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

Saturday, May 29, 2010

week ending May 29

A Look Inside the Fed’s Balance Sheet - Assets on the Fed’s balance sheet contracted a bit in the latest week, dropping to $2.316 trillion from $2.333 trillion. Most of the decline came from a $7.96 billion reduction in liquidity swaps for foreign central banks. Three weeks ago the Fed re-established the swap lines to ensure access to dollars amid the troubles in Europe debt markets. However, reduced demand indicates that conditions are stable enough that overseas banks aren’t willing to tap into the swaps, which carry a penalty rate over other dollar-funding facilities. Separately, the value of the Fed’s mortgage-backed securities also declined this week. The central bank has stopped new purchases of the securities, but the portfolio valued at more than $1 trillion still posts gains and losses. Direct-bank lending continued its decline, getting closer to the precrisis levels of 2007. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. See a full-size version. Click on chart in large version to sort by asset class.

US Fed Total Discount Window Borrowings Wed $74.94 Billion… The Federal Reserve's balance sheet shrunk in the latest week as foreign central banks made little use of new currency swap lines with the U.S. central bank.The Fed's asset holdings in the week ended May 26 fell to $2.338 trillion from $2.354 trillion a week earlier, the Fed said in a report released Thursday.The Fed lent out a total of $1.24 billion to foreign central banks in the week ended Wednesday. Separate data from the New York Fed show the Bank of Japan joined the European Central Bank in using the facility.Meanwhile, the Fed report said total discount window borrowing fell to $74.94 billion on Wednesday from $75.86 billion a week earlier. Borrowing by commercial banks through the Fed's discount window dropped to $4.21 billion on Wednesday from $4.63 billion a week earlier.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--May 27, 2010

Fed Says Asset Sales Will Come After Rates Are Raised (Bloomberg) -- The Federal Reserve doesn’t intend to sell any of its securities, including more than $1.1 trillion in mortgage-backed securities, until after it begins raising interest rates, the central bank said in a report to Congress.“The Federal Reserve currently does not anticipate that it will sell any of its securities holding in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery,” the Fed in its annual report, which was posted on its Web site today.Fed officials led by Chairman Ben S. Bernanke are debating when to reduce the central bank’s balance sheet and withdraw unprecedented monetary stimulus as the economy recovers. The annual report’s reference to asset sales was in line with minutes of the April Fed meeting and identical to the Fed’s February policy report to Congress.

Dissent within the FOMC - Is this the beginning of a Federal Reserve versus regional bank split? Three regional bank presidents indicated they thought the discount rate should be increased by 25 bp to 1 per cent, according to the minutes of the discount rate meetings, released today. None of the Fed governors voted for the action and the nine regional bank presidents also recommended against increasing the rate.An increase to 100bp would leave it at least 75bp above the current federal funds rate, and not far off from its pre-crisis levels of 100bp above the Fed funds rate. The Fed moved the discount rate off of its crisis lows last February.The Fed has emphasised that they don’t view discount rate increases as monetary tightening, and the increases don’t say anything about the timing of the eventual exit from ultra loose monetary policy. Instead, raising the discount rate sets the stage so that at the point when the Fed wants to tighten monetary policy, it can.

The Case for a Fed Rate Hike -Everywhere there are arguments that we are in a "V"-shaped recovery. And there are signs that in fact that is the case. Today we will look at some of those, and then take up the topic of when the Fed will raise rates. We open the case and look at the evidence. Is there enough to come to a real conviction? I think there is. I don’t have access to a graph of M3, though it is still produced by several groups (the Fed stopped several years ago), but that chart would show that even M3 has gone negative. Now, notice that with both graphs you see a large increase beginning in the middle of 2008 as the Fed pumped the money supply in order to inject liquidity into the system. This was basically the $1.25 trillion purchase of mortgages, but toward the end even that was not boosting the money supply as much as it did in the beginning. Why? Partially, because of the following graph.This shows total commercial lending at US banks. It is down almost 25% in less than a year and a half. Notice that in the last recession commercial lending dropped by “only” 18% in 3.5 years.

Fed’s Bullard: Europe Woes Unlikely to Trigger Another Recession - European financial troubles are unlikely to send the world back into recession, and the U.S. may actually benefit from unsettled markets over the near term as investors look for a safe place to preserve their wealth, a U.S. central bank official said Tuesday.Because the trouble in Europe is rooted in government debt problems, there is good reason to think events “will probably fall short of becoming a worldwide recessionary shock,” Federal Reserve Bank of St. Louis President James Bullard said. The official noted the world has seen these types of events before, and “there is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy.”“It is always possible that “this time will be different” and maybe it will be, but that would be unusual given the historical evidence,” the central banker said.

Fed to Test Tool It May Use Later to Tighten Credit - The U.S. Federal Reserve said Friday it would soon test a tool it could use later on to tighten credit by soaking up cash from the financial system.Signaling that Europe’s debt crisis isn’t derailing the U.S. central bank’s plans to unwind the huge stimulus pumped in during the financial crisis, the Fed said it has scheduled three small sales of term deposits over the next two months.In term deposits, banks set up interest-bearing deposits at the central bank, similar to certificates of deposits that banks offer to retail customers. The facility gives banks an extra incentive to keep their money at the Fed instead of lending it out to companies and households, making credit harder to get.The Fed isn’t expected to make large use of the tool soon. Though the U.S. economy is picking up, credit remains tight and problems in Europe may hurt lending further. But the U.S. central bank wants to be ready in case the economy’s gains speed up and it needs to prevent an outbreak of inflation.The auctions planned through the Fed’s Term Deposit Facility “are a matter of prudent planning and have no implications for the near-term conduct of monetary policy,” the Fed said in a statement.

Fed’s Next Move Could Be Reduced Rate on Dollar-Euro Swaps - The Federal Reserve has a lever it can pull to help European officials combat a worsening financial crisis: Reducing the interest rate it charges on U.S. dollar loans it makes through the European Central Bank to dollar-starved commercial banks in Europe. The move, though not a cure-all, could relieve some of the strains in European money markets. Federal Reserve Bank of St. Louis President James Bullard said the swap lines are "certainly not tapped out," and could provide much more funding if necessary.The loans currently are priced one percentage point above a market rate called Overnight Indexed Swaps (OIS), which tracks the expected path of the Fed's benchmark federal funds rate. The loans are set above OIS to discourage foreign banks from using the government program too aggressively. But the Fed could reduce that penalty to encourage more borrowing and ease some of the financial strain on foreign banks in need of dollars. Whether it chooses to take this step remains to be seen, and will depend in part on how markets behave in the days ahead.

The Fed’s Swap Loans and Libor – OIS Spread - For about two years—from August 2007 to September 2009—fluctuations in the spread between dollar Libor and the overnight index swap (OIS) served as a valuable quantitative indicator of financial stress in the interbank loan market. It also served as a measure of the impact of various government interventions. As shown in the chart, the dollar Libor-OIS spread rose further during the panic in September-October 2008. It then returned to near pre-crisis levels in September 2009 and stayed there until the new crisis in Europe erupted when it started to increase again, attracting the attention of financial analysts and the financial press. Note, however, that the recent increase—visible in the right part of the chart—is very small compared with the jumps in 2007 and 2008. Nevertheless, as part of the European rescue package, the Fed agreed to provide dollar swap loans to the ECB and other central banks so that they could provide dollar loans in the interbank market. Have these swap loans affected the spreads?

Fed’s monetary policy report highlights -The Federal Reserve released its annual monetary policy report to Congress today. It’s good reminder of the year-that-was and provides some modest new insights into the Fed’s plan for the coming years. Here are the highlights: 1. The wealth catch. The Fed reiterated in its annual report that “households’ desire to rebuild wealth” will probably be one of the headwinds to the recovery. And wealth rebuilding - at least in the form of a higher savings rate, has yet to start in earnest. 3. It ain’t over til it’s over. The bulls of the world are taking every fresh housing market indicator to say that the housing collapse is at an end. The bears argue that the high level of foreclosures and the level of housing price increases compare to declines suggests prices have farther to fall. No matter. Even if the bulls are right, municipalities have yet to feel the property value pain, the Fed’s report said. 5. Buyer beware. The Fed knows what happened, but it’s making no claims to know with great confidence where the economy is heading.

The $21bn bail-out item - That’s the amount the Congressional Budget Office estimates the Federal Reserve’s credit programmes cost US taxpayers.Of course, that’s not on a cash basis. The CBO has previously estimated that the Fed will be paying the Treasury around $70bn a year in 2010 and 2011 (compared to payments of between $18bn to $34bn from 2000 to 2008) because of the expected higher yields of the riskier-than-normal assets the US central bank bought to stabilise the economy during the crisis.But, of course, there is risk. They might not pay out. And, in many cases, the Fed paid more for assets than they were worth, discounting for the risk associated with them. And now the CBO has estimated the amount the Fed overpaid - $21bn. Here’s there breakdown.

Fed May Send Record $70 Billion to Treasury, CBO Says (Bloomberg) -- The Federal Reserve will probably transfer record earnings exceeding $70 billion to the U.S. Treasury Department this year on income from assets including mortgage-backed securities, according to the Congressional Budget Office. “The Federal Reserve’s actions to stabilize the financial markets are likely to significantly increase the amount of its remittances over the next few years,” the CBO said in a report released today. It was prepared at the request of Senator Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee. The Fed returned $47.4 billion of its income last year, primarily from interest earnings on its assets, according to the Fed’s annual consolidated financial statements. The central bank earns interest income from its holdings of Treasury securities, loans to banks and its holdings of housing debt, the Fed said. The amount returned to the Treasury in 2009 was $15.7 billion higher than in 2008.

The Budgetary Impact and Subsidy Costs of the Federal Reserve’s Actions During the Financial Crisis - CBO Director's Blog - Over the past several years, the nation has experienced its most severe financial crisis since the Great Depression of the 1930s. To stabilize financial markets and institutions, the Federal Reserve System used its traditional policy tools to reduce short-term interest rates and increase the availability of funds to banks, and created a variety of nontraditional credit programs to help restore liquidity and confidence to the financial sector. In doing so, it more than doubled the size of its asset portfolio to over $2 trillion and assumed more risk of losses than it normally takes on. In a study prepared at the request of the Ranking Member of the Senate Budget Committee, CBO describes the various actions by the Federal Reserve and how those actions are likely to affect the federal budget in coming years. The report also presents estimates of the risk-adjusted (or fair-value) subsidies that the Federal Reserve provided to financial institutions through its emergency programs. Unlike the cash treatment of the Federal Reserve in the budget, fair-value subsidies include the cost of the risk that the central bank has assumed. Thus, those subsidies are a more comprehensive measure of the cost of the central bank’s actions

Costs of the Federal Reserve's Actions During the Financial Crisis - CBO (pdf)

Monetary policy: Real policy problems | The Economist - SCOTT SUMNER quotes a Nick Rowe post on the status of orthodox economics: For 70 years we have taught, and believed, that we would never again need to suffer a persistent shortage of demand. We promised ourselves the 1930’s were behind us. We knew how to increase demand, and would do it if we needed to.The orthodox have lost faith in that promise; only the heterodox still believe it.And Mr Sumner says:I have certainly lost faith in the promise that we “would do it if we needed to.”  But I still believe it can and should have been done.I basically agree with Mr Sumner in that policymakers had, and continue to have, the ability to reduce the seriousness of the crisis. Central bankers, in particular, seem to have learned only half the lesson of the Depression, and were willing to act boldly enough to halt growth in unemployment, but not enough to try and reverse it.

"NY Fed President: 'The Recovery Is Crumbling,'" From NY Fed President William Dudley's commencement speech at New College of Florida:[T]he recovery is not likely to be as robust as we would like for several reasons.First, households are still in the process of deleveraging. The housing boom created paper wealth that households borrowed against. This pushed the consumption share of nominal gross domestic product to a record high of about 70 percent. When the boom turned into a bust, those paper gains evaporated.  Second, the banking system is still under significant stress. This is particularly the case for small- and medium-sized banks that have significant exposure to commercial real estate loans. This stress means that banks have been slow to ease credit standards as the economy has moved from recession to recovery.Third, some of the sources that have supported the nascent recovery are temporary. The big swing from inventory liquidation during the recession back to accumulation will soon end as inventory levels come back into better balance with sales.

More Fed Swap Lines for Europe and the End of Globalization; Comment: Clifford Rossi in Support of the Office of Financial Research- Before we delve into the sublime world of enhanced financial data via the OFR, let us explain our views more generally on reform and the immediate outlook for the US economy. The legislative process in Washington with respect to financial reform is thankfully at an end and the result is even less impressive than the breathless news reports indicate. Most of the supposed reform is actually window dressing, especially those portions of the legislation that afford regulators "discretion" in terms of changes in the behavior of the largest banks and markets. What is the point of greater transparency from "private" banks, companies and markets envisioned by financial reform legislation if the condition of private obligors is being undermined every day by the irresponsible fiscal and monetary policies coming from Washington? What difference does greater financial transparency make when the underlying political economy is built upon false assumptions and outright fallacies about finance and economics that stretch back decades to the WW II and the Bretton Woods agreement?

Senate bill brings new powers, new pressures for Fed - The exact impact of the far-reaching Senate legislation on the Fed is hard to predict, and it will change further as the Senate bill is reconciled with the House version passed last year. But the final bill will clearly reinforce the primacy of the Fed in preventing financial firms from taking risks that endanger the U.S. economy as a whole. Under both bills, Fed leaders would identify firms whose size, complexity or interconnectedness makes them in need of extra oversight and, if a newly established council of financial regulators agreed, the Fed would begin supervising those companies. When a large, complex financial firm is on the verge of failure, the central bank would play a role in shutting it down, outside the bankruptcy process.

Bernanke Says Central Banks Must Be Free of Pressure (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said central banks must be free from political pressure as they bolster regulation and try to prevent future financial crises. “In undertaking financial reforms, it is important that we maintain and protect the aspects of central banking that proved to be strengths during the crisis and that will remain essential to the future stability and prosperity of the global economy,” Bernanke said today in a speech at the Bank of Japan in Tokyo. Bernanke and other central bank chiefs have faced mounting political threats to policy independence while combating the worst financial crisis since the Great Depression.

Bernanke Continues to Fight Against Greater Political Scrutiny - WSJ - With Congress getting close to finalizing an overhaul of the nation's financial-regulatory system, Federal Reserve Chairman Ben Bernanke weighed in against provisions in the proposed legislation that would subject the central bank to more political scrutiny. In a speech at the Bank of Japan on Wednesday, the Fed chief argued before an international audience that central banks independent from politics were better at managing the economy. He also detailed the steps the Fed had taken to become more transparent and accountable to the public, two conditions he said were needed in return for greater independence.

Place Political Limits on Overly Compliant Central Banks - In theory I agree that Central Banks should be free from political influence.  In practice, I don’t.  Why?  Central Banks regularly cave into political influence.  They are quick to loosen, and slow to tighten.  They are happy to let asset bubbles develop, because that is not what they are employed to handle.The truth is, the arguments of Ben Bernanke are a joke (here too).  When Central Banks felt no pressure, they happily went along with what the politicians wanted.  No one wanted a strict central bank.  Thus for all of the Greenspan/Bernanke era, asking to be free from political control is just a show.  They want to agree with the politicians, who want easy credit.  They don’t want rules that would lead to a better economy in the long run, where their political friends get harmed.Here’s a simple rule, that if put into place, would reduce volatility considerably: if the 3-month T-bill yield is more than 2% lower than the 10-year T-note yield, tighten.  If the 3-month T-bill yield is more than 1% higher than the 10-year T-note yield, loosen.  When in doubt, set Fed funds rate such that the gap between the 10-year and 3-month T-bill to 0.5%.  It’s that simple.  We don’t need grotesque yield curve shapes to guide the economy; we do need to limit  the amount of excess liquidity in loosening, lest we get asset bubbles.

Central Bankers Still Seeing Tame Inflation Data - Strains in European financial markets have made it more likely that the Federal Reserve will refrain from raising interest rates until as late as next year. Good thing, then, that inflation pressures remain so modest, sparing policy makers the ugly choice between deciding whether to support growth or combat rising prices. The lack of inflation should also help counter fears in some quarters that the Fed’s massive balance sheet is set to be the engine of an unwanted inflation surge.For some time now, economic data has shown nothing but decidedly low inflation. On Friday, the government reported in its release on April personal spending and income that the core personal consumption expenditures price index, which is stripped of food and energy costs, rose by 0.1% in April and by 1.2% from a year ago.This gauge is the central bank’s preferred inflation barometer, and it continues to range under what officials view as price stability.

FT Alphaville – That receding, deflationary, resurfacing … M3 money supply - When the Federal Reserve decided to get rid of its M3 measure of monetary supply in 2006, it sparked a wave of ‘what are they trying to hide?’ conspiracy theories — most of those centred around inflation.So it’s perhaps with some surprise, that this Bloomberg story has surfaced on Monday:A measure of the U.S. money supply, created but abandoned by the Federal Reserve, has turned negative in the past year and signals disinflation or outright deflation, according to economists who track the figure.The CHART OF THE DAY shows M3 has shrunk 5.4 percent in the past year, an indication the economy may face deflationary pressure as fewer dollars chase the same amount of goods, according to economists Paul Ashworth and Paul Dales at Capital Economics Ltd. in Toronto. They began compiling a measure of M3 after the Fed discontinued it in 2006. And here’s the chart:

Have You Seen M3 Lately? -- Deflation-minded individuals are no doubt cheering the recent M3 data featured today in a Bloomberg “Chart of the Day” along with other measures of the money supply. As for M3, it’s not all good. The broadest measure of the money supply (abandoned by the Federal Reserve back in 2006 but reconstructed elsewhere, for example by Capital Economics above) is now down 5.4 percent from a year ago and the fear of fewer dollars chasing the same amount of goods has more than a few economists thinking that we’ll be seeing lots of minus signs in front of the inflation numbers for some time to come.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus - The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened. The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression"

M3 Hysteria and a Look M2, MZM, GDP and PPI  I would very much like to have M3 back, but in particular I would like the Fed to be releasing a more accurate and contemporary measure of Eurodollars, the dollar overhang overseas, particularly in light of the huge swings in the DX index, and its almost undeniable relationship to the recent dollar short squeezes on the European banks. The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks...
But alas, we do not have this, so we can only estimate M3, particularly the eurodollar component. But the good news is that we still have both M2 and MZM. Here are the most recent figures for MZM and M2 from the St. Louis Fed, expressed as a percent of change YoY, not adjusted for seasonality. For good measure I have added GDP and PPI Finished Consumer Goods in the mix.MZM is the broadest measure of liquidity, and is very much a creature of the Adjusted Monetary Base. As one can see from the chart, the Fed, using their various policy tools, jams the short term money supply higher in response to a lagging economy, and the broader measures like M2 tend to follow with a lag.

Will the Fed Bring Back M3? - Is the M3 money supply making a comeback? It seems to be gaining attention as Bloomberg, the FT Alphaville, and now Ambrose Evans-Pritchard are discussing the deflationary implications of the dramatic slide in the M3 money supply over the past year. I am not as concerned about deflation as they are, but am sympathetic to their view that M3 is currently a better measure of the U.S. money supply than M1 or M2.* I believe this argument was first made by Gary Gorton in his research on the financial crisis. He makes the case for M3 by noting that an accurate measure of the money supply today should include repurchase agreements (which are not in M1 and M2) because (1) they too are bank liabilities used as money and (2) they have grown increasingly important:

Will The USD Be Replaced By The SDR Or The CNY As The Next Reserve Currency? - Jim O'Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF's Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O'Neill as usual focuses on the angle of the "next paradigm" BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct.

Barry Eichengreen Sees a Breakup of the Dollar Zone - Over at The Economist there is an interesting discussion surrounding the future of the Eurozone. Today Barry Eichengreen weighed in and made the case that the dollar zone in the United States will break up in the next 10 years due to state fiscal problems. Coming from Eichengreen, this piece has to be satire. There is no way he really believes the dollar zone will breakup in the next decade. Even I don't believe it and I have published research questioning whether the United States is truly an optimal currency area. I suspect Eichengreen is cleverly making the point that even though there may be problems with the dollar zone, that if taken to their logical conclusion would imply a break up of currency union, it is absurd to think it will actually happen. If so, then ditto for the break up of the Eurozone. Or maybe I am reading too much into this piece. Maybe the Eurozone crisis has Eichengreen in a funk and he has taken to heart the conversation among Paul Krugman, Ryan Avent, and myself that questioned the dollar zone as an optimal currency area. You decide for yourself:

Conventional Madness - Krugman - I’ve had a chance to read the new OECD Economic Outlook. It’s a terrifying document.Why? Not because it offers a grim prospect, although it does — although the OECD has marked up its growth projections, it’s still forecasting extremely high unemployment for years to come. No, what’s scary is the utter folly that now passes for respectable opinion. Here’s the OECD on US monetary policy:In the United States, where some long-term measures of inflation expectations have increased and the labour market has stabilised earlier than expected, the start of normalisation [by which they mean raising interest rates] should not be delayed beyond the last quarter of 2010. Policy interest rates should be well above half-way to neutral by end-2011, but the path of convergence to full normalisation would have to accelerate if long-term inflation expectations were to drift up further.So the OECD wants the Fed to start raising interest rates soon — in the next six months or less — because … well, we can look at the OECD’s own forecast. According to this forecast, in the fourth quarter of 2011 — a year and a half from now — the unemployment rate will still be 8.4 percent. Meanwhile, inflation will be 1 percent — well below the Fed’s implicit target of 2 percent.

More Aggregate Demand Weakness? -The wailing and gnashing of teeth over deflation has begun anew. With the CPI showing a decline in April, folks like Paul Krugman and Greg Ip are concerned about a Japanese-style deflation emerging in the United States. Other observers like Tim Duy and Scott Sumner are similarly concerned as they fear U.S. aggregate demand is going to get increasingly weak. I do not mean to be a contrarian here, but I am having a hard time seeing how these concerns are justified. Yes, the U.S. economy has been plagued by a weak recovery, but the image one gets from this discussion is that we are standing on the precipice of another collapse in spending. If so, the data sure don't show it. Take, for example, monthly retail sales. It grew at a year-on-year rate of almost 10% in April as can be seen in the figure below. The figure also shows domestic demand through 2010:Q1. Given the strong correlation between these two series, it seems likely that the strong growth in current retail sales will also be seen in domestic demand once the numbers are released.(Click on figure to enlarge.)

A different take on deflationary pressures - DAVID BECKWORTH surveys the crowd of economic writers wringing their hands over lagging inflation and says that they're wrong to see a new crisis looming. Retail sales data in America don't indicate that falling prices are due to falling growth expectations.[B]oth current and expected spending are growing. It may be not be growing as fast as we want, but it is growing and there is no sign of an imminent collapse. Now if aggregate demand is growing and is expected to grow how is it possible to have inflation falling? The simple answer is that aggregate supply must be growing as well. As I noted in my previous post, this spike in the productivity growth rate may be why the unemployment rate has been remained so high. The problem with this is that it's inconsistent with falling markets, which are perfectly consistent with declining growth expectations

Whose your Daddy!!! - This article may seem dire, but one can wonder if it is quite so bad. There is an astonishing number of Experts out there, who see deflation as the fall of Western Civilization. I have often postulated that deflation could possess neutral, if not beneficial, potential scenarios. Deflation tends to reintroduce older cottage industries, reestablish older types of employment, and raise the quality of Product to justify retention of Product prices. The decline in Housing prices were long awaited, and in my mind, should have stabilized somewhere in 2002; later Home pricing being in itself over inflationary. The only problem here was the tie between Credit and Housing Retail. An intelligent Government would have long established a minimum and maximum Interest rate for Mortgages. It is and was a sensible plan to separate Mortgages from the Credit industry, while presenting little initial impact to Credit overall; banks and financial institutions devoting their attention to the viability of the mortgage payment system.

Strippers Declare Inflation Dead as Dealers Revive Zero-Coupon Treasuries - The 18-month slump in Treasury zero- coupon bonds is giving way to rising demand as the rate of inflation falls to a 40-year low, turning so-called Strips into the best performers in the U.S. government debt market.  Investment banks increased the securities -- created by separating the interest and principal payments of a bond and selling them at a discount -- by 4.4 percent to $179.4 billion from December through April, according to Treasury Department data. It’s the first time that the market expanded for five straight months since 2006. “We are in some sort of a new normal environment and inflation is not going to be a problem anytime soon,”

Inflation, Deflation, Japan - Krugman - First, here’s a prime example of the fire-in-Noah’s-flood syndrome: Irwin Kellner manages to get all scared about inflation in the face of a deflationary environment. To do this, he has to come up with a novel theory: that the prices that matter are those of things we buy frequently, as opposed to big-ticket items bought less frequently. And the reason for this is …??? (Remember, there’s a very clear reason for excluding food and energy prices; I have no idea why big-ticket items should receive the same treatment.) Yet both logic and experience show that when you’re in a liquidity trap, big rises in the monetary base aren’t inflationary — in fact, they can be virtually irrelevant.Which brings me to a very insightful talk (pdf) by Adam Posen, my favorite Japan expert (and now on the policy board of the BOE). There’s a lot in this talk, but let me just focus on one issue: the effects of Japan’s “quantitative easing” policy, which involved pushing up the monetary base in the hope of getting some traction. (Unlike what we now call quantitative easing, this didn’t involve large purchases of nontraditional assets.)First, here’s the record of increases in narrow money, aka the monetary base

Fed and Bank of Japan reject higher inflation target - FT - The top central bankers at the Federal Reserve and the Bank of Japan said on Wednesday that they oppose higher inflation targets, a measure that would give more scope to cut interest rates in a crisis. Inflation targets of 4 per cent have been floated by Olivier Blanchard, chief economist of the International Monetary Fund, as a way to reduce the danger of deflation caused by central bankers’ inability to cut rates below zero.A higher inflation target would on average lead to higher interest rates. That would mean greater scope to respond to a crisis by cutting rates but must be weighed against the cost of higher inflation in normal times.The opposition of Federal Reserve chairman Ben Bernanke and Bank of Japan governor Masaaki Shirakawa suggests that central banks are unlikely to change their inflation targets despite hitting the zero per cent floor on rates in response to the financial crisis

Hyperinflation Guaranteed - Yes this is it! We have crossed the Rubicon and events in the world economy are now likely to unfold in a totally uncontrollable fashion. Clueless governments still don’t understand that it is their ruinous actions that have created a credit infested and bankrupt world. They will continue to prescribe the same remedy that caused the problem in the first place, namely more credit and more printed money. The consequences are clear; we will have hyperinflation, economic and human misery as well as social unrest.When will the world finally begin to understand that we have reached the point of no return and that “the voyage of their life is bound in shallows and in miseries” (Shakespeare, Julius Caesar)? Sadly, we are probably not very far from that point. It is already starting to happen in many countries.

Enough hot air about inflation—there are other things to worry about right now - Can we please stop worrying about inflation—at least for a few months? Since the onset of the financial crisis in 2008, there has been serious concern that the massive expansion of the Fed's balance sheet, the central bank's policy of zero interest rates, and the large stimulus (and ensuing deficits) would, by some iron law of economics, debase the currency, boost the government's long-term borrowing costs, and ignite inflation. By almost every measure, observed inflation and inflation expectations have remained remarkably contained since the fall of 2008. . And the evidence weighing in favor of deflation—or at least a serious lack of inflation—continues to mount. Last week, the Bureau of Labor Statistics reported that inflation, as measured by the Consumer Price Index, fell 0.1 percent in April. Over the last year, it has risen a tame 2.2 percent. Factor out volatile food and energy prices and the long-term trend was more heartening. In the last 12 months, the core index has risen just 0.9 percent, "the smallest 12-month increase since January 1966." (Check out this inflation chart Krugman posted on his blog on May 19.)

US, Greece, Spain Are in Debt Risk 'Ring of Fire,' Pimco Says (Bloomberg) -- The U.S., Spain and Greece are among developed nations whose borrowings put them in a “ring of fire” amid sovereign debt concerns, said Pacific Investment Management Co., which runs the world’s biggest bond fund.The company is investing in emerging markets that will benefit from high savings rates, the absence of debt bubbles and a greater capacity for government spending, said John Wilson, head of the Australian unit of Newport Beach, California-based Pimco, in an e-mailed statement today. The fund manager is targeting bonds including those in Brazil, Mexico and Russia and retaining holdings of inflation-linked Australian debt, he said. “While the support declared by European leaders and the International Monetary Fund quelled concerns of sovereign risk spreading, Greece’s ability to refinance near-term debt remains a risk,” said Wilson. “Other developed countries in this ‘ring of fire’ are Ireland, Spain, France, U.S., U.K., Italy, Portugal and Japan.”

Loomis' Fuss Cuts All Treasury Holdings, Echoes Gross' Warning  (Bloomberg) -- Dan Fuss, whose Loomis Sayles Bond Fund beat 95 percent of competitors the past year, said he sold all of his Treasury holdings because of prospects interest rates will rise as the U.S. borrows unprecedented amounts.“The fundamentals are awful,” Fuss said in a telephone interview yesterday from Boston. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury. Do you really want to buy the debt of the biggest issuer?” Fuss said he doesn’t own Treasuries in any of the investments he is directly involved with after selling the last of them this week.

Debt experts toll recovery warning bell – Debt experts warned a bipartisan White House panel Wednesday that federal borrowing could slow or stall recovery from the recession. Several members of the Fiscal Responsibility Commission then said they should find ways to cut the debt rather than stabilize it.University of Maryland economic historian Carmen Reinhart said that, over the last two centuries, countries have seen debt drag down growth once it reaches 90 percent of national income. Federal debt owed to public creditors and government trust funds is close to that mark at nearly $13 trillion, while GDP is about $14.6 trillion.

The National Debt and National Security - The Washington Post has an important column today by David Ignatius on the concerns that senior members of the military have about our national debt and those of our allies. It's easy to see why this is the case from the following table. It shows two things. First, our defense spending as a share of the economy is far above our allies. As pressure to deal with our debt situation mounts, it is inevitable that there is going to be massive political pressure to cut the defense budget. Second, given the low level of defense spending by our allies, many of which are struggling to deal with debt problems worse than ours, there is no possibility that they will be able to pick up the slack if we are forced to pull back our defense commitments.

PIMCO - Bill Gross - Three Will Get You Two (or) Two Will Get You Three - Debt will get you in trouble – on both sides of the dollar bill as Shakespeare wisely counseled long ago: Neither a lender nor a borrower be. How much debt is too much? How little growth is too little? No one knows for sure. Economic historians such as Kenneth Rogoff point out that at debt levels of 80-90% of GDP, a country’s real growth becomes stunted, and the sixteen tons become more and more difficult to bear. Greece is well past that standard, which is one of the reasons why lenders are balking at extending a private-market helping hand. When not only government but corporate and household debt is included, the waters become murkier, because historical statistics are less available, and corporations are more multinational than ever before. Common sense observation tells you, though, that the debt super cycle trend in the U.S. shown in the following chart is reaching unsustainable proportions and that the “growth” required to service it if real interest rates were ever to go up instead of down would be insufficient. That is why lenders balked 18 months ago during events surrounding the Lehman liquidity crisis and why they’re beginning to balk once again. Too much debt/too little growth makes for a “three will get you two” moment, and they refuse to extend credit under those circumstances.

The real cost of US debt - The current national debt estimate of $14 trillion is misleading. The government’s deceptive accounting practices fail to include its ownership in the automotive and financial sectors as part of the national debt, which would increase it by trillions of dollars.It’s time for this administration to bring transparency to the federal budget process by properly accounting for companies now held by the federal government through the Troubled Asset Relief Program (TARP).When Office of Management and Budget Director Peter Orszag ran the Congressional Budget Office, he unsuccessfully nudged the Bush administration to include the debt of federally backed mortgage enterprises Fannie Mae and Freddie Mac in the national budget. His position was that two principles of government accounting require such debts to be on the government’s books: principle one, we control these companies; principle two, we guarantee their debt.

Government Takeover Facts - Statistics on Public Ownership 2010… graphic

U.S. Dollar Drop Is Bigger Risk Than Default, HSBC's King Says (Bloomberg) -- U.S. dollar investors face a greater risk of the government allowing the currency to devalue rather than the nation failing to make good on its debts, HSBC Holdings Plc Chief Economist Stephen King said. "If there's a dollar decline and you put your money back in say, renminbi, then you lose out because you lent to the U.S. in dollars rather than in your own currency, so you are at risk," King told reporters at an event in Dubai yesterday. "The big risk is not that they'll default, the big risk is that the U.S. engineers at some point a dollar decline that works in its own favor."

But, You Sputtered, I'm Just A Hack....That is, with all my pesky math and charts like this: Remember that I've been preaching for a while that we embedded a roughly $500-600 billion structural deficit into the economy post-2000?  And that now, in response to this recession (and in a refusal to admit that we have been playing credit drunk) we've now embedded a roughly 10% structural deficit - three times the former? Before you consider me a chucklehead for having the temerity to look at the math you might take it up with the BIS - the Bank of International Settlements, or the "bankers' bank" - which agrees with me: According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010.  Gee, you mean they looked at the same chart I've been preaching from?  This stuff isn't hard folks!

Deficit hawks ignore the R-word - Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don't really believe we're still in recession. Or maybe, they just don't care. How else to explain the continual harping on the deficit by editorialists, centrist think tanks and the like when the nation is still enmeshed in the most serious economic downturn since the 1930s? How else to understand the growing opposition to the jobs bills Congress is set to vote on this week, particularly when nobody has identified any future engine of American economic growth save countercyclical public investment? It's not that the American people aren't concerned about the deficit. But in poll after poll, they make clear that their No. 1 concern is jobs. Forty-seven percent of respondents to a Fox News poll this month, for instance, said they were concerned with the economy and jobs, while just 15 percent acknowledged concern over the deficit and spending. "There is no significant difference across party lines," Pew reported.

Deficit Hawk Hypocrisy - Harold Meyerson is spot on: “Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don’t really believe we’re still in recession. Or maybe, they just don’t care.” What is even more galling is that, having been the greatest beneficiaries of the government’s largesse over the past 2 years, these very same people now decry the government’s “irresponsible” and “unsustainable” fiscal policy. The collective amnesia and moral turpitude of these elites is truly mind-boggling.Why do we have a deficit of about 10% of GDP right now when it was less than 2% about 3 years ago? The reasons are: the Obama stimulus, the TARP, and the slower economy (which arose in response to a major financial crisis, not because the government began an irrational and irresponsible spending binge). A slower economy leads to lower revenues (less income=less taxes paid since most tax revenue is based on income, and lower tax brackets) and higher spending on the social safety net.

Moody’s Reiterates U.S. Spending Risks Credit Rating - The U.S. government’s Aaa bond rating will come under pressure in the future unless additional measures are taken to reduce projected record budget deficits, according to Moody’s Investors Service Inc....The government’s finances have been “substantially worsened by the credit crisis, recession, and government spending to address these shocks,” Moody’s analysts lead by Steven A. Hess wrote. “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.” Debt to revenue has more than doubled over the past three years and is now over 400 percent, which could lead to “potential stress” on finances, the report said.

Is There Such a Thing As an Unsustainable Level of Debt? - My short answer is: “no.”  Debt is a stock concept, not a flow one.  To determine whether something is “sustainable” or not (whether it be the government’s fiscal condition, a family’s personal finances, environmental quality, one’s physical health, or even personal relationships) requires a look at the dynamics of the situation, not just a snapshot.I mention this because there’s been a lot of buzz among fiscal policy economists over the past couple days, ever since the President’s fiscal commission discussed the idea of setting a specific level of gross federal debt to GDP as a policy goal.  Experts from all sides attacked this notion immediately, focusing on the “gross” part.  They emphasize that economically, it’s really net debt, or debt held by the public (investors whether American or foreign), that matters.  Jim Horney of the (left-leaning) Center on Budget and Policy Priorities explains this very well, and Andrew Biggs of the (right-leaning) American Enterprise Institute agrees. My objection is on the emphasis of a particular level of debt–whether gross or net, actually–as some sort of magical number that would trigger a particular set of bad economic outcomes if we were to reach it.

The safe asset shortage - Ricardo Caballero has an interesting idea: the fundamental problem in the current global macroeconomic and financial equilibrium is one of asset shortages. In particular, there is a shortage of safe “AAA” assets. The world seems to need more US Treasury-like instruments than are available.This shortage of safe assets existed before the crisis, but it is even worse today. The demand for these assets has expanded as a result of the fear triggered by the crisis – as it did for emerging markets after the 1997-1998 crisis. But this time the private sector industry created to supply these safe assets – the securitisation and complex-assets production industry – is severely damaged.Broadly I think that he is right. The demand for safe assets was one of the key enablers of the credit crunch

Extending unemployment insurance is the fiscally responsible thing to do - Unemployment insurance (UI) not only provides a vital safety net to workers who lose their jobs, it also serves as a valuable stimulus, which puts money back into the economy and helps create jobs during recessions.  Yet at a time of the worst job crisis in a generation, with unemployment at 9.9%, more than five unemployed workers for every job opening, and record levels of long-term unemployment, millions of workers are at risk of losing their UI benefits.On May 26, EPI hosted Long-Term Unemployment: Causes, Consequences, and Solutions, a panel featuring several leading labor market economists discussing the unprecedented rates of long-term unemployment and showing why extending UI benefits to those workers would help them maintain some consumption during a time of economic distress and help create more jobs. The economists provided an array of evidence disputing the contention that extending unemployment insurance raises the unemployment rate in any meaningful way

Debt worries prompt House to trim jobless-benefits bill - Under fire from rank-and-file Democrats worried about the soaring national debt, congressional leaders reached a tentative agreement yesterday to scale back a package that would have devoted nearly $200 billion to jobless benefits and other economic provisions while postponing a scheduled pay cut for doctors who see Medicare patients.After struggling throughout the day to reach a compromise, House leaders scheduled a vote today on the slimmed-down package in hopes of pushing it through both chambers before the 10-day Memorial Day recess, which is scheduled to begin Friday.Unless lawmakers act before Wednesday, millions of people could cease to be eligible for up to 99 weeks of jobless benefits and doctors' Medicare payments could fall by 20 percent.

Senate Approves Nearly $60 Billion for Wars - The Senate on Thursday approved a nearly $60 billion measure to pay for contin uing military operations in Afghanistan and Iraq as House Democrats struggled to round up votes for a major package of business tax breaks and safety-net programs for the long-term unemployed.Senators delivered a bipartisan 67-to-28 vote for the war financing bill after rejecting a series of Republican proposals on border protection as well as a plan by Senator Russ Feingold, Democrat of Wisconsin, to require President Obama to produce a timetable for withdrawing from Afghanistan. With lawmakers eager to begin a Memorial Day recess, House Democratic leaders ran into stiff resistance from rank-and-file members uneasy about supporting the approximately $143 billion tax and unemployment measure. More than $80 billion of it would be deficit spending — a hot-button issue in the midterm Congressional campaigns and an increasingly frequent line of Republican attack.

A Question That Needs Answering: Who Will Be Hurt by Deficit Reduction? - The progressive message on the deficit has to be very clear: first, don't do anything that will endanger our economic recovery, because the best way to solve the deficit is to improve our economic health (see: the 1990s). Secondly, when you ask for sacrifices, they shouldn't be all or mostly from the middle class and poor. This is a pretty key point, since many of the deficit hawks seem to be zeroing in on cuts in Social Security and a Value Added Tax, both of which overwhelmingly impact the poor and middle class far more than they do the wealthy.What these proposals are is an attempt to make middle and lower income people pay for the sins of the wealthy who have benefited from the deficit. Middle class incomes have been stagnant over the last decade, while the costs of their groceries, gas, utilities, and college education for their kids has skyrocketed. Middle class housing prices have plummeted the last three years, with foreclosures and bankruptcies increasing exponentially. Middle class folks haven't gotten the big tax cuts the wealthy have over the last 10 years, and when taxes are raised at the local level, its almost always regressive taxes like the sales tax that impact poor and middle class people the most. Meanwhile, public school teachers, social services for the poor, parks, libraries, community colleges, programs to help handicapped kids - all of those programs that matter to working families are the things that get cut.

In Defense of Deficits - The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. (Back in his salad days, former Senator Alan Simpson was a regular schemer to cut Social Security.) The Obama spending freeze is another symbolic sacrifice to the deficit gods. Most observers believe neither will amount to much, and one can hope that they are right. But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.

Op-Ed - Easy Money, Hard Truths - NYTimes - Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences. According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.

On writing fiction - The New York Times carried an Op-Ed article – Easy Money, Hard Truths – on May 26, 2010 written by a hedge fund president, one David Einhorn.It was not just the poor economics that was on display but also a mis-use of statistics to try to reinforce the poor economics that was notable.Einhorn asks his fellow US citizens – “(a)re you worried that we are passing our debt on to future generations?” Answer: “Well, you need not worry.” Why? Because the:… the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences. He claims  “the United States’ structural deficit – the amount of our deficit adjusted for the economic cycle – has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010″. I have written cautionary blogs about structural deficit measurement before – for example, Structural deficits – the great con job!

Be Optimistic About Euro Fiscal Situation; Not US - Courtesy of the Wall Street Journal, here we have a laundry list of PIIGS' efforts to adjust to an age of diminished expectations - Reuters also has a similar list, albeit a bit more detailed. Meanwhile, the "safe haven" of America? You must be joking. Having crashed through the $13 trillion debt mark according to the US National Debt Clock with offhand ease, Uncle Sam is gorging like your typical blubbery American at an all you can eat buffet. (Speaking of which, this analogy is a great one.) From the Associated Press:

Is the World Broke? Entitlements, Spending May Spell Doom - Fox -What started as a cautious eye toward problems in a marginally important economy in Greece became a full-blown crisis, when ratings firms cut debt outlooks for fellow eurozone economies Spain and Portugal. There were concerns that the euro itself would collapse, or at least break into pieces, either because Greece was thrown out or more stable economies like Germany pulled out. But it isn’t just a European problem. Spending in the U.S. threatens to leverage the domestic economy so much that it faces, within just a few years, a debt level that represents the country’s entire gross domestic product. And, since the U.S. is a relatively strong world economy, even with unemployment near 10% and uneven signs of recovery, American taxpayers have been forced to dig deep to help out the rest of the world. Indeed, the bailout of Greece couldn’t happen without two American contributions: the U.S.’s funding of nearly 20% of the International Monetary Fund, which is helping to keep Greece afloat, and the move by the Federal Reserve to swap dollars for euros, thus helping prop up European banks. So how did we get here?

Blue Dogs Bit Off Some Deficit Today - For over a year House Blue Dog Democrats took a back seat to President Obama's top priorities, a $787 billion stimulus bill and a health reform bill that CBO scored as paid for, but about which many have their doubts. This week the Blue Dogs bit off almost $80 billion from the extenders bill, H.R.4213, most of which passed the House this afternoon on two separate votes. The good news is that those fighting larger deficits in the House are gaining power. The bad news is that the Senate will undoubtedly add back some of that spending when it takes up the bill during the week of June 7. Taking away $8 billion of COBRA health benefits for the unemployed, $24 billion of Medicaid aid for the states, and $40 billion from the Medicare physician reimbursement hits the vulnerable, which I'm not comfortable with, but I've learned the hard way that there are no easy deficit cuts.

Reasons To Despair - Krugman - For some reason today’s papers made me feel especially grim about the prospects for economic recovery — not the economic news so much as what one sees about the mindset of policy makers.Well, we could have more fiscal stimulus — but Congress is balking even at the idea of extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low! We could get tough with China, which continues its currency manipulation and, in the face of a world of grossly inadequate demand, is actually tightening monetary policy to avoid an overheating economy . So given China’s outrageous behavior, Geithner went to China, got nothing .. and pronounced himself very pleased.We could do more through monetary policy. Macro theory suggests that the theoretically right answer, if you can do it, is to get central banks to commit to a higher inflation target. But the Fed and the Bank of Japan say no, because … well, that’s not what central bankers do.

Great Depression 2.0. Bet on it! - Deficits create demand. Demand generates spending. Spending generates economic activity. Economic activity generates growth. Growth generates jobs, increases government revenues, reduces deficits and ends recessions. Simple, right? When consumers have too much debt, they will not spend no matter how low interest rates are. This is not theory, this is fact. If the government cuts spending at the same time as consumers, then overall spending declines and the economy slips into recession. This is what the deficit hawks want–a return to recession. This is politics, not economics. Increasing the deficits, lowers the deficitsThe deficit hawks say “You can’t solve a debt problem by adding more debt”. This is a very persuasive argument, but it’s wrong. Increasing the deficits, lowers the deficits. This sounds wrong, but its right. Here’s proof from a recent article by economist Marshall Auerback:

More On National Security Spending Reductions And The Deficit - As a follow-up to Bruce's post below on the likelihood that the Pentagon budget will be under intense pressure in any deficit reduction plan, take a look at this interview I did last week with Gordon Adams and Cindy Williams, the co-authors of the new book, Buying National Security: How America Plans and Pays for Its Global Role and Safety at HomeIn addition to being a good friend, Gordon is the former head of national security for the Office of Management and Budget, the founder of the Center for Strategic and Budgetary Assessements, and one of the most respected military and foreign affairs experts in Washington. In the interview, Gordon and Cindy both agree that neither the Pentagon, State Department, and Department of Homeland Security will be able to avoid being part of a deficit reduction package

I Wish It Were Only Butter - Maxine Udall (girl economist) - The metaphor of guns and butter is used in macro 101 to convey the tradeoffs a nation and it's economy must make. More spent on national defense means less available to spend on consumer goods at home. Oh, would that it were just consumer goods! Unfortunately, the choices seem to be guns and education and jobs.The problem here is that education, much like health, can be thought of as an investment good. It's something that enables higher rates of production both in this generation and for our children and grandchildren. We do not need people who hawk deficit reduction strategies with the style and substance of a carny barker. We need deficit falconers. Sensible, informed people. Not just policy makers and politicians, but the electorate, too. We are going to have to spend some money to get out of this hole. How we spend it will matter immensely both for us in the near term and for our children and grandchildren.  We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.

The Effects of Automatic Stabilizers on the Federal Budget - CBO 11 pp pdf

The $123 Billion Tab For Job And Tax Bill – 24/7 Wall St.- The bill known as H.R. 4213, The American Jobs and Closing Tax Loopholes Act, may clear Congress in the next few days. It would extend eligibility for unemployment insurance benefits, COBRA health care tax credits and other critical programs that families and communities depend on through December 31, 2010. In other words, it would help millions of the unemployed. Another major part of the legislation would close tax loopholes for wealthy investment fund managers and foreign operations of multinational companies.The goals of the programs may be noble, but they will cost taxpayers $123 billion over the next two years. None of this money is in the budget. It is hard to gauge how many times voters will countenance Congress increasing unemployment payments. The new bill provides for 52-week weeks of extended benefits. The Emergency Unemployment Compensation (EUC) program will be extended through the end of the year.

