I should point out that forecasts of the cost have declined.The reason is that the CBO values TARP assets at "fair market value" which means the value for which they could be sold. It assumes that risky assets are not systematically worth much more to the Treasury than to private investors. Thus the cost is the cost if the Treasury liquidiated its portfolio (without considering the huge market pressure and reputational effects). It is not equal to the expected value of additional debt due to TARP -- it is assumed that variance in returns on assets (which by definition doesn't affect the expected value of those returns) increases the cost to the Treasury.I think this is backwards. It is good for the country for the Treasury to bear risk, so the risky returns act as automatic stabilizers.  After the jump, I quote Doug Elmendorf explaining what they do (and indirectly noting that Barney Frank objected). Barney Frank is an excellent congressman.

The Terrible Tale of the TARP Two Years Later - Two years ago, the top honchos at the Fed, Treasury and the Wall Street banks were running around like Chicken Little warning that the world was about to end. This fear mongering, together with a big assist from the elite media (i.e. NPR, the Washington Post, the Wall Street Journal, etc.), earned the banks their $700 billion TARP blank check bailout. This money, along with even more valuable loans and loan guarantees from the Fed and FDIC, enabled them to survive the crisis they had created. As a result, the big banks are bigger and more profitable than ever.  Now, the same crew that tapped our pockets two years ago is eagerly pitching the line that their bailout was good for us. It may be the case the history books are written by the winners, but that doesn't prevent the rest of us from telling the truth.

TARP Watchdog Bulks Up - The Treasury Department is winding down the oft-criticized Troubled Asset Relief Program, which officially expires on Oct. 3, but TARP’s watchdog is just ramping up. Neil Barofsky, the special inspector general for TARP, has submitted a budget request to the White House that would allow him to expand his staff to 192 people from its current level of about 140, according to people familiar with the matter. He’s opening four branch offices across the country, which he plans to staff with investigators. Meanwhile, the Treasury, which is in the midst of ending TARP, has about 220 people working on the program.

Debating the Policy Response - Mark Zandi, Alan Blinder and John Taylor make the case for and against the government's policy response to the recent recession at Wednesday's Senate Budget Committee hearing. Read the prepared testimonies here, or watch the hour-long hearing itself here.

Munger Says `Thank God’ U.S. Opted for Bailouts Over Handouts (Bloomberg) -- Charles Munger, the billionaire vice chairman of Berkshire Hathaway Inc., defended the U.S. financial-company rescues of 2008 and told students that people in economic distress should “suck it in and cope.”  “You should thank God” for bank bailouts, Munger said in a discussion at the University of Michigan on Sept. 14, according to a video posted on the Internet. “Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.”  Bank rescues allowed the U.S. to avoid what could have been an “awful” downturn and will help the country as it deals with the housing slump, Munger, 86, said. He used the example of post-World War I Germany to explain how the bailouts under Presidents George W. Bush and Barack Obama were “absolutely required to save your civilization.”

Toxie's Dead - Toxie, Planet Money's pet toxic asset, died this week. She was killed by one of the worst housing busts in U.S. history. Toxic assets — bundles of mortgages that Wall Street sliced up and sold to investors — were at the center of the financial crisis.  When the housing market tanked, no one wanted to own them.  That's when we bought one. When we bought Toxie , in January of this year, she seemed like a great deal.   We paid $1,000. That was 99 percent less than she cost dring the housing boom. Every month, when homeowners paid their mortgages, we got a check. We thought we'd make back our investment before she died. But in the end, we collected only $449.

“We Should Have Gone Swedish . . .” “What were the alternatives to the bailouts?”  This article, Stopping a Financial Crisis, the Swedish Way, published exactly 2 years ago today, provides an answer:  Sweden did not just bail out its financial institutions by having the government take over the bad debts. It extracted pounds of flesh from bank shareholders before writing checks. Banks had to write down losses and issue warrants to the government. That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.” (emphasis added) The result of the Swedish method? They spent 4%  of GDP ($18.3 billion in today’s dollars), to rescue their banks. That is far less than the $trillions we have spent — somewhere between 15-20% of GDP.

Tim's Bank Looking at 20% Haircut | zero hedge - The Federal Financing Bank makes loans to Government Agencies. FFB is owned by Treasury and Tim Geithner is the Chairman of this outfit, As of the end of August this bank had a balance sheet of $54b of dodgy loans. A good chunk was out to the Post Office. Another big slug was out to the National Credit Union Administration. This balance sheet shows it: Put that together with the news after the close that Tim Geithner has done another bailout. Guess who? The National Credit Union Administration of course. The early terms of the deal from the WSJ. A few highlights:

Credit Union Fix May Be $9.2 Billion, Regulator Says (Bloomberg) -- Credit unions in the U.S. may absorb as much as $9.2 billion in losses over the next decade as the industry strives to recover from sour investments in real estate and consumer loans, U.S. regulators said today.  Part of the plan to resolve the credit unions’ financial problems includes the National Credit Union Administration packaging $50 billion in distressed securities for sale as $35 billion in bonds carrying government guarantees, the agency said today. The debt will be backed primarily by bonds tied to home loans, with the first sale scheduled for next month.  The NCUA already sold more liquid securities from two credit unions that failed last year:  The administration said today that it assumed control of three more.

Unofficial Problem Bank List increases to 872 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for September 24, 2010. Changes and comments from surferdude808:  The Unofficial Problem Bank List underwent significant changes this week from failures and the FDIC releasing its enforcement actions for August 2010. The list finished the week at 872 institutions with assets of $422.4 billion, up from 854 institutions with assets of $416 billion last week. Changes this week include three removals and 21 additions. The removals are the two failures  and one from an unassisted merger.

Lewis Lapham on “the end of capitalism” - This is the second installment of "The Influencers," a six-part interview series that Lynn Parramore, the editor of New Deal 2.0 and a media fellow at the Roosevelt Institute, is conducting for Salon. She talked to Lewis Lapham, the former longtime editor of Harper’s and the founder of Lapham’s Quarterly, about the nature of American-style capitalism — its beginning, its historical manifestation and, possibly, its end.

Inside Job: A Movie Wall Street is Sure to Hate - Yves Smith - Tom Adams and I saw an advance screening of the Charles Ferguson film Inside Job, a documentary on the financial crisis, due for theatrical release in New York on October 8. Given how well each of us knows the subject matter, we’re not easily swayed, but I can speak for both of us in giving the picture high marks. It’s is a very smart, well framed indictment.I’m generally struck by how TV coverage of finance and economics dumbs down their subject matter, which results in annoyingly sanitized, incomplete accounts. This picture demonstrates that the common excuse, that film isn’t well suited to complex material, is merely cover for laziness and low standards.  Inside Job an ambitious picture, clearly aiming to stir public anger and action by showing how criminally corrupt the financial services has become and how it has subverted government and the economics discipline. Despite minor errors and occasional oversimplification, overall Inside Job does an extremely effective job in covering a lot of ground in a compelling manner.

Wall Street’s Engines of Profit Are Slowing Down - Even after taxpayer bailouts restored bankers’ profits and pay, the great Wall Street money machine is decelerating. Big financial institutions, including commercial banks, are still making a lot of money. But given unease in the financial markets and the economy, brokerages and investment banks are not making nearly as much as their executives, employees and investors had hoped.  After an unusually sharp slowdown in trading this summer, analysts are rethinking their profit forecasts for 2010.  The activities at the heart of what Wall Street does — selling and trading stocks and bonds, and advising on mergers — are running at levels well below where they were at this point last year, said Meredith Whitney, a bank analyst who was among the first to warn of the subprime mortgage disaster and its impact on big banks.

FT: Junk bond prices hit pre-crisis levels - From the Financial Times: Junk bond prices hit pre-crisis levels Strong investor demand for junk bonds has pushed the average price on such corporate debt to its highest level since June 2007, when companies could borrow with ease at the height of the credit boom. And from the WSJ: Bond Markets Get Riskier Bond markets are growing riskier as investors seeking steady returns bid up prices and ignore some early warning signs similar to those that flashed during the credit bubble.Last week, prices on high-yield, or junk, bonds, hit their highest level since 2007, nearly double their lows of the credit crisis. Nine months into the year, companies have sold $172 billion in junk bonds, already an annual record, according to data provider Dealogic.This seems like investors chasing yield - and that is making it easy to sell junk bonds. Oh well ...

Microsoft sells debt at record U.S. low rate (Reuters) - Microsoft Corp (MSFT.O) on Wednesday sold $4.75 billion in new debt, some of it at the lowest U.S. corporate borrowing rate on record, as the world's largest software company takes advantage of low interest rates to raise cash. The bonds -- due in three years, five years, 10 years and 30 years -- are raising money for capital expenditures, share buybacks and acquisitions, among other things, Microsoft said in a filing with securities regulators. Microsoft sold $1 billion of the three-year notes at a coupon of 0.875 percent, or 25 basis points over comparable Treasuries, according to a source familiar with the offering. That's the lowest level in U.S. data going back to 1970 compiled by Thomson Reuters/IFR. It means Microsoft is paying even less in interest than a government-insured savings account. The overnight average yield on a one-year certificate of deposit (CD) is 1.2 pct, according to

Evaluating the "excess" in the US corporate financial balance - Rebecca Wilder - In a NY Times op-ed, Rob Parenteau and Yves Smith reminded us that the private sector financial balance is a function of the household financial balance and the corporate household balance. They conclude the following: I don't think that it's that simple (not that this type of policy would be easy at all). As I illustrate below, firms, like households, are in a deleveraging cycle, and corporate excess saving is likely to persist for some time. The illustration above plots the total corporate financial balance as a percentage of GDP. I calculate the Total Corporate Financial Balance (TCFB) as in the JP Morgan study, which is the residual of the national accounting identity of the Current Account Balance minus the Household Financial Balance minus the Government Financial Balance. About the same time as JP Morgan published their research, the IMF and the OECD were wondering why global TCFBs were rising. Several factors are attributed the upward trend in the first half of the 2000's

An oversight on oversight: The Federal Home Loan Bank - Debate over financial regulatory reform has been far-reaching. Yet one set of institutions has gone largely unnoticed: the Federal Home Loan Bank (FHLBank) system, a government sponsored enterprise composed of 12 regional bankers’ banks that has been at the centre of sustainable home ownership finance in the US since 1932 . The lack of attention by lawmakers is not entirely a surprise. The Federal Reserve has long overshadowed the FHLBank system. Moreover, FHLBank leaders and supporters may well prefer flying under the Congressional radar to wait out the present financial storm. Regardless of the reason, we show in our recent book Mission Expansion in the Federal Home Loan Bank System (Cassell and Hoffmann 2010) that by neglecting the FHLBank system, lawmakers miss a chance to tap the most important source of housing finance expertise in the federal government. In addition, we lose an opportunity to reform the FHLBank system, which, while not at the centre of the current foreclosure and financial crisis, was certainly a player.

Fannie And Freddie, Again - Krugman - For those people still trying to blame Fannie and Freddie for the housing bubble, I direct you to the conservator’s report, nicely summarized by Karl Smith. As far as I’m concerned, all you really need is this figure:What this tells us is that during the peak years of the housing bubble, Fannie and Freddie were largely off the scene. Everything else — every complicated calculation coming out of AEI or wherever — is an attempt to obscure this simple fact. That’s not a defense of F&F. As Smith says, they’re creepy and unsavory. But they didn’t commit this particular crime.

Fannie Freddie Further - Krugman - OK, some readers want to know my answer to Rajan’s defense on the FF issue. So, first of all, the first time I wrote about FF, I got something wrong — I was unaware of their late in the game rush into subprime.  But Rajan’s other point, that securitization numbers — which show a much reduced role for FF at the height of the bubble — are misleading, is just wrong as a quantitative matter. Look at the flow of funds data on mortgage holdings (pdf). You’ll see that securitization is the bulk of the story. And let’s do one more thing: let’s look at changes in those mortgage holdings by the GSEs — securitized and not — and by asset-backed private pools. It looks like this: During the peak of the housing bubble, Fannie and Freddie basically stopped providing net lending for home purchases, while private securitizers rushed in. Yes, very late in the game FF increased their share of subprime financing, as they tried to play catchup; but that’s really off point.* The real question is, who was financing the bubble — and it wasn’t GSEs.

Fannie and Freddie: guilty? - The Economist - AS A general rule of thumb, the answer to the question, "Did x cause the crisis?" is no, for all x. The right question to ask is to what extent various factors contributed to the crisis. Where Fannie and Freddie are concerned, the answer would seem to be: some, but less than many may imagine.The latest round of debate over Fannie and Freddie began with Raghu Rajan, whose book "Fault Lines" argues that government action to support housing markets was one of the major economic forces underlying the development of the crisis (alongside things like global imbalances and easy money). Responding to a review of the book by Paul Krugman, Mr Rajan wrote:Clearly, Fannie and Freddie did not originate sub-prime mortgages directly — they are not equipped to do so. But they fuelled the boom by buying or guaranteeing them. I actually think that the evidence for Mr Rajan's argument here is somewhat weak.

Why Did We Have A Housing Bubble? Because Houses Are Attached to the Ground -There are lots of explanations for why we had a housing bubble, but I suggest that there was nothing unusual about the price of housing. Construction costs went up a bit during the boom. What really soared in price was the land the housing was sitting on... the soaring price of land didn’t look any different than the soaring price of everything else that comes out of the ground. Here is the run-up in housing prices versus the Producer Price index for Crude Goods, ie stuff that comes out of the ground. The thick pink line is the Crude Goods index.The thin lines are the housing price indexes from the various census regions. The top thin blue line is the Pacific Region. The bottom green line is the East North Central Region, which is basically the rust belt.The index is based on 100 for everything just before the 2001 recession started.

FHFA: Banks Should Share Fannie, Freddie Bailout Costs The nation's largest banks have an obligation to pay some of the cost for bailing out mortgage buyers Fannie Mae and Freddie Mac because they sold them bad mortgages, a government regulator said Wednesday. Edward DeMarco, the acting director for the Federal Housing Finance Agency, said the banks this summer have refused to take back $11 billion in bad loans sold to the two government-controlled companies, in written testimony submitted for a House subcommittee hearing Wednesday. A third of those requests have been outstanding for at least three months.DeMarco said the banks have a legal obligation to buy back the loans and called the delays "a significant concern." He said the government may take new steps to force those buybacks if "discussions do not yield reasonable outcomes soon." In an interview with reporters after the hearing, DeMarco declined to give further details on what the government might do next. He said only that "we're looking for contractual obligations to be fulfilled."

Moody's: Commercial Real Estate Prices Dive 3.1% in July - U.S. commercial real estate prices as measured by Moody’s/Real Commercial Property Price Indices (CPPI) tumbled 3.1 percent in July, the second consecutive monthly drop of more than 3 percent. Across the nation, prices are 43.2 percent under their October 2007 peak and just 0.9 percent higher than the recession trough posted in October 2009.  The CPPI has dipped 7.3 percent in the past year and has fallen 35.9 percent in the past two years.“Commercial real estate markets were caught in a downdraft as the economy appeared to further weaken in the early part of 2010, resulting in relatively large declines in the index in the early summer,” said Moody’s Managing Director Nick Levidy.

Moody's: Commercial Real Estate Price Index declined 3.1% in July - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 3.1% in July. This is a repeat sales measure of commercial real estate prices. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  It is important to remember that the number of transactions is very low and there are a large percentage of distressed sales.  Commercial real estate prices (as measured by this index) fell 7% combined in June and July. The index is now down 43.2% from the peak in October 2007

Two Thirds of Atlanta's 3.6 Million Square Feet of New Office Space Sits Empty - Atlanta office developers bet the farm in 2008 - and lost.  Two third of the city's 3.6 million square feet of Class A office space sits empty today, according to the latest tabulations from Cushman & Wakefield. Worse, there is little hope the situation will improve for at least another five years, according to several analysts intimate with the Atlanta office market. Atlanta is not alone among major metro areas to be experiencing the office-leasing malaise, but the Southern city is a prime example of what happens when developers build quickly after lenders hand out big-number construction loans, a Bloomberg analysis finds.  The 34-story 3630 Peachtree is a symbol of a construction boom that has saddled Atlanta with a 21.2 percent vacancy rate, the second highest among major U.S. markets

HAMP data for August - From Treasury: HAMP Servicer Performance Report Through August 2010 And here is the HUD Housing Scorecard. Click on tables for larger images About 468 thousand modifications are now "permanent" - up from 422 thousand last month - and 663 thousand trial modifications have been cancelled. The pace of new trial modifications has slowed sharply from over 150,000 in September 2009 to under 18,000 in August. The program has slowed way down.  The second graph shows the aged trials (greater than 6 months) as a percent of total trials. According to HAMP, there are 202,521 "active trials", down from 255,934 last month. The shows that the HAMP servicers have made progress on getting borrowers out of "modification limbo" - although the trial program was originally designed to be for 3 months - so maybe the measurement should be 4 months (instead of 6 months).

Permanent HAMP mods fall 26% in August - Servicers participating in the Home Affordable Modification Program converted 33,342 trial modifications into permanent status in August, down 26.7% from the 45,512 in July.The Treasury Department launched HAMP in March 2009 to provide incentives to servicers for the modification of loans on the verge of foreclosure. Since then, the participating servicers have provided 468,058 permanent modifications. Borrowers must submit all documents and make three monthly trial payments to receive a permanent modification. The Obama Administration set an early goal for 3 million to 4 million borrowers to receive aid under HAMP. After 17 months, servicers have reached more than 15% of that mark, up from slightly higher than 14% in July. If servicers gain an average of 1 basis point every month, they would not reach 3 million permanent modifications for another 85 months, or another seven years. But HAMP is set to expire at the end of 2012.

Obama Homeowner Program Hits 10-Month Low As Prices Drop And Foreclosures Surge - The number of homeowners receiving permanent relief under the Obama administration's primary foreclosure-prevention initiative hit a 10-month low as home prices dropped and repossessions jumped, threatening more homeowners just as the administration's aid program winds down. Just over 33,000 homeowners had their monthly mortgage payments reduced in August for the next five years as part of the administration's Home Affordable Modification Program, Treasury Department data released Wednesday show. Obama promised in 2009 that some 3 to 4 million homeowners would be helped. About 449,000 borrowers have thus far received mortgage modifications. The program, sold as a $50-billion effort, is unlikely to spend that much helping delinquent homeowners keep their homes. Nearly one and a half years into the program, only 1 percent of that money has been spent.

Where Did HAMP Go Wrong? -Jean Braucher's posts about servicers as gatekeepers raises the question of just where did HAMP go wrong?   HAMP has always been fatally flawed conceptually and operationally it has also been fraught with problems.  Conceptually, HAMP was always an attempt to get away with doing as little as possible, hoping that the market would turn around, hoping that all the housing bears were wrong. HAMP has never been real serious about negative equity, unemployment, or second liens.  Yes, there are add-on programs for all of those, but they are too little, too late.    The operational problems sapped a lot of energy from Treasury and also served as a distraction from the much more important conceptual flaws.  The program's limited effect could be blamed on operational, rather than conceptual issues, when even if operations had been perfect, the program would still have been a flop.  (OK, it's not Hope 4 Homeowners, which I called, although not as bad as just 72 endorsements though July 2010 (and I can't tell if I'm double counting 12 of them!) but it's still a pretty sorry mess.) 

New Homebuyer Tax Credit Arrives But Is Destined To Fail…Home prices want to come down. Home prices need to come down. And home prices will come down, as soon as government gets the hell out of the way. All it took was a couple months of lousy housing data and Washington is at it again, propping up a market that's desperately groping for a bottom. If bureaucrats would just step aside and admit that their piecemeal solutions simply delay the formation of a fundamental bottom, we could be on the actual road to recovery. But it is not to be. According to HousingWire, a mortgage trade publication, yesterday Fannie Mae and Freddie Mac announced the latest iteration of the homebuyer tax credit. Not nearly so far-reaching as the $8,000 credit that expired this summer, and no doubt enacted at the behest of the National Association of Realtors, Fannie and Freddie are doling out cash to new buyers and the real estate agents who close the deals. A buyer planning to occupy a home foreclosed by Fannie or Freddie can get a closing credit of as much as 3.5% of the purchase amount, while listing agents stand to earn a $1,500 bonus for purchase contracts signed by the end of 2010

The Role of Government and the Foreclosure Crisis - As we all know, there are two competing views on the proper role of government. On the one hand, we have those who believe that it is the government's responsibility to redistribute as much income as possible upward to the richest people in the country. On the other hand, there are those who believe that government should promote a strong economy that serves the vast majority of the population. Adherents of the former group in both political parties have been firmly in control of government in recent decades. This comes out very clearly in the treatment of the foreclosure crisis. The basic story of the foreclosure crisis is that banks made trillions of dollars of bad mortgage loans that were used to buy or refinance houses at bubble-inflated prices. With the collapse of the housing bubble, more than a fifth of all mortgages are underwater. As a result, many homeowners are struggling to pay mortgages on houses in which they have no equity and have no real prospect of ever getting equity.

How Underwater Mortgages Can Float the Economy - NYTimes - RECENT calls for another federal stimulus package raise an important question: Before considering costly short-term measures to raise overall consumer demand, have we done enough to ensure that financial markets will work properly and lead us to recovery? For housing — the sector at the center of the crisis — the answer is no. But the good news is that it might be possible to improve the housing market and invigorate the economy in a way that won’t require a costly stimulus package.  In a normally functioning mortgage market, almost all homeowners would have refinanced their mortgages to take advantage of low rates. Yet today, low interest rates are doing little to stimulate the housing market because of other stresses, including declines in house prices, falling household incomes and banks’ wariness of making loans.  To change this dynamic, we propose a new program through which the federal government would direct the public and quasi-public entities that guarantee mortgages — Fannie Mae, Freddie Mac, Ginnie Mae, the Department of Veterans Affairs loan-guarantee program and the Federal Housing Administration — to make it far easier and quicker for homeowners to refinance.

Mortgage Relief for All; But Who’s Paying?? - Glenn Hubbard is the dean of the Columbia Business School as well as the former chairman of the Council of Economic Advisors under President George W. Bush. That resume is what makes so puzzling his op ed in yesterday’s Sunday NY Times: Op-Ed Contributors:  How Underwater Mortgages Can Float the Economy. Maybe I shouldn’t be surprised that their proposal seems unhinged from reality.Who wouldn’t love to solve the mortgage crisis? But Hubbard and Mayer’s "plan" seems to be missing a few key links. They envision mortgage refinancings being made available to millions of underwater borrowers at prevailing rates (4.3 % is mentioned), seemingly regardless of their credit scores, an issue not raised in the piece. Hubbard and Mayer further contemplate Fannie Mae and Freddie Mac getting involved in arranging mortgage-backed securities to raise capital to deliver refinancings to the masses currently denied them. They add: Not only would foreclosures be avoided, but stimulus of massive proportions would be achieved as mortgage payments are brought down by lower interest rates!

Down again - THE homebuyers tax credit programme, it was hoped, would support housing markets by enticing buyers with a generous purchase subsidy (of up to $8,000), reducing the glut of supply and limiting additional price declines. For a little while, it seemed to work. But in the wake of the policy's April expiration, data on sales and construction have tumbled. Price indexes for homes come out with a bit of a lag, and so obervers have wondered whether housing values might buck the trend and avoid a renewed decline. For better or worse, it is not to be so. The Federal Housing Finance Agency released new price data today for the month of July. The figures showed sharp declines from May to June and June to July. Year-over-year prices were off 3.3% in July. More reliable price indicators, like the Case-Shiller index, will likely point toward a similar reversal in coming months. A closer look at recent trends tells the story:

Life After the Home Buyer Tax Credit - The Home Buyer Tax Credit contained in the American Recovery and Reinvestment Act of 2009 has been given much credit for buoying the housing market. But recent housing market data suggest that the credit’s effect was limited, even while it lasted.  The law passed in February 2009 included a temporary 10 percent capped tax credit for qualified first-time home buyers that expired April 30, 2010. The program was later expanded to include repeat home buyers, and recently home buyers were given until September 2010 to complete qualified transactions. One view of the tax credit’s effect is that it changes the timing of housing transactions — market participants rush to complete transactions before the credit expires — but has little effect on the value and quantity of homes because homes are expected to last many times longer than the tax credit does. Another view is that the market cannot do without the credit, and the housing market collapse that preceded it may well continue when it’s gone.

Housing starts climb 10.5% in August - New home construction rose 10.5% in August to the highest level since April, easily topping analysts' estimates and possibly indicating more stability to the beleaguered housing market. Housing starts climbed to a seasonally adjusted 598,000 units last month from a downwardly revised 541,000 for July, according to the Commerce Department. Starts of apartment units last month soared 32.2% to 160,000, which is on top of a 36% gain in July. Meanwhile single-family starts increased 4.3% in August after falling 6.7% in July, the Commerce Department said. Permits for new construction, a leading indicator of upcoming building activity, rose about 1.8% to 569,000 from 559,000 one month earlier. Economists were expecting August permits to inch up to 560,000.

Single Family Housing Starts increase slightly in August - Total housing starts were at 598 thousand (SAAR) in August, up 10.5% from the revised July rate of 541 thousand (revised down from 546 thousand), and up 25% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Single-family starts increased 4.3% to 438 thousand in August. This is 22% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for over a year - with a slight up and down over the last several months due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

Home-Price Index Posts July Decline - U.S. home prices fell in July, a government agency says, the second straight monthly decline as the industry suffers from the loss of a tax credit that had given sales a boost. Home prices dropped 0.5% on a seasonally adjusted basis from June, according to the Federal Housing Finance Agency’s home price index Wednesday. That followed a 1.2% decline in June from May. U.S. home prices in July were down 3.3% from July 2009. Home sales have collapsed in the U.S. since the April 30 end of the tax incentive, meant to spur the moribund housing market as the economy recovers from a long recession. Wednesday’s data showed prices month-on-month fell in six of nine regions. “The U.S. index is 13.8% below its April 2007 peak,” the agency said.

U.S. home prices down 0.5% in July, FHFA says -- U.S. home prices fell 0.5% in July compared with June, and were down 3.3% compared with a year earlier, the Federal Housing Finance Agency reported Wednesday. Prices fell a revised 1.2% in June, much weaker than the initial estimate of a 0.3% drop. The FHFA purchase-only home-price index is down 13.8% from the peak in 2007. The biggest losses in July came in the South Atlantic states with a 1.6% drop. Economists at Majestic Research said that home prices are weakening because existing inventory is growing at the fastest rate since 2007."