What About the Jobs Deficit? - CBPP -Members of Congress who are opposing the pending jobs legislation on the grounds that it isn’t fully paid for are focusing on the wrong deficit.  Yes, we have a long-term budget deficit that we need to take very seriously.  But the deficit to worry about right now is the jobs deficit.If Congress leaves town without extending the temporary unemployment insurance benefits set to expire next week, the unemployment insurance map will change from this: (For an explanation of the different types of unemployment insurance expansions cited in the maps, see here.) Letting these benefits expire wouldn’t just impose unnecessary hardship and uncertainty on the unemployed.  It would also slow the recovery by depriving the economy of a needed boost that would encourage stronger job creation.  As my colleague Paul Van de Water and I have argued, this is too high a price to pay to avoid the very small long-term deficit impact from passing the full jobs bill.

Why Deficit Hawks Are Killing the Recovery, by Robert Reich: Consumer spending is 70 percent of the American economy, so if consumers can’t or won’t spend we’re back in the soup. Yet the government just reported that consumer spending stalled in April – the first month consumers didn’t up their spending since last September. Instead, consumers boosted their savings, probably because they’re worried about the slow pace of job growth..., as well as a lackluster “recovery.” They’re also still carrying enormous debt burdens. One in four home owners is still underwater. And median wages are going nowhere. So what’s Congress doing to stoke the economy as consumers pull back? In a word, nothing. Democratic House leaders yesterday shrank their jobs bill to a droplet. They jettisoned proposed subsidies to help the unemployed buy health insurance, as well as higher matching funds for state-run health programs such as Medicaid. And they trimmed extended unemployment insurance. Deficit-cutting fever has also struck the Senate – except when it comes to the military, of course. Last night the Senate okayed a $60 billion war-funding bill for Afghanistan.

We’re Not Greece, But That’s No Consolation - Both Bruce Bartlett and the Brookings Institution (Economic Studies directors Karen Dynan and Ted Gayer) warn this week that although the U.S. is no “Greece,” we still should be worried about our fiscal situation.From Bruce’s Forbes column: Many doomsayers believe that our fiscal profligacy will end in a bang, as happened recently to Greece and previously to many other countries. However, it’s very unlikely that the U.S. would ever suffer the sort of abrupt inability to sell its bonds that triggered a fiscal crisis in other countries. And Karen and Ted (of Brookings) express a similar mix of reassurance and warning:So no, we’re not that much like Greece, but at the same time we’re a lot more like the Greece now than the U.S. we used to be.

Are We Japan 2.0? - A balance sheet recession is different from a normal recession. It's caused not by inventory cycles or monetary manipulation by the Fed, but by a debt fueled boom that eventually bursts and leaves the economy in the doldrums until debt levels get back to normal. That's the kind of recession we went through last year, and it's the kind of recession that wracked Japan in 90s. Mike Konczal points us today to a paper written a few months ago by Richard Koo of Nomura Research that compares what we're going through today to Japan's earlier experience: As Koo argues, the economy will not enter self-sustaining growth until the private sector balance sheets are repaired. Even with zero interest rates, there are no borrowers of newly generated savings and debt repayments. With no borrowers, the economy will continue to lose aggregate demand. And how long will it take for balance sheets to get back to normal? Here's Koo on Japan's experience:

Lies, Damned Lies, and Growth - Krugman - Scott Sumner says that I’m wrong about taxes, regulation, and growth, because although American growth has slowed since deregulation and all that, the growth has been better than we might have expected. We can try to parse whether that’s true — but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies — a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating. And it’s telling that so many on the right have airbrushed the whole postwar generation out of history. Given all that, what do we learn from the fact that since 1980 the United States has more or less maintained its relative GDP per capita, after substantial decline previously?

Government Spending and Economic Expansions - It is conventional wisdom that raising taxes, particularly during and just after a recession, will harm the economy. Last week I checked whether that was true. (The post appeared in the Presimetrics blog and the Angry Bear blog.) The post looked at every recession since 1929, and it showed that recessions that were accompanied by marginal tax rate cuts were followed by shorter, slower expansions than recessions that weren't accompanied by marginal tax rate cuts. (Expansion, btw, is the term for the period between recessions.) This week I will look at the effect of cutting back on government spending during and just after a recession. I'm going to do that with three graphs. The first shows the length (in months) of every expansion since 1929. The second looks at the annualized growth in real GDP per capita for each expansion period, and the third looks at the total growth rate in real GDP per capita over the length of the expansion period. In each graph, recoveries are divided into three groups based on what happened to the federal government's spending as a share of GDP from the start of the recession to the period one year after the end of the recession.

Bad Analysis At The Deficit Commission -Krugman -  The Center on Budget and Policy Priorities worries that the Obama budget commission is already giving ammunition to the deficit crazies; it cites testimony by Carmen Reinhart claiming that gross debt, not debt owed to the public, is the right measure. I agree that this is off base. But there’s actually a worse problem: I’m a great admirer of the Reinhart-Rogoff work on crises — but NOT of their work claiming that 90 percent debt/GDP ratios constitute a red line, which isn’t at all up to the standard of the other material. It’s based on a crude correlation — and as soon as you look at specific examples, it starts to look all wrong. I wrote about it here. Reinhart and Rogoff specifically cite data from the United States showing slower growth when debt was above 90 percent of GDP. But if you know the data at all, you know that so far, the only years in which US debt was above 90 was in the immediate postwar period, when growth was indeed slow — but not because of the debt burden; instead, the US was demobilizing after the war, with many women leaving the paid work force. So it’s a terrible example to use. And I suspect that much of the rest of their result reflects reverse causation:

Summers: The Fiscal Questions Don’t Change, The Answers Do. -This year’s U.S. federal budget deficit is projected at $1.5 trillion, but Mr. Summers said that a recovering  economy and President Barack Obama’s policy proposals — like the freeze in non-security spending and the expiration of the high-income tax cuts — will cut this budget deficit in half as a share of the economy.  But deficits, on current projections, will still be in the 4% to 5% of GDP implying steady and unsustainable and unacceptable increases in the ratio of our national debt to our income.So what to do? “In the tradition of the two-handed economists,” Mr. Summers said,  “I emphasize both the seriousness of our current cyclical situation and the magnitude of the budget challenge we face because I am convinced that is impossible to sensibly address either challenge in isolation

A sticky gas-pedal - The Economist -The “American Jobs and Closing Tax Loopholes Act” is a typical piece of congressional sausage-making originally projected to add $134 billion to the federal deficit. Only $79 billion of that qualifies as true stimulus: extended unemployment benefits, health subsidies for the unemployed and more Medicaid money for the states. Most of its hundred-odd other provisions are goodies for assorted constituents from Indian reservation property developers to cotton shirt manufacturers and routine extensions of expiring provisions such as the research tax credit.

Pork Barrel Tax Provisions in the Extenders Bill - Reading through the tax provisions of the misnamed "American Jobs and Closing Tax Loopholes Act of 2010" is like reading a pork barrel laden appropriations bill. The vast majority of the so-called tax cuts are essentially earmarked spending through the tax code. Below is a short list of some of the more glaring giveaways in the bill. Some of the bigger winners are local governments who will benefit from taxpayer-subsidized bond authority and the alternative energy industry who are getting a windfall of targeted tax credits.  The more curious "business" tax breaks are the tax benefit for "certain motorsports entertainment complexes" and the special expensing rules for film and television productions.

To extend or not to extend, Pew (do you) Trust - The Pew Trust has published a study of the cost of extending the Bush tax cuts: Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts. As surely all ataxingmatter (and Angry Bear) readers are aware, the Bush tax cuts were enacted with sunset dates. Some of those sunsets were 2008 but were extended to 2010. The Bush Congress intended to make the cuts permanent, but knew the price tag would be too high. So instead they used the sunset gimmick to pretend that the tax cut wasn't really a major cause of increasing deficits. Now the bill is due. And of course, Congress is today debating an "extender" bill for many of those cuts, that will be financed, at least, by other revenue increases, unlike the original Bush cuts.

Why I Changed My Mind about Tax Cuts – Thoma - The experience from the first attempt at using tax changes to stimulate the economy, the Bush tax rebate of Spring of 2008, suggests that temporary tax cuts of this variety are largely saved. Here’s an estimate of the effect of the Bush tax rebates from the Congressional Budget Office. It shows that the rebates drove income up quite a bit, but consumption hardly budged:The lack of impact on aggregate demand (consumption) is due to how the tax rebates were distributed. The tax rebates went to a lot of people who really didn’t need them, and they chose to save the extra money.But better targeting can fix this. Thus, I thought that the best way to do the second stimulus package, the one Obama put into place a little over a year ago, would be to have well-targeted tax cuts go into effect as fast as possible to give the economy an initial jolt. This would be followed by government spending, which takes a bit longer to put into place. As this spending came online it would sustain or even strengthen the impact on aggregate demand provided initially by the tax cuts, and, importantly, the spending would be sustained until the economy was clearly on its way to recovery.

Why Not Impoundment? -The Obama administration has announced another effort to give the president some sort of line-item veto authority. Since the Supreme Court has made clear that a statutory line-item veto is unconstitutional--Republicans gave it to Bill Clinton in 1996 and it was ruled unconstitutional in 1998--Obama is asking for enhanced rescission authority. Basically, the president would ask for spending cuts and Congress would be forced to vote upon them as a package.I have no problem with this legislation; I do believe that insofar as the budget is concerned that the president needs more authority vis a vis Congress. However, I think there really is a much simpler way of getting around the constitutional problem--just repeal the part of the Budget Act which prohibits impoundment. In essence, impoundment means that if the president doesn't want to spend money appropriated by Congress he simply impounds it; i.e., doesn't spend it. It has exactly the same effect as a line-item veto and is unquestionably constitutional--every president up until Nixon had and routinely used impoundment to control spending.

Last Word on Impoundment - I don't want to get into an argument with Stan, whose knowledge of the Budget Act is certainly superior to my own. Nor am I in the mood to research the legislative history of that legislation. But I do think that Stan misunderstands the precise meaning of the word impoundment. In this respect, I quote Justice Scalia from Clinton v. New York, the 1998 case that found statutory line-item veto unconstitutional:.. Given that impoundment was used by virtually every president dating back to the earliest days of the Republic, I think it's a stretch for Stan to say the practice was illegal. On the other hand, impoundment is clearly a less satisfactory means of controlling spending than a line-item veto, which explains why Grant, FDR and JFK all asked Congress for line-item veto authority.

Spending Through The Tax Code - Forbes.- Conservatives are united in their belief that government spends much too much and that spending ought to be cut sharply. But they almost universally ignore de facto spending through the Tax Code even though many tax provisions are functionally identical to spending. These "tax expenditures" not only hemorrhage revenue unnecessarily, but they distort private decision-making, create unfairness and reduce economic growth.  in 1961 the top marginal income tax rate was 91%, meaning that reducing one's taxable income by $1 saved 91 cents in taxes for those in the top bracket, while earning $1 of additional income netted them only 9 cents. For some people it was worth spending 90 cents to reduce their taxable income by $1, which gave rise to many wasteful tax shelters designed to produce nothing except tax deductions.

More on Carried Interest - As most ataxingmatter readers know, there is currently under consideration in Congress legislation that would extend some of the Bush tax breaks and in return pay for those extensions by taxing service partners' profits interests at ordinary income rates (or, under one version now being put forward to mollify the wealthy service partners who don't want to pay tax on their wages like other people do, partially under ordinary rates and partially under capital gains rates). Not surprisingly, there are strong lobbyist pushes against the legislation. Although you'd think this would be a no-brainer, it has been hard for Congress, especially the Senate, to pass the reform. The House has proposed and passed a carried interest bill several times, but the Senate has balked. Wealthy interests wield quite a bit of power, and they tend to wield it in their own favor.

The VC Tax Break - The House of Representatives is considering a bill that would change the tax treatment of venture capitalists’ income (and that of private equity fund managers as well). Currently, VCs typically are paid “2 and 20″ — that is, an annual fee of 2 percent of assets, plus 20 percent of profits. For example, let’s say a fund starts out with $200 million. Most of that money is invested by the fund’s limited partners — pension funds, endowments, insurance companies, the usual suspects. After ten years (roughly the average life of a VC fund), the investments made by the fund are now worth $400 million — a pretty humdrum return of 7 percent per year (before fees). The venture capitalists themselves will earn about $14 million ($200 million x 2% x 7 years)* plus $40 million (20% x ($400 million – $200 million)) equals $54 million. . Right now, the $14 million is taxed as ordinary income, but the $40 million is taxed as capital gains — that is, at a tax rate of 15%. The bill would tax the $40 million as ordinary income

The Challenge of Closing Tax Loopholes For Billionaires, by Robert Reich: Who could be opposed to closing a tax loophole that allows hedge-fund and private equity managers to treat their earnings as capital gains – and pay a rate of only 15 percent rather than the 35 percent applied to ordinary income?Answer: Some of the nation’s most prominent and wealthiest private asset managers, such as Paul Allen and Henry Kravis, who, along with hordes of lobbyists, are determined to keep the loophole wide open.  The House has already tried three times to close it only to have the Senate cave in because of campaign donations from these and other financiers who benefit from it. But the measure will be brought up again in the next few weeks, and this time the result could be different. Few senators want to be overtly seen as favoring Wall Street. And tax revenues are needed to help pay for extensions of popular tax cuts, such as the college tax credit that reduces college costs for tens of thousands of poor and middle class families. Closing this particular loophole would net some $20 billion.

House Votes to Eliminate Hedge Fund Tax Break - The House passed a bill on Friday that would end a tax break for executives of investment funds, leaving hedge funds, private equity firms and venture capitalists scrambling to ease the effects of the bill before it is taken up by the Senate next month.  The measure was part of a broader tax bill, passed by a vote of 215 to 204, that would extend benefits for unemployed people. It seeks to change the tax treatment of “carried interest,” which is the portion of a fund’s investment gains taken by fund managers as compensation.  Under current rules, carried interest is taxed federally at a rate of 15 percent because it is treated as a capital gain. The plan approved by the House, which overcame strong lobbying pressure from Wall Street, amounted to a compromise that would tax 75 percent of carried interest as ordinary income and 25 percent as capital gains. It is expected to raise more than $17 billion in tax revenue over the next decade.

Should We Dump the Home Mortgage Interest Deduction? - Do we want to use the tax code to subsidize home ownership? And, if we do, is the mortgage interest deduction the best way to do it? A new paper by my Tax Policy Center colleagues Eric Toder and Katherine Lim, along with Urban Institute researchers Margery Turner and Liza Getsinger, asks these provocative questions, and comes up with some surprising answers.To even ask seems almost un-American— But a close look suggests there is much less to the hallowed deduction than meets the eye. Thus, we’d miss it much less than we think.In 2012, the deduction will reduce federal revenues by $131 billion. In contrast, the entire budget for the Department of Housing and Urban Development is just $48 billion. The conventional wisdom says these tax breaks are important because A) they increase home ownership and B) homeowners are more engaged in their communities than renters.

Short 2-Year Notes - Only 23 basis points of daylight separate LIBOR (at 51 bps) from 2-year Treasury notes (at 74 bps). Banks are financing roughly two-thirds of the Treasury deficit, and foreign banks are doing most of that. If banks’ cost of funds rises above LIBOR, it’s Katie, bar the door. Bloomberg reports today The market turmoil has made banks reluctant to lend to each other. The London interbank offered rate, or Libor, for three- month loans in dollars rose to more than 0.5 percent for the first time since July 24, data from the British Bankers’ Association showed today. The rate climbed to 0.51 percent, the highest level since July 16, from 0.497 percent at the end of last week, on concern about the quality of banks’ collateral amid the euro-region’s financial crisis. European banks have massive unrealized losses in government debt markets, and the interbank market freeze is likely to worsen. Whether LIBOR hits the 1.5% level projected by Citibank is beside the point. It only has to creep up to 75 bps for the 2-year-note to get clobbered.

Libor Shows Strain, Sales Dwindle, Spreads Soar: Credit Markets (Bloomberg) -- Corporate bond sales are poised for their worst month in a decade, while relative yields are rising the most since Lehman Brothers Holdings Inc.’s collapse, as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence. Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly increase since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows. Investors are fleeing all but the safest securities on concern European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while U.S. legislation threatens to curb credit and hurt bank profits. The rate banks say they charge each other for three-month loans in dollars has almost doubled since February.

Credit Indicators - During the crisis these indicators showed the stress in the credit markets and it is probably worth revisiting them now. This graph from Bloomberg, based on data from the British Bankers' Association, shows the three-month U.S. dollar London interbank offered rate, or Libor rose to 0.50% on Friday. This is an important rates since trillions of financial products worldwide are tied to the Libor - including many adjustable mortgages in the U.S. The TED spread has also risen recently and is now at 34.47. This is a 5 year graph to show the recent increase is very small compared to the huge increases during the worst of the crisis. Note: This is the difference between the interbank rate for three month loans and the three month Treasury. The peak was 463 on Oct 10th and a normal spread is below 50 bps. Here is the A2P2 spread from the Federal Reserve. This is the spread between high and low quality 30 day nonfinancial commercial paper.This has increased recently to 0.19, but the spread is still very low.The last graph shows the Merrill Lynch Corporate Master Index OAS (Option adjusted spread) for the last few years.

Banks get scary again - Market-based anxiety measures have crept steadily higher over the past month, reflecting a marked shift in investor psychology. Less than two years after governments made promises totaling trillions of dollars to prop up the financial system, fears that Europe's banks will fall ill are pummeling the markets again. Libor, the rate at which highly rated banks borrow from one another on an unsecured basis, has more than doubled since February to 0.54%, its highest level since last summer. The rise shows that bankers are worried about getting repaid at a time when banks everywhere are still relying on government support, and state finances in Europe and elsewhere are looking increasingly shaky."Who are you willing to lend to when things are changing so rapidly?"

Are Libor Fears Overdone? - MarketBeat - WSJ - So, it looks like we finished up a pretty nice day in the stock market.Still, we’re sticking with our thesis that the key to the direction of the market is the London interbank offered rate, or Libor, which is the rate banks charge to borrow from eachother. Over the last couple days Libor has continued its move higher, although its moves up have tapered off a lot almost to the point of flattening. That seems to be encouraging a bit more risk-taking, as it lessens the fear about problems with the global financial plumbing system.“Cut to the chase,” investors say. “If Libor is the key, where is it going.” According to a couple thoughtful notes we’ve come across, the likely direction is up. But that doesn’t mean we’re set for a repeat of 2008.

Basel III: Grounds for optimism - If you’re not a central banker and don’t even know any central bankers, chances are that you’ve never heard of Global Risk Regulator, a trade publication in London. But right now it’s very much worth paying attention to them, because their sources in and around Basel are unsurpassed. And it turns out, reading the cover story from their latest issue — which they’ve been nice enough to put online for free — that the central bankers seem to have the upper hand, right now, in the fight with the bankers.The author, Melvyn Westlake, also has a handy one-sentence summary of what exactly Basel III is:The proposed measures – dubbed Basel III – initially issued on December 17, include tighter definitions of Tier 1 capital, the introduction of a leverage ratio, a framework for counter-cyclical capital buffers, measures to limit counterparty credit risk, and short and medium-term quantitative liquidity ratios.

Disabling Greed - Maxine Udall (girl economist) - Are there additional ways to rein in unfettered, seemingly unbounded short-term individual self-interest? Remember when the marginal tax rate on the top income bracket in the US was 90%?  It used to outrage me, but now I find myself wondering. What if it dampened unfettered, seemingly unbounded, short-term individual self interest? What if the Gyges of the world are unable to resist the temptation to go for broke? What if they are drawn to jobs where payoffs are high (because of their non-diminishing marginal utility of income)? If this were the case, then progressively higher marginal tax rates serve more purpose than simply allowing those who have benefited most from the laws, markets, and other benefits of residing in the US to contribute equally in utility terms to the infrastructure and country that enabled their success. It serves to dampen the siphoning of financial capital away from productive enterprise and into non-productive unfettered, seemingly unbounded, short-term individual self-interest. It dampens the incentives to take high risks with other peoples' money for high payoffs to oneself. It internalizes the negative externalities associated with unproductive financial "innovation," thereby discouraging it. Am I advocating a return to a 90% top marginal tax rate? I'm not sure....

Senate Passes Faux Financial "Reform" Bill - The Senate passed a financial "reform" bill which won't fix any of the core problems in the financial system, and won't prevent the next financial crisis.The bill doesn't include the Volcker Rule (it wasn't even debated), doesn't break up or even substantially rein in the too big to fails, doesn't stop prop trading, and doesn't force transparency in the derivatives market. Senator Feingold said: The bill does not eliminate the risk to our economy posed by "too big to fail" financial firms, nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown. Senator Cantwell agreed...Nouriel Roubini said the bill is "cosmetic", and won't stop the next crisis.

Financial Reforms: Private Equity Firms Escape Financial Reforms – CNBC - Private equity firms scored a big victory on Capitol Hill on Thursday.The House and Senate versions of the financial reform bill require hedge-fund advisers to register with the Securities and Exchange Commission. Both versions exempt venture capital firms from registration. A little noticed change in the version passed by the Senate on Thursday night, however, would also exempt private equity firms.If that exemption survives the reconciliation process, it will mean that private equity funds would not have to register with the Securities and Exchange Commission. Instead, the bill simply calls for the SEC to determine what sort of records it would like private equity firms to file. The venture capital community fought hard and publicly for its exemption. The exemption of private equity firms, however, went into the Senate bill with much less fanfare.

Who might win big or lose big in financial overhaul? Financial reform to mete out penalties, prizes - The nation's biggest banks, from Goldman Sachs to J.P. Morgan Chase, stand to lose billions of dollars as they are socked with new fees and regulations and forced to shed businesses. But their loss could be a gain for other firms. If the banks are forced to stop trading with their own money or spin off activities focused on financial instruments called derivatives, this business could move to hedge funds, which are far more lightly regulated, or foreign banks that don't face the same restrictions. The biggest banks also will face new oversight and tighter limits that could raise their costs and make it easier for smaller banks to compete. With its bill, the Senate is picking winners and losers throughout the financial industry and across corporate America.

ND20 FinReg Reactions: Elizabeth Warren, Mike Konczal, Marshall Auerback - The Senate bill is big (1,500 pages). It’s unwieldy. It’s full of compromises. Is it enough? What works? What doesn’t? To help you navigate the murky waters of financial reform, we asked ND20 contributors to give us their take. Elizabeth Warren: “No bill that deals with big issues is ever perfect, but the Senate’s Wall Street reform package will go a long way toward preventing the kinds of abusive practices that brought our economy to its knees. Getting to this point was a tough slog, and President Obama and Chairman Dodd deserve a lot of credit for producing a strong bill.” Mike Konczal:The best point of comparison for the Senate Bill is the House Bill, HR 4173, that passed last December. Resolution authority is a little bit weaker than what reformers were able to achieve in the House. There is no equivalent of Miller-Moore’s amendment for unsecured creditors in a resolution. A lack of a leverage cap also means that there is no fencing on what the regulators can do with their discretion...Marshall Auerback: On the Volcker Rule (which restricts banks from making certain kinds of speculations) there are so many allowed exceptions that the rule is meaningless....

More ND20 FinReg Reactions: Bill Black and Henry Liu - Two more New Deal 2.0 contributors have weighed in to help you navigate the debate on the Senate bill…

The Senate finance bill merits two cheers - Two cheers for Senator Christopher Dodd and Senate Democrats who, along with four Republicans, have passed the most sweeping reform of financial markets in 80 years – 1,500 pages of financial and regulatory detail guaranteed to make your eyes glaze over. Among many other things, it sets up a council of regulators to monitor “systemic risks”, creates a consumer protection division within the Federal Reserve charged with coming up with rules to protect consumers from abusive lending practices, allows the government to seize and liquidate failing financial companies and gives regulators new powers to oversee the giant derivatives market, forcing most trading on to open exchanges.But the Senate bill does not merit three cheers. Although it is tougher than the House bill, it contains some whopping loopholes, designed with loophole-users in mind. Both bills exempt “customised” derivatives from the exchanges, but leave it to regulators to define what contracts will be excused. Yet many of the derivatives that caused the most trouble (read AIG) might well be thought of as customised.

Finance-Overhaul Bill Would Reshape Wall Street, Washington…(Bloomberg) -- The legislation passed by the Senate yesterday would reshape the U.S. financial industry and its regulators with a sweep unseen since the aftermath of the Great Depression.  It would change the way banks manage their balance sheets, hedge their interest-rate bets and invest their proceeds. It would chip away at the secrecy of the Federal Reserve, create a council of regulators and make it easier for investors to sue credit raters. It would cut the fees debit-card issuers collect from merchants.  The Senate bill’s provisions could cut the profits of the largest U.S. banks by 13 percent, Goldman Sachs Group Inc. said in a May 17 report. The biggest impact would come from stricter rules on derivatives and the powers of a new consumer agency to write regulations affecting mortgage fees and other financial products. Each of those provisions would hurt bank incomes by 4 percent, Goldman analysts estimated.

Financial Reform Legislation - Brookings (video) The Senate has passed a financial regulatory overhaul bill aimed at stopping future financial crises before they start. The bill, the most sweeping reforms since the 1930s, aims to address the problems that led to the economy’s recent collapse such as banks taking on too much risk, lax lending standards, minimal consumer protection, inflated credit ratings and regulators’ inability to wind down financial institutions in an orderly way. Economic Studies Fellow Douglas Elliott says he thinks the legislation is about as good as could be expected.

Stop Hyping Financial Reform - Last week, the Senate followed the House and passed a bill to regulate Wall Street, all but ensuring President Obama another major legislative victory. At moments like these, the Washington press corps drops its adversarial tone and adopts a witness-to-history earnestness.Pronouncements are made about the historic nature of the new law ("The most profound remaking of financial regulations since the Great Depression,'' declared the Washington Post). The key figures, like Senators Blanche Lincoln and Christopher Dodd, are lionized ("Dodd Prepares to Depart in Triumph,'' blared The New York Times). Like a good pulp thriller, the standard media narrative of any major law requires high stakes, a clear delineation between good guys and bad guys, and a satisfying resolution. But the truth about legislation, including financial reform, is usually more mundane.

Financial Reform: A Win for Wall Street, A Cold Shoulder for Main Street - It's mission accomplished for financial reform.Unfortunately, it's more of a Bush 43 "mission accomplished" than an Apollo 13 "mission accomplished." That's because the financial reform bill passed by the Senate last week, like Bush's ship deck ceremony, is more notable for what it has left to still be done.First, it doesn't do enough to rein in Wall Street. It doesn't end "too big to fail" banks, doesn't create a Glass-Steagall style firewall between commercial and investment banking, keeps taxpayers on the hook for future bailouts, and leaves open dangerous loopholes in the regulation of derivatives. And we can expect more loopholes to be inserted as the bill heads to conference committee. In D.C., crafting a bill without them would be like baking bread without yeast. Though you can't see them, they're what makes a Washington bill rise.

Wall Street scores a win on financial reform … for now - A sigh of relief is due on Wall Street. The procedural finale for the U.S. Senate’s debate on financial reform came just in time for the big banks. The bill just kept getting tougher as the talk dragged on. But it could have been worse. While banks’ future activities and profitability may get pinched, their core business model appears intact. In the end, Wall Street got nicked, not nuked. Some observations

Financial Reform Bill Full of Loopholes - Newsweek - President Obama and leading Democrats are calling the "Restoring American Financial Stability Act of 2010" the greatest overhaul of Wall Street since the Great Depression. And that may well be true. But judging from the many loopholes in the legislation—with more to come as the banks maneuver stealthily to tweak the final product in conference—the new bill might be better termed "the Accountants' and Lawyers' Welfare Act of 2010." The bottom line is that despite the blizzard of amendments and provisions added—including some very smart changes at the 11th hour, like imposing greater control of ratings agencies—what's likely to emerge on the other side of this in the years to come is a Wall Street that's largely unchanged if marginally more regulated.

Four Ways to a Better Financial Bill - NYTimes. - Democrats say their financial regulation plan will vastly reduce the odds of a future crisis and ensure that taxpayers won’t ever again have to pay for banks’ sins. Skeptics worry — and with good reason — that the White House and Congress are being a little too confident. Financial crises are complex beasts. Even after they’re over, people have trouble agreeing on exactly what caused them. So the Obama administration and Congress were smart to avoid the magic bullet trap: the wishful idea that one sweeping solution, like breaking up the banks, could prevent the next crisis. Their goal instead has been to improve financial regulation in dozens of ways, making it harder for tomorrow’s regulators to do as poor a job as yesterday’s. But as the House and Senate begin merging their separate bills into a single bill, they still have a chance to make some important improvements. Here are four issues to watch in coming weeks:

Conference Committee - Where Lobbyists Attack Bills after they have passed Congress - As noted many times, lobbyists are swarming capital hill trying to stop financial reform. Many of you probably don't know of a major kill legislation lobbyist trick in their arsenal tool basket. That trick is to kill amendments, rewrite the bill in conference committee. After a bill has passed both houses, even with some amendments passing in overwhelming majorities, lobbyists can get their chosen representatives as conferees when the House and Senate bill versions are negotiated to rectify the differences between the two versions.Conferees are House and Senate members, but only about 3 from each congressional body. So, a select group of 6 or 8 can literally change a piece of legislation after it has passed both houses via conference committee. Lobbyists can get their representatives hand picked by Congressional and or Committee leadership and then override the vote of the Congressional majority.  This is where amendments are literally ripped out, per the conferees and one gets a completely different bill than what passed either the House or the Senate body.

Treasury’s Five-Point Wish List for Financial Overhaul - Deputy Treasury Secretary Neal Wolin, in remarks for delivery to a group in Baltimore today, listed five things the administration is pressing for in the House-Senate conference on the sprawling financial-regulatory reform bill — beyond those on which there is substantial agreement.“Financial reform is complex,” he said. “The details matter. And so, as conferees begin the process of reconciling the remaining differences in the two bills, we will continue to fight for the strongest financial reform bill possible. And we will oppose any attempts by particular interests to use the conference process as an opportunity to weaken the final bill.”

Six Key Fights for Wall Street Reform’s Next Phase - Thursday night's passage of Wall Street reform by the U.S. Senate is an event to be celebrated, but several key issues remain in play as the House and Senate seek to iron out differences between their respective versions of the legislation. And while the final bill will provide regulators with important new tools to fight financial excess, many of the most critical issues facing our economy will simply not be addressed, leaving the next Congress with plenty of work to do. Here's a list of key issues to watch as Congress moves to the conference committee between the House and Senate:

What’s Missing in the Financial Rules Bill? - Room for Debate - NYtimes…President Obama will be in New York on Thursday to lobby for the Democrats’ effort to overhaul financial regulations, as Senator Christopher Dodd, the chairman of the banking committee and sponsor of the legislation, and Treasury Secretary Timothy Geithner try to gain the support of centrist Congressional Republicans for the measure. So far Republican support is hard to come by, and, on the other side, some Democrats say the bill is not strong enough. What is wrong with the bill, from both perspectives? Are there ways to improve it?

Conference Matters: What to Expect in the FinReg Negotiations - The conference committee is comprised of senior members of the committees that worked on the bills. In this case, that means the House Financial Services Committee, the Senate Banking Committee and the Senate Agriculture Committee — expect to see Rep. Barney Frank (D-Mass.), Rep. Spencer Bachus (R-Ala.), Sen. Richard Shelby (R-Ala.) and Sen. Saxby Chambliss (R-Ga.) as well as Dodd, Lincoln and others. The committee will prepare a “conference report,” splitting the difference between the House and Senate bills; the House and Senate approve the report and then, once signed by President Barack Obama, the bill becomes law. Frank, the head of the House Financial Services Committee, says he expects that done by July 4.What can the conference committee change? It cannot introduce any new language to the bill. It can only adopt either House or Senate measures, or split the difference between the two. (That said, if the bill needed new language coming out of conference committee, there are ways to tack it on.)

Laying Out Some Key Differences Between The House And Senate Financial Reform Bills - Next, the bill moves to a conference committee, where it will be merged with the bill passed by the House of Representatives last December. Already, lobbyists for the financial services industry have their eye on the conference, hoping to weaken various provisions of the legislation. “We are going to have to try and clean up as much of this as we can,” said Ed Yingling, the American Bankers Association’s president.Due to the fairly open amendment process on the Senate floor, and the considerably different point from which Dodd’s bill started, there are several key differences between the two pieces of legislation that will have to be ironed out in conference. This is by no means an exhaustive list, but here are some of the major ways in which the bills differ:

What are good reforms in the House finreg bill that aren't in the Senate? It's a perfectly reasonable first response to the crisis we went through, and it should have been passed in exchange for TARP. In an ideal world, we as a people could have said: "Yes we will loan you $800,000,000,000 and untold amounts more through the Federal Reserve. But in exchange for this loan, we need a legal mechanism to FDIC you guys, to undo the derivatives deregulation of the 1990s and update the derivatives regime for the 21st century, consolidate consumer protection and expand it to include the shadow banking lending networks, and if you are a shadow bank please act like you are a regular bank when it comes to capital." Sadly that wasn't ready to move as an attachment to that short document that Federal Reserve provided in the 2008 panic. But in terms of that exchange, the Senate bill gets us a good part of the way there. There's still a lot to do, and we'll lay out a bit of a possible agenda for both the United States and the international community this week. But first is that this bill isn't done yet! I am not sure what will happen in conference committee yet, and you aren't either.There are some things that are stronger in the House bill that could be added to the Senate. What are the big things missing compared with the House?

Not Enough Skin in the Game - On Wednesday, I mentioned four big issues to watch as the House and Senate try to put together a final financial regulation bill. But, obviously, there are more than four issues that matter. David A. Levine — an investor and economist in New York, formerly with Sanford C. Bernstein — offers this additional idea in an e-mail message:There is a fifth way to improve the financial reform bill that has received scant notice. Both the House and Senate versions are almost identical on this point, because the authors of the pertinent section were evidently not familiar with current industry practice. The bills require that the packagers of asset-backed securities that fail to meet certain underwriting standards (which have yet to be specified) retain ownership of 5 percent of those securities. The basic idea is that by requiring issuers of subprime securities to have some “skin in the game” (a phrase used in the Senate bill summary), they will have the incentive to be more careful underwriters.

Matthew Richardson Explains the Bank Tax - My column this week — on how the House and Senate can improve in financial-regulation bill in coming weeks — returns to the idea of a bank tax. Matthew Richardson, a finance professor at New York University, has done some of the best writing on this issue.Mr. Richardson and his colleague Viral Acharya recently made the case for a bank tax on their Web site:[A bank's] top management, shareholders, and in fact, even its creditors, do not bear the full systemic costs when the pendulum swings down. It is the real economy that feels the burden and society pays the price, whether in the form of bailouts, lost productivity or unemployment. While profits remain privatized in good times, downside risks are socialized.They go on to talk about the details of collecting such a tax. But the broad point is worth lingering on. The goal of a bank tax isn’t merely to cover the costs of future bailouts. It isn’t even merely to cover the cost of bailouts and to reduce the odds of a crisis. It’s also to acknowledge that financial crises are inevitable and that society pays a terrible price for them

What Will Wall Street Look Like Next Year? - Room for Debate NYT… Congress is on the verge of adopting the most far-reaching overhaul of financial regulations since the Depression. Though the details of combining the House’s bill with the version passed by the Senate on Thursday still have to be worked out, there is broad support for an expansion of government oversight of the banking system and financial markets. What will Wall Street look like after the changes are put in place?

Obama’s Regulatory Brain, by Robert Reich: The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. If does nothing to change the structure of Wall Street. The bill omits two critical ideas for changing the structure of Wall Street’s biggest banks so they won’t cause more trouble in the future, and leaves a third idea in limbo. The White House doesn’t support any of them. First, although the Senate bill seeks to avoid the “too big to fail” problem by pushing failing banks into an “orderly” bankruptcy-type process, this regulatory approach isn’t enough. The Senate roundly rejected an amendment that would have broken up the biggest banks... You do not have to be an algorithm-wielding Wall Street whizz-kid to understand that the best way to prevent a bank from becoming too big to fail is preventing it from becoming too big in the first place.

Regulation vs. Structural Change - Robert Reich discusses a theme that I think I’ve discussed before (and first heard expressed by Ezra Klein): “The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week — now on he way to being reconciled with the House bill — is that it’s regulatory. It does nothing to change the structure of Wall Street.” Reich’s post weirdly cuts off in the middle on his site, but Mark Thoma has a longer excerpt. In that excerpt, Reich concludes this way: “The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. “So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly.”

Psychoanalyzing the Relationship Between Obama and Wall Street —- On May 20, the Senate passed its bill to reregulate Wall Street by a vote of 59-39, complete with a (watery) version of the Volcker Rule. The story of the legislation’s passage can be told in a number of ways: a tale of conflict or compromise, triumph or capitulation. But on any reading, that story is only the climactic chapter in a larger narrative: how the masters of the money game fell out of love with—and into a state of bitter, seething, hysterical fury toward—Obama.The speed and severity of the swing from enchantment to enmity would be difficult to overstate. When Obama was sworn into office, Democrats on Wall Street rejoiced at the ascension of a president in whom they saw many qualities to admire: brains, composure, bi-partisan instincts, an aversion to class-based combat. And many Wall Street Republicans—after witnessing the horror show that constituted John McCain’s response to the financial crisis—quietly admitted relief that the other guy had prevailed.

Wall Street CEOs Are Nuts Geithner’s team spent much of its time during the debate over the Senate bill helping Senate Banking Committee chair Chris Dodd kill off or modify amendments being offered by more-progressive Democrats. A good example was Bernie Sanders’s measure to audit the Fed, which the administration played a key role in getting the senator from Vermont to tone down. Another was the Brown-Kaufman Amendment, which became a cause célèbre among lefty reformers such as former IMF economist Simon Johnson. ‘If enacted, Brown-Kaufman would have broken up the six biggest banks in America,’ says the senior Treasury official. ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’”Oh, well.That’s one passage from John Heileman’s juicy article in New York Magazine. It provides a lot of background support for what many of us have been thinking for a while: the administration is happy with the financial reform bill roughly as it turned out, and it got there by taking up an anti-Wall Street tone and then quietly pruning back its most far-reaching components.

Atomic - Having been thinking about resolution authority for a while now, I'm coming to the conclusion that the resolution authority is not really designed to be used. Rather it is there for its deterrent effect. Like a nuclear bomb. It's atomic.The resolution authority as drafted leaves a good deal unanswered. For example, who will run the bridge financial institution? FDIC? Resolving Citigroup as a whole is a lot different from resolving Citibank. And I tend to doubt many of the employees will stick around. So the goal must be deterrence -- make the executives so afraid of resolution authority that they become risk adverse. That might work for entities that are clearly "too big to fail," but what about a large hedge fund? At some point ex post they might be deemed systemically important, but ex ante what do they do? Once again I'm left wishing the banking people had talked with the insolvency people before developing this resolution authority thing.

Private equity: winners in financial regulatory reform? -While private equity fund managers work to come up with ways to avoid higher taxes, they can take comfort in the fact that new financial regulations could create some new business opportunities.Most likely to reap the benefits of a regulatory overhaul are sprawling firms like Blackstone, Carlyle, and KKR, which built up significant lending and advisory businesses over the past few years. These big-name leveraged buyout shops are also investing in credit, arranging financing for LBOs, and providing mezzanine and rescue financing to other businesses - just the sorts of activities that could become less appealing to banks after new rules are passed."The overall message of this legislation is that we want banks to not take on risky activities, including leveraged buyouts or significant lending for private equity transactions,"

America's reform bill: Give us a huddle - BANKERS usually look forward to conferences as an opportunity to get out of the office, network with colleagues and whoop it up in the hotel bar. But this time they are full of trepidation, not margaritas. Now that America’s Senate has passed a set of financial reforms, after three weeks of testy debate, its bill must be reconciled with a version passed earlier by the House of Representatives. This will be done in a horse-trading exercise known as “conference”. Though the broad outlines of the final product are already clear, its precise shape is yet to be determined.

Wall Street's War - Matt Taibbi - It's early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once- indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.

America's New Culture War: Free Enterprise vs. Government Control - This is not the culture war of the 1990s. Those old battles have been eclipsed by a new struggle between two competing visions of the country's future. In one, America will continue to be an exceptional nation organized around the principles of free enterprise--limited government, a reliance on entrepreneurship and rewards determined by market forces. In the other, America will move toward European-style statism grounded in expanding bureaucracies, a managed economy and large-scale income redistribution. These visions are not reconcilable. We must choose. It is not at all clear which side will prevail. The forces of big government are entrenched and enjoy the full arsenal of the administration's money and influence. Our leaders in Washington, aided by the unprecedented economic crisis of recent years and the panic it induced, have seized the moment to introduce breathtaking expansions of state power in huge swaths of the economy, from the health-care takeover to the financial regulatory bill that the Senate approved Thursday. If these forces continue to prevail, America will cease to be a free enterprise nation.I call this a culture war because free enterprise has been integral to American culture from the beginning, and it still lies at the core of our history and character. (links to others on same)

The Fallacy of Bank Diversification - In a recent Wall Street Journal article, John Varley, Barclays Chief Executive, was quoted as saying: "We see big banks as diversifiers, not risk aggregators." His comments are part of a chorus of Bank CEOs now questioning various reforms that are aimed at large, complex banks.He is plain wrong and regulators should be wary of such arguments.Finance 101 tells us that there are two types of risk - idiosyncratic or firm-specific which is diversifiable, and systematic or market-wide risk which is not. While it is certainly true that the expansion of Barclays, and similar financial firms, into multiple business lines may reduce overall volatility of their asset portfolio, this is not what we most care about. Because an economic crisis is the realization of market-wide risk, the problem we really care about is whether banks - large or small - can withstand such risk and continue to perform valuable intermediation functions.

Get the Rainy-Day Money Upfront - NYT - “The legislation is full of holes.” That assessment of the Senate’s recently approved financial legislation came from Harvey R. Miller, the éminence grise of the bankruptcy bar and a partner at Weil, Gotshal & Manges.  If there is someone who understands the practical realities of our “too big to fail” system and the damage it can wreak, it is Mr. Miller, who, at 77 years old, has handled the largest bankruptcies in history, including the mother of all failures, Lehman Brothers. Mr. Miller says he has deep misgivings about how well the legislation — which President Obama declared would mean “no more taxpayer-funded bailouts, period” — will translate into a real-world solution the next time a crisis comes along.

Goldman seeks settlement with SEC on lesser offence Goldman Sachs is hoping to avoid the Securities and Exchange Commission’s charge of fraud by reaching a settlement on a lesser offence and agreeing to a fine of hundreds of millions of dollars, according to people familiar with the bank’s negotiating position.Goldman, which has been accused of civil fraud over a complex mortgage-related security called Abacus, is trying to focus settlement talks with the SEC on the less serious charge of omitting or mis-stating material facts to investors. Regulatory experts say that companies charged with fraud often seek a settlement on a lesser charge but it is unclear whether the SEC would agree to downgrade such a high-profile case. A lesser charge would reduce Goldman’s risk of being sued by investors and help the bank avoid the reputational damage of having settled a fraud charge, according to people familiar with the situation

Want Economic Justice? Then It’s Time To Act.- On Thursday, the U.S. Senate passed a financial reform package that includes a handful of important reforms, but it won’t fundamentally change the relationship between banks and society. Wall Street still has a vice grip on our economy, and lawmakers still find it very difficult to stand up to bigwig financiers.The real fight for our economy will involve future legislative battles with bankers. Winning those battles will require sweeping action by engaged citizens. The good news is, critical progressive mobilization is already happening. Public outcry helped fuel the fire for Senate reform. Rep. Barney Frank (D-MA), has said that the Wall Street reform bill he pushed through the House last year would have been much stronger in today’s atmosphere of outspoken economic unrest.

New financial rules might not prevent next crisis - Experts say the financial regulatory bill approved by the Senate last week, and a similar bill that passed the House, include loopholes and gaps that weaken their impact. Many provisions depend on the effectiveness of regulatory agencies — the same agencies that failed to foresee the last crisis. A big reason for the bill's limitations is that banks and industry groups lobbied against rules they felt would reduce their profit-making ability.The financial sector's influence in Washington reflects its enormous donations and lobbying. Over the past two decades, it's given $2.3 billion to federal candidates. It's outdone every other industry in lobbying since 1998, having spent $3.8 billion.

It's Official — The FIRE Is Out - iTulip's Eric Janszen has long referred to our FIRE economy. FIRE is an acronym standing for Finance, Insurance and Real Estate. You've likely heard me refer to our Phony Economy or more recently, our Ripoff Economy. These are all names for the same thing, and stand in opposition to a Real Economy based on production, savings & consumption. In a recent note, Janszen observes that our FIRE Economy re-start has flamed out.In contrast to a productive economy, the FIRE economy grows only if credit (and its obverse debt) expands. Fees for intangible services must also expand. Monthly (or quarterly, etc.) payments (e.g. car insurance, mortgages) or one-time payments (e.g. title insurance) must increase as money flows to the banks, insurance companies and real estate brokers. Janszen's graph shows the success of the FIRE economy in expanding mortgage interest cash flows starting in the early 1980s.You may have noticed that all—not some, all—government stimulus programs or Federal Reserve actions are designed to jump start the FIRE economy. Most of these programs are designed to re-capitalize the banks from the bottom-up (e.g. HAMP mortgage modifications) or from the top-down (e.g. government shares in Citigroup).  Perhaps you have asked yourself a pertinent question: what is the general social benefit of these multi-trillion dollar guarantees and bailouts for the big banks?

Wall Street Rules May Fall Short of Glass-Steagall (Bloomberg) -- It’s been almost 80 years since the U.S. government has reached as deeply into the financial markets as it will do when the regulatory overhaul being crafted in Congress becomes law.  Few historians, market participants or former regulators say they expect the current bill to put an end to financial crises any more than the post-Depression rules did. In one major area the new legislation is weaker because it departs from a central goal of 1930s lawmakers -- to control the size and scope of the largest financial institutions. The Glass-Steagall Act, which separated commercial and investment banking in 1933, “was the most effective antitrust law we’ve ever had,”Glass-Steagall was as much about breaking up companies as ensuring customer deposits wouldn’t be used for risky practices, Geisst said. Today’s Congress may live to regret that they’ve done almost nothing to shrink firms such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., he said.

Wall Street's Victory Lap - By now you have probably realized -- correctly -- that "financial reform" has turned into a victory lap for Wall Street.When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they -- and Congress -- manifestly have failed to do.Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers). There is only one small chance for any sensible progress remaining -- and you are about to see this crushed in conference by the supporters of unfettered big banks.

So Damn Little Money - The financial reform legislation currently heading into a June Senate-House conference will, at best, do little to affect the incentives and beliefs at the heart of the largest banks on Wall Street.  Serious attempts to strengthen the bill through amendment – such as Brown-Kaufman and Merkley-Levin – were either shot down on the floor of the Senate or, when their prospects seemed stronger, not allowed to come to a vote.Senator Blanche Lincoln is holding the Alamo with regard to reining in the big broker-dealers in derivatives.  But these same people are bringing to bear one of the most intensely focused lobbying campaigns of recent years, bent on killing her provisions (or weakening them beyond recognition).  All the early indications are that the lobbyists, once again, will prevail.  You can argue about which is the chicken and which is the egg, but the basic facts are inescapable.“In 1974, the average winning campaign for the Senate cost $437,000; by 2006, that number had grown to $7.92 million. The cost of winning House campaigns grew comparably: $56,500 in 1974, $1.3 million in 2006.”[1]

An autopsy of the US financial system: Accident, suicide, or negligent homicide? - VoxEU - Many policymakers stress that the global crisis was caused by a series of unforeseen events and “suicidal” behaviour by market players. This column argues that this is a self-serving narrative. Policymakers designed, implemented, and maintained policies that destabilised the financial system in the decade leading up to 2006 – and were fully aware they were doing so. It is a case of “negligent homicide”.

Banking split essential to avoid new financial crisis, warns OECD adviser - The global economy will be plunged into a second and even more serious crisis unless banks are split into separate retail and speculative arms, a senior policymaker from the west's leading thinktank said today. Adrian Blundell-Wignall, special adviser on financial markets to Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development, said that without a basic reform of banks "the lesson from the crisis was that it was not big enough". Blundell-Wignall, speaking in a personal capacity at the OECD's annual forum in Paris, said one of the big obstacles to better global governance was "institutional capture" of policymakers by the leading global financial institutions.

Checking Up on Financial Reform - If financial reform is passed — and it looks like it will be — how can we tell if it's working? Mike Konczal offers a couple of metrics: The most obvious problem would be if the market finds resolution authority non-credible and starts lending to the five biggest firms as if they had a permanent government and Federal Reserve backstop....The next thing to watch is whether derivatives are reformed, and how much the laws are gamed in general. Will Goldman Sachs drop its bank holding company status, add a 20 percent non-financial wing and declare itself an end-user, and whatever other complicated acrobatics the lawyers are dreaming up? That all depends on the wink-winks that the regulators will give, and we will never see those on the outside. All we can do is watch for the effects.I'd add a couple of other things. The first is leverage. This is easy to hide and hard to measure, so it's imperfect. Still, there are various good measures of leverage in the banking industry, and if reform works they should stay at moderate levels even when the economy picks up.The second is easier: industry profitability. If reform works, Wall Street should be less profitable.

The FinReg battle: The next two years - Dave Dayen, noting that the financial sector is starting to breathe a sigh of relief over how much it is getting away with, starts to consider what "the blueprint for what the response should look like in the next crisis" here, and Chris Bowers does the same here.A lot could still happen in either direction this week, but let's talk about the medium term in this fight for financial reform. Given where progressives are, I think it is best to think in terms of specific battles where it is likely they'll both win and where they'll be able to do the most in terms of serious reforms of the financial sector. I see three battles in the next two years that will happen regardless of a double-dip financial crisis. Though I'm mentioning progressives, much of this will appeal across the entire political spectrum. Because these fights aren't for fun or grudges. If we have another financial crisis within a decade, it will probably permanently wreck the wealth and happiness of a generation of Americans and perhaps even a generation of the world; this isn't a game.

Financial Bill Poses a Big Test for Lobbyists - NYTimes - Executives and political action committees from Wall Street banks, hedge funds, insurance companies and related financial sectors have showered Congressional candidates with more than $1.7 billion in the last decade, with much of it going to the financial committees that oversee the industry’s operations.  In return, the financial sector has enjoyed virtually front-door access and what critics say is often favorable treatment from many lawmakers. But that relationship, advantageous to both sides for many years, is now being tested in ways rarely seen, as the nation’s major financial firms seek to call in their political chits to stem regulatory changes they believe will hurt their business. The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night. Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.

a nerve struck? - The world's biggest pusher of derivatives was complaining yesterday. JP Morgan stated:“If the [Lincoln] amendment stands, you are going to have liquidity and credit provided by the US banks in the derivatives space contract and that cannot be good for the market,” he said. “It is a very troublesome situation.”“We are on a dangerous path,” he addedHmm, sounds like a nerve was struck. There's plenty of problems with Lincoln's amendment, the whole Senate finance industry bill is garbage, so too the House's, but not in the way this statement implies. The fact is the financial industry has to shrink, by at least 50%, which means there's going to be a lot less "liquidity". It's the only way you're going to tie money back to the real economy. Derivatives are the biggest fraud component of our last decades' Ponzi finance. How often have we heard all the derivatives cancel each other out? So no losses for anyone? That folks is the definition of Ponzi finance.

Derivatives sour Wall St. on Obama - Wall Street executives say language in the Senate financial reform bill dealing with derivatives is like a horror movie slasher — repeatedly left for dead, only to rise again and again. The move to force banks to spin off their derivatives desks could slice 20 percent off Wall Street profits by some estimates. Now, some executives say that if the language survives, there will almost certainly be consequences in terms of Wall Street support for Democrats in the midterms and President Barack Obama’s reelection campaign. Already, contributions to Republicans have picked up this year as financial firms are souring on Obama. The derivatives push was supposed to die in the Senate Agriculture Committee. It didn’t. Assurances were then whispered from Washington to Wall Street that it would be quickly excised by Senate Banking Committee Chairman Chris Dodd (D-Conn.). It wasn’t.

The Policy Debate vs The Policy Horse Race - Senator Mark Warner said something about derivatives reform. I kept reading a version of what he said which seemed implausible to me. I had trouble finding a transcript or video of him speaking. In the end very beginning but I’m an idiot and didn’t notice: I found it. It confirms my suspicions. Warner is described as saying that the conference committee will scrap the Senate’s derivatives reform provisions. In fact, he predicted that they would scrap the requirement that banks spin off derivatives trading desks, but he did not predict that they would scrap the requirements for exchange trading and a clearing system. Important reforms vanished from the discussion, because their fate is no longer in doubt. Much more (including links) after the jump

Buffett warned Congress about derivatives… …in 1982. His analysis was remarkably prescient. The kind of wisdom one might expect from him today.  Fast forward 28 years and the Oracle dispatched lieutenants to Washington to fight sensible derivatives reforms that would have made it more expensive to maintain his $63 billion portfolio of them. Luckily the White House beat back the “Berkshire provision.”His investment in Goldman was an effort to profit from TARP; he benefited more than anyone from FDIC’s explicit guarantee of bank debt while arguing that such guarantees are unfair; he mocked Treasury’s stress test, which forced banks to raise much needed capital; he opposed Obama’s sensible bank tax, which would charge TBTF banks for the implicit government guarantee they receive; and he was first to propose a public-private partnership to leverage public money to overpay for banks’ toxic assets.

Barney Frank Deals a Death Blow to Derivatives Reform - Barney Frank just delivered a speech at Compliance Week’s annual conference in Washington D.C. and he seems to have confirmed what Goldman Sachs analysts told us yesterday – new legislation that forces banks to spin-off their derivatives business probably won’t make it into the final financial reform bill.“Banks ought to be able to hedge their own risks,” Mr. Frank said. He said banks would be prohibited from overly risky derivatives activities by the Volcker Rule and that the separate provision wouldn’t be necessary.“I don’t see the need for a separate rule regarding derivatives because the restriction on banks engaging in proprietary activities would apply to derivatives as well as everything else,” Mr. Frank said.That’s not going to sit well with Barney’s Democratic colleague, Blanche Lincoln of Arkansas, who has been fighting tooth and nail for the new legislation. Goldman’s analysts warned yesterday that the legislation would do some serious damage to the banks if it passed, but they don’t think it will get through. 

What is the point of innovative financial instruments ? - Why pool and tranche ? A common argument is that different investing entities have different risk preference, so it is useful to provide them with tranches of different safety. This doesn’t follow at all. In a simple model with no transactions costs and no non-traded assets, all agents buy all risky assets. The more risk averse invest more in the safe asset (treasury inflation protected securities or TIPS). There is no agent who wants a slightly risky AAA tranche but not a mezzanine or equity tranche. If all agents buy equal amounts of all tranches, there is no point in tranching. An intermediary is only needed to pool if the final investors would have to buy odd lots to diversify their portfolio. Individuals did not invest much in CDOs, they were bought by institutional investors who could have diversified on their own. However, for the purposes of banks’ capital controls, what matters is the amount of AAA, Aaa etc, and not the risk. A special purpose entity which pooled, tranched and sold to a bank reduced the risk adjusted assets of the bank. The purpose of relaxing capital controls was clearly served. Also some institutional investors have charters which require them to invest only in investment grade debt instruments. CDOs gave them a way to bear the risk of, say, defaults on liars loans, without breaking this rule. CDOs helped neutralize the prudential charter.

Nudity and the Financial Markets - Last week Chancellor Angela Merkel of Germany banned naked credit-default swaps on the bonds of European governments and naked short sales of the stock of the country’s 10 most important financial institutions. The ban spooked the financial markets, even while commentators argued that the ban could easily be circumvented if other nations, notably the United States and Britain, refused to join — and because the ban, apparently, does not apply to branches of German financial institutions outside of Germany.The ban also brought stern lectures from America’s commentariat. So what is all this fuss about? Who is right here, and who is wrong? Take your pick.

More Naked Credit Default Swaps--the Role of Dealers - I want to add another point to the debate:  CDS are often done through dealers, and a naked position for a dealer is different from a naked position for an end-user.  A CDS dealer's swaps desk is unlikely to have any stake in the underlying asset.  Instead, if the swaps desk is well run, it will only execute perfectly matched swaps, so that it will never have any exposure itself to the underlying assets, only counterparty risk.  (And dicey counterparties have to post collateral).  If naked CDS were banned without a dealer exception, covered CDS would become quite difficult to arrange and execute.  much harder to execute.  To illustrate the role of dealers, consider the Abacus deal..

‘100% Protected’ Isn’t as Safe as It Sounds - Questions about how Wall Street marketed yet another complex product, sold as solid and secure, are now emerging in investor arbitration cases. The instrument is named, inaptly as it turns out, “100 percent principal protected absolute return barrier notes.” These securities are essentially zero-coupon notes sweetened by tying the return, in part, to the performance of an equity index, like the Standard & Poor’s 500 or the Russell 2000. The securities promise to return an investor’s principal, typically at the end of 18 months, with the added gain from the index’s performance if that index trades within a certain range. Brokerage firms often issued these securities. For an investor in one of these notes to earn the return of the index as well as get the principal back, the index cannot fall 25.5 percent or more from its level at the date of issuance. Neither can it rise more than 27.5 percent above that level. If the index exceeds those levels during the holding period, the investors receive only their principal back. Convoluted enough for you?

It's about time we gave consumers a fair shake - Now that the Senate has passed financial reform legislation, the next step in the process — reconciling the Senate and House bills — will prove critical. We must keep the consumer protection function strong, with meaningful rulemaking and enforcement powers and dedicated funding. Most Americans don't work for an investment bank, don't draw executive compensation and never have to deal with collateralized mortgage obligations or credit default swaps. Most middle-class Americans do, however, hold a mortgage, make credit card payments and hope for a reasonable retirement. Average Americans can't out-lobby large financial institutions. They need a regulatory structure to protect their interests.A Consumer Financial Protection Agency that will be independent from the financial institutions it supervises is a critical part of the upcoming regulatory reform. As the legislative process winds down, lawmakers need to fend off lobbying efforts intended to weaken this new agency.

Pay Attention to Your Bank’s Overdraft Changes – In the past week, I've received a letter and phone call from my bank letting me know about changes to its overdraft policy. You've probably received a similar letter or call (or will soon) because all banks are required to make these changes by July 1, 2010, for new accounts and August 15, 2010, for existing accounts. You need to pay attention to what your bank has to say. New federal rules now require banks to get your permission before enrolling you in their overdraft-protection programs. If you don't opt in, banks can't charge you a fee if a debit-card transaction or ATM withdrawal would overdraw your account. What it also means is that your bank probably won't authorize these types of transactions if you don't have the money to cover them. In short, transaction denied

Preparing for bank downgrades - Mark Gongloff goes out on a limb today, saying that if the final financial regulatory reform bill passes in anything like the form passed by the Senate, “the rating companies will almost certainly lower credit ratings for some of the biggest banks”. No one from any ratings agency is quoted in the piece, but it’s worth reading between the lines here: while the story explicitly says that “all of the banks either declined to comment or didn’t return phone calls seeking comment”, there’s no such disclaimer about the ratings agencies. So I think it’s fair to assume that Gongloff got his story straight from the agencies themselves, on the proviso that he not quote them directly. It seems that the ratings agencies want to be ahead of the curve on this issue:

Suddenly, the Rating Agencies Don’t Look Untouchable - NYTimes - The threat from Washington is relatively new. For months, it looked as though S.& P., Moody’s and Fitch would escape the regulatory overhaul relatively unscathed. But on Thursday the Senate passed a bill that included two notable ratings-related amendments. The first, by Senator George LeMieux, Republican of Florida, would strip from federal laws a requirement that a variety of institutional buyers — including banks, insurers and money market funds — buy only products stamped with a high grade by a rating agency. Then there’s the amendment from Senator Al Franken, Democrat of Minnesota, which is an attempt to upend the conflict of interest that has been at the heart of the rating agencies for some 30 years. Currently, bond issuers pay for grades to their products, giving rating agencies a financial incentive to provide high grades. Senator Franken’s amendment calls for the creation of a Credit Rating Agency Board, essentially a committee that would pair issuers with rating agencies.

Another View: Reining In the Rating Agencies - Nobody disputes that Moody’s Investors Service, Standard & Poor’s and Fitch Ratings performed abysmally in rating subprime mortgage-backed securities. They gave their highest triple-A rating in many cases where a far lower rating was warranted. Investors bought the securities, relying on the ratings. The securities plummeted in value, with disastrous consequences not only for the investors and markets, but also for the economy.Last week, the Senate passed two amendments to the financial regulatory bill dealing with rating agencies, the Franken amendment and the LeMieux-Cantwell amendment. How well will these amendments work? The amendments seek to prevent future over-reliance on inaccurate ratings. To consider whether they will work, we need to understand why the ratings were so inaccurate.

What are Credit Ratings For? -The standards proposed in the current finance reform bill don’t go far enough.  The existing bill allows for ratings shopping.  A better way to do it would be to allow the Credit Rating Agency Board to veto ratings of those that are too aggressive.  The CRAB could set real standards for structured lending, and perhaps, push back against the continued downgrade in ratings standards.  There would be competition to meet the standards of the CRAB, and of the originator at the same time.Why do we have credit ratings?  What are the main reasons they exist?

  • To provide profits to those that rate credit.
  • To provide credit standards for regulators and creditors that can’t judge credit risk.
  • To allow debtors to easily issue debt; simplifying the pricing decisions of creditors.
  • Providing quantitative and qualitative analyses of  new and existing debt issues

Speculative thoughts on the credit rating agencies - Reform proposals aim to improve the quality of the agencies and limit their corruption.  Imagine honest agencies, overrating securities half the time and underrating them the other half of the time.  The underrated occasions still would be ignored while overrated securities still would be used to game the system.  The core problem would remain about half of the time. An alternative proposal would be to remove the legal power of the ratings and require each agency to hire a convicted felon as CEO.  Board members would be restricted to men with ten years or more experience as a department store Santa Claus, or eleven-year-old female fans of Hannah Montana.  If the agency is wrong some of the time no matter what, and that error has bad consequences, should we not aim to lower the credibility of the agencies rather than restoring it?

Rating the Raters - There is widespread recognition that rating agencies have let down investors. Many financial products related to real estate lending that Standard & Poor, Moody’s, and Fitch rated as safe in the boom years turned out to be lethally dangerous. And the problem isn’t limited to such financial products: with issuers of other debt securities choosing and compensating the firms that rate them, the agencies still have strong incentives to reciprocate with good ratings. What should be done? One proposed approach would reduce the significance of the raters’ opinions. In many cases, the importance of ratings comes partly from legal requirements that oblige or encourage institutional investors and investment vehicles to maintain portfolios of assets that have received sufficiently high grades from the recognized agencies.Another approach would be to unleash the liability system. On this view, if investors were able to take raters to court, raters’ incentives would improve. But, while such judicial scrutiny may be effective in eliminating some egregious cases, it cannot ensure that raters do the right thing when courts are not expected to be able to tell after the fact what the right thing was.

Banks Fret as Regulators Push to Set Capital Levels - NYTimes -The Obama administration is pursuing an international agreement to make banks hold significantly larger reserves, which it regards as essential to increase the stability of the global financial system. It wants to complete the negotiations, which are being coordinated by the Basel Committee on Banking Supervision, by the end of the year. The world’s largest banks have responded with consternation, arguing that the proposed standards would tie up too much money that otherwise could be used for lending, a loss that would curtail economic growth. The debate between regulators and banks is about the proper balance between growth and safety, but the implications are much broader. In fixing reserve requirements, governments are deciding how much horsepower belongs under the hood of the global economy.

Ezra Klein - The debate over GSE reform is beginning - As opposed to the conservative meme, the financial crisis was not simply about providing housing for low-income folks. Or even regular folks. It was a bubble-bust cycle that was in every category of credit -- CRE, credit cards, auto loans, etc. The common denominator for all of these problems was the emergence of a new lending channel that lacked sufficient risk regulation and safeguards against liquidity runs -- the shadow banking system and the originate-to-distribute private securitization lending channel that it funded.But in the wake of the collapse, the U.S. housing market is a wreck, and nobody is sure how to fix it. On April 14, the U.S. Treasury Department released a list of seven questions to the public about the future of the U.S. housing market (criterion for each answer excluded here, in document):

Is Summers Headed Home? -I have been right far more often than I have been wrong about Lawrence Summers in the nearly thirty years that I have followed his career, I have occasionally misjudged him. For example, I argued that he’d be a good president of Harvard University.Last year I speculated that he’d be a short-timer once it became clear that President Obama wasn’t about to appoint him chairman of the Federal Reserve Board or Treasury Secretary. After the in-house jostling calmed down and Summers remained director of the National Economic Council, I rehearsed the opportunities that would be available to him as a powerbroker if he remained in Washington, and hoped he would remain a well-trammeled and successful adviser to the president for many years to come. It now seems more likely that he’ll be headed home to Harvard in the winter.

Private pay shrinks to historic lows as gov't payouts rise…Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds. At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important,"

Good Government vs. Less Government - Recently, a controversy raged in the blogosphere about whether neo-liberalism has been a bane or a boon for the world economy. The argument is rather coarse, in that it fails to distinguish between the various elements of neo-liberalism, or moderate deregulation vs. extreme deregulation. But if we take the argument at face value, one of the major claims of neoliberals is that countries in the world which are more neoliberal are more successful (because they are more neoliberal). I disagree.My disagreement is not with the raw correlation between the Heritage Index and Per Capita GDP. A number is a number. My disagreement is with the composition of the index itself, and interpreting this correlation as causation between neo-liberalism and ‘good things.’My primary contention below is that many of these measures used in the composite Heritage Index have nothing to do with less government, and a lot more to do with good government. It is these measures of good government that correlate to economic growth and drive the overall correlation between the “Freedom Index” and positive outcomes. Secondarily, I will argue that many of the other items in the index (like investment freedom) are not causes of growth, but rather outcomes of growth.

Blame the Instructions, Not the Machines - A market dominated by information augmenting strategies will tend to be stable and to track information as it arises in the economy.  The problem is that if too many people are using such strategies, there isn't enough information getting into prices systematically, and certain technical strategies can start generating mutually amplifying responses to noise.The SEC-CFTC preliminary report on the crash contains a wealth of information and some interesting clues about the kinds of strategies that may have been implicated. First, "approximately 200 securities traded, at their lows, almost 100% below their previous day’s values." These trades, "occurred at extraordinarily low prices – five cents or less – which indicates an execution against a “stub” quote of a market maker." The overwhelming majority of these trades, it turns out, were short sales: In other words, the trades at the most extreme prices were not generated by retail investors whose stop loss orders were converted to market sell orders as prices fell: they were generated by short selling in a falling market.

Can this be for real? -I don’t know if it’s just me, but there is something disturbing about the recent market behavior. If one were to proxy the state of the (real) world with the stock market index, one would have to conclude that consumers, businesses and governments have turned into schizophrenics. Surely, that’s not the case (though I’ll reserve my judgment about the latter group for later). News regarding the economic outlook has been by no means commensurate to the vertical moves we saw in the market last week. But since many have already thrown the “efficient market hypothesis” out of the window, here I’ll focus on a somewhat different question: Is it possible to get a negative feedback loop, from volatile—or declining—markets to the real economy (and back to the markets) and turn the sudden shift in investor mood into a self-fulfilling “prophecy”? To answer that, let’s first see what the possible channels of transmission are.

BREAKING THE CYCLE: A Conversation with Emanuel Derman - Watching that interrogation of the bankers at the Senate hearings, I had the feeling that this is the way karma works in the universe. Everybody is going to do something not quite right as they act out their destiny mechanically, doing what they unthinkingly believe they have to do. The Wall Street people are going to reflexively overshoot and be too greedy. The Senate people are going to reflexively grandstand and be too uninformed and try to rein them in. There isn't going to be an elegant solution to any of this.

Too big to fail or too small to maintain stability? - VoxEU - Many commentators have called for regulation to prevent banks from becoming “too big to fail”. This column adds a cautionary note. A world with only small and domestic banks is no safer. The key benefit of multinational banks – being able to mobilise funds across countries – could still be extremely useful for maintaining stability in times of distress.

Private pay shrinks to historic lows as gov't payouts rise - Assuming "we" are Americans, more of us are now wards of the State than not, and that isn't even taking into account the banks and auto companies: A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007. [So 58% of personal income comes from non-private wages and salaries or other sources.] Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.Sounds to Guambat like a slippery slope. Indeed, Greecy.

Wall Street CEOs Getting Increased Perks, Benefits Despite Public Outrage Some of the nation's biggest financial firms have increased the perks and benefits they pay their chief executives, despite the glaring spotlight from a public fed up with handsome bonuses at bailed-out Wall Street banks. The lavish fringe benefits included country club dues, chauffeured drivers, personal financial planning services, home security systems and parking. Some increases were in perks that Obama administration officials consider among the most egregious, such as corporate aircrafts for personal travel. J.P. Morgan Chase awarded its chairman and chief executive, Jamie Dimon, $91,000 in personal travel on the company jet in 2009, up from about $54,000 the previous year. His total perks increased 19 percent, to $266,000. Dimon, along with Goldman Sachs chief executive Lloyd Blankfein and McLean-based Capital One chief executive Richard Fairbank, also received sharply higher perks related to personal and home security. "Marie Antoinette could fit into this crowd without missing a beat,"

Study: Benchmarks and 'leapfrogs' drive up CEO pay - Why have CEO salaries skyrocketed over the past 20 years? Much of the blame lies in the practice of compensation benchmarking, say the authors of a study to be published next week in the American Journal of Sociology. Benchmarking is a standard practice in American corporations. When setting pay, compensation committees use peer groups of executives at comparable firms to establish a "fair" market wage their CEOs. But according to the study, led by sociologist Thomas DiPrete from Columbia University, a few CEOs each year "leapfrog" their peers by getting huge raises that have little to do with the performance of their companies. Other companies then use the oversized pay of leapfroggers in subsequent benchmarks. Over time, this ratchets up pay for everyone through a "contagion effect." "We show that rising CEO pay is not simply a function of what individual companies do, but is influenced by the behavior of leapfroggers at other firms," DiPrete said.

Are there too many psychopaths in Corporate America? - We know much less about corporate psychopathy and its implications, in large part because of the difficulty in obtaining the active cooperation of business organizations. This has left us with only a few small-sample studies, anecdotes, and speculation. In this study, we had a unique opportunity to examine psychopathy and its correlates in a sample of 203 corporate professionals selected by their companies to participate in management development programs. The correlates included demographic and status variables, as well as in-house 360° assessments and performance ratings. The prevalence of psychopathic traits - as measured by the Psychopathy Checklist - Revised (PCL-R) and a Psychopathy Checklist: Screening Version (PCL: SV) equivalent - was higher than that found in community samples. The results of confirmatory factor analysis (CFA) and structural equation modeling (SEM) indicated that the underlying latent structure of psychopathy in our corporate sample was consistent with that model found in community and offender studies. Psychopathy was positively associated with in-house ratings of charisma/presentation style (creativity, good strategic thinking and communication skills) but negatively associated with ratings of responsibility/performance (being a team player, management skills, and overall accomplishments).

Slouching Toward Despotism -And the question we keep pondering is, “Are we there yet?” Are we merely slouching toward despotism, or have we arrived? Are we already so corrupt so as to need despotic government, what with Vampire Squids and corporate/union-bought elections and Congressional bystanders and regulatory capture and Systemically Important Too Big To Fail and Gulf of Mexico oil well disasters? (Despotism, by the way, describes a form of government by which a single entity rules with absolute and unlimited power, and may be expressed by an indvidual as an autocracy or through a group as an oligarchy according to Wikipedia, the world's leading source of made-up information, which is good enough for us.)

The High Price Of Wall-Street's 'Puffed-Up' Money Machine -  While we need regulatory reform as well as legitimate financial freedoms, our greatest need is for a new financial architecture that disfranchises the illegitimate growth of money in financial markets — “puffed up money” that dilutes the value of honest wages earned by workers engaged in productive enterprises. Financial markets have created far more paper wealth than justifiable by any honorable logic. Much paper wealth is little more than a future claim against the income, assets or ownership title of others. Wall Street elites have devised surreptitious ways of growing their ownership claim on world assets. They aim to make workers worldwide capitulate sizeable portions of their wage income as governments increase taxes to pay interest on vast amounts of sovereign debt owned by elites.

U.S. Banks Post Profit, but Woes Persist - —A total of 775 banks, or one-tenth of all U.S. banks, were on the Federal Deposit Insurance Corp.'s list of "problem" institutions in the first quarter, as bad loans in the commercial real-estate market weighed on bank balance sheets. Poor loan performance in other sectors also continued to hurt banks, with the total number of loans at least three months past due climbing for the 16th consecutive quarter, FDIC officials said in a briefing on Thursday.There were 702 on the FDIC's "problem" bank list at the end of 2009 and 252 at the end of 2008. FDIC officials said they expected the number of failed banks to peak this year after climbing steadily over the past three years. Regulators have shut 72 banks so far this year, more than double the number closed by this time last year. Ms. Bair said regulators were preparing for a steady pace of additional closures through the end of the year. A total of 237 banks have failed since the beginning of 2008.

Loss Provisions and Bank Charge-offs in the Financial Crisis - SF Fed - The enormity of the recent financial shock was not fully apparent until well into the crisis. One result was that banks did unusually low levels of pre-reserving against eventual loan losses. Much of that underreserving was related to the extraordinary decline in real estate values that led to outsized losses on mortgage loans. This experience highlights the limitations of the bank provisioning process and the need to guard against worse-than-expected economic conditions through higher capital levels.

Extend and Pretend Reaches A New Level - Yves Smith - Just when you thought financial firm accounting couldn’t get more dubious…it gets worse. Deux Ex Macchiato (hat tip FT Alphaville) tells of the disconcerting changes to what was formerly called FAS Rule 157, which brought us Level 1, 2, and 3 accounting. A brief recap:Readers may recall that the Financial Standards Accounting Board implemented Statement 157, which required financial firms to identify how they arrived at the “fair value” for their assets. Level 1 are ones where there is a market price. Level 2 are those where there may not be much of a market, but they can nevertheless be priced in reference to similar assets that have a market price, or their price can be derived from “observable inputs” which are presumably from financial markets Level 3 assets are priced using “unobservable inputs,” and is therefore colloquially called “mark to make believe.” Almost as soon as this regime was in place, the officialdom started giving waivers. The refinements to these valuation rules that become ever-more bank flattering. For instance, consider this item from March 2008 (post Bear, natch), which discussed a Floyd Norris article, “If Market Prices Are Too Low, Ignore Them”:

Proposed Accounting Standards Include Mark-to-Market Rule…NYT - The group that sets corporate accounting standards proposed an overhaul Wednesday of the way lenders record the value of their assets, hoping that more stringent and consistent reporting rules might help avert another financial crisis. Under the new rules, banks and other lenders would be required to book their loans at their current market value, a method called mark-to-market accounting. Previously, they had more leeway in valuing assets, so long as they expected to hold them for a long period of time. Critics called that approach “mark to make believe.” Banks already use mark-to-market accounting for stocks and complex mortgage bonds whose value fluctuates through daily trading. The change in the way they treat the value of loans, however, is expected to be greeted with fierce opposition from banks. Banks claim that the change would force them to take big losses on loans during periods of economic distress.

Marking bank loans to market - Should banks mark their loans to market? The issue — which flared up briefly at the height of the financial crisis, when everybody was wondering whether many of America’s largest banks were insolvent — is back in the headlines, thanks to FASB’s proposed rule change, which Tracy Alloway calls “mark-to-mayhem”.Cue the predictable response from the American Bankers’ Association: If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.As a curio, before the financial crisis, banks’ fair value numbers were generally above book value. At that point no one really seemed to care about the discrepency, or mark-to-market, for that matter. It’s not obvious just how much mayhem the proposed rule change would cause, since Businessweek’s Michael Moore says that “changes in the fair value of loans probably wouldn’t show up in banks’ earnings”. But I’m not completely convinced that this is a good idea.

How Smaller Commercial Banks Are Dying - At least, that's what the Federal Reserve should have titled the report (.pdf) it released today. Instead, it went for the incredibly boring-sounding name, "Profits and Balance Sheet Developments at U.S. Commercial Banks in 2009." But despite the awful title, it actually has some pretty fascinating information and charts. The major theme is that times are still difficult for smaller commercial banks. Let's start with its chart for bank profitability: This probably goes against the predominate theme you hear in the news that banks are doing great again. That's because most of the banks reaping huge profits these days are the big guys. The smaller banks continue to struggle.

Smaller Banks Are 'No Safer' - Writing at Vox, four Italian economists argue that big banks weren’t the problem: A world with only small and domestic banks is no safer…. [Such banks] also had to be supported because of bad investment policies. Examples include Northern Rock in Britain and WestLB in Germany. Moreover, the key “raison d’être” of multinational banks – i.e. being able to mobilize funds across countries – could in principle be extremely useful to support global operations in times of distress and not necessarily be a cause of instability.The riskiness of a bank’s holdings, not its size, seems to be the most important issue. In this country, that helps explain why Lehman Brothers — which was not a huge firm — was able to cause such enormous damage. I think the financial regulation bills favored by the White House and Congressional Democrats have their flaws. But the failure to break up the big banks doesn’t seem as if it should be at the top of the list.

Dr. Doom’ Roubini anticipates a ‘double-dip downturn’ and 20% fall in markets —The Turkish born economist and academic said that Europe's crisis and the US slowdown along with the uncertainty of other industrialized economies would weigh down on investors in the coming months.In addition, Roubini, also known as “Dr. Doom” for his dire economic outlook, warned of a double-dip downturn, meaning the economy will experience another nosedive following a mild recovery.“There are some parts of the global economy that are now at the risk of a double-dip recession,” he said. “From here on, I see things getting worse.”The 51-year-old said that hammering out the debt trouble in Greece and other European countries was “Mission Impossible” and called for tougher decisions.

"Two Scoop Special": Double-Dip Recession Guaranteed - A "double-dip recession" makes no sense to the 76 percent of Americans who believe that the US economy remains in recession. And indeed, I argued in Suppressing the Cognitive Dissonance of a Bogus Recovery that the "growth" touted by the mainstream media and the Central State propaganda machine is a mirage. To the 24% of the populace who believes the U.S. exited recession in fine fettle, I offer a "Two Scoop Special": a Double-Dip recession is guaranteed for the following reasons:

Don't Rule Out a Double Dip Recession - WSJ - World financial markets reacted bearishly to Germany's surprise announcement last week banning "naked" short-selling of euro-zone government debt, derivatives and some financial stocks.Also causing anxiety is the ominous rise in recent weeks in the three-month London interbank offered rate (Libor), the rate the most creditworthy banks charge each other for loans. This could result in yet another European credit crisis with banks becoming increasingly unwilling to lend to each other because of the interconnected holdings of "junk" European government debt. Bank for International Settlements (BIS) data shows that European bank exposure to sovereign debt in Portugal, Italy, Ireland, Greece and Spain totalled $2.8 trillion at the end of last year, accounting for 89% of international banks' total exposure to those countries.

Ignore Cassandra at Your Own Risk - Part of the reason that lax lending standards fueled the housing boom and created the subsequent bust was top managers ignoring the cassandras in their midst, according to a new report. On the Developments blog an in-depth look at the study prepared for the Mortgage Bankers Association by Clifford Rossi, a former banker who is now a finance professor at the University of Maryland. While the report focuses on problems with the risk models, one of the issues raised is risk managers being shouted down by business managers.To be sure, the flawed models that the risk managers were using further exacerbated the problems. When the bust hit, even some of the worst-case scenarios weren’t pessimistic enough.

Why Deleveraging Is Necessary For Economic Recovery - While bank closures and high foreclosure and mortgage default rates are universally seen as negative impacts on the economy, it is closures and foreclosures that we need for a recovery. The bearers of such news are usually ignored as doom-sayers, bears, or Cassandras: no one wants to hear bad news. A fear of "bad news" is what has been driving the government's recovery policies and that is why this recession is not over. In fact those same policies may be leading us to a renewed period of decline. It is of course unfortunate and sad to see banks close and people lose their homes. But when put in the context of the boom years when personal, corporate, bank, and government debt went off the charts, deleveraging has the effect of creating the conditions needed for a recovery.

Commercial Real Estate Vacancies to Peak Near Early 2011 - Vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011, according to the National Association of Realtors®.Lawrence Yun, NAR chief economist, said there is one bright spot in commercial real estate. "The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year," he said. "However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011."The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts,(1) confirms that significant fallout from the recession remains, but to a lesser extent.

Commercial property troubles US banks -study (Reuters) - The default rate for commercial mortgages held by banks in the first quarter hit its highest level since at least 1992 and is expected to surpass that by year-end and peak in 2011, according to a study by Real Capital Analytics.That could spell prolonged problems for larger banks and even greater trouble for regional and small banks where commercial real estate loans comprise a greater percentage of all loans. The default rate for bank-held commercial mortgages reached 4.17 percent in the first quarter, up from 3.83 percent in the fourth quarter 2009, according to a report released on Monday by the real estate research firm

Defaults on Apartment-Building Loans Set Record for US Banks (Bloomberg) -- Defaults on apartment-building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter, almost twice the year-earlier level, as more borrowers failed to repay debt approved near the market peak, said Real Capital Analytics Inc. in a report.Defaults on so-called multifamily mortgages rose from 4.4 percent in the fourth quarter and from 2.4 percent during the same period in 2009, the New York-based real estate research firm said today. Commercial-mortgage defaults also rose in the first quarter for loans against office, retail, hotel and industrial properties, Real Capital said. “Banks tended to make more aggressively underwritten apartment loans earlier during this last cycle. Credit and pricing reached their peaks for office properties and other commercial assets later.”

Mortgage Defaults Hit 18-Year High - NEW YORK CITY-The default rate for commercial mortgages is now the highest since 1992 and is likely to surpass the previous record, according to an analysis of bank and FDIC data by Real Capital Analytics. However, the quarterly rise in volume of commercial mortgage defaults is the smallest in a year. At the end of the first quarter of 2010, the default rate stood at 4.17%, or $45.5 billion, up 192 basis points year over year and second only to the 4.55% record set in 1992. By year’s end, it’s projected to surpass the ’92 record and peak at 5.4% in 2011, according to RCA. In the multifamily sector, the default rate is even higher, as is the year-over-year increase: 4.62% or $9.9 billion at the end of Q1, an increase of 219 basis points. That represents an all-time high, surpassing the 4.17% level set in 1993, RCA says.

Commercial Real Estate Collapse – Midtown Manhattan – PBS video - One sees this every day. Storefronts on Park Avenue South where overpriced restaurants sat two years ago are empty with “For Rent” signs, something one never saw in such neighborhoods. Traditionally in NYC, property changes hands in private deals, never through the posting of rent signs. With 1% down payments, commercial real estate makes the subprime meltdown look outright responsible.

Fitch: $5 Billion Securitized Commercial Property Loan Seen Defaulting - A nearly $5 billion portfolio of commercial real estate properties securitized at the peak of the boom is set to default, according to a Fitch report released Monday.The portfolio was moved into special servicing, where it will be considered for a workout or resolution, according to Fitch.The buildings that back these loans were originally owned by Equity Office Properties, which was first sold to The Blackstone Group (BX) in 2007, are part of a deal called GS Mortgage Securities Corporation II, Series 2007-EOP. The collateral on the deal consists of mortgages, equity pledges in joint ventures and cash flow pledges. In addition, there is approximately $2.3 billion of mezzanine debt held outside the trust.

Property Trax: Commercial real estate sees rising vacancy rates - It could be seven months or more before rising vacancy rates begin to level out in most commercial sectors nationwide. That's according to research released this week by the National Association of Realtors. The NAR's chief economist, Lawrence Yun, could point to only one bright spot in commercial real estate --apartments."The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year," Yun said. "However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011."

Commercial Real Estate: To Default or Not Default? That is the Question - Unlike Shakespeare’s Hamlet, who had the simple task of deciding whether to be or not to be, borrowers in today’s commercial real estate market face the daunting dilemma of deciding whether to default on their loans as a way to secure discounts in a struggling economy. According to “To Default or Not Default? That Is the Question,” the latest podcast produced by John B. Levy & Company (available online at, some commercial real estate owners are considering loan default as a viable strategy for managing troubled debt at a time when access to money has become tight. “What we’re seeing is that some borrowers are being advised to stop paying on their loans if they want to get a discount . . . to default,” says Andrew Little, principal at John B. Levy & Company. “And that is really bad advice. Borrowers who are experiencing problems with their debt need to take a more measured approach when working with lenders. The best way for property owners to do that is to work with someone who knows the ropes and who can help them secure a discount and avoid default.

BP Oil Spill & Its Adverse Effect on Commercial Real Estate -Normally a tourist hot spot, the Gulf has become taboo. Many people are backing out of their vacation plans, which is having and will continue to have its own demoralizing affects on, what is looked to be, a rebounding local economy after the hurt of Katrina and the credit crisis. GNO, Inc. conducted a survey and 54% of businesses said they are expecting to be hurt by the by the spill, and 53% said they will need outside assistance to regain their losses. With fewer tourists flocking to the Gulf, commercial real estate owners will be among those taking a hit. The already hurting hotel market will continue its struggle and retail spaces will face vacancies if business owners are unable to pay the rent. To combat the deterioration of local businesses, low interest SBA loans will be extended to those who need help, but I can’t imagine anyone is excited to take on additional debt coming out of the credit crisis.

Whither Fannie and Freddie? A Proposal for Reforming the Housing GSEs - We propose a specific reform of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that securitize and guarantee conforming mortgages.  Our plan protects taxpayers and the overall economy from the systemic risk posed by the former GSE model, while ensuring that financing remains available for housing even in periods of credit market strains.  Under this proposal the two firms would become private companies that buy conforming mortgages and bundle them into securities that are eligible for government backing. The reformed firms would not have the investment portfolios that were the main source of risk under their previous structure. The federal government would offer a guarantee on mortgage-backed securities composed of conforming loans. This guarantee would be explicit, backed by the full faith and credit of the United States. To compensate taxpayers for taking on housing risk, Fannie and Freddie would pay an actuarially fair fee to the government in return for the guarantee, and the shareholders of the firms would take losses before the government guarantee kicks in. Other private firms such as bank subsidiaries would be allowed to compete by securitizing conforming loans and purchasing the government guarantee. Over time, entry into these activities would help ensure that the benefits of the government support are passed through to homeowners and would reduce the risk that the failure of any one firm would pose a threat to the housing market or the overall economy.

FHA Home-Financing Volume Sign of ‘Very Sick System’ (Bloomberg) -- Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac.FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,” David Stevens, the agency’s head, said today at a conference in New York, citing research by consultant Potomac Partners. “This is a market purely on life support, sustained by the federal government,” he said at the Mortgage Bankers Association conference. “Having FHA do this much volume is a sign of a very sick system.”

Why Is U.S. Government Still the Dominant Force in Mortgage Market?… According to many experts, the worst of the financial crisis is over. The Federal Reserve has ended a number of extraordinary credit programs and boosted its discount rate to normalize its lending facitlities. The Treasury has announced plans to fully dispose of its 7.7 billion shares of Citigroup, Inc. (C) common stock over the course of 2010. To top it all off, banks are making money hand-over-fist. So that must mean the financial system is back on track, right? Then why, as Bloomberg reports in "FHA Home-Financing Volume Sign of ‘Very Sick System,’" is our government still the dominant force in the U.S. mortgage market? [italics mine]Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae (FNM) and Freddie Mac (FRE).FHA lending last quarter may have topped the combined volume of government-supported Fannie Mae and Freddie Mac in a home-lending market that’s still a “government-financed market,”

Freddie Mac Portfolio Grows, Delinquencies Mixed - Freddie Mac, the No. 2 U.S. home finance agency, said on Tuesday its portfolio grew in April for the first time in 2010 after the Federal Reserve concluded its buying of mortgage securities in March. The levels of home loans with late payments were mixed in April but remained above year-ago levels, suggesting persistent strain on home-owners due to high unemployment and a slow recovery of the real estate market, the company's latest monthly portfolio data showed.  High loan delinquencies stress Freddie Mac's capital and earnings. Earlier this month, the company said it had a net loss of $6.7 billion in the first quarter and asked for an additional $10.6 billion in government aid.

'Critical' Fannie Mae, Freddie Mac Need More Aid, Report Says (Bloomberg) -- Fannie Mae and Freddie Mac, the mortgage companies operating under U.S. conservatorship, will require additional government aid amid losses stemming from the 2008 credit crisis, the nation’s top housing regulator said in its annual report to Congress.“While critical to supporting the ongoing functioning of the nation’s housing finance system, the enterprises would be unable to serve the mortgage market in the absence of the ongoing financial support,” said Edward DeMarco, acting director of the Federal Housing Finance Agency, said in the report released today.The so-called government-sponsored enterprises, which own or guarantee half the loans in the $11 trillion U.S. mortgage market, operated as private companies before they were seized by the federal government amid soaring losses in September 2008. Since then, Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, have survived on a promise of unlimited U.S. aid, drawing $145 billion in Treasury Department funding.

Mortgage Lenders Seek Relief From Forced Bad Debt Repurchases (Bloomberg) -- Mortgage lenders are seeking relief from Fannie Mae and Freddie Mac as the government-supported companies force them to buy back more soured debt, said John Courson, president of the industry’s largest trade group.While his members “certainly understand” their contracts require repurchases of defaulted loans when items such as faulty appraisals, inflated borrower incomes or missing documentation are discovered, the Mortgage Bankers Association has started to “aggressively” push the two companies and their regulator to ease up, he said.Fannie Mae and Freddie Mac, propped up by unlimited taxpayer capital, should acknowledge lenders are unfairly absorbing too many losses, with unemployment that reached a 27- year high among the causes of defaults unrelated to loan quality, Courson said yesterday in an interview at Bloomberg News headquarters in New York

Existing Home Sales increase in April - The NAR reports: Existing-Home Sales Rise Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 5.77 million units in April from an upwardly revised 5.36 million in March, and are 22.8 percent higher than the 4.70 million-unit pace in April 2009. Total housing inventory at the end of April rose 11.5 percent to 4.04 million existing homes available for sale, which represents an 8.4-month supply at the current sales pace, up from an 8.1-month supply in March. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  Sales in April 2010 (5.77 million SAAR) were 7% higher than last month, and were 22.8% higher than April 2009 (4.61 million SAAR).

U.S. Economy: Home Purchases, Inventories Increase (Bloomberg) -- A larger-than-projected increase in April sales of previously owned homes was accompanied by an even bigger jump in inventories, raising the risk U.S. property values will backslide. Purchases climbed 7.6 percent to a 5.77 million annual rate as buyers rushed to qualify for an expiring government tax credit, the National Association of Realtors said today in Washington. The number of homes on the market surged by the most in a decade, while median prices showed the biggest gain in four years. Increasing supply, combined with mounting foreclosures and the probability that sales will retrench once a federal credit expires in June, may bring an end to the improvement in home values. Lower mortgage rates brought on by concern the European debt crisis will slow global growth may limit the damage.

Existing Home Sales: Inventory increases Year-over-Year - Earlier the NAR released the existing home sales data for April; 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. Inventory increased 2.7% YoY in April, the first YoY increase since 2008. This increase in the inventory is especially concerning because the reported inventory is already historically very high, and the 8.4 months of supply in April is well above normal. The months of supply will probably decline over the next two months because of the increase in sales due to the tax credit (reported at closing), but this will be something to watch this summer and later this year.

New Home Sales increase to 504K Annual Rate in April -The Census Bureau reports New Home Sales in April were at a seasonally adjusted annual rate (SAAR) of 504 thousand. This is an increase from the revised rate of 439 thousand in March (revised from 411 thousand).The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted). Note the Red columns for 2010. In April 2010, 48 thousand new homes were sold (NSA). The record low for the month of April was 32 thousand in 1982 and 2009; the record high was 116 thousand in 2005.The second graph shows New Home Sales vs. recessions for the last 45 years. Sales of new one-family houses in April 2010 were at a seasonally adjusted annual rate of 504,000 ... This is 14.8 percent (±19.5%)* above the revised March rate of 439,000 and is 47.8 percent (±26.0%) above the April 2009 estimate of 341,000. And another long term graph - this one for New Home Months of Supply.

New Home Prices: Median Lowest since 2003 - As part of the new home sales report, the Census Bureau reported that the median price for new homes fell to the lowest level since 2003.This graph shows the median and average new home price. It appears the builders sold at a lower price point in April, and that helped boost sales.This makes sense since many of the buyers were trying to take advantage of the housing tax credit (and probably using FHA insurance). Since the modification programs and the delays in foreclosure limited the number of distressed sales - many buyers at the low end found buying a new home easier than buying an existing home. The second graph shows the percent of new home sales by price. Half of all home sales were under $200K in April - tying Jan 2009 as the highest level since 2003 (there was panic selling in Jan 2009).

Mortgage Rates: Up, No Wait Down - Once again, the wisdom of crowds doesn't look so smart. A few months ago the prevailing wisdom was that mortgage rates were headed up. Why? Well, for so many reasons. Government borrowing was going to push up interest rates. The economy was recovering. And of course, we were soon going to be hit by massive inflation (even though the consumer price index recently fell, but whatever no need to look at the real numbers). The New York Times ran an article a month ago on mortgage rates with the title, No Where to Go but Up. Wrong. Mortgage rates did have somewhere else to go but up: Down.