U.S. Home Prices Fell 3.3% in July From Year Earlier (Bloomberg) -- U.S. home prices dropped 3.3 percent in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.  Prices fell 0.5 percent from June, the Federal Housing Finance Agency in Washington said in a report today. Economists had projected prices to fall 0.2 percent from the previous month, based on the average of 15 estimates in a Bloomberg survey. The agency revised the previously reported May-to-June decline to 1.2 percent from 0.3 percent.  Foreclosures are boosting the supply of available properties and reducing prices, even as mortgage rates tumble to record lows. The time it would take to clear the market of homes for sale was 12.5 months in July, the highest in more than a decade of data, according to the National Association of Realtors. Banks seized a record 95,364 properties from delinquent borrowers in August, according to RealtyTrac Inc., an Irvine, California-based seller of housing data.

BBC News – US existing home sales rise 7.6% in August - Sales of previously-owned homes in the US rose 7.6% in August, figures have shown, but activity in the housing market remains at low levels. Sales climbed to an annual rate of 4.13 million, the National Association of Realtors (NAR) said. But that was from a low base - July's revised annualised rate of 3.84 million was the lowest since 1997. July had seen a record one-month drop after the end of a tax credit, designed to boost sales. "The housing market is trying to recover on its own power without the home buyer tax credit," said Lawrence Yun, NAR chief economist. "Despite very attractive affordability conditions, a housing market recovery will likely be slow and gradual because of lingering economic uncertainty."

Existing Home Sales at 4.1 million SAAR, 11.6 months of supply - The NAR reports: Existing-Home Sales Move Up in August This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in August 2010 (4.13 million SAAR) were 7.6% higher than last month, and were 19.0% lower than August 2009 (5.1 million SAAR).  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased slightly to 3.98 million in August from 4.01 million in July. The all time record high was 4.58 million homes for sale in July 2008.  Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory increasing in the spring and into the summer. I'll have more on inventory later ...The last graph shows the 'months of supply' metric. Months of supply decreased to 11.6 months in August from 12.5 months in July. This is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will continue to decline.

Existing home sales rebound 7.6% in August: NAR - Home sales increased 7.6% in August after the drop to a decade low in July, according to the National Association of Realtors. The annual rate of sales in August reached 4.13 million, up from the revised 3.84 million in July. But sales are still down 19% from last year. Lawrence Yun, the chief economist at NAR, said the housing market is still trying to move forward without government incentives. "The housing market is trying to recover on its own power without the homebuyer tax credit. Despite very attractive affordability conditions, a housing market recovery will likely be slow and gradual because of lingering economic uncertainty,” Yun said. NAR measures the completed transactions of single-family, townhomes, condos and co-ops. Also today, Freddie Mac reported the average rate on a 30-year, fixed-rate mortgage fell to a record low of 4.43% in August, down from 5.19% last year.

Existing Home Inventory increases 1.5% Year-over-Year - Earlier the NAR released the existing home sales data for August; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. Although inventory decreased slightly from July 2010 to August 2010, inventory increased 1.5% YoY in August.   Usually July is the peak month for inventory. The year-over-year increase in inventory is especially bad news because the reported inventory is already historically very high (around 4 million), and the 11.6 months of supply in August is far above normal. Based on the MBA mortgage purchase applications index, it appears there will be little increase in sales over the next couple of months - and that suggests house prices will continue to fall.By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2010. Sales for the last two months are significantly below the previous years, and sales will probably be well below the previous years for the remainder of 2010.

New Home Sales Unchanged from July, Worst August on Record The Census Bureau reports New Home Sales in August were at a seasonally adjusted annual rate (SAAR) of 288 thousand. This is unchanged from July. Here is the graph for New Home Sales NSA. The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted or annualized). Note the Red columns for 2010. In August 2010, 25 thousand new homes were sold (NSA). This is a new record low for August. The previous record low for the month of August was 34 thousand in 1981; the record high was 110 thousand in August 2005. The second graph shows New Home Sales vs. recessions for the last 47 years. And another long term graph - this one for New Home Months of Supply. The third graph is for Months of Supply. Months of supply decreased to 8.6 in August from 8.7 in July. The all time record was 12.4 months of supply in January 2009. This is still very high (less than 6 months supply is normal).

U.S. Aug. new home sales flat at 288,000 pace - U.S. new-home sales were flat in August, matching the second lowest level on record, the Commerce Department estimated Friday. Sales were steady at a seasonally adjusted annual rate of 288,000 units, below the 300,000 pace expected by economists surveyed by MarketWatch. Sales plunged in May to a record low after tax breaks for homebuyers expired and have bounced around at low levels over the past three months. New-home sales in July fell a revised 7.7% to a 288,000 level compared with the previous estimate of a 12.4% fall to 276,000. New-home sales are down 28.9% compared with a year ago. The supply of new homes fell 1.4% to 206,000. Supply in relation to sales fell slightly to 8.6 months in August from 8.7 months in July. Median sales prices have fallen 1.2% in the past year to $204,700

Home Sales: Distressing Gap - By request, here is an update - this graph shows existing home sales (left axis) and new home sales (right axis) through August. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due partially to distressed sales). Note: it is important to note that existing home sales are counted when transaction are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The two spikes in existing home sales were due primarily to the first time homebuyer tax credit (the initial credit last year, followed by the extension to April 30th / close by June 30th). There were also two smaller bumps for new home sales related to the tax credit.

Mortgage demand idles despite low loan rates - Home loan demand fell for a third straight week though fixed mortgage rates slid near all-time lows, with potential buyers still unnerved by the jobs market, Mortgage Bankers Association data showed on Wednesday. While the housing market is seen unlikely to plunge anew, it lacks traction. Unemployment and underemployment prevent many buyers from making such a big financial commitment. Loan applications to buy homes and refinance declined last week despite average 30-year mortgage rates dropping 0.03 percentage point to 4.44 percent. At a record low dating back to 1990, the rate fell to 4.43 percent last month. "I don't think we're going to see massive dips like we did before, but housing can't recover until employment recovers,"

Rates are Low–Where Are All the Refis? - Jean Braucher's post on the Hubbard-Mayer housing market reform proposal points to a really interesting question:  why is it that despite historically low interest rates, there has been relatively little in the way of refinancings?   This is a critical question because the housing market has traditionally been a prime channel through which the Federal Reserve can use interest rates to affect the economy.  I've seen one estimate that the missing refinancings would put $90 billion into the pockets of mortgaged households (around 50 million of 'em) every year, without affecting the federal budget.  That's real a direct-to-consumer annual stimulus of $1800/mortgaged household. So, what's preventing more refinancing activity?  

Mortgage Delinquencies Drop, as Foreclosures Jump - A government report Friday said the number of seriously delinquent mortgages fell in the second quarter for the first time in more than a year, reflecting a surge in completed foreclosures as well as lower monthly payments as homeowners negotiated loan modifications. But while the fall in serious delinquencies — mortgages that are 60 or more days past due–is positive, the overall home lending picture remains uncertain, said Bruce Krueger, a mortgage expert at the Office of the Comptroller of the Currency. “There are mixed signals right now,” Krueger said. The OCC’s quarterly report said completed foreclosures, in which borrowers lost their homes, increased by 7% from the previous quarter to nearly 163,000. That’s a 54% rise from a year earlier “as the large volume of seriously delinquent mortgages and foreclosures in process worked through the system,” the report said.

House prices heading to a new low at end of 2010: Radar Logic - House prices held a very slight decline in July, possibly a marked transition toward a new trough at the end of 2010 or the start of 2011, according to Radar Logic, Quinn Eddins, director of research at Radar Logic, told HousingWire prices will follow the declining trends in demand for house purchases. In July, the National Association of Realtors reported a 27% drop in sales activity, which then rebound in August 7.6%. But the last time prices were as flat as they were from June to July, was in 2006, at the height of the housing peak. From there, rapid price growth transitioned into rapid price decline. Radar Logic anticipates the Standard & Poor's/Case-Shiller Home Price Index to remain at the same level in July that it reached in June. A large inventory of homes continues to contribute to the lack of demand, according to Radar Logic. Most of it has been REO. The sale of foreclosed homes and those sold at country foreclosure auctions increased to almost 25% of total transactions.

GMAC Stops Foreclosures in 23 States In one trial I’m familiar with, but not one of these 23 states listed, the GMAC guy was on the stand twice, and the second time, it was pretty clearly established that he had perjured himself in his initial testimony. But I doubt the mother ship took note of that trial (no verdict rendered yet). However, to put it politely, there was pretty clear evidence of document forgeries; the only question which party (GMAC or its law firm) was responsible. From Bloomberg (hat tip reader Scott): Ally Financial Inc.’s GMAC Mortgage unit told brokers and agents to halt evictions tied to foreclosures on homeowners in 23 states including Florida, Connecticut and New York. GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 marked “urgent.”….Brokers were told to immediately stop evictions, cash- for-key transactions and lockouts, according to the document, addressed to GMAC preferred agents.

More on GMAC and Foreclosure Fraud Mess: “The Shit is Hitting the Fan” (Updated) - Yves Smith - Various updates on the possible drivers of the GMAC announcement suspending its foreclosures in 23 states. Max Gardner, a North Carolina bankruptcy attorney who is held in high esteem and is playing a leading role in legal efforts against foreclosure fraud, provided this comment on our earlier post on the GMAC bombshell:I believe this action relates to thousands of false affidavits filed by an officer of GMAC Residential Funding. It is also my understanding that this particular officer may be facing a multitude of federal and state criminal charges. As of this date, thousands of foreclosure affidavits have been withdrawn in Florida and a number of notices of false evidence have been filed by the mill law firms with the Florida trial and appellate courts. This, in my view, is the tip of the iceberg! More details from Jeffrey Stephens of the Florida Default Law Group via e-mail: I’m also told that an Mortgage Bankers Association conference which is in progress, is “freaking out” over this. Um, how could they not know this dead body was in the room?

How Serious is the GMAC Problem? Pretty Serious and Not Just GMAC - Yves Smith  - The news reports on GMAC Mortgage’s decision to halt evictions and foreclosure sales in 23 states, as originally reported by Bloomberg News, has generated keen interest in the mortgage and securitizaion communities. One reason is the oddly abrupt and broad nature of GMAC Mortgage’s action. GMAC Mortgage subsequently issued a rebuttal of sorts to the article. Not only did it fail to clairify matters, it is inconsistent with the actual notice it sent last week. Various accounts have described how one officer of GMAC Mortgage’s servicing unit has admitted during testimony that, while he signs thousands of affidavits each month in order to affect steps in the foreclosure process, he does not have personal knowledge of certain critical facts in the affidavit which he asserts to be true. Reader Stupendous Man provided the text of Federal Rule 56 on affidavits (although the cases in question are in state courts, the same principles no doubt apply.

The GMAC fiasco - Yves Smith has been doing a fabulous job covering the latest fiasco at Ally Financial, the state-owned bank which used to be called GMAC. But to get a quick idea of how dysfunctional the situation is, all you need to do first is read the official GMAC memo to its agents in 23 states around the country, and then read the official GMAC press release on the subject. The memo could hardly be any clearer. “Do not proceed with evictions, cash for keys transactions, or lockouts,” it says. “All files should be placed on hold, regardless of occupant type. Do not proceed with REO sale closings.”Yet here’s how the press release begins: Recent reports have stated that GMAC Mortgage instituted a moratorium on all residential foreclosures in 23 states. This is not true. In fact, all new residential foreclosures are continuing in the ordinary course of business with no interruption,,,There’s no good reason for this kind of misdirection and mendacity. Ally is meant to be the friendly, transparent bank; instead, at the first sign of trouble, it retreats into Clintonian language (didja spot that “new” in the press release?) which only serves to reinforce the impression that no banks, including Ally, can ever be trusted.

The Disintegrating Mortgage Front - Yves Smith at Naked Capitalism continues her documentation of the mortgage system unraveling. As I’ve written about several times before, the sale and securitization system has devolved, with mortgage mills set up to evade many layers of local and state taxes while the mortgages themselves are disintegrated into a mind-boggling atom-smasher of tranches of CDOs and CDOs of CDOs. The physical note often disappears somewhere along the way. Nobody could legitimately figure out who actually owns these mortgages, in many cases. The mortgages themselves have effectively ceased to exist. This reads like a satire on a land distribution system where the physical land is viewed abstractly even by those who physically squat on it and call themselves “owners” (but are really debtors). But under today’s legal system the land is really owned by the parasite finance sector. But as Smith has extensively written, even according to their rigged law they’ve been abdicating this “ownership”. Legal ownership is anchored in the note. But where the note can’t be produced, as is happening more and more, no one can legitimately claim this ownership, or any right to foreclose or sell. As debtor advocates say, Always make them produce the note!

On the GMAC Foreclosure Stories - First an update from Bloomberg earlier today: Ally Says GMAC Mortgage Mishandled Affidavits on Foreclosures Ally Financial Inc., whose GMAC Mortgage unit halted evictions in 23 states amid allegations of mishandled affidavits, said its filings contained no false claims about home loans.  The “defect” in affidavits used to support evictions was “technical” and was discovered by the company, The basic facts are: The homeowners had a mortgage. The homeowners are in default. The lender was sloppy and filed inaccurate documents with the court. The best reporting on the GMAC story comes from 2007 (just change the name of the lender) - and you can learn all about affidavits from Tanta's posts: From 2007: Deutsche Bank FC Problems and Revenge of the Nerd And a follow-up in 2007: In Re Foreclosure Cases  And in 2008 on Lost Note Affidavit (LNA): Lost Note Affidavits & Skeletons in the Closet And what Tanta wrote in 2007 applies to the GMAC stories:  To summarize: there were dollars on the table encouraging secondary market participants to get real sloppy. ... The big news here is that the true cost of doing business is belatedly showing up. I happen to think that's a more important story than was originally reported.

GMAC Mortgage: "Proudly Executing Up To 10,000 Fake Documents Per Month" - Since we live in a day and age when nobody in their right mind has the attention span to read an actual deposition transcript, here is a powerpoint presentation prepared by Max Gardner's Bankruptcy Boot Camp excerpting the deposition of GMAC Mortgage employee Jeffrey Stephen in which he essentially confirms that the firm executes up to 10,000 fake documents per month. The punchline:  Q. So other than the due date and the balances due, is it correct that you do not know whether any other part of the affidavit that you sign is true?  A. That could be correct. We could be wrong, but this is about to become a national level scandal. Full must read summary (ppt link, feel free to send to all your friends and neighbors who may have had a GMAC mortgage):

Ally Financial legal issue with foreclosures may affect other mortgage companies - Some of the nation's largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork - an admission that may open the door for homeowners across the country to challenge foreclosure proceedings. The legal predicament compelled Ally Financial, the nation's fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans. As head of Ally's foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate. He was also required to sign the documents in the presence of a notary. In a sworn deposition, he testified that he did neither.  How the nation's foreclosure system became reliant on the tedious work of a few corporate bureaucrats is still a matter that mortgage lenders are trying to answer. While the lenders may have had legitimate cause to foreclose, the mishandling of the paperwork has given homeowners ammunition in their fight against foreclosure and has drawn the attention of state law enforcement officials.

'Robo-signer' played quiet role in huge number of foreclosures - Many large mortgage lenders have come to rely on a relative handful of so-called robo-signers ... to attest to the accuracy of thousands of home foreclosure documents across the country. ...Stephan - who declined to talk to a reporter -... works as the leader of the document execution team for GMAC Mortgage. He has signed off on as many as 10,000 foreclosures in a month, according to court documents. That's barely a minute per case, assuming he works a normal eight-hour day.  His signature indicated that the information in the cases was accurate to the best of his knowledge, and that he had signed in the presence of a notary. He stated that he would glance at .a few other numbers, but simply assumed most of the information in the files was correct. Stephan, who has more than a dozen people working under him, told attorneys that he had three days of training for the position and that he didn't know how the "summary judgment" affidavits he signed were used in judicial foreclosure cases.  Stephan's admission has cast into doubt thousands of mortgage foreclosure filings.

A Crack In Wall Street's Foreclosure Pipeline? - Could one bank's admission about dubious foreclosure documents cast doubt over millions of foreclosures filed by Wall Street banks in the past few years? A quick recap: On Monday, a brief news item appeared saying that GMAC Mortgage, a multibillion-dollar housing subsidiary of Ally Financial, may "need to take corrective action in connection with some foreclosures" and had halted parts of the foreclosure process in 23 states, including Florida, a foreclosure hotspot. The news immediately took the housing industry by surprise and set the foreclosure blogosphere abuzz. Soon after, GMAC clarified its position to say there was no moratorium. But the company did say it had temporarily halted numerous evictions and foreclosure sales in those 23 states. A GMAC spokeswoman told Bloomberg News that the move resulted from a "defect" in the company's foreclosure paperwork that was merely "technical." But state officials, experts, and foreclosure defense attorneys say there's a lot more going on—and that the ramifications of GMAC's decision could send shockwaves throughout other big banks, mortgage servicers, and possibly the entire foreclosure industry.

Improper GMAC Affidavits Leading to Charges of Document Fabrication to Change Title - Yves Smith - Ah, what a tangled web we weave when first we practice to deceive, said the bard. And the web emanating from the GMAC affidavit improprieties extend much further than most may realize. Although GMAC continues to maintain that having its “robot signor” officers like Jeffrey Stephan provide affidavits on matters they know nothing about is a mere technical problem that they can remedy. In fact, an affidavit is a statement of someone with personal knowledge of a matter. Stephan signed as many as 10,000 documents a month and clearly could not have personal knowledge of the underlying situations. Deliberately preparing and submitting inaccurate documents in a legal proceeding is a fraud on the court, something most judges really really do not like. Predictably, lawyers who are contesting foreclosures are jumping on the affidavit issue and using it to open up broader issues with foreclosures where GMAC was the servicer of the loan. For instance, this letter to a judge in South Carolina, a judicial foreclosure state, discusses not only the role of an apparent fellow robot signor of Stephan, one Jack Kerr, but more critically, another document provided in this case stamped (not signed) by one Judy Faber, also of GMAC. The Faber document transferred title to the party foreclosing in the case, so if the document is invalid, the plaintiff, in this case a Deutsche Bank trust, will lack standing to foreclose (legalese for “no tickie, no laundry”).

Texas, Iowa Attorneys General Open GMAC Foreclosure Probes (Bloomberg) -- Attorneys general in Texas and Iowa, following Florida, have started their own investigations into foreclosure practices at Ally Financial Inc.’s GMAC mortgage unit.  “The integrity of the foreclosure process is of utmost importance and we are very concerned by the issues that have been raised regarding Ally Financial’s treatment of affidavits,” Iowa Assistant Attorney General Patrick Madigan said yesterday. Iowa leads an 11-state working group of attorneys general and bank examiners exploring ways to prevent foreclosures.  Texas Attorney General Greg Abbott opened an investigation “early this month,” said Tom Kelley, a spokesman for the office.  Iowa and Texas follow an announcement by Florida Attorney General William McCollum, who last month said he was investigating three Florida law firms handling foreclosures.

GMAC Told Freddie of Improper Affidavits Weeks Ago; Frank, Grayson, Brown Write “WTF” Letter - It isn’t surprising that given the potential consequences (revelation of widespread fraud, improper foreclosures, and big time difficulties straightening out the mess revealed), GMAC and other servicers have taken the “nothing to see here, drive on by” approach to reports that they forged affidavits and fabricated documents in order to be able to show courts the right sort of documents required to foreclose. Note there are depositions as far back as 2006 showing that GMAC was using improper affidavits, yet only when pressure has started to rise substantially (more lawsuits challenging standing of the party foreclosing; actions and increased interest by state attorneys general) has GMAC ‘fessed up to its main client (see here and here for more background on this story). That means it was continuing to evict people even though its procedures did not comply with the law. Submitting false affidavits is a fraud on the court. And as we indicated earlier today, the false affidavits are symptomatic of far more serious problems with foreclosure proceedings when the mortgage is owned by a securitization entity. Per Bloomberg:

GMAC’s Errors Leave Foreclosures in Question - The recent admission by a major mortgage lender that it had filed dubious foreclosure documents is likely to fuel a furor against hasty foreclosures, which have prompted complaints nationwide since housing prices collapsed.  Lawyers for distressed homeowners and law enforcement officials in several states on Friday seized on revelations by GMAC Mortgage, the country’s fourth-largest home loan lender, that it had violated legal rules in its rush to file many foreclosures as quickly as possible. Attorneys general in Iowa and North Carolina said they were beginning separate investigations of the lender, and the attorney general in California directed the company to suspend all foreclosures in that state until it “proves that it’s following the letter of the law.”  Florida lawyers representing borrowers in default said they would start filing motions as early as next week to have hundreds of foreclosure actions dismissed.  While GMAC is the first big lender to publicly acknowledge that its practices might have been improper, defense lawyers and consumer advocates have long argued that numerous lenders have used inaccurate or incomplete documents to remove delinquent owners from their houses.

GMAC Ordered to Stop All Foreclosures in California - Yves Smith - Per the Sacremento Bee: California officials today demanded that Ally Financial Inc. stop foreclosing on homes in the state, citing reports indicating the big mortgage lender is violating the law. The cease-and-desist letter, issued by Attorney General Jerry Brown, came as officials in several other states began investigating Ally’s operations… So it appears the Brown argument is at least that the robo signers are the ones affirming that the banks tried contacting the borrower, when they are in no position, legally or practically, to do so. But this potentially opens a much bigger can of worms, that the robo signers may have been providing cover for the failure to make the required effort. Update 10:00 PM. California was not one of the 23 states in which Ally halted foreclosures, presumably because it is a non-judicial foreclosure state. Apparently Jerry Brown halted the foreclosures based on the requirement under Civil Code 2923.5 that prior to serving a notice of default, the first step in the foreclosure process, the trustee must file a declaration (affidavit) that it has contacted the borrower “in person or by telephone in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.”

No. There’s No LIfe at MERS - Mortgage Electronic Registration Systems, Inc (MERS) has a very long history. The beginning stages have remained a mystery until now. In 1989, Brian Hershkowitz developed the “Whole Loan Book Entry” concept while serving as a director for the Mortgage Bankers Association (MBA). In 1990, he first introduced this concept to seven different industry group; Document Custodian, Originators, Servicers, Title Insurers, County Recorders, Government Sponsored Enterprises (GSE’s) and Warehouse/Interim Lenders. The reception was very positive and it was viewed as a very useful recording system to be used for how equity and debt securities could be identified and managed. MERS has evolved into a totally different purpose today. More than 60 percent of all newly-originated mortgages are registered in MERS. Its mission is to register every mortgage loan in the United States on the MERS System.

Oops! No mortgage and still foreclosed on - From  the Sun Sentinel: Man's home sold out from under him in foreclosure mistake When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage. Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a [Fannie Mae]. ... Talk about a foreclosure error. I'm surprised a notice wasn't posted on the front door. At least the property wasn't sold to another party on the court house steps - imagine if that 3rd party had shown up with an eviction notice.

Foreclosure Wave Hits Cash Buyers, Too - Since most of you probably read Calculated Risk, you’ve probably seen the Sun Sentinel story of the man in Florida who paid cash for a house–and still lost it in a foreclosure. Not only that, but he bought the house in a short sale in December 2009, the foreclosure sale happened in July 2010, and only then did he learn about the foreclosure proceeding. Bank of America now says it will correct the error “at its own expense.” How gracious of them. If the legal system simply allows Bank of America to correct errors, at cost and with ordinary damages, after they happen, this type of abuse will only get worse. There’s obviously no incentive for banks not to make mistakes, and as a result they will behave as aggressively as possible at every opportunity possible. Yes, this was probably incompetence, not malice, on the part of the bank. But if you don’t force companies to pay for the consequences of their incompetence, they will remain willfully incompetent, and the end result will be the same.

Private Sector Efficiency? - Maxine Udall - Mark Thoma sends us to this Washington Post article about an apparently low-paid private sector employee who has been signing off on GMAC mortgage foreclosures at the rate of roughly 10,000 per month with little regard for the accuracy of the documents he was signing. Calculated Risk sends us to this article about a Florida man whose house, bought and paid for with cash, was foreclosed on by Bank of America. Regular readers know that one recurring theme in this blog is that concentrated economic and political power in the private sector is as much a "problem" as an ineffective, inefficient guvment. Regular readers also know that as someone who grew up in a private sector family business, I expect  private sector employees and their managers to behave better than caricatures of mindless guvmint bureaucrats that populate cautionary tales about totalitarian guvmints.Just ask yourself, as I often do, was your last unpleasant encounter with a cell phone company, a cable television company, a credit card company, or a bank or was it with a government agency?  In my case, I sorry to say that some of the larger, more powerful parts of the private sector lose hands down.

Housing isn’t even close to stabilizing— An incredible 14% of the nearly 54 million first liens in the country are now either delinquent or in default. This chart from the Calculated Risk blog shows the steady growth since 2005. To come up with a total for the shadow inventory, let’s first add the total number of loans in default to those delinquent 90 days or more since we know that these loans are headed for foreclosure or a short sale. That comes to 4.5 million properties. Based on the cure rate for loans delinquent at least 60 days, we’ll add 95% of those 60-day delinquencies. That is an additional 723,000 residences. For the same reason, we’ll add 70% of those delinquent for at least 30 days — 1.25 million properties. And, of course, let’s not forget the REOs that haven’t yet been placed on MLS listings by the bank servicers. We’ll be conservative and estimate them at 500,000.  Adding all of these together, we come up with a total of roughly 6.97 million residences that are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices.

Right to Rent could change the nation's foreclosure crisis: CEPR - In the wake of reform enacted to promote homeownership, analysts at the Center for Economic and Policy Research are saying that ownership may not be the smartest option. In a report released today, The Gains from Right to Rent in 2010, the CEPR suggests that giving homeowners the right to rent their house at a fair market price could be a game changer in the nation's foreclosure crisis. The report dissects the benefits of a drafted bill, H.R. 5028, also known as The Right to Rent. Under the legislation, homeowners entering the foreclosure process would be able to occupy their homes for up to five years, while paying rent to a lender. Rent would be based on fair market price as determined by an independent appraiser and adjusted annually. "This would give homeowners an important degree of security, since they could not simply be thrown out on the streets," The CEPR report, which compares the costs of owning a home and renting in 16 major metropolitan statistical areas around the U.S., found that homeowners would see substantial reductions in costs by becoming renters if they rented in a bubble-inflated market. Savings are much less, however, if the market was not affected by the housing bubble.

Housing Starts and the Unemployment Rate - This graph shows single family housing starts and the unemployment rate through August (inverted). You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts (blue) rebounded a little last year,and then moved sideways for some time, before declining again in May. This is what I expected when I first posted the above graph over a year ago.  Usually near the end of a recession, residential investment1 (RI) picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover. However this time, with the huge overhang of existing housing units, this key sector isn't participating. So in this recovery there is less job creation, less household formation, and less demand for housing units than in a normal recovery. This is sort of a circular trap for both GDP growth and employment that will persist until the excess housing units are absorbed.

Deleverage? No, Default! - Real Time Economics references the Fed’s Z.1 Flow of Funds Accounts released Friday. What some economists have been assuming was Deleveraging was in fact Defaults: “The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.” There are two ways, though, that the debts can decline: Pay them or default. The total value of home-mortgage debt and consumer credit outstanding has fallen by about $610 billion, to $12.6 trillion, according to the Federal Reserve. Of that $610 billion, “banks and other lenders charged off a total of about $588 billion in mortgage and consumer loans.” So much for the great deleveraging . . .

Guest Post: American Businesses and Consumers are NOT Deleveraging … They Are Going On One Last Binge - Everyone knows that the American consumer is deleveraging … living more frugally, and paying down debt. Right? Well, actually, as CNBC’s Diana Olick pointed out in April, many consumers are stopping their mortgage payments, and then blowing the money they would usually pay towards their mortgage on luxuries: I opened up a big can of debate Monday, when I repeated some chatter around that consumer spending might be juiced by all those folks not paying their mortgages. They have a little extra cash, so they’re spending it at the mall. Some of you thought the premise had some validity, others, as is often the case, told me I was an idiot. Well after the blog went up Erin Burnett put the question to Economist Robert Shiller, of the S&P/Case Shiller Home Price Index, during an interview on Street Signs. He didn’t deny the possibility, and added: “In some sense there might be a silver lining in that.”  Then I decided to ask Mark Zandi, of Moody’s, who will often shoot down my more ridiculous theories.

Q2 Flow of Funds: Household Net Worth off $12.3 Trillion from Peak - The Federal Reserve released the Q2 2010 Flow of Funds report yesterday: Flow of Funds. According to the Fed, household net worth is now off $12.3 Trillion from the peak in 2007, but up $4.7 trillion from the trough in Q1 2009. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles.This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices collapsed in 2007 and 2008. The third graph shows household real estate assets and mortgage debt as a percent of GDP.

“The Giant Elephant in The Room” - What is holding back our economy? Why isn’t there more credit available in our banking system? I have answered these questions numerous times over the last two years BUT many in Washington pretend not to know the answer and pander to their constituencies in the process. Regular readers of Sense on Cents are well aware that the books of our banks–especially our largest money center banks–remain chock-filled with loans that are being valued far in excess of what they are truly worth. Let’s navigate.   I first addressed issues within the second mortgage and HELOC (home equity line of credit) space in Fall of 2008 (Sense on Cents/Second Mortgages). Here we are a full two years later and America still has not received a straight answer and a full accounting by the banks or their regulators as to this “sinkhole” on their books and in our economy.

The Bastard Child Of The Mother Of All Bubbles - Easy Al Greenspan created the Mother of All Bubbles by keeping interest rates at 1% for a prolonged period of time while encouraging everyone to take out adjustable rate mortgages. His unshakeable faith in the free market policing itself allowed Wall Street criminals, knaves and dirtbags to create fraudulent mortgage products which were then marketed to willing dupes and “retired” internet day traders. Al’s easy money policies and disinterest in enforcing existing banking regulations also birthed the ugly stepsister of the Mother of All Bubbles. Her name is the Consumer Debt Bubble. The chart below is hauntingly similar to the home price chart above. The consumer will be deleveraging for the next ten years. The numbskulls on CNBC and the other mainstream media have been falsely reporting for months that consumers were deleveraging when it was really just debt being written off by banks. Baby Boomers are not prepared for retirement and will be shifting dramatically from consuming to saving. As consumer expenditures decline from 70% of GDP back to 65% of GDP, consumer debt will resemble the home price chart to the downside.

Default Is In Our Stars - Krugman - Not in ourselves. I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out. So, how does it end? A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets. The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another.  Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt. And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift. So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.

Looking Behind the Decline in Credit Card Debt - The substantial drop in credit card debt in the United States since early 2009 has been widely attributed to newly frugal consumers. But analysts say that a significant portion of the decline is actually the result of financial institutions writing off billions of dollars in credit card debt as losses.  While consumers have done their part by shying away from exceeding new credit limits and turning increasingly to debit cards, the question is to what extent are consumers voluntarily reducing their balances, and to what extent are banks making the decision for them. The answer has wide implications for the broader economy as banks try to determine whom to extend credit to — and how much — and as businesses try to adapt to the changes in consumers’ spending patterns.

Naked Capitalism's Open Thread on Personal Stories of the Great Recession - Yves Smith opened a great comment thread on naked capitalism that anyone interested in the way this Great Recession has hit people across the US (and world) should read. It was triggered by the NBER analysis that the recession is over. Her question opens a thread for readers to comment on the recession from their own personal perspectives.  The comments address a range of perspectives, and consider whether the recession is over, what it has meant for them personnally or for their communities and what they see for the future. There are reports from Lansing (like Detroit, hit by white flight to the suburbs --I'll add that in Detroit, it does gall to see all the suburbanites driving into Detroit to earn their pay at their jobs, then driving out again to spend it in their comfortable, mostly white, middle-class or above suburban communities, so that the dollars created because of Detroit don't get spent to benefit Detroit at all), from Ohio with its loss of manufacturing, from upstate New York, where are more gradual and longer term slowdown meant that housing prices didn't inflate as much and the economy stayed more stable, and from all other the country and abroad.

Small Business Men Not Suffering from the Blues - Worthwhile Canadian point. Nick Rowe looks at Catherine Rampell's graph, which everyone has been talking about, and notes the dog that didn't bark. Very few small businessmen are complaining about the quality of labor. This basically proves that the argument that the incerase in unemployment is due to missmatch is wrong. If the problem were too many construction workers and no workers in other fields, than firms in other sectors would be complaining about trouble finding qualified workers. I add that they might also complain about the cost of labor. These are really the same problem if the minimum wage and contracts negotiated with unions aren't binding. Firms can always hire quality labor if they offer one million and hour. Fortunately the graph has the fraction describing quality of labor and cost of labor as the number one problem one on top of the other and both shaded blue. The graph shows the fraction of small business men with the blues declining sharply.

Why the small business jobs bill won't create that many jobs. - It's rare for small business to drive headlines, but the Small Business Jobs Act, passed by Congress last week, has brought the sometimes yawn-inducing and often misunderstood sector to the front pages.  Heavy on lending and tax provisions, the legislation has been touted as a means to spur job growth. But the bill is actually a Cash for Clunkers-like Band-Aid for the intertwined scourges of chronic joblessness and stymied growth. While the aid package will help many small businesses, it won't create many jobs because it will benefit more established firms, rather than the young ones that do the bulk of hiring.  As denizens of the little-guy economy already know, capital is the No. 1 concern for startups and small businesses. Raising money is difficult. Business owners can't get loans from the bailed-out, dollar-hoarding banks. And while the $30 billion allocated for Small Business Administration loans is laudable, the loans will be doled out carefully in order to comply with requirements that a lot of small businesses won't come close to meeting.

Philly Fed State Coincident Indexes - Here is a map of the three month change in the Philly Fed state coincident indicators. Forty states are showing increasing three month activity. The index decreased in 6 states, and was unchanged in 4. Based on the one month data, this three month activity map be turning red again. Here is the Philadelphia Fed state coincident index release for August. In the past month, the indexes increased in 27 states, decreased in 16, and remained unchanged in seven for a one-month diffusion index of 22. Over the past three months, the indexes increased in 40 states, decreased in six, and remained unchanged in four (California, Iowa, Indiana, and Missouri) for a three-month diffusion index of 68. The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity.

High-Speed Rail Stalls - Opposition from freight railroads is threatening the Obama administration's multibillion-dollar push to make high-speed passenger trains an integral part of the U.S. transportation network. The standoff demonstrates the difficulties of introducing new passenger service to a rail network that is at least 90% owned by freight railroads and outfitted for slower trains.  To save time and money, government officials want new high-speed rail routes to operate on the vast system of train corridors that already crisscross the U.S., unlike European and Asian countries that have built dedicated tracks for high-speed rail. But Norfolk Southern Corp., Union Pacific Corp. and other railroad companies are balking at sharing their tracks or rights-of-way with trains that would run between 90 and 200-plus miles an hour. They argue that mixing high-speed passenger trains with slower freight trains would create safety risks, prevent future expansion and cause congestion.

Durable Goods Orders decreased 1.3% in August - From the Census Bureau: New orders for manufactured durable goods in August decreased $2.5 billion or 1.3 percent to $191.2 billion, the U.S. Census Bureau announced today. Down three of the last four months, this decrease followed a 0.7 percent July increase. Excluding transportation, new orders increased 2.0 percent. Excluding defense, new orders decreased 1.2 percent....Shipments of manufactured durable goods in August, down following two consecutive monthly increases, decreased $3.1 billion or 1.5 percent to $197.9 billion. This was below the consensus for a decline of 1.0%.

Is the Recent Productivity Boom Over? - FRBSF Economic Letter - Productivity growth has been quite strong over the past 2½ years, despite a drop in the second quarter of 2010. Many analysts believe that productivity growth must slow sharply in order for the labor market to recover robustly. However, looking at the observable factors underlying recent productivity growth and the patterns of productivity over past recessions and recoveries, a sharp slowdown appears unlikely.

Recession Officially Over, but Joblessness Remains - The United States economy has lost more jobs than it has added since the recovery began over a year ago.  Yes, you read that correctly.  The downturn officially ended, and the recovery officially began, in June 2009, according to an announcement Monday by the official arbiter of economic turning points. Since that point, total output — the amount of goods and services produced by the United States — has increased, as have many other measures of economic activity.  But nonfarm payrolls are still down 329,000 from their level at the recession’s official end 15 months ago, and the slow growth in recent months means that the unemployed still have a long slog ahead.

Can't touch this - NBER declared the recession was over in June 2009. Look, it doesn't matter what sort of accounting is used here, and it doesn't matter what other justifications (rising stock markets, bank profits [sic]) are offered for a statement such as that. It's just wrong. It’s wrong because since June 2009, unemployment numbers have continued to shoot up, especially long term numbers, and millions of Americans have lost their homes.  When 77% of your population lives paycheck to paycheck, as David DeGraw writes, up from 43% when the recession started in 2007 and 61% when it supposedly ended, it's high time to consider dignity and respect when publishing cold statistics. How good of a thing is it for a president to tout his achievements in front of TV cameras while fast increasing numbers of those who voted him into office see no way out of their misery anymore, when for many the recession's just started instead of ended? Who does a president represent, exactly?

Recession or Not, U.S. Job Market Woes Persist.- Even as Wall Street rallies on the National Bureau of Economic Research announcement that the recession ended in June 2009, Gallup finds -- more than a year later -- that 88% of Americans believe now is a bad time to find a quality job. Here's the question: "Thinking about the job situation in America today, would you say now is a good time or a bad time to find a quality job?" The percentage of Americans holding these views about finding a quality job is as high now as it was a year ago, and higher than it was at this time in 2008, when the recession was fully underway. The unemployment rate component of Gallup's underemployment measure continues to rise, with the latest 30-day average hitting 9.7% (not seasonally adjusted) on Tuesday, Sept. 20 -- up from 9.4% last week, 9.3% in August, and 8.9% at the end of July. Underemployment was also up during this period, reaching 18.8% on Sept. 20 -- increasing from 18.6% readings last week and in August, and 18.4% at the end of July.

How Do Unemployment Claims Relate to the National Rate?… Each Thursday morning, economic commentators get excited about new data for initial unemployment claims. Today, for example, we learned that number was 450,000 -- the lowest number since early July. But what does this number really mean? And how does it compare to the monthly unemployment numbers that accompany changes in the national unemployment rate? There's a lot of confusion out there, so let's clear it up.  First, let's talk about the weekly number. Each week, it gets in statistics on how many Americans filed for unemployment insurance. So the first statistic is called "initial claims." But this term is misleading. This isn't necessary the first time an American has filed for unemployment insurance.  The next term is "continuing" claims. Again, here someone requests unemployment insurance, but in such a way that the DOL's definition of "initial" is not met. So those Americans whose filings are not considered initial and have been in the program for 26 weeks or fewer are grouped under continuing claims. This number is a little bit better of a gauge of labor market health, but is still incomplete.

State Unemployment Rates in August: "Little changed" from July - This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Thirteen states now have double digit unemployment rates (up from eleven last month). A number of other states are close. Nevada set a new series high at 14.4% and now has the highest state unemployment rate. Michigan held the top spot for over 4 years until May. From the BLS: Regional and State Employment and Unemployment Summary  Regional and state unemployment rates were little changed in August. Twenty-seven states recorded unemployment rate increases, 13 states registered rate decreases, and 10 states and the District of Columbia had no rate change, the U.S. Bureau of Labor Statistics reported today.

Jobless Rate Rises in 27 States - The unemployment rate rose in 27 states between July and August, the Labor Department reported Tuesday, although only Maryland and Florida recorded statistically significant increases. Nevada again had the highest unemployment rate in the country in August. The rate, 14.4 percent, was at its highest since the department began keeping records of state unemployment in 1976. It was the fourth consecutive month that Nevada topped the list of states, followed by Michigan with a rate of 13.1 percent and California with 12.4 percent. North Dakota again had the lowest rate, at 3.7 percent. North Carolina created the most jobs in August, with 18,600 nonfarm payroll positions. At the other end of the scale, employers in Michigan cut the most jobs, slashing 50,300. Compared with a year ago, 26 states recorded decreases in their unemployment rates.

Payrolls decrease in 36 U.S. states – Payrolls dropped in 36 U.S. states in August, led by Michigan, indicating the labour market will take time to rebound from the worst recession since the 1930s.Employers in Michigan cut 50,300 jobs last month, the biggest drop since January 2009, figures from the Labor Department showed today in Washington. Texas and California rounded out the three states with the biggest job losses. Joblessness climbed in 27 states, with Nevada reaching a record 14.4% rate, the highest in the nation.Companies added 67,000 jobs in August, less than in the prior month, Labor Department figures showed on Sept. 3. The unemployment rate, which climbed to 9.6 percent last month, is forecast to average more than 9% through next year, one reason Federal Reserve policy makers may consider new measures to stimulate the economy during today’s meeting.

August Unemployment Rates, by State: Stagnant Labor Market - The jobless rate was little changed in most of the country in August, the Labor Department said. Twenty-seven states recorded unemployment rate increases from the previous month, 13 states registered rate decreases, and 10 states and the District of Columbia had no rate change. Nevada remained the state with the highest unemployment rate in the nation — 14.4% — more than percentage point higher than Michigan’s 13.1% rate. Thirteen states recorded jobless rates in excess of 10%. . Amid concerns that the labor market stagnated over the summer, 23 states still have higher or equal unemployment rates this August compared to a year ago. See the full interactive graphic. see also interactive table

Temporary Decennial Census workers almost gone - It is worth noting that the Census came in well under budget, and the temporary workers are almost all gone. One of the reasons the Census came in under budget was because of the quality of temporary workers hired (a small benefit from the high unemployment rate). This month also marks the end of the weekly payroll report from the Census Bureau: "These data will continue through the end of September with the last release of data being the week of Sept. 26-Oct. 2." This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. The temporary Census payroll decreased to 9,820 last week, and September will be the last month with a significant impact on the employment report.

Is Paying 10 Million People Not to Work Really a Good Idea? - Welcome to The End of (Paying) Work, when unemployment checks are mailed out to 10 million people so they can be unproductive and lose their job skills and habits. Some economists such as Kenneth R. Beauchemin (senior research economist at the Federal Reserve Bank of Cleveland) are claiming that this "recovery" is consistent with previous post-1983 recessions. I would suggest that looking at selected data from carefully selected timeframes can yield the conclusion you sought from the start, i.e. confirmation bias. I would also suggest that these economists step into the real world of corporate America and U.S. small business for a real-world lesson on employment trends.

Since 2009, Unemployed More Likely To Drop Out Of Labor Force Than Get Jobs - Since 2009, a layoff victim has been more likely to give up looking for work and drop out of the labor force than to find a job, according to a new report from the Roosevelt Institute, meaning employment prospects for the jobless are the worst they have been since the government started keeping track of them.  From data going back to 1967, "We can see that it has never been more likely than it is now for the unemployed to leave the labor force over finding a job in the labor market," write the Roosevelt Institute's Arjun Jayadev and Michael Konczal. Since the recession began in December 2007, 4.7 million people have dropped out of the labor force, which means they lost hope of finding work and so quit looking. Even more people would have given up on their job searches had it not been for a dramatic increase in unemployment benefits, which encourage the jobless to keep searching, according to the report's authors.

Dropping Out Of The Labor Force - The paper is: The Stagnating Labor Market (pdf). I hope you check it out; I’m going to talk about the main things we found in two posts. This is what the labor market loops like. It is normally a dynamic machine where people transition between employed, unemployed, and out of the labor force. But recently sand has been thrown in the gears, and people’s transitioning between these states is slowing, with more and more people ending up in not in the labor force and staying there.Here is one of the scariest chart I’ve seen in this recession: It’s a little complicated, so let me explain. This is the percent of unemployment who leave unemployment every month and where they go. In normal times, you’ll see 25%+ of unemployed transition to employed. This is robust to several ways of calculating this number. This high number is the result of, and a justification for, our comparatively weak social safety net for the unemployed. But notice what has happened in this recession: Starting in January 2009 it is more likely an unemployed person will drop out of the labor force instead of finding a job. More people are leaving unemployment by simply leaving the formal labor force rather than ending up with a new job. This has massive implications for how we all should view the unemployment numbers.

Question of the Day: How Many People Have Exhausted All Their Unemployment Benefits? - For starters, to exhaust benefits, one first must have had them. That excludes those who are self-employed. It also excludes those fresh out of high school or college, and looking for a job for their first time. I have a series of charts from reader Tim Wallace that will help explore the issues. The charts are based on weekly unemployment claims data put out by the states. The above chart shows the number of people collecting unemployment benefits or extended unemployment benefits, divided by the number of eligible participants.The current data point consists of 3,891,808 continuing claims + 5,253,587 extended and EUC claims (a total of 9,145,395) divided by the eligible benefits pool of 126,763,245. The result is an unprecedented 7.2% of those eligible, now collect unemployment benefits.In 2008 there were 133,690,617 covered participants. Now there are 126,763,245 covered participants. The drop from the peak is 6,927,372. The implication is at least 6,927,372 have exhausted all of their unemployment benefits. Indeed, the number may be considerably higher because every first-time job seeker who found a covered job since the pool peak in 2008, displaced someone in the eligibility pool who exhausted all benefits.

JOBLESS CLAIMS RISE. A SIGN OF STRUCTURAL UNEMPLOYMENT? After a month of declines in new filings for unemployment benefits, the trend reversed last week. New claims jumped 12,000 for the week ending September 18, the government reported. That’s discouraging, but nothing’s really changed in terms of the broad trend this year. We're still going nowhere fast in the labor market. As the chart below shows, seasonally adjusted jobless claims have been treading water this year by holding steady in roughly the 450,000-500,000 per week range. There's lots of volatility from week to week, but so far in 2010 there's nothing really new under this sun. That’s a sign that the labor market is struggling to generate new jobs on a net basis. That's discouraging news, but it's also old news.But make no mistake: The longer the job market remains stuck in a rut, the stronger the case for arguing that we’re suffering a potent bout of structural unemployment. If so, the odds are lower--perhaps a lot lower--that a new round of monetary and/or fiscal stimulus (assuming they're tried) will provide any kick to the economy from here on out.

What's holding back employment growth? - Paul Krugman declared last week:Businesses aren't hiring because of poor sales, period, end of story. The statement that businesses aren't hiring is simply false. According to the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey, the U.S. private sector hired 3.9 million new workers every month, on average, over the first 7 months of 2010. But if that's true, then why isn't total employment booming? The answer is that, according to the same JOLTS data, some 3.8 million workers quit or lost their jobs each month on average during Jan-July. The difference between gross new hires and gross separations was only enough to add about 100,000 net new private-sector jobs each month. There are some discrepancies between the extent of net job creation implied by the JOLTS data and the number inferred from other sources such as the BLS establishment survey. But the fact that small changes in net employment figures mask a dynamic economy in which there are huge gross changes in employment status for individuals and firms is quite indisputable.

What Can the Employed Tell Us About the Unemployed? - Why is unemployment so bad in this recession? There are two theories at work. The first is a story of aggregate demand. The second theory is one of a mismatch in skills. In order to examine this question we will now look at those who are underemployed. Specifically, we will take into account those who work part-time for economic reasons, whom the Bureau of Labor Statistics recorded as employed.The following graphs the percentage of those employed who are working part-time for economic reasons as well as the percentage of those employed who are working part-time for economic reasons specifically because of “Slack Work or Business Conditions.” These are people who are considered employed though they work less than 35 hours a week, and the reasons they cite are not personal ones or seasonal ones but instead economic ones. We use this term interchangeably with underemployed workers or underemployment:

Structural Impediments - Krugman - Mike Konczal has another excellent post, this time on the whole question of why employment remains so low. As he points out, There are two theories at work. The first is a story of aggregate demand. The second theory is one of a mismatch in skills. What he doesn’t say explicitly, although it’s clearly implied, is that these two theories have very different policy implications. If it’s aggregate demand, we should be doing everything we can to raise demand, including fiscal expansion and unconventional monetary policy. If it’s mishmash mismatch, we should do nothing, because any effort to create jobs leaves part of the work of depressions undone.  So how would you decide between these theories? The answer is to look at the evidence — specifically, to ask whether what we see bears the “signature” of one story or the other. And Mike shows that the data overwhelmingly fit the demand story, not the mismatch story; Every single major industry has seen a rise in involuntary part-time work; so has every major occupation. There’s no hint that any major kind of labor, in any sector, is in short supply.

There is No Evidence for Structural Unemployment -There is an effort by many of the economists who could not see the $8 trillion housing bubble that wrecked the economy to say that there is nothing that we can do about the damage because unemployment is structural, not cyclical.  If this is the case, then the problem is not insufficient demand, the problem is with the workers who are unemployed. (Yes, this is another "blame the workers" story.) The NYT lent space to Narayana R. Kocherlakota, president of the Minneapolis Fed, to present this argument. Mr. Kocherlakota referred to statistics showing a large number of job openings. Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels. It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment.

Debunking the theory of structural unemployment -The reason for this prolonged jobs crisis is fairly simple:  The bursting of the housing and stock bubbles and the financial crisis lead to a severe cutback in household consumption and business investment. But many are promoting a different, misguided narrative, that a large share of unemployment is "structural,” meaning that there is a mismatch between unemployed workers and the jobs becoming available. Structural unemployment would result from workers having inadequate skills, or not living in the places where there are jobs. Why does the cause of our high unemployment rate matter? Because it will dictate the policy prescription. The policy implications of structural unemployment would be that (1) it would be foolhardy to pursue policies that increase the demand side of the equation (fiscal stimulus, either tax cuts or increased spending, or monetary policy) to lower unemployment; and (2) the appropriate policy is to offer education and training to the unemployed to help them make a transition to new occupations and sectors.EPI’s new paper, Reasons for Skepticism About Structural Unemployment,  shows that there has been little evidence  to support the claim of extensive structural unemployment and that the pattern of employer behavior regarding job openings, layoffs and hires does not support such a claim.

The Case Against Structural Unemployment - NYTimes - There is a continuing debate about whether the record levels and lengths of long-term unemployment in recent months indicates that there may be some significant structural — as opposed to cyclical — — forces at work. In other words, some jobs that have been lost may not come back, at least not in their current locations, and this phenomenon may account for a large portion of continuing unemployment.A few economists have been vigorously arguing against claims of structural unemployment, which they fear are being used merely to weaken the case for additional stimulus (which is generally intended to address more temporary, cyclical issues). No one will know for sure to what extent joblessness remains high because of structural or cyclical causes until the labor market fully recovers. That is, after all, when we’ll eventually determine where today’s displaced workers eventually end up — and whether their next jobs, if they come, resemble the positions they had lost during the crisis and its aftermath.

The Interdependence of Cyclical and Structural Unemployment - From the introduction to a paper presented at the joint ILO-IMF conference on Growth, Employment and Social Cohesion, entitled The Human Cost of Recessions: Assessing It, Reducing It,Recessions leave scars on the labour market; the Great Recession of 2007-09 has left gaping wounds. Over 200 million people across the globe are estimated to be unemployed at present. Among countries with unemployment data in the IMF's World Economic Outlook (WEO) database, there has been an increase of over 20 million unemployed people since 2007. The ILO estimates that globally the increase is over 30 million. As shown in the left panel of Figure 1, three-fourths of this increase in the number of unemployed people has occurred in the 'advanced' economies (the term used in the WEO to denote high per capita income countries) and the remainder among emerging market economies. The unemployment rate has increased by 3 percentage points in advanced countries since 2007 and by 0.25 percentage points in emerging markets...  The paper documents a wide variety of effects, but one striking implication is the impact on mortality, as shown in this graph:

Bomb-throwing - MY CRUSADE for a more sophisticated discussion about the American labour market seems to be falling short of its goals. Lawrence Mishel released a note yesterday entitled, "Debunking the theory of structural unemployment", which concluded: Widespread claims that our unemployment crisis is structural are not only inaccurate, but they imply that macroeconomic tools such as fiscal policy (spending or tax cuts) or monetary policy can not address our unemployment crisis.  Surprisingly, perhaps amazingly, there’s no systematic empirical evidence for such assertions. Policy makers should understand that the problem faced by the unemployed is a simple scarcity of jobs, a feature of the labor market facing every group of workers regardless of education, sector, occupation or location. Sigh. First of all structural unemployment isn't a "theory" to be "debunked". We understand what structural unemployment is, where in previous episodes it has occurred, and why it is almost certainly occurring, to some extent, right now. Second, it is almost certainly occurring, to some extent, right now. .

Holding Elected Officials Responsible for Unemployment - Elected officials have a strong incentive to overstate the great things that they will accomplish or the bad things that will follow their enemy’s election; they’ve got to persuade people to show up at the voting booth. A company’s chief executive typically enjoys plenty of control over employees and operations, which makes it natural to judge that executive on the company’s performance. Our president doesn’t really control the government, much less the vast private sector that really determines national economic performance. It is unwise to assign either President Obama, or President Bush, too much responsibility for our current economic troubles.  Listening to the Democrats, you’d think that a Republican-controlled House of Representatives would plunge us into a new Great Depression. Listening to the Republicans, you’d think that their victory would save us from a continuing Obama-exacerbated recession.