Remarks on U.S. Mortgage Finance, Arnold Kling - At a conference yesterday on mortgage finance, I managed to turn a discussion of the future of securitization into a discussion of the 30-year fixed-rate mortgage. I think that the 30-year fixed-rate mortgage is an artifact of government intervention, and that without it we would have a simpler, safer mortgage finance system. The U.S. is the only country with the 30-year fixed-rate mortgage. Other countries get along fine without it.   The core of my argument against the thirty-year fixed-rate mortgage is that without government intervention I believe that more borrowers would prefer mortgages where the interest rate is fixed or a shorter period, like five years. The thirty-year fixed-rate mortgage includes both a default option and a prepayment option. The less money you put down, the more valuable the default option. The lower the cost of originating a new mortgage, the more valuable the prepayment option. Origination costs have fallen considerably over the past twenty years, especially when calculated as a percentage of the loan amount.

Case-Shiller House Prices "Weakening" - These graphs are Seasonally Adjusted (SA). S&P has cautioned that the seasonal adjustment is probably being distorted by irregular factors. These distortions could include distressed sales and the various government programs.  From S&P: The First Quarter of 2010 Indicates Some Weakening in Home Prices; Data through March 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices ... show that the U.S. National Home Price Index fell 3.2% in the first quarter of 2010, but remains above its year-earlier level. In March, 13 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down although the two composites and 10 MSAs showed year-over-year gains. The second graph shows the Year over year change in both indices. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Home prices mixed during first quarter - Home prices fell in the first quarter of 2010 but are still higher than they were a year ago. According to the S&P/Case-Shiller nation-wide index, home prices fell 3.2% quarter-over-quarter but have still managed to climb 2% year-over-year. The index continued to show weakness despite very low mortgage interest rates and tax incentives to encourage home purchases.Two other indexes tracked by Case-Shiller registered declines for the month of March, 0.5% for its index of 20 major cities and 0.4% for the 10-city index."The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices,"

Falling home prices stir fears of new bottom - The housing slump isn't over.Tax credits and historically low mortgage rates have failed to lift home prices so far this year. Prices fell 0.5 percent in March from February, according to the Standard & Poor's/Case-Shiller 20-city index released Tuesday.That marks six straight months of declines — a sign that the housing market is going in reverse."It looks a little like a double-dip already," economist Robert Shiller said in an interview. "There is a very real possibility of some more decline."The co-creator of the Case-Shiller index, who predicted in 2005 that the housing bubble would burst, says he worries that home prices rose last year only because of the federal tax credits. That fear is shared by other economists. They note that weak job growth, tight credit and millions more foreclosures ahead will weigh on the home market.

Looking for the housing bottom - In which US cities are home prices likely to fall? One measure is to look at the amount home prices have fallen, relative to the increases in their rental prices. Moves in rental prices tend to represent fundamental changes in the value of a property (people are paying only what it’s worth to stay there) rather than bubble-induced speculation about the future value of the property. In markets where there are bubbles, eventually, home prices should fall back in line with rental prices.Using Case Shiller and BLS data, there are 17 cities where we can compare home prices versus rentals (See chart). It’s a rough measure, to be sure. Rental price inflation is typically measured over a larger area than home price inflation, react with a lag, and can be pulled up by housing speculation. Also, for simplicity, I’ve used the same starting dates, even though bubble-suggestive activity didn’t begin simultaneously in all cities.

Housing markets: The bust's second act - The Economist -FOR a brief moment last fall, it looked as though the American housing sector might not be the persistent economic drag economists had feared. Home prices and sales leveled off and began climbing. Construction did the same. In the third and fourth quarter of last year, residential investment was a minor but positive contributor to American output growth. Buoyed by a generous homebuyer tax credit and mortgage rates held down by Federal Reserve purchases, housing markets seem poised for stability, if not a new boom in activity.But the good times haven't lasted. Construction and builder confidence have weakened once again. The latest data on existing home sales show a spike in activity and the best April performance since 2006. But this was almost certainly due to the looming end of the federal tax credit. Sales also rose and spiked before and immediately after the previous deadline, last fall, only to decline again through the winter. More worrying still, the previous spike in sales coincided with a decline in housing inventory. This time, inventories have risen dramatically. Even as the end of government incentive programmes lead buyers to exit the market, the number of homes for sale will have grown significantly.

House Prices Down, Property Taxes . . .Up?One of the worries as house prices began their now three-year plunge back in 2007 was the affect of falling values would have on budgets of cities and other local governments, which rely heavily on property taxes. Well it turns out, property tax revenue is far more resilient than people thought.The strength of the property tax was the main driver of the small positive growth in overall state and local taxes for the fourth quarter of 2009.  This was a theme in many of the presentations.  New research by Byron Lutz, Raven Malloy and Hui Shan illustrates that house value declines don't necessarily lead to lower property taxes, and when they do, it can take a while. With luck, by the time property taxes do dip, sales and income taxes will be recovering. The good news is that if property taxes could stand up in this recession, which was both deep and caused by a housing collapse, they can stand up to most crises.

Homeowners 'Overconfident' About Home Values: Zillow - In just one quarter, homeowners have gone from being overly cynical about the state of their own home’s value to being overly confident. According to the Q1 Homeowner Confidence Survey conducted by Seattle-based Zillow, 50 percent of homeowners nationwide believe their own home’s value declined in the past year. But in reality, 65 percent of U.S. homes have dropped in value in the last 12 months. This overconfidence brought Zillow’s Q1 2010 Home Value Misperception Index up to 5, a jump from -2 in the Q4 2009 index. Zillow said an index of zero indicates that homeowner perception is in line with reality, while a negative index suggests that homeowners are overly pessimistic about the value of their own home. While homeowners were considered overly confident on a national basis, regional results varied.

IMF Economist Argues Home Prices Still Have Far To Fall - Dour predictions about the housing market aren’t the norm anymore, as many economists have grown optimistic that home prices will begin rebounding strongly next year. But International Monetary Fund economists Prakash Loungani has found plenty of reasons to remain glum. Loungani presented his analysis of housing busts since 1970 in the countries that make up the OECD. His prediction: Home prices will fall much farther and for much longer.On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%.But the latest boom was so much bigger than the previous ones that it’s logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. Loungani likened the current cycle to a rollercoaster which has roared up a steep hump and now needs to come down again.

A Look at Case-Shiller, by Metro Area (May Update) - The S&P/Case-Shiller National Index, a broad gauge of U.S. home prices, posted a 2% gain in the first quarter from a year earlier, but was down 3.2% from the end of 2009. The national data are released quarterly, but the monthly numbers showed a similar pattern. The closely watched 20-city home-price index rose 2.3% in March from a year earlier, but was 0.5% lower than February.Cleveland posted the largest jump in prices from the prior month, while Las Vegas posted the biggest drop. Eight cities — Atlanta, Charlotte, Chicago, Detroit, Las Vegas, New York, Portland and Tampa — posted new index lows. But, the West Coast has shown some strength. Los Angeles, San Diego and San Francisco are all up more than 7% from recent lows. San Diego, in particular, has stood out with 11 consecutive months of increasing home prices.

Where the Smart People Live -  Instead, I compiled the data at two geographic levels: first at the city level and second at the "urban county" level. I realize that comparing these geographies is not always entirely fair. That's why I'm giving away the spreadsheet with all of my work to anyone who wants to build upon this analysis (download it here).I picked these cities by looking at the 50 largest metro areas by population and pulling what I deemed to be the "primary city" from each. In two metro areas, the Twin Cities and Bay Area, I pulled two "primary cities". At the city-level, college degree density breaks down like this: So which one of these trends is going to win out?

Real Case-Shiller National House Prices - S&P/Case-Shiller also released the Q1 2010 National Index this morning.By request, here is a graph that shows the national index in both nominal and real terms (adjusted with CPI less shelter). In nominal terms (blue), the National Index declined 1.3% in Q1, and is 2.1% off the recent bottom in Q1 2009. Note: Case-Shiller reported the national index declined 3.2% in Q1 (Not Seasonally Adjusted, NSA) - however I'm using the SA data.In real terms (red), the National Index declined 1.9% in Q1, and is now at the lowest level since Q4 2000

MBA: Mortgage Purchase Applications at 13 Year Low - The MBA reports: Mortgage Refinance Applications Continue to Increase, Purchase Applications Decline Further The Market Composite Index, a measure of mortgage loan application volume, increased 11.3 percent on a seasonally adjusted basis from one week earlier ...The Refinance Index increased 17.0 percent from the previous week. This third consecutive increase marks the highest Refinance Index recorded in the survey since October 2009. The seasonally adjusted Purchase Index decreased 3.3 percent from one week earlier and is the lowest Purchase Index observed in the survey since April 1997.

Mapping the Mortgage Interest Deduction - Here on Economix we’ve written quite a bit about the mortgage interest deduction, a blessing for many home buyers but a bane to many economists (for its distorting effect on house prices, its questionable social goals and the big tax revenue giveaway it amounts to).The Tax Foundation, a nonpartisan research organization that generally advocates lower tax rates and broader tax bases, has now analyzed Internal Revenue Service data on 2008 federal income tax returns to determine exactly whom the deduction benefits.Across the United States, just over one-quarter of individual tax returns — 26.8 percent– claimed the mortgage interest deduction. Of the tax returns that did deduct for mortgage interest, the average amount deducted was $12,221.As you can see in the interactive map above, Maryland had the highest percentage of tax returns claiming the deduction (37.9 percent), followed by Connecticut (35.15 percent).

California Leads States With Mortgage Interest Tax Deduction - Californians that claimed the mortgage interest rate deduction saved an average of almost $20,000 from their tax bill in 2008, according to a Tax Foundation analysis of new data from the Internal Revenue Service. Close behind were Hawaii and Nevada. The national average among the roughly one quarter of Americans who deducted mortgage interest from their taxes was $12,221.These numbers are a reminder of why the mortgage interest rate deduction, despite being assaulted by everyone from economists who say it distorts incentives in favor of home ownership to urban zealots who say it encourages sprawl, remains an untouchable tax break and a third rail of American politics.The Tax Foundation, a think tank that advocates for a simpler tax code with a broader reach but lower rates, doesn’t hide their disgust for the break

New Survey Reveals Shocking Increase in Strategic Defaulters… A new survey of homeowners released today found that two out of five, or 41 percent, of homeowners would consider walking away from their mortgages if their homes were worth less than the amount they owed.The survey, by search site and RealtyTrac, the online marketplace for foreclosed properties, demonstrates the growing popularity of “strategic defaults, which were the subject of a 60 minutes segment last Sunday .  The Trulia-RealtyTrac survey produced the highest number yet of potential strategic defaulters.The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009 according to new data released two weeks ago. Some 288,992 foreclosures per quarter are strategic defaults, according to the U of C and Northwestern researchers.

What kind of homeowners choose to default? – latimes - Memo to the bank: Take this underwater, money-gulping house and go ahead and wreck my credit for years to come. I'm walking away no matter what. Why?That's the provocative question posed by Brent T. White, a University of Arizona law professor whose academic paper on the fast-spreading "strategic default" phenomenon last year drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement. Now White has published a new paper, based on the personal accounts of 356 strategic defaulters and homeowners on the verge of doing the same. His finding: People who intentionally default on their loans are not as calculating in their decision-making as widely believed.

Boom in real estate auctions - Going, going, gone: An increasing number of homes are now being sold at auction -- rather than through real estate brokers -- in an effort to dump properties more quickly and efficiently.Auctions have increased by about 10% a year since the early 2000s, with homes worth nearly $17 billion sold this way in 2007, according to the National Auctioneers Association.Auction sales have already spiked 14% in the first three months of 2010, according to the group. "One auctioneer told me yesterday that he's been doing two, sometimes even three auctions a day, up from one a day or less a couple of years ago,"

"Housing Production Credit Crisis"? - I thought this was from The Onion ... unfortunately it is not. From the NAHB: Legislation Addresses Housing Production Credit Crisis Legislation introduced yesterday would help alleviate the severe lack of credit for acquisition, development and construction (AD&C) financing that threatens to end the budding housing recovery before it has time to take root, according to the National Association of Home Builders (NAHB).“We applaud these lawmakers for taking the lead to address the housing production credit crisis that is jeopardizing the housing and economic recovery now under way,” said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich.H.R. 5409, the Residential Construction Lending Act, would create a new residential construction loan guarantee program within the Department of Treasury to provide loans to builders with viable construction projects.

Is there any reason to subsidize construction loans? - Is Brad Miller — one of the most financially-sophisticated Congressmen in the House — really sponsoring a bill in which Treasury would provide loan guarantees for homebuilders? I thought it was at least worth asking Miller what exactly was going on. He pointed me to a letter he wrote to Treasury a year ago, and added this: So, that’s the rationale, and there are parts of it which make sense. If banks are as dysfunctional and self-defeating in their relations with homebuilders as they are in their relations with homeowners, then I’m perfectly willing to believe that they’re destroying projects which can and should be perfectly profitable for them — and in the process causing unnecessary unemployment.

Why we shouldn’t subsidize construction - I’ve received some great feedback on my post on subsidizing construction loans, especially from Tom Lindmark, who points out that if you want a short-term jobs boost which doesn’t increase U.S. imports very much, then construction is a great area to subsidize. Lindmark cites Mike Mandel in support of his argument, which is always a good sign, but it’s worth noting that Mike kicks off his post by noting that he’s “never been a big fan of home construction as a driver of economic growth”. It’s a cheap high, and the hangover is always brutal.Meanwhile, commenter winstongator points me to this article from today’s Raleigh News Observer. He does so because Brad Miller specifically singled out Raleigh as a city where new construction was needed. The first line says it all:Hue, the multicolor building that is the largest condo project ever attempted in downtown Raleigh, closed its sales office without ever selling a unit....Subprime lending was not driven by home ownership; home ownership was the political excuse for it…Only about ten percent of subprime loans were for the purchase of first homes. More than 70 percent, as I recall, were refinances… and the vast majority of homeowners who got subprime mortgages qualified for prime mortgages

Foreclosures hit record high as late payments wane - The percentage of loans in foreclosure or with at least one payment past due was a non-seasonally-adjusted 14% in the first quarter, down from 15% in the fourth quarter of 2009, the Mortgage Bankers Association said Wednesday. But mortgages in the foreclosure process hit a record high at a non-seasonally-adjusted 4.63%, up from 4.58% in the fourth quarter. The percentage of loans in the foreclosure process was 3.85% in the first quarter of 2009. Homeowner delinquency rates muddied the housing-market picture:  The seasonally adjusted delinquency rate for mortgages on one- to four-unit residential properties, which includes mortgages at least one payment past due but doesn't include those in foreclosure, rose to 10%, from 9.5%. The delinquency rate was 9.1% in the first quarter of 2009.

Barack Obama’s Foreclosure Help Programs Are NOT Working - When Barack Obama first took office, he promised that he was going to get help to homeowners that were struggling with their mortgages.  He promised that a program would be set up that would enable large numbers of homeowners to receive long-term mortgage modifications.So how is that working out?Well, it turns out that only 168,708 homeowners have received long-term mortgage modifications under Barack Obama's plan as of the end of February.This represents less than 3 percent of the 6 million borrowers who are currently more than 60 days behind on their mortgages.What kind of foreclosure help is that?

The sleazy world of predatory debt buyers - NEDAP has an extremely important new report on a particularly evil and sleazy part of the predatory financial universe: debt buyers. These institutions make hundreds of millions of dollars by suing people in low-income neighborhoods, often without properly serving them with notice that they’re being sued. When the alleged debtor doesn’t show up for court, the debt buyers get a default judgment, and start attaching bank accounts and garnishing wages. Often they do this successfully even when the debt is not legitimate.The debt buyers are massively profitable, despite the fact that they have almost no legal leg to stand on:

How Debt Buyers Abuse the Legal System to Prey on Lower-Income New Yorkers. 36pp pdf

Growing Homelessness in America - In the world's richest country, the trend is shocking, disturbing and appalling. In its 2009 report on "Hunger and Homelessness in US Cities," the US Conference of Mayors stated:"Hunger and homelessness (are) at record levels in US cities," citing an overall 26% demand increase over the past year and 19% more homelessness. Yet worsening conditions leave millions on their own and out of luck because Washington has other priorities excluding them. "At a time of historic economic crisis, the issues of hunger and homelessness in America are more prevalent than ever." Cities are hard-pressed to handle them, and planned budget cuts and revenue shortfalls will strap them well into the future.

Another Clumsy Attack On Income Redistribution Policies -Brooks cited a poll showing that 70% of Americans approve of "the free enterprise system" and only 30% believe we would be better off "without free markets at the core of our sysytem." OK, fine, this is believable. But then Brooks somehow decides that this 70% also believes that "free enterprise brings happiness; redistribution does not," and "that it is 30% coalition, not the 70% majority, that is fundamentally materialistic." Brooks gives no ground for any program at all in any form, whether food stamps, or social security, or medicare, or progressive income taxation, or whatever. They are all bad and not supported by the free-enterprise-loving majority. I guess this would include all those tea partiers who were opposed to Obama's "socialistic" health care reform because it might damage their free market medicare.

Invest in Bulldozers - The Mortgage Bankers Association recently released data on prime loan delinquencies (30 days+) and foreclosures. Both categories reached alarming new highs, as together they represent more than 10.7% of all prime loans. Foreclosures increased at a faster pace than delinquencies, up 37% from the first quarter of 2009. With so many failed modifications, many of these loans will likely transition to REO and hit the market, further pressuring prices. The overhang of shadow inventory is showing up in the FDIC data. The Quarterly Banking Profile for the first quarter of 2010, released yesterday, showed a 10-fold increase in REO across all FDIC-insured institutions since 2005. The REO situation at Fannie Mae and Freddie Mac mirrors the rest of the market. They held $17.4 billion in REO combined as of March 31, 2010. The increasing supply of REO held at Fannie Mae and Freddie Mac comes with the cost of maintenance, upkeep and taxes. In order to incentivize individuals to buy properties (and get the REO off of their books), Fannie Mae began providing a 3.5% discount on the purchase of a property in February, which was set to expire May 1. Fannie Mae just pushed the deadline to June 30, 2010. We would expect a rolling deadline until REO improves.

Loan modifications often damage credit scores - Struggling homeowners who get a loan modification to reduce their mortgage payments are often unaware that it can seriously ding their credit score. Moreover, if they don't get long-term help, the temporary loan mod can bury them in a deeper hole of debt that increases the likelihood they'll lose their home. "A lot of people don't understand that by making the payments due on their temporary loan mod they're reported as delinquent immediately," said Margot Saunders of the National Consumer Law Center in Washington. "It's a huge misunderstanding." For borrowers who do end up getting long-term relief, the credit hits may be worthwhile, said Ruth Susswein, deputy director for national priorities at Consumer Action.

How "discouraged" are small businesses? Insights from an Atlanta Fed small business lending survey - Roughly half of U.S. workers are employed at firms with fewer than 500 employees, and about 90 percent of U.S. firms have fewer than 20 employees. While estimates vary, small businesses are also credited with creating the lion's share of net new jobs. But is a lack of willingness to lend to small businesses really what's behind the decline in small business lending? Or is it the lack of creditworthy demand resulting from the effects of the recession and housing market distress? We at the Federal Reserve Bank of Atlanta have also noted the paucity of data in this area and have begun a series of small business credit surveys. Leveraging the contacts in our Regional Economic Information Network (REIN), we polled 311 small businesses in the states of the Sixth District (Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee) on their credit experiences and future plans.

Small Businesses not yet Buying into the Recovery- The economic recovery that some had been predicting over the past months may not be right around the corner, after all. While there are some indications of a strengthening economy, many experts are becoming more cautious about both the timing and the rate of the recovery.And there is a growing chorus of those who believe that we may actually see a second downturn as part of this recession.Recent surveys find that small- business owners also are not confident that good times will be returning anytime soon.SurePayroll's Small Business Scorecard for April found that optimism among small-business owners has shown some improvement during 2010. However, the authors caution that, "while some good things are happening, until more small businesses start hiring full-time workers -- and those workers spend with confidence due to perceived job security -- it is not time to declare a full recovery."

The CPI and other asset prices - Returning from a long weekend's canoeing, I remembered one of the main reasons I am a sticky-price macroeconomist. I checked to see if the economy had imploded while I was not worrying about it. April CPI up 0.1% from March; CAD/USD down about 2%; CAD/EUR up about 2%; TSX down around 3%; S&P500 down around 6%; oil down around 3%, etc. You get the picture. The exact numbers don't matter. The CPI moved less in one whole month than all the other numbers moved in my 4-day weekend. A whole order of magnitude less. The CPI is a boring number. Anybody can predict next month's CPI within a 1% range; nobody can predict next month's exchange rates, oil prices, or stock prices with that degree of accuracy. But what does this tell us?

Consumer Spending is Not 70% of the Economy - Journalists, commentators, and economists often say that consumer spending makes up 70% of the U.S. economy. There’s just one problem with the 70% claim: it’s wrong. Consumer spending actually makes up only 60% of the economy. This discrepancy exists because national income accounting doesn’t always mix well with simple arithmetic. If you look at data for 2009, you will find that consumer spending totaled $10.1 trillion, while GDP was $14.3 trillion, both measured in current dollars. Put those together, and it appears that consumer spending is about 71% of the economy (= 10.1 / 14.3). That calculation is so simple, it’s easy to understand why it has a fan club. But there’s a hidden problem. To see it, it helps to do the same calculation for other parts of the economy. Notice anything strange? If you add these four sectors of the economy together, you discover that they account for 114% of GDP. In other words, consumer spending, investment, government spending, and exports, when combined, are one-seventh larger than the total economy.

Your Household’s Share Of The September 2008 Economic Collapse: $104,350 - A recent report from the Pew Charitable Trusts tallies up each US household's share in the economic collapse. Your household's share? $104,350. That includes lost income, government bailouts, and both reduced home values and reduced stock values. (breakdown follows)

U.S. Economy on Continued Life Support -Calculated Risk details that according to the CBO, stimulus (i.e. the American Recovery and Reinvestment Act "ARRA") raised GDP in Q1 by an estimated range of 1.7% to 4.2%. Since reported GDP growth was 3.2% annualized for the quarter, this means that if the impact of stimulus was at the high-end of the range, GDP "would have" been negative in Q1.The chart below shows actual GDP and a range for GDP ex-stimulus (simply actual GDP less the estimated impact of the stimulus at the low and high-end ranges as detailed by the CBO).The good news? The impact of stimulus is expected to be strong the remainder of the year (Q2 '10: 1.7% - 4.6%, Q3 '10: 1.4% - 4.2%, Q4 '10: 1.1% - 3.6%)

No Progress in Weekly Unemployment Claims for Five Months - Mish -Weekly claims once again hover around 450,000 with the 4-week moving average rising a bit to 456,500 for months. Please consider the Unemployment Weekly Claims Report for May 22, 2010.  In the week ending May 22, the advance figure for seasonally adjusted initial claims was 460,000, a decrease of 14,000 from the previous week's revised figure of 474,000. The 4-week moving average was 456,500, an increase of 2,250 from the previous week's revised average of 454,250. The 4-week moving average is still near the peak results of the last two recessions. It's important to note those are raw numbers, not population adjusted. Nonetheless, the numbers do indicate broad weakness.To be consistent with an economy adding jobs coming out of a recession, the number of claims needs to fall to the 400,000 level.

Repairing America’s roads: It tolls for thee | The Economist SINCE his first days as a presidential candidate, Barack Obama has championed investment in infrastructure. Now would seem a good time to do some. The building and repairing of roads in America is paid for by a federal petrol tax, which replenishes the highway trust fund. Current transport revenues are too puny to cover existing commitments, to say nothing of new initiatives. Only congressional infusions of money from general revenues have prevented the trust fund from going into the red (see chart). Because people are driving less, and cars are more efficient, the petrol tax is not the money-spinner it used to be. But uncertainty, fears about climate change and environmental disasters have not improved the appetite for a rise in the tax rate. It has stayed at 18.4 cents per gallon since 1993. Mr Obama ruled out a petrol-tax increase almost from the beginning of his presidency, saying it would threaten recovery. The administration recently opposed a carbon fee on fuels in a draft Senate climate bill for similar reasons.

The Climate Bill and the Employment Picture - A new report estimates that, if enacted, the provisions in the Senate climate and energy bill would create 200,000 new jobs each year from 2011 to 2020. Given that the number of employed civilians in the United States currently exceeds 140 million, that’s a drop in the bucket.“This is not fundamentally going to change the employment picture in the U.S., neither on the up side or the down side,” said Trevor Hauser, a visiting fellow at the Peterson Institute for International Economics and one of the report’s authors. “It’s modestly stimulative.”Still, some may find it notable that a rise in the number of renewable energy projects and the creation of a cap and trade system for greenhouse gases could have a positive rather than a negative effect on the unemployment rate, which is at 10 percent two years after the start of a recession.

Bill on jobless benefits, state financial help scaled back - Under fire from rank-and-file Democrats worried about the soaring national debt, congressional leaders reached a tentative agreement Wednesday to scale back a package that would have devoted nearly $200 billion to jobless benefits and other economic provisions while postponing a scheduled pay cut for doctors who see Medicare patients. After struggling throughout the day to reach a compromise, House leaders scheduled a Thursday vote on the slimmed-down package in hopes of pushing it through both chambers before the 10-day Memorial Day recess, which is scheduled to begin Friday. Unless lawmakers act before June 1, millions of people could cease to be eligible for up to 99 weeks of jobless benefits and doctors' Medicare payments could fall by 20 percent.

New jobs bill would save or create well over a million jobs - The House and Senate are about to debate the American Jobs and Closing Tax Loopholes Act (H.R. 4213), which would provide desperately needed help for a U.S. economy that is still recovering from the worst recession in 70 years and for millions of American families who will benefit from new jobs, unemployment compensation, and lower taxes.  Failure to enact it could have serious consequences for an economy that is just now turning the corner from job loss to job creation.  Without the added demand that the Act will generate, the economy risks sliding back into a weakened state and repeating the cycle of consumer retrenchment, lost business, layoffs, and further erosion  of consumer confidence that has characterized most of the last two-and-a-half years. This jobs bill has a host of provisions of varying importance, including:

Census Hiring Set to Go Supernova - Temporary hiring for the decennial 2010 census has boosted U.S. jobs numbers for the last few months, but in May it looks set to go supernova.Every 10 years the U.S. Census Bureau hires temporary workers to go door to door collecting data. This hiring boosts the overall number of workers reported on U.S. payrolls. In April, the 290,000 increase in payrolls was boosted by 66,000 Census hires. Next month, that number is likely to be much larger.Every week, the Census Bureau releases the number of temporary workers on its payroll. For the week including May 12, which is when the Labor Department conducted its survey used to compile the May payrolls figure, that number was 573,779. The April level was 156,335, which translates to a gain of more than 417,000 jobs in May. That means the government figure reported next Friday is likely to be well over half a million. Indeed, economists polled by Dow Jones Newswires forecast 563,000. That would be the largest one-month jump in payrolls since September 1983.

OECD: Factblog: Big variations in R&D spending - People often think about innovation in terms of research and development – R&D. The Factblog has already compared R&D expenditure as a percentage of GDP, so this time we’re looking at R&D expenditure per capita – in other words, how much do countries spend per person on R&D. Again, differences between countries are stark, with Israel and Sweden spending 14 times more per year per person than Turkey. Countries like United Kingdom or France are slightly below the OECD average of $711.But R&D is only one part of the innovation story. Today, the OECD is presenting Measuring Innovation – A New Perspective, which introduces a broader framework for comparing innovation policies. In addition to R&D, it includes indicators on the context in which innovation occurs, including education, international cooperation and taxation. It also takes into account the characteristics of innovating firms. We’ll take a more detailed look at some of these issues in future Factblog posts.

Structural Unemployment and Technology - Previously, I've argued here that job automation technology might someday advance to the point where most routine or repetitive jobs will be performed by machines or software, and that, as a result, we may end up with severe structural unemployment. Clearly, the economy continues to struggle with job creation, and I think that automation is playing a significant role.Catherine Rampell recently wrote an article in the New York Times that delves into the impact this issue is having in the lives of typical workers. As the article points out:For the last two years, the weak economy has provided an opportunity for employers to do what they would have done anyway: dismiss millions of people — like file clerks, ticket agents and autoworkers — who were displaced by technological advances and international trade. Rampell's piece does an especially good job of capturing the denial that is likely to continue to be associated with this issue:

Millions of unemployed could lose benefits under current law - In April, 2010 there were 15.3 million unemployed workers actively looking for work, but with 5.6 unemployed workers for every job opening, their chances of finding a job are slim. Fortunately, the American Jobs and Closing Tax Loopholes Act of 2010 (AJCTLA) brings much needed relief for unemployed workers. The act extends unemployment insurance payments through the end of 2010, providing an estimated 5 million unemployed workers with support, while ensuring access to affordable health care.In addition to helping those who have been hit the hardest in this recession, the act will help the overall economy recover by providing funds for infrastructure investments, tax cuts for individuals and small businesses, summer jobs, and other programs. These payments are partially offset by the elimination of tax loopholes, particularly ones for multinational corporations.Under current law, unemployment insurance extensions are set to phase out at the end of May 2010. If that is allowed to happen, every quarter through 2010 will see millions of unemployed workers exhaust their benefits and stop receiving payments. The Chart below shows how many workers will exhaust their benefits each quarter under current law and under the AJCTLA extension

Job Searches Around the Country, Part II - On Thursday we posted a map, created by the Economic Policy Institute, showing the average duration of unemployment in each American state last year. I was curious how closely the duration of unemployment tracked with the portion of people who were unemployed, since it seems likely that people will stay unemployed longer if the are competing with a bigger pool of unemployed workers. And lo and behold, that generally seems to be the case: The chart above shows state unemployment rates on the horizontal axis, and the median duration of unemployment (for those who are actually out of work but looking) on the vertical axis. All numbers are from 2009, the earliest period for which joblessness duration information is available.

How Bad Is It Really for the Unemployed? - Many of us have read that long-term unemployment (26 weeks or more) is at a record high. But sometimes it takes a new angle of vision to make you see just how difficult things are. My “aha” moment came over the weekend, when I read a recent survey that tracked the fate of a large sample of individuals who were unemployed as of last August. Here's a summary: Of the 908-person sample, 67 percent remained unemployed but were still looking for work, and an additional 12 percent had given up and dropped out of the labor force. Only 21 percent had found jobs (only 13 percent full-time) and were currently employed. A stunning 28 percent of the newly reemployed had been looking for work for more than one year, and 6 percent for more than two years. Fifty-five percent accepted a pay cut in their new jobs; 13 percent took a cut larger than one-third of their previous salary.

Jobless and feeling hopeless - To hear economists talk, the Great Recession, which hurtled across the U.S. like a hurricane starting at the end of 2007, has passed. But on a human level, it often doesn’t feel that way. Jobs are scarce and unemployment – at 9.9 per cent – remains startlingly high after the massive layoffs of the past two years.  President Barack Obama acknowledged the disparity between the “fancy formulas” employed by economists and the lived experience of ordinary people. “If you're still looking for a job, it's still a recession,” he said. “If you can't pay your bills or your mortgage, it's still a recession. No matter what the economists say, it's not a real recovery until people can feel it in their own lives.”  As market commentators fret about the fate of the euro and the path of the Chinese economy, another vulnerability is on display at job fairs like the one Mr. Voigt visited. U.S. consumers have powered global economic demand for years, but now struggle with high levels of joblessness that aren’t likely to abate any time soon. If U.S. consumers cut back on spending, the outlook for the global recovery darkens.

Family Structure and Economic Mobility of Children - Economic Mobility Project - Family Structure and the Economic Mobility of Children explores the relationship between parental marital status and intergenerational economic mobility. Co-authored by Thomas DeLeire of the University of Wisconsin and Leonard M. Lopoo of Syracuse University, the report compares the economic mobility outcomes for children who were born to single mothers, divorced parents, and continuously married parents. It finds that, across the income distribution, divorce is particularly harmful for children’s economic mobility in both absolute and relative terms. The report also highlights the striking differences in economic mobility outcomes for white and African American children, but finds that family structure does not fully explain these differences.

Does more immigration mean less crime? From the WSJ:... Brace yourself for the backlash. University of Colorado sociologist Tim Wadsworth has a study out in Social Science Quarterly suggesting that more immigration leads to less crime. During the 1990s, the incidence of serious crime dropped in many places in the U.S.—but fastest in the cities with the largest increase in immigrants. That conclusion comes from studying demographic data from the Census for cities with more than 50,000 residents and information from the FBI about instances of homicide and robbery.

The Economics of Immigration Are Not What You Think, by Robert J. Shapiro, NDN [CC]: Waves of new immigrants often spark economic anxiety and cultural discomfort, as well as occasional violence and wide-net crackdowns, on the Arizona model. Even here, a nation comprised almost entirely of immigrants and their descendents, we’ve seen these reactions not only in recent times but also a century ago, when waves of poor immigrants from Europe arrived here. With a hundred years’ distance, however, we can now see that those early waves of immigration were generally associated not with economic dislocation and national decline, but with extraordinary economic boom times and America’s emergence as the world’s leading economy. And for much the same reasons as a century ago, recent evidence indicates that the economic effects of the current waves of immigration are also largely positive. The New Policy Institute (NPI) asked me to review all of the available data and economic studies of recent U.S. immigration. With my colleague Jiwon Vellucci, we found, to start, that more than one-third of recent immigrants come from Europe and Asia, while less than 57 percent have come from Mexico and other Latin American nations.

Bill on jobless benefits, state financial help scaled back - Under fire from rank-and-file Democrats worried about the soaring national debt, congressional leaders reached a tentative agreement Wednesday to scale back a package that would have devoted nearly $200 billion to jobless benefits and other economic provisions while postponing a scheduled pay cut for doctors who see Medicare patients. After struggling throughout the day to reach a compromise, House leaders scheduled a Thursday vote on the slimmed-down package in hopes of pushing it through both chambers before the 10-day Memorial Day recess, which is scheduled to begin Friday. Unless lawmakers act before June 1, millions of people could cease to be eligible for up to 99 weeks of jobless benefits and doctors' Medicare payments could fall by 20 percent.

States: U-6 Unemployment Rate vs. Mortgage Delinquency Rate - By request here is a scatter graph comparing the Q1 2010 delinquency rate for mortgage loans (including all loans in foreclosure) vs. the U-6 unemployment rate for all states. U-6 is available on a rolling four quarters basis from the BLS - and this is the 'Second Quarter of 2009 through First Quarter of 2010 Averages' data. (ht Keith for the data). Note: The U-6 unemployment rate includes "total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers."

32 States Have Borrowed from the Federal Government to Make Unemployment Payments; California Has Borrowed $7 Billion - has learned that 32 states have run out funds to make unemployment benefit payments and that the federal government has been supplying these states with funds so that they can make their  payments to the unemployed. In some cases, states have borrowed billions. As of May 20, the total balance outstanding by 32 states (and the Virgin Islands) is $37.8 billion. The state of California has borrowed $6.9 billion. Michigan has borrowed $3.9 billion, Illinois $2.2 billion.Below is the full list of the 32 states (and the Virgin Islands) that have borrowed from the federal government  to make unemployment payments, and the amounts that remain borrowed as of May 20 . (Numbers in red are billions)

States face hurdles in cutting worker benefits| Reuters - State governors working to close yawning deficits are again eyeing a tempting target -- the billions of dollars in benefits and wage hikes that public workers won in boom times.So far, they have achieved only limited success due to ironclad union contracts, federal and state constitutional protections and lawsuits filed by public workers and others.The stakes are high. All 50 states have a collective $1 trillion shortfall in their retirement funds, says the Pew Center on the States in Washington. Some states have hired private workers in certain fields, from prisons to computers. Others have merged agencies, such as Massachusetts, which twinned its mass transit and highway arms.

Don't just blame the crisis (video) AMERICA'S jobs machine is still broken. As the economy slowly recovers, the labour market is struggling to follow suit. Unemployment remains stubbornly high, at 9.9% nationally, and full employment is years away.To understand the labour market’s slow response to the recovery, The Economist went to Rhode Island, which entered the recession six months before the rest of the country. Its unemployment rate, one of the nation’s worst, peaked at a seasonally-adjusted 12.7% in December 2009 and remained there until February of this year. In Rhode Island, as in many states, cyclical problems including low consumer spending and tight credit markets only added to long-ignored structural issues, like dwindling manufacturing industries, an abyssal budget deficit, a poorly trained workforce, and a graying population. What we found is that unemployment cannot be resolved through national policies alone. State and local governments must also help themselves.

300,000 jobs in public sector face the axe - Detailed research by The Sunday Times shows that at least 300,000 workers, including civil servants and frontline staff, will lose their jobs over the next few years. Some estimates suggest that the number of job losses could reach 700,000. These will include tens of thousands of health service managers as well as many thousands of doctors and nurses, according to internal documents from the National Health Service. Three out of the 10 strategic health authorities have disclosed that they will reduce their headcounts by a total of 30,132, an average of 8.7%. If these cuts were replicated nationwide, the total job losses would amount to 120,000. A similar analysis of 75 local authorities suggests that at least 100,000 council workers across the country will lose their jobs.

The Property Tax: Unsung Hero - It is not news that state tax revenues have been absolutely hammered in the current economic downturn. But you may be surprised to learn that one local tax has held up relatively well.  It is, of all things, the property tax. How can that be, you ask, if so much of the economic mess was caused by a collapse of a housing bubble? Last week a Tax Policy Center conference on the housing crisis and its impact on state and local governments took a close look at why.  In part, it’s because the dog hasn’t barked yet. Nationally, property tax revenues have yet to fall both because the levy tends to be backward-looking (it takes a while for assessed values to catch up with reality on both the upside and the downside) and because local governments can raise rates.

New report says Oregon faces decade of budget deficits - Oregon risks 10 years of crushing, multibillion-dollar budget shortfalls unless it immediately puts the brakes on spending and starts offering fewer services, cautions a new report released Thursday.This is no attack by anti-tax or anti-government factions. The warning comes from Gov. Ted Kulongoski's "reset Cabinet," a group of trusted advisers he appointed to assess the state's long-term fiscal outlook and suggest changes."We find that Oregon faces a decade of deficits, during which we cannot expect to be bailed out by a rebounding economy or a more generous federal government," the report, says. If state spending is allowed to grow at its current rate, it goes on to say, "lawmakers and voters will find themselves again and again between the rock and the hard place of cutting services or raising taxes."

DiNapoli says New York Racking Up More Debt - New York state is on the brink of racking up more unsustainable debt, state Comptroller Thomas DiNapoli warned on Tuesday...DiNapoli studied three proposals for borrowing floated this year by Lt. Gov. Richard Ravitch and Democrats in the Senate and Assembly. He didn’t like what he saw: annual principal and interest payments of between $725 million to $850 million—or more.The proposed borrowing would be used to cover operating expenses and help close the state’s $9.2 billion deficit. “When you borrow to close budget gaps, there’s nothing to show for it but the billions taxpayers pay out each year—no roads, no schools, no bridges,” DiNapoli said. “It’s time to put aside borrowing proposals and move forward with a budget that recognizes New York’s fiscal reality. Every day of delay is just more wasted time.” The state currently has $60.4 billion of debt—a number projected to grow 11 percent by 2014, even if the state doesn’t borrow a penny this year

NY Assembly Looks at Millionaire's Tax -New York Assembly Speaker Sheldon Silver is reportedly pitching a plan for an increased "millionaire's tax" aimed at 75-85 thousand New Yorkers making $1 million or more a year.Political columnist Fred Dicker , who appeared on Wednesday's Good Day New York, says Silver secretly proposed a $1 billion tax hike on the highest income earners to Gov. Paterson.The plan would jack up a current millionaires tax another 11-percent. The current "millionaire's tax" actually starts affecting people who have incomes over $200,000. High income tax earners would pay more than 13-percent of their salary in local taxes.The highest one percent of income earners account for about 36 percent of all state taxes.

California Democrats Seek $9 Billion Bond to Offset Budget Cuts (Bloomberg) -- Democrats in California’s Assembly proposed selling $9 billion of bonds backed by beverage recycling fees and a new tax on oil production they say can be passed without a two-thirds vote to help ease a $19 billion deficit. Under the plan proposed by Assembly Speaker John Perez of Los Angeles, the state would sell as much as $8.9 billion of bonds backed by the unclaimed redemptions on recyclable beverage containers. Another $900 million a year would be raised with a so-called severance tax on oil taken out of the ground in California. To make the proposal “revenue neutral,” and therefore not subject to the two-thirds requirement under the state’s constitution, the plan would increase local sales taxes by one- quarter of a cent while lowering the state’s sales tax by the same amount, Perez said. The oil tax would make up the difference.

New Jersey Careening `Toward Becoming Greece' as Costs Rise, Christie Says - New Jersey Governor Chris Christie said the state is “careening our way toward becoming Greece” and can’t afford the cost of benefits and pensions for current workers. The governor, speaking today to members of the Manhattan Institute, said his state must reduce its tax burden and control government spending. He has proposed a constitutional amendment to cap growth in property taxes, the main source of funding for schools and towns, at 2.5 percent a year. “Higher taxes are not going to solve the problem,” said Christie, a Republican who took office Jan. 19. “We’ve got to change the course.”

U.S. cities face deepening fiscal problems (Reuters) - Most U.S. cities face worsening economies, and local governments will have to cut personnel or stop construction over the next few years, according to a survey released by the National League of Cities on Monday. Three in four city officials reported that overall economic and fiscal conditions have worsened over the past year, the league reported, and more than six in 10 said poverty has intensified.Almost all -- 90 percent -- said unemployment was a problem for their communities and that joblessness has mounted over the last year.

European banks and muni credit facilities - Market analysts have devoted a lot of time to sorting out which US financial institutions have European sovereign debt exposure and bank counterparty risk.  According to a recent article in American Banker, Bank of America had about $1.3 billion invested in Greece and $731 million invested in Portugal.  JP Morgan Chase estimated its exposure at under $2.1 billion in each country.  US financial institutions’ counterparty exposure to European banks seems almost impossible to estimate.While it seems intuitive that banks would be concerned with the meltdown overseas, you might be interested to know that US state and local governments also have significant exposure to European banks through the credit facilities they have backstopping their variable rate bonds.  Much of this exposure stems from the collapse of the auction rate securities (ARS) market in 2008.

Not Greece...Sacramento, Albany, Talahassee, Kansas City, and Cleveland May Be The Key To Federal Deficit Reductions - All of the attention Wall Street is paying to the financial situation in Greece may be misdirected.  The real story about the economic future in the U.S. and the budget choices facing the federal government in the next year or so are far more likely to be coming from the state capitals and cities around the country.As I've previously posted (here and here) largely because of balanced budget requirements (but also some fiscal mismanagement and political games), many states and cities are having to make budget choices that were totally inconceivable not that long ago.  This includes four-day school weeks, closing bathrooms on highways, shuttering a large percentage of schools, and letting convicted criminals out of jail early.The cost of the legislation absolutely should be considered.  But the fact that prison terms for heinous crimes may be limited for cost reasons tells you just how dire the budget situation is.

The Assault on Public Employees -For more than a generation, America's working families have been under a constant assault from the CEO's and extraordinarily wealthy members of our society. While median incomes in the U.S. have stagnated since the mid-1970's, incomes for those in the top five percent have more than doubled. Since the beginning of our new century - and aided by record-breaking tax cuts -- incomes for the top 1 percent have tripled, while working families scrape by , working harder and longer and taking home less than they deserve in pay and benefits. Last week, the very rich once again attacked the middle-class, this time in U.S. News and World Report. Billionaire publisher Mort Zuckerman decided to use his magazine to publish a rabid attack on public employees , the men and women who provide the services that keep our communities safe, teach our children, keep our streets paved and our water clean.

Local goverment job losses hurt entire economy - Although recent economic indicators suggest a turnaround, much of the economy is still struggling, and these elements could keep unemployment high. Local governments in particular have suffered from the recession, which has led to massive budget gaps caused by a combination of depressed tax revenues and higher costs from a social safety net that more and more Americans are forced to rely on.These budget gaps will translate into a loss of jobs, over half of which have yet to occur. Unlike the federal government, most local governments must balance their budgets each year. This means, among other things, that vital local public servants like teachers, firefighters, and police are a target of budget cuts and could be laid off. According to the Bureau of Labor Statistics, 180,000 local public-sector jobs have already been lost since August 2008.And it will get worse—much worse. Read Issue Brief #279

Floating-Rate Debt Faces a Liquidity Issue - Municipalities with floating-rate debt, especially those with lower bond ratings, are likely to face high costs to renew their liquidity facilities this year and next — if they can obtain them at all.More than $200 billion of state and local governments’ credit ­facilities — a term chiefly used to describe bank letters of credit and standby purchase agreements — are set to expire in 2010 and 2011, according to a ­Standard & Poor’s estimate based on ­Bloomberg data.The unusual volume of expirations comes courtesy of the implosion of the auction-rate securities market in February 2008, which prompted hundreds of government bodies to flock to variable-rate debt products that typically require credit backing from a bank to appeal to investors in the short-term market.

Economic segregation rising in US public schools -The portion of schools where at least three-quarters of students are eligible for free or reduced-price meals – a proxy for poverty – climbed from 12 percent in 2000 to 17 percent in 2008.The federal government released a statistical portrait of these schools Thursday as part of its annual Condition of Education report. When it comes to educational opportunities and achievement, the report shows a stark contrast between students in high-poverty and low-poverty schools (those where 25 percent or less are poor). Economic segregation is on the rise in American schools, and that “separation of rich and poor is the fountainhead of inequality. High-poverty schools “get worse teachers ... are more chaotic ... [have] lower levels of parental involvement ... and lower expectations than at middle-class schools – all of which translate into lower levels of achievement.” Cities aren’t the only places facing this challenge: Forty percent of urban elementary schools have high poverty rates, but 13 percent of suburban and 10 percent of rural elementary schools do as well. In some states – Mississippi, Louisiana, and New Mexico – concentrated poverty affects more than one-third of K-12 schools.

100,000 teachers nationwide face layoffs - Senior congressional Democrats and the Obama administration scrambled Wednesday to line up support for $23 billion in federal aid to avert an estimated 100,000 or more school layoffs in a brutal year for education budgets coast to coast. As early as Thursday, the House Appropriations Committee expects to take up a bill that couples the school funding with spending for the Afghanistan war -- a measure that has bipartisan support. But a parallel push in the Senate stalled this week after a leading proponent concluded that he couldn't muster enough votes to surmount Republican opposition. "We desperately need Congress to act -- to recognize the emergency for what it is," Education Secretary Arne Duncan said Wednesday on Capitol Hill. "We have to keep hundreds of thousands of teachers teaching."