Bill Clinton Says Global Initiative Will Aid U.S. Unemployed-- Former U.S. President Bill Clinton's campaign against poverty in poor countries is making room this year for programs to aid unemployed Americans. The Clinton Global Initiative, a forum to connect corporate donors with non-profit groups, will "try to spend more time on the domestic needs," Clinton said on NBC's "Meet the Press" today. With the nation's unemployment rate at 9.6 percent, U.S. workers need help "with both jobs and with training," he said. The "biggest problem" that stands in the way of boosting employment is a "skills mismatch" in the U.S. economy, Clinton said. This means "the jobs that are being opened don't have qualified people applying for them," he said. If job-specific training were provided to 5 million unemployed workers, the jobless rate would fall to around 7 percent, Clinton said.

Older Unemployed Struggle to Rejoin the Work Force - Since the economic collapse, there are not enough jobs being created for the population as a whole, much less for those in the twilight of their careers. Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. The unemployment rate in the group — 7.3 percent — is at a record, more than double what it was at the beginning of the latest recession. After other recent downturns, older people who lost jobs fretted about how long it would take to return to the work force and worried that they might never recover their former incomes. But today, because it will take years to absorb the giant pool of unemployed at the economy’s recent pace, many of these older people may simply age out of the labor force before their luck changes.

The Plight of Older Workers - I have an article today that looks at the plight of older workers — specifically those 55 or older — who have lost their jobs and fear they may never work again. For this group, losing a job is perhaps more frightening than it is for younger workers, because older workers face a much longer path back into the work force, if they ever can break in again at all.  But although the unemployment rate among this age cohort — 7.3 percent in August — is at a record high, it is still lower than any other age group. That may be in part because older workers have not been laid off at at a rate as high as younger workers. Still, it is striking that the oldest workers make up a larger proportion of the long-term unemployed than of the jobless in general. Of the 4.4 million workers who have been out of work a year or longer, 18.3 percent are 55 or older. Over all, that age group makes up only 14.9 percent of the total unemployed pool, according to the Labor Department.  Many of the workers I spoke with for this article said they suspected job discrimination.

Fair Pay Isn’t Always Equal Pay - AMONG the top items left on the Senate’s to-do list before the November elections is a “paycheck fairness” bill, which would make it easier for women to file class-action, punitive-damages suits against employers they accuse of sex-based pay discrimination.  The bill’s passage is hardly certain, but it has received strong support from women’s rights groups, professional organizations and even President Obama, who has called it “a common-sense bill.”  But the bill isn’t as commonsensical as it might seem. It overlooks mountains of research showing that discrimination plays little role in pay disparities between men and women, and it threatens to impose onerous requirements on employers to correct gaps over which they have little control.

The nasty politics of 10 percent unemployment - Why should governments care, above all else, about keeping unemployment down and ensuring that the greatest number of people get a fair share of the economic pie? Because if you don't, bad things happen. Europe's leaders learned this the hard way in the 1930s, but our historical memory seems fleeting.  ...[I]n late 1929, the Great Depression hit and everything fell apart. Thanks to Bruning's deflationary policies, Germany's national income fell by more than a quarter, and official unemployment rose to almost a third of the labor force. Optimism was replaced by a profound sense of insecurity. Inevitably, the extremist parties benefitted That, in a nutshell, is the message of today's must read: Kevin O'Rourke's "Lessons From the Great Depression." (Hat tip, Mark Thoma.)

Get Used To Lower Living Standards - Most Americans probably find it hard to believe that statisticians have deemed the U.S. economy to be out of recession. Unemployment and underemployment are stubbornly stuck at the highest level since the Great Depression. Capacity utilization is under 75 percent, well below pre-crisis levels. There is still a large overhang of houses in foreclosure and serious delinquency, meaning that the housing market has yet to bottom. The ugly fact is that serious financial crises take a very long time to resolve and result in a permanent fall in the standard of living. Past historical patterns confirm the slow job creation rate: it will be many years before the excesses of the credit bubble work their way through. That means the best we can hope for, absent aggressive government action, is an economy that bumps along at a low level of what is technically growth, but is very far from what most businessmen and consumers would consider healthy.

1 in 6 Americans Live In Poverty  - The Census Bureau recently released the poverty numbers, and even if these numbers actually did reflect reality, the results are shameful. Unfortunately, the official statistics considerably understate the poverty rate in the United States. According to the Census Bureau's survey, 43.6 million people, or approximately 1 in 7 Americans, live at or below their poverty line in 2009. I refer you to their report Income, Poverty and Healh Insurance Coverage in the United States: 2009 if you want to dig into the details.  The disparity occurs because of differing formulas the Census Bureau and the National Academy of Sciences use for calculating the poverty rate. The NAS formula shows the poverty rate to be at 15.8 percent, or nearly 1 in 6 Americans, according to calculations released this week. That's higher than the 13.2 percent, or 39.8 million, figure made available recently under the original government formula. That measure, created in 1955, does not factor in rising medical care, transportation, child care or geographical variations in living costs. Nor does it consider non-cash government aid when calculating income. As a result, official figures released last month by Census may have overlooked millions of poor people, many of them 65 and older.Thus nearly 1 in 6 Americans live in poverty, not 1 in 7. But wait, it gets worse because unemployment insurance kept 3.3 million Americans out of poverty in 2009

The poor are getting poorer - While 14.3% of all Americans were living in poverty last year, a record 6.3% were in so-called deep poverty, earning less than half the official poverty threshold, or subsistence rate, according to the new data on poverty released last week by the Census Bureau. The Figure tracks the share of the American population below half the poverty line over time. The current level is the highest seen since the Census Bureau started keeping records in 1975. It surpasses the prior peak of 6.2% in 1993, and is nearly double the low point of the series, 3.3% of the population living in deep poverty in 1976. This sizable share of the American population falling below half the poverty line is particularly notable given that even the official poverty threshold – an annual income of $21,954 for a family of four – is widely considered insufficient to pay for life’s most basic essentials like food and housing. To fall below half the poverty line, a family of four would have an annual income of less than about $11,000.

15 Shocking Poverty Statistics That Are Skyrocketing As The American Middle Class Continues To Be Slowly Wiped Out - The "America" that so many of us have taken for granted for so many decades is literally disintegrating right in front of our eyes.  Most Americans are still operating under the delusion that the United States will always be "the wealthiest nation" in the world and that our economy will always produce large numbers of high paying jobs and that the U.S. will always have a very large middle class.  But that is not what is happening.  The very foundations of the U.S. economy have rotted away and we now find ourselves on the verge of an economic collapse.  Already, millions upon millions of Americans are slipping out of the middle class and into the devastating grip of poverty.  Statistic after statistic proves that the middle class in the United States is shrinking month after month after month.  Meanwhile, millions of Americans are starting to wake up and are beginning to realize that we have very serious problems on our hands, but they have no idea what is causing our economic distress and they are unaware that most of our politicians have absolutely no idea how to fix the economic disaster that we have created.

Americans Vastly Underestimate Wealth Inequality, Support 'More Equal Distribution Of Wealth': Study - Americans vastly underestimate the degree of wealth inequality in America, and we believe that the distribution should be far more equitable than it actually is, according to a new study. Or, as the study's authors put it: "All demographic groups -- even those not usually associated with wealth redistribution such as Republicans and the wealthy -- desired a more equal distribution of wealth than the status quo." The report (pdf) "Building a Better America -- One Wealth Quintile At A Time" by Dan Ariely of Duke University and Michael I. Norton of Harvard Business School (hat tip to Paul Kedrosky), shows that across ideological, economic and gender groups, Americans thought the richest 20 percent of our society controlled about 59 percent of the wealth, while the real number is closer to 84 percent.

Building a Better America—One Wealth Quintile at a Time - Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of "regular" Americans into these debates by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to "build a better America" by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo.

Underwear Economics - There is no Santa Claus. The next best thing is Wal-Mart. And Wal-Mart says we're all getting underwear for Christmas. OK, so maybe some children will still receive their annual allotments of cheap electronic games and plastic toys. "But for all you adults out there, I think you should plan on socks and underwear for Christmas," said Bill Simon, CEO of Wal-Mart's U.S. business, at a Goldman Sachs conference last week. "Because that's going to be what you are going to get -- at least from me." He was kidding. But he was not all that funny.

Watching Walmart At Midnight - “And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs,and continue to shop and mill about the store until midnight, when electronic — government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher. “And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.”

The Public Assistance Cycle - Even before the financial crisis struck, many people were living from paycheck to paycheck, hurt by stagnant incomes, the rising cost of essential goods and services, and widespread risk-shifting by employers.Now that the "recovery" is well underway, a post at the Wall Street Journal's Real-Time Economics blog, "Watching Wal-Mart at Midnight," suggests that a growing number of Americans are having to cope with an even more depressing reality: sales for those first few hours on the first of the month are substantially and significantly higher. “And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.”

Wal-Mart's CEO Provides The Starkest Visual Of The Modern Bread Line Yet - Profits And Baby Formula – Our pal, Rich Yamarone, over at Bloomberg picked up an eye-opening statement made by the Wal-Mart CEO last week.I don't need to tell you that our customer remains challenged…You need not go farther than one of our stores on midnight at the end of the month. And it's real interesting to watch, about 11 p.m. customers start to come in and shop, fill their grocery basket with basic items – baby formula, milk, bread, eggs – and continue to shop and mill about the store until midnight when government electronic benefits cards get activated, and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher. Talk about shopping only for necessities. The mid-night trip for baby formula says it all. Luckily the NBER said the recession ended.

For Needy Families, a Needy Program - Temporary Assistance for Needy Families, our nation’s primary cash-welfare program for families with children, would more accurately be named Inadequate Assistance for Needy Families.  The latest Census Bureau estimates show that an additional 2.1 million children officially entered poverty between 2007 and 2009, as the poverty rate among children rose to 20.7 percent from 18 percent.  This comes as no surprise, given increases in unemployment over these years, from 4.6 percent in January 2007 to 10 percent by December 2009 (declining only slightly to 9.6 percent in August 2010).  The American Recovery and Reinvestment Act of 2009 provided an emergency fund intended to bolster aid for needy families, but this fund is scheduled to expire this month. We could make this program more responsive to the needs of poor families and their children. Until we do, we should start calling it by a more accurate name.

Bank of America Collection Agency Harrassed Borrowers With Racist, Obscene Calls - Yves Smith - I imagine we are going to hear more and more about this sort of thing, not simply because high unemployment rates mean more people getting into credit trouble (yes, banks reported a fall off in new delinquencies, but a robin does not mean a spring. In addition, banks are also getting more aggressive on other fronts. For instance, banks would get a deficiency judgment when a foreclosure sale failed to recover the mortgage balance plus other charges. They would seldom pursue it, since people who lose their homes are under financial stress and you can’t get blood from a turnip. Since discussions of strategic defaults are now common, banks now appear to believe they are widespread, when the studies that have touted that idea are simply not reliable (I’m regularly called in to evaluate possible corporate investments, and my work often includes assessing consultant and academic research). So expect more debt collectors to be called in to pursue people who have lost their homes, even when there is nothing more to get. The Bank of America case is particularly striking since the collection agency violated the Fair Debt Collection Practices Act

Capitol Hill reaction to poverty figures sidetracked by political concerns - Deborah Weinstein, a longtime advocate for the poor, calls the news that one in seven Americans is living in poverty "a national emergency."  But for much of Washington's political class, the shocking new poverty numbers provoked not alarm about the poor but further debate over tax cuts for the middle class. "We know that a strong middle class leads a strong economy," President Obama told reporters in the Rose Garden on Friday, as he used the new census report, which also showed that middle-class income has dipped slightly over the past decade, to continue making his case for limiting the cuts to family incomes under $250,000.  Meanwhile, Republican leaders in the House and Senate had no reaction to the poverty report. But earlier in the week, Senate Minority Leader Mitch McConnell (R-Ky.) took the Senate floor to argue for extending the tax breaks to everyone, saying, "We can't let the people who have been hit hardest by this recession and who we need to create jobs to get us out of it" be subject to a tax increase.

Billionaire Bailout Recipient to America: "Suck It In and Cope, Buddy" --Matt Taibbi - Check out billionaire vice-chair of Warren Buffet's Berkshire Hathaway, Charles Munger, telling people in economic distress that they must "suck it in and cope" and that they should "thank God" for bank bailouts. A little background here: Buffet and B-H made a $5 billion equity investment in Goldman Sachs at the height of the financial crisis. If Goldman doesn't get $13 billion via the AIG bailout, that investment vanishes. If Goldman doesn’t get handed a federal bank charter overnight (allowing them to borrow huge amounts of cheap cash from the Fed) and doesn't get a ban on short-selling and doesn't get $10 billion from the TARP, again, B-H loses that $5 billion. Moreover Berkshire-Hathaway is the largest shareholder in Wells Fargo, which got $25 billion from the TARP and also had government help in acquiring Wachovia in a shotgun wedding for $12.7 billion (W-F balked at buying Wachovia until it was given about $25 billion in tax breaks by the government). So that's just two of Berkshire-Hathaway's biggest investments that collectively received at least $70 billion in government aid during the bailouts, by my count

California Employment Hooks Downward Once Again - Last month I suggested that the little hook downward in California employment, reported for July, was a troubling sign. Today, fresh data was released from the State of California, and the downward move has continued. Whereas employment levels had just managed to hang on above the 16 million person level in July–in August they slipped back below, to 15.968 million. | see: California Employment in Millions 2000-2010.Let’s consider the context here. Lower interest rates and several trillion in monetary and fiscal stimulus over three years has produced, at best, a small but brief cessation of job losses in California, the largest state in the union. As my work here at has also shown, over the past year and a half, California is one of a handful of states that is extremely sensitive to the price of oil. 75 dollar oil is too high for California’s economy, which is massively leveraged to a road and highway transport system that was built out on 12 dollar oil.

New York City Freezes Hiring as It Seeks $2 Billion of Savings to Cut Gap - -- New York Mayor Michael Bloomberg ordered agencies to freeze hiring until they receive his approval for spending cuts totaling $2 billion during the next 21 months.  The mayor’s directive today comes as he anticipates a $3.3 billion budget gap for the 2012 fiscal year that begins July 1. He ordered officials to seek savings of about $800 million in the remaining nine months of this fiscal year and $1.2 billion in 2012. This year, Bloomberg said in a letter to agency heads, he wants public-safety agencies and schools to cut spending by 2.7 percent and all other agencies to trim by 5.4 percent. The following year, the targets rise to 4 percent and 8 percent, respectively.

9800 people could be laid off as agencies seek ways to trim billions - To the children at the Texas School for the Deaf, Mary Monckton is a sunny and engaging speech pathologist determined to help them learn to communicate. But to legislators, Monckton is an expense that Texas might not be able to afford. Hers is one of 9,800 jobs that state agencies have offered up for elimination as legislators prepare to trim billions of dollars from the 2012-13 state budget, according to an American-Statesman analysis of agency budget requests.  While some positions might be preserved or are already vacant, thousands of workers could likely be laid off as the state grapples with a projected two-year budget shortfall approaching $21 billion. Mike Gross, vice president of the Texas State Employees Union, said he expects there will be much more pressure to lay off employees next year than in 2003, the last time Texas faced a similar budget crunch. State leaders have again vowed to close the gap without raising taxes, but the magnitude of the budget problem is greater this time, in part because of the ongoing recession. "Texas is not a poor state," Gross said. "We can afford to do better by our people."

Missouri Tells Judges Cost of Sentences - When judges here sentence convicted criminals, a new and unusual variable is available for them to consider: what a given punishment will cost the State of Missouri.  For someone convicted of endangering the welfare of a child, for instance, a judge might now learn that a three-year prison sentence would run more than $37,000 while probation would cost $6,770. A second-degree robber, a judge could be told, would carry a price tag of less than $9,000 for five years of intensive probation, but more than $50,000 for a comparable prison sentence and parole afterward. The bill for a murderer’s 30-year prison term: $504,690.  Legal experts say no other state systematically provides such information to judges, a practice put into effect here last month by the state’s sentencing advisory commission, an appointed board that offers guidance on criminal sentencing.

Muni Debt Cost May Increase on Tougher Bank Capital Rules, RBC Report Says-- State and local governments using banks as buyers of last resort for variable-rate bonds may see the cost of the debt rise by a percentage point or more because of rules intended to strengthen the financial system, according to RBC Capital Markets.  The measures, known as Basel III for the Swiss city where world banking regulators meet, would require banks to hold more capital to absorb unexpected losses and more cash to make them less vulnerable in a financial crisis. The steps would increase banks costs, which may be passed on to customers including local governments, RBC said in a report today.  “The Basel III capital and liquidity rules will significantly increase the cost and decrease the availability of bank credit facilities,” Chris Mauro, RBC’s head of U.S. municipals strategy, said in the report. State and local governments facing the expiration of $101 billion of bank support agreements in 2011 should expect renewals to last only to the Jan. 1, 2015, start date for the new proposed rules, the report said.

Arizona cities, towns still face budget battles - Despite economists' pronouncement this week that the Great Recession is over, Arizona cities and towns are not expecting much relief.  Looking ahead to the next fiscal year, city officials are facing stiff challenges because of a 10 percent drop in state income-tax collections and difficulty identifying further cuts to services or personnel after years of drastic belt-tightening. In Arizona, individual and corporate income taxes are paid to the state, which distributes the money to cities and towns. Because of administrative lags, the money that cities receive reflects tax collections from two years prior.  In 2011-12, cities will get money based on what the state took in for 2009-10, when Arizona income-tax collections were at their lowest in five years.

Moody's cuts state's credit outlook - New Jersey's credit outlook on $2.6 billion of general-obligation bonds was cut to negative from stable by Moody's Investors Service, which cited the state's budget gap, underfunded pensions, and predictions of a slow economic recovery. The downgrade for the wealthiest U.S. state by per-capita income after Connecticut reflects New Jersey's failure to fund pension contributions in its 2010 and 2011 budgets and the expiration of federal stimulus funding in fiscal 2012, Moody's said Wednesday in a news release.  A negative outlook means a reduction in the state's rating is possible. A lower rating may boost the state's borrowing cost by leading investors to ask for higher interest rates to compensate for increased risk.

Wisconsin deficit higher than first predicted says UW Prof - The Wisconsin deficit is already projected at a daunting $2.7 billion, but a new report from a University of Wisconsin professor said the deficit is actually at $3.1 billion. Andrew Reschovsky, UW professor of economics, said previously uncalculated factors could increase the budget shortfall by as much as $400 million. The Legislative Fiscal Bureau initially estimated the deficit at $2.7 billion based on the deficit in the state’s General Fund, the money the state uses to operate. According to the report, the deficit is approximately one-tenth of the $27.7 billion dollar General Fund, which is 70 percent of the budget allotted to the entire UW system.

Illinois's $25 Billion of Bonds Get Negative Moody's Outlook  -- Illinois, facing the worst financial crisis in its history, received a negative outlook on $25 billion of general obligation bonds from Moody’s Investors Service after failing to address a deficit that almost tripled in one year.  A negative outlook may indicate another cut to the state’s rating, which was lowered to A1, fifth-highest, on June 4, Moody’s said today in a release. Lower ratings can increase the cost of borrowing as investors demand higher returns to compensate for increased risk. The yield of taxable Build America Bonds issued by Illinois in June has risen to almost 2.5 percentage points above benchmark 30-year Treasury bonds from just over 2 percentage points on June 24. Illinois’s budget deficit in 2009 widened to $7.7 billion, almost tripling, Moody’s said. The debt burden may increase because of continued borrowing for the state’s capital program and contributions to its pension plans, the company said.

Budget deadlock blamed for toilet paper shortage -- The state budget crisis has led to an unexpected problem for visitors to state parks and if you want to use the bathroom, you may have to bring your own toilet paper.  Whether you enjoy the beaches, the campgrounds or historical sites in California, you might have to "hold it" or bring your own toilet paper when nature calls.  The state budget is so late, a state credit card used to buy supplies is being canceled by the bank due to a lack of payment. That means the Parks Department can no longer buy toilet paper for its rural sites.  "This is outrageous! Today it's toilet paper, tomorrow, trail closures, restroom closures and state beaches. People don't know what to expect," Jay Ziegler from The Nature Conservancy

Food pantries and hunger in New Jersey - The harsh truth for many in New Jersey and around the country is that the local pantry has replaced, or at least supplemented, the grocery store. No longer able to afford basic necessities, the unemployed and underemployed are turning to food pantries filled with free canned and boxed goods, and maybe meats, eggs and produce, depending on the site and the season. At one time this resource was thought of as a lifeline for the poor or for those facing emergencies. The local pantry served as a stop-gap “if you had a fire, or if your refrigerator died and all your food went bad, or if you applied for food stamps and were waiting,” “Now it’s an entirely new group who have never accessed benefits before, never needed benefits before. They’re finding themselves having to go for help with food.”

Homelessness soaring - The number of people who are facing homelessness in Oakland County is dramatically rising, according to a nonprofit agency. The Housing Resource Center, which is part of the Community Housing Network of Troy, has seen the number of calls for help jump tenfold from last August’s 229 inquiries to 2,171 this August, said Anne Osmer, community relations manager for CHN. There are 5,933 homes in foreclosure in Oakland County, including 573 sheriff’s sales, compared with some 13,000 in Wayne County, according to “The amount of need within the county for housing is just incredible,”

Tally of homeless students in Oregon continues to climb - Oregon public schools continued to see swelling numbers of homeless students in 2009-10, a testament to the reach and tenacity of a stubborn recession.More than three in every 100 students — 19,040 — met the federal definition of homelessness last year, an increase of 5.5 percent over 2008-09, according to a state report released Wednesday.The uptick surprised no one on the front lines of providing services to homeless families. “We see how the recession has hit,”  “We know that we’re seeing families we’ve never seen before, that have never been in this type of situation before. There’s been a shift in the type of people who are needing assistance.”But the increase between the two years wasn’t as large as the previous year’s 14 percent.

Deficit could bring more education cuts - Arizona's revenue projections continue to fall and some lawmakers say that could mean massive cuts to education despite the state's new sales tax increase. The budget deficit could grow to more than $700 million this fiscal year, according to new budget records. That will add to the $1 billion shortfall estimated for 2012. "The economy is at a critical state," said Treasurer Dean Martin. "It's hitting the bottom." Rep. Kyrsten Sinema, D-Phoenix, said that in order to make up the difference, cuts in next year's budget for education could reach $1.5 billion -- $1 billion from K-12 and $500 million from universities. "That would decimate the system," she said.

States playing fast and loose with teachers' jobs money - What Congress giveth, governors taketh away. Lawmakers gave cash-strapped states $10 billion last month to save 145,000 teachers' jobs. The funds were meant to reduce classroom crowding and restore programs lost to state budget cuts. But some governors have other ideas for the money, namely using the funds to close their budget shortfalls. Several are planning to reduce state aid to school districts by the amount they receive from the feds. Others are looking to use the money for school construction and improvements. And if state tax revenues fall short later this year, even more governors will likely slash state aid, figuring schools have the federal funds as a cushion. The shift has left educators worried they'll never see the extra money they need to retain teachers and other personnel.

Next Budget Year May Be Worst Ever (Video) Next year's budget is likely to be the worst the San Diego Unified School Distict has seen in its 150 years, according to new superintendent Bill Kowba.The district, running out of money and options, is weighing steep cuts to the classroom along with teacher layoffs in order to balance a projected deficit is $140 million. School board members must submit a tentative plan to balance the budget by Dec. 15. The School Board reviewed a list of proposed cuts at a special meeting Tuesday night. The cuts include layoffs of up to a thousand teachers, librarians and counselors and 500 support personnel.

LAUSD taking on new deficits - Just a week into the new school year, Los Angeles Unified officials are already mired in budget woes and have just three weeks to figure out how to erase the $1.1 billion deficit projected over the next three years.Thousands of employee layoffs, program cuts and larger class sizes are being discussed as the school district lays out a plan for closing a $446 million gap in 2011-12 and a $700 million hole in 2012-13."We are already in a situation where we are down hundreds of employees and have a shortened school year ... It is a very problematic way to run the nation's second-largest school district," Deputy Superintendent John Deasy said.

Those Who Don't Build Must Burn - Ray Bradbury wrote his dystopian novel Fahrenheit 451 in 1950.  Most people think Bradbury’s novel was a warning about censorship. It was not. It was a warning about TV and radio turning the minds of Americans to mush. It is now sixty years later and his warning went unheeded. A self imposed ignorance by a vast swath of Americans is reflected in these statistics:

  • 33% of high school graduates never read another book for the rest of their lives.
  • 42% of college graduates never read another book after college.
  • 80% of U.S. families did not buy or read a book last year.
  • 70% of U.S. adults have not been in a bookstore in the last five years.
  • 57% of new books are not read to completion.
  • There are over 17,000 radio stations and over 2,000 TV stations in America today.
  • Each day in the U.S., people spend on average 4.7 hours watching TV, 3 hours listening to the radio and 14 minutes reading magazines.
  • The projected average number of hours an individual (12 and older) will spend watching television this year is 1,750.
  • In a 65-year life, the average person will have spent 9 years glued to the tube.
  • Number of 30-second TV commercials seen in a year by an average child –  20,000
  • Number of videos rented daily in the U.S. – 6 million
  • Number of public library items checked out daily – 3 million
  • Percentage of Americans who can name The Three Stooges – 59%
  • Percentage who can name at least three justices of the U.S. Supreme Court – 17%

"Against Homework" -This is from an 1860 edition of Scientific American: Against Homework, Scientific American: A child who has been boxed up six hours in school might spend the next four hours in study, but it is impossible to develop the child’s intellect in this way. The laws of nature are inexorable. By dint of great and painful labor, the child may succeed in repeating a lot of words, like a parrot, but, with the power of its brain all exhausted, it is out of the question for it to really master and comprehend its lessons. The effect of the system is to enfeeble the intellect even more than the body. We never see a little girl staggering home under a load of books, or knitting her brow over them at eight o’clock in the evening, without wondering that our citizens do not arm themselves at once with carving knives, pokers, clubs, paving stones or any weapons at hand, and chase out the managers of our common schools, as they would wild beasts that were devouring their children.

Who's Behind the U.S. Higher Education Bubble? - We didn't set out to go looking for it, but we couldn't help but notice what would appear to be a really unique correlation between the average annual tuition at a four-year higher education institution in the United States and the total amount of money the U.S. federal government spends every year.   To better see that correlation, we mashed up our charts indicating the presence of an unsustainable bubble in U.S. higher education with our chart showing the level of federal government spending, covering the period from 1976 through 2008, which includes all the tuition cost data we have.  We then multiplied the annual tuition cost data by a scale factor of 243, which indexes the data to the year 2000, and show the data plotted against household median income for these years.  What we find is that changes in the average cost of college tuition closely pace the growth of total U.S. federal spending, and has done so almost perfectly since 1998.

College Grads Expand Lead in Job Security - The unemployment rate for workers 25-and-older with a bachelor's degree or higher was 4.6% in August, for example, compared with 10.3% for those with just a high-school diploma. That's a 5.7-percentage-point gap, compared with a gap of only 2.6 percentage points in December 2007 when the recession began. Laid-off college graduates are also finding work faster. Their median duration of unemployment was 18.4 weeks as of August, compared with 27.5 weeks for high-school grads. Three years ago, that figure was roughly the same for both groups—9.5 weeks and 9.6, respectively. And among the worst-off 25-and-older workers, the 5.2 million who have been out of work six months or more, only 19% are those who graduated from college, even though that group makes up a third of the work force. Yet because college is increasingly expensive and doesn't guarantee a good job at a good wage, skepticism about the value of college is rising, even as the government pours more money into helping people get degrees. As part of the health-care legislation passed in March, Congress approved a student-loan overhaul that replaces private lenders with the federal Department of Education and redirects some $60 billion to community colleges and programs such as Pell Grants, which are college loans for the needy.

Want to work? Stay in college. - It can't be more straightforward: the more educated you are, the more likely you are to have a job. In every OECD country, without a single exception, a higher proportion of 25 to 64–year-olds with a tertiary level of education are employed than those with only an upper secondary degree. And likewise, those with an upper secondary qualification are generally far more likely to have a job than those with a level of education below that. data (xls)  Across the OECD, some 85% of 25 to 64-year-olds with a tertiary education have a job, compared to an average of 59% of those with a secondary education or less. And the gap grows considerably wider for some countries (see our chart). With notable exceptions of Iceland and Korea, very few countries have managed to shrink this gap down.

A Health Care Plan for Colleges - NYTimes - Consider this: In 1980, a new associate professor at the University of Illinois at Urbana-Champaign, a leading public school, earned about the same amount as one at the University of Chicago, a nearby leading private school; ditto for the University of Texas at Austin and Rice University.  By 2000, new associate professors at the University of Illinois and the University of Texas were earning about 15 percent less than their counterparts at Chicago and Rice. And by this year, the differential had widened to 20 percent.  What does health care have to do with any of this? Research I’ve done with Tom Kane of Harvard and the Gates Foundation finds a surprisingly strong connection: over recent decades, as state governments have devoted a larger share of resources to rising costs of Medicaid, the health care program for the poor, they have cut support for higher education.

Retirement program rate hikes will hit schools hard - Oregon’s public employee retirement programs aren’t a financial drag just on state government. They also are having an increasingly severe impact on local governments and school districts, whose employees are part of the system. Local public agencies are preparing to sharply increase the amount of money they have to contribute to PERS — the Public Employee Retirement System — and other elements of the retirement programs in coming years. That’s money that otherwise could be spent on public services. School districts are bracing for some of the biggest rate increases into PERS, though the hike will vary among those that previously took out bonds in order to pay pension costs — including the Eugene and Springfield districts. They won’t learn the exact rates until next month, but Eugene expects an increase of 5.8 percentage points, said Susan Fahey, chief financial officer. That would push the PERS rate — the percentage of total payroll paid into PERS — to 24.6 percent.

Families struggle to build nest egg in wake of recession…For decades, Americans have largely counted on the stock markets and real estate to finance life's biggest expenses, from their children's college to retirement. But discouraging returns over the past decade and a sputtering economy that shows few signs of reviving soon are raising acute doubts about those traditional investments, leaving many families confused and frustrated over how to secure their financial future.  For those in their "nesting years," which financial experts say last from roughly the 20s through the 40s, the loss of this time to build wealth could end up haunting even the most prudent savers well into their old age.  This is one reason the economic downturn has been so wrenching, even for those who pay their bills and have jobs. Some financial planners continue to preach that long-term investing requires riding out the losses as well as the gains. Others are now telling clients to moderate their expectations - work longer, cut spending, downgrade retirement dreams - rather than crossing their fingers and hoping for bigger returns down the road.

New Jersey Governor Says Broken Pension Promise Necessary - Gov. Chris Christie says he had to renege on a campaign promise to New Jersey firefighters not to touch their pensions in order to save their pensions. During the campaign last year, the Republican told firefighters he would not "eliminate, change, or alter" their pensions. Last week, Christie proposed pension and health benefits reforms that would raise the retirement age for public workers and require current employees and retirees to shoulder a substantially higher portion of their health care costs. The governor says past promises made by other governors about the level of benefits "can't be kept." The state pension system is underfunded by at least $46 billion. The health benefits system is underfunded by $76 billion.

A Risky Pension Accounting Tactic Is Spreading - Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.  Gov. Pat Quinn of Illinois approved a plan in April that seemed to help balance the budget, but it may imperil the pension fund.  Actuaries, including some who serve on the profession’s governing boards, got wind of what Illinois was doing and began to look more closely. Many thought Illinois was using an unorthodox maneuver to starve its pension fund of billions of dollars, while papering over a widening gap between what it owed and how much it had. Alarmed, they began looking for a way to discourage Illinois’s method before other states could adopt it.

State employers brace for PERS rates to skyrocket - State agencies, school districts and local governments will receive two years' worth of bad news on Friday, when the Oregon Public Employees Retirement System board votes on employer pension rates for the upcoming 2011-13 biennium. The rates are expected to more than double as a result of investment losses PERS suffered during the market downturn. "We've done our best to give employers an idea in which direction the rates will be headed," said Dale Orr, actuarial service manager for PERS. The pension rate increases will likely lead to budget cuts for many PERS employers, who are already reeling from loss of tax income due to the poor economy.

More Class Hatred at the Washington Post - Most of the elite have contempt for the portion of the American population that does not have at least 6-figure incomes, however the Washington Post stands out in its willingness to express this contempt so openly. This contempt was fully visible again today when the Post ran an editorial complaining that UAW members who were employees of Delphi, GM's former auto parts division, would get their full pensions. By contrast, the editorial complained that Delphi's management personnel had their pension plan taken over by the Pension Benefit Guarantee Corporation (PBGC) and as a result would get just "pennies on the dollar." We all know how infuriating it must be to the Post that ordinary working people might get pensions that can sustain a middle class living standard, but they are entitled to their class hatred. However the "pennies on the dollar" claim is more than a bit of a stretch. The PBGC guarantees a benefit of up to $4,500 a month for a worker retiring at age 65. That may be "pennies on the dollar" in Washington Post land, but it's more than most of the rest of us can expect to live on in retirement.

Fed's Flow of Funds Report Shows US Corporate Plan Assets Shrank 6.8% in Second Quarter - According to the Federal Reserve’s Flow of Funds latest report, US corporate defined benefit and defined contribution plans had combined assets of $5.32 trillion as of June 30, a 6.8% drop from three months earlier.  As of June 30, while corporate DB plan assets amounted to $2.05 trillion, down 5.4% from the previous quarter, corporate DC plan assets came to $3.27 trillion, down 7.5%, as reported by Pensions & Investments. Meanwhile, total assets in state and local government retirement funds were $2.56 trillion, down 8.2%, while the federal government’s retirement funds totaled $1.311 trillion, down 1%. Additionally, the report concluded that household net worth — the difference between the value of assets and liabilities — fell to $53.5 trillion, far below the $64.2 trillion it had reached at the end of 2007 when the recession began. The report revealed financial assets, mainly stocks and mutual funds, faced steep declines, with stocks alone down $1.9 trillion to $14.9 trillion, more than offsetting minor gains in other areas.

Want People to Save? Force Them - In Chile last June, I had the opportunity to spend some time with Felipe Kast, the new government’s minister of planning, and a few of his compadres. One of the topics we talked about was the Chilean retirement saving plan. By law, 11% of every employee’s salary is automatically transferred into a retirement account. Employees select their preferred level of risk, with the following restrictions: They may not choose either 100% equities or 100% bonds, and the percentage of equity that they can select diminishes as they age. When employees reach retirement, their savings are converted into annuities. The government auctions off the rights to annuitize retirees in groups of 250,000. This brilliantly conceived approach solves thorny behavioral and institutional challenges. Behaviorally, it recognizes that people are not good at two aspects of financial planning for retirement—deciding to save and eliminating risk in later years—and it forces them to act in a better way.

Social Security Trust Funds: Why Solvency = Discounted Interest Only Loan - Are the Special Treasuries that make up the Social Security Trust Funds real? Absolutely, quite apart from legal and historical arguments the DI Trust Fund will be cashing in some $23 billion of them in 2010 along with taking some $9 billion [edit] in interest, their reality is affirmed every time a SS Disability check gets credited to a beneficiaries account each month. QED. But does that mean that all of those Special Treasuries in the combined Trust Funds will get paid back? Or need to be paid back? Well no, if we fix Social Security in precisely the right way, those Trust Funds get converted into a discounted interest only loan, and the principal simply rolls over forever. To understand why this should be we can start with the following from Steve Goss, the Chief Actuary of Social Security in his recent article for the Social Security Bulletin The Future Financial Status of the Social Security Program

Cut Medicare first - Social Security offers cash benefits, whereas Medicare is an in-kind benefit, in the form of health care (which in turn is distinct from health, itself another in-kind benefit)," writes Tyler Cowen. "Therefore always cut Medicare first." I agree. This is a point I made in my column against Social Security cuts: Social Security is a program of cash transfers to America's elderly. Its administrative costs are less than 1 percent. For every dollar that goes into the program, in other words, we're getting pretty much a full dollar in value on the other side.  Medicare -- to pick just one example -- is a program that purchases health-care services on behalf of America's elderly. Those health-care services are supposed to buy health. We know that many of them don't. We also know we pay more for them than people in other countries do, and without better results. In other words, for every dollar we put into the program, it's not at all clear that we're getting a full dollar in value out of the program.We should be reducing spending in places where we're overpaying relative to the value we're getting back. Social Security is not one of those places.

State's Medicaid numbers hit record - More than 2.2 million Pennsylvanians are eligible for Medicaid, the federally mandated, state-managed program that provides health care for people and families who can't afford care otherwise. It is the highest number on record, representing nearly 18 percent of the population -- more than one in six Pennsylvanians -- and underscoring the worrisome economic climate and continued difficulty many people have finding jobs and employer-provided insurance. But the swelling Medicaid roster is not just a sign of the economic times. It's also reflective of growing dependence on state-sponsored health care and safety nets, as well as the increasing cost of health care and long-term care -- trends showing few signs of immediate abatement. As a result, the state's Department of Public Welfare budget, and the need to trim it, have been regular sources of political strife for Gov. Ed Rendell and the state Legislature. The same will remain true for future governors and lawmakers.

Medicaid will cost NY state $63.5 billion in 2014 - Medicaid will cost New York state $63.5 billion by 2014, a 27 percent increase over 2010, without a drastic overhaul of the state-federal health plan that includes barring the middle class from qualifying. That was the estimate issued on Monday by Lieutenant Governor Richard Ravitch in a report. Medicaid "has an unwieldy and overly decentralized structure that serves contradictory goals and provides perverse incentives," he said. New York's rules that allow couples to qualify for Medicaid by "spending down" their assets are among the most lax in the nation, as are policies governing "spousal refusal" when one partner can decline to pay nursing home bills, Ravitch said. New York also has one of the nation's most generous Medicaid programs -- the state is one of only five states that pays for health care for low-income adults who have no children, Ravitch said.

Paterson's No. 2 Calls for Medicaid Overhaul - Describing Medicaid as a “massive program” whose growth threatens the state’s finances, Lt. Gov. Richard Ravitch is calling for significant changes in New York’s health care benefits for the poor and disabled, lobbing a volatile issue in the midst of the campaign for a new governor. " "New York State has wrestled for years with the growth of Medicaid, which now costs more than $50 billion a year, more than double the spending in 1995. With stimulus spending, the federal government covers about $30 billion, more than the 50 percent share it has historically covered in New York. But when that extra money runs out in June, New York and other states will “fall off a cliff,” Mr. Ravitch said, just as they are trying to claw out of deficits and recession.

Comptroller claims state's Medicaid program lost $114 million - New York’s Medicaid program lost $114 million over the past four years, state Comptroller Thomas DiNapoli claims in a statement released Monday. Most of the lost funds identified in audits the comptroller unveiled—$100 million—trace to uncollected coinsurance. DiNapoli blames inefficiencies in the state Department of Health’s eMed NY reimbursement system, which he says, failed to apply a required 20 percent coinsurance payment to claims. The comptroller also said he detected 13 repeat claimants among providers identified in a second audit that collected more than their share of claims in Medicaid overpayments totaling $14 million. He has referred the 13 providers’ claims records to the Office of the Medicaid Inspector General for investigation of possible fraud, DiNapoli said.

Ky. Medicaid Chief Resigns Amid Budget Problems - With Kentucky's Medicaid program facing a nearly $500 million shortfall, the program's chief has resigned. Kentucky Medicaid Commissioner Elizabeth Johnson announced her resignation Tuesday. The announcement comes as lawmakers have become increasingly critical of her handling of the nearly $6 billion a year health care plan that serves about 800,000 low-income and disabled Kentuckians. Johnson said she was not asked to resign. She is leaving to work with the Lexington law office of Stites and Harbison, Gov. Steve Beshear's former law firm. Her resignation is effective Sept. 30

Double-digit hikes for some Medicare drug plans - Millions of seniors face double-digit hikes in their Medicare prescription premiums next year unless they shop for cheaper coverage. A new analysis of government data finds that premiums will go up an average of 10 percent among the top plans that have signed up some 70 percent of seniors. That's according to Avalere Health, a private research firm that crunched the numbers. Marketing for next year's drug plans gets under way Oct. 1, and seniors will see some of the biggest changes since the Medicare prescription benefit became available in 2006. More than 17 million are enrolled in private drug plans offered through Medicare. "People are just going to have to get on top of this and shop around,"  "Beneficiaries are really going to have to reassess their plans for next year."

Health Reform is here: More coverage for kids, free physicals among changes that take effect this week - A variety of consumer-friendly health reform rules will go into effect this week, promising to make life easier for young adults, parents, children with pre­existing conditions, people with chronic diseases, and people appealing claims that have been denied. Starting Thursday, insurance companies must allow young adults to remain on their parents' plans until age 26, with some conditions. That change will improve insurance access for an estimated 86,300 young people, according to Census Bureau and White House estimates. Also, after Thursday, children younger than 19 cannot be denied coverage for pre­existing health problems when their families sign up for new coverage. A host of other changes also will go into effect that day:

10 Major New Health Reform Benefits Take Effect Today: Starting today, insurers will be required to:

    • Keep you covered when you get sick: Simple mistakes or typos will no longer be grounds for insurance companies to cancel your insurance.
    • Cover kids with pre-existing conditions....
    • Allow young adults to stay on their parents' plan up to age 26....
    • Remove lifetime [coverage] limits....
    • Phase out annual [coverage] limits....

For any insurance plan that goes into effect after September 23, 2010, your insurance company must:

    • Pay for preventive care like mammograms and immunizations....
    • Give you a better appeals process for insurance claims....
    • Let you choose your own doctor... choose any available participating primary care provider as your provider, and any available participating pediatrician to be your child's primary care provider.
    • Provide easier access to OB-GYN services....
    • Allow you to use the nearest emergency room without penalty: If an emergency arises while you're away, you will no longer have to drive home to your in-network provider to receive in-network benefits.

Plan for Changes in '11 - Employees need to pay extra attention during open enrollment this fall. Health-care benefits are expected to improve for many workers, but choices are expected to be more complicated and expensive as employers try to comply with the Patient Protection and Affordable Care Act, which will be phased in over a few years.Among the changes to expect: additional coverage for young adults, well care and pre-existing conditions, but also higher premiums, co-pays and out-of-pocket expenses, according to industry surveys. Most employers also plan to increase efforts that encourage workers to participate in health-and-wellness programs."This is not the year to stay where you are," says Helen Darling, president of the National Business Group on Health, a nonprofit association of large employers. "Look at all the ways you can reduce your own costs."

Insurers Scramble to Satisfy New Health Care Rules - The first big wave of new rules under the federal health care law goes into effect on Thursday, leaving many insurers scrambling to get ahead of the changes.  Insurers are cutting administrative staff to lower overhead costs, investing in big technology upgrades and training employees to field the expected influx of customer inquiries.  Despite the talk among some Republicans of repealing all or part of the law, insurers say they cannot afford to put off the changes. Many said they were fundamentally altering their business models to cope.  “It is really the Manhattan Project because of the scale and the scope,” said Karen Ignagni, chief executive of America’s Health Insurance Plans, a trade group.

Would "ObamaCare" Tax the Sale of Your Home? Probably Not. - There has been a story and an e-mail floating around for some time claiming that the recent health care reform bill (PPACA) would impose a 3.8 percent "sales" tax on the sale of every home. The e-mail has been rightfully debunked by the usuals ( and Snopes), but here is what the bill would actually do regarding taxation of the sales of homes. First off, there is no "sales" tax on home sales in the health care bill. The bill would impose capital gains taxes on some home sales made by a limited number of taxpayers. To be hit by the 3.8 percent capital gains tax, you first have to be a married couple making more than $250,000 in adjusted gross income or $200,000 if you are single. For those who earn above those income thresholds ($250,000/$200,000) and who have a capital gain on a home that is a second home or one that does not qualify for principal residence (i.e., lived in for too short of a time period), the full capital gain would be subject to the new 3.8 percent tax. Over time, however, if the health care reform and the tax code were never changed, more and more home sales would be subject to this tax. That's because the $200,000 and $250,000 income thresholds in the health care reform bill were not indexed for inflation leading more and more people to qualify for having to pay the 3.8 percent tax on their investment income

Price Of Health Reform: Insurers Ask Higher Rates Than Expected - As health insurers file their first post-reform rate-hike requests, a rift is becoming clear: Insurers such as Aetna and Anthem are seeking far higher increases than federal officials and consumer advocates had anticipated. At the same time, the years-old debate continues to rage about whether medical costs justify the upward march of health premiums. For Connecticut employers and insurance customers anxiously awaiting prices for 2011, there is no simple rule of thumb. Some plans will rise sharply if they didn't previously offer features now mandated by reform, while others will see only minor adjustments, according to regulators, company filings and industry experts. But one thing is clear — the rate increases will heighten an already fevered debate about whether the health insurers are bilking the public or just passing along costs they cannot control

Health Insurance Companies Really Hate Your Sick Children - The health insurance industry is generally known for its efficiency, generosity and -- of course -- for its customer-first attitude. That's why it comes as such a shock that several of the more beloved insurance institutions like Wellpoint, Aetna, Cigna and United Healthcare have decided to stop selling you insurance policies for your sick children. These companies say the have opted to put a halt to selling child-only policies rather than comply with a new federal law forbidding them from rejecting coverage for children under the age of 19, even if they have (here's the sticking point) a pre-existing medical condition. Insurance companies have seen sales of child-only policies increase in recent years as more employee-based health plans cut coverage of dependents. But now that the insurers won't be able to say no to kids with costly conditions, many have decided to cease selling new child-only policies.

What makes the US health care system so expensive – Introduction - I will be endeavoring this week (and further) to give you better answers.  I’m going to draw heavily on the McKinsey & Company paper I have referenced in the past, supplementing that when appropriate.  I’m also basing much of this on an important point made by Uwe Reinhardt and colleagues in their paper U.S. Health Care Spending In An International Context: Why is U.S. spending so high, and can we afford it?: No single factor explains the levels or rates of increase in health spending among industrialized countries. However, ability to pay, as measured by GDP per capita, has repeatedly been shown to be one of the most important factors. About 90 percent of the observed cross-national variation in health spending across the OECD countries in 2001 can be explained simply by GDP per capita.In other words, the vast majority of health care spending can be explained by wealth.  As countries become wealthier, they spend more on health care, and they do so in a predictable fashion.  At least, most of them do.

What makes the US health care system so expensive – Outpatient Care - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Each of these pieces is going to discuss one of the components of unexpected spending that accounts for why our system is so expensive. Remember, these posts are going to follow a common theme.  I am going to highlight how the United States is spending more than you’d expect given our wealth.  Much of this comes from the McKinsey & Company study, Accounting for the cost of health care in the United States. The single biggest spending component of our health care system is outpatient care.  In 2006, it accounted for $850 billion, making it more than 41% of our health care spending.  Amazingly, it’s more than double what you would expect, given our wealth:

What makes the US health care system so expensive – Drugs - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  You knew I had to get around to this eventually.  Who hasn’t tried to blame the high cost of health care on pharmaceuticals?  There is, of course, some truth to that claim; but anyone who hoped to find that pharma is the big bad boss here is going to be disappointed. Yes, the United States spends more for its pharmaceuticals than you would expect given our wealth.We spent more to the tune of about $98 billion in 2006.  Most of that was for drugs used on an outpatient basis.  Ironically enough, people in the US actually used about 10% fewer drugs than people in the other countries.  The problem is that our drugs, on the whole, cost about 50% more.  For name brand pharmaceuticals, we pay about 77% more.

What makes the US health care system so expensive – Administration and Insurance - If you haven’t read the introduction, go back and read it now.  That introductory post also includes links to all the posts in this series on what makes our health care system so expensive.  Some of you have been eagerly waiting for this one.  Our health care system is a bloated, bureaucratic mess.  You won’t get an argument from me.  All together, administration and insurance totaled $145 billion in 2006, accounting for 7% of all health care spending.  We spent $486 per person, which is almost twice what the next country spent.  As most of you expect, the majority of that spending is above what you would expect, given our wealth: In fact, $91 billion dollars were spent in 2006 above what you would expect.

The United States Does Leave Drug Prices to the Market - The Washington Post told readers that President Obama's health care plan leaves drug prices to the market. This is not true.The plan leaves in place government issued patent monopolies that raise prices by many times above their competitive market price. At one point the piece notes that the health care plan's closing of the "doughnut hole" for prescription drugs in Medicare would cost the drug companies $32 billion over the next decade. It would have been helpful to inform readers that this is less than 1 percent of projected spending on prescription drugs over this period.

GOP Aims to Erode White House Agenda - Eyeing a potential Congressional win in November, House Republicans are planning to chip away at the White House's legislative agenda—in particular the health-care law—by depriving the programs of cash. The emerging plan has been devised in part to highlight the policy differences between the two main parties, especially over legislative achievements of the Obama administration that have proven unpopular with voters. Republican leaders are also devising legislative maneuvers that might have a bigger impact, using appropriations bills and other tactics to try to undermine the administration's overhaul of health care and financial regulations and its plans to regulate greenhouse gases. GOP leaders also hope to trim spending, return unspent stimulus funds and restore sweeping tax cuts.

The GOP Health Care Plan Of Attack - A couple interesting health care news stories today. First, the GOP has absolutely no idea what to "replace" the Affordable Care Act with: Republicans are promising to repeal and replace President Barack Obama's health care overhaul if they win control of Congress. But with what? Not even they know.  Remember, unlike 1994, Republicans could not afford to defend the health care status quo in 2010. The public demanded health care reform, and Republicans took the position that they favored some superior alternative proposal that would do all the good stuff and none of the bad stuff. Actually formulating a plan that satisfies those requirements is impossible. So what do they plan to do instead? Throw sand in the gears:

How many wrongs make a right? - If you’re looking for two different perspectives on the House Republicans’ “Pledge to America,” to be officially unveiled later today, see Ezra Klein and Avik Roy. For a concise summary of what’s in it on health care and how it relates to current law, see Igor Volsky. I want to focus on just one thing, and it isn’t really about the Pledge, though it relates to something Avik wrote in reaction to it.Importantly, the Pledge says almost nothing about the biggest and most difficult questions in health policy: Medicare and Medicaid reform. It criticizes PPACA’s “massive Medicare cuts” without offering an alternative solution for putting the program on stable long-term footing.If there is one thing I would love for all Americans to have in mind when evaluating politicians’ pronouncements about what we have done or should do with respect to government health spending it is this graph of projected federal revenue and spending as a percent of GDP, from the CBO:

Fibbing With Numbers - Charles Seife is steaming mad about all the ways that numbers are being twisted to erode our democracy. We’re used to being lied to with words. But numbers? They’re supposed to be cold, hard and objective. Numbers don’t lie, and they brook no argument. They’re the best kind of facts we have. And that’s precisely why they can be so powerfully, persuasively misleading, Seife, a veteran science writer who teaches journalism at New York University, examines the many ways that people fudge with numbers, sometimes just to sell more moisturizer but also to ruin our economy, rig our elections, convict the innocent and undercount the needy. Many of his stories would be darkly funny if they weren’t so infuriating.  Although Seife never says so explicitly, the book’s title alludes to “truthiness” — the Word of the Year in 2005. The numerical cousin of truthiness is proofiness: “the art of using bogus mathematical arguments to prove something that you know in your heart is true — even when it’s not.”

Continuing efforts to justify false "death panels" claim - Brendan Nyhan gives the story. Palin's language suggests that a "death panel" would determine whether individual patients receive care based on their "level of productivity in society." This was -- and remains -- false. Denying coverage at a system level for specific treatments or drugs is not equivalent to "decid[ing], based on a subjective judgment of their 'level of productivity in society.'" Seems like an open-and-shut case to me. The "bureaucrats" (I think Palin is referring to "government employees") are making decisions based on studies of the drug's effectiveness: An FDA advisory committee voted 12 to 1 on July 20 to withdraw Avastin's authorization for advanced breast cancer based on two new studies that the advisers concluded had not shown that the drug extends life. Not only that, the committee concluded that the studies indicated the drug slowed tumor growth for even less time -- perhaps as little as about a month. "Nothing here about judgments of patients' "level of productivity in society" or of individuals standing in front of any panels at all. It sounds more like Palin is taking concerns about the existing private insurance system--having to talk with faceless people on the phone who decide based on seemingly arbitrary criteria whether you have the right paperwork to be reimbursed--and transposing it onto a hypothetical government-run system of the future.