What Is an Emergency? - Congress is about to pass an additional $32 billion to pay for the war In Afghanistan. It will have overwhelming bipartisan support, with legislators eager to display their fealty to the troops in an election year.At the same time, the Congress is struggling with a $23 billion bill to forestall the layoff of nearly 300,000 teachers next year, What kind of country are we? In the worst economic recession in 70 years, competitive industrial nations must choose their priorities -- what gets saved, what must be sacrificed. No sensible leadership would choose to make children -- particularly the children of working and poor families -- pay the cost of the downturn.The damage is already being done. Hawaii has gone to a four-day school week; districts in Kansas are headed there. Detroit is closing more than 40 schools. Kansas City wants to shutter more than 50% of its school buildings.  Indiana and Arizona have eliminated free all-day kindergarten. One third of districts are considering eliminating summer school this year. Nearly two-thirds anticipate increasing class size next year. Classes may reach 35 students in Chicago elementary schools.

New York Is Almost Out of Cash - Guess how long it is before the state of New York runs out of cash? Less than a week, according to the state's comptroller.The state won't be able to meet its June 1 commitments to school districts.On June 1, New York is due to send $3.8 billion in aid to local school districts, including $2.1 billion that was supposed to be paid in March but not sent for lack of funds. Yet New York is still $1 billion short. This could affect school operations, the solvency of any business that sells goods or services to the state, the paychecks of state workers, and ultimately home values

CalSTRS to reduce forecast of investment returns - The state's teacher pension fund is about to reduce its official forecast of investment returns by half a percentage point, a move that could cost state and local taxpayers hundreds of millions of dollars. CalSTRS' staff, which has been wrestling with the issue for months, said Wednesday that the forecast of annual returns should be cut to 7.5 percent. The board of the California State Teachers' Retirement System will vote on the recommendation next week.The reduction in CalSTRS' investment forecast will be crucial in determining how much taxpayers will have to spend to support the $139 billion teachers pension fund. It could heighten the political debate about the affordability of public pensions at a time when Gov. Arnold Schwarzenegger is pushing a plan to reduce benefits for new workers.Already severely underfunded because of the 2008-09 market crash, CalSTRS has been preparing to ask the Legislature to increase the contributions from the state and local school districts

US House Democrats Push For $23 Billion To Avert Teacher Layoffs - Education Secretary Arne Duncan said the Obama administration fully supports the additional funds and urged Congress to include it in legislation to pay for the war in Afghanistan through the remaining four months of the current fiscal year. Somewhat unusually, the administration hasn't formally requested additional public funds to prevent the layoffs, nor did it mention the need in its statement of support for the legislation issued earlier this week. Duncan conceded the actual number of teacher-jobs that could disappear in the fall is difficult to pin down, saying it could range from 100,000-300,000

How to prevent huge teacher layoffs, by Christina D. Romer - The emergency spending bill before the House would address the education crisis facing communities across America -- and the jobs of hundreds of thousands of teachers are at stake. Because ... state and local budgets are stressed to the breaking point..., hundreds of thousands of public school teachers are likely to be laid off over the next few months. As many as one out of every 15 teachers could receive a pink slip this summer...Additional federal aid targeted at preventing these layoffs can play a critical role in combating the crisis. Such aid would be very cost-effective. There are no hiring or setup costs. The teachers are there, eager to stay in their classrooms. ...Furthermore, by preventing layoffs, we would save on unemployment insurance payments, food stamps and COBRA subsidies for health insurance, and we would maintain tax revenue. Accounting for these savings, the actual cost of the program is likely to be 20 to 40 percent below the sticker price...

Keeping Teachers on the Job Costs Less Than Advertised - Mark Zandi of Moody’s estimates that each dollar of federal aid to states provided during times of high unemployment will lead to a $1.40 increase in overall economic activity (gross domestic product, or GDP).This large bang-for-buck means that the $23 billion gross cost of the Harkin education staffing proposal greatly overstates its actual impact on the federal budget deficit. The Congressional Budget Office has estimated that each 1% increase in actual GDP relative to potential GDP (for example, the level of economic activity that would have been reached had unemployment been at 5% instead of 10%) leads to a $0.38 reduction in the federal budget deficit.Using these two numbers, we can roughly calculate the self-financing of the education staffing proposal: the $23 billion multiplied by the 1.4 multiplier yields a $32 billion increase in GDP as a result of the legislation. This extra $32 billion will then generate extra taxes and reduced safety net spending that will lower the federal budget deficit by $12.2 billion. With this offset, the net cost of Harkin’s proposal will be only $10.8 billion, or less than half the headline price. Read Policy Memo #168

The teacher bailout needs sticks, not just carrots - The jobs bill in congress includes a $23 billion dollar provision that’s being called “the teacher bailout”, to prevent school districts from laying off 100,000 to 300,000 teachers. There’s certainly something to be said for trimming the fat, and I’m sure every school district in the country spends hundreds of thousands of dollars on stuff that could, and should be cut from the budget. Nevertheless, Derek Thompson points out that the good kinds of cuts are not necessarily the kinds of cuts we would get.  You don’t hear about school districts whose budget cuts involve finally firing some of the old, ineffective, teachers who everyone knows shouldn’t be teaching, or taking back some of the overly generous salaries commanded by 8th grade history teachers because they have PhDs they don’t need. No, what you see is the most recently hired teachers being fired, and whole departments like music and art being cut. And many State laws ensure not going to get any better: Fifteen states, including New York and California, now operate under union-backed state laws mandating that seniority, or “last in/first out,” determines layoffs.

New $23B for teacher subsidies falters in House - A $23 billion payout to save thousands of educators' jobs faltered Thursday -- perhaps for good -- to election-year jitters among moderate Democrats over deficit spending and only lukewarm support from the White House.The proposal's chief advocate in the House abruptly canceled a committee meeting to put the money in a war spending bill. Its lead sponsor in the Senate gave up trying to do it, acknowledging he lacked the necessary votes. The developments jeopardized what progressives in Congress and some members of the Obama administration had described as a life raft for 100,000 to 300,000 teachers and other school personnel whose billions of dollars in stimulus salary subsidies run out this fall.

Recession May Cut Into Female College Advantage - Since the late 1970s there have been more women than men attending college, and a new report expects the gap to grow over the next ten years. But it’s possible the recession may alter that dynamic.Female undergraduate enrollment at four-year institutions increased by 26% to 9.3 million students from 2000 to 2008, according to the “Condition of Education 2010” report by the National Center for Education Statistics. Meanwhile, male enrollment increased by 22% over the same period to 7.1 million students.In 2008, women accounted for 57% of enrollment, and the NCES expects that number to rise to 59% by 2019. The disparity is even wider in postgraduate education. Women represented 59% of enrollment in postbaccalaureate programs in 2008, with the number seen jumping to 61% by 2019.In an article on the report, the Chronicle for Higher Education notes the disparity in wages for men and women as one reason women stay in school longer. But the conditions in the labor market have shifted in the last few years, and may be forcing some men to seek higher education.

Congress Weighs Pension Bailout – MarketWatch -U.S. lawmakers are laying the groundwork for a possible federal bailout of some faltering pension plans that are jointly run by companies and unions. The effort reflects a worrisome new problem in the nation's troubled retirement-savings system: the grim financial condition of such pension plans, known as multi-employer plans. They are common in the hotel, construction, trucking and other industries, and cover about 10 million workers, or almost one in four workers who have a private pension.  Many multi-employer plans are struggling after years of financial hits and relatively light regulation. In the past two years, almost 400 plans have announced they are in bad condition, according to lawmakers.  In response, some lawmakers are pushing a plan that would provide federal aid to a few of the ailing pension funds. But some conservatives and anti-union groups oppose the aid effort, arguing it could lead to a broader taxpayer bailout of the whole class of pensions, costing tens of billions of dollars.

Should the Government Bail Out Union Pension Funds? - Fox Business has made something of a splash claiming that Senator Casey has introduced a bill to bail out union pensions that will cost $165 billion.  Media Matters lashes back, arguing that the bill will only cost $8-10 billion and isn't a bailout.  Who's right?As so often with these things, the truth is somewhere in between.The bill in question will essentially let multi-employer union pension plans, like the Teamster's plan that is currently causing UPS so much trouble, segregate out the workers of defunct companies and get the Pension Benefit Guarantee Corp to pony up for their benefits.  Media Matters says that the bailout won't cost $165 billion, and they're right;  that's the total liabilities of the plan.  Theoretically, it could cost $165 billion if every single employer went bankrupt, but that's not a very likely scenario. However, Media Matters also says it's not a bailout, which is silly.

U.S. GAO – Private Pensions: Long-standing Challenges Remain for Multiemployer Pension Plans -Multiemployer defined benefit pension plans, which are created by collective bargaining agreements covering more than one employer and generally operated under the joint trusteeship of labor and management, provide pension coverage to over 10.4 million participants in the 1,500 multiemployer plans insured by the Pension Benefit Guaranty Corporation (PBGC). Changes to the structure of the multiemployer plan framework and to PBGC's role as insurer have sought to improve plan funding. Reports of declines in plan funding have prompted questions about the financial health of these plans. The committee asked GAO to provide information on (1) the unique characteristics of multiemployer plans and (2) the challenges that multiemployer plans face and how they may affect PBGC. GAO provided a draft of this testimony to PBGC for review and comment. PBGC provided technical comments, which were incorporated, as appropriate. To address these objectives, GAO relied primarily on its previously published reports on multiemployer plans (GAO-04-423 and GAO-04-542T), and data publicly available from PBGC. GAO is not making new recommendations in this testimony.

Proud to underfund employee pensions? -The “tax extenders” bill, which yesterday I relabeled The Hypocrisy Act of 2010, contains some little-discussed provisions that would allow certain firms to further underfund their employee pensions.  Advocates for the legislation promote this as a virtue, continuing a longstanding bipartisan trend of Congress rewarding bad pension behavior by both management and labor bosses in firms with a certain type of pension plan.  These provisions are irresponsible and should be removed from the bill. I’m going to use this as an opportunity to provide a crash course in a few aspects of pension policy.  Let’s begin with some background on defined contribution and defined benefit pension plans.

Transparency for the Public Sector - On Friday, The New York Times ran ">a front-page article about pensions that took note of a 44-year-old retired police officer who receives an annual pension of $101,333 despite never having earned more than $74,000 a year in base pay. The article reported that about 3,700 retired public workers in New York are now getting pensions of more than $100,000 a year, exempt from state and local taxes. The emotional response of many people is to vilify the retirees, but that’s a mistake. The individual police officers and firefighters were following the rules. They have jobs that require them to risk their lives in service of their communities, and large pensions are one payoff for accepting those risks and accepting relatively lower wages up front. The fault lies in the political process that makes their negotiating partners — state and local governments — more impatient than their employees. State and local governments don’t want to face the short-term consequences of paying higher wages, so they structure compensation in ways that defer the costs of each new deal for years.Politics doesn’t just favor delayed compensation; it also favors forms of compensation that are particularly hard for people to evaluate. Governments almost always love obfuscation.

How the Fed Pushed the Nation’s Pension Plans– and Local Government–into Insolvency -A key player in the nation's unfolding pension debacle is rarely fingered--The Federal Reserve. If you reckon state and local government have created their own guaranteed-to-go-bankrupt pension problem, you'd be half-right: the Federal Reserve's policies of the past two decades are the crumbling foundation beneath the nation's unsustainable pension plans. Here's a precis of how the nation's local government pension plans were set to implode. 1. Public unions formed an unholy alliance with elected officials (in effect, an oligarchy) to establish politically untouchable protected fiefdoms. (Please see Survival+ for more on asymmetric stakes in the game and protected fiefdoms.)  2. As the stock market bubbled ever higher in the 1990s, managers of pension plans ratcheted up their expectations of future "permanent" growth, giving politicos the go-ahead to ramp up pension pay-outs.

Social Security and the Infinite Future: From 1997 to Heat Death - Eric Laursen in his post Cato Premieres its Latest Horror Show points us to a new book forthcoming called 'Social Security; A Fresh Look at Policy Alternatives' by senior Cato fellow Jagadeesh Gokhale. Gokhale along with his oft-time collaborator Kent Smetters seems to be the father of 'intergenerational equity' and lead advocate for measuring that over the 'Infinite Future Horizon'. Eric, backed up by people as varied as the American Academy of Actuaries and conservative economist Bruce Bartlett, does a nice job showing why Infinite Future is not a useful tool in this instance, a topic I have taken up from time to time and I urge people to read it. But what interested me is what it revealed about the curious timeline during which Infinite Future even became part of the Social Security Policy discussion. Details below the fold.

The Politics of an Aging Population - The Census Bureau has just issued a new report on the rapid aging of the U.S. population. There's a lot of good data and graphs in it, but I want to focus on just one implication right now: the political impact of an aging society.First let's look at the data. According to Census, 27.1 percent of the population is currently under age 20, 59.9 percent is between 20 and 64, and 13.0 percent is 65 or older. By 2020, the under-65 share will fall by 3.1 percent and the 65 and over share will rise to 16.1 percent of the population. In raw numbers, the number of those 65 or over will rise by 14.5 million persons. Now let's look at a second new Census report on voting in the 2008 election. It shows that voting is highly correlated with age: the older one is the more likely that person votes, as shown in the following table. The Census Bureau estimates that the odds that someone voted were twice as high for someone aged 45 to 64 as for someone 18 to 24, and more than three times as high for someone 65 or older.

Party until you die? - IF YOU’RE like most people you’ve not saved enough for retirement. There’s a good chance your savings and state pension (such as Social Security) will not provide enough income to live in the manner in which you’ve become accustomed for up to thirty years. But don’t feel too bad, many of us have been sold an unrealistic vision of retirement. The idea, for obvious reasons, has taken hold that after forty years of work we are entitled to spend a few decades of our life in leisure. And why not; who wouldn't want to spend their golden years in a warm climate, playing golf, surrounded by peers who also have ample free time? It’s like being on spring break until you die.But this is not realistic financial goal for most people. No matter how keen a saver you may be, raising children and maintaining even a modest lifestyle often does not leave enough money to spend a third of your life on holiday. Also, many people are simply not saving enough, forget the endless vacation—they will probably face a large cut in their standard of living after they retire.

With Medicaid, states face painful cuts and few choices - While states closely watched this year’s debate over health care reform in Washington, it’s another massive federal initiative that has cast an even bigger shadow over 2010’s state legislative sessions: the federal economic stimulus law. Nothing else in this year’s legislative sessions, now concluded in 28 states, has had more impact on what states can — and can’t — do with their Medicaid programs as they try to rein in health care spending amid tumbling revenue.On one hand, the economic stimulus provided states with billions of federal dollars to help sustain the health insurance program for the poor through the recession. So for the most part, states were able to avoid making truly draconian cuts to the program.On the other hand, the law also temporarily barred states from cutting back on who is eligible for Medicaid. That restriction took away one of the most potent tools states have to control their health care costs and balance their budgets.

Uncertainty over Medicare pay sets doctors on edge - May 28th, 2010 (AP) — For the third time this year, Congress is scrambling to stave off a hefty pay cut to doctors treating Medicare patients — even as the Obama administration mails out a glossy brochure to reassure seniors the health care program is on solid ground.The 21.3 percent cut will take effect June 1 unless lawmakers intervene in the next few days. Recurring uncertainty over Medicare fees is making doctors take a hard look at their participation in a program considered a bedrock of middle-class retirement security.If the problem is allowed to fester, it could undermine key goals of President Barack Obama’s health care overhaul, which envisions using Medicare to test ideas for improving the quality of care for all Americans. Doubts about Medicare’s stability can also create political problems for Democrats in the fall elections, since polls show seniors are worried about the impact of the remake on their own care.

Health insurance rate hikes hitting California small business…Small businesses in California are being hit this year with double-digit hikes in health insurance costs that could hurt the state's economic recovery as companies curtail plans for hiring and expansion to pay their insurance bills. Five major insurers in California's small-business market are raising rates 12% to 23% for firms with fewer than 50 employees, according to a survey by The Times. Similar increases are being felt by many small businesses across the nation, including those in Texas, Ohio and Florida — mainly the result of escalating costs for medical care and pharmaceuticals, insurers say.In California, some small businesses say they are stunned by their latest insurance bills. Longtime customers of Blue Shield of California, for instance, are facing rate hikes as high as 76%

Healthcare Plan and Small Business - Dan Danner, CEO of the NFIB, had an op-ed piece in the Wall Street Journal yesterday that clearly summarizes all of the negative aspects for small business owners with the Obamacare system. Danner clearly summarizes the problems with the much ballyhooed tax credit: "The credit, which is only available for a maximum of six years, puts small business owners through a series of complicated "tests" to determine if they qualify and how much they will receive. Fewer than one-third of small businesses even pass the first three (of four) tests to qualify: have 25 employees or less, provide health insurance, and pay 50% of the cost of that insurance." And even if a small employer does pass this gauntlet of tests and paperwork, the credit is only temporary. And let's not forget who is going to pay for this massive government program -- small business owners.

GOP: U.S. can’t afford to fund health ‘entitlement program’ for 9/11 rescue workers - Republicans argued Tuesday that it would put the nation's finances at risk if Congress gave aiing Sept. 11 responders a permanent, guaranteed program to ensure they get health care.Calling the Sept. 11 Health and Compensation Act a new "entitlement program" like Medicare, GOP members of the House Energy and Commerce Committee argued the nation already has too much that it must pay for. They said  obligating the feds for lifetime care of tens of thousands of 9/11 responders was too much of a burden. "By making this a new mandatory program, you jeopardize the financial health of the United States of America," said Rep. Mike Rogers (R-Mich.). And they argued that the heroes of Sept. 11, 2001, were already being cared for, noting the $150 million the Obama recently requested for this year.

The NYT Notices Provision of Health Care Bill It Previously Opted to Ignore - The NYT just noticed that the pay or play provision in the health care bill makes no sense. The issue here is the extent to which larger employers will be obligated to pick up a portion of their workers' health care costs. The final bill included a provision that subjected employers of more than 50 workers to penalties if employees' health care costs exceeded a certain percent of family income.The problem with this sort of penalty structure is that employers do not have control over workers family income and in general should not even know it. This sets up an absurd penalty structure where employers do not have the knowledge they need to act to avoid the penalty -- it's sort of like enforcing speed limits that randomly change and are never posted.The problem with the NYT coverage is its description of this problem as: "a little-noticed provision of the law." Yes, it is true the provision got relatively little attention, but the NYT played a big role in this.

The End of Employer-Sponsored Health Insurance As We Know It - My latest Kaiser Health News column bids farewell to employer-sponsored health insurance. It will erode. And that’s a good thing. It begins, One of the latest criticisms of the new health overhaul law is that it will encourage employers to stop offering health insurance. In fact, it will. We should welcome this, provided the decline in employer coverage is gradual and good alternatives exist. There are several advantages to the way in which the new law promotes severing the connection between employment and health insurance. One of them is that it will make more visible the biggest looming health care problem: costs.More here.See also, today’s Health Wonk Review for a roundup of recent posts from around the blogosphere on health policy.

63% Favor Repeal of National Health Care Plan - Support for repeal of the new national health care plan has jumped to its highest level ever. A new Rasmussen Reports national telephone survey finds that 63% of U.S. voters now favor repeal of the plan passed by congressional Democrats and signed into law by President Obama in March.  Prior to today, weekly polling had shown support for repeal ranging from 54% to 58%.  Currently, just 32% oppose repeal.  The new findings include 46% who Strongly Favor repeal of the health care bill and 25% who Strongly Oppose it. While opposition to the bill has remained as consistent since its passage as it was beforehand, this marks the first time that support for repeal has climbed into the 60s. It will be interesting to see whether this marks a brief bounce or indicates a trend of growing opposition.

What Regulation Can Do - In my most recent Kaiser Health News column I described the role of the ACA’s minimum loss ratio (MLR) regulation. That’s the rule that heath insurers must spend 85% of premium revenue on medical costs in the large-group market and 80% in the small- and non-group markets. I was not (am not) optimistic that MLR regulation or other rate regulation would (will) work in a market with dominant providers. Well, we’re getting a good test in Massachusetts right now. Remember that last month the Massachusetts Division of Insurance denied health insurance rate increases to hundreds of insurers in the state. What has been the effect? Today we learn from Liz Kowalczyk in the Boston Globe that, Massachusetts health insurers say they want to freeze or slash payments to some hospitals and large physician groups this year, setting up the toughest contract negotiations in memory and creating the potential for disruptions in where patients get their care. Other providers would get small increases, at most.Notice what is happening here. Regulators are squeezing insurers on rates. Insurers, in turn, are demanding lower price increases from providers. Those providers are, of course, fighting back. It isn’t yet clear what the outcome will be, in the short or long run.

Do two rights make a wrong? - Users of my favorite textbook know that it includes, in Chapter 7, a case study on whether kidneys should be traded in a market.  Today's NY Times has a related article.The paper's so-called "Ethicist" is dealing with this situation: Person A receives a kidney transplant as a donation from person B.  A short time later, person B is having financial troubles and her home may go into foreclosure.  Person A is considering her giving some money to help out.So what does the "Ethicist" say about all this?  Apparently, both of these gifts are noble acts, worthy of the highest praise and admiration. Unless, that is, there is some reason to think they are linked together.  In that case, the reallocation of resources (kidney, cash) would be a despicable market transaction.I suspect that few economists would concur.  Indeed, the essence of market transactions is a kind of reciprocal altruism, enforced by contract.  It might be nice if the world could work using pure altruism alone, but that seems highly unrealistic. 

The aging of science - That's the question behind a paper (abstract available here) released Monday by the National Bureau of Economic Research. The paper -- by Benjamin Jones, associate professor of management at Northwestern University -- argues that science has changed in key ways. Specifically, it argues that the age at which researchers are able to make breakthroughs has advanced, and that scientists are parts of increasingly larger teams, encouraging narrow specialization. Yet, he argues, science policy (or a lot of it) continues to assume the possibility if not desirability of breakthroughs by a lone young investigator. Much of the paper focuses on the greater difficulty of making key contributions -- solo -- early in one's career. Jones cites, for example, the growth in the number of journal articles. In 2006, for example, there were 941,000 journal articles published, 90 percent of them in science and engineering, and these articles cited 4,372,000 unique journal articles. With the publication rate growing by 5.5 percent a year, someone able to read only a certain number of articles a year is seeing his or her "fraction of extant knowledge" decreasing by the same percentage.

Baby Steps to New Life-Forms - Intelligent design. That’s one goal of synthetic biology, a field that was catapulted into the news last week with the announcement that a group of biologists had manufactured a genome that exists nowhere in nature and inserted it into a bacterial cell. The dream is that, one day, we’ll be able to sit and think about what sort of life-form we’d like to make — and then design and build it in much the same way we make a bridge or a car. Realizing this dream is still some way off. But before I get to that, let me briefly describe the state of play.

BBC News – Synthetic life patents ‘damaging’ - A top UK scientist who helped sequence the human genome has said efforts to patent the first synthetic life form would give its creator a monopoly on a range of genetic engineering. Professor John Sulston said it would inhibit important research. US-based Dr Craig Venter led the artificial life form research, details of which were published last week. Prof Sulston and Dr Venter clashed over intellectual property when they raced to sequence the genome in 2000.  Craig Venter led a private sector effort which was to have seen charges for access to the information. John Sulston was part of a government and charity-backed effort to make the genome freely available to all scientists.

Congress, Obama Suddenly Interested in Synthetic Biology - Congress explicitly took up the subject of synthetic biology for the first time Thursday during a hastily convened hearing of the House Energy and Commerce Committee The Wired crowd has been talking about how to engineer biological machines for years, but Craig Venter’s announcement last week that he’s created a synthetic cell has drawn the attention of the very highest levels of government.The hearing came shortly after President Barack Obama ordered a six-month review of synthetic biology by a panel of scientific stars.The House committee members seemed primarily interested in the potential of synthetic biology to create micro-organisms that could effectively produce hydrocarbons that could be used to power the nation’s transportation system.Accounting for increasing energy use by the US food system - Energy used by the US food system accounted for 80% of the increase in American energy use between 1997 and 2002, according to a recent report from the USDA’s Economic Research Service. Other remarkable conclusions of the analysis include:

  • Food system energy use increased by 22.4% while total energy use rose by just 3.3%.
  • On a per capita basis, total energy use actually fell by 1.8%, but food system energy use was still up by 16.4%.
  • Putting food on the plate of the average American required 2.4 million BTU more in 2002 than in 1997. (To put this in context, total per capita energy consumption of 20 nations was less than 2.4 million BTU in 2002.)
  • The period between 2002 to 2007 likely saw another jump in food system energy use that far exceeded the increase observed in the rest of the US economy.

Attacking Science to Defend Beliefs - It’s hardly a secret that large segments of the population choose not to accept scientific data because it conflicts with their predefined beliefs: economic, political, religious, or otherwise. But many studies have indicated that these same people aren’t happy with viewing themselves as anti-science, which can create a state of cognitive dissonance. That has left psychologists pondering the methods that these people use to rationalize the conflict. A study published in the Journal of Applied Social Psychology takes a look at one of these methods, which the authors term “scientific impotence”—the decision that science can’t actually address the issue at hand properly. It finds evidence that not only supports the scientific impotence model, but suggests that it could be contagious. Once a subject has decided that a given topic is off limits to science, they tend to start applying the same logic to other issues…

Monsanto's Poison Pills for Haiti - "A new earthquake" is what Haitian peasant farmer leader Chavannes Jean-Baptiste of the Peasant Movement of Papay (MPP) called the news that Monsanto will be dumping 60,000 seed sacks (475 tons) of hybrid corn seeds and vegetable seeds on Haiti, seeds doused with highly toxic fungicides such as thiram, known to be extremely dangerous to farm workers. Hybrid seeds, like GMO seeds (in contrast to Creole heirloom or organic seeds) require lots of water, chemical fertilizers, and pesticides. In addition, if a small farmer tries to save hybrid seeds after harvest, hybrid seeds usually do not "breed true" or grow very well in the second season, forcing the now-indentured peasant to buy seeds from Monsanto or one of the other hybrid/GMO seed monopolies in perpetuity. Monsanto wanted initially to dump GMO seeds on Haiti, but even the corrupt Haitian government knew that this would spark a rebellion, so Monsanto cleverly decided to dump hybrid seeds instead

A special report on water: A glass half empty | The Economist -  Some of the remedies require changes in behaviour, and policies to bring them about. If people are to use water with more care, they must know how much they draw and what it costs. They must also know how to use it, and reuse it, productively. To make progress on this front requires education, not least of politicians. Then policies must be drawn up and implemented. All this requires money—for meters, pipes, sewers, satellites, irrigation, low-flow taps and umpteen other things.Some policies apparently unconnected to water must change too. Trade and investment must be unfettered if water-short countries are to be encouraged to import water-heavy goods and services, rather than relying on their own production. Using crops like sugarbeet to make biofuels in dry regions must be abandoned. Governments must overcome their love of secrecy and reveal all the information they have about river flows, water tables, weather forecasts, likely floods. They must also look to non-water policies to solve water problems. For example, building a road passable in all weather all year round to let farmers get their produce to market will enable them to move from subsistence to commercial agriculture.

Low-Income Consumers under the Kerry-Lieberman Bill -The American Power Act, which Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released in draft form on May 12, includes important provisions to help ensure that the legislation’s measures limiting greenhouse-gas emissions do not increase hardship by making poor families poorer or pushing more people into poverty.Like the climate-change bill the House passed last year, the Kerry-Lieberman proposal includes a program of direct payments (“energy refunds”) for low-income households.[1] The refunds would protect the typical household in the poorest 20 percent of the population from incurring a financial loss as a result of the policies necessary to reduce greenhouse-gas emissions. (The bottom 20 percent consists of households with incomes below roughly 150 percent of the poverty line, or about $33,000 for a family of four.) The proposal also includes a smaller refundable tax credit for families with modestly higher incomes.

Ezra Klein - Risk and climate change - I'm glad to hear the "top kill" is working to plug the BP leak, and also that Barack Obama has rediscovered the term "climate change." The case I, and others, have made to illustrate the connection between the two is that there are huge costs to relying so heavily on oil, and particularly huge costs to oil that's increasingly hard to reach, as in the case of the deep-sea drilling that led to this catastrophe. But there's another, arguably more important, reason that the BP spill should be the final push needed for us to seriously address climate change.The last few years have been an ongoing seminar on the reality of serious risk. Very bad things that look likely to happen eventually do happen. The financial crisis, the Massey coal-mine disaster, the Greek debt crisis, the BP oil spill. The last few years have also been an ongoing seminar in the many ways that we ignore risks that we don't like to think about, and the role that our evasions play in making the eventual catastrophes worse than they needed to be.

John Cook, Skeptical Science: Why Greenland's ice loss matters- The important point to remember here is that ice loss is accelerating. In 2002, the ice loss was 137 gigatonnes per year (Velicogna 2009). At that rate, the ice sheet would take nearly 22,000 years to dissipate.By 2009, this rate had more than doubled to 286 gigatonnes per year, reducing the ice sheet "lifetime" to 10,500 years. As the rate of ice loss increases, the ice sheet's lifetime is also diminishing. So the crucial question is how will the Greenland ice sheet behave in the future? Extrapolating an accelerating curve into the future is always problematic. However, there are several different ways to approach the problem.

Soil science: Arctic thaw - Arctic soils store tremendous amounts of organic matter. Over millennia, cold, wet conditions have slowed the breakdown of plant material in the Arctic, and large quantities of carbon and nitrogen have built up in permanently frozen ground — termed permafrost. Global warming threatens to thaw these frozen soils and release large quantities of methane and carbon dioxide to the atmosphere1. Nitrous oxide — another potent greenhouse gas — can also be emitted from permafrost soils, but the relationship to thawing is uncertain2. Writing in Nature Geoscience, Elberling and colleagues3 show that the addition of the original nitrogen- and carbon-rich meltwater to thawed permafrost cores, sampled from Greenland, stimulates nitrous oxide production.

John Cook, Skeptical Science: Latest GRACE data on Greenland ice mass (from Wahr) -I don't plan to fall into the trap of breathlessly reporting every twist and turn of short-term climate fluctuations (I went through a bit of a silly period in March and April 2008). But we've been discussing Greenland trends, and as it's been over a year since posting GRACE data on Greenland ice mass, I figure we're due an update. Many thanks to Tenney Naumer of Climate Change: The Next Generation who emailed me the graph. Thanks also to John Wahr at the University of Colorado who analysed the GRACE data and granted permission to reproduce it here. Figure 1 below shows the latest satellite gravity measurements of the Greenland ice mass, through to February 2010.

Greenland’s Uplift: Evidence Of Rapid Ice Loss -Scientists at the University of Miami say Greenland’s ice is melting so quickly that the land underneath is rising at an accelerated pace. According to the study, some coastal areas are going up by nearly one inch per year and if current trends continue, that number could accelerate to as much as two inches per year by 2025, explains Tim Dixon, professor of geophysics at the University of Miami Rosenstiel School of Marine and Atmospheric Science (RSMAS) and principal investigator of the study.The research was published in Nature Geoscience. The idea behind the study is that if Greenland is losing its ice cover, the resulting loss of weight causes the rocky surface beneath to rise. The same process is affecting the islands of Iceland and Svalbard, which also have ice caps, explains Shimon Wdowinski, research associate professor in the University of Miami RSMAS, and co-author of the study.

Rapid circulation of warm subtropical waters in a major glacial fjord in East Greenland -The recent rapid increase in mass loss from the Greenland ice sheet1, 2 is primarily attributed to an acceleration of outlet glaciers3, 4, 5. One possible cause of this acceleration is increased melting at the ice–ocean interface6, 7, driven by the synchronous warming8, 9, 10 of subtropical waters offshore of Greenland. However, because of the lack of observations from Greenland’s glacial fjords and our limited understanding of their dynamics, this hypothesis is largely untested. Here we present oceanographic data collected in Sermilik Fjord, East Greenland, by ship in summer 2008 and from moorings. Our data reveal the presence of subtropical waters throughout the fjord. These waters are continuously replenished through a wind-driven exchange with the shelf, where they are present all year. The temperature and renewal of these waters indicate that they currently cause enhanced submarine melting at the glacier terminus. Key controls on the melting rate are the volume and properties of the subtropical waters on the shelf, and the patterns of along-shore winds, suggesting that the glaciers’ acceleration has been triggered by a combination of atmospheric and oceanic changes. Our measurements provide evidence for a rapid advective pathway for the transmission of oceanic variability to the ice-sheet margins.

John Cook, Skeptical Science: Robust warming of the global upper ocean -Most of global warming goes into the ocean. Consequently, the amount of heat accumulating in the world's oceans is a vital cog in our understanding of climate. A number of teams across the world have performed analyses of ocean heat observations. While there's year-to-year differences between the various estimates, they all show essentially the same long-term trend. Now members from the various teams have combined their efforts into a single 'best estimate' of ocean heat (Lyman 2010). What they find is robust warming in the upper ocean over the 16 years from 1993 to 2008.When reconstructing ocean heat content, the greatest source of uncertainty is biases in expendable bathythermograph (XBT) data. XBTs are dropped from ships and measure water temperature as they sink. One example of uncertainty is estimating how the rate at which the XBTs fall has changed over time as the instruments have subtly changed. This fall rate is used to work out the depth at which temperature is measured. The various teams working on the problem make their own choices on how to adjust for the various XBT biases. We can see the differences arising from these choices by overlaying the curves produced by each team.

Ocean stored significant warming over last 16 years, Study Finds — The upper layer of the world's ocean has warmed since 1993, indicating a strong climate change signal, according to a new study. The energy stored is enough to power nearly 500 100-watt light bulbs per each of the roughly 6.7 billion people on the planet. "We are seeing the global ocean store more heat than it gives off," said John Lyman, an oceanographer at NOAA's Joint Institute for Marine and Atmospheric Research, who led an international team of scientists that analyzed nine different estimates of heat content in the upper ocean from 1993 to 2008.The team combined the estimates to assess the size and certainty of growing heat storage in the ocean. Their findings are published in the May 20 edition of the journal Nature. The scientists are from NOAA, NASA, the Met Office Hadley Centre in the United Kingdom, the University of Hamburg in Germany and the Meteorological Research Institute in Japan.

NOAA predicts an active to extremely active Atlantic hurricane season for 2010 - Expected factors supporting this outlook are:

  • Upper atmospheric winds conducive for storms. Wind shear, which can tear apart storms, will be weaker since El Niño in the eastern Pacific has dissipated. Strong wind shear helped suppress storm development during the 2009 hurricane season.
  • Warm Atlantic Ocean water. Sea surface temperatures are expected to remain above average where storms often develop and move across the Atlantic. Record warm temperatures – up to 4 °F above average – are now present in this region.
  • High activity era continues. Since 1995, the tropical multi-decadal signal has brought favorable ocean and atmospheric conditions in sync, leading to more active hurricane seasons. Eight of the last 15 seasons rank in the top 10 for the most named storms, with 2005 in first place with 28 named storms.

Environmentalists’ $100,000 Bail for Civil Disobedience - There is a bail reduction hearing this morning for two environmental activists who protested mountain-top removal coal mining and had their bail set at $100,000. EmmaKate Martin and Benjamin Bryant took part in non-violent civil disobedience to blockade Massey Energy’s regional headquarters in Boone County, W.Va. They were charged with four non-violent misdemeanor charges of trespassing, obstructing an officer, conspiracy to commit a misdemeanor, and littering. As Climate Ground Zero notes, violent criminals have had their bail set much lower: Magistrates in Boone County have set bails at $30,000 and $20,000, both with 10% cash bond options for individuals charged with malicious wounding; the first for intentionally hitting a man with a van and the second for stabbing a man.

UN warning on fisheries loss - The UN's top environment official has echoed warnings that commercial fishing could be destroyed within 50 years. "It is not a science fiction scenario. It is within the lifetime of a child born today," said Achim Steiner, head of the UN Environment Programme (Unep). He made the remarks at a conference in New York previewing a new study on how to make the global economy more environmentally sustainable. His colleague, Dr Pavan Sukhdev, said if current fishing practices continued, "then we are in a situation where 30 or 40 years down the line we effectively are out of fish". A similar warning was first aired several years ago by an international team of researchers led by the ecologist Boris Worm, of Dalhousie University in Canada.

World faces the nightmare possibility of fishless oceans by 2050 without fundamental restructuring of the fishing industry, UN experts said - The world faces the nightmare possibility of fishless oceans by 2050 without fundamental restructuring of the fishing industry, UN experts said Monday. "If the various estimates we have received... come true, then we are in the situation where 40 years down the line we, effectively, are out of fish," Pavan Sukhdev, head of the UN Environment Program's green economy initiative, told journalists in New York. A Green Economy report due later this year by UNEP and outside experts argues this disaster can be avoided if subsidies to fishing fleets are slashed and fish are given protected zones -- ultimately resulting in a thriving industry. The report, which was opened to preview Monday, also assesses how surging global demand in other key areas including energy and fresh water can be met while preventing ecological destruction around the planet.

End of Alaotra grebe is further evidence of Sixth Great Extinction - One more step in what scientists are increasingly referring to as the Sixth Great Extinction is announced today: the disappearance of yet another bird species. The vanishing of the Alaotra grebe of Madagascar is formally notified this morning by the global conservation partnership BirdLife International – and it marks a small but ominous step in the biological process which seems likely to dominate the 21st century.  Researchers now recognise five earlier cataclysmic events in the earth's prehistory when most species on the planet died out, the last being the Cretaceous-Tertiary extinction event of 65 million years ago, which may have been caused by a giant meteorite striking the earth, and which saw the disappearance of the dinosaurs.

Deepwater Horizon Survivors Allege They Were Kept In Seclusion After Rig Explosion, Coerced Into Signing Legal Waivers - According to two surviving crew members of the Deepwater Horizon, oil workers from the rig were held in seclusion on the open water for up to two days after the April 20 explosion, while attorneys attempted to convince them to sign legal documents stating that they were unharmed by the incident. The men claim that they were forbidden from having any contact with concerned loved ones during that time, and were told they would not be able to go home until they signed the documents they were presented with. Davis' attorney told Goldenberg that while on the boat, his client and the others were told to sign the statements presented to them by attorneys for Transocean — the firm that owned the Deepwater Horizon — or they wouldn't be allowed to go home. After being awake for 50 harrowing hours, Davis caved and signed the papers. He said most of the others did as well.

Despite Leak, Louisiana Is Still Devoted to Oil - In some parts of the country, the sight of oil drifting toward the Louisiana coast, oozing into the fragile marshlands and bringing large parts of the state’s economy to a halt, has prompted calls to stop offshore drilling indefinitely, if not altogether. Here, in the middle of things, those calls are few. Here, in fact, the unfolding disaster is not even prompting a reconsideration of the 75th annual Louisiana Shrimp and Petroleum Festival. Louisiana is an oil state, through and through. A gushing leak off of its coast has not, apparently, changed that.

Louisiana fishermen contemplating suicide, need mental health services - The situation in the gulf is getting so dire for some in the seafood industry, they've thought about committing suicide. Steps to intervene are underway. Desperation is setting in in Southeast Louisiana. "I spoke to a group of fishermen, mainly Vietnamese Americans and a group of them came up to me and said, they told me that they contemplated suicide because they're in such despair," says Congressman Joseph Cao. He says fishermen are feeling compounded stress on top of post-Katrina troubles. "For some people, this is almost a boiling point where they can no longer handle it and they're going to crack."

U.S. government slams BP for missed deadlines on spill (Reuters) – The U.S. government threatened to remove BP from efforts to seal a blown-out oil well in the Gulf of Mexico if it doesn't do enough to stop the leak, though it acknowledged only the company and the oil industry have the know-how to halt the deepwater spill.Interior Secretary Ken Salazar said on Sunday Washington is frustrated and angry that BP Plc missed "deadline after deadline" in its efforts to seal the well more than a month after an oil rig explosion triggered the disaster."I am angry and I am frustrated that BP has been unable to stop this oil from leaking and to stop the pollution from spreading. We are 33 days into this effort and deadline after deadline has been missed," Interior Secretary Ken Salazar said after visiting BP's U.S. headquarters in Houston.

BP May Owe U.S. $1 Million a Day in Royalties on Spilled Oil (Bloomberg) -- BP Plc, already facing billions of dollars in clean-up costs and liability claims, may owe the U.S. government as much as $1.1 million a day in royalties on the oil gushing from its leaking well in the Gulf of Mexico. The drilling lease with the Minerals Management Service for the Macondo well that blew up last month calls for BP to pay a royalty fee of 18.75 percent on the value of oil or natural gas “lost or wasted” if a leak is due to the company’s negligence. Royalties on the oil spilled, as well as any that’s recovered, would add to the list of costs.  “Mark my word, the royalty will be paid here,” said David Pursell, a managing director at the investment bank Tudor Pickering Holt & Co. LLC in Houston. “If I had a ranch in South Texas and a company came in with a massive blowout they couldn’t control, I’d have them in court to collect royalties.”

Oil reaches Louisiana shores - Over one month after the initial explosion and sinking of the Deepwater Horizon oil rig, crude oil continues to flow into the Gulf of Mexico, and oil slicks have slowly reached as far as 12 miles into Louisiana's marshes. According to Louisiana Governor Bobby Jindal, more than 65 miles of Louisiana's shoreline has now been oiled. BP said it will be at least Wednesday before they will try using heavy mud and cement to plug the leak, a maneuver called a "top kill" that represents their best hope of stopping the oil after several failed attempts. Based on low estimates, at least 6 million gallons of crude have spewed into the Gulf so far - though some scientists have said they believe the spill already surpasses the 11 million-gallon 1989 Exxon Valdez oil spill off Alaska as the worst in U.S. history. (39 photos total)

As spill grows, oil soaks delicate marshes, birds - The dire impact of the massive Gulf spill was apparent Sunday on oil-soaked islands where pelicans nest as several of the birds splashed in the water and preened themselves, apparently trying to clean crude from their feet and wings.Pelican eggs were glazed with rust-colored gunk in the bird colony, with thick globs floating on top of the water. Nests sat precariously close the mess in mangrove trees. As oil crept farther into the delicate wetlands in Barataria Bay off Louisiana, BP officials said Sunday that one of their efforts to slow the leak wasn't working as effectively as before.A pelican colony off Louisiana's coast was awash in oil Saturday, and an Associated Press photographer saw several birds and their eggs coated in the ooze while nests rested in mangroves precariously close to the crude that had washed in. Workers had surrounded the island with the booms, but puddles of oil had seeped through the barrier.

Oil Spill Hurts Wildlife - ABC News - slide show - 72 images

NYTimes’s (updated) time-lapse graphic tracking the oil spill in the Gulf

Experts Continue Quest for Accurate Leak Rate Figure - BP said on Thursday it is capturing 5,000 barrels of oil a day from a leaking pipe in the Gulf of Mexico -- a double-edged progress report that showed that the company and government have been understating the scope of the spill for more than a month. Their estimate has been 5,000 barrels a day, but with BP capturing that amount, live video from the well showed oil still was billowing into the water almost a mile below the surface of the Gulf. The video and other new details from BP allowed independent scientists to narrow significantly estimates that have ranged as high as 20 times the spill rate BP and the federal government have been using. It also bolstered criticism that the government has been lax in measuring the true extent of the catastrophe, which already has sent oil into Louisiana's coastal wetlands and threatens the Florida Keys

BP slashes oil capture estimates for Gulf spill (Reuters) - BP said the oil it is siphoning off from a ruptured well in the Gulf of Mexico was on average less than half its estimate for the amount leaking each day and well below previous rates.BP said on Monday the oil collected by the mile-long siphon tube was at times as low as 1,360 barrels of oil per day in the six days to May 23 with the tube capturing an average 2,010 barrels per day in the time period.The average figure is less than half the 5,000 barrels per day the company estimates is leaking into the sea and comes after it said it was managing to siphon off around 5,000 barrels per day a few days ago. Some experts have given significantly higher estimates for the size of the leak.

Worse than the Exxon Valdez spill already? - USGS Director Dr. Marcia McNutt today announced that the National Incident Command’s Flow Rate Technical Group (FRTG) has developed an independent, preliminary estimate of the amount of oil flowing from BP’s leaking oil well....Based on three separate methodologies, outlined below, the independent analysis of the Flow Rate Technical Group has determined that the overall best initial estimate for the lower and upper boundaries of flow rates of oil is in the range of 12,000 and 19,000 barrels per day. At 12,000 barrels per day, it would take only 21 days to reach the level of the Exxon Valdez spill (250,000 barrels).

Gulf oil spill could hit your wallet - The calamitous oil spill in the Gulf of Mexico isn't just a mess for the people who live or work on the coast. If you drink coffee, eat shrimp, like bananas or plan to buy a new set of tires, you could end up paying more because of the disaster.The slick has forced the shutdown of the gulf's rich fishing grounds and could also spread to the busy shipping lanes at the mouth of the Mississippi River, tying up the cargo vessels that move millions of tons of fruit, rubber, grain, steel and other commodities and raw materials in and out of the nation's interior.Though a total shutdown of the shipping lanes is unlikely, there could be long delays if vessels are forced to wait to have their oil-coated hulls power-washed to avoid contaminating the Mississippi.

Gulf oil plume darker; not good news, expert says (AP) Live video of the Gulf of Mexico oil spill shows the underwater plume getting significantly darker. A top oil engineering expert says that suggests heavier, more-polluting oil is spewing out.The color of the oil gushing from the main pipe has changed in color from medium gray to black. Two scientists noticed the change, which oil company BP downplayed as a natural fluctuation that is not likely permanent.But engineering professor Bob Bea at the University of California at Berkeley says the color change may indicate the BP leak has hit a reservoir of more oil and less gas. Gas is less polluting because it evaporates. Bea has spent more than 55 years working and studying oil rigs.

Oil tax increase would help pay to clean up spills - Responding to the massive BP oil spill, Congress is getting ready to quadruple—to 32 cents a barrel—a tax on oil used to help finance cleanups. The increase would raise nearly $11 billion over the next decade. The tax is levied on oil produced in the U.S. or imported from foreign countries. The revenue goes to a fund managed by the Coast Guard to help pay to clean up spills in waterways, such as the Gulf of Mexico. The tax increase is part of a larger bill that has grown into a nearly $200 billion grab bag of unfinished business that lawmakers hope to complete before Memorial Day. The key provisions are a one-year extension of about 50 popular tax breaks that expired at the end of last year, and expanded unemployment benefits, including subsidies for health insurance, through the end of the year.