Does the NYT Allow Its Reporters to Talk About Drug Patents? - Readers of an article on clinical trials for a new melanoma drug might think that the NYT prohibits such discussion. The gist of the NYT article is that some people may end up dying because they were selected for the control group rather than the treatment group for an effective drug. A more serious article would have explored the comment buried in the middle of the article: "The surest way to get the F.D.A’s endorsement for a broader market was a controlled trial. And with its competitors rushing to get similar drugs to market, the findings of such a trial might give Roche an advantage in marketing its version as the only one proven to prolong survival." This is an incredible statement that largely negates the point of the article. Is the purpose of the clinical test to get Roche more profit or is to find out more information about the effectiveness of a drug? Suppose that all drug test results were fully public and the patents were placed in the public domain. Would the same issues still exist? Readers do not know.

Number of the Week: When Job Creation Is Troubling -36%: The share of the U.S. population that is obese, according to the OECD. Does economic growth always mean our lives are getting better?  As of 2009, about 36% of the U.S. population was obese and another 32% was merely overweight, according to estimates from the Organization for Economic Cooperation and Development. That makes the U.S. the fattest among advanced nations, where the average obesity rate stands at about 16%. Our weight isn’t a function of our wealth. Rather, obesity tends to be concentrated among the poorer and less-educated parts of the population. These people, according to a new OECD report, are more vulnerable to a convergence of factors — including changes in processing technology, government subsidies and marketing — that have made fats and sugars cheaper and more easily accessible than healthier foods, particularly in the places where the poor tend to live.

Warning over soaring dementia costs - The costs associated with dementia will amount to more than 1% of the world's gross domestic product this year at $604bn (£388bn), a report says. The World Alzheimer Report says this is more than the revenue of retail giant Wal-Mart or oil firm Exxon Mobil. The authors say dementia poses the most significant health and social crisis of the century as its global financial burden continues to escalate.Campaigners say more investment in dementia care and research into new treatments is needed. Spending more money now would save nations more money in the future by decreasing the disease burden, they say.

Factory farm fracas on Capitol Hill -The recall of half a billion eggs last month, after more than 1,600 Americans fell ill with salmonella food poisoning, might seem a sufficient impetus to jolt even this highly polarized Congress into legislative action.  Not so fast. Efforts to pass a major food safety bill ground to a halt yesterday (20 September), the victim of partisan wrangling.  The dramatic backdrop for action certainly was there, as victims of the outbreak testified at a hearing about nearly losing their lives, and the heads of the two Iowa companies that shipped the tainted eggs were pummeled by angry members of the House Energy and Commerce subcommittee on oversight and investigations. Along with witness statements, you can see a fairly grisly photo gallery here, documenting the conditions that Food and Drug Administration (FDA) inspectors documented at the farms last month: “Live rodents were located in the laying houses. We have liquid manure oozing out of buildings….We have dead and decaying chickens found at the sites….live and dead flies too numerous to count.” Most important, he noted, inspectors found at both farms the same strain of salmonella enteritidis that sickened 1,608 people, including in the feed mill and in water used to wash the eggs.

FDA will Ban Food Makers from Telling the Truth about Non-GMO Foods - In case anyone had any doubts about who the FDA really serves, the latest news should prove once and for all whose side they are on - and it isn't yours or mine. The Washington Post has reported that, in addition to approving genetically modified "Frankenfish" salmon without requiring a GMO label, the FDA will also be banning the inclusion of any references to not containing genetically modified content on food items which are GMO free. The FDA, which has been under intense pressure from GM interests to approve the modified salmon without requiring any labeling, stated that it could not require a label on the salmon because the agency determined that the altered fish are not "materially different" from other salmon. Apparently, the agency is using even the same, and even flimsier, justifications to force food companies to hide the truth if their products are GM/GMO free - much to the delight of the multi-billion dollar GM industries.

FDA won’t allow food to be labeled free of genetic modification… 'Extra labeling only confuses the consumer,' biotech spokesman says That the Food and Drug Administration is opposed to labeling foods that are genetically modified is no surprise anymore, but a report in the Washington Post indicates the FDA won't even allow food producers to label their foods as being free of genetic modification. In reporting that the FDA will likely not require the labeling of genetically modified salmon if it approves the food product for consumption, the Post's Lyndsey Layton notes that the federal agency "won't let conventional food makers trumpet the fact that their products don't contain genetically modified ingredients."

The World Is Fat - Until 1980, fewer than one in 10 people in industrialized countries like the United States were obese.Today, these rates have doubled or tripled. In almost half of developed countries, one out of every two people is overweight or obese. These populations are expected to get even heavier in the near future, and in some countries two out of three people are projected to be obese within 10 years. Those are some of the disturbing statistics from a new report released today by the Organization for Economic Cooperation and Development, a research and membership organization that focuses on the world’s richest nations. Here’s a chart, for example, showing current and projected trends in weight in select O.E.C.D. countries:

Global food risk from China-Russia pincer - World food supplies are caught in a pincer as China becomes a net importer of corn for the first time in modern history and Russia's drought inflicts even more damage than expected, raising the risk of a global grain shock in 2011.  The Moscow bank Uralsib said half of Russia's potato crop has been lost and the country's wheat crisis will drag on for a second year, forcing the Kremlin to draw on world stocks.  Wheat prices have risen 70pc since June to $7.30 a bushel as the worst heatwave for half a century ravages crops across the Black Sea region, an area that supplies a quarter of global wheat exports. This has caused knock-on effects through the whole nexus of grains and other foods.

Brazilian socialism distorts free markets to feed hungry poor and dying babies - There are people around North America who’ve never seen any existing socialism, so they have no real idea what “socialism” is. So, you know, this article describes what that is. A labor-union party takes power, and they feed the poor voters by government fiat. Simple really. Socialism is a major bureaucratic drag, unless you’re starving, or weirdly obese or malnourished, or a fifth of the children in your country are living in poverty. Actually, what’s really needed to make socialism more or less work is large organized cadres of militant and patient socialists. People who don’t mind filling milk-powder packets and hanging out with poor folk all day.  A lot of countries don’t have anybody that patriotic. On the other hand, the USA is full of gold-hoarding Glenn Beck fans who are convinced we’ll all be starving any minute. This is what that would look like. You know: radical government intervention to keep the abjectly poor from starving to death.

Fish or frankenfish? FDA weighs altered salmon --- Fish or frankenfish? A Massachusetts company wants to market a genetically engineered version of Atlantic salmon, and regulators are weighing the request. If approval is given, it would be the first time the government allowed such modified animals to join the foods that go onto the nation's dinner tables. Ron Stotish, CEO of AquaBounty, said at Monday's first of two days of hearings that his company's fish product is safe and environmentally sustainable.Food and Drug Administration officials have largely agreed with him, saying that the salmon, which grows twice as fast as its conventional "sisters," is as safe to eat as the traditional variety. Part of the hearing is focusing on labeling of the fish. It is possible that if the modified salmon is approved, consumers would not even know they were eating it. Current FDA regulations require modified foods to be labeled as such only if the food is substantially different from the conventional version, and the agency has said that the modified salmon is essentially the same as the Atlantic salmon.

Groundwater depletion rate accelerating worldwide - In recent decades, the rate at which humans worldwide are pumping dry the vast underground stores of water that billions depend on has more than doubled, say scientists who have conducted an unusual, global assessment of groundwater use. These fast-shrinking subterranean reservoirs are essential to daily life and agriculture in many regions, while also sustaining streams, wetlands, and ecosystems and resisting land subsidence and salt water intrusion into fresh water supplies. Today, people are drawing so much water from below that they are adding enough of it to the oceans (mainly by evaporation, then precipitation) to account for about 25 percent of the annual sea level rise across the planet, the researchers find. Soaring global groundwater depletion bodes a potential disaster for an increasingly globalized agricultural system.

Our Water Is Totally Fracked Up - An independent lab found fracking chemicals in the well water of "almost everybody" living in one neighborhood in Pennsylvania. Fracking is not a typo or a joke or a TV reference, it refers to "hydrofracking," in which chemicals are pumped into the ground to create cracks and fissures that increase the output of oil and gas wells. The neighbors point their fingers at nearby drilling company Cabot, who has countered that the chemicals, like methane, were in some of the wells already before they began fracking everything up. Report: Fracking chemicals in Pennsylvania water wells

The Phytoplankton Crisis — An Update  - In How We Wrecked The Oceans — Part II, I reported on a result published in the science journal Nature. It was reported that phytoplankton in the oceans has declined 40% since 1950. In so far as this is easily the most terrifying thing I've ever read concerning the human impact on the natural world, I thought I would post an update today. I've now had a chance to read the published paper, which is now available on the web. The identified culprit is sea surface temperature (SST), which has risen due to anthropogenic climate change (i.e. global warming arising from the burning of fossil fuels). What you don't see is often more important than what you do see. What we don't see here or any place else is serious criticism of the methodology used or otherwise serious questioning of the results. Thus the preliminary finding stands subject to further confirming or disconfirming research. That research should tell us whether this scary trend is continuing. That is to say, we might see a continuing loss of phytoplankton in the oceans at a rate of 1% per year.

Growing La Nina Chills out the Pacific - The tropical Pacific Ocean has transitioned from last winter's El Niño condi tions to a cool La Niña, as shown by new data about sea surface heights, collected by the U.S-French Ocean Surface Topography Mission (OSTM)/Jason-2 oceanography satellite.A new image depicts places where the Pacific sea surface height is higher (warmer) than normal as yellow and red, with places where the sea surface is lower (cooler) than normal as blue and purple. Green indicates near-normal conditions. Sea surface height is an indicator of how much of the sun's heat is stored in the upper ocean. La Niña ocean conditions often follow an El Niño episode and are essentially the opposite of El Niño conditions. During a La Niña episode, trade winds are stronger than normal, and the cold water that normally exists along the coast of South America extends to the central equatorial Pacific. La Niña episodes change global weather patterns and are associated with less moisture in the air over cooler ocean waters, resulting in less rain along the coasts of North and South America and the equator, and more rain in the far Western Pacific.

"Hot: Living Through the Next Fifty Years on Earth" -  My daughter Chiara, age five, is a member. So is my goddaughter Emily, age twenty-two. So are the thousands of Pakistani children now suffering after record monsoon rains left 20 percent of their country — an area the size of Great Britain — under water. In fact, every child on earth born after June 23, 1988 belongs to what I call Generation Hot. This generation includes some two billion young people, all of whom have grown up under global warming and are fated to spend the rest of their lives confronting its mounting impacts. For Generation Hot, the brutal summer of 2010 is not an anomaly; it’s the new normal. One wouldn’t know it from most media coverage, but the world’s leading climate scientists have concluded that last summer’s rash of extreme weather — including record heat across much of Europe (especially Russia) and the United States — was driven in no small part by man-made global warming.

NOAA's NCDC: Global Surface Temperature Anomalies - Annual Global Temperature Anomalies (chart)

Hockey Stick Reaffirmed; No One Cares - Via Joe Romm, two new scientific studies reaffirm the infamous hockey stick graph. The first study appeared in Geophysical Research Letters: "We conclude that the 20th century warming of the incoming intermediate North Atlantic water has had no equivalent during the last thousand years." And the second study was published in the Journal of Geophysical Research: "The last decades of the past millennium are characterized again by warm temperatures that seem to be unprecedented in the context of the last 1600 years.”  Earth's currently warming at a rate that's unprecedented over the last millennium. Think this will change anyone's minds? Yeah, me neither.

NSIDC director: “The volume of ice left in the Arctic likely reached the lowest ever level this month.” - Serreze: "I stand by my previous statements that the Arctic summer sea ice cover is in a death spiral. It's not going to recover." - This amazing Arctic melt season is finally coming to an end.  We just about equaled 2008 for the second lowest sea ice extent and area.  But volume matters more — and here it looks like we’re setting the record. We’ve seen that National Snow and Ice Data Center (NSIDC) scientists have tracked a sharp drop in oldest, thickest Arctic sea ice.  So it’s no surprise that the Polar Science Center’s PIOMAS model for mid-September shows a record low volume for the month and hence the year and hence “any time in recent geologic history”:

Ontario on front line of climate change - Due to our latitude, global warming is occurring faster in Ontario than the global average; while the average temperature around the world went up by 0.75 degrees Celsius in the past century, average temperatures in south-central Canada increased by an average 1.2 degrees Celsius. Most experts predict this warming will accelerate. And if you take into account the lowlands of Hudson’s Bay, it could speed up even more. There’s a vast expanse of wetland peat in the lowlands, composed of centuries of decayed vegetation. A shift in the water table could release methane and carbon dioxide, both of them greenhouse gases. The province’s Expert Panel on Climate Change Adaption has warned: “Losing that carbon to the atmosphere as GHG’s is a risk of global proportions.” All of this threatens to dramatically alter the landscape of the province, wiping out familiar plant and animal species, and introducing alien species that have never been seen here before.

UK opens world’s biggest offshore windfarm - It is a very rare thing for the UK to claim pre-eminence in the much-touted global green economy, so the assembled local dignitaries, industry folk and one cabinet minister were not letting the dismal maritime backdrop put a downer on proceedings. The official opening of the Thanet windfarm off the coast of Kent – the biggest offshore project in the world – means that Britain generates more power from offshore wind than the rest of the world put together. The eight lines of turbines, running north-west to south-east, cover a total area of 35sq km off Foreness Point near Margate. With 100 turbines, each 115 metres high with 44-metre blades, it can generate 300 megawatts (MW) of power – enough for 200,000 homes.

Developing nations to get clean-burning stoves — Nearly three billion people in the developing world cook their meals on primitive indoor stoves fueled by crop waste, wood, coal and dung. Every year, according to the United Nations, smoke from these stoves kills 1.9 million people, mostly women and children, from lung and heart diseases and low birth weight. The stoves also contribute to global warming as a result of the millions of tons of soot they spew into the atmosphere and the deforestation caused by cutting down trees to fuel them. On Tuesday, Secretary of State Hillary Rodham Clinton is expected to announce a significant commitment to a group working to address the problem, with a goal of providing 100 million clean-burning stoves to villages in Africa, Asia and South America by 2020. The United States is providing about $50 million in seed money over five years for the project, known as the Global Alliance for Clean Cookstoves.

Spain’s largest biomass plant gets go-ahead - New €100m plant set to supply 400,000 people with electricity from wood fuel. Ambitious plans for Spain’s largest biomass plant have been approved by the Spanish government. Renewable energy group Ence required governmental permission as the €100m (£84.4m) plant near the town of Huelva was to be funded using public money specifically set aside for renewable energy projects. Ence has drawn up a shortlist of three companies – Tecnicas Reunidas, OHL and Acciona-Idom – to build the plant, which when completed will increase the firm’s current 68MW facility to 118MW and become Spain’s largest. The wood fuel for the Huelva plant is likely to come from the company’s 116,000 hectares of sustainably managed forests in Spain, Portugal and Uruguay, although the company said it hoped to decrease its dependence on imported materials.

As a tiny island nation makes a big sacrifice, will the rest of the world follow suit? - Kiribati, a small nation consisting of 33 Pacific island atolls, is forecast to be among the first countries swamped by rising sea levels. Nevertheless, the country recently made an astounding commitment: it closed over 150,000 square miles of its territory to fishing, an activity that accounts for nearly half the government's tax revenue. What moved the tiny country to take this monumental action? President Anote Tong, says Kiribati ("Kir-ee-bas") is sending a message to the world: "We need to make sacrifices to provide a future for our children and grandchildren."  President Tong isn't mincing his words. Kiribati looks to make the ultimate sacrifice by mid-century, when much of the country is projected to be largely uninhabitable. Rising seas will contaminate freshwater supplies, ruin agriculture lands, and erode beaches and villages, forcing its people to flee. Kiribati has done nothing to earn this fate—its greenhouse gas emissions are negligible and its population barely tops 100,000. Yet it is already looking at buying land in other countries for eventual resettlement of a substantial proportion of its population.

Working from home and online shopping can increase carbon emissions - Shopping on the internet or working from home could be increasing carbon emissions rather than helping to reduce them, a new report claims today. The research reveals that people who shop online must order more than 25 items otherwise the impact on the environment is likely to be worse than traditional shopping.  It also highlights that working from home can increase home energy use by as much as 30 per cent, and can lead to people moving further from the workplace, stretching urban sprawl and increasing pollution. The Institution of Engineering and Technology (IET) report looks at the ‘rebound’ effects of activities that are commonly thought to be green. Rebound effects are the unintended consequences of policies that are designed to reduce emissions, but on closer analysis can move the emission’s production elsewhere or lessen the positive impact.

Forget going green -- Earth doesn't care - "The Earth Doesn't Care If You Drive a Hybrid!" Or recycle. Or eat organic food. Or live in a green house powered by solar energy. Or squander commodities. The Earth just doesn't care how much you waste. But you better care. Laughlin pinpoints the key reason a global crisis is coming soon: What he says has everything to do with America's global warming policies, our deficits, hot commodities, investment strategies and how to live in an age of increasing warfare. The Scholar's editor hammers home Laughlin's warning that "humans have already triggered the sixth great period of species extinction in Earth's history."

The Brothers Koch and AB 32 - The 2006 law, known as AB 32, is aimed at reducing California’s emissions of carbon dioxide and other greenhouse gases to 1990 levels by 2020 and by 80 percent at midcentury. To reach these targets, state agencies are drawing up regulations that would affect businesses and consumers across the board — requiring even cleaner cars, more energy-efficient buildings and appliances, and power plants that use alternative energy sources like wind instead of older fossil fuels.  The prospect that these rules could reduce gasoline consumption strikes terror into some energy companies. A large chunk of the $8.2 million raised in support of the ballot proposition has come from just two Texas-based oil and gas companies, Valero and Tesoro, which have extensive operations in California. The Koch brothers have contributed about $1 million, partly because they worry about damage to the bottom line at Koch Industries, and also because they believe that climate change is a left-wing hoax.

Climate Change: Can Geoengineering Satisfy Everyone? - Reflecting sunlight from the Earth by geoengineering would undoubtedly cool the climate, but would different countries agree on how much to reflect? Research by climate scientists at the University of Bristol shows that the impact of geoengineering would be felt in very different ways across the world. Previous studies of geoengineering approaches, aimed at averting dangerous climate change, have shown that although the average global temperature could be restored to 'normal' levels, some regions would remain too warm, whereas others would 'overshoot' and cool to much. In addition, average rainfall would be reduced. This new study looked at the impacts of different strengths of geoengineering, from full strength (sufficient to return global average temperatures back to normal), through to no geoengineering.

3 Teams Win Automotive X Prize The competition, which began in 2007 with 136 vehicles from 111 teams, required that the vehicles achieve 100 miles per gallon or the energy equivalent. While two of winning vehicles reached that goal with electric power plants, the top winner did it with an internal combustion engine.The Automotive X Prize is the contemporary interpretation of the Mobil Economy Runs and other popular fuel-economy contests that ran through the late-1960s. The X Prize was sponsored by the Progressive Group of Insurance Companies. Glenn Renwick, the chief executive of the Progressive Corporatin, said the company came up with the $10 million purse by diverting money from its advertising budget over the last three years. The X Prize also received up to a $5.5 million grant from the federal Energy Department.

Energy policy in Quebec: High-Speed Gas - MOST people would be delighted to discover that they were sitting on top of natural gas reserves that could potentially supply their needs for the next century or so. No more worrying about complicated Middle East politics or whether oil supplies are past their peak. Yet in the Canadian province of Quebec, news of abundant gas in the shale beneath the St Lawrence river basin has not been met with unalloyed joy. This abundance of cheap renewable electricity is the main reason why Quebeckers are “finicky” about shale gas, says Christian Bourque, a pollster based in Montreal. It has allowed them to be proudly green. At the Copenhagen summit on climate change in December, officials from Quebec publicly chided their counterparts from Alberta over their failure to reduce carbon emissions from the tar sands in the western province. They also called on the federal government to speed up its lackadaisical efforts to bring in a national plan to reduce emissions.

Nuclear Waste Worries On St. Lawrence, Great Lakes - A Canadian power company plans to ship nuclear reactor components from Ontario, through Lakes Huron, Erie and Ontario, then through the St. Lawrence Seaway on the way to Sweden, where the scrap will be recycled.   Bruce Power says the 16 bus-sized cases contain the tubings that carried radioactive heavy water, but that the cases are welded shut.  A Swedish company will recycle the steel casings, with the remaining 10%, the radioactive tubes, to be shipped back to the East Coast and then trucked back to the Bruce site, where they'll be stored. Environmental groups, including Save the River, based in Clayton, are concerned that the plan opens the door for much more nuclear transport.  Save the River is part of Great Lakes United, a coalition that is fighting the shipments. Also opposed, Lake Ontario Waterkeeper, an environmental group that is testifying at next week's Canadian Nuclear Safety Commission hearings on the proposed shipping license.  Mark Matson, environmental lawyer with the group, says the concern is that this is a major shift in the way we handle environmental waste.

Is Deep-Sea Mining Bad for the Environment? - In May an arm of the Chinese government submitted plans to explore the seafloor around an underwater ridge in the Indian Ocean near Madagascar, where hot springs in the ocean bottom called hydrothermal vents have created deposits containing gold, silver, copper, nickel, cobalt, and tellurium (used in computers, CDs, and DVDs). The filing came on the first day that the International Seabed Authority, the United Nations agency set up to manage seafloor mining in international waters, accepted exploration plans; as land-based sources of precious metals run dry, China will surely have company. It is no small irony that the first would-be undersea ’49ers made their move in the midst of BP’s Gulf of Mexico disaster, but not for the reason one might think. Just as the reality of the BP spill has, so far, fallen short of the marine Armageddon some green groups predicted, so the actual environmental damage from mining the seafloor looks as though it might, too. If so, nothing is likely to stand in China’s way as it stakes its undersea claims.

“Sea Snot” Explosion Caused by Gulf Oil Spill? - The Gulf of Mexico oil spill sparked an explosion of sticky clumps of organic matter that scientists call sea snot, according to ongoing research. The boom likely precipitated a sea-snot “blizzard” in Gulf (map) waters, researchers say. And as the clumps sank, they may have temporarily wiped out the base of the food chain in the spill region by scouring all small life from the water column. These particularly slimy flakes of “marine snow” are made up of tiny dead and living organic matter, according to Uta Passow, a biological oceanographer at the University of California, Santa Barbara. Tiny plants in the ocean called phytoplankton produce a mucus-like substance when stressed, and it’s possible that exposure to the Deepwater Horizon oil caused them to pump out more of the sticky stuff than usual.

After The Kill - On September 19th, nearly five months after the spill started, BP, the company leasing the rig, finally sealed the Macondo well. An adjoining relief well had already been completed, and Macondo got a final wallop of cement. This is the coup de grâce. A temporary containment cap was placed over the wellhead in July, and a cement filling was installed in August.  Now more efforts will turn to assessing and compensating for the damage, which involves several things happening at once. The Natural Resource Damage Assessment process, overseen by the National Oceanic and Atmospheric Administration (NOAA), quantifies the damage and what it might cost to fix it. It figures out BP’s bill, in other words. Alongside this, an army of federal and state agencies, government researchers, academic scientists and independent advocates works on pieces of the picture: whether sampled fish show traces of oil in their gall bladders, whether whales are avoiding their usual mating grounds, whether water samples contain more hydrocarbons than would occur from natural seepage.

Sizing up the spill - When the government began releasing estimates of the size of BP’s Gulf of Mexico oil well leak, scientists and environmental groups questioned the figures, certain the leak was larger. New research supports that notion. According to the study, published in Science, some 4.4 million barrels of oil has escaped into the ocean. It is the first independent, peer-reviewed paper on the size of the leak. (doi: 10.1126/science.1195840) Timothy Crone, a marine geophysicist at Columbia University’s Lamont-Doherty Earth Observatory, in Palisades, New York arrived at the estimate using a video analysis technique originally designed to study hydrothermal vents. He had spent years developing optical techniques to measure the flow of the underwater plumes that spew buoyant, superheated mineral-rich water. “Those flows are similar to what we were seeing in the oil flow event, and people were interested in what my estimates would be” he says

BP and Government Representatives Still Keeping Scientists and Reporters Away from Areas Impacted by Oil - As shown by the following videos, BP and government representatives are still keeping scientists and reporters away from areas impacted by oil. WEAR ABC news documented yesterday that federal agents are preventing reporters from digging in the sand to look for oil: Award-winning investigative reporter Dahr Jamail says in a new interview that a federal agent confiscated Gulf oil samples: Representatives of the oil spill commission are harassing independent scientists who are finding contamination in the Gulf, and questioning whether they have permits to even take samples: Scientists’ samples have been confiscated by the police and – according to someone calling in to NPR’s Science Friday show and claiming to be an adjunct professor at Texas A & M – by homeland security:

BP Oil Well Is Dead ... But What About the Nearby Seeps...Oil-industry expert Bob Cavnar says that the Macondo well is dead. True, there may still be some bubbles leaking: However, that might just be naturally-occurring methane being released from the seafloor. For example, this video made by University of Mississippi researchers in the Gulf in 2006 – years before the BP blowout – shows methane bubbles rising naturally from the seafloor (when contained by a test tube, they turn into snowflake-like methane hydrate crystals). As I noted in June, areas in close proximity to the BP well have long been known to have enormous amounts of methane and methane hydrates. And see this. Indeed, as oil disaster expert Dr. Robert Bea pointed out in May: About a month before the blowout, a “kick” of gas pressure hit the well hard enough that the platform was shut down. “Something under high pressure was being encountered,” says Bea—apparently both hydrates and gas on different occasions.

Your grandmother (but without the milk and cookies) - Nicole Foss looks like she might be your grandmother coming to reassure you about something. But instead of milk and cookies you are served a cold dose of reality. According to Foss, one of the writers on the popular finance-oriented blog The Automatic Earth, the global economy is locked into an inexorable deflationary decline that cannot be stopped by governments or central banks. And, the world is headed for a depression worse than that of the 1930s. Believe it or not, that's the good news. The bad news is that the problems we face in the emerging depression will be aggravated by fossil fuel depletion, in particular, the onset of world peak oil production. When one questioner asked Foss when she thought we might return to even the tepid economic activity we see today, she had a one-word answer: "Never."

Chris Martenson Podcast On Surviving And Resilience -- Chris Martenson is one of the few visionaries who has long been warning about the disastrous effects of out of control spending and debt monetization (as well as unmasking the shell game the government has been engaging in for the past two years as it attempts to sequester foreign MBS holdings and exchange them for Treasury securities by tracking the TIC-custody account divergence), and his blog should be required reading for all interested in the intricacies of Fed intervention in rates. Today, Martenson has a post which, however, touches on something completely different: survival. In his words: "I was interviewed by Jack Spirko of The Survival Podcast. We had a meaty exploration of the core tenets of the Three Es (Economy, Energy, Environment) in light of recent developments, then delved pretty deeply into strategies for building personal resilience, which is the main focus of Jack's regular podcasts. Martenson's podcast interview is now posted on TSP. Click here to listen to it. Additionally, for those who are interested in delving deeper in the topics presented by Martenson, Chris has posted links to his ongoing 'What Should I Do? The Basics of Resilience' series which offers more detailed guidance than provided in the podcast:

Saudis hold oil reserves for 80 years of production: Aramco CEO - At current production rates, Saudi Arabia has oil reserves for more than 80 years of sustained production, according to Khalid A. Al-Falih, the president and the CEO of Saudi Aramco. Addressing the 21st World Energy Congress in Montreal, Al-Falih said that Aramco’s capability went even beyond, as it was expecting to increase its current reserves of 260 billion barrels by an additional 40 per cent and was endeavouring to raise the rate of recovery from its major existing fields to 70 per cent — twice the world average. However, warning the global energy leaders of the discriminating against select energy resources, Al-Falih questioned the very logic of almost four-and-a-half per cent per year on average growth in the global coal consumption in this decade as against just one-and-a-half per cent growth in oil consumption during the same period

Privatizing electricity puts Nigeria on the right track - Nigeria is going the right route by privatizing its electricity sector, says the chief economist for the International Energy Agency (IEA), referring to the government’s call last month for international investors to pour $100 billion into its ailing Power Holding Company of Nigeria. But the No. 3 oil exporter to the United States could immediately solve its electricity woes if the government decided to reallocate a mere fraction of its vast oil and gas revenues, says Fatih Birol of the IEA.  “If Nigeria were to spend 0.4 percent of its oil and gas revenues on energy power and electricity, they would solve this problem immediately," he said in a telephone interview. "Other countries [aside from Nigeria] are not getting revenues from oil and gas. If left to the markets they will never get access to electricity."

Putin Confident in Nord Stream Despite Polish Concerns - Russian Prime Minister Vladimir Putin expressed confidence that his favorite brainchild, a gas pipeline linking Russia directly with Germany, will go ahead despite latest objections from Poland. The Nord Stream pipeline is already under construction in the Baltic Sea, and will carry gas from Russia directly to Germany along a route almost entirely offshore, making redundant a large transit pipeline running through Poland. In an interview with Russian daily Kommersant published Tuesday, Mr. Putin said Poland asked Germany to force the shareholders of the Nord Stream gas pipeline project to bury the pipeline deeper in the Baltic Sea bed so that the pipeline doesn’t reduce the depth of the waterway leading to a planned Polish liquefied natural gas port. The Russian prime minister calls the move “unexpected” and “the latest piece of news” despite Poland’s long-standing concerns over the depth of the waterway. “Unexpectedly, Poles have said now the pipeline should be going through the waterway at a much bigger depth than expected because in the future they plan to deepen their port and have larger ships use the waterway. Until now, they haven’t said anything of such intentions,” Mr. Putin reportedly said.

Iran now self-sufficient, stops importing petrol - Oil Minister Masoud Mirkazemi said yesterday that Iran had now stopped importing petrol, a commodity targeted by world powers in new sanctions against Tehran's controversial nuclear drive. "No purchase has been made of petrol since last month," Mirkazemi was quoted by Mehr news agency as saying. It reported him as saying Iran's daily petrol production had reached 66.5 million litres per day, more than the national requirement of 64 million litres. On September 7, Mirkazemi said that Iran had now reached "self-sufficiency" in petrol production, adding that previously it produced 44 million litres a day and imported 20 million litres in order to meet domestic need. Yesterday, Mirkazemi said any new imports of petrol would help to boost the country's domestic reserves.

Gulf states in $123bn US arms spree -  The Arab states of the Gulf have embarked on one of the largest re-armament exercises in peacetime history, ordering US weapons worth some $123bn as they seek to counter Iran’s military power. A package of US arms worth more than $67bn for Saudi Arabia accounts for the largest single component of this military build-up, providing a huge boost to the American defence industry. The first phase of this agreement – soon to go before the US Congress for approval – is estimated at about $30bn. Anthony Cordesman, from the Centre for Strategic and International Studies in Washington, said that the US was aiming to achieve a “new post-Iraq war security structure that can secure the flow of energy exports to the global economy”. The arms sales would “reinforce the level of regional deterrence and help reduce the size of forces the US must deploy in the region”. The purchase of new weaponry comes at a time when many countries in the Middle East, home to two-thirds of the world’s proven oil reserves, are alarmed by Iran’s nuclear ambitions.

Coal aplenty, but power companies prefer foreign assets - Despite India’s abundant coal resources, many power producers are investing in coal assets outside India to buy the commodity to fuel their proposed power projects in the country. Major private players like Tata Power, Reliance Power, Adani, JSW Energy, Jindal Steel & Power, GMR and Essar Energy have invested more than Rs 35,000 crore for coal assets abroad and seek further investment opportunities in countries with conducive regulatory norms, say people connected with the development. India has the world’s third-largest reserves of coal at 267 billion tonnes, and the country’s biggest coal company, Coal India, has scheduled a public offer to raise funds for expansion to improve the quality of coal and also release funds to develop mining. Tata Power, India’s largest private utility, has a 30% stake in the Kaltim Prima Coal and Arutmin coal mines of Bumi Resources in Indonesia and is exploring further overseas opportunities. “We continue to look at overseas coal mines including in Indonesia, Australia and South Africa to secure coal supply to our forthcoming power projects,”

Pakistan pushes to get Turkmenistan pipeline moving - Pakistan will push hard for quick implementation of a long-delayed trans-regional gas pipeline from Turkmenistan in a bid to ease its mounting energy crisis, the petroleum minister said on Tuesday.Senior officials of Turkmenistan, Afghanistan, Pakistan and India on Monday inked the framework of an agreement to construct the project with an estimated value of $3.3 billion. The so-called TAPI project would pump natural gas to Pakistan and India through the southern Afghan province of Kandahar, the stronghold of the Taliban and its birthplace.

China firm aims to build big nuclear plant for Pakistan - China’s main nuclear energy corporation is in talks to build a 1-gigawatt atomic power plant in Pakistan, an executive said on Monday, a move that could intensify international unease about their nuclear embrace. China has already helped Pakistan build its main nuclear power facility at Chashma in Punjab province, where one reactor is running and another near finished, and it has contracts to build two more there, despite the qualms of other governments. Qiu Jiangang, vice president of the China National Nuclear Corp (CNNC), told a meeting in Beijing that the company was already looking beyond those deals to an even bigger plant. “Both sides are in discussions over the CNNC exporting a one-gigawatt nuclear plant to Pakistan,” he said.

Tomgram: Michael Klare, China Shakes the World - The year 2009 was a bad one for the United States.  And no, I’m not talking about unemployment, or poverty, or home foreclosures, or banks too-big-to-fail, or any of the other normal bad news.  I’m talking about something serious.  As the world’s leading maker of things that go bang in the night (and I don’t mean Hollywood films), we took a hit last year.  A big one.  The planet’s leading arms-maker and dealer -- that’s us by a country mile -- with a 68.4% cut of the global market in 2008, had the value of its arms deals drop by almost $16 billion in the gloomy economic times of 2009.  Consider it a blow to one of the few things Americans do well these days.  Fortunately, there was a simpatico country rich enough to bail us out.  I’m referring to Saudi Arabia, which is now doing for U.S. arms what the Chinese have long done for U.S. Treasury bills.For a whopping $60 billion -- yes, Virginia, that is “billion” -- the Saudis, according to Jim Lobe of Inter Press Service, have agreed to buy 84 F-15s and 175 helicopters as part of the largest arms deal in U.S. history

China Bans Rare Earth Exports to Japan Amid Tension - Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has placed a trade embargo on all exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles. Chinese customs officials are halting all shipments to Japan of so-called rare earth elements, industry officials said on Thursday morning. On Tuesday, Prime Minister Wen Jiabao personally called for Japan’s release of the captain, who was detained after his vessel collided with two Japanese coast guard vessels about 40 minutes apart as he tried to fish in waters controlled by Japan but long claimed by China. Mr. Wen threatened unspecified further actions if Japan did not comply. China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths, which sell for several hundred dollars a pound.

China Blocks Rare Earth Shipments to Japan -  Yves Smith - Certain rare earths are necessary for many advanced technology components. Even though China is not the only place were deposits exist, we’ve allowed it to become the dominant provider, and it would take years to get other sources to the point where they could replace Chinese production. (However, the article notes that China is willing to ship rare earths if they are in intermediary or end products, in other words, forcing Japan to cede operations to Chinese companies). Even though it is Japan, rather than the, which is on the wrong side of Chinese action, given the close relationship between Japan and the US (Japan is, after all, a military protectorate of the US), and heavy use of Japanese products made from these materials in the US, one has to assume this is also intended as a shot across our bow. It seems an over the top response to the matter at hand, the detention of a Chinese fisherman caught in disputed waters. In other words, this could get ugly fast. From the New York Times:

Diversification and Trade with China in Rare Natural Resources - The world relies on China to produce cheap exports.  While economists celebrate comparative advantage because it makes us richer and able to afford to purchase a broader set of items we want, can we be overly reliant on a trade partner?   Japan is learning that the answer is "yes". In a diplomacy spat with Japan, China appears to have suspended its export  trade in rare metals to Japan. So what?  "China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths .. This is an interesting case.  Japan has learned that it made a strategic mistake by not diversifying its supply chains.  Today,  China seems to be almost a monopolist here.  Knowing that China plays tough and uses is trade leverage to achieve its political goals (such as claiming disputed Asian islands near China) --- China knows that it can use the threat of cutting off exports to get what it wants.

China Is Blocking Minerals, Executives Say - China’s Commerce Ministry denied on Thursday that it had halted exports to Japan of a crucial category of minerals, but industry executives said that factories in China were still not shipping to Japan after Chinese customs agents blocked shipments earlier this week.  The minerals are so-called rare earths, which are used in products like wind turbines and hybrid cars. Eight executives, analysts and traders in the Chinese, Japanese and North American rare earths industries said that China had suspended the shipments on Tuesday in response to a diplomatic dispute over Japan’s detention of a Chinese fishing trawler captain. Some theorized that the action might have been taken by Chinese customs agents, rather than as a formal trade embargo imposed by commerce ministry regulations, to give Beijing more negotiating room with Japan.

Traders: China halts rare earth exports to Japan  -- China has halted exports to Japan of rare earth elements -- which are crucial for advanced manufacturing -- trading company officials said Friday amid tensions between the rival Asian powers over a territorial dispute. Japan imports 50 percent of China's rare earth shipments. Rare earth are metallic elements crucial for manufacturing superconductors, computers, hybrid electric cars and other high-tech products. The two trading company officials said the shipments were suspended on Tuesday. Companies using the rare metals are believed to have stockpiles that could last several months. "We are told that only Japan-bound shipments were suspended. The Chinese side did not give any reasons for the suspension," said an official at a major Japanese trading house.

Rare earth supply and trade implications - In brief, the Chinese have just f**ked themselves over if the NYT take on the issue is accurate.  It will make Mountain Pass' environmental problems easier to overcome, make funding Mount Lynas easier. It'll make it more likely that I'll get my grant to extract REs from the wastes of alumina production (yes, it does work, we just don't know whether it's economic as yet, thus the grant). Most importantly perhaps, it'll make the politicians concentrate on what's actually important here. REs aren't rare but the ability to separate them is. There are any number of places around the world where I could scare up a few tens of thousands of tonnes of rare earth ores. Really, almost trivially simple. However, separating them can take thousands (yes, really, thousands) of iterations of boiling them in hot acid. And when you're done you've still got the thorium almost always associated with them to dispose of. So, politicians will have to accept that if they want windmills and electric cars then they're going to have to allow people to play with boiling acids: and they're going to have to find a repository for all that thorium (for it is radioactive, if only mildly so).

Worried About China's Monopoly on Rare Elements? Restart American Production - A dispute over a fishing boat collision took a strange turn yesterday when the New York Times reported that China had halted exports of rare earth elements to Japan.  Since the report, Chinese officials have disputed that any such ban is in place. Regardless of the facts or outcome of this particular situation, the bare fact remains: China has a virtual monopoly on the mining and production of the 17 rare earth elements and could stop shipments of the metals to any country at any time. That would impact all kinds of products and processes from glassmaking to lightbulbs to batteries to wind turbine production. Even the American defense industry is dependent on rare earth elements from China, as a Government Accountability Office report found earlier this year. The M1A2 Abrams tank has a navigation system that requires the elements. The Aegis Spy-1 radar needs them, too. Already, supply crunches have caused production delays in military technology, the GAO reported. The wind and electric vehicle industries also require large amounts of rare earth elements, and fear a squeeze.

China's renewable energy edge - Five miles off the coast of Shanghai, the Chinese recently completed the country's first offshore wind farm. The project was completed before construction on the first American offshore wind farm has even begun.  The Shanghai project is not just another wind farm. It's the next generation in wind power technology and the latest example of how China is jumping ahead of the United States. Earlier this month, the accounting firm Ernst & Young named China the most attractive place to invest in renewables, knocking the United States out of the top position.  The study ranked countries on such things as regulatory risk, access to finance, grid connection and tax climate. It cited the lack of a clear policy promoting demand for renewables in the United States -- a product of Congress' failure to pass an energy bill -- as one of the main factors for the dethroning.

China's Power Generation Capacity Leaps Above 900 Million Kilowatts (Xinhua) -- China's installed power generation capacity has exceeded 900 million kilowatts Monday after a reactor with the second phase of Ling'ao Nuclear Power Plant began operation in Guangdong Province, chief of the country's top economic planner said.Zhang Ping, director of the National Development and Reform Commission (NDRC), hailed the achievement as "a new stage of development" for China's power industry at a forum held in Beijing on nuclear power development."Starting from a weak basis, we have explored a path of healthy development for the country's electricity industry," Zhang told the forum.According to the NDRC, it took China 38 years to raise its power generating capacity to 100 million kilowatts in 1987 from 1.85 million kilowatts when new China was founded in 1949.

China: Energy Superpower - If you want to know which way the global wind is blowing (or the sun shining or the coal burning), watch China. That's the news for our energy future and for the future of great-power politics on planet Earth. Washington is already watching - with anxiety. Rarely has a simple press interview said more about the global power shifts taking place in our world. On July 20, the chief economist of the International Energy Agency (IEA), Fatih Birol, told the Wall Street Journal that China had overtaken the United States to become the world's number one energy consumer. One can read this development in many ways: as evidence of China's continuing industrial prowess, of the lingering recession in the United States, of the growing popularity of automobiles in China, even of America's superior energy efficiency as compared to that of China. All of these observations are valid, but all miss the main point: by becoming the world's leading energy consumer, China will also become an ever more dominant international actor and so set the pace in shaping our global future.

Some in China ready to drop U.S. holdings and pour money into nationChina's young bankers and budding economists are part of a wired, frustrated generation looking for their inheritance. They've enjoyed the savings of their parents to get this far. Now they are looking to collect their due from another source – the money China has loaned to the United States.  The Council on Foreign Relations estimates that China holds at least $1.4 trillion of U.S. debts, plus $231 billion in corporate bonds and equity. That amount works out to a loan of roughly $4,500 to every American. This debtor-lender relationship between America and China is a "financial balance of terror," as White House adviser Lawrence Summers once put it. If China sold its dollar holdings, U.S. borrowing needs are so great that the sale could cause a spike in interest rates and push America back into recession.

China's urbanization could cost US$3.6 trillion - China's urbanization rate is currently around 47 percent and is increasing by about 1 percentage point each year. If the nation continues its urbanization-friendly policies, the rate could rise to 65 percent by 2020, according to the report by the China Development Research Foundation.  To accommodate this increase in the urban population, the report said the country may need to invest at least 16 trillion yuan in roads, railways, power plants, water systems and social services. But it added that this could be a conservative estimate.  “If the ratio of urban infrastructure investment to the country's gross domestic product reaches 4 percent, which is the average rate in developing countries, then the total investment could amount to 24 trillion yuan.”

The China Bears Are Wrong – China may have passed Japan as the world's second-largest economy in August, but that hasn't stopped bearish analysts from forecasting hard times for the Chinese economy. Such skeptics as short-seller Jim Chanos warned earlier this year that China's real estate bubble is a thousand times worse than Dubai's. Former Morgan Stanley economist Andy Xie has argued that China is in a real estate bubble because 25 percent to 30 percent of the country's homes are vacant and the typical consumer has to work a full year to be able to afford a closet. The mantra of these China bears is that the world's second-largest economy is set for a massive slowdown, at best—and an explosion, at worst. Either way, the rest of the world had better watch out, the argument goes. Most of the bears' logic simply does not hold up to even basic scrutiny. First, the argument made by Xie about high prices relative to average salaries and empty units does not make economic sense. Vacant units are not a problem if they have been sold to consumers who can afford them and are not held by developers who need to sell in order to pay back their loans. China's real estate developers are not sitting on empty units; they've sold to consumers who hold onto them as investments, much as many investors buy gold bars. Holding these units would be a problem if the investors were overleveraged, as in the U.S. before the crash, when even subprime borrowers could buy multiple houses at zero percent down.

White Collar Work: A Shameful Occupation? - Two media stories caught my attention this week, both of which indicate a significant shift in our concept of a good job with a livable wage, particularly in the East. Beyond highlighting challenges faced by the professional individual today, they may foretell new hurdles for Western companies that have either set up shop in China or are planning to do so in the near future. The first story, featured in Monday’s New York Times, captures the attitude of young Japanese professionals who no longer have the stability of a long-term corporate job that provides a paycheck adequate enough to cover Japan’s astronomical cost of living.The second story, which has gained a lot of attention from both China’s netizens and mainstream media outlets but has thus far been overlooked by Western journalists is the apparent change in attitude about white collar jobs in China. China’s media promotes another career, civil servant positions- or, “red collar jobs”- as being most in demand these days for their comparative stability in terms of job security, income and work-life balance. Unfortunately, for those coveting a hot red collar job in China, they’re quite difficult to come by.

BBC News – China official rebuffs Geithner over yuan - An adviser to China's central bank has rebuffed criticism from the US over Beijing's exchange rate policy. In a speech in Beijing, Li Daokui said China "will not appreciate the yuan solely because of external pressure". His comments follow strong criticism in America that the yuan is significantly undervalued, damaging US exports. Last week US the Treasury Secretary, Timothy Geithner, said he was considering ways to press China to let the yuan appreciate.In June, after months of pressure from the US, China pledged to relax its grip on its currency.

More Protectionism Likely - I agree with Michael Pettis that removing Larry Summers from the White House should be construed as a sign that the Obama Administration is poised to take a more populist tone with China. In June I wrote (More on China, Trade and Protectionism): I see the China issue as more of a backburner thing given the sovereign debt crisis in Europe and the recent understanding in policy circles that leading indicators are rolling over. I sense that Team Obama is more interested in ensuring the recovery sticks through November than in creating a political mess with China. That’s why people are talking about stimulus. I could be wrong but this explains my dovish answer to [BNN presenter]Paul [Waldie]’s question. And since that time, there really hasn’t been a very populist tone to the Obama Administration’s rhetoric toward China. However, as the economy has stalled and trade figures have deteriorated, this will change.  First come the rhetoric and preparation; only later, if the U.S. economy is in the doldrums after the mid-terms, will the follow-through turn to action.

The Long View of Changes in China’s Currency - Spend enough time with Chinese officials and economists, and you will hear a story about the Japanese yen in the 1980s. Back then, Americans were upset about Japanese imports flowing into the country, just as they are upset about Chinese imports today. So the United States pushed Japan to let the yen appreciate, thereby making Japanese imports more expensive and American exports to Japan cheaper. Tokyo complied, and the yen surged almost 50 percent from 1985 to 1987. Yet the imports kept coming. The trade deficit with Japan actually widened to $108 billion in 1987, from $94 billion in 1985. The rising yen wasn’t enough to halt the growth of companies like Sony and Toyota. They had too many advantages, including lower labor costs.  The moral of the story, in the Chinese telling, is that even a sharp rise in China’s renminbi won’t necessarily do much to help the American economy. “Renminbi appreciation may not have a big impact,” Fan Gang, an economist and former government adviser, said last week at a meeting here with American economists and policy makers, “or an impact at all.”

China’s Currency and the Trade Deficit - David Leonhardt examines the prospective impact of a rise in China's currency on the U.S. trade deficit with China. He concludes that the impact might be limited for two reasons. First he argues that much production might be transferred to countries with even lower cost labor, like Vietnam. Second, he notes that much of the value-added of goods that we import from China actually comes from third countries. The items are simply assembled in China. The rise in the value of the yuan would only affect the cost of assembly, not the cost of the other inputs, which may account for most of the value. While both of these points are valid, there are important qualifications to each. Many other developing countries also peg their currency, either formally or informally, to the dollar. If China were to substantially raise the value of its currency, they would likely follow suit, since they are trying consciously to maintain the same competitive position vis-a-vis China. This was the experience the last time China substantially raised the value of its currency in 2007.

House Panel Eyes Action On China Currency Bill (Reuters) - The House of Representatives Ways and Means Committee could vote as early as Friday on a bill that would allow the Commerce Department to apply duties against China's "undervalued" currency, a source familiar with the discussions said on Tuesday. "I have heard from I think some pretty reliable sources there would be a markup on Friday, and it would go to the House floor next week," the source said, speaking on condition that he not be identified. But as of late Tuesday afternoon, there was still no announcement from the House Ways and Means Committee about its plans for China currency legislation. Earlier in the day, House Majority Leader Steny Hoyer suggested it could be some time before there is a decision. "We'll wait to see what the Ways and Means Committee determines to do over the next few days or weeks," Hoyer said.

Yuan Appreciation Will Not Solve U.S. Trade Deficit: China FM Spokeswoman (Xinhua) -- The appreciation of the Chinese currency would not solve the U.S. trade deficit problem, China Foreign Ministry spokeswoman Jiang Yu said Tuesday. When answering a question at the regular press briefing, Jiang said the Sino-U.S. trade imbalance was a result of the international division of labor rather than exchange rate fluctuations. Jiang Yu pointed out that recently some officials in the U.S. criticized the RMB exchange rate, and suggested ways to push for its appreciation. "This is unwise and shortsighted," she said. The fluctuation of the RMB would not solve trade imbalance between any particular counties. She said that China is always concerned about increasing imports from the U.S., urging the U.S. to make concrete progress in relaxing export controls to China.

Bill combating China currency to advance - House leaders are moving forward with legislation to combat China's currency policies, adding to pressure from the Obama administration and giving lawmakers an election-year chance to vote on a sensitive trade matter. The House Ways and Means Committee plans to vote Friday on a bill that would expand the Commerce Department's power to impose duties on Chinese imports in response to that country's currency being undervalued on world markets. The effect of China's currency policy is to make its goods cheaper, but federal rules restrict Commerce's ability to respond as forcefully as in other instances in which a government underwrites exports. After months in which the administration encouraged China to allow the value of its currency to float more freely - and saw little progress - House leaders said they felt it was time to push ahead.

With warning, Obama presses China on currencyPresident Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China’s prime minister to the issue and sending the message, according to one of his top aides, that if “the Chinese don’t take actions, we have other means of protecting U.S. interests.”  But Prime Minister Wen Jiabao barely budged beyond his familiar talking points about gradual “reform” of China’s currency policy, leaving it unclear whether Mr. Obama’s message would change Beijing’s economic or political calculus.

Wen Says 20% Gain in Yuan Would Cause Social Upheaval (Bloomberg) -- Chinese Premier Wen Jiabao said a 20 percent rise in the yuan would cause severe job losses and trigger social instability, putting the nation on course for a clash with U.S. lawmakers demanding a stronger currency.  “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside” should China acquiesce to demands for a 20 percent to 40 percent gain, Wen said in New York yesterday. “China would suffer major social upheaval.”  The yuan has appreciated about 2 percent against the dollar since June 19, when the central bank said it would pursue a more flexible exchange rate after keeping the currency at about 6.83 versus the U.S. currency for almost two years. The yuan gained 0.1 percent to 6.7079 per dollar on Sept. 21, the strongest level since the central bank unified official and market exchange rates at the end of 1993.

The Yuan's Course, Updated and Extended - Since China's currency is in the news [NYT], [Reuters] [Economix/Leonhardt], I thought it useful to update and extend the data depictions from the post a week ago. The main points I hope to convey from these two graphs are:

  • The nominal and real exchange rates can diverge substantially in theory and in practice. Recently, the US-China real bilateral exchange rate has diverged from the nominal due to faster inflation in China.
  • The bilateral exchange rate can diverge from the trade weighted exchange rate. In open economy macroeconomics, we usually concern ourselves more with the effective (in this case trade-weighted) exchange rate.

Close Yes, Comfy No for Sino-U.S. Trade Ties _English_Caixin – Andy Xie - Globalization was a win-win for developed and developing countries for a long time. It doesn't feel that way anymore. Developed countries, after enjoying cheap goods and high incomes for years, are now suffering as jobs dry up. In their eyes, the future looks worse. Against this backdrop, the United States is putting more pressure on China to appreciate its currency. The pressure seems to be working – a bit. The yuan has been posting new highs against the dollar, although for the most part only to the second decimal. As a result, the U.S. side is still unhappy and Congress, reflecting its displeasure, soon might pass a major protectionist bill that disrupts bilateral trade. The currency market has not taken this spat seriously. For months, the yuan non-deliverable forwards market hardly budged, and no significant appreciation for the yuan has been predicted. Why has the market been so indifferent? Does it know something U.S. policymakers don't?

Obama Kisses Up to ASEAN - In case you missed it, President Obama met with ASEAN leaders in New York just yesterday. What are notable to me are that (1) in approaching ASEAN as a whole, the US is bashing Myanmar less and less on human rights grounds; (2) Obama didn't emphasize the South China Sea so much--though he maintained the hypocrisy of referring to "international law" it hasn't signed; and (3) he pledges to visit Indonesia again after failing to do so three times before. The read-out of his working lunch meeting with ASEAN bigwigs is posted on the White House website for what it's worth; what follow are the key bullet points...