BP oil spill: Unbelievable photos from what is really going on along the coast of Louisiana - Elmer's Island Wildlife Refuge, even after all the warnings, looks worse than I imagined. Pools of oil black and deep stretch down the beach; when cleanup workers drag their rakes along an already-cleaned patch of sand, more auburn crude oozes up. Beneath the surface lie slimy washed-up globules that, one worker says, are "so big you could park a car on them." We continue on to Grand Isle beach, where toddlers splash in the surf. Only after I've stepped in a blob of crude do I realize that the sheen on the waves and the blackness covering a little blue heron from the neck down is oil.The next day, cops drive up and down Grand Isle beach explicitly telling tourists it is still open, just stay out of the water. There are pools of oil on the beach; dolphins crest just offshore. A fifty-something couple, Southern Louisianians, tell me this kind of thing happened all the time when they were kids; they swam in rubber suits when it got bad, and it was no big deal. They just hope this doesn't mean we'll stop drilling.

Over 300 dead birds are likely Gulf spill victims (Reuters) - More than 300 sea birds, nearly 200 turtles and 19 dolphins have been found dead along the U.S. Gulf Coast during the first five weeks of BP's huge oil spill off Louisiana, wildlife officials reported on Monday.The 316 dead birds collected along the shores of Louisiana, Mississippi, Alabama and Florida -- plus 10 others that died or were euthanized at wildlife rehabilitation centers after they were captured alive, far outnumber the 31 surviving birds found oiled to date.The raw tally of birds listed by the U.S. Fish and Wildlife Service as dead on arrival at wildlife collection facilities include specimens obviously tainted with oil and some with no visible signs of oil contamination.But all are being counted as potential casualties of the oil gushing since April 20 from a ruptured wellhead on the floor of the Gulf because of their proximity in time and space to the spill, said Jay Holcomb, who directs a rescue center for birds in Fort Jackson, Louisiana.The same is true of nearly 200 sea turtles found dead and dying along the Gulf Coast, and 19 dead dolphins verified in the region since the oil drilling blowout on April 20.

LA, MS and AL fisheries are declared a national disaster - Commerce Secretary Gary Locke declared the Gulf of Mexico a national fisheries disaster area this week, citing the havoc wrought on the region’s multibillion-dollar fishing industry by the Deepwater Horizon blowout. The fisheries of Louisiana, Mississippi and Alabama are covered by the disaster declaration, making them eligible for federal relief funds. The spill in the gulf has forced the closing of more than 54,000 square miles of federal waters and wide swaths of Louisiana state waters to commercial and recreational fishing. Louisiana’s commercial fisheries, which generated about $2.4 billion in revenue and 27,000 jobs for the state last year, have been particularly hard hit by the spreading slick.

Gulf oil spill is public health risk, environmental scientists warn - Guardian - Prolonged exposure to crude oil and chemical dispersants is a public health danger, environmental scientists warned yesterday as BP spent a third day trying to initiate a "top kill" operation to cap the ruptured well on the sea bed. With no immediate end in sight, there were growing concerns over the effects on public health of a prolonged exposure to the oil as well as to the more than 3,640,000 litres (800,000 gallons) of chemical dispersants sprayed on the slick.Environmentalists and fishing groups in Louisiana say prolonged exposure to the oil, in the form of tiny airborne particles as well as dispersants, could be wreaking devastating damage on public health.They also accuse BP of threatening to sack workers who try to turn up for clean-up duty wearing protective respirators, and the Obama administration of refusing to release results of air and water quality tests that would show the impact of crude oil and dispersants on the environment.

Four oil-cleanup workers fall ill; Breton Sound fleet ordered back to dock - Fishing boats helping clear oil from the Gulf of Mexico spill from Breton Sound have been called back to dock after four workers reported health problems Wednesday afternoon, Unified Command in Houma announced. Crew members on three boats reported nausea, dizziness, headaches and chest pains Wednesday about 3:30 p.m. Four workers were taken to West Jefferson Medical Center in Marrero for treatment, one traveling by air, one by boat and two by ambulance. The other crewmembers refused treatment at the dock.As a precaution, Unified Command directed all 125 of the commercial vessels that had been outfitted with equipment for oil recovery operations in the Breton Sound area, to return to their temporary accommodations in Breton Sound

"Cleaning Oil-Soaked Wetlands May Be Impossible" - The gooey oil washing into the maze of marshes along the Gulf Coast could prove impossible to remove, leaving a toxic stew lethal to fish and wildlife, government officials and independent scientists said. Officials are considering some drastic and risky solutions: They could set the wetlands on fire or flood areas in hopes of floating out the oil. But they warn an aggressive cleanup could ruin the marshes and do more harm than good. The only viable option for many impacted areas is to do nothing and let nature break down the spill. More than 50 miles of Louisiana's delicate shoreline already have been soiled by the massive slick unleashed after BP's Deepwater Horizon burned and sank last month. Officials fear oil eventually could invade wetlands and beaches from Texas to Florida

New Satellite Analysis Reveals: The Oil Spill Is Now 29,000 Square Miles -The MODIS / Terra satellite image of the Gulf taken yesterday (May 24, 2010) is a relatively cloud-free look at the ongoing oil spill in the eastern Gulf of Mexico. Areas covered by oil slick and sheen are marked with a solid orange line. Areas where we think there may be slicks and sheen, but our analysis is of lower confidence, are shown by dashed orange lines. All together, slicks and sheen are possibly covering as much as 28,958 square miles (75,000 km2). That's an area as big as the state of South Carolina:

BP Document Shows Leak May Be 14,000 Barrels Daily.- A BP Plc document shows the company’s well in the Gulf of Mexico may be leaking about 14,000 barrels of oil a day, more than publicly estimated, The internal BP document from April 27 put a high estimate for the leak at 14,266 barrels a day, Markey, a Massachusetts Democrat, said today at a House Natural Resources Committee hearing. At the time, BP was saying publicly that its well was leaking 1,000 barrels a day, Markey said. The amount of oil being spilled will help determine BP’s liability for the leak, which was triggered by an April 20 explosion aboard the Deepwater Horizon drilling rig leased by BP from Transocean Ltd. BP began its most ambitious attempt to plug the well today by pumping mud-like drilling fluid into it. Markey said he received the BP document yesterday.

BP refuses EPA order to switch to less-toxic oil disperants - BP has rebuffed demands from government officials and environmentalists to use a less-toxic dispersant to break up the oil from its massive offshore spill, saying that the chemical product it is now using continues to be "the best option for subsea application."On Thursday, the U.S. Environmental Protection Agency gave the London-based company 72 hours to replace the dispersant Corexit 9500 or to describe in detail why other dispersants fail to meet environmental standards. The agency on Saturday released a 12-page document from BP, representing only a portion of the company's full response. Along with several dispersant manufacturers, BP claimed that releasing its full evaluation of alternatives would violate its legal right to keep confidential business information private.

Gulf of Mexico oil spill: BP recovering 40pc less oil than previously claimed as it prepares fourth attempt to halt leak – Telegraph - BP was back on the defensive on Monday amid growing political and public frustration in the US at its failure to stem the massive Gulf of Mexico oil spill and the start of preparations for a fourth attempt to cap the damaged well The oil giant admitted it was recovering less oil from a tube inserted into the mile-long pipeline that snapped after the Deepwater Horizon drilling rig exploded with the loss of 11 lives a month ago. BP initially said that most of the estimated 5,000 barrels a day spewing out of the well was being collected and taken a mile to the surface but yesterday the company disclosed that the average daily recovery is running at just over 2,000 barrels.

BP Prepares for ‘Top Kill’ Procedure to Contain Spill - With frustration growing in the Gulf region over BP’s inability to contain the oil spill, the company on Tuesday morning outlined its next plan for stopping the underwater leak. BP said equipment was in place for what is known as a “top kill” procedure, in which heavy drilling fluids twice the density of water are pumped through two narrow lines into the blowout preventer to essentially plug the runaway well. Depending on pressure readings taken Tuesday, officials said they might start the procedure as early as Wednesday morning — but they left open the possibility of more delays. Officials also said that it could take 12 hours to 48 hours once the procedure begins to determine whether it is effective. If top kill does not work, they will move toward placing another containment dome over the leak, possibly to be installed after several days.

BP's top kill on leaking well could be delayed - 25 (Reuters) - BP Plc (BP.L) will begin a process to plug a leaking undersea oil well on Wednesday at the earliest, but it could be delayed or even abandoned if tests show it would not work, a company executive said on Tuesday."In terms of when the actual kill might go forward, the earliest would be tomorrow and it could extend on from there," BP senior vice president Kent Wells told reporters on a conference call, referring to the "top kill" procedure. BP officials had said the top kill, which involves injecting heavy drilling fluids twice as dense as water into the well to stop the oil flow, would begin last Sunday at the earliest.They subsequently pushed its start to Tuesday, then Wednesday, and Wells said it might start later as scientists finish tests to gauge its chances of success."In terms of timing, the pace at which we're doing this -- subsea construction -- we usually spend months to do what we've done in days and weeks," Wells said. "We have to be careful in terms of setting expectations."

Oil FAIL: BP to shut down live cam during “top kill” attempt - Gee, I wonder why? I mean, wouldn't it be simpler just to swap in a new loop? Kidding, but when you've got video that isn't time-stamped and isn't archived, you kinda have to wonder... Move along, people, move along. There's no story here.NOTE You mean the same guys doing the animations aren't give BP a break on the loop work? Kidding again, but when you've got a smart, rich company executing a flawless public relations FAIL, you've got to wonder what's more important to them than a functioning PR effort ...UPDATE And now we hear that the top kill may be delayed, no doubt to buy more time, as day by day the relief well solution assumes more prominence as the only workable "solution."UPDATE BP backtracks:The company had planned to turn off its live video feed of the leak during the procedure, but at the request of President Obama and the National Incident Center has decided to keep it on

Live feeds from BPs remotely operated vehicles (ROV)

Appears only mud flowing from well (Reuters) - BP Chief Operating Officer Doug Suttles said on Wednesday it appears drilling mud, not oil, was gushing from a ruptured undersea well six hours into an effort to halt a growing oil spill."What you've been observing coming out of the top of that riser is most likely mud," Suttles said at a news conference broadcast from a Louisiana command center. "We can't fully confirm that because we can't sample it. And the way we know we've been successful is it stops flowing."

BREAKING: If Top Kill Doesn’t Work, U.S. Navy To Take Over Spill - Hayride sources indicate that today’s effort at a “top kill” of the Macondo gusher carries with it gigantic stakes for BP – as if no measurable progress is made on the spill through that method, President Obama will announce when he comes to New Orleans on Friday that the federal government will seize control of the response from BP and turn it over to the U.S. Navy. Secretary of the Navy Ray Mabus has reportedly floated the idea of sinking a battleship directly on top of the Macondo well in order to drop 80,000 tons on it and crush the drill pipe and the blowout preventer alike.

BP Suspends Top Kill Attempt - WSJ - BP PLC suspended its "top kill" attempt to plug a well that is gushing oil into the Gulf of Mexico as a federal panel of scientists declared the spill the worst in U.S. history, surpassing the Exxon Valdez disaster of 1989.BP said Thursday afternoon that it had stopped pumping drilling mud into the well for much of the day in order to assess the results of the first phase of the top kill and monitor the pressure in the well. Doug Suttles, BP's chief operating officer, said BP pumping would start again later Thursday evening, adding the top kill would continue for at least another 24 hours."The operation has not yet achieved its objective," he said, in that oil was continuing to flow to the surface.Mr. Suttles said BP was expecting to have to deploy a "junk shot," a procedure that involves injecting material such as rubber tires and golf balls to clog up the blowout preventer. That makes sure all the drilling mud is diverted down into the well bore instead of out of the end of the broken riser, the pipe that once connected the rig to the well.

"Top Kill" Has Failed - Here's the scoop: BP's attempt to stop the oil spill using the "Top Kill" method has failed. How do I know? Well, as the New York Times notes: BP officials, who along with government officials created the impression early in the day that the strategy was working, disclosed later that they had stopped pumping the night before when engineers saw that too much of the drilling fluid was escaping along with the oil.  Indeed, BP stopped pumping "mud" for more than 16 hours (the material gushing out of the leaking riser didn't stop during that time). Virtually all of the oil industry technical experts - many of them working in the oil industry - at the Oil Drum agree that it is failed. Basically, BP has failed in trying to drive enough "mud" down the well to provide enough weight to tamp down the oil gushing out. It didn't work.Oh, BP and the mainstream media may not admit it for a couple of days. But it has failed. Indeed, BP's "re-starting" Top Kill really means that Top Kill Version 1.0 was tried and failed, and now BP will try Top Kill Version 2.0 - which will include adding "junk" to the mix.

BP’s Effort to Plug Oil Leak Suspended a Second Time - NYT - BP’s renewed efforts at plugging the flow of oil from its runaway well in the Gulf of Mexico stalled again on Friday, as the company suspended pumping operations for the second time in two days, according to a technician involved with the response effort.  In an operation known as a “junk shot,” BP engineers poured pieces of rubber, golf balls and other materials into the crippled blowout preventer, trying to clog the device that sits atop the wellhead. The maneuver was designed to work in conjunction with the continuing “top kill” operation, in which heavy drilling liquids are pumped into the well to counteract the pressure of the gushing oil. But the company suspended pumping operations at 2:30 a.m. Friday after two junk shot attempts, said the technician, who spoke on the condition of anonymity because he was not authorized to speak publicly about the efforts.

BP Engineers Making Little Headway on Leaking Well - BP engineers struggled Friday to plug a gushing oil well a mile under the sea, but as of late in the day they had made little headway in stemming the flow.Amid mixed messages about problems and progress, the effort — called a “top kill” — continued for a third day, with engineers describing a painstaking process of trying to plug the hole, using different weights of mud and sizes of debris like golf balls and tires, and then watching and waiting. They cannot use brute force because they risk making the leak worse if they damage the pipes leading down to the well.Despite an apparent lack of progress, officials said they would continue with the process for another 48 hours, into Sunday, before giving up and considering other options, including another containment dome to try to capture the oil.

Either the BP Oil Gusher Has Just Completely Blown Out, or BP is Implementing LMRP RIGHT NOW - I took a break from work, and watched the live feed for a minute. I either just saw the whole thing entirely blow out, or BP is implementing LMRP or hot tap right now. Specifically, I saw a HUGE rain of white clumps and particles which are either foam-like objects used in a junk shot or methane hydrates. Then all of the water within the camera view got very, very dark. When I looked more closely, I could make out the outline of massive jet-black plumes of oil rising from below the camera. This is either very, very bad, or BP has abandoned the top kill/junk shots altogether and is in the middle of surgery where it has already cut off sections of the BOP and/or riser, and is trying to cap it off with a sealing grommet. I pray it is the latter.

Cousteau Jr.: ‘This Is a Nightmare… a Nightmare’ ABC (video) Philippe Cousteau Jr. and Sam Champion take hazmat dive into Gulf's oily waters.

Oil spill brings ‘death in the ocean from top to bottom’ - Onshore, small landfalls of the same sludge have started to cause panic among locals as they coat the marshes. Here, just a few feet beneath the surface, a much bigger disaster is unfolding in slow motion.“This is terrible, just terrible,” says Dr Shaw, back on the boat. “The situation in the water column is horrible all the way down. Combined with the dispersants, the toxic effects of the oil will be far worse for sea life. It’s death in the ocean from the top to the bottom.”Dispersants can contain particular evils. Corexit 9527 — used extensively by BP despite it being toxic enough to be banned in British waters — contains 2-butoxyethanol, a compound that ruptures red blood cells in whatever eats it. Its replacement, COREXIT 9500, contains petroleum solvents and other components that can damage membranes, and cause chemical pneumonia if aspirated into the lungs following ingestion.But what worries Dr Shaw most is the long-term potential for toxic chemicals to build up in the food chain. “There are hundreds of organic compounds in oil, including toxic solvents and PAHs (polycyclic aromatic hydrocarbons), that can cause cancer in animals and people. In this respect light, sweet crude is more toxic than the heavy stuff. It’s not only the acute effects, the loss of whole niches in the food web, it’s also the problems we will see with future generations, especially in top predators.”

Nausea-Inducing Photos Of Oil Entering The Marshes - Source: Greenpeace

Awful News From The Gulf: Explosions Collapse Seafloor At Deepwater Horizon Well Head  - A series of explosions appears to have collapsed the seafloor and blown up the BOP at the well head. Oil and gas are billowing out of a depression in the seafloor where the BOP used to be at an exponentially greater rate than anything seen before.My theory: The well consisted of the casing with the drill pipe inside it. The sand and rocks that turned the gusher into a giant sandblaster that blew out holes in the riser pipe at the kinks was coming from the walls of the well that the cement between the casing and the wall was supposed to protect. Therefore, the hole has been getting bigger and bigger and now it’s like a volcano vent with the piping inside it probably a twisted mess. The relief wells can’t possibly stop this because anything they add will just be blown out of the volcano

What If the Leak Can't Be Stopped? Another concern with the spill is that it appears that a portion has been picked up by the Loop Current, which swirls through the Gulf of Mexico to the Florida Keys and back out to the Atlantic Ocean. As the spill heads toward the Florida Keys, it may bring new problems. "If it starts impinging on coral reefs then you have impacts to what are already highly endangered and otherwise fragile ecosystems," Carr said. "There are all these other human assaults on coral reef systems. When you add this on, the cumulative impacts may be beyond what they can handle. Oil on coral reefs is not a common phenomenon." But Rouse noted that the current spreads and becomes more diffuse as it heads across the Atlantic, meaning that impacts on Europe would be minimal. Of greater concern is the area along the U.S. east coast, where it acts like a river.

New, giant sea oil plume seen in Gulf - Marine scientists have discovered a massive new plume of what they believe to be oil deep beneath the Gulf of Mexico, stretching 22 miles (35 kilometers) from the leaking wellhead northeast toward Mobile Bay, Alabama.The discovery by researchers on the University of South Florida College of Marine Science's Weatherbird II vessel is the second significant undersea plume recorded since the Deepwater Horizon exploded on April 20.The thick plume was detected just beneath the surface down to about 3,300 feet (1,000 meters), and is more than 6 miles (9.6 kilometers) wide, said David Hollander, associate professor of chemical oceanography at the school.

New giant oil plume discovered in Gulf - Marine scientists aboard the Weatherbird II have discovered what they believe is a massive new oil plume situated in deep waters of the Gulf of Mexico. The plume is located just beneath the surface down to a depth of 3,300 feet, with the greatest concentration of hydrocarbons at about 1,300 feet, suggesting the highest levels of environmental pollution from the BP disaster may be located out of sight in the Gulf’s deep waters.  The scientists estimate the newest plume to be 22 miles long by 6 miles wide and fear it is the result of BP’s unprecedented use of chemical dispersants applied subsurface at the well site. David Hollander, associate professor of chemical oceanography at USF and lead investigator of the research mission, said the oil they tested is no longer visible, dissolving into the water and raising more fears that oil combined with dispersant toxicity may lead to a dangerous situation for fish larvae and other creatures that filter ocean water for food.

22-mile oil plume under Gulf nears rich waters - A thick, 22-mile plume of oil discovered by researchers off the BP spill site was nearing an underwater canyon, where it could poison the foodchain for sealife in the waters off Florida.The discovery by researchers on the University of South Florida College of Marine Science's Weatherbird II vessel is the second significant undersea plume reported since the Deepwater Horizon exploded on April 20. The plume is more than 6 miles wide and its presence was reported Thursday.The cloud was nearing a large underwater canyon whose currents fuel the foodchain in Gulf waters off Florida and could potentially wash the tiny plants and animals that feed larger organisms in a stew of toxic chemicals, another researcher said Friday.Larry McKinney, executive director of the Harte Research Institute for Gulf of Mexico Studies at Texas A&M University-Corpus Christi, said the DeSoto Canyon off the Florida Panhandle sends nutrient-rich water from the deep sea up to shallower waters.

La. scientist locates another vast oil plume in the gulf - A day after scientists reported finding a huge "plume" of oil extending miles east of the leaking BP well, on Friday a Louisiana scientist said his crew had located another vast plume of oily globs, miles in the opposite direction. James H. Cowan Jr., a professor at Louisiana State University, said his crew on Wednesday found a plume of oil in a section of the gulf 75 miles northwest of the source of the leak. Cowan said that his crew sent a remotely controlled submarine into the water, and found it full of oily globules, from the size of a thumbnail to the size of a golf ball. Unlike the plume found east of the leak -- in which the oil was so dissolved that contaminated water appeared clear -- Cowan said the oil at this site was so thick that it covered the lights on the submarine. Cowan said that the submarine traveled about 400 feet down, close to the sea floor, and found oil all the way down. Trying to find the edges of the plume, he said the submarine traveled miles from side to side. "We really never found either end of it," he said. This discovery seems to confirm the fears of some scientists that -- because of the depth of the leak and the heavy use of chemical "dispersants" -- this spill was behaving differently than others. Instead of floating on top of the water, it may be moving beneath it.

Oil spill may reach Bahamas by weekend -The worst natural disaster to hit the Gulf Coast is likely to reach local coastlines by the weekend, according to Chief Climatological Officer Michael Stubbs, who said a shift in wind patterns is expected to propel the oil slick towards The Bahamas. In an interview with The Nassau Guardian yesterday Stubbs said that in pervious weeks weather conditions have kept the oil slick contained in the Gulf of Mexico. "As it stands now the wind is not supporting movement out of the Gulf. It's keeping the oil particles that are floating along the surface in the Gulf of Mexico," said Stubbs. "However as Friday approaches we see the weather pattern changing and what would happen then is the winds in the area would be flowing clockwise, making it possible for oil floating on the surface to make it to the notorious loop current. So once the particles move into the loop current the chances are [higher] for it [the oil] to reach our area."

NYTimes’s (updated) time-lapse graphic tracking the oil spill in the Gulf

Simmons Calls For Obama to Take Over BP; Military To Nuke Oil Leak -Today Matt Simmons, one of the largest investment bankers in the energy industry appeared on Bloomberg. The chairman of Simmons & Co. INTL went on to explain that there is much more to the oil leak than the news has been reporting. Last Sunday, NOAA confirmed reports of a second fissure about 5-7 miles from the original. This new fissure appears to be releasing a plume the size of Delaware and Maryland combined! He went on to state that “the plume from the riser is minor thing… the best estimate is about 120,000 barrels of oil per day”.Simmons is quoted as saying, “Obama could remove BP today… tell BP it is time to leave”. Some questions were also brought up that pertained to a nuclear device and how the military could lower one 18,000 feet into the well bore. Simmons went on to say ” Such techniques have been used by the Russians on several different occasions”.

What would a hurricane do to the Deepwater Horizon oil spill? - Hurricane season is upon us next week, and the Deepwater Horizon blowout is still spewing a geyser of oil into the Gulf of Mexico. With this year's hurricane season likely to be a severe one, with much above average numbers of hurricanes and intense hurricanes, we have the unwholesome prospect of a hurricane churning through the largest accidental oil spill in history. A hurricane has never passed over a sizable oil spill before, so there are a lot of unknowns about what might happen. The closest call came in 1979, after the greatest accidental oil spill in history, the massive Ixtoc I blowout. That disaster dumped 3 million barrels (126 million gallons) of oil into the Southern Gulf of Mexico between June 1979 and March 1980.

U.S. Deepwater Drilling's Future - Council on Foreign Relations… In an effort to prevent overdependence on oil imports, domestic oil production as a percentage of U.S. consumption has grown even as environmental concerns have prevented new exploration in places like the Arctic National Wildlife Refuge and along most U.S. coasts. The U.S. government's Energy Information Service (EIA) estimates that in the near term, most new U.S. oil production will be in the deep waters of the Gulf of Mexico. While the Obama administration had planned to open up new areas to oil and gas leasing off the coast of Virginia, in Alaska, and in the Gulf of Mexico, angering environmental advocates, the massive oil spill from the explosion of the Deepwater Horizon rig in April 2010 forced the administration to reconsider.

Oil Shocks - BP and the Deepwater Horizon oil spill - BP’s Deepwater Horizon spill makes the Santa Barbara spill look like a puddle. By some estimates, the BP spill is spewing as much oil into the Gulf of Mexico each day as the Union well spewed into the Santa Barbara Channel in all, and the BP spill is now in its second month. The news out of the Gulf continues to range from grim to grimmer. Recently, it was revealed that the spill has created an undersea plume of oil ten miles long, and that some of the oil has already entered the loop current and is being carried toward Florida. Then the federal government doubled the area of the Gulf that had been closed to fishing. On Friday, the government increased that area again, to forty-eight thousand square miles. President Barack Obama has called the spill a “massive and potentially unprecedented environmental disaster,” a characterization that, if anything, probably understates the case.

BP facing extra $60bn in legal costs as US loses patience - The oil disaster unfolding in the Gulf of Mexico could present BP with much higher costs than previously thought as a result of US government penalties of up to $60bn (£40bn), according to City analysts.The penalties are in addition to BP's already huge bill for the clean-up mission, which stood at $760m yesterday, and potentially unlimited damages payable by the company to fishermen and other affected local communities. BP also faces billions of dollars of lost earnings as a result of its damaged reputation in the US, which could result in it being barred from bidding for future contracts.The Guardian has obtained a confidential briefing, from a top-level US environmental lawyer who specialises in oil industry litigation, to stockbroker Canaccord, assessing the financial impact of impending legal action on BP.He warned that, under US law, BP is liable for $1,100 in civil penalties for each spilt barrel of oil and gas, to be paid to the US federal and affected state governments. If BP is found to have acted with gross negligence – and there is no evidence so far that it has – this fine would rise to $4,300 for each barrel.

BP well disaster stuns hardened oil men (Reuters) - Hardened U.S. oil men might be able to do deals in dangerous parts of the world and stay cool under perennial political fire, but the gravity of the Gulf of Mexico disaster has left some of them feeling shell-shocked.Apache Corp (APA.N) CEO Steve Farris, a senior executive at the company for two decades, said he does his best to remain calm and keep the gushing well in perspective. But the first thing he does when he wakes at 5 a.m. is seek out the latest news developments."It has a psychological effect not only on America, but our industry, and you try to overcome that," Farris told the Reuters  Apart from the possibility that it could happen to one of their own rigs, executives worry about the pall BP Plc's blown-out well has cast over a deepwater drilling sector that once had a persistently sunny outlook.

Oil Industry Faces Its ‘1,000-Year Flood’ as Drilling Is Halted - (Bloomberg) -- Energy companies are scrambling to cope with the extension of a deep-water drilling ban, a situation many never foresaw before BP Plc’s oil well began spewing crude into the Gulf of Mexico last month.  Companies can’t plan for an event such as the extended moratorium, said Gene Shiels, a spokesman for oilfield-services provider Baker Hughes Inc., based in Houston. The industry may move personnel and equipment to other markets, such as Brazil and West Africa, and may see job losses, he said.  “The spill is like the 1,000-year flood: it’s the worst- case scenario,” said Brian Youngberg, an analyst with Edward Jones in St. Louis. “It’s hard to prepare for those extreme situations like that.”

Prominent Oil Industry Insider: "There's Another Leak, Much Bigger, 5 to 6 Miles Away" - Matt Simmons was an energy adviser to George W. Bush, is an adviser to the Oil Depletion Analysis Centre, and is a member of the National Petroleum Council and the Council on Foreign Relations. Simmon is chairman and CEO of Simmons & Company International, an investment bank catering to oil companies. Simmons told Dylan Ratigan that "there's another leak, much bigger, 5 to 6 miles away" from the leaking riser and blowout preventer shown on the underwater cameras: If accurate, the bigger leak could have been caused by the destruction of the well casing when the oil rig exploded. That is Simmons' theory.

Spill May Be Much Bigger Than Estimated" » The Gulf oil spill may be a good deal bigger even than the numbers issued Thursday suggest, some of the scientists who worked on the estimate said. BP PLC's oil well is leaking between 12,000 and 19,000 barrels of oil a day, according to initial estimates announced by the U.S. Geological Survey on Thursday. Even using the more conservative figure, of 12,000 barrels a day, the spill already has become the largest in U.S. history, surpassing that of the Exxon Valdez accident in Alaska in 1989. The USGS statement Thursday called the numbers "the overall best initial estimate for the lower and upper boundaries."But some of the researchers who came up with the range of 12,000 to 19,000 say that is merely the minimum amount gushing out, not the lower and upper limits.

25% of Gulf of Mexico waters are closed to fishing as of 6 pm, 5/28/10 -From NOAA's Southeast Fishery Bulletin: BP Oil Spill: NOAA Modifies Commercial and Recreational Fishing Closure in the Oil-Affected Portions of the Gulf of Mexico (PDF):Current revisions to the closure, described below, will be effective on May 28, 2010 at 6 p.m. eastern time (5 p.m. central time). All commercial and recreational fishing including catch and release is prohibited in the closed area; however, transit through the area is allowed. The closure is 60,683 sq mi (157,169 sq km), which is about 25% of the Gulf of Mexico exclusive economic zone. The majority of federal waters in the Gulf of Mexico are open to commercial and recreational fishing.

What if the oil spill just can’t be fixed? -The BP Gulf oil disaster is reaching an interesting phase. People's gut instinct, their first reaction, is to find someone to blame. They blame BP for negligence; the Obama administration for its tepid response; the Bush administration for lax regulatory enforcement. People have been casting about for some way to compartmentalize this thing, some way to cast it as an anomaly, an "accident," the kind of screwup that can be meliorated or avoided in the future.We are, however, drifting toward a whole different kind of place. Tomorrow BP is attempting the "top kill" maneuver -- pumping mud into the well. If it doesn't work, well ... then what? Junk shot? Top hat? Loony stuff like nukes? Relief wells will take months to drill and no one's sure if they'll work to relieve pressure. It's entirely possible, even likely, that we're going to be stuck helplessly watching as this well spews oil into the Gulf for years. I'm curious to see how the public's mood shifts once it becomes clear that we are powerless in the face of this thing. What if there's just nothing we can do? That's not a feeling to which Americans are accustomed.

Op-Ed - Of Top Hats, Top Kills and Bottom Feeders NYT…It’s unnerving, disorienting. A particularly noxious blend of helplessness, fear and fury that washes over you when you realize the country has again been dragged into a costly and scary maelstrom revolving around acronyms you’ve never heard of. And now a gazillion gallons of oil have poisoned the Gulf of Mexico, thanks in part to unethical employees at a once-obscure agency known as M.M.S. — the Interior Department’s Minerals Management Service. M.M.S. is charged with collecting royalties from Big Oil even as it regulates it — an absurd conflict right there. So M.M.S. has had the same sort of conflicts of interest as ratings agencies like Moody’s and Standard & Poor’s had with Wall Street. . As when derivatives experts had to help unravel the derivatives debacle, now the White House is dependent on BP to find a solution to the horror it created. The financial crisis and the oil spill are both man-made disasters brought on by hubris and avarice.

Who Failed at BP, and Why? - The accounts from BP on what happened at the well are sounding more and more troubling.  Warning signs were ignored; BP officials refused to listen to a specialist team that had just arrived, even when said team demanded evacuation (and got it, but only from their own company).  The well blew up a flew hours after their helicopter took off. When events like this happen, we always ask the same question:  how could people be so stupid?  How could they ignore what is now plain to us?  There will be a lot of answers to that question, but I'm willing to bet that a lot of it will end up sounding like "We'd ignored those problems before, and it always turned out all right."

Big Spat on Rig Preceded Explosion - More details emerged Wednesday about a disagreement between employees of rig operator Transocean Ltd. and oil giant BP PLC over how to begin shutting down the well just hours before it exploded in the Gulf of Mexico last month.Testimony on Wednesday about the disagreement, in a hearing held by the U.S. Coast Guard and the Minerals Management Service, which jointly regulate offshore drilling, was likely to bring increased scrutiny to the decisions BP made aboard the rig the day of the explosion, April 20. There was also likely to be more focus on whether Transocean should have done more to ensure proper procedures were carried out.Douglas H. Brown, Transocean's chief mechanic on the Deepwater Horizon rig, said key representatives from both companies had a "skirmish" during an 11 a.m. meeting on April 20. Less than 11 hours later, the well had a blowout, an uncontrolled release of oil and gas, killing 11 workers.

Unusual Decisions Set Stage for BP Disaster - The final step in the causation chain, industry engineers have said in interviews, was most likely the failure of a crucial seal at the top of the well or a cement plug at the bottom.But neither scenario explains the whole story. A Wall Street Journal investigation provides the most complete account so far of the fateful decisions that preceded the blast. BP made choices over the course of the project that rendered this well more vulnerable to the blowout, which unleashed a spew of crude oil that engineers are struggling to stanch.BP, for instance, cut short a procedure involving drilling fluid that is designed to detect gas in the well and remove it before it becomes a problem, according to documents belonging to BP and to the drilling rig's owner and operator, Transocean Ltd. BP also skipped a quality test of the cement around the pipe—another buffer against gas—despite what BP now says were signs of problems with the cement job and despite a warning from cement contractor Halliburton Co.

BP Deepwater Horizon operations were six weeks behind schedule, documents say - BP's drilling operations were about six weeks behind schedule when the Deepwater Horizon rig exploded April 20, according to documents cited Wednesday at a hearing examining the cause of the Gulf of Mexico oil spill.Reading from BP documents that have not been made public, BP safety leader Steve Tink said his company had applied to use the Deepwater Horizon in another oilfield on March 8, 43 days before the accident.BP was paying Transocean, the company that leased the rig to BP and ran it on BP's behalf, $533,000 a day, Transocean safety official Adrian Rose testified.The figures were drawn out of the witnesses by a member of the investigative panel, Jason Mathews of the federal Minerals Management Service

BP chose riskier, cheaper casing for well: report (Reuters) - BP Plc installed a type of cement casing on its now-ruptured undersea well that it knew ran the risk of leaking gases in order to save money, The New York Times reported on Wednesday, citing a BP document it received from a congressional investigator. Workers from the Deepwater Horizon oil rig and the energy company have said that gases were leaking through the casing hours before an explosion caused a massive oil spill in the Gulf of Mexico. Investigators have said the leaks could have caused the explosion. The casing pipe that lined the well had cement that, if it did not seal properly, would allow gas to leak to the wellhead, where there was only a single barrier, the Times said. Using a different type of casing would have created two barriers.

BP Used Riskier Method to Seal Oil Well Before Blast - Several days before the explosion on the Deepwater Horizon oil rig, BP officials chose, partly for financial reasons, to use a type of casing for the well that the company knew was the riskier of two options, according to a BP document. The concern with the method BP chose, the document said, was that if the cement around the casing pipe did not seal properly, gases could leak all the way to the wellhead, where only a single seal would serve as a barrier. Using a different type of casing would have provided two barriers, according to the document, which was provided to The New York Times by a Congressional investigator. Workers from the rig and company officials have said that hours before the explosion, gases were leaking through the cement, which had been set in place by the oil services contractor, Halliburton. Investigators have said these leaks were the likely cause of the explosion. The approach taken by the company was described as the “best economic case” in the BP document.

BP Cites Crucial 'Mistake' -Oil giant BP PLC told congressional investigators that a decision to continue work on an oil well in the Gulf of Mexico after a test warned that something was wrong may have been a "fundamental mistake," according to a memo released by two lawmakers Tuesday.The document describes a wide array of mistakes in the fateful final hours aboard the Deepwater Horizon—but the main revelation is that BP now says there was a clear warning sign of a "very large abnormality" in the well, but work proceeded anyway.The rig exploded about two hours later.According to the memo, BP identified several other mistakes aboard the rig, including possible contamination of the cement meant to seal off the well from volatile natural gas and the apparent failure to monitor the well closely for signs that gas was leaking in, the congressmen wrote in their post-meeting memo. An immense column of natural gas, erupting from the oil well, fueled the fireball that destroyed the rig.

Top BP official on oil rig takes the fifth; another says he's too sick to testify… After reports that a BP "company man" overruled workers for the oil rig company Transocean on a key safety procedure prior to an explosion which set the rig aflame and sinking into the Gulf of Mexico, a senior BP official that was on the rig when it exploded has told investigators he will invoke his Fifth Amendment right not to testify in the case. "One of BP's company men on the Deepwater Horizon when it exploded, Robert Kaluza, has declined to testify before the investigative panel in Kenner, citing his Fifth Amendment right not to incriminate himself, the Coast Guard said," according to the New Orleans Times Picayune. "Kaluza was scheduled to testify Thursday in the joint U.S. Coast Guard and Minerals Management Services hearings in Kenner."

What's the best way to punish BP for the oil spill? - The damage from BP's oil spill is mounting. The lucrative tourism business in Florida is suffering. Housing predictor estimates that homes in the path of the leak will lose "at least 30 percent in value as a result of the environmental catastrophe." The thriving seafood industry in the Gulf has largely been shut down. Huge quantities of oil have been wasted. The spill may cause severe long-term damage to sea life in the Gulf, destroy sensitive coastal marshes, and send oil washing up on Atlantic Ocean beaches. And don't forget all the jobs and profits that could have materialized from opening up new areas to offshore drilling—but that likely won't thanks to the spill.  Which brings us to the $64 billion question: BP should pay—and pay dearly—for the damage. But how much? And, more importantly, how? What should the United States do to BP that would be satisfying, punish the company appropriately, and, most importantly, provide incentives for BP and other oil firms to act with greater care? I've puzzled over this and have come up with a few ideas—none of them very satisfying.

Estimate from oil leak  gush past twice the previous levels; drill permits yanked - With mud continuing to battle oil in an attempted "top kill" of the leaking well at the bottom of the Gulf of Mexico, the historic scale of the disaster became clearer Thursday when scientists said the mile-deep well has been spewing 12,000 to 19,000 barrels of oil a day, far more than previously estimated. The new figure supports what many observers have assumed from the images of oil slicking the gulf surface, slathering beaches and spurting from a pipe on the sea floor: This is the worst oil spill in U.S. history.  President Obama, feeling pressure to act in a crisis now in its sixth week, yanked the exploratory drilling permits for 33 deepwater rigs in the gulf and suspended planned exploration in two areas off the coast of Alaska. He announced the moves at a news conference carried on cable TV channels that simultaneously showed the live video feed of effluent billowing from the cracked riser pipe at the bottom of the gulf.

Exploratory oil drilling in Arctic halted until 2011 - The Obama administration Thursday will suspend planned exploratory oil drilling in the Arctic Ocean off Alaska until at least 2011, a casualty of the Gulf of Mexico oil spill.The suspension will be part of a report that Interior Secretary Ken Salazar will give to President Obama, who's likely to address the suspension as well as other proposals stemming from Salazar's report, at a White House news conference Thursday.The move will stop Shell from drilling five wells in the Chukchi and Beaufort seas off northern Alaska weeks before it had hoped to start work, an administration official said. The move will stop for now a controversial expansion of oil drilling in a part of the world that could hold vast stores of oil and natural gas, but which environmentalists warn would come at great risk.

Parish official says BP shipped in workers for president's visit - Grand Isle- Did BP hire beach cleanup workers in preparation for President Barack Obama's visit to Louisiana? Jefferson Parish Councilman say so in what he called a dog and pony show staged for the press and the visiting President. A Gulf Coast official accused BP of shipping workers into Grand Isle, Louisiana, for President Barack Obama's visit to the oil-stricken area Friday and sending them away once the president left the region. Early Friday morning, "a number of buses brought in approximately 300 to 400 workers that had been recruited all week," Jefferson Parish Councilman Chris Roberts told CNN's Roberts said the workers were offered $12 an hour to come out to the scene at Grand Isle and work in what he called a "dog and pony show." But, when Obama departed, so did the workers, he said, adding that he's never seen more than 20 workers at the Grand Isle cleanup site since the effort started.

Despite Obama’s Moratorium, Drilling Projects Move Ahead— In the days since President Obama announced a moratorium on permits for drilling new offshore oil wells and a halt to a controversial type of environmental waiver that was given to the Deepwater Horizon rig, at least seven new permits for various types of drilling and five environmental waivers have been granted, according to records. The records also indicate that since the April 20 explosion on the rig, federal regulators have granted at least 19 environmental waivers for gulf drilling projects and at least 17 drilling permits, most of which were for types of work like that on the Deepwater Horizon shortly before it exploded, pouring a ceaseless current of oil into the Gulf of Mexico. Asked about the permits and waivers, officials at the Department of the Interior and the Minerals Management Service, which regulates drilling, pointed to public statements by Interior Secretary Ken Salazar, reiterating that the agency had no intention of stopping all new oil and gas production in the gulf.

U.S. oil drilling regulator ignored experts’ red flags on environmental risks - The federal agency responsible for regulating U.S. offshore oil drilling repeatedly ignored warnings from government scientists about environmental risks in its push to approve energy exploration activities quickly, according to numerous documents and interviews. Minerals Management Service officials, who can receive cash bonuses in the thousands of dollars based in large part on meeting federal deadlines for leasing offshore oil and gas exploration, frequently changed documents and bypassed legal requirements aimed at protecting the marine environment, the documents show. This has dramatically weakened the scientific checks on offshore drilling that were established under landmark laws such as the Marine Mammal Protection Act and the National Environmental Policy Act, say those who have worked with the MMS, which is part of the Interior Department. "It's a war between the biologists and the engineers,"

MMS Employees Took Gifts, Viewed Porn, Report Finds (Bloomberg) -- U.S. Minerals Management Service employees, some of whom were assigned to inspect offshore drilling platforms in the Gulf of Mexico, accepted gifts from oil and gas companies and used government computers to view pornography, the Interior Department said. Interior Secretary Ken Salazar ordered a broader investigation today into ethics violations at the agency that oversees offshore oil drilling after a report found lapses by staff in the Lake Charles, Louisiana, office between 2000 and 2008. The investigation by the department’s inspector general followed a 2008 probe of the agency that found illegal drug use and inappropriate sexual relationships between staff and industry contacts

BP-owned Alaska oil pipeline shut after spill (Reuters) - The Trans-Alaska Pipeline, partly owned by BP, shut down on Tuesday after spilling several thousand barrels of crude oil into backup containers, drastically cutting supply down the main artery between refineries and Alaska's oilfields. The accident comes at a difficult time for BP -- the largest single owner of the pipeline operator, holding 47 percent -- as it struggles to plug a gushing Gulf of Mexico oil well.The shutdown followed a series of mishaps that resulted from a scheduled fire-command system test at Pump Station 9, about 100 miles south of Fairbanks, said Alyeska Pipeline Service Co, the operator of the 800-mile oil line.The power outage triggered opening of relief valves, causing an unspecified volume of crude oil to overflow a storage tank into a secondary containment.

Something Rotten At Interior - Krugman - Something is very wrong at the Interior Department. Actually, that’s not news. No part of the government was as thoroughly corrupted; Interior became a case of government of the extractive industries, by the extractive industries, and very much for the extractive industries. And it was going to take time to clean up the mess. But has the cleanup even started? Every day there’s another news story with Ken Salazar firmly declaring that he’s losing patience with BP, and that if the company doesn’t get with it … he’ll make another firm declaration tomorrow. Meanwhile, we get assurances that no more drilling is being allowed pending review, followed by stories that, well, actually it is; we get stories about MMS officials partying with cakes inscribed “Drill, baby, drill.”What this says to me is that officials at Interior are acting as if nothing has changed.

Drilling For Certainty - Over the past decades, we’ve come to depend on an ever-expanding array of intricate high-tech systems. These hardware and software systems are the guts of financial markets, energy exploration, space exploration, air travel, defense programs and modern production plants. These systems, which allow us to live as well as we do, are too complex for any single person to understand. Yet every day, individuals are asked to monitor the health of these networks, weigh the risks of a system failure and take appropriate measures to reduce those risks.  If there is one thing we’ve learned, it is that humans are not great at measuring and responding to risk when placed in situations too complicated to understand.

JP Morgan invented credit-default swaps to give Exxon credit line for Valdez liability - Credit-default swaps are widely seen as a major contributor to the recent financial meltdown. But the origin of CDS’s with the Exxon Valdez oil disaster isn’t as widely known. The New Yorker has a long review of a couple of financial books, including Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe.  It details the history of the CDS, an idea that came out of a June 1994 JP Morgan off-site in Boca Raton (where “binge drinking occurred” and  “a senior colleague’s nose was broken”):

Gulf oil spill offers a lesson in capitalism vs. socialism - So who is in charge of stopping the oil spill, BP or the federal government?  The fact that the answer to this question seems as murky as the water around the exploded oil platform in the Gulf of Mexico suggests that this is an excellent moment to recognize that our arguments pitting capitalism against socialism and the government against the private sector muddle far more than they clarify.  Many tragic ironies are bubbling to the surface along with the oil. Consider the situation of Gov. Bobby Jindal of Louisiana, a Republican conservative who devoutly opposes the exertions of big government. But with his state facing an environmental disaster of unknown proportions, Jindal is looking for a little strength from Washington. His beef is that the federal government isn't doing enough to help. "It is clear we don't have the resources we need to protect our coast," he said this week

The Importance of Presidential Indignation and Explanation - Robert Reich - According to a new CBS News poll 70 percent of Americans disapprove of how BP has handled the oil gush, compared with 45 percent who disapprove of how Obama has handled it. This could change in the days or weeks ahead if the spill continues to worsen and the White House looks and acts powerless. But it’s not just the oil gush. Most Americans continue to be livid at Wall Street executives and traders — for which they blame an economic crisis that’s cost many their jobs, savings, and homes — a crisis that’s still costing taxpayers a bundle even as the bankers are back to collecting huge compensation packages. Yet the President continues to consult and socialize with many of them. Most people are also furious that executives at Massey Energy failed to use mandated safety equipment and procedures that might have saved the lives of 29 miners. Most Americans upset that the top guns at Anthem, WellPoint, and other health insurers are still hiking insurance rates. Many are angry that the executives of credit card companies still charging outlandish rates on overcharges that are still hard to compute. What happened to the new rules that were supposed to stop this?

Mr. President, Defend America - The only thing more blatant than the fraud and corruption that is killing our country is our current leaders' unwillingness to stop it. Now, as we are faced with the unspeakable damage from both the Gulf oil spill and the financial crisis, our leaders still insist that the best people to deal with the aftermath are the very people who caused it in the first place.Imagine how silly this reasoning would sound if we decided to let the spouses of murder victims be in charge of the crime scene. After all, they know the area the best and are very familiar with the victim. By our current leaders' reasoning, these criteria alone would make this the best person to do a thorough investigation and bring the perpetrator to justice.This kind of bizarre ignorance of incentives is now displayed by our current president, who often appears to think that government works best when it is subservient to corporations under even the most dubious circumstances.

Time for industry to end its war on regulation -The biggest oil spill ever. The biggest financial crisis since the Great Depression. The deadliest mine disaster in 25 years. One recall after another of toys from China, of vehicles from Toyota, of hamburgers from roach-infested processing plants. The whole Vioxx fiasco. And let's not forget the biggest climate threat since the Ice Age. Even if you're not into conspiracy theories, it's hard to ignore the common thread running through these recent crises: the glaring failure of government regulators to protect the public. Regulators who were cowed by industry or intimidated by politicians. Regulators who were compromised by favors or prospects of industry employment. Regulators who were better at calculating the costs of oversight than the benefits. And regulators who were blinded by their ideological bias against government interference and their faith that industries could police themselves

The Gulf Of Mexico Before The Oil Spill -- The oil leak on the Mississippi Canyon seafloor of the Gulf of Mexico proceeds apace. It is not clear that recent actions have succeeded in plugging the leak. The widely dispersed petroleum is a great disaster, but I get the distinct impression that this oil is seen as despoiling a pristine environment. Nothing could be further from the truth. I have this impression because, to my knowledge, the sorry state of the Gulf of Mexico before the oil spill is not being discussed. Before the oil spill, the Gulf of Mexico was being ravaged by ongoing, slower-acting environmental disasters have a common cause: human activity—

  • coastal erosion
  • hypoxia (very low oxygen)
  • harmful algal blooms (red tides)

Oil Rules - The more we learn about the BP oil well blowout in the Gulf of Mexico, the more we ought to question the basic assumptions that led us here. Like the explosion of the housing bubble that ruptured the world economy, this human and environmental tragedy resulted from a system that encourages reckless profiteering without effective regulation.It is impossible to understand why an accident like the Deepwater Horizon disaster was inevitable without looking back on an era when the energy industry dominated government. The oil bidness, as it is known affectionately in Texas, could do no wrong under the Bush-Cheney administration, which was run by former oil executives and their lobbyists.

Deepwater Horizon: This Is What the End of the Oil Age Looks Like - Lately I’ve been reading the excellent coverage of the Deepwater Horizon Gulf oil spill at, a site frequented by veteran oil geologists and engineers. A couple of adages from the old-timers are worth quoting: “Cut corners all you want, but never downhole,” and, “There’s fast, there’s cheap, and there’s right, and you get to pick two.”There will be plenty of blame to go around, as events leading up to the fatal rig explosion are sorted out. Even if efforts to plug the gushing leak succeed sooner rather than later, the damage to the Gulf environment and to the economy of the region will be incalculable and will linger for years if not decades. The deadly stench from oil-oaked marshes—as spring turns to hot, fetid summer—will by itself ruin tens or hundreds of thousands of lives and livelihoods. Then there’s the loss of the seafood industry: we’re talking about more than the crippling of the economic backbone of the region;

Gulfs in our Energy Security, and the Louisiana Oil Blowout  - In the wake of the April oil well blowout off the coast of Louisiana, policy-makers are rethinking the issue of off-shore drilling. Clearly the last decade’s neglect of safety rules by federal regulators needs to come to an end. But what larger implications should we draw for domestic oil drilling? Usually it is taken as self-evident that the energy security goal argues in the direction of increased exploitation of domestic oil resources:   “Drill, Baby, Drill.”    But some of us have long thought that a more appropriate slogan for the policy of using domestic reserves as aggressively as possibly would be “Drain America First.”   A true understanding of energy security could tip the balance the other way instead, in the direction of conserving American energy resources.    Oil wells such as the Deepwater Horizon site, once it is capped, should be saved, their future use to be made conditional on a true national emergency, such as a long-term cut-off of Persian Gulf oil resulting in a global oil price of $200 a barrel or more.

"Gulfs in our Energy Security" - Jeff Frankel argues that energy security does not mean minimizing imports of oil and maximizing domestic production of energy. Instead, it means insuring ourselves against future variations in supply that might damage the economy or interfere with our national defense needs. When approached in this manner, it's important to have large domestic deposits available under some scenarios that lead to long-term reductions in the available supply of oil. Since the economic and strategic damage could be large if one of these scenarios were to occur, it's also important to give them substantial weight when thinking about insuring ourselves against the risk of long-term reductions in our access to outside sources of energy. What this means is that current thinking on energy security -- termed "Drain America First" below -- is not the optimal energy security policy. It extracts rather than preserves the domestic oil reserves that would be needed if one of the scenarios actually occurred...

The U.S. Exports More Corn Ethanol - There is nothing low cost about exploiting our land to produce politically driven, taxpayer subsidized ethanol through industrialized corn growing. One third of our corn crop now goes towards ethanol production and the corn growers and ethanol interests would like to see mandates for yet higher blends. How can they refer to this product as low-cost when its survival isn't even feasible without the taxpayer subsidies??? What is the EROEI of the product once it gets to the Netherlands and elsewhere??? Nebraska's extremely productive corn output is dependent upon irrigation, which is depleting the Ogallala aquifer and requires even more electrical energy to produce, thus an even lower EROEI than corn from other states. A better ethanol policy would, at minimum, exclude irrigated corn from eligibility of taxpayer subsidies. Instead, current policy is increasing irrigation demand.

Not just oil: US hit peak water in 1970 and nobody noticed - The concept of peak oil, where the inaccessibility of remaining deposits ensures that extraction rates start an irreversible decline, has been the subject of regular debate for decades. Although that argument still hasn't been settled—estimates range from the peak already having passed us to its arrival being 30 years in the future—having a better sense of when we're likely to hit it could prove invaluable when it comes to planning our energy economy. The general concept of peaking has also been valuable, as it applies to just about any finite resource. A new analysis suggests that it may be valuable to consider applying it to a renewable resource as well: the planet's water supply. The analysis, performed by staff at the Pacific Institute, recognizes that there are some significant differences between petroleum and water. For oil, using it involves a chemical transformation that won't be reversed except on geological time scales. Using water often leaves it in its native state, with a cycle that returns it to the environment in a geologic blink of an eye. Still, the authors make a compelling argument that, not only can there be a peak water, but the US passed this point around 1970, apparently without anyone noticing.

Shale Gas Costing 2/3 Less Than OPEC Oil Converges With U.S. Water Concern - Companies from India’s Reliance Industries Ltd. to Japan’s Mitsui & Co. are spending billions of dollars to dislodge natural gas from a band of Pennsylvania shale -- sedimentary rock composed of mud, quartz and calcite. Shale gas proponents, led by 91-year-old oil patch billionaire George Mitchell, who invented the process to extract it, say the U.S. should plumb all forms of natural gas. That would help unhook the nation from coal and foreign petroleum. Gas is about two-thirds cheaper than oil and greener too. It produces 117 pounds (53 kilograms) of carbon dioxide per million British thermal units (MMBtu) of energy equivalent compared with 156 for gasoline and 205 for coal.

Oil sector investments help stability: producers - Massive investments planned by Saudi Arabia and other Arab hydrocarbon producers to expand their production capacity will ensure the world's oil needs and support market stability, their main oil group has said.Saudi Arabia, which sits atop a quarter of the world's recoverable crude resources, and three other Arab producers have pledged to pump nearly $396 billion (Dh1.45 trillion) into their hydrocarbon sector over the next few years to raise capacity, the Kuwait-based Organisation of Arab Petroleum Exporting Countries (Oapec) said in its monthly bulletin issued this week. It said energy investments in the Arab world, which controls more than 56 per cent of the global oil wealth, are needed to offset a decline in capital in other producers because of the global fiscal distress.

Michael Ruppert: Confronting the Peak Oil Crisis - Los Angeles based Michael Ruppert, author of Confronting Collapse, speaks on the tangible steps that must be taken to confront the grave global reality of our oil dependence. Sponsored by Chelsea Green Publishing, Vermont Commons, The Candidates for Vermont Independence and Free Vermont Radio, along with local sponsors.

International Energy Outlook 2010-Highlights       10 pdfs / 11 graphs

China more dependent on foreign oil than ever - In the first quarter of 2010, China's dependence on imported oil reached 54.5 percent, hitting a new high, according to a report released by the China Petroleum and Chemical Industry Association. The report showed that China's apparent oil consumption in the first quarter totaled 106 million tons, 17 percent higher year-on-year. Apparent consumption of natural gas increased 19 percent to 26.4 billion cubic meters. It is notable that China's dependence on imported oil was 54.5 percent in the first quarter. The figure exceeded 50 percent for the first time in 2009. Last year, China produced 189 million tons of crude oil, and net crude oil import was 199 million tons.However, the export volume of China's oil products is also growing fast. China exported nearly 7 million tons of refined oil in the first quarter, up 66.4 percent year on year."Overcapacity in the oil-refining sector is the reason for this situation," said an industry expert

China's refining capacity may rise 50%, Sinopec says - China, the world's second-biggest energy consumer, may increase its annual crude-oil refining capacity by 50 percent in the next five years to meet rising demand in the fastest-growing major economy.Plants in China may be able to refine 750 million metric tons of crude oil annually by the end of 2015, compared with an estimated 507.5 million tons by the end of this year, China Petrochemical Corp, or Sinopec Group, said in a report today. Overseas sales of goods, including machinery and electronics, rose a better-than-expected 30.5 percent last month, spurring fuel consumption by factories. Crude imports may reach a record this year, according to a Feb 4 estimate by China National Petroleum Corp, the country's biggest oil company.

China journal: Can 1,300 coal plants be wrong? - This week, I'm traveling around China trying to get a better sense for the country's energy and environmental policies (the trip is being sponsored by the China-U.S. Exchange Foundation). On a very broad level, there are two big, contradictory facts about the country to consider. One is that China is working far more frantically than we are to rein in its greenhouse-gas pollution and promote cleaner energy sources. The other is that the country is so large and growing so fast that its emissions are still rising at a shocking pace—a new coal plant comes online nearly every week, belching up countless tons of carbon into the air.In a meeting with reporters earlier this morning, Peggy Liu, who chairs the Joint U.S.-China Collaboration on Clean Energy, a non-profit in Shanghai, offered an interesting perspective. Right now, she conceded, it's true, all of China's efforts to scale up renewable power—the current goal is 15 percent by 2020—are pretty meaningless when compared with all the coal the country's burning. But, Liu argued, one way to think of things is that China's currently in a "throw spaghetti at the wall and see what sticks" phase

Prostitutes blamed for property bulge - Prostitution is illegal in China, but the police crackdowns recently launched across the country indicate that the "world's oldest profession" is doing as well as ever. In Beijing, there are reportedly so many xiaojie (mistresses) that state media claim their numbers have driven up housing prices. After efforts to "physically and spiritually" cleanse Beijing for the 2008 Summer Olympic Games, prostitution has made a big comeback, so much so that municipal police launched a citywide "strike hard" vice crackdown in April entitled "Operation 4.11". Coincidentally, in line with central government policy, the municipal government has also began taking measures (so far in vain) to bring down the city's skyrocketing housing prices.

The "financialization" of commodities - A couple of weeks ago in Mobile, Ala., this correspondent watched a shipyard auction where spools of copper cable were fetching prices that had some participants shaking their heads. In a bidding frenzy, one buyer won every single spool, spending about $1,000,000 in total. Then he bundled them onto a ship headed for China where they’ll be stripped, ground up and melted into new metal. Right as that was happening, financial market prices for copper — along with a host of other commodities — were slumping as traders fretted that Europe’s financial crisis could swamp global demand.So, who was right, the buyer in Mobile or the financial markets? The Baltic Dry Index suggests the former.The index, which measures global shipping costs for bulk commodities, has risen 22% in May, putting it at its highest levels in six months. Since it’s very sensitive to demand for moving goods around the world, it tends to be a good measure of whether the global economy is heating up or cooling down.

The Chinese Economic Model - Something that emerges quite quickly and a bit unexpectedly from being taken around on an economics-focused tour of China is that the Chinese economic miracle is really a great deal less of a “free market” miracle than the conventional understanding in the United States would suggest. What’s more, it’s not simply a case of “industrial policy” à la Japan, though that’s certainly an element. Rather, the really striking facts are things like the one highlighted by Tyler Cowen that “Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks.” The closest analogy it seems to me is probably to France, which I think is the western country to have been least-impacted by the neoliberal turn away from state ownership of firms. And somewhat like in France, the Chinese speak specifically about the idea that over the past thirty years their development has been enhanced by the creation of a better-educated better-trained bureaucracy and their aspirations to continue doing this in the future.

House prices: You can’t keep ‘em down | The Economist - HOUSING markets continue to strengthen, as The Economist’s latest survey of global house prices shows. Our periodic round-up was dominated for nearly a year by countries where house prices were falling year-on-year. But the latest available data show that in half of the 20 countries whose markets we monitor, house prices are higher than they were twelve months earlier. Since these indicators were last published at the end of 2009, house-price inflation has quickened in each of the seven countries where it was already positive. In Hong Kong, prices are more than a quarter above their level a year earlier. With the exception of Ireland, the pace of decline has slowed in countries where the market has yet to turn the corner. In America, two of the three measures we follow show that prices remain below their level a year earlier, but the Case-Shiller index of house prices in ten big cities was at the same level in January as it was a year earlier.

China attempting to curb housing market speculation - On a policy-relevant note, Monday morning I was part of a group of people who spoke to a Vice President at the Bank of Commerce, which is one of China’s large basically state-owned banks, about various financial and economic issues and naturally the question of whether China’s experiencing a housing bubble of its own came up. He offered a couple of interesting points in response. One was that he said China’s largest banks have a limited exposure to real estate, with it amounting to no more than seven percent of total assets as a regulatory manner. So even if big losses are coming, it’s something the system can weather. Maybe so. More interesting, he noted that in the past couple of months the Chinese government has taken regulatory steps to try to cool things down including, most notably, requiring a 50% downpayment on any second homes. The clear intention there is to make it difficult to engage in leveraged real estate speculation, thus preventing too much in the way of mania.

China's $2.5 trillion dilemma - Oh, the trials and tribulations of sitting on $2.5 trillion. That's how much China holds in foreign currency reserves. And in this period of market turmoil and economic uncertainty, what would you do with it? I can't figure out where to put my far more meager earnings. I couldn't begin to guess where I'd invest trillions.China's leaders are probably having a tough time of it as well. The name of the game in recent years has been diversification. Most of China's reserves are likely in U.S. dollars. We don't know exactly how much, since China doesn't break down its reserves by type of currency. Fearful of placing all of its eggs in one currency basket, it has aimed to protect its national wealth by increasing its holdings of other currencies, thus creating a more balanced portfolio. That seemed to make sense. If you recall, not too long ago it was the greenback that was supposed to be knockin' on heaven's door. Now – surprise – we have a euro crisis. The dollar is looking groovy. That has only complicated the lives of China's policymakers. And what they decide to do could have major repercussions for currency markets and the global economy.

China Finds a Policy Job for Forex Reserves - The State Administration of Foreign Exchange (SAFE) is leading a policy adjustment that taps China's huge stash of foreign reserves for overseas loans through commercial banks.Under an evolving reform project launched in recent months, SAFE has taken initial steps toward giving policy and commercial banks authority to handle loans for intergovernmental cooperation projects.Major loan-for-oil swaps signed in recent months by China and  several other countries marked a coming-out for the new policy.The adjustments are designed to help China diversify its foreign currency assets and provide a channel for some of the US$ 2.4 trillion in reserves held by the central bank.

Caixin Online: China municipalities to get resource-tax windfall - For many years, China's oil prices and natural-resource taxes were based on volume. In 2009, oil companies paid 28 yuan ($4.10) per ton of crude oil, and total tax revenues from crude oil on a nationwide basis last year was 5.3 billion yuan. But figures of this size are about to be considered miniscule.  If the overhaul is implemented across the country, tax revenues from crude oil are estimated by industry insiders to hit 47.3 billion yuan per year. The State Council -- the Cabinet -- has decided to levy natural resource taxes on crude oil and natural gas based on price. Sources say that current proposals would set the tax at 5% initially. All revenues from natural resources, with the exception of offshore oil resource taxes, belong to local governments, and the reform could substantially boost the incomes of local governments.

Clinton and Geithner Face Hurdles in China Talks - NYTimes - China and the United States opened three days of high-level meetings here on Monday meant to broaden and deepen the ties between the world’s largest developed and developing economies. But the opening session instead laid bare a recurring theme between Beijing and Washington: the United States came with a long wish list for China on both economic and security issues, while China mostly wants to be left alone to pursue policies that are turning it into an economic superpower. President Hu Jintao, welcoming the 200-strong American delegation in the Great Hall of the People, praised the “mutually beneficial and win-win cooperation” between the United States and China. Such coordination, he said, had helped speed the recovery from the 2008 financial crisis. On the crucial issue of China revaluing its currency — something the Obama administration had pushed for — Mr. Hu repeated China’s past promises to make its effectively fixed exchange rate respond more to the market, but the fact that the country’s top leader mentioned reform at all suggested it is on the leadership’s agenda

Chinese protectionism, not the yuan, is our greatest concern, says top US negotiator - The remarks by Ron Kirk, the US trade representative, on the sidelines of the US-China strategic and economic dialogue in Beijing come as US and European firms increasingly raise concerns over a new Chinese policy aimed at favouring indigenous technology over imported know-how.  Mr Kirk warned that any Chinese moves to reduce intellectual property theft and cut down on myriad internal regulations that discriminate against foreign companies could do more to improve the US-China trade imbalances than yuan reforms.

Martin Wolf v Stephen Roach on US-China relations - Who’s more opinionated? Tough call, when it’s Morgan Stanley’s Stephen Roach up against the FT’s Martin “Two Brains” Wolf on the small matter of US-China relations and the outlook for China’s currency policy.Bloomberg filmed the pair, who spoke — at length — at an event in New York on May 25. The president of the National Committee on US-China Relations, Stephen Orlins, moderated the 90-minute discussion. Worth noting that Wolf and Roach have parried before. In January 2009, Wolf told Roach (via an exchange of blog posts) “he was far too sanguine for a world that was already in a ‘proto-Depression’…”

Memo From Beijing - Chinese Economy Treads Risky Path. (Ask Japan.)- The White House dispatched 200 dignitaries to China’s capital for relationship-cementing talks this week, a number that bespeaks a world order rapidly turning upside down. From China’s threefold economic growth in a decade to today’s swarms of five-star hotels and six-figure autos, it is a cliché to say that the world has never before seen anything like this juggernaut. Actually, the world has. Twenty years ago, Japan was the juggernaut, a silky economic machine poised, according to conventional wisdom and more than a few best sellers, to dominate world trade and global diplomacy in the decades to come. That it never happened hardly foreshadows China’s future prospects. Yet as outsiders behold China’s transformation from peasant nation to economic colossus, the risks of extrapolating from China’s robust present into an indeterminate future are not to be ignored.

Downturn After Boom: Slow Credit Growth in Middle East, North Africa by iMFdirect - In the midst of an early and uncertain economic recovery from the global crisis, countries in the Middle East and North Africa (MENA) region have been experiencing a sharp slowdown in the growth of credit to the private sector, by about 30 percentage points on average relative to precrisis peak rates.For many sectors, firms, and households that depend on bank financing, this slowdown may be forcing them to scale back their spending plans, or to resort to scarce or costly alternative avenues for financing. Slow credit growth may therefore be constraining the strength of the recovery in the short run, in addition to limiting prospects for longer-term growth. Policymakers are understandably concerned

What happened in 2003? -PAUL KEDROSKY always has the best charts. This weekend he posts the figure below, under the headline "What happened to Africa in 2003?": This seems like a pretty question to answer. One word: China. Around the beginning of the last decade, rapid Chinese growth began placing upward pressure on a range of commodity prices:. And China has been an active investor in African infrastructure in order to improve its access to the continent's resources. The question is, how will this boom translate into sustainable growth?

Op-Ed - Moonshine or the Kids? - NYTimes - There’s an ugly secret of global poverty, one rarely acknowledged by aid groups or U.N. reports. It’s a blunt truth that is politically incorrect, heartbreaking, frustrating and ubiquitous: It’s that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households. That probably sounds sanctimonious, haughty and callous, but it’s been on my mind while traveling through central Africa with a college student on my annual win-a-trip journey. The Obamzas have no mosquito net, even though they have already lost two of their eight children to malaria. They say they just can’t afford the $6 cost of a net. Nor can they afford the $2.50-a-month tuition for each of their three school-age kids. But Mr. Obamza and his wife, Valerie, do have cellphones and say they spend a combined $10 a month on call time. In addition, Mr. Obamza goes drinking several times a week at a village bar, spending about $1 an evening on moonshine.

Africa resists the protectionist temptation- voxeu - Despite the return of economic growth, the threat of protectionism still lingers. This column presents the fifth report from the Global Trade Alert with a focus on sub-Saharan Africa. The report is the busiest yet – the number of identified protectionist measures has risen by 40%. No four-digit product line, no economic sector, and no jurisdiction have emerged unscathed by crisis-era protectionism.

India Is Stealing Water Of Life, Says Pakistan - Crucial, coveted and increasingly scarce, water has become the latest issue to stoke tensions between India and Pakistan, with farmers in Pakistan's breadbasket accusing Delhi of reducing one of the subcontinent's most important rivers to little more than a trickle. A group of more than 20 different UN bodies warned earlier this month that the world may be perilously close to its first water war. "Water is linked to the crises of climate change, energy and food supplies and prices, and troubled financial markets," said the report. "Unless their links with water are addressed and water crises around the world are resolved, these other crises may intensify and local water crises may worsen, converging into a global water crisis and leading to political insecurity and conflict at various levels."

Global Infrastructure Deficit Pegged at $2Trillion Per Annum - The World Economic Forum’s Positive Infrastructure Report (PIR) finds that world faces a global infrastructure deficit of US$2 trillion per year over the next 20 years. The report analyses the four largest infrastructure markets – Latin America, China, India and the US, and studies how to best deploy public funds made available through global fiscal stimuli packages to further the cause of infrastructure development.The report has clarified that though the term “infrastructure” could denote a wide range of facilities and systems including economic and financial infrastructure, social infrastructure and physical infrastructure, the study has centred on physical infrastructure. As per the report, the projections for the future infrastructural development have been drawn from a study by the consulting firm, Booz Allen Hamilton.

How is the world economy doing? - ESWAR PRASAD (of Cornell and the Brookings Institution and occasionally Free exchange) and his Brookings collaborator Karim Foda have developed a new series of indexes they call TIGER (Tracking Indexes for the Global Economic Recovery). These are time-series charts of growth rates for things like GDP, exports, imports, industrial production, financial-market stuff like bond spreads and stock market capitalisations, and measures of confidence. The landing page is here and these are also available on the Financial Times' website, here. The charts break the relevant index down into sub-series for rich and emerging economies—a quick and useful way to get a sense of the trajectories in the case of the two sets of countries (they cover 20 large rich and emerging economies). It would be interesting to see where certain things—like world GDP, or exports from various sets of countries—are relative to, say, August 2008.

Good news and bad news - THE Organisation for Economic Cooperation and Development has released its latest global economic outlook, updated since last November. In general, the OECD sees an economic picture far more promising than was the cast last autumn. Output rates in 2010 were revised upward, from 2.5% to 3.2% in America, 0.9% to 1.2% in Europe, and 1.8% to 3.0% in Japan. But the report acknowledges the difficult of sustaining this performance: ... I thought two charts in particular where informative. First, have a look at the OECD's summary projections:In particular, notice the inflation and unemployment data points. Through 2011, inflation is expected to be low and declining. Unemployment, on the other hand, will remain above 8% in America at the end of 2011, and near 10% in the euro area at the same point.

Drag them into it? - SO, WHAT should China do now that Europe's debt crisis seems to be imperiling global growth? Eduardo Lora and Alessandro Rebucci, of the Inter-American development bank, write: Suffering from excessive capital inflows and exchange rate appreciation, several Latin American leaders have sided with the United States in recent months and supported calls for a revaluation of the Chinese renminbi.The reasoning is that a stronger renminbi will induce a change in the composition of Chinese growth, away from exports and toward domestic consumption, while giving the rest of the world and Latin America a competitive boost.An ongoing joint study of the Inter-American Development Bank and the University of Cambridge suggests the opposite. Renminbi revaluation could bring slower Chinese and global growth Perhaps the right conclusion to draw is that the outcome of immediate Chinese revaluation (while beneficial to global rebalancing over the long term) is sufficiently uncertain that it's difficult to foist responsibility for salvaging European recovery on China. Certainly it doesn't make much sense to fault China's currency policy in the absense of a real commitment by the European Central Bank to an appropriately expansionary policy.

Trade: Who's at risk? | The Economist - UBS has a daily chart on emerging market exposure to the economy of the euro area: Countries on the periphery of the euro zone stand to lose the most. But merchandise exports to the euro area account for over 5% of Chinese GDP. It's understandable that China's leaders would be hesitant to take other demand-restraining measures just as Europe's recovery seems to be in danger.

Mexico Takes U.S. Share From China as Peso Drop Buoys Trade –(Bloomberg) -- Mexico’s exports to the U.S. are taking market share from China as demand rises for Mexican-made refrigerators from Whirlpool Corp. and Dodge Ram pickups from Chrysler Group LLC.Mexico’s share of the $427.7 billion in goods and services the U.S. imported in the first three months of the year rose to a record 12.3 percent from 11 percent a year ago, helped by a weaker peso and U.S. companies moving manufacturing south of the border. China’s share fell to 17 percent from 18.4 percent.To combat China’s low-cost manufacturing industry, Mexican factories have shifted to goods that are expensive to ship overseas and those that require more complex manufacturing, such as automobiles and appliances, said Luis de la Calle, a former Mexican negotiator for the North American Free Trade Agreement. Mexico adopted the strategy after China’s entry into the World Trade Organization in 2001 caused the closure of hundreds of textile, toy and electronics plants.

Brazil's booming economy: Flying too high for safety - Economist - The problem is that while it may be growing at Chinese speeds, Brazil is not China. Because it still saves and invests too little, most economists think it is restricted to a speed limit of 5% at the most, if it is not to crash. The growth spurt is partly the result of the stimulus measures taken by President Luiz Inácio Lula da Silva’s government when the world financial crisis briefly tipped the country into recession late in 2008. The trouble, say critics, is that much of the extra government spending is turning out to be permanent—and so the economy is starting to resemble a Toyota with the accelerator stuck to the floor. The strain is showing. Businesses are chasing after scarce skilled labour.

Japan Past 'Sweet Spot' as EU Woes Worsen, Morgan Stanley Says (Bloomberg) -- Japan’s economic expansion may be past its peak as Europe’s sovereign-debt crisis threatens exports to the region, Morgan Stanley MUFG Securities Co. said. “Economic activity has now passed the sweet spot, and we may well see renewed stagnation,” Morgan Stanley economists Takehiro Sato and Takeshi Yamaguchi wrote in a report today. It’s “dangerous to dismiss the impact of Europe on Japan’s trade.” A 1 percentage-point slowdown in Europe would depress Japan’s gross domestic product by 0.2 percentage point, according to Morgan Stanley.

Japan's problem is supply, not demand (updated) - Paul Krugman wrote in the NYT that we are talking too much about Greece: "Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan." According to Krugman the U.S risks ending up like Japan, because of "policy makers... doing too little".First the cheap shot. A year ago, Krugman wrote "Well, I’m sure I’m not the only person to notice this: Japan doesn’t look so bad these days."Does the U.S risk becoming a new Japan if we don't pursue even more Keynesian spending and borrowing policies? Let's first look at the lost decade, 1991-2000. When the rest of the world was having rapid, IT-fueled growth, Japan was stagnating. Here are the growth rates in real GDP between 1991-2000 :For all the nice years Japan had 9.6% growth compared to 38.7% for the U.S and 22.7% for the EU.15. The U.S grew by an average of 3.7% per year, Japan only 1.0% per year. But as most of you know Japan is undergoing a rapid demographic transition.  Because the old and children cannot work, when we want to compare countries with very different demographic characteristics instead of calculating GDP per capita, it makes sense to calculate GDP per working age adult (people aged 15-65).

Japan’s Exports Jumped 40% in April - NYTimes -Japan's exports jumped 40 percent in April, rising for a fifth straight month, fueled by brisk overseas demand for cars and high-tech goods in a fresh sign that the global economy is recovering. Led by shipments of cars and semiconductors, exports rose to 5.9 trillion yen ($65 billion), the Ministry of Finance said Thursday. Automobile exports more than doubled from a year earlier, while semiconductor shipments rose 35.5 percent. ''The figures underlined a steady recovery in the global economy. It is heartening to see Japanese car exports sharply up in every key region,'' said Hiroshi Watanabe, economist at Daiwa Institute of Research. Robust global demand, particularly in Asia, is feeding a turnaround in Japan's economy -- the world's second-largest -- offsetting weak demand and falling prices at home. Japan's exports to Asia alone account for 56 percent of total shipments.

Japan Unemployment Rate Unexpectedly Rises, Prices Fall Further (Bloomberg) -- Japan’s unemployment rate unexpectedly increased in April and the decline in consumer prices deepened, signaling that domestic demand is restraining the nation’s recovery from its deepest postwar recession. The reports come a day after government figures showed a sustained rebound in exports, driven by demand from Asia’s emerging economies, and highlight Japan’s reliance on trade to sustain growth. The export revival hasn’t been strong enough to spur hiring that would in turn boost household spending, which unexpectedly fell in April, today’s data showed.

Crisis or no crisis, Europe’s carmakers still moving east - West European car makers came under great pressure in the global economic crisis to keep production in their west European home countries. But they have continued switching output to the low-cost factories of central Europe.Industry figures show that, CEE (excluding Russia and Ukraine) increased its share of European vehicle production from 22.4 per cent to 24 per cent despite the threats and promises made by French president Nicolas Sarkozy and other west European leaders. The Czech Republic and Poland overtook Italy in terms of vehicle output - and now rank fifth and sixth in the European Union, just behind the UK. UniCredit, the Italian bank, says in a report published last week that even if the economic crisis fades CEE’s advance in the European car industry will continue given its cost advantages.

China Falls Victim to Greek Deficit Contagion: Michael Pettis…(Bloomberg) -- China is under growing pressure from Asia, Europe and the U.S. to revalue its currency. Until recently, it even looked like we were about to embark on a sustained process of yuan revaluation fairly soon. The Greek crisis may have changed that. The 15 percent slide in the euro’s value against the yuan over the past six months has eroded Chinese competitiveness in the market of its largest trading partner: the European Union. More importantly, many trade-deficit countries in Europe -- such as Greece, Portugal and Spain -- are having difficulty financing themselves. Without net capital inflows, these countries can no longer run current-account shortfalls.  Not surprisingly, concerns in China about euro weakness have fueled calls for caution in any decision to realign the currency. One school of thought says to allow more yuan appreciation might create a drag on the economy, just as the Chinese government is trying to wean itself off a massive, and perhaps toxic, dose of investment. ...The reasoning sounds plausible and even responsible, but it might only exacerbate the problem for China over a longer horizon by increasing trade tensions, which historically have been especially damaging to surplus countries.

The Asian Man’s Burden? China worried about prospects of Europe - According to the FT, China’s Investment Corporation is “very concerned” about threats of further instability in the Eurozone.  Considering also China’s big new role in aid to Africa, is it time to start wondering whether both World Bank and IMF should be moved to Beijing?  Not that I am willing to join the China-worship cult, but I DO love historical ironies that deflate pretensions of the White Man as Savior.

Greece May Not Be as Rich as It Looks - GREECE is a relatively wealthy country, or so the numbers seem to show. Per-capita income is more than $30,000 — about three-quarters of the level of Germany. What the income figures fail to capture is the relative weakness of Greece’s economic institutions. They are not remotely comparable to those of Germany and some of the other better-governed European Union nations, which is why the current crisis will prove so difficult to solve.  Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last, ahead of only Equatorial Guinea, which has oil wealth.

Europe debt crisis stirs recession fear -- A dark cloud has settled over the world's financial markets, as growing numbers of people conclude the debt crisis in Europe could hammer global growth -- and even bring back recession barely a year after a patchy recovery took hold.Government officials -- whose job it is to boost confidence -- downplay that risk, but many economists are warning that a much-feared "double-dip" recession could be starting from Europe. It would be the next ugly chapter in the global financial and economic turmoil that began three years ago. And now as then, what is striking is the inter-connectedness of everything -- how near-default in Greece and weeks of dithering in Germany have affected commodities like oil and gold and, with demand and confidence waning, have bludgeoned stock markets around the world in a way that rattles ordinary people saving for retirement from Korea to California.

Payback Time - Deficit Crisis Threatens Ample  Benefits Long Expected by Europeans - Europeans have boasted about their social model, with its generous vacations and early retirements, its national health care systems and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism. Europeans have benefited from low military spending, protected by NATO and the American nuclear umbrella. They have also translated higher taxes into a cradle-to-grave safety net. “The Europe that protects” is a slogan of the European Union.  But all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead. With low growth, low birthrates and longer life expectancies, Europe can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The countries are trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits and pensions.

Another Clumsy Attack on the European Social Model - The New York Times, supposedly the reliable voice of bleeding-heart liberalism, has repeatedly attacked European welfare state institutions in its news pages. The latest assault was published today, informing us that pensions and other social benefits are no longer “affordable” and that the coddled European public must wake up and face reality. All such “analyses” require the reader to accept without questioning the strange notion that social programs that were instituted decades ago when Europe was substantially poorer have now become, after a long run of economic growth, too expensive to bear. The article suggests that all sorts of damage has been caused by excessive concern for the old, the sick and other insufficiently productive citizens, with the result that “the region generally lacks competitiveness in world markets.”Let’s get this straight: journalists tell Europeans to emulate America’s high-octane approach to economic efficiency when the Eurozone has approximately balanced trade with the rest of the world, while the US runs the largest trade deficits the world has ever seen.

The Road To Economic Serfdom - Boone and Johnson - According to Friedrich von Hayek, the development of welfare socialism after World War II undermined freedom and would lead western democracies inexorably to some form of state-run serfdom. Hayek had the sign and the destination right but was entirely wrong about the mechanism.  Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe.  All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe.  In the coming years, it will be the ECB and the European Union who dictate policy.  The policy elite who run these structures – along with their allies in the private sector – are the new overlords.

Hedge funds bet big on the falling euro - Traders and brokers told The Sunday Telegraph that hedge funds are using a range of financial instruments to bet that the value of the euro will fall. One trader said: “Shorting the euro is the biggest bet in town. “We’re seeing big volumes in credit default swaps and short selling in equities that are exposed to the euro.” Gennaro Pucci, manager at Matrix, which manages £3bn, generated 19pc returns last month in its €110m Global Credit Fund on bearish euro bets. Mr Pucci told Bloomberg: “The ECB is buying debt at artificial levels, but that won’t solve structural problems.” Nick Swenson, manager of US-based Groveland, who made millions of pounds during the credit crisis, said he started buying credit-default swaps on Spanish, Italian and Irish government bonds in March. Kyle Bass at Hayman, who made $500m in 2007 betting on the implosion of subprime mortgages, told investors: “The EU and the IMF went all-in with a bad hand in the highest stakes game of financial poker ever played with the world.”

Hedge funds in €3bn gamble on Irish default – US and British hedge funds are aggressively targeting Irish government debt, in a multibillion euro gamble that could make obscene profits if Ireland defaults, or the euro falls apart.New figures from the IMF showed that about 4 per cent of the near €80bn of Irish government debt was targeted by speculators and hedge funds using financial derivatives or credit default swaps, which make money if the bonds fall in value or blow up. This represents a gamble of more than €3.2bn.Last week it emerged that Nick Swenson's US hedge fund Groveland Capital had been buying credit default swaps on Irish, Spanish and Italian bonds since the European debt crisis erupted in March."It's asymmetric, it reminds me of the subprime trades", Swenson told Bloomberg last week.

After the flood: European cities on the edge of a debt crisis - While relaxing on the back of a gondola, the millions of tourists who drift by the Palazzo Diedo, Gradenigo or San Casciano in Venice don't generally know that what they're looking at are the roots of another European debt crisis. ... The crisis in the eurozone is making headlines at the moment, but at a lower level another debt storm is slowly brewing. European cities and regions are expected to flood the market this year, all anxious to fund ballooning deficits. Local and regional government borrowing is expected to reach a historical peak of nearly €1.3 trillion, according to credit ratings agency Standard & Poor's (S&P). The bulk will come from the highly decentralised German Länder (states) and from the deficit-ridden Spanish regions, which face severe central government transfer cuts. Regions also face higher borrowing costs and, most likely, further credit downgrades.

European bank risk close to that after Lehman Brothers collapse –22 May - European Union-based bank credit default swap spreads (CDS), which measure the cost of insuring the banks' bonds against the threat of non-repayment of the debt, were yesterday trading at around 200 basis points, meaning that to insure £1,000 will cost nearly £20 a year. Fears over the exposure of eurozone banks to the financial chaos in Greece and the growing contagion affecting other southern European countries, including Portugal and Spain, have led CDS prices to spike in the last two months from less than 100 basis points to their current level. The increase has come despite the German government on Tuesday imposing a ban on the naked short-selling of German banking shares and EU government debt, including a bar on naked transactions in CDS, whereby a trader buys CDS on a bond they don't own purely to take a directional view on the company or country's credit.

Euro-Area Countries Failed Fiscal Goals 57% of Time, Data Show - Euro-area governments breached their own fiscal rules more than half of the time since they began trading the single currency, according to data compiled by Bloomberg News. With Greece’s debt crisis now exposing the weakness of fiscal oversight in the 16-nation economy, governments missed one or both of the European Union’s two budget requirements 57 percent of the time since they adopted the euro. Those rules limit debt to 60 percent of gross domestic product and budget deficits to 3 percent of GDP, as set out in the 1997 Stability and Growth Pact. The pledge by countries to meet their fiscal rules turned out to be “rhetoric rather than reality” and contributed to the debt crisis, David Blanchflower, a Bloomberg News contributor and former Bank of England policy maker, said in an interview from Dartmouth College in Hanover, New Hampshire, where he teaches economics.

French Industry Minister Says Retirement Age May Rise Beyond 60   (Bloomberg) -- France's Industry Minister Christian Estrosi said the government may raise the country's retirement age beyond 60 as part of a plan to stem the deficit in the nation's pay-as-you-go pension system."We're going more or less toward an increase in the retirement age which might exceed 60," Estrosi said on RTL radio today. "The decision isn't made," and "retirement at 60 isn't necessarily over." Undermined by longer life expectancy and higher unemployment, France's state pensions will post a d  eficit of 10.7 billion euros ($13.45 billion) this year, up from 8.2 billion euros last year and 5.6 billion euros in 2008, the government estimates. The shortfall will rise to 14.5 billion euros in 2013 and 50 billion euros in 2020, the Budget Ministry said this month.

Europe’s debt crisis and Keynes’ green cheese solution - The great German physicist Max Planck remarked that “science advances one funeral at a time.” The situation is worse in economics, which is subject to regress, as happened when the valuable but imperfect insights of Keynesianism were supplanted by the ideological blinkers of neo-liberalism.The effects of this regress have again been on display in the confused discussions and policy responses to Europe’s sovereign debt crisis. The fact is that countries which borrow in their own currency and control their money supply will never default because they can always issue the money needed to repay their debts. For such countries, central banks should respond to speculative debt crises with “bear squeeze” tactics that have them buy existing debt. In this fashion, countries can buy back debt below par value, in effect repaying it on the cheap. It is what the European Central Bank should have been doing on behalf of its member countries.

Defaults on European Commercial Mortgages to Rise, Moody's Says (Bloomberg) -- Defaults on European commercial mortgages will increase as banks restrict lending to prime properties, according to Moody's Investors Service analysts.Of 18 commercial real-estate loans due in the first quarter, seven defaulted and only one was refinanced, the New York-based rating company said in a report on the commercial mortgage-backed securities that it covers."We do not expect CRE loan performance to improve" in the coming quarters, analyst Manuel Rollmann wrote. "We still expect that many CMBS loans will default during their term, or at maturity."

What is it really all about? - This graphic is a capture of part of the front business page of the UK Times today (May 25, 2010). It sort of got me rolling very early today. I thought Who is in charge in these countries?. Since when does an unelected and unaccountable institution based in Washington D.C., which regularly makes errors of such a magnitude that people die from the poverty that result, have any right to order nations around that have open elections? Well the answer is that: (a) financial matters now take priority over everything; and (b) these nations are vulnerable on those grounds because their politicians took them on a fraught journey into an economic and monetary system that would always deliver hardship the first time a serious negative aggregate demand shock hit that system. It was obvious from day 1 when the Maastricht Treaty was signed and then the Lisbon rules were consolidated that this would be the case.They were living a fool’s dream to think that the short-term prosperity – is a debt-fuelled vulnerable asset boom prosperity? – would survive the next negative spending shock. It was obvious that the cycle would turn and that the nonsensical deregulation of banking and German-rated access to credit for the weaker economies would only create conditions that amplify the in-built design faults in the monetary system once things turned south.What was going on? The answer is that we have completely lost our vision of what an economy should be about.

Get a Grip: Austerity Does Not Produce Prosperity - Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.The price of the rescues of Greece, Spain and Portugal will be brutal deflation. The International Monetary Fund, which supposedly learned from its earlier mistakes of imposing austerity on already damaged economies, is back in cold-bath mode, demanding higher taxes and dramatically reduced spending as its pound of flesh.The European Central Bank and key leaders of the E.U. are promoting economic pain as the price of relief. Here at home, President Obama has sworn off serious new outlays for jobs or aid to the states, and is using his fiscal commission to pursue a bipartisan consensus on spending cuts and higher taxes.The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies.

Is the euro Europe's problem? - These are the worst of times for the euro. Not only is the currency steadily sinking in value, but the Eurozone's debt crisis has provided all kinds of new ammunition to critics of the monetary union to do some self-satisfied euro-bashing. The euro has even been blamed for causing, or at least exacerbating, the Eurozone's crisis. One persistent commentator writes on every one of my posts about Europe's debt woes that countries like Greece would have avoided a crisis if they only had control over their own currencies. He then usually goes on to predict the euro's doom.That view is of course too simple. Countries with their own national currencies and full responsibility for their monetary policies fall into debt crises with unfortunate regularity. But at the same time, it's impossible to separate Europe's woes from its experiment with monetary union. Does the euro deserve blame for the Eurozone crisis?

Viewpoint: euro's crucial flaw is a one-size-fits-all approach…Stage one of the global financial crisis involved the private sector: over-indebted consumers and over-leveraged banks. That crisis came to a head in the autumn of 2008 when Paulson, then US Treasury secretary, allowed Lehman to go to the wall and prompted a month of turmoil that pushed the global banking industry to the brink of collapse.Stage two of the crisis was the bailout by western governments, during which the banks were recapitalised and economies reflated through ultra-cheap money and a willingness to allow budget deficits to balloon. Stage three was supposed to be recovery, and until about six weeks ago that was what the markets assumed was happening. The concern now is that stage three was just a sucker's rally during which the burden of debt was shifted from the private to the public sector. We are now on the brink of stage four, where the effects of the drugs pumped into the global economy wear off and the markets wonder how on earth hugely indebted sovereign governments are going to repair their public finances in a low-growth environment. The tumultuous events of the past week have not just been about Greece nor about whether the eurozone can survive. They have been about whether the global economy can avoid a double-dip recession.

Long live the euro – at parity with the dollar - FT -The euro is crumbling. Does this mean that the single currency project is nearing its end? Not quite. In fact, if well managed, the euro’s depreciation is just what the doctor ordered to complement the much-needed fiscal consolidation in Greece as well as in the rest of southern Europe. Somewhat paradoxically, a weaker euro is the precondition for its survival.Markets have their own ways to get us to the right place, although they do not always do it in the least disruptive manner. They have been bringing the euro down more out of fear than understanding that the solution lies therein. Yet we should understand that the goal is a good one rather than a tragedy. It is up to policymakers to ameliorate the markets’ natural clumsiness during such periods of collective confusion. The first beneficiaries of a weaker euro are the countries of southern Europe whose difficulties have been putting the future of monetary union in doubt. Greece has been the focus, but Spain, Portugal and Italy also face a sharp loss of competitiveness.Greece can take one of two paths: a repeat of Ireland 1982, or of Ireland 1987. In 1982, in the middle of a deep recession and with public debt growing by 5 percentage points of gross domestic product a year, Ireland slashed the budget. The result was a worsening of the recession and an acceleration of debt growth. Dublin tried again in 1987. This time fiscal consolidation was a big success. By 1989 the ratio of debt to GDP was falling and output was growing at 4 per cent a year. What explains the difference between the two episodes?

Spiegel: How much Euro decline will Obama tolerate? - A fall in value for the euro is good for Europe. Since the decline is not a beggar-my-neighbor policy to gain an unfair trade advantage, but a symptom of the sovereign debt crisis, it seems unlikely that the US will intervene just yet.The Obama administration's stance towards Europe has performed a dramatic about-face. The benign neglect that characterized its early months has been replaced by deep concern that the contagion shouldn't cross the Atlantic. Media reports have it that Washington gave Europe's politicians a significant nudge to get over their differences and assemble the historic €750 billion bailout package of loans, loan guarantees and credit in their battle against contagion.It is reminiscent of the early Second World War period, when an isolationist America thought it could safely turn its back on Europe's disintegration until wiser heads realized Europe's troubles were America's troubles.

Chronicle of a Currency Crisis Foretold -The crisis in Greece and the debt problems in Spain and Portugal have exposed the euro’s inherent flaws.  No amount of financial guarantees – much less rhetorical reassurance – from the European Union can paper them over. The attempt to establish a single currency for 16 separate and quite different countries was bound to fail. The shift to a single currency meant that the individual member countries lost the ability to control monetary policy and interest rates in order to respond to national economic conditions. It also meant that each country’s exchange rate could no longer respond to the cumulative effects of differences in productivity and global demand trends.In addition, the single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive. And when a country with excessive fiscal deficits needs to raise taxes and cut government spending, as Greece clearly does now, the resulting contraction of GDP and employment cannot be reduced by a devaluation that increases exports and reduces imports.

Europe is a dead political project - Within a single month, we have witnessed Prime Minister George Papandreou of Greece announcing his country's possible default, an expansive European rescue loan offered to him on the condition of devastating budget cuts, soon followed by the "downgraded rating" of the Portuguese and Spanish debts, a threat on the value and the very existence of the euro, the creation (under strong US pressure) of a European security fund worth €750bn, the Central European Bank's decision (against its rules) to redeem sovereign debts, and the announcement of budget austerity measures in several member states. Clearly, this is only the beginning of the crisis. The euro is the weak link in the chain, and so is Europe itself. There can be little doubt that catastrophic consequences are coming. Europe did not display any real solidarity towards one of its member states, but imposed on it the coercive rules of the IMF, which protect not the nations, but the banks.

Germany: Just Another Weak Man of Europe? - Wolfgang Munchau, in the Financial Times:, revives a line of thought that was voiced from time to time during the financial crisis: that some countries (the UK, Germany, the Netherlands, Switzerland) had banking sectors that were so large that it was an open question as to whether they could credibly backstop them. One of the peculiar conventions of modern banking that goes unaddressed post crisis is that the country that is the headquarters of an international financial firm is perceived to be responsible for it. So let us say Citigroup has a run in Europe. That is not the problem of the regulators in the countries in which Citibank does business; Citigroup is expected to supply funds to meet depositor demands, and if they need emergency help to do so, they look to Fed (the other model would be to have any banking operation in, say, Italy, to be subject to national rules regarding capital adequacy, a sort of “each tub on its own bottom” approach).Munchau explains that when you look at the obligations of various states in Europe and include contingent claims, particularly those issued to banks, the strength of fortress Germany comes into question.