Brazil Central Bank Buys $5.9 Billion in 12 Days to Help Stem Real's Gain-- Brazilian central bank President Henrique Meirelles stepped up dollar purchases to the highest in almost a year this month in a bid to temper gains in the real.  The central bank bought $5.9 billion in the first 12 businesses days of September, Altamir Lopes, head of the bank’s economic department, told reporters today. The purchases are the biggest for the period since October 2009, when policy makers bought $6.3 billion. Efforts to keep a lid on the currency may get a boost after the government on Sept. 17 authorized its 17.9 billion reais ($10.4 billion) sovereign wealth fund to buy an unlimited amount of dollars with reais to supplement the central bank’s purchases in the currency market. The fund hasn’t purchased dollars yet, Finance Minister Guido Mantega said today.

Japan’s Savings Crisis -  Japan was long famous for having the highest saving rate among the industrial countries. In the early 1980’s, Japanese households were saving about 15% of their after-tax incomes. But the 1990’s was a decade of slow growth, and households devoted a rising share of their incomes to maintaining their level of consumer spending. Although they had experienced large declines in share prices and house values, they had such large amounts of liquid savings in postal savings accounts and in banks that they did not feel the need to increase saving in order to rebuild assets. A variety of forces have contributed to a continuing decline in Japan’s household saving rate. The country’s demographic structure is changing, with an increasing number of retirees relative to the workers who are in their prime saving years. Surveys tell us that younger Japanese are more interested in current consumption and less concerned about the future than previous generations were. The household saving rate therefore continued to fall until it was below 5% at the end of the 1990’s and reached just above 2% in 2009. At the same time, the fiscal deficit is more than 7% of GDP.

Japan's Kan Says Intervention in Markets "Unavoidable" - Japanese Prime Minister Naoto Kan has said intervention in the foreign exchange markets would be "unavoidable" if there is drastic change in the currency. Japan last week carried out its first intervention in six years to stem economic damage from the surging yen that shot up to a 15-year high against the dollar. In an interview with the Financial Times published on Wednesday, Kan said Tokyo also plans to create a "total" package of measures that will expand domestic demand and help to weaken the currency. "I think it is necessary to combine economic policy and monetary policies that will be conducive to...(a yen exchange rate) slightly lower than the current level," Kan said.

The Wide, Wide World of Currency Intervention - Following my rapture on the revival of Japanese yen intervention after years and years of waiting (yes, I am a curious case), Reuters has a nifty new feature on what several other countries have done to, ah, "rationalize" the value of their currencies. It's in keeping with the Japanese national character IMHO: they are usually very mild-mannered, but when agitated, boy do they move. Many don't elicit the same sense of banzai amazement as Japanese intervention which is usually unbeatable in amount spent in a short space of time--effectiveness in limiting yen gains aside--make no mistake that several others are at it, too. What does it all mean? The last major bout of global currency intervention worldwide occurred was around 2006-07 when the dollar was really being socked in the foreign exchange market. At the moment, we seem to have a reprise as the United States has signalled no intention of raising interest rates or removing similarly accommodative, "quantitative easing" measures. Many have made this argument before, but don't these American policies represent as blatant currency intervention as the efforts of other countries? Speaking of which, verbal suggestions, suspected and actual intervention are rife:

On The Edge of History: Will Europe Join in Promoting the SDR as the Global Reserve Currency? - China and Russia and some of the other developing nations have been proposing a reformulated SDR, with less US dollar content, a broader representation of currencies, and the inclusion of gold and silver, as a suitable replacement for the US dollar as the global reserve currency. The US and UK are opposing the SDR as replacement to the US dollar as the new global reserve currency. They prefer to delay and postpone the discussions, and to maintain the status quo for as long as is possible to support their primacy in the financial markets. Control of the money supply is a huge hand on the levers of financial and political power. It will be most interesting to see where the European Union comes out on this issue, especially in light of the recent drubbing that their banks have taken via dodgy dollar assets and a vicious dollar short squeeze, alleviated by a rescue from the Federal Reserve. It could have gone otherwise, and that provides things to think about. No one wishes to be at the mercy of a small group of unelected financial engineers who are closely aligned with an equally small set of Anglo-American banks operating with a somewhat opaque discretion.

EU - China relations: EU Strategy Towards China - The EU Summit has come and gone, but was hijacked over the Roma dispute.  This meant that little time was spent on discussing strategies towards third countries, including China.  There was an inconclusive discussion at the recent informal foreign ministers’ meeting.We do know how the EU High Representative for Foreign & Security Policy/Commission Vice President (HR), Cathy Ashton, sees China, following her recent, very successful visit to Shanghai, Beijing and Guizhou, and her long discussions with State Councillor Dai Bingguo, and meetings with Premier Wen Jiabao and Foreign Minister Yang Jiechi.The HR is convinced that there are few more vital EU tasks than to decide the right strategy and set the right direction for the EU’s strategic partnership with China.

Europe Debt Crisis Abates as Traders See Yield Spreads Narrow (Bloomberg) -- Four months after a European Union- led bailout, Germany’s biggest bond dealers say the worst is over for the region’s most-indebted nations.   HSBC Holdings Plc, Europe’s largest bank by market value, Goldman Sachs Group Inc. and Societe Generale SA advise buying securities sold by Greece.  Bond dealers are confident that austerity measures will be enough to damp speculation the 16-nation currency union is in jeopardy of falling apart. Gross domestic product in the region will likely increase 1.7 percent this year instead of the 0.9 percent projected at the depth of the crisis in May, the European Commission said Sept. 13. Banks were given more time to raise capital levels to meet new regulations, reducing the likelihood they will need additional government aid.

ECB Steps Up Bond Purchases—The European Central Bank has increased its purchases of government bonds amid rising concerns in financial markets about the ability of Greece, Ireland and Portugal to repay their debts.""Although the ECB has spent more than €61 billion ($79.58 billion) since May on government bonds, borrowing costs haven't declined for struggling countries on Europe's fringe. Yield spreads between government debt in Greece, Ireland and Portugal and their safer German equivalents are hitting or approaching record highs, making it harder for the countries to finance mountingdebts.The ECB said it spent €323 million on government bonds last week, up from €237 million the previous week and its highest level since mid-August.

ECB bails out Ireland - ECB bails out Irish bonds, after a report warning about the downgrade of Irish covered bonds; FT Alphaville explains in detail that the problem is due to the liquidity of the commercial assets backing those bonds; the Greek troika agrees to postpone the stress test for Greek banks – in line with the European policy never to test a bank that stands a chance of failing a test; Jean Quatremer has an intriguing report about a telephone call with Pierre Lellouche, the French European minister, just ahead of Sarkozy’s fateful press conference; Wolfgang Munchau says the real problem with the state of the European Union is not that fact of its decline, but the manner; The French do not appreciate Nicolas Sarkozy’s populist outbursts; Angelo Baglioni says the problem with Basel III is not the effect on the economy, but the likelihood of another financial crisis; Simon Johnson and Peter Boone, meanwhile, come out in favour of what they call a Trichet bond. [more]

Ireland credit default insurance costs rise again - The cost of insuring Irish government debt against default through credit default swaps rose to a new record Wednesday morning, reversing relief seen the previous day following an auction of Irish government debt. The spread on five-year Irish sovereign CDS widened by 33 basis points to 467 basis points, according to data provider Markit. That means it would now cost $467,000 a year to insure $10 million of Irish debt against default for five years, up from $434,000 on Tuesday. Other peripheral euro-zone CDS spreads also widened, Markit said, with Portugal widening 20 basis points to 385 ahead of an auction of up to 1 billion euros of debt

Ireland’s bond auction succeeds, but rate relief is already petering out - Bond yields fall initially, but rise again subsequently , 10-year spreads are now back below 4%; Nout Wellink hints that the ECB might prolong its support for the bank system; also calls for restrictions on dividends by banks who fail to meet the Basel criteria during the transitional phase; a second strike against pension reform is due in France tomorrow; a frustrated Larry Summers quits the White House, and returns to Harvard; the head of Germany’s largest asset manager says China may be about to crash; Martin Wolf, meanwhile, agrees, but see the real problem not in asset price bubbles, but imbalances between investment and consumption. [more)

Republic of Ireland powerless stop 'fleeing' developers - The statement came at a heated Oireachtas committee meeting, where Mr Lenihan insisted he would be able to reveal the final cost of Anglo Irish Bank's rescue "by early October". Amid the mounting cost of bank bailouts, Labour finance spokeswoman Joan Burton expressed outrage at the way bankers and developers could start afresh in new climes such as the US and the Far East. "We don't have exit control in Ireland," an exasperated Mr Lenihan said. "If people want to move to another country they can. I am not accountable for their movements." The Irish minister stressed, however, that "every step possible under our law" was being taken to recover monies owed to Irish banks and bring rule-breakers to justice, regardless of where they were now residing.

Is Ireland the next Greece? - Spanish Prime Minister José Luis Rodríguez Zapatero declared to The Wall Street Journal this week that the economic crisis in Europe has ended. "I believe that the debt crisis affecting Spain, and the euro zone in general, has passed," Zapatero said. He probably hasn't been watching the ongoing trials and tribulations of Ireland. Once the zone's official poster child of reform, Ireland has found itself in the bright spotlight of investor concern in recent weeks. Bond markets have signaled that investors consider Irish sovereign bonds increasingly risky to hold. The spread between the yields on Irish bonds and benchmark German bonds has been widening, even reaching a euro-era high earlier this week (before tapering back slightly). Ireland has not yet been shut out from fresh borrowing – the government successfully sold $2 billion of bonds on Tuesday. But the government only raised such funds at a cost much higher than in previous auctions. That begs the crucial question: How vulnerable is Ireland to a sovereign debt crisis?

BBC News – Irish economy contracts by 1.2% - The Irish Republic's economy shrank in the second quarter from the previous three months, surprising analysts who had been expecting growth. Gross domestic product (GDP) fell 1.2%, the Central Statistics Office said. It also revised down its measure of growth in the first quarter to 2.2% from 2.7%. Gross national product (GNP), seen by some as a more accurate barometer of the economy, fell by 0.3%. The government has been seeking to reassure investors about the economy. There have been concerns in the markets about the health of the Irish economy and government finances because of continued problems in the banking sector

Irish Economy Declines 1.2% - NYTimes - Already reeling from a banking crisis that is threatening its financial credibility, Ireland suffered another setback on Thursday when fresh data showed that its ailing economy shrank 1.2 percent in the second quarter. The decline, after growth of 2.2 percent in the first quarter, surprised many analysts, who had expected the expansion to continue. It also raised the daunting prospect that the Irish economy, hamstrung by a real estate market that has slumped 50 percent and banks that are barely lending, may not soon recover.  The bad economic news, combined with continued uncertainty over how much more the country must invest in its depleted banking companies, led to a further increase in Irish 10-year bond yields, to a record of 6.6 percent.

Feeling green - BUTTONWOOD writes this morning: Pity Ireland. The latest figures show its GDP fell 1.2% (quarter-on-quarter) in Q2 and the numbers for Q1 were revised lower. That definitely looks like a double dip. Meanwhile, despite a couple of successful bond issues earlier in the week, the country is still paying over 6% on its ten-year debt, a good four points more than Germany. If you recall the idea of a debt trap, in which problems mount if your cost of financing is greater than GDP growth, then Ireland is in it. But Ireland was a good boy in markets' terms, taking swift action to cut public spending in the aftermath of its banking crisis. It has gained litrtle reward for this in economics or finance. That is hardly going to encourage other nations contemplating the austerity route. Ireland now has the world's fifth-highest default probability, after Venezuela, Greece, Argentina, and Pakistan. That's not the company Ireland would prefer. Tyler Cowen quips that Ireland hasn't actually tried austerity yet, citing this:

Ireland’s austerity measures show us how not to do it - Savage budget cuts have prevented the Irish economy, once the poster child for deficit hawks, from returning to growth. Ireland is the poster child for deficit hawks. When the rest of the world was dusting down their copies of Keynes's General Theory to justify fiscal stimulus packages during the great recession, the Irish embraced austerity. Big time.The government in Dublin announced not one but three slash-and-burn budgets that took the axe to the public sector and welfare entitlements. Unemployment has tripled; emigration of talent has resumed. But it was deemed to be a price worth paying. The aim was to reassure the financial markets that the government was serious about cleaning up the mess left behind in the banking system from the colossal boom-bust in the property market. And it won plaudits for doing so. Take this hymn of praise from Jean-Claude Trichet, the president of the European Central Bank, as the problems piled up on Greece and the other weak members of the eurozone earlier this year. "Greece has a role model and that role model is Ireland," Trichet said.

Stat of the Day: Ireland now fifth for highest government default probabilities in the world - Here is a chart showing you that, indeed, Ireland is now near the centre of the sovereign debt crisis in Europe with a debt default probability of 35%.Greece still leads the way in the Eurozone with a 51% default probability, second on the list just behind Venezuela. The biggest cause for concern in Ireland today was the horrible GDP report in which gross domestic product (GDP) fell 1.2%. The statisticians also revised down Q1 growth from 2.7% to 2.2%.

Government perilously close to calling in IMF, report warns - The cost of borrowing for the country moved higher again on international bond markets, after falling back following last week's government decision to split Anglo Irish Bank. And a report from Barclays, one of Europe's largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.  But a spokesman for Finance Minister Brian Lenihan said last night: "The Government's strategy for dealing with the economic and financial challenges has been commended by the EU Commission, the European Central Bank and many other international experts.  "This strategy is at an advanced stage and is being implemented in an extremely open and transparent manner." Barclays said: "In the coming months the Government may need to seek outside help."

IMF and EU postpone stress tests in Greece to allow more time to prepare-- A stress test on the health of the banking system in debt-stricken Greece has been postponed to allow the authorities more time to prepare, the Financial Times reported on Monday. The newspaper said the International Monetary Fund, European Commission and European Central Bank agreed with Greece's central bank to delay testing the solvency of the bank sector by one month to the end of October.  In May, the three put together a 110-billion-euro (US$140-billion) rescue package for Athens to save it from default, with the government in turn adopting draconian austerity measures to repair its strained public finances.  The Financial Times said the delay in the test means that the banks' nine-month results can be assessed, along with a cash call next month of 1.7 billion euros by National Bank of Greece, the country's largest lender.

The IMF Itself Has Become The Problem As Europe's Woes Return - Portuguese banks cannot survive on local savings. They rely on foreign funding to cover 40pc of assets (IMF data). Hence an urgent meeting between the central bank governor and President Cavaco Silva for an hour-and-a-half late on Friday. The governor said global funding for Portugal was drying up. Markets would no longer tolerate Portugal's leisurely pace of fiscal tightening.  Hours later, Portugal's leaders agreed in principle to bring forward the 2011 budget. So much for hopes that they could avoid cuts and let growth trim the deficit from 9.3pc of GDP in 2009 to 7.3pc. The first casualty is likely to be the high-speed train to Madrid.  Yet what exactly will austerity achieve? Combined private and public debt is 325pc of GDP (viz 247pc for Greece), so the country already risks a debt-compound spiral.

U.S. presses for fewer Western Europeans on the IMF board - The Obama administration has launched a battle to cut the number of Western Europeans on the board of the International Monetary Fund and make room for more representatives from developing countries. Taking on a cluster of small nations such as Belgium and the Netherlands, the administration has threatened to to let the board dissolve unless the Europeans give up two or three of the nine seats they hold. The U.S. appointee to the IMF board, Meg Lundsager, in August blocked a vote needed for new board elections, part of an effort to redistribute power within the IMF and, the administration says, sustain the agency's credibility in newly influential parts of the world. By most any reckoning, Western Europe's role in the global economy is not what it used to be. But the region accounts for more than a third of the board's 24 seats, and several smaller European countries argue that their presence on the board remains vital.

A more perfect union - Americans are writing Europe off–and apparently for good reason. The last several months have seen the European Union stagger from one crisis to another. After barely passing the Lisbon Treaty–which amended the EU’s fundamental texts in order to streamline its institutional structures–the EU soon found itself in the throes of its current crisis over the economic governance of the euro, while simultaneously confronting the failure of its ten-year effort to modernize the European economy.  American pundits seem almost to take pleasure in Europe’s problems. Richard Haass, the president of the Council on Foreign Relations, claims that the European project is “foundering” and that Europe’s days as a world power are over. Officials in the Obama Administration are less consumed by schadenfreude, but are nonetheless irritated with Europe’s navel gazing.  While U.S. officials publicly claim that the relationship with Europe is “the cornerstone for U.S. engagement with the world,” they privately do everything that they can to avoid entanglement with Europe’s byzantine policy apparatus.

Portuguese Budget Deficit Widens 5 Percent as Borrowing Costs Hit Record - Portugal’s budget gap widened in the first eight months of the year, indicating the government may struggle to rein in the euro-region’s fourth-largest deficit as its borrowing costs surged to a record. The central government’s shortfall rose to 9.19 billion euros ($12 billion) from 8.74 billion euros a year earlier, the Finance Ministry said late yesterday. Tax revenue rose 3.3 percent, more than budgeted, and spending increased 2.7 percent, in line with budget estimates, the ministry said.  Portugal’s borrowing costs rose to a euro-era record yesterday, on concerns over the government’s ability to rein in the region’s fourth-largest budget deficit while avoiding a return to recession. While the extra yield investors demand to hold Portuguese debt rather than German equivalents eased to 388 basis points today, that’s still close to the level Greek bonds were trading at in April when the European Union offered the country emergency loans to avoid default."

Ireland, Portugal default insurance costs jump - The cost of insuring peripheral euro-zone government debt against default continued to rise Thursday, with the spread on Ireland credit default swaps, or CDS, widening further into record territory. The spread on five-year Irish sovereign CDS widened to 490.8 basis points from 464.2 on Wednesday, according to data provider CMA. That means it would cost $490,800 a year to insure $10 million of Irish debt against default for five years, up from $464,200. The spread on Portuguese CDS widened to 419 from 391.2, CMA said, while Italy widened to 204.8 from 195.3. The Spain five-year CDS spread was at 242.5 basis points versus 234.3 on Wednesday, while Greece widened to 828.6 from 813.Irish Finance Minister Brian Lenihan yesterday admitted he was powerless to stop indebted developers and bankers from upping sticks and starting new lives outside the Republic.

About Decline - What lies behind all the anger that is coming out of the European Council? The Sarkozy-Barroso show last Thursday was partly a deflection from a chronic inability to solve problems at the interface between the EU and its member states.  You might recall that this was the summit supposed to make significant progress on economic policy co-ordination and better surveillance of fiscal policy. The spat certainly deflected attention from the abysmal failure of the taskforce headed by Herman van Rompuy, the president of the European Council, to come up with an intelligent and coherent governance framework for the eurozone. Unable to reach agreement, leaders produced a very European diplomatic éclat.  But what I find most disturbing is the return of the policy of blame. Wherever you look in the EU, politicians have become more assertive in blaming minorities and immigrants, other governments and, of course, “Brussels”.

Olli gets tough - Rehn produces his proposals for a Stability Pact, Mark III; prime element is a refundable levy; proposal also includes a penalty-based approach to deal with imbalances; Irish and Portuguese bonds spreads back above 4%, as Irish GDP continued to contract in Q2; eurozone’s PMI falls unexpectedly sharp, signalling an end to the mini-boom; 3m take to the streets in France in a day of strikes over pension reform; France plans to reduce deficit by €25bn; the Spanish government is to present its budget today; the decline in the eurozone’s unsecured interbank-market continues with no signs of reversal; Gunter Bannas, meanwhile, argues that Angela Merkel is fighting for her political survival.

European Bond Spreads - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Sept 22nd): From the Atlanta Fed:  European bond spreads have for the most part risen and remain elevated since the August FOMC meeting.  As of today, the Ireland-to-German spread has increased to 418 bps, and the Portugal-to-German spread has increased to 402 bps - both new records. Note: The Atlanta Fed data is a couple days old. Nemo has links to the current data on the sidebar of his site.

One-Size-Fits-All Monetary Policy Does Not Work - Many times I have discussed here how the Eurozone is far from an optimal currency area--its member countries have different business cycles and insufficient economic shock absorbers in place--and the problems that this reality creates for the ECB in conducting monetary policy.  One of the key problems is that the ECB is applying a-one-size-fits-all monetary policy to vastly different economies.  For example, consider the case of Ireland and Germany.  When the Euro was adopted in 1999 Ireland was growing close to 10% while Germany was growing around 3%.  Should the ECB be responding to Ireland, Germany, or the average in setting its target interest  rates?  As the figure below shows, up through the end of the housing boom period Ireland was consistently growing faster than Germany. (Click on figure to enlarge.)

Survey Finds €1,900bn Hole In EU Pensions - Workers across the European Union need to save €1,900bn ($2,490bn) more each year if they hope to retire with pensions that will maintain their standard of living, according to new insurance industry research. The so-called “pensions gap” is worst in Germany and the UK, where the total additional savings required each year are €468.8bn and €379bn respectively. When calculated per head, the situation is worse for UK citizens, who need to save an average €12,300 a year extra, while Germans should put aside an extra €11,600.

Did France cause the Great Depression? -A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened US monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7% in 1926 to 27% in 1932. It suggests that France’s policies directly account for about half of the 30% deflation experienced in 1930 and 1931.

UK Proposes All Paychecks Go to the State First - The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer. The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid. Currently employers withhold tax and pay the government, providing information at the end of the year, a system know as Pay as You Earn (PAYE). There is no option for those employees to refuse withholding and individually file a tax return at the end of the year.If the real-time information plan works, it further proposes that employers hand over employee salaries to the government first.

World Bank's IFC Leads Push for $13 Billion Bad Debt Market: Russia Credit (Bloomberg) -- For the first time, the World Bank plans to jump-start lending in Russia with a fund that will buy bad loans from banks, freeing up cash as the demand for credit surges in the economy of the biggest energy exporter.  The bank’s International Finance Corp. is in talks with OAO Sberbank and Russia’s Deposit Insurance Agency, which was set up in 2008 to buy troubled lenders, said Timothy Krause, the IFC’s head of financial markets in central and Eastern Europe in Moscow. The 2.49 percent Ruble Overnight Index Average that Russian banks charge one another is five times more than the 0.43 percent Euro Overnight Index Average.  Non-performing corporate loans in Russia are set to rise to 10.5 percent this year from 9.9 percent at a time when regulators worldwide are increasing capital requirements,, according to the Moscow-based debt ratings company, Rusrating. Demand for dollar credit from Russian companies is the highest since before Lehman Brothers Holdings Inc.’s collapse froze markets two years ago, according to Renaissance Capital.

Where is the World Economy Headed? - Toward what goal is the world economy steering? That obviously depends on who is doing the steering. It almost always has been the most powerful nations that organize the world in ways that transfer income and property to themselves. From the Roman Empire through modern Europe such transfers took mainly the form of military seizure and tribute. The Norman conquerors endowed themselves as a landed aristocracy extracting rent, as did the Nordic conquerors of France and other countries. Europe later took resources by colonial conquest, increasingly via local client oligarchies. Today, financial maneuvering and debt leverage play the role that military conquest did in times past. Its aim is still to control land, basic infrastructure and the economic surplus – and also to gain control of national savings, commercial banking and central bank policy. This financial conquest is achieved peacefully and even voluntarily rather than militarily.

Finding the tipping point: When sovereign debt turns bad - Public debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP.

The Global Systemic Crisis – Spring 2011 - As anticipated by LEAP/E2020 last February in the GEAB No. 42, the second half of 2010 is really characterized by a sudden worsening of the crisis marked by the end of the illusion of recovery maintained by Western leaders (1) and the thousands of billions swallowed up by the banks and the economic « stimulation » plans of no lasting effect. The coming months will reveal a simple, yet especially painful reality: the Western economy, and in particular that of the United States (2), never really came out of recession (3). The startling statistics recorded since summer 2009 have only been the short-lived consequences of a massive injection of liquidity into a system which had essentially become insolvent just like the US consumer (4). At the heart of the global systemic crisis since its inception, the United States is, in the coming months, going to demonstrate that it is, once again, in the process of leading the economy and global finances into the « heart of darkness » (5) because it can’t get out of this « Very Great US Depression (6) ». Thus, coming out of the political upheavals of the US elections next November, with growth once again negative, the world will have to face the « Very Serious Breakdown » of the global economic and financial system founded over 60 years ago on the absolute necessity of the US economy never being in a lasting recession. Now the first half of 2011 will dictate that the US economy take an unprecedented dose of austerity plunging the planet into new financial, monetary, economic and social chaos (7).

Testing Economic Theory in Simulated Virtual Economies - David K. Levine has written a white paper for the NSF proposing that they invest in large-scale simulated economies as virtual laboratories: An alternative method of validating theories is through the use of entirely artificial economies. To give an example, imagine a virtual world – something like Second Life, say – populated by virtual robots designed to mimic human behavior. A good theory ought to be able to predict outcomes in such a virtual world. Moreover, such an environment would offer enormous advantages: complete control – for example, over risk aversion and social preferences; independence from well-meant but irrelevant human subjects “protections”; and great speed in creating economies and validating theories. If we were to look at the physical sciences, we would see the large computer models used in testing nuclear weapons as a possible analogy. In the economic setting the great advantage of such artificial economies is the ability to deal with heterogeneity, with small frictions, and with expectations that are backward looking rather than determined in equilibrium. These are difficult or impractical to combine in existing calibrations or Monte Carlo simulations.

A Conversation with George Soros -Soros declares that there was twenty-five to thirty (25-30) years of a “Super Bubble,” which has now burst.  It seems from the discussion that Soros believes the SuperBubble was worldwide.  Recovery is being hindered by some policies—Germany’s talk about austerity was especially mentioned—by Soros sees strong hope in the Trade Shift that has accompanied the crisis. He noted that the “global economy is a lot better than the US economy,” and that he expects to see it continue growing even if the U.S. (or Europe, due to the German leadership, or even both) fall into a :double-dip.” (In this he is arguably more of an optimist than many.)

Europe's hangover could become a blackout (Roubini) After a summer of Europeans forgetting their woes and tanning themselves at the beach, the time for a reality check has come. For the fundamental problems of the eurozone remain unresolved. First, a trillion US dollar bailout package in May prevented an immediate default by Greece and a break-up of the eurozone. However, now sovereign spreads in the peripheral eurozone countries have returned to the levels seen at the peak of the crisis in May.
Second, a fudged set of financial “stress tests” sought to persuade markets that European banks’ needed only 3.5 billion euros (US$4.56 billion) in fresh capital. However, now Anglo-Irish alone may have a capital hole as high as 70 billion euros, raising serious concerns about the true health of other Irish, Spanish, Greek and German banks.
Finally, a temporary acceleration of growth in the eurozone in the second quarter boosted financial markets and the euro, but it is now clear that the improvement was transitory. All of the eurozone’s peripheral countries’ GDP is still either contracting (Spain, Ireland and Greece) or barely growing (Italy and Portugal).