Fees Drop 17% in Europe for Bankers as Deals Pulled (Bloomberg) -- Investment banking fees in western Europe are falling victim to the Greek debt crisis, as companies from London to Dusseldorf pull stock and bond offerings and put takeovers on hold. Income from advising on mergers and selling shares and bonds in the region dropped 17 percent from a year earlier to $5.9 billion in the first four months of 2010, the lowest in six years, according to estimates from New York-based research firm Freeman & Co. Fees in Europe are at about the same level as in 1999, the year the euro started, the data show. “Companies have been held back from tapping primary markets because of the volatility and uncertainty driven by concerns over sovereign debt,” The decline in fees in Europe contrasts with a 53 percent jump in revenue in the U.S. and a 68 percent increase in Asia, Freeman said.

When the ECB should be about leadership, all Europe has is chaos – - The horrors that beset the banks in the financial meltdown have not so much been dealt with as transferred from the private to the public sector. All along, the danger was that if a recovery in private sector spending did not cause public deficits to fall back sharply, then a crisis of confidence would cause a spike in bond yields. Alternatively, sharp and early fiscal tightening would send the economy back into recession. The present crisis is based on both of these threats.  It is striking that these problems have reached a head in the eurozone which, at least in aggregate, was not subject to the excesses of Anglo-Saxon finance. But parts were. In Greece, there has been enormous fiscal profligacy. In Ireland and Spain, although the fiscal numbers were never that bad, a private sector spending boom associated with a property bubble made the economy and the financial system almost as precarious. We have now learned that there is more than one road to financial disaster. .

ECB injects €10bn into debt market - The European Central Bank has stepped up its efforts to shore up eurozone debt markets by buying another €10bn of government bonds in the past week, but bankers believe the programme will have to be intensified amid market fragility. The purchases, announ-ced yesterday, bring the ECB's bond-buying to about €26.5bn ($33bn, £23bn) since it began the programme two weeks ago, in support of a €750bn "shock and awe" rescue package adopted by eurozone governments and the International Monetary Fund to try to arrest a gathering sovereign debt crisis."

The ECB: Gestures and credibility - VoxEU - Improvisation in handling the crisis in Greece has given the impression that governments and European institutions are not capable of facing the toughest challenges. This column reminds us that in times like these, the credibility of institutions is essential and rests on consistency. The ECB decision to "sterilise" the purchase of bonds with inverse operations to drain liquidity puts this credibility at risk.

Doubts on European Central Bank Amid Crisis - Amid signs that some fretful deposit holders on Europe’s troubled periphery are moving their money to presumably safer German banks, fears are spreading on trading floors from Hong Kong to Frankfurt to New York that Europe’s central bank and its 16 backer nations might not be able to stem a classic bank panic. There is no conclusive evidence that money is fleeing Europe in significant amounts. And the European Central Bank retains several crucial tools to backstop vulnerable banks, including the ability to buy more of their bonds and even, if pressed, to raise interest rates to attract capital from elsewhere. But the continued erosion of the euro against other currencies and the dark mood in the financial markets highlight perhaps the most crucial question for Europe today: Who stands behind the banks if the loans they and the central bank have extended to Greece, Portugal, Spain and a few other sovereign debtors need to be written down? “If it was one country and one central bank, this would work,”

World's Wealthy Tapped for Cash as Governments Tax High Incomes (Bloomberg) -- From Athens to Olympia, Washington, governments made poorer by the recession are looking to higher taxes on the rich for cash.Spain’s wealthiest should be tapped to help close the euro region’s third-largest budget deficit, Prime Minister Jose Luis Rodriguez Zapatero said yesterday. The U.K. has boosted taxes on high earners and French and Swedish politicians are calling for the same. The top U.S. tax rate is set to rise in 2011, while at least 14 states have lifted rates or are considering increases.“There’s a real move to get at whatever revenue you can get at without being so broad as to get the populace all up in arms,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington. “You go where the money is.”

As stock markets plunge anew, sovereign debt threatens secondary banking crisis - Stock markets are in trouble again. You don’t have to look far to see why. The worst affected sectors are banks, oils and mining. Oil and commodity prices are falling because of fears about a double dip recession; banks are slumping anew for much the same reason.With banking there is a simple, arithmetic relationship between the level of economic activity and bad debt experience. As a crude rule of thumb, every one percentage point of contraction in the economy will result in a roughly equivalent impairment in the value of assets. Despite all the government money thrown at the problem, capital in the banking sector has barely recovered from the last, sub-prime and recessionary hit to its integrity. Now there is every possibility of a fresh round of bad debts.In its last Global Financial Stability Report, the IMF reduced its estimate of prospective bank write-downs and loan loss provisions in advanced economies for the 2007-10 crisis and recession from $2.8 trillion to $2.3 trillion, of which the GFSR estimated that approximately two thirds had already been recognised. Note however, that these are the write-offs the IMF thinks appropriate for the last crisis. They say nothing about a new one.

Eurozone contagion fears hit eastern Europe as investors seek safe havens - Bond investors are looking to the relative safety of Poland and the Czech Republic as the Eurozone debt crisis takes toll on eastern Europe’s smaller economies.After showing a strong recovery from the financial crisis, eastern Europe is beginning to suffer as the economic situation in the Eurozone worsens, causing bond investors to look for safe havens amid the turmoil. While countries in the Balkan region, such as Bulgaria and Serbia, have been affected by their exposure to Greece through trade links and the the involvement of Greek banks in their respective financial sectors, the larger economies of central Europe have remained relatively insulated from the turmoil. Both Poland and the Czech Republic boast healthy fundamentals and relatively little exposure to southern Europe. Public debt to GDP stands at 51% in Poland and a mere 35.4% in the Czech Republic, both significantly lower than the Eurozone average of 85%.

Double-dip fears over worldwide credit stress - The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump. The strains in Europe's sovereign debt markets are nearing levels that forced EU leaders to launch their "shock and awe" rescue package. "If a $1 trillion (£700bn) bail-out did not finally turn sentiment, I struggle to see what can," said Tim Ash, an economist at RBS. While the Libor rate is still far below peaks reached during the Lehman crisis, the pattern has ominous echoes of credit market strains before the two big "pulses" of the credit crisis in August 2007 and September 2008. In each case a breakdown of trust in the interbank market was a harbinger of violent moves in equities and the real economy weeks later.

Pimco’s El-Erian Tells PBS Spain Stress Spurs Contagion Concern –(Bloomberg) -- Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, said strains evident in Spain’s banking system are intensifying concern that the Greek debt crisis may spread, PBS reported. “Banks have a way of amplifying shocks in the system,” El- Erian, co-chief investment officer at Pacific Investment Management Co., said in an interview with PBS’s Nightly Business Report posted on the U.S. public broadcaster’s website. Banks are “like the oil in your car. They link up so many different parts.”  “The minute you introduce strains in the banking system, there’s always a fear that governments will be behind the curve and that you can get contagion,” El-Erian said. “You can get widespread disruption.”

Debt Crisis Spills Into Spain, Propels Dollar - The euro sank close to a four-year low against the dollar Tuesday as bank troubles in Spain highlighted the vulnerabilities spreading through Europe's financial system.The euro has dropped about 15 percent this year as the debt crisis in Greece roiled credit markets, forcing the International Monetary Fund and the European Union to put together a nearly $1 trillion financing deal to stem fears of default from spreading to otmandher countries. But the deal quickly triggered concerns about European economies contracting because of the cuts in government spending and higher taxes that are mandated by the aid package. On Tuesday, the Italian and Danish governments paved the way for spending cuts, while Queen Elizabeth II laid out the U.K.'s austerity plan. European countries are slashing budgets in hopes of convincing investors that they can manage their debt loads.

Spanish Crisis Exacerbated by Private Debt, Not Public – CNBC  -“The developers are the main reason for private sector debt inflation,” Marques said.  Private sector debt currently stands at 171 percent debt of gross domestic product (GDP), compared with the government debt ratio 53 percent.Without the developers, the Spanish private sector debt would be only 10 percent higher than in Germany, and well below the UK, US and France, he argued.Lending to developers in Spain accounts for 29 percent of Spain’s GDP, or 320 billion euros, “which is a very big number,” according to Marques. Financially vulnerable Spanish regional banks -- those most exposed to weakness in Spain's property market -- are starting to merge operations to improve solvency, and the government has given cajas -- as Spain's savings banks are known -- a June 30 deadline to consolidate.“It is serious. It will take years to be fixed," Marques said

Spain's Cajas 'Weak and Risky' as $153 Billion of Debt Matures -  (Bloomberg) -- Spanish lenders need to refinance 125 billion euros ($153 billion) of bonds by the end of next year, putting the nation’s savings banks in a “very weak and risky position,” according to analysts at Deutsche Bank AG.The so-called cajas have to repay about half the 46 billion euros falling due for banks this year and the 79 billion euros maturing 2011, according to Carlos Berastain, an analyst at Deutsche Bank AG. The remainder is owed by commercial lenders such as Banco Santander SA.The savings banks helped fuel Spain’s housing boom, accounting for about 50 percent of loans, and since the property crash triggered by the country’s worst recession in 60 years the lenders have been under pressure to merge. The Bank of Spain seized CajaSur on May 22 after the bank lost almost 600 million euros in 2009.

Spain’s Cajas scare the hell out of global investors - Another extremely volatile day in the markets, and the euro back down again. The latest trigger for the markets’ nervousness are new regulatory measures from Germany and banking mergers in Spain, which investors regard as a sign of trouble ahead. Four of Spain Cajas, or savings banks, have announced a merger, another merger is on the cards according to El Mundo, as a preliminary step to sort out the mess of the Spanish saving banks sector, which accounts for about half of the country’s total savings, and the bulk of mortgage finance, much of it is now in deep trouble. The rush of merger comes as Spanish savings banks are trying to meet the June deadline – likely to extended for a few month – by which they can plug into the government’s refinance facility. If they let the deadline pass, the Bank of Spain will force them to write off bad assets. However, as the FT points out, the new groups are mostly book-keeping exercise. There is no genuine consolidation.

What does Spain need to do to get out of the crisis?  - I just came back from a conference in Spain, where this was the question on the table. I made the following points. First, expenditure cuts are not going to do the job on their own, unless accompanied by policies targeted directly at improving competitiveness. Second, "structural reforms" (which in the Spanish context means largely labor market reforms) are not a substitute for competitiveness policies.  Insofar as they eat up political capital, they may even backfire in the short-run. Third, there are no easy solutions to Spain's competitiveness conundrum.  But the least bad solution is to engineer an economy-wide reduction in nominal wages and the prices of services (utilities, etc.) through some kind of social compact. Easy?  No.  Any other practical alternative to a prolonged period of recession and high unemployment? Probably not

Whither Spain – Towards Finland or Argentina? - Dani Roderik, who has also been here, and spoke yesterday, has come to very similar conclusions: “Spain’s needs a 20 % internal devaluation” (or in his opinion should leave the Eurozone - I don’t agree with this part), and he basically arrived here by a process of steady elimination, examining all the other options and deciding they wouldn’t work quickly enough. Keeping ahead of the curve, I am now starting to argue - as previewed in my latest AFOE post - that either we move soon on this, or Germany will inevitably have to go back (hopefully only temporarily) to the Mark. The system won’t hold otherwise. Given that opinions have changed so radically here in Spain in just six months, nothing can be ruled out at this point.

Tensions rise as jobless migrants are blamed for the pain in Spain - They did the hard, dirty work and were welcomed. Not any more. Half lost their jobs when Spain’s construction bubble burst in 2008 and brought the good times to an abrupt end. A deeply unpopular €15 billion (£12.7 billion) austerity package rushed through parliament yesterday will make life even harder. On top of that, the immigrants are now the target of Platform for Catalonia, Spain’s equivalent of the BNP, which is based in Vic. “Control immigration — stop the crisis,” its leaflets proclaim. “They insult us. They say maybe we’re the cause of the crisis, that we take their jobs. It’s not fair and it’s not nice,” said Mercy Omoroagbon, 30, as she collected her handout. She arrived from Nigeria in 2002, lost both her cleaning jobs last year and now lives off the charity of friends.

IMF: Italy Is No Spain - The International Monetary Fund Wednesday welcomed Italy’s 25-billion-euro ($30.5 billion) austerity measures, but urged more efforts to cut a big — and rising — public debt.In a annual update on the Italian economy, the IMF said it “strongly commended” the measures, which were approved by the Italian government on Tuesday. They focus on a wage freeze to the country’s bloated public sector workforce and spending cuts to Italian regions and cities.The IMF’s positive assessment of Italy’s budget cuts contrast with an unusually blunt warning it gave Spain this week about fixing its economy to avoid the troubles that have hit Greece. Italy’s austery measures, approved by Premier Silvio Berlusconi’s cabinet Tuesday, were the latest step by a European government to try to calm financial markets’ worries about rising sovereign debt levels.

Italy announces £20.8 billion cuts plan - Ministers have approved £20.8 billion in budget cuts for 2011-2012 to protect Italy from the market speculation that pushed Greece to the brink of bankruptcy. The measures seek to reduce the budget deficit to below 3% of gross domestic product by 2012, down from 5.3% last year. The government said the measures focused on reducing public spending for both Italy's highly-paid politicians and public administration as well as on fighting tax evasion, a major revenue drain.

Europe: Reason for Optimism? - While I’ve been skeptical for awhile about whether the Euro can — or should — survive the present crisis, key governments are now starting to address their own budget crises, finally giving some reason for optimism.My New Atlanticist piece, “Euro Crisis:  Light at the End of the Tunnel?” details the reasons for skepticism, including increasing evidence that Germany — along with other Northern European states — is getting tired of backstopping the profligacy of their weak sisters to the South, that the steps taken thus far are mere Band Aids, and so forth.   And these still alarm me greatly. The good news is that, after putting off the inevitable for far too long, many European players are now taking bold steps to deal with the fundamentals.   Spiegel reports:(“Italy Joins Europe’s Wave of Belt-Tightening”)

Banks covertly financing Italy’s deficit - Covert financing of the government’s deficit by Italian banks reinforces the solvency fears currently surrounding Italy, according to a new report from Lombard Street Research.While Italy’s banks have historically held only a small portion of outstanding Treasuries (BTPs), they have been the major buyers of bonds and T-bills (BOTs) issued by the Italian government over the past year, economist Jamie Dannhauser said in a report. Fears that the Italian government will not be able to pay its bills are not the immediate threat, rather Mr. Dannhauser is concerned about potential illiquidity problems for Italian government debt if banks look to reduce their exposure.

We must slash deficit by €10bn, says OECD report – IRELAND faces the fourth biggest budgetary challenge in the 30-nation Organisation for Economic Co-operation and Development (OECD), but the challenges faced by Britain and the US are even bigger. The calculations are contained in yesterday's global economic report from the Paris-based OECD .The OECD analysts suggest that Ireland has to reduce its underlying deficit by 6.2pc of GDP -- equivalent to €10bn in current money terms. With the economy still declining, the present range of cutbacks and tax rises will merely stabilise the situation by 2011.

Sarkozy follows Europe in raising retirement age - The French, who have the youngest retirement age in Europe, will soon have to work longer to qualify for a full state pension. As unions called a nationwide strike to defend pension rights today, the government said that France could no longer afford the retirement age of 60 – for both men and women – which has existed since 1982. The insolvency of state pension systems, as the 1950s baby-boom generation approaches retirement, is a severe problem for all European Union countries. Deficits in pension schemes are one of the contributory factors to the immense state debts which have provoked a speculative panic on financial markets in recent days. The problem is especially acute in France, which has the most generous retirement provisions of any European nation. The deficit in the French state pension fund, estimated at €32bn (£27bn) this year, is forecast to triple to €92bn in the next three decades unless the system is reformed.

French unions turn wrath on Sarkozy pension reforms - French unions hope to unleash their wrath on Nicolas Sarkozy tomorrow, as they protest over plans to rob workers of their cherished right to retire at 60. Furious at the government's insistence that the French will have to work longer to receive a full pension, the unions have vowed to do what they can to hold on to what they see as a symbol of hard-fought social progress.But Sarkozy, who has made pension reform the hallmark of his next two years in power, has accused the leftwing opposition of refusing to face the facts. France has a lower retirement age than almost all its European neighbours, while facing the same pressures of an ageing population and ballooning budget deficit."It is a logical option for the government. We are going to increase the legal age [of retirement],"

French unions strike to keep right to retire at 60 - Strikes across France delayed flights, closed schools and frustrated commuters Thursday as workers protested government plans to raise the retirement age past 60 — one of the lowest even in Europe. President Nicolas Sarkozy says retiring so young is now untenable given growing life spans, but unions see his planned reforms to France's over-stretched pension system as yet another blow to Europe's cherished social model.His government wants to raise the retirement age to 61 or 62 — reforms that have been under discussion since well before the current European debt crisis. Sarkozy has called them his main priority this year.Despite the protests, France's retirement plans pale before the harsh austerity measures instituted by other European nations, including Greece, Ireland and Portugal. Spain and Italy have also announced recent austerity plans as a debt crisis that started in Greece has weakened the euro and raised questions about the future of currency shared by 16 nations.

Europe's Banks Hoard Cash - WSJ - In the latest signs of stress for European banks, new data show they are increasingly hoarding cash while borrowing far less in a key short-term funding market. In the past month, the amount of short-term IOUs, or commercial paper, issued by some European banks in Spain, Portugal and Italy has fallen, according to bankers operating in the financial hubs of London and Brussels. That is potentially a sign money-market funds and others that buy the debt are refusing to do business with these banks. At the same time, banks fortified with cash are keeping a tighter rein on it by moving it to the European Central Bank rather than lend it to other banks.

How fears of contagion gave Europe a dose of cuts fever - Let's go over to Rome to hear the vote of the Italian jury. "€26bn in cuts over two years, including savage reductions in health spending and road building."And now it is over to Spain. "Good evening, Madrid. €15bn in spending cuts over two years? Thank you Madrid." Paris? "€5bn in cuts over two years." Does that really complete the voting of the French jury? Oui (although no one much in France believes the figures). Athens? A punishing €30bn over three years, on top of previous cuts. Good evening to London, where a new coalition jury has just gathered. "£6.2bn of cuts in the present tax year with much, much more to come." The sound of screaming and howling that can be heard all over Europe resembles a European Cuts Contest. In the last week, almost all EU governments have been slashing their budget deficits in order to prop up stock markets, blunt attacks on the euro and the pound and discourage the kind of speculation on sovereign, or national, debt which almost drove Greece to the wall.

European Nations Take Steps to Pare Deficits - NYTimes— Fearful of becoming the next Greece, European governments are lining up to demonstrate to investors, who have long helped finance their spending, that an era of austerity has begun. The latest example is Italy, which on Tuesday joined Britain, Spain, Portugal and other European Union members in announcing plans to cut billions to help close yawning budget deficits. Yet markets have given little sign of a let-up in pressure. European stocks continued to slide Tuesday as the Euro Stoxx 50 benchmark index closed down 2.73 percent. The euro was down almost a cent, and the amount the Spanish, Italian and Irish governments had to pay on 10-year notes rose. The severity of the steps being enacted varies by country, as does the timing, but most of the measures center on freezing or cutting public-sector pay, increasing retirement ages and reversing temporary tax breaks and other cushions that were encouraged in 2008 and 2009 to help beat back the worst recession in decades.

Austerity is the new cool as Europe turns its back on Keynes – A new fashion is sweeping Europe – the hair shirt and daily diet of thinnest gruel. According to Britain's new Chancellor, George Osborne, it is a trend in which the UK plans to be "a leading force". The game has changed. Just as Gordon Brown claimed to be framing the international response to the recession by attempting to spend his way out of it, Mr Osborne plans to set the pace in a new, fiscally responsible Europe.  Austerity is the new cool, so much so that if the idea were not quite so ridiculous, you might almost imagine that governments are engaged in some kind of competition for the prize of fiscal pin up boy of Europe. Who can do most to get those deficits down? Whose public debt trajectory looks least scary?

Hooverite policies haven't arrived in all of Europe yet - Greece, Spain and Portugal are cutting their budget deficits in response to pressure from bond markets, Brussels and the International Monetary Fund. But the Continent as a whole isn’t tightening its fiscal belt this year amid concerns about the vitality of the global economic recovery.“The news this week out of Germany, France and Italy largely reflects decisions about how the fiscal tightening that has already been planned for next year will be achieved,” economists at J.P. Morgan Chase said in a note Friday. “Thus, this recent news from these countries does not affect our estimate of the fiscal drag in the region. Overall, we continue to see fiscal policy as largely neutral this year and only turning tighter in the region as a whole from next year (by just over 1% of GDP). That fiscal policy is not tightening yet in the entire region is largely due to ongoing loosening in a few countries, notably in Germany, the Netherlands, Austria and Finland. This easing broadly offsets the very large tightenings that are already planned in Spain (2.7% of GDP), Portugal (2.4% of GDP), and Greece (9.5% of GDP).”

Martin Wolf: Spare Britain the policy hair shirt - The UK should tighten fiscal and monetary policy now, in the depths of a slump. That, in essence, is what the Organisation for Economic Co-operation and Development calls for in its latest Economic Outlook. I wonder what John Maynard Keynes would have written in response. It would have been savage, I imagine. The OECD argues: “A weak fiscal position and the risk of significant increases in bond yields make further fiscal consolidation essential. The fragile state of the economy should be weighed against the need to maintain credibility when deciding the initial pace of consolidation, but a concrete and far-reaching consolidation plan needs to be announced upfront.” Furthermore, monetary tightening should begin no later than the fourth quarter of this year, with rates rising to 3.5 per cent by the end of 2011. Let us translate this proposal into ordinary language: “If you are unwilling to starve yourself when desperately ill, nobody will believe you would adopt a sensible diet when well.” But might it not make sense to get better first?

David Cameron rules out transfer of powers to strengthen Euro… David Cameron today stressed that Britain would veto any attempt to shore up troubled eurozone countries that meant surrendering more powers from London to the EU. But on a visit to Berlin, Cameron said it was in the British national interest for a "strong and stable eurozone". Speaking after a meeting with the German chancellor, Angela Merkel, the prime minister said he would oppose any transfer of power from Westminster to Brussels.Merkel is pushing for a renegotiation of elements of the Libson treaty, in an effort to prevent another Greek-style eurozone crisis.But Cameron said Britain would not support any moves that resulted into a loss of sovreignty. "We don't want to see transfer of powers from Westminster to Brussels. That is very clearly set out in the coalition agreement," he said

Default May Be Option for Some Nations, Gross Says (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said restrictive lending rates and austerity measures that slow growth may leave default as the “only way out” for some sovereign borrowers dealing with mounting debt and deficits. “Credit and equity market vigilantes are wondering if in many cases sovereigns haven’t already gone too far and that the only way out might be via default or the more politely used phrase of ‘restructuring,’” Gross wrote in his June investment outlook today on the Newport Beach, California-based company’s website. “It may not be possible for a country to escape a debt crisis by reducing deficits.”

Not as Rich as We Think - Tyler Cowen writes,This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot of countries, most of all Greece, aren't as rich as we used to think. He has been riding this horse for quite some time. It is the sort of statement that resonates with non-economists' natural pessimism. That is, after a crash it is very tempting for people to believe that the previous prosperity was false. However, there is a good economic case for presuming that it is a recession that is an aberration, not prosperity. For example, a graph of long-term GDP growth shows a steady upward trend, to which we return even after severe recessions. We still have the capacity to produce the output we produced in 2006. Therefore, to a first approximation, we should still be able to consume what we consumed in 2006.

Greece Faces Debt Restructuring or Default, Mundell, Hanke Say (Bloomberg) -- Nobel Prize winning economist Robert Mundell said debt restructuring may be “inevitable” in parts of the euro area and Steve Hanke, the architect of currency regimes from Argentina to Estonia, warned a Greek default may become unavoidable.Mundell, who won the economics prize in 1999, predicted debt restructuring for “one or two” euro nations within five years. Hanke of Johns Hopkins University said Greece’s “death spiral” will end in default if debt obligations can’t be renegotiated.Euro-area ministers agreed on May 2 to provide 110 billion euros ($135 billion) of aid to Greece as the country struggled to control a deficit that reached 13.6 percent of gross domestic product last year, more than four times the European Union limit. When that failed to stop the euro’s slide, the EU and International Monetary Fund offered a financial lifeline of almost $1 trillion to member states.

Vacationers Staying Away - Crisis Hits Greek Tourism As Cancellations Soar - The Greek tourism industry, which was hoped to contribute to the country's recovery, is in crisis. Hundreds of hotels are for sale, and visitor numbers are in sharp decline. The cash-strapped government is hardly in a position to help. The season got off to a late start this year. It is mid-May, there is bright sunshine in the skies over Greece, and Dimitris Fassoulakis is standing on the abandoned terrace of his hotel on the southern coast of Crete. The lobby and the restaurant are empty, and there is no one in the pool. "Pick a spot," says the manager, spreading his arms widely.

The Greek Bailout's Two Secret Exit Clauses: Why Europe Is Now Cheering For Its Own Demise - When all of Europe rushed into its rescue package two weeks ago (first half a trillion, market red, then a full trillion, market green), the one thing that struck us as odd was the conflicting data on the conditionality of the package, with various sources both confirming and denying that the "package" was revocable. It did seem somewhat shortsighted of the Germans, whose political leadership would soon be on the verge of a series of electoral routs, to tie its fate without even one exit hatch, to a country that is a financial toxic spiral. Sure enough, the Telegraph's Evans-Pritchard has uncovered what may be the two loopholes in the European bailout agreement. While the first one is not surprising, the second one explains why the biggest sellers of European government debt (and/or buyers of Euro sovereign CDS), are likely the governments of the distressed, and core, countries themselves.

Bring back the drachma –The European monetary union is a vestige of the old global economic model that is becoming unsustainable. It may have taken triple-digit oil prices, and the massive recession they brought, to drive home the point, but Greece and Portugal are no better suited to a monetary union with Germany and France than Mexico is to one with the United States and Canada. All eyes in Lisbon these days are trained on Athens, as a bankrupt Greek economy clings to fiscal life-support from its richer euro partners. But more Greeks are realizing that they might be better off if they forgo the bailout and the fiscal austerity measures that come with it, and just leave the monetary union. (What particularly irks the Portuguese is that, as members of the monetary union, they too had to shell out for the Greek bailout, when most suspect their country will be the next target of short-sellers.)

The aggregate demand crisis in eastern Europe is not over - PSD Blog - The World Bank -That's my main takeaway from just-released data based on surveys of over 1,800 firms in eastern Europe. In mid-July 2009, firms in six countries were asked whether they had seen an increase, decrease, or no change in sales from the previous year. The numbers then were not pretty—75% of firms reported a decrease in sales (based on an average of country-level data). The same set of firms were surveyed again in February and March of this year, and there was little improvement. This time, 68% of firms reported a decrease in sales on a year earlier, not a particularly large improvement (especially in light of the fact that more firms have become insolvent or were impossible to locate in this most recent survey). Many of these countries have not had the luxury of engaging in fiscal stimulus policies unlike their richer neighbors to the west. All of this is particularly worrying for growth prospects in the region. A recent paper asked Will the Crisis Affect the Economic Recovery in Eastern European Countries? and found that the financial crisis has had a disproportionately large impact on young and innovative firms.

EU faces €2trillion debt time bomb - The financial sector risks being catapulted into a new crisis by a €2trillion debt time bomb in southern Europe, investors were warned yesterday. The cost of borrowing charged on loans between banks rose to its highest level since last summer amid new concerns about foreign liabilities racked up by Spain, Greece and Portugal. Research from economists at The Royal Bank of Scotland showed the three stricken eurozone countries have issued public and private debt worth €2.16trillion (£1.9trillion) - or 22pc of the region's gross domestic product - to foreign banks, pension funds and insurers.

Global Banks May Need $1.5 Trillion in Capital, Study Says (Bloomberg) -- Global banks may have a capital deficit of more than $1.5 trillion by the end of next year and some may require state support, according to a study by Independent Credit View, a Swiss rating company. Allied Irish Banks Plc, Commerzbank AG, Bank of Ireland Plc and Royal Bank of Scotland Group Plc may have the biggest capital deficits by the end of 2011 among the 58 banks examined in the study, Christian Fischer, a partner and banking analyst at Independent Credit View, told journalists in Zurich today. “Without state aid or debt restructuring these banks will hardly be able to raise capital,” Fischer said, forecasting “massive dilution for existing shareholders.” The study compared estimated capital needs for the end of 2011 with capital ratios reported at the end of last year. The analysts took into account the banks’ earnings estimates for this year and next, forecasts for loan and provisions growth as well as an increase in the tangible common equity ratio to 10 percent from the average of 9 percent at the end of December.

Barnier in call for Europe-wide bank tax and bailout fund - The European Commission yesterday called for new taxes to be imposed on all of the continent's banks to insure against future failures and prevent a repeat of the financial crisis.The EU's internal market commissioner, Michel Barnier, said the levies would go towards establishing a set of national funds that could be used to disburse emergency money in case of a repeat of the 2008 crisis that plunged the continent into the worst recession since the Second World War. These funds would be managed by national governments but would create what Mr Barnier said would be a "network of bank resolution funds".

Is China Preparing To Divest Its $630 Billion In Eurozone Bond Holdings? -Is China about to start dumping its $630 billion in eurozone debt holdings? Maybe not yet, although the FT reports that China's State Administration of Foreign Exchange, the central bank's foreign reserves manager, has "expressed concern about its exposure" to the PIIGS. Obviously, with China moving away from dollar denominated assets for the past six months would represent a "big strategic shift" as "last year, the Chinese were trying to reduce their exposure to dollar assets by buying eurozone assets. This would be a complete reversal." Additionally a Chinese diplomat noted that, "The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise, He Yafei, a vice foreign minister, said, according to Bloomberg." The question then arises of just what assets China would be comfortable holding? Alas, the only readily available answer we can come up with rhymes it old and has 79 protons.

Love it or leave it? - HOPEFULLY, you've had a chance to click over to the latest Economist debate, on the motion: This house believes the euro area will fragment over the next ten years. There have been some very good contributions from Martin Feldstein and Charles Wyplosz. Tomorrow will feature commentary from Barry Eichengreen, with Daniel Gros to follow on Monday. I think Mr Wyplosz is on solid ground in arguing that the euro is likely to endure. Exit from the currency zone by a southern European economy would be chaotic and potentially economically devastating (with the benefits of currency depreciation offset by capital flight, financial crisis, increased borrowing costs, and inflation). And European leaders have so far proven willing to commit vast sums to keeping to the area together. In my mind, the most likely scenario for a break-up is one Mr Feldstein posits, in which German citizens decide they have had enough and opt out of the currency. But that, too, strikes me as an unlikely outcome.

US Treasury Secretary Tim Geithner calls for European action as EU is divided over bank reforms - Tim Geithner, the US Treasury Secretary, has called for Europe’s leaders to shore up the euro and calm global markets by putting their €750bn (£635bn) rescue plan into action quickly.  However, as Mr Geithner embarked on a two-day tour of the continent, Europe was yesterday divided on how best to stop banks from needing further government bail-outs. Tensions rose as the European Commission proposed a bank levy, while France and Britain raised strong objections to the plan. Chancellor George Osborne spoke out against the EU’s new proposals, saying they could create a “moral hazard” by encouraging banks to consider them as an insurance policy.

Geithner on "Sustaining the Unsustainable"; Bill Gross, Robert Mundell say Sovereign Default Likely Inevitable - Mish - Treasury Secretary Tim Geithner had me laughing out loud over his statement yesterday in Beijing where he took part in the two-day U.S.-China Strategic and Economic Dialogue. "European leaders face the difficult challenge of trying to restore sustainability to an unsustainable system." Yes Tim, that challenge would indeed be "difficult", in fact, impossible by definition. It is a contradiction in terms and thus logically impossible to suggest it is possible to "sustain the unsustainable". Geithner needs math lessons or logic lessons, most likely both.With Geithner focused on the impossible, others have a more practical outlook. For example, Bill Gross and Noble Prize winning economist Robert Mundell say Sovereign Default May Prove Inevitable for Nations.

Euro Depreciation Could Be Boon for Europe - A 10% depreciation in the euro could provide a sizable boon to the euro zone, without hitting the U.S. too hard, according to OECD.A report prepared by the Organization for Economic Cooperation and Development shows that a one-time 10% decline in the trade weighted euro would boost the euro zone’s gross domestic product by 1.7% from the baseline forecast by the third year of the depreciation. Inflation would be 1% above the baseline by the third year. By contrast, it would only subtract 0.2% from the baseline U.S. GDP in the third year and 0.2% from baseline Japan GDP. The following table shows the deviation from the baseline forecast for each period in the wake of a 10% depreciation in the trade weighted euro.

Naked euro currency swaps face same fate as CDSs in Germany – The German Finance Ministry has produced draft legislation that would enshrine last week's temporary short selling ban into law. However, the legislation expands the scope of instruments banned to capture naked currency swaps on the euro as well as all German stocks traded on exchanges.This means the ban, in theory, could be applied to German entities trading in other jurisdictions, which would be crazy. The shorting ban announced by the German securities regulator, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin), which shook global markets last week, initially prohibited the naked short selling of eurozone government bonds, credit default swaps (CDSs) on those bonds and 10 German financial stocks.

German short sell ban snares long euro FX derivatives – Long euro derivatives positions caught up in proposed legislation, while doubts remain over the exemption of market-makers The legislation, distributed for comment to market participants this week, will enshrine into law last week's temporary short selling ban announced by the German securities regulator, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin), plus a raft of expansions including the prohibition of uncovered short selling on all German stocks listed on domestic exchanges and equity derivatives that replicate uncovered short selling. But the most surprising expansion is a bar on trading currency derivatives that derive their value directly or indirectly from the exchange rate of the euro unless the trade acts as a hedge. Although the overall legislation is aimed at short selling, the provision for currency derivatives does not differentiate between a short and long position, but instead bundles both under the ban.

Germany prepares for worst in euro zone crisis (Reuters) - Germany's push for an orderly insolvency process for indebted euro zone states suggests Berlin is assuming the worst: that one of its peers -- most likely Greece -- will default on its debt repayments.But by pressing for a process to deal with a potential default, Chancellor Angela Merkel and her finance minister are showing they want to hold the euro zone together rather than eject deficit sinners. Merkel, in the same speech in which she said "the euro is in danger", called last week for the euro zone to develop "a process for an orderly state insolvency".

The grasshoppers and the ants – a modern fable - Everybody in the west knows the fable of the grasshopper and the ant. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.” Ants and grasshoppers are happy. Being frugal and cautious, the ants deposit their surplus earnings in supposedly safe banks, which relend to grasshoppers. The latter, in turn, no longer need to make goods, since ants supply them so cheaply. But ants do not sell them houses, shopping malls or offices. So grasshoppers make these, instead. They even ask ants to come and do the work. Grasshoppers find that with all the money flowing in, the price of land rises. So they borrow more, build more and spend more.

I Know! Let's Vilify Germany! - Amusing the articles on Bloomberg this morning... let's start here: “The situation has been tough for all of us, lawyers and regulators alike,” said Jochen Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt. “The step was dropped on us like a bomb and no one really had any time to prepare.” .  Awwwwww poor babies!  You mean that people who bill by the hour actually had to put in some billable hours on time other than 9-5 Monday - Friday?   Then there's this:The euro crisis is looking more like a German crisis every day. The way the single currency now works is clear: It involves massive transfers of wealth from the richer to the poorer regions. And it means you have a soft, political currency. If Germany doesn’t like that, it should decide it doesn’t want to be part of the euro club anymore. Crisis? Germany has no crisis.  It has a pension funding problem but as a percentage of the budget, as a percentage of GDP, as a fiscal matter they look like the Girl Scouts at this party.

Germany vs. Europe - Germany’s commitment to the European Union has been central to its postwar rehabilitation and its economic success. For years, Germany played the role in Europe that America so frequently plays globally — the locomotive whose dynamism and demand helps turn around recessions before they deepen into depressions.  Now, at the worst possible moment, Germany is turning to nationalist illusions. Europe’s past economic successes are now viewed as German successes. Europe’s current deep problems are everyone else’s except Germany’s. That is neither realistic nor sustainable. But German politicians and commentators are callously and self-destructively feeding these ideas. After a rough stretch following reunification, Germany took the tough decisions necessary to restore its competitiveness and revive growth. As a result, it is doing far better than the rest of Europe, with a low fiscal deficit and strong export surpluses. But its export-dependent economy would sputter if European consumers — its main customers — could no longer afford to buy its goods.

Graying Germany Contemplates Demographic Time Bomb - Germans fretting about the country's looming demographic problems are unlikely to have been cheered by recent news on birth rates and emigration. With its graying population, the country's cradle-to-grave welfare system could become unaffordable due to a dearth of working-age people to keep the system going. And the country seems to be failing to either attract enough immigrants or produce babies fast enough to dispel fears of future demographic disaster. Only two weeks ago, hopes of a government-created baby boom were dashed by the latest birth rate figures. The Federal Statistics Office revealed that despite heavy investment in maternity and paternity pay and other family-friendly policies, the birth rate was actually declining in Germany, with 651,000 children born in 2009, fully 30,000 less than in 2008.

European Demand For Dollars Spikes To €5.4 Billion In Wake Of Failed German Auction, Spanish Bank CP Problems - Earlier today, Germany conducted a €7 billion Bobl auction, which however filled out the entire order book at a sub 1x Bid To Cover with just €6.12 billion in bids submitted, a €0.9 billion shortfall. In other words, this was a failed auction, with the government having to "retain" €1.555 billion in order to make the BTC seem an acceptable 1:1. Combining this negative news with the disclosure that BBVA may be suffering a commercial paper liquidity crunch, as reported earlier, has resulted in a material spike in demand in today's ECB's 7-Day Dollar auction, which came in at 5.4 billion, compared to 0 a week earlier. Expect the Fed's FX swap lines to increase by a comparable amount when the Fed's updated H.4.1 data is released this Thursday. The euro continues to slide on the negative news, although stocks both in Europe and in the US, continue trading higher as momentum programs once again take control.

Schauble and Geithner clash in Berlin - The talks between Tim Geithner and Wolfgang Schauble in Berlin did not go well. FT Deutschland reported that German officials called them frank and intensive – a euphemism for a disagreement. They also noted that it was Geithner who ended an extremely short press, something that is unheard of in Berlin. Geithner pointedly refused to comment on the German government’s most recent decision to ban short sales, and to lobby for a financial transactions tax.  France admits that rescue operation is a breach of the Treaty Ooops, we have broken the law, the French European minister Pierre Lellouche proudly tells the Financial Times, a comment that might be of more than cursory interest to the German constitutional court, which may yet rule on the legality of the support operations. Lellouche made the extraordinary comment: “It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty.” He speaks as an official of the French government, not as an independent commentator, so his interpretation of the law has some significance in the legal judgement of this case.

Credit Swaps Signal Sovereign Debt May Need 'Aggressive Action' (Bloomberg) -- Credit-default swaps on the sovereign debt of Italy and Spain are heading for their biggest monthly increase amid investor concern that depressed demand for bonds of indebted nations will keep borrowing costs elevated.Contracts on Greece signal a 45 percent chance the Mediterranean nation will default within the next five years, even after the European Union committed to an almost $1 trillion aid package to ease the region’s budget deficit crisis. “Until we see clear signs that the free market wants to buy peripheral debt then the risk is that the package and the European resolve is tested one more time,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “Unless the free market makes this transition quickly, the authorities may soon be forced into more aggressive action.”

In graphics: Eurozone in crisis - BBC - One of the main causes of the currency crisis in the eurozone is that virtually all countries involved have breached their own self-imposed rules. Under the convergence criteria adopted as part of economic and monetary union, government debt must not exceed 60% of GDP at the end of the fiscal year. Likewise, the annual government deficit must not exceed 3% of GDP. However, as the maps show, only two of the 16 eurozone countries - Luxembourg and Finland - have managed to stick to both rules. Overall, Greece is the worst offender, with debt at 115.1% of GDP and a deficit of 13.6% of GDP. But among the bigger economies, Italy's debt is even higher than Greece's as a percentage of GDP, while Spain's deficit is 11.2% of GDP. If the UK were in the eurozone, it would also fall foul of the criteria, with its debt now standing at 68.1% of GDP and its deficit at 11.5% of GDP.

OECD Sees Euro-Zone Recovery Fraught With Risk - A new look at the euro-zone’s economy depicts a sluggish, risk-laden recovery that leaves the region falling behind the U.S. The Organization for Economic Cooperation and Development said in its latest global economic outlook that the 16-country currency area economy should grow by something like 1.2% this year, compared with 3.2% growth in the U.S.  Even that is largely thanks to better functioning economies elsewhere, which are propping up euro-zone industry with rising export orders.At home, the currency bloc is burdened by draconian government spending cuts, rising taxes, more job losses, credit shortages, indebted households, government default risk, exposed banks, a tumbling currency and even a new inflation threat if the European Central Bank gets it wrong. “There is considerable uncertainty about the strength and pace of the recovery,” the big multinational think tank said.For many Europeans, the litany of uncertainties mean digging in and spending less

Does a European fire break exist? - Mohamed El-Erian had one of his most explicitly bearish op-eds yet in the WSJ this weekend, saying that “the unwind of unstable investor positions is still in its early stages”. But he also talked a little about the necessary policy responses which have yet to be seen in Europe: Are appropriate circuit breakers being put in place to limit the collateral damage for European growth and the global economy more broadly? …The emphasis on circuit breakers is there, but badly targeted. Rather than focus on a defensible and sustainable fire break, too much effort and money are being deployed to defend the indefensible, like Greek over-indebtedness. I’m skeptical that “a defensible and sustainable fire break” exists even in theory, let alone that it can be implemented in practice. Fire breaks work by isolating problem areas and preventing them from infecting the broader neighborhood. But the global financial system is far too complex and interconnected for any problem area to be isolated

Is the eurozone insolvent? - In the past few weeks, we have all focused on the solvency of Greece, Spain and Portugal. But we never seriously questioned the solvency of those who actually guarantee all those southern European debts. The first thing to note is that you cannot answer that question with a cursory reference to the debt-to-gross domestic product ratios of eurozone countries. The problem is that those headline numbers exclude contingent debt and the interconnectedness of financial flows. The biggest category of contingent debt is made up of the various guarantees the eurozone has been handing out in the last couple of years. European Union governments have effectively guaranteed the liabilities of their entire banking sectors. They have guaranteed all bank deposits up to a certain limit. The eurozone member states guaranteed Greek debt for the next three years, and then extended the scheme to the rest of the eurozone. And those guarantees will probably have to be doubled again.

Is Europe heading for a meltdown? - Mervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop." In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line. The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets.

When Will Europe Have Its Wile E. Coyote Moment? - Yves Smith - Wile E. Coyote was the famous Warner Brothers character ever in pursuit of Road Runner. One regular bit of shtick was having him run off cliffs and proceed quite a way in thin air, falling only when he looked down and saw the gulf below him. Despite some occasional sharp falls in equity values in May, and a significant depreciation of the euro, most investors recognize that some serious adjustment is inevitable, starting with a restructuring of Greece’s debt. Yet in a peculiar parallel to the US’s extend and pretend with its financial system, the officialdom seems to hope that if things can be kept on even keel long enough, the system will self-repair, or at least be better able to handle the shock. Yet the contrary evidence continues to mount, with Fitch’s downgrade of Spain to AA+ leaving Moody’s as the sole rating agency that pegs Spain at AAA. The problem is that it looks virtually certain that dislocations will hit Europe well before banks are off their covert life support programs. Yet while a restructuring of Greece’s sovereign debt is seen as inevitable by most analysts (well, save maybe Jeffrey Sachs), the denial among the Eurozone leadership appears profound. From an article yesterday by Gillian Tett in the Financial Times:

World economy: Fear returns - The Economist - IT’S not quite a Lehman moment, but financial markets are more anxious today than at any time since the global recovery took hold almost a year ago. The MSCI index of global stocks has fallen by over 15% since mid-April. Treasury yields have tumbled as investors have fled to the relative safety of American government bonds. The three-month inter-bank borrowing rate is at a ten-month high. Gone is the exuberance that greeted the return to growth (see article). Investors are on edge.  What lies behind these jitters? One is about the underlying health of the world economy. Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fuelled rebound peters out. The other concerns government policy. From America’s overhaul of financial regulation to Germany’s restrictions on short-selling, politicians are changing the rules in unpredictable ways (see article). And the scale of sovereign debts has left governments with less room to counter any new downturn; indeed, many of them are being forced into austerity.

 Investors Assess the ‘Nightmare’ Scenario - “Things really start to get scary if not only do the European and U.S. economies turn down, but also China’s real estate bubble and its expansion collapse and Japan slumps on falling exports and another misguided deficit reduction program,” wrote economist David Levy of the Jerome Levy Forecasting Center. “To turn this situation into a full nightmare scenario, suppose — and it is not too difficult — that policy responses necessary to contain the global depression are delayed or bungled in much of the world, causing serious disruptions in major developed economies and allowing financial sector collapses in parts of Latin America, Asia, Eastern Europe, and Africa.”

YouTube - Newsnight 26th May, Hugh Hendry 'I would recommend you panic'

Where is Europe Taking the Global Economy? - All the news coming out of Europe for the last two weeks has roiled global currency and equities markets and in many ways it’s starting to feel like 2008 all over again. Here are some things we need to pay attention to:

World is dangerously exposed to European default, report says - For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage.

Are We Headed for Another Global Crash? -There have been many banking crises over the years, but never one on the scale of this one. Never have the imbalances been so stark—Germany, China, and India scarfing up giant slabs of world savings from feckless consumers in the U.S., Great Britain, and southern Europe. Never have the Currency Guardians so recklessly fed asset bubbles. And never have governments helicoptered so many trillions onto their banks. Only a fool would claim to know how it will all turn out.We could still muddle through. The banking sector is awash in cash, although credit is still very tight. American employment has finally turned positive, but at much too tepid a pace to absorb new workers. Everyone understood that last week’s trillion-dollar rescue for Greece was a charade. Greece must inevitably default on some portion of its debt, but it is a tiny country. The real purpose of the intervention was to buy time for Ireland, Italy, Spain, and Portugal to get their acts together.But we are still tip-toeing along the brink of the abyss.

The G20 Moves The World A Step Closer To A Global Currency - A single clause in Point 19 of the communiqué issued by the G20 leaders amounts to revolution in the global financial order. "We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity," it said. SDRs are Special Drawing Rights, a synthetic paper currency issued by the International Monetary Fund that has lain dormant for half a century. In effect, the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body. Conspiracy theorists will love it